-----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, FEW4/ydxg0/l4p4Tv/GiiU7Iuxn9sJGYACzCTGYBPVQjwCsImMDv+VZTMK5prfUP UrMu94889qKf/Bh/dUHw+g== 0000910394-02-000003.txt : 20020413 0000910394-02-000003.hdr.sgml : 20020413 ACCESSION NUMBER: 0000910394-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20020116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY ELECTRIC STEEL INC /DE/ CENTRAL INDEX KEY: 0000910394 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 611244541 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22416 FILM NUMBER: 2510265 BUSINESS ADDRESS: STREET 1: P O BOX 3500 CITY: ASHLAND STATE: KY ZIP: 41105-3500 BUSINESS PHONE: 6069291222 MAIL ADDRESS: STREET 1: P O BOX 3500 CITY: ASHLAND STATE: KY ZIP: 41105-3500 10-K 1 combined.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 29, 2001 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________________ to ________________. Commission File No. 0-22416 KENTUCKY ELECTRIC STEEL, INC. (Exact name of Registrant as specified in its charter) Delaware 61-1244541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 3500, Ashland, Kentucky 41105-3500 (Address of principal executive office, Zip code) (606) 929-1222 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) 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 ( ) No (X) (Cover Page 1 of 2 Pages) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on January 7, 2002: $2,089,962. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of January 7, 2002: 4,100,285 shares of Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14(a) are incorporated herein by reference in response to items 10 through 13 in Part III of this report. (Cover Page 2 of 2 Pages) KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY FORM 10-K TABLE OF CONTENTS Page PART I .......................................................... 4 Item 1. Business .......................................... 4 Item 2. Properties ........................................ 9 Item 3. Legal Proceedings ................................. 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II ......................................................... 11 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ............................... 11 Item 6. Selected Financial Data ........................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 12 Item 7A. Qualitative and Quantitative Disclosure about Market Risk ....................................... 20 Item 8. Financial Statements and Supplementary Data ....... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 20 PART III ........................................................ 21 Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation ............................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 21 Item 13. Certain Relationships and Related Transactions .... 21 PART IV ......................................................... 22 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 22 SIGNATURES ...................................................... 25 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES .................... 26 KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY PART I Item 1. Business General Kentucky Electric Steel, Inc., a Delaware corporation incorporated in August, 1993 (the "Company"), owns and operates a steel mini-mill near Ashland, Kentucky. As a mini-mill producer of bar flats, the Company recycles steel from scrap, a process designed to result in lower production costs than those of integrated steel mills, which produce steel by processing iron ore and other raw materials in blast furnaces. Bar flats are produced to a variety of specifications and fall primarily into two general quality levels - merchant bar quality steel bar flats ("MBQ Bar Flats") for generic types of applications, and special bar quality steel bar flats ("SBQ Bar Flats"), where more precise customer specifications require the use of various alloys, customized equipment and special production procedures to insure that the finished product meets critical end-use performance characteristics. The Company is a leading manufacturer of SBQ Bar Flats for the cold drawn bar converter and truck trailer support beam markets. The Company manufactures over 2,600 different Bar Flat items which are sold to a variety of relatively small volume niche markets, including the leaf-spring suspension market for light and heavy-duty trucks, mini-vans and utility vehicles, cold drawn bar converters, certain specialty applications for steel service centers, truck trailer manufacturers and other miscellaneous markets. The Company's mill was specifically designed to manufacture wider and thicker bar flats up to three inches in thickness and twelve inches in width that are required by these markets. In addition, the Company employs a variety of specially designed equipment which is necessary to manufacture SBQ Bar Flats to the specifications demanded by its customers. Although the Company specializes in SBQ Bar Flats, particularly in the thicker and wider sections, it also, to a much lesser extent, competes in the MBQ Bar Flat market. The Company's business strategy is to increase its share of the SBQ Bar Flat market and to expand into related niche market applications where it can supply products for special customer needs. The Company plans to expand its business primarily by increasing the number of products it sells to existing customers and the development of new customers. Current Industry Conditions During the past three years, market conditions within the domestic steel industry have experienced significant downward economic pressure largely due to market price and shipment volume declines. These market conditions are a result of a number of factors including a decline in the general economy of the United States, a decline in the industries of the Company's customers, the increased cost of production due to high electricity and natural gas costs and an increase in competition from foreign steel companies. These forces have driven market prices to levels below the cost of production for certain domestic producers, and as a result, many steel manufacturers have curtailed production or ceased operations, and a number of steel industry producers have sought protection under the United States Bankruptcy Code. As a result of these conditions, the Company has experienced sharp declines in shipment volumes and operating margins during fiscal 2001, which impacted the Company's cash flows and produced a pre-tax loss of approximately $9.6 million in fiscal 2001. Since March 31, 2001, the Company has failed to meet the fixed charge coverage ratio covenant of its loan agreements which required the Company to maintain a fixed charge coverage ratio of 2:1 for each rolling four quarter period. In addition to the default of the fixed charge coverage ratio covenant, the Company failed to make a scheduled principal payment on its unsecured senior notes of $3,333,333 due on November 1, 2001. In response to these conditions, the Company has undertaken and will continue to undertake certain cost control initiatives and was successful in restructuring its long-term debt obligations and bank credit facility in order to manage the Company's liquidity through this difficult market environment. Management anticipates that the market conditions discussed above will continue to impact the Company's operations through fiscal 2002 and negatively impact the Company's financial performance. Management believes that the Company has the ability to sustain its operations and meet its commitments at least for the near-term through effective management of its operations and the restructured debt and bank credit facility. However, should these negative market conditions worsen or persist on a long-term basis, the Company's ability to continue to manage its liquidity for the long-term may be jeopardized. Manufacturing Operations The Company recycles steel by melting steel scrap in two 50-ton electric arc furnaces. The molten steel is then taken to the ladle metallurgy facility where a variety of alloys are added to make different grades of steel in accordance with customer specifications. The refined molten steel is then poured into a continuous caster to produce continuous strands of steel with cross-sectional dimensions ranging from approximately 16 to 72 square inches. The Company can utilize up to four continuous strands in producing certain sizes. The strands are cut to produce billets of specified length which are reheated to approximately 2,300 degrees Fahrenheit at the Company's rolling mill and fed through a series of roll stands to reduce their size and form them into steel bar sections. These sections emerge from the rolling mill, are uniformly cooled on a cooling bed, and are cut to lengths specified by the customer. The cut bar flats are stacked into bundles ready for shipment. The production capacity of the Company for finished products is 330,000 tons per year. The Company sold 181,500 tons of finished goods in 2001 which constitutes 55% of its melting and casting capacity. In addition, the Company sold 1,700 billet tons (semi- finished product) in 2001. The Company transports its products by common carrier, generally shipping by truck and by rail. The Company has railroad sidings at its facilities. Capital Improvements and Expansion Annual capital expenditures over the last five fiscal years have averaged $2.2 million, which includes $.8 million expended in fiscal year 2001. The Board of Directors has currently authorized the use of $.5 million for capital expenditures in fiscal 2002, which includes completion of various projects begun in fiscal 2001, as well as equipment upgrades and replacements. Additional capital expenditures, which may be required, must be approved by the Board of Directors. Primary Markets and Products The Company is primarily a special bar quality ("SBQ") producer of alloy and carbon steel bar flats. Its primary markets are manufacturers of leaf-spring suspensions, cold drawn bar converters, flat bed truck trailer manufacturers and steel service centers. Leaf-Spring Suspension Market. High tensile SBQ spring steel is produced to customer and industry specifications for use in leaf- spring assemblies. These assemblies are utilized in light, medium and heavy duty trucks, trailers, mini-vans and four-wheel drive vehicles with off-road capability. The trend toward tapered leaf-spring products and air-ride suspension continues. These products use somewhat less steel but they are manufactured from larger cross section bar flats that match the Company's manufacturing strengths. Cold Drawn Bar Converters Market. The Company sells its expanded range of SBQ hot rolled bar products to cold drawn bar manufacturers. The Company's product range, 1/4" through 3" in thickness and 2" through 12" in width, enables the Company to supply practically all the sizes needed by the converters. The converters remove the scale from the hot rolled bar and draw it through a die. The drawing reduces the cross section, improves surface and internal properties, and produces a more exacting tolerance bar. The end product is sold through distributors and directly to original equipment manufacturers. Steel Service Centers Market. Approximately 30% of all steel shipments to the end-user are distributed through steel service centers, making this the largest single market for steel manufacturers. The Company sells both MBQ and SBQ Bar Flats into this market. Truck Trailers Market. The Company is a significant supplier of SBQ Bar Flats for flat bed trailer support beam flange material. This material is engineered and produced to exacting specifications consistent with trailer manufacturers' requirements. Miscellaneous Markets. The Company supplies other markets including metal building, grader blades, agricultural equipment, construction/ fabricating, railroad and industrial chain manufacturers. The products furnished to these markets are primarily SBQ Bar Flats along with a mixture of MBQ Bar Flats. Customers The Company sells to over 350 customers. Several wholly-owned subsidiaries of Republic Technologies International aggregated approximately 10.1% of sales for fiscal 2001. No other customer accounted for more than 10% of sales in fiscal 2001. The loss of a principal customer could have a material adverse effect on the Company's operations. The Company's foreign sales as a percentage of total sales were 8.3% in fiscal 2001. These sales consisted primarily of shipments to Canada and Mexico. Marketing Senior management of the Company is directly involved in sales to new and existing customers. Sales are nationwide and in certain foreign markets. Sales efforts are primarily performed by in-house sales personnel and augmented with manufacturers' representative companies. The efforts of these sales representatives are directed by the Company's Vice President, Sales and Marketing. Competition and Other Market Factors The domestic and foreign steel industries are characterized by intense competition. The Company competes with domestic and foreign producers, many of whom have financial resources substantially greater than those available to the Company. The Company has identified its principal competition from the following sources: (i) in its leaf- spring suspension market, the Company faces competition from four North American mills; (ii) in its cold drawn bar converters market, the Company competes with five North American mills; (iii) in the steel service center market, the Company encounters competition from numerous North American mills; and (iv) in its truck trailer market, the Company competes with three North American mills. The Company believes that the principal competitive factors affecting its business are quality, service, price and geographic location. Backlog and Seasonality As of September 29, 2001, the Company had firm orders for approximately 37,500 tons representing approximately $16.0 million in sales, as compared with approximately 51,600 tons representing approximately $22.4 million in sales, at September 30, 2000. The Company operates on a continuous basis with two scheduled shutdowns for heavy maintenance work in July and December. The Company's operations are not subject to seasonal fluctuations in operations or sales. Raw Materials The principal raw material used in the Company's steel mill is ferrous scrap. Ferrous scrap is derived from, among other sources, discarded automobiles, appliances, structural steel, railroad cars and machinery. The purchase price of scrap is subject to market conditions largely beyond the control of the Company. The Company is located in an area where scrap is generally available and typically maintains less than one month of scrap supply. Historically, price fluctuations of scrap have had no material long-term impact on the Company. However, while the Company has generally been successful in passing on scrap cost increases through price increases, the effect of steel imports, market price competition and under-utilized industry capacity has in the past, and could in the future, limit the Company's ability to increase prices. Two scrap dealers supplied approximately 60% of the Company's scrap in fiscal 2001. In an attempt to ensure an adequate source of raw materials, however, the Company has identified, inspected and purchased scrap from 25 dealers. The Company's manufacturing process consumes large amounts of electricity, which the Company purchases from Kentucky Power Company, d/b/a American Electric Power ("AEP"). An abundant regional supply of coal, used in producing electricity, helps keep the Company's energy costs relatively low. Effective November 13, 1997, the Company and AEP entered into a contract for Operating Reserve Interruptible Electric Service ("1997 Contract") which will have a minimum term of five years, or until an open competitive market exists, unless the Company gives AEP at least one year's notice of termination. The 1997 Contract limits AEP's right to interrupt service to only those instances that an AEP unit goes offline or that AEP is responsible to share reserves with other electrical generators pursuant to the East Central Area Reliability Coordination Agreement (ECAR), and any such interruption can be no more than 30 minutes in duration. Interruptions in the Company's electric service under the 1997 Contract with AEP have been minimal in fiscal 2001 and did not significantly impact the Company's operations. Employees As of September 29, 2001, the Company employed 346 people, approximately 80% of whom are members of the United Steelworkers of America. The Company's current five-year collective bargaining agreement expires in September 2004. The Company believes that its wage rates and benefits are competitive with other mini-mills. Environmental and Regulatory Matters The Company is subject to federal, state, and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. As with similar mills in the industry, the Company's furnaces are classified as generating hazardous waste (K061) because the furnaces produce certain types of dust containing lead, chromium and cadmium ("Furnace Dust"). Between 1981 and 1983, the prior operator (the "Prior Operator") disposed of Furnace Dust in the Cooksey Brother's landfill, in Cannonsburg, Kentucky ("Cooksey Landfill"). Before 1981 the Prior Operator disposed of Furnace Dust in other locations, including a strip mine. The Company did not assume any liability from the Prior Operator for disposal at the Cooksey Landfill or such other sites. The Cooksey Landfill is operating pursuant to a permit and bond issued and approved by the Kentucky Division of Waste Management, and the Company has no reason to believe that the Cooksey Landfill or other sites are likely targets for listing as a Kentucky "uncontrolled site" or Federal Superfund Site. On May 5, 1999, the Company was notified by the Kentucky Division of Waste Management ("DWM") that as a result of a RCRA Facility Assessment ("RFA") conducted in 1986 and 1987 while the Company's mill was operated by the Prior Operator, that DWM requests that the Company undertake a RCRA Facility Investigation ("RFI") and, if necessary, thereafter, a RCRA Corrective Measures Study ("CMS") and, if necessary, thereafter, a RCRA Corrective Measures Implementation ("CMI"). On June 8, 1999, the Company was notified by DWM that the Company's mill had been listed with 32 other sites in Kentucky as a high priority for clean-up on the RCRA Corrective Action Baseline List of Facilities. The Company has not made a determination as to whether the Prior Operator released any hazardous waste at its site, has submitted a confirmatory sampling plan and is continuing negotiations with DWM. The Company, however, could incur investigation and/or clean-up expenses in the future with respect to the operation of the Company's facility by the Prior Operator with respect to the Cooksey Landfill or such other sites if (1) the sites are listed as a Kentucky "Uncontrolled Site" or Federal Superfund Site, (2) DWM required the Company to undertake an RFI, CMS and CMI, and (3) the Company is not successful in obtaining full indemnification from the Prior Operator. The Company's operations are subject to the Federal Clean Air Act which provides for regulation, through state implementation of federal requirements, of the emission of certain air pollutants. On June 2, 1999, the Kentucky Division for Air Quality issued to the Company its Title V Operating Permit ("Air Permit") with an expiration date of June 2, 2004. As with similar mills in the industry, the Federal Clean Air Act required that the Permit include emission limitations and standards as well as monitoring, recordkeeping, reporting, inspection and entry requirements to assure compliance with those limits. Pursuant to the United States Environmental Protection Agency (USEPA) Mini-mill Audit Initiative, the Company continues to evaluate past compliance with applicable regulations. The Company has also agreed with the Kentucky Division for Air Quality to conduct a stack test of emissions from its EAF/LMF baghouse to further evaluate compliance with its Air Permit. Additionally, the Company does not know whether it will be able to consistently comply with the Air Permit without additional capital and/or operating expense. The Company's operations are also subject to the Federal Clean Water Act which provides for regulation through state implementation of federal requirements of the discharge of certain water pollutants. On March 19, 1999, the Kentucky Division of Water ("DOW") issued the Company its Kentucky Pollutant Discharge Elimination System Permit ("Water Permit") with an expiration date of May 31, 2002. In its application for the Water Permit, the Company requested that DOW re- evaluate the temperature limits established in its prior permit. DOW agreed to determine allowable surface water temperatures on a site- specific basis and included in the Water Permit a requirement that the Company conduct a year-long thermal plume study to assess the impact of the effluent temperature on the aquatic biota in the receiving stream. The study has been completed and DOW will determine whether to allow surface water temperatures on a site-specific basis utilizing available data and the results of the thermal plume study. The Company, therefore, does not know whether it will be able to comply with temperature limits without additional capital and/or operating expense when the limits are determined by DOW. Further, there can be no assurance that evolving federal and state environmental requirements or discovery of unknown conditions will not (1) require the Company to make material expenditures in the future or (2) affect the Company's ability to obtain permits for its existing operations or any future expansion. The Company will continue to plan and budget, as appropriate, for any additional capital and operating expenses that may be required to upgrade or install new or additional pollution control equipment in order to comply with all permits. Except as otherwise indicated, the Company believes it is in substantial compliance with applicable environmental laws and regulations. Notwithstanding such compliance, if damage to persons or property or contamination of the environment has been or is caused by the conduct of the Company's business or by hazardous substances or wastes used, generated or disposed of by the Company (or possibly by prior operators of the Company's mini-mill or by third parties), the Company may be held liable for such damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability to the Company could be material. Changes in federal or state laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by the Company. Item 2. Properties The Company's operations are located on approximately 126 acres of land near Ashland, Kentucky, next to an interstate highway and a rail line. The Company believes that its facilities are well maintained, in good condition and adequate and suitable for its operating needs. The Company has completed certain capital expenditures with respect to its properties. See Item 1 - Business - "Manufacturing Operations" and "Capital Improvements and Expansion." Item 3. Legal Proceedings The Company is subject to various claims and lawsuits arising in the ordinary course of business with respect to commercial, product liability and other matters, which seek remedies or damages. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's business, financial position, results of operations or cash flows. See also Item 1 "Business - Environmental and Regulatory Matters." Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of shareholders during the fourth quarter of the fiscal year ended September 29, 2001. Executive Officers of the Registrant Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held February 26, 2002. The names, ages and positions of all of the executive officers of the Registrant as of September 29, 2001 are listed below with their business experience with the Registrant for the past five years. Officers are elected annually by the Board of Directors at the first meeting of directors following the annual meeting of stockholders. There are no family relationships among these officers, nor any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Charles C. Hanebuth, 57, has been President and Chief Executive Officer of the Company since its formation in August 1993. From November 1990 to October 1993, Mr. Hanebuth was President and Chief Operating Officer of Kentucky Electric Steel Corporation, a wholly- owned subsidiary of NS Group, Inc. Mr. Hanebuth has 22 years management experience in the steel industry. Mr. Hanebuth is a advisory director of Fifth Third Bank Ohio Valley. William J. Jessie, 51, a certified public accountant, has been Vice President, Secretary, Treasurer and Chief Financial Officer of the Company since its formation in August 1993. Prior to August 1993, he was Controller of Kentucky Electric Steel Corporation since 1986. Mr. Jessie has 21 years of public accounting experience with national and local accounting firms. Joseph E. Harrison, 57, has been Vice President of Sales and Marketing of the Company since its formation in August 1993. From February 1991 to August 1993 he was General Sales Manager of Kentucky Electric Steel Corporation. Mr. Harrison has over 31 years of sales experience in the steel industry. William H. Gerak, 56, has been Vice President of Administration of the Company since January 1994. From February 1988 to December 1993 he was the Director of Human Resources and Labor Relations for Heekin Can, Inc., a wholly-owned subsidiary of Ball Corporation, a producer of steel food and aerosol containers, head-quartered in Cincinnati, Ohio. Mr. Gerak has over 27 years of human resource and administrative experience. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Effective with the opening of the stock market on August 20, 2001, the Company's common stock trades on the NASDAQ Small Cap Market under the symbol "KESI." Prior to August 20, 2001, the Company's common stock traded on the NASDAQ National Market under the symbol "KESI." The following table sets forth, for the fiscal periods indicated, the high and low closing prices of the stock on the NASDAQ National or NASDAQ Small Cap Market: Fiscal 2000 Fiscal 2001 High Low High Low First Quarter $ 4.000 $ 2.375 $ 2.500 $ 1.500 Second Quarter 2.625 1.750 1.875 1.250 Third Quarter 2.781 1.875 1.900 1.280 Fourth Quarter 2.500 1.625 1.370 .600 On January 7, 2002, there were approximately 800 beneficial owners of the Company's common stock. The Company currently intends to retain all earnings to support the development of its business. Certain of the Company's debt instruments currently prohibit the payment of dividends and the repurchase of Company stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 of the Notes to Consolidated Financial Statements of the Company. Item 6. Selected Financial Data The selected financial data shown below for the five years in the period ended September 29, 2001 are derived from the audited financial statements of the Company. The information set forth below should be used in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes thereto included elsewhere herein. Year Ended Sept. 27, Sept. 26, Sept. 25 Sept. 30, Sept. 29, 1997 1998 1999 2000 2001 (In thousands, except share and per share data) Income Statement Data: Net sales ............ $ 97,966 $113,676 $110,265 $120,585 $ 77,859 Cost of goods sold ... 93,306 101,940 100,016 110,883 77,863 ------- ------- ------- ------- ------- Gross profit (loss). 4,660 11,736 10,249 9,702 (4) Selling and admini- strative expenses .. 6,800 7,011 7,627 7,573 8,298 ------- ------- ------- ------- ------- Operating income (loss) (2,140) 4,725 2,622 2,129 (8,302) Interest expense ..... (2,125) (2,395) (2,274) (2,528) (2,051) Interest income and other .............. 34 80 1,234 911 909 Loss on abandonment of assets .......... - - - - (457) Gain on involuntary con- version of equipment - - - - 256 ------- ------- ------- ------- ------- Income (loss) before income taxes ...... (4,231) 2,410 1,582 512 (9,645) Income taxes ......... (1,599) 916 604 195 5,624 ------- ------- ------- ------- ------- Net income (loss) $ (2,632) $ 1,494 $ 978 $ 317 $(15,269) Net income (loss) per common share - basic and diluted... $ (.57) $ .32 $ .24 .08 $ (3.74) Weighted average shares outstanding-basic 4,633,315 4,624,671 4,085,480 4,074,463 4,081,966 Weighted average shares outstanding-diluted 4,633,315 4,630,920 4,089,219 4,074,463 4,081,966 Balance Sheet Data: Working capital ..... $ 11,335 $14,153 $15,718 $23,924 $15,935 Total assets ........ 78,770 80,251 82,941 76,954 60,014 Long-term debt (1) .. 20,000 20,000 20,000 16,667 16,667 Shareholders' equity 34,211 35,192 35,252 35,612 20,383
(1) Net of current portion. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of results of operations and financial condition of the Company should be read in conjunction with "Selected Financial Data" and Financial Statements and Supplementary Data included elsewhere herein. General The Company manufactures special bar quality alloy and carbon steel bar flats to precise customer specification for sale in a variety of niche markets. Market conditions caused the Company to experience sharp declines in shipment volumes and operating margins during fiscal 2001, which impacted the Company's cash flows and produced a pre-tax loss of approximately $9.6 million. See "Current Industry Conditions." The Company's fiscal year ends on the last Saturday of September. The fiscal year normally consists of fifty-two weeks; however, the fiscal year ended September 30, 2000 has fifty-three weeks. The fiscal year ended September 29, 2001 has fifty-two weeks. Results of Operations The following table sets forth the percentages of the Company's net sales represented by certain income and expense items for the periods indicated. Year Ended September September September 25, 1999 30, 2000 29, 2001 Net sales .................... 100.0% 100.0% 100.0% Cost of goods sold ........... 90.7 92.0 100.0 ----- ----- ----- Gross profit (loss) .......... 9.3 8.0 - Selling and administrative expenses ................... 6.9 6.3 10.7 ----- ----- ----- Operating income (loss) ...... 2.4 1.7 (10.7) Interest expense ............. (2.1) (2.1) (2.6) Interest income and other .... 1.1 .8 1.2 Loss on abandonment of assets - - (.6) Gain on involuntary conversion of equipment ............... - - .3 ----- ----- ----- Income (loss) before income taxes ............... 1.4 .4 (12.4) Income taxes ................ .5 .1 7.2 ----- ----- ----- Net income (loss) ............ .9% .3% (19.6%) Year Ended September 29, 2001 Compared with Year Ended September 30, 2000 Net Sales. Net sales for fiscal 2001 decreased by $42.7 million (35.4%) to $77.9 million from $120.6 million in fiscal 2000. The decrease in net sales is attributable to a significant decrease in shipments combined with a decrease in average selling price. Finished goods tons shipped decreased 31.5% from 264,800 tons in fiscal 2000 to 181,500 tons in fiscal 2001. The decrease in finished goods tons shipped reflects market conditions throughout the steel industry. The average selling price per finished goods shipped was down 3.9% in fiscal 2001 as compared to fiscal 2000. The decrease in average selling price for fiscal 2001 is attributed to market price reductions and a change in product mix. In addition, fiscal 2001 shipments included 1,700 tons of billets (semi-finished product) as compared to 11,800 tons of billets in fiscal 2000. Cost of Goods Sold. Cost of goods sold for fiscal 2001 decreased by $33.0 million, or 29.8% to $77.9 million from $110.9 million in fiscal 2000. As a percentage of net sales, cost of goods sold increased from 92.0% in fiscal 2000 to 100% in fiscal 2001. The decrease in cost of goods sold reflects the decrease in shipments (as discussed above) offset by an increase in the per ton cost of tons shipped. The increase in the per ton manufacturing costs of tons shipped for fiscal 2001 resulted from lower production levels and higher energy costs partially offset by lower scrap costs. The increase in cost of goods sold, as a percentage of net sales for fiscal 2001, as compared to fiscal 2000, reflects lower selling prices (as discussed above) and the increase in per ton manufacturing costs. Gross Profit (Loss). As a result of the above, gross profit for fiscal 2001 decreased by $9.7 million from $9.7 million in fiscal 2001 to ($4,000) in fiscal 2001. As a percentage of net sales, gross profit decreased from 8.0% in fiscal 2000 to 0% in fiscal 2001. Selling and Administrative Expenses. Selling and administrative expenses include salaries and benefits, corporate overhead, insurance, sales commissions and other expenses incurred in the executive, sales and marketing, shipping, human resources, and other administrative departments. Selling and administrative expenses for fiscal 2001 increased by $.7 million (9.6%) to $8.3 million from $7.6 million in fiscal 2001. As a percentage of net sales, such expenses increased from 6.3% for fiscal 2000 to 10.7% for fiscal 2001. The increase in the percentage of selling and administrative expenses to net sales for fiscal 2001, as compared to fiscal 2000, is due to the significant decrease in net sales and the increase in actual expenses. The increase in selling and administrative expenses for fiscal 2001 as compared to fiscal 2000 is primarily due to an increase in bad debt expense. The increase in bad debt expense is due to the bankruptcy of a large customer which is currently in reorganization. Operating Income (Loss). For the reasons described above, operating income decreased by $10.4 million from $2.1 million in fiscal 2000 to an operating loss of $(8.3) million in fiscal 2001. As a percentage of net sales, operating income decreased from 1.7% in fiscal 2000 to (10.7%) in fiscal 2001. Interest Expense. Interest expense decreased by $.4 million to $2.1 million in fiscal 2001 from $2.5 million in fiscal 2000. The decrease in interest expense in fiscal 2001 is due to the decrease in long-term debt and the decrease in the average amount outstanding on the Company's line of credit. To a lesser extent, the decrease in interest expense reflects lower line of credit interest rates and the fact that there was one less week in fiscal 2001. Interest Income and Other. Interest and other income for fiscal 2001 and 2000 was $.9 million. Fiscal 2001 and 2000 includes $.4 million and $.8 million, respectively, for a claim settlement pertaining primarily to the Company's purchase of electrodes during the years 1992 and 1997. Interest income increased $.2 million in fiscal 2001 due to the investment of proceeds from the sale and leaseback transaction completed in September 2000. Loss on Abandonment of Assets. During fiscal 2001, the Company disposed of certain assets that were no longer in service. The net book value of the equipment abandoned was $.5 million which is reflected as a loss in the financial statements for fiscal 2001. Gain on Involuntary Conversion of Equipment. As a result of a fire which destroyed an auxiliary building and certain equipment, the Company received insurance proceeds of $448,000 for the replacement cost of the building and equipment and other additional expenses associated with the fire. The net book value of the assets destroyed was approximately $57,000 and the Company has incurred approximately $135,000 in additional expenses associated with the fire and expended $313,000 on the new building and equipment. The excess of the replacement cost over the net book value of the building and equipment destroyed resulted in a gain of approximately $256,000. Provision (Credit) for Income Taxes. The Company has recorded a tax provision of approximately $5.6 million in fiscal 2001 which, based on a pre-tax loss of approximately $9.6 million, results in a negative effective tax rate of approximately 59%. Due to the loss incurred in fiscal 2001, continuing losses, related debt re- structurings (see "Current Industry Conditions"), the potential limitation of utilizing net operating losses under Section 382 of the Internal Revenue Code (as discussed below) and management's current belief that the available objective evidence creates sufficient uncertainty regarding the realizability of previously recognized deferred tax assets, the Company recorded a valuation allowance of approximately $8.9 million during the fourth quarter of fiscal 2001 which fully offsets previously recognized deferred tax assets. The Financial Accounting Standards Board Statement No. 109 (SFAS 109) "Accounting for Income Taxes", requires that the Company record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax asset will not be realized." The Company will continue to provide a 100% valuation allowance for the deferred tax asset in the future until the Company returns to an appropriate level of cumulative financial accounting income. The ultimate realization of a future tax benefit related to net operating loss carryforwards depends on the Company's ability to generate sufficient taxable income in the future. If the Company is able to generate sufficient taxable income in the future, the Company will reduce the valuation allowance through a reduction of income tax expense (and a corresponding increase in shareholders' equity). The realization of a benefit from net operating loss carryforwards which can, and previously did, generate deferred tax assets, may also be limited by Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code contains rules designed to discourage persons from buying and selling the net operating losses of companies. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the common stock of a company or any change in ownership arising from a new issuance of stock by a company. In general, Section 382 rules limit the ability of a company to utilize net operating losses after a change of ownership of more than 50% of its common stock over a three-year period. Purchases of the Company's common stock in amounts greater than specified levels could inadvertently create a limitation on the Company's ability to utilize its net operating losses for tax purposes in the future. Net Income (Loss). As a result of the above, net income decreased by $15.6 million from $.3 million in fiscal 2000 to a net loss of $(15.3) million in fiscal 2001. As a percentage of net sales, net income (loss) decreased from .3% in fiscal 2000 to (19.6%) in fiscal 2001. Year Ended September 30, 2000 Compared with Year Ended September 25, 1999 Net Sales. Net sales for fiscal 2000 increased by $10.3 million (9.4%) to $120.6 million from $110.3 million in fiscal 1999. The increase in net sales is attributable to an increase in shipments offset by a decrease in average selling price. Finished goods shipments increased by 8.9% from 243,100 tons in fiscal 1999 to 264,800 in fiscal 2000. The average selling price per finished goods shipped was down 2.0% in fiscal 2000 as compared to fiscal 1999. The decrease in finished goods average selling price for fiscal 2000 is primarily attributable to a change in product mix as the Company increased its participation in lower priced products. In addition, fiscal 2000 shipments included 11,800 tons of billets (semi-finished product) as compared to 800 tons of billets in fiscal 1999. Cost of Goods Sold. Cost of goods sold for fiscal 2000 increased by $10.9 million, or 10.9% to $110.9 million from $100.0 million in fiscal 1999. As a percentage of net sales, cost of goods sold increased from 90.7% in fiscal 1999 to 92.0% in fiscal 2000. The increase in cost of goods sold reflects the increase in shipments (as discussed above) offset by a decrease in the per ton cost of tons shipped. The decrease in the per ton manufacturing costs of tons shipped for fiscal 2000 resulted from lower conversion costs due to increased productivity offset by higher scrap costs. The increase in cost of goods sold as a percentage of net sales for fiscal 2000, as compared to fiscal 1999, reflects lower selling prices (as discussed above) partially offset by lower per ton manufacturing costs. Gross Profit. As a result of the above, gross profit for fiscal 2000 decreased by $.5 million from $10.2 million in fiscal 1999 to $9.7 million in fiscal 2000. As a percentage of net sales, gross profit decreased from 9.3% in fiscal 1999 to 8.0% in fiscal 2000. Selling and Administrative Expenses. Selling and administrative expenses include salaries and benefits, corporate overhead, insurance, sales commissions and other expenses incurred in the executive, sales and marketing, shipping, human resources, and other administrative departments. Selling and administrative expenses for fiscal 2000 and 1999 were $7.6 million with decreases in legal and professional fees being offset by increases in the provision for bad debt expense, sales commissions, and miscellaneous other items. As a percentage of net sales, such expenses decreased from 6.9% for fiscal 1999 to 6.3% for fiscal 2000. The decrease in selling and administrative expenses as a percentage of net sales for fiscal 2000, as compared to fiscal 1999, is due to higher net sales in 2000. Operating Income. For the reasons described above, operating income decreased by $.5 million (18.8%) from $2.6 million in fiscal 1999 to $2.1 million in fiscal 2000. As a percentage of net sales, operating income decreased from 2.4% in fiscal 1999 to 1.7% in fiscal 2000. Interest Expense. Interest expense increased by $.2 million to $2.5 million in fiscal 2000 from $2.3 million in fiscal 1999. The increase in interest expense is due to an increase in both the average interest rate and the average amount outstanding on the line of credit. Provision (Credit) for Income Taxes. The Company has recorded a tax provision of approximately $.2 million in fiscal 2000 as compared to a tax provision of approximately $.6 million in fiscal 1999 at an effective tax rate of 38% for both years. As of September 30, 2000 the Company had net deferred tax assets of $5.7 million, which were net of a $2.7 million valuation allowance. Included in the $8.4 million of gross deferred tax assets was $5.4 million representing the tax benefit of net operating tax loss carryforwards which expire beginning in 2011. The realization of the deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. Taking into consideration historical pre-tax income levels of operations for fiscal 1998, 1999, and 2000, and other factors, management believed it was more likely than not that the net deferred tax asset, after consideration of the valuation allowance which has been established, would be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in future years if estimates of future taxable income during the carryforward period are reduced. Interest Income and Other. Interest and other income decreased by $.3 million from $1.2 million in fiscal 1999 to $.9 million in fiscal 2000. Fiscal 2000 and fiscal 1999 include other income of $.8 million and $1.1 million, respectively, for a claim settlement pertaining primarily to the Company's purchase of electrodes during the years 1992 through 1997. Net Income. As a result of the above, net income decreased by $.7 million from $1.0 million in fiscal 1999 to $.3 million in fiscal 2000. As a percentage of net sales, net income decreased from .9% in fiscal 1999 to .3% in fiscal 2000. Liquidity and Capital Resources The Company considers its level of cash, availability under its line of credit, and its current ratio and working capital to be its most important measures of short-term liquidity. In terms of long- term liquidity indicators, the Company believes its historical levels of cash generated from operations and required debt repayments to be the most important measures. Cash flows from operating activities amounted to $.7 million and $6.2 million in fiscal 1999 and 2000, respectively. Net cash used by operating activities was $7,000 in fiscal 2001. Fiscal 1999 operating cash flows reflect net income of $1.0 million, depreciation and amortization of $3.6 million and the decrease in the net deferred tax asset of $.7 million. Operating cash flows were negatively impacted by increases in accounts receivable and inventories of $2.1 million and $2.4 million, respectively. Also, operating cash flows were positively impacted by an increase of $1.2 million in trade accounts payable. The increase in inventories and accounts payable is primarily due to an increase in scrap and billet inventory. The increase in accounts receivable reflects the higher sales level in the latter part of fiscal 1999. Fiscal 2000 operating cash flows reflect net income of $.3 million and depreciation and amortization of $3.8 million. Operating cash flows were positively impacted by decreases in accounts receivable and inventories of $3.3 million and $1.1 million, respectively. Operating cash flows were negatively impacted by a $1.9 million decrease in trade accounts payable. The decrease in accounts receivable reflects the lower sales level in the latter part of fiscal 2000. The decrease in inventories is primarily due to a decrease in billet inventories and a decrease in the carrying value of finished good inventory offset by slightly higher scrap inventories. The decrease in the carrying value of finished goods inventory reflects the lower conversion costs in fiscal 2000. The decrease in accounts payable is due to timing of payments on open accounts. Fiscal 2001 operating cash flows reflect the net loss of $15.3 million, the write-off of deferred tax assets of $5.7 million, depreciation and amortization of $2.8 million and the loss on abandonment of assets of $.5 million. Operating cash flows were positively impacted by decreases in inventories and accounts receivable of $4.7 million and $2.3 million, respectively. Also, operating cash flows were negatively impacted by the decrease in trade accounts payable of $.9 million. The decrease in inventories is due to a decrease in the tons of scrap, billets, and finished goods inventory which reflects lower operating levels. The decrease inventory tonnage was offset somewhat by an increase in the carrying value of billets and finished goods inventory. The increase in the carrying value of billets and finished goods inventory reflects higher per ton cost due to lower production levels in fiscal 2001. The decrease in accounts receivable is due to the decrease in sales in fiscal 2001. The decrease in accounts payable is due to lower operating levels. Cash flows used by investing activities consisted of capital expenditures of $2.8 million in fiscal 1999. Cash flows provided by investing activities amounted to $7.2 million in fiscal 2000 and consisted of proceeds from sale-leaseback transaction of $8.5 million offset by capital expenditures of $1.3 million. Cash flows used by investing activities amounted to $.5 million in fiscal 2001 and consisted of capital expenditures of $.8 million offset by proceeds from involuntary conversion of $.3 million. Cash flows provided from financing activities amounted to $2.2 million in fiscal 1999 and reflects $3.1 million in advances on the Company's line of credit facility offset by $1.0 million used to purchase treasury stock. Cash flows used in financing activities amounted to $4.9 million and $.7 million in fiscal 2000 and 2001, respectively. The $4.9 million in fiscal 2000 reflects the $4.9 million in net repayments on the Company's line of credit facility. The $.7 million in fiscal 2001 reflects the $3.3 million repayment of long-term debt offset by the $2.6 million in advances on the Company's line of credit facility. Working capital at September 29, 2001, was $15.9 million as compared to $23.9 million at September 30, 2000. The current ratio was 1.7 to 1.0 at September 29, 2001 as compared to 2.0 to 1.0 at September 30, 2000. The Company completed its 500,000 share buyback program during fiscal 1998 and the Board of Directors authorized the repurchase of an additional 500,000 shares of the Company's common stock. During the fiscal year ended September 29, 2001, the Company did not repurchase any shares of its common stock leaving 60,515 authorized repurchase shares remaining. The Company's primary ongoing cash requirements are for current capital expenditures and ongoing working capital. Since March 31, 2001, the Company has failed to meet the fixed charge coverage ratio covenant which required the Company to maintain a fixed charge coverage ratio of 2:1 for each rolling four quarter period. In addition to the default of the fixed charge coverage ratio covenant, the Company failed to make a scheduled principal payment on the unsecured senior notes of $3,333,333 due on November 1, 2001. These covenant violations were waived in connection with the debt restructuring as discussed below. On January 14, 2002, the Company was successful in restructuring its existing debt obligations. As a result of this restructured financing, the Company deferred its November 1, 2001 principal payment and a portion of the scheduled November 1, 2002 principal payment until November 1, 2005. Annual maturities of the senior notes under the restructured financing are $1,500,000 due on November 1, 2002, $3,333,333 due on September 30, 2003, $3,333,333 due on November 1, 2004 and $8,500,000 due on November 1, 2005. These notes bear interest at the fixed rate of 9.00% per annum, with interest paid monthly. The restructured financing also includes an $18 million secured bank credit facility which expires on November 1, 2005. Borrowings are limited to defined percentages of eligible inventory and accounts receivable. Interest on borrowings accrue at the rate of prime plus 2.5%. As of January 14, 2002, approximately $10.0 million was outstanding under the Company's line of credit, approximately $1.1 million was utilized to collateralize various letters of credit and $4.2 million was available for additional borrowings. In addition, the Company had approximately $.7 million in cash. Under the terms of the restructured financing, both the senior notes and the borrowings on the line of credit are secured by all current and future assets of the Company, including, but not limited to, accounts receivable, inventory, and all real property, plant and equipment. The senior notes and bank credit facility in the restructured financing contain restrictive covenants, which include, among other requirements , the maintenance of minimum shareholders' equity; minimum earnings before interest, taxes, depreciation, and amortization (EBITDA); minimum interest coverage ratio; minimum debt service coverage ratio; capital expenditure restrictions; and prohibition on the payment of dividends. Though the Company will continue its aggressive working capital management and cost reduction initiatives, continued losses similar to those incurred in fiscal 2001 will severely limit the Company's ability to provide future liquidity from operations and remain in compliance with the new covenants of the restructured financing. There can be no assurances that long-term cash requirements and compliance with existing debt covenants will be met if the Company continues to incur significant financial losses for an extended period of time. Recent Developments On March 15, 2001, the Company received a determination letter from the Nasdaq Stock Market, Inc. indicating that, absent a successful appeal by the Company, the Company's common stock would be removed from listing on the Nasdaq National Market. This determination was made based on the Company's common stock failing to maintain public float market value of $5,000,000 as required under Nasdaq's National Market rules. The Company requested a hearing on the written record before a Nasdaq Listing Qualifications Panel to appeal the staff's determination. The Company's appeal was rejected by the Nasdaq Listing Qualifications Panel. The Panel agreed to automatically transfer the Company's common stock to the Nasdaq Small Cap Market effective with the opening of the market on August 20, 2001. See "Current Industry Conditions" for other recent developments. Impact of Inflation and Changing Prices While the Company has not experienced any material long-term adverse effects on operations in recent years because of inflation, margins have been affected by inflationary conditions. The Company's primary cost components are steel scrap, labor, and energy, all of which are susceptible to domestic inflationary pressures. Scrap costs are frequently influenced by supply and demand factors as well as general economic conditions. Finished product prices are influenced by nationwide economic trends, steel imports, and manufacturing capacity within the steel industry. While the Company has generally been successful in passing on cost increases through price increases, the effect of steel imports, market price competition and under- utilized industry capacity has in the past, and could in the future, limit the Company's ability to increase prices. See "Business - Competition and Other Market Factors," "Raw Materials," "Manufacturing Operation" and "Employees." Forward Looking Statements The matters discussed or incorporated by reference in this Report on Form 10-K that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. These risks and uncertainties include, but are not limited to: the reliance on truck and utility vehicle industry; excess industry capacity; product demand and industry pricing; volatility of raw material costs, especially steel scrap; intense foreign and domestic competition; management's estimates of niche market data; the cyclical and capital intensive nature of the industry; and cost of compliance with environmental regulations. These risks and uncertainties could cause actual results of the Company to differ materially from those projected or implied by such forward-looking statements. Impact of Recent Accounting Pronouncements See Note 2 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements of the Company. Item 7A. Qualitative and Quantitative Disclosure about Market Risk The Company is exposed to certain market risks that are inherent in financial instruments arising from transactions that are entered into in the normal course of business. The Company does not enter into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes but is subject to interest rate risk on its fixed interest rate secured senior notes. The bank credit facility has a variable interest rate which reduces the potential exposure of interest rate risk from a cash flow perspective. The fair value of debt with a fixed interest rate generally will increase as interest rates fall given consistency in all other factors. Conversely, the fair value of fixed rate debt will decrease as interest rates rise. The Company is also subject to increases in the cost of energy, supplies and steel scrap due to inflation and market conditions. Item 8. Financial Statements and Supplementary Data The financial statements and schedules referenced in Item 14(a)(1) and (a)(2) hereof are included herein and are filed as part of this report. 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 The specified information required by this item is incorporated by reference to the information under the heading "Proposal I: Election of Directors" in the Proxy Statement as filed with the Commission or is included under the heading "Executive Officers of the Registrant" in Part I of this 10-K filing. The disclosure required by Item 405 of Regulation S-K is incorporated by reference to the information under the heading "Compliance with Section 16(a)" of the Proxy Statement. Item 11. Executive Compensation The specified information required by this item is incorporated by reference to the information under the heading "Executive Compensation" in the Proxy Statement as filed with the Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management The specified information required by this item is incorporated by reference to the information in the table under the heading "Voting Securities and Principal Holders Thereof" in the Proxy Statement as filed with the Commission. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. See Index to Financial Statements and Schedule (a)2. See Index to Financial Statements and Schedule (a)3. Exhibits 3.1 Certificate of Incorporation of Kentucky Electric Steel, Inc., filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 3.2 By-Laws of Kentucky Electric Steel, Inc., filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 4.1 Senior Note Agreement between Registrant and a group of institutional investors. Filed as Exhibit 4.1 to Registrant's Form 10-K for the fiscal year ended September 30, 1995, File No. 0-22416, and incorporated by reference herein. 4.2 First Amendment Agreement to Senior Note Agreement between Registrant and a group of institutional investors. Filed as Exhibit 4.4 to Registrant's Form 10-Q, No. 0-22416, filed on February 11, 1997, and incorporated by reference herein. 4.3 Amended and Restated Loan Agreement between Registrant and National City Bank of Kentucky dated January 14, 2002, filed herewith. 4.4 Amendment No. 2 to Senior Note Agreement between Registrant and a group of institutional investors, filed herewith. 10.1 Transfer Agreement between NS Group, Inc., Kentucky Electric Steel Corporation, and Registrant, filed as Exhibit 10.2 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.2 Tax Agreement between NS Group, Inc., Kentucky Electric Steel Corporation and Registrant, filed as Exhibit 10.3 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.3 Form of Indemnification Agreement between Registrant and Its Executive Officers and Directors, filed as Exhibit 10.4 to Amendment No. 1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein.* 10.4 Registration Rights Agreement between Registrant and NS Group, Inc., filed as Exhibit 10.7 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.5 Kentucky Electric Steel, Inc. 1993 Employee Stock Option/ Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-77598), filed on April 12, 1994, and incorporated by reference herein.* 10.6 Kentucky Electric Steel, Inc. 1993 Transition Stock Option Plan, filed on Registrant's Form S-8 (No. 33-77598), filed on April 12, 1994, and incorporated by reference herein. 10.7 The Kentucky Electric Steel, Inc. Salary Continuation Plan, effective June 7, 1994, as amended, for the benefit of the Company's eligible salaried employees, filed as Exhibit 10.8 to Registrant's Form 10-Q, File No. 0-22416, filed on August 6, 1999, and incorporated by reference herein.* 10.8 The Kentucky Electric Steel, Inc. Executive Severance Plan, effective June 7, 1994, as amended, for the benefit of the Company's eligible Executive Officers, filed as Exhibit 10.9 to Registrant's Form 10-Q, File No. 0-22416, filed on August 6, 1999, and incorporated by reference herein.* 10.9 Employment Agreements dated June 7, 1994, as amended, between Kentucky Electric Steel, Inc. and its four Executive Officers, filed as Exhibit 10.10 to Registrant's Form 10-Q, file No. 0-22416, filed on August 6, 1999 and incorporated by reference herein.* 10.10 Form of Salary Continuation Agreements entered into between Kentucky Electric Steel, Inc. and its four Executive Officers, filed as Exhibit 10.11 to Registrant's Form 10-K for fiscal year ended September 25, 1999, File No. 0-22416, and incorporated by reference herein.* 10.11 The Kentucky Electric Steel, Inc. Key Employee Stock/Loan Plan, effective February 2, 1995 for the benefit of the Company's Executive Officers, filed as Exhibit 10.14 to Registrant's Form 10-Q, No. 0-22416, filed on February 9, 1995, and incorporated by reference herein.* 10.12 Kentucky Electric Steel, Inc. 1994 Employee Stock Option/ Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-301218), filed on February 12, 1996, and incorporated by reference herein.* 10.13 Rights Agreement between Kentucky Electric Steel, Inc. and EquiServe Trust Company, N.A., dated as of September 1, 1999, filed as Exhibit 4.8 to Registrant's Form 8-K, File No. 0-22416, filed on September 14, 1999 and incorporated by reference herein. 10.14 The Kentucky Electric Steel, Inc. 1999 Share Plan for Non- Employee Directors, filed as Exhibit 10.18 to Registrant's Form 10-Q, No. 0-22416 filed on August 6, 1999 and incorporated by reference herein.* 10.15 Form of Promissory Note dated October 6, 1999, between Kentucky Electric Steel, Inc. and its four executive officers, filed as Exhibit 10.19 to Registrant's From 10-K for the fiscal year ended September 25, 1999, File No. 0- 22416, and incorporated by reference herein.* 10.16 Form of Loan Forgiveness Agreement dated October 6, 1999, between Kentucky Electric Steel, Inc. and its four executive officers, filed as Exhibit 10.20 to Registrant's Form 10-K for the fiscal year ended September 25, 1999, File No. 0-22416, and incorporated by reference herein.* 10.17 Trust Under Certain Kentucky Electric Steel Salary Continuation Agreements dated October 14, 1999, filed as Exhibit 10.21 to Registrant's Form 10-K for the fiscal year ended September 25, 1999, File No. 0-22416, and incorporated by reference herein.* 10.18 Master Equipment Lease for Manufacturing Equipment dated September 30, 2000 with Fifth Third Bank, Ohio Valley, filed as Exhibit 10.18 to Registrant's Form 10-K for fiscal year ended September 30, 2000, File No. 0-22416, and incorporated by reference herein. 10.19 Master Equipment Lease for Manufacturing Equipment dated September 30, 2000 with Fifth Third Bank, Ohio Valley, filed as Exhibit 10.19 to Registrant's Form 10-K for fiscal year ended September 30, 2000, File No. 0-22416, and incorporated by reference herein. 10.20 Kentucky Electric Steel, Inc. 2001 Share Plan for Non- Employee Directors, filed as Exhibit 10.22 to Registrant's Form 10-Q, File No. 0-22416, filed on March 31, 2001, and incorporated by reference herein. 10.21 Amended and Restated Addendum A to Master Equipment Lease for Manufacturing Equipment, dated January 14, 2002 with Fifth Third Bank, Ohio Valley, filed herewith. 23 Consent of Arthur Andersen LLP (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 29, 2001. * Indicates management contracts or compensatory plans or arrangements in which one or more Directors or Executive Officers of the Company participate or is a party. 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. KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY January 16, 2002 By: \s\Charles C. Hanebuth Charles C. Hanebuth President, Chief Executive Officer and Chairman 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. Signatures Title Date \s\Charles C. Hanebuth President, Chief Executive Officer January 16, 2002 Charles C. Hanebuth and Chairman \s\William J. Jessie Vice President, Secretary, January 16, 2002 William J. Jessie Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) \s\Clifford R. Borland Director January 16, 2002 Clifford R. Borland \s\Carl E. Edwards, Jr. Director January 16, 2002 Carl E. Edwards, Jr. \s\J. Marvin Quin, II Director January 16, 2002 J. Marvin Quin, II \s\David C. Struve Director January 16, 2002 David C. Struve
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements Page(s) Report of Independent Public Accountants .............. F-1 Consolidated Balance Sheets - September 30, 2000 and September 29, 2001 .................................... F-2 Consolidated Statements of Operations - Years ended September 25, 1999, September 30, 2000 and September 29, 2001 ................................ F-3 Consolidated Statements of Changes in Shareholders' Equity - Years ended September 25, 1999, September 30, 2000, and September 29, 2001 .......................... F-4 Consolidated Statements of Cash Flows - Years ended September 25, 1999, September 30, 2000 and September 29, 2001 ................................ F-5 Notes to Consolidated Financial Statements ............ F-6 Financial Statement Schedule Report of Independent Public Accountants .............. S-1 Schedule II Valuation and Qualifying Accounts ........ S-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Electric Steel, Inc. and Subsidiary: We have audited the accompanying consolidated balance sheets of Kentucky Electric Steel, Inc. (a Delaware corporation) and Subsidiary as of September 30, 2000 and September 29, 2001, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 29, 2001. 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 auditing standards generally accepted in the United States. 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 Kentucky Electric Steel, Inc. and Subsidiary as of September 30, 2000 and September 29, 2001 and the results of their operations and their cash flows for each of the three years in the period ending September 29, 2001 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Cincinnati, Ohio, January 14, 2002 KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) September September 30, 2000 29, 2001 ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,688 $ 7,505 Accounts receivable, less allowance for doubtful accounts and claims of $685 in 2000 and $695 in 2001 10,923 8,600 Inventories 21,668 16,962 Operating supplies and other current assets 5,295 5,128 Refundable income taxes 175 - Deferred tax assets 1,028 - ------- ------- Total current assets 47,777 38,195 ------- ------- PROPERTY, PLANT AND EQUIPMENT Land and buildings 5,604 5,881 Machinery and equipment 34,833 35,252 Construction in progress 946 162 Less - accumulated depreciation (17,387) (19,936) ------- ------- Net property, plant and equipment 23,996 21,359 ------- ------- DEFERRED TAX ASSETS 4,636 - ------- ------- OTHER ASSETS 545 460 ------- ------- Total assets $ 76,954 $ 60,014 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Advances on line of credit $ 9,572 $ 12,141 Accounts payable 7,193 6,303 Accrued liabilities 3,630 3,691 Current maturities of long-term debt 3,458 125 ------- ------- Total current liabilities 23,853 22,260 ------- ------- LONG-TERM DEBT 16,667 16,667 ------- ------- DEFERRED GAIN FROM SALE-LEASEBACK 822 704 ------- ------- Total liabilities 41,342 39,631 ------- ------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued - - Common stock, $.01 par value, 15,000,000 shares authorized, 5,022,544 and 5,051,566 shares issued, respectively 50 51 Additional paid-in capital 15,778 15,817 Less treasury stock - 951,281 shares at cost (4,309) (4,309) Retained earnings 24,093 8,824 ------- ------- Total shareholders' equity 35,612 20,383 ------- ------- Total liabilities and shareholders' equity $ 76,954 $ 60,014
See notes to consolidated financial statements KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Share and Per Share Data) Year Ended September September September 25, 1999 30, 2000 29, 2001 NET SALES $110,265 $120,585 $ 77,859 COST OF GOODS SOLD 100,016 110,883 77,863 ------- ------- ------- Gross profit (loss) 10,249 9,702 (4) SELLING AND ADMINISTRATIVE EXPENSES 7,627 7,573 8,298 ------- ------- ------- Operating income (loss) 2,622 2,129 (8,302) INTEREST EXPENSE (2,274) (2,528) (2,051) INTEREST INCOME AND OTHER 1,234 911 909 LOSS ON ABANDONMENT OF ASSETS - - (457) GAIN ON INVOLUNTARY CONVERSION OF EQUIPMENT - - 256 ------- ------- ------- Income (loss) before income taxes 1,582 512 (9,645) PROVISION FOR INCOME TAXES 604 195 5,624 ------- ------- ------- Net income (loss) $ 978 $ 317 $(15,269) NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ .24 $ .08 $ (3.74) WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,085,480 4,074,463 4,081,966 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 4,089,219 4,074,463 4,081,966 See notes to consolidated financial statements KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Years in the Period Ended September 29, 2001 (Dollars in Thousands) Addi- De- tional ferred Common Stock Paid-In Treasury Stock Compen- Retained Shares Amount Capital Shares Amount sation Earnings Total BALANCE, Sept. 26, 1998 4,985,937 $50 $15,671 (526,996) $(3,254) $(73) $22,798 $35,192 Amortization of deferred comp- ensation - - - - - 43 - 43 Issuance of Stock 17,937 - 57 - - - - 57 Purchases of treasury stock - - - (405,585) (1,018) - - (1,018) Net income - - - - - - 978 978 --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 25, 1999 5,003,874 50 15,728 (932,581) (4,272) (30) 23,776 35,252 Amortization of deferred comp- ensation - - - - - 30 - 30 Issuance of Stock 18,670 - 50 - - - - 50 Purchases of treasury stock - - - (18,700) (37) - - (37) Net income - - - - - - 317 317 --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 30, 2000 5,022,544 50 15,778 (951,281) (4,309) - 24,093 35,612 Issuance of Stock 29,022 1 39 - - - - 40 Net loss - - - - - - (15,269) (15,269) --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 29, 2001 5,051,566 $51 $15,817 (951,281) $(4,309) $ - $ 8,824 $20,383
See notes to consolidated financial statements KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year Ended September September September 25, 1999 30, 2000 29, 2001 Cash Flows From Operating Activities: Net income (loss) $ 978 $ 317 $(15,269) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 3,636 3,827 2,790 Loss on abandonment of assets - - 457 Gain on involuntary conversion of equipment - - (256) Change in deferred taxes 737 617 4,636 Change in other 23 (430) 65 Changes in current assets and current liabilities: Accounts receivable (2,143) 3,257 2,323 Inventories (2,388) 1,083 4,706 Operating supplies and other current assets (88) (1) 167 Refundable income taxes (315) 140 175 Deferred tax assets (35) (345) 1,028 Accounts payable 1,153 (1,873) (890) Accrued liabilities 154 (358) 61 Environmental liabilities (982) - - ------ ------ ------ Net cash flows from operating activities 730 6,234 (7) ------ ------ ------ Cash Flows From Investing Activities: Capital expenditures (2,848) (1,341) (752) Proceeds from sale-leaseback - 8,536 - Proceeds from involuntary conversion - - 300 ------ ------ ------ Net cash flows from investing activities (2,848) 7,195 (452) ------ ------ ------ Cash Flows From Financing Activities: Repayment of long-term debt - - (3,333) Net advances (repayments)on line of credit 3,113 (4,938) 2,569 Issuance of common stock 57 50 40 Purchases of treasury stock (1,018) (37) - ------ ------ ------ Net cash flows from financing activities 2,152 (4,925) (724) ------ ------ ------ Net increase (decrease)in cash and cash equivalents 34 8,504 (1,183) Cash and Cash Equivalents - Beginning of Period 150 184 8,688 ------ ------ ------ Cash and Cash Equivalents - End of Period $ 184 $ 8,688 $ 7,505 Interest Paid $ 2,262 $ 2,472 $ 2,144 Income Taxes Paid (Received) $ 216 $ 80 $ (175) See notes to consolidated financial statements KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of Operations Kentucky Electric Steel, Inc. (KESI or the Company), a Delaware corporation, owns and operates a steel mini-mill near Ashland, Kentucky. The Company manufactures special bar quality alloy and carbon steel bar flats to precise customer specifications for sale in a variety of niche markets. During the past three years, market conditions within the domestic steel industry have experienced significant downward economic pressure largely due to market price and shipment volume declines. These market conditions are a result of a number of factors including a decline in the general economy of the United States, a decline in the industries of the Company's customers, the increased cost of production due to high electricity and natural gas costs and an increase in competition from foreign steel companies. These forces have driven market prices to levels below the cost of production for certain domestic producers, and as a result, many steel manufacturers have curtailed production or ceased operations, and a number of steel industry producers have sought protection under the United States Bankruptcy Code. As a result of these conditions, the Company has experienced sharp declines in shipment volumes and operating margins during fiscal 2001, which impacted the Company's cash flows and produced a pre-tax loss of approximately $9.6 million in fiscal 2001. Since March 31, 2001, the Company has failed to meet the fixed charge coverage ratio covenant of its loan agreements which required the Company to maintain a fixed charge coverage ratio of 2:1 for each rolling four quarter period. In addition to the default of the fixed charge coverage ratio covenant, the Company failed to make a scheduled principal payment on the unsecured senior notes of $3,333,333 due on November 1, 2001. However, the Company is current on all interest payments. In response to these conditions, the Company has undertaken and will continue to undertake certain cost control initiatives and subsequent to September 29, 2001, the Company was successful in restructuring its long-term debt obligations and bank credit facility in order to manage the Company's liquidity through this difficult market environment. Management anticipates that the market conditions discussed above will continue to impact the Company's operations through fiscal 2002 and negatively impact the Company's financial performance. Management believes that the Company has the ability to sustain its operations and meet its commitments at least for the near-term through effective management of its operations and the restructured debt and bank credit facility. However, should these negative market conditions worsen or persist on a long-term basis, the Company's ability to continue to manage its liquidity for the long-term may be jeopardized. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Kentucky Electric Steel, Inc. and its wholly-owned subsidiary, KESI Finance Company, which was formed in October 1996 to finance the ladle metallurgy facility. All significant intercompany accounts and transactions have been eliminated. On September 28, 2001, the Company dissolved KESI Finance Company as a separate legal entity. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications of previously reported amounts have been made to conform with current classifications. Cash and Cash Equivalents Cash includes currency on-hand and deposits with financial institutions. Cash equivalents consist of investments with original maturities of three months or less. Amounts are stated at cost, which approximates market value. Cash and cash equivalents as of September 30, 2000 includes the proceeds from the sale-leaseback transaction. Inventories Inventory costs include material, labor and manufacturing overhead. Inventories are valued at the lower of average cost or market. Property, Plant and Equipment and Depreciation Property, plant and equipment is recorded at cost, less accumulated depreciation. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally 3 to 12 years for machinery and equipment and 15 to 30 years for buildings and improvements. Depreciation for income tax purposes is computed using accelerated methods. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals, which extend the useful life of any asset, are capitalized. The Company assesses its long-lived assets for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Revenue Recognition The Company recognizes revenue from sales at the time of shipment. Income Taxes The Company accounts for income taxes pursuant to the asset and liability method. Deferred tax assets and liabilities are recognized based upon the estimated increase or decrease in taxes payable or refundable in future years expected to result from reversal of temporary differences and utilization of carryforwards which exist at the end of the current year. Temporary differences represent the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates scheduled to apply to taxable income in the years in which the temporary differences are expected to be settled, and are adjusted in the period of enactment for the effect of a change in tax law or rates. Valuation allowances are provided against deferred tax assets for which it is "more likely than not" the assets will not be realized. The valuation allowance was increased to $11.5 million as a result of the uncertainty of the recoverability of such tax benefits. (See Note 9 to the Consolidated Financial Statements) Fiscal Year End The Company's fiscal year ends on the last Saturday of September. The fiscal year normally consists of fifty-two weeks, however, the fiscal year ending September 30, 2000 consisted of fifty- three weeks. The fiscal year ending September 29, 2001 consisted of fifty-two weeks. Segment Information Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the decision-making group in deciding how to allocate resources. The Company has one business unit. New Accounting Pronouncements SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS No. 133 effective as of the beginning of the first quarter of fiscal 2001. The Company does not currently have any derivative financial instruments; therefore, SFAS No. 133 does not currently apply. SFAS No. 141 "Business Combinations" In July 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS 141) "Business Combinations". This standard eliminates the pooling of interest method of accounting for business combinations. This standard is effective for all business combinations initiated after June 30, 2001. As the Company has not completed any business combinations or mergers in the current year, this standard currently does not apply. SFAS No. 142 "Goodwill and Other Intangible Assets" In July 2001, the Financial Accounting Standards Board issued Statement No. 142 (SFAS 142) "Goodwill and Other Intangible Assets". SFAS 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets. It requires that an entity cease amortization of goodwill and intangible assets and establishes an annual requirement to test these assets for impairment. This standard is required to be adopted for fiscal years beginning after December 15, 2001. As such, the Company is not required to adopt this standard until the fiscal year beginning September 29, 2002. Early application of this standard is permitted for entities with fiscal years beginning after March 15, 2001. The Company did not early adopt this standard. Management does not believe that the adoption of this standard will have a material impact on the financial position or results of operations of the Company. SFAS No. 143 "Accounting for Asset Retirement Obligations" In August 2001, the Financial Accounting Standards Board issued Statement No. 143 (SFAS 143) "Accounting for Assets Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard is required to be adopted for fiscal years beginning after June 15, 2002. As such, the Company is not required to adopt this standard until the fiscal year beginning September 29, 2002. Management does not believe that the adoption of this standard will have a material impact on the financial position or results of operations of the Company. SFAS No. 144 "Accounting for the Impairment or Disposal of Long- Lived Assets In October 2001, the Financial Accounting Standards Board issued Statement No. 144 (SFAS 144) "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting impairment or disposal of long-lived assets and requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. This standard is required to be adopted for fiscal years beginning after December 15, 2001. As such, the Company is not required to adopt this standard until the fiscal year beginning September 28, 2002. Management does not believe that the adoption of this standard will have a material impact on the financial position or results of operations of the Company. (3) Inventories Inventories at September 30, 2000 and September 29, 2001 consist of the following ($000's): 2000 2001 Raw materials $ 3,181 $ 2,113 Semi-finished and finished goods 18,487 14,849 Total inventories $21,668 $16,962 (4) Accrued Liabilities Accrued liabilities at September 30, 2000 and September 29, 2001 consist of the following ($000's): 2000 2001 Accrued payroll and related liabilities $ 1,293 $ 1,095 Accrued insurance and workers' compensation 880 1,050 Accrued interest payable 770 677 Other 687 869 $ 3,630 $ 3,691 (5) Involuntary Conversion Due to Fire The Company experienced a fire which destroyed an auxiliary building and certain equipment during the first quarter of fiscal 2001. This fire did not interrupt the Company's operations. The resulting damage and replacement costs were covered by the Company's insurance carrier, subject to a $100,000 deductible. The Company completed construction of new facilities during the fourth quarter of fiscal 2001. The net book value of the assets destroyed was approximately $57,000 and the Company incurred approximately $135,000 in additional expenses associated with the fire and expended $313,000 on the new building and equipment. The excess of the replacement cost over the net book value of the building and equipment destroyed resulted in a gain of approximately $256,000. The insurance company advanced the Company $300,000 related to this claim. The financial statements as of September 29, 2001 include a receivable from the insurance company of approximately $148,000. (6) Advances on Line of Credit and Long-Term Debt Long-term debt of the Company at September 30, 2000 and September 29, 2001, as restructured, consists of the following ($000's): 2000 2001 Secured senior notes, due in annual installments from November 2000 through 2005, interest at 9.00% $ 20,000 $ 16,667 Other 125 125 20,125 16,792 Less - Current portion (3,458) (125) $ 16,667 $ 16,667 At September 29, 2001, before the debt restructuring, the Company had outstanding borrowings of $16.7 million on the unsecured senior notes. These notes bore interest at a fixed rate of 7.66% per annum, with interest paid semi-annually. Additionally, the Company had a $24.5 million unsecured bank credit facility which expired on January 31, 2002. Borrowings were limited to defined percentages of eligible inventory and accounts receivable. Interest on borrowings accrued at the rate of LIBOR plus 1.35% or the prime rate minus 1/2%. As of September 29, 2001, approximately $12.1 million was outstanding under the old bank credit facility, approximately $1.1 million was utilized to collateralize various letters of credit. The weighted average interest rate on short-term borrowings as of September 30, 2000 and September 29, 2001 were 8.2% and 5.5%, respectively. The maximum and average borrowings for the year ended September 29, 2001 were $13,210,000 and $10,587,000, respectively. The senior notes and the bank credit facility contained restrictive covenants, which include, among other restrictions, a maximum ratio of total funded debt to total capitalization, a minimum fixed charge coverage ratio, a minimum net worth requirement and restrictions on the payment of dividends. Since March 31, 2001, the Company failed to meet the fixed charge coverage ratio covenant which required the Company to maintain a fixed charge coverage ratio of 2:1 for each rolling four quarter period. In addition to the default of the fixed charge coverage ratio covenant, the Company failed to make the scheduled principal payment of $3,333,333 due on November 1, 2001. These covenant violations were waived in connection with the debt restructuring as discussed below. On January 14, 2002, the Company was successful in obtaining restructured financing of its existing debt obligations. As a result of this restructured financing, the Company deferred its November 1, 2001 principal payment and a portion of the scheduled November 1, 2002 principal payment until November 1, 2005. Annual maturities of the senior notes under the restructured financing are $1,500,000 due on November 1, 2002, $3,333,333 due on September 30, 2003, $3,333,333 due on November 1, 2004 and $8,500,000 due on November 1, 2005. These notes bear interest at the fixed rate of 9.00% per annum, with interest paid monthly. The restructured financing also includes an $18 million secured bank credit facility which expires on November 1, 2005. Borrowings are limited to defined percentages of eligible inventory and accounts receivable. Interest on borrowings accrue at the rate of prime plus 2.5%. As of January 14, 2002, approximately $12.1 million was outstanding under the Company's line of credit, approximately $1.1 million was utilized to collateralize various letters of credit. In addition, the Company had approximately $3.7 million in cash. Under the terms of the restructured financing, both the senior notes and the borrowings on the line of credit are secured by all current and future assets of the Company, including, but not limited to, accounts receivable, inventory, and all real property, plant and equipment. The senior notes and bank credit facility in the restructured financing contain restrictive covenants, which include, among other requirements, the maintenance of minimum shareholders' equity; minimum earnings before interest, taxes, depreciation, and amortization (EBITDA); minimum interest coverage ratio; minimum debt service coverage ratio; capital expenditure restrictions; and prohibition on the payment of dividends. The estimated fair value of the Company's secured senior notes is estimated using discounted cash flow analysis, based upon the estimated market rate as of September 29, 2001. The fair value of the secured senior notes was approximately $17.7 million as of September 29, 2001 and $19.8 million as of September 30, 2000. (7) Sale-Leaseback Transaction In September 2000, the Company entered into a sale-leaseback transaction for its ladle metallurgy facility and certain other of its machinery and equipment for approximately $8.5 million, resulting in a deferred gain of $.8 million, to be amortized over the seven year term of the lease. Lease expense for the ladle metallurgy facility and certain other machinery and equipment was $1,318,000. The Company has an early buyout option for a certain portion of the leased assets at the end of 5 years, and another early buyout option for all the leased assets at the end of 6-1/2 years at an amount approximating the estimated fair value of the assets. The Company also has a purchase option at the end of the lease term at an amount equal to the equipment's then fair market value. If the purchase option is not exercised, the lease automatically renews for a term and rate to be negotiated by the Company and the lessor. The lease has been accounted for as an operating lease. The future minimum lease payments are as follows ($000's): 2002 $1,448 2003 1,360 2004 1,297 2005 1,275 2006 1,210 thereafter 1,310 Total $7,900 (8) Significant Customers and Foreign Sales The Company grants trade credit to customers within the markets it serves. Sales to the leaf-springs suspension market represented 12.5%, 16.7%, and 13.8% of total sales for fiscal 1999, 2000 and 2001, respectively. One company, through several wholly-owned subsidiaries, which are customers of the Company, represented 13.5%, 11.2%, and 10.1% of net sales in fiscal 1999, 2000, and 2001, respectively. Another customer, through two wholly-owned subsidiaries, which are customers of the Company, accounted for 11.0%, 8.0%, and 6.8% of net sales in fiscal 1999, 2000, and 2001, respectively. No other customer accounted for more than 10% of net sales. The Company's foreign sales represented 8.6%, 12.7%, and 8.3% of total sales for 1999, 2000 and 2001, respectively. (9) Income Taxes The provision (credit) for income taxes consists of the following ($000's): 1999 2000 2001 Current: Federal $ (98) $ (76) $ 775 State - - 103 (98) (76) 878 Deferred: Federal 626 249 3,142 State 76 22 1,604 702 271 4,746 Total provision (credit) for income taxes $ 604 $ 195 $ 5,624 The provision (credit)for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons ($000's): 1999 2000 2001 Income tax provision (credit) at statutory tax rate of 34% $ 538 $ 174 $(3,312) State income taxes, net of federal effect 50 15 (311) Change in valuation allowance - - 8,865 Other, net 16 6 382 $ 604 $ 195 $ 5,624 The components of the net deferred tax asset at September 30, 2000 and September 29, 2001 are as follows ($000's): Sept. 30, Sept. 29, 2000 2001 Deferred tax components: Property, plant and equipment $(1,671) $(2,228) Intangibles 1,684 1,472 AMT credit carryforwards 992 951 NOL carryforward 5,362 9,509 Other 1,978 1,842 8,345 11,546 Valuation allowance (2,681) (11,546) Net deferred tax assets $ 5,664 $ 0 For Federal income tax purposes the Company has alternative minimum tax credit carryforwards of approximately $1.0 million, which are not limited by expiration dates. The Company also has gross operating tax loss carryforwards of approximately $27.9 million, which expire beginning in 2011. The Company has recorded deferred tax assets related to these carryforwards. The realization of deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management has considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. After taking into consideration historical pre-tax income levels, the results of operations from fiscal 1999, 2000 and 2001, the potential limitation of net operating losses under Section 382 of the Internal Revenue Code and other available objective evidence, the realization of the deferred tax asset is no longer more likely than not. Therefore, the valuation allowance was increased to fully reserve the net deferred tax asset. Also, realization of deferred tax assets may be limited by Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code contains rules designed to discourage persons from buying and selling the net operating losses of companies. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the common stock of a company or any change in ownership arising from a new issuance of stock by a company. In general, Section 382 rules limit the ability of a company to utilize net operating losses after a change of ownership of more than 50% of its common stock over a three-year period. Purchases of our common stock in amounts greater than specified levels could inadvertently create a limitation on our ability to utilize our net operating losses for tax purposes in the future. (10) Profit Sharing Plans The Company has established profit sharing plans for its bargaining unit (hourly) and salaried employees. Generally, the plans require mandatory contributions of five percent of pretax profits (with a guaranteed minimum based on hours worked) for the hourly employees, and an additional discretionary contribution set by the Board of Directors for salaried employees. Expense for contributions was approximately $219,000, $225,000 and $175,000 in fiscal 1999, 2000 and 2001, respectively. (11) Earnings Per Share Statement of Financial Accounting Standards No. 128 (SFAS No. 128) related to earnings per share requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. Net Income ($000's) For the Year Ended For the Year Ended September 25, 1999 September 30, 2000 Per Per Net Share Net Share Income Shares Amount Income Shares Amount Amounts for Basic Earnings Per Share $ 978 4,085,480 $ .24 $ 317 4,074,463 $.08 Effect of Dilutive Securities Options - 3,739 - - - - Amounts for Diluted Earnings Per Share $ 978 4,089,219 $ .24 $ 317 4,074,463 $.08 For the Year Ended September 29, 2001 Per Net Share (Loss) Shares Amount Amounts for Basic Earnings Per Share $(15,269) 4,081,966 $(3.74) Effect of Dilutive Securities Options - - - Amounts for Diluted Earnings Per Share $(15,269) 4,081,966 $(3.74) The following options were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the applicable period: 1999 2000 2001 Transition stock options 56,061 50,951 26,633 Employee stock options 378,668 561,052 601,744 434,729 612,003 628,377 See Note 12 for further information regarding options outstanding. (12) Stock Option/Restricted Stock Plan The Company has Employee Stock Option/Restricted Stock Plans which provide shares of common stock for awards to eligible employees in the form of stock options and restricted stock. Awards under the Plans may be made to any officer or other key employees of the Company. The options become exercisable on a pro rata basis over a period of four years beginning one year after the grant date, except for options issued in conjunction with the initial public offering, which became exercisable over a three-year period, which began upon approval by the stockholders of the 1993 Employee Stock Option/Restricted Stock Plan in February 1994. All unexercised options expire ten years after the date of grant. Option prices range from $1.50 to $12.31 per share. The Plans also provide for the issuance of restricted stock. The restricted shares vest three years after the grant date. During 1994 in connection with the initial public offering, 18,000 restricted shares were granted and issued, and vested on a pro rata basis over a period of four years beginning one year after the grant date. A summary of transactions in the above plans for fiscal 1999, 2000, and 2001 are as follows: 1999 2000 2001 Weighted- Weighted- Weighted- Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price Options outstanding, beginning of year 386,668 $ 9.15 469,860 $ 7.97 561,052 $ 8.99 Options granted 91,192 3.03 91,192 2.53 85,192 1.50 Options forfeited (8,000) 8.66 - - (44,500) 4.72 Options outstanding, end of year 469,860 $ 7.97 561,052 $ 7.09 601,744 $ 6.47 Options exercisable, end of year 318,022 $ 9.72 380,916 $ 8.99 423,559 $ 8.28 Restricted shares granted - - - Options and restricted shares available for grant 191,041 99,849 59,157
The 1993 Transition Stock Option Plan (the "Transition Plan") was approved by the shareholders in 1994. The Transition Plan was designed to substitute KESI stock options for previously issued NS Group stock options. KESI incentive stock options for 186,539 shares of Common Stock were issued in 1994, with exercise prices varying from $8.76 per share to $20.86 per share. All options outstanding at September 29, 2001 have ten year terms and expire in 2003. A summary of transactions in the plan for fiscal 1999, 2000, and 2001 are as follows: 1999 2000 2001 Weighted- Weighted- Weighted- Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price Options outstanding, beginning of year 92,335 $ 10.84 56,061 $ 8.93 50,951 $ 8.86 Options granted - - - - - - Options forfeited (6,340) 11.01 (4,755) 8.86 (10,640) 8.86 Options expired (29,934) 14.40 (355) 19.57 (13,678) 9.05 Options outstanding, end of year 56,061 $ 8.93 50,951 $ 8.86 26,633 $ 8.76 Options exercisable, end of year 56,091 $ 8.93 50,951 $ 8.86 26,633 $ 8.76
The Company accounts for its stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25 and related interpretations. Under this method, no compensation cost has been recognized for the Company's Employee Stock Option Plan for fiscal years 1999, 2000, and 2001. Had compensation cost for the stock option plans been determined based on the fair value of the options at the grant dates, under those plans consistent with the fair value method, pro forma net income and basic and diluted earnings per share would have been net income of $.9 million and $.21 per share for fiscal 1999, net income of $.2 million or $.05 per share for fiscal 2000, and net loss of $15.3 million and ($3.74) per share for fiscal 2001. The weighted-average fair value of options granted in fiscal 1999, 2000 and 2001 was $1.64, $1.48 and $.83 per share, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions: weighted average risk free interest rate of 5.1% for fiscal 1999, 6.78% for fiscal 2000 and 5.17% for fiscal 2001, weighted average volatility of 39.4% for fiscal 1999, 40.4% for fiscal 2000 and 40.95% for fiscal 2001, expected life of eight years and zero dividends. The following table summarizes information about stock options outstanding at September 29, 2001 under the Employee Stock Option/Restricted Stock Plans and the Transition Plan: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 9/29/01 Life Price at 9/29/01 Price Employee Stock Option/Restricted Stock Plans: $ 9.13 - 12.31 208,784 2.97 Years $11.11 208,784 $11.11 5.56 - 7.63 153,884 5.11 Years 6.57 153,884 5.11 1.50 - 3.03 239,076 8.36 Years 2.36 60,891 2.86 $ 1.50 - 12.31 601,744 5.66 Years $ 6.47 423,559 $ 8.28 Transition Plan: $ 8.76 - 8.76 26,633 1.39 Years $ 8.76 26,633 $ 8.76
The Company has a key employees' stock loan plan which provides for the granting of loans to eligible employees for the purchase of the Company's common stock in the open market. Under the terms of the plan, the loans are forgiven, and the related amounts expensed, on a pro-rata basis over a five-year period of service beginning at the date of grant. The stock loan was fully amortized as of September 30, 2000. In fiscal 2000, the Company recognized approximately $30,000 of compensation expense related to the plan. During 1997, the Board of Directors established the Kentucky Electric Steel, Inc. Share Plan for Non-Employee Directors (the "Plan"), which provides for the issuance of stock in lieu of cash for director services. Under the Plan, 25,000 shares were authorized for issuance. In May 1999, the Board of Directors approved the 1999 Share Plan for Non-Employee Directors, which authorized 25,000 of additional shares to be used for Directors' compensation. In February 2001, the stockholders of the Company approved the 2001 Share Plan for Non- Employee Directors, which authorized 100,000 of additional shares to be used for Directors' compensation. The Plan provides for issuance of common stock for at least 60% of the fees payable with respect to the applicable meeting for each Non-Employee Director. During fiscal 2000, 18,670 shares were issued at stock prices ranging from $1.97 to $3.72 per share. During fiscal 2001, 29,022 shares were issued at stock prices ranging from $1.25 to $2.25. (13) Shareholders' Equity Each share of common stock outstanding (and each share of common stock issued prior to the occurrence of certain events) carries with it one Preferred Stock Purchase Right (a Right) to purchase at a price of $40, one-hundredth of a share of Series A Junior Participating Preferred Stock. The Rights are exercisable only if a person or group acquires or announces a tender offer which would result in ownership of 20% or more of the common stock. The Company can redeem the Rights for $.01 per Right at any time prior to the time a person or group acquires 20% or more of the Company's shares. Following the acquisition of 20% or more of the Company's common stock by a person or group, the holders of the Rights will be entitled to purchase additional shares of Company common stock at one-half the then current market price, and, in the event of a subsequent merger or other acquisition of the Company, to buy shares of common stock of the acquiring entity at one-half of the market price of those shares. In neither event, however, would the acquiring person or group be entitled to purchase shares at the reduced price. In connection with the shareholder rights plan, which was adopted by the Board of Directors on February 27, 1996 and amended and restated as of September 1, 1999, 150,000 shares of the Company's 1,000,000 authorized shares of preferred stock have been designated as Series A Junior Participating Preferred Stock. No shares of the Series A Junior Participating Preferred Stock have been issued. (14) Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, environmental and other matters, which seek remedies or damages. Costs to be incurred in connection with environmental matters are accrued when the prospect of incurring costs for testing or remedial action is deemed probable and such amounts can be estimated. The Company maintains reserves which it believes are adequate related to testing, consulting fees and minor remediation. However, new information or developments with respect to known matters or unknown conditions could result in the recording of accruals in the periods in which they become known. The Company believes that any liability that may ultimately be determined with respect to commercial, product liability, environmental or other matters will not have a material effect on its financial condition or results of operations. (15) Quarterly Financial Data (Unaudited) Quarterly results of operations (in thousands, except share and per share amounts) for fiscal 2000 and fiscal 2001 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter 2000 Net sales $ 30,715 $ 31,171 $ 32,629 $ 26,070 Gross profit $ 1,619 $ 3,058 $ 3,246 $ 1,779 Net income (loss) $ (620) $ 362 $ 920 $ (345) Net income (loss) per common share - basic and diluted $ (.15) $ .09 $ .23 $ (.08)(A) Weighted average shares outstanding - basic 4,073,979 4,077,771 4,075,760 4,070,405 Weighted average shares outstanding - diluted 4,073,979 4,077,771 4,075,760 4,070,405 2001 Net sales $ 17,279 $ 22,737 $ 19,442 $ 18,401 Gross profit (loss) $ 273 $ 490 $ 34 $ (801) Net income (loss) $ (1,224) $ (1,407) $ (1,346) $ (11,292) Net income (loss) per common share - basic and diluted $ (.30) $ (.35) $ (.33) $ (2.76)(A) Weighted average shares outstanding - basic 4,072,476 4,076,545 4,085,150 4,093,694 Weighted average shares outstanding - diluted 4,072,476 4,076,545 4,085,150 4,093,694 (A) The sum of the quarters may not equal the annual amounts due to rounding.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Electric Steel, Inc. and Subsidiary: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Kentucky Electric Steel, Inc. and Subsidiary's annual report on Form 10-K, and have issued our report thereon dated January 14, 2002. Our audit was made for the purpose of forming an opinion on those 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 regulations 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. Arthur Andersen LLP Cincinnati, Ohio, January 14, 2002 SCHEDULE II KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Doubtful Accounts (1) BALANCE, September 26, 1998 ....................... 460 Additions: Charged to costs and expenses ................. (30) Deductions: Net charge-off of accounts deemed uncollectible - --- BALANCE, September 25, 1999 ....................... $ 430 Additions: Charged to costs and expenses ................. 324 Deductions: Net charge-off of accounts deemed uncollectible (69) --- BALANCE, September 30, 2000 ....................... $ 685 Additions: Charged to costs and expenses ................. 719 Deductions: Net charge-off of accounts deemed uncollectible (709) --- BALANCE, September 29, 2001 ....................... $ 695 (1) Deducted from accounts receivable. EX-23 4 exhibittwentythree.txt EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-301218 and 33-77598. Arthur Andersen LLP Cincinnati, Ohio January 14, 2002 EX-4 5 loanagreement.txt LOAN AGREEMENT AMENDED AND RESTATED LOAN AGREEMENT BY AND BETWEEN KENTUCKY ELECTRIC STEEL, INC. AND NATIONAL CITY BANK OF KENTUCKY January 14, 2002 1. Definitions and Cross References 2 1.1 Accounts Receivable 2 1.2 Affiliate 2 1.3 Amended and Restated Loan Agreement 3 1.4 Amended and Restated Working Capital Line of Credit Note 3 1.5 And/or 3 1.6 Application and Agreement For Letter of Credit 3 1.7 Authorized Officer 3 1.8 Bank 3 1.9 Bankruptcy Code 3 1.10 Borrower 3 1.11 Borrower's Loan Account 4 1.12 Borrowing Base 4 1.13 Borrowing Base Report 4 1.14 Borrowing Certificate 4 1.15 Business Day 4 1.16 Capitalized Lease 4 1.17 Capitalized Rentals 4 1.18 CERCLA 4 1.19 Closing Date 5 1.20 Code 5 1.21 Common Stock 5 1.22 Compliance Certificate 5 1.23 Consolidated EBITDA 5 1.24 Consolidated Funded Debt 5 1.25 Consolidated Net Earnings 5 1.26 Consolidated Stockholders' Equity 6 1.27 Consolidated Tangible Net Worth 6 1.28 Consolidated Total Assets 6 1.29 Consolidated Total Capitalization 6 1.30 Covered Tax 6 1.31 Debt 6 1.32 Debt Service 7 1.33 Debt Service Coverage Ratio 7 1.34 Default Rate 7 1.35 Eligible Accounts 7 1.36 Eligible Billet Inventory 8 1.37 Eligible Finished Goods Inventory 8 1.38 Eligible Scrap Inventory 9 1.39 Environmental Claim 9 1.40 Environmental Law 9 1.41 ERISA 10 1.42 ERISA Affiliate 10 1.43 Excluded Tax 10 1.44 Export Accounts Receivable 10 1.45 Events of Default 10 1.46 Fiscal Quarter 11 1.47 Fiscal Year 11 1.48 Funded Debt 11 1.49 Funding Date 11 1.50 GAAP 11 1.51 Governmental Approval 11 1.52 Governmental Authority 11 1.53 Guaranties 11 1.54 Hazardous Material 12 1.55 Hazardous Material Activity 12 1.56 Indebtedness 12 1.57 Interest Charges 13 1.58 Interest Coverage Ratio 13 1.59 Inventory 13 1.60 Investments 13 1.61 Joint Venture 13 1.62 Legal Requirement 14 1.63 Letter of Credit Fee 14 1.64 Letter of Credit Usage 14 1.65 Letters of Credit 14 1.66 Lien 14 1.67 Loan Instruments 15 1.68 Margin Stock 15 1.69 Master Equipment Lease 15 1.70 Material Adverse Effect 15 1.71 Minority Interests 15 1.72 Multiemployer Plan 15 1.73 Net Outstanding Amount of Eligible Accounts 15 1.74 Net Security Value of Eligible Billet Inventory 16 1.75 Net Security Value of Eligible Finished Goods Inventory 16 1.76 Net Security Value of Eligible Scrap Inventory 16 1.77 Obligations 16 1.78 Officer's Certificate 17 1.79 PBGC 17 1.80 Person 17 1.81 Plan 17 1.82 Prime Rate 17 1.83 RCRA 17 1.84 Release 17 1.85 Rentals 17 1.86 Reportable Event 18 1.87 Restricted Investments 18 1.88 Restricted Payments 20 1.89 Security 20 1.90 Senior Note Agreement 21 1.91 Senior Notes 21 1.92 Significant Subsidiary 21 1.93 Subordinated Debt 21 1.94 Subsidiary 21 1.95 Tax 21 1.96 Tax Transferee 21 1.97 Total Utilization of Working Capital Commitment 22 1.98 Voting Stock 22 1.99 Wholly-Owned 22 1.100 Working Capital Commitment 22 1.101 Working Capital Line of Credit 22 1.102 Working Capital Line of Credit Termination Date 22 1.103 Working Capital Loans 22 1.104 Accounting Terms and Financial Information 22 1.105 Other Definitional Provisions 23 2. Working Capital Line of Credit 23 2.1 Working Capital Commitment; Working Capital Loans 24 2.2 Interest on the Amended and Restated Working Capital Line of Credit Note 28 2.3 Fees 29 2.4 Prepayments and Payments; Reductions in Working Capital Commitment 30 2.5 Use of Proceeds 31 2.6 Letters of Credit 31 3. Security for the Indebtedness 36 3.1 Security Interest 36 3.2 Right of Offset 37 3.3 Mortgage 37 3.4 Assignment of Rents and Leases 37 3.5 Other Security 37 4. Conditions Precedent 37 4.1 Initial Closing Conditions 37 4.2 Conditions to All Letters of Credit 40 4.3 Conditions to All Working Capital Loans and Letters of Credit 40 5. Representations and Warranties 41 5.1 Organization, Standing, etc. of the Borrower 41 5.2 Subsidiaries 41 5.3 Qualification 41 5.4 Use of Proceeds 42 5.5 Intellectual Property 42 5.6 Contracts 42 5.7 Disclosure 42 5.8 Funded Debt and Capitalized Leases 43 5.9 Title to Properties; Liens 43 5.10 Litigation, etc 43 5.11 Authorization; Compliance with Other Instruments 43 5.12 Governmental Consent 44 5.13 Eligible Accounts 44 5.14 Investment Company Act Status 44 5.15 Regulation G, etc 44 5.16 Holding Company Act 44 5.17 Employee Retirement Income Security Act of 1974 44 5.18 Accuracy of Financial Reports 45 5.19 Bank Accounts 45 6. Affirmative Covenants 45 6.1 Maintenance of Properties 45 6.2 Monetary Obligations 45 6.3 Financial Statements and Other Reports 46 6.4 Financial Records; Inspection 49 6.5 Permits, Certificates, Leases, Licenses, etc. 49 6.6 Notice 49 6.7 Further Assurances 50 6.8 Payment of Obligations 50 6.9 Preservation of Existence, Leases, etc 50 6.10 Insurance 50 6.11 Environmental Matters 50 7. Negative Covenants 51 7.1 Mergers, Consolidations and Sales of Assets 51 7.2 Use of Assets 53 7.3 Limitation of Liens 53 7.4 Restricted Payments 55 7.5 Nature of Business 56 7.6 Agreements and Licenses 56 7.7 Limitations on Funded Debt 56 7.8 Transactions with Affiliates 57 7.9 Guaranties 57 7.10 ERISA Compliance 57 7.11 Minimum Consolidated Tangible Net Worth 58 7.12 Minimum Consolidated EBITDA 59 7.13 Interest Coverage Ratio 60 7.14 Debt Service Coverage Ratio 60 7.15 Capital Expenditures 60 8. Events of Default; Acceleration 60 9. Remedies 63 9.1 Defaults 63 9.2 Offset 63 9.3 Rights Cumulative 63 9.4 Payment of Costs and Expenses 63 10. Assignments and Participations 64 11. Indemnity 65 12. Miscellaneous 65 12.1 Role of the Bank 65 12.2 Notices 66 12.3 Waiver 67 12.4 Survival of Representations and Warranties 67 12.5 Invalidity 67 12.6 Assignment 67 12.7 Governing Law 67 12.8 Section Headings 68 12.9 Entire Agreement 68 12.10 Time of the Essence 68 12.11 No Oral Modifications 68 12.12 Costs and Expenses 68 12.13 Right to Request Waivers 68 12.14 Supersession of Original Loan Agreement 68 12.15 Termination of Export Line of Credit 68 12.16 Waiver 68 13. Release of Bank 69 14. Waiver of Jury Trial 69 Acceptable Bank 1.87(m) Acceptable Broker-Dealer 1.87(m) Accounts Receivable 1.1 Affiliate 1.2 Amended and Restated Loan Agreement Preamble Amended and Restated Working Capital Line of Credit Note 1.4 And/or 1.5 Application and Agreement For Letter of Credit 1.6 Asset Disposition 7.1(b) Assignment of Rents and Leases 3.4 Authorized Officer 1.7 Bank Preamble Bankruptcy Code 1.9 Borrower Preamble Borrower's Loan Account 1.11 Borrowing Base 1.12 Borrowing Rate 2.2(a) Borrowing Base Report 1.13 Borrowing Certificate 1.14 Business Day 1.15 Capitalized Lease 1.16 Capitalized Rentals 1.17 CERCLA 1.18 Closing Date 1.19 Code 1.20 Collateral Agent Preamble Common Stock 1.21 Compliance Certificate 1.22 Consolidated EBITDA 1.23 Consolidated Funded Debt 1.24 Consolidated Net Earnings 1.25 Consolidated Stockholders' Equity 1.26 Consolidated Tangible Net Worth 1.27 Consolidated Total Assets 1.28 Consolidated Total Capitalization 1.29 control 1.2 Covered Tax 1.30 Debt 1.31 Debt Service 1.32 Debt Service Coverage Ratio 1.33 Default Rate 1.34 Eligible Accounts 1.35 Eligible Assignees 10.0(a) Eligible Billet Inventory 1.36 Eligible Finished Goods Inventory 1.37 Eligible Scrap Inventory 1.38 Environmental Claim 1.39 Environmental Law 1.40 ERISA 1.41 ERISA Affiliate 1.42 Excluded Tax 1.43 Export Accounts Receivable 1.44 Events of Default 1.45, 8 Excluded Asset Dispositions 7.1(c) Fiscal Quarter 1.46 Fiscal Year 1.47 Funded Debt 1.48 Funding Date 1.49 GAAP 1.50 Government Acts 2.6(h) Governmental Approval 1.51 Governmental Authority 1.52 Guaranties 1.53 Hazardous Material 1.54 Hazardous Material Activity 1.55 Indebtedness 1.56 Interest Charges 1.57 Interest Coverage Ratio 1.58 Inventory 1.59 Investments 1.60 Joint Venture 1.61 Legal Requirement 1.62 Lenders Preamble Letter of Credit Fee 1.63 Letter of Credit Usage 1.64 Letters of Credit 1.65 Lien 1.66 Line of Credit Recital A Loan Instruments 1.67 Margin Stock 1.68 Master Equipment Lease 1.69 Material Adverse Effect 1.70 Minority Interests 1.71 Moody's 1.87(m) Mortgage 3.3 Multiemployer Plan 1.72 net income taxes 1.43 Net Outstanding Amount of Eligible Accounts 1.73 Net Security Value of Eligible Billet Inventory 1.74 Net Security Value of Eligible Finished Goods Inventory 1.75 Net Security Value of Eligible Scrap Inventory 1.76 Note Agreement Recital B Note Documents 4.1(h) Noteholders Recital B Obligations 1.77 Officer's Certificate 1.78 PBGC 1.79 Person 1.80 Plan 1.81 primary obligor 1.53 Prime Rate 1.82 Prior Loan Agreement Recital A RCRA 1.83 Release 1.84 Rentals 1.85 Reportable Event 1.86 Repurchase Agreement 1.87(m) Restricted Investments 1.87 Restricted Payments 1.88 Restructure Fee 2.3(b) Security 1.89 Senior Note Agreement 1.90 Senior Notes Recital B, 1.91 Significant Subsidiary 1.92 S&P 1.87(m) Subordinated Debt 1.93 Subsidiary 1.94 Tax 1.95 Tax Transferee 1.96 Term Sheet Recital D Title Insurance Policy 4.1(t) Total Utilization of Working Capital Commitment 1.97 Transfer Price 1.87(m) Unfunded Vested Pension Liability 7.10(a) United States Governmental Security 1.87(m) Voting Stock 1.98 Wholly-Owned 1.99 Working Capital Commitment 1.100 Working Capital Line of Credit 1.101 Working Capital Line of Credit Termination Date 1.102 Working Capital Loans 1.103 EXHIBITS Description Exhibit Form of Amended and Restated Working Capital Line of Credit Note A Form of Application and Agreement for Letter of Credit B Form of Borrowing Base Report C Form of Borrowing Certificate D Form of Compliance Certificate E Provisions to Include in Opinion of Counsel to Borrower F Schedule of Indebtedness and Liens G Schedule of Restricted Investments H AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Amended and Restated Loan Agreement"), is made and entered into as of the 14th day of January, 2002, by and between: (i) KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation, with principal office and place of business in Boyd County, Kentucky (the "Borrower"), and (ii) NATIONAL CITY BANK OF KENTUCKY, a national banking association, with principal office and place of business in Louisville, Kentucky (the "Bank"), for itself and in its capacity as "Collateral Agent" under that certain Intercreditor and Collateral Agency Agreement (the "Collateral Agency Agreement") of even date herewith among Connecticut General Life Insurance Company, Modern Woodmen of America and the Bank, for the benefit of the "Lenders" (as therein defined). RECITALS: A. Pursuant to that certain Amended and Restated Loan Agreement dated as of November 1, 1995, between the Borrower and the Bank (the "Prior Loan Agreement"), the Bank established in favor of the Borrower a revolving line of credit in the principal amount not to exceed Twenty- Three Million Dollars ($23,000,000.00) (the "Line of Credit"). B. Pursuant to that certain Note Agreement dated as of November 1, 1995, among the Borrower, CONNECTICUT GENERAL LIFE INSURANCE COMPANY, individually and on behalf of one or more separate accounts, and MODERN WOODMEN OF AMERICA (the "Noteholders"), as amended by that certain First Amendment Agreement dated January 30, 1997, and by Amendment No. 2 to Note Agreement and Waiver of even date herewith (as amended, the "Note Agreement"), the Borrower has issued its 9.00% Senior Notes in the aggregate principal amount of Twenty Million Dollars ($20,000,000.00), with a current outstanding principal balance of Sixteen Million Six Hundred Sixty-Six Thousand Six Hundred Sixty-Seven Dollars ($16,666,667.00)(the "Senior Notes"). C. The Borrower is in default under the Prior Loan Agreement, based on the Borrower's failure to comply with certain financial covenants contained in the Prior Loan Agreement, and based on the Borrower's failure to remit certain payments to the Noteholders due under the Senior Notes on November 1, 2001. D. Pursuant to a term sheet (the "Term Sheet") dated December 5, 2001, in consideration of the grant by the Borrower of a first lien on all of its assets, the Bank and the Noteholders have agreed to waive any and all existing defaults of the Borrower; the Bank has agreed to continue the Line of Credit up to (and not to exceed) the sum of Eighteen Million Dollars ($18,000,000.00); the Bank has further agreed to extend the maturity date of the Line of Credit; and the Noteholders have agreed to revise the payment terms of the Senior Notes, all on the terms and conditions described in this Amended and Restated Loan Agreement, and in that certain Amendment No. 2 to Note Agreement and Waiver referred to in Paragraph B above. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the mutuality, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS AND CROSS REFERENCES. The following terms used in this Amended and Restated Loan Agreement shall have the following meanings: 1.1 Accounts Receivable. "Accounts Receivable" means all "Accounts," as such term is defined in Section 9-106 of the Uniform Commercial Code, now or hereafter owned, acquired or held by the Borrower, excluding, however, Export Accounts Receivable, but otherwise including, without limitation, any and all accounts, accounts receivable, contract rights, book debts, notes, drafts, acceptances and other forms of obligations now owned, acquired or held or hereafter received or acquired by or belonging or owing to the Borrower (including under any trade names, styles or divisions thereof) arising out of goods sold, rented or leased and/or services rendered by the Borrower and all of the Borrower's rights in, to and under all purchase orders, instruments, receipts and other documents now owned, acquired or held or hereafter acquired or received by it evidencing obligations for and representing payment for goods sold or leased and/or services rendered, and all of the Borrower's rights to goods represented by any of the foregoing (including unpaid seller's rights of rescission, replevin, reclamation and stopping in transit and rights to returned, reclaimed or repossessed goods), and all moneys due or to become due to the Borrower under all contracts for the sale, rental or lease of goods and/or the performance of services by the Borrower (whether or not yet earned by performance on the part of the Borrower) or in connection with any other transaction, now in existence or hereafter arising, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. 1.2 Affiliate. "Affiliate" means any Person (other than a Wholly-Owned Subsidiary) (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower, (b) which beneficially owns or holds 5% or more of any class of the Voting Stock of the Borrower, or (c) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by the Borrower or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. 1.3 Amended and Restated Loan Agreement. "Amended and Restated Loan Agreement" has the meaning assigned to that term in the Preamble to this Amended and Restated Loan Agreement. 1.4 Amended and Restated Working Capital Line of Credit Note. "Amended and Restated Working Capital Line of Credit Note" means that certain Amended and Restated Revolving Promissory Note dated the date of this Amended and Restated Loan Agreement, made by the Borrower, payable to the order of the Bank, in the face principal amount of Eighteen Million Dollars ($18,000,000.00), as the same may hereafter be amended, modified, restated, renewed and/or replaced from time to time. The Amended and Restated Working Capital Line of Credit Note evidences the obligation of the Borrower to repay Working Capital Loans made to the Borrower pursuant to the Working Capital Line of Credit, together with accrued interest thereon. The form of the Amended and Restated Working Capital Line of Credit Note is attached hereto and made a part hereof, as Exhibit A. 1.5 And/or. "And/or" means one or the other or both, or any one or more or all, of the things or persons or parties in connection with which the conjunction is used. 1.6 Application and Agreement For Letter of Credit. "Application and Agreement For Letter of Credit" means the document substantially in the form of Exhibit B attached hereto and made a part hereof, with appropriate insertions and deletions, with respect to the proposed issuance or amendment of a Letter of Credit; provided, to the extent any of the provisions of the Application and Agreement For Letter of Credit are in conflict with the provisions of this Amended and Restated Loan Agreement, the provisions of this Amended and Restated Loan Agreement shall govern and control. 1.7 Authorized Officer. "Authorized Officer" means the President, the Chief Financial Officer and any other officer of the Borrower who, by the Certificate of Incorporation, Bylaws or Resolutions of the Board of Directors of the Borrower, is authorized to execute and deliver this Amended and Restated Loan Agreement and the other Loan Instruments on behalf of the Borrower. 1.8 Bank. "Bank" has the meaning assigned to that term in the Preamble to this Amended and Restated Loan Agreement. 1.9 Bankruptcy Code. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy" as now and hereafter in effect, or any successor statute. 1.10 Borrower. "Borrower" has the meaning assigned to that term in the Preamble to this Amended and Restated Loan Agreement. 1.11 Borrower's Loan Account. "Borrower's Loan Account" means the account on the books of the Bank in which will be recorded Working Capital Loans made by the Bank to the Borrower pursuant to the Working Capital Line of Credit, payments made on the Working Capital Loans, and other appropriate debits and credits as provided in this Amended and Restated Loan Agreement. 1.12 Borrowing Base. "Borrowing Base" means, as of each date of determination thereof, the sum of (a) eighty percent (80%) of the Net Outstanding Amount of Eligible Accounts, and (b) the lesser of Twelve Million Dollars ($12,000,000.00) or the sum of (i) fifty percent (50%) of the Net Security Value of Eligible Scrap Inventory, (ii) forty percent (40%) of the Net Security Value of Eligible Billet Inventory, and (iii) sixty percent (60%) of the Net Security Value of Eligible Finished Goods Inventory. 1.13 Borrowing Base Report. "Borrowing Base Report" means the Borrowing Base Report in substantially the form attached hereto and made a part hereof as Exhibit C. 1.14 Borrowing Certificate. "Borrowing Certificate" means the Certificate substantially in the form of Exhibit D annexed hereto with respect to a proposed Working Capital Loan to be delivered by the Borrower to the Bank pursuant to Sections 2.1(c) and 2.6(c) hereof. 1.15 Business Day. "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Kentucky or is a day on which banking institutions located in the Commonwealth of Kentucky are authorized or required by law or other governmental action to close. 1.16 Capitalized Lease. "Capitalized Lease" means any lease, the obligation for Rentals with respect to which is required to be capitalized on a consolidated balance sheet of the lessee and its subsidiaries, or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet in accordance with GAAP. 1.17 Capitalized Rentals. "Capitalized Rentals" of any Person means as of the date of any determination thereof the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under which such Person is a lessee would be reflected as a liability on a consolidated balance sheet of such Person. 1.18 CERCLA. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Supplemental Amendments and Reauthorization Act of 1986, 42 U.S.C. Sections 9601 et seq., and any future amendments. 1.19 Closing Date. "Closing Date" means the date on which the conditions set forth in Section 4.1 hereof are satisfied. 1.20 Code. "Code" means the Internal Revenue Code of 1986, as amended. 1.21 Common Stock. "Common Stock" means the common stock ($.01 par value) of the Borrower. 1.22 Compliance Certificate. "Compliance Certificate" means a certificate substantially in the form of Exhibit E annexed hereto delivered by the Borrower to the Bank pursuant to Section 6.3(f) hereof. 1.23 Consolidated EBITDA. "Consolidated EBITDA" shall mean, for any period, Consolidated Net Earnings during such period, plus (to the extent deducted in determining Consolidated Net Earnings)(a) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Borrower and its Subsidiaries, (b) all provisions of any federal, state or other income taxes made by the Borrower and its Subsidiaries during such period, and (c) depreciation, amortization, or any other non- cash charges for the Borrower and its Subsidiaries for such period. 1.24 Consolidated Funded Debt. "Consolidated Funded Debt" means all Funded Debt of the Borrower and its Subsidiaries, determined on a consolidated basis, eliminating intercompany items. 1.25 Consolidated Net Earnings. "Consolidated Net Earnings" for any period means the gross revenues of the Borrower and its Subsidiaries for such period less all expenses and other proper charges (including taxes on income), determined on a consolidated basis in accordance with GAAP after eliminating earnings or losses attributable to outstanding Minority Interests, but excluding in any event: (a) any extraordinary items (including extraordinary gains and extraordinary losses); (b) net earnings and losses of any Subsidiary accrued prior to the date it became a Subsidiary; (c) net earnings and losses of any corporation (other than a Subsidiary), substantially all the assets of which have been acquired in any manner by the Borrower or any Subsidiary, realized by such corporation prior to the date of such acquisition; (d) net earnings and losses of any corporation (other than a Subsidiary) with which the Borrower or a Subsidiary shall have consolidated or which shall have merged into or with the Borrower or a Subsidiary prior to the date of such consolidation or merger; (e) net earnings of any business entity (other than a Subsidiary) in which the Borrower or any Subsidiary has an ownership interest unless such net earnings shall have actually been received by the Borrower or such Subsidiary in the form of cash distributions; and (f) any portion of the net earnings of any Subsidiary which for any reason is unavailable for payment of dividends to the Borrower or any other Subsidiary. 1.26 Consolidated Stockholders' Equity. "Consolidated Stockholders' Equity" means stockholders' equity of the Borrower and its Subsidiaries determined in accordance with GAAP. 1.27 Consolidated Tangible Net Worth. "Consolidated Tangible Net Worth" shall mean, at any time, Consolidated Stockholders' Equity after, without duplication, (a) excluding the effect of changes in GAAP after September 29, 2001, and (b) excluding any write-downs of assets occurring subsequent to September 29, 2001, (i) under Financial Accounting Standards Board Statement No. 5 relating to asset impairment, (ii) under Financial Accounting Standards Board Statement No. 121 relating to asset impairment, and/or (iii) pursuant to Section 382 of the Code, minus the net book value of all assets of the Borrower and its Subsidiaries, after deducting any reserves applicable thereto, which would be treated as intangible under GAAP, including, without limitation, goodwill, trademarks, trade names, service marks, brand names, copyrights, patents and unamortized debt discount and expense (other than expenses incurred in connection with this Amended and Restated Loan Agreement, the Note Amendment, and certain amendments to the Master Equipment Lease), organizational expenses and the excess of the equity in any Subsidiary over the cost of the investment in such Subsidiary. 1.28 Consolidated Total Assets. "Consolidated Total Assets" means the total assets of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP. 1.29 Consolidated Total Capitalization. "Consolidated Total Capitalization" means the sum of Consolidated Adjusted Net Worth and Consolidated Funded Debt. 1.30 Covered Tax. "Covered Tax" means any Tax that is not an Excluded Tax. 1.31 Debt. "Debt" of the Borrower or any Subsidiary means, as of the date of any determination thereof without duplication (a) all Indebtedness of the Borrower or any Subsidiary for borrowed money or which has been incurred in connection with the acquisition of assets, (b) Capitalized Rentals, and (c) Guaranties of obligations of the character referred to herein above in this definition; provided, however, that Debt shall not include (i) Debt of a Subsidiary to the Borrower or to another Wholly-Owned Subsidiary or Debt of the Borrower to a Wholly-Owned Subsidiary, (ii) Guaranties by the Borrower or any Subsidiary in favor of the Borrower or another Wholly-Owned Subsidiary, and (iii) any unfunded obligations which may exist at any time with respect to any Plan of the Borrower. 1.32 Debt Service. "Debt Service" shall mean, with respect to any period, the sum of the following: (a) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Borrower and its Subsidiaries for such period, and (b) all payments of principal in respect of Debt of the Borrower and its Subsidiaries (including Capitalized Rentals) paid or payable during such period after eliminating all offsetting debits and credits between the Borrower and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Borrower and its Subsidiaries in accordance with GAAP. 1.33 Debt Service Coverage Ratio. "Debt Service Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) Debt Service for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Debt Service Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is four and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. 1.34 Default Rate. "Default Rate" means, upon the occurrence and during the continuation of any Event of Default, with respect to the Working Capital Loans then or thereafter outstanding, a variable rate per annum equal to the sum of one percent (1%) per annum in excess of the "Borrowing Rate," as defined in Section 2.2(a). 1.35 Eligible Accounts. "Eligible Accounts" means only Accounts Receivable arising out of the sale, rental or lease of Inventory or the rendition of services by the Borrower in the ordinary course of its business to customers or account debtors which are not Wholly-Owned Subsidiaries or Affiliates of the Borrower, but excluding from the definition of Eligible Accounts all of the following: (a) Accounts Receivable which remain unpaid for more than ninety (90) days from original invoice date, (b) Accounts Receivable owing by a single account debtor, or related group of account debtors, if as much as fifteen percent (15%) of the aggregate balance owing by said account debtor or related group of account debtors on such Accounts Receivable remains unpaid for more than ninety (90) days from their respective invoice dates, (c) Accounts Receivable owed by any Wholly-Owned Subsidiary or Affiliate of the Borrower, (d) Accounts Receivable with respect to which the account debtor is the United States of America or any state, city, county or governmental authority or any department, agency or instrumentality of any of them, (e) Export Accounts Receivable, (f) Accounts Receivable owed to the Borrower by any account debtor which is subject to any of the events of the type described in subsections (h) or (i) of Section 8 hereof, (g) Accounts Receivable evidencing or otherwise arising out of the sale, lease or rental of assets of the Borrower other than the sale, lease or rental of Inventory in the ordinary course of business, and (h) Accounts Receivable to the extent any claim, offset or defense exists to the payment thereof. The net amount of Eligible Accounts shall be computed by deducting therefrom any credits and allowances given by the Borrower to its customers and account debtors as more fully set forth in Section 1.73 hereof. No Account Receivable shall constitute an Eligible Account unless it complies with Section 5.13 of this Amended and Restated Loan Agreement. 1.36 Eligible Billet Inventory. "Eligible Billet Inventory" means and includes such Work In Process Billet Inventory as the Bank, in its reasonable discretion, considers suitable for use as a basis in making unsecured loans. The Bank agrees that the Inventory currently classified as Work in Process Billet Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. The value of Eligible Billet Inventory shall be computed at the lower of its cost or market value. 1.37 Eligible Finished Goods Inventory. "Eligible Finished Goods Inventory" means and includes such finished steel bar quality steel bar flats, merchant bar quality steel bar flats, and other finished steel products which are ready for shipment to customers of the Borrower and which the Bank, in its reasonable discretion, considers suitable for use as a basis in making Working Capital Loans. The Bank agrees that the Inventory currently classified as finished goods Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. The value of Eligible Finished Goods Inventory shall be computed at the lower of its cost or market value. 1.38 Eligible Scrap Inventory. "Eligible Scrap Inventory" means and includes such scrap metal and additives used in the melt process as the Bank, in its reasonable discretion, considers suitable for use as a basis in making Working Capital Loans. The Bank agrees that the Inventory currently classified as scrap or additives Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. The value of Eligible Scrap Inventory shall be computed at the lower of its cost or market value. 1.39 Environmental Claim. "Environmental Claim" means any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding or claim (whether administrative, judicial or private in nature) arising (a) pursuant to, or in connection with an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Material or actual or alleged Hazardous Material Activity, (c) from any abatement, removal, remedial, corrective or other response action in connection with a Hazardous Material, Environmental Law or other order of a Governmental Authority, or (d) from any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. 1.40 Environmental Law. "Environmental Law" means any current or future Legal Requirement pertaining to (a) the protection of health, safety and the indoor or outdoor environment, (b) the conservation, management or use of natural resources and wildlife, (c) the protection or use of surface water and groundwater, (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, Release, threatened Release, abatement, removal, remediation or handling of, or exposure to, any Hazardous Material or (e) pollution (including any Release to air, land, surface water and groundwater), and includes, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Sections 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Sections 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. Sections 1251 et seq., Clean Air Act of 1966, as amended, 42 U.S.C. Sections 7401 et seq., Toxic Substances Control Act of 1976, 15 U.S.C. Sections 2601 et seq., Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801 et seq., Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. Sections 651 et seq., Oil Pollution Act of 1990, 33 U.S.C. Sections 2701 et seq., Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001 et seq., National Environmental Policy Act of 1969, 42 U.S.C. Sections 4321 et seq., Safe Drinking Water Act of 1974, as amended 42 U.S.C. Sections 300(f) et seq., any similar, implementing or successor law, and any amendment, rule, regulation, order or directive issued thereunder. 1.41 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed to also refer to any successor sections. 1.42 ERISA Affiliate. "ERISA Affiliate" means any corporation, trade or business that is, along with the Borrower, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in Sections 414(b) and 414(c), respectively, of the Code or Section 4001 of ERISA. 1.43 Excluded Tax. "Excluded Tax" means any of the following taxes, levies, imposts, duties, deductions, withholdings or charges, and all liabilities with respect thereto: (a) Taxes imposed on the net income of the Bank or a Tax Transferee (including without limitation branch profits taxes, minimum taxes and taxes computed under alternative methods, at least one of which is based on net income (collectively referred to as "net income taxes") by (i) the United States of America, (ii) the jurisdiction under the laws of which the Bank or Tax Transferee is organized or any political subdivision thereof or (iii) the jurisdiction of the Banks or Tax Transferee's applicable lending office or any political subdivision thereof or (iv) any jurisdiction in which the Bank or Tax Transferee is doing business, (b) any Taxes to the extent that they are in effect and would apply to a payment to the Bank as of the Closing Date, (c) any Taxes that are in effect and would apply to a payment to a Tax Transferee as of the date of acquisition of the Working Capital Loans by such Tax Transferee or the date of the change of lending office of such Tax Transferee, as the case may be (provided however that a Person shall not be considered a Tax Transferee for purposes of this clause (c) as a result of a change of its lending office), (d) any Taxes to the extent of any credit or other tax benefit available to the Bank or Tax Transferee, as applicable, as a result thereof, or (e) any Taxes that would not have been imposed but for the failure by the Bank or Tax Transferee, as applicable, to provide and keep current any certification or other documentation required to qualify for an exemption from or reduced rate of any Tax. 1.44 Export Accounts Receivable. "Export Accounts Receivable" means Accounts Receivable owed to the Borrower from account debtors located in foreign countries, other than Canada, and which arise from the sale of Inventory in the ordinary course of business. 1.45 Events of Default. "Events of Default" means the occurrence or happening of any of the matters set forth in Section 8 hereof. 1.46 Fiscal Quarter. "Fiscal Quarter" means a fiscal quarter of the Borrower. The Fiscal Quarters of the Borrower for its Fiscal Year ending September 28, 2002, are December 29, 2001; March 30, 2002; June 29, 2002; and September 28, 2002. The Borrower shall notify the Bank in writing prior to the commencement of each subsequent Fiscal Year of the last day of each Fiscal Quarter in such Fiscal Year. 1.47 Fiscal Year. "Fiscal Year" means a fiscal year of the Borrower. The Borrower's current Fiscal Year ends on the last Saturday of September of each calendar year. 1.48 Funded Debt. "Funded Debt" of any Person means all Debt of such Person which would, in accordance with GAAP, constitute long-term Debt, but including in any event (a) any Debt having a final maturity of one or more than one year from the date of origin thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of origin), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not the obligation to make such payments shall constitute a current liability of the obligor under GAAP, (b) any Debt outstanding under a revolving credit or similar agreement or credit line or similar facility, (c) all Capitalized Rentals of such Person, and (d) Guaranties by such Person of Funded Debt of others. 1.49 Funding Date. "Funding Date" means the date of the funding of a Working Capital Loan. 1.50 GAAP. "GAAP" means generally accepted accounting principles in the United States in effect as of the Closing Date. 1.51 Governmental Approval. "Governmental Approval" means any permit, license, variance, certificate, consent, letter, clearance, closure, exemption, decision or action or approval of a Governmental Authority. 1.52 Governmental Authority. "Governmental Authority" means any international, foreign, federal, state, regional, county or local person or body having governmental or quasi-governmental authority or subdivision thereof. 1.53 Guaranties. "Guaranties" by any Person means all obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligations as a general partner of a Joint Venture and all obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (b) to advance or supply funds (i) for the purchase or payment of such Indebtedness or obligation, (ii) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, (c) to lease property or to purchase Securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (d) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Amended and Restated Loan Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum reasonably anticipated amount of such obligation, liability or dividend as determined by such Person in good faith. 1.54 Hazardous Material. "Hazardous Material" means any substance, chemical, compound, product, solid, gas, liquid, waste, byproduct, pollutant, contaminant or material which is hazardous or toxic, and includes, without limitation (a) asbestos, polychlorinated biphenyls and petroleum (including crude oil or any fraction thereof) and (b) any such material classified or regulated as "hazardous" or "toxic" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Preauthorization Act of 1986, 42 U.S.C. Sections 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Sections 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. Sections 1251 et seq., Clean Air Act of 1966, as amended, 42 U.S.C. Sections 7401 et seq., Toxic Substances Control Act of 1976, 15 U.S.C. Sections 2601 et seq., or Hazardous Materials Transportation Act, 49 U.S.C. App. Sections 1801 et seq. 1.55 Hazardous Material Activity. "Hazardous Material Activity" means any activity, event or occurrence involving a Hazardous Material, including, without limitation, the manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, Release, threatened Release, abatement, removal, remediation, handling of or corrective or response action to any Hazardous Material. 1.56 Indebtedness. "Indebtedness" of any Person means and includes all obligations of such Person which in accordance with GAAP shall be classified upon a balance sheet of such Person as liabilities of such Person, and in any event shall include all (a) obligations of such Person for borrowed money or which has been incurred in connection with the acquisition of property or assets, (b) obligations secured by any Lien upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (c) obligations creating or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, (d) Capitalized Rentals, and (e) Guaranties of obligations of others of the character referred to in this definition. 1.57 Interest Charges. "Interest Charges" for any period means all interest and all amortization of debt discount and expense on any particular Indebtedness for which such calculations are being made. 1.58 Interest Coverage Ratio. "Interest Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Borrower and its Subsidiaries for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Interest Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is four and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. 1.59 Inventory. "Inventory" means all "Inventory," as such term is defined in Section 9-109(4) of the Uniform Commercial Code, now or hereafter owned, acquired or held by the Borrower and, in any event, shall mean and include, but not be limited to, all inventory, merchandise, goods and other personal property now or hereafter owned by the Borrower which is held for sale, rental or lease or is furnished or is to be furnished under a contract of service or which constitutes raw materials, work in process or materials used or consumed or to be used or consumed in the Borrower's business, or the processing, packaging, delivery or shipping of the same, and all finished goods. 1.60 Investments. "Investments" means all investments, in cash or by delivery of property made, directly or indirectly in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or Securities or by loan, advance, capital contribution or otherwise; provided, however, that "Investments" shall not mean or include routine investments in property to be used or consumed in the ordinary course of business. 1.61 Joint Venture. "Joint Venture" means a joint venture, partnership or similar arrangement, whether in corporate, partnership or other legal form, provided, that as to any such arrangement in corporate form, such corporation shall not, as to any Person of which such corporation is a Subsidiary, be considered a Joint Venture to which such Person is a party. 1.62 Legal Requirement. "Legal Requirement" means any treaty, convention, statute, law, regulation, ordinance, Governmental Approval, injunction, judgment, order, consent decree or other requirement of any Governmental Authority. 1.63 Letter of Credit Fee. "Letter of Credit Fee" has the meaning assigned to that term in Section 2.6(e)(1) hereof. 1.64 Letter of Credit Usage. "Letter of Credit Usage" means, as at any date of determination thereof, the sum of (a) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding, plus (b) the aggregate amount of all drawings under all Letters of Credit honored by the Bank and not theretofore reimbursed by the Borrower to the Bank, whether by virtue of the Bank making a Working Capital Loan to the Borrower to enable the Borrower to reimburse the Bank for such drawing, or otherwise. 1.65 Letters of Credit. "Letters of Credit" means any letter of credit or similar instrument issued by the Bank for the account of the Borrower pursuant to this Amended and Restated Loan Agreement for the purpose of securing the performance, payment, deposit or surety obligations of the Borrower, other than in connection with the purchase by the Borrower of materials, goods or services, pursuant to contracts and/or Capitalized Leases entered into or proposed to be entered into or assumed or proposed to be assumed by the Borrower. 1.66 Lien. "Lien" means any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a Capitalized Lease, consignment or bailment or security purposes, or the signing or filing of a financing statement which names such Person as debtor, or the signing of any security agreement by any such Person authorizing any other party as the secured party thereunder to file any financing statement naming such Person as debtor. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, Capitalized Leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements) affecting the property. For the purposes of this Amended and Restated Loan Agreement, the Borrower or a Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, Capitalized Lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes and such retention or vesting shall constitute a Lien. 1.67 Loan Instruments. "Loan Instruments" means this Amended and Restated Loan Agreement, the Amended and Restated Working Capital Line of Credit Note, the Mortgage, the Assignment of Rents and Leases, the Security Agreement, UCC Financing and Fixture Filings, the Environmental Indemnity Agreement, each Application and Agreement for Letter of Credit, and all other documents or certificates executed in favor of Bank relating to the Letters of Credit, all Borrowing Certificates, all Compliance Certificates delivered to the Bank, and all other agreements, documents and instruments pertaining to the Working Capital Line of Credit. 1.68 Margin Stock. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. 1.69 Master Equipment Lease. "Master Equipment Lease" shall mean that certain Master Equipment Lease, dated as of September 29, 2000, between the Borrower and Fifth Third Bank, Ohio Valley, as amended, restated, supplemented or otherwise modified from time to time. 1.70 Material Adverse Effect. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Borrower and its Subsidiaries taken as a whole, or (b) the ability of the Borrower to perform its obligations under this Amended and Restated Loan Agreement and the Amended and Restated Working Capital Line of Credit Note, or (c) the validity or enforceability of this Amended and Restated Loan Agreement or the Amended and Restated Working Capital Line of Credit Note. 1.71 Minority Interests. "Minority Interests" means any shares of stock of any class of a Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Borrower and/or one or more of its Subsidiaries. Minority Interests shall be valued by valuing Minority Interests constituting preferred stock at the voluntary or involuntary liquidating value of such preferred stock, whichever is greater, and by valuing Minority Interests constituting common stock at the book value of capital and surplus applicable thereto adjusted, if necessary, to reflect any changes from the book value of such common stock required by the foregoing method of valuing Minority Interests in preferred stock. 1.72 Multiemployer Plan. "Multiemployer Plan" shall have the same meaning as in ERISA. 1.73 Net Outstanding Amount of Eligible Accounts. "Net Outstanding Amount of Eligible Accounts" means the net outstanding amount of Eligible Accounts after deducting from the aggregate face amount thereof all payments, adjustments and credits applicable thereto and all amounts due thereon reasonably considered by the Bank difficult to collect or uncollectible by reason of return, rejection, repossession, loss or damage of or to the merchandise giving rise thereto or other disputes between the account debtor and the Borrower or the insolvency or questionable creditworthiness of the account debtor, or otherwise, all as determined by the Bank in its reasonable discretion. 1.74 Net Security Value of Eligible Billet Inventory. "Net Security Value of Eligible Billet Inventory" means the net value of Eligible Billet Inventory after taking into account charges and Liens (other than those in favor of the Bank) of all kinds against the Eligible Billet Inventory, changes in the market value thereof, and transportation, processing and other handling charges affecting the value thereof, all as determined by the Bank in its reasonable discretion. The Bank agrees that the Inventory currently classified as Work in Process Billet Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base, and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. 1.75 Net Security Value of Eligible Finished Goods Inventory. "Net Security Value of Eligible Finished Goods Inventory" means the net value of Eligible Finished Goods Inventory after taking into account charges and Liens (other than those in favor of the Bank) of all kinds against the Eligible Finished Goods Inventory, changes in the market value thereof, and transportation, processing and other handling charges affecting the value thereof, all as determined by the Bank in its reasonable discretion. The Bank agrees that the Inventory currently classified as finished goods Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base, and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. 1.76 Net Security Value of Eligible Scrap Inventory. "Net Security Value of Eligible Scrap Inventory" means the net value of Eligible Scrap Inventory after taking into account charges and Liens (other than those in favor of the Bank) of all kinds against the Eligible Scrap Inventory, changes in the market value thereof, and transportation, processing and other handling charges affecting the value thereof, all as determined by the Bank in its reasonable discretion. The Bank agrees that the Inventory currently classified as scrap and additives Inventory by the Borrower on its operating and financial statements is eligible for inclusion in the Borrowing Base, and may be used by the Borrower as a basis in obtaining Working Capital Loans and Letters of Credit. 1.77 Obligations. "Obligations" means: (a) the entire unpaid principal balance of and all interest now accrued or hereafter to accrue on the Amended and Restated Working Capital Line of Credit Note, (b) the performance of all of the covenants, agreements and obligations of the Borrower hereunder and under the other Loan Instruments, and (c) all other liabilities, obligations, covenants and duties owing by the Borrower to the Bank arising under or pursuant to this Amended and Restated Loan Agreement or the other Loan Instruments of any kind or nature, present or future, and whether or not evidenced by any note, guaranty or other instrument. The term "Obligations" includes, without limitation, all interest, charges, expenses, reasonable attorneys' fees and any other sums chargeable to the Borrower under this Amended and Restated Loan Agreement and/or any other Loan Instrument. 1.78 Officer's Certificate. "Officer's Certificate" means a certificate executed on behalf of the Borrower by an Authorized Officer. 1.79 PBGC. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. 1.80 Person. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, other entity or group, institution, party or government, whether federal, state, county, city, municipal or other, or agency or division thereof. 1.81 Plan. "Plan" means a "pension plan," as such term is defined in ERISA, established or maintained by the Borrower or any ERISA Affiliate or as to which the Borrower or any ERISA Affiliate contributed or is a member or otherwise may have any liability. 1.82 Prime Rate. "Prime Rate" means, for any day, the "Prime Rate" of interest generally charged by the Bank on such day to its most substantial and credit-worthy commercial borrowers for 90-day unsecured loans, it being understood and agreed to by the Borrower that the "Prime Rate" is the rate of interest designated by the Bank as its "Prime Rate," and such term does not necessarily mean or imply that it is the lowest or best rate then available from the Bank on floating rate loans to specific borrowers of the class described above. All changes in the Prime Rate shall become effective immediately without prior notice to the Borrower. 1.83 RCRA. "RCRA" means the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Sections 6901 et seq., and any future amendments. 1.84 Release. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the indoor or outdoor environment, including, without limitation, the abandonment or discharging of barrels, drums, containers, tanks and other receptacles containing or previously containing any Hazardous Material. 1.85 Rentals. "Rentals" means and includes as of the date of any determination thereof all fixed payments (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Borrower or a Subsidiary, as lessee or sublessee under a lease of real or personal property, but shall be exclusive of any amounts required to be paid by the Borrower or a Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under any so-called "percentage leases" shall be computed solely on the basis of the minimum rents, if any, required to be paid by the lessee regardless of sales volume or gross revenues. 1.86 Reportable Event. "Reportable Event" means a "reportable event" as described in Section 4043 of ERISA for which the notice requirement to the PBGC has not been waived (provided that the loss of qualification of a Plan and the failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver of the reporting requirement by the PBGC). 1.87 Restricted Investments. "Restricted Investments" means all Investments made by the Borrower and its Subsidiaries, except for the following: (a) Investments by the Borrower and its Subsidiaries in and to Subsidiaries in lines of business reasonably related to the Borrower's existing lines of business, as determined in good faith by the Board of Directors of the Borrower, including any Investment in a corporation which, after giving effect to such Investment, will become a subsidiary; (b) Investments in commercial paper which, at the time of acquisition by the Borrower or any Subsidiary, is rated A-1 or better by S&P or P-1 or better by Moody's; (c) Investments in United States Governmental Securities, provided that such obligations mature in twelve months or less from the date of acquisition thereof; (d) Investments in certificates of deposit maturing within one year from the date of issuance thereof, or in bankers acceptances issued by an Acceptable Bank; (e) Investments in Repurchase Agreements; (f) loans or advances in the usual and ordinary course of business to officers, directors and employees, provided such outstanding loans do not exceed Seven Hundred Fifty Thousand Dollars ($750,000.00) in the aggregate at any time; (g) receivables arising from the sale of goods and services in the ordinary course of business of the Borrower and its Subsidiaries; (h) money market preferred stock (including MAPs) rated A or better by S&P and Moody's; (i) Investments in Affiliates or Joint Ventures in lines of business reasonably related to the Borrower's existing lines of business (assuming compliance with Section 7.5 hereof), as determined in good faith by the Board of Directors of the Borrower; (j) Investments in or commitments to purchase foreign currency to the extent the Borrower and its Subsidiaries are obligated to make payments to others in such currencies; (k) tax-exempt floating rate option tender bonds backed by letters of credit from an Acceptable Bank; (l) other investments of the Borrower and/or its Subsidiaries existing on the Closing Date which are described in Exhibit H attached to this Amended and Restated Loan Agreement; and (m) the purchase, redemption or retirement (directly, indirectly or through a Subsidiary) of any shares of the Borrower's capital stock of any class or any rights or options to purchase or acquire any shares of its capital stock to the extent permitted by Section 7.4(b) of this Amended and Restated Loan Agreement. In valuing any Restricted Investments, such Restricted Investments shall be taken at the original cost thereof, without allowance for any subsequent write-offs or appreciation or depreciation therein, but less any amount repaid or recovered on account of capital or principal. As used in this definition of "Restricted Investments": "Acceptable Bank" means any bank or trust company (a) which is organized under the laws of the United States of America or any State thereof, (b) which has capital, surplus and undivided profits aggregating at least $100,000,000, and (c) whose long-term unsecured debt obligations (or the long-term unsecured debt obligations of the bank holding company owning all of the capital stock of such bank or trust company) shall have been given a rating of "AA" or better by S&P, "Aa" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Acceptable Broker-Dealer" means any Person other than a natural person (a) which is registered as a broker or dealer pursuant to the Securities Exchange Act of 1934, as amended, and (b) whose long-term unsecured debt obligations shall have been given a rating of "A" or better by S&P, "A2" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Moody's" means Moody's Investors Service, Inc. "Repurchase Agreement" means any written agreement: (a) that provides for (i) the transfer of one or more United States Governmental Securities in an aggregate principal amount at least equal to the amount of the Transfer Price (defined below) to the Borrower or any of its Subsidiaries from an Acceptable Bank or an Acceptable Broker-Dealer against a transfer of funds (the "Transfer Price") by the Borrower or such Subsidiary to such Acceptable Bank or Acceptable Broker-Dealer, and (ii) a simultaneous agreement by the Borrower or such Subsidiary, in connection with such transfer of funds, to transfer to such Acceptable Bank or Acceptable Broker-Dealer the same or substantially similar United States Governmental Securities for a price not less than the Transfer Price plus a reasonable return thereon at a date certain not later than 365 days after such transfer of funds, (b) in respect of which the Borrower or such Subsidiary shall have the right, whether by contract or pursuant to applicable law, to liquidate such agreement upon the occurrence of any default thereunder, and (c) in connection with which the Borrower or such Subsidiary, or an agent thereof, shall have taken all action required by applicable law or regulations to perfect a Lien in such United States Governmental Securities. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. "United States Governmental Security" means any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. 1.88 Restricted Payments. "Restricted Payments" shall have the meaning set forth in Section 7.4 hereof. 1.89 Security. "Security" shall have the meaning as in section 2(1) of the Securities Act of 1933, as amended. 1.90 Senior Note Agreement. "Senior Note Agreement" means that certain Note Agreement dated as of November 1, 1995, between the Borrower and the Noteholders, as amended, together with all future amendments and modifications thereto, pursuant to which the Borrower has issued the Senior Notes. 1.91 Senior Notes. "Senior Notes" means the Borrower's 7.66% Senior Notes due November 1, 2005, in the original principal amount of Twenty Million Dollars ($20,000,000.00) issued pursuant to the Senior Note Agreement, together with all amendments, modifications, extensions, renewals, restatements and replacements thereof. 1.92 Significant Subsidiary. "Significant Subsidiary" means at any time any Subsidiary that would at such time constitute a "significant subsidiary" (as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the Closing Date) of the Borrower. 1.93 Subordinated Debt. "Subordinated Debt" means the principal of and premium if any, and interest on all Indebtedness of the Borrower, whether currently outstanding or hereafter created, for money borrowed, or any Indebtedness incurred in connection with an acquisition or lease of property or with a merger, consolidation, or acquisition of assets which is expressly subordinate in right of payment pursuant to its terms to the Amended and Restated Working Capital Line of Credit Note (whether or not they are subordinated to other Indebtedness of the Borrower). 1.94 Subsidiary. "Subsidiary" means as to any particular parent corporation any corporation of which more than 50% (by number of votes) of the Voting Stock shall be beneficially owned, directly or indirectly, by such parent corporation. The term "Subsidiary" means a subsidiary of the Borrower. 1.95 Tax. "Tax" or "Taxes" means any present or future tax, levy, impost, duty, charge, governmental fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person's principal office (and/or, in the case of the Bank, its lending office) is located on all or part of the net income, profits or gains of that Person (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise). 1.96 Tax Transferee. "Tax Transferee" means any Person who acquires any interest in the Working Capital Loans (whether or not by operation of law) or in the office to which the Bank has transferred its Working Capital Loans for purposes of determining where the Working Capital Loans are made, accounted for or booked. 1.97 Total Utilization of Working Capital Commitment. "Total Utilization of Working Capital Commitment" means, as at any date of determination thereof, the sum of (a) the aggregate principal amount of all outstanding Working Capital Loans, plus (b) the Letter of Credit Usage. 1.98 Voting Stock. "Voting Stock" means Securities of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). 1.99 Wholly-Owned. "Wholly-Owned" when used in connection with any Subsidiary means a Subsidiary of which all of the issued and outstanding shares of stock (except shares required as directors' qualifying shares) and all Debt shall be owned by the Borrower and/or one or more of its Wholly-Owned Subsidiaries. 1.100 Working Capital Commitment. "Working Capital Commitment" shall have the meaning set forth in Section 2.1(a) hereof. 1.101 Working Capital Line of Credit. "Working Capital Line of Credit" means the revolving line of credit in the original principal amount of Eighteen Million Dollars ($18,000,000.00) established by the Bank in favor of the Borrower pursuant to this Amended and Restated Loan Agreement. 1.102 Working Capital Line of Credit Termination Date. "Working Capital Line of Credit Termination Date" means the earliest of (a) November 1, 2005, (b) the date as of which the Obligations shall have become immediately due and payable pursuant to Section 8 hereof, or (c) the date on which all of the Obligations are paid in full to the Bank (including, without limitation, the repayment, expiration, termination or cash collateralization of Letters of Credit pursuant to this Amended and Restated Loan Agreement) and the Working Capital Commitment is terminated by the Borrower. 1.103 Working Capital Loans. "Working Capital Loans" means the Working Capital Loans which the Bank has agreed to maintain or make pursuant to Section 2.1(a) hereof. 1.104 Accounting Terms and Financial Information. (a) For purposes of this Amended and Restated Loan Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to then in conformity with GAAP and all financial statements and certificates and reports as to financial matters required to be delivered to the Bank hereunder shall (unless otherwise disclosed to the Bank in writing at the time of delivery thereof in the manner described in Section 1.104(b) hereof) be prepared in accordance with GAAP applied on a basis consistent with GAAP as applied in the preparation of the latest financial statements furnished to the Bank hereunder. (b) The Borrower shall deliver to the Bank at the same time as the delivery of any annual or monthly financial statement under Section 6.3 hereof, (i) a description in reasonable detail of any variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements (which variation materially affects the presentation of the financial position or results of operations of the Borrower) and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. 1.105 Other Definitional Provisions. Any reference in this Amended and Restated Loan Agreement (a) to a Section, a Schedule or an Exhibit is a reference to a section hereof, a schedule hereto or an exhibit hereto, respectively; and (b) to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. In this Amended and Restated Loan Agreement, the singular includes the plural and the plural the singular; "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Amended and Restated Loan Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other genders; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments, supplements, assignments, and other modifications thereto, but only to the extent. such modifications are not prohibited by the terms of this Amended and Restated Loan Agreement, and references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons. 2. WORKING CAPITAL LINE OF CREDIT. Subject to the terms and conditions of this Amended and Restated Loan Agreement, the Bank hereby establishes the Working Capital Line of Credit in favor of the Borrower in the principal amount not to exceed Eighteen Million Dollars ($18,000,000.00). Pursuant to the Working Capital Line of Credit, the Borrower may obtain Working Capital Loans and Letters of Credit pursuant to, and subject to the terms and conditions set forth in, this Amended and Restated Loan Agreement for the purposes set forth in Section 2.5(a) hereof. The Working Capital Line of Credit shall be subject to the following terms and conditions: 2.1 Working Capital Commitment; Working Capital Loans. (a) Working Capital Commitment. The Bank agrees to lend to the Borrower from time to time during the period from the Closing Date to but excluding the working Capital Line of Credit Termination Date an aggregate amount not exceeding in the aggregate at any one time outstanding the lesser of (a) Eighteen Million Dollars ($18,000,000.00), or (b) the Borrowing Base. The Bank's commitment to make Working Capital Loans to the Borrower and to issue Letters of Credit for the account of the Borrower pursuant to this Section 2 is herein called its "Working Capital Commitment." The amount of the Working Capital Commitment shall be reduced from time to time by the amount of any reductions thereto made pursuant to Section 2.4(c) hereof (it being understood that all references to the Working Capital Commitment of the Bank set forth in this Amended and Restated Loan Agreement shall mean the initial Working Capital Commitment of the Bank, as reduced by voluntary reductions of the Working Capital Commitment effected by the Borrower pursuant to Section 2.4(c) hereof). The Bank's Working Capital Commitment shall expire on the Working Capital Line of Credit Termination Date, and all Working Capital Loans and all other amounts owed hereunder with respect to the Working Capital Loans and the Working Capital Commitment shall be paid in full no later than that date. Amounts borrowed under this Section 2.1(a) may be repaid and reborrowed to but excluding the Working Capital Line of Credit Termination Date, subject to the provisions of Section 2.4(c) hereof. Anything contained in this Amended and Restated Loan Agreement to the contrary notwithstanding, the Working Capital Loans and the Working Capital Commitment shall be subject to the following limitations (and the Borrower may be obligated to prepay Working Capital Loans outstanding by virtue of such limitations): (1) The Total Utilization of Working Capital Commitment shall not exceed the lesser of the Working Capital Commitment or the Borrowing Base at any time; and (2) The amount otherwise available for borrowing under the Working Capital Line of Credit (other than to reimburse the Bank for the amount of any drawings under any Letters of Credit honored by the Bank and not theretofore reimbursed by the Borrower) shall be reduced by an amount equal to the Letter of Credit Usage as of such time of determination. (b) Term of Working Capital Line of Credit. The Working Capital Line of Credit shall become effective immediately as of the date hereof, and as of the date hereof the Borrower may obtain Working Capital Loans and Letters of Credit under the Working Capital Line of Credit from the Bank subject to the other terms and conditions contained herein. The working capital Line of Credit shall continue in effect until November 1, 2005, unless sooner terminated (a) by the Bank upon the occurrence and during the continuation of an Event of Default, or (b) by the Borrower at any time in its sole and absolute discretion. Upon termination of the Working Capital Line of Credit, the entire unpaid principal balance of and all accrued and unpaid interest on the Amended and Restated Working Capital Line of Credit Note shall be due and payable in full to the Bank on the then Working Capital Line of Credit Termination Date, subject at all times to the Bank's absolute right to accelerate the maturity date of the Working Capital Line of Credit and the Amended and Restated Working Capital Line of Credit Note upon the occurrence and during the continuation of an Event of Default. Upon the termination of the Working Capital Line of Credit by the Bank upon the occurrence and during the continuation of an Event of Default, or by the Borrower at any time in its sole and absolute discretion, the entire unpaid principal balance of and all accrued and unpaid interest on the Amended and Restated Working Capital Line of Credit Note shall be due and payable in full to the Bank. The termination of the Working Capital Line of Credit, for whatever reason, shall not in any way release or relieve the Borrower from its obligations incurred hereunder or in connection herewith or under the Amended and Restated Working Capital Line of Credit Note or the other Loan Instruments, and the provisions hereof and of the Amended and Restated Working Capital Line of Credit Note and the other Loan Instruments shall continue in full force and effect until the Amended and Restated Working Capital Line of Credit Note and all other obligations have been paid in full to the Bank. In the event the Borrower terminates the Working Capital Line of Credit, which the Borrower has the right to do at any time in its sole and absolute discretion, the Borrower shall be obligated to pay the Amended and Restated Working Capital Line of Credit Note, and all other obligations in full to the Bank. In addition, on September 30, 2003, provided an Event of Default has not occurred and is continuing hereunder and provided that the making of such payment will not result in the occurrence of an Event of Default hereunder, the Borrower shall make a mandatory payment of principal on the Amended and Restated Working Capital Line of Credit Note in an amount equal to thirty percent (30%) of the outstanding principal amount of the Working Capital Line of Credit as of September 30, 2003, which amount shall be applied by the Bank in accordance with the provisions of the Amendment to Participation Agreement of even date herewith between the Bank and SunTrust Bank. (c) Borrowing Mechanics. Working Capital Loans made on any Funding Date shall be in a minimum amount of $5,000.00 and integral multiples of $1,000.00 in excess of that, amount whenever the Borrower desires that the Bank make a Working Capital Loan to the Borrower, the Borrower shall deliver to the Bank a Borrowing Certificate no later than 11:00 A.M. (Louisville, Kentucky, time) on the proposed Funding Date. Each Working Capital Loan requested by the Borrower shall be made to the Borrower on the Funding Date selected by the Borrower unless the Borrowing Certificate pertaining to such Working Capital Loan is delivered to the Bank after the date and time, as applicable, specified above, in which event the Bank has the option to make the particular Working Capital Loan to the Borrower on the first Business Day that qualifies as a Funding Date in accordance with the provisions of this Section 2.1(c). The Borrowing Certificate shall be in the form of Exhibit D annexed hereto and shall specify (i) the proposed Funding Date (which shall be a Business Day), and (ii) that the amount of the proposed Working Capital Loan will not cause the Total Utilization of Working Capital Commitment to exceed the lesser of the Working Capital Commitment or the Borrowing Base. In lieu of delivering the above described Borrowing Certificate, the Borrower may give the Bank telephonic notice by the required time of the requested Working Capital Loan under this Section 2; provided that such notice shall be promptly confirmed in writing by delivery of a Borrowing Certificate to the Bank on or before 12:00 Noon on the requested Funding Date. The Bank shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above which the Bank believes in good faith to have been given by a duly Authorized Officer or other Person authorized to borrow on behalf of the Borrower or for otherwise acting in good faith under this Section 2.1(c) and, upon funding of any Working Capital Loan by the Bank in accordance with this Amended and Restated Loan Agreement pursuant to any telephonic notice, the Borrower shall have effected such Working Capital Loan hereunder. (d) Disbursement of Working Capital Loans. Upon satisfaction or waiver of the conditions precedent specified in Section 4.1 in the case of the initial Working Capital Loan on the initial Funding Date and Section 4.3 in the case of a Working Capital Loan on any subsequent Funding Date, the Bank shall make the proceeds of each Working Capital Loan requested by the Borrower available to the Borrower on the Funding Date by causing an amount of same day funds equal to such Working Capital Loan to be credited to the Borrower's Loan Account. (e) Records. The Bank shall record the Working Capital Loans made to the Borrower from time to time and each repayment or prepayment in respect of the principal amount of the Working Capital Loans in the Bank's electronic records. Any such recordation in accordance with the terms of this Amended and Restated Loan Agreement shall be conclusive and binding on the Borrower absent manifest error; provided, the failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligation to repay all Working Capital Loans to the Bank in accordance with this Amended and Restated Loan Agreement and the Amended and Restated Working Capital Line of Credit Note. (f) Borrower's Loan Account. (1) The Bank shall enter all Working Capital Loans made to the Borrower as debits in the Borrower's Loan Account. The Bank shall also record in the Borrower's Loan Account in accordance with customary accounting practice all other charges, expenses and other items properly chargeable to the Borrower; all payments made by the Borrower on account of the Working Capital Loans; and other appropriate debits and credits. The debit balance of the Borrower's Loan Account shall reflect the unpaid principal balance of the Working Capital Loans from time to time. At least once each month the Bank shall render a statement of account for the Borrower's Loan Account, which statement shall be considered correct and accepted by the Borrower and conclusively binding upon the Borrower unless the Borrower notifies the Bank to the contrary within thirty (30) days from the receipt of said statement by the Borrower or unless the Bank committed manifest error, bad faith, willful misconduct or gross negligence in the preparation of such statement. (2) Any and all principal, interest, charges and expenses, attorneys' fees and taxes now or hereafter due and owing under the Amended and Restated Working Capital Line of Credit Note and any of the other Loan Instruments may be charged to any deposit account of the Borrower with the Bank or to the Borrower's Loan Account. (g) Borrowing Base Report. The Borrower shall deliver to the Bank a Borrowing Base Report, substantially in the form of Exhibit C attached hereto and made a part hereof, on a daily basis. The Borrowing Base Report will be updated daily as to sales and accounts receivable with Line 6 "ineligible collateral" being updated each Friday. If Friday is a holiday, it would be updated the last working day before Friday. Inventory will be updated monthly, but at the option of the Borrower, it may update the inventory section each week. The Borrower shall also deliver a Borrowing Base Report to the Bank prior to the funding of any Working Capital Loan if the funding of such Working Capital Loan would cause the Total Utilization of Working Capital Commitment to exceed the Borrowing Bass based upon the most recent Borrowing Base Report delivered to the Bank. Each Borrowing Base Report shall be certified to be true, correct and accurate by an Authorized Officer of the Borrower. The Borrower shall, in addition, from time to time deliver to the Bank such other information concerning the Borrower's Accounts Receivable and Inventory as the Bank may reasonably request. The Bank reserves the right to audit, from time to time, the Borrower's Accounts Receivable and Inventory. (h) Loss or Deprecation of Inventory, Returns, Disputed Accounts, Set-offs. Discounts. Adjustments and Credits in Accounts Receivable. Subject to the proviso set forth below, the Borrower shall promptly notify the Bank of (a) any event causing loss or depreciation in value of Eligible Inventory and the amount of such loss or depreciation, (b) all cases involving the return, rejection, repossession, loss or damage of or to merchandise covered by Eligible Accounts and of any request for credit for, or adjustment of, any merchandise, or of any other dispute arising with respect to Eligible Accounts, and (c) generally all happenings and events affecting Eligible Inventory or Eligible Accounts or the value or amount thereof. All loss or depreciation in value of Eligible Inventory shall be immediately reflected in the Net Security Value of Eligible Inventory, and all adjustments and credits to Eligible Accounts shall be immediately reflected in the Net Outstanding Amount of Eligible Accounts; provided however, the Borrower shall not be required to give notice to the Bank of the occurrence of any of the events described in this Section 2.1(h) unless and until the aggregate loss or depreciation in the value of Eligible Inventory and all adjustments and credits to Eligible Accounts exceeds One Hundred Thousand Dollars ($100,000.00) in any month. 2.2 Interest on the Amended and Restated Working Capital Line of Credit Note. (a) Borrowing Rate. Subject to provisions of Section 2.2(d) hereof, the unpaid principal balance of the Amended and Restated Working Capital Line of Credit Note outstanding from time to time commencing on the date hereof shall bear interest (hereinafter referred to as the "Borrowing Rate," as the same may change from time to time) at the Prime Rate plus 2.50% per annum for as long as the ratio of the Borrower's Funded Debt to EBITDA is 4.0xx or greater, based on a rolling four quarter average (for any four consecutive quarters) and commencing on December 30, 2001, for the second Fiscal Quarter of 2002. The Bank agrees that the Borrowing Rate shall be reduced (i) to the Prime Rate plus 2% per annum if the ratio of the Borrower's Funded Debt to EBITDA is between 3.0xx and 3.9xx, and (ii) to the Prime Rate plus 1% per annum if the ratio of the Borrower's Funded Debt to EBITDA is below 3.0xx, in either event based on a rolling four quarter average (for any four consecutive quarters) and commencing on December 30, 2001, for the second Fiscal Quarter of 2002. (b) Availability Fee. The Borrower agrees to pay to the Bank an annual availability fee for the period from and including the Closing Date to and excluding the Working Capital Line of Credit Termination Date equal to one half of 1% per annum times the positive difference, if any, between (a) the Working Capital Commitment, and (b) the Total Utilization of Working Capital Commitment, calculated on a daily basis for the relevant period, such availability fee to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable monthly in arrears on the first day of each month, commencing on the first such date to occur after the Closing Date, and on the Working Capital Line of Credit Termination Date. (c) Interest Payments. Subject to the provisions of Section 2.2(d) hereof, interest on the unpaid principal balance of the Amended and Restated Working Capital Line of Credit Note as the same shall exist from time to time shall be payable monthly to the Bank on the first (1st) day of each and every month until the Working Capital Line of Credit Termination Date. (d) Post-Maturity Interest. Any principal of the Amended and Restated Working Capital Line of Credit Note not paid when due and, to the extent permitted by applicable law, any interest payments on the Amended and Restated Working Capital Line of Credit Note or any fees or other amounts owed hereunder not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand at a rate equal to the Default Rate. Payment or acceptance of the increased rates of interest provided for in this Section 2.2(d) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of the Bank by virtue of any default in the payment of any principal of and/or accrued interest on the Amended and Restated Working Capital Line of Credit Note. (e) Computation of Interest. Interest on the unpaid principal balance of the Amended and Restated Working Capital Line of Credit Note shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. 2.3 Fees. (a) Collateral Agent Fee. In consideration of the Bank administering the Working Capital Line of Credit as the Collateral Agent, the Borrower shall pay to the Bank an annual agent fee in the amount of Thirty Thousand Dollars ($30,000.00), due on or before January 14 of each year, commencing on January 14, 2002. The foregoing fee shall be deemed fully earned and nonrefundable by the Bank, as agent, upon the payment thereof to the Bank, an agent, and the Bank shall have no obligation whatsoever to share such fee with any of the Eligible Assignees. (b) Restructure Fee. The Borrower agrees to pay a "Restructure Fee" on the Closing Date in the amount of $ 433,338.00, which amount represents 1.25% of the amounts owed to the Bank (based on the maximum amount of the Working Capital Line of Credit) and the Noteholders as of the date hereof, which Restructure Fee shall be shared among the Lenders in accordance with the amounts of the respective Indebtedness owed by the Borrower to the Lenders. Twenty percent (20%) of the Restructure Fee ($86,667) shall be nonrefundable. The Borrower shall be entitled to a refund of a portion of the Restructure Fee if the Borrower consummates refinancing of all of its Indebtedness acceptable to the Bank and the Noteholders within the following specified time periods: Portion of Refundable Restructure Closing of Refinancing Fee to be Refunded to Borrower Within six months following the Closing Date 75% or $ 260,000 Within twelve months following the Closing Date 50% or $ 173,335 The Borrower shall not be entitled to any refund of the Restructure Fee if such refinancing fails to close within twelve (12) months following the Closing Date. 2.4 Prepayments and Payments; Reductions in Working Capital Commitment. (a) Prepayments. The Borrower may at any time and from time to time pay any portion of the unpaid principal balance of the Amended and Restated Working Capital Line of Credit Note to the Bank. In the event the Working Capital Loans outstanding at any one time and the Letter of Credit Usage exceed the Borrowing Base, the Borrower shall immediately prepay to the Bank an amount of principal of the Working Capital Loans sufficient to cause the aggregate unpaid principal balance of the Working Capital Loans to equal or be less than the Borrowing Base then existing. (b) General Provisions Regarding Prepayment. (1) Manner and Time of Payment. All payments of principal, interest and fees hereunder and under the Amended and Restated Working Capital Line of Credit Note by the Borrower shall be made without defense, setoff and counterclaim and in same day funds and delivered to the Bank not later than 11:00 A.M. (Louisville, Kentucky time) on the date due at its office located at 101 South Fifth Street, Louisville, Kentucky; funds received by the Bank after that time shall be deemed to have been paid by the Borrower on the next succeeding Business Day. (2) Payments on Business Days. Whenever any payment to be made hereunder or under the Amended and Restated Working Capital Line of Credit Note shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day (unless no further Business Day occurs in such month, in which case payment shall be made on the next preceding Business Day) and such extension of time shall be included in the computation of the payment of interest hereunder or under the Amended and Restated Working Capital Line of Credit Note or of the availability fee due under Section 2.2(b) hereof, as the case may be. (c) Voluntary Reduction of Working Capital Commitment. The Borrower shall have the right, at any time and from time to time, to terminate in whole or permanently reduce in part, without premium or penalty, the Working Capital Commitment in an amount up to the amount by which the Working Capital Commitment exceeds the Total Utilization of Working Capital Commitment. The Borrower shall give not less than five Business Days' prior written notice to the Bank designating the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction of the Working Capital Commitment. Such termination or partial reduction of the Working Capital commitment shall be effective on the date specified in the Borrower's notice. Any such partial reduction of the Working Capital Commitment shall be in an aggregate minimum amount of $1,000,000.00. 2.5 Use of Proceeds. (a) Working Capital Loans. The proceeds of the Working Capital Loans shall be used by the Borrower to fund its working capital needs, capital expenditures, and to fund debt owed to its lenders. (b) Margin Regulations. No portion of the proceeds of any Working Capital Loans has been used or will be used to purchase or carry any Margin Stock, to extend credit to others for the purpose of purchasing or carrying Margin Stock or for any purpose proscribed by Regulation G, Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. If requested by the Bank, the Borrower shall execute and deliver to the Bank a completed F.R. Form U-1. 2.6 Letters of Credit. Subject to the terms and conditions, of this Amended and Restated Loan Agreement and in reliance upon the representations and warranties of the Borrower set forth herein, the Borrower may request, in accordance with the provisions of this Section 2.6, that on and after the Closing Date, the Bank issue Letters of Credit for the account of the Borrower denominated in U.S. Dollars. Issuances of Letters of Credit shall be subject to the following limitations: (a) Dollar Limitations. The Borrower shall not request that the Bank issue any Letter of Credit if, after giving effect to such issuance, (y) the total Letter of Credit Usage would exceed $2,500,000.00, or (z) the Total Utilization of Working Capital Commitment would exceed the lesser of the Working Capital Commitment, as the amount available under the Working Capital Commitment may be reduced from time to time pursuant to Section 2.4(c) hereof, or the Borrowing Base. (b) Expiration Dates. In no event shall the Bank issue, reissue, amend or permit the extension of: (y) any Letter of Credit having an expiration date later than the Working Capital Line of Credit Termination Date in effect at the time of issuance, re-issuance, amendment or extension (automatic or otherwise) thereof; or (z) subject to the foregoing clause (y), any Letter of Credit having an expiration date more than one year after its date of issuance; provided that subject to the foregoing clause (y), this clause (z) shall not prevent the Bank from agreeing that a Letter of Credit will automatically be extended annually for one or more periods each not to exceed one year if the Bank does not cancel such extension. It shall be a condition precedent to the issuance of any Letter of Credit in accordance with the provisions of this Section 2.6 that each condition set forth in Sections 4.1 and 4.3 of this Amended and Restated Loan Agreement shall have been satisfied. Each Letter of Credit may provide that the Bank may (but shall not be required to) pay the beneficiary thereof upon the occurrence of an Event of Default and the acceleration of the stated maturity date of the Amended and Restated Working Capital Line of Credit Note or, if payment is not then due to the beneficiary, provide for the deposit of funds in an account to secure payment to the beneficiary and that any funds so deposited shall be paid to the beneficiary of the Letter of Credit if conditions to such payment are satisfied or returned to the Bank (or, if all of the Obligations shall have been indefeasibly paid in full to the Bank, to the Borrower) if no payment to the beneficiary has been made and thirty (30) days after the final date available for drawings under the Letter of Credit has passed. Each payment or deposit of funds by the Bank as provided in this paragraph shall be treated for all purposes of this Amended and Restated Loan Agreement as a drawing duly honored by the Bank under the related Letter of Credit. (c) Notice of Issuance. Whenever the Borrower desires the issuance of a Letter of Credit, the Borrower shall deliver to the Bank an Application and Agreement for Letter of Credit in the form of Exhibit B annexed hereto and a Borrowing Certificate no later than 10:00 A.M. (Louisville, Kentucky, time) at least ten (10) Business Days, or in each case such shorter period as may be agreed to by the Bank in any particular instance, in advance of the proposed date of issuance. The Application and Agreement for Letter of Credit shall specify (i) the proposed date of issuance (which shall be a Business Day under the laws of the Commonwealth of Kentucky), (ii) the face amount of the Letter of Credit, (iii) the expiration date of the Letter of Credit, (iv) the name and address of the beneficiary, and (v) a summary of the purpose and contemplated terms of such Letter of Credit. Prior to the date of issuance of any Letter of Credit, the Borrower shall specify a precise description of the documents and the proposed text of any certificate to be presented by the beneficiary under such Letter of Credit which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the Bank to make payment under the Letter of Credit; provided that the Bank, in its sole reasonable judgment, may require changes in any such documents and certificates; provided further that no Letter of Credit shall require payment against a conforming draft to be made thereunder on the same Business Day (under the laws of the Commonwealth of Kentucky) that such draft is presented if such presentation is made after 11:00 A.M. (Louisville, Kentucky, time) on such Business Day. In determining whether to pay under any Letter of Credit, the Bank shall be responsible only to determine that the documents and certificates required to be delivered under that Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit; provided, further, nothing contained in this Section 2.6(c) shall be deemed to prejudice the right of the Borrower to recover from the Bank in respect of any amounts paid by the Bank under any Letter of Credit in the event that it is determined by a court of competent jurisdiction that the payment with respect to such Letter of Credit by the Bank constituted gross negligence or willful misconduct on the part of the Bank. (d) Payment of Amounts Due Under Letters of Credit. In the event of any drawing under any Letter of Credit by the beneficiary thereof, the Bank shall promptly notify the Borrower thereof, and the Borrower shall reimburse the Bank on the date on which such drawing is honored in an amount in same day funds equal to the amount of such drawing. Each drawing under a Letter of Credit honored by the Bank, until an amount equal thereto is reimbursed by the Borrower to the Bank, shall be deemed a Working Capital Loan hereunder and shall bear interest at the rates set forth in and shall be payable on the dates and otherwise upon the terms and conditions set forth in this Amended and Restated Loan Agreement and the Amended and Restated Working Capital Line of Credit Note. (e) Compensation. The Borrower agrees to pay, without duplication, the following amounts to the Bank with respect to each Letter of Credit issued by it: (1) with respect to each Letter of Credit, an annual letter of credit fee (the "Letter of Credit Fee") payable to the Bank equal to 2% per annum multiplied by the maximum amount available from time to time to be drawn under such Letter of Credit, payable in advance on the date of issuance of such Letter of Credit and on the date, if such should occur, of each renewal of such Letter of Credit. (2) with respect to each draft honored by the Bank under any Letter of Credit issued by the Bank pursuant to this Amended and Restated Loan Agreement, a drawing fee equal to the greater of (y) one fourth of one percent per annum (1/4 of 1%) of the amount of such draft, or (z) $100. (3) with respect to drawings made under any Letter of Credit, interest, payable in immediately available funds to the Bank on demand, on the amount paid by the Bank in respect of each such drawing from the date of the drawing through the date such amount is reimbursed by the Borrower at a variable rate equal to the rate specified in Section 2.2(a); and (4) with respect to the issuance, amendment or transfer of each Letter of Credit, documentary and processing charges payable to the Bank in accordance with the Bank's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or drawing, an the case may be. (f) Obligations Absolute. Subject to the right of the Borrower to seek damages in the event that a court of competent jurisdiction determines that the Bank committed gross negligence or willful misconduct in honoring any draft presented under any Letter of Credit issued by the Bank, the obligation of the Borrower to reimburse the Bank for drawings made under the Letters of Credit issued by it shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Amended and Restated Loan Agreement under all circumstances including, without limitation, the following circumstances: (1) any lack of validity or enforceability of any Letter of Credit; (2) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such transferee may be acting), the Bank or any other Person, whether in connection with this Amended and Restated Loan Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between the Borrower and the beneficiary for which the Letter of Credit was procured); (3) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) payment by the Bank under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit, provided that such payment does not constitute bad faith, gross negligence or willful misconduct on the part of the Bank as determined by a court of competent jurisdiction; any other circumstance or happening whatsoever, which is similar to any of the foregoing; or the fact that an Event of Default under this Amended and Restated Loan Agreement shall have occurred and be continuing. (g) Additional Payments. If by reason of (i) any change in applicable law, regulation, rule, decree or regulatory requirement or any change in the interpretation or application by any judicial or regulatory authority of any law, regulation, rule, decree or regulatory requirement or (ii) compliance by the Bank with any direction, request or requirement (whether or not having the force of law) of any governmental or monetary authority including, without limitation, Regulation D: (1) any reserve, deposit or similar requirement is or shall be applicable, imposed or modified in respect of any Letters of Credit issued by the Bank; or (2) there shall be imposed on the Bank any other condition regarding any Letter of Credit; and the result of the foregoing is to directly or indirectly increase the cost to the Bank of issuing, making or maintaining any Letter of Credit, or to reduce the amount receivable in respect thereof by the Bank, then and in any such case the Bank may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify the Borrower, and the Borrower shall pay on demand such amounts as the Bank may specify to be necessary to compensate the Bank for such additional cost or reduced receipt, together with interest on such amount from ten (10) days after the date of such demand until payment in full thereof at a rate equal at all times to the Floating Rate. The determination by the Bank of any amount due pursuant to this Section 2.6(g) as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on the Borrower. (h) Indemnification; Nature of the Bank's Duties. In addition to amounts payable as elsewhere provided in this subsection (i), the Borrower hereby agrees to protect, indemnify, pay and save the Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees and allocated costs of internal counsel) which the Bank may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of the Letters of Credit, other than as a result of the bad faith, gross negligence or willful misconduct of the Bank as determined by a court of competent jurisdiction, or (ii) the failure of the Bank to honor a drawing under any Letter of Credit an a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Government Acts"). As between the Borrower and the Bank, the Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of credit issued by the Bank by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Bank shall not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of such Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such 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; (iii) for failure of the beneficiary of any such Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of credit; and (viii) for any consequences arising from causes beyond the control of the Bank, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of the Bank's rights or powers hereunder; provided, however, that the Bank shall be responsible for any payment the Bank makes under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit in the event such payment constitutes bad faith, gross negligence or willful misconduct of the Bank as determined by a court of competent jurisdiction. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Bank under or in connection with the Letters of Credit issued by it or the related certificates, if taken or omitted in good faith and without bad faith, gross negligence or willful misconduct, shall not put the Bank under any resulting liability to the Borrower. Notwithstanding anything to the contrary contained in this Section 2.6, the Borrower shall have no obligation to indemnify the Bank in respect of any liability incurred by the Bank arising out of the bad faith, gross negligence or willful misconduct of the Bank, as determined by a court of competent jurisdiction, or out of the wrongful dishonor by the Bank of proper demand for payment made under the Letters of Credit issued by it. (i) Computation of Interest. Interest payable pursuant to this Section 2.6 shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which it accrues. (j) Amendments. The Borrower may request that the Bank enter into one or more amendments of any Letter of Credit issued by the Bank by delivering to the Bank an Application and Agreement For Letter of Credit specifying (i) the proposed date of the amendment, and (ii) the requested amendment. The Bank shall have sole discretion in determining whether to enter into any amendment with respect to the Letters of Credit issued by it, and any such amendment extending the expiry date or increasing the stated amount of any Letter of Credit shall only be permitted if the Bank would be permitted to issue a new Letter of Credit having such an expiry date or stated amount under this Section 2.6(j) on the date of the amendment. 3. SECURITY FOR THE INDEBTEDNESS. The Indebtedness, including the Amended and Restated Line of Credit Note, is and shall be secured by and entitled to the benefits of all the following: 3.1 Security Interest. A first priority, perfected and continuing security interest in favor of the Collateral Agent, covering all assets of the Borrower, as more fully described in that certain Security Agreement of even date herewith between the Collateral Agent and the Borrower, and accompanying UCC Financing Statements. The Security Agreement shall include "immediate lockbox" provisions, pursuant to which all of the Borrower's account debtors shall make payments of all Accounts directly to the Collateral Agent for the account of the Borrower. 3.2 Right of Offset. The right of offset specified in Section 9.2 hereof. 3.3 Mortgage. That certain Mortgage of even date herewith made by the Borrower in favor of the Collateral Agent, granting the Collateral Agent a first and prior lien on certain real property and all improvements thereon located in Boyd County, Kentucky, as more fully described therein (the "Mortgage"). 3.4 Assignment of Rents and Leases. That certain Assignment of Rents and Leases of even date herewith between the Borrower and the Collateral Agent, granting the Bank a first and prior lien on the rents and leases applicable to the property more fully described therein (the "Assignment of Rents and Leases"). 3.5 Other Security. Other security and instruments, if any, granted by Borrower to the Collateral Agent, whether of even date herewith or hereafter or heretofore granted, to secure the Amended and Restated Working Capital Line of Credit Note and/or any other Indebtedness. 4. CONDITIONS PRECEDENT. The obligation of the Bank to establish the Working Capital Line of Credit in favor of the Borrower pursuant to and upon the terms and conditions set forth in this Amended and Restated Loan Agreement is subject to the Bank entering into an Amendment to its existing Participation Agreement with SunTrust Bank, and the Bank entering into an Intercreditor and Collateral Agency Agreement with the Borrower and the Noteholders. In addition, the obligation of the Bank to establish the Working Capital Line of Credit in favor of the Borrower is subject to the satisfaction of all of the following conditions: 4.1 Initial Closing Conditions. The obligation of the Bank to make the initial Working Capital Loans to the Borrower is subject to the condition that, in addition to the satisfaction of the conditions precedent specified in Section 4.3 hereof as of the Closing Date, the Bank shall have received the following from the Borrower, dated as of the Closing Date or such other date as shall be acceptable to the Bank, all of which must be acceptable to the Bank and its counsel in form and substance: (a) this Amended and Restated Loan Agreement, duly executed and delivered by the Borrower; (b) the Amended and Restated Working Capital Line of Credit Note, duly executed and delivered by the Borrower; (c) duly executed counterparts of the Amendment No. 2 to Note Agreement and Waiver among the Borrower and the Noteholders; (d) one or more duly executed 9.00% Senior Notes; (e) duly executed counterparts of the Security Agreement, the Mortgage, the Assignment of Rents and Leases, UCC Financing and Fixture Filings, and the Environmental Indemnity Agreement, each in form, scope and substance satisfactory to the Bank, executed and delivered by the Borrower; (f) evidence that all other actions necessary or desirable to perfect and protect the security interests created by the Loan Agreements have been taken; (g) duly executed counterparts of the Collateral Agency Agreement, in form, scope and substance satisfactory to each Noteholder, executed and delivered by the Borrower and all other parties thereto; (h) certificate of the Secretary or Assistant Secretary of the Borrower attaching and certifying copies of (i) the certificate of incorporation, as amended, of the Borrower, certified by the Secretary of State of Delaware, (ii) the bylaws, as amended, of the Borrower, (iii) the resolutions of the board of directors of the Borrower, authorizing the execution, delivery and performance of the Loan Instruments and the "Note Documents" (as defined in the Note Agreement), and (iv) the name, title and true signature of each officer of the Borrower executing such documents; (i) current appraisals pertaining to the Borrower's real property, plant, equipment and inventory; (j) Phase I environmental site assessment reports with respect to any real property to be owned or leased by the Borrower from and after the Effective Date; (k) evidence that the Borrower has entered into documentation amending the Master Equipment Lease to (i) waive all existing Defaults and Events of Default as defined therein, and (ii) amend the financial covenants contained therein to be consistent with the financial covenants contained herein; (l) evidence that each of Fifth Third Bank and General Electric Capital Corporation has consented to the execution and delivery of an appropriate Amendment by the Borrower; (m) an opinion from Frost Brown Todd LLC, counsel for the Borrower; (n) an opinion from VanAntwerp, Monge, Jones & Edwards, LLP, counsel for the Borrower, containing the matters set forth on Exhibit F hereto; (o) audited Fiscal Year 2001 consolidated financial statements of the Borrower and its Subsidiaries, together with the unqualified report thereon by Arthur Andersen LLP marked "draft," delivered in accordance with the requirements of Section 6 hereof other than those relating to the timing of the delivery thereof; (p) payment to the Bank of the fees payable on the Closing Date pursuant to Section 2.3 hereof, and reimbursement of the items referred to in Section 12.12 hereof; (q) each Noteholder shall have received, in immediately available funds, interest accrued from and including November 1, 2001, through January 14, 2002, on the unpaid principal amount of each of their respective Senior Notes calculated at the rate of 9.00% per annum; (r) payment of the Borrower to the Bank of all excess cash on hand as of the date of Closing, to be applied towards reduction of the Working Capital Line of Credit; (s) there shall be no material adverse change in the financial condition of the Borrower from the date of the Term Sheet; (t) a duly executed original of the title insurance policy issued by a title insurance company acceptable to the Bank, covering the real property subject to the Mortgage and containing only such exceptions as the Bank may approve in its sole discretion, with proof, satisfactory to the Bank, that all premiums, search fees and other charges in connection therewith have been paid in full (the "Title Insurance Policy"); (u) the Bank shall have been provided with UCC, tax lien, and judgment lien searches performed in such locations as the Bank shall determine in the exercise of its sole discretion, which shall indicate that all of the Borrower's assets are free and clear of all liens and encumbrances, other than those liens and encumbrances expressly permitted by the Bank; (v) satisfactory proof that policies of insurance of the types and coverage as specified in this Amended and Restated Loan Agreement and the Loan Instruments are in full force and effect; (w) the Bank shall have entered into an Amendment to Participation Agreement; and (x) such other documents, agreements and instruments as the Bank may reasonably request. 4.2 Conditions to All Letters of Credit. The issuance of any Letter of Credit by the Bank hereunder, in addition to the conditions precedent specified in Section 4.3 hereof, is subject to the prior or concurrent satisfaction of each condition set forth in Section 4.1 hereof. 4.3 Conditions to All Working Capital Loans and Letters of Credit. The obligation of the Bank to make each Working Capital Loan on each Funding Date and the obligation of the Bank to issue or extend the stated expiration date of each Letter of Credit is subject to the following further conditions precedent: (a) The Bank shall have received with respect to each Working Capital Loan, in accordance with the provisions of Section 2.1(c) of this Amended and Restated Loan Agreement, an originally executed Borrowing Certificate, in each case signed by an Authorized Officer of the Borrower. (b) The Bank shall have received with respect to each Letter of Credit, in accordance with the provisions of Section 2.6(c) of this Amended and Restated Loan Agreement, an originally executed Borrowing Certificate and an Application and Agreement For Letter of Credit relating to such Letter of Credit, in each case signed by an Authorized Officer of the Borrower. (c) As of the Funding Date of the Working Capital Loan or the date of issuance or extension of the stated expiration date of the Letter of Credit: (1) The representations and warranties contained herein shall be true and correct in all material respects on and as of that date to the same extent as though made on and as of that date; (2) No event shall have occurred and be continuing or would result from the funding of the Working Capital Loan or the issuance or extension of the stated expiration date of such Letter of Credit which would constitute an Event of Default; (3) The Borrower shall have performed in all material respects all agreements and satisfied all conditions which this Amended and Restated Loan Agreement and the other Loan Instruments provide shall be performed by it on or before such date; (4) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain the Bank from making that Working Capital Loan or from issuing or extending the stated expiration date of that Letter of Credit; (5) There shall not be pending or, to the knowledge of the Borrower threatened, any action, suit, proceeding or arbitration or, to the knowledge of the Borrower, any governmental investigation pending or threatened, against or affecting the Borrower or any property of the Borrower, which is required by the terms of this Amended and Restated Loan Agreement to be disclosed to the Bank and which has not been disclosed by the Borrower pursuant to Sections 6.3 and 6.6 hereof prior to the making of the last preceding Working Capital Loans (or, in the case of the initial Working Capital Loans made hereunder, prior to the execution of this Amended and Restated Loan Agreement) or the issuing of the most recent Letter of Credit (or, in the case of the initial Letter of Credit, prior to the execution of this Amended and Restated Loan Agreement) or the most recent extension of the stated expiration date of any Letter of Credit and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, which, in either event, in the reasonable opinion of the Borrower, is likely to be determined adversely to the Borrower and, in such event, is reasonably expected to have a Material Adverse Effect. No injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent this Amended and Restated Loan Agreement or the making of the Working Capital Loans or the issuing or extension of the respective stated expiration dates of the Letters of Credit hereunder. 5. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank as follows, which representations and warranties shall be deemed to be continuing representations and warranties until the Amended and Restated Working Capital Line of Credit Note and the other Obligations have been paid in full to the Bank and the Working Capital Commitment has expired or has terminated, and shall survive the execution and delivery of this Amended and Restated Loan Agreement: 5.1 Organization, Standing, etc. of the Borrower. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and the Borrower has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to execute and deliver into this Amended and Restated Loan Agreement and the other Loan Instruments to which it is a party, to issue the Amended and Restated Working Capital Line of Credit Note and to carry out. the respective terms hereof and thereof. The Borrower has delivered to the Bank a true and complete copy of its Certificate of Incorporation and Bylaws as in effect on the date hereof. 5.2 Subsidiaries. The Borrower has no Subsidiaries. 5.3 Qualification. The Borrower is duly qualified to transact business as a foreign corporation and is in good standing as a foreign corporation in the commonwealth of Kentucky and in each other jurisdiction in which the character of the properties owned or leased by the Borrower or the nature of the activities conducted or proposed to be conducted by the Borrower makes such qualification necessary. 5.4 Use of Proceeds. The Borrower's uses of the Working Capital Loans will at all times be legal and proper corporate uses duly authorized by the Board of Directors of the Borrower, and such uses are consistent with all applicable laws and statutes as in effect as of the date hereof. 5.5 Intellectual Property. The Borrower owns or possesses adequate assets, licenses, patents, patent applications, copyrights, trademarks, trademark applications, trade names, franchises, consents, authorizations and service marks and rights with respect to the foregoing necessary for the conduct of its business as presently conducted and as proposed to be conducted without any known conflict with the rights of others. 5.6 Contracts. The Borrower is not in default under any contract, agreement, judgment, decree or order which, if not cured or waived, would reasonably be likely to have a Material Adverse Effect. 5.7 Disclosure. Neither this Amended and Restated Loan Agreement nor any other Loan Instrument furnished to the Bank by or on behalf of the Borrower in connection with the transactions contemplated hereby taken as a whole contains any statement of any material fact which is untrue or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than as is hereafter disclosed in any document filed by the Borrower with the Securities and Exchange Commission or is otherwise disclosed by the Borrower in writing to the Bank) which materially adversely affects or in the future will (so far as the Borrower can now reasonably foresee) materially adversely affect the properties, business, operations, affairs or financial condition of the Borrower and its Subsidiaries taken as a whole which has not been set forth in this Amended and Restated Loan Agreement or in the other Loan Instruments furnished to the Bank by or on behalf of the Borrower in connection with the transactions contemplated hereby. The Borrower is currently solvent, and neither the issuance and delivery of the Amended and Restated Working Capital Line of Credit Note to the Bank, nor the performance of the transactions contemplated hereunder, will render the Borrower insolvent, inadequately capitalized to undertake the transactions contemplated hereunder or to undertake the business in which it is presently engaged or about to engage or render the Borrower unable to pay its debts as they become due. The Borrower is not contemplating either the filing of a petition by it or the commencement of a case by it under the Bankruptcy Code or any state insolvency laws or the liquidation of all or a major portion of its property, and the Borrower has no knowledge of any Person contemplating the filing of any such petition or commencement of any such case against the Borrower. 5.8 Funded Debt and Capitalized Leases. Upon the funding of the initial Working Capital Loan, the Borrower has no outstanding Funded Debt or Capitalized Leases other than the Senior Notes, the Funded Debt or Capitalized Leases identified on Exhibit G attached hereto and made a part hereof, and the Obligations. 5.9 Title to Properties; Liens. Except for a Mortgage in favor of Republic Corporation as shown on the Title Insurance Policy, the Borrower has good and marketable title to all of its properties and assets (other than the mineral interest in the Borrower's real property, which was previously severed from the real property), and none of such properties or assets is or will be, upon the funding of the initial Working Capital Loan, subject to any Lien except the Liens permitted hereunder and other Liens which in the aggregate are not substantial in amount, do not secure any Indebtedness, do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Borrower and have not arisen other than in the ordinary course of business. The Borrower represents and warrants that the maximum amount of the Lien in favor of Republic Corporation referred to above does not exceed $250,000, and will not exceed $250,000 at any time hereafter. 5.10 Litigation, etc. There is no action, proceeding or investigation pending or, to the best knowledge of the Borrower, threatened (or any basis therefor known to the Borrower) (a) which questions the validity of this Amended and Restated Loan Agreement, the Amended and Restated Working Capital Line of Credit Note or the other Loan Instruments or any action taken or to be taken pursuant hereto or thereto, or (b) which in. the Borrower's reasonable judgment is likely to be determined adversely to the Borrower and, as a result of such adverse determination to the Borrower, will in the Borrower's reasonable judgment result, either in any case or in the aggregate, in a Material Adverse Effect. 5.11 Authorization; Compliance with Other Instruments. The execution, delivery and performance of this Amended and Restated Loan Agreement, the Amended and Restated Working Capital Line of Credit Note and the other Loan Instruments have been duly authorized- by all necessary corporate action on the part of the Borrower, will not result in any violation of or be in conflict with or constitute a default under the Certificate of Incorporation or By-Laws of the Borrower or any agreement, instrument,, judgment, decree, order, statute, rule or governmental regulation applicable to the Borrower, or result in the creation of any Lien upon any of the properties or assets of the Borrower. The Borrower is not in material violation of its Certificate of Incorporation or By-Laws or, to the Borrower's best knowledge, any judgment, decree, order, statute, rule or governmental regulation applicable to the Borrower except as otherwise disclosed in writing to the Bank. Without limiting the generality of the foregoing, to the best knowledge of the Borrower, the Borrower is in compliance in all material respects with all federal and state laws and all rules, regulations and administrative orders of all state and local commissions or authorities which are applicable to the Borrower or to the operation of its business. 5.12 Governmental Consent. To the best knowledge of the Borrower, the Borrower is not required to obtain any order, consent, approval or authorization of, and is not required to make any declaration or filing with, any governmental authority in connection with the execution and delivery of this Amended and Restated Loan Agreement or the negotiation, offer, issue, sale and delivery of the Amended and Restated Working Capital Line of Credit Note to the Bank, or in connection with the execution, delivery and performance of the other Loan Instruments, except such as have been obtained. 5.13 Eligible Accounts. Each Eligible Account shall be a good and valid Account Receivable representing an undisputed, bona fide indebtedness incurred by the debtor named therein, for merchandise shipped or delivered pursuant to a contract of sale, or for services theretofore performed by the Borrower with or for said debtor. There shall be no setoffs or counter-claims against any Eligible Account, and no agreement under which any deduction or discount may be claimed shall have been made with the debtor of any Eligible Account except as indicated in a written list, statement or invoice furnished to the Bank with reference thereto. 5.14 Investment Company Act Status. The Borrower is not an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. 5.15 Regulation G, etc. The Borrower does not own, or have any present intention of acquiring, any Margin Stock. None of the Working Capital Loans will be used, directly or indirectly, by the Borrower for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any Margin Stock or for any other purpose which might constitute the transactions contemplated hereby a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or cause this Amended and Restated Loan Agreement to violate Regulation U, Regulation T, Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934. 5.16 Holding Company Act. The Borrower is not a "Holding Company" or a "Subsidiary Company" of a "Holding Company," or an "Affiliate" of a "Holding Company" or of a "Subsidiary Company" of a "Holding Company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.17 Employee Retirement Income Security Act of 1974. The Borrower has not incurred (a) any material accumulated funding deficiency within the meaning of ERISA, or (b) any material liability to the PBGC established under ERISA (or any successor thereto under ERISA) in connection with any Plan established, maintained or assumed by the Borrower, nor has the Borrower had any tax assessed against it by the Internal Revenue Service for any alleged violation under Section 4975 of the Code. To the Borrower's knowledge, no prohibited transaction within the meaning of Section 4975 of the Code has occurred with respect to any Plan established, maintained or assumed by the Borrower. 5.18 Accuracy of Financial Reports. The audited consolidated financial statements of the Borrower for its Fiscal Year 2000 and the interim unaudited consolidated financial statements of the Borrower and its Subsidiaries as at and for the Fiscal Quarters ended December 30, 2000; March 31, 2001; June 30, 2001; and September 29, 2001, in each case which have been delivered to the Bank, have been prepared in accordance with GAAP and fairly and accurately present the financial condition of the Borrower as of the dates and for the periods ended reflected in such financial statements; provided, such interim financial statements shall be without footnotes and shall be subject to normal year-end adjustments. There have been no material adverse changes in the financial condition of the Borrower subsequent to the periods ended reflected in such financial statements. 5.19 Bank Accounts. All of the Borrower's current operating, deposit, and other bank depository accounts have been listed and described in a letter from the Borrower to the Bank of even date herewith. 6. AFFIRMATIVE COVENANTS. The Borrower hereby covenants and agrees that until the Amended and Restated Working Capital Line of Credit Note and the other obligations have been paid in full to the Bank and the Working Capital Commitment has expired or has terminated, the Borrower will perform and observe all of the following provisions: 6.1 Maintenance of Properties. The Borrower will, insofar as it is not prevented by causes beyond its control, maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of the Borrower (whether owned in fee or a leasehold interest) and from time to time the Borrower will, insofar as it is not prevented by causes beyond its control, make or. cause to be made all appropriate repairs, renewals and replacements thereof so that the efficiency thereof shall be maintained in all material respects. 6.2 Monetary Obligations. (a) The Borrower will pay and discharge promptly as they become due and payable all taxes, assessments and other governmental charges levied upon it or its income or upon any of its properties or assets or in respect of its franchises, business, income or profits, or upon any part thereof, as well as all lawful claims of any kind (including claims for labor, materials and supplies) which, if unpaid, might by law become a lien or a charge upon its property before any of the same become delinquent; provided, however, the Borrower shall not be obligated to pay any such tax, assessment or charge if the Borrower is contesting the amount or validity of, or its liability for, any such taxes, assessments or charges in good faith and by appropriate proceedings promptly initiated and diligently conducted by the Borrower and if the Borrower shall have established such reserve or other appropriate provision, if any, as shall be required by GAAP in respect thereof. (b) The Borrower will pay in full all its other debts, obligations and liabilities allowed hereunder before the same become delinquent, to the extent the failure to pay the same would reasonably be likely to have a Material Adverse Effect, unless the same are being contested in good faith by the Borrower, the Borrower has established adequate reserves for the payment of the same in accordance with GAAP, and the contesting thereof does not involve the risk of forfeiture or loss of a material portion of the assets of the Borrower and its Subsidiaries taken as a whole. 6.3 Financial Statements and Other Reports. The Borrower will furnish to the Bank: (a) a Borrowing Certificate duly completed by the Borrower and certified to be true, accurate and complete by the Chief Financial Officer of the Borrower on each date specified in Section 2.1(c) hereof; (b) as soon as prepared and in any event within thirty (30) days following the close of each Fiscal Year, a comprehensive business and financial plan for the current Fiscal Year (for the Borrower and its Subsidiaries on a consolidated basis), which annual business/financial plan shall include quarterly financial projections and forecasts and planned Capital Expenditures for such Fiscal Year; and (c) as soon as reasonably possible, and in any event within thirty (30) days after the end of each month in each Fiscal Year (other than the last month in each Fiscal Year, in which case such financial statements shall be delivered within 45 days after the end of such Fiscal Year), an unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such month, and related unaudited consolidated statements of income and cash flows of the Borrower and its Subsidiaries for such month, which will compare actual results to the Borrower's projections delivered pursuant to Section 6.3(b), including, without limitation, a monthly cash flow analysis showing monthly variances from the beginning of the relevant Fiscal Year, all in reasonable detail, prepared in accordance with GAAP consistently applied and certified to be true, accurate and complete by the Chief Financial Officer of the Borrower; provided, such interim financial statements shall be without footnotes and shall be subject to normal year-end adjustments; (d) as soon as reasonably possible, and in any event within ninety (90) days after the end of each Fiscal Year of the Borrower, the audited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such Fiscal Year, and the related audited consolidated statements of income and cash flows of the Borrower and its Subsidiaries for such Fiscal Year, setting forth in comparative form the figures for the previous Fiscal Year, all in reasonable detail and accompanied by the opinion thereon of independent public accountants selected by the Borrower and reasonably acceptable to the Bank, which opinion shall be in a form generally recognized as unqualified and shall state that such financial statements have been prepared in accordance with GAAP and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards; provided, the delivery within the time period specified above; (e) the Borrower's Annual Report on Form 10-K for such Fiscal Year (together with the Borrower's annual report to shareholders, if any, at the time such annual report is sent to shareholders) prepared pursuant to Rule 14a-3 under the Securities and Exchange Act of 1934, as amended, prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountants' opinion described above, shall be deemed to satisfy the requirements of this Section 6.3(e); together with each delivery of financial statements pursuant to subsections (b), (c), and (d) above, a Compliance Certificate (i) stating that the Chief Financial Officer of the Borrower has reviewed the relevant terms of this Amended and Restated Loan Agreement and has no knowledge of any event or condition which constitutes a default under this Amended and Restated Loan Agreement or an Event of Default hereunder, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken or is taking or proposes to take with respect thereto, and (ii) demonstrating in reasonable detail compliance at the end of such accounting period with Section 7.1, relating to mergers, consolidations and sales of assets; Section 7.3, relating to Liens, Section 7.4, relating to Restricted Payments, Section 7.7, related to Funded Debt, Sections 7.11 through 7.15, relating to financial covenants, Section 7.8, relating to Transactions with Affiliates, and Section 7.9, relating to Guaranties (and, with respect to all financial covenants, including with each Compliance Certificate appropriate work papers demonstrating the Borrower's method of calculating the various financial information included in the Compliance Certificate); (f) forthwith upon any principal officer of the Borrower obtaining knowledge of, or receiving notice of any claim of or action taken with respect to, any condition or event which constitutes a default under this Amended and Restated Loan Agreement or an Event of Default hereunder (including, without limitation, knowledge that any claim by any creditor has been made that there exists, or that any action has been taken by any creditor with respect to, any default as set forth in Section 6.3(i)), an Officers' Certificate specifying the nature and period of existence thereof and what action the Borrower has taken or is taking or proposes to take with respect thereto; (g) Upon request by the Bank, copies of any reports submitted to the Borrower by its independent certified public accountants in connection with the examination of the financial statements of the Borrower made by such accountants; (h) Promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally and of each regular or periodic report, and any registration statement or prospectus filed by the Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency, and copies of any orders which are material in relation to the business, operations, affairs, financial condition, assets or properties of the Borrower and its Subsidiaries taken as a whole in any proceedings to which the Borrower or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over the Borrower or any of its Subsidiaries; (i) Promptly upon an Authorized Officer of the Borrower becoming aware of the occurrence thereof, written notice of (i) a Reportable Event with respect to any defined benefit Plan (in which event such notice shall be given when the Reportable Event is required to be reported to the PBGC) ; (ii) the institution of any steps by the Borrower, any ERISA Affiliate, the PBGC or any other Person to terminate any defined benefit Plan; (iii) the institution of any steps by the Borrower or any ERISA Affiliate to withdraw from any defined benefit Plan; (iv) a non-exempt "prohibited transaction" within the meaning of Section 406 of ERISA in connection with any Plan (in which event such notice shall be given when either Form 5330 or Form 5500 is filed with the Internal Revenue Service or the Department of Labor, respectively, with respect to such prohibited transaction); (v) any material increase in the contingent liability of the Borrower or any Subsidiary with respect to any post-retirement welfare liability; or (vi) the taking of any action by, or the threatening of the taking of any action by, the Internal Revenue Service, the Department of Labor or the PBGC with respect to any of the foregoing; (j) With reasonable promptness, such other information and data with respect to the Borrower as from time to time may be reasonably requested by the Bank. The Bank shall keep confidential all of the financial statements and other information furnished to the Bank pursuant to this Amended and Restated Loan Agreement, except the Bank shall have the right to furnish copies of such financial statements and other information furnished to the Bank (i) to any proposed participant in any of the Working Capital Line of Credit, subject to such participant executing a Confidentiality Agreement as required under Section 10(a) hereof, (ii) to governmental agencies having jurisdiction over the Bank and which request copies of such financial statements and/or other information, (iii) if required to under applicable rules of civil procedure to any appropriate Person in any litigation involving or affecting the Bank, provided, the Bank shall seek an appropriate protective order in such litigation preserving the confidentiality of any non-public information furnished to the Bank, and (iv) to any appropriate Person in connection with the enforcement by the Bank of its rights under this Amended and Restated Loan Agreement and the other Loan Instruments. 6.4 Financial Records; Inspection. (a) The Borrower will maintain a system of accounting established and administered in accordance with GAAP consistently applied, and will set aside on its books all such proper reserves as shall be required by GAAP. (b) The Borrower will permit the Bank and its authorized representatives to inspect any of the properties of the Borrower, including its books of account (and to make copies thereof and to take extracts therefrom), to make field exams on a regular (at least quarterly) basis, and to discuss its affairs, finances and accounts with its officers and with its independent accountants, all at such reasonable times and as often as may be reasonably requested. Such inspection shall be for the information and benefit of the Bank and, unless otherwise publicly available, any information obtained thereby or otherwise pursuant thereto shall not be divulged to others except in connection with the enforcement of the rights of the Bank upon the occurrence of an Event of Default hereunder or in connection with any sale of any participation in the Working Capital Line of Credit, and except as may be required by law or by any governmental authority having jurisdiction over the Bank. The Borrower shall be responsible for payment of the reasonable fees and expenses incurred by the Bank or its agents in connection with such field exams and inspections. 6.5 Permits, Certificates, Leases, Licenses, etc.. The Borrower will obtain, maintain and substantially comply at all times with all permits, certificates, licenses, approvals, authorizations, leases and other instruments necessary or appropriate for the conduct of its business in all material respects as presently conducted or as contemplated to be conducted in the future. 6.6 Notice. The Borrower will notify the Bank in writing, within no more than ten (10) Business Days (and without the benefit of any grace period afforded in any provision of this Amended and Restated Loan Agreement or any other Loan Instrument) after the Borrower learns of any of the following: (a) the existence or occurrence of any default under this Amended and Restated Loan Agreement and/or any of the other Loan Instruments, (b) that any representation or warranty made herein or in the other Loan Instruments shall, for any reason, not be or shall cease in any material respect to be true and complete and not misleading, (c) the entry of a final uninsured, non-appealable judgment against the Borrower which exceeds Two Hundred Fifty Thousand Dollars ($250,000.00), together with a copy of such judgment and a statement of the Borrower of the actions which the Borrower intends to take with respect to such judgment, or (d) the occurrence of any labor strikes or work stoppages by the employees of the Borrower. 6.7 Further Assurances. The Borrower will from time to time hereafter execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents, will pay all filing fees and taxes in connection therewith and will take all such further actions, as the Bank may reasonably request for the purposes of implementing or effectuating the provisions of this Amended and Restated Loan Agreement and/or the other Loan Instruments. Upon the exercise by the Bank of any power, right, privilege or remedy pursuant to the Loan Instruments which requires any consent, approval, registration, qualification or authorization of any Person, the Borrower will execute and deliver, or will cause the execution and delivery of, all applications, certificates, instruments and other documents and papers that the Bank requires in order to obtain any such consent, approval, registration, qualification or authorization. 6.8 Payment of Obligations. The Borrower will remit all excess cash on hand to the Bank on a daily basis, to be applied towards reduction of the Working Capital Line of Credit. All Payments on the Amended and Restated Working Capital Line of Credit Note and all other Obligations shall be made to the Bank in "good, and collected funds," at the principal office of the Bank as set forth in Section 12.2 hereof, not later than 11:00 A.M., Louisville, Kentucky time, on the date due; funds received by the Bank after that hour shall be deemed to have been received on the next following Business Day. 6.9 Preservation of Existence, Leases, etc. Borrower will at all times preserve and keep in full force and effect its corporate existence, rights, patents, trademarks, service marks, trade names, copyrights, licenses, consents and authorizations, other than any changes to any of the same effected by the Borrower in the ordinary course of business, provided that the foregoing shall not prevent any transaction permitted by Section 7.1 hereof, and the Borrower shall comply in all material respects with all applicable laws and regulations of the United States of America and of any state or municipality or other political subdivision thereof. 6.10 Insurance. The Borrower shall keep its insurable properties adequately insured at all times by financially sound and respectable insurers and maintain such other insurance, including deductibles, and against such risks as are presently maintained by the Borrower. 6.11 Environmental Matters. The Borrower at its sole expense shall, and shall cause its Subsidiaries to, do the following, except where the failure to do so would not reasonably be likely to have a Material Adverse Effect: (a) comply in all material respects with any applicable Environmental Law; (b) obtain and maintain in full force and effect all material Governmental Approvals required by any applicable Environmental Law for its operations; (c) cure any material violation by it or at its properties of applicable Environmental Laws; (d) not allow the presence or operation at its properties of any (i) landfill or dump, or (ii) hazardous waste management facility or solid waste disposal facility as defined pursuant to RCRA or any comparable state or federal law, other than for solid waste management facilities managing K061 waste as allowed under RCRA or any comparable state of federal laws; (e) within thirty (30) days notify the Bank in writing of and provide any reasonably requested documents upon learning of any of the following in connection with the Borrower or any Subsidiary; (1) any material liability for response or corrective action, natural resource damage or other harm pursuant to CERCLA, RCRA or any comparable state law; (2) any material Environmental claim; (3) any material violation of an Environmental Law or material Release, threatened Release or disposal of a Hazardous Material; or (4) any material environmental, natural resource, health or safety condition; and, (f) conduct at its expense any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any material Release, threatened Release or disposal of a Hazardous Material as required by any applicable Environmental Law, unless the Borrower or such Subsidiary, as the case may be, is contesting the validity or applicability of such Environmental Law or any amount relating to the application of such Environmental Law in good faith by appropriate actions or proceedings and the Borrower or such Subsidiary shall set aside on its books, reserves deemed by it to be adequate with respect thereto. 7. NEGATIVE COVENANTS. The Borrower hereby covenants and agrees that until the Amended and Restated Working Capital Line of Credit Note and the other obligations have been respectively paid in full to the Bank and the Working Capital Commitment has expired or has terminated, the Borrower will perform and observe all of the following provisions except to the extent the Bank otherwise expressly consents in writing. 7.1 Mergers, Consolidations and Sales of Assets. (a) The Borrower will not, and will not permit any Subsidiary to, (i) consolidate with or be a party to a merger with any other corporation or (ii) engage in any Asset Disposition involving any "substantial part of the consolidated assets of the Borrower and its Subsidiaries" (as defined in paragraph (c) of this Section 7.1); provided, however, that any Subsidiary may merge or consolidate with or into the Borrower or any Wholly-Owned Subsidiary so long as in any merger or consolidation involving the Borrower, the Borrower shall be the surviving or continuing corporation. (b) As used in this Section 7.1, "Asset Disposition" means and includes (i) a sale, lease or other disposition of assets by the Borrower or any Subsidiary (other than in the ordinary course of business, Excluded Asset Dispositions, as defined in subsection (c) hereof and the sale, lease or other dispositions of assets to the Borrower or to a Wholly-Owned Subsidiary), (ii) the issuance or sale by any Subsidiary of any shares of stock of any class (including as "stock" for the purposes of this Section 7.1, any warrants, rights or options to purchase or otherwise acquire stock or other Securities exchangeable for or convertible into stock) of such Subsidiary (except to qualify directors) to any Person other than the Borrower or a Wholly-Owned Subsidiary, and, (iii) the sale, transfer or other disposition by the Borrower of any shares of stock of any Subsidiary (except to qualify directors) to any Person other than a Wholly-Owned Subsidiary and the sale, transfer or other disposition by any Subsidiary (except to the Borrower or a Wholly-Owned Subsidiary) of any shares of stock of any other Subsidiary. (c) As used in this Section 7.1, an Asset Disposition shall be deemed to be a "substantial part of the consolidated assets of the Borrower and its Subsidiaries" if the book value of the assets subject to such Asset Disposition, when added to the book value of all other assets subject to Asset Dispositions (i) during the 12-month period ending with the date of such Asset Disposition exceeds two percent (2%) of the Consolidated Total Assets, determined as of the end of the immediately preceding Fiscal Quarter, or (ii) during the period from and after the Closing Date to and including the date of such Asset Disposition shall in the aggregate exceed twenty-five percent (25%) of Consolidated Total Assets determined as of the end of the immediately preceding Fiscal Quarter. As used herein, the term "Excluded Asset Dispositions" means Asset Dispositions to the extent that the net proceeds thereof are applied to the prepayment, purchase or redemption of outstanding Senior Debt of the Borrower or its Subsidiaries. Any such prepayment, purchase or redemption made by the Borrower shall be made ratably to the holders of all outstanding Senior Debt of the Borrower and its Subsidiaries, including the Bank. In any event, the Borrower shall promptly notify the Bank when either (i) the aggregate book value of assets subject to Asset Dispositions in any fiscal year exceeds two percent (2%) of Consolidated Total Assets, determined as of the need of the immediately preceding Fiscal Quarter, or (ii) the aggregate book value of assets subject to Asset Dispositions during the period beginning on the Closing Date and ending with the date of such Asset Dispositions exceeds 25% of Consolidated Total Assets, determined as of the end of the immediately preceding Fiscal Quarter. For purposes of this Section 7.1, if a Wholly-Owned Subsidiary shall for any reason cease to be a Wholly-Owned Subsidiary but shall continue to be a Subsidiary, then any assets or shares of stock of any other Subsidiary which were the subject of an Asset Disposition from such other Subsidiary to such Wholly-Owned Subsidiary previously permitted by this Section 7.1 shall be deemed to be the subject of a new Asset Disposition at the time such Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary. 7.2 Use of Assets. The Borrower will not use, or cause or permit the use of, any of its assets in any manner prohibited by law, governmental regulations or applicable insurance policies. 7.3 Limitation of Liens. The Borrower will not, and will not permit any Subsidiary to, create or incur, or suffer to be incurred or to exist, any Lien on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, unless in the case of any Lien securing Indebtedness, the Amended and Restated Working Capital Line of Credit Note shall be secured equally and ratably with, or prior to, any such Indebtedness in a manner reasonably satisfactory to the Bank, provided, however, that the foregoing restrictions shall not apply to the following Liens, which Liens are permitted without regard to the above restrictions: (a) Liens for property taxes and assessments or governmental charges and levies and Liens securing claims or demands of mechanics and materialmen which are not overdue, or, if the Borrower or such Subsidiary, as the case may be, is contesting the validity, applicability or amount thereof in good faith by appropriate actions or proceedings and the Borrower or such subsidiary shall set aside on its books, reserves deemed by it to be adequate with respect thereto; (b) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Borrower or a Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (c) Liens (other than any Lien imposed by ERISA) arising in the ordinary course of business or incidental to the ownership of properties and assets (including Liens in connection with worker's compensation, unemployment insurance and other like laws, warehousemen's and attorneys' liens and statutory landlords' liens) and Liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money and which do not in the aggregate materially impair the operation of the business of the Borrower and its Subsidiaries taken as a whole; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (d) Survey exceptions and encumbrances, easements and reservations, and rights of others for rights-of-way, utilities and other similar purposes, and zoning and other restrictions an to the use of real properties, which are necessary for the conduct of the activities of the Borrower and its Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event. materially- impair their use in the operation of the business of the Borrower and its Subsidiaries taken as whole; (e) Liens securing Indebtedness of a Subsidiary to the Borrower or to a Wholly-Owned Subsidiary and Liens securing Indebtedness of the Borrower to a Wholly-Owned Subsidiary; (f) Liens existing as of the Closing Date and reflected on Exhibit G hereto and any extension, renewal or replacement thereof in respect of the same property theretofore subject to such Lien, incurred in connection with any extension, renewal or refunding of the Indebtedness secured thereby (without increase in principal amount) which is permitted by the limitations contained in Section 7.7(a). (g) Liens incurred in connection with obtaining or performing government contracts; (h) Liens (including without limitation, Capitalized Leases) incurred after the Closing Date given to secure the payment of the purchase price or cost of construction incurred in connection with the acquisition or construction of fixed assets (i.e., property, plant and equipment) intended to be used in carrying on the business of the Borrower or a Subsidiary, including Liens existing on such fixed assets at the time of acquisition thereof or at the time of acquisition by the Borrower or a Subsidiary of any business entity then owning such fixed assets, whether or not such existing Liens were given to secure the payment of the purchase price of the fixed assets to which they, attach, provided that (i) the Lien shall attach solely to the fixed assets acquired or purchased, (ii) at the time of acquisition or construction of such fixed assets, the aggregate amount remaining unpaid on all Indebtedness secured by Liens on such fixed assets whether or not assumed by the Borrower or a Subsidiary shall not exceed an amount equal to 100% of the lesser of the total purchase price or fair market value at the time of acquisition or construction of such fixed assets (as determined in good faith by the Board of Directors of the Borrower), (iii) any such Lien shall be created contemporaneously with, or within 270 days after, the acquisition or the completion of construction of such fixed assets and (iv) all such Indebtedness shall have been incurred within the applicable limitations provided in Section 7.7 hereof. (i) The interest of a lessor or lessee in any leased property of the Borrower and its Subsidiaries subject to a lease that is not a Capitalized Lease; and (j) Liens not otherwise permitted by the preceding clauses (a) through (i), inclusive, securing Funded Debt of the Borrower or any Subsidiary, provided that all Funded Debt secured by such wholly-owned liens shall be permitted by the provisions of Section 7.7(a)(4) hereof. For purposes of this Section 7.3, if a Wholly-Owned Subsidiary shall for any reason cease to be a Wholly-Owned Subsidiary but shall continue to be a Subsidiary, then any existing Liens granted to such Subsidiary securing Indebtedness of the Borrower or another Subsidiary to such Wholly-Owned Subsidiary and previously permitted by this Section 7.3 shall be deemed to be re-incurred by the Borrower or such other Subsidiary at the time such Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary. 7.4 Restricted Payments. The Borrower will not, except as hereinafter provided: (a) Declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Borrower); (b) Directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock; (c) Make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; (d) Make any optional prepayment, either directly or indirectly or through any Subsidiary, of any Subordinated Debt of the Borrower or any Subsidiary; or (e) Make, or permit any Subsidiary to make, any Restricted Investment; (such declarations or payments of dividends, purchases, redemptions or retirements of capital stock and warrants, rights or options and all such other payments or distributions and such Restricted Investments being herein collectively called "Restricted Payments"), in any Fiscal Quarter if after giving effect thereto any Event of Default shall have occurred and be continuing or the aggregate amount of Restricted Payments made during such Fiscal Quarter would exceed the Restricted Payment Pool applicable to such Fiscal Quarter. Notwithstanding the foregoing, this provision shall not prevent the payment of any dividend by the Borrower within sixty (60) days after the date of its declaration (if the declaration of such dividend was permitted at the time of such declaration). For the purposes of this Section 7.4, the amount of any Restricted Payment declared, paid or distributed in property shall be deemed to be the greater of the book value or fair market value (as determined in good faith by the Board of Directors of the Borrower) of such property at the time of the making of the Restricted Payment in question. For purposes of this Section 7.4, at any time when a corporation becomes a Subsidiary, all investments of such corporation at such time shall be doomed to have been made by such corporation, as a Subsidiary, at such time. 7.5 Nature of Business. Neither the Borrower nor any Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Borrower and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Borrower and its Subsidiaries on the date of this Amended and Restated Loan Agreement; provided, however, that in any event, the Borrower and its Subsidiaries shall be permitted to engage in lines of business which the Board of Directors of the Borrower determines in good faith to be reasonably related to those of the Borrower on the date of this Amended and Restated Loan Agreement. 7.6 Agreements and Licenses. The Borrower will not transfer, terminate, cancel, modify or amend, other than in the ordinary course of business, or encumber, except pursuant to the Loan Instruments, or commit a default under, any Capitalized Lease to which the Borrower is a party or any license, permit, consent, approval or authorization necessary or appropriate for the conduct of the Borrower's business, to the extent any of the actions or events described in this Section 7.6 would reasonably be likely to have a Material Adverse Effect. 7.7 Limitations on Funded Debt. (a) The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee or otherwise become directly or indirectly liable with respect to, any Funded Debt (including liabilities under Capitalized Leases), except: (1) Funded Debt evidenced by the Senior Notes; (2) Funded Debt evidenced by the Amended and Restated Working Capital Line of Credit Note; (3) Funded Debt of the Borrower and its Subsidiaries outstanding as of the date of this Amended and Restated Loan Agreement and reflected on Exhibit G hereto; (4) Capitalized Leases to the extent permitted by Section 7.15 hereof; or (5) Funded Debt of a Subsidiary to the Borrower or to a Wholly-Owned Subsidiary and Funded Debt of the Borrower to a Wholly-Owned Subsidiary. (b) Any corporation which becomes a Subsidiary after the date hereof shall for all purposes of this Section 7.6 be deemed to have created, assumed or incurred at the time it becomes a Subsidiary all Funded Debt of such corporation existing immediately after it becomes a Subsidiary. (c) For purposes of this Section 7.6, if a Wholly-Owned Subsidiary shall for any reason cease to be a Wholly-Owned Subsidiary but shall continue to be a Subsidiary, then any Funded Debt of another Subsidiary or the Borrower issued to such Subsidiary previously permitted by this Section 7.6 shall be deemed to be re-incurred by the Borrower or such other Subsidiary at the time such Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary. 7.8 Transactions with Affiliates. The Borrower will not directly or indirectly enter into any Capitalized Lease or other transaction with any Affiliate of the Borrower on terms that are less favorable to the Borrower than those which might be obtained at the time from Persons who are not an Affiliate of the Borrower; the burden of proving that such terms are not less favorable to the Borrower as aforesaid shall be on the Borrower. 7.9 Guaranties. The Borrower will not, and will not permit any Subsidiary to, become liable in respect of any Guaranty except Guaranties in favor of the Bank. 7.10 ERISA Compliance. (a) The Borrower will not, and will not permit any subsidiary to, permit any defined benefit Plans (subject to the minimum funding standards of Section 412 of the Code) at any time maintained by the Borrower or any Subsidiary to have any Unfunded Vested Pension Liabilities, except where the existence of such Unfunded Vested Pension Liabilities would not reasonably be likely to materially and adversely affect the properties, business, prospects, profits or condition of the Borrower and its Subsidiaries taken as a whole. As used herein "Unfunded Vested Pension Liability" means an, excess of the actuarial present value of accumulated vested defined benefit Plan benefits as at the end of the immediately preceding Plan year of such defined benefit Plans (or as of any more recent valuation date) over the net assets allocated to such defined benefit Plans which are available for benefits, all an determined and disclosed in the most recent actuarial valuation report for such defined benefit Plans. (b) All assumptions and methods used to determine the actuarial valuation of vested employee benefits under all defined benefit Plans at any time maintained by the Borrower or any Subsidiary and the present value of assets of such defined benefit Plans shall be reasonable in the good faith judgment of the Borrower and shall comply with all requirements of law. (c) The Borrower will not, and will not permit any Subsidiary to, cause any defined benefit Plan which it maintains at any time to engage in any "prohibited transaction" (as such term is defined in ERISA). (d) The Borrower will not, and will not permit any Subsidiary to: (1) fail to contribute the minimum amounts required under Section 302 of ERISA or Section 412 of the Code to any defined benefit Plan which it maintains; or (2) terminate any such defined benefit Plan in a manner which could result in the imposition of a lien on any property of the Borrower or any of its Subsidiaries pursuant to ERISA. (e) The Borrower will not, and will not permit any Subsidiary to, permit any condition to exist in connection with any defined benefit Plan which would constitute grounds for the PBGC to institute proceedings to have such Plan terminated or a trustee appointed to administer such defined benefit Plan. (f) The Borrower will not, and will not permit any Subsidiary to, withdraw from any Multiemployer Plan if such withdrawal shall subject the Borrower or any Subsidiary to withdrawal liability (as defined under Part 1 of Subtitle E to Title IV of ERISA). 7.11 Minimum Consolidated Tangible Net Worth. The Borrower will not, at any time during any period set forth below, permit Consolidated Tangible Net Worth to be less than the amount set forth opposite such period below: Minimum Consolidated Period Tangible Net Worth Fiscal Year 2002 $11,000,000 Fiscal Year 2003 $ 9,000,000 First two Fiscal Quarters of Fiscal Year 2004 $10,000,000 Third Fiscal Quarter of $11,000,000 plus and aggregate amount Fiscal Year 2004 and equal to 50% of Consolidated Net Earnings thereafter (but, in each case) only if a positive number) for each completed Fiscal Quarter beginning with the third Fiscal Quarter of Fiscal Year 2004 7.12 Minimum Consolidated EBITDA. (a) The Borrower will not, on the last day of any Fiscal Quarter set forth below, permit Consolidated EBITDA calculated using Consolidated EBITDA for the Fiscal Year to date as of the end of each such period (except as otherwise indicated with respect to the last two periods below) to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2002 ($2,300,000) Second FQ of Fiscal Year 2002 ($3,800,000) Third FQ of Fiscal Year 2002 ($4,150,000) Fourth FQ of Fiscal Year 2002 ($4,300,000) First FQ of Fiscal Year 2003 ($250,000) Second FQ of Fiscal Year 2003 $535,000 Third FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,438,000 Fourth FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,356,000 (b) If Consolidated Tangible Net Worth on the last day of any Fiscal Quarter set forth below is less than $14,000,000, the Borrower will not, on the last day of such Fiscal Quarter, permit Consolidated EBITDA for such Fiscal Quarter to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2004 $1,666,000 Second FQ of Fiscal Year 2004 $1,666,000 Third FQ of Fiscal Year 2004 $1,666,000 Fourth FQ of Fiscal Year 2004 $1,666,000 First FQ of Fiscal Year 2005 and thereafter $2,441,000 7.13 Interest Coverage Ratio. The Borrower will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Interest Coverage Ratio to be less than 1.10 to 1.00. 7.14 Debt Service Coverage Ratio. The Borrower will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Debt Service Coverage Ratio to be less than 1.00 to 1.00. 7.15 Capital Expenditures. The Borrower will not, and will not permit any Subsidiary to, make or become committed to make (without duplication) any Capital Expenditure if the aggregate amount of all Capital Expenditures made or committed to be made by the Borrower and its Subsidiaries in (a) Fiscal Year 2002 would exceed $1,500,000, (b) Fiscal Year 2003 would exceed $1,500,000, plus an amount equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Section 7.15 in Fiscal Year 2002 but were not incurred during Fiscal Year 2002, (c) Fiscal Year 2004 would exceed $2,000,000 plus an amount (which shall in no event exceed $1,000,000) equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Section 7.15 in Fiscal Year 2003 but were not incurred during Fiscal Year 2003 and (iv) Fiscal Year 2005 and each Fiscal Year thereafter would exceed $3,000,000. Notwithstanding anything to the contrary contained in this Section 7.15, the foregoing limitations on Capital Expenditures for any Fiscal Year shall be adjusted upward for any Capital Expenditures that are necessary for compliance with requirements of the United States Environmental Protection Agency or any other Governmental Authority. 8. EVENTS OF DEFAULT; ACCELERATION. Each of the following events shall constitute an "Event of Default" under this Amended and Restated Loan Agreement: (a) If the Borrower shall default in the payment of any interest on and/or any principal of the Amended and Restated Working Capital Line of Credit Note when the same becomes due and payable, and such default continues for ten (10) days after the Bank has given written notice of such default to the Borrower. (b) If the Borrower shall breach or default in the performance or observance of any of the provisions of Sections 7.3, 7.4 or 7.7 hereof. (c) If the Borrower shall breach or default in the performance or observance of any of the provisions of Section 7 hereof (other than Sections 7.3, 7.4 or 7.7 hereof for which no cure period is provided), and such breach or default is not cured within thirty (30) days after the earlier of (i) the date the Borrower first obtains knowledge of the particular breach or default, or (ii) the date written notice of the particular breach or default is given to the Borrower by the Bank. (d) If the Borrower shall default in the performance of or compliance with any covenant, obligation or provision contained in this Amended and Restated Loan Agreement or any of the other Loan Instruments, and not otherwise referred to in this Section 8, and such default shall not have been remedied (i) within thirty (30) days after written notice of such default shall have been delivered to the Borrower, or (ii) if such default cannot be cured within such thirty (30) day period, within such longer period of time as may be necessary to effect such cure, but in any event within sixty (60) days after written notice of such default shall have been delivered to the Borrower, provided that the Borrower commences to cure the particular default within such thirty (30) day period and prosecutes the cure to completion with due diligence within sixty (60) days after written notice of such default shall have been delivered to the Borrower. (e) If any material representation or warranty made in writing by or on behalf of the Borrower herein or pursuant hereto or otherwise in connection with the transactions contemplated hereby shall have been materially false or misleading or incorrect when made and the Borrower shall have known or should have known of the falsity, misleading nature of or incorrectness of such representation or warranty when it was made, and the Borrower fails to cause such representation or warranty to cease to be materially false, misleading or incorrect within ton (10) days after written notice of such materially false, misleading or incorrect representation or warranty shall have been delivered to the Borrower. (f) If the Borrower shall default (as principal or guarantor or other surety or otherwise) in the payment of any principal of or premium, if any, or interest on any Indebtedness which, at the time of the Borrower's default in the payment thereof, has an unpaid balance in excess of Two Million Dollars ($2,000,000.00), or if the Borrower defaults in the performance of or compliance with any term of any evidence of such Indebtedness or of any mortgage, indenture or other agreement relating thereto, and such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; provided, however, to the extent the Borrower is contesting the amount or validity of any such Indebtedness claimed to be in default and/or is contesting whether it has defaulted in the performance or compliance with any term or provision of any document of the type referenced in this subsection (f), in each case in good faith and by appropriate proceedings promptly initiated and diligently conducted by the Borrower, any such default of the type referred to in this subsection (f) shall not constitute an Event of Default. (g) The occurrence of any Event of Default under and as defined in the Senior Note Agreement, or a default by the Borrower under the Master Equipment Lease or any Funded Debt. (h) If the Borrower shall discontinue its business or shall make an assignment for the benefit of its creditors, or shall fail generally to pay its debts as such debts become due, or shall apply for or consent to the appointment of or taking possession by a trustee, receiver or liquidator (or other similar official) of any substantial part of its property, or shall commence a case or have an order for relief entered against it under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or if the Borrower shall take any action in furtherance of the dissolution or liquidation of the Borrower. (i) If, within sixty (60) days after the commencement against the Borrower of a case under the Bankruptcy Code, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, such case shall have been consented to or shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of the Borrower shall not have been stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if within sixty (60) days after the entry of a decree appointing a trustee, receiver or liquidator (or other similar official) of any substantial part of the property of the Borrower, such appointment shall not have been vacated. (j) If a final uninsured, non-appealable judgment which, with other outstanding final judgments against the Borrower exceeds an aggregate of Two Hundred Fifty Thousand Dollars ($250,000.00) shall be rendered against the Borrower and (i) if, prior to the availability of any execution thereon, such judgment shall not have been discharged or execution thereof shall not have been stayed pending appeal, or if, after the expiration of any such stay, such judgment shall not have been discharged, or (ii) the Borrower shall not have established adequate reserves on its books in respect of such final uninsurable judgment or judgments. Upon the occurrence of any Event of Default described in subsection (h) or (i) of this Section 8, the respective unpaid principal balances of the Amended and Restated Working Capital Line of Credit Note together with all accrued interest thereon and all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Borrower. Further, upon the occurrence of any other Event of Default referred to in this Section 8, the Bank may at any time at its option, by written notice to the Borrower, declare the respective unpaid principal balances of the Amended and Restated Working Capital Line of Credit Note together with all accrued interest thereon and all other obligations to be due and payable in full to the Bank, without presentment, demand, protest or other requirements of any kind, all of which are hereby waived by the Borrower. 9. REMEDIES. 9.1 Defaults. Upon the occurrence and during the continuation of any Event of Default, the Bank may proceed to protect and enforce its rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in the other Loan Instruments, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. In case of a default in the payment of any principal of or premium, if any, or interest on the Amended and Restated Working Capital Line of Credit Note, or upon acceleration thereof, the Borrower will pay to the Bank such further amount as shall be sufficient to cover the cost and expenses of collection thereof, including (to the extent permitted by law), without limitation, reasonable attorneys' fees, expenses and disbursements. 9.2 Offset. If any Event of Default shall occur and be continuing and regardless of whether or not the Bank has accelerated the respective stated maturity dates of the Amended and Restated Working Capital Line of Credit Note or any of the other Obligations, or if the Borrower shall fail to pay any principal of the Amended and Restated Working Capital Line of Credit Note to the Bank on the due date thereof, the Bank shall have the right then, or at any time thereafter, to setoff against any and all deposit balances and other sums and Indebtedness and other property then held or owned by the Bank to or for the credit or account of the Borrower, all without notice to or demand upon the Borrower or any other Person, all such notices and demands being hereby expressly waived by the Borrower. 9.3 Rights Cumulative. All of the rights and remedies of the Bank upon the occurrence of an Event of Default hereunder shall be cumulative to the greatest extent permitted by law, and shall be in addition to all those rights and remedies afforded the Bank at law or in equity or under the other Loan Instruments. 9.4 Payment of Costs and Expenses. All of the costs, expenses, damages and liabilities, including, without limitation, all reasonable attorneys' fees, incurred by and imposed upon the Bank with respect to, in connection with or as a result of any action taken or omitted to be taken pursuant to this Amended and Restated Loan Agreement, the Amended and Restated Working Capital Line of Credit Note and the other Loan Instruments shall be paid by, and shall be the sole responsibility of, the Borrower. 10. ASSIGNMENTS AND PARTICIPATIONS. (a) The Bank shall have the right at any time, with the prior written consent of the Borrower, to sell, assign, transfer or negotiate all or any part of its Working Capital Commitment to one or more commercial banks, insurance companies, savings and loan associations, savings banks or other financial institutions, pension funds or mutual funds or other accredited investors ("Eligible Assignees"); provided that prior to receiving any confidential or other material information regarding the Borrower or the transactions contemplated by this Amended and Restated Loan Agreement, any Eligible Assignee shall have entered into a Confidentiality Agreement in form and substance satisfactory to the Borrower, provided, further, the Bank shall at all times retain at least sixty percent (60%) of the Working Capital Commitment and will retain the right to administer the Working Capital Commitment and the Loan Instruments on behalf of itself and the Eligible Assignees which acquire interests in the working capital Commitment. In the case of any sale, assignment, transfer or negotiation of all or part of the Working Capital Commitment authorized under this Section 10, the assignee, transferee or recipient shall have, to the extent of such sale, assignment, transfer or negotiation, the same rights, benefits and obligations as it would if it were a Bank hereunder, including, without limitation (i) the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of the Bank, and (ii) the obligation to fund Working Capital Loans directly to the Borrower pursuant to Section 2 hereof. (b) The Bank may sell participations in all or any part of the Working Capital Commitment to one or more Eligible Assignees with the prior written consent of the Borrower; provided that (i) the Borrower hereby consents to the sale of participation interests in the Working Capital Commitment to SunTrust Bank; (ii) any such sale shall not, without the consent of the Borrower, require the Borrower to file a registration statement with the Securities and Exchange Commission or apply to qualify the Amended and Restated Working Capital Line of Credit Note under the blue sky law of any state; (iii) the holder of any such participation, other than an Affiliate of the Bank, shall not be entitled to require the Bank to take or omit to take any action hereunder, subject to the rights of each holder of any such participation under each and every participation agreement to which the Bank and such holder is a party; and (iv) the Bank shall at all times retain at least sixty percent (60%) of the Working Capital Commitment and will retain the right to administer the Working Capital Commitment and the Loan Instruments on behalf of itself and the Eligible Assignees which acquire interests in the Working Capital Commitment. For purposes of Section 9.2 hereof, the Borrower hereby acknowledges and agrees that any sale of any participation interest in the Working Capital Commitment will give rise to a direct obligation of the Borrower to the participant and the participant shall be considered to be a "Bank" hereunder. (c) Notwithstanding the foregoing provisions of this Section 10, the Bank may at any time sell, assign, transfer, or negotiate all or any part of the Working Capital Commitment to any Affiliate of the Bank; provided that an Affiliate to whom such disposition has been made shall not be considered a "Bank" for purposes of this Amended and Restated Loan Agreement other than for purposes of Section 9.2 hereof, provided further that the Borrower shall not incur any additional expenses solely as a result of such sale, assignment, transfer or negotiation. (d) The Bank shall not, as between the Borrower and the Bank, be relieved of any of its obligations hereunder as a result of any granting of participations in all or any part of the Working Capital Commitment. The Bank shall, as between the Borrower and the Bank, be relieved of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of all or any part of the Working Capital Commitment made in accordance with Section 10(a) hereof. 11. INDEMNITY. The Borrower shall indemnify and hold harmless the Bank, its successors, assigns, agents and employees, from and against any and all claims, actions, suits, proceedings, costs, expenses, damages, fines, penalties and liabilities, including, without limitation, reasonable attorneys' fees and costs, arising out of, connected with or resulting from the operation of the business of the Borrower. Provided, the Borrower shall have no obligation to indemnify the Bank for any loss to the extent caused by the Bank's bad faith, gross negligence or willful misconduct. At the Bank's request, the Borrower shall, at its own cost and expense, defend or cause to be defended any and all such actions or suits that may be brought against the Bank and, in any event, shall satisfy, pay and discharge any and all judgments, awards, penalties, costs and fines that may be recovered against the Bank in any such action, plus all attorneys' fees and costs related thereto to the extent permitted by applicable law; provided, however, that the Bank shall give the Borrower, to the extent the Bank seeks indemnification from the Borrower under this Section 11, written notice of any such claim, demand or suit as soon as practicable after the Bank has received written notice thereof, and the Bank shall not settle any such claim, demand or suit, if the Bank seeks indemnification therefor from the Borrower, without first giving notice to Borrower of the Bank's desire to settle and obtaining the consent of Borrower to the same, which consent the Borrower hereby agrees not to unreasonably withhold. 12. MISCELLANEOUS. 12.1 Role of the Bank. Notwithstanding any of the terms or conditions hereof or of the other Loan Instruments to the contrary, the Bank shall not have, and by its execution and acceptance of this Amended and Restated Loan Agreement hereby expressly disclaims, any obligation or responsibility for the management, conduct or operation of the business and affairs of the Borrower. Any term or condition hereof, or of any of the other Loan Instruments, permitting the Bank to take or refrain from taking any action with respect to the Borrower shall be deemed solely to permit the Bank to audit and review the management, operation and conduct of the business and affairs of the Borrower and may not be relied upon by any other Person. Further, the Bank shall not have, has not assumed, and by its execution and acceptance of this Amended and Restated Loan Agreement hereby expressly disclaims, any liability or responsibility for the payment or performance of any indebtedness or obligation of the Borrower, and no term or condition hereof, or of any of the other Loan Instruments, shall be construed otherwise. 12.2 Notices. All notices required or permitted to be given hereunder shall be given in writing and shall be personally delivered or sent by telecopier (with confirmation by mail to follow), by express courier service or by registered or certified United States mail, return receipt requested, postage prepaid, addressed-as follows (or to such other address as to which either party hereto shall have given the other written notice): If to the Borrower: Kentucky Electric Steel, Inc. U.S. Highway 60 (Coalton) P.0. Box 3500 Ashland, KY 41105 Attn: William J. Jessie cc: William H. Jones, Jr., Esq. VanAntwerp, Monge, Jones & Edwards 1544 Winchester Avenue, 5th Floor P. 0. Box 1111 Ashland, KY 41105-1111 cc: Jeffery R. Rush Esq. Frost Brown Todd LLC 2200 PNC Center 201 East Fifth Street Cincinnati, OH 45202-4182 If to the Bank: National City Bank of Kentucky 10th Floor, National City Tower 101 South Fifth Street Louisville, KY 40202 Attn: Mr. Jerrol Z. Miles cc: Tandy C. Patrick, Esq. Greenebaum Doll & McDonald PLLC 3300 National City Tower 101 South Fifth Street Louisville, KY 40202 All notices hereunder shall be deemed given upon the earliest of (a) actual delivery in person or by telecopier (with confirmation by mail to follow), (b) one (1) Business Day after delivery to an express courier service, or (c) three (3) Business Days after having been deposited in the United States mails, in accordance with the foregoing. 12.3 Waiver. No course of dealing in respect of, nor any omission or delay in the exercise of, any right, power, remedy or privilege by the Bank shall operate as a waiver thereof, nor shall any right, power, remedy or privilege of the Bank be exclusive of any other right, power, remedy or privilege referred to herein or in any related document or now or hereafter available at law, in equity, in bankruptcy, by statute or otherwise. Each such right, power, remedy or privilege may be exercised by the Bank, either independently or concurrently with others, and as often and in such order as the Bank may deem expedient. No waiver or consent granted by the Bank in respect of this Amended and Restated Loan Agreement or the other Loan Instruments shall be binding upon the Bank unless specifically granted in writing by a duly authorized officer of the Bank, which writing shall be strictly construed. 12.4 Survival of Representations and Warranties. All representations, warranties and covenants of the Borrower contained herein or in the other Loan Instruments or made pursuant hereto shall survive the execution and delivery of the Loan Instruments and shall continue throughout the term hereof. Further, the indemnities set forth in Sections 4, 6.11 and 10 hereof shall survive the payment of the obligations to the Bank. 12.5 Invalidity. If any part of this Amended and Restated Loan Agreement shall be adjudged invalid or unenforceable, whether in general or in any particular circumstance, then such partial invalidity or enforceability shall not cause the remainder of this Amended and Restated Loan Agreement to be or to become invalid or unenforceable, and if a provision hereof is held invalid or unenforceable in one or more of its applications, the parties hereto agree that said provision shall remain in effect in all valid applications that are severable from the invalid be unenforceable application or applications. 12.6 Assignment. This Amended and Restated Loan Agreement may not be assigned by the Borrower without the prior written consent of the Bank. All rights of the Bank hereunder shall inure to the benefit of its successors and assigns, subject to the provisions of Section 10 hereof, and all obligations, covenants and agreements of the Borrower shall bind its successors and assigns, if any. 12.7 Governing Law. This Amended and Restated Loan Agreement and the rights and obligations of the parties hereunder shall, in all respects, be governed by and construed in accordance with the laws of the Commonwealth of Kentucky. 12.8 Section Headings. The section headings of this Amended and Restated Loan Agreement are inserted herein solely for convenience of reference and shall not affect the construction or interpretation of the provisions hereof. 12.9 Entire Agreement. This Amended and Restated Loan Agreement and the other Loan Instruments constitute the entire agreement between the Bank and the Borrower with respect to the subject matter hereof and supersedes all prior written or oral agreements between the Borrower and the Bank pertaining to the subject matter hereof. 12.10 Time of the Essence. Time shall be of the essence in the payment and performance of all of the Borrower's obligations under this Amended and Restated Loan Agreement, the Amended and Restated Working Capital Line of Credit Note and the other Loan Instruments. 12.11 No Oral Modifications. This Amended and Restated Loan Agreement may be modified only in writing executed by the Bank and the Borrower. 12.12 Costs and Expenses. The Borrower agrees to reimburse the Bank for all charges, expenses, out-of-pocket costs and fees incurred by the Bank in the preparation, negotiation and execution of the Loan Instruments (including the Term Sheet), including without limitation, all documentary, stamp or other tax liabilities, all security deposits and agreed loan or commitment fees, and all costs of printing, documentation, recording, credit reports and lien searches. All obligations of the Borrower under this Section 12.12 shall survive the termination or cancellation of this Amended and Restated Loan Agreement for any reason whatsoever. 12.13 Right to Request Waivers. The Borrower reserves the right from time to time to request the Bank to waive one or more of the terms and provisions of this Amended and Restated Loan Agreement; provided, the Bank shall have no obligation to consent to any such waiver requested by the Borrower, and nothing set forth in this Amended and Restated Loan Agreement shall be construed to the contrary. 12.14 Supersession of Original Loan Agreement. This Amended and Restated Loan Agreement amends, restates and supersedes in its entirety the Prior Loan Agreement, which is terminated and shall be of no further force and effect as of the date hereof. 12.15 Termination of Export Line of Credit. The Export Line of Credit referred to in the Prior Loan Agreement is canceled and terminated. 12.16 Waiver. Effective as of November 1, 2001, the Bank waives the Event of Default of the Borrower as described in Paragraph C of the Recitals hereto. 13. RELEASE OF BANK. As a material inducement to the Bank to enter into this Amended and Restated Loan Agreement, the Borrower hereby releases and forever discharges the Bank and its officers, directors, attorneys, agents, representatives, employees, predecessors and successors-in-interest, and assigns, of and from any and all known or reasonably discoverable claims, demands, obligations, actions, causes of action, damages, costs, losses of services, expenses and compensation of any nature whatsoever, whether based on a tort, including but not limited to, breach of fiduciary duty, bad faith, conversation, breach of contract, or other theory or recovery which the Borrower has or may have against the Bank, or which may exist or which might be claimed to exist at or prior to the date of this Amended and Restated Loan Agreement on account of, or in any way arising out of the banking relationship between the Borrower and the Bank. The Borrower specifically agrees and acknowledges that the release of the Bank for the consideration herein is complete, final, unqualified, and not subject to any condition precedent or condition subsequent, it being the express intention that this shall constitute an unconditional general release for the benefit of the Bank and have immediate effect and shall not be subject to any contingency or condition whatsoever. The Borrower further acknowledges that it expressly waives any right to subsequently attach the enforcement of this Amended and Restated Loan Agreement or release based upon claim of mutual mistake of fact or law. The Borrower additionally agrees that no action shall be commenced by it for any future claim against the Bank arising from or in any way connected with the transaction between the Borrower and the Bank for the execution and performance of the various agreements herein or in the Loan Agreement, unless notice shall be given to the Bank, specifically setting forth the claim. Such notice must be given within sixty (60) calendar days after the discovery of the occurrence of the event upon which the Borrower shall base such claim. Failure to give such notice within such sixty (60)-day period shall constitute a waiver by the Borrower of any such claim. In the construction of this paragraph, as in the entirety of this Amended and Restated Loan Agreement, time shall be of the essence. 14. Waiver of Jury Trial. Borrower hereby knowingly, voluntarily and intentionally waives the right it may have to a trial by jury in respect to any litigation or any other proceeding based on, or arising out of, under or in connection with this Amended and Restated Loan Agreement or any other loan document or out of any course of conduct, course of dealing, statements (whether written or oral) or actions of the Borrower or the Bank. [SIGNATURE PAGE FOLLOWS] In Witness Whereof, the parties hereto have caused this Amended and Restated Loan Agreement to be duly executed as of the day and year first above written. Kentucky Electric Steel, Inc. By: \s\Charles C. Hanebuth Charles C. Hanebuth, Chief Executive Officer (the "Borrower") National City Bank of Kentucky By: \s\Jerrol Z. Miles Title: Senior Vice President (the "Bank") Exhibit D Borrowing Certificate (Working Capital Loan) THIS BORROWING CERTIFICATE ("Borrowing Certificate") is being delivered to NATIONAL CITY BANK OF KENTUCKY, a national banking association (the "Bank"), pursuant to Section 2 of that certain Amended and Restated Loan Agreement dated as of January __, 2002, between KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the "Borrower"), and the Bank (together with all amendments, modifications and supplements thereto and all restatements thereof, the "Loan Agreement"). All capitalized terms used herein without definition shall have the same meaning as in the Loan Agreement. The Borrower hereby requests the Bank to make a Working Capital Loan to Borrower in the amount of $_______________ on __________ __, 200_ (the "Funding Date"). The proceeds of the Working Capital Loan requested pursuant to this Borrowing Certificate shall be deposited in the Borrower's account maintained with the Bank. The undersigned officer on behalf of the Borrower, to the best of his knowledge, and the Borrower certify that: (a) The amount of the Working Capital Loan requested pursuant to this Borrowing Certificate will not cause the Total Utilization of Working Capital Commitment to exceed the Working Capital Commitment in effect as of the date hereof or the Borrowing Base; (b) The representations and warranties contained in the Loan Agreement are true and correct in all material respects on and as of the date hereof, to the same extent as though made on and as of the date hereof; (c) No event has occurred and is continuing under the Loan Agreement or will result from the disbursement of the Working Capital Loan requested pursuant to this Borrowing Certificate which would constitute an Event of Default; (d) The Borrower has performed in all material respects all agreements and satisfied all conditions which the Loan Agreement and the other Loan Instruments provide shall be performed or satisfied by the Borrower on or before the Funding Date of the Working Capital Loan requested pursuant to this Borrowing Certificate; (e) No order, judgment or decree of any court, arbitrator or governmental authority purports to enjoin or restrain the Bank from making the Working Capital Loan requested pursuant to this Borrowing Certificate; and (f) There is not pending or, to the knowledge of the Borrower, threatened, any action, suit, proceeding or arbitration or, to the knowledge of the Borrower, any governmental investigation, pending or threatened, against or affecting the Borrower whish is required by the terms of the Loan Agreement to be disclosed to the Bank and which has not been disclosed by the Borrower to the Bank pursuant to the Loan Agreement prior to the Funding Date of the last preceding Working Capital Loan or, with respect to the initial Working Capital Loan requested by the Borrower, prior to the date of the Loan Agreement, and there has occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, which, in either event, in the reasonable opinion of the Borrower, is likely to be determined adversely to the Borrower and, in such event, is reasonably expected to have a Material Adverse Effect. Further, no injunction or other restraining order has been issued and no hearing to cause an injunction or other restraining order to be issued is pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of the Loan Agreement or the making of Working Capital Loans thereunder or the issuing of Letters of Credit thereunder. Dated: ____________________ KENTUCKY ELECTRIC STEEL, INC. By: Title: (the "Borrower") Exhibit D Borrowing Certificate (Letter of Credit) THIS BORROWING CERTIFICATE ("Borrowing Certificate") is being delivered to NATIONAL CITY BANK OF KENTUCKY, a national banking association (the "Bank"), pursuant to Section 2 of that certain Amended and Restated Loan Agreement dated as of January __, 2002, between KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the "Borrower"), and the Bank (together with all amendments, modifications and supplements thereto and all restatements thereof, the "Loan Agreement"). All capitalized terms used herein without definition shall have the same meaning as in the Loan Agreement. The Borrower hereby requests the Bank to issue a Letter of Credit for the account of the Borrower in the amount of $_______________ on __________ __, 200_ (the "Issuance Date"). The Letter of Credit is more particularly described in the accompanying Application for Irrevocable Letter of Credit duly executed by the Borrower. The undersigned officer on behalf of the Borrower, to the best of his knowledge, and the Borrower certify that: (a) The amount of the Letter of Credit requested pursuant to this Borrowing Certificate will not cause the Total Utilization of Working Capital Commitment to exceed the Working Capital Commitment in effect as of the date hereof or the Borrowing Base; (b) The representations and warranties contained in the Loan Agreement are true and correct in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof; (c) No event has occurred and is continuing under the Loan Agreement or will result from the disbursement of the Letter of Credit requested pursuant to this Borrowing Certificate which would constitute an Event of Default; (d) The Borrower has performed in all material respects all agreements and satisfied all conditions which the Loan Agreement and the other Loan Instruments provide shall be performed or satisfied by the Borrower on or before the Issuance Date of the Letter of Credit requested pursuant to this Borrowing Certificate; (e) No order, judgment or decree of any court, arbitrator or governmental authority purports to enjoin or restrain the Bank from issuing the Letter of Credit requested pursuant to this Borrowing Certificate; and (f) There is not pending or, to the knowledge of the Borrower, threatened, any action, suit, proceeding or arbitration or, to the knowledge of the Borrower, any governmental investigation, pending or threatened, against or affecting the Borrower whish is required by the terms of the Loan Agreement to be disclosed to the Bank and which has not been disclosed by the Borrower to the Bank pursuant to the Loan Agreement prior to the Issuance Date of the last preceding Letter of Credit or, with respect to the initial Letter of Credit requested by the Borrower, prior to the date of the Loan Agreement, and there has occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, which, in either event, in the reasonable opinion of the Borrower, is likely to be determined adversely to the Borrower and, in such event, is reasonably expected to have a Material Adverse Effect. Further, no injunction or other restraining order has been issued and no hearing to cause an injunction or other restraining order to be issued is pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of the Loan Agreement or the making of Letter of Credits thereunder or the issuing of Letters of Credit thereunder. Dated: ____________________ KENTUCKY ELECTRIC STEEL, INC. By: Title: (the "Borrower") Exhibit E Form of Compliance Certificate THIS COMPLIANCE CERTIFICATE is being delivered to NATIONAL CITY BANK OF KENTUCKY, a national banking association (the "Bank"), pursuant to Section 6.3(d) of that certain Amended and Restated Loan Agreement dated as of January __, 2002, between KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the "Borrower"), and the Bank (together with all amendments, modifications and supplements thereto and all restatements thereof, the "Loan Agreement"). All capitalized terms used herein without definition shall have the same meaning as in the Loan Agreement. The undersigned officer on behalf of the Borrower, to the best of his knowledge, and the Borrower certify that as of the last day of the most recently ended month dated ___________ __, 200_ (the "Compliance Date"): 1. Ratio Requirements. (a) The Borrower's Consolidated Tangible Net Worth is $______________ [Reference Section 7.11 of the Loan Agreement]; (b) The Consolidated EBITDA of the Borrower is $______________ [Reference Section 7.12 of the Loan Agreement]; (c) [to include starting 9/2003] The Borrower's Interest Coverage Ratio is $_____________ [Reference Section 7.13 of the Loan Agreement]; and (d) [to include starting 9/2003] The Borrower's Debt Service Coverage Ratio is $_____________ [Reference Section 7.14 of the Loan Agreement]; 2. Mergers, Consolidations and Sales of Assets. Neither the Borrower nor any of its Subsidiaries has, during the preceding month, taken or permitted to be taken any of the actions prohibited under Section 7.1 of the Loan Agreement other than [if any such actions have been taken or have been permitted to be taken, describe the same in detail][Reference Section 7.1 of the Loan Agreement). 3. Liens. Neither the Borrower nor any of its Subsidiaries has, during the preceding calendar month, granted any Liens in violation of Section 7.3 of the Loan Agreement other than [if any such Liens have been granted, describe the Lien in detail including the amount of the Indebtedness secured by the Lien, the assets secured by the Lien and the holder thereof][Reference Section 7.3 of the Loan Agreement]. 4. Restricted Payments. The Borrower has not, during the preceding month, made any Restricted Payments in violation of Section 7.4 of the Loan Agreement other than [if any such Restricted Payments have been made by the Borrower, describe the amount thereof, the date of making thereof and the date of payment thereof][Reference Section 7.4 of the Loan Agreement]. 5. Funded Debt. Neither the Borrower nor any of its Subsidiaries has, during the preceding month, incurred, assumed or guaranteed any new Funded Debt other than [if any such new or additional Funded Debt has been incurred, assumed or guaranteed by the Borrower or any of its Subsidiaries, describe the amount and nature of the Funded Debt, the assets securing the same, if any and the holder thereof][Reference Section 7.7 of the Loan Agreement]. 6. Transactions with Affiliates. Neither the Borrower nor any of its Subsidiaries has, during the preceding month, entered into any transactions with Affiliates in violation of the provisions of Section 7.8 of the Loan Agreement other than [if the Borrower or any of its Subsidiaries has entered into any transactions with Affiliates in violation of the provisions of Section 7.8 of the Loan Agreement, describe the nature of each such transaction, the Affiliate with whom such transaction has been made, and the obligations incurred or assumed by the Borrower or such Subsidiary pursuant to such transaction.[Reference Section 7.8 of the Loan Agreement]. 7. Guaranties. Neither the Borrower nor any of its Subsidiaries has, during the preceding calendar month, executed or issued any Guaranties in violation of the provisions of Section 7.9 of the Loan Agreement. The undersigned officer of the Borrower executing and delivering this Compliance Certificate on behalf of the Borrower further certifies that he has reviewed the Loan Agreement and has no knowledge of any event or condition which constitutes a default or an Event of Default under the Loan Agreement or the other Loan Instruments other than [if any default or Event of Default has occurred, describe the same, the period of existence thereof and what action the Borrower has taken or proposes to take with respect thereto]. IN WITNESS WHEREOF, the Borrower has executed this Compliance Certificate this 14th day of January, 2002. KENTUCKY ELECTRIC STEEL, INC. By: Charles C. Hanebuth, Chief Executive Officer (the "Borrower") Exhibit F Provisions to Include in Opinion of Counsel to Borrower An opinion of counsel to the Borrower, dated the date of this Amended and Restated Loan Agreement, addressed to the Bank, and satisfactory to counsel for the Bank, (a) to the effect that (i) this Amended and Restated Loan Agreement and all of the Loan Documents have been duly executed and delivered by the Borrower, and (ii) the applicable Loan Documents have been recorded in all necessary public offices, and the security interests and/or liens created thereby in favor of the Bank have been duly perfected, and constitute the first and prior lien and encumbrance on and against all of the collateral described or referred to therein; (b) to the best of such counsel's knowledge, all of the representations and warranties of the Borrower set forth in the Loan Agreement are true and correct; (c) all corporate actions necessary or appropriate for the execution and delivery of the Loan Documents have been taken and all governmental approvals necessary for the due execution and delivery of the Loan Documents have been obtained; (d) none of the Loan Documents violate or contravene any provision of the Articles of Incorporation or By-Laws of the Borrower or, to the knowledge of such counsel, any agreement or instrument binding on the Borrower or any of its properties. GD&M 677798.6 January 14, 2002 TABLE OF CONTENTS Section Page GLOSSARY OF DEFINED TERMS Term Section GD&M 677798.6 January 14, 2002 EX-4 6 amendmenttoagrementcigna.txt SENIOR NOTE AGREEMENT AMENDMENT NO. 2 TO NOTE AGREEMENT AND WAIVER THIS AMENDMENT NO. 2 TO NOTE AGREEMENT AND WAIVER (this "Amendment") is entered into as of January 14, 2002 by and among KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the "Company"), CONNECTICUT GENERAL LIFE INSURANCE COMPANY, individually and on behalf of one or more separate accounts ("CIGNA"), and MODERN WOODMEN OF AMERICA ("Modern Woodmen" and together with CIGNA, the "Noteholders"). Recitals A. The Company and the Noteholders entered into that certain Note Agreement dated as of November 1, 1995, as amended by that certain First Amendment Agreement dated January 30, 1997 (as so amended, the "Note Agreement"), pursuant to which the Company issued and sold to the Noteholders and the Noteholders purchased, on the terms and conditions therein set forth, the Company's 7.66% Senior Notes due November 1, 2005, in the aggregate principal amount of $20,000,000, with a current outstanding aggregate principal balance of $16,666,667 (the "Existing Notes"). The Noteholders remain the holders of 100% of the outstanding principal amount of the Existing Notes. Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to them in the Note Agreement. B. The Company has requested that, subject to the terms and conditions set forth herein, (i) effective as of November 1, 2001, the Noteholders waive the Events of Default under Section 6.1(b) of the Note Agreement arising as a result of the Company's failure to make the $3,333,333 payment of principal due November 1, 2001 and (ii) effective as of September 28, 2001, the Noteholders waive the Events of Default under Section 5.9 of the Note Agreement for the calculation dates that occurred on March 31, 2001, June 30, 2001, September 29, 2001 and December 29, 2001, and the Noteholders are willing to do so subject to the terms and conditions set forth herein. C. The Company has requested amendments to the Note Agreement and Existing Notes to, among other things, (i) remove the Make-Whole Amount, (ii) amend and restate the Existing Notes, increasing the per annum interest rate to 9.00%, (iii) defer a portion of the principal payments due to the Noteholders and (iv) modify the financial covenants contained in the Note Agreement. D. The Company and National City Bank of Kentucky ("NCBK") entered into that certain Amended and Restated Loan Agreement dated as of November 1, 1995, as amended by that certain Amendment No. 1 to Amended and Restated Loan Agreement, dated December 28, 1996, that certain Amendment No. 2 to Amended and Restated Loan Agreement, dated December 19, 1997, and by that certain Amended and Restated Loan Agreement, dated as of even date herewith (as so amended and restated, the "Loan Agreement"), pursuant to which NCBK has agreed to establish in favor of the Company a revolving line of credit in the principal amount of $18,000,000. E. Concurrently herewith, the Company, the Noteholders and NCBK, in both its capacity as a Lender thereunder and as Collateral Agent for all Lenders thereunder will enter into that certain Intercreditor and Collateral Agency Agreement dated as of even date herewith (the "Collateral Agency Agreement") in order to (a) set forth certain responsibilities and obligations of the Collateral Agent and (b) establish among the Lenders (as defined in such Collateral Agency Agreement) their respective rights with respect to certain payments that may be received by (i) the Collateral Agent in respect of the Collateral (as defined in such Collateral Agency Agreement) and (ii) any of such Lenders under, in connection with or pursuant to their respective Credit Facilities (as defined in such Collateral Agency Agreement). F. The Company and the existing and all subsequently organized or acquired Subsidiaries will execute and deliver various mortgages, deeds of trust, security agreements, pledge agreements, assignments, financing statements and other documents (the foregoing, together with any amendments, restatements, supplements and other modifications thereto, and any lessor agreements, estoppel certificates or other documents executed by third parties in connection with any of the foregoing, collectively, the "Security Documents"), providing liens and security interests in favor of NCBK, as Collateral Agent under the Collateral Agency Agreement, in the property described in such Security Documents in order to secure (i) the obligations under and in respect of the 9.00% Senior Notes (as hereinafter defined) and the Note Agreement and (ii) the obligations under and in respect of the Loan Agreement. G. In furtherance of the foregoing, the Company and the Noteholders now desire to amend the Note Agreement and the Existing Notes in the respects, but only in the respects, hereinafter set forth. NOW, THEREFORE, the Company and the Noteholders, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, do hereby agree as follows: Section 1. Amendment and Restatement of Notes. In order to implement the amendment and modifications contemplated hereby, the Company hereby agrees to issue and deliver to each Noteholder, and each such Noteholder agrees to accept from the Company, in exchange for and against surrender for cancellation of the Existing Notes originally issued under the Note Agreement, the Company's amended and restated 9.00% Senior Notes (any such promissory notes issued to the Noteholders on the date hereof pursuant to this Amendment, and any such promissory notes which may be issued in substitution or exchange therefor, herein collectively called the "9.00% Senior Notes") in the aggregate principal amount of $16,666,667, to be dated the date of issue, to bear interest from such date at the rate of 9.00% per annum, payable monthly on the first day of each month (commencing on the first such day next succeeding the date hereof) and at maturity and to bear interest on overdue principal (including any overdue required or optional prepayment of principal) and on any overdue installment of interest at the rate of 11.00% per annum after the date due, whether by acceleration or otherwise, until paid, to be expressed to mature on November 1, 2005, and to be substantially in the form of Exhibit A attached hereto. Such 9.00% Senior Notes are given in renewal (but not in extinguishment) of, and amend and restate in their entirety, the Existing Notes issued to the Noteholders on November 1, 1995 pursuant to the Note Agreement. From and after the date hereof, all references in the Note Agreement and the other Note Documents to "Notes" shall be deemed references to the 9.00% Senior Notes. Exhibit A attached to the Note Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto. Section 2. Amendments to Prepayment Provisions. 2.1 Amendment to Section 2.1. Section 2.1 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 2.1. Required Prepayments. The Company agrees that on each of the dates set forth below it will prepay and apply and there shall become due and payable, on the principal indebtedness evidenced by the Notes, the lesser of (i) the amount set forth below: Date Required Prepayment November 1, 2002 $1,500,000 September 30, 2003 $3,333,333 November 1, 2004 $3,333,333 or (ii) the principal amount of the Notes then outstanding. In addition, on November 1, 2002, the Company shall prepay and apply and there shall become due and payable, on the principal indebtedness evidenced by the Notes, the lesser of (i) 50% of the excess of (A) Consolidated EBITDA for Fiscal Year 2002 over (B) $477,000 or (ii) the principal amount of the Notes then outstanding. The entire remaining principal amount of the Notes, if any, shall become due and payable on November 1, 2005. For purposes of this Sec.2.1, in the event of any prepayment of less than all of the outstanding Notes pursuant to Sec.2.3, the amount of the payment required at maturity and each prepayment required to be made pursuant to this Sec.2.1 shall be reduced in the proportion that the principal amount of such prepayment bears to the unpaid principal amount of the Notes which were outstanding immediately prior to such prepayment." 2.2 Amendment to Section 2.2. Section 2.2 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 2.2. Optional Prepayment. In addition to the payments required by Sec.2.1, upon compliance with Sec.2.4 the Company shall have the privilege, at any time, of prepaying the outstanding Notes in whole, but not in part, by payment of the principal amount of the Notes and accrued interest thereon to the date of such prepayment." 2.3 Amendments to Section 2.3. Section 2.3 of the Note Agreement is amended as follows: (a) Paragraph (d) thereof is amended by deleting it in its entirety and replacing it with the following: "(d) Prepayment of the Notes to be prepaid pursuant to this Sec.2.3 shall be at 100% of the outstanding principal amount of such Notes, together with interest on the outstanding principal amount of such Notes accrued to the date of prepayment. The prepayment shall be made on the Proposed Prepayment Date." (b) Paragraph (e) of Section 2.3 is amended by deleting subsection (iv) thereof and renumbering subsections (v), (vi) and (vii) as subsections (iv), (v) and (vi). 2.4 Amendment to Section 2.4. Section 2.4 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 2.4. Notice of Optional Prepayments. The Company will give notice of the prepayment of the Notes pursuant to Sec.2.2 to each Holder thereof not less than 30 days nor more than 60 days before the date fixed for such optional prepayment (i) specifying the date of such optional prepayment and (ii) certifying all facts, if any, which are conditions precedent to any such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes, together with accrued interest thereon, shall become due and payable on the prepayment date specified in said notice (the "Scheduled Prepayment Date") unless the Company timely delivers a Revocation Notice (defined below) revoking such notice of prepayment. If the notice of prepayment sets forth any facts which are conditions precedent to the prepayment relating thereto, the Company shall be permitted to postpone (to a date not later than 10 days after the Scheduled Prepayment Date, a "Rescheduled Prepayment Date" hereunder) or revoke such notice of prepayment by providing written notice (a "Revocation Notice") to each Holder not later than the tenth day prior to the Scheduled Prepayment Date. Any notice of prepayment delivered hereunder shall be deemed irrevocable unless the Company provides a timely Revocation Notice." 2.5 Amendment to Section 2.5. Section 2.5 of the Note Agreement is amended by deleting the reference to "Sec.Sec.2.1 and 2.2" and replacing it with a reference to "Sec.2.1". 2.6 Amendment to Section 2.6. Section 2.6 of the Note Agreement is amended by (a) inserting in the fifth line thereof the word "and" immediately before the phrase "interest thereon" and (b) deleting the phrase and punctuation "and premium, if any," in the fifth line thereof. Section 3. Amendments to Company Covenants. 3.1 Amendment to Section 5.2. Section 5.2 of the Note Agreement is amended by adding the new following new sentence at the end thereof: "The Collateral Agent and all Holders of Notes shall be named as additional insureds, and the Collateral Agent shall be named as loss payee, on each insurance policy obtained or maintained by the Company or any of its Subsidiaries." 3.2 Amendment to Section 5.7. Section 5.7 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 5.7. Minimum Consolidated Tangible Net Worth. The Company will not, at any time during any period set forth below, permit Consolidated Tangible Net Worth to be less than the amount set forth opposite such period below: Period Minimum Consolidated Tangible Net Worth Fiscal Year 2002 $11,000,000 Fiscal Year 2003 $9,000,000 First two Fiscal Quarters of Fiscal Year 2004 $10,000,000 Third Fiscal Quarter of Fiscal Year 2004 and thereafter $11,000,000 plus an aggregate amount equal to 50% of Consolidated Net Earnings (but, in each case, only if a positive number) for each completed Fiscal Quarter beginning with the third Fiscal Quarter of Fiscal Year 2004 3.3 Amendment to Section 5.8. Section 5.8 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 5.8. Limitations on Funded Debt. (a) The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee or otherwise become directly or indirectly liable with respect to, any Funded Debt (including liabilities under Capitalized Leases), except: (1) Funded Debt evidenced by the Notes; (2) Funded Debt (which shall in no event exceed $18,000,000) evidenced by the Amended and Restated Working Capital Line of Credit Note issued under and as defined in the Loan Agreement; (3) Capitalized Leases to the extent permitted by Sec.5.22 of this Agreement; (4) Funded Debt of a Subsidiary to the Company or to a Wholly-owned Subsidiary and Funded Debt of the Company to a Wholly-owned Subsidiary; and (5) Funded Debt of the Company and its Subsidiaries outstanding as of January 14, 2002 and reflected on Schedule 1 to that certain Amendment No. 2 to Note Agreement and Waiver. (b) Any corporation which becomes a Subsidiary after the date hereof shall for all purposes of this Sec.5.8 be deemed to have created, assumed or incurred at the time it becomes a Subsidiary all Funded Debt of such corporation existing immediately after it becomes a Subsidiary. (c) For purposes of this Sec.5.8, if a Wholly- owned Subsidiary shall for any reason cease to be a Wholly-owned Subsidiary but shall continue to be a Subsidiary, then any Funded Debt of another Subsidiary or the Company issued to such Wholly-owned Subsidiary previously permitted by this Sec.5.8 shall be deemed to be re-incurred by the Company or such other Subsidiary at the time such Wholly-owned Subsidiary ceases to be a Wholly-owned Subsidiary." 3.4 Amendment to Section 5.9. Section 5.9 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 5.9. Intentionally Deleted." 3.5 Amendment to Section 5.10. Section 5.10 of the Note Agreement is amended by deleting paragraphs (h), (i) and (j) thereof in their entirety and replacing them with the following new paragraphs: "(h) the interest of a lessor or lessee in any leased property of the Company and its Subsidiaries subject to a lease that is not a Capitalized Lease; and (i) Liens in favor of the Collateral Agent arising under the Security Documents, securing payment of the Notes and the obligations under the Loan Agreement and payment, performance and observance of the other obligations under the Note Documents and Loan Documents." 3.6 Amendment to Section 5.11. Section 5.11 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 5.11. Restricted Payments and Restricted Investments. The Company will not, and will not permit any of its Subsidiaries to: (a) declare or make, or incur any liability to declare or make, any Restricted Payments; or (b) make or authorize any Restricted Investments." 3.7 Amendment to Section 5.12. Section 5.12 of the Note Agreement is amended as follows: (a) Paragraph (a) thereof is deleted in its entirety and replaced with the following: "(a) The Company will not, and will not permit any Subsidiary to, (i) consolidate with or be a party to a merger with any other corporation or (ii) engage in any Asset Disposition involving any "substantial part of the consolidated assets of the Company and its Subsidiaries" (as defined in paragraph (c) of this Sec.5.12; provided, however, that any Subsidiary may merge or consolidate with or into the Company or any Wholly-owned Subsidiary so long as in any merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation." (b) Paragraph (c) thereof is deleted in its entirety and replaced with the following: "(c) As used in this Sec.5.12, an Asset Disposition shall be deemed to be a "substantial part of the consolidated assets of the Company and its Subsidiaries" if the book value of the assets subject to such Asset Disposition, when added to the book value of all other assets subject to Asset Dispositions (i) during the 12-month period ending with the date of such Asset Disposition exceeds 2% of Consolidated Total Assets, determined as of the end of the immediately preceding Fiscal Quarter or (ii) during the period from and after the Closing Date to and including the date of such Asset Disposition shall in the aggregate exceed 25% of Consolidated Total Assets determined as of the end of the immediately preceding Fiscal Quarter. As used herein, the term "Excluded Asset Dispositions" means Asset Dispositions to the extent that the net proceeds thereof are applied to the prepayment, purchase or redemption of outstanding Senior Debt of the Company or its Subsidiaries. Any such prepayment, purchase or redemption made by the Company shall be made ratably to the holders of all outstanding Senior Debt of the Company and its Subsidiaries." 3.8 Amendment to Section 5.13. Section 5.13 of the Note Agreement is amended by deleting it in its entirety and replacing it with the following: "Section 5.13. Guaranties. The Company will not, and will not permit any Subsidiary to, become liable in respect of any Guaranty except Guaranties in favor of the Holders executed pursuant to Sec.5.26(a)." 3.9 Amendments to Section 5.17. Section 5.17 of the Note Agreement is amended as follows: (a) Each occurrence of the term "fiscal year" in paragraphs (a) and (b) thereof is deleted and replaced with the defined term "Fiscal Year". (b) Paragraph (f) thereof is amended by adding the new phrase "and Sec.5.19 through Sec.5.22" immediately after the phrase "Sec.5.7 through Sec.5.16" in the fifth line thereof. (c) The punctuation "." at the end of paragraph (h) thereof is deleted and replaced with the punctuation ";". (d) The following new paragraphs are added immediately after paragraph (h) thereof: "(i) Annual Business/Financial Plan. As soon as prepared and in any event within 30 days following the close of each Fiscal Year, a comprehensive business and financial plan for the current Fiscal Year (for the Company and its Subsidiaries on a consolidated basis), which annual business/financial plan shall include quarterly financial projections and forecasts and planned Capital Expenditures for such Fiscal Year; and (j) Monthly Financial Statements. As soon as reasonably possible, and in any event within thirty (30) days after the end of each month in each Fiscal Year (other than the last month in each Fiscal Year, in which case such financial statements shall be delivered within 45 days after the end of such Fiscal Year), an unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of such month, and related unaudited consolidated statements of income and cash flows of the Company and its Subsidiaries for such month, which will compare actual results to the Company's projections delivered pursuant to paragraph (i) of this Sec.5.17, including, without limitation, a monthly cash flow analysis showing monthly variances from the beginning of the relevant Fiscal Year, all in reasonable detail, prepared in accordance with GAAP consistently applied and certified to be true, accurate and complete by the Chief Financial Officer of the Company; provided, such interim financial statements shall be without footnotes and shall be subject to normal year-end adjustments." (e) In the last grammatical paragraph thereof, the punctuation and phrase ", but not more than two (2) times by each such Institutional Holder during each fiscal year of the Company; provided that during any period when a Default or Event of Default shall have occurred and be continuing no reasonable advance notice shall be required and there shall be no limit on the number of times any Institutional Holder and/or its designee shall be permitted to visit and inspect" beginning immediately after the word "requested" in the ninth line thereof is deleted and replaced with the punctuation and phrase "; provided that during any period when a Default or Event of Default shall have occurred and be continuing no reasonable advance notice shall be required". 3.10 Addition of Covenants. Section 5 of the Note Agreement is further amended by adding the following new sections at the end thereof: "Section 5.19. Minimum Consolidated EBITDA. (a) The Company will not, on the last day of any Fiscal Quarter set forth below, permit Consolidated EBITDA calculated using Consolidated EBITDA for the Fiscal Year to date as of the end of each such period (except as otherwise indicated with respect to the last two periods below) to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2002 ($2,300,000) Second FQ of Fiscal Year 2002 ($3,800,000) Third FQ of Fiscal Year 2002 ($4,150,000) Fourth FQ of Fiscal Year 2002 ($4,300,000) First FQ of Fiscal Year 2003 ($250,000) Second FQ of Fiscal Year 2003 $535,000 Third FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,438,000 Fourth FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,356,000 (b) If Consolidated Tangible Net Worth on the last day of any Fiscal Quarter set forth below is less than $14,000,000, the Company will not, on the last day of such Fiscal Quarter, permit Consolidated EBITDA for such Fiscal Quarter to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2004 $1,666,000 Second FQ of Fiscal Year 2004 $1,666,000 Third FQ of Fiscal Year 2004 $1,666,000 Fourth FQ of Fiscal Year 2004 $1,666,000 First FQ of Fiscal Year 2005 and thereafter $2,441,000 Section 5.20. Interest Coverage Ratio. The Company will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Interest Coverage Ratio to be less than 1.10 to 1.00. Section 5.21. Debt Service Coverage Ratio. The Company will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Debt Service Coverage Ratio to be less than 1.00 to 1.00. Section 5.22. Capital Expenditures. The Company will not, and will not permit any Subsidiary to, make or become committed to make (without duplication) any Capital Expenditure if the aggregate amount of all Capital Expenditures made or committed to be made by the Company and its Subsidiaries in (i) Fiscal Year 2002 would exceed $1,500,000, (ii) Fiscal Year 2003 would exceed $1,500,000, plus an amount equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Sec.5.22 in Fiscal Year 2002 but were not incurred during Fiscal Year 2002, (iii) Fiscal Year 2004 would exceed $2,000,000 plus an amount (which shall in no event exceed $1,000,000) equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Sec.5.22 in Fiscal Year 2003 but were not incurred during Fiscal Year 2003 and (iv) Fiscal Year 2005 and each Fiscal Year thereafter would exceed $3,000,000. Notwithstanding anything to the contrary contained in this Sec.5.22, the foregoing limitations on Capital Expenditures for any Fiscal Year shall be adjusted upward for any Capital Expenditures that are necessary for compliance with requirements of the United States Environmental Protection Agency or any other Governmental Authority. Section 5.23. Environmental Indemnities. The Company hereby agrees to indemnify, defend and hold harmless each Holder of Notes, the Collateral Agent and each of their respective officers, directors, employees, agents, consultants, attorneys, contractors, affiliates, successors, assigns or transferees from and against, and reimburse said Persons in full with respect to, any and all loss, liability, damage, fines, penalties, costs and expenses, of every kind and character, including reasonable attorneys' fees and court costs, known or unknown, fixed or contingent, occasioned by or associated with any claims, demands, causes of action, suits and/or enforcement actions, including any administrative or judicial proceedings, and any remedial, removal or response actions ever asserted, threatened, instituted or requested by any Persons, including any governmental agency or authority, arising out of or related to: (i) the breach of any representation or warranty of the Company contained in Section 8(j) of that certain Amendment No. 2 to Note Agreement and Waiver; (ii) the failure of the Company to perform, or to cause its Subsidiaries to perform, any of the covenants contained in Sec.5.16; or (iii) the ownership, construction, occupancy, operation, or use of any properties or assets of the Company or any Subsidiary (all of the foregoing, collectively, the "Indemnified Liabilities"). THE FOREGOING INDEMNITY OBLIGATIONS OF THE COMPANY SHALL EXTEND TO ALL INDEMNIFIED LIABILITIES, INCLUDING, WITHOUT LIMITATION, ANY INDEMNIFIED LIABILITIES ARISING FROM OR ATTRIBUTED TO THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ANY INDEMNIFIED LIABILITIES ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. Section 5.24. Prepayments of Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, (i) refinance the obligations under the Loan Agreement, (ii) terminate the Working Capital Line of Credit (as such term is defined in the Loan Agreement) or (iii) terminate in whole or permanently reduce in part the Working Capital Commitment (as such term is defined in the Loan Agreement) pursuant to section 2.4(c) of the Loan Agreement, unless each Note is prepaid in full pursuant to Sec.2.2. Section 5.25. Most Favored Lender Status. The Company will not and will not permit any of its Subsidiaries to enter into, assume or otherwise be bound or obligated under any agreement (including, without limitation, the Loan Agreement) creating or evidencing Indebtedness or any agreement executed and delivered in connection with any Indebtedness containing one or more Additional Covenants or Additional Defaults, unless the prior written consent of the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes shall have been obtained; provided, however, in the event the Company or any of its Subsidiaries shall enter into, assume or otherwise become bound by or obligated under any such agreement without the prior written consent of the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes, the terms of this Agreement shall, without any further action on the part of the Company or the Holders of Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. Upon the request of the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes, the Company will promptly execute and deliver at their expense (including, without limitation, the fees and expenses of counsel for the Holders of Notes) an amendment to this Agreement in form and substance satisfactory to such Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, provided that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Sec.5.25, but shall merely be for the convenience of the parties hereto." Section 5.26. Collateral; Subsequently Acquired Subsidiaries. Subject to the restrictions in Sec.5.11 prohibiting Investments in Subsidiaries: (a) It is the intent of the parties that all obligations of the Company and its Subsidiaries under the Note Documents shall be guaranteed by all direct and indirect Subsidiaries (if any) of the Company, whether now existing or hereafter acquired or created by the Company, and that all such obligations shall be secured by substantially all the property and assets of the Company and its Subsidiaries, whether now existing or hereafter acquired, including, without limitation, real property, permits, patents, trademarks, copyrights, trade names, service marks, capital stock or other equity interests in Subsidiaries or other Persons and other properties acquired after the date of closing and whether owned or acquired by the Company, any existing Subsidiary or any such subsequently acquired or created Subsidiary. (b) At its expense the Company shall execute and deliver, and shall cause its Subsidiaries to execute and deliver, any and all financing statements, mortgages, deeds of trust and other instruments, agreements or other documents, and take all action (including, without limitation, filing all Uniform Commercial Code financing statements, filing or recording mortgages and deeds of trust and filing assignments or other documents customarily filed with the U.S. Patent and Trademark Office or the U.S. Copyright Office) that may be required under applicable law, or that the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes or the Collateral Agent may reasonably request in order to effectuate the transactions contemplated by the Note Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests and Liens created or purported to be created by the Security Documents or in order to effectuate the intent of the parties set forth in paragraph (a) of this Sec.5.26. (c) At its expense the Company shall (a) cause each subsequently acquired or organized Subsidiary, contemporaneously with such acquisition or organization, to execute and deliver each Security Document that the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes or the Collateral Agent may request in order to grant the Collateral Agent a valid, first priority perfected pledge or security interest in the assets and properties of such Subsidiary, including without limitation, the capital stock or other equity interests of such Subsidiaries in its Subsidiaries; (b) execute and deliver, and cause any Subsidiary that has not previously executed and delivered a pledge agreement or a supplement thereto and that itself has a subsequently acquired or organized Subsidiary, a pledge agreement pledging all of the capital stock or other equity interests in such subsequently acquired or organized Subsidiary; and (c) pursuant to the pledge agreement, deliver or cause such Subsidiary to deliver to the Collateral Agent all certificates, stock powers and other documents required by the pledge agreement with respect to any such subsequently acquired or organized Subsidiary, or take or cause such Subsidiary to take such other actions, all as may be necessary to provide the Collateral Agent with a first priority perfected pledge of and security interest in all outstanding capital stock or other equity interests in such Subsidiary. (d) Any security interests and Liens granted by the Company and its Subsidiaries pursuant to this Sec.5.26 shall be created under the Security Documents and other security agreements, pledge agreements, mortgages, deeds of trust, assignments and other instruments, agreements and other documents in form, scope and substance satisfactory to the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes and to the Collateral Agent, and at its expense the Company will deliver or cause to be delivered to the Collateral Agent all such instruments, agreements and other documents, including, without limitation, legal opinions, title insurance policies, surveys and lien searches, as such Holders or the Collateral Agent shall request to evidence compliance with this Sec.5.26. The Company agrees to provide from time to time such evidence as the Holders holding 66-2/3% in aggregate principal amount of the outstanding Notes or the Collateral Agent shall request as to the perfection and priority status of each security interest and Lien. Section 5.27. Accounting Periods. The Company will not change, or permit a change in, its Fiscal Year. Section 5.28. Lien in favor of Republic Corporation. The Company will not, at any time, permit the obligations secured by the Lien arising in connection with a mortgage in favor of Republic Corporation to exceed $250,000." Section 4. Amendments to Events of Default and Remedies. 4.1 Amendments to Section 6.1. Section 6.1 of the Note Agreement is amended as follows: (a) Paragraph (c) thereof is deleted in its entirety and replaced with the following: "(c) Default shall occur in the making of any other payment of the principal of any Note at the expressed or any accelerated maturity date or at any date fixed for prepayment; or" (b) Paragraph (e) thereof is deleted in its entirety and replaced with the following: "(e) The Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $2,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment; or" (c) Paragraph (f) thereof is deleted in its entirety and replaced with the following: "(f) Default shall occur in the observance or performance of any covenant or agreement contained in Sec.5.7, Sec.5.8, Sec.5.10, Sec.5.11, Sec.5.12, Sec.5.13, Sec.5.19, Sec.5.20, Sec.5.21, Sec.5.22, Sec.5.24, Sec.5.27 or any Additional Covenant; or" (d) Paragraph (l) thereof is amended by deleting the punctuation "." at the end of such paragraph and replacing it with the punctuation and word "; or". (e) The following new paragraphs (m) and (n) are added to the end of Section 6.1: "(m) any provision of any Security Document shall for any reason cease to be a valid and binding obligation on the Company or any Subsidiary or any other Person that is a party thereto, or the Company or such Subsidiary or other Person shall so assert in writing; or (n) the occurrence of (i) any Event of Default under and as defined in (A) the Loan Agreement or (B) the Master Equipment Lease or (ii) any default by the Company under any other Funded Debt." 4.2 Amendment to Section 6.3. Section 6.3 of the Note Agreement is amended as follows: (a) The phrase "or paragraphs (m) or (n)" is added immediately after the phrase and punctuation "paragraphs (d) through (j), inclusive," in the third line thereof. (b) The phrase "and, to the extent not prohibited by applicable law, an amount as liquidated damages for the loss of the bargain evidenced hereby (and not as a penalty) equal to the Make-Whole Amount, determined as of the date on which the Notes shall so become due and payable" beginning on the thirteenth line thereof is deleted in its entirety. 4.3 Amendment to Section 6.4. Section 6.4 of the Note Agreement is amended by (a) adding the phrase "or paragraphs (m) or (n)" immediately after the phrase and punctuation "paragraphs (d) through (j), inclusive," in the fourth line thereof and (b) deleting the parenthetical in paragraph (b) thereof and replacing it with the parenthetical "(except any principal or interest on the Notes which has become due and payable solely by reason of such declaration under Sec.6.3)". 4.4 Addition of Remedies Provision. Section 6 of the Note Agreement is further amended by adding the following new section at the end thereof: "Section 6.5. Other Remedies. If any Event of Default or Default shall occur and be continuing, (i) any Holder of Notes may proceed to protect and enforce its rights under this Agreement, such Note and the other Note Documents by exercising such remedies as are available to such Holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or the other Note Documents or in aid of the exercise of any power granted in this Agreement or the other Note Documents, and (ii) both the Collateral Agent and the Holders of Notes may exercise any rights or remedies in their respective capacities under the Security Documents in accordance with the provisions thereof. No remedy conferred in this Agreement or the other Note Documents upon the Holders of Notes or the Collateral Agent is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise." Section 5. Amendments to Definitions. 5.1 Deletion of Certain Definitions. Section 8.1 of the Note Agreement is amended by deleting in its entirety each of the following definitions set forth therein: "Consolidated Adjusted Net Worth", "Consolidated Cash Flow Available for Fixed Charges", "Consolidated Funded Debt", "Consolidated Total Capitalization", "Fixed Charges", "Make-Whole Amount", "Reinvestment Rate", "Restricted Payment Pool" and "Weighted Average Life to Maturity". 5.2 Addition of Certain New Definitions. Section 8.1 of the Note Agreement is further amended by adding the following new definitions in the appropriate alphabetical positions therein: "Additional Covenant" shall mean any affirmative or negative covenant or similar restriction applicable to the Company or any Subsidiary of the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of the covenants in Sec.5 of this Agreement, or related definitions in Sec.8 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the holder or holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of the covenants in Sec.5 of this Agreement, or related definitions in Sec.8 of this Agreement. "Additional Default" shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company or any Subsidiary of the Company which permits the holder or holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company or any Subsidiary of the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to the Defaults and Events of Default contained in Sec.6 of this Agreement, or related definitions in Sec.8 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the holder or holders of such other Indebtedness (and such provision shall be deemed an "Additional Default" only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of the Defaults and Events of Default contained in Sec.6 of this Agreement, or related definitions in Sec.8 of this Agreement. "Capital Expenditures" shall mean, for any period and with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries with respect to such period which should be capitalized according to GAAP on a consolidated balance sheet of such Person and its Subsidiaries, including all expenditures with respect to fixed or capital assets which should be so capitalized and, without duplication, the amount of all Capitalized Rentals. "Collateral Agency Agreement" shall mean the Intercreditor and Collateral Agency Agreement, dated as of January 14, 2002, among the Company, the Holders of Notes, the Banks (as defined therein) and the Collateral Agent, as amended, modified, restated or supplemented from time to time. "Collateral Agent" shall mean National City Bank of Kentucky, in its capacity as Collateral Agent for the Holders of Notes and the Banks (as defined in the Collateral Agency Agreement) under the Security Documents and the Collateral Agency Agreement, and its successors and assigns. "Consolidated EBITDA" shall mean, for any period, Consolidated Net Earnings during such period, plus (to the extent deducted in determining Consolidated Net Earnings) (a) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Company and its Subsidiaries, (b) all provisions of any Federal, state or other income taxes made by the Company and its Subsidiaries during such period and (c) depreciation, amortization, or any other non-cash charges for the Company and its Subsidiaries for such period. "Consolidated Tangible Net Worth" shall mean, at any time, Consolidated Stockholders Equity after, without duplication, (i) excluding the effect of changes in GAAP after September 29, 2001 and (ii) excluding any write-downs of assets occurring subsequent to September 29, 2001 (x) under Financial Accounting Standards Board Statement No. 5 relating to asset impairment, (y) under Financial Accounting Standards Board Statement No. 121 relating to asset impairment and/or (z) pursuant to section 382 of the Code, minus the net book value of all assets of the Company and its Subsidiaries, after deducting any reserves applicable thereto, which would be treated as intangible under GAAP, including, without limitation, goodwill, trademarks, trade names, service marks, brand names, copyrights, patents and unamortized debt discount and expense (other than the expenses associated with the restructuring of the Indebtedness under this Agreement and the Loan Agreement on or about January 14, 2002), organizational expenses and the excess of the equity in any Subsidiary over the cost of the investment in such Subsidiary. "Debt Service" shall mean, with respect to any period, the sum of the following: (a) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Company and its Subsidiaries for such period and (b) all payments of principal in respect of Debt of the Company and its Subsidiaries (including Capitalized Rentals) paid or payable during such period after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. "Debt Service Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) Debt Service for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Debt Service Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is 4 and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. "Distribution" shall mean, in respect of any corporation, association or other business entity: (a) dividends or other distributions or payments on capital stock or other equity interest of such corporation, association or other business entity (except distributions in such stock or other equity interest); and (b) the redemption or acquisition of such stock or other equity interests or of warrants, rights or other options to purchase such stock or other equity interests (except when solely in exchange for such stock or other equity interests) unless made, contemporaneously, from the net proceeds of a sale of such stock or other equity interests. "Environmental Indemnity Agreement" shall mean that certain Environmental Indemnity Agreement dated as of January 14, 2002 among the Company, the Holders, and National City Bank of Kentucky, as amended, restated, supplemented or otherwise modified from time to time.. "Fiscal Quarter" shall mean a fiscal quarter of the Company. "Fiscal Year" shall mean a fiscal year of the Company. "Indemnified Liabilities" shall have the meaning set forth in Sec.5.23. "Indemnified Parties" shall have the meaning set forth in Sec.9.14. "Indemnity Matters" shall mean any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, demands and causes of action made or threatened against a Person and, in connection therewith, all losses, liabilities, damages (including, without limitation, consequential damages) or reasonable costs and expenses of any kind of nature whatsoever incurred by such Person whether caused by the sole or concurrent negligence of such Person seeking indemnification. "Interest Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) all Interest Charges on all Indebtedness (including Capitalized Rentals) of the Company and its Subsidiaries for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Interest Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is 4 and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. "Loan Agreement" shall mean, from and after January 14, 2002, the Amended and Restated Loan Agreement dated as of January 14, 2002 between the Company and National City Bank of Kentucky, as amended, restated, supplemented or otherwise modified from time to time. "Loan Documents" shall mean the Loan Agreement, the Security Documents and all other instruments, certificates, agreements and other documents executed and delivered by the Company, its Subsidiaries or any other Person pursuant to or in connection with the Loan Agreement or the transactions contemplated thereby, and any and all amendments, supplements or other modifications to any of the foregoing. "Master Equipment Lease" shall mean that certain Master Equipment Lease, dated as of September 29, 2000 between the Company and Fifth Third Bank, Ohio Valley, as amended, restated, supplemented or otherwise modified from time to time. "Mortgage" shall mean that certain Mortgage dated as of January 14, 2002 between the Company and the Collateral Agent, as amended, restated, supplemented or otherwise modified from time to time. "Note Documents" shall mean the Note Agreement, Notes, the Security Documents and all other instruments, certificates, agreements and other documents executed and delivered by the Company, its Subsidiaries or any other Person pursuant to or in connection with the Note Agreement or the transactions contemplated thereby, and any and all amendments, supplements or other modifications to any of the foregoing. "Security Agreement" shall mean that certain Security Agreement, dated as of January 14, 2002 and executed and delivered by the Company to and in favor of the Collateral Agent, as the same may be amended, restated, supplemented or otherwise modified from time to time (including, without limitation, by any supplement thereto executed and delivered after the date hereof pursuant to Sec.5.26 in order to effect the joinder of any subsequently acquired or organized Subsidiary of the Company). "Security Documents" shall mean the Collateral Agency Agreement, the Security Agreement, the Mortgage, the Environmental Indemnity Agreement and all (i) mortgages, deeds of trust, assignments, pledges, financing statements, lien entry forms, notices, documents and other writings executed and delivered from time to time in favor of the Collateral Agent for the benefit of the Holders of Notes and the Banks (as defined in the Collateral Agency Agreement) in order to secure the obligations of the Company and its Subsidiaries under and in respect of the Note Documents and the Loan Documents and any and all amendments, restatements, supplements or other modifications thereto and (ii) Guaranties executed by direct or indirect Subsidiaries of the Company in favor of the Holders pursuant to Sec.5.26(a). "Transferee" shall mean any direct or indirect transferee of all or any part of any Note originally issued under this Agreement. 5.3 Amendment of Certain Definitions. Section 8.1 of the Note Agreement is further amended by deleting in its entirety each of the defined terms listed below, as such defined term is presently set forth in Section 8.1, and replacing it with the applicable amended definition set forth below: "Funded Debt" of any Person shall mean all Debt of such Person which would, in accordance with GAAP, constitute long term Debt, but including in any event (i) any Debt having a final maturity of one or more than one year from the date of origin thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of origin), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not the obligation to make such payments shall constitute a current liability of the obligor under GAAP, (ii) any Debt outstanding under a revolving credit or similar agreement or credit line or similar facility, (iii) all Capitalized Rentals of such Person, and (iv) all Guaranties by such Person of Funded Debt of others. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement, the Notes or any other Note Document, or (c) the validity or enforceability of this Agreement, the Notes, or any other Note Document. "Restricted Investments" shall mean all Investments made by the Company and its Subsidiaries (including, without limitation, Investments in Subsidiaries), except for the following: (a) Investments in commercial paper which, at the time of acquisition by the Company or any Subsidiary, is rated A-I or better by S&P or P-I or better by Moody's; (b) Investments in United States Governmental Securities, provided that such obligations mature in twelve months or less from the date of acquisition thereof; (c) Investments in certificates of deposit maturing within one year from the date of issuance thereof, or in bankers acceptances issued by an Acceptable Bank; (d) Investments in Repurchase Agreements; (e) loans or advances in the usual and ordinary course of business to officers, directors and employees provided such outstanding loans do not exceed $750,000 in the aggregate at any time; (f) receivables arising from the sale of goods and services in the ordinary course of business of the Company and its Subsidiaries; (g) Investments in or commitments to purchase foreign currency to the extent the Company and its Subsidiaries are obligated to make payments to others in such currencies; and (h) other Investments of the Company and/or its Subsidiaries existing on the Closing Date which are described in Schedule III attached to this Agreement. In valuing any Restricted Investments, such Restricted Investments shall be taken at the original cost thereof, without allowance for any subsequent write-offs or appreciation or depreciation therein, but less any amount repaid or recovered on account of capital or principal. As used in this definition of "Restricted Investments": "Acceptable Bank" means any bank or trust company (i) which is organized under the laws of the United States of America or any State thereof, (ii) which has capital, surplus and undivided profits aggregating at least $100,000,000, and (iii) whose long-term unsecured debt obligations (or the long-term unsecured debt obligations of the bank holding company owning all of the capital stock of such bank or trust company) shall have been given a rating of "AA" or better by S&P, "AA" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Acceptable Broker-Dealer" means any Person other than a natural person (i) which is registered as a broker or dealer pursuant to the Securities Exchange Act of 1934, as amended and (ii) whose long-term unsecured debt obligations shall have been given a rating of "A" or better by S&P, "AT' or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Moody's" means Moody's Investors Service, Inc. "Repurchase Agreement" means any written agreement (a) that provides for (i) the transfer of one or more United States Governmental Securities in an aggregate principal amount at least equal to the amount of this Transfer Price (defined below) to the Company or any of its Subsidiaries from an Acceptable Bank or an Acceptable Broker-Dealer against a transfer of funds (the "Transfer Price") by the Company or such Subsidiary to such Acceptable Bank or Acceptable Broker-Dealer, and (ii) a simultaneous agreement by the Company or such Subsidiary, in connection with such transfer of funds, to transfer to such Acceptable Bank or Acceptable Broker-Dealer the same or substantially similar United States Governmental Securities for a price not less than the Transfer Price plus a reasonable return thereon at a date certain not later than 365 days after such transfer of funds, (b) in respect of which the Company or such Subsidiary shall have the right, whether by contract or pursuant to applicable law, to liquidate such agreement upon the occurrence of any default thereunder, and (c) in connection with which the Company or such Subsidiary, or an agent thereof, shall have taken all action required by applicable law or regulations to perfect a Lien in such United States Governmental Securities. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. "United States Governmental Security" means any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. "Restricted Payment" shall mean (a) any Distribution in respect of the Company or any Subsidiary of the Company (other than on account of capital stock or other equity interests of a Subsidiary of the Company owned legally and beneficially by the Company or another Subsidiary of the Company), including, without limitation, any Distribution which would constitute treasury stock; and (b) any payment, repayment, redemption, retirement, repurchase or other acquisition, direct or indirect, by the Company or any Subsidiary of, on account of, or in respect of, the principal of any Subordinated Debt (or any installment thereof) prior to the regularly scheduled maturity date thereof (as in effect on the date such Subordinated Debt was originally incurred). For purposes of this Agreement, the amount of any Restricted Payment made in property shall be the greater of (i) the fair market value of such property (as determined in good faith by the Board of Directors (or equivalent governing body) of the Person making such Restricted Payment) and (ii) the net book value thereof on the books of such Person, in each case determined as of the date on which such Restricted Payment is made. Section 6. Amendments to Miscellaneous Provisions. 6.1 Amendment of Section 9.1. The last sentence of Section 9.1 of the Note Agreement is amended by deleting the punctuation and phrase ", premium, if any,". 6.2 Amendment of Section 9.4. Section 9.4 of the Note Agreement is amended by deleting the name "Chapman and Cutler" in the fifth line thereof and replacing it with "Baker Botts L.L.P." 6.3 Amendment to Section 9.7. Section 9.7 of the Note Agreement is amended by adding two new sentences to the end thereof reading as follows: "Each Transferee hereby agrees that upon becoming a Holder it shall become, without any further action on the part of such Transferee or the parties to the Collateral Agency Agreement, a party to the Collateral Agency Agreement and the terms of the Collateral Agency Agreement shall bind and inure to the benefit of such Transferee. Each Transferee further agrees to promptly execute and deliver such documents evidencing such agreement to be bound by the terms of the Collateral Agency Agreement as the transferor of such Transferee's interest may reasonably request." 6.4 Addition of Miscellaneous Provisions. Section 9 of the Note Agreement is further amended by adding the following new sections at the end thereof: "9.13. Submission to Jurisdiction. The Company irrevocably agrees that any legal action or proceeding with respect to this Agreement, the Notes or any other Note Document may be brought in the courts of the State of New York or any court of the United States of America located in the State of New York, and, by execution and delivery of this Agreement, the Company accepts for itself, generally and unconditionally, and agrees to submit to the jurisdiction of each of the above-mentioned courts and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or later have based on venue or forum non conveniens with respect to any action instituted therein. Service of the summons and complaint and any other process which may be served in any such action may be made by mailing or delivering a copy thereof to the Company in the manner specified in Sec.9.6 hereof. 9.14. Indemnities, etc. The Company hereby agrees: (a) TO INDEMNIFY EACH HOLDER AND EACH OF ITS AFFILIATES AND EACH OF ITS OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES AND AGENTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF THE ISSUANCE OF THE NOTES; (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE NOTE DOCUMENTS; (III) THE OPERATIONS OF THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES; (IV) THE FAILURE OF THE COMPANY OR ANY OF ITS SUBSIDIARIES TO COMPLY WITH THE TERMS OF ANY NOTE DOCUMENT, OR WITH ANY LAW OR REQUIREMENT OF ANY GOVERNMENTAL AUTHORITY; (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY SET FORTH IN ANY OF THE NOTE DOCUMENTS; (VI) ANY ASSERTION THAT THE HOLDERS OF NOTES WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY DOCUMENTS; OR (VII) ANY OTHER ASPECT OF THE NOTE DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ANY INDEMNITY MATTERS ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. (b) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an Indemnified Party proposes, if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitor at that time, including the maximum potential claims against the Indemnified Party to be indemnified pursuant to this Sec.9.14. (c) In the case of any indemnification hereunder, the Indemnified Party shall give notice to the Company of any such claim or demand being made against the Indemnified Party and the Company shall have the non-exclusive right to join in the defense against any such claim or demand provided that if the Company provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Company and such Indemnified Party. (d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES EXCLUDING HOWEVER ONLY GROSS NEGLIGENCE AND WILLFUL MISCONDUCT. 9.15. Waiver of Jury Trial. The Company and each Holder of any Note agrees to waive its respective rights to a jury trial of any claim or cause of action based upon or arising out of this Agreement, the Notes, any other Note Document or any dealings between them relating to the subject matter of this transaction and their existing lender/borrower relationship. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. The Holders of Notes and the Company each acknowledge that this waiver is a material inducement to enter into this business relationship, that each has already relied on the waiver in entering into this Agreement, and that each will continue to rely on the waiver in their related future dealings. The Holders and the Company further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 9.16. Release of Holders. As a material inducement to each Holder to enter into this Agreement, the Company hereby releases and forever discharges each Holder and its respective officers, directors, attorneys, agents, representatives, employees, predecessors and successors-in- interest, and assigns, of and from any and all known or reasonably discoverable claims, demands, obligations, actions, causes of action, damages, costs, losses of services, expenses and compensation of any nature whatsoever, whether based on a tort, including but not limited to, breach of fiduciary duty, bad faith, conversation, breach of contract, or other theory or recovery which the Company has or may have against such Holder, or which may exist or which might be claimed to exist at or prior to the date of this Agreement on account of, or in any way arising out of the financing relationship between the Company and the Holders. The Company specifically agrees and acknowledges that the release of the Holders for the consideration herein is complete, final, unqualified, and not subject to any condition precedent or condition subsequent, it being the express intention that this shall constitute an unconditional general release for the benefit of each Holder and have immediate effect and shall not be subject to any contingency or condition whatsoever. The Company further acknowledges that it expressly waives any right to subsequently attack the enforcement of this Agreement or release based upon claim of mutual mistake of fact or law. The Company additionally agrees that no action shall be commenced by it for any future claim against any Holder arising from or in any way connected with the transaction between the Company and the Holders for the execution and performance of the various agreements herein or in the other Note Documents, unless notice shall be given to such Holder, specifically setting forth the claim. Such notice must be given within sixty calendar days after the Company's discovery of the event upon which the Company shall base such claim. Failure to give such notice within such sixty-day period shall constitute a waiver by the Company of any such claim. In the construction of this paragraph, as in the entirety of this Agreement, time shall be of the essence. Section 7. Waivers. Effective as of November 1, 2001, the Noteholders waive the Event of Default under Section 6.1(b) of the Note Agreement arising as a result of the Company's failure to make the $3,333,333 payment of principal due November 1, 2001. Effective as of September 28, 2001, the Noteholders waive the Events of Default under Section 5.9 of the Note Agreement for the calculation dates that occurred on March 31, 2001, June 30, 2001, September 29, 2001 and December 29, 2001. Section 8. Effective Date. Except as otherwise provided in Section 7 of this Amendment, each of the foregoing Sections of this Amendment shall become effective on the date hereof (the "Effective Date"), subject in all cases to the following conditions: (a) Certain Documents. The following shall have been received by and be satisfactory to each Noteholder: (i) duly executed counterparts of this Amendment; (ii) one or more duly executed 9.00% Senior Notes, in the form attached hereto as Exhibit A; (iii) duly executed counterparts of the Amended and Restated Loan Agreement, dated of even date herewith, amending the Loan Agreement, in form, scope and substance satisfactory to each Noteholder, executed and delivered by the Company and all other parties thereto; (iv) duly executed counterparts of the Security Agreement, the Mortgage and the Environmental Indemnity Agreement, each in form, scope and substance satisfactory to each Noteholder, executed and delivered by the Company and all other parties thereto; (v) evidence that all other actions necessary or desirable to perfect and protect the security interests created by the Security Documents have been taken; (vi) duly executed counterparts of the Collateral Agency Agreement, in form, scope and substance satisfactory to each Noteholder, executed and delivered by the Company and all other parties thereto; (vii) certificate of the Secretary or Assistant Secretary of the Company attaching and certifying copies of (A) the certificate of incorporation, as amended, of the Company certified by the Secretary of State of Delaware, (B) the bylaws, as amended, of the Company, (C) the resolutions of the board of directors of the Company, authorizing the execution, delivery and performance of this Amendment, the 9.00% Senior Notes, the Note Agreement as amended hereby, the Security Documents and all related documents (collectively, the "Amendment Documents"), and (D) the name, title and true signature of each officer of the Company executing the Amendment Documents; (viii) current appraisals pertaining to the Company's real property, plant, equipment and inventory; (ix) Phase I environmental site assessment reports with respect to any real property to be owned or leased by the Company from and after the Effective Date; (x) evidence that the Company has entered into documentation amending the Master Equipment Lease to (A) waive all existing Defaults and Events of Default as defined therein and (B) amend the financial covenants contained therein to be consistent with the financial covenants contained in the Note Agreement as amended by this Amendment; (xi) evidence that each of Fifth Third Bank and General Electric Capital Corporation has consented to the execution and delivery of this Amendment and the other Amendment Documents by the Company; (xii) an opinion from Frost Brown Todd LLC, counsel for the Company, dated the Effective Date, in form, scope and substance satisfactory to each Noteholder; (xiii) an opinion from VanAntwerp, Monge, Jones & Edwards, LLP, counsel for the Company, dated the Effective Date, in form, scope and substance satisfactory to each Noteholder; and (xiv) audited Fiscal Year 2001 consolidated financial statements of the Company and its Subsidiaries, together with the unqualified report thereon by Arthur Andersen LLP marked "draft", delivered in accordance with the requirements of Section 5.17(b) of the Note Agreement other than those relating to the timing of the delivery thereof. (b) Fees of the Noteholders. Each Noteholder shall have received a restructuring fee in accordance with the letter agreement dated December 5, 2001, by and among the Company, the Noteholders, National City Bank of Kentucky and SunTrust Bank. (c) Accrued Interest. Each Noteholder shall have received, in immediately available funds, interest accrued from and including November 1, 2001 through January 14, 2002 on the unpaid principal amount of each of their respective Notes calculated at the rate of 9.00% per annum. (d) Fees, Charges and Disbursements of Baker Botts L.L.P. Baker Botts L.L.P., special counsel to the Noteholders, shall have received, in immediately available funds on or before the Effective Date, its fees, charges and disbursements charged or incurred in connection with the preparation, negotiation, execution and delivery of this Amendment, the Collateral Agency Agreement, the other Amendment Documents and the Loan Agreement and related documents, to the extent such fees, charges and disbursements are reflected in a statement of such special counsel provided to the Company on or prior to the Effective Date. (e) Representations and Warranties; No Default; No Material Adverse Effect. After giving effect to this Amendment, (i) the representations and warranties of the Company and its Subsidiaries contained in this Amendment and each Security Document shall be true on and as of the Effective Date; (ii) there shall exist on the Effective Date no Event of Default or Default; and (iii) on the Effective Date there shall exist or have occurred no condition, event or act which could have a Material Adverse Effect. (f) Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in substance in form, scope and substance to the Noteholders, and each such Noteholder shall have received all such counterpart originals or certified or other copies of such documents as such Noteholder may reasonably request. Section 9. Representations and Warranties. As a material inducement to each Noteholder to enter into this Amendment, the Company represents and warrants as follows: (a) Corporate Organization and Authority. The Company: (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (ii) has all requisite power and authority and all necessary licenses and permits to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted; and (iii) is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction wherein the nature of the business transacted by it or the nature of the property owned or leased by it makes such licensing or qualification necessary. (b) Subsidiaries. The Company has no Subsidiaries. (c) Financial Statements. (i) The audited consolidated balance sheets of the Company and its Subsidiaries as of September 29, 2001 and the audited consolidated statements of operations, shareholders' equity and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date have been prepared in accordance with GAAP consistently applied, are correct and complete and present fairly the financial position of the Company and its consolidated Subsidiaries as of said date and the results of their operations and changes in their financial position or cash flows for such period. (ii) Since September 29, 2001, there has been no change in the condition, financial or otherwise, of the Company and its consolidated Subsidiaries as shown on the consolidated balance sheet as of such date except changes in the ordinary course of business, none of which individually or in the aggregate have had, or would reasonably be expected to have, a Material Adverse Effect. (d) Full Disclosure. Neither the financial statements referred to in paragraph (c) of this Section 9 nor the Note Agreement nor any other written statement furnished by the Company to any Noteholder in connection with this Amendment, contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to the Company or its Subsidiaries which the Company has not disclosed in writing to both the Noteholders which materially affects adversely nor, so far as the Company can now foresee, will materially affect adversely the properties, business, prospects, profits or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. (e) Title to Properties. The Company has good and marketable title in fee simple (or its equivalent under applicable law) to all material parcels of real property and has good title to all the other material items of property it purports to own, including that reflected in the most recent balance sheet referred to in paragraph (b) of this Section 9, except as sold or otherwise disposed of in the ordinary course of business and except for Liens permitted by the Note Agreement. (f) Patents and Trademarks. The Company owns or possesses all the patents, trademarks, trade names, service marks, copyright, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. (g) Power and Authority; Enforceability. The issuance of the 9.00% Senior Notes and compliance by the Company with all of the provisions of this Amendment and the other Amendment Documents: (i) are within the corporate powers of the Company; (ii) will not violate any provisions of any law or any order of any court or governmental authority or agency and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under the Certificate of Incorporation nor By-laws of the Company or any indenture or other agreement or instrument to which the Company is a party or by which it may be bound or result in the imposition of any Liens or encumbrances on any property of the Company; and (iii) have been duly authorized by proper corporate action on the part of the Company (no action by the stockholders of the Company being required by law, by the Certificate of Incorporation or By-laws of the Company or otherwise), executed and delivered by the Company, and this Amendment and the other Amendment Documents constitute the legal, valid and binding obligations, contracts and agreements of the Company enforceable in accordance with their respective terms. (h) No Defaults. After giving effect to this Amendment, no Default or Event of Default exists as of the Effective Date, and no Default or Event of Default is imminent. The Company is neither in default in the payment of principal or interest on any Debt nor in default under any instrument or instruments or agreements under and subject to which any Debt has been issued, and no event has occurred and is continuing under the provisions of any such instrument or agreement which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (i) Consents. Except for the consents of Fifth Third Bank and General Electric Capital Corporation delivered by the Company to the Noteholders pursuant to Section 8(a)(xi) of this Amendment, neither the nature of the business conducted by the Company, nor any of its properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the transactions contemplated by this Amendment is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental body or any other Person in connection with the execution and delivery of this Amendment or any other Amendment Document (other than filings with governmental offices to perfect Liens created under the Security Documents) or fulfillment of or compliance with the terms and provisions hereof or thereof. (j) Compliance with Laws (other than Environmental Laws). The Company (i) is not in violation of any law, ordinance, franchise, governmental rule or regulation to which it is subject (other than Environmental Laws); or (ii) has not failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property or to the conduct of its business, which violation or failure to obtain would materially adversely affect the business, prospects, profits, properties or condition (financial or otherwise) of the Company, taken as a whole, or impair the ability of the Company to perform its obligations contained in this Amendment or the other Amendment Documents. The Company is not in default with respect to any order of any court or governmental authority or arbitration board or tribunal. (k) Compliance with Environmental Laws. The Company is not in violation of any applicable Environmental Law, which violation could have a material adverse effect on the business, prospects, profits, properties or condition (financial or otherwise) of the Company, taken as a whole. Except as set forth (i) in the Phase I Environmental Assessment Report dated January 8, 2002 and delivered to the Noteholders pursuant to Section 8(a)(ix) hereof and (ii) on Exhibit B attached to the Environmental Indemnity Agreement, the Company does not know of any liability of the Company under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.). (l) Pending Litigation. There are no proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any governmental authority or arbitration board or tribunal which are reasonably likely to materially and adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of the Company, taken as a whole. There is no action, suit, investigation or proceeding pending or threatened against the Company which purports to affect the validity or enforceability of any Amendment Document or the transactions contemplated thereby. (m) Indebtedness. Schedule 1 attached hereto replaces Annex B to Exhibit B to the Note Agreement and correctly describes all Funded Debt (including liabilities under Capitalized Leases) of the Company other than Funded Debt described in Sections 5.8(a)(1) and (2) of the Note Agreement and all Liens existing as of the Effective Date against property of the Company, each of which Liens is permitted by one of the clauses contained in Section 5.10 of the Note Agreement. The Company (i) does not have a provision in its certificate of incorporation, or (ii) is not a party to any indenture, agreement or other instrument which limits the ability of the Company or any Subsidiary to incur Debt (other than the Loan Agreement and the Master Lease Agreement). (n) Accounting Periods. The Company's Fiscal Year ends on the last Saturday of September of each calendar year. The Fiscal Quarters for Fiscal Year 2002 end on December 29, 2001, March 30, 2002, June 29, 2002 and September 28, 2002. Section 10. Miscellaneous. (a) References to Note Agreement. Upon and after the Effective Date, each reference to the Note Agreement in the Note Agreement and each other document, instrument or agreement executed and delivered in connection with the Note Agreement shall mean and be a reference to the Note Agreement as amended by this Amendment. (b) Ratification and Confirmation. Except as specifically amended herein, the Note Agreement shall remain in full force and effect, and is hereby ratified and confirmed. (c) No Waiver. The execution, delivery and effectiveness of this Amendment shall not, except as expressly set forth herein, operate as a waiver of any right, power or remedy of any Noteholder, nor constitute a waiver of any provision of the Note Agreement, the Existing Notes or any other document, instrument or agreement executed and delivered in connection with the Note Agreement. (d) Expenses. The Company confirms its agreement, pursuant to Section 9.4 of the Note Agreement, to pay promptly all expenses of the Noteholders related to this Amendment and all matters contemplated hereby, including, without limitation, all fees and expenses of special counsel to the Noteholders. (e) GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK. (f) Counterparts. This Amendment may be executed in counterparts (including those transmitted by facsimile), each of which shall be deemed an original and all of which taken together shall constitute one and the same document. Delivery of this Amendment may be made by facsimile transmission of a duly executed counterpart copy hereof. [Remainder of Page Intentionally Left Blank; Signature Page to Follow] IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute this Amendment as of the date first above written. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: CIGNA Investments, Inc. By: \s\Stephen H. Wilson Name: Stephen H. Wilson Title: Managing Director CONNECTICUT GENERAL LIFE INSURANCE COMPANY, on behalf of one or more Separate accounts By: CIGNA Investments, Inc. By: \s\Stephen H. Wilson Name: Stephen H. Wilson Title: Managing Director MODERN WOODMEN OF AMERICA By: \s\Nick S. Coin Name: Nick S. Coin Title: Manager, Securities Division KENTUCKY ELECTRIC STEEL, INC. By: \s\Charles C. Hanebuth Name: Charles C. Hanebuth Title: CEO EXHIBIT A [Form of 9.00% Senior Note] KENTUCKY ELECTRIC STEEL, INC. 9.00% Senior Note Due November 1, 2005 PPN: 49127B A* 1 No._________ ___, ____ $ Kentucky Electric Steel, Inc., a Delaware corporation (the "Company"), for value received, hereby promises to pay to or registered assigns on the first day of November, 2005 the principal amount of DOLLARS ($_____________) and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the principal amount from time to time remaining unpaid hereon at the rate of 9.00% per annum from the date hereof until maturity, payable monthly on the first day of each month (commencing on the first such day next succeeding the date hereof) and at maturity. The Company agrees to pay interest on overdue principal (including any overdue required or optional prepayment of principal) and on any overdue installment of interest, at the rate of 11.00% per annum after the due date, whether by acceleration or otherwise, until paid. Payments of principal hereof and interest hereon are to be made in lawful money of the United States of America at the main office of JP Morgan Chase Bank in New York City or at such other place as the holder of this Note shall have designated by written notice to the Company as provided in the Note Agreement referred to below. This Note is one of the 9.00% Senior Notes due November 1, 2005 (the "Notes") of the Company in the aggregate principal amount of $16,666,667 issued under and pursuant to the terms and provisions of the Note Agreement dated as of November 1, 1995, as amended by that certain First Amendment Agreement dated January 30, 1997 and that certain Amendment No. 2 to Note Agreement and Waiver dated January 14, 2002 (as so amended and as the same may be further amended, restated, supplemented or otherwise modified from to time, the "Note Agreement"), entered into by the Company with the Holders of Notes therein referred to, and this Note and the holder hereof are entitled equally and ratably with the holders of all other Notes outstanding under the Note Agreement to all the benefits provided for thereby or referred to therein. Reference is hereby made to the Note Agreement for a statement of such rights and benefits. This Note and the other Notes outstanding under the Note Agreement may be declared due prior to their expressed maturity dates and certain prepayments are required to be made thereon, all in the events, on the terms and in the manner and amounts as provided in the Note Agreement. This Note is entitled to the benefits of the Security Documents (as defined in the Note Agreement). This Note is subject to optional prepayment, in whole but not in part, and required prepayment on the terms specified in the Note Agreement. This Note is registered on the books of the Company and is transferable only by surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or its attorney duly authorized in writing. Payment of or on account of principal and interest on this Note shall be made only to or upon the order in writing of the registered holder. THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH STATE. KENTUCKY ELECTRIC STEEL, INC. By__________________________ Its GD&M LOU:682518.1 EX-10 7 masterlease.txt MASTER EQUIPMENT LEASE AMENDED AND RESTATED ADDENDUM A To MASTER EQUIPMENT LEASE Attached to and by reference made a part of the Master Equipment Lease dated September 29, 2000 and all Equipment Schedule A's dated September 29, 2000 executed by Fifth Third Bank, Ohio Valley as Lessor, and Kentucky Electric Steel, Inc. (the Lessee) as Lessee. This Amended and Restated Addendum amends and restates that certain Addendum A to the Master Lease dated September 29, 2000. In consideration of Fifth Third Bank, Ohio Valley extending a 1ease in the total amount of $8,536,082 to Lessee and various other prior and existing extensions of credit and any additional extensions of credit or renewals (the "lease", "notes", "loan", or "loans") Lessee agrees as follows: Representations and Warranties To induce Lessor to make the lease, Lessee makes the following representations and warranties, which shall survive the execution and delivery of the lease: 1. Affirmative Covenants. The Lessee covenants, and agrees with the Lessor that, until (a) all Obligations have been paid in full, and (b) there exists no commitment by the Lessor which could give rise to any Obligations, the Lessee will comply with such of the following covenants: (a) The financial information furnished to Lessor in connection with its application for the lease and in the financial statements submitted to Lessor is complete and accurate in all material respects and Lessee has no undisclosed direct or contingent liabilities which are material in amount. (b) Lessee is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, has corporate power to carry on the business in which it is engaged, and the obtaining and performance of the lease have been duly authorized by all necessary action of the board of directors and shareholders of the corporation under the applicable law, and do not and will not (i) violate any provisions of law or any of its organizational or other organic documents, or (ii) result in a breach of, constitute a default under, require any consent under, or result in the creation, of any lien, charge, or encumbrance upon any property of Lessee pursuant to any instrument order, or other agreement to which Lessee is a party or by which Lessee, any of its officers as such, or any of its property is bound. (c) There are no judgments, liens, encumbrances, or other security interests outstanding against Lessee or any of its property other than those disclosed to Lessor in connection with its request for the lease. (d) Lessee has not incurred any debts, liabilities, or obligations, which are material in amount and has not committed itself to incur any debts, liabilities, or other obligations other than those disclosed to Lessor in connection with the request for the lease or shown on the financial statements submitted to Lessor. (e) Proceeds of the lease will be used exclusively to repay debt and other general corporate purposes. (f) Reserve and keep in force all licenses, permits, and franchises necessary for the proper conduct of its business and duly pay and discharge all taxes, assessments, and governmental charges upon Lessee or against Lessee's property which are material in amount before the date on which penalties attach thereto, unless and to the extent only that the same shall be contested in good faith and by appropriate proceedings. (g) Periodic Financial Statements. Furnish to the Lessor in writing as soon as available, but in no event more than 120 days after the end of each Annual accounting period of the Lessee, statements of operations, changes in shareholders' equity, and cash flows for such period and for the period from the beginning of the current fiscal year of the Lessee to the end of such period, and a balance sheet as at the end of such period, all in detail and scope reasonably satisfactory to the Lessor. (h) Interim Statements. Within 60 days after the close of each Quarter, Lessee will provide Lessor a balance sheet and statement of operations on Lessee certified by Lessee to be correct and accurate; and such other information respecting the financial condition and operation of Lessee as Lessor may from time to time reasonably request. (i) At any time an annual or quarterly report is due and the Lessee cannot comply with the provisions of this Agreement, an executive officer of the Lessee shall provide to the Lessor a certificate stating the respect in which it has failed to do so. (j) Record Audit. Upon reasonable prior notice and during business hours, permit any representative or agent of Lessor to examine and audit any or all Lessee's books, assets, and records requested by Lessor. (k) Adverse Change. Inform Lessor immediately of any material adverse change in the financial condition of Lessee Lessee will also promptly inform Lessor of any litigation or threatened litigation, which might substantially affect Lessee's financial condition. (l) Certain Defined Terms. As used herein the following terms will have the following meanings: 1.1 "Capital Expenditures" shall mean, for any period and with respect to any person, the aggregate of all expenditures by such person and its subsidiaries with respect to such period which should be capitalized according to GAAP on a consolidated balance sheet of such person and its subsidiaries, including all expenditures with respect to fixed or capital assets which should be so capitalized and, without duplication, the amount of all Capitalized Rentals. 1.2 "Capitalized Rentals" of any person shall mean as of the date of any determination thereof the amount at which the aggregate rentals due and to become due under all capitalized leases under which such person is a lessee would be reflected as a liability on a consolidated balance sheet of such person. 1.3 "Consolidated EBITDA" shall mean, for any period, consolidated net earnings during such period, plus (to the extent deducted in determining consolidated net earnings) (a) all interest charges on all indebtedness (including Capitalized Rentals) of the Lessee and its subsidiaries, (b) all provisions of any Federal, state or other income taxes made by the Lessee and its subsidiaries during such period and (c) depreciation, amortization, or any other non- cash charges for the Lessee and its subsidiaries for such period. 1.4 "Consolidated Tangible Net Worth" shall mean, at any time, Consolidated stockholders equity (determined in accordance with GAAP) after, without duplication, (i) excluding the effect of changes in GAAP after September 29, 2001 and (ii) excluding any write- downs of assets occurring subsequent to September 29, 2001 (x) under Financial Accounting Standards Board Statement No. 5 relating to asset impairment, (y) under Financial Accounting Standards Board Statement No. 121 relating to asset impairment and/or (z) pursuant to section 382 of the Code, minus the net book value of all assets of the Lessee and its subsidiaries, after deducting any reserves applicable thereto, which would be treated as intangible under GAAP, including, without limitation, goodwill, trademarks, trade names, service marks, brand names, copyrights, patents and unamortized debt discount and expense (other than debt expenses incurred in connection with the financial restructuring with Lessees noteholders and lender occurring as of January 14, 2002), organizational expenses and the excess of the equity in any subsidiary over the cost of the investment in such subsidiary. 1.5 "Debt Service" shall mean, with respect to any period, the sum of the following: (a) all interest charges on all indebtedness (including Capitalized Rentals) of the Lessee and its subsidiaries for such period and (b) all payments of principal in respect of debt of the Lessee and its subsidiaries (including Capitalized Rentals) paid or payable during such period after eliminating all offsetting debits and credits between the Lessee and its subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Lessee and its subsidiaries in accordance with GAAP. 1.6 "Debt Service Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) debt Service for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Debt Service Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is 4 and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. 1.7 "Fiscal Quarter" shall mean a fiscal quarter of the Lessee. 1.8 "Fiscal Year" shall mean a fiscal year of the Lessee. 1.9 "Interest Coverage Ratio" shall mean, at any time, the ratio of (a) Consolidated EBITDA for the period of four consecutive Fiscal Quarters ending on, or most recently ended prior to, such time to (b) all interest charges on all indebtedness (including Capitalized Rentals) of the Lessee and its subsidiaries for such period. Notwithstanding the foregoing, in the fourth Fiscal Quarter of Fiscal Year 2003 and each of the first three Fiscal Quarters of Fiscal Year 2004, the Interest Coverage Ratio shall be annualized by multiplying Consolidated EBITDA for the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003 at the time of computation by a fraction, the numerator of which is 4 and the denominator of which is the actual number of Fiscal Quarters elapsed since the end of the third Fiscal Quarter of Fiscal Year 2003. (m) Minimum Consolidated Tangible Net Worth. The Company will not, at any time during any period set forth below, permit Consolidated Tangible Net Worth to be less than the amount set forth opposite such period below: Period Minimum Consolidated Tangible Net Worth Fiscal Year 2002 $11,000,000 Fiscal Year 2003 $9,000,000 First two Fiscal Quarters of Fiscal Year 2004 $10,000,000 Third Fiscal Quarter of Fiscal Year 2004 and thereafter $11,000,000 plus an aggregate amount equal to 50% of Consolidated Net Earnings (but, in each case, only if a positive number) for each completed Fiscal Quarter beginning with the third Fiscal Quarter of Fiscal Year 2004 (n) Minimum Consolidated EBITDA (a) The Lessee will not, on the last day of any Fiscal Quarter set forth below, permit Consolidated EBITDA calculated using Consolidated EBITDA for the Fiscal Year to date as of the end of each such period (except as otherwise indicated with respect to the last two periods below) to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2002 ($2,300,000) Second FQ of Fiscal Year 2002 ($3,800,000) Third FQ of Fiscal Year 2002 ($4,150,000) Fourth FQ of Fiscal Year 2002 ($4,300,000) First FQ of Fiscal Year 2003 ($250,000) Second FQ of Fiscal Year 2003 $535,000 Third FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,438,000 Fourth FQ of Fiscal Year 2003 (Consolidated EBITDA for such FQ only) $1,356,000 (b) If Consolidated Tangible Net Worth on the last day of any Fiscal Quarter set forth below is less than $14,000,000, the Lessee will not, on the last day of such Fiscal Quarter, permit Consolidated EBITDA for such Fiscal Quarter to be less than the amount set forth opposite such period below: Period (FQ = Fiscal Quarter) Minimum Consolidated EBITDA First FQ of Fiscal Year 2004 $1,666,000 Second FQ of Fiscal Year 2004 $1,666,000 Third FQ of Fiscal Year 2004 $1,666,000 Fourth FQ of Fiscal Year 2004 $1,666,000 First FQ of Fiscal Year 2005 and thereafter $2,441,000 (o) Interest Coverage Ratio. The Lessee will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Interest Coverage Ratio to be less than 1.10 to 1.00. (p) Debt Service Coverage Ratio. The Lessee will not, for any Fiscal Quarter commencing with the Fiscal Quarter ending in September 2003, permit the Debt Service Coverage Ratio to be less than 1.00 to 1.00. (q) Capital Expenditures. The Lessee will not, and will not permit any subsidiary to, make or become committed to make (without duplication) any Capital Expenditure if the aggregate amount of all Capital Expenditures made or committed to be made by the Lessee and its subsidiaries in (i) Fiscal Year 2002 would exceed $1,500,000, (ii) Fiscal Year 2003 would exceed $1,500,000, plus an amount equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Section in Fiscal Year 2002 but were not incurred during Fiscal Year 2002, (iii) Fiscal Year 2004 would exceed $2,000,000 plus an amount (which shall in no event exceed $1,000,000) equal to the maximum amount of Capital Expenditures which could have been incurred in compliance with this Section in Fiscal Year 2003 but were not incurred during Fiscal Year 2003 and (iv) Fiscal Year 2005 and each Fiscal Year thereafter would exceed $3,000,000. Notwithstanding anything to the contrary contained in this Section, the foregoing limitations on Capital Expenditures for any Fiscal Year shall be adjusted upward for any Capital Expenditures that are necessary for compliance with requirements of the United States Environmental Protection Agency or any other Governmental Authority. (r) Specific Equipment. Certain equipment as further described in Exhibit A located at Ashland, Kentucky. (s) Lien declaration. Lessee represents and warrants that Lessor is the absolute owner of all equipment described in the Equipment Schedule A dated as of September 29, 2000 and that such equipment is owned free and clear of all liens, encumbrances, mortgages, and security interests of any kind except as presented in the original lease request. Dated as of January 14, 2002 KENTUCKY ELECTRIC STEEL, INC. FIFTH THIRD BANK, OHIO VALLEY By: \s\William J. Jessie By: \s\Stewart Greenlee Title: Vice President & CFO Title: President GENERAL ELECTRIC CAPITAL CORPORATION By: \s\Erik E. Anderson Title Senior Risk Analyst - -7- -----END PRIVACY-ENHANCED MESSAGE-----