-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I0eiDwgObRgFg5JcRbZ4F5IHRfjsoTPE250iGKDXR8fNA5hD1uh+K05tQHxlu3Xq NA9dSQ769hviwjyhxDK85A== 0000910394-00-000001.txt : 20000215 0000910394-00-000001.hdr.sgml : 20000215 ACCESSION NUMBER: 0000910394-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY ELECTRIC STEEL INC /DE/ CENTRAL INDEX KEY: 0000910394 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 611244541 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22416 FILM NUMBER: 541738 BUSINESS ADDRESS: STREET 1: P O BOX 3500 CITY: ASHLAND STATE: KY ZIP: 41105-3500 BUSINESS PHONE: 6069291222 MAIL ADDRESS: STREET 1: P O BOX 3500 CITY: ASHLAND STATE: KY ZIP: 41105-3500 10-Q 1 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. 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 KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) Jan. 1, Sept. 25, ASSETS 2000 1999 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 See notes to condensed consolidated financial statements
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 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 See notes to condensed consolidated financial statements
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 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 See notes to condensed consolidated financial statements
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. 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 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)
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. 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 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 EX-27 2 ART.5 FDS FOR 1ST QUARTER 10-Q
5 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. 0000910394 KENTUCKY ELECTRIC STEEL, INC. 1,000 U.S. DOLLARS 3-MOS SEP-30-2000 SEP-26-1999 JAN-01-2000 1 684 0 12,790 405 21,175 41,076 52,628 19,303 80,652 29,327 20,000 50 0 0 34,608 80,652 29,029 29,029 27,410 27,410 0 0 670 (1,001) (381) (620) 0 0 0 (620) (.15) (.15)
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