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 28, 1996
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 (x) No ( )
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
statements 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 December 12, 1996: $23,887,821.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of December 12, 1996:
4,628,099 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 dated December 12, 1996 are incorporated herein by reference
in response to items 10 through 13 in Part III of this report.
<PAGE>
TABLE OF CONTENTS
Page
PART I .............................................................. 4
Item 1. Business .............................................. 4
Item 2. Properties ............................................ 10
Item 3. Legal Proceedings ..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ... 10
PART II ............................................................. 12
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ................................... 12
Item 6. Selected Financial Data ............................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 13
Item 8. Financial Statements and Supplementary Data ........... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 18
PART III ............................................................ 19
Item 10. Directors and Executive Officers of the Registrant .... 19
Item 11. Executive Compensation ................................ 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management ................................. 19
Item 13. Certain Relationships and Related Transactions ........ 19
PART IV ............................................................. 20
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................... 20
SIGNATURES .......................................................... 23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ......................... 24
<PAGE>
KENTUCKY ELECTRIC STEEL, INC.
PART I
Item 1. Business
General
Kentucky Electric Steel, Inc. was incorporated in Delaware in August,
1993. On October 6, 1993, Kentucky Electric Steel, Inc. purchased the
assets of Kentucky Electric Steel Corporation, a wholly owned subsidiary of
NS Group, Inc. The operating results included in this report represent the
operations of Kentucky Electric Steel, Inc. (the Company"). The Company's
operations use the same facilities and market to the same customers as its
predecessor.
The Company owns and operates a steel mini-mill near Ashland,
Kentucky. As a mini-mill, 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 leaf-spring suspension,
cold drawn bar conversion and truck trailer support beam markets.
Approximately 80% of the Company's sales are of SBQ Bar Flats.
The Company has completed a capital expenditure program ("Project
'94") which expanded the Company's casting, rolling and finishing capacity
and increased the size range of products the Company can produce. The
Company has also substantially completed the capital expenditure program to
install a ladle metallurgy facility (the "Ladle Metallurgy Project"), which
began start-up operations in the fourth quarter of fiscal 1996. The ladle
metallurgy facility removes the refining cycle from the electric arc
furnace, thereby increasing total melting capacity.
The Company manufactures over 2,600 different SBQ 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 that are required by these
markets. Completion of Project '94 enabled the Company to increase the
size range of products offered from two inches in thickness and eight
inches in width to three inches in thickness and twelve inches in width.
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 profitably supply products for special customer needs. Project '94
increased the range of thickness and width of the Company's products,
thereby enabling the Company to expand its business primarily by increasing
the number of products it sells to existing customers and, to a lesser
degree, the development of new customers.
Manufacturing Operations
The Company recycles steel by melting steel scrap in two 50-ton
electric arc furnaces and adding a variety of alloys 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 addition of the fourth strand, as part of
Project '94, increased the maximum cross-section from 38 square inches and
allows the Company to use 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 completion of Project '94 increased the Company's casting, rolling
and finishing capacity. The Company currently is able to finish more
product in its rolling operations than it is capable of producing with its
existing melting facilities. As described below, the Company began start-
up operations of the Ladle Metallurgy Facility in the fourth quarter of
fiscal 1996, which is designed to increase melting capacity toward the
Company's goal of balancing its operations at approximately 400,000 tons a
year. Due to start-up problems, the caster fire, and melting capacity
limitation during fiscal 1996, the production capacity of finished products
from the Company's rolling mill was approximately 260,000 tons. The
Company sold 225,800 tons of finished goods in fiscal 1996 which
constitutes 87% of its capacity.
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 $7.1 million, which includes $10.5 million expended in fiscal year
1996.
The Company has substantially completed the Ladle Metallurgy Project
and began start-up operations in the fourth quarter of fiscal 1996. The
ladle metallurgy facility removes the refining cycle from the electric arc
furnace, thus increasing total melting capacity toward the Company's
ultimate goal of approximately 400,000 tons per year.
The Board of Directors has approved the fiscal 1997 capital
expenditure plan for approximately $5.0 million, which includes completion
of the Ladle Metallurgy Project, environmental compliance projects, and
various equipment upgrades and replacements for all departments.
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 trailers
manufacturers and steel service centers.
In general, the size of markets served by the Company is such that
comprehensive published industry data is not available. Therefore, much of
the information relating to the size of steel bar markets has been
estimated by the Company based upon its knowledge of the industry. During
the year ended September 28, 1996, the Company's sales to leaf-spring
suspension customers decreased, while sales to cold drawn bar converters
and steel service centers increased. The following table presents, for
fiscal 1995 and 1996, the percentage of the Company's net sales by market:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Leaf-spring suspension ......... 32.0% 25.3%
Cold drawn bar converters ...... 15.7% 19.3%
Steel service centers .......... 13.9% 18.0%
Truck trailers ................. 12.3% 11.3%
Miscellaneous .................. 26.1% 26.1%
Totals ..................... 100.0% 100.0%
</TABLE>
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. The Company believes the total leaf-spring
domestic market is approximately 450,000 tons annually, and that the
Company's share of this market is approximately 15%. The Company believes
that it is a leading supplier to manufacturers of leaf-spring suspensions
for heavy trucks, vans, trailers, and heavy equipment.
Cold Drawn Bar Converters Market. The Company sells its expanded range of
SBQ hot rolled bar products to cold drawn bar manufacturers. KESI's
product range, 1/4" through 3" thickness and 2" through 12" 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 carbide die. The drawing reduces the cross section, improves surface and
internal properties, and produces a more exacting tolerance bar. The end
product is sold directly to original equipment manufacturers and through
distributors, with the majority being sold by the steel service centers.
The Company estimates that the domestic cold drawn bar market for bar flats
is approximately 200,000 tons annually, and that the Company's share of
this market is approximately 20%.
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. The majority of its sales consist of
the less competitive heavier section sizes and hard to make grades.
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. Although the Company has not focused its sales efforts on MBQ Bar
Flats, attention to select sizes of MBQ Bar Flats has provided good balance
for the Company's manufacturing facilities. Within the MBQ Bar Flat
market, the Company has concentrated its sales on specialty items as
opposed to higher volume commodity products. Targeted opportunities within
these markets match the Company's planned expansion described in "Business
- -- Capital Improvements and Expansion."
Customers
The Company sells to over 350 customers. Four subsidiaries of one
customer, which manufacture different products, represented approximately
11.7% of sales for fiscal 1996. No other customer accounted for more than -
10% of sales in fiscal 1996. 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 8.8%
in fiscal 1996. These sales consisted primarily of leaf-spring suspension
products shipped to Canada, Mexico, and South America.
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 performed by seven in-house sales
representatives and seven 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 five 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 one North American mill.
The Company believes that the principal competitive factors effecting its
business are price, quality, service, and geographic location.
Backlog and Seasonality
As of September 28, 1996, the Company had firm orders for
approximately 48,000 tons representing approximately $21.4 million in
sales, as compared with approximately 57,000 tons representing
approximately $26.8 million in sales, at September 30, 1995.
The Company operates on a continuous basis with only occasional
scheduled shutdowns for heavy maintenance work. The Company's operations
are not otherwise 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 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. One scrap dealer supplied
approximately 47% of the Company's scrap in fiscal 1996. In an attempt to
insure an adequate source of raw materials, however, the Company has
identified, inspected, and purchased scrap from over 20 dealers.
The Company's manufacturing processes consume large amounts of
electricity, which the Company purchases from Kentucky Power Company. An
abundant regional supply of coal, used in producing electricity, helps keep
the Company's energy costs relatively low. Since November 1987, the
Company has operated its facilities under an interruptible power contract
with Kentucky Power Company, which is terminable by either party upon
twelve months notice. Under this agreement the Company may use electricity
at any hour of the day or night, provided that Kentucky Power Company may
impose a surcharge on the Company if it exceeds certain specified levels of
use. The agreement also provides that the electricity supplier may
interrupt the Company's use during times of peak demand, although it is
required to provide a certain amount of firm contract capacity to prevent
equipment damage during interrupted periods. The Company believes that
there is sufficient electricity available for its current and foreseeable
levels of production.
Employees
As of September 28, 1996, the Company employed 447 people,
approximately 77% of whom are members of the United Steelworkers of
America. The Company's current five-year collective bargaining agreement
expires in September 1998. The Company believes that its wage rates and
benefits are competitive with other mini-mills.
The Company offers no postretirement employee health care benefits or
other benefit program subject to accounting under the provisions of
Statement of Financial Accounting Standards No. 106 -- "Employers'
Accounting for Postretirement Benefits other than Pensions" which became
effective in fiscal 1994.
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 they produce certain types of dust containing lead,
chromium and cadmium ("Furnace Dust"). The Company currently collects and
handles Furnace Dust through a contract with Horsehead Resource Development
Company, Inc. ("HRD"), which reclaims from the waste dust certain materials
for reuse and arranges for further recycling or disposal of the residual
material. Some of the Furnace Dust generated by the Company and shipped to
HRD was processed at HRD's Palmerton, Pennsylvania facility (the "Palmerton
Site"), which is the subject of an enforcement action brought by the United
States Department of Justice and the Pennsylvania Department for
Environmental Resources. Although on August 24, 1995 HRD, the Department
of Justice, and USEPA issued a joint press release announcing a settlement
of the enforcement action, HRD may incur substantial costs in connection
with the remediation of the Palmerton Site and compliance with the
settlement agreement and environmental laws and regulations. If HRD were
to become insolvent, the Company could incur liability with respect to the
remediation of the Palmerton Site or other HRD disposal sites. In
addition, the cost of reclaiming or disposing of Furnace Dust may increase
substantially in the future.
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.
Prior to 1985, Furnace Dust was stored by a prior owner at the
Company's mini-mill facility. Although this storage area was closed in
1985 and the stored Furnace Dust was removed, amendments to the Resource
Conservation and Recovery Act ("RCRA") and federal regulations currently
require that storage units, such as the Furnace Dust storage area, which
were closed by removal ("clean closure") either obtain post-closure permits
or demonstrate that the closure is equivalent to current standards. The
U.S. Environmental Protection Agency has notified the Company, which has in
turn notified the prior operators of the facility, that it must be
demonstrated that the prior closure meets RCRA current standards or a post
closure permit must be obtained. The Company believes the costs associated
with demonstrating clean closure equivalency are the responsibility of the
mini-mill's prior operator. Nevertheless, there can be no assurance that
the Company will be successful in seeking reimbursement from the prior
operator or will not otherwise incur expenses in connection with the
closure of the Furnace Dust storage site.
Between 1981 and 1983, a prior operator of the Company's mini-mill
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 for disposal at the Cooksey Landfill or such other
sites in the acquisition agreement pursuant to which the Company acquired
its mini-mill in 1986. Though 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, the Company could incur
clean up expenses with respect to the Cooksey Landfill or such other sites
if such sites are listed as a Kentucky "uncontrolled site" or federal
superfund site and the Company is not successful in obtaining full
indemnification from the prior operator of its mini-mill.
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. The Company will
continue to monitor these evolving laws and regulations and will plan and
budget, as appropriate, for any such additional capital and operating
expenditures that may be required to upgrade or install new or additional
pollution control equipment and secure additional or modified permits.
There can be no assurance that evolving federal and state environmental
requirements or discovery of unknown conditions will not require the
Company to make material expenditures in the future or affect the Company's
ability to obtain permits for its existing operations or future expansion.
Item 2. Properties
The Company's operations are located on approximately 122 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 planned 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 28, 1996.
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 6, 1997.
The names, ages and positions of all of the executive officers of the
Registrant as of September 28, 1996 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 shareholders. 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, 52, 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. Prior to November 1990, Mr. Hanebuth was a Vice President of ELCOR
Corporation, a manufacturer of roofing and industrial products, and
President of its wholly-owned subsidiary, Chromium Corporation, a
remanufacturer of diesel engine components. Mr. Hanebuth has 17 years
management experience in the steel industry. Mr. Hanebuth is a director of
Ashland Bankshares, Inc., the holding company of the Bank of Ashland, and
Ashland Hospital Corporation, which operates King's Daughters' Medical
Center.
William J. Jessie, 46, 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, 52, 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. From July 1988 to November 1990, Mr. Harrison was general
sales manager with Lorin Industries, an aluminum coil anodizer. Mr.
Harrison has over 26 years of sales experience in the steel industry.
William H. Gerak, 51, 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
22 years of human resource and administrative experience.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The Company's common stock trades 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 Market:
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 11-1/8 $ 7-3/4 $ 10 $ 7-3/4
Second Quarter 10 8-1/4 8-11/16 6-5/8
Third Quarter 9-3/4 8-3/4 8-1/2 6-7/8
Fourth Quarter 11-1/4 8-7/8 8-1/2 6-1/2
</TABLE>
On December 12, 1996 there were approximately 2,400 beneficial owners
of the Company's common stock.
The Company currently intends to retain all earnings to support the
development of its business, although the paying of dividends on its common
stock is periodically reviewed. Certain of the Company's debt instruments
currently restrict the payment of dividends by Kentucky Electric Steel,
Inc. Specifically, the debt instruments restrict payment of dividends to
the amount available in a "Restricted Payment Pool" as defined in the
senior note agreement and amended bank credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 5 of the Notes to 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 28, 1996 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.
<TABLE>
<CAPTION>
Year Ended
September September September September September
26, 1992 25, 1993 24, 1994 30, 1995 28, 1996
<S> <C> <C> <C> <C> <C>
(In thousands, except share data)
Income Statement Data:
Net sales .............. $80,438 $90,547 $102,629 $107,402 $ 98,320
Cost of goods sold ..... 66,669 75,884 86,892 91,642 89,783
------ ------ ------- ------- -------
Gross profit ......... 13,769 14,663 15,737 15,760 8,537
Selling and admini-
strative expenses .... 6,065 6,069 6,963 7,696 7,391
------ ------ ------ ------ ------
Operating income ..... 7,704 8,594 8,774 8,064 1,146
Interest income from
NS Group, Inc. - net 322 686 30 - -
Interest expense ....... (552) (402) (586) (658) (1,453)
Interest income and
other ................ 16 12 164 57 31
Gain on involuntary con-
version of equipment - - - - 369
------ ------ ------ ------ ------
Income before income
taxes ............... 7,490 8,890 8,382 7,463 93
Income taxes ........... 2,919 3,374 3,167 2,812 35
------ ------ ------ ------ ------
Net Income ......... $ 4,571 $ 5,516 $ 5,215 $ 4,651 $ 58
Net income
per common share ..... $ 1.02 $ 1.23 $ 1.06 $ .95 $ .01
Weighted average shares
outstanding .........4,500,000 4,500,000 4,908,158 4,905,456 4,806,161
Balance Sheet Data:
Working capital ........ $24,654 $13,145 $21,553 $10,324 $14,963
Total assets ........... 39,711 46,259 56,870 72,625 78,433
Long-term debt (1) ..... 4,586 2,748 9,001 7,287 20,000
Shareholders' equity ... 24,928 15,134 34,276 38,097 37,110
(1) Net of current portion.
</TABLE>
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
Kentucky Electric Steel, Inc. (KESI) was formed to acquire the assets
and assume the liabilities of Kentucky Electric Steel Corporation (KESC), a
wholly owned subsidiary of NS Group, Inc. (NS Group). KESI was capitalized
in an initial public offering of its common stock on October 6, 1993 in
which 4,500,000 shares were issued. As used herein, "the Company" refers
to Kentucky Electric Steel, Inc. and its predecessor, Kentucky Electric
Steel Corporation, with respect to the applicable periods.
The Company manufactures special bar quality alloy and carbon steel
bar flats to precise customer specification for sale in a variety of niche
markets. As a result, while the Company's business is cyclical in nature,
its financial
results have been less volatile than those of the domestic steel industry
in general. The Company has historically generated sufficient cash flow to
meet its capital expenditure and debt service requirements.
The Company's net sales increased from $90.5 million in fiscal 1993 to
$102.6 million in fiscal 1994, and $107.4 million in fiscal 1995. Fiscal
1996 net sales decreased to $98.3 million. The increase in net sales for
fiscal 1994 was attributed to significant increases in raw material prices
that were, over a period of time, passed on to the customer. The increase
in net sales for fiscal 1995 is attributed to an increase in average
selling price and also to a change in product mix, with lower priced leaf-
spring material comprising a smaller percent of total shipments. The
decrease in net sales for fiscal 1996 is primarily attributed to a 7.4%
decline in shipments, which has resulted from continued production problems
encountered in start-up of the new finishing facilities during the first
half of fiscal 1996, the caster fire during the second quarter, and the
start-up of the ladle metallurgy facility during the fourth quarter of
fiscal 1996, combined with softening demand in certain markets. During
these periods, the Company has focused its efforts on increasing its market
share with existing customers and expanding its customer base in higher
margin applications.
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.
<TABLE>
<CAPTION>
Year Ended
September September September
24, 1994 30, 1995 28, 1996
<S> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0%
Cost of goods sold ................ 84.7 85.3 91.3
----- ----- -----
Gross profit ...................... 15.3 14.7 8.7
Selling and administrative
expenses ........................ 6.8 7.2 7.5
Operating income .................. 8.5 7.5 1.2
Interest expense .................. (.6) (.6) (1.5)
Interest income and other ......... .2 - -
Gain on involuntary conversion
of equipment .................... - - .4
----- ----- -----
Income before income taxes ........ 8.1 6.9 .1
Income taxes ...................... 3.1 2.6 -
----- ----- -----
Net income ........................ 5.0% 4.3% .1%
</TABLE>
Year Ended September 28, 1996 Compared with Year Ended September 30, 1995
Net Sales. Net sales for fiscal 1996 decreased by $9.1 million (8.5%)
to $98.3 million from $107.4 million for fiscal 1995 due to a decline in
shipments and decrease in average selling price. Total shipments for
fiscal 1996 were approximately 225,800 tons, down 7.4% from fiscal 1995.
The average selling price per ton decreased by 1.1% in 1996. The decline
in shipments has resulted from the continued production problems
encountered with the start-up of the new finishing facilities during the
first half of fiscal 1996, a caster fire during the second quarter and the
start-up of the ladle metallurgy facility during the fourth quarter of
fiscal 1996, combined with softening demands in certain markets.
Cost of Goods Sold. Cost of goods sold for fiscal 1996 decreased $1.8
million (1.9%) to $89.8 million from $91.6 million for fiscal 1995. As a
percentage of net sales, cost of goods sold increased from 85.3% for fiscal
1995 to 91.3% in fiscal 1996. The increase in cost of goods sold as a
percentage of net sales is primarily attributed to an increase in per ton
conversion costs and additional depreciation expense. The problems
associated with the start-up of the new finishing equipment during the
first half of fiscal 1996, the ladle metallurgy facility during the fourth
quarter of fiscal 1996 and, to a lesser extent, the effect of February's
caster fire negatively impacted productivity and increased per ton
conversion cost. In addition, conversion costs were higher due to
additional depreciation related to the completion of the capital projects.
Gross Profit. As a result of the above, gross profit for fiscal 1996
decreased by $7.3 million (45.8%) from $15.8 million in fiscal 1995 to $8.5
million in fiscal 1996. As a percentage of net sales, gross profit
decreased from 14.7% in fiscal 1995 to 8.7% in fiscal 1996.
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 1996 decreased $.3 million
(4.0%) to $7.4 million from $7.7 million for fiscal 1995. As a percentage
of net sales such expenses increased from 7.2% for fiscal 1995 to 7.5% for
fiscal 1996. The selling and administrative expenses reflect a decrease in
incentive compensation (due to the decrease in pre-tax income) and a
decrease in shipping wages (due to reorganization of the Shipping
Department, in connection with the completion of the capital expansion
plan). These decreases have been partially offset by an increase in the
provision for uncollectible accounts. The increase in selling and
administrative expenses as a percentage of net sales was primarily
attributed to the decrease in shipments, resulting in lower net sales for
fiscal year 1996.
Operating Income. For the reasons described above, operating income
decreased by $7.0 million (85.8%) from $8.1 million in fiscal 1995 to $1.1
million in fiscal 1996. As a percentage of net sales, operating income
decreased from 7.5% in fiscal 1995 to 1.2% in fiscal 1996.
Interest Expense. Interest expense increased by $.8 million to $1.5
million in fiscal 1996 from $.7 million in fiscal 1995, net of interest
capitalized of $262,000 and $523,000, respectively. The increase in
interest expense is attributed to the additional debt incurred in financing
the capital expansion projects and the reduction in capitalized interest
due to the completion and start-up of Project '94.
Gain on Involuntary Conversion of Equipment. As a result of the
caster fire, the Company received insurance proceeds of $912,000 for the
replacement cost of the equipment destroyed which had a net book value of
$543,000. The excess of the replacement cost over the net book value of
the equipment destroyed resulted in a gain of approximately $369,000.
Net Income. As a result of the above, net income decreased by $4.6
million from $4.7 million in fiscal 1995 to $58,000 in fiscal 1996. As a
percentage of net sales, net income decreased from 4.3% in fiscal 1995 to
.1% in fiscal 1996.
Year Ended September 30, 1995 Compared with Year Ended September 24, 1994
Net Sales. Net sales for fiscal 1995 increased by $4.8 million (4.7%)
to $107.4 million from $102.6 million for fiscal 1994 due to an increase in
average selling price and change in product mix. The average selling price
per ton increased 7.9% in 1995. The change in product mix reflects the
decrease in sales of lower priced leaf-spring material during fiscal 1995.
Total shipments for fiscal 1995 were 243,900 tons, down 3.1% over fiscal
1994. This decrease is largely attributable to the 12.1% decline in fiscal
1995 fourth quarter shipments, resulting from production problems
encountered with the start-up of the new finishing facilities.
Cost of Goods Sold. Cost of goods sold for fiscal 1995 increased $4.7
million (5.5%) to $91.6 million from $86.9 million for fiscal 1994. As a
percentage of net sales, cost of goods sold increased from 84.7% for fiscal
1994 to 85.3% in fiscal 1995. The increase in cost of goods sold as a
percentage of net sales is primarily attributed to higher conversion costs
per ton. The higher conversion costs resulted from lower production,
reflecting the problems encountered with the start-up of the new equipment
and the additional depreciation on the new equipment.
Gross Profit. As a result of the above, gross profit for fiscal 1995
increased slightly to $15.8 million from $15.7 million in fiscal 1994. As
a percentage of net sales, however, gross profit decreased from 15.3% in
fiscal 1994 to 14.7% in fiscal 1995.
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 1995 increased $733,000
(10.5%) to $7.7 million from $7.0 million for fiscal 1994. As a
percentage of net sales, such expenses increased from 6.8% for fiscal 1994
to 7.2% for fiscal 1995. The increase in selling and administrative
expenses is largely attributed to increases in incentive compensation,
shipping, repairs and maintenance cost, increases in license, franchise and
miscellaneous taxes (due to a non-recurring refund received in the prior
year) and an increase in the provision for uncollectible accounts. The
increases are partially offset by the elimination of corporate charges from
the Company's former parent, a decrease in workers compensation expense and
decreases in miscellaneous supplies and other.
Operating Income. For the reasons described above, operating income
decreased by $.7 million (8.1%) from $8.8 million in fiscal 1994 to $8.1
million in fiscal 1995. As a percentage of net sales, operating income
decreased from 8.5% in fiscal 1994 to 7.5% in fiscal 1995.
Interest Expense. Interest expense increased by $72,000 to $658,000
in fiscal 1995 from $586,000 in fiscal 1994, net of interest capitalized of
$523,000 and $87,000, respectively. The increase is attributed to the
additional debt incurred in financing the capital expansion project.
Net Income. As a result of the above, net income decreased by
$564,000 (10.8%) from $5.2 million in fiscal 1994 to $4.7 million in fiscal
1995. As a percentage of net sales, net income decreased from 5.0% in
fiscal 1994 to 4.3% in fiscal 1995.
Liquidity and Capital Resources
Cash flows from operating activities amounted to $12.7 million, $5.3
million, and $3.9 million in fiscal 1994, 1995 and 1996, respectively. In
fiscal 1994, in connection with the initial public offering, the Company
settled its $5.7 million receivable from NS Group as partial payment of a
$15.4 million dividend to NS Group. The $5.7 million decrease in the
receivable from NS Group is included in cash flows from operating
activities in fiscal 1994. Cash flows from operating activities before
changes in the receivable to NS Group were $7.0 million in fiscal 1994.
Fiscal 1995 operating cash flows were negatively impacted by $3.1
million increase in inventories. The increase in inventories reflected the
Company's build-up of billet inventory in anticipation of the new equipment
being ramped-up to projected production levels. The increase in
inventories also reflected the increase in conversion costs associated with
the start-up of the new equipment. Partially offsetting this was a $1.6
million increase in cash flows from operating activities resulting from the
combined reduction in accounts receivable and increase in accounts payable,
which resulted from efforts to minimize working capital requirements.
Fiscal 1996 operating cash flows reflect the lower earnings which have
partially been offset by additional depreciation and a reduction in
accounts receivable and inventories. The additional depreciation is
related to the equipment placed in service during the latter part of the
third quarter of fiscal 1995. The decrease in accounts receivable reflects
the lower average net selling price for shipments during the fourth quarter
of fiscal 1996 as compared to the fourth quarter of fiscal 1995. The
decrease in inventories is primarily attributed to a decrease in finished
goods inventory, which has partially been offset by the increase in
carrying value from the increase in conversion costs.
Cash flows used by investing activities consist of capital
expenditures, net of capital expenditures payables, of $6.0 million, $14.9
million, and $11.2 million in fiscal 1994, 1995, and 1996, respectively.
The decrease in capital expenditures in fiscal 1996 is primarily due to the
completion of Project '94 in fiscal 1995, which has been partially offset
by expenditures on the Ladle Metallurgy Project in fiscal 1996. Cash flows
from investing activities for fiscal 1996 also include the proceeds from
the involuntary conversion of equipment of $.9 million.
Cash flows used in financing activities amounted to $6.2 million in
fiscal 1994. The $6.2 million in fiscal 1994 is comprised of $5.8 million
in principal payments on long-term debt and a $15.4 million dividend paid
to NS Group, offset by $12.0 million proceeds from long-term debt
borrowings and the net proceeds from the initial public offering of $3.0
million.
Cash flows provided from financing activities amounted to $8.4 million
and $6.1 million in fiscal 1995 and 1996, respectively. The $8.4 million
in fiscal 1995, represents $11.1 million in advances on the Company bank
credit facility offset by $1.8 million principal payments on long-term debt
and $.9 million used for purchases of treasury stock. The $6.1 million in
fiscal 1996, reflects net repayments of $3.6 million on the Company's line
of credit, $9.0 million repayment on long-term debt, and $1.3 million for
purchases of treasury stock, offset by the proceeds of $20.0 million of
unsecured senior notes.
Working capital at September 28, 1996, was $15.0 million as compared
to $10.3 million at September 30, 1995. The current ratio was 1.7 to 1.0
at September 28, 1996 as compared to 1.4 to 1.0 at September 30, 1995. The
increase in working capital and current ratio is primarily attributed to
the Company refinancing its debt through the private placement of $20.0
million in unsecured senior notes, which require no principal payments for
five years. The remaining proceeds from the issuance were utilized to pay
down the Company's bank credit facilities.
The Company's primary ongoing cash requirements are for the payment of
retainage on Project '94, which expanded the Company's casting, rolling,
and finishing capacity, and on the Ladle Metallurgy Project, which is
expanding the melting capacity. The two sources for the Company's
liquidity are internally generated funds and its $24.5 million bank credit
facility. The Company had $7.5 million in borrowings outstanding as of
September 28, 1996 under that facility. The Company believes that the bank
credit facility and internally generated funds will be sufficient to
finance the capital projects and for its ongoing cash needs through the
next twelve-month period.
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 prices are frequently influenced
by supply and demand factors as well as general economic conditions. In
contrast, finished product prices are influenced by nationwide economic
trends 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 --
Employees," "Competition and Other Market Factors," "Raw Materials" and
"Manufacturing Operation."
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 Financial Statements of the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules listed 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
The specified information required by this item is incorporated by
reference to the information under the heading "Certain Transactions" in
the Proxy Statement as filed with the Commission.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Index to Statements Covered by Report of Independent Public
Accountants
The following financial statements of Kentucky Electric Steel, Inc.
are included in this report on Form 10-K:
Page
Report of Independent Public Accountants ..................... F-1
Balance Sheets - September 30, 1995 and September 28, 1996 ... F-2
Statements of Operations - years ended September 24, 1994,
September 30, 1995, and September 28, 1996 ................... F-3
Statements of Changes in Shareholders' Equity - years ended
September 24, 1994, September 30, 1995, and September 28,
1996 ......................................................... F-4
Statements of Cash Flows - years ended September 24, 1994,
September 30, 1995 and September 28, 1996 .................... F-5
Notes to Financial Statements ................................ F-6
(a)2. Index to Financial Statement Schedules
The following financial statement schedules of Kentucky Electric
Steel, Inc. are filed as a separate section of this report.
Page
Report of Independent Public Accountants ..................... S-1
Schedule II Valuation and Qualifying Accounts ............... S-2
(a) 3. Exhibits
3.1 Certification 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 Amended and Restated Loan Agreement between Registrant and
National City Bank, Kentucky, dated November 1, 1995. Filed as
Exhibit 4.2 to Registrant's Form 10-K for the fiscal year ended
September 30, 1995, File No. 0-22416, and incorporated by
reference herein.
4.3 Amended and Restated Export Financing Agreement between
Registrant and National City Bank, Kentucky, dated November 1,
1995. Filed as Exhibit 4.3 to Registrant's Form 10-K for the
fiscal year ended September 30, 1995, File No. 0-22416, and
incorporated by reference herein.
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 Amend-
ment No. 1 to Registrant's Registration Statement on Form S-1
(No. 33-67140), and incorporated by reference herein.
10.4 Form of Salary Continuation Agreement entered into with Charles
C. Hanebuth, filed as Exhibit 10.6 to Amendment No. 1 to
Registrant's Registration Statement on Form S-1 (No. 33-67140),
and incorporated by reference herein.
10.5 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.
10.6 Contract with Morgan-Pomini Company for Rolling and Finishing End
Modernization filed as Exhibit 10.8 to Registrant's Form 10-Q,
No. 0-22416, filed on May 4, 1994, and incorporated by reference
herein.
10.7 Contract with Stel-Tek Engineering Co., Ltd. for Melt Shop
Casting Machine Upgrade filed as Exhibit 10.9 to Registrant's
Form 10-Q, No. 0-22416, filed on May 4, 1994, and incorporated by
reference herein.
10.8 The Kentucky Electric Steel, Inc. Salary Continuation Plan,
effective June 7, 1994, for the benefit of the Company's eligible
salaried employees, filed as Exhibit 10.10 to Registrant's Form
10-K for the fiscal year ended September 24, 1994, File No. 0-
22416, and incorporated by reference herein.
10.9 The Kentucky Electric Steel, Inc. Executive Severance Plan,
effective June 7, 1994, for the benefit of the Company's eligible
Executive Officers, filed as Exhibit 10.11 to Registrant's Form
10-K for the fiscal year ended September 24, 1994, File No. 0-
22416, and incorporated by reference herein.
10.10 Employment agreements dated June 7, 1994, between Kentucky
Electric Steel, Inc. and its four Executive Officers, filed as
Exhibit 10.12 to Registrant's Form 10-K for the fiscal year ended
September 24, 1994, File No. 0-22416, and incorporated by
reference herein.
10.11 Salary Continuation Agreements entered into between Kentucky
Electric Steel, Inc. and its four Executive Officers, filed as
Exhibit 10.13 to Registrant's Form 10-K for the fiscal year ended
September 24, 1994, File No. 0-24416, and incorporated by
reference herein.
10.12 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
Form10-Q, No. 0-22416, filed on February 9, 1995, and
incorporated by reference herein.
10.13 Contract with EMC International, Inc. for Ladle Metallurgy
Facility, filed as Exhibit 10.15 to Registrant's Form 10-Q, No.
0-22416, filed on May 16, 1995, and incorporated by reference
herein.
10.14 Rights Agreement between Kentucky Electric Steel, Inc. and
Wachovia Bank of North Carolina, N.A., dated as of February 27,
1996, filed as Exhibit 4 to Registrant's Form 8-K, File No. 0-
22416, filed on February 28, 1996 and incorporated by reference
herein.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 28, 1996.
<PAGE>
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.
December 12, 1996 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 December 12, 1996
Charles C. Hanebuth and Director
\s\William J. Jessie Vice President, Secretary, December 12, 1996
William J. Jessie Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
\s\Clifford R. Borland Director December 12, 1996
Clifford R. Borland
\s\Carl E. Edwards, Jr. Director December 12, 1996
Carl E. Edwards, Jr.
\s\J. Marvin Quin, II Director December 12, 1996
J. Marvin Quin, II
\s\David C. Struve Director December 12, 1996
David C. Struve
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements Page
Report of Independent Public Accountants ................. F-1
Balance Sheets - September 30, 1995 and September 28, 1996 F-2
Statements of Operations - years ended September 24, 1994,
September 30, 1995 and September 28, 1996 ................ F-3
Statements of Changes in Shareholders' Equity - years ended
September 24, 1994, September 30, 1995, and September 28,
1996 ..................................................... F-4
Statements of Cash Flows - years ended September 24, 1994,
September 30, 1995 and September 28, 1996 ................ F-5
Notes to Financial Statements ............................ F-6
Financial Statement Schedules
Report of Independent Public Accountants ................. S-1
Schedule II Valuation and Qualifying Accounts ........... S-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Electric Steel, Inc.:
We have audited the accompanying balance sheets of Kentucky
Electric Steel, Inc. (a Delaware corporation) as of September 30, 1995 and
September 28, 1996, and the related statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the
period ended September 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Electric Steel, Inc. as of September 30, 1995 and September 28, 1996 and
the results of its operations and its cash flows for each of the three
years in the period ending September 28, 1996 in conformity with generally
accepted accounting principles.
As explained in Note 7 to the financial statements, the Company
changed its method of accounting for income taxes effective September 26,
1993.
Arthur Andersen LLP
Cincinnati, Ohio,
October 29, 1996
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
September September
30, 1995 28, 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 327 $ 124
Accounts receivable, less allowance for doubtful
accounts of $625 in 1995 and $390 in 1996 12,928 12,113
Inventories 18,205 17,367
Operating supplies and other current assets 5,273 5,067
Refundable income taxes 452 540
Deferred tax assets 193 680
------- -------
Total current assets 37,378 35,891
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 3,766 4,353
Machinery and equipment 25,980 37,774
Construction in progress 4,093 1,412
Less - accumulated depreciation (5,673) (7,852)
------- -------
Net property, plant and equipment 28,166 35,687
------- -------
DEFERRED TAX ASSETS 6,881 6,263
------- -------
OTHER ASSETS 200 592
------- -------
Total assets $ 72,625 $ 78,433
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 11,131 $ 7,546
Accounts payable 7,295 7,214
Capital expenditures payable 3,076 2,404
Accrued liabilities 3,713 3,639
Current portion of long-term debt 1,839 125
------- -------
Total current liabilities 27,054 20,928
------- -------
LONG-TERM DEBT 7,287 20,000
------- -------
OTHER LIABILITIES 187 395
------- -------
Total liabilities 34,528 41,323
------- -------
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, 4,974,099 shares issued 50 50
Additional paid-in capital 15,710 15,710
Less treasury stock - 100,000 and 273,000 shares
at cost, respectively (869) (2,165)
Deferred compensation (672) (421)
Retained earnings 23,878 23,936
------- -------
Total shareholders' equity 38,097 37,110
------- -------
Total liabilities and shareholders' equity $ 72,625 $ 78,433
<FN>
See notes to financial statements
</TABLE>
<TABLE> KENTUCKY ELECTRIC STEEL, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<CAPTION>
Year Ended
September September September
24, 1994 30, 1995 28, 1996
<S> <C> <C> <C>
NET SALES $102,629 $107,402 $ 98,320
COST OF GOODS SOLD 86,892 91,642 89,783
------ ------- -------
Gross profit 15,737 15,760 8,537
SELLING AND ADMINISTRATIVE EXPENSES 6,963 7,696 7,391
------- ------- -------
Operating income 8,774 8,064 1,146
INTEREST EXPENSE (586) (658) (1,453)
INTEREST INCOME AND OTHER 194 57 31
GAIN ON INVOLUNTARY CONVERSION
OF EQUIPMENT - - 369
------- ------- -------
Income before income taxes 8,382 7,463 93
PROVISION FOR INCOME TAXES 3,167 2,812 35
------- ------- -------
Net income $ 5,215 $ 4,651 $ 58
NET INCOME PER COMMON SHARE $ 1.06 $ .95 $ .01
WEIGHTED AVERAGE SHARES OUTSTANDING 4,908,158 4,905,456 4,806,161
<FN>
See notes to financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Years in the Period Ended
September 28, 1996
(Dollars in Thousands)
<CAPTION>
Addi-
tional Deferred
Common Stock Paid-In Treasury Stock Compen- Retained
Shares Amount Capital Shares Amount sation Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, Sept. 25, 1993 4,500,000 $45 $ 955 - $ - $ - $14,134 $15,134
Issuance of stock,
net of stock
issuance cost 400,000 4 2,980 - - - - 2,984
Tax benefit recorded
in conjunction with
initial public
offering - - 11,000 - - - - 11,000
Dividend paid to
NS Group, Inc. - - - - - - (122) (122)
Restricted stock
grants 18,000 - 490 - - (490) - -
Amortization of
deferred comp-
ensation - - - - - 65 - 65
Net income - - - - - - 5,215 5,215
--------- -- ------ ------- ----- --- ------ ------
BALANCE, Sept. 24, 1994 4,918,000 49 15,425 - - (425) 19,227 34,276
Restricted stock
grants 56,099 1 285 - - (286) - -
Stock loan grants - - - - - (185) - (185)
Amortization of
deferred comp-
ensation - - - - - 224 - 224
Purchases of treasury
stock - - - (100,000) (869) - - (869)
Net income - - - - - - 4,651 4,651
--------- -- ------ ------- ----- --- ------ ------
BALANCE, Sept. 30, 1995 4,974,099 $50 $15,710 (100,000) $ (869) $(672) $23,878 $38,097
Stock loan grants - - - - - (32) - (32)
Amortization of
deferred comp-
ensation - - - - - 283 - 283
Purchases of treasury
stock - - - (173,000) (1,296) - - (1,296)
Net income - - - - - - 58 58
--------- -- ------ ------- ----- --- ------ ------
BALANCE, Sept. 28, 1996 4,974,099 $50 $15,710 (273,000) $(2,165) $(421) $23,936 $37,110
<FN>
See notes to financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
Year Ended
September September September
24, 1994 30, 1995 28, 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 5,215 $ 4,651 $ 58
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 916 1,564 2,769
Gain on involuntary conversion of equipment - - (369)
Change in deferred taxes 601 1,927 618
Change in other (104) (141) (257)
Changes in current assets and
current liabilities:
Accounts receivable 453 445 815
Inventories (2,581) (3,055) 838
Operating supplies and other
current assets (471) (830) 206
Refundable income taxes (566) 114 (88)
Receivable/payable with NS Group, Inc. 5,730 - -
Deferred stock issuance costs 1,480 - -
Deferred tax assets 1,236 (79) (487)
Accounts payable 1,769 1,138 (81)
Accrued liabilities 470 (455) (74)
Accrued stock issuance costs (1,419) - -
------ ------- -----
Net cash flows from operating activities 12,729 5,279 3,948
------ ------ -----
Cash Flows From Investing Activities:
Proceeds from involuntary conversion of equipment - - 912
Capital expenditures (7,335) (16,647) (10,509)
Increase (decrease) in capital expenditures payable 1,304 1,772 (672)
------ ------ ------
Net cash flows from investing activities (6,031) (14,875) (10,269)
------ ------ ------
Cash Flows From Financing Activities:
Net advances (repayments) on line of credit - 11,131 (3,585)
Repayments on long-term debt (5,754) (1,839) (9,001)
Proceeds from long-term debt borrowings 12,000 - 20,000
Net proceeds from issuance of common stock 2,984 - -
Dividends paid to NS Group, Inc. (15,432) - -
Purchases of treasury stock - (869) (1,296)
------ ------ ------
Net cash flows from financing activities (6,202) 8,423 6,118
------ ------ ------
Net increase (decrease) in cash
and cash equivalents 496 (1,173) (203)
Cash and Cash Equivalents at Beginning of Period 1,004 1,500 327
------ ------ ------
Cash and Cash Equivalents at End of Period $ 1,500 $ 327 $ 124
Interest Paid, net of amount capitalized $ 570 $ 566 $ 884
Income Taxes Paid, including amounts paid to
NS Group, Inc. $ 1,655 $ 1,326 $ 376
<FN>
See notes to financial statements
</TABLE>
KENTUCKY ELECTRIC STEEL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Operations
Kentucky Electric Steel, Inc. (KESI or the Company) was formed to
acquire the assets and assume the liabilities of Kentucky Electric Steel
Corporation (KESC), a wholly owned subsidiary of NS Group, Inc. (NS Group).
The Company 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. KESI was capitalized in an initial public offering of its common
stock on October 6, 1993 in which 4,500,000 shares were issued. The
proceeds of the offering, after deducting the underwriting discount, were
approximately $50,220,000. Approximately $45,630,000, representing the
proceeds of 4,100,000 of the shares issued in the offering less a portion
of the expenses of the offering, was given to NS Group together with
400,000 shares of KESI common stock in exchange for the net assets of KESC.
The remaining net proceeds, approximately $2,984,000 after expenses of the
offering, were retained by KESI and have been recorded in equity in fiscal
1994.
In accordance with generally accepted accounting principles, the
approximately $15,134,000 historical cost basis of the net assets of KESC
transferred to KESI was reflected in the financial statements of KESI upon
consummation of the transaction. This amount was recorded in equity for
the common stock issued to acquire the net assets of KESC (4,100,000 shares
of the initial public offering and 400,000 shares issued directly to NS
Group).
In connection with the transaction described above, KESC declared a
special dividend on September 24, 1993 in an amount required to reduce
total shareholders' equity to $15,134,000 at the date of closing of the
transaction. An additional dividend to NS Group of $122,000 was declared
in fiscal 1994 based upon earnings through October 6, 1993, the closing
date of the transaction.
(2) Summary of Significant Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits with financial
institutions. Cash equivalents consist of investments with maturities of
three months or less. Amounts are stated at cost, which approximates
market value.
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 capitalizes interest costs as part of the historical cost
of acquiring major capital assets. Interest costs of $262,000 and $523,000
were capitalized for the year ended September 28, 1996 and September 30,
1995, respectively.
Income Taxes
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), deferred tax
liabilities and future tax benefits are adjusted to the amount of the
estimated effect on taxes payable in future years at the rate scheduled to
then be in affect. The Company adopted SFAS No. 109 effective September
26, 1993; the cumulative effect of adoption was not material. As a result
of the agreement pursuant to which the Company acquired the assets and
assumed the liabilities of Kentucky Electric Steel Corporation, the
Company's net tax basis in its assets and liabilities increased without a
corresponding increase in the basis of its assets and liabilities for
financial reporting purposes. Accordingly, the Company initially recorded
a deferred tax asset of $13,803,000 and a valuation allowance of
$2,803,000. The related benefit has not been reflected in the statement of
operations but rather as a direct increase to shareholders' equity. The
amount of the deferred tax asset is based upon appraisal of the Company's
assets and tax laws and rates currently in effect. The $13,803,000
deferred tax asset, as of October 6, 1993, relates primarily to the excess
tax basis of the Company's property, plant and equipment. The actual
benefit received could be impacted by future changes in the tax law and
rates.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS No. 121) related to the accounting for impairment
of long lived assets and for long lived assets held for disposal. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when impairment indicators are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying values. The Company adopted SFAS No. 121
effective October 1, 1995, but the effect of adoption was not material to
the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123) related to accounting for stock-based
compensation. SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. The statement
encourages the use of the fair value based method to measure compensation
cost for stock-based employee compensation plans, however, it also
continues to allow the intrinsic value based method of accounting as
prescribed by APB Opinion No. 25. If the intrinsic value based method is
used, the statement requires pro forma disclosures of net income and
earning per share, as if the fair value based method of accounting had been
applied. The fair value based method requires compensation cost be
measured at the grant date based upon the value of the award and recognized
over the service period, which is normally the vesting period. The Company
will adopt SFAS No. 123 effective September 29, 1996 and will continue to
use the intrinsic value based method of accounting.
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, 1995 consists of fifty-three weeks.
Net Income per Common Share
Net income per share is calculated using the weighted average number
of shares of common stock equivalents outstanding during the period. The
effect of stock options outstanding is not material and therefore is not
included in the computation of net income per share.
Reclassifications
Certain reclassifications have been made to prior years income
statements in order to conform with the fiscal 1996 presentation.
(3) Inventories
Inventories at September 30, 1995 and September 28, 1996 consist of
the following ($000's):
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Raw materials $ 3,621 $ 4,069
Semi-finished and finished goods 14,584 13,298
Total inventories $ 18,205 $ 17,367
</TABLE>
(4) Accrued Liabilities
Accrued liabilities at September 30, 1995 and September 28, 1996
consist of the following ($000's):
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Accrued payroll and related liabilities $ 2,052 $ 1,442
Accrued insurance and workers' compensation 1,128 950
Accrued interest payable 127 697
Other 406 550
$ 3,713 $ 3,639
</TABLE>
(5) Long-Term Debt
Long-term debt of the Company at September 30, 1995 and September 28,
1996 consists of the following ($000's):
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Variable rate term loan due a
financial institution $ 9,001 $ -
Unsecured senior notes, due in equal
annual installments from November
2000 through 2005, interest at 7.66% - 20,000
Other 125 125
9,126 20,125
Less - Current portion (1,839) (125)
$ 7,287 $ 20,000
</TABLE)
Effective November 1, 1995, the Company refinanced its long-term debt
through the private placement of $20 million in unsecured senior notes,
which require no principal payments for five years. Principal payments
commence on November 1, 2000 and are due in equal annual installments over
six years. These notes bear interest at the rate of 7.66% per annum, with
interest paid semi-annually. The remaining proceeds from the issuance were
utilized to pay down the Company's bank credit facility. The Company also
renegotiated its bank credit facility, increasing the facility from $19.5
million to $24.5 million and decreasing the LIBOR rate option from LIBOR
plus 1.65% to LIBOR plus 1.35%, or the higher of the prime rate minus 1/2%
or the seven day Fed Funds average rate plus 2%. The bank credit facility
is unsecured. The notes and bank credit facility contain restrictive
covenants, which include, among other restrictions, a maximum ratio of
total funded debt to total capitalization, fixed charge coverage ratio,
minimum net worth and restrictions on the payment of dividends.
As of September 28, 1996, approximately $7.5 million was outstanding
under the bank credit facility, approximately $1.9 million was utilized to
collateralize various letters of credit and $9.5 million was available for
additional borrowings. The weighted average interest rate on short term
borrowings as of September 28, 1996 and September 30, 1995 were 7.5% and
7.7%, respectively.
The estimated fair value of the Company's unsecured senior notes is
estimated using discounted cash flow analysis, based upon the estimated
market rate as of September 28, 1996. The fair value of the unsecured
senior notes was approximately $19.8 million as of September 28, 1996.
(6) Significant Customers and Foreign Sales
The Company grants trade credit to customers within the markets it
serves, the most significant of which is the leaf-spring suspension market.
Sales to this market represented 40.4%, 32.0% and 25.3% of total sales for
1994, 1995 and 1996, respectively.
One company, which has several wholly-owned subsidiaries which are
customers of the Company, represented 16.6%, 16.2% and 11.7% of net sales
in fiscal 1994, 1995 and 1996, respectively. No other customer accounted
for more than 10% of net sales.
The Company's foreign sales represented 14.8%, 6.3% and 8.8% of total
sales for 1994, 1995 and 1996, respectively.
(7) Income Taxes
During fiscal year 1994, the Company adopted SFAS No. 109 in
accounting for income taxes, as discussed in Note 1. The provision for
income taxes consists of the following ($000's):
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal $ 992 $ 916 $(2,510)
State 97 - (379)
1,089 916 (2,889)
Deferred:
Federal $ 1,867 $ 1,616 $ 2,541
State 211 280 383
2,078 1,896 2,924
Total provision for income taxes $ 3,167 $ 2,812 $ 35
</TABLE>
The provision 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):
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Income tax provision at statutory
tax rate of 34% $ 2,849 $ 2,537 $ 32
State income taxes, net of
federal effect 203 185 1
Other, net 115 90 2
$ 3,167 $ 2,812 $ 35
</TABLE>
The components of the net deferred tax asset at September 30, 1995 and
September 28, 1996 are as follows ($000's):
<TABLE>
<CAPTION>
Sept. 30, Sept. 28,
1995 1996
<S> <C> <C>
Deferred tax components:
Property, plant and equipment $ 5,734 $ 3,323
Intangibles 3,160 2,949
AMT credit carryforwards 912 2,023
NOL carryforward - 1,604
Other (51) (275)
9,755 9,624
Valuation allowance (2,681) (2,681)
Net deferred tax assets $ 7,074 $ 6,943
</TABLE>
For Federal income tax purposes the Company has alternative minimum
tax carryforwards of approximately $2.0 million, which are not limited by
expiration dates. The Company also has gross operating tax loss
carryforwards of approximately $3.8 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. Taking into
consideration historical pre-tax income levels, the impact of the Company's
recent capital expenditures and changes in its capital structure, and other
factors, management believes it is more likely than not that the net
deferred tax asset, after consideration of the valuation allowance which
has been established, will be realized. The amount of the net deferred tax
asset considered realizable, however, could be reduced if estimates of
future taxable income during the carryforward period are reduced.
(8) 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 $779,000,
$751,000 and $213,000 in 1994, 1995 and 1996, respectively.
(9) 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 become exercisable over a three year
period which began on approval by the shareholders of the 1993 Employee
Stock Option/Restricted Stock Plan in February 1994. All unexercised
options expire ten years after the date of grant. Option and restricted
stock prices range from $7.63 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 vest on a pro rata basis over a period of four
years beginning one year after the grant date. Compensation expense of
$209,000 and $240,000 was recognized in fiscal 1995 and 1996, respectively,
as a result of amortization of restricted stock grants over the vesting
periods. The unamortized portion of the restricted stock is reflected in
deferred compensation and was $502,000 and $261,000 as of September 30,
1995 and September 28, 1996, respectively.
A summary of transactions in the plans for fiscal 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Options outstanding, beginning of year 151,092 240,284
Options granted 89,192 91,192
Options forfeited - (3,500)
------- -------
Options outstanding, end of year 240,284 327,976
Options exercisable, end of year 51,571 102,009
Restricted shares granted 30,721 -
Options and restricted shares
available for grant 175,617 87,925
</TABLE>
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. A summary of transactions in the plan for fiscal 1995 and 1996 are
as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Options outstanding, beginning of year 181,275 177,422
Options granted - -
Options forfeited (3,853) (7,992)
------- -------
Options outstanding, end of year 177,422 169,430
Options exercisable, end of year 141,050 149,814
</TABLE>
During 1995, the Company began 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 unamortized balance due from eligible employees under the
plan is reflected as deferred compensation and shown as a deduction of
shareholders' equity and was $170,000 and $160,000 as of September 30, 1995
and September 28, 1996, respectively. In fiscal 1995 and fiscal 1996, the
Company recognized $15,000 and $43,000, respectively, of compensation
expense related to the plan.
(10) 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 to purchase at a price of $40, one-hundredth
of a share of Series A Junior Participating Preferred Stock. The Preferred
Stock Purchase 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 Preferred Stock Purchase
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, 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.
(11) 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 and other matters, which seek remedies or
damages. The Company believes that any liability that may ultimately be
determined will not have a material effect on its financial position or
results of operations.
The Company generates both hazardous wastes and non-hazardous wastes
which are subject to various governmental regulations. Estimated costs to
be incurred in connection with environmental matters are accrued when the
prospect of incurring cost for testing or remedial action is deemed
probable. The Company is not aware of any asserted or unasserted
environmental claims against the Company and, accordingly, no accruals for
such matters have been recorded in the accompanying balance sheets.
However, discovery of unknown conditions could result in the recording of
accruals in the periods in which they become known.
(12) Quarterly Financial Data (Unaudited)
Quarterly results of operations (in thousands, except per share
amounts) for fiscal 1996 and fiscal 1995 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C>
1996
Net sales $ 23,688 $ 24,625 $ 26,483 $ 23,524
Gross profit $ 2,576 $ 2,447 $ 2,669 $ 845
Net income (loss) $ 162 $ 243 $ 319 $ (666)
Net income (loss) per common share $ .03 $ .05 $ .07 $ (.14)
Weighted average shares outstanding 4,871,140 4,828,055 4,790,885 4,729,566
1995
Net sales $ 26,717 $ 29,260 $ 27,910 $ 23,515
Gross profit $ 4,145 $ 4,539 $ 4,190 $ 2,886
Net income $ 1,300 $ 1,623 $ 1,310 $ 418
Net income per common share $ .26 $ .33 $ .27 $ .09
Weighted average shares outstanding 4,950,624 4,911,638 4,883,414 4,872,673
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Electric Steel, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the financial statements included in Kentucky Electric Steel,
Inc.'s annual report on Form 10-K, and have issued our report thereon dated
October 29, 1996. 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 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,
October 29, 1996
<PAGE>
<TABLE>
SCHEDULE II
KENTUCKY ELECTRIC STEEL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<CAPTION>
Reserves Deducted
from Assets in
Balance Sheets
Allowance for
Doubtful
Accounts (1)
<S> <C>
BALANCE, September 25, 1993 .......................... $ 305
Additions:
Charged to costs and expenses .................... 89
Deductions:
Net charge-off of accounts deemed uncollectible .. (39)
---
BALANCE, September 24, 1994 ... ...................... $ 355
Additions:
Charged to costs and expenses .................... 507
Deductions:
Net charge-off of accounts deemed uncollectible . (237)
---
BALANCE, September 30, 1995 .......................... $ 625
Additions:
Charged to costs and expenses .................... 651
Deductions:
Net charge-off of accounts deemed uncollectible .. (886)
---
BALANCE, September 28, 1996 .......................... $ 390
(1) Deducted from accounts receivable.
</TABLE>
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. 33-73042
and 33-77598.
Arthur Andersen LLP
Cincinnati, Ohio,
December 12, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Kentucky Electric Steel, Inc.'s condensed financial statements as of and
for the twelve month period ended September 28, 1996 included in this
Company's quarterly report on Form 10-K and is qualified in its entirety by
reference to such condensed financial statements.
</LEGEND>
<CIK> 0000910394
<NAME> KENTUCKY ELECTRIC STEEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 124
<SECURITIES> 0
<RECEIVABLES> 12,503
<ALLOWANCES> 390
<INVENTORY> 17,367
<CURRENT-ASSETS> 35,891
<PP&E> 43,539
<DEPRECIATION> 7,852
<TOTAL-ASSETS> 78,433
<CURRENT-LIABILITIES> 20,928
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 37,060
<TOTAL-LIABILITY-AND-EQUITY> 78,443
<SALES> 98,320
<TOTAL-REVENUES> 98,320
<CGS> 89,783
<TOTAL-COSTS> 89,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,453
<INCOME-PRETAX> 93
<INCOME-TAX> 35
<INCOME-CONTINUING> 58
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
