FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to_____________________.
Commission File No. 0-22416
KENTUCKY ELECTRIC STEEL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 61-1244541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
P. O. Box 3500, Ashland, Kentucky 41105-3500
(Address of principal executive office, Zip Code)
(606) 929-1222
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES x NO
The number of shares outstanding of each of the issuer's classes of
common stock, as of February 14, 2000, is as follows:
4,075,358 shares of voting common stock, par value $.01 per share.
<PAGE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets ............. 3
Condensed Consolidated Statements of Operations ... 4
Condensed Consolidated Statements of Cash Flows ... 5
Notes to Condensed Consolidated Financial
Statements ..................................... 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 8-11
Item 3 - Qualitative and Quantitative Disclosures about
Market Risk ..................................... 11
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K .................. 12
SIGNATURES ....................................... 13
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
Jan. 1, Sept. 25,
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 684 $ 184
Accounts receivable, less allowance for doubtful
accounts and claims of $405 at January 1, 2000
and $430 at September 25, 1999 12,385 14,180
Inventories 21,175 22,751
Operating supplies and other current assets 6,009 5,294
Refundable income taxes 130 315
Deferred tax assets 693 683
------- -------
Total current assets 41,076 43,407
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,679 4,621
Machinery and equipment 45,325 45,324
Construction in progress 2,624 2,470
Less - accumulated depreciation (19,303) (18,307)
------- -------
Net property, plant and equipment 33,325 34,108
------- -------
DEFERRED TAX ASSETS 5,624 5,253
------- -------
OTHER ASSETS 627 173
------- -------
Total assets $ 80,652 $82,941
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 14,777 $ 14,510
Accounts payable 8,120 8,731
Capital expenditures payable 229 335
Accrued liabilities 2,743 3,988
Current portion of long-term debt 3,458 125
-------- -------
Total current liabilities 29,327 27,689
------- -------
LONG-TERM DEBT 16,667 20,000
------- -------
Total liabilities 45,994 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, 5,007,939 and 5,003,874
share issued, respectively 50 50
Additional paid-in capital 15,743 15,728
Less treasury stock - 932,581 and 932,581
shares at cost, respectively (4,272) (4,272)
Deferred compensation (19) (30)
Retained earnings 23,156 23,776
------- -------
Total shareholders' equity 34,658 35,252
------- -------
Total liabilities and shareholders' equity $ 80,652 $ 82,941
<FN>
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
Jan. 1, Dec. 26,
2000 1998
<S> <C> <C>
NET SALES $ 29,029 $ 25,624
COST OF GOODS SOLD 27,410 23,549
------- -------
Gross profit 1,619 2,075
SELLING AND ADMINISTRATIVE EXPENSES 1,970 1,689
------- -------
Operating income (loss) (351) 386
INTEREST INCOME AND OTHER 20 25
INTEREST EXPENSE (670) (553)
------- -------
Loss before income taxes (1,001) (142)
CREDIT FOR INCOME TAXES (381) (54)
------- -------
Net loss $ (620) $ (88)
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (.15) $ (.02)
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC 4,073,979 4,147,178
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 4,073,979 4,147,178
<FN>
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
Jan. 1, Dec. 26,
2000 1998
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (620) $ (88)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization 1,022 885
Change in deferred taxes (371) (110)
Change in other assets (469) -
Change in current assets and current
liabilities:
Accounts receivable 1,795 33
Inventories 1,576 82
Operating supplies and other
current assets (715) (185)
Refundable income taxes 185 -
Deferred tax assets (10) (44)
Accounts payable (611) 538
Accrued liabilities (1,245) (927)
------- -------
Net cash flows from operating
activities 537 184
------- -------
Cash Flows From Investing Activities:
Capital expenditures (213) (846)
Change in capital expenditures payable (106) (186)
------- -------
Net cash flows from investing
activities (319) (1,032)
------- -------
Cash Flows From Financing Activities:
Net advances on line of credit 267 1,830
Purchases of treasury stock - (1,013)
Issuance of common stock 15 15
------- -------
Net cash flows from financing
activities 282 832
------- -------
Net increase (decrease) in cash
And cash equivalents 500 (16)
Cash and Cash Equivalents at Beginning
Of period 184 150
------- -------
Cash and Cash Equivalents at End of Period $ 684 $ 134
Interest Paid $ 996 $ 937
Income Taxes Paid $ - $ 100
<FN>
See notes to condensed consolidated financial statements
</TABLE>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements represent Kentucky Electric Steel, Inc. and its wholly-
owned subsidiary, KESI Finance Company (collectively the Company).
All significant intercompany accounts and transactions have been
eliminated. These statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended
January 1, 2000, are not necessarily indicative of the results that
may be expected for the year ending September 30, 2000. For
further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form
10-K for the year ended September 25, 1999.
(2) Accounting Policies
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 ended September 30, 2000 has fifty-three
weeks. The first quarter of fiscal 2000 consists of fourteen weeks
as compared to thirteen weeks for the first quarter of fiscal 1999.
Property, Plant, Equipment and Depreciation
Property, plant and equipment is recorded at cost, less
accumulated depreciation. For financial reporting purposes,
depreciation is provided on the straight-line method over the
estimated useful lives of the assets, generally 3 to 12 years for
machinery and equipment and 15 to 30 years for buildings and
improvements. Depreciation for income tax purposes is computed
using accelerated methods. Expenditures for maintenance and
repairs are charged to expense as incurred. Expenditures for
equipment renewals which extend the useful life of any asset are
capitalized.
Derivative Financial Instruments
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.
(3) Inventories
Inventories at January 1, 2000 and September 25, 1999 consist
of the following ($000's):
Jan. 1, Sep. 25,
2000 1999
Raw materials $ 2,988 $ 2,824
Semi-finished and finished goods 18,187 19,927
Total inventories $ 21,175 $ 22,751
(4) Earnings Per Share
Statement of Financial Accounting Standards No. 128 (SFAS No.
128) related to earnings per share (E.P.S) requires dual presentation
of basic and diluted E.P.S. on the face of the income statement for
all entities with complex capital structures. The Company adopted
SFAS No. 128 during fiscal 1998. The following is the reconciliation
of the numerators and denominators of the basic and diluted earnings
per share computations.
<TABLE>
For the Three For the Three
Months Ended Months Ended
January 1, 2000 December 26, 1998
Per Per
Net Share Net
Share
Loss Shares Amount Loss Shares
Amount
<S> <C> <C> <C> <C> <C> <C>
Basic Loss Per Share
Loss available to
common stockholders $(620) 4,073,979 $(.15) $(88) 4,147,178
$(.02)
Effect of Dilutive Securities
Options - - - - -
- -
Diluted Loss Per Share
Loss available to
common stockholders
plus assumed conversions $(620) 4,073,979 $(.15) $(88) 4,147,178
$(.02)
</TABLE>
The following options were not included in the computation of
diluted loss per share because to do so would have been antidilutive
for the applicable period:
January 1, 2000 December 26, 1998
Transition stock options 55,187 91,106
Employee stock options 469,860 386,668
(5) Commitments and Contingencies
The Company has various commitments for the purchase of materials,
supplies and energy arising in the ordinary course of business.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of business
with respect to commercial, product liability and other matters, which
seek remedies or damages. 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 January 1, 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.
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General. The Company manufactures special bar quality alloy and
carbon steel bar flats to precise customer specifications for sale in a
variety of niche markets. Its primary markets are manufacturers of leaf-
spring suspensions and flat bed truck trailers, cold drawn bar converters
and steel service centers.
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 ended September 30, 2000 has fifty-three weeks. The first quarter
of fiscal 2000 consists of fourteen weeks as compared to thirteen weeks
for the first quarter of fiscal 1999.
Net Sales. Net sales increased $3.4 million (13.3%) in the first
quarter of fiscal 2000 to $29.0 million, as compared to $25.6 million for
the first quarter of fiscal 1999. The increase in net sales is
attributed to a 23.1% increase in tons shipped offset partially by a 7.9%
decrease in the average selling price. The first fiscal quarter of 2000
consisted of fourteen weeks as compared to thirteen weeks for the first
fiscal quarter of 1999 (as discussed above), which favorably impacted
shipments for the quarter. The decrease in average selling price from
the first quarter of fiscal 1999 is primarily attributed to market price
reductions implemented after the first quarter of fiscal 1999 in response
to lower scrap metal prices. While scrap metal prices remained relatively
stable during fiscal 1999, in the first quarter of fiscal 2000 scrap
metal prices significantly increased. The Company has announced and
implemented several price increases in the second fiscal quarter which
are expected to improve operating margins. Historically, selling price
increases lag scrap cost increases by a few months. Also, the average
selling price was effected, to a lesser extent, by the Company's
increasing participation in the lower priced spring and commodity SBQ
markets that was limited as our new equipment was installed and debugged.
Cost of Goods Sold. Cost of goods sold increased $3.9 million
(16.4%) in the first quarter of fiscal 2000 to $27.4 million, as compared
to $23.5 million for the first quarter of fiscal 1999. As a percentage
of net sales, cost of goods sold increased from 91.9% for the first
quarter of fiscal 1999 to 94.4% for the first quarter of fiscal 2000. The
increase in cost of goods sold reflects the 23.1% 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 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 is primarily
attributed to lower selling prices (as discussed above).
Gross Profit. As a result of the above, the first quarter of fiscal
2000 reflected gross profit of $1.6 million as compared to a gross profit
of $2.1 million for the first quarter of fiscal 1999. As a percentage
of net sales, gross profit decreased from 8.1% for the first quarter of
fiscal 1999 to 5.6% for the first quarter of 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, personnel, and other administrative departments.
Selling and administrative expenses increased by $281,000 for the first
quarter of fiscal 2000 as compared to the same period in fiscal 1999. As
a percentage of net sales, such expenses increased from 6.6% for the
first quarter of fiscal 1999 to 6.8% for the first quarter of fiscal
2000. The increase in selling and administrative expenses is partially
due to an additional week in the first quarter of fiscal 2000 as compared
to the first quarter of fiscal 1999 (as discussed above). In addition,
the Company experienced increases in self-insured health benefit costs,
workers compensation, and sales commissions.
Operating Income. For the reasons described above, operating income
(loss) decreased by $737,000 from an operating income of $386,000 in the
first quarter of fiscal 1999 to an operating loss of $351,000 in the
first quarter of fiscal 2000. As a percentage of net sales, operating
income (loss) decreased from 1.5% in the first quarter of fiscal 1999 to
(1.2)% in the first quarter of fiscal 2000.
Interest Expense. Interest expense increased by $117,000 for the
three months ended January 1, 2000 from $553,000 for the first quarter
of fiscal 1999 to $670,000 for the first quarter of fiscal 2000. The
increase in interest expense is due to the additional week in the first
quarter of fiscal 2000 (as discussed above), combined with an increase
in the average amount outstanding and an increase in the interest rate
on the Company's line of credit during the first quarter of fiscal 2000
as compared to the first quarter of fiscal 1999.
Net Loss. As a result of the above, net loss increased by $532,000
for the three months ended January 1, 2000 from a net loss of $88,000 for
the first quarter of fiscal 1999 to a net loss of $620,000 for the first
quarter of fiscal 2000.
Liquidity and Capital Resources.
The cash flows provided by operating activities were $.5 million for
the first quarter of fiscal 2000 as compared to cash flows provided by
operations of $.2 million for the first quarter of fiscal 1999. First
quarter of fiscal 2000 cash flows reflect the net loss of $.6 million,
$1.0 million in depreciation and amortization, a decrease in accounts
receivable of $1.8 million, a decrease in inventory and supplies of $.9
million, a reduction of $.6 million in accounts payable, a reduction of
$1.2 million in accrued liabilities, and changes in deferred taxes and
other assets. The decrease in accounts receivable is due to the timing
of shipments and cash receipts. The decline in inventory reflects a
planned reduction in finished goods inventory. The decrease in accrued
liabilities is attributed to the payment of interest on long term debt
and the annual deposit of profit sharing and 401K matching funds with the
trustee. The first quarter of fiscal 1999 cash flows reflect a net loss
of $88,000, $.9 million in depreciation and amortization, an increase of
$.5 million in accounts payable, and a $.9 million reduction in accrued
liabilities.
The cash flows used by investing activities were $.3 million for the
first quarter of fiscal 2000 as compared to $1.0 million for the first
quarter of fiscal 1999. The cash flows used by investing activities
consist of $.2 million in capital expenditures and a decrease in capital
expenditures payable of $.1 million for the first fiscal quarter of 2000.
The cash flows used by investing activities for the first quarter of
fiscal 1999 consist of capital expenditures of $.8 million and a decrease
in capital expenditures payable of $.2 million.
The cash flows provided from financing activities were $.3 million
for the first quarter of fiscal 2000 as compared to $.8 million for the
first quarter of fiscal 1999. The cash flows provided from financing
activities for the first quarter of fiscal 2000 reflect net advances of
$.3 million on the Company's line of credit which were used primarily for
capital expenditures as discussed above. The cash flows provided from
financing activities for the first quarter of fiscal 1999 reflect net
advances of $1.8 million on the Company's line of credit which were used
primarily for capital expenditures and for the purchase of treasury
stock.
Working capital at January 1,2000 was $11.8 million as compared to
$15.7 million at September 25, 1999, and the current ratio was 1.4 to 1.0
as compared to 1.6 to 1.0.
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
installments over six year. 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 January 1, 2000, the Company
had $14.8 million outstanding and $6.3 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 would be Year 2000 Compliant. The Company's Year 2000
program also included investigation of the Year 2000 readiness status of
our major vendors and customers. During fiscal 1998 and 1999, the
Company completed its Year 2000 compliance program and to date has
experienced no problems related to the Year 2000.
Outlook
Management continues to believe that demand for our products is
strong in our major markets as exhibited by our current shipments and
bookings. Also, while increases in scrap metal prices combined with an
increasing participation in the lower priced spring and commodity SBQ
markets negatively impacted first quarter operating margins, announced
price increases effective in the second quarter are expected to improve
operating margins. Historically, price increases in the Company's
markets lag increases in scrap metal prices by a few months.
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.
Forward-Looking Statements
The matters discussed or incorporated by reference in this Report
on Form 10-Q that are forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) involve risks and
uncertainities. These risks and uncertainities include, but are not
limited to, the reliance on truck and utility vehicle industry; excess
industry capacity; product demand and industry pricing; volatility of raw
material costs, especially steel scrap; intense foreign and domestic
competition; management's estimate of niche market data; the cyclical and
capital intensive nature of the industry; and cost of compliance with
environmental regulations. These risks and uncertainities could cause
actual results of the Company to differ materially from those projected
or implied by such forward-looking statements.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A) Exhibits
3.1 - Certificate of Incorporation of Kentucky Electric
Steel, Inc., filed as Exhibit 3.1 to Registrant's
Registration Statement on Form S-1 (No. 33-67410),
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.
10.22 - Kentucky Electric Steel, Inc. 1998 Employee Stock
Option/Restricted Stock Plan, filed on Registrant's
Form S-8 (No. 333-95999), filed on February 2, 2000,
and incorporated by reference herein.
27 - Financial Data Schedule
B) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DATED: February 14, 2000 KENTUCKY ELECTRIC STEEL, INC.
(Registrant)
William J. Jessie
William J. Jessie, Vice President,
Secretary, Treasurer, and
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Kentucky Electric Steel, Inc.'s condensed consolidated financial
statements as of and for the three month period ended January 1, 2000
included in this Company's quarterly report on Form 10-Q and is qualified
in its entirety by reference to such condensed consolidated financial
statements.
</LEGEND>
<CIK> 0000910394
<NAME> KENTUCKY ELECTRIC STEEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> SEP-26-1999
<PERIOD-END> JAN-01-2000
<EXCHANGE-RATE> 1
<CASH> 684
<SECURITIES> 0
<RECEIVABLES> 12,790
<ALLOWANCES> 405
<INVENTORY> 21,175
<CURRENT-ASSETS> 41,076
<PP&E> 52,628
<DEPRECIATION> 19,303
<TOTAL-ASSETS> 80,652
<CURRENT-LIABILITIES> 29,327
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 34,608
<TOTAL-LIABILITY-AND-EQUITY> 80,652
<SALES> 29,029
<TOTAL-REVENUES> 29,029
<CGS> 27,410
<TOTAL-COSTS> 27,410
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 670
<INCOME-PRETAX> (1,001)
<INCOME-TAX> (381)
<INCOME-CONTINUING> (620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
