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 27, 1997
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
(Cover Page 1 of 2 Pages)
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, 1997: $25,142,000.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of December 12, 1997:
4,625,361 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14(a) are incorporated herein by reference in response to items
10 through 13 in Part III of this report.
(Cover Page 2 of 2 Pages)
<PAGE>
KENTUCKY ELECTRIC STEEL, INC.
FORM 10-K
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 producer of bar flats, the Company recycles steel from scrap,
a process designed to result in lower production costs than those of
integrated steel mills, which produce steel by processing iron ore and other
raw materials in blast furnaces. Bar flats are produced to a variety of
specifications and fall primarily into two general quality levels - merchant
bar quality steel bar flats ("MBQ Bar Flats") for generic types of
applications, and special bar quality steel bar flats ("SBQ Bar Flats"), where
more precise customer specifications require the use of various alloys,
customized equipment and special production procedures to insure that the
finished product meets critical end-use performance characteristics. The
Company is a leading manufacturer of SBQ Bar Flats for the cold drawn bar
converter and truck trailer support beam markets. Approximately 80% of the
Company's sales are of SBQ Bar Flats.
The Company completed a two-phase capital expenditure program in fiscal
1996. The first phase expanded the Company's casting, rolling and finishing
capacity and increased the size range of products the Company can produce.
The second phase, installation of a 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 the
capital expenditure program increased 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. The completion of the
capital expenditure program increased the range of thickness and width of the
Company's products, thereby creating the capacity for 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.
The Company has increased its shipments of the thicker, wider products from
fiscal 1996 to fiscal 1997 and has continued to increase its sales to the cold
drawn bar converter market while decreasing sales to the leaf-spring
suspension market.
Manufacturing Operations
The Company recycles steel by melting steel scrap in two 50-ton electric
arc furnaces. The molten steel is then taken to the ladle metallurgy facility
where a variety of alloys are added to make different grades of steel in
accordance with customer specifications. The refined molten steel is then
poured into a continuous caster to produce continuous strands of steel with
cross-sectional dimensions ranging from approximately 16 to 72 square inches.
The Company can utilize up to four continuous strands in producing certain
sizes. The strands are cut to produce billets of specified length which are
reheated to approximately 2,300 degrees Fahrenheit at the Company's rolling
mill and fed through a series of roll stands to reduce their size and form
them into steel bar sections. These sections emerge from the rolling mill,
are uniformly cooled on a cooling bed, and are cut to lengths specified by the
customer. The cut bar flats are stacked into bundles ready for shipment.
The production capacity of finished products from the Company's rolling
and finishing facilities is approximately 400,000 tons per year but can vary
with product mix. The annual production capacity of the melting and casting
operation is approximately 300,000 tons of finished product. Thus, the
Company is able to finish more product in its rolling operations that it is
capable of producing with its melting facilities. The Company's ultimate goal
is to balance its operations at approximately 400,000 tons per year. Due in
part to problems with the ramp-up of the new facilities, the ten day shutdown
in the melt shop in the second quarter to repair the caster superstructure and
to convert an additional strand to produce the thicker, wider products, and
the third quarter shutdown of the melt shop for twelve days in order to
decontaminate the baghouse facilities, after detection of a radioactive
substance, the Company sold 217,000 tons of finished goods in 1997 which
constitutes 72% 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 $7.7 million, which includes $3.2 million expended in fiscal year
1997.
The Company completed the ladle metallurgy facility and began start-up
operations in the fourth quarter of fiscal 1996 and continued during the first
half of fiscal 1997. 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 1998 capital expenditure
plan for approximately $4.3 million, which includes completion of projects
begun in fiscal 1997, environmental compliance projects, and various
equipment upgrades and replacements.
Primary Markets and Products
The Company is primarily a special bar quality ("SBQ") producer of alloy
and carbon steel bar flats. Its primary markets are manufacturers of leaf-
spring suspensions, cold drawn bar converters, flat bed truck trailer
manufacturers and steel service centers
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 27, 1997, the Company's sales to leaf-spring suspension
customers decreased, while sales to cold drawn bar converters increased. The
following table presents, for fiscal 1996 and 1997, the percentage of the
Company's net sales by market:
1996 1997
Leaf-spring suspension 25.3% 18.6%
Cold drawn bar converters 19.3% 29.2%
Steel service centers 18.0% 15.5%
Truck trailers 11.3% 11.4%
Miscellaneous 26.1% 25.3%
Totals 100.0% 100.0%
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
475,000 tons annually, and that the Company's share of this market is
approximately 10%.
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 steel service centers. The Company estimates
that the domestic cold drawn bar market for bar flats is approximately 225,000
tons annually, and that the Company's share of this market is approximately
28%.
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 difficult 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 production facility described in "Business - General."
Customers
The Company sells to over 350 customers. Two wholly-owned subsidiaries
of one customer represented approximately 14% of sales for fiscal 1997. No
other customer accounted for more than 10% of sales in fiscal 1997. 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 8.5% in
fiscal 1997. 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 personnel and six
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 affecting its business are quality, service,
price and geographic location.
Backlog and Seasonality
As of September 27, 1997, the Company had firm orders for approximately
58,000 tons representing approximately $27.7 million in sales, as compared
with approximately 48,000 tons representing approximately $21.4 million in
sales, at September 28, 1996.
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 33% of the
Company's scrap in fiscal 1997. 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 process consumes large amounts of
electricity, which the Company purchases from Kentucky Power Company, d/b/a
American Electric Power ("AEP"). An abundant regional supply of coal, used in
producing electricity, helps keep the Company's energy costs relatively low.
Prior to November 13, 1997, the Company purchased electricity from AEP under
an Interruptible Power Contract ("Prior Contract") which was terminable by
either party upon 12 months notice and under which AEP could interrupt service
during times of peak demand. Effective November 13, 1997, the Company and AEP
entered into a contract for Operating Reserve Interruptible Electric Service
("1997 Contract") which limits AEP's right to interrupt service in only those
instances that an AEP unit goes offline or that AEP is responsible to share
reserves with other electrical generators pursuant to the East Central Area
Reliability Coordination Agreement (ECAR). The 1997 Contract, however, limits
the periods of any such interruption to no more than 30 minutes. As with the
Prior Contract, AEP is required to provide a certain amount of firm contract
capacity to prevent equipment damage during interrupted periods. Likewise, as
with the Prior Contract, AEP may impose a surcharge on the Company if the
Company fails to interrupt load as required by the 1997 Contract or if the
Company exceeds certain specified levels of use. The initial term of the 1997
Contract expires November 12, 1998. Thereafter, the 1997 Contract will remain
in effect until the Company gives at least one year notice to AEP of its
intention to discontinue service under the 1997 Contract. The 1997 Contract
additionally provides for termination upon the later of the fifth anniversary
of the effective date or any date on which it becomes possible for retail
customers of AEP to purchase electrical energy from other providers and AEP is
required to use its transmission and distribution lines to deliver such energy
to those customers.
Employees
As of September 27, 1997, the Company employed 448 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".
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 has been
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.
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 and the Kentucky Division of Waste Management (the "Division") is
requiring the Company to demonstrate that the prior closure meets RCRA current
standards or, alternatively, to obtain a post closure permit. In July of
1995, the Company submitted a closure equivalency demonstration to the
Kentucky Division of Waste Management (the "Division") seeking a regulatory
determination that the clean closure meets the requirements for closure
equivalency as established by applicable regulations and that a post-closure
permit is not required. In November of 1995, the Division advised that it
intends to conduct an investigation of the Company's compliance with RCRA
before making a determination on the Company's request. Due to personnel
changes at the Division, the investigation has not been completed and the
Division has not made a determination on the Company's application. The
Company believes the costs associated with demonstrating clean closure
equivalency are the responsibility of a prior operator of the mini-mill (the
"Prior Operator") and it has notified the Prior Operator of its claim.
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, the Prior Operator disposed of Furnace Dust in
the Cooksey Brother's landfill, in Cannonsburg, Kentucky ("Cooksey Landfill").
Before 1981 the Prior Operator disposed of Furnace Dust in other locations,
including a strip mine. The Company did not assume any liability 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. The Cooksey
Landfill is operating pursuant to a permit and bond issued and approved by the
Division, 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. Nevertheless, 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.
The Company's operations are subject to the Federal Clean Air Act which
provides for regulation, through state implementation of federal require-
ments, of the emission of certain air pollutants. As required by applicable
regulations, on December 14, 1996, the Company filed a Title V permit
application with the Kentucky Division for Air Quality. The application
required the Company to identify any of the nine emissions points within the
Company's facility that were not in compliance with the Company's operating
permits and/or applicable regulations. The Company listed Emission Unit Nos.
02 and 03, its electric arc furnaces A and B. In so doing, the Company's
application indicated that the Company would conduct a diagnostic evaluation
of its melt shop fume capture system and its baghouse. The Company does not
anticipate receiving a draft of its Title V permit until late February or
March of 1998. The Company, therefore, does not know whether it will be able
to comply with its Title V permit without additional capital and operating
expense or whether the Company will be the subject of an enforcement action
for failure to comply with the requirements of its existing permit or its
Title V permit. Additionally, there can be no assurance that evolving federal
and state environmental requirements for 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 any
future expansion. The Company will continue to plan and budget, as
appropriate, for any additional capital and operating expenses that may be
required to upgrade or install new or additional pollution control equipment
in order to comply with all permits.
On April 29, 1997, the Company ceased melting operations due to the
melting of a radioactive source. The Company restarted its melt shop
operations on May 11, 1997, after decontamination of the melt shop and related
facilities. The melting of the radioactive source resulted in the
classification of approximately 13,530 cubic feet of Furnace Dust and 7,000
cubic feet of baghouse filter bags and related supplies removed during
decontamination as a mixed waste ("Mixed Waste") as defined in the Federal
Facility Compliance Act. HRD does not have the regulatory permits to process
Mixed Waste. The Company, therefore, on July 29, 1997, entered into a
contract with Zhagrus Environmental, Inc. ("Zhagrus"), an affiliate company
under common control of Envirocare of Utah, Inc. ("Envirocare") for the
packaging, transportation, treatment and disposal of the Mixed Waste at the
waste disposal facility of Envirocare at Clive, Utah (the "Envirocare
Facility"). The Envirocare Facility is licensed by the State of Utah to
handle and dispose of the Mixed Waste. Zhagrus has completed transportation
of the Mixed Waste to the Envirocare Facility and is required by its contract
with the Company to secure treatment and disposal of the Mixed Waste by
September 1, 1998.
The Company also has been experiencing problems with the new bags in
its baghouse which were installed in May of 1997, as a result of melting a
radioactive source. The Company is currently working with the vendor,
consultants, and the insurance company to determine the appropriate necessary
corrective action.
Except as otherwise indicated, the Company believes it is in substantial
compliance with applicable environmental laws and regulations. Notwithstand-
ing such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company's business or
by hazardous substances or wastes used, generated or disposed of by the
Company (or possibly by prior operators of the Company's mini-mill or by third
parties), the Company may be held liable for such damages and be required to
pay the cost of investigation and remediation of such contamination. The
amount of such liability to the Company could be material. Changes in federal
or state laws, regulations or requirements or discovery of unknown conditions
could require additional expenditures by the Company.
Item 2. Properties
The Company's operations are located on approximately 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 completed
certain capital expenditures with respect to its properties. See Item 1 -
Business - "Manufacturing Operations" and "Capital Improvements and
Expansion."
Item 3. Legal Proceedings
The Company is subject to various claims and lawsuits arising in the
ordinary course of business with respect to commercial, product liability and
other matters, which seek remedies or damages. Based upon its evaluation of
available information, management does not believe that any such matters are
likely, individually or in the aggregate, to have a material adverse effect
upon the Company's business, financial position, results of operations or cash
flows. See also Item 1 "Business - Environmental and Regulatory Matters."
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of shareholders during the
fourth quarter of the fiscal year ended September 27, 1997.
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 4, 1998.
The names, ages and positions of all of the executive officers of the
Registrant as of September 27, 1997 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, 53, 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 18 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, 47, 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, 53, 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 27 years of
sales experience in the steel industry.
William H. Gerak, 52, 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 23 years
of human resource and administrative experience.
<PAGE
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:
Fiscal 1996 Fiscal 1997
High Low High Low
First Quarter $ 10 $ 7-3/4 $ 7-1/4 $ 5-1/4
Second Quarter 8-11/16 6-5/8 6-7/8 5-1/8
Third Quarter 8-1/2 6-7/8 5-3/4 4-1/8
Fourth Quarter 8-1/2 6-1/2 7-1/4 5-1/4
On December 12, 1997 there were approximately 1,600 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 6 of the
Notes to Consolidated Financial Statements of the Company.
Item 6. Selected Financial Data
The selected financial data shown below for the five years in the period
ended September 27, 1997 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.
<PAGE
Year Ended
Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1993 1994 1995 1996 1997
(In thousands, except share data)
Income Statement Data:
Net sales ............ $90,547 $102,629 $107,402 $ 98,320 $ 94,652
Cost of goods sold ... 75,884 86,892 91,642 89,783 89,992
------ ------- ------- ------ ------
Gross profit ....... 14,663 15,737 15,760 8,537 4,660
Selling and admini-
strative expenses .. 6,069 6,963 7,696 7,391 6,800
------ ------- ------- ------ ------
Operating income (loss) 8,594 8,774 8,064 1,146 (2,140)
Interest income from
NS Group, Inc. - net 686 30 - - -
Interest expense ..... (402) (586) (658) (1,453) (2,125)
Interest income and
other .............. 12 164 57 31 34
Gain on involuntary con-
version of equipment - - - 369 -
------ ------- ------- ------ ------
Income (loss) before
income taxes ...... 8,890 8,382 7,463 93 (4,231)
Income taxes ......... 3,374 3,167 2,812 35 (1,599)
------ ------- ------- ------ ------
Net income (loss) $ 5,516 $ 5,215 $ 4,651 $ 58 $(2,632)
Net income (loss)
per common share ... $ 1.23 $ 1.06 $ .95 $ .01 $ (.57)
Weighted average shares
outstanding ...... 4,500,000 4,908,158 4,905,456 4,806,161 4,633,315
Balance Sheet Data:
Working capital ..... $13,145 $21,553 $10,324 $14,963 $11,335
Total assets ........ 46,259 56,870 72,625 78,433 78,770
Long-term debt (1) .. 2,748 9,001 7,287 20,000 20,000
Shareholders' equity 15,134 34,276 38,097 37,110 34,211
(1) Net of current portion.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis of results of operations and financial condition
of the Company should be read in conjunction with "Selected Financial Data"
and Financial Statements and Supplementary Data included elsewhere herein.
General
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.
Results of Operations
The following table sets forth the percentages of the Company's net
sales represented by certain income and expense items for the periods
indicated.
Year Ended
September September September
30, 1995 28, 1996 27, 1997
Net sales ....................... 100.0% 100.0% 100.0%
Cost of goods sold .............. 85.3 91.3 95.1
----- ----- -----
Gross profit .................... 14.7 8.7 4.9
Selling and administrative
expenses ...................... 7.2 7.5 7.2
----- ----- -----
Operating income (loss) ......... 7.5 1.2 (2.3)
Interest expense ................ (.6) (1.5) (2.2)
Gain on involuntary conversion
of equipment .................. - .4 -
----- ----- -----
Income (loss) before income taxes . 6.9 .1 (4.5)
Income taxes ................... 2.6 - (1.7)
----- ----- -----
Net income (loss) ............... 4.3% .1% (2.8%)
Year Ended September 27, 1997 Compared with Year Ended September 28, 1996
Net Sales. Net sales for fiscal 1997 decreased by $3.6 million (3.7%)
to $94.7 million from $98.3 million for fiscal 1996 due to a decline in
shipments. Total shipments for fiscal 1997 were approximately 217,000 tons,
down 3.9% from fiscal 1996, while the average selling price per ton remained
constant with the prior year. The decline in shipments primarily resulted
from the third quarter shutdown caused by a radioactive contamination of the
baghouse, continued start-up of the ladle metallurgy facility during the first
half of fiscal 1997, and the ten day Melt Shop outage in the second quarter.
Cost of Goods Sold. Cost of goods sold for fiscal 1997 increased $.2
million (.2%) to $90.0 million from $89.8 million for fiscal 1996. As a
percentage of net sales, cost of goods sold increased from 91.3% for fiscal
1996 to 95.1% for fiscal 1997. The increase in cost of goods sold is
primarily due to higher conversion costs and additional depreciation,
partially offset by a decrease in material costs. Conversion costs for fiscal
1997 were adversely impacted by lower production during the third quarter due
to the 12 day shutdown of the Melt Shop operations required to decontaminate
the baghouse facilities following detection of a radioactive substance in the
baghouse dust and by the shutdown and restart of the caster during the second
quarter. The caster was also shut down for repairs for 10 days in late
December and early January. During this 10 day shut down, the Company
converted an additional caster strand to allow for increased production of
thicker, wider products. The resulting shortage of billets idled the rolling
mill for several days and negatively impacted rolling mill production and
productivity. To a lesser degree, conversion costs were also adversely
impacted by an increase in repair, maintenance and supply costs, health
benefit costs and the continued start-up phase of the new ladle metallurgy
facility in the first half of fiscal 1997.
The cost of goods sold for fiscal 1996 includes a $1.7 million
reimbursement from business interruption insurance, related to the caster
fire. The fiscal year 1997 includes a $2.3 million reimbursement from
business interruption insurance related to the decontamination of the baghouse
in the calculation of cost of goods sold.
Gross Profit. As a result of the above, gross profit for fiscal 1997
decreased by $3.8 million (45.4%) from $8.5 million in fiscal 1996 to $4.7
million in fiscal 1997. As a percentage of net sales, gross profit decreased
from 8.7% in fiscal 1996 to 4.9% in fiscal 1997.
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 1997 decreased $.6 million (8.0%) to $6.8
million from $7.4 million for fiscal 1996. As a percentage of net sales, such
expenses decreased from 7.5% for fiscal 1996 to 7.2% for fiscal 1997. The
decrease is primarily the result of a reduction in the provision for
uncollectible accounts (which was higher in the prior year due to problems
with a few specific accounts).
Operating Income. Fiscal year 1997 reflected an operating loss of $2.1
million as compared to operating income of $1.1 million for fiscal 1996. As a
percentage of net sales operating income decreased from 1.2% in fiscal 1996 to
(2.3%) for fiscal 1997.
Interest Expense. Interest expense increased by $.6 million to $2.1
million in fiscal 1997 from $1.5 million in fiscal 1996, net of interest
capitalized of $11,000 and $262,000, 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 the ladle metallurgy facility.
Provision (Credit) for Income Taxes. The Company has recorded a tax
benefit of approximately $1.6 million in fiscal 1997 as compared to a
provision of $35,000 in fiscal 1996 at an effective tax rate of 38% for both
years. The Company has recorded an increase in net deferred tax assets of $.7
million and has recorded refundable income taxes of $.9 million resulting from
the $1.6 million benefit recorded in fiscal 1997. As of September 27, 1997
the Company has net deferred tax assets of $7.6 million, which is net of a
$2.7 million valuation allowance. Included in the $10.3 million of gross
deferred tax assets is $4.7 million of net operating tax loss carryforwards
which expire beginning in 2011. The realization of the deferred tax assets is
dependent in part upon generation of sufficient future taxable income.
Management 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 nature of
certain events which adversely affected operations in fiscal 1996 and 1997,
the Company's return to profitability during the third and fourth quarter of
fiscal 1997, the continued improvement in productivity 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.
Net Income. As a result of the above, fiscal 1997 reflected a net loss
of $2.6 million as compared to net income of $58,000 in fiscal 1996. As a
percentage of net sales, net income decreased from .1% in fiscal 1996 to
(2.8%) in fiscal 1997.
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 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 the capital expenditure program which expanded the
Company's casting, rolling and finishing capacity and increased the size range
of products the Company can produce.
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.
Liquidity and Capital Resources
Cash flows from operating activities amounted to $5.3 million, $3.9
million, and $2.5 million in fiscal 1995, 1996 and 1997, respectively. 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.
Fiscal 1997 operating cash flows reflect the net loss of $2.6 million
and the increase in the net deferred tax asset of $1.0 million, which has been
partially offset by depreciation of $3.7 million, decrease in accounts
receivable of $.5 million and inventories of $.8 million, and an increase in
accounts payable of $.8 million. The additional depreciation is related to
the start-up of the ladle metallurgy facility. The decrease in inventories is
primarily related to a reduction in scrap inventory.
Cash flows used by investing activities consist of capital expenditures,
net of capital expenditures payables, of $14.9 million, $11.2 million, and
$5.1 million in fiscal 1995, 1996, and 1997, respectively. The decrease in
capital expenditures in fiscal 1997 is primarily due to the completion, in
fiscal 1995, of the capital expenditure program which expanded the Company's
casting, rolling and finishing capacity and increased the size range of
products the Company can produce, and the completion of the ladle metallurgy
facility 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 provided from financing activities amounted to $8.4 million,
$6.1 million, and $2.6 million in fiscal 1995, 1996, and 1997, 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. The $2.6 million in fiscal 1997 reflects
$3.1 million in advances on the Company bank credit facility offset by $.5
million used for the purchases of treasury stock.
Working capital at September 27, 1997, was $11.3 million as compared to
$15.0 million at September 28, 1996. The current ratio was 1.5 to 1.0 at
September 27, 1997 as compared to 1.7 to 1.0 at September 28, 1996. The
decrease in working capital and current ratio is primarily attributed to the
increase in the Company's advances on line of credit, from financing the
current year's capital expenditures.
The Company's primary ongoing cash requirements are for current capital
expenditures. The two sources for the Company's liquidity are internally
generated funds and its bank credit facility. The Company has $10.6 million
in borrowings outstanding on its line of credit as of September 27, 1997. The
Company believes that the bank credit facility and internally generated funds
will be sufficient to fund 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
Consolidated Financial Statements of the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules referenced in Item 14(a)(1) and
(a)(2) hereof are included herein and are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE
PART III
Item 10. Directors and Executive Officers of the Registrant
The specified information required by this item is incorporated by
reference to the information under the heading "Proposal I: Election of
Directors" in the Proxy Statement as filed with the Commission or is included
under the heading "Executive Officers of the Registrant" in Part I of this
10-K filing. The disclosure required by Item 405 of Regulation S-K is
incorporated by reference to the information under the heading "Compliance
with Section 16(a)" of the Proxy Statement.
Item 11. Executive Compensation
The specified information required by this item is incorporated by
reference to the information under the heading "Executive Compensation" in the
Proxy Statement as filed with the Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The specified information required by this item is incorporated by
reference to the information in the table under the heading "Voting Securities
and Principal Holders Thereof" in the Proxy Statement as filed with the
Commission.
Item 13. Certain Relationships and Related Transactions
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. See Index to Financial Statements and Schedule
(a)2. See Index to Financial Statements and Schedule
(a)3. Exhibits
3.1 Certificate of Incorporation of Kentucky Electric Steel, Inc.,
filed as Exhibit 3.1 to Registrant's Registration Statement on
Form S-1 (No. 33-67140), and incorporated by reference herein.
3.2 By-Laws of Kentucky Electric Steel, Inc., filed as Exhibit 3.2
to Registrant's Registration Statement on Form S-1 (No. 33-
67140), and incorporated by reference herein.
4.1 Senior Note Agreement between Registrant and a group of
institutional investors. Filed as Exhibit 4.1 to Registrant's
Form 10-K for the fiscal year ended September 30, 1995, File
No. 0-22416, and incorporated by reference herein.
4.2 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.
4.4 First Amendment Agreement to Senior Note Agreement between
Registrant and a group of institutional investors. Filed as
Exhibit 4.4 to Registrant's Form 10-Q, No. 0-22416, filed on
February 11, 1997, and incorporated by reference herein.
4.5 Amendment No. 1 to Amended and Restated Loan Agreement between
Registrant and National City Bank, Kentucky. Filed as Exhibit
4.5 to Registrant's Form 10-Q No. 0-22416, filed on February
11, 1997, 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 Kentucky Electric Steel, Inc. 1993 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-
77598), filed on April 12, 1994, and incorporated by reference
herein.
10.7 Kentucky Electric Steel, Inc. 1993 Transition Stock Option
Plan,
filed on Registrant's Form S-8 (No. 33-77598), filed on April
12, 1994, and incorporated by reference herein.
10.8 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.
10.9 The Kenucky 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.
10.10 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.
10.11 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.
10.12 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.
10.13 The Kentucky Electric Steel, Inc. Key Employee Stock/Loan Plan,
effective February 2, 1995 for the benefit of the Company's
Executive Officers, filed as Exhibit 10.14 to Registrant's Form
10-Q, No. 0-22416, filed on February 9, 1995, and incorporated
by reference herein.
10.14 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.
10.15 Kentucky Electric Steel, Inc. 1994 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-
301218), filed on February 12, 1996, and incorporated by
reference herein.
10.16 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.
10.17 First Addendum to Agreement with Morgan-Pomini Company for
Rolling
and Finishing Fund Modernization, filed as Exhibit 10.15 to
Registrant's Form 10-Q, No. 0-22416, filed on February 11,
1997, and incorporated by reference herein.
10.18 Remediation and Waste Disposal Agreement - Zhagrus
Environmental,
Inc., filed as Exhibit 10.16 to Registrant's Form 10-Q, No. 0-
22416
filed on May 12, 1997 and incorporated by reference herein.
10.19 The Kentucky Electric Steel, Inc. Share Plan for Non-Employee
Directors.
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 27, 1997.
<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, 1997 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, 1997
Charles C. Hanebuth and Chairman
\s\William J. Jessie Vice President, Secretary, December 12, 1997
William J. Jessie Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
\s\Clifford R. Borland Director December 12, 1997
Clifford R. Borland
\s\Carl E. Edwards, Jr. Director December 12, 1997
Carl E. Edwards, Jr.
\s\J. Marvin Quin, II Director December 12, 1997
J. Marvin Quin, II
\s\David C. Struve Director December 12, 1997
David C. Struve
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements Page
Report of Independent Public Accountants ...................... F-1
Consolidated Balance Sheets - September 28, 1996 and
September 27, 1997 ............................................ F-2
Consolidated Statements of Operations - Years ended
September 30, 1995, September 28, 1996 and September 27, 1997 . F-3
Consolidated Statements of Changes in Shareholders' Equity -
Years ended September 30, 1995, September 28, 1996, and
September 27, 1997 ............................................ F-4
Consolidated Statements of Cash Flows - Years ended
September 30, 1995, September 28, 1996 and September 27, 1997 . F-5
Notes to Consolidated Financial Statements .................... F-6
Financial Statement Schedule
Report of Independent Public Accountants ...................... S-1
Schedule II Valuation and Qualifying Accounts ................ S-2
<PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Electric Steel, Inc.:
We have audited the accompanying consolidated balance sheets of Kentucky
Electric Steel, Inc. (a Delaware corporation) and subsidiary as of September
28, 1996 and September 27, 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended September 27, 1997. 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. and subsidiary as of September 28, 1996 and September 27, 1997 and
the results of its operations and their cash flows for each of the three years
in the period ending September 27, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Cincinnati, Ohio,
October 24, 1997
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
September September
28, 1996 27, 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 124 $ 127
Accounts receivable, less allowance for doubtful
accounts and claims of $390 in 1996, and $470 in 1997 12,113 11,577
Insurance claim receivable - 900
Inventories 17,367 16,538
Operating supplies and other current assets 5,067 4,802
Refundable income taxes 540 900
Deferred tax assets 680 457
------- -------
Total current assets 35,891 35,301
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,353 4,448
Machinery and equipment 37,774 40,301
Construction in progress 1,412 2,012
Less - accumulated depreciation (7,852) (11,229)
------- -------
Net property, plant and equipment 35,687 35,532
------- -------
DEFERRED TAX ASSETS 6,263 7,159
------- -------
OTHER ASSETS 592 778
------- -------
Total assets $ 78,433 $ 78,770
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 7,546 $ 10,635
Accounts payable 7,214 7,977
Capital expenditures payable 2,404 547
Accrued liabilities 3,639 3,700
Environmental liabilities - 982
Current portion of long-term debt 125 125
------- -------
Total current liabilities 20,928 23,966
------- -------
LONG-TERM DEBT 20,000 20,000
------- -------
OTHER LIABILITIES 395 593
------- -------
Total liabilities 41,323 44,559
------- -------
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 and 4,977,988 shares
issued, respectively 50 50
Additional paid-in capital 15,710 15,665
Less treasury stock - 273,000 and 350,976 shares
at cost, respectively (2,165) (2,638)
Deferred compensation (421) (170)
Retained earnings 23,936 21,304
------- -------
Total shareholders' equity 37,110 34,211
------- -------
Total liabilities and shareholders' equity $ 78,433 $ 78,770
<FN>
See notes to consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<CAPTION>
Year Ended
September September September
30, 1995 28, 1996 27, 1997
<S> <C> <C> <C>
NET SALES $107,402 $ 98,320 $ 94,652
COST OF GOODS SOLD 91,642 89,783 89,992
------- ------- -------
Gross profit 15,760 8,537 4,660
SELLING AND ADMINISTRATIVE EXPENSES 7,696 7,391 6,800
------- ------- -------
Operating income (loss) 8,064 1,146 (2,140)
INTEREST EXPENSE (658) (1,453) (2,125)
INTEREST INCOME AND OTHER 57 31 34
GAIN ON INVOLUNTARY CONVERSION
OF EQUIPMENT - 369 -
------- ------- -------
Income (loss) before income taxes 7,463 93 (4,231)
PROVISION (CREDIT) FOR INCOME TAXES 2,812 35 (1,599)
------- ------- -------
Net income (loss) $ 4,651 $ 58 $ (2,632)
NET INCOME (LOSS) PER COMMON SHARE $ .95 $ .01 $ (.57)
WEIGHTED AVERAGE SHARES OUTSTANDING 4,905,456 4,806,161 4,633,315
<FN>
See notes to consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Years in the Period Ended
September 27, 1997
(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. 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
Tax effect of
restricted stock
recognized differ-
ently for financial
reporting and tax
purposes - - (66) - - - - (66)
Amortization of
deferred comp-
ensation - - - - - 251 - 251
Issuance of stock 3,889 - 21 - - - - 21
Purchases of treasury
stock - - - (77,976) (473) - - (473)
Net income (loss) - - - - - - (2,632) (2,632)
--------- -- ------ ------- ----- --- ------ ------
BALANCE, Sept. 27, 1997 4,977,988 $50 $15,665 (350,976) $(2,638) $(170) $21,304 $34,211
<FN>
See notes to consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
Year Ended
September September September
30, 1995 28, 1996 27, 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 4,651 $ 58 $(2,632)
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,564 2,769 3,737
Gain on involuntary conversion of equipment - (369) -
Change in deferred taxes 1,927 618 (896)
Change in other (141) (257) (158)
Changes in current assets and
current liabilities:
Accounts receivable 445 815 536
Insurance claim receivable - - (900)
Inventories (3,055) 838 829
Operating supplies and other
current assets (830) 206 265
Refundable income taxes 114 (88) (360)
Deferred tax assets (79) (487) 223
Accounts payable 1,138 (81) 763
Accrued liabilities (455) (74) 61
Environmental liabilities - - 982
------ ------ -----
Net cash flows from operating activities 5,279 3,948 2,450
------ ------ -----
Cash Flows From Investing Activities:
Proceeds from involuntary conversion of equipment - 912 -
Capital expenditures (16,647) (10,509) (3,226)
Change in capital expenditures payable 1,772 (672) (1,858)
------ ------ ------
Net cash flows from investing activities (14,875) (10,269) (5,084)
------ ------ ------
Cash Flows From Financing Activities:
Net advances (repayments) on line of credit 11,131 (3,585) 3,089
Repayments on long-term debt (1,839) (9,001) -
Proceeds from long-term debt borrowings - 20,000 -
Issuance of common stock - - 21
Purchases of treasury stock (869) (1,296) (473)
------ ------ ------
Net cash flows from financing activities 8,423 6,118 2,637
------ ------ ------
Net increase (decrease) in cash
and cash equivalents (1,173) (203) 3
Cash and Cash Equivalents at Beginning of Period 1,500 327 124
------ ------ ------
Cash and Cash Equivalents at End of Period $ 327 $ 124 $ 127
Interest Paid, net of amount capitalized $ 566 $ 884 $ 2,142
Income Taxes Paid $ 1,326 $ 376 $ -
<FN>
See notes to consolidated financial statements
</TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations
Kentucky Electric Steel, Inc. (KESI or 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.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Kentucky Electric Steel, Inc. and its wholly-owned subsidiary,
KESI Finance Company, which was formed in October 1996 to
finance the ladle metallurgy facility. All significant
intercompany accounts and transactions have been eliminated.
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 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 assesses its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable.
The Company capitalizes interest costs as part of the historical cost of
acquiring major capital assets. Interest costs of $262,000 and $11,000 were
capitalized for the year ended September 28, 1996 and September 27, 1997,
respectively.
Income Taxes
The Company accounts for income taxes pursuant to the asset and
liability method. Deferred tax assets and liabilities are recognized based
upon the estimated increase or decrease in taxes payable or refundable in
future years expected to result from reversal of temporary differences and
utilization of carryforwards which exist at the end of the current year.
Temporary differences represent the differences between the financial
statement carrying amount of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates scheduled to apply to taxable income in the years in which the temporary
differences are expected to be settled, and are adjusted in the period of
enactment for the effect of a change in tax law or rates.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS No. 128) Earnings Per Share. This Statement replaces
the presentation of primary E.P.S. with a presentation of basic E.P.S. and
requires dual presentation of basic and diluted E.P.S. on the face of the
income statement for all entities with complex capital structures. The
Company will adopt SFAS No. 128 during the first quarter of fiscal 1998.
Applying the provisions of SFAS No. 128, basic and diluted earnings per share
for the fiscal years 1995, 1996, and 1997 would have been the same as
previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS No. 130) "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. The
Company currently has no items of other comprehensive income; therefore, SFAS
No. 130 does not currently apply. The Company is required to adopt SFAS No.
130 effective with the fiscal year ending September 25, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 (SFAS No. 131) "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for reporting
information about operating segments in annual financial statements and
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. Management is currently evaluating the provisions
of this statement to determine its impact upon current reporting. The Company
is required to adopt SFAS No. 131 effective with the fiscal year ending
September 25, 1999.
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.
(3) Inventories
Inventories at September 28, 1996 and September 27, 1997 consist of the
following ($000's):
1996 1997
Raw materials $ 4,069 $ 3,280
Semi-finished and finished goods 13,298 13,258
Total inventories $ 17,367 $ 16,538
(4) Insurance Claim Receivable and Environmental Liabilities
The Company's melt shop operations were shut down for twelve days during
the third quarter of fiscal 1997 in order to decontaminate its baghouse
facilities after detection of a radioactive substance in the baghouse dust, a
by-product of the melting process. The financial statements include a
receivable of $.9 million which represents the estimated balance due from the
insurance carrier on the total projected reimbursement of $6.7 million, which
reimburses the costs incurred in the radiation contamination clean-up, the
disposal cost, and business interruption. To date, the Company has received
$5.8 million from the insurance carrier for payment of costs incurred.
The $1.0 million in environmental liabilities recorded as a current
liability on the balance sheet represents final payment due an environmental
services company for treatment and disposal of the contaminated baghouse dust.
Payment for the disposal will occur within the next twelve months. Although
it is possible that the ultimate disposal costs may change from current
estimates, the effect of the change, if any, is not expected to be material to
the financial statements due to the Company having appplicable insurance
coverage.
(5) Accrued Liabilities
Accrued liabilities at September 28, 1996 and September 27, 1997 consist
of the following ($000's):
1996 1997
Accrued payroll and related liabilities $ 1,442 $ 1,431
Accrued insurance and workers' compensation 950 1,085
Accrued interest payable 697 679
Other 550 505
$ 3,639 $ 3,700
(6) Long-Term Debt
Long-term debt of the Company at September 28, 1996 and September 27,
1997 consists of the following ($000's):
1996 1997
Unsecured senior notes, due in equal
annual installments from November
2000 through 2005, interest at 7.66% $ 20,000 $ 20,000
Other 125 125
20,125 20,125
Less - Current portion (125) (125)
$ 20,000 $ 20,000
The unsecured senior notes require no principal payments for the first
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 Company has a $17.5 million unsecured bank credit facility.
Borrowings are limited to defined percentages of eligible inventory and
accounts receivable. Interest on borrowings accrue at the rate of LIBOR plus
1.35% or the higher of the prime rate minus 1/2%.
The notes and bank credit facility contain restrictive covenants, which
include, among other restrictions, a maximum ratio of total funded debt to
total capitalization, a minimum fixed charge coverage ratio, a minimum net
worth requirement and restrictions on the payment of dividends.
As of September 27, 1997, approximately $10.6 million was outstanding
under the bank credit facility, approximately $1.6 million was utilized to
collateralize various letters of credit and $3.8 million was available for
additional borrowings. The weighted average interest rate on short term
borrowings as of September 28, 1996 and September 27, 1997 were 7.5% and 7.3%,
respectively.
The Company's unsecured senior notes and bank credit facility agreements
were amended, effective December 28, 1996, to reduce the required fixed charge
coverage ratio, increase the minimum net worth requirement and revise other
miscellaneous provisions of the agreements. In connection with the amendment,
the amount of the Company's unsecured bank credit facility was reduced from
$24.5 million to $17.5 million. With this amendment, the Company continues to
be in compliance with the financial covenants and management believes it is
probable that the Company will continue to be in compliance with the amended
covenants.
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 27, 1997. The fair value of the unsecured senior notes
was approximately $19.7 million as of September 27, 1997.
(7) Significant Customers and Foreign Sales
The Company grants trade credit to customers within the markets it
serves, the most significant of these are the leaf-spring suspension and cold
drawn bar converter markets. Sales to the leaf-springs suspension market
represented 32.0%, 25.3%, and 18.6% of total sales for 1995, 1996 and 1997,
respectively. Sales to the cold drawn bar converter market represented 15.7%,
19.3%, and 29.2% of total sales for 1995, 1996, and 1997, respectively.
One company, through several wholly-owned subsidiaries which are
customers of the Company, represented 16.2%, 11.7% and 9.6% of net sales in
fiscal 1995, 1996 and 1997, respectively. Another customer, through two
wholly-owned subsidiaries which are customers of the Company, accounted for
14.0% of net sales in fiscal 1997. No other customer accounted for more than
10% of net sales.
The Company's foreign sales represented 6.3%, 8.8%, and 8.5% of total
sales for 1995, 1996 and 1997, respectively.
(8) Income Taxes
The provision (credit) for income taxes consists of the following
($000's):
1995 1996 1997
Current:
Federal $ 916 $(2,510) $ (900)
State - (379) -
916 (2,889) (900)
Deferred:
Federal 1,616 2,541 (498)
State 280 383 (201)
1,896 2,924 (699)
Total provision (credit)
for income taxes $ 2,812 $ 35 $(1,599)
The provision (credit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before income
taxes for the following reasons ($000's):
1995 1996 1997
Income tax provision (credit) at
Statutory tax rate of 34% $ 2,537 $ 32 $(1,438)
State income taxes, net of
federal effect 185 1 (103)
Other, net 90 2 (58)
$ 2,812 $ 35 $(1,599)
The components of the net deferred tax asset at September 28, 1996 and
September 27, 1997 are as follows ($000's):
Sept. 28, Sept. 27,
1996 1997
Deferred tax components:
Property, plant and equipment $ 3,323 $ 1,126
Intangibles 2,949 2,737
AMT credit carryforwards 2,023 1,197
NOL carryforward 1,604 4,682
Other (275) 555
9,624 10,297
Valuation allowance (2,681) (2,681)
Net deferred tax assets $ 6,943 $ 7,616
For Federal income tax purposes the Company has alternative minimum tax
carryforwards of approximately $1.2 million, which are not limited by
expiration dates. The Company also has gross operating tax loss carryforwards
of approximately $13.8 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 nature of certain events which adversely
affected operations in fiscal 1996 and 1997, the results of operations in the
third and fourth quarters of fiscal 1997, 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.
(9) 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 $751,000, $213,000,
and $219,000 in 1995, 1996 and 1997, respectively.
(10) 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 became
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 $5.56 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 $240,000 and
$208,000 was recognized in fiscal 1996 and 1997, 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 $261,000 and $53,000 as of September 28, 1996 and
September 27, 1997, respectively.
A summary of transactions in the plans for fiscal 1996 and 1997 are as
follows:
1996 1997
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 240,284 $11.06 327,976 $10.11
Options granted 91,192 7.63 89,192 5.56
Options forfeited (3,500) 10.49 (12,000) 9.69
------- ----- ------- -----
Options outstanding, end of year 327,976 $10.11 405,168 $ 9.12
Options exercisable, end of year 102,009 $11.50 186,505 $10.96
Restricted shares granted - -
Options and restricted shares
available for grant 87,925 10,733
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 1996 and 1997 are as follows:
1996 1997
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 177,422 $14.02 169,430 $14.00
Options granted - - - -
Options forfeited (7,992) 14.35 (10,728) 13.06
------- ----- ------- -----
Options outstanding, end of year 169,430 $14.00 158,702 $14.06
Options exercisable, end of year 149,814 $14.69 149,720 $14.38
The Financial Accounting Standard Board issued Statement No. 123 (SFAS
No. 123) related to accounting for stock based compensation. The statement
encourages the use of the fair value based method to measure compensation cost
for stock-based employee compensation plans. As permitted, the Company
continues to account for its stock-based compensation plans using the
intrinsic value method in accordance with APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized for
the Company's Employee Stock Option Plan for fiscal years 1996 and 1997. Had
compensation cost for the stock options granted in fiscal 1996 and 1997 been
determined based on the fair value at the grant dates for awards under those
plans consistent with the fair value method of SFAS No. 123, pro forma net
income and earnings per share would have been a net loss of $192,000 and loss
per share of $.04 for fiscal 1996 and a net loss of $2.8 million and $.61 per
share for fiscal 1997. These pro forma disclosures are not likely to be
representative of the effect on reported net income and earnings per share for
future years since current options vest over a three to four year period and
additional options are generally granted each year. The weighted-average fair
value of options granted in fiscal 1996 and fiscal 1997 was $4.38 and $3.15
per share, respectively. The fair value of each option is estimated on the
date of grant using the Black-Scholes options pricing model with the following
assumptions: weighted average risk free interest rate of 6.96% for fiscal
1996 and 6.59% for fiscal 1997, weighted average volatility of 38.4%,
expected life of eight years and zero dividends.
The following table summarizes information about stock options
outstanding at September 27, 1997 under the Employee Stock Option/Restricted
Stock Plans and the Transition Plan:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 9/27/97 Life Price at 9/27/97 Price
Employee Stock Option/Restricted Stock Plans:
$ 5.56 - 7.63 176,384 9.12 Years $ 6.58 21,797 $ 7.63
9.13 - 12.31 228,784 7.01 Years 11.08 164,708 11.40
------------ ------- ---------- ----- ------- -----
5.56 - 12.31 405,168 7.92 Years 9.12 186,505 10.96
Transition Plan:
8.76 - 9.05 69,810 4.86 Years 8.86 60,828 8.88
14.40 - 20.86 88,892 1.18 Years 18.15 88,892 18.15
------------- ------- ---------- ----- ------- -----
$ 8.76 - 20.86 158,702 2.80 Years $14.06 149,720 $14.38
The Company has a key employees' stock loan plan which provides for the
granting of loans to eligible employees for the purchase of the Company's
common stock in the open market. Under the terms of the plan, the loans are
forgiven, and the related amounts expensed, on a pro-rata basis over a five-
year period of service beginning at the date of grant. The unamortized
balance due from eligible employees under the plan is reflected as deferred
compensation and shown as a deduction of shareholders' equity and was $160,000
and $117,000 as of September 28, 1996 and September 27, 1997, respectively.
In fiscal 1996 and fiscal 1997, the Company recognized $43,000 each year of
compensation expense related to the plan.
During 1997, the Board of Directors established the Kentucky Electric
Steel, Inc. Share Plan for Non-Employee Directors (the "Plan"), which provides
for the issuance of stock in lieu of cash for director services. Under the
Plan, 25,000 shares were authorized for issuance. The Plan provides for
issuance of common stock for at least 60% of the fees payable with respect to
the applicable meeting for each Non-Employee Director. During fiscal 1997,
3,889 shares were issued at stock prices ranging from $5.13 to $5.50 per
share.
(11) Shareholders' Equity
Each share of common stock outstanding (and each share of common stock
issued prior to the occurrence of certain events) carries with it one
Preferred Stock Purchase Right (a Right) to purchase at a price of $40, one-
hundredth of a share of Series A Junior Participating Preferred Stock. The
Rights are exercisable only if a person or group acquires or announces a
tender offer which would result in ownership of 20% or more of the common
stock. The Company can redeem the Rights for $.01 per Right at any time prior
to the time a person or group acquires 20% or more of the Company's shares.
Following the acquisition of 20% or more of the Company's common stock by
a person or group, the holders of the Rights will be entitled to purchase
additional shares of Company common stock at one-half the then current market
price, and, in the event of a subsequent merger or other acquisition of the
Company, to buy shares of common stock of the acquiring entity at one-half of
the market price of those shares. In neither event, however, would the
acquiring person or group be entitled to purchase shares at the reduced price.
In connection with the shareholder rights plan, which was adopted by the
Board of Directors on February 27, 1996, 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.
(12) 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 costs for testing or remedial action is deemed probable.
The Company is not aware of any asserted or unasserted environmental claims
against the Company and no accruals for such matters have been recorded in the
accompanying balance sheets except as disclosed in Note 4. However, discovery
of unknown conditions could result in the recording of accruals in the periods
in which they become known.
(13) Quarterly Financial Data (Unaudited)
Quarterly results of operations (in thousands, except per share amounts)
for fiscal 1996 and fiscal 1997 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
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
1997
Net sales $ 23,382 $ 23,159 $ 22,724 $ 25,387
Gross profit (loss) $ (14) $ (456) $ 2,370 $ 2,760
Net income (loss) $ (1,384) $ (1,659) $ 45 $ 366
Net income (loss)
per common share $ (.30) $ (.36) $ .01 $ .08
Weighted average shares
outstanding 4,658,691 4,626,639 4,622,062 4,626,414
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Electric Steel, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Kentucky Electric
Steel, Inc.'s annual report on Form 10-K, and have issued our report thereon
dated October 24, 1997. 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 24, 1997
<PAGE>
SCHEDULE II
KENTUCKY ELECTRIC STEEL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Reserves Deducted
from Assets in
Balance Sheets
Allowance for
Doubtful
Accounts (1)
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
Additions:
Charged to costs and expenses .................... 120
Deductions:
Net charge-off of accounts deemed uncollectible .. (40)
---
BALANCE, September 27, 1997 ......................... $ 470
(1) Deducted from accounts receivable.
<PAGE>
</DOCUMENT
KENTUCKY ELECTRIC STEEL, INC.
SHARE PLAN FOR NON-EMPLOYEE DIRECTORS
I. Name and Purpose of Plan
1.1 Establishment. This plan created in accordance with the terms
hereof shall be known as the "Kentucky Electric Steel, Inc. Share Plan for
Non-Employee Directors" (the "Plan").
1.2 Purposes. The purposes of this Plan are to encourage the Non-
Employee Directors of Kentucky Electric Steel, Inc. (the "Company") to own
shares of the Company's stock and thereby to align their interests more
closely with the interests of the other shareholders of the Company, to
encourage the highest level of director performance by providing the Non-
Employee Directors with a direct interest in the Company's attainment of its
financial goals, and to provide a financial incentive that will help attract
and retain the most qualified directors.
II. Definitions
2.1 Definitions. The following terms shall have the meanings set
forth below:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Non-Employee Director" shall mean an individual duly
elected or chosen as a member of the Board who is not an employee of the
Company.
(c) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(d) "Fair Market Value" means the average of the highest sale
price and the lowest sale price of a Share on the date the value of a Share is
to be determined, as reported on the NASDAQ System, and published in the Wall
Street Journal, or if no sale is reported for such date, then on the next
preceding date for which a sale is reported or, if the Shares are no longer
traded on the NASDAQ System, the determination of such value shall be made by
the Board.
(e) "Fees" shall mean the amount of the fees to be paid to each
Non-Employee Director for services as a director (including all meetings of
the full Board and all committee meetings) for each fiscal quarter, as
determined by the Board from time to time.
(f) "Shares" shall mean the common stock, par value $.01 per
share, of the Company.
2.2 Gender and Number. Except when otherwise indicated by the
context, the masculine gender shall also include the feminine gender, and the
definition of any term herein in the singular shall also include the plural.
III. Stock Subject to the Plan
A total of 25,000 Shares are authorized for issuance under this Plan in
accordance with the provisions of this Plan. This authorization may be
increased from time to time by approval of the Board and by the shareholders
of the Company if, in the opinion of counsel for the Company, such shareholder
approval is required.
IV. Participation
Each Non-Employee Director of the Company may receive Shares pursuant to
this Plan on the terms and conditions set forth herein. Each Non-Employee
Director shall, if required by the Board, enter in an agreement with the
Company, in such form as the Board shall determine and which is consistent
with the provisions of this Plan. In the event of any inconsistency between
the provisions of this Plan and any such agreement entered into hereunder, the
provisions of this Plan shall govern.
V. Stock Issuances
Promptly following each Board meeting or meeting of a committee of the
Board during a fiscal quarter commencing on or after September 27, 1997, the
Company shall issue to each Non-Employee Director the number of Shares
(rounded to the nearest whole number) obtained by dividing the "Applicable
Portion" of such Non-Employee Director's Fees by the Fair Market Value of a
Share on the date of the applicable Board or committee meeting. No fractional
Share shall be issued by the Company under this Plan. The "Applicable
Portion" shall be 60% of the Fees payable with respect to the applicable
meeting for each Non-Employee Director, or such higher percentage that any
individual Non-Employee Director elects for himself, such election to be filed
in writing with the Chief Financial Officer of the Company prior to the first
day of the fiscal quarter during which the applicable meeting occurs.
VI. General Provisions
6.1 Non-transferability. No rights to the issuance of Shares pursuant
to this Plan shall be assigned, pledged, hypothecated or otherwise transferred
by a Non-Employee Director or any other person, voluntarily or involuntarily,
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order.
6.2 Investment Representations; Restricted Stock. The Company may
require any Non-Employee Director to whom Shares are to be issued pursuant to
this Plan, as a condition of receiving such Shares, to given written
assurances in substance and form satisfactory to the Company and its counsel
to the effect that such person is acquiring the Shares for his own account for
investment and not with any present intention of selling or otherwise
distributing the same, that the Shares issued pursuant to this Plan have not
been registered pursuant to any applicable securities law and can only be
transferred upon compliance with such laws, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws. The Shares issued pursuant to this Plan
will bear an appropriate legend.
6.3 Compliance with Laws. (a) Each issuance of Shares pursuant to
this Plan shall be subject to the requirement that, if at any time counsel to
the Company shall determine that the listing, registration or qualification of
the Shares upon any securities exchange or under any state or federal law, or
the consent or approval of any governmental or regulatory body, is necessary
as a condition of, or in connection with, the issuance of Shares thereunder,
such Shares may not be issued unless such listing, registration,
qualification, consent or approval shall have been effected or obtained on
conditions acceptable to the Board.
(b) This Plan and the issuance of Shares pursuant to this Plan are
intended to comply with Rule 16b-3 promulgated under the Exchange Act; and the
Board shall interpret and administer the provisions of this Plan in a manner
consistent therewith.
(c) The issuance of Shares and the payment of cash pursuant to this
Plan shall be subject to all applicable laws, rules and regulations.
VII. Plan Amendment and Termination
The Board may at any time terminate, and from time to time amend or
modify this Plan; provided, however, that no amendment or modification may
become effective without approval of the amendment or modification by the
shareholders if shareholder approval is required to enable this Plan to
satisfy any applicable statutory or regulatory requirements, or if the
Company, on the advice of counsel, determines that shareholder approval is
otherwise necessary or desirable.
VIII. Miscellaneous
8.1 Retention as Director. Nothing contained in this Plan shall
interfere with or limit in any way the right of the shareholders or the
Directors of the Company to remove any Director from the Board pursuant to the
bylaws of the Company, nor confer upon any Director any right to continue in
the service of the Company.
8.2 Relationship to Other Plans. The adoption of this Plan shall not
affect any other compensation plan in effect for the Company. Furthermore,
this Plan shall not preclude the Company from establishing any other form of
incentive or other compensation arrangement for Directors of the Company.
8.3 Plan Binding on Successors. This Plan shall be binding upon the
successors and assigns of the Company.
8.4 Governing Law. The provisions of this Plan shall be governed by
and construed in accordance with the laws of the State of Delaware.
8.5 Headings. Headings are given to the sections of this Plan solely
as a convenience to facilitate reference. Such headings, numberings and
paragraphing shall not in any case be deemed in any way material or relevant
to the construction of this Plan or any provisions thereof.
IX. Effective Date
The effective date of this Plan shall be the date of its adoption by the
Board.
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, 1997
<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 27, 1997 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.
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 12,047
<ALLOWANCES> 470
<INVENTORY> 16,538
<CURRENT-ASSETS> 35,301
<PP&E> 46,761
<DEPRECIATION> 11,229
<TOTAL-ASSETS> 78,770
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<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 34,161
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<INCOME-PRETAX> (4,231)
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</TABLE>