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 30, 2000
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. ( )
Aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price on December 8, 2000:
$6,915,315.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of December 8, 2000:
4,072,818 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)
KENTUCKY ELECTRIC STEEL, INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I .......................................................... 4
Item 1. Business .......................................... 4
Item 2. Properties ........................................ 9
Item 3. Legal Proceedings ................................. 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II ......................................................... 11
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ............................... 11
Item 6. Selected Financial Data ........................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 12
Item 7A. Qualitative and Quantitative Disclosure about
Market Risk ....................................... 18
Item 8. Financial Statements and Supplementary Data ....... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............... 18
PART III ........................................................ 19
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation ............................ 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................. 19
Item 13. Certain Relationships and Related Transactions .... 19
PART IV ......................................................... 20
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 20
SIGNATURES ...................................................... 23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE ..................... 24
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.
The Company manufactures over 2,600 different 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 supply products for special customer needs.
The Company plans to expand its business primarily by increasing the
number of products it sells to existing customers and the development
of new customers.
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 the Company for finished products is
330,000 tons. The Company's ultimate goal is to balance its
operations at approximately 400,000 tons per year. The Company sold
265,000 tons of finished goods in 2000 which constitutes 80% of its
melting and casting capacity. In addition, the Company sold 12,000
billet tons (semifinished product) in 2000.
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 $4.1 million, which includes $1.3 million expended in fiscal
year 2000.
The Board of Directors has approved the fiscal 2001 capital
expenditure plan for approximately $2.3 million, which includes
completion of various projects begun in fiscal 2000, 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
through distributors and directly to original equipment manufacturers.
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
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.
Customers
The Company sells to over 350 customers. Several wholly-owned
subsidiaries of Republic Technologies International represented
approximately 11.2% of sales for fiscal 2000. No other customer
accounted for more than 10% of sales in fiscal 2000. 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
12.7% in fiscal 2000. These sales consisted primarily of shipments 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 primarily performed by in-house
sales personnel and augmented with 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 three North American mills. 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 30, 2000, the Company had firm orders for
approximately 52,000 tons representing approximately $22.4 million in
sales, as compared with approximately 52,000 tons representing
approximately $24.1 million in sales, at September 25, 1999.
The Company operates on a continuous basis with two scheduled
shutdowns for heavy maintenance work in July and December. 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
31% of the Company's scrap in fiscal 2000. In an attempt to insure an
adequate source of raw materials, however, the Company has identified,
inspected and purchased scrap from 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. 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, or until an open competitive market exists, 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 30, 2000, the Company employed 415 people,
approximately 78% 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.
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").
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 from the Prior
Operator for disposal at the Cooksey Landfill or such other sites.
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. On
June 2, 1999, the Kentucky Division for Air Quality 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
consistently 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.
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 30, 2000.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following
list is included as an unnumbered Item in Part I of this report in
lieu of being included in the Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held February 6, 2001.
The names, ages and positions of all of the executive officers
of the Registrant as of September 30, 2000 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, 56, 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 21 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, 50, 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, 56, 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 30 years of sales experience in
the steel industry.
William H. Gerak, 55, 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 26 years of human resource and
administrative experience.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades on the NASDAQ National Market
under the symbol "KESI." The following table sets forth, for the
fiscal periods indicated, the high and low closing prices of the stock
on the NASDAQ National Market:
Fiscal 1999 Fiscal 2000
High Low High Low
First Quarter $ 4 $ 2-11/16 $ 4 $ 2-3/8
Second Quarter 3-3/4 2-5/8 2-5/8 1-3/4
Third Quarter 3-3/8 2-1/2 2-25/32 1-7/8
Fourth Quarter 4-1/2 2-5/8 2-1/2 1-5/8
On December 8, 2000, there were approximately 900 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 5 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 30, 2000 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. 28, Sept. 27, Sept. 26, Sept. 25, Sept.
30,
1996 1997 1998 1999
2000
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ............ $ 98,320 $ 94,652 $109,456 $105,389
$113,605
Cost of goods sold ... 89,783 89,992 97,720 95,140
103,903
------- ------- ------- ------- ----
---
Gross profit ....... 8,537 4,660 11,736 10,249
9,702
Selling and admini-
strative expenses .. 7,391 6,800 7,011 7,627
7,573
------- ------- ------- ------- ----
---
Operating income (loss) 1,146 (2,140) 4,725 2,622
2,129
Interest expense ..... (1,453) (2,125) (2,395) (2,274)
(2,528)
Interest income and
other .............. 31 34 80 1,234
911
Gain on involuntary con-
version of equipment 369 - - - -
------- ------- ------- ------- ----
---
Income (loss) before
income taxes ...... 93 (4,231) 2,410 1,582
512
Income taxes ......... 35 (1,599) 916 604
195
------- ------- ------- ------- ----
---
Net income (loss) $ 58 $ (2,632) $ 1,494 $ 978 $
317
Net income (loss)
per common share -
basic and diluted... $ .01 $ (.57) $ .32 $ .24 $
.08
Weighted average shares
outstanding-basic 4,806,161 4,633,315 4,624,671 4,085,480
4,074,463
Weighted average shares
outstanding-diluted 4,806,485 4,633,315 4,630,920 4,089,219
4,074,463
Balance Sheet Data:
Working capital ..... $ 14,963 $11,335 $14,153 $15,718
$23,924
Total assets ........ 78,433 78,770 80,251 82,941
76,954
Long-term debt (1) .. 20,000 20,000 20,000 20,000
16,667
Shareholders' equity 37,110 34,211 35,192 35,252
35,612
</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
26, 1998 25, 1999 30, 2000
Net sales .................... 100.0% 100.0% 100.0%
Cost of goods sold ........... 89.3 90.3 91.5
----- ----- -----
Gross profit ................. 10.7 9.7 8.5
Selling and administrative
expenses ................... 6.4 7.2 6.6
----- ----- -----
Operating income ............. 4.3 2.5 1.9
Interest expense ............. (2.2) (2.2) (2.2)
Interest income and other .... .1 1.2 .8
----- ----- -----
Income before
income taxes ............... 2.2 1.5 .5
Income taxes ................ .8 .6 .2
----- ----- -----
Net income ................ 1.4% .9% .3%
Year Ended September 30, 2000 Compared with Year Ended September 25,
1999
Net Sales. Net sales for fiscal 2000 increased by $8.2 million
(7.8%) to $113.6 million from $105.4 million in fiscal 1999. The
increase in net sales is attributable to an increase in shipments
offset by a decrease in average selling price. Finished goods
shipments increased by 8.9% from 243,100 tons in fiscal 1999 to
264,800 in fiscal 2000. The average selling price per finished goods
shipped was down 3.4% in fiscal 2000 as compared to fiscal 1999. The
decrease in finished goods average selling price for fiscal 2000 is
primarily attributable to a change in product mix as the Company
increased its participation in lower priced products. In addition,
fiscal 2000 shipments included 11,800 tons of billets (semi-finished
product) as compared to 800 tons of billets in fiscal 1999.
Cost of Goods Sold. Cost of goods sold for fiscal 2000 increased
by $8.8 million, or 9.2% to $103.9 million from $95.1 million in
fiscal 1999. As a percentage of net sales, cost of goods sold
increased from 90.3% in fiscal 1999 to 91.5% in fiscal 2000. The
increase in cost of goods sold reflects the increase in shipments (as
discussed above) offset by a decrease in the per ton cost of tons
shipped. The decrease in the per ton manufacturing costs of tons
shipped for fiscal 2000 resulted from lower conversion costs due to
increased productivity offset by higher scrap costs. The increase in
cost of goods sold as a percentage of net sales for fiscal 2000, as
compared to fiscal 1999, reflects lower selling prices (as discussed
above) partially offset by lower per ton manufacturing costs.
Gross Profit. As a result of the above, gross profit for fiscal
2000 decreased by $.5 million from $10.2 million in fiscal 1999 to
$9.7 million in fiscal 2000. As a percentage of net sales, gross
profit decreased from 9.7% in fiscal 1999 to 8.5% in fiscal 2000.
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 2000 and
1999 were $7.6 million with decreases in legal and professional fees
being offset by increases in the provision for bad debt expense, sales
commissions, and miscellaneous other items. As a percentage of net
sales, such expenses decreased from 7.2% for fiscal 1999 to 6.6% for
fiscal 2000. The decrease in selling and administrative expenses as a
percentage of net sales for fiscal 2000, as compared to fiscal 1999,
is due to higher net sales in 2000.
Operating Income. For the reasons described above, operating
income decreased by $.5 million (18.8%) from $2.6 million in fiscal
1999 to $2.1 million in fiscal 2000. As a percentage of net sales,
operating income decreased from 2.5% in fiscal 1999 to 1.9% in fiscal
2000.
Interest Expense. Interest expense increased by $.2 million to
$2.5 million in fiscal 2000 from $2.3 million in fiscal 1999. The
increase in interest expense is due to an increase 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 $.2 million in fiscal 2000 as compared
to a tax provision of approximately $.6 million in fiscal 1999 at an
effective tax rate of 38% for both years. As of September 30, 2000
the Company has net deferred tax assets of $5.7 million, which is net
of a $2.7 million valuation allowance. Included in the $8.4 million
of gross deferred tax assets is $5.4 million representing the tax
benefit 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
of operations for fiscal 1998, 1999, and 2000, 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 decreased
by $.3 million from $1.2 million in fiscal 1999 to $.9 million in
fiscal 2000. Fiscal 2000 and fiscal 1999 include other income of $.8
million and $1.1 million, respectively, for a claim settlement
pertaining primarily 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
$.7 million from $1.0 million in fiscal 1999 to $.3 million in fiscal
2000. As a percentage of net sales, net income decreased from .9% in
fiscal 1999 to .3% in fiscal 2000.
Year Ended September 25, 1999 Compared with Year Ended September 26,
1998
Net Sales. Net sales for fiscal 1999 decreased by $4.1 million,
or (3.7%), to $105.4 million from $109.5 million in fiscal 1998. The
decrease in net sales is attributed 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
$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 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.
Liquidity and Capital Resources
Cash flows from operating activities amounted to $2.6 million,
$.7 million, and $6.2 million in fiscal 1998, 1999 and 2000,
respectively. 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 $1.2
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.
Fiscal 2000 operating cash flows reflect net income of $.3
million and depreciation and amortization of $3.8 million. Operating
cash flows were positively impacted by decreases in accounts
receivable and inventories of $3.3 million and $1.1 million,
respectively. Operating cash flows were negatively impacted by a $1.9
million decrease in trade accounts payable. The decrease in accounts
receivable reflects the lower sales level in the latter part of fiscal
2000. The decrease in inventories is primarily due to a decrease in
billet inventories and a decrease in the carrying value of finished
good inventory offset by slightly higher scrap inventories. The
decrease in the carrying value of finished goods inventory reflects
the lower conversion costs in fiscal 2000. The decrease in accounts
payable is due to timing of payments on open accounts.
Cash flows used by investing activities consist of capital
expenditures of $2.8 million in both fiscal 1998 and 1999. Cash flows
provided by investing activities amounted to $7.2 million in fiscal
2000 and consisted of proceeds from the sale-leaseback transaction of
$8.5 million offset by capital expenditures of $1.3 million.
Cash flows provided from financing activities amounted to $.2
million and $2.2 million in fiscal 1998 and 1999, respectively. The
$.2 million in fiscal 1998 reflects $.8 million in advances on the
Company's line of credit facility offset by $.6 million 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. Cash flows
used in financing activities amounted to $4.9 million in fiscal 2000
and reflects the $4.9 million in net repayments on the Company's line
of credit facility.
Working capital at September 30, 2000, was $23.9 million as
compared to $15.7 million at September 25, 1999. The current ratio
was 2.0 to 1.0 at September 30, 2000 as compared to 1.6 to 1.0 at
September 25, 1999. The increase in working capital is primarily
attributed to the $8.5 million in proceeds from the sale-leaseback of
certain equipment combined with cash flow from operations.
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 30, 2000, the Company repurchased 18,700
shares of its common stock leaving 60,515 authorized repurchase shares
remaining.
The Company's primary ongoing cash requirements are for current
capital expenditures and ongoing working capital requirements. In
addition, principal payments on the unsecured senior notes commenced
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 30, 2000, the Company had
$9.6 million outstanding and $8.6 million available under its line of
credit. In addition, the Company had cash and cash equivalents of
$8.7 million at September 30, 2000. The Company believes that the
bank credit facility and internally generated funds will be sufficient
to fund its ongoing cash needs.
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 - Competition and Other Market
Factors," "Raw Materials," "Manufacturing Operation" and "Employees."
Forward Looking Statements
The matters discussed or incorporated by reference in this
Report on Form 10-K that are forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) involve risks
and uncertainties. These risks and uncertainties include, but are not
limited to: the reliance on truck and utility vehicle industry; excess
industry capacity; product demand and industry pricing; volatility of
raw material costs, especially steel scrap; intense foreign and
domestic competition; management's estimates of niche market data; the
cyclical and capital intensive nature of the industry; and cost of
compliance with environmental regulations. These risks and
uncertainties could cause actual results of the Company to differ
materially from those projected or implied by such forward-looking
statements.
Impact of Recent Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies" of the
Notes to Consolidated Financial Statements of the Company.
Item 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.
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)1. See Index to Financial Statements and Schedule
(a)2. See Index to Financial Statements and Schedule
(a)3. Exhibits
3.1 Certificate of Incorporation of Kentucky Electric Steel,
Inc., filed as Exhibit 3.1 to Registrant's Registration
Statement on Form S-1 (No. 33-67140), and incorporated by
reference herein.
3.2 By-Laws of Kentucky Electric Steel, Inc., filed as Exhibit
3.2 to Registrant's Registration Statement on Form S-1
(No. 33-67140), and incorporated by reference herein.
4.1 Senior Note Agreement between Registrant and a group of
institutional investors. Filed as Exhibit 4.1 to
Registrant's Form 10-K for the fiscal year ended September
30, 1995, File No. 0-22416, and incorporated by reference
herein.
4.2 Amended and Restated Loan Agreement between Registrant and
National City Bank, Kentucky, dated November 1, 1995.
Filed as Exhibit 4.2 to Registrant's Form 10-K for the
fiscal year ended September 30, 1995, File No. 0-22416,
and incorporated by reference herein.
4.3 Amended and Restated Export Financing Agreement between
Registrant and National City Bank, Kentucky, dated
November 1, 1995. Filed as Exhibit 4.3 to Registrant's
Form 10-K for the fiscal year ended September 30, 1995,
File No. 0-22416, and incorporated by reference herein.
4.4 First Amendment Agreement to Senior Note Agreement between
Registrant and a group of institutional investors. Filed
as Exhibit 4.4 to Registrant's Form 10-Q, No. 0-22416,
filed on February 11, 1997, and incorporated by reference
herein.
4.5 Amendment No. 1 to Amended and Restated Loan Agreement
between Registrant and National City Bank, Kentucky.
Filed as Exhibit 4.5 to Registrant's Form 10-Q No. 0-
22416, filed on February 11, 1997, and incorporated by
reference herein.
4.6 Amendment No. 2 to Amended and Restated Loan Agreement
between Registrant and National City Bank, Kentucky.
Filed as Exhibit 4.6 to Registrant's Form 10-Q, No. 0-
22416, filed on February 9, 1998, and incorporated by
reference herein.
4.7 Amendment No. 1 to Amended and Restated Export Financing
Agreement between Registrant and National City Bank,
Kentucky. Filed as Exhibit 4.7 to Registrant's Form 10-Q,
No. 0-22416, filed on February 9, 1998, and incorporated
by reference herein.
10.1 Transfer Agreement between NS Group, Inc., Kentucky
Electric Steel Corporation, and Registrant, filed as
Exhibit 10.2 to Registrant's Form 10-K for the fiscal year
ended September 25, 1993, File No. 0-22416, and
incorporated by reference herein.
10.2 Tax Agreement between NS Group, Inc., Kentucky Electric
Steel Corporation and Registrant, filed as Exhibit 10.3 to
Registrant's Form 10-K for the fiscal year ended September
25, 1993, File No. 0-22416, and incorporated by reference
herein.
10.3 Form of Indemnification Agreement between Registrant and
Its Executive Officers and Directors, filed as Exhibit
10.4 to Amendment No. 1 to Registrant's Registration
Statement on Form S-1 (No. 33-67140), and incorporated by
reference herein.*
10.4 Registration Rights Agreement between Registrant and NS
Group, Inc., filed as Exhibit 10.7 to Registrant's Form
10-K for the fiscal year ended September 25, 1993, File
No. 0-22416, and incorporated by reference herein.
10.5 Kentucky Electric Steel, Inc. 1993 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No.
33-77598), filed on April 12, 1994, and incorporated by
reference herein.*
10.6 Kentucky Electric Steel, Inc. 1993 Transition Stock Option
Plan, filed on Registrant's Form S-8 (No. 33-77598), filed
on April 12, 1994, and incorporated by reference herein.
10.7 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.*
10.8 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.*
10.9 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.*
10.10 Form of Salary Continuation Agreements entered into
between Kentucky Electric Steel, Inc. and its four
Executive Officers, filed as Exhibit 10.11 to Registrant's
Form 10-K for fiscal year ended September 25, 1999, File
No. 0-22416, and incorporated by reference herein.*
10.11 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.*
10.12 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.*
10.13 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.
10.14 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.*
10.15 Form of Promissory Note dated October 6, 1999, between
Kentucky Electric Steel, Inc. and its four executive
officers, filed as Exhibit 10.19 to Registrant's From 10-K
for the fiscal year ended September 25, 1999, File No. 0-
22416, and incorporated by reference herein.*
10.16 Form of Loan Forgiveness Agreement dated October 6, 1999,
between Kentucky Electric Steel, Inc. and its four
executive officers, filed as Exhibit 10.20 to Registrant's
Form 10-K for the fiscal year ended September 25, 1999,
File No. 0-22416, and incorporated by reference herein.*
10.17 Trust Under Certain Kentucky Electric Steel Salary
Continuation Agreements dated October 14, 1999, filed as
Exhibit 10.21 to Registrant's Form 10-K for the fiscal
year ended September 25, 1999, File No. 0-22416, and
incorporated by reference herein.*
10.18 Master Equipment Lease for Manufacturing Equipment dated
September 30, 2000 with Fifth Third Bank, Ohio Valley,
filed herewith.
10.19 Master Equipment Lease for Manufacturing Equipment dated
September 30, 2000 with Fifth Third Bank, Ohio Valley,
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 30, 2000.
* 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.
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 8, 2000 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 8,
2000
Charles C. Hanebuth and Chairman
\s\William J. Jessie Vice President, Secretary, December 8,
2000
William J. Jessie Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
\s\Clifford R. Borland Director December 8,
2000
Clifford R. Borland
\s\Carl E. Edwards, Jr. Director December 8,
2000
Carl E. Edwards, Jr.
\s\J. Marvin Quin, II Director December 8,
2000
J. Marvin Quin, II
\s\David C. Struve Director December 8,
2000
David C. Struve
</TABLE>
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 25, 1999 and
September 30, 2000 .................................... F-2
Consolidated Statements of Operations - Years ended
September 26, 1998, September 25, 1999
and September 30, 2000 ................................ F-3
Consolidated Statements of Changes in Shareholders'
Equity - Years ended September 26, 1998, September 25,
1999, and September 30, 2000 .......................... F-4
Consolidated Statements of Cash Flows - Years ended
September 26, 1998, September 25, 1999
and September 30, 2000 ................................ 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
4
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 25, 1999 and September 30, 2000, 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 30, 2000. 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 auditing standards
generally accepted in the United States. 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 25, 1999
and September 30, 2000 and the results of its operations and its cash
flows for each of the three years in the period ending September 30,
2000 in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Cincinnati, Ohio,
October 31, 2000
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
September September
25, 1999 30, 2000
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 184 $ 8,688
Accounts receivable, less allowance for
doubtful accounts of $430 in 1999 and
$685 in 2000 14,180 10,923
Inventories 22,751 21,668
Operating supplies and other current assets 5,294 5,295
Refundable income taxes 315 175
Deferred tax assets 683 1,028
------- -------
Total current assets 43,407 47,777
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,621 5,604
Machinery and equipment 45,324 34,833
Construction in progress 2,470 946
Less - accumulated depreciation (18,307) (17,387)
------- -------
Net property, plant and equipment 34,108 23,996
------- -------
DEFERRED TAX ASSETS 5,253 4,636
------- -------
OTHER ASSETS 173 545
------- -------
Total assets $ 82,941 $ 76,954
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 14,510 $ 9,572
Accounts payable 9,066 7,193
Accrued liabilities 3,988 3,630
Current portion of long-term debt 125 3,458
------- -------
Total current liabilities 27,689 23,853
------- -------
LONG-TERM DEBT 20,000 16,667
------- -------
DEFERRED GAIN FROM SALE-LEASEBACK - 822
------- -------
Total liabilities 47,689 41,342
------- -------
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 5,003,874 and 5,022,544 shares
issued, respectively 50 50
Additional paid-in capital 15,728 15,778
Less treasury stock - 932,581 and 951,281
shares at cost, respectively (4,272) (4,309)
Deferred compensation (30) -
Retained earnings 23,776 24,093
------- -------
Total shareholders' equity 35,252 35,612
------- -------
Total liabilities and shareholders' equity $ 82,941 $ 76,954
</TABLE>
See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Data)
Year Ended
September September September
26, 1998 25, 1999 30, 2000
NET SALES $109,456 $105,389 $113,605
COST OF GOODS SOLD 97,720 95,140 103,903
------- ------- -------
Gross profit 11,736 10,249 9,702
SELLING AND ADMINISTRATIVE
EXPENSES 7,011 7,627 7,573
------- ------- -------
Operating income 4,725 2,622 2,129
INTEREST EXPENSE (2,395) (2,274) (2,528)
INTEREST INCOME AND OTHER 80 1,234 911
------- ------- -------
Income before
income taxes 2,410 1,582 512
PROVISION FOR INCOME TAXES 916 604 195
------- ------- -------
Net income $ 1,494 $ 978 $ 317
NET INCOME PER COMMON SHARE
- BASIC AND DILUTED $ .32 $ .24 $ .08
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 4,624,671 4,085,480 4,074,463
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,630,920 4,089,219 4,074,463
See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Years in the Period Ended
September 30, 2000
(Dollars in Thousands)
<TABLE>
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. 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
eporting 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
Amortization of
deferred comp-
ensation - - - - - 30 -
30
Issuance of Stock 18,670 - 50 - - - -
50
Purchases of treasury
stock - - - (18,700) (37) - -
(37)
Net income - - - - - -
317 317
--------- -- ------ ------- ----- --- ---
--- ------
BALANCE, Sept. 30, 2000 5,022,544 $50 $15,778 (951,281) $(4,309) $ -
$24,093 $35,612
</TABLE>
See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended
September September September
26, 1998 25, 1999 30, 2000
Cash Flows From Operating Activities:
Net income $ 1,494 $ 978 $ 317
Adjustments to reconcile net income
to net cash flows from
operating activities:
Depreciation and amortization 3,683 3,636 3,827
Change in deferred taxes 1,169 737 617
Change in other (154) 23 (430)
Changes in current assets and
current liabilities:
Accounts receivable (460) (2,143) 3,257
Insurance claim receivable 900 - -
Inventories (3,825) (2,388) 1,083
Operating supplies and other
current assets (404) (88) (1)
Refundable income taxes 900 (315) 140
Deferred tax assets (191) (35) (345)
Accounts payable (611) 1,153 (1,873)
Accrued liabilities 134 154 (358)
Environmental liabilities - (982) -
------ ------ ------
Net cash flows from operating activities 2,635 730 6,234
------ ------ ------
Cash Flows From Investing Activities:
Capital expenditures (2,806) (2,848) (1,341)
Proceeds from sale-leaseback - - 8,536
------ ------ ------
Net cash flows from investing activities (2,806) (2,848) 7,195
------ ------ ------
Cash Flows From Financing Activities:
Net advances on line of credit 762 3,113 (4,938)
Issuance of common stock 48 57 50
Purchases of treasury stock (616) (1,018) (37)
------ ------ ------
Net cash flows from financing activities 194 2,152 (4,925)
------ ------ ------
Net increase in cash
and cash equivalents 23 34 8,504
Cash and Cash Equivalents -
Beginning of Period 127 150 184
------ ------ ------
Cash and Cash Equivalents -
End of Period $ 150 $ 184 $ 8,688
Interest Paid, net of amount
capitalized $ 2,371 $ 2,262 $ 2,472
Income Taxes Paid $ 200 $ 216 $ 80
See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations
Kentucky Electric Steel, Inc. (KESI or the Company), a
Delaware corporation, 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.
(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
accounting principles generally accepted in the United States
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.
Reclassifications
Certain reclassifications of previously reported amounts
have been made to conform with current classifications.
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. Cash and cash
equivalents as of September 30, 2000 includes the proceeds from
the sale-leaseback transaction.
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.
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.
Comprehensive Income
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.
Derivative and Hedging Activities
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 is required to adopt SFAS
No. 133 effective as of the beginning of the first quarter of fiscal
2001. The Company does not currently have any derivative financial
instruments; therefore, SFAS No. 133 does not currently apply.
Fiscal Year End
The Company's fiscal year ends on the last Saturday of
September. The fiscal year normally consists of fifty-two weeks,
however, the fiscal year ending September 30, 2000 consists of fifty-
three weeks.
(3) Inventories
Inventories at September 25, 1999 and September 30, 2000 consist
of the following ($000's):
1999 2000
Raw materials $ 2,824 $ 3,181
Semi-finished and finished goods 19,927 18,487
Total inventories $22,751 $21,668
(4) Accrued Liabilities
Accrued liabilities at September 25, 1999 and September 30, 2000
consist of the following ($000's):
1999 2000
Accrued payroll and related liabilities $ 1,498 $ 1,293
Accrued insurance and workers' compensation 945 880
Accrued interest payable 714 770
Other 831 687
$ 3,988 $ 3,630
(5) Long-Term Debt
Long-term debt of the Company at September 25, 1999 and
September 30, 2000 consists of the following ($000's):
1999 2000
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) (3,458)
$ 20,000 $16,667
Principal payments on the unsecured senior notes commenced 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 30, 2000, approximately $9.6 million was
outstanding under the bank credit facility, approximately $1.3 million
was utilized to collateralize various letters of credit and $8.6
million was available for additional borrowings. The weighted average
interest rates on short-term borrowings as of September 25, 1999 and
September 30, 2000 were 7.1% and 8.2%, 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 30, 2000. The fair value of the
unsecured senior notes was approximately $19.8 million as of September
30, 2000 and $19.7 million as of September 25, 1999.
(6) Sale-Leaseback Transaction
In September 2000, the Company entered into a sale-leaseback
transaction for its ladle metallurgy facility and certain other of its
machinery and equipment for approximately $8.5 million, resulting in a
deferred gain of $.8 million, to be amortized over the term of the
lease.
The Company has an early buyout option for a certain portion of
the leased assets at the end of 5 years, and another early buyout
option for all the leased assets at the end of 6-1/2 years at an
amount approximating the estimated fair value of the assets. The
Company also has a purchase option at the end of the lease term at an
amount equal to the equipment's then fair market value. If the
purchase option is not exercised, the lease automatically renews for a
term and rate to be negotiated by the Company and the lessor. The
lease has been accounted for as an operating lease. The future
minimum lease payments are as follows ($000's):
2001 $1,328
2002 1,448
2003 1,360
2004 1,297
2005 1,275
thereafter 2,520
Total $9,228
(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
14.2%, 12.5%, and 16.7% of total sales for fiscal 1998, 1999 and 2000,
respectively.
One company, through several wholly-owned subsidiaries, which
are customers of the Company, represented 10.4%, 13.5%, and 11.2% of
net sales in fiscal 1998, 1999, and 2000, respectively. Another
customer, through two wholly-owned subsidiaries, which are customers
of the Company, accounted for 10.4%, 11.0%, and 8.0% of net sales in
fiscal 1998, 1999, and 2000, respectively. No other customer
accounted for more than 10% of net sales.
The Company's foreign sales represented 7.5%, 8.6%, and 12.7% of
total sales for 1998, 1999 and 2000, respectively.
(8) Income Taxes
The provision for income taxes consists of the following
($000's):
1998 1999 2000
Current:
Federal $ 200 $ (98) $ (76)
State - - -
200 (98) (76)
Deferred:
Federal 596 626 249
State 120 76 22
716 702 271
Total provision
for income taxes $ 916 $ 604 $ 195
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before
income taxes for the following reasons ($000's):
1998 1999 2000
Income tax provision at
Statutory tax rate of 34% $ 819 $ 538 $ 174
State income taxes, net of
federal effect 64 50 15
Other, net 33 16 6
$ 916 $ 604 $ 195
The components of the net deferred tax asset at September 25,
1999 and September 30, 2000 are as follows ($000's):
Sept. 25, Sept. 30,
1999 2000
Deferred tax components:
Property, plant and equipment $(1,562) $(1,671)
Intangibles 2,314 1,684
AMT credit carryforwards 1,038 992
NOL carryforward 6,405 5,362
Other 422 1,978
8,617 8,345
Valuation allowance (2,681) (2,681)
Net deferred tax assets $ 5,936 $ 5,664
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 $15.8 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 results of operations for fiscal 1998, 1999 and 2000, 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 $226,000, $219,000 and $225,000 in fiscal 1998, 1999
and 2000, 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 26, 1998 September 25, 1999
Per Per
Share Share
Income Shares Amount Income Shares Amount
Amounts for Basic
Earnings -
Per Share $ 1,494 4,624,671 $ .32 $ 978 4,085,480 $.24
Effect of Dilutive
Securities Options - 6,249 - - 3,739 -
Amounts for Diluted
Earnings
Per Share $ 1,494 4,630,920 $ .32 $ 978 4,089,219 $.24
For the Year Ended
September 30, 2000
Per
Share
Income Shares Amount
Amounts for Basic
Earnings Per Share $ 317 4,074,463 $.08
Effect of Dilutive
Securities Options - - -
Amounts for Diluted
Earnings Per Share $ 317 4,074,463 $.08
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:
1998 1999 2000
Transition stock options 92,335 56,061 50,951
Employee stock options 301,976 378,668 561,052
394,311 434,729 612,003
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 upon
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 prices range
from $2.53 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 $53,000, $0, and $0 was recognized in fiscal
1998, 1999 and 2000, 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 1999 and
2000 are as follows:
1999 2000
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 386,668 $ 9.15 469,860 $ 7.97
Options granted 91,192 3.03 91,192 2.53
Options forfeited (8,000) 8.66 - -
Options outstanding,
end of year 469,860 $ 7.97 561,052 $ 7.09
Options exercisable,
end of year 318,022 $ 9.72 380,916 $ 8.99
Restricted shares granted - -
Options and restricted
shares available
for grant 191,041 99,849
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 1999 and 2000 are as follows:
1999 2000
Weighted- Weighted-
Average Average
Stock Exercise Stock Exercise
Options Price Options Price
Options outstanding,
beginning of year 92,335 $10.84 56,061 $ 8.93
Options granted - - - -
Options forfeited (6,340) 11.01 (4,755) 8.88
Options expired (29,934) 14.40 (355) 19.57
Options outstanding,
end of year 56,061 $ 8.93 50,951 $ 8.86
Options exercisable,
end of year 56,061 $ 8.93 50,951 $ 8.86
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 1998, 1999, and 2000. 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 net income of $1.4 million and $.30 per share
for fiscal 1998, net income of $.9 million or $.21 per share for
fiscal 1999, and net income of $.2 million and $.05 per share for
fiscal 2000. The weighted-average fair value of options granted in
fiscal 1999 and 2000 was $1.64 and $1.48 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 5.1% for fiscal 1999 and
6.78% for fiscal 2000, weighted average volatility of 39.4% for fiscal
1999 and 40.4% for fiscal 2000, 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 30, 2000 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 9/30/00 Life Price at 9/30/00
Price
<S> <C> <C> <C> <C> <C>
Employee Stock Option/Restricted Stock Plans:
$ 2.53 - 3.03 182,384 8.86 Years $ 2.78 22,797 $
3.03
5.56 - 7.63 161,884 6.11 Years 6.57 141,335
6.72
9.13 - 12.31 216,784 3.98 Years 11.10 216,784
11.10
$ 2.53 - 12.31 561,052 6.18 Years $ 7.09 380,916 $
8.99
Transition Plan:
$ 8.76 - 9.05 50,951 1.87 Years $ 8.86 50,951 $
8.86
$ 8.76 - 9.05 50,951 1.87 Years $ 8.86 50,951 $
8.86
</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 approximately $30,000 and $0
as of September 25, 1999 and September 30, 2000, respectively. In
fiscal 1999 and 2000, the Company recognized approximately $43,000 and
$30,000 respectively 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 1999, 17,937 shares were issued at stock prices ranging
from $2.91 to $3.41 per share. During fiscal 2000, 18,670 shares were
issued at stock prices ranging from $1.97 to $3.72.
(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 30, 2000. 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 1999 and fiscal 2000 are as follows:
<TABLE>
First Second Third
Fourth
Quarter Quarter Quarter
Quarter
<S> <C> <C> <C> <C>
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
2000
Net sales $ 29,029 $ 29,448 $ 30,629 $
24,499
Gross profit $ 1,619 $ 3,058 $ 3,246 $
1,779
Net income (loss) $ (620) $ 362 $ 920 $
(345)
Net income (loss) per
common share -
basic and diluted $ (.15) $ .09 $ .23 $
(.08)
Weighted average shares
outstanding - basic 4,073,979 4,077,771 4,075,760
4,070,405
Weighted average shares
outstanding - diluted 4,073,979 4,077,771 4,075,760
4,070,405
</TABLE>
F-1
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 31, 2000. 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 31, 2000
S-1
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 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
Additions:
Charged to costs and expenses ................. 324
Deductions:
Net charge-off of accounts deemed uncollectible (69)
---
BALANCE, September 30, 2000 ....................... $ 685
(1) Deducted from accounts receivable.
S-2
