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 25, 1999
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 ( )
(Cover Page 1 of 2 Pages
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 statement 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 10, 1999:
$9,452,707.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of December 10, 1999:
4,075,358 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 ................................. 11
Item 4. Submission of Matters to a Vote of Security Holders 11
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 ....................................... 20
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 produces. 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
1998 to fiscal 1999 and has continued to limit 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 330,000 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
244,000 tons of finished goods in 1999 which constitutes 74% of its
melting and casting capacity.
The Company transports its products by common carrier, generally
shipping by truck and by rail. The Company has railroad sidings at
its facilities.
Capital Improvements and Expansion
Annual capital expenditures over the last five fiscal years have
averaged $7.2 million, which includes $2.8 million expended in fiscal
year 1999.
The Board of Directors has approved the fiscal 2000 capital
expenditure plan for approximately $1.7 million, which includes
completion of various projects began in fiscal 1999, as well as
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. Several wholly-owned
subsidiaries of Republic Technologies International represented
approximately 13.5% of sales for fiscal 1999. Two wholly-owned
subsidiaries of Niagara Corporation represented 11.0% of net sales for
fiscal 1999. No other customer accounted for more than 10% of sales
in fiscal 1999. The loss of a principal customer could have a material
adverse effect on the Company's operations.
The Company's foreign sales as a percentage of total sales were
8.6% in fiscal 1999. These sales consisted primarily of leaf-spring
suspension products shipped to Canada and Mexico.
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
competes in the leaf spring market, is currently in the construction
phase of a plan to increase the capacity of its plant and to expand
the size range of the products it manufactures. The Company believes
that the principal competitive factors affecting its business are
quality, service, price and geographic location.
Backlog and Seasonality
As of September 25, 1999, the Company had firm orders for
approximately 52,000 tons representing approximately $24.1 million in
sales, as compared with approximately 54,000 tons representing
approximately $26.0 million in sales, at September 26, 1998.
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
34% of the Company's scrap in fiscal 1999. 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 to 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), and any such
interruption can be no more than 30 minutes in duration.
Employees
As of September 25, 1999, the Company employed 407 people,
approximately 77% of whom are members of the United Steelworkers of
America. The Company's current five-year collective bargaining
agreement expires in September 2004. 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 approximately 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. On December
10, 1999, the U. S. District Court approved and entered the Consent
Decree, which will require the payment of $64,950.18 for the Company's
1.3032 percent volumetric share of the Furnace 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 HRD
not pay the $4,984,000 to USEPA, the Company will be required to pay
$64,950.18.
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 1993. 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. On May 5, 1999, the Company was notified by
the Kentucky Division of Waste Management ("DWM") that as a result of
a RCRA Facility Assessment ("RFA") conducted in 1986 and 1987 while
the Company's mill was operated by the Prior Operator, that DWM
requests that the Company undertake a RCRA Facility Investigation
("RFI") and, if necessary, therefore, a RCRA Corrective Measures Study
("CMS") and, if necessary, therefore, a RCRA Corrective Measures
Implementation ("CMI"). On June 8, 1999, the Company was notified by
DWM that the Company's mill had been listed with 32 other sites in
Kentucky as a high priority for clean-up on the RCRA Corrective Action
Baseline List of Facilities. The Company has not made a determination
as to whether the Prior Operator released any hazardous waste at its
site and has not agreed to undertake the RFI and is continuing
negotiations with DWM. The Company, however, could incur
investigation and/or clean-up expenses in the future with respect to
the operation of the Company's facility by the Prior Operator with
respect to the Cooksey Landfill or such other sites if (1) the sites
are listed as a Kentucky "Uncontrolled Site" or Federal Superfund
Site, (2) DWM required the Company to undertake an RFI, CMS and CMI,
and (3) 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 requirements, 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"). On June 2, 1999, DAQ issued to the Company its Title
V Operating Permit ("Air Permit") with an expiration date of June 2,
2004. As with similar mills in the industry, the Federal Clean Air
Act required that the Permit include emission limitations and
standards as well as monitoring, recordkeeping, reporting, inspection
and entry requirements to assure compliance with those limits. The
Company does not know whether it will be able to comply with the Air
Permit without additional capital and/or operating expense.
The Company's operations are also subject to the Federal Clean
Water Act which provides for regulation through state implementation
of federal requirements of the discharge of certain water pollutants.
On March 19, 1999, the Kentucky Division of Water ("DOW") issued the
Company its Kentucky Pollutant Discharge Elimination System Permit
("Water Permit") with an expiration date of May 31, 2002. In its
application for the Water Permit, the Company requested that DOW re-
evaluate the temperature limits established in its prior permit. DOW
has agreed to determine allowable surface water temperatures on a
site-specific basis and has included in the Water Permit a requirement
that the Company conduct a year-long thermal plume study to assess the
impact of the effluent temperature on the aquatic biota in the
receiving stream. At the completion of the study, DOW will determine
allowable surface water temperatures on a site-specific basis
utilizing available data and the results of the thermal plume study.
The Company, therefore, does not know whether it will be able to
comply with temperature limits without additional capital and/or
operating expense when the limits are determined by DOW.
Further, there can be no assurance that evolving federal and
state environmental requirements or discovery of unknown conditions
will not (1) require the Company to make material expenditures in the
future or (2) 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. On July 29,
1997, the Company 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. On April 9, 1999, Zhagrus certified to the Company that
Zhagrus has completed the treatment and disposal of the Mixed Waste at
the Envirocare Facility.
Except as otherwise indicated, the Company believes it is in
substantial compliance with applicable environmental laws and
regulations. Notwithstanding such compliance, if damage to persons or
property or contamination of the environment has been or is caused by
the conduct of the Company's business or by hazardous substances or
wastes used, generated or disposed of by the Company (or possibly by
prior operators of the Company's mini-mill or by third parties), the
Company may be held liable for such damages and be required to pay the
cost of investigation and remediation of such contamination. The
amount of such liability to the Company could be material. Changes in
federal or state laws, regulations or requirements or discovery of
unknown conditions could require additional expenditures by the
Company.
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 25, 1999.
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 1, 2000.
The names, ages and positions of all of the executive officers
of the Registrant as of September 25, 1999 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, 55, 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 20 years
management experience in the steel industry. Mr. Hanebuth is a
advisory director of Fifth Third Bank Ohio Valley and a director of
Ashland Hospital Corporation, which operates King's Daughters' Medical
Center.
William J. Jessie, 49, 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, 55, 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 29 years of sales experience in
the steel industry.
William H. Gerak, 54, 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 25 years of human resource and
administrative experience.
<PAGE
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades on the NASDAQ National Market
under the symbol "KESI." The following table sets forth, for the
fiscal periods indicated, the high and low closing prices of the stock
on the NASDAQ National Market:
Fiscal 1998 Fiscal 1999
High Low High Low
First Quarter $ 8 $ 4-1/2 $ 4 $ 2-11/16
Second Quarter 7-1/4 4-3/4 3-3/4 2-5/8
Third Quarter 6-15/16 4-15/16 3-3/8 2-1/2
Fourth Quarter 5-1/8 3-1/2 4-1/2 2-5/8
On December 10, 1999 there were approximately 1,100 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 25, 1999 are derived from the audited
financial statements of the Company. The information set forth below
should be used in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Financial Statements and related notes thereto included elsewhere
herein.
<TABLE>
Year Ended
Sept. 30, Sept. 28, Sept. 27, Sept. 26, Sept. 25,
1995 1996 1997 1998 1999
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ............ $107,402 $ 98,320 $ 94,652 $109,456 $105,389
Cost of goods sold ... 91,642 89,783 89,992 97,720 95,140
------- ------- ------- ------- -------
Gross profit ....... 15,760 8,537 4,660 11,736 10,249
Selling and admini-
strative expenses .. 7,696 7,391 6,800 7,011 7,627
------- ------- ------- ------- -------
Operating income (loss) 8,064 1,146 (2,140) 4,725 2,622
Interest expense ..... (658) (1,453) (2,125) (2,395) (2,274)
Interest income and
other .............. 57 31 34 80 1,234
Gain on involuntary con-
version of equipment - 369 - - -
------- ------- ------- ------- -------
Income (loss) before
income taxes ...... 7,463 93 (4,231) 2,410 1,582
Income taxes ......... 2,812 35 (1,599) 916 604
------- ------- ------- ------- -------
Net income (loss) $ 4,651 $ 58 $ (2,632) $ 1,494 $ 978
Net income (loss)
per common share -
basic and diluted... $ .95 $ .01 $ (.57) $ .32 $ .24
Weighted average shares
outstanding-basic 4,905,456 4,806,161 4,633,315 4,624,671 4,085,480
Weighted average shares
outstanding-diluted 4,909,575 4,806,485 4,633,315 4,630,920 4,089,219
Balance Sheet Data:
Working capital ..... $ 10,324 $14,963 $11,335 $14,153 $15,718
Total assets ........ 72,625 78,433 78,770 80,251 82,941
Long-term debt (1) .. 7,287 20,000 20,000 20,000 20,000
Shareholders' equity 38,097 37,110 34,211 35,192 35,252
</TABLE>
(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
27, 1997 26, 1998 25, 1999
Net sales .................... 100.0% 100.0% 100.0%
Cost of goods sold ........... 95.1 89.3 90.3
----- ----- -----
Gross profit ................. 4.9 10.7 9.7
Selling and administrative
expenses ................... 7.2 6.4 7.2
----- ----- -----
Operating income (loss) ...... (2.3) 4.3 2.5
Interest expense ............. (2.2) (2.2) (2.2)
Interest income and other .... - .1 1.2
----- ----- -----
Income (loss) before
income taxes ............... (4.5) 2.2 1.5
Income taxes ................ (1.7) .8 .6
----- ----- -----
Net income (loss) ............ (2.8%) 1.4% .9%
Year Ended September 25, 1999 Compared with Year Ended September 26,
1998
Net Sales. Net sales for fiscal 1999 decreased by $4.1 million
(3.7%) to $105.4 million from $109.5 million in fiscal 1998. The
decrease in net sales is attributable to a 5.2% decline in average
selling prices due to market price reductions, offset by an increase
in tons shipped. Shipments increased by 1.5% from 240,300 tons in
fiscal 1998 to 244,000 tons in fiscal 1999.
Cost of Goods Sold. Cost of goods sold for fiscal 1999 decreased
by $2.6 million, or 2.6% to $95.1 million from $97.7 million in fiscal
1998. As a percentage of net sales, cost of goods sold increased from
89.3% in fiscal 1998 to 90.3% in fiscal 1999. The decrease in cost of
goods sold reflects a decrease in the per ton cost of tons shipped
offset by the increase in tons shipped. The decrease in the per ton
cost of tons shipped during fiscal 1999 as compared to fiscal 1998
resulted from lower scrap prices offset by higher conversion costs
primarily due to lower production caused by equipment problems in the
melt shop.
Gross Profit. As a result of the above, gross profit for fiscal
1999 decreased by $1.5 million from $11.7 million in fiscal 1998 to
$10.2 million in fiscal 1999. As a percentage of net sales, gross
profit decreased from 10.7% in fiscal 1998 to 9.7% in fiscal 1999.
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 1999
increased $.6 million, or 8.8% to $7.6 million from $7.0 million for
fiscal 1998. As a percentage of net sales, such expenses increased
from 6.4% for fiscal 1998 to 7.2% for fiscal 1999. The increase in
selling and administrative expenses is due primarily to an increase in
legal and professional fees and self-insured health care costs
incurred during fiscal 1999. The increase in legal and professional
fees is primarily due to legal and consulting fees related to the
Company's electric service contract and a pending trade case with the
Department of Commerce.
Operating Income. For the reasons described above, operating
income decreased by $2.1 million (44.5%) from $4.7 million in fiscal
1998 to $2.6 million in fiscal 1999. As a percentage of net sales,
operating income decreased from 4.3% in fiscal 1998 to 2.5% in fiscal
1999.
Interest Expense. Interest expense decreased by $.1 million to
$2.3 million in fiscal 1999 from $2.4 million in fiscal 1998. The
decrease in interest expense is due to a decrease in both the average
interest rate and the average amount outstanding on the line of
credit.
Provision (Credit) for Income Taxes. The Company has recorded a
tax provision of approximately $.6 million in fiscal 1999 as compared
to a tax provision of approximately $.9 million in fiscal 1998 at an
effective tax rate of 38% for both years. As of September 25, 1999
the Company has net deferred tax assets of $5.9 million, which is net
of a $2.7 million valuation allowance. Included in the $8.6 million
of gross deferred tax assets is $6.4 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 1997, the results
of operations for fiscal 1998 and 1999 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 in future years
if estimates of future taxable income during the carryforward period
are reduced.
Interest Income and Other. Interest and other income increased
by $1.2 million for fiscal 1999 from $.1 million in fiscal 1998.
Fiscal 1999 includes other income of $1.1 million from a claim
settlement pertaining to the Company's purchase of electrodes during
the years 1992 through 1997.
Net Income. As a result of the above, net income decreased by
$.5 million from $1.5 million in fiscal 1998 to $1.0 million in fiscal
1999. As a percentage of net sales, net income decreased from 1.4% in
fiscal 1998 to .9% in fiscal 1999.
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, in the future, 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.
Liquidity and Capital Resources
Cash flows from operating activities amounted to $2.5 million,
$2.3 million, and $1.3 million in fiscal 1997, 1998 and 1999,
respectively. Fiscal 1997 operating cash flows reflect the net loss
of $2.6 million and the increase in the net deferred tax asset of $.7
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 the net deferred tax asset of $1.0 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.
Fiscal 1999 operating cash flows reflect net income of $1.0
million, depreciation and amortization of $3.6 million and the
decrease in the net deferred tax asset of $.7 million. Operating cash
flows were negatively impacted by increases in accounts receivable and
inventories of $2.1 million and $2.4 million, respectively. Also,
operating cash flows were positively impacted by an increase of $1.7
million in trade accounts payable. The increase in inventories and
accounts payable is primarily due to an increase in scrap and billet
inventory. The increase in accounts receivable reflects the higher
sales level in the latter part of fiscal 1999.
Cash flows used by investing activities consist of capital
expenditures, net of changes in capital expenditures payables, of $5.1
million, $2.5 million, and $3.4 million in fiscal 1997, 1998 and 1999,
respectively. The increase in capital expenditures in fiscal 1999 is
primarily due to the payment of retainage on projects completed during
the year.
Cash flows provided from financing activities amounted to $2.6
million, $.2 million, and $2.2 million in fiscal 1997, 1998, and 1999,
respectively. 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.
The $2.2 million in fiscal 1999 reflects $3.1 million in advances on
the Company's line of credit facility offset by $1.0 million used to
purchase treasury stock.
Working capital at September 25, 1999, was $15.7 million as
compared to $14.2 million at September 26, 1998. The current ratio
was 1.6 to 1.0 at September 25, 1999 as compared to 1.6 to 1.0 at
September 26, 1998. The increase in working capital is primarily
attributed to cash flow generated by operations combined with the
Company's 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. During the
fiscal year ended September 25 1999, the Company repurchased 405,585
shares of its common stock.
The Company's primary ongoing cash requirements are for current
capital expenditures. In addition, principal payments on the
unsecured senior notes commence on November 1, 2000 and are due in
equal annual installments over six years. The two sources for the
Company's liquidity are internally generated funds and its bank credit
facility. The Company has a $24.5 million unsecured bank credit
facility which expires January 31, 2002. Borrowings are limited to
defined percentages of eligible inventory and accounts receivable. As
of September 25, 1999, the Company had $14.5 million outstanding and
$6.0 million available under its line of credit. The Company believes
that the bank credit facility and internally generated funds will be
sufficient to fund its ongoing cash needs.
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 has completed an organized program 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
program was designed to assure the Company's information technology
systems and related infrastructure will be Year 2000 compliant. The
Company 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 included 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 included testing of individual modifications as they were
installed); and (3) a testing phase to test entire systems for Year
2000 compliance after individual modifications were installed and
tested. All phases of the Company's Year 2000 program are
substantially complete.
The estimated cost for correction of Year 2000 issues, including
any software and hardware changes and the cost of personnel involved
in working on the project, is approximately $260,000, substantially
all of which has been incurred to date. The Year 2000 updates were
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 also included investigation of
the Year 2000 readiness status of our major vendors and customers.
The Company used 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. 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. Based upon the responses received, all
of our major vendors and customers indicated they are addressing the
Year 2000 issues on a timely basis.
The Company has developed a Year 2000 contingency plan in the
event we experience Year 2000 related problems. The plan includes,
among other actions, reverting to manual systems and controls and
setting internal clocks to earlier dates.
The Company believes that with the modifications made to its
computer systems and electronic equipment, the Year 2000 issue will
not result in significant operational problems. However, because of
the uncertainties associated with addressing the Year 2000 problem for
both internal and external systems critical to the Company's
operations, there is a risk of a material adverse effect on the
Company's operations. While the Company is not aware of any
significant exposure, there can be no assurance that the Year 2000
issue will not have a material impact on the Company's business and
operations.
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. 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, but are not
limited to: 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 Amend- ment 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 Kentucky Electric Steel, Inc. Salary Continuation
Plan, effective June 7, 1994, as amended, for the
benefit of the Company's eligible salaried employees,
filed as Exhibit 10.8 to Registrant's Form 10-Q, File
No. 0-22416, filed on August 6, 1999, and incorporated
by reference herein.*
10.9 The Kentucky Electric Steel, Inc. Executive Severance
Plan, effective June 7, 1994, as amended, for the benefit
of the Company's eligible Executive Officers, filed as
Exhibit 10.9 to Registrant's Form 10-Q, File No. 0-22416,
filed on August 6, 1999, and incorporated by reference
herein.*
10.10 Employment agreements dated June 7, 1994, as amended,
between Kentucky Electric Steel, Inc. and its four
Executive Officers, filed as Exhibit 10.10 to Registrant's
Form 10-Q, file No. 0-22416, filed on August 6, 1999 and
incorporated by reference herein.*
10.11 Form of 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
EquiServe Trust Company, N.A., dated as of September 1,
1999, filed as Exhibit 4.8 to Registrant's Form 8-K, File
No. 0-22416, filed on September 14, 1999 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. 1999 Share Plan for Non-
Employee Directors, filed as Exhibit 10.18 to Registrant's
Form 10-Q, No. 0-22416 filed on August 6, 1999 and
incorporated by reference herein.*
10.19 Form of Promissory Note dated October 6, 1999, between
Kentucky Electric Steel, Inc. and its four executive
officers, filed herewith.*
10.20 Form of Loan Forgiveness Agreement dated October 6, 1999,
between Kentucky Electric Steel, Inc. and its four
executive officers, filed herewith.*
10.21 Trust Under Certain Kentucky Electric Steel Salary
Continuation Agreements dated October 14, 1999, 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 25, 1999.
* 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 10, 1999 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.
<TABLE>
Signatures Title Date
<S> <C> <C>
\s\Charles C. Hanebuth President, Chief Executive Officer December 10, 1999
Charles C. Hanebuth and Chairman
\s\William J. Jessie Vice President, Secretary, December 10, 1999
William J. Jessie Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
\s\Clifford R. Borland Director December 10, 1999
Clifford R. Borland
\s\Carl E. Edwards, Jr. Director December 10, 1999
Carl E. Edwards, Jr.
\s\J. Marvin Quin, II Director December 10, 1999
J. Marvin Quin, II
\s\David C. Struve Director December 10, 1999
David C. Struve
</TABLE>
<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 26, 1998 and
September 25, 1999 .................................... F-2
Consolidated Statements of Operations - Years ended
September 27, 1997, September 26, 1998
and September 25, 1999 ................................ F-3
Consolidated Statements of Changes in Shareholders'
Equity - Years ended September 27, 1997, September 26,
1998, and September 25, 1999 .......................... F-4
Consolidated Statements of Cash Flows - Years ended
September 27, 1997, September 26, 1998
and September 25, 1999 ................................ 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 26, 1998 and September 25, 1999, 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
25, 1999. 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 26, 1998 and
September 25, 1999 and the results of their operations and their cash
flows for each of the three years in the period ending September 25, 1999
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cincinnati, Ohio,
October 27, 1999
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
September September
26, 1998 25, 1999
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 150 $ 184
Accounts receivable, less allowance for
doubtful accounts of $460 in 1998 and
$430 in 1999 12,037 14,180
Inventories 20,363 22,751
Operating supplies and other current assets 5,206 5,294
Refundable income taxes - 315
Deferred tax assets 648 683
------- -------
Total current assets 38,404 43,407
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,532 4,621
Machinery and equipment 42,004 45,324
Construction in progress 3,031 2,470
Less - accumulated depreciation (14,772) (18,307)
------- -------
Net property, plant and equipment 34,795 34,108
------- -------
DEFERRED TAX ASSETS 5,990 5,253
------- -------
OTHER ASSETS 1,062 173
------- -------
Total assets $ 80,251 $ 82,941
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 11,397 $ 14,510
Accounts payable 7,056 8,731
Capital expenditures payable 857 335
Accrued liabilities 3,834 3,988
Environmental liabilities 982 -
Current portion of long-term debt 125 125
------- -------
Total current liabilities 24,251 27,689
------- -------
LONG-TERM DEBT 20,000 20,000
------- -------
OTHER LIABILITIES 808 -
------- -------
Total liabilities 45,059 47,689
------- -------
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 4,985,937 and 5,003,874 shares
issued, respectively 50 50
Additional paid-in capital 15,671 15,728
Less treasury stock - 526,996 and 932,581
shares at cost, respectively (3,254) (4,272)
Deferred compensation (73) (30)
Retained earnings 22,798 23,776
------- -------
Total shareholders' equity 35,192 35,252
------- -------
Total liabilities and shareholders' equity $ 80,251 $ 82,941
<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
27, 1997 26, 1998 25, 1999
<S> <C> <C> <C>
NET SALES $ 94,652 $109,456 $105,389
COST OF GOODS SOLD 89,992 97,720 95,140
------- ------- -------
Gross profit 4,660 11,736 10,249
SELLING AND ADMINISTRATIVE
EXPENSES 6,800 7,011 7,627
------- ------- -------
Operating income (loss) (2,140) 4,725 2,622
INTEREST EXPENSE (2,125) (2,395) (2,274)
INTEREST INCOME AND OTHER 34 80 1,234
------- ------- -------
Income (loss) before
income taxes (4,231) 2,410 1,582
PROVISION (CREDIT) FOR
INCOME TAXES (1,599) 916 604
------- ------- -------
Net income (loss) $ (2,632) $ 1,494 $ 978
NET INCOME (LOSS) PER COMMON
SHARE - BASIC AND DILUTED $ (.57) $ .32 $ .24
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 4,633,315 4,624,671 4,085,480
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,633,315 4,630,920 4,089,219
<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 25, 1999
<CAPTION>
(Dollars in Thousands)
Addi- De-
tional ferred
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. 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
Amortization of
deferred comp-
ensation - - - - - 43 - 43
Issuance of Stock 17,937 - 57 - - - - 57
Purchases of treasury
stock - - - (405,585) (1,018) - - (1,018)
Net income - - - - - - 978 978
--------- -- ------ ------- ----- --- ------ ------
BALANCE, Sept. 25, 1999 5,003,874 $50 $15,728 (932,581) $(4,272) $(30) $23,776 $35,252
<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
27, 1997 26, 1998 25, 1999
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(2,632) $ 1,494 $ 978
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation and amortization 3,737 3,683 3,636
Change in deferred taxes (896) 1,169 737
Change in other (158) (154) 23
Changes in current assets and
current liabilities:
Accounts receivable 536 (460) (2,143)
Insurance claim receivable (900) 900 -
Inventories 829 (3,825) (2,388)
Operating supplies and other
current assets 265 (404) (88)
Refundable income taxes (360) 900 (315)
Deferred tax assets 223 (191) (35)
Accounts payable 763 (921) 1,675
Accrued liabilities 61 134 154
Environmental liabilities 982 - (982)
------ ------ ------
Net cash flows from operating activities 2,450 2,325 1,252
------ ------ ------
Cash Flows From Investing Activities:
Capital expenditures (3,226) (2,806) (2,848)
Change in capital expenditures payable (1,858) 310 (522)
------ ------ ------
Net cash flows from investing activities (5,084) (2,496) (3,370)
------ ------ ------
Cash Flows From Financing Activities:
Net advances on line of credit 3,089 762 3,113
Issuance of common stock 21 48 57
Purchases of treasury stock (473) (616) (1,018)
------ ------ ------
Net cash flows from financing activities 2,637 194 2,152
------ ------ ------
Net increase in cash and cash
equivalents 3 23 34
Cash and Cash Equivalents -
Beginning of Period 124 127 150
------ ------ ------
Cash and Cash Equivalents -
End of Period $ 127 $ 150 $ 184
Interest Paid, net of amount
capitalized $ 2,142 $ 2,371 $ 2,263
Income Taxes Paid $ - $ 200 $ 216
<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 $11,000 was
capitalized for the year ended September 27, 1997. No interest was
capitalized for the years ended September 26, 1998 and September 25,
1999, respectively.
Income Taxes
The Company accounts for income taxes pursuant to the asset and
liability method. Deferred tax assets and liabilities are recognized
based upon the estimated increase or decrease in taxes payable or
refundable in future years expected to result from reversal of
temporary differences and utilization of carryforwards which exist at
the end of the current year. Temporary differences represent the
differences between the financial statement carrying amount of assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates scheduled to
apply to taxable income in the years in which the temporary
differences are expected to be settled, and are adjusted in the period
of enactment for the effect of a change in tax law or rates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS No 130),
"Reporting Comprehensive Income", which established standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. The Company adopted SFAS No. 130 in the
quarter ended December 26, 1998. For the periods presented herein,
comprehensive income is equal to net income reported.
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.
The Company has determined it has no reportable segments as defined
under SFAS No. 131.
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 derivative financial instruments; 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 quarter of fiscal 2001.
Fiscal Year End
The Company's fiscal year ends on the last Saturday of
September.
(3) Inventories
Inventories at September 26, 1998 and September 25, 1999 consist
of the following ($000's):
1998 1999
Raw materials $ 1,984 $ 2,824
Semi-finished and finished goods 18,379 19,927
Total inventories $20,363 $22,751
(4) 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 at September 26, 1998
represents final payment due an environmental services company for
treatment and disposal of the contaminated baghouse dust. Payment for
the disposal occurred during fiscal 1999.
(5) Accrued Liabilities
Accrued liabilities at September 26, 1998 and September 25, 1999
consist of the following ($000's):
1998 1999
Accrued payroll and related liabilities $ 1,431 $ 1,498
Accrued insurance and workers' compensation 820 945
Accrued interest payable 702 714
Other 881 831
$ 3,834 $ 3,988
(6) Long-Term Debt
Long-term debt of the Company at September 26, 1998 and September
25, 1999 consists of the following ($000's):
1998 1999
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
Principal payments on the unsecured senior notes commence on
November 1, 2000 and are due in equal annual installments over six
years. These notes bear interest at a fixed rate of 7.66% per annum,
with interest paid semi-annually.
The Company has a $24.5 million unsecured bank credit facility
which expires January 31, 2002. Borrowings are limited to defined
percentages of eligible inventory and accounts receivable. Interest
on borrowings accrue at the rate of LIBOR plus 1.35% or the 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 25, 1999, approximately $14.5 million was
outstanding under the bank credit facility, approximately $.9 million
was utilized to collateralize various letters of credit and $6.0
million was available for additional borrowings. The weighted average
interest rate on short-term borrowings as of September 26, 1998 and
September 25, 1999 were 7.3% and 7.1%, respectively.
The estimated fair value of the Company's unsecured senior notes
is estimated using discounted cash flow analysis, based upon the
estimated market rate as of September 25, 1999. The fair value of the
unsecured senior notes was approximately $19.7 million as of September
25, 1999 and as of September 26, 1998.
(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
18.6%, 14.2%, and 12.5% of total sales for fiscal 1997, 1998 and 1999,
respectively.
One company, through several wholly-owned subsidiaries, which
are customers of the Company, represented 8.7%, 10.4%, and 13.5% of
net sales in fiscal 1997, 1998, and 1999, respectively. Another
customer, through two wholly-owned subsidiaries, which are customers
of the Company, accounted for 14.0%, 10.4%, and 11.0% of net sales in
fiscal 1997, 1998, and 1999, respectively. No other customer
accounted for more than 10% of net sales.
The Company's foreign sales represented 8.5%, 7.5%, and 8.6% of
total sales for 1997, 1998 and 1999, respectively.
(8) Income Taxes
The provision (credit) for income taxes consists of the following
($000's):
1997 1998 1999
Current:
Federal $ (900) $ 200 $ (98)
State - - -
(900) 200 (98)
Deferred:
Federal (498) 596 626
State (201) 120 76
(699) 716 702
Total provision (credit)
for income taxes $(1,599) $ 916 $ 604
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):
1997 1998 1999
Income tax provision (credit)
at statutory tax rate of 34% $(1,438) $ 819 $ 538
State income taxes, net of
federal effect (103) 64 50
Other, net (58) 33 16
$(1,599) $ 916 $ 604
The components of the net deferred tax asset at September 26,
1998 and September 25, 1999 are as follows ($000's):
Sept. 26, Sept. 25,
1998 1999
Deferred tax components:
Property, plant and equipment $ (307) $(1,398)
Intangibles 2,526 2,314
AMT credit carryforwards 1,177 1,038
NOL carryforward 5,429 6,405
Other 494 258
9,319 8,617
Valuation allowance (2,681) (2,681)
Net deferred tax assets $ 6,638 $ 5,936
For Federal income tax purposes the Company has alternative
minimum tax credit carryforwards of approximately $1.0 million, which
are not limited by expiration dates. The Company also has gross
operating tax loss carryforwards of approximately $18.8 million, which
expire beginning in 2011. The Company has recorded deferred tax
assets related to these carryforwards.
The realization of deferred tax assets is dependent in part upon
generation of sufficient future taxable income. Management has
considered the levels of currently anticipated pre-tax income in
assessing the required level of the deferred tax asset valuation
allowance. Taking into consideration historical pre-tax income
levels, the nature of certain events which adversely affected
operations in fiscal 1997, the results of operations for fiscal 1998
and 1999, 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 $219,000, $226,000 and $219,000 in fiscal 1997, 1998
and 1999, 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 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 27, 1997 September 26, 1998
Per Per
Share Share
(Loss) Shares Amount Income Shares Amount
Amounts for Basic
Earnings (Loss)
Per Share $(2,632) 4,633,315 $(.57) $1,494 4,624,671 $.32
Effect of Dilutive
Securities Options -__ - - - 6,249 -
Amounts for Diluted
Earnings (Loss)
Per Share $(2,632) 4,633,315 $(.57) $1,494 4,630,920 $.32
For the Year Ended
September 25, 1999
Per
Share
Income Shares Amount
Amounts for Basic
Earnings Per Share $ 978 4,085,480 $.24
Effect of Dilutive
Securities Options - 3,739 -
Amounts for Diluted
Earnings Per Share $ 978 4,089,219 $.24
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:
1997 1998 1999
Transition stock options 158,702 92,335 56,061
Employee stock options 405,168 301,976 378,668
563,870 394,311 434,729
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 became 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 $3.03 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 vested on a pro rata basis over a
period of four years beginning one year after the grant date.
Compensation expense of $208,000, $53,000 and $0 was recognized in
fiscal 1997, 1998 and 1999, 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 1998 and
1999 are as follows:
1998 1999
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 405,168 $ 9.12 386,668 $ 9.15
Options granted - - 91,192 3.03
Options forfeited (18,500) 8.46 (8,000) 8.66
Options outstanding,
end of year 386,668 $ 9.15 469,860 $ 7.97
Options exercisable,
end of year 263,877 $10.24 318,022 $ 9.72
Restricted shares granted - -
Options and restricted
shares available
for grant 29,233 191,041
The 1993 Transition Stock Option Plan (the "Transition Plan") was
approved by the shareholders in 1994. The Transition Plan was designed
to substitute KESI stock options for previously issued NS Group stock
options. KESI incentive stock options for 186,539 shares of Common Stock
were issued in 1994, with exercise prices varying from $8.76 per share
to $20.86 per share. A summary of transactions in the plan for fiscal
1998 and 1999 are as follows:
1998 1999
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 158,702 $14.06 92,335 $10.84
Options granted - - - -
Options forfeited (24,892) 14.69 (6,340) 11.01
Options expired (41,475) 20.86 (29,934) 14.40
Options outstanding,
end of year 92,335 $10.84 56,061 $ 8.93
Options exercisable,
end of year 92,335 $10.84 56,061 $ 8.93
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
1997, 1998, and 1999. Had compensation cost for the stock option plans
been determined based on the fair value of the options at the grant
dates, 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 $2.7 million and $.59 per share for fiscal 1997, net income of
$1.4 million or $.30 per share for fiscal 1998, and net income of $.9
million and $.21 per share for fiscal 1999. 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. In addition, the pro forma fair value
method has not been applied to options granted in years prior to fiscal
1996. The weighted-average fair value of options granted in fiscal 1997
and 1999 was $3.15 and $1.64 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 6.59% for fiscal 1997 and 5.1% for fiscal
1999, weighted average volatility of 38.4% for fiscal 1997 and 39.4% for
fiscal 1999, 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 25, 1999 under the Employee Stock
Option/Restricted Stock Plans and the Transition Plan:
<TABLE>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 9/25/99 Life Price at 9/25/99 Price
<S> <C> <C> <C> <C> <C>
Employee Stock Option/Restricted Stock Plans:
$ 3.03 - 3.03 91,192 9.39 Years $ 3.03 - $ -
5.56 - 7.63 161,884 7.13 Years 6.57 101,238 6.78
9.13 - 12.31 216,784 4.99 Years 11.10 216,784 11.10
$ 3.03 - 12.31 469,860 6.58 Years $ 7.97 318,022 $ 9.72
Transition Plan:
$ 8.76 - 9.05 55,706 2.88 Years $ 8.86 55,706 $ 8.86
19.57 - 19.57 355 .67 Years 19.57 355 19.57
$ 8.76 - 19.57 56,061 2.87 Years $ 8.93 56,061 $ 8.93
</TABLE>
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 $73,000 and $30,000 as of
September 26, 1998 and September 25, 1999, respectively. In fiscal
1998 and 1999, the Company recognized $44,000 and $43,000 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. In May 1999, the Board of Directors approved the 1999 Share
Plan for Non-Employee Directors, which authorized 25,000 of additional
shares to be used for Directors' compensation. 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 1998, 7,949 shares were issued at stock prices ranging
from $3.50 to $6.94 per share. During fiscal 1999, 17,937 shares were
issued at stock prices ranging from $2.91 to $3.41 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 and amended and
restated as of September 1, 1999, 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, environmental and other
matters, which seek remedies or damages. 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 and
such amounts can be estimated. The Company has no recorded reserves
for environmental matters as of September 25, 1999. However, new
information or developments with respect to known matters or unknown
conditions could result in the recording of accruals in the periods in
which they become known. The Company believes that any liability that
may ultimately be determined with respect to commercial, product
liability, environmental or other matters will not have a material
effect on its financial condition or results of operations.
(14) Quarterly Financial Data (Unaudited)
Quarterly results of operations (in thousands, except share and
per share amounts) for fiscal 1998 and fiscal 1999 are as follows:
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
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
1999
Net sales $ 25,624 $ 25,952 $ 27,421 $ 26,392
Gross profit $ 2,075 $ 1,961 $ 3,711 $ 2,502
Net income (loss) $ (88) $ (327) $ 1,269 $ 124
Net income (loss) per
common share -
basic and diluted $ (.02) $ (.08) $ .31 $ .03
Weighted average shares
outstanding - basic 4,147,178 4,060,355 4,064,920 4,069,469
Weighted average shares
outstanding - diluted 4,147,178 4,060,355 4,064,920 4,080,212
</TABLE>
<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 27, 1999. 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 27, 1999
<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 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
Additions:
Charged to costs and expenses ................. (30)
Deductions:
Net charge-off of accounts deemed uncollectible -
---
BALANCE, September 25, 1999 ....................... $ 430
(1) Deducted from accounts receivable.
<PAGE>
EXHIBIT
10.11
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, the 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 the
Executive to remain employed by compensating him beyond his regular
salary for service which he has rendered or will hereafter render; and
WHEREAS, the Company and the Executive entered into a
Salary Continuation Agreement effective September 22, 1994 (the
"Agreement") which was amended and restated in its entirety on
September 1, 1998; and
WHEREAS, the parties desire to further amend and restate
the Agreement to modify certain terms and conditions:
NOW, THEREFORE, the Agreement is amended and restated in
its entirety to read as follows:
1. If the 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 of the Company his period of active employment shall be
shortened, or, with his consent, extended.
2. Upon said retirement, the Company shall pay the
Executive __________ per month to age eight-five (85) and ____________
per month thereafter for life commencing with the first day of the
month following the date of said retirement. Notwithstanding the
foregoing, the amount of monthly payments provided under this Section
2, shall be reduced (but not below zero) by the Monthly Amount (as
hereinafter defined). The "Monthly Amount" is the monthly benefit
which the cash surrender value of the life insurance policies issued
by Pacific Life, Policy Number _________ Minnesota Life, Policy Number
___________ on the life of the Executive ("Policies") would provide
over the period of time until Executive reaches age 85 as of the time
of the Executive's termination of employment as determined by a life
insurance agent satisfactory to both the Company and the Executive,
adjusted upward to the amount which said monthly benefit would equal
if it were fully taxable to the Executive and results in said monthly
benefit after payment of taxes. The insurance agent will calculate
the Monthly Amount by assuming that (a) the Policies have remained in
effect until the date of the calculation, (b) the cash surrender value
of the Policies is first withdrawn in an amount equal to the
Executive's tax basis in the Policies, and (c) loans are then taken
out on the Policies but not in excess of the amount which would reduce
the remaining cash surrender value in the Policies below the amount
necessary to keep the Policies in effect until age 100 based upon the
insurance carrier's current crediting rates, expenses, and mortality
assumptions in effect on the date of calculation. If less than one
hundred twenty (120) such monthly payments shall be made prior to the
death of the Executive, such monthly payments shall continue to
whomever the Executive shall have designated, on the most recent
Salary Continuation Agreement Designation of Beneficiary form filed
with the Company (the "Beneficiary"), until the full number of one
hundred twenty (120) monthly payments have been made; provided, that
the amount of such monthly payments to the Beneficiary shall be
reduced (but not below zero) by the monthly benefit the death benefit
paid under the Policies would have provided over such remaining number
of months as determined by a life insurance agent satisfactory to both
the Company and the Beneficiary, said monthly benefit to be adjusted
upward in the same manner as provided above to determine the Monthly
Amount.
3. In the event the Executive terminates employment on
account of permanent and total disability (as determined by the Board
of Directors of the Company), he shall receive one hundred percent
(100%) of the benefit described in Section 2 commencing at age sixty-
two (62). In the event the Executive terminates employment for any
reason other than permanent and total disability (as determined by the
Board of Directors of the Company) or death, he shall receive such
percentage of the benefit described in Section 2 commencing at age
sixty-two (62) which the Compensation Committee of the Company's Board
of Directors shall from time to time determine. Provided, that in no
event shall such percentage be reduced below a percentage previously
set by such Committee. Provided, further, that upon a change of
control (as hereinafter defined) of the Company the Executive shall be
entitled to receive one hundred percent (100%) of the benefit
described in Section 2 commencing at age sixty-two (62) so long as he
continues to comply with the provisions of Section 4 of this
Agreement. For purposes of this Agreement, 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 twenty-five percent (25%) 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 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, as amended, directly or indirectly, or,
without the specific authority of the Board of Directors of the
Company, serve as a director or employee of any corporation or
business entity so engaged. The 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" as defined in Section VI of such Employment Agreement.
The Executive also agrees to make himself available for such
consulting services as the Company may reasonably request during the
period in which payments are being made to the Executive under this
Agreement, but in no event shall the Executive be required to devote
more than ten (10) hours per month for such consulting services. The
Company agrees to pay the Executive's reasonable fees and expenses in
respect of the consulting services the Executive in fact renders.
5. The Executive agrees that if he shall breach any
covenant of Section 4 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 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.
6. The Company shall pay all administrative expenses of
the Trust Agreement entered into as of 10/6/99 between the Executive
and Fifth Third Bank, Ohio Valley, as Trustee (the "Trustee")
including, but not limited to, fees for legal services rendered to the
Trustee, any taxes levied or assessed under existing or future laws
upon or against the Trustee, actuarial fees, accounting fees, and to
pay compensation to the Trustee or other persons. If the Company pays
any premium on the Policies, the Executive shall incur income on such
payment for tax purposes ("Premium Payment Income"). As Executive
incurs Premium Payment Income, the Company shall pay to Executive a
payment (a "Gross-Up Payment") in an amount sufficient to enable
Executive to pay all income and employment taxes (including any interest
or penalties imposed with respect to such income and employment taxes)
on the Premium Payment Income as well as all such income and employment
taxes imposed upon the Gross-Up Payment.
7. It is agreed that neither the 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. Any attempted sale, assignment, transfer or conveyance
shall be null and void and the Company shall have no further liability
hereunder after any such attempt.
8. 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.
9. This Agreement may be revoked or amended in whole or in
part only by mutual consent of the parties hereto. This Agreement
shall be construed and administered in accordance with the laws of the
Commonwealth of Kentucky without regard to the principles of conflicts
of law which might otherwise apply.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed this 6th day of October, 1999.
ATTEST: KENTUCKY ELECTRIC STEEL, INC.
_______________________________ By: ________________________________
Secretary
_______________________________ By: ________________________________
Witness
<TABLE>
Kentucky Electric Steel, Inc.
Supplemental Schedule for Exhibit 10.11
Salary Continuation Agreement
<CAPTION>
Monthly
Monthly Retirement
Retirement Benefit Benefit
(Ten Year Certain) After Age 85
Name Title Age 62 to Age 85 for Life
<S> <C> <C> <C>
Charles C. Hanebuth President & Chief Executive Officer $13,518.00 $6,200.00
William J. Jessie V. P. and Chief Financial Officer $ 6,636.00 $ 0.00
Joseph E. Harrison Vice President, Sales & Marketing $ 6,320.00 $ 0.00
William H. Gerak Vice President, Administration $ 5,495.00 $ 0.00
</TABLE>
Exhibit 10.19
PROMISSORY NOTE
Coalton, Kentucky
FOR VALUE RECEIVED, _____________ ("Borrower") hereby promises to
pay to the order of Kentucky Electric Steel, Inc. (the "Company"), at
its offices in Coalton, Kentucky, the principal amount of
_______________. Subject to the terms of that certain Loan Forgiveness
Agreement between the Company and Borrower of even date herewith, (the
"Agreement"), the principal amount outstanding under this Note shall be
due and payable in full on January 1, 2008.
This Note shall bear interest at the rate of five and thirty-seven
hundredths percent (5.37%) per annum, payable on each Forgiveness Date
(as defined in the Agreement) subject to the terms of the Agreement.
If this Note is placed in the hands of an attorney for collection, or
suit is brought on same, or same is collected through probate, or
bankruptcy, or insolvency proceedings of any nature, or by other judicial
proceedings, Borrower agrees to pay a reasonable attorney's fee in
addition to the principal and interest then owing.
Borrower hereby waives presentment for payment, demand, notice of
nonpayment, protest, and notice of protest.
_____________________________________
October 6, 1999
Date
<TABLE>
Kentucky Electric Steel, Inc.
Supplemental Schedule for Exhibit 10.19
Promissory Note
<CAPTION>
Amount of
Name Title Notes
<S> <C> <C>
Charles C. Hanebuth President and Chief Executive Officer $213,862
William J. Jessie Vice President & Chief Financial Officer $ 69,315
Joseph E. Harrison Vice President, Sales & Marketing $101,470
William H. Gerak Vice President, Administration $ 84,740
</TABLE>
Exhibit 10.20
LOAN FORGIVENESS AGREEMENT
LOAN FORGIVENESS AGREEMENT (this "Agreement") dated and
effective as of October 6, 1999 (the "Effective Date") between
KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the
"Company"), and ___________________ ("Executive"), an individual.
W I T N E S S E T H:
WHEREAS, the Company has secured a "split-dollar" life
insurance policy on the life of Executive pursuant to a Split Dollar
Insurance Agreement dated September 1, 1998 between the Company and
Executive;
WHEREAS, the Company desires to transfer to Executive the
applicable life insurance policy and to terminate the Split Dollar
Insurance Agreement, and in connection therewith to loan to Executive,
pursuant to that certain Promissory Note in the original principal
amount of_______________________________________ executed and
delivered by Executive in favor of the Company on the date hereof (the
"Note"), which represents 90% of the aggregate federal and state
income taxes due from Executive on account of such life insurance policy
transfer; and
WHEREAS, subject to the terms and conditions set forth
herein, the Company further desires to provide for the forgiveness of
the principal and interest due under the Note.
NOW, THEREFORE, in consideration of the mutual covenants
set forth herein and for other good and valuable consideration the
parties hereby agree as follows:
1. Loan Forgiveness. On the first day of each of the
following nine calendar years, beginning with January 1, 2000 (each of
such dates being a "Forgiveness Date"), Executive shall be relieved of
the obligation to pay (i) _______________ of the principal and (ii)
all accrued interest due under the Note as of each such Forgiveness
Date. Such amounts shall be automatically and immediately forgiven
and canceled, provided that the following conditions have been met as
of the applicable Forgiveness Date:
1.1 Executive shall have continued employment with
the Company through the close of business of such Forgiveness Date; or
1.2 In the event Executive shall have been
terminated (whether due to death, disability or otherwise) or have
retired or resigned from his employment with the Company, that he
shall have at all times been in full and complete compliance with his
obligations not to compete with the Company and maintain
confidentiality as set forth in Section 2 of this Agreement.
Provided that the foregoing conditions have been
met, at the close of business on the 9th of such Forgiveness Dates,
the Company shall cancel the Note, record such cancellation on the
books and records of the Company and deliver the original Note, marked
canceled, to Executive, provided however, that the Company's failure
to perform any of the foregoing acts shall not in any way affect the
automatic cancellation of the debts and obligations of Executive under
the Note. However, if the requirement set forth in subsection 1.1
above is not satisfied on any Forgiveness Date, or if the requirement
set forth in Section 1.2 above has not at any time been satisfied,
Executive shall be obligated to repay in cash to the Company the
balance of the Note plus accrued interest, less only those amounts
previously forgiven in accordance with this Agreement.
1.3 As a result of the loan forgiveness provided
under this Section, Executive shall incur forgiveness of indebtedness
income for tax purposes ("Forgiveness Income"). As Executive incurs
Forgiveness Income, the Company shall pay to Executive a payment (a
"Gross-Up Payment") in an amount sufficient to enable Executive to pay
all income and employment taxes (including any interest or penalties
imposed with respect to such income and employment taxes) on the
Forgiveness Income as well as all such income and employment taxes
imposed upon the Gross-Up Payment.
2. Covenant Not to Compete and Confidentiality
2.1. For the period beginning upon the termination
of the Executive's employment with the Company for any reason or upon
Executive's resignation and retirement, and ending on the 9th
Forgiveness Date, 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. or Slater
Steels. The Executive agrees that if he shall breach any covenant of
this Section 2.1, 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 provisions hereof to the
contrary notwithstanding, the full unpaid balance of the Note shall
become immediately due and payable.
2.2. 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.
2.3. The Executive agrees to receive Confidential
Information (as defined in this Section 2.3) 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.
3. Jurisdiction, Venue and Governing Law. This
Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Kentucky (regardless of that
jurisdiction or any other jurisdiction's choice of law principles).
To the extent permitted by law, the parties hereto agree that all
actions or proceedings arising in connection herewith, shall be
litigated in the state and federal courts located in the State of
Kentucky, and each party hereby waives any right it may have to object
to venue. The parties each hereby stipulate that the state and
federal courts located in the County of Boyd, State of Kentucky, shall
have personal jurisdiction and venue over each party for the purpose
of litigating any such dispute, controversy or proceeding arising out
of or related to this Agreement.
4. Validity. If any one or more of the provisions (or
any part thereof) of this Agreement shall be held to be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions (or any part thereof) shall
not in any way be affected or impaired thereby.
5. Attorneys' Fees. The prevailing party shall be
entitled to recover from the losing party its attorneys fees and costs
incurred in any action or proceeding, including arbitration, brought
to interpret this Agreement or to enforce any right arising out of
this Agreement.
6. No Waiver of Rights. The delay or failure of either
party to enforce at any time any provision of this Agreement shall in
no way be considered a waiver of any such provision, or any other
provision, of this Agreement. No waiver of, or delay or failure to
enforce any provision of this Agreement shall in any way be considered
a continuing waiver or be construed as a subsequent waiver of any such
provision, or any other provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
Executive KENTUCKY ELECTRIC STEEL, INC.
_______________________________ By:________________________________
<TABLE>
Kentucky Electric Steel, Inc.
Supplemental Schedule for Exhibit 10.20
Loan Forgiveness Agreement
<CAPTION>
Name Title Amount
<S> <C> <C>
Charles C. Hanebuth President and Chief Executive Officer $213,862
William J. Jessie Vice President & Chief Financial Officer $ 69,315
Joseph E. Harrison Vice President, Sales & Marketing $101,470
William H. Gerak Vice President, Administration $ 84,740
</TABLE>
Exhibit 10.21
TRUST UNDER CERTAIN KENTUCKY ELECTRIC STEEL, INC. SALARY
CONTINUATION AGREEMENTS
This Agreement made this 14th day of October, 1999 by and
between Kentucky Electric Steel, Inc. ("Company") and Fifth Third
Bank, Ohio Valley ("Trustee").
WHEREAS, Company has adopted the Salary Continuation Agreements
listed in Appendix A (each, an "Agreement" and collectively, the
"Agreements");
WHEREAS, Company has incurred or expects to incur
liability under the terms of such Agreements with respect to the
individuals participating in such Agreements (said individuals are
hereinafter referred to as "Participants" or "Beneficiaries" but
only as long as they remain entitled to a benefit under an Agreement),
said liabilities to be reduced by the monthly benefit payments the
cash surrender value of certain insurance policies listed in the
Agreements ("Policies") may provide;
WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of Company's creditors in the event of
Company's Insolvency, as herein defined, until paid under the
Agreements;
WHEREAS, it is the intention of the parties that this
Trust shall constitute an unfunded arrangement and shall not affect
the status of the Agreements as unfunded Agreements maintained for the
purpose of providing deferred compensation for a select group of
management or highly compensated employees for purposes of Title I of
the Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of Company to make
contributions to the Trust to provide itself with a source of funds to
assist it in the meeting of its liabilities under the Agreements;
NOW, THEREFORE, the parties do hereby establish the Trust
and agree that the
Trust shall be comprised, held and disposed of as follows:
I. Establishment of Trust.
A. Company hereby deposits with Trustee in
trust one dollar ($1.00) which shall become the principal of the
Trust to be held, administered and disposed of by Trustee as
provided in this Trust Agreement.
B. The Trust hereby established is
revocable by Company, it shall become irrevocable upon
a Change of Control (as defined herein).
C. The Trust is intended to be a
grantor trust, of which Company is the grantor, within
the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as
amended, and shall be construed accordingly.
D. The principal of the Trust, and
any earnings thereon shall be held separate and apart
from other funds of Company and shall be used
exclusively for the uses and purposes of Participants
and general creditors as herein set forth.
Participants and their Beneficiaries shall have no
preferred claim on, or any beneficial ownership
interest in, any assets of the Trust. Any rights
created under the Agreements and this Trust Agreement
shall be mere unsecured contractual rights of
Participants and their Beneficiaries against Company.
Any assets held by the Trust will be subject to the
claims of Company's general creditors under federal and
state law in the event of Insolvency, as defined in
Section III-A herein.
E. Upon a Change of Control,
Company shall, as soon as possible, but in no event
longer than 5 days following the Change of Control (as
defined herein), make an irrevocable contribution to
the Trust ("Change of Control Contribution") in an
amount that is sufficient to (a) pay all premiums which
shall thereafter become due to fully fund the Policies
to provide the "Monthly Amount" for each Participant
described on Appendix B attached hereto as calculated
by the insurer under each of the Policies and (b) pay
the Gross Up Payment as described in II-A, below. The
Policies are identified as follows:
Policy Number
Insurer
1A22856570
Pacific Life
1A22856560
Pacific Life
1A22856540
Pacific Life
1A22856530
Pacific Life
1953997V
Minnesota Life
II. Payments of Premiums on the Policies.
A. After the Change of Control Contribution has
been made, the Trustee shall thereafter pay all future premiums, to
the extent that funds are available, on each of the Policies until the
earliest of (a) the insured's death, (b) the date that the Policy
value is sufficient to provide the Monthly Amount described in I-E,
above, (c) the date the Policy is canceled by the insured, or (d) the
date the Participant violates Section 5 of his Agreement. As the
Trustee pays premiums on the Policies, the Executive shall incur
income on such payment for tax purposes ("Premium Payment Income").
As Executive incurs Premium Payment Income, the Trustee shall pay to
Executive, to the extent that funds are available, a payment (a
"Gross-Up Payment") in an amount sufficient to enable Executive to pay
all income and employment taxes (including any interest or penalties
imposed with respect to such income and employment taxes) on the Premium
Payment Income as well as all such income and employment taxes imposed
upon the Gross-Up Payment.
B. The entitlement of a Participant or his or her
Beneficiaries to benefits under the Agreements shall be determined by
Company or such party as it shall designate under the Agreements, and
any claim for such benefits shall be considered and reviewed under the
procedures set out in the Agreements.
III. Trustee Responsibility Regarding Payments to Insurance Companies
When Company Is Insolvent.
A. Trustee shall cease payment of premiums on the
Policies if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is
unable to pay its debts as they become due, or (ii) Company is subject
to a pending proceeding as a debtor under the United States Bankruptcy
Code.
B. At all times during the continuance of this
Trust, as provided in Section I-D hereof, the principal and income of
the Trust shall be subject to claims of general creditors of Company
under federal and state law as set forth below.
C. The Board of Directors and the Chief Executive
Officer of Company shall have the duty to inform Trustee in writing of
Company's Insolvency. If a person claiming to be a creditor of
Company alleges in writing to Trustee that Company has become
Insolvent, Trustee shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue payment of
premiums on the Policies.
D. Unless Trustee has actual knowledge of
Company's Insolvency, or has received notice from Company or a person
claiming to be a creditor alleging that Company is Insolvent, Trustee
shall have no duty to inquire whether Company is Insolvent. Trustee
may in all events rely on such evidence concerning Company's solvency
as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's
solvency.
E. If at any time Trustee has determined that
Company is Insolvent, Trustee shall discontinue payments of premiums
on the Policies and shall hold the assets of the Trust for the benefit
of Company's general creditors. Nothing in this Trust Agreement shall
in any way diminish any rights of Participants or their Beneficiaries
to pursue their rights as general creditors of Company with respect to
benefits due under the Agreements or otherwise.
F. Trustee shall resume the payment of premiums
on the Policies in accordance with Section II of this Trust Agreement
only after Trustee has determined that Company is not Insolvent (or is
no longer Insolvent).
G. Provided that there are sufficient assets, if
Trustee discontinues the payment of premiums on the Policies pursuant
to Section III-A hereof and subsequently resumes such payments, the
first payment following such discontinuance shall include the
aggregate amount of all payments due under the policies for the period
of such discontinuance, less the aggregate amount of any premium
payments made by Company in lieu of the payments provided for
hereunder during any such period of discontinuance.
IV. Payments to Company.
A. Except as provided in Section III hereof,
Company shall have no right or power to direct Trustee to return to
Company or to divert to others any of the Trust assets before all
payment of premiums have been made on the Policies.
V. Investment Authority.
A. In no event may Trustee invest in securities
(including stock or rights to acquire stock) or obligations issued by
Company, other than a de minimis amount held in common investment
vehicles in which Trustee invests. All rights associated with assets
of the Trust shall be exercised by Trustee or the person designated by
Trustee, and shall in no event be exercisable by or rest with
Participants.
VI. Disposition of Income.
A. During the term of this Trust, all income
received by the Trust, net of expenses and taxes, shall be accumulated
and reinvested.
VII. Accounting by Trustee.
A. Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements, and all other
transactions required to be made, including such specific records as
shall be agreed upon in writing between Company and Trustee. Within
ninety (90) days following the close of each calendar year and within
sixty (60) days after the removal or resignation of Trustee, Trustee
shall deliver to Company a written account of its administration of
the Trust during such year or during the period from the close of the
last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities
and investments purchased and sold with the cost or net proceeds of
such purchases or sales (accrued interest paid or receivable being
shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such
removal or resignation, as the case may be.
VIII. Responsibility of Trustee.
A. Trustee shall act with the care, skill,
prudence and diligence under the circumstances then prevailing that a
prudent person acting in like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims, provided, however, that Trustee shall incur no liability to
any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity
with, the terms of the Agreements or this Trust and is given in
writing by Company. In the event of a dispute between Company and a
party, Trustee may apply to a court of competent jurisdiction to
resolve the dispute.
B. If Trustee undertakes or defends any
litigation arising in connection with this Trust, Company agrees to
indemnify Trustee against Trustee's costs, expenses and liabilities
(including, without limitation, attorneys' fees and expenses) relating
thereto and to be primarily liable for such payments. If Company does
not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
C. Trustee may consult with legal counsel (who
may also be counsel for Company generally) with respect to any of its
duties or obligations hereunder.
D. Trustee may hire agents, accountants,
actuaries, investment advisors, financial consultants or other
professionals to assist it in performing any of its duties or
obligations hereunder.
E. Trustee shall have, without exclusion, all
powers conferred on Trustees by applicable law, unless expressly
provided otherwise herein, provided, however, that if an insurance
policy is held as an asset of the Trust, Trustee shall have no power
to name a beneficiary of the policy other than the Trust, to assign
the policy (as distinct from conversion of the policy to a different
form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
F. Notwithstanding any powers granted to Trustee
pursuant to this Trust Agreement or to applicable law, Trustee shall
not have any power that could give this Trust the objective of
carrying on a business and dividing the gains therefrom, within the
meaning of section 301.7701-2 of the Procedure and Administrative
Regulations promulgated pursuant to the Internal Revenue Code.
IX. Compensation and Expenses of Trustee.
A. Company shall pay all administrative and
Trustee's fees and expenses.
X. Resignation and Removal of Trustee.
A. Trustee may resign at any time by written
notice to Company, which shall be effective thirty (30) days after
receipt of such notice unless Company and Trustee agree otherwise.
B. Trustee may be removed by Company on ten (10)
days notice or upon shorter notice accepted by Trustee.
C. Upon a Change of Control, as defined herein,
Trustee may not be removed by Company without the unanimous consent of
the Participants.
D. If Trustee resigns within three (3) years
after a Change of Control, as defined herein, Company shall apply to a
court of competent jurisdiction for the appointment of a successor
Trustee or for instructions unless the Company and all Participants
agree upon a successor Trustee.
E. If Trustee resigns or is removed within three
(3) years of a Change of Control, as defined herein, Trustee shall
select a successor Trustee in accordance with the provisions of
Section XI-B hereof prior to the effective date of Trustee's
resignation or removal.
F. Upon resignation or removal of Trustee and
appointment of a successor Trustee, all assets shall subsequently be
transferred to the successor Trustee. The transfer shall be completed
within 60 days after receipt of notice of resignation, removal or
transfer, unless Company extends the time limit.
G. If Trustee resigns or is removed, a successor
shall be appointed, in accordance with Section XI hereof, by the
effective date of resignation or removal under paragraph(s) A or B of
this section. If no such appointment has been made, Trustee may apply
to a court of competent jurisdiction for appointment of a successor or
for instructions. All expenses of Trustee in connection with the
proceeding shall be allowed as administrative expenses of the Trust.
XI. Appointment of Successor.
A. If Trustee resigns or is removed in accordance
with Section X-A or B hereof, Company may appoint any third party,
such as a bank trust department or other party that may be granted
corporate trustee powers under state law, as a successor to replace
Trustee upon resignation or removal. The appointment shall be
effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall
execute any instrument necessary or reasonably requested by Company or
the successor Trustee to evidence the transfer.
B. If Trustee resigns or is removed pursuant to
the provisions of Section X-E hereof and selects a successor Trustee,
Trustee may appoint any third party such as a bank trust department or
other party that may be granted corporate trustee powers under state
law. The appointment of a successor Trustee shall be effective when
accepted in writing by the new Trustee. The new Trustee shall have
all the rights and powers of the former Trustee, including ownership
rights in Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the successor Trustee
to evidence the transfer.
C. The successor Trustee need not examine the
records and acts of any prior Trustee and may retain or dispose of
existing Trust assets, subject to Sections 7 and 8 hereof. The
successor Trustee shall not be responsible for and Company shall
indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes
successor Trustee.
XII. Amendment or Termination.
A. This Trust Agreement may be amended by a written instrument
executed by Trustee and Company. Notwithstanding the foregoing,
no such amendment shall conflict with the terms of the
Agreements or shall make the Trust revocable after it has become
irrevocable in accordance with Section I-B hereof.
B. The Trust shall not terminate until the date on which all
premiums have been paid on the Policies as required by Section
II. Upon termination of the Trust any assets remaining in the
Trust shall be returned to Company.
C. This Trust Agreement may not be amended by Company following a
Change of Control, as defined herein without the unanimous
consent of the Participants.
XIII. Miscellaneous.
A. Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without
invalidating the remaining provisions hereof.
B. Benefits payable to Participants and their Beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at
law or in equity), alienated, pledged, encumbered or subjected
to attachment, garnishment, levy, execution or other legal or
equitable process.
C. This Trust Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky without
regard to the principles of conflicts of law which might
otherwise apply.
D. For purposes of this Trust, 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 twenty-five percent
(25%) 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 (2/3) of the
directors then still in office who were directors at the
beginning of such two-year period.
XIV. Effective Date.
A. The effective date of this Trust Agreement
shall be ______________, 1999.
FIFTH THIRD BANK, OHIO VALLEY KENTUCKY ELECTRIC STEEL, INC.
By:____________________________ By:________________________________
APPENDIX A
Salary Continuation Agreements
1. Agreement dated October 6, 1999 between Company and Charles C.
Hanebuth
2. Agreement dated October 6, 1999 between Company and William J.
Jessie
3. Agreement dated October 6, 1999 between Company and William H.
Gerak
4. Agreement dated October 6, 1999 between Company and Joseph E.
Harrison
APPENDIX B
Name of Participant
Charles C. Hanebuth
Monthly Amount
The "Monthly Amount" for Charles C. Hanebuth ("Participant") is the
monthly benefit which the cash surrender value of the life insurance
policies issued by Pacific Life, Policy Number 1A22856570 and
Minnesota Life, Policy Number 1953997V on the life of the Participant
("Policies") would provide over the same period of time as of the
time of the Participant's termination of employment as determined by a
life insurance agent satisfactory to both the Company and the
Participant, adjusted upward to the amount which said monthly benefit
would equal if it were fully taxable to the Participant and results in
said monthly benefit after payment of taxes. The insurance agent will
calculate the Monthly Amount by assuming that (a) the Policies have
remained in effect until the date of the calculation, (b) the cash
surrender value of the Policies is first withdrawn in an amount equal
to the Participant's tax basis in the Policies, and (c) loans are
then taken out on the Policies but not in excess of the amount which
would reduce the remaining cash surrender value in the Policies below
the amount necessary to keep the Policies in effect until age 100
based upon the insurance carrier's current crediting rates, expenses,
and mortality assumptions in effect on the date of calculation.
Name of Participant
William H. Gerak
Monthly Amount
The "Monthly Amount" for William H. Gerak ("Participant") is the
monthly benefit which the cash surrender value of the life insurance
policy issued by Pacific Life, Policy Number 1A22856530 on the life
of the Participant ("Policy") would provide over the same period of
time as of the time of the Participant's termination of employment as
determined by a life insurance agent satisfactory to both the Company
and the Participant, adjusted upward to the amount which said monthly
benefit would equal if it were fully taxable to the Participant and
results in said monthly benefit after payment of taxes. The insurance
agent will calculate the Monthly Amount by assuming that (a) the
Policy has remained in effect until the date of the calculation, (b)
the cash surrender value of the Policy is first withdrawn in an amount
equal to the Participant's tax basis in the Policy, and (c) loans are
then taken out on the Policy but not in excess of the amount which
would reduce the remaining cash surrender value in the Policy below
the amount necessary to keep the Policy in effect until age 100 based
upon the insurance carrier's current crediting rates, expenses, and
mortality assumptions in effect on the date of calculation.
Name of Participant
William J. Jessie
Monthly Amount
The "Monthly Amount" for William J. Jessie ("Participant") is the
monthly benefit which the cash surrender value of the life insurance
policy issued by Pacific Life, Policy Number 1A22856560 on the life of
the Participant ("Policy") would provide over the same period of time
as of the time of the Participant's termination of employment as
determined by a life insurance agent satisfactory to both the Company
and the Participant, adjusted upward to the amount which said monthly
benefit would equal if it were fully taxable to the Participant and
results in said monthly benefit after payment of taxes. The insurance
agent will calculate the Monthly Amount by assuming that (a) the
Policy has remained in effect until the date of the calculation, (b)
the cash surrender value of the Policy is first withdrawn in an amount
equal to the Participant's tax basis in the Policy, and (c) loans are
then taken out on the Policy but not in excess of the amount which
would reduce the remaining cash surrender value in the Policy below
the amount necessary to keep the Policy in effect until age 100 based
upon the insurance carrier's current crediting rates, expenses, and
mortality assumptions in effect on the date of calculation.
Name of Participant
Joseph E. Harrison
Monthly Amount
The "Monthly Amount" for Joseph E. Harrison ("Participant") is the
monthly benefit which the cash surrender value of the life insurance
policy issued by Pacific Life , Policy Number 1A22856540 on the life
of the Participant ("Policy") would provide over the same period of
time as of the time of the Participant's termination of employment as
determined by a life insurance agent satisfactory to both the Company
and the Participant, adjusted upward to the amount which said monthly
benefit would equal if it were fully taxable to the Participant and
results in said monthly benefit after payment of taxes. The insurance
agent will calculate the Monthly Amount by assuming that (a) the
Policy has remained in effect until the date of the calculation, (b)
the cash surrender value of the Policy is first withdrawn in an amount
equal to the Participant's tax basis in the Policy, and (c) loans are
then taken out on the Policy but not in excess of the amount which
would reduce the remaining cash surrender value in the Policy below
the amount necessary to keep the Policy in effect until age 100 based
upon the insurance carrier's current crediting rates, expenses, and
mortality assumptions in effect on the date of calculation.
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 20, 1999
<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 25, 1999 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-25-1999
<PERIOD-START> SEP-26-1998
<PERIOD-END> SEP-25-1999
<EXCHANGE-RATE> 1
<CASH> 184
<SECURITIES> 0
<RECEIVABLES> 14,610
<ALLOWANCES> 430
<INVENTORY> 22,751
<CURRENT-ASSETS> 43,407
<PP&E> 52,415
<DEPRECIATION> 18,307
<TOTAL-ASSETS> 82,941
<CURRENT-LIABILITIES> 27,689
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 35,202
<TOTAL-LIABILITY-AND-EQUITY> 82,941
<SALES> 105,389
<TOTAL-REVENUES> 105,389
<CGS> 95,140
<TOTAL-COSTS> 95,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,274
<INCOME-PRETAX> 1,582
<INCOME-TAX> 604
<INCOME-CONTINUING> 978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 978
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
