FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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
The number of shares outstanding of each of the issuer's classes of common
stock, as of February 9, 1998, is as follows:
4,625,361 shares of voting common stock, par value $.01 per share.
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets ................. 3
Condensed Consolidated Statements of Operations ....... 4
Condensed Consolidated Statements of Cash Flows ....... 5
Notes to Condensed Consolidated Financial Statements .. 6-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 9-10
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ...................... 11
SIGNATURES ........................................... 12
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
Dec. 27, Sept. 27,
1997 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 126 $ 127
Accounts receivable, less allowance for doubtful
accounts and claims of $435 at December 27, 1997
and $470 at September 27, 1997 13,178 11,577
Insurance claim receivable 900 900
Inventories 19,486 16,538
Operating supplies and other current assets 5,670 4,802
Refundable income taxes 900 900
Deferred tax assets 418 457
------- -------
Total current assets 40,678 35,301
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,448 4,448
Machinery and equipment 40,723 40,301
Construction in progress 2,376 2,012
Less - accumulated depreciation (12,099) (11,229)
------- -------
Net property, plant and equipment 35,448 35,532
------- -------
DEFERRED TAX ASSETS 7,172 7,159
------- -------
OTHER ASSETS 827 778
------- -------
Total assets $ 84,125 $ 78,770
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 14,730 $ 10,635
Accounts payable 10,114 7,977
Capital expenditures payable 821 547
Accrued liabilities 2,423 3,700
Environmental liabilities 982 982
Current portion of long-term debt 125 125
------- -------
Total current liabilities 29,195 23,966
------- -------
LONG-TERM DEBT 20,000 20,000
------- -------
OTHER LIABILITIES 647 593
------- -------
Total liabilities 49,842 44,559
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value, 15,000,000
shares authorized, 4,979,905 and 4,977,988
share issued, respectively 50 50
Additional paid-in capital 15,679 15,665
Less treasury stock - 354,544 and 350,976
shares at cost, respectively (2,663) (2,638)
Deferred compensation (128) (170)
Retained earnings 21,345 21,304
------- -------
Total shareholders' equity 34,283 34,211
------- -------
Total liabilities and shareholders' equity $ 84,125 $ 78,770
<FN>
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
Dec. 27, Dec. 28,
1997 1996
<S> <C> <C>
NET SALES $ 26,020 $ 23,382
COST OF GOODS SOLD 23,680 23,396
------- -------
Gross profit (loss) 2,340 (14)
SELLING AND ADMINISTRATIVE EXPENSES 1,688 1,725
------- -------
Operating income (loss) 652 (1,739)
INTEREST INCOME AND OTHER 10 5
INTEREST EXPENSE (595) (494)
------- -------
Income (loss) before income taxes 67 (2,228)
PROVISION (CREDIT) FOR INCOME TAXES 26 (844)
------- -------
Net income (loss) $ 41 $ (1,384)
NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED $ .01 $ (.30)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,626,383 4,658,691
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 4,643,073 4,658,691
<FN>
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
Dec. 27, Dec. 28,
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 41 $ (1,384)
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 917 894
Change in deferred taxes (13) (1,248)
Change in other - (20)
Change in current assets and current
liabilities:
Accounts receivable (1,601) 1,404
Inventories (2,948) 931
Operating supplies and other
current assets (868) (366)
Deferred tax assets 39 404
Accounts payable 2,137 294
Accrued liabilities (1,277) (1,135)
------- -------
Net cash flows from operating activities (3,573) (226)
------- -------
Cash Flows From Investing Activities:
Capital expenditures (786) (920)
Change in capital expenditures payable 274 (514)
------- -------
Net cash flows from investing activities (512) (1,434)
------- -------
Cash Flows From Financing Activities:
Net advances on line of credit 4,095 2,106
Purchases of treasury stock (25) (443)
Issuance of common stock 14 -
------- -------
Net cash flows from financing activities 4,084 1,663
------- -------
Net increase (decrease) in cash and
cash equivalents (1) 3
Cash and Cash Equivalents at Beginning of Period 127 124
------- -------
Cash and Cash Equivalents at End of Period $ 126 $ 127
Interest Paid, net of amount capitalized $ 957 $ 870
Income Taxes Paid $ - $ -
<FN>
See notes to condensed consolidated financial statements
</TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements represent Kentucky Electric Steel, Inc. and its wholly-owned
subsidiary, KESI Finance Company, (the Company). KESI Finance Company
was formed in October 1996 to finance the Ladle Metallurgy Project. All
significant intercompany accounts and transactions have been eliminated.
These statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for
a fair presentation have been included. Operating results for the three
month period ended December 27, 1997, are not necessarily indicative of
the results that may be expected for the year ending September 26, 1998.
For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended September 27, 1997.
(2) Accounting Policies
Fiscal Year End
The Company's fiscal year ends on the last Saturday of September.
Property, Plant, Equipment and Depreciation
Property, plant and equipment is recorded at cost, less accumulated
depreciation. For financial reporting purposes, depreciation is provided
on the straight-line method over the estimated useful lives of the
assets, generally 3 to 12 years for machinery and equipment and 15 to
30 years for buildings and improvements. Depreciation for income tax
purposes is computed using accelerated methods. Expenditures for
maintenance and repairs are charged to expense as incurred.
Expenditures for equipment renewals which extend the useful life of any
asset are capitalized.
The Company capitalizes interest costs as part of the historical
cost of constructing major capital assets. Interest cost of $7,834 was
capitalized for the quarter ended December 28, 1996.
(3) Inventories
Inventories at December 27, 1997 and September 27, 1997 consist of
the following ($000's):
Dec. 27, Sept. 27,
1997 1997
Raw materials $ 3,147 $ 3,280
Semi-finished and finished goods 16,339 13,258
Total inventories $ 19,486 $ 16,538
(4) Long-Term Debt
The Company bank credit facility was amended effective December 19, 1997.
This amendment increased the bank credit facility from $17.5 million to $24.5
million and extended the maturity date to January 31, 2001.
(5) 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
E.P.S. 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 Three For the Three
Months Ended Months Ended
December 27, 1997 December 28, 1996
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
Basic Earnings Per Share
Income (loss) available
to common stockholders $ 41 4,626,383 $.01 $(1,384) 4,658,691 $(.30)
Effect of Dilutive Securities
Options - 16,690 - -
Diluted Earnings Per Share
Income (loss) available to
common stockholders plus
assumed conversions $ 41 4,643,073 $.01 $(1,384) 4,658,691 $(.30)
The Company had transition stock options of 147,184 and 168,821 as of
December 27, 1997 and December 28, 1996, respectively. The options have
exercise prices ranging from $8.76 to $20.86 per share which exceeded the
average market price as of December 27, 1997 and as of December 28, 1996 and
therefore weren't included in the computation of diluted earnings per share.
These options expire beginning July 14, 1998 through February 18, 2003.
The Company also had options of 315,976 and 327,976 as of December 27,
1997 and December 28, 1996, respectively. These options have exercise prices
ranging from $7.63 to $12.31 per share which exceeded the average market price
as of December 27, 1997 and December 28, 1996 and therefore weren't included
in the computation of diluted earnings per share. These options expire
beginning October 6, 2003 through May 8, 2006.
(6) Insurance Claim Receivable and Environmental Liabilities
The Company's melt shop operations were shut down for twelve days during
the third quarter of fiscal 1997 in order to decontaminate its baghouse
facilities after detection of a radioactive substance in the baghouse dust,
a by-product of the melting process. The financial statements include a
receivable of $.9 million which represents the estimated balance due from the
insurance carrier on the total projected reimbursement of $6.7 million, which
reimburses the costs incurred in the radiation contamination clean-up, the
disposal cost, and business interruption. To date, the Company has received
$5.8 million from the insurance carrier for payment of costs incurred.
The $1.0 million in environmental liabilities recorded as a current
liability on the balance sheet represents final payment due an environmental
services company for treatment and disposal of the contaminated baghouse dust.
Payment for the disposal will occur within the next twelve months. Although
it is possible that the ultimate disposal costs may change from current
estimates, the effect of the change, if any, is not expected to be material
to the financial statements due to the Company having applicable insurance
coverage.
(7) 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 material 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 6. However,
discovery of unknown conditions could result in the recording of accruals in
the periods in which they become known.
<PAGE
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General. The Company manufactures special bar quality alloy and carbon
steel bar flats to precise customer specifications for sale in a variety of
niche markets. Its primary markets are manufacturers of leaf-spring
suspensions, cold drawn bar converters, flat bed truck trailers, and steel
service centers.
Net Sales. Net sales increased $2.6 million (11.3%) in the first quarter
of fiscal 1998 to $26.0 million, as compared to $23.4 million for the first
quarter of fiscal 1997. The increase in net sales is attributed to a 6.1%
increase in shipments, an increase in average selling price and to a lesser
extent a change in product mix. The increase in shipments resulted from the
continued increases in productivity during the first quarter of fiscal 1998.
The increase in average selling price is attributed to the price increases
implemented on many products during fiscal 1997, primarily in the third
quarter.
Cost of Goods Sold. Cost of goods sold increased $.3 million (1.2%) in
the first quarter of fiscal 1998 to $23.7 million, as compared to $23.4
million for the first quarter of fiscal 1997. As a percentage of net sales,
cost of goods sold decreased from 100.1% for the first quarter of fiscal 1997
to 91.0% for the first quarter of fiscal 1998. The increase in cost of goods
sold reflects the 6.1% increase in shipments offset by a decrease in per ton
conversion cost. The decrease in per ton conversion cost resulted from the
significant improvements in productivity during the first quarter of fiscal
1998 as compared to the first quarter of fiscal 1997, offset slightly by an
increase in scrap costs. The Company recently achieved production records in
both the melt shop and rolling mill, reflecting productivity improvement from
the capital projects. Also favorably impacting conversion costs, although to
a lesser degree, were decreases in health benefit cost and workers
compensation.
Gross Profit (Loss). As a result of the above, the first quarter of
fiscal 1998 reflected a gross profit of $2.3 million as compared to a loss of
$14,000 for the first quarter of fiscal 1997. As a percentage of net sales,
gross profit increased from (.1%) for the first quarter of fiscal 1997 to 9.0%
for the first quarter of 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, personnel, and other administrative departments. Selling and
administrative expenses decreased by approximately $37,000 for the three
months ended December 27, 1997 as compared to the comparable period in fiscal
1997. As a percentage of net sales, such expenses decreased from 7.4% for the
three months ended December 28, 1996 to 6.5% for the three months ended
December 27, 1997. The decrease, as a percentage of sales, is primarily the
result of an increase in net sales (as discussed above) for the quarter ended
December 27, 1997.
Operating Income (Loss). For the reasons described above, operating
income increased by $2.4 million from an operating loss of $1.7 million in the
first quarter of fiscal 1997 to an operating income of $.7 million in the
first quarter of fiscal 1998. As a percentage of net sales, operating income
(loss) increased from (7.4%) in the first quarter of 1997 to 2.5% in the first
quarter of 1998.
Interest Expense. Interest expense increased by $.1 million for the
three months ended December 27, 1997 from $.5 million for the first quarter
of fiscal 1997 to $.6 million for the first quarter of fiscal 1998. The
increase is the result of additional borrowings on the Company's line of
credit.
Net Income (Loss). As a result of the above, net income increased by
$1.4 million for the three months ended December 27, 1997 from a net loss of
$1.4 million for the first quarter of fiscal 1997 to $41,000 for the first
quarter of fiscal 1998.
Liquidity and Capital Resources.
The cash flows used by operating activities were $3.6 million for the
first quarter of fiscal 1998 as compared to $.2 million for the first quarter
of fiscal 1997. First quarter of fiscal 1998 operating cash flows reflect the
increases in accounts receivable and inventories (due primarily to the
increased level of sales and production) and the decrease in accrued
liabilities, which have been slightly offset by an increase in accounts
payable. The decrease in accrued liabilities is attributed to the payment of
interest on long-term debt, the annual deposit of profit sharing and 401K
matching funds with the trustee, and a reduction in the workers compensation
accrual. First quarter of fiscal 1997 operating cash flows were negatively
impacted by the net loss and a decrease in accrued liabilities, which were
offset due to a decrease in accounts receivable and inventories.
The cash flows used by investing activities were $.5 million for the
first quarter of fiscal 1998 as compared to $1.4 million for the first quarter
of fiscal 1997. The cash flows used by investing activities consist of $.8
million in capital expenditures offset somewhat by an increase in capital
expenditures payable of $.3 million for the first fiscal quarter of 1998. The
cash flows used by investing activities for the first quarter of fiscal 1997
consist of capital expenditures of $.9 million and a reduction in capital
expenditures payable of $.5 million.
The cash flows provided from financing activities were $4.1 million for
the first quarter of fiscal 1998 as compared to $1.7 million for the first
quarter of fiscal 1997. The cash flows provided from financing activities for
the first quarter of fiscal 1998 reflect net advances of $4.1 million on the
Company's line of credit which were used primarily for the working capital
needs discussed above. The cash flows provided from financing activities for
the first quarter of fiscal 1997 reflect net advances of $2.1 million on the
Company's line of credit and $.4 million used for the purchase of treasury
stock.
Working capital at December 27, 1997 was $11.5 million as compared to
$11.3 million at September 27, 1997, and the current ratio was 1.4 to 1.0 as
compared to 1.5 to 1.0.
The Company's primary ongoing cash requirements are for working capital
needs. The two sources for the Company's liquidity are internally generated
funds and its bank credit facility. The Company has $14.7 million in
borrowings outstanding on its line of credit as of December 27, 1997. The
Company believes that the unused portion of its $24.5 million bank credit
facility and internally generated funds will be sufficient to fund its ongoing
cash needs.
Outlook
Management continues to see strength in both demand and pricing for the
Company's products as exhibited by current bookings. The Company has recently
achieved production records in both the melt shop and rolling mill, reflecting
productivity improvement from the capital projects. The benefits from these
projects and continued market strength makes management optimistic about the
future.
Forward-Looking Statements
The matters discussed or incorporated by reference in this Report on Form
10-Q that are forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995) involve risks and uncertainities. These risks
and uncertainities 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 estimate of niche
market data; the cyclical and capital intensive nature of the industry; and
cost of compliance with environmental regulations. These risks and
uncertainities could cause actual results of the Company to differ materially
from those projected or implied by
such forward-looking statements
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A) 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
Exhibit 3.2 to Registrant's Registration Statement
on Form S-1 (No. 33-67140), and incorporated by
reference herein.
4.6 - Amendment No. 2 to Amended and Restated Loan
Agreement between Registrant and National City
Bank, Kentucky.
4.7 - Amendment No. 1 to Amended and Restated Export
Financing Agreement between Registrant and National
City Bank, Kentucky.
27 - Financial Data Schedule
B) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DATED: February 9, 1998 KENTUCKY ELECTRIC STEEL, INC.
(Registrant)
William J. Jessie
William J. Jessie, Vice President,
Secretary, Treasurer, and
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kentucky
Electric Steel, Inc.'s condensed consolidated financial statements as of and
for the three month period ended December 27, 1997 included in this Company's
quarterly report on Form 10-Q and is qualified in its entirety by reference
to such condensed consolidated financial statements.
</LEGEND>
<CIK> 0000910394
<NAME> KENTUCKY ELECTRIC STEEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 126
<RECEIVABLES> 13,613
<ALLOWANCES> 435
<INVENTORY> 19,486
<CURRENT-ASSETS> 40,678
<PP&E> 47,547
<DEPRECIATION> 12,099
<TOTAL-ASSETS> 84,125
<CURRENT-LIABILITIES> 29,195
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 34,233
<TOTAL-LIABILITY-AND-EQUITY> 84,125
<SALES> 26,020
<TOTAL-REVENUES> 26,020
<CGS> 23,680
<TOTAL-COSTS> 23,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 595
<INCOME-PRETAX> 67
<INCOME-TAX> 26
<INCOME-CONTINUING> 41
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41
<EPS-PRIMARY> .01
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</TABLE>
AMENDMENT NO. 2
TO AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT NO. 2 TO AMENDED AND RESTATED LOAN AGREEMENT (the "Second
Amendment"), is made and entered into as of the 19th day of December, 1997,
by and between (i) KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation with
principal office and place of business in Boyd County, Kentucky (the
"Borrower"), and (ii) NATIONAL CITY BANK OF KENTUCKY, formerly known as
National City Bank, Kentucky, a national banking association with principal
office and place of business in Louisville, Kentucky (the "Bank").
PRELIMINARY STATEMENT:
A. Pursuant to that certain Amended and Restated Loan Agreement dated
as of November 1, 1995, between the Borrower and Bank, as amended pursuant to
that certain Amendment No. 1 to Amended and Restated Loan Agreement dated as
of December 28, 1996, between the Borrower and Bank (the "First Amendment")
and, together with the Amended and Restated Loan Agreement, (the "Amended and
Restated Loan Agreement"), the Bank has established in favor of the Borrower
a revolving line of credit in the current principal amount of Sixteen Million
Dollars ($16,000,000.00) (the "Working Capital Line of Credit"), which was
reduced from the original principal amount of Twenty-Three Million Dollars
($23,000,000.00) pursuant to the First Amendment.
B. The Borrower has now requested that the Bank (a) increase the
principal amount of the Working Capital Line of Credit from Sixteen Million
Dollars ($16,000,000.00) to Twenty-Three Million Dollars ($23,000,000.00), and
(b) amend certain of the terms and provisions of the Amended and Restated Loan
Agreement, all of which the Bank is willing to do upon the terms and
conditions set forth in this Second Amendment.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements set forth herein and in the Amended and
Restated Loan Agreement, and for other good and valuable consideration, the
mutuality, receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Each capitalized term used herein, unless otherwise expressly
defined herein, shall have the meaning set forth in the Amended and Restated
Loan Agreement.
2. The Bank hereby increases the principal amount of the Working
Capital Line of Credit from Sixteen Million Dollars ($16,000,000.00) to
Twenty-Three Million Dollars ($23,000,000.00), effective as of the date of
this Second Amendment, and the Bank hereby extends the term of the Working
Capital Line of Credit from January 31, 1998 to January 31, 2001. All
references to the principal amount of the Working Capital Line of Credit shall
hereafter constitute a reference to Twenty-Three Million Dollars
($23,000,000.00). In furtherance of the provisions of this Section 2, the
following defined terms set forth in the Amended and Restated Loan Agreement
are hereby redefined as follows:
(a) The term "Amended and Restated Working Capital Line of
Credit Note", as defined in Section 1.4 of the Amended and Restated Loan
Agreement, is hereby redefined to mean that certain Amended and Restated
Revolving Promissory Note dated November 1, 1995, made by the Borrower,
payable to the order of the Bank, and in the original face principal amount
of Twenty-Three Million Dollars ($23,000,000.00) as amended pursuant to (i)
that certain Agreement to Extend Maturity Date dated August 28, 1996, between
the Borrower and the Bank, and (ii) that certain First Amendment to Amended
and Restated Revolving Promissory Note dated as of December 19, 1997, between
the Borrower and the Bank, together with all future amendments, modifications,
restatements, renewals and/or replacements thereof from time to time.
(b) The term "Working Capital Line of Credit", as defined in
Section 1.107 under the Amended and Restated Loan Agreement, is hereby
redefined to mean the revolving line of credit in the principal amount of
Twenty-Three Million Dollars ($23,000,000.00) established by the Bank in favor
of the Borrower pursuant to the Amended and Restated Loan Agreement.
(c) The term "Working Capital Line of Credit Termination Date",
as defined in Section 1.108 of the Amended and Restated Loan Agreement, is
hereby redefined to mean the Working Capital Line of Credit Termination Date
then in effect, which shall be the earliest of (i) January 31, 2001, subject
to extension thereof as provided in Section 2.1B of the Amended and Restated
Amended and Restated Loan Agreement, (ii) the date as of which the Obligations
shall become immediately due and payable pursuant to Section 8 of the Amended
and Restated Amended and Restated Loan Agreement, and (iii) the date on which
all of the Obligations are payable in full to the Bank (including, without
limitation, the repayment, expiration, termination or cash collateralization
of Letters of Credit pursuant to the Amended and Restated Amended and Restated
Loan Agreement) and the Working Capital Commitment is terminated by the
Borrower.
3. Section 2.1 of the First Amendment, adding Section 6.12 to the
Amended and Restated Amended and Restated Loan Agreement, is hereby deleted in
its entirety.
4. Notwithstanding that the Working Capital Line of Credit is not
secured by a security interest in any assets of the Borrower, including,
without limitation, its accounts receivable and inventory, the aggregate
principal amount of the Working Capital Loans from time to time outstanding
shall not exceed the lesser of (a) Twenty-Three Million Dollars
($23,000,000.00), or (b) the Borrowing Base. Further, the Borrower shall
continue to be obligated to deliver to the Bank pursuant to Section 2.1G of the
Amended and Restated Loan Agreement, the Borrowing Base Report within twenty
(20) days after the end of each month. In furtherance of the provisions of
this Section 4, the term "Borrowing Base", is defined in Section 1.12 of the
Amended and Restated Loan Agreement, is hereby redefined to mean, as of each
date of determination thereof, the sum of (a) eighty percent (80%) of the Net
Outstanding Amount of Eligible Accounts, and (b) the lesser of Fourteen Million
Dollars ($14,000,000.00) or the sum of (i) fifty percent (50%) of the Net
Security Value of Eligible Scrap Inventory, (ii) forty percent (40%) of the Net
Security Value of Eligible Billet Inventory, and (iii) sixty percent (60%) of
the Net Security Value of Eligible Finished Goods Inventory.
5. The term "Floating Rate", is defined in Section 1.49 of the Amended
and Restated Amended and Restated Loan Agreement, is hereby redefined to mean
the Prime Rate less one-half of one percent (1/2 of 1%) per annum.
6. Section 5.2 of the Loan Agreement is hereby amended to reflect that
the Borrower has, since the date of the Loan Agreement, formed an additional
Subsidiary, which is KESI Finance Company, a Kentucky corporation.
7. Section 6.3(d) of the Loan Agreement is hereby amended to provide
that the Borrower shall hereafter deliver the Compliance Certificate to the
Bank on a quarterly basis within thirty (30) days after the end of each Fiscal
Quarter of the Borrower, commencing with its Fiscal Quarter ending December 27,
1997.
8. In consideration of the execution and delivery of this Second
Amendment by the Bank, the Borrower covenants and agrees to pay to the Bank a
modification fee equal to one-half of one percent (1/2 of 1%) or One Hundred
Fifteen Thousand Dollars ($115,000.00).
9. Conditions to Effectiveness. This Second Amendment shall become
effective as of December 19, 1997, provided that the Bank shall receive this
Second Amendment and the First Amendment to the Amended and Restated Working
Capital Note duly executed and delivered by the Borrower.
10. Effect on the Amended and Restated Amended and Restated Loan
Agreement.
(a) Each reference in the Amended and Restated Amended and
Restated Loan Agreement to "this Agreement", "hereunder", "hereof", "herein",
or words of like import shall mean and be a reference to the Amended and
Restated Amended and Restated Loan Agreement as amended pursuant to this
Second Amendment.
(b) Except as specifically amended herein, the Borrower and the
Bank hereby ratify and reaffirm their respective covenants, agreements,
representations and warranties set forth in the Amended and Restated Amended
and Restated Loan Agreement and the other Loan Instruments.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment
No. 2 to Amended and Restated Amended and Restated Loan Agreement to be duly
executed as of the day and year first above written.
KENTUCKY ELECTRIC STEEL, INC.
By:__________________________
Title: ______________________
(the "Borrower")
NATIONAL CITY BANK OF KENTUCKY, formerly
known as National City Bank, Kentucky
By:__________________________
Title: ______________________
(the "Bank")
0111687.03
<PAGE>
AMENDMENT NO. 1
TO AMENDED AND RESTATED EXPORT FINANCING AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED EXPORT FINANCING
AGREEMENT (the "First Amendment"), is made and entered into as of the 19th
day of December, 1997, by and between (i) KENTUCKY ELECTRIC STEEL, INC., a
Delaware corporation with principal office and place of business in Boyd
County, Kentucky (the "Borrower"), and (ii) NATIONAL CITY BANK OF KENTUCKY,
formerly known as National City Bank, Kentucky, a national banking
association with principal office and place of business in Louisville,
Kentucky (the "Bank").
PRELIMINARY STATEMENT:
A. Pursuant to that certain Amended and Restated Export Financing
Agreement dated as of November 1, 1995, between the Borrower and Bank (the
"Amended and Restated Financing Agreement"), the Bank has established a
revolving line of credit in the principal sum of One Million Five Hundred
Thousand Dollars ($1,500,000.00) in favor of the Borrower (the "Line of
Credit") in order to finance certain Export Accounts Receivable, as such
term is defined in the Amended and Restated Financing Agreement, of the
Borrower.
B. The current stated maturity date of the Line of Credit and the
Amended and Restated Export Line of Credit Note, as such term is defined in
the Amended and Restated Financing Agreement, is January 31, 1998.
C. The Borrower and the Bank have agreed to extend the stated
maturity date of the Line of Credit and the Amended and Restated Export
Line of Credit Note from January 31, 1998 to January 31, 2001.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants set forth herein and in the Amended and Restated Financing
Agreement, and for other good and valuable consideration, the mutuality,
receipt and sufficiency of which are hereby acknowledged, the Borrower and
the Bank hereby agree as follows:
1. The Borrower and the Bank hereby agree to extend the stated
maturity date of the Line of Credit and the Amended and Restated Export
Line of Credit Note from January 31, 1998 to January 31, 2001, subject to
further extension or renewal thereof in accordance with the provisions of
the Amended and Restated Financing Agreement.
2. Section 7.3(d) of the Amended and Restated Financing Agreement
is hereby amended to provide that the Borrower shall hereafter deliver the
compliance certificate referred to therein to the Bank on a quarterly basis
within thirty (30) days after the end of each Fiscal Quarter of the
Borrower, commencing with its Fiscal Quarter ending December 27, 1997.
3. Except to the extent expressly amended or modified hereby, the
Borrower hereby ratifies all of its covenants and obligations set forth in
the Amended and Restated Financing Agreement and the Amended and Restated
Export Line of Credit Note.
4. This First Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
5. This First Amendment shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of the Bank and its
successors and assigns.
WITNESS the signatures of the Borrower and the Bank as of the day and
year first above written.
KENTUCKY ELECTRIC STEEL, INC.
By:__________________________
Title: ______________________
(the "Borrower")
NATIONAL CITY BANK OF KENTUCKY,
formerly known as National City Bank,
Kentucky
By: _________________________
Title: ______________________
(the "Bank"
0111926.01
<PAGE>
