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 26, 1998
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 11, 1998: $10,552,000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of December 11, 1998:
4,059,531 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 7A. Qualitative and Quantitative Disclosure about Market
Risk ................................................. 12
Item 8. Financial Statements and Supplementary Data .......... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 20
PART III ........................................................... 21
Item 10. Directors and Executive Officers of the Registrant ... 21
Item 11. Executive Compensation ............................... 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management ................................ 21
Item 13. Certain Relationships and Related Transactions ....... 21
PART IV ............................................................ 22
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K .................................. 22
SIGNATURES ......................................................... 25
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE ........................ 26
<PAGE>
KENTUCKY ELECTRIC STEEL, INC.
PART I
Item 1. Business
General
Kentucky Electric Steel, Inc., a Delaware corporation incorporated
in August, 1993 (the "Company"), owns and operates a steel mini-mill near
Ashland, Kentucky. As a mini-mill producer of bar flats, the Company
recycles steel from scrap, a process designed to result in lower
production costs than those of integrated steel mills, which produce
steel by processing iron ore and other raw materials in blast furnaces.
Bar flats are produced to a variety of specifications and fall primarily
into two general quality levels - merchant bar quality steel bar flats
("MBQ Bar Flats") for generic types of applications, and special bar
quality steel bar flats ("SBQ Bar Flats"), where more precise customer
specifications require the use of various alloys, customized equipment
and special production procedures to insure that the finished product
meets critical end-use performance characteristics. The Company is a
leading manufacturer of SBQ Bar Flats for the cold drawn bar converter
and truck trailer support beam markets. 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, removed 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 up to
three inches in thickness and twelve inches in width that are required by
these markets. In addition, the Company employs a variety of specially
designed equipment which is necessary to manufacture SBQ Bar Flats to the
specifications demanded by its customers. Although the Company
specializes in SBQ Bar Flats, particularly in the thicker and wider
sections, it also, to a much lesser extent, competes in the MBQ Bar Flat
market.
The Company's business strategy is to increase its share of the SBQ
Bar Flat market and to expand into related niche market applications
where it can 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 the development
of new customers. The Company has increased its shipments of the thicker,
wider products from fiscal 1997 to fiscal 1998 and has continued to
decrease its 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 than 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. The Company sold 240,300 tons of finished goods in
1998 which constitutes 80% 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 $8.1 million, which includes $2.8 million expended in fiscal
year 1998.
The Board of Directors has approved the fiscal 1999 capital
expenditure plan for approximately $3.1 million, which includes
completion of various projects begun in fiscal 1998, and 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.
Leaf-Spring Suspension Market. High tensile SBQ spring steel is produced
to customer and industry specifications for use in leaf-spring
assemblies. These assemblies are utilized in light, medium and heavy
duty trucks, trailers, mini-vans and four-wheel drive vehicles with off-
road capability. The trend toward tapered leaf-spring products and air-
ride suspension continues. These products use somewhat less steel but
they are manufactured from larger cross section bar flats that match the
Company's manufacturing strengths.
Cold Drawn Bar Converters Market. The Company sells its expanded range
of SBQ hot rolled bar products to cold drawn bar manufacturers. KESI's
product range, 1/4" through 3" in thickness and 2" through 12" in width,
enables the Company to supply practically all the sizes needed by the
converters. The converters remove the scale from the hot rolled bar and
draw it through a 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.
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 this
market match the Company's ability to produce thicker, wider bar flats
described in "Business - General."
Customers
The Company sells to over 350 customers. Two wholly-owned
subsidiaries of Niagara Corporation represented approximately 10.4% of
sales for fiscal 1998. No other customer accounted for more than 10% of
sales in fiscal 1998. 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
7.5% in fiscal 1998. 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. One company, which currently competes in the leaf spring
market, has announced plans to increase the capacity of its plant and to
expand the size range of the products it manufactures. Also, another
mini-mill which currently competes in two of the Company's markets, is
building a new rolling mill to produce both rounds and bar flats. Both
of these projects may increase competition in the markets served by the
Company. The Company believes that the principal competitive factors
affecting its business are quality, service, price and geographic
location.
Backlog and Seasonality
As of September 26, 1998, the Company had firm orders for
approximately 54,000 tons representing approximately $26.0 million in
sales, as compared with approximately 58,000 tons representing
approximately $27.7 million in sales, at September 27, 1997.
The Company operates on a continuous basis with only occasional
scheduled shutdowns for heavy maintenance work. The Company's operations
are not subject to seasonal fluctuations in operations or sales.
Raw Materials
The principal raw material used in the Company's steel mill is
ferrous scrap. Ferrous scrap is derived from, among other sources,
discarded automobiles, appliances, structural steel, railroad cars and
machinery. The purchase price of scrap is subject to market conditions
largely beyond the control of the Company. The Company is located in an
area where scrap is generally available and typically maintains less than
one month of scrap supply. Historically, price fluctuations of scrap
have had no material long-term impact on the Company. However, while the
Company has generally been successful in passing on scrap cost increases
through price increases, the effect of steel imports, market price
competition and under-utilized industry capacity has in the past, and
could in the future, limit the Company's ability to increase prices. One
scrap dealer supplied approximately 44% of the Company's scrap in fiscal
1998. In an attempt to insure an adequate source of raw materials,
however, the Company has identified, inspected, and purchased scrap from
over 30 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 will have a minimum term of five years unless the Company gives AEP
at least one year's notice of termination. The 1997 Contract limits
AEP's right to interrupt service, for no more than 30 minutes at a time,
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).
Employees
As of September 26, 1998, the Company employed 421 people,
approximately 78% of whom are members of the United Steelworkers of
America. The Company and The United Steelworkers of America have agreed
to a one-year extension of the current contract, which was to expire on
September 10, 1998, and are continuing multi-year contract negotiations.
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 is the
subject of a civil action ("Civil Action") filed in the United States
District Court for the Middle District of Pennsylvania by USEPA (No. CV.
98-654) seeking recovery of costs for alleged environmental contamination
at the Palmerton Site. HRD has negotiated a Consent Decree and a
settlement of $4,984,000 with USEPA for the approximate 250 companies
which sent 3,348,287 tons of Furnace Dust to the Palmerton Site. On
October 16, 1998, the Company executed the Consent Decree in the Civil
Action, which, if approved by the Court, will require the payment of
$64,950.18 for the Company's 1.3032 percent volumetric share of the
Furance Dust sent to the Palmerton Site. In consideration of this
payment, the Company will be relieved of any liability that the Company
may have for contribution or claims for response costs incurred in
connection with the Palmerton Site as provided by Sections 113(f)(2) and
122(g)(5) of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended. HRD has represented to the Company
that HRD will pay USEPA the entire settlement of $4,984,000. However,
should the settlement become final and HRD does not pay the $4,984,000 to
USEPA, the Company will be required to pay $64,950.18. Should the
settlement not become final and 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.
Between 1981 and 1983, the prior operator (the "Prior Operator")
disposed of Furnace Dust in the Cooksey Brother's landfill, in
Cannonsburg, Kentucky ("Cooksey Landfill"). Before 1981 the Prior
Operator disposed of Furnace Dust in other locations, including a strip
mine. The Company did not assume any liability 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 Kentucky Division of Waste Management, and the Company
has no reason to believe that the Cooksey Landfill or other sites are
likely targets for listing as a Kentucky "uncontrolled site" or federal
superfund site. 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
("DAQ"). 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 ("EAFs") in the Company's melt shop. 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. On July 10, 1998, the Company amended its application to
provide a detailed description of the methods the Company would use to
achieve compliance with the applicable regulations for the EAFs. In this
submittal, the Company stated that it will modify its melt shop to
improve updraft velocity to the canopy hoods and thereby bring emissions
into compliance with applicable regulations during the charging and
tapping of the EAFs. On July 24, 1998, the Company entered into an
Agreed Order with DAQ which requires the Company to complete construction
of the melt shop modifications and demonstrate compliance with applicable
regulations by February 1, 1999. The Company has completed certain
modifications to its melt shop and is evaluating whether additional
modifications will be necessary to demonstrate compliance by February 1,
1999. Though the Company anticipates that it will be able to demonstrate
compliance with the regulations by February 1, 1999 as required by the
Agreed Order, if it fails to do so, the Company could be the subject of
an enforcement action for failure to comply with the Agreed Order.
Additionally, on August 21, 1998, the Company received a preliminary
draft of its Title V permit from DAQ. The Company has submitted comments
and has sought clarification concerning certain aspects of the draft
permit but has not, as yet, received a response from DAQ. The Company,
therefore, does not know whether it will be able to comply with its Title
V Permit without additional capital and/or operating expense. Further,
there can be no assurance that evolving federal and state environmental
requirements or discovery of unknown conditions will not require the
Company to make material expenditures in the future or affect the
Company's ability to obtain permits for its existing operations or 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 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. Zhagrus
has advised that it has completed treatment of the Mixed Waste but was
unable to complete disposal by September 1, 1998, as required by its
contract due to lack of permitted disposal capacity at the Envirocare
Facility. Zhagrus, however, has advised the Company that additional
disposal capacity has been constructed and near term regulatory approval
is anticipated allowing for the disposal of the Company's mixed waste by
February 28, 1999.
On June 29, 1998, the Company applied for reissuance of its
Kentucky Pollutant Discharge Elimination System Permit ("KPDES Permit")
which expired on October 31, 1998. Though the Company has supplied the
Kentucky Division of Water ("DOW") all requested information, DOW has not
reissued the KPDES Permit and the Company continues to operate under the
provisions of the existing KPDES Permit. During warm weather, the
Company has exceeded the discharge limitations for temperature at its
Outfall No. 3. Though the Company has not received a Notice of
Violation, DOW may seek penalties for any such temperature exceedences.
Additionally, since the Company has not received its reissued KPDES
Permit, the Company does not know whether it will be able to comply with
the reissued KPDES Permit without additional capital and operating
expense.
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 26, 1998.
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 2, 1999.
The names, ages and positions of all of the executive officers of
the Registrant as of September 26, 1998 are listed below with their
business experience with the Registrant for the past five years.
Officers are elected annually by the Board of Directors at the first
meeting of directors following the annual meeting of stockholders. There
are no family relationships among these officers, nor any agreement or
understanding between any officer and any other person pursuant to which
the officer was selected.
Charles C. Hanebuth, 54, has been President and Chief Executive Officer
of the Company since its formation in August 1993. From November 1990 to
October 1993, Mr. Hanebuth was President and Chief Operating Officer of
Kentucky Electric Steel Corporation, a wholly-owned subsidiary of NS
Group, Inc. Mr. Hanebuth has 19 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, 48, 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, 54, has been Vice President of Sales and Marketing of
the Company since its formation in August 1993. From February 1991 to
August 1993 he was General Sales Manager of Kentucky Electric Steel
Corporation. Mr. Harrison has over 28 years of sales experience in the
steel industry.
William H. Gerak, 53, 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 24 years of human resource and administrative experience.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The Company's common stock trades on the NASDAQ National Market
under the symbol KESI. The following table sets forth, for the fiscal
periods indicated, the high and low closing prices of the stock on the
NASDAQ National Market:
Fiscal 1997 Fiscal 1998
High Low High Low
First Quarter $ 7-1/4 $ 5-1/4 $ 8 $ 4-1/2
Second Quarter 6-7/8 5-1/8 7-1/4 4-3/4
Third Quarter 5-3/4 4-1/8 6-15/16 4-15/16
Fourth Quarter 7-1/4 5-1/4 5-1/8 3-1/2
On December 11, 1998 there were approximately 1,500 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. 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 26, 1998 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. 24, Sept. 30, Sept. 28, Sept. 27, Sept. 26,
1994 1995 1996 1997 1998
(In thousands, except share and per share data)
Income Statement Data:
Net sales ......... $102,629 $107,402 $ 98,320 $ 94,652 $109,456
Cost of goods sold 86,892 91,642 89,783 89,992 97,720
------- ------- ------- ------ ------
Gross profit .... 15,737 15,760 8,537 4,660 11,736
Selling and admini-
strative expenses 6,963 7,696 7,391 6,800 7,011
------- ------- ------- ------ ------
Operating income
(loss) 8,774 8,064 1,146 (2,140) 4,725
Interest income from
NS Group, Inc. - net 30 - - - -
Interest expense ..... (586) (658) (1,453) (2,125) (2,395)
Interest income and
other .............. 164 57 31 34 80
Gain on involuntary con-
version of equipment - - 369 - -
------- ------- ------- ------ ------
Income (loss) before
income taxes ...... 8,382 7,463 93 (4,231) 2,410
Income taxes ......... 3,167 2,812 35 (1,599) 916
------- ------- ------- ------ ------
Net income (loss)$ 5,215 $ 4,651 $ 58 $(2,632) $ 1,494
Net income (loss)
per common share -
basic and diluted..$ 1.06 $ .95 $ .01 $ (.57) $ .32
Weighted average
shares outstanding
- basic 4,908,158 4,905,456 4,806,161 4,633,315 4,624,671
Weighted average
shares outstanding
- - diluted 4,924,231 4,909,575 4,806,485 4,633,315 4,630,920
Balance Sheet Data:
Working capital .. $ 21,553 $10,324 $14,963 $11,335 $14,153
Total assets ..... 56,870 72,625 78,433 78,770 80,251
Long-term debt (1) 9,001 7,287 20,000 20,000 20,000
Shareholders' equity 34,276 38,097 37,110 34,211 35,192
(1) Net of current portion.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following analysis of results of operations and financial
condition of the Company should be read in conjunction with "Selected
Financial Data" and Financial Statements and Supplementary Data included
elsewhere herein.
General
The Company manufactures special bar quality alloy and carbon
steel bar flats to precise customer specification for sale in a variety
of niche markets. As a result, while the Company's business is cyclical
in nature, 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
28, 1996 27, 1997 26, 1998
Net sales ...................... 100.0% 100.0% 100.0%
Cost of goods sold ............. 91.3 95.1 89.3
----- ----- -----
Gross profit ................... 8.7 4.9 10.7
Selling and administrative
expenses ..................... 7.5 7.2 6.4
----- ----- -----
Operating income (loss) ........ 1.2 (2.3) 4.3
Interest expense ............... (1.5) (2.2) (2.2)
Interest income and other ...... - - .1
Gain on involuntary conversion
of equipment ................. .4 - -
----- ----- -----
Income (loss) before income taxes .1 (4.5) 2.2
Income taxes ................... - (1.7) .8
----- ----- -----
Net income (loss) ............... .1% (2.8%) 1.4%
Year Ended September 26, 1998 Compared with Year Ended September 27, 1997
Net Sales. Net sales for fiscal 1998 increased by $14.8 million,
or 15.6%, to $109.5 million from $94.7 million in fiscal 1997. The
increase in sales is attributed to an increase in shipments and an
increase in average selling price. Shipments increased by 10.7% from
217,000 tons in fiscal 1997 to 240,300 tons in fiscal 1998. The increase
in shipments resulted from the strong demand for the Company's products
during the first three quarters of fiscal 1998, and from the increase in
tons available for shipment due to improvements in productivity. Also,
shipments for fiscal 1997 were negatively impacted by the effect on
production of the melt shop operations being shut down for twelve days in
order to decontaminate the baghouse facility, after the detection of a
radioactive substance in the baghouse dust. The increase in average
selling price is attributed to the price increases implemented on many
products during the first half of fiscal 1998.
Cost of Goods Sold. Cost of goods sold for fiscal 1998 increased
$7.7 million, or 8.6%, to $97.7 million from $90.0 million in fiscal
1997. As a percentage of net sales, cost of goods sold decreased from
95.1% in fiscal 1997 to 89.3% in fiscal 1998. The increase in cost of
goods sold reflects the increase in shipments offset by a decrease in the
per ton cost of tons shipped. The decrease in the per ton cost of tons
shipped during fiscal 1998 as compared to fiscal 1997 resulted from lower
conversion costs due to improvements in productivity, offset partially by
an increase in scrap costs. The cost of goods sold for fiscal 1997
includes a $2.3 million reimbursement from business interruption
insurance related to the decontamination of the baghouse.
Gross Profit. As a result of the above, gross profit for fiscal
1998 increased by $7.0 million from $4.7 million in fiscal 1997 to $11.7
million in fiscal 1998. As a percentage of net sales, gross profit
increased from 4.9% in fiscal 1997 to 10.7% in fiscal 1998.
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 1998
increased $.2 million, or 3.1%, to $7.0 million from $6.8 million for
fiscal 1997. As a percentage of net sales, such expenses decreased from
7.2% for fiscal 1997 to 6.4% for fiscal 1998. The decrease as a
percentage of sales is primarily the result of an increase in net sales
(as discussed above) for fiscal 1998.
Operating Income. Fiscal year 1998 reflected operating income of
$4.7 million as compared to an operating loss of $2.1 million for fiscal
1997. As a percentage of net sales, operating income increased from
(2.3%)in fiscal 1997 to 4.3% for fiscal 1998.
Interest Expense. Interest expense increased by $.3 million to
$2.4 million in fiscal 1998 from $2.1 million in fiscal 1997, net of
interest capitalized of $11,000 for fiscal 1997. The increase is the
result of additional borrowings on the Company's line of credit.
Provision (Credit) for Income Taxes. The Company has recorded a tax
provision of approximately $.9 million in fiscal 1998 as compared to a
benefit of $1.6 million in fiscal 1997 at an effective tax rate of 38%
for both years. As of September 26, 1998 the Company has net deferred tax
assets of $6.6 million, which is net of a $2.7 million valuation
allowance. Included in the $9.3 million of gross deferred tax assets is
$5.4 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 results of operations for fiscal 1998 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 1998 reflected net
income of $1.5 million as compared to a net loss of $2.6 million in
fiscal 1997. As a percentage of net sales, net income increased from
(2.8%) in fiscal 1997 to 1.4% in fiscal 1998.
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 a ten
day Melt Shop outage in the second quarter which is discussed below.
Cost of Goods Sold. Cost of goods sold for fiscal 1997 increased
$.2 million, or .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% in 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 twelve 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 shut down 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 a 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 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.
Liquidity and Capital Resources
Cash flows from operating activities amounted to $3.9 million, $2.5
million, and $2.3 million in fiscal 1996, 1997 and 1998, respectively.
Fiscal 1996 operating cash flows reflect 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.
Fiscal 1998 operating cash flows reflect net income of $1.5
million, depreciation and amortization of $3.7 million, and the decrease
in net deferred tax asset of $1.2 million. Operating cash flows were
negatively impacted by a $3.8 million increase in inventories. The
increase in inventories is primarily attributed to an increase in
finished goods inventory offset somewhat by a decrease in scrap
inventory. The increase in finished goods inventory is due to lower than
anticipated fourth quarter shipments in fiscal 1998 and lower than normal
inventories in fiscal 1997 due to production problems.
Cash flows used by investing activities consist of capital
expenditures, net of changes in capital expenditures payables, of $11.2
million, $5.1 million, and $2.5 million in fiscal 1996, 1997, and 1998,
respectively. The decrease in capital expenditures in fiscal 1998 is
primarily due to capital expenditures returning to a more routine
maintenance level following the completion 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. 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 $6.1
million, $2.6 million, and $.2 million in fiscal 1996, 1997, and 1998,
respectively. 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's
line of credit facility offset by $.5 million used for the purchases of
treasury stock. The $.2 million in fiscal 1998 reflects $.8 million in
advances on the Company's line of credit facility offset by $.6 used for
the purchase of treasury stock.
Working capital at September 26, 1998, was $14.2 million as
compared to $11.3 million at September 27, 1997. The current ratio was
1.6 to 1.0 at September 26, 1998 as compared to 1.5 to 1.0 at September
27, 1997. The increase in working capital and current ratio is primarily
attributed to a decrease in capital expenditures as fiscal 1998 saw the
Company return to a more routine maintenance capital expenditure level.
The Company completed its 500,000 share buyback program during
fiscal 1998 and the Board of Directors authorized the repurchase of an
additional 500,000 shares of the Company's common stock. Subsequent to
the fiscal year ended September 26, 1998, the Company repurchased 403,785
shares of common stock.
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
$11.4 million in borrowings outstanding on its line of credit as of
September 26, 1998. 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.
Year 2000 Compliance
The following Year 2000 discussion is provided in response to the
Securities and Exchange Commission's recent interpretative statement
expressing its view that public companies should include detailed
discussion of Year 2000 issues in their MD&A.
The Company is currently assessing the issues confronting it
related to the "Year 2000 problem", which is the result of the inability
of many computer systems and electronic equipment to distinguish the Year
2000 from the year 1900. The Company is following an organized program
to assure the Company's information technology systems and related
infrastructure will be Year 2000 compliant. The Company has divided its
Year 2000 issues into three areas including: computer hardware and
software business systems, manufacturing processing control devices and
related systems, and facility support systems. The Company's Year 2000
program includes three phases: (1) an audit and assessment phase
designed to identify Year 2000 issues; (2) a modification phase designed
to correct Year 2000 issues (this phase includes testing of individual
modifications as they are installed); and (3) a testing phase to test
entire systems for Year 2000 compliance after individual modifications
have been installed and tested.
The Company has completed the audit and assessment phase for both
the computer hardware and software business systems and the facility
support systems. The Company currently expects that the audit and
assessment phase for the manufacturing process control devices and
related systems will be completed by December 31, 1998.
The Company is currently performing the second phase of its program
including modification and testing of individual modifications on its
computer hardware and software business systems. The Company expects to
complete the second phase of its program for these business systems by
December 31, 1998. The Company also expects to conduct final testing of
its business systems in the first calendar quarter of 1999.
The Company currently expects to complete modification and testing
of its manufacturing control devices and related systems by the first
calendar quarter of 1999. After all modifications have been made,
appropriate testing of the system will be performed prior to June 30,
1999.
Management has estimated that the cost for correction of Year 2000
issues, including any software and hardware changes and the cost of
personnel involved in working on the project, will be approximately
$300,000. The Company estimates that 25% of the total cost has been
spent to date. The Year 2000 updates are being funded out of funds
generated from operations and account for less than 30% of the Company's
information technology budget.
The Company's Year 2000 program includes investigation of the Year
2000 readiness status of our major vendors and customers. The Company is
using letters, questionnaires and protocols to determine its vendors' and
customers' 2000 readiness. The Company has contacted all major vendors
including energy and scrap suppliers and external service providers
including banks, insurance companies and phone service providers to
determine their Year 2000 compliance status. If any such vendor
indicates that they will not be Year 2000 compliant, the Company will
develop contingency plans to address the issue, which may include
identifying and developing other vendors. The Company has also contacted
significant customers to determine their progress towards Year 2000
compliance and to identify issues, if any, which might develop if a
customer is unable to become year 2000 compliant on a timely basis. If
any issues are identified, the Company expects to develop procedures to
permit the Company to continue to supply the customer despite Year 2000
issues.
The Company does not have a contingency plan to operate in the
event that its business systems are not Year 2000 compliant. As our work
progresses, if testing scheduled for the first calendar quarter of 1999
suggests that there is a significant risk that the business systems might
not be Year 2000 compliant, a contingency plan will be developed.
Impact of Inflation and Changing Prices
While the Company has not experienced any material long-term
adverse effects on operations in recent years because of inflation,
margins have been affected by inflationary conditions. The Company's
primary cost components are steel scrap, labor, and energy, all of which
are susceptible to domestic inflationary pressures. Scrap costs are
frequently influenced by supply and demand factors as well as general
economic conditions. 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.
Without limiting the foregoing, various statements in the previous
discussion of Year 2000 are likewise forward-looking statements. These
statements include statements of the Company's expectations, statements
with regard to schedules and expected completion dates and statements
regarding expected Year 2000 compliance. These forward-looking
statements are subject to various risk factors which may materially
affect the Company's efforts to achieve Year 2000 compliance. These risk
factors include the inability of the Company to complete the plans and
modifications that it has identified, the failure of software vendors to
deliver the upgrades and repairs to which they have committed, the wide
variety of information technology systems and components, both hardware
and software, that must be evaluated and the large number of vendors and
customers with which the Company interacts. The Company's assessments of
the effects of Year 2000 on the Company are based, in part, upon
information received from third parties and the Company's reasonable
reliance on that information. Therefore, the risk that inaccurate
information is supplied by third parties upon which the Company
reasonably relied must be considered as a risk factor that might affect
the Company's Year 2000 efforts. The Company is attempting to reduce the
risks by utilizing an organized approach, extensive testing, and
allowance of ample contingency time to address issues identified by
tests.
Impact of Recent Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies" of the
Notes to Consolidated Financial Statements of the Company.
Item 7A. Qualitative and Quantitative Disclosure about Market Risk
Management does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that
would require disclosure under this item.
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.
4.6 Amendment No. 2 to Amended and Restated Loan Agreement
between Registrant and National City Bank, Kentucky. Filed
as Exhibit 4.6 to Registrant's Form 10-Q, No. 0-22416, filed
on February 9, 1998, and incorporated by reference herein.
4.7 Amendment No. 1 to Amended and Restated Export Financing
Agreement between Registrant and National City Bank,
Kentucky. Filed as Exhibit 4.7 to Registrant's Form 10-Q,
No. 0-22416, filed on February 9, 1998, 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
Amendment No. 1 to Registrant's Registration Statement on
Form S-1 (No. 33-67140), and incorporated by reference
herein.*
10.4 Registration Rights Agreement between Registrant and NS
Group, Inc., filed as Exhibit 10.7 to Registrant's Form 10-K
for the fiscal year ended September 25, 1993, File No. 0-
22416, and incorporated by reference herein.
10.5 Kentucky Electric Steel, Inc. 1993 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No.
33-77598), filed on April 12, 1994, and incorporated by
reference herein.*
10.6 Kentucky Electric Steel, Inc. 1993 Transition Stock Option
Plan, filed on Registrant's Form S-8 (No. 33-77598), filed on
April 12, 1994, and incorporated by reference herein.
10.7 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.
10.8 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.*
10.9 The Kentucky Electric Steel, Inc. Executive Severance Plan,
effective June 7, 1994, for the benefit of the Company's
eligible Executive Officers, filed as Exhibit 10.11 to
Registrant's Form 10-K for the fiscal year ended September
24, 1994, File No. 0-22416, and incorporated by reference
herein.*
10.10 Employment agreements dated June 7, 1994, between Kentucky
Electric Steel, Inc. and its four Executive Officers, as
amended, filed herewith.*
10.11 Salary Continuation Agreements entered into between Kentucky
Electric Steel, Inc. and its four Executive Officers, filed
herewith.*
10.12 The Kentucky Electric Steel, Inc. Key Employee Stock/Loan
Plan, effective February 2, 1995 for the benefit of the
Company's Executive Officers, filed as Exhibit 10.14 to
Registrant's Form 10-Q, No. 0-22416, filed on February 9,
1995, and incorporated by reference herein.*
10.13 Contract with EMC International, Inc. for Ladle Metallurgy
Facility, filed as Exhibit 10.15 to Registrant's Form 10-Q,
No. 0-22416, filed on May 16, 1995, and incorporated by
reference herein.
10.14 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.*
10.15 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.
10.16 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.
10.17 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.
10.18 The Kentucky Electric Steel, Inc. Share Plan for Non-Employee
Directors, filed as Exhibit 10.19 to Registrant's Form 10-K,
No. 0-22416 filed on December 19, 1997 and incorporated by
reference herein.*
10.19 Split Dollar Insurance Agreement dated September 1, 1998
between Kentucky Electric Steel, Inc. and its four Executive
Officers, filed herewith.*
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 26, 1998.
* Indicates management contracts or compensatory plans or
arrangements in which one or more Directors or Executive
Officers of the Company participate or is a party.
<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 11, 1998 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 December 11, 1998
Charles C. Hanebuth Officer and Chairman
\s\William J. Jessie Vice President, Secretary, December 11, 1998
William J. Jessie Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
\s\Clifford R. Borland Director December 11, 1998
Clifford R. Borland
\s\Carl E. Edwards, Jr. Director December 11, 1998
Carl E. Edwards, Jr.
\s\J. Marvin Quin, II Director December 11, 1998
J. Marvin Quin, II
\s\David C. Struve Director December 11, 1998
David C. Struve
<PAGE
KENTUCKY ELECTRIC STEEL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements Page(s)
Report of Independent Public Accountants ................. F-1
Consolidated Balance Sheets - September 27, 1997 and
September 26, 1998 ....................................... F-2
Consolidated Statements of Operations - Years ended
September 28, 1996, September 27, 1997 and
September 26, 1998 ....................................... F-3
Consolidated Statements of Changes in Shareholders' Equity -
Years ended September 28, 1996, September 27, 1997, and
September 26, 1998 ....................................... F-4
Consolidated Statements of Cash Flows - Years ended
September 28, 1996, September 27, 1997 and
September 26, 1998 ....................................... 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 27, 1997 and September 26, 1998, 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 26, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Electric Steel, Inc. and subsidiary as of September 27, 1997 and September
26, 1998 and the results of their operations and their cash flows for each
of the three years in the period ending September 26, 1998 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Cincinnati, Ohio,
October 28, 1998
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
September September
27, 1997 26, 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 127 $ 150
Accounts receivable, less allowance for
doubtful accounts of $470 in
1997 and $460 in 1998 11,577 12,037
Insurance claim receivable 900 -
Inventories 16,538 20,363
Operating supplies and other current
assets 4,802 5,206
Refundable income taxes 900 -
Deferred tax assets 457 648
------- -------
Total current assets 35,301 38,404
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,448 4,532
Machinery and equipment 40,301 42,004
Construction in progress 2,012 3,031
Less - accumulated depreciation (11,229) (14,772)
------- -------
Net property, plant and equipment 35,532 34,795
------- -------
DEFERRED TAX ASSETS 7,159 5,990
------- -------
OTHER ASSETS 778 1,062
------- -------
Total assets $ 78,770 $ 80,251
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 10,635 $ 11,397
Accounts payable 7,977 7,056
Capital expenditures payable 547 857
Accrued liabilities 3,700 3,834
Environmental liabilities 982 982
Current portion of long-term debt 125 125
------- -------
Total current liabilities 23,966 24,251
------- -------
LONG-TERM DEBT 20,000 20,000
------- -------
OTHER LIABILITIES 593 808
------- -------
Total liabilities 44,559 45,059
------- -------
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,
4,977,988 and 4,985,937 shares
issued, respectively 50 50
Additional paid-in capital 15,665 15,671
Less treasury stock - 350,976 and 526,996
shares at cost, respectively (2,638) (3,254)
Deferred compensation (170) (73)
Retained earnings 21,304 22,798
------- -------
Total shareholders' equity 34,211 35,192
------- -------
Total liabilities and shareholders'
equity $ 78,770 $ 80,251
<FN>
See notes to consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Data)
<CAPTION>
Year Ended
September September September
28, 1996 27, 1997 26, 1998
<S> <C> <C> <C>
NET SALES $ 98,320 $ 94,652 $109,456
COST OF GOODS SOLD 89,783 89,992 97,720
------- ------- -------
Gross profit 8,537 4,660 11,736
SELLING AND ADMINISTRATIVE EXPENSES 7,391 6,800 7,011
------- ------- -------
Operating income (loss) 1,146 (2,140) 4,725
INTEREST EXPENSE (1,453) (2,125) (2,395)
INTEREST INCOME AND OTHER 31 34 80
GAIN ON INVOLUNTARY CONVERSION
OF EQUIPMENT 369 - -
------- ------- -------
Income (loss) before income taxes 93 (4,231) 2,410
PROVISION (CREDIT) FOR INCOME TAXES 35 (1,599) 916
------- ------- -------
Net income (loss) $ 58 $ (2,632) $ 1,494
NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED $ .01 $ (.57) $ .32
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC 4,806,161 4,633,315 4,624,671
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 4,806,485 4,633,315 4,630,920
<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 26, 1998
(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. 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 (loss) - - - - - -
(2,632) (2,632)
--------- -- ------ ------- ----- ---
------ ------
BALANCE, Sept. 27, 1997 4,977,988 50 15,665 (350,976) (2,638) (170)
21,304 34,211
Tax effect of
restricted stock
recognized differ-
ently for financial
reporting and tax
purposes - - (42) - - -
- (42)
Amortization of
deferred comp-
ensation - - - - - 97
- 97
Issuance of stock 7,949 - 48 - - -
- 48
Purchases of treasury
stock - - - (176,020) (616) -
- (616)
Net income - - - - - -
1,494 1,494
--------- -- ------ ------- ----- ---
------ ------
BALANCE, Sept. 26, 1998 4,985,937 $50 $15,671 (526,996) $(3,254)
$(73) $22,798 $35,192
<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
28, 1996 27, 1997 26, 1998
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 58 $ (2,632) $ 1,494
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation and amortization 2,769 3,737 3,683
Gain on involuntary conversion
of equipment (369) - -
Change in deferred taxes 618 (896) 1,169
Change in other (257) (158) (154)
Changes in current assets and
current liabilities:
Accounts receivable 815 536 (460)
Insurance claim receivable - (900) 900
Inventories 838 829 (3,825)
Operating supplies and other
current assets 206 265 (404)
Refundable income taxes (88) (360) 900
Deferred tax assets (487) 223 (191)
Accounts payable (81) 763 (921)
Accrued liabilities (74) 61 134
Environmental liabilities - 982 -
------ ------ ------
Net cash flows from operating
activities 3,948 2,450 2,325
------ ------ ------
Cash Flows From Investing Activities:
Proceeds from involuntary
conversion of equipment 912 - -
Capital expenditures (10,509) (3,226) (2,806)
Change in capital expenditures
payable (672) (1,858) 310
------ ------ ------
Net cash flows from investing
activities (10,269) (5,084) (2,496)
------ ------ ------
Cash Flows From Financing Activities:
Net advances (repayments) on
line of credit (3,585) 3,089 762
Repayments on long-term debt (9,001) - -
Proceeds from long-term debt
borrowings 20,000 - -
Issuance of common stock - 21 48
Purchases of treasury stock (1,296) (473) (616)
------ ------ ------
Net cash flows from financing
activities 6,118 2,637 194
------ ------ ------
Net increase (decrease) in cash
and cash equivalents (203) 3 23
Cash and Cash Equivalents -
Beg. of Period 327 124 127
------ ------ ------
Cash and Cash Equivalents -
End of Period $ 124 $ 127 $ 150
Interest Paid, net of amount
capitalized $ 884 $ 2,142 $ 2,371
Income Taxes Paid $ 376 $ - $ 200
<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 original
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 cost of $262,000 and $11,000
was capitalized for the years ended September 28, 1996 and September 27,
1997, respectively. No interest was capitalized for the year ended
September 26, 1998.
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 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.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133) "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. The Company does not currently have any instruments that would
qualify; therefore, SFAS No. 133 does not currently apply. The Company
is required to adopt SFAS No. 133 effective as of the beginning of the
first fiscal quarter of 2000.
Fiscal Year End
The Company's fiscal year ends on the last Saturday of September.
(3) Inventories
Inventories at September 27, 1997 and September 26, 1998 consist of
the following ($000's):
1997 1998
Raw materials $ 3,280 $ 1,984
Semi-finished and finished goods 13,258 18,379
Total inventories $16,538 $20,363
(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 $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 applicable insurance coverage.
(5) Accrued Liabilities
Accrued liabilities at September 27, 1997 and September 26, 1998
consist of the following ($000's):
1997 1998
Accrued payroll and related liabilities $ 1,431 $ 1,431
Accrued insurance and workers' compensation 1,085 820
Accrued interest payable 679 702
Other 505 881
$ 3,700 $ 3,834
(6) Long-Term Debt
Long-term debt of the Company at September 27, 1997 and September 26,
1998 consists of the following ($000's):
1997 1998
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 $24.5 million unsecured bank credit facility.
Borrowings are limited to defined percentages of eligible inventory and
accounts receivable. Interests on borrowings accrue at the rate of LIBOR
plus 1.35% or 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 26, 1998, approximately $11.4 million was
outstanding under the bank credit facility, approximately $1.5 million
was utilized to collateralize various letters of credit and $8.0 million
was available for additional borrowings. The weighted average interest
rate on short-term borrowings as of September 27, 1997 and September 26,
1998 were 7.3% for both years.
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 26, 1998. The fair value of the unsecured
senior notes was approximately $19.7 million as of September 26, 1998 and
as of September 27, 1997.
(7) Significant Customers and Foreign Sales
The Company grants trade credit to customers within the markets it
serves. Sales to the leaf-springs suspension market represented 25.3%,
18.6%, and 14.2% of total sales for 1996, 1997 and 1998, respectively.
One company, through several wholly-owned subsidiaries which are
customers of the Company, represented 11.7%, 9.6% and 9.2% of net sales
in fiscal 1996, 1997 and 1998, respectively. Another customer, through
two wholly-owned subsidiaries, which are customers of the Company,
accounted for 14.0% and 10.4% of net sales in fiscal 1997 and 1998,
respectively. No other customer accounted for more than 10% of net sales.
The Company's foreign sales represented 8.8%, 8.5%, and 7.5% of
total sales for 1996, 1997 and 1998, respectively.
(8) Income Taxes
The provision (credit) for income taxes consists of the following
($000's):
1996 1997 1998
Current:
Federal $(2,510) $ (900) $ 200
State (379) - -
(2,889) (900) 200
Deferred:
Federal 2,541 (498) 596
State 383 (201) 120
2,924 (699) 716
Total provision (credit)
for income taxes $ 35 $(1,599) $ 916
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):
1996 1997 1998
Income tax provision (credit)
at statutory tax rate of 34% $ 32 $(1,438) $ 819
State income taxes, net of
federal effect 1 (103) 64
Other, net 2 (58) 33
$ 35 $(1,599) $ 916
The components of the net deferred tax asset at September 27, 1997
and September 26, 1998 are as follows ($000's):
Sept. 27, Sept. 26,
1997 1998
Deferred tax components:
Property, plant and equipment $ 1,126 $ (307)
Intangibles 2,737 2,526
AMT credit carryforwards 1,197 1,177
NOL carryforward 4,682 5,429
Other 555 494
10,297 9,319
Valuation allowance (2,681) (2,681)
Net deferred tax assets $ 7,616 $ 6,638
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 $16.0 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 for fiscal 1998, 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
$213,000, $219,000, and $226,000 in 1996, 1997 and 1998, respectively.
(10) Earnings Per Share
Statement of Financial Accounting Standards No. 128 (SFAS No. 128)
related to earnings per share requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures. The Company adopted SFAS No.
128 during the first quarter of fiscal 1998. The following is the
reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations.
For the Year Ended For the Year Ended
September 28, 1996 September 27, 1997
Per Per
Share Share
Income Shares Amount (Loss) Shares Amount
Amounts for Basic
Earnings (Loss)
Per Share $58 4,806,161 $.01 $(2,632) 4,633,315 $(.57)
Effect of Dilutive
Securities
Options - 324 - - - -
Amounts for Diluted
Earnings (Loss)
Per Share $58 4,806,485 $.01 $(2,632) 4,633,315 $(.57)
For the Year Ended
September 26, 1998
Per
Share
Income Shares Amount
Amounts for Basic
Earnings Per Share $1,494 4,624,671 $.32
Effect of Dilutive
Securities Options - 6,249 -
Amounts for Diluted
Earnings Per Share $1,494 4,630,920 $.32
The following options were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the
applicable period:
1996 1997 1998
Transition stock options 169,430 158,702 92,335
Employee stock options 236,784 405,168 301,976
406,214 563,870 394,311
See Note 11 for further information regarding options outstanding.
(11) Stock Option/Restricted Stock Plan
The Company has Employee Stock Option/Restricted Stock Plans which
provide shares of common stock for awards to eligible employees in the
form of stock options and restricted stock. Awards under the plans may
be made to any officer or other key employees of the Company. The
options become exercisable on a pro rata basis over a period of four
years beginning one year after the grant date, except for options issued
in conjunction with the initial public offering, which become exercisable
over a three-year period, which began on approval by the stockholders of
the 1993 Employee Stock Option/Restricted Stock Plan in February 1994.
All unexercised options expire ten years after the date of grant. Option
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 $208,000 and $53,000 was recognized in fiscal 1997 and 1998,
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 $53,000 as of September 27,
1997. The restricted stock was fully amortized as of September 26, 1998.
A summary of transactions in the above plans for fiscal 1997 and
1998 are as follows:
1997 1998
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 327,976 $10.11 405,168 $ 9.12
Options granted 89,192 5.56 - -
Options forfeited (12,000) 9.69 (18,500) 8.46
Options outstanding,
end of year 405,168 $ 9.12 386,668 $ 9.15
Options exercisable,
end of year 186,505 $10.96 263,877 $10.24
Restricted shares granted - -
Options and restricted shares
available for grant 10,733 29,233
The 1993 Transition Stock Option Plan (the "Transition Plan") was
approved by the stockholders 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 1997
and 1998 are as follows:
1997 1998
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 169,430 $14.00 158,702 $14.06
Options granted - - - -
Options forfeited (10,728) 13.06 (24,892) 14.69
Options expired - - (41,475) 20.86
Options outstanding,
end of year 158,702 $14.06 92,335 $10.84
Options exercisable,
end of year 149,720 $14.38 92,335 $10.84
The Company accounts for its stock-based compensation plans using the
intrinsic value method in accordance with APB Opinion No. 25 and related
interpretations. Under this method, no compensation cost has been recognized
for the Company's Employee Stock Option Plan for fiscal years 1996, 1997,
and 1998. Had compensation cost for the stock options granted in fiscal
1996 and 1997 been determined based on the fair value of the options at the
grant dates for awards under those plans consistent with the fair value
method pro forma net income and basic and diluted earnings per share would
have been a net loss of $4,000 and $.00 per share for fiscal 1996, a net
loss of $2.7 million and $.59 per share for fiscal 1997, and net income of
$1.4 million or $.30 per share for fiscal 1998. These pro forma disclosures
are not likely to be representative of the effect on reported net income and
basic and diluted 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 Company did not grant any options in fiscal
1998.
The following table summarizes information about stock options
outstanding at September 26, 1998 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 9/26/98 Life Price at 9/26/98 Price
Employee Stock Option/Restricted Stock Plans:
$ 5.56 - 7.63 165,884 8.12 Years $ 6.57 62,642 $ 6.92
9.13 - 12.31 220,784 6.00 Years 11.09 201,235 ll.28
5.56 - 12.31 386,668 6.91 Years 9.15 263,877 10.24
Transition Plan:
$ 8.76 - 9.05 60,405 3.88 Years $ 8.86 60,405 $ 8.96
14.40 - 19.57 31,930 .71 Years 14.60 31,930 l4.60
8.76 - 19.57 92,335 2.78 Years 10.84 92,335 10.84
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 reduction of
shareholders' equity and was $117,000 and $73,000 as of September 27,
1997 and September 26, 1998, respectively. In fiscal 1997 and fiscal
1998, the Company recognized $43,000 and $44,000 of compensation expense
related to the plan.
During 1997, the Board of Directors established the Kentucky
Electric Steel, Inc. Share Plan for Non-Employee Directors (the "Plan"),
which provides for the issuance of stock in lieu of cash for director
services. Under the Plan, 25,000 shares were authorized for issuance.
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. During fiscal 1998, 7,949 shares
were issued at stock prices ranging from $3.50 to $6.94 per share.
(12) 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.
(13) 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.
(14) Quarterly Financial Data (Unaudited)
Quarterly results of operations (in thousands, except share and per
share amounts) for fiscal 1997 and fiscal 1998 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997
Net sales $ 23,382 $ 23,159 $ 22,724 $ 25,387
Gross profit $ (14) $ (456) $ 2,370 $ 2,760
Net income (loss) $ (1,384) $ (1,659) $ 45 $ 366
Net income (loss) per
common share -
basic and diluted $ (.30) $ (.36) $ .01 $ .08
Weighted average shares
outstanding - basic 4,658,691 4,626,639 4,622,062 4,626,414
Weighted average shares
outstanding - diluted 4,658,691 4,626,639 4,622,062 4,626,414
1998
Net sales $ 26,020 $ 29,610 $ 27,751 $ 26,075
Gross profit $ 2,340 $ 3,423 $ 3,457 $ 2,516
Net income $ 41 $ 563 $ 652 $ 238
Net income per
common share -
basic and diluted $ .01 $ .12 $ .14 $ .05
Weighted average shares
outstanding - basic 4,626,383 4,626,033 4,626,375 4,619,893
Weighted average shares
outstanding - diluted 4,643,073 4,630,520 4,630,192 4,619,893
<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 28, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in item 14(a)2 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities
and Exchange Commission's rules and regulations and is not part of the
basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Arthur Andersen LLP
Cincinnati, Ohio,
October 28, 1998
<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 30, 1995 ..................... $ 625
Additions:
Charged to costs and expenses ............... 651
Deductions:
Net charge-off of accounts deemed
uncollectible ......................... 470
---
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
Additions:
Charged to costs and expenses ............... (10)
Deductions:
Net charge-off of accounts deemed
uncollectible ......................... -
---
BALANCE, September 26, 1998 ..................... $ 460
(1) Deducted from accounts receivable.
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 1st day of September, 1998, by and
between Kentucky Electric Steel, Inc., with its principal office in
Ashland, Kentucky (the "Company"), and ________________________, residing
at_______________________ (hereinafter called the "Executive").
WITNESSETH
WHEREAS, the Company and the Executive executed an Employment
Agreement effective as of June 7, 1994 ("Agreement"); and
WHEREAS, the parties desire to amend and restate the
Agreement to define the term "Change of Control" as if included in the
original Agreement;
NOW, THEREFORE, the Agreement is amended and restated in its
entirety to read as follows:
I. Employment Duties and Term
A. Beginning on the Commencement Date (as
hereinafter defined) the Company agrees to employ the Executive at not
lower than the office held on the Commencement Date and the Executive
agrees to faithfully and to the best of his ability discharge the
responsibilities of said office and perform such duties and services of
an executive, administrative and managerial nature as shall be specified
and designated from time to time by the Board of Directors of the Company
in connection with the business and activities of the Company. The
Executive's duties and responsibilities shall be those normally
associated with such office. The Executive's duties may be reasonably
modified from time to time following the Commencement Date by the Board
of Directors, but there shall be no significant change in his duties,
position, title, job responsibility and authority, office facilities,
support staff, growth potential and opportunity, or job location without
his specific written agreement.
The Executive agrees that during the Employment Period (as
defined in Section I, B hereof), he shall devote substantially all his
professional time and effort to the performance of his duties hereunder
except for (i) time spent in managing his personal investments and
services on corporate, civic or charitable boards or committees, in each
case not significantly interfering with the performance of such duties,
and (ii) periods of vacation and sick leave to which he is entitled.
Furthermore, the Executive agrees that during the Employment Period, he
shall refrain from engaging on his own behalf or on behalf of a third
party, including without limitation, any customer or supplies of the
Company, in any line of activities or business in which he knows or has
reason to know that the Company is or is considering becoming engaged
during the Employment Period or in any related activities or business
without the express written consent of the Board of Directors of the
Company.
B. The term of the Executive's employment under this Agreement
(the "Employment Period") shall commence on the effective date of a
Change of Control (as hereinafter defined) ("Commencement Date") and
shall be for an initial period commencing on the Commencement Date and
ending on the third anniversary hereof (the "Initial Term"), plus all
Renewal Periods, if applicable. After the Initial Term, this Agreement
shall be automatically renewed for subsequent three (3) year periods
(each such three (3) year period being referred to herein as a "Renewal
Period") unless, no later than (i) one (1) year prior to the expiration
of the Initial Term, or, (ii) if during a Renewal Period, one (1) year
prior to the expiration of such Renewal Period, either party gives
written notice of cancellation to the other party. After timely notice
of cancellation has been given as required above, the Employment Period
shall continue until the expiration of the Initial Term or the then
current Renewal Period, as applicable, and the term "Termination Date,"
as used herein, shall be the last day of the Initial Term, or such
Renewal Period, as applicable.
The provisions of this Agreement shall not apply if, for any
reason (other than as set forth in the following sentence), the Executive
is not employed by the Company on the Commencement Date. The provisions
of this Agreement shall apply in the event the Executive's employment is
terminated prior to, but in connection with, a Change of Control, by the
Company's Board of Directors in the exercise of its fiduciary duties as
part of a negotiation with a third party that requires such termination
of employment as a condition of consummating a transaction resulting in a
Change of Control.
II. Compensation and Termination
A. During the Employment Period, the Company shall
pay to the Executive, and the Executive agrees to accept as compensation
for his services hereunder, a base annual salary in the amount of not
less than the level in effect on the Commencement Date, payable in the
manner and at the times the Company pays its senior executives. Such
base annual salary shall be increased on each anniversary of the
Commencement Date by an amount not less than that which is substantially
similar, on a percentage basis, to the average percentage increase in
base salary for all corporate officers of the Company during the
preceding twelve (12) months. "Base Salary" at any time shall mean the
Executive's base annual salary as adjusted by the Board of Directors and
as in effect at the time in question.
In addition to his Base Salary, the Executive shall be
entitled to participate in and receive compensation pursuant to the
Company's Incentive Bonus Plan, the Company's 1993 Incentive Stock Option
Plan and all other benefit, bonus and stock plans that now exist or as
may exist in the future (collectively, the "Benefit Plans").
B. In the event the Company terminates Executive's
employment Without Cause (as defined in this Section II B below), the
Company's obligation to pay Executive the compensation set forth herein
shall nevertheless continue until the Termination Date. For the purposes
of this Agreement, a termination "Without Cause" shall mean a termination
by the Company for any reason other than for Cause (as defined in
Section II C hereof) or Disability, and the Executive's employment with
the Company shall be deemed terminated Without Cause by the Company in
the event of a termination resulting from a change in duties, position,
title, job responsibility and authority, office facilities, support
staff, growth potential and opportunity, compensation, job location, or
senior management of the Company which, in the reasonable judgement of
the Executive, would have a material adverse impact on the Executive or
the nature of work performed by the Executive, or which would require him
to change the location of his residence to avoid a commuting distance
greater than the greater of (i) his commuting distance prior to the
change and (ii) thirty (30) miles.
C. In the event that the Company terminates the
Executive's employment under this Agreement for "Cause" (as hereinafter
defined), except as provided in Section III, the Executive shall cease to
receive compensation as of the date of termination of his employment.
For the purpose of this Agreement, "Cause" shall mean (i) an act or acts
of dishonesty on the Executive's part which are intended to result in the
Executive's substantial personal enrichment at the expense of the Company
or (ii) any gross misconduct by the Executive in the performance of his
duties or responsibilities set forth in Section I hereof which is
demonstrably willful and deliberate on the Executive's part and which
results in material injury to the Company after written demand to cease
such misconduct by the Board of Directors of the Company is delivered to
the Executive. "Cause" shall not include any mistake of fact or opinion
made in good faith with respect to the Company's business.
III. Change of Control
A. 1. In the event of a Change of Control (as
hereinafter defined) which causes this Agreement to commence, Executive
may terminate his employment hereunder at any time during the period
commencing six (6) months following the Change of Control and ending
thirty-six (36) months following the Change of Control. If (a) the
Executive shall terminate his employment during such period for any
reason other than death or Disability, (b) the Company shall terminate
the Executive's employment during the Change of Control Period (as
hereinafter defined) for any reason, or (c) the Executive terminates his
employment during the first six (6) months of the Change of Control
Period for Good Reason as hereinafter defined, the Company shall pay to
the Executive upon such termination of employment, in a single lump cash
sum, an amount equal to One Dollar ($1.00) less than 300% of Employee's
Base Amount as hereinafter defined. Such payment shall be in lieu of
further Base Salary payments under Section II except as otherwise
provided in Section II-B. Notwithstanding anything to the contrary
contained herein, nothing in this Agreement shall relieve the Company of
its obligation of providing the Executive with all benefits in accordance
with the terms of the Benefit Plans in which the Executive participates.
2. In addition to the foregoing, if requested by the
Executive, the Company will purchase the Executive's principal residence
at any time requested by the Executive within a period of two (2) years
following termination of employment; provided, however, that the purchase
price of the residence shall be the fair market value of such residence
as established by the average of appraisals submitted by three (3)
independent appraisers mutually selected by the Executive and the
Company.
B. 1. The term "Good Reason" shall mean the failure of
the company to comply with the following requirement: During the Change
of Control Period, (i) the Executive's Base Salary, position (including
status, offices, titles and reporting requirements), authority, duties
and responsibilities shall be at least commensurate in all material
respects with the most significant of those held or exercised by or
assigned to the Executive at any time during the 90-day period
immediately preceding the date of the Change of Control and (ii)
Executive's services shall be performed at the location where Executive
was employed immediately preceding the date of the Change of Control.
2. The term "Base Amount" shall mean Executive's average
annual compensation from the Company (as reported on Form W-2) for the
five consecutive calendar years (or such lesser period as constitutes
Executive's total years of employment with the Company) ending with the
calendar year immediately preceding the Change of Control.
3. The term "Change of Control" shall mean (i) the
consummation of (A) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to
which shares of the Company's Common Stock would be converted into cash,
securities or other property, other than a merger of the Company in which
the holders of the Company's Common Stock immediately prior to the merger
have substantially the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (B) any sale,
lease, exchange or transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Company, or
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, other than in
connection with a bankruptcy or reorganization proceeding of the Company
under applicable federal or state bankruptcy laws, or (iii) any "person"
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), other than the
Company or a subsidiary thereof or any employee benefit plan sponsored by
the Company or a subsidiary thereof, becoming the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities
of the Company representing 20% or more of the combined voting power of
the Company's then outstanding securities ordinarily (and apart from
rights accruing in special circumstances) having the right to vote in the
election of directors, as a result of a tender or exchange offer, open
market purchases, privately-negotiated purchases or otherwise, or (iv) at
any time during a period of two (2) consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company ceasing for any reason to constitute at least a majority thereof,
unless the election or the nomination for election by the Company's
shareholders of each new director during such two-year period was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such two-year period.
4. The term "Change of Control Period" shall mean the
period beginning on the date of the Change of Control and ending thirty-
six (36) months thereafter.
C. Notwithstanding anything else contained herein, if the
aggregate of the payments to be made under this Agreement as a result of
a Change of Control, either alone or together with other payments to
which the Executive is entitled from the Company, would constitute an
"excess parachute payment" (as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code")), such total payments shall
be reduced to the largest amount as will result in no portion of the
payments made hereunder being subject to the excise tax imposed by
Section 4999 of the Code or being disallowed as a deduction by the
Company under Section 280G of the Code. The determination of any
reduction in payments hereunder pursuant to the foregoing provisions
shall be made by the Executive in good faith after consultation with the
Company, and such determination shall be conclusive and binding on the
Company. The Company shall cooperate in good faith with the Executive in
making such determination and providing the necessary information for
this purpose.
IV. Executive's Rights Under Certain Plans and Policies
The Company agrees that the benefits provided to the
Executive herein are not in lieu of any rights and privileges to which
the Executive may be entitled as an employee of the Company under
retirement, pension, special salary continuation plan, disability, life
insurance, hospitalization, vacation, business expense reimbursement or
other plan or policy which may now or hereafter be in effect, it being
understood that the Executive shall have no less than the same rights and
privileges to participate in such plans, policies or benefits as any
other employee of the Company.
V. Covenant Not to Compete and Consultation
A. For the period of two (2) years after the termination
of the Executive's employment hereunder for any reason, the Executive
shall not engage or attempt to engage on his own behalf or on behalf of a
third party, in any "Competitive Activity". The term "Competitive
Activity" shall mean participation by the Executive, without the written
consent of the Board of Directors of the Company, in the management of
any business operation of any enterprise if such operation (a
"Competitive Operation") engages in substantial and direct competition
with any business operation activity conducted by the Company or its
subsidiaries at the time of the termination of the Executive's
employment. A business operation shall be considered a Competitive
Operation if such business operation's sales of any product or service
competitive with any product or service of the Company amounts to thirty
percent (30%) of that business operation's total sales and if the
Company's sales of said product or service of its comparable business
operation amounts to thirty percent (30%) of the Company's total sales.
"Competitive Activity" shall not include (i) the mere ownership of
securities in any enterprise, or (ii) participation in the management of
any enterprise or any business operation thereof other than in connection
with a Competitive Operation of such enterprise. Without limiting the
generality of the foregoing, Competitive Activity shall include becoming
employed by or associated with, Stelco-McMaster Ltd., Slater Steels or
Atlantic Steel Industries, Inc. In addition, the Executive shall make
himself available for reasonable consultation services with the Company
for two (2) years after termination of employment.
B. If the restrictions set forth in the preceding
paragraph or any part thereof should, for any reason whatsoever, be
declared invalid by a court of competent jurisdiction, the validity or
enforceability of the remainder of such restriction shall not thereby be
adversely affected. The Executive agrees that the foregoing territorial
and time limitations are reasonable and properly required for the
adequate protection of the business of the Company and that in the event
that any such territorial or time limitation is deemed to be unreasonable
by a court of competent jurisdiction, then the Executive agrees and
submits to the reduction of either said territorial or time limitation to
such an area or period as said court shall deem reasonable. In the event
that the Executive shall be in violation of the aforementioned
restrictive covenants, then the time limitation thereof shall be extended
for a period of time equal to the period of time during which such breach
or breaches should occur.
VI. Confidential Information
The Executive agrees to receive Confidential Information (as
defined in this Section VI below) of the Company in confidence, and not
to disclose to others, assist others in the application of, or use for
his own gain, such information, or any part thereof, unless and until it
has become public knowledge or has come into the possession of such other
or others by legal and equitable means, except in the ordinary course of
the Company's business, without the express written consent of the Board
of Directors of the Company. The Executive further agrees that, upon
termination of his employment with the Company, all documents, records,
notebooks and similar repositories containing Confidential Information,
including copies thereof, then in the Executive's possession, whether
prepared by him or others, shall be left with the Company. For the
purpose of this Agreement, "Confidential Information" means information
disclosed to the Executive or known by the Company, not generally known
in the industry in which the Company is or may become engaged, about the
Company's products, processes or services.
VII. Remedy for Violation of Noncompetition and Confidential
Information Agreements
The Executive acknowledges that the Company has no adequate
remedy at law and would be irreparably harmed were the Executive to
breach or threaten to breach the provisions of Section V or VI hereof,
and, therefore, agrees that the Company shall be entitled to injunctive
relief to prevent any breach or threatened breach of Section V or VI
hereof, and to specific performance of the terms of each such sections in
addition to any other legal or equitable remedy it may have. The
Executive further agrees that he shall not, in any equity proceeding
involving him relating to the enforcement of Section V or VI hereof,
raise the defense that the Company has an adequate remedy at law.
Nothing in this Agreement shall be construed as prohibiting the Company
from pursuing any other remedies at law or in equity that it may have or
any other rights that it may have under any other agreement.
VIII. Indemnification for Expense
If litigation or other judicial or arbitrative proceedings
shall be brought to enforce or interpret any provision contained herein,
the Company, to the extent permitted by applicable law and the Company's
Certificate of Incorporation and By-laws as in effect on the date hereof,
hereby indemnifies the Executive for his reasonable expenses (including
without limitation, attorneys' fees and disbursements) incurred in
connection with such proceeding. If so requested by the Executive, the
Company shall pay to the Executive an amount equal to any and all such
expenses within five (5) business days after the Executive's written
request, which request shall be supported by reasonably adequate
documentation.
IX. Successors
A. The rights and obligations of the Company under
this Agreement shall inure to the benefit of and shall be binding upon
the Company, its successors and assigns, including without limitation,
any person, partnership or corporation which may acquire all or
substantially all of the Company's assets and business, or with or into
which the Company may be consolidated or merged. Any and all references
to the Company in this Agreement shall be deemed to mean and include any
successor or assignee.
B. This Agreement shall also inure to the benefit of
and be binding on the Executive and his legal representatives, but being
a contract for personal services, cannot be assigned by Executive.
X. Severability
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the
fullest extent permitted by law.
XI. Applicable Law
The construction and interpretation of this Agreement
shall be governed by the laws of the State of Kentucky applicable to
agreements made and to be performed within Kentucky, without regard to
Kentucky's conflict of laws rules.
XII. No Mitigation Required
The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made
under any provision of this Agreement, and the obtaining of any such
other employment shall in no event effect any reduction of the Company's
obligations to make the payments and arrangements required to be made
under this Agreement.
XIII. Notice
All notices under this Agreement shall be made in
writing and shall be duly sent if sent by registered mail or certified
mail to the respective parties' address shown hereinabove or such other
address as the parties may hereafter designate in writing for such
purpose.
XIV. Captions and Titles
Captions and titles have been used in this Agreement
only for convenience, and in no way define, limit or describe the meaning
of this Agreement or any part thereof.
IN WITNESS WHEREOF, the parties have signed this Agreement on
this 1st day of September, 1998 effective as if adopted on June 7, 1994.
KENTUCKY ELECTRIC STEEL, INC.
By: ________________________
________________________
_______________________
WITNESS
This Agreement has been entered into between the Company and each of the
named Executive Officers.
Charles C. Hanebuth Chairman and President
William J. Jessie Vice President - Finance,
Chief Financial Officer,
Secretary and Treasurer
Joseph E. Harrison Vice President - Sales and Marketing
William H. Gerak Vice President - Administration
KENTUCKY ELECTRIC STEEL, INC.
SALARY CONTINUATION AGREEMENT
This Agreement is entered into between Kentucky Electric Steel Inc.,
a corporation having its principal office in Ashland, Kentucky, (herein
called the "Company"), and ___________________ (herein called the
"Executive").
WITNESSETH
WHEREAS, Executive is employed by the Company in the capacity of
________________________________________________ and by reason thereof has
acquired experience and knowledge of considerable value to the Company; and
WHEREAS, the Company wishes to offer an inducement to Executive to
remain in its employ by compensating him beyond his regular salary for
service which he had rendered or will hereafter render; and
WHEREAS, the Company and the Executive executed a Salary Continuation
Agreement effective September 22, 1994 ("Agreement"); and
WHEREAS, the parties desire to amend and restate the Agreement to
modify certain terms and conditions; and
NOW, THEREFORE, the Agreement is amended and restated in its entirety
to read as follows:
(1) If Executive remains in the continuous employ of the Company he shall
retire from active employment with the Company on his sixty-second
(62nd) birthday, unless by action of the Board of Directors his period
of active employment shall be shortened, or, with his consent,
extended.
(2) Upon said retirement the Company, commencing with the first day of the
month following the date of such retirement, shall pay Executive
$____________ per month to age 85, and $________ per month thereafter
for life; provided that if less than one hundred twenty (120) such
monthly payments shall be made prior to the death of the Executive
the Company shall continue such monthly payment of $_____________ to
whomever the Executive shall have designated, on the most recent
Salary Continuation Agreement Designation of Beneficiary form filed
with the Company, until the full number of one hundred twenty (120)
monthly payments have been made.
(3) In the event Executive should die while in the active employ of the
Company, the Company and the Executive have entered into a Split
Dollar Life Insurance Agreement that will provide benefits to the
Executive's designated beneficiary, as provided for on the most
recent Salary Continuation Agreement Designation of Beneficiary
form filed with the Company.
(4) In the event Executive terminates employment on account of permanent
and total disability (as determined by the Board of Directors), he
shall receive 100% of the benefit described in Section 2 commencing
at age 62. In the event Executive terminates employment on account
of permanent and total disability (as determined by the Board of
Directors) and dies prior to attainment of age 62, Executive's
designated beneficiary, as provided for on the most recent Salary
Continuation Agreement Designation of Beneficiary form filed with the
Company, shall receive the benefits described in Section 3.
(5) Executive agrees that he will not, during or after his employment
under this Agreement, engage in competitive activity, as it is
defined in Section V of the Executive's Employment Agreement with the
Company, directly or indirectly, or, without the specific authority
of the Company's Board of Directors, serve as a director or employee
of any corporation or business entity so engaged. Executive further
agrees that he will not, either during or after his employment under
this Agreement, disclose to anyone not legally entitled thereto any
confidential information relative to the business of the Company.
(6) Executive agrees that if he shall breach any covenant of Section 5 of
this Agreement, and shall continue to breach such covenant for a
period of thirty (30) days after the Company shall have requested him
to desist from such breach, then, any of the provisions hereof to the
contrary notwithstanding, no further payments shall be due or payable
by the Company hereunder either to the Executive or to his wife or
other designee, and the Company shall have no further liability
hereunder.
(7) It is agreed that neither Executive, nor his wife, nor any other
designee, shall have any right to sell, assign, transfer, or
otherwise convey the right to receive any payments hereunder which
payments and the right thereto are expressly declared to be non-
assignable or transfer, the Company shall have no further liability
hereunder.
(8) If the Company shall acquire an insurance policy or any other asset
in connection with the liabilities assumed by it hereinunder it is
expressly agreed that neither Executive nor any beneficiary of
Executive shall have any right with respect to, or claim against,
such policy or other asset above or beyond the rights conveyed in any
existing split dollar agreement. Such policy or asset shall not be
deemed to be held in trust for the benefit of Executive or his
beneficiaries or to be held in any way as collateral security for the
fulfilling of the obligations of the Company under this Agreement
except as may be expressly provided by the terms of such policy or
title to such other asset. It shall be, and remain, a general,
unrestricted asset of the Company. Executive's rights to payment
hereinunder shall be not greater than those of an unsecured general
creditor of the Company.
(9) The Company agrees that it will not merge or consolidate with any
other company or organization, or permit its business activities to
be taken over by any other organization unless and until the
succeeding or continuing company or other organization shall
expressly assume all obligations and liabilities herein set forth.
(10) This Agreement may be revoked or amended in whole or in part only by
mutual consent of the parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
this 1st day of September, 1998.
ATTEST: KENTUCKY ELECTRIC STEEL, INC.
______________________ By:__________________________
Secretary
______________________ By:___________________________
Witness
<TABLE>
Kentucky Electric Steel, Inc.
Supplemental Schedule for Exhibit 10.12
Salary Continuation Agreement
<CAPTION>
Monthly
Retirement
Benefit
Monthly
(Ten Year
Certain)
Retirement
Benefit
Name
Title
Age 62 to Age 85
After Age 85 for
Life
<S>
<C>
<C>
<C>
Charles C.
Hanebuth
President and
Chief
Executive Officer
$13,518.00
$6,200.00
William J.
Jessie
Vice President,
Chief Financial
Officer
$6,636.00
$0.00
Joseph E.
Harrison
Vice President,
Sales and
Marketing
$5,750.00
$0.00
William H. Gerak
Vice President,
Administration
$5,495.00
$0.00
</TABLE>
KENTUCKY ELECTRIC STEEL, INC.
SPLIT DOLLAR INSURANCE AGREEMENT
THIS AGREEMENT made on the 1st day of September, 1998, by and between
Kentucky Electric Steel, Inc., a corporation (hereinafter called the
"Company") and ____________________, (hereinafter called the
"executive").
WITNESSETH
WHEREAS, ___________________ is a valuable and experienced Executive
of the Company; and
WHEREAS, the Company whishes to set up a split-dollar arrangement in
order to provide insurance protection for Executive's benefit; and
WHEREAS, in furtherance of the relationship of the Company and
Executive, the Company desires to enter into an agreement with respect to
the payment of premiums of any policy(s) purchased under the terms of this
Agreement in order to provide such insurance protection;
NOW THEREFORE, the parties mutually agree as follows:
1. OWNERSHIP AND PURCHASE OF INSURANCE: The Company owns a life insurance
policy issued by Pacific Life (the "Insurer"), policy number
_____________, on Executive's life. The parties hereto agree that
any policy purchased under the terms of this Agreement shall be
subject to the terms and conditions of this Agreement and of the
endorsement filed with the Insurer relating to the policy.
2. BENEFICIARY PROVISION. The beneficiary provisions of any policy
purchased under the terms of this Agreement shall provide that, upon
Executive's death, the total combined proceeds shall be paid as
follows:
A. An amount equal to $_____________ to the beneficiaries
designated by Executive in the manner and in the amounts
provided in the beneficiary designation provision of any policy
purchased under the terms of this Agreement. Executive shall
have the absolute right during the terms of this Agreement to
designate beneficiaries for the above portion of the death
benefit provided under any policy purchased under the terms of
this Agreement. The parties agree that the beneficiary
designation provision of any policy purchased under the terms
of this Agreement shall conform to the provisions of this
Agreement.
B. To the Company, the portion of the proceeds in excess of
$________________.
3. OWNERSHIP. Except for Executive's right to designate or change the
beneficiary of any policy purchased under the terms of this Agreement
as to the amount provided in paragraph 2.A hereof, the Company shall
be the sole and absolute owner of the policy, and may exercise all
other ownership rights granted to the owner by the terms of the
policy.
4. DIVIDENDS. Any policy purchased under the terms of this Agreement
shall provide that dividends are to be applied to purchase
additional, paid-up insurance on Executive's life. The parties
hereto agree that the dividend election provision of the policy shall
conform to the provisions of this Agreement.
5. PREMIUMS. Premiums on any policy purchased under the terms of this
Agreement shall be paid by the Company as they become due. The
Company shall furnish Executive a statement of the amount of income
reportable by Executive for Executive's federal and state income tax
purposes as a result of its payment of the premiums.
6. TERMINATION OF AGREEMENT. Either party hereto, with or without the
consent of the other, may terminate this Agreement by giving notice
of termination in writing. This Agreement shall terminate, without
notice, upon the first to occur of the following: (a) the total
cessation of the business of the Company; (b) the bankruptcy,
receivership or dissolution of the Company; or (c) the termination of
Executive's employment for any reason other than death. Subject to
the provision of this section, upon termination of the Agreement, the
Company shall have the right to surrender or cancel any policy(s)
purchased under the terms of this Agreement and retain proceeds
hereof.
7. AMENDMENTS. Amendments may be made to this Agreement by a written
agreement signed by each of the parties and attached hereto.
Additional policies of insurance on Executive's life may be purchased
under this Agreement by amendment to paragraph 1 hereof.
8. LIMITATION OF RIGHTS. This Agreement shall not give Executive any
right or claim except to the extent that such right is specifically
fixed under the terms of the Agreement. This Agreement shall not be
construed to give Executive a right to be continued in the employ of
the Company or as interfering with the right of the Company to
terminate Executive's employment at any time.
9. EFFECT OF AGREEMENT. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns, and
Executive and his respective successors, assigns, heirs, executors,
administrators and beneficiaries.
10. GOVERNING LAW. This Agreement shall be governed and constructed in
accordance with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
ATTEST: KENTUCKY ELECTRIC STEEL, INC.
_____________________ By:__________________________
Secretary
_____________________ By:__________________________
Witness
<TABLE>
Kentucky Electric Steel, Inc.
Supplemental Schedule for Exhibit 10.20
Split Dollar Insurance Agreement
<CAPTION>
Life
Insurance
Pre-
retirement
Name
Title
Policy
Number
Death
Benefit
<S>
<C>
<C>
<C>
Charles C.
Hanebuth
President and Chief
Executive Officer
1A22856570
$2,040,000.
00
William J.
Jessie
Vice President and Chief
Financial Officer
1A22856560
$1,000,000.
00
Joseph E.
Harrison
Vice President, Sales and
Marketing
1A22856540
$860,000.00
William H. Gerak
Vice President,
Administration
1A22856530
$830,000.00
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our reports included in this Form 10-K into
the Company's previously filed Registration Statements File Nos. 33-
301218 and 33-77598.
Arthur Andersen LLP
Cincinnati, Ohio,
December 11, 199
<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 26, 1998 included in this
Company's annual report on Form 10-K and is qualified in its entirety by
reference to such condensed financial statements.
</LEGEND>
<CIK> 0000910394
<NAME> KENTUCKY ELECTRIC STEEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-27-1997
<PERIOD-END> SEP-26-1998
<EXCHANGE-RATE> 1
<CASH> 150
<SECURITIES> 0
<RECEIVABLES> 12,497
<ALLOWANCES> 460
<INVENTORY> 20,363
<CURRENT-ASSETS> 38,404
<PP&E> 49,567
<DEPRECIATION> 14,772
<TOTAL-ASSETS> 80,251
<CURRENT-LIABILITIES> 24,251
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 35,142
<TOTAL-LIABILITY-AND-EQUITY> 80,251
<SALES> 109,456
<TOTAL-REVENUES> 109,456
<CGS> 97,720
<TOTAL-COSTS> 97,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,395
<INCOME-PRETAX> 2,410
<INCOME-TAX> 916
<INCOME-CONTINUING> 1,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,494
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
