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AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
BETWEEN
KES ACQUISITION COMPANY, LLC
AND
PINNACLE STEEL, LLC
DATED AS OF FEBRUARY 28, 2005
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TABLE OF CONTENTS
Page
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ARTICLE 1
TERM.................................................................1
1.1
Term.................................................................1
ARTICLE 2
SERVICES.............................................................2
2.1
Engagement...........................................................2
2.2
Services During the
Term.............................................2
ARTICLE 3 RESPONSIBILITIES; AUTHORITY; BOARD
MEMBER............................3
3.1
Primary
Client.......................................................3
3.2
Authority............................................................3
3.3
Company Board
Member.................................................3
ARTICLE 4
PAYMENTS.............................................................4
4.1
Services
Fees........................................................4
4.2
Expenses.............................................................4
ARTICLE 5
INSURANCE............................................................5
5.1
Insurance............................................................5
ARTICLE 6 REPRESENTATIONS AND
WARRANTIES.......................................5
6.1
Representations and Warranties by
KES................................5
6.2
Representations and Warranties by the
Company........................6
ARTICLE 7
INDEMNIFICATION......................................................6
7.1
Indemnification by
KES...............................................6
7.2
Indemnification by the
Company.......................................7
7.3
Indemnification Procedures for Third Party
Claims....................7
7.4
Indemnification Procedures for Non-Third Party
Claims................8
7.5
Exclusive
Remedy.....................................................8
7.6
Limitation of
Liability..............................................8
ARTICLE 8 RELATIONSHIP OF
PARTIES..............................................8
8.1
Independent
Contractor...............................................8
8.2
Confidentiality......................................................9
8.3
Work for
Hire........................................................9
ARTICLE 9
TERMINATION.........................................................10
9.1
Termination.........................................................10
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9.2
Effect of
Termination..............................................13
ARTICLE 10 NON-SOLICITATION;
NON-COMPETITION..................................13
10.1
Non-Solicitation of
Employees......................................13
10.2
Non-Competition....................................................14
10.3
Severability.......................................................14
10.4
Remedies...........................................................14
ARTICLE 11 DISPUTE
RESOLUTION.................................................14
11.1
Dispute
Resolution.................................................14
11.2
Submission to
Jurisdiction.........................................15
11.3
Waiver of Jury
Trial...............................................15
ARTICLE 12
MISCELLANEOUS......................................................15
12.1
Successors and
Assigns.............................................15
12.2
Governing
Law......................................................15
12.3
Notices............................................................15
12.4
No
Waiver..........................................................16
12.5
Severability.......................................................17
12.6
Entire Agreement; Modifications and
Amendments.....................17
12.7
Survival...........................................................17
12.8
Section Headings:
Interpretation...................................17
12.9
Public
Announcement................................................17
12.10
Counterparts.......................................................17
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AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (this
"AGREEMENT")
is made as of February 28, 2005 by and between KES ACQUISITION
COMPANY, LLC, a
Delaware limited liability company ("KES"), and PINNACLE STEEL,
LLC, a Delaware
limited liability company (the "COMPANY").
RECITALS
WHEREAS, KES and the Company are parties to that certain Management
Services Agreement (the "ORIGINAL AGREEMENT") dated as of September
3, 2003 (the
"EFFECTIVE DATE") with respect to the operation of that certain
steel
"mini-mill" located at U.S. Route 60 West, Ashland, Kentucky (the
"MILL"); and
WHEREAS, KES and the Company desire to amend and restate the
Original
Agreement on the terms provided herein.
NOW, THEREFORE, in consideration of the mutual promises and
undertakings
herein contained and for other good and valuable consideration, the
receipt and
sufficiency of which are hereby acknowledged, intending to be
legally bound
hereby, the parties hereto agree as follows:
ARTICLE 1
TERM
1.1 TERM. Subject in all cases to the termination provisions set
forth in
Section 9 below, the Company shall provide the services described
in this
Agreement during the period commencing on the Effective Date and
ending on
October 31, 2009 (such period, as extended in the manner described
below, the
"TERM"); provided, however, that the term of this Agreement shall
be extended
automatically by an additional twelve (12)-month period for each
fiscal year
(i.e., a year ending September 30 or such other date as may be
designated by KES
as the end of its fiscal year) during the initial five (5)-year
period of the
Original Agreement (i.e., for any fiscal year ending on or before
September 30,
2008) in which KES recognizes in excess of Fifteen Million Dollars
($15,000,000)
of EBITDA (defined in Section 4.1(b) below) (the "PROFIT TARGET").
For the
avoidance of doubt, but solely by way of example, unless this
Agreement is
terminated earlier in accordance with Section 9 below, if KES
recognizes in
excess of the Profit Target for one (1) fiscal year prior to and
including the
fiscal year ending September 30, 2008, the term of this Agreement
shall be
extended by one (1) fiscal year (i.e., from October 31, 2009 until
October 31,
2010); if KES recognizes in excess of the Profit Target for two (2)
fiscal years
prior to and including the fiscal year ending September 30, 2008,
the term of
this Agreement shall be extended by two (2) years (i.e., from
October 31, 2009
to until October 31, 2011); and so on such that if the KES
recognizes in excess
of the Profit Target for all five (5) of the fiscal years for the
five (5)-year
period ending September 30, 2008, the Term will be extended by five
(5) years.
Notwithstanding any other provision of this Agreement, in no event
shall the
Term extend beyond October 31, 2014 without the express written
consent of the
parties.
ARTICLE 2
SERVICES
2.1
ENGAGEMENT.
(a) KES hereby appoints and engages the Company to provide the
services
described in this Article 2 and in Article 3 below (the
"SERVICES"), and the
Company hereby accepts such appointment and engagement upon the
terms and
subject to the conditions provided for herein.
(b) Subject to the terms and conditions contained in this
Agreement, in
performing the Services and carrying out its duties hereunder, the
Company
agrees to use commercially reasonable efforts to perform and
provide the
Services in accordance with steel "mini-mill" industry practices.
The Company
agrees to provide the Services in a manner consistent with, and of
the same
nature as, the management services ordinarily provided by a
management company
appointed to operate, and by the general manager and business
advisors of a
facility of the type and size of, the Mill.
2.2
SERVICES DURING THE TERM.
(a) During the Term, the Company shall provide, at its expense,
employees
of the Company to serve as the General Manager of the Mill (the
"GM") and
provide oversight and general management of the operations of the
Mill (the
persons performing the oversight and general management services
shall be
referred to as the "ADVISORS").
(b) The Services shall include all of those services, activities
and
functions typically expected from a general manager of a
"mini-mill" steel
company, including, without limitation, (i) management of the daily
operations
of the Mill, (ii) hiring of all employees (on behalf of KES, as
employer of such
employees) required to operate the Mill, (iii) procurement, at the
expense of
KES, of all supplies and services required to operate the Mill,
(iv) marketing
functions for the Mill, (v) sales functions for the Mill, (vi)
obtaining, at the
expense of KES, all required governmental licenses and approvals to
operate the
Mill and (vii) generally all operational requirements of the Mill;
provided,
however, that the Company shall not be required to provide any
accounting or
financial functions for the Mill, which shall be provided by KES.
(c) From time to time, the Company may recommend to KES new
individuals to
fill the positions of GM or Advisors, which individuals shall have
similar
credentials and abilities to the individuals being replaced;
provided, however,
that any such replacements shall be subject to the approval of the
Board of
Managers of KES (the "BOARD") or its authorized representative (the
"BOARD
REPRESENTATIVE"), which approval shall not be withheld
unreasonably. In
undertaking the Services, the Company acknowledges and agrees that
the services
of the specific individuals providing the Services are unique and
valuable to
KES.
(d) The Company (including, without limitation, the GM and the
Advisors)
shall at all times be subject to the authority of the Board and the
Board
Representative.
(e) The Company shall report to the Board, the Board Representative
or a
designee of the Board Representative on a bi-weekly basis until
December 31,
2005. Thereafter, the Company shall report to the Board, the Board
Representative or a designee of the Board
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Representative on a monthly basis. Such reports will be in such
form and include
such items as the Board, the Board Representative or the designee
of the Board
Representative reasonably shall require, including, at a minimum,
sales,
backlog, revenues, expenses, net income and EBITDA.
(f) All revenues of the Mill shall be deposited into a lock-box
arrangement, or similar procedure to be designated from time to
time by KES. KES
shall provide, or cause a third party to provide, an outsourced
accounting
department (the "ACCOUNTING DEPARTMENT") to handle all accounting
functions of
the Mill; provided, however, that KES may from time to time (but is
not required
to) cause the Company, at the expense of KES, to hire one (1) or
more
individuals to serve as an employee of KES to assist the Accounting
Department
in fulfilling its functions. The Company shall submit all invoices
and check
requests to the Accounting Department in a manner such as to permit
the
Accounting Department to pay timely all such invoices. At the
request of the
Company, the arrangement contemplated by this Section 2.2(f) shall
be reviewed
from time to time to determine whether modifications are necessary
or advisable
(as determined by KES in its sole discretion) to permit more
efficient operation
of the Mill.
(g) Notwithstanding the foregoing, KES shall make available to the
Company
a petty cash supply at the Mill, in such amounts as reasonably are
requested by
the Company from time to time, to pay for incidental expenses of
the Mill.
ARTICLE 3
RESPONSIBILITIES; AUTHORITY; BOARD MEMBER
3.1 PRIMARY CLIENT. The Company acknowledges and agrees that,
during the
Term, it shall cause (i) the individual designated as GM to devote
his full-time
attention to fulfilling his duties and obligations as GM of the
Mill and (ii)
the individuals designated as Advisors to devote such time as
reasonably is
required to enable the GM and the Company to fulfill the
obligations of the
Company under this Agreement.
3.2 AUTHORITY. Each of the GM and the Advisors shall have the
executive
authority, responsibilities and duties typically held by a general
manager of a
company of a similar size and type as a company conducting the
operations of the
Mill; provided, however, that neither the Company, nor any
representative of the
Company shall have the authority to enter into any understanding,
commitment,
agreement, contract or obligation on behalf of KES except and to
the limited
extent provided to the Company by the Board or the Board
Representative (but not
the designee of the Board Representative) in writing from time to
time - it
being the expectation of the parties that KES shall grant each of
the GM and the
Advisors the authority to bind KES to contractual obligations
consistent with
(i.e., not exceeding) the budget of the Mill, prepared from time to
time by the
Company and approved by KES.
3.3 COMPANY BOARD MEMBER. The Company shall be entitled to
designate one
(1) person who is reasonably acceptable to KES Holdings, LLC
("HOLDINGS") to
serve as a member of the Board during the Term; provided, however,
that such
person is qualified to serve in such position, as determined by KES
in its
reasonable discretion.
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ARTICLE 4
PAYMENTS
4.1 SERVICES FEES. In consideration of the Services, KES agrees to
pay the
Company the following consideration:
(a) MANAGEMENT FEE. During the Term, by the tenth (10th) business
day of
each month (provided, however, that the first such payment (i.e.,
the payment
for September, 2003) shall be due and payable on or before
September 25, 2003),
an aggregate amount (the "MANAGEMENT FEE") equal to Fifty-Eight
Thousand Three
Hundred Thirty-Three Dollars and Thirty-Three Cents ($58,333.33)
per month.
(b) MANAGEMENT INCENTIVE FEE. An amount (the "MANAGEMENT INCENTIVE
FEE"),
for each fiscal year during the Term, commencing with the fiscal
year ending
September 30, 2004 and pro-rated for any fiscal year which is less
than a full
fiscal year, equal to Sixteen and Six-Tenths Percent (16.6%) of the
amount by
which EBITDA for such fiscal year exceeds Six Million Dollars
($6,000,000);
provided, however, that for the period of January 1, 2005 to
September 30, 2005,
the Management Incentive Fee shall be equal to Sixteen and
Six-Tenths Percent
(16.6%) of the amount by which EBITDA for such fiscal period
exceeds Four
Million Five Hundred Thousand Dollars ($4,500,000). For purposes of
this
Agreement, "EBITDA" means, for any period of computation thereof,
the sum of (i)
KES' Net Income (defined below) for such period, plus (ii) the
aggregate amount
(without duplication) of (A) taxes imposed on, or measured by,
income or excess
profits, (B) interest charges for such period accrued on or with
respect to all
indebtedness or other obligations of KES for money borrowed,
including, without
limitation, capitalized lease obligations, letter of credit
reimbursement
obligations and guaranty fees, and (C) depreciation and
amortization for such
period, in each case accrued for such period by KES. For purposes
of this
Agreement "NET INCOME" means, with respect to KES for any period of
computation
thereof, the net income (or loss) of KES for such period; provided,
however,
that the following items shall be excluded when determining net
income: (i) any
item of gain or loss resulting from the sale, conversion or other
disposition of
plant, property, and equipment, (ii) gains or losses on the
acquisition,
retirement, sale or other disposition of equity interests in and
other
securities of KES, (iii) any write up of any asset, (iv) any other
net gains or
losses of an extraordinary nature as determined in accordance with
United States
Generally Accepted Accounting Principles ("GAAP"), consistently
applied and (v)
any earnings attributable to the amortization of negative good
will. The audited
financial statements of KES shall be used to determine EBITDA. Any
amount owed
as a Management Incentive Fee in any year will be paid within ten
(10) business
days after the completion of the audit of KES' books for such
fiscal year.
Notwithstanding any other provision herein to the contrary, KES
shall exercise
its commercially reasonable efforts to complete its audit as soon
as practicable
following the end of each fiscal year (which, in no event shall be
construed as
being prior to the ninetieth (90th) calendar day following the end
of the fiscal
year as to which audit pertains).
4.2 EXPENSES. Except to the extent otherwise provided in this
Agreement,
the Company shall be responsible for all out-of-pocket costs and
expenses
incurred by the Company in connection with the performance of its
obligations
under this Agreement and KES shall be responsible for all expenses
associated
with operation of the Mill. In addition, the Company acknowledges
that KES has
no obligation to reimburse or otherwise compensate the Company
4
for any services provided or expenses incurred by the Company (or
any of its
employees or representatives) at any time prior to the date of the
Original
Agreement. Without limiting the foregoing, the parties agree as
follows:
(A) The Company shall be responsible for payment of all expenses
incurred
by the Company for travel to and from the Mill and for the costs of
housing at
the Mill (e.g., hotels or an apartment in Ashland, Kentucky) in
excess of
Fifteen Thousand Dollars ($15,000) per year (or such greater amount
as may be
agreed to in writing by KES or the Board Representative (but not
the designee of
the Board Representative) from time to time in writing, which
writing
specifically references this Agreement); and
(B) KES shall be responsible for the payment of travel and lodging
expenses
incurred by the Company in connection with the performance of the
Services
(e.g., for travel or lodging expenses associated with visiting
customer or
supplier sites, inspecting supplies, etc.).
ARTICLE 5
INSURANCE
5.1 INSURANCE. During the Term, from time to time and at the
expense of
KES, the Company shall consult with one (1) or more insurance
brokers (the
"BROKERS") and following such consultation, shall recommend to KES
insurance
types and coverages appropriate and customary for the Mill (as
determined after
consultation with such Brokers) and facilitate KES obtaining and
maintaining in
full force and effect insurance coverage with respect to the Mill.
Such
insurance shall, in all events, be satisfactory to KES (in its
absolute
discretion) and may include, at the discretion of KES (but without
limitation):
(i) commercial general liability insurance, (ii) products/completed
operations
hazard insurance, (iii) contractual liability coverage, (iv)
workers'
compensation and employer's liability insurance, (v) unemployment
insurance,
(vi) umbrella or excess insurance, which insurance may partially
satisfy the
limits of primary insurance specified above and (vii) such other
insurance as
the may be recommended by the Company (after consultation with such
Brokers)
that is satisfactory to KES (in its absolute discretion). All such
insurance
policies shall be underwritten by insurance companies satisfactory
to KES (at
its absolute discretion), shall have deductible amounts, coverage
limits and
exclusions that are satisfactory to KES (as its absolute
discretion), and shall
name Holdings as an additional insured and the loss payee. For the
avoidance of
doubt, the parties acknowledge and agree that KES may elect to have
no insurance
with respect to the Mill.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
6.1 REPRESENTATIONS AND WARRANTIES BY KES. KES represents and
warrants
that:
(a) KES is a limited liability company duly organized and validly
existing
under the laws of the state of Delaware. KES has all necessary
limited liability
company power and authority to execute and deliver this Agreement
and to perform
its obligations hereunder. The execution and delivery of this
Agreement, and the
performance of KES' obligations hereunder, have been duly
authorized by all
necessary action on the part of KES and this Agreement
5
constitutes the legal, valid and binding obligation of KES,
enforceable against
it in accordance with its terms.
(b) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will conflict
with, or
result in a breach or default of any of the terms, conditions or
provisions of
the certificate of formation or limited liability company agreement
(or other
similar governing documents) of KES or any law or any regulation,
order, writ,
injunction, license, franchise or decree of any court or
governmental
instrumentality or agency or of any agreement or instrument to
which KES is a
party or by which it is bound.
6.2 REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents
and warrants that:
(a) The Company is a limited liability company duly organized and
validly
existing under the laws of the state of Delaware. The Company has
all necessary
corporate power and authority to execute and deliver this Agreement
and to
perform its obligations hereunder. The execution and delivery of
this Agreement,
and the performance of the Company's obligations hereunder, have
been duly
authorized by all necessary corporate action on the part of the
Company and this
Agreement constitutes the legal, valid and binding obligation of
the Company,
enforceable against it in accordance with its terms.
(b) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will conflict
with, or
result in a breach or default of any of the terms, conditions or
provisions of
the certificate of formation or limited liability company agreement
(or similar
documents) of the Company or any law or any regulation, order,
writ, injunction,
license, franchise or decree of any court or governmental
instrumentality or, or
agency or of any agreement or instrument to which the Company is a
party or by
which it is bound.
ARTICLE 7
INDEMNIFICATION
7.1 INDEMNIFICATION BY KES. KES shall indemnify and save and hold
the
Company, its officers and directors (including in their capacities
as GM and
Advisors during the Term), security holders, employees, consultants
and agents
(individually, a "COMPANY INDEMNIFIED PARTY" and collectively the
"COMPANY
INDEMNIFIED PARTIES") harmless from and against any and all
damages,
liabilities, losses, costs and expenses (including, without
limitation,
reasonable attorney's fees, court costs and other out-of-pocket
expenses
incurred in investigating, preparing or defending the foregoing)
(collectively,
"LOSSES") resulting from, arising out of, or in connection with,
this Agreement
or the acceptance or performance of any duties or rendering of any
Services
performed by any Company Indemnified Party under this Agreement,
provided,
however, that KES shall have no liability hereunder in respect of
any act or
omission of a Company Indemnified Party caused by such Company
Indemnified
Party's willful breach of this Agreement in any material respect,
reckless
disregard of its obligations and duties under this Agreement, or
willful
misconduct, gross negligence or willful malfeasance in the
performance of or in
connection with providing the Services.
6
7.2 INDEMNIFICATION BY THE COMPANY. The Company shall indemnify and
save
and hold KES and Holdings and the officers and directors, managers,
security
holders, employees, consultants and agents of KES and Holdings
(individually, a
"KES INDEMNIFIED PARTY" and collectively the "KES INDEMNIFIED
PARTIES," and
together with the Company Indemnified Parties, the "INDEMNIFIED
PARTIES")
harmless from and against any and all Losses resulting from or
arising out of
the Company's willful breach of this Agreement in any material
respect, reckless
disregard of its obligations and duties under this Agreement, or
willful
misconduct, gross negligence or willful malfeasance in the
performance of or in
connection with providing the Services.
7.3 INDEMNIFICATION PROCEDURES FOR THIRD PARTY CLAIMS. In order for
