-----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, S4eudmWf1Eo276l1W3t4GlxetS6ESSJTm0KLBCOO3xwd/+xm3M18CQF/1LxnC80b jkVQZ+Z9iBZjmi7c9QkSAQ== 0000910394-97-000005.txt : 19971222 0000910394-97-000005.hdr.sgml : 19971222 ACCESSION NUMBER: 0000910394-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971219 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-22416 FILM NUMBER: 97741212 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-K 1 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 27, 1997 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 ( ) 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 statements (Cover Page 1 of 2 Pages) incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on December 12, 1997: $25,142,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of December 12, 1997: 4,625,361 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 ................................................ 10 Item 3. Legal Proceedings ......................................... 10 Item 4. Submission of Matters to a Vote of Security Holders ....... 10 PART II ................................................................. 12 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ....................................... 12 Item 6. Selected Financial Data ................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... 13 Item 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 SCHEDULES ............................. 24 KENTUCKY ELECTRIC STEEL, INC. PART I Item 1. Business General Kentucky Electric Steel, Inc. was incorporated in Delaware in August, 1993. On October 6, 1993, Kentucky Electric Steel, Inc. purchased the assets of Kentucky Electric Steel Corporation, a wholly owned subsidiary of NS Group, Inc. The operating results included in this report represent the operations of Kentucky Electric Steel, Inc. (the "Company"). The Company's operations use the same facilities and market to the same customers as its predecessor. The Company owns and operates a steel mini-mill near Ashland, Kentucky. As a mini-mill producer of bar flats, the Company recycles steel from scrap, a process designed to result in lower production costs than those of integrated steel mills, which produce steel by processing iron ore and other raw materials in blast furnaces. Bar flats are produced to a variety of specifications and fall primarily into two general quality levels - merchant bar quality steel bar flats ("MBQ Bar Flats") for generic types of applications, and special bar quality steel bar flats ("SBQ Bar Flats"), where more precise customer specifications require the use of various alloys, customized equipment and special production procedures to insure that the finished product meets critical end-use performance characteristics. The Company is a leading manufacturer of SBQ Bar Flats for the cold drawn bar converter and truck trailer support beam markets. Approximately 80% of the Company's sales are of SBQ Bar Flats. The Company completed a two-phase capital expenditure program in fiscal 1996. The first phase expanded the Company's casting, rolling and finishing capacity and increased the size range of products the Company can produce. The second phase, installation of a ladle metallurgy facility, removes the refining cycle from the electric arc furnace, thereby increasing total melting capacity. The Company manufactures over 2,600 different SBQ Bar Flat items which are sold to a variety of relatively small volume niche markets, including the leaf-spring suspension market for light and heavy-duty trucks, mini-vans and utility vehicles, cold drawn bar converters, certain specialty applications for steel service centers, truck trailer manufacturers and other miscellaneous markets. The Company's mill was specifically designed to manufacture wider and thicker bar flats that are required by these markets. Completion of the capital expenditure program increased the size range of products offered from two inches in thickness and eight inches in width to three inches in thickness and twelve inches in width. In addition, the Company employs a variety of specially designed equipment which is necessary to manufacture SBQ Bar Flats to the specifications demanded by its customers. Although the Company specializes in SBQ Bar Flats, particularly in the thicker and wider sections, it also, to a much lesser extent, competes in the MBQ Bar Flat market. The Company's business strategy is to increase its share of the SBQ Bar Flat market and to expand into related niche market applications where it can profitably supply products for special customer needs. The completion of the capital expenditure program increased the range of thickness and width of the Company's products, thereby creating the capacity for the Company to expand its business primarily by increasing the number of products it sells to existing customers and, to a lesser degree, the development of new customers. The Company has increased its shipments of the thicker, wider products from fiscal 1996 to fiscal 1997 and has continued to increase its sales to the cold drawn bar converter market while decreasing sales to the leaf-spring suspension market. Manufacturing Operations The Company recycles steel by melting steel scrap in two 50-ton electric arc furnaces. The molten steel is then taken to the ladle metallurgy facility where a variety of alloys are added to make different grades of steel in accordance with customer specifications. The refined molten steel is then poured into a continuous caster to produce continuous strands of steel with cross-sectional dimensions ranging from approximately 16 to 72 square inches. The Company can utilize up to four continuous strands in producing certain sizes. The strands are cut to produce billets of specified length which are reheated to approximately 2,300 degrees Fahrenheit at the Company's rolling mill and fed through a series of roll stands to reduce their size and form them into steel bar sections. These sections emerge from the rolling mill, are uniformly cooled on a cooling bed, and are cut to lengths specified by the customer. The cut bar flats are stacked into bundles ready for shipment. The production capacity of finished products from the Company's rolling and finishing facilities is approximately 400,000 tons per year but can vary with product mix. The annual production capacity of the melting and casting operation is approximately 300,000 tons of finished product. Thus, the Company is able to finish more product in its rolling operations that it is capable of producing with its melting facilities. The Company's ultimate goal is to balance its operations at approximately 400,000 tons per year. Due in part to problems with the ramp-up of the new facilities, the ten day shutdown in the melt shop in the second quarter to repair the caster superstructure and to convert an additional strand to produce the thicker, wider products, and the third quarter shutdown of the melt shop for twelve days in order to decontaminate the baghouse facilities, after detection of a radioactive substance, the Company sold 217,000 tons of finished goods in 1997 which constitutes 72% of its capacity. The Company transports its products by common carrier, generally shipping by truck and by rail. The Company has railroad sidings at its facilities. Capital Improvements and Expansion Annual capital expenditures over the last five fiscal years have averaged $7.7 million, which includes $3.2 million expended in fiscal year 1997. The Company completed the ladle metallurgy facility and began start-up operations in the fourth quarter of fiscal 1996 and continued during the first half of fiscal 1997. The ladle metallurgy facility removes the refining cycle from the electric arc furnace, thus increasing total melting capacity toward the Company's ultimate goal of approximately 400,000 tons per year. The Board of Directors has approved the fiscal 1998 capital expenditure plan for approximately $4.3 million, which includes completion of projects begun in fiscal 1997, environmental compliance projects, and various 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 In general, the size of markets served by the Company is such that comprehensive published industry data is not available. Therefore, much of the information relating to the size of steel bar markets has been estimated by the Company based upon its knowledge of the industry. During the year ended September 27, 1997, the Company's sales to leaf-spring suspension customers decreased, while sales to cold drawn bar converters increased. The following table presents, for fiscal 1996 and 1997, the percentage of the Company's net sales by market: 1996 1997 Leaf-spring suspension 25.3% 18.6% Cold drawn bar converters 19.3% 29.2% Steel service centers 18.0% 15.5% Truck trailers 11.3% 11.4% Miscellaneous 26.1% 25.3% Totals 100.0% 100.0% 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. The Company believes the total leaf-spring domestic market is approximately 475,000 tons annually, and that the Company's share of this market is approximately 10%. 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" thickness and 2" through 12" width, enables the Company to supply practically all the sizes needed by the converters. The converters remove the scale from the hot rolled bar and draw it through a carbide die. The drawing reduces the cross section, improves surface and internal properties, and produces a more exacting tolerance bar. The end product is sold directly to original equipment manufacturers and through distributors, with the majority being sold by steel service centers. The Company estimates that the domestic cold drawn bar market for bar flats is approximately 225,000 tons annually, and that the Company's share of this market is approximately 28%. Steel Service Centers Market. Approximately 30% of all steel shipments to the end-user are distributed through steel service centers, making this the largest single market for steel manufacturers. The Company sells both MBQ and SBQ bar flats into this market. The majority of its sales consist of the less competitive heavier section sizes and difficult to make grades. Truck Trailers Market. The Company is a significant supplier of SBQ bar flats for flat bed trailer support beam flange material. This material is engineered and produced to exacting specifications consistent with trailer manufacturers' requirements. Miscellaneous Markets. The Company supplies other markets including metal building, grader blades, agricultural equipment, construction/fabricating, railroad and industrial chain manufacturers. The products furnished to these markets are primarily SBQ Bar Flats along with a mixture of MBQ Bar Flats. Although the Company has not focused its sales efforts on MBQ Bar Flats, attention to select sizes of MBQ Bar Flats has provided good balance for the Company's manufacturing facilities. Within the MBQ Bar Flat market, the Company has concentrated its sales on specialty items as opposed to higher volume commodity products. Targeted opportunities within these markets match the Company's production facility described in "Business - General." Customers The Company sells to over 350 customers. Two wholly-owned subsidiaries of one customer represented approximately 14% of sales for fiscal 1997. No other customer accounted for more than 10% of sales in fiscal 1997. The loss of a principal customer could have a material adverse effect on the Company's operations. The Company's foreign sales as a percentage of total sales were 8.5% in fiscal 1997. These sales consisted primarily of leaf-spring suspension products shipped to Canada, Mexico and South America. Marketing Senior management of the Company is directly involved in sales to new and existing customers. Sales are nationwide and in certain foreign markets. Sales efforts are performed by seven in-house sales personnel and six manufacturers' representative companies. The efforts of these sales representatives are directed by the Company's Vice President, Sales and Marketing. Competition and Other Market Factors The domestic and foreign steel industries are characterized by intense competition. The Company competes with domestic and foreign producers, many of whom have financial resources substantially greater than those available to the Company. The Company has identified its principal competition from the following sources: (i) in its leaf-spring suspension market, the Company faces competition from five North American mills; (ii) in its cold drawn bar converters market, the Company competes with five North American mills; (iii) in the steel service center market, the Company encounters competition from numerous North American mills; and (iv) in its truck trailer market, the Company competes with one North American mill. The Company believes that the principal competitive factors affecting its business are quality, service, price and geographic location. Backlog and Seasonality As of September 27, 1997, the Company had firm orders for approximately 58,000 tons representing approximately $27.7 million in sales, as compared with approximately 48,000 tons representing approximately $21.4 million in sales, at September 28, 1996. The Company operates on a continuous basis with only occasional scheduled shutdowns for heavy maintenance work. The Company's operations are not otherwise 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 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 33% of the Company's scrap in fiscal 1997. In an attempt to insure an adequate source of raw materials, however, the Company has identified, inspected, and purchased scrap from over 20 dealers. The Company's manufacturing process consumes large amounts of electricity, which the Company purchases from Kentucky Power Company, d/b/a American Electric Power ("AEP"). An abundant regional supply of coal, used in producing electricity, helps keep the Company's energy costs relatively low. Prior to November 13, 1997, the Company purchased electricity from AEP under an Interruptible Power Contract ("Prior Contract") which was terminable by either party upon 12 months notice and under which AEP could interrupt service during times of peak demand. Effective November 13, 1997, the Company and AEP entered into a contract for Operating Reserve Interruptible Electric Service ("1997 Contract") which limits AEP's right to interrupt service in 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). The 1997 Contract, however, limits the periods of any such interruption to no more than 30 minutes. As with the Prior Contract, AEP is required to provide a certain amount of firm contract capacity to prevent equipment damage during interrupted periods. Likewise, as with the Prior Contract, AEP may impose a surcharge on the Company if the Company fails to interrupt load as required by the 1997 Contract or if the Company exceeds certain specified levels of use. The initial term of the 1997 Contract expires November 12, 1998. Thereafter, the 1997 Contract will remain in effect until the Company gives at least one year notice to AEP of its intention to discontinue service under the 1997 Contract. The 1997 Contract additionally provides for termination upon the later of the fifth anniversary of the effective date or any date on which it becomes possible for retail customers of AEP to purchase electrical energy from other providers and AEP is required to use its transmission and distribution lines to deliver such energy to those customers. Employees As of September 27, 1997, the Company employed 448 people, approximately 77% of whom are members of the United Steelworkers of America. The Company's current five-year collective bargaining agreement expires in September 1998. The Company believes that its wage rates and benefits are competitive with other mini-mills. The Company offers no postretirement employee health care benefits or other benefit program subject to accounting under the provisions of Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits other than Pensions". Environmental and Regulatory Matters The Company is subject to federal, state, and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. As with similar mills in the industry, the Company's furnaces are classified as generating hazardous waste (K061) because they produce certain types of dust containing lead, chromium and cadmium ("Furnace Dust"). The Company currently collects and handles Furnace Dust through a contract with Horsehead Resource Development Company, Inc. ("HRD"), which reclaims from the waste dust certain materials for reuse and arranges for further recycling or disposal of the residual material. Some of the Furnace Dust generated by the Company and shipped to HRD was processed at HRD's Palmerton, Pennsylvania facility (the "Palmerton Site"), which has been the subject of an enforcement action brought by the United States Department of Justice and the Pennsylvania Department for Environmental Resources. Although on August 24, 1995 HRD, the Department of Justice, and USEPA issued a joint press release announcing a settlement of the enforcement action, HRD may incur substantial costs in connection with the remediation of the Palmerton Site and compliance with the settlement agreement and environmental laws and regulations. If HRD were to become insolvent, the Company could incur liability with respect to the remediation of the Palmerton Site or other HRD disposal sites. In addition, the cost of reclaiming or disposing of Furnace Dust may increase substantially in the future. Prior to 1985, Furnace Dust was stored by a prior owner at the Company's mini-mill facility. Although this storage area was closed in 1985 and the stored Furnace Dust was removed, amendments to the Resource Conservation and Recovery Act ("RCRA") and federal regulations currently require that storage units, such as the Furnace Dust storage area, which were closed by removal ("clean closure") either obtain post-closure permits or demonstrate that the closure is equivalent to current standards. The U.S. Environmental Protection Agency and the Kentucky Division of Waste Management (the "Division") is requiring the Company to demonstrate that the prior closure meets RCRA current standards or, alternatively, to obtain a post closure permit. In July of 1995, the Company submitted a closure equivalency demonstration to the Kentucky Division of Waste Management (the "Division") seeking a regulatory determination that the clean closure meets the requirements for closure equivalency as established by applicable regulations and that a post-closure permit is not required. In November of 1995, the Division advised that it intends to conduct an investigation of the Company's compliance with RCRA before making a determination on the Company's request. Due to personnel changes at the Division, the investigation has not been completed and the Division has not made a determination on the Company's application. The Company believes the costs associated with demonstrating clean closure equivalency are the responsibility of a prior operator of the mini-mill (the "Prior Operator") and it has notified the Prior Operator of its claim. Nevertheless, there can be no assurance that the Company will be successful in seeking reimbursement from the Prior Operator or will not otherwise incur expenses in connection with the closure of the Furnace Dust storage site. Between 1981 and 1983, the Prior Operator disposed of Furnace Dust in the Cooksey Brother's landfill, in Cannonsburg, Kentucky ("Cooksey Landfill"). Before 1981 the Prior Operator disposed of Furnace Dust in other locations, including a strip mine. The Company did not assume any liability for disposal at the Cooksey Landfill or such other sites in the acquisition agreement pursuant to which the Company acquired its mini-mill in 1986. The Cooksey Landfill is operating pursuant to a permit and bond issued and approved by the Division, 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. Nevertheless, the Company could incur clean up expenses with respect to the Cooksey Landfill or such other sites if such sites are listed as a Kentucky "uncontrolled site" or federal superfund site and 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 require- ments, of the emission of certain air pollutants. As required by applicable regulations, on December 14, 1996, the Company filed a Title V permit application with the Kentucky Division for Air Quality. The application required the Company to identify any of the nine emissions points within the Company's facility that were not in compliance with the Company's operating permits and/or applicable regulations. The Company listed Emission Unit Nos. 02 and 03, its electric arc furnaces A and B. In so doing, the Company's application indicated that the Company would conduct a diagnostic evaluation of its melt shop fume capture system and its baghouse. The Company does not anticipate receiving a draft of its Title V permit until late February or March of 1998. The Company, therefore, does not know whether it will be able to comply with its Title V permit without additional capital and operating expense or whether the Company will be the subject of an enforcement action for failure to comply with the requirements of its existing permit or its Title V permit. Additionally, there can be no assurance that evolving federal and state environmental requirements for discovery of unknown conditions will not require the Company to make material expenditures in the future or affect the Company's ability to obtain permits for its existing operations or any future expansion. The Company will continue to plan and budget, as appropriate, for any additional capital and operating expenses that may be required to upgrade or install new or additional pollution control equipment in order to comply with all permits. On April 29, 1997, the Company ceased melting operations due to the melting of a radioactive source. The Company restarted its melt shop operations on May 11, 1997, after decontamination of the melt shop and related facilities. The melting of the radioactive source resulted in the classification of approximately 13,530 cubic feet of Furnace Dust and 7,000 cubic feet of baghouse filter bags and related supplies removed during decontamination as a mixed waste ("Mixed Waste") as defined in the Federal Facility Compliance Act. HRD does not have the regulatory permits to process Mixed Waste. The Company, therefore, on July 29, 1997, entered into a contract with Zhagrus Environmental, Inc. ("Zhagrus"), an affiliate company under common control of Envirocare of Utah, Inc. ("Envirocare") for the packaging, transportation, treatment and disposal of the Mixed Waste at the waste disposal facility of Envirocare at Clive, Utah (the "Envirocare Facility"). The Envirocare Facility is licensed by the State of Utah to handle and dispose of the Mixed Waste. Zhagrus has completed transportation of the Mixed Waste to the Envirocare Facility and is required by its contract with the Company to secure treatment and disposal of the Mixed Waste by September 1, 1998. The Company also has been experiencing problems with the new bags in its baghouse which were installed in May of 1997, as a result of melting a radioactive source. The Company is currently working with the vendor, consultants, and the insurance company to determine the appropriate necessary corrective action. Except as otherwise indicated, the Company believes it is in substantial compliance with applicable environmental laws and regulations. Notwithstand- ing 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 27, 1997. 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 4, 1998. The names, ages and positions of all of the executive officers of the Registrant as of September 27, 1997 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 shareholders. 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, 53, 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. Prior to November 1990, Mr. Hanebuth was a Vice President of ELCOR Corporation, a manufacturer of roofing and industrial products, and President of its wholly- owned subsidiary, Chromium Corporation, a remanufacturer of diesel engine components. Mr. Hanebuth has 18 years management experience in the steel industry. Mr. Hanebuth is a director of Ashland Bankshares, Inc., the holding company of the Bank of Ashland, and Ashland Hospital Corporation, which operates King's Daughters' Medical Center. William J. Jessie, 47, 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, 53, 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. From July 1988 to November 1990, Mr. Harrison was general sales manager with Lorin Industries, an aluminum coil anodizer. Mr. Harrison has over 27 years of sales experience in the steel industry. William H. Gerak, 52, 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 23 years of human resource and administrative experience. 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. 10.1 Transfer Agreement between NS Group, Inc., Kentucky Electric Steel Corporation, and Registrant, filed as Exhibit 10.2 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.2 Tax Agreement between NS Group, Inc., Kentucky Electric Steel Corporation and Registrant, filed as Exhibit 10.3 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.3 Form of Indemnification Agreement between Registrant and Its Executive Officers and Directors, filed as Exhibit 10.4 to Amend- ment No. 1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 10.4 Form of Salary Continuation Agreement entered into with Charles C. Hanebuth, filed as Exhibit 10.6 to Amendment No. 1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 10.5 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. 10.6 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. 10.7 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. 10.8 Contract with Morgan-Pomini Company for Rolling and Finishing End Modernization filed as Exhibit 10.8 to Registrant's Form 10-Q, No. 0-22416, filed on May 4, 1994, and incorporated by reference herein. 10.9 The Kenucky Electric Steel, Inc. Salary Continuation Plan, effective June 7, 1994, for the benefit of the Company's eligible salaried employees, filed as Exhibit 10.10 to Registrant's Form 10-K for the fiscal year ended September 24, 1994, File No. 0-22416, and incorporated by reference herein. 10.10 The Kentucky Electric Steel, Inc. Executive Severance Plan, effective June 7, 1994, for the benefit of the Company's eligible Executive Officers, filed as Exhibit 10.11 to Registrant's Form 10-K for the fiscal year ended September 24, 1994, File No. 0-22416, and incorporated by reference herein. 10.11 Employment agreements dated June 7, 1994, between Kentucky Electric Steel, Inc. and its four Executive Officers, filed as Exhibit 10.12 to Registrant's Form 10-K for the fiscal year ended September 24, 1994, File No. 0-22416, and incorporated by reference herein. 10.12 Salary Continuation Agreements entered into between Kentucky Electric Steel, Inc. and its four Executive Officers, filed as Exhibit 10.13 to Registrant's Form 10-K for the fiscal year ended September 24, 1994, File No. 0-24416, and incorporated by reference herein. 10.13 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. 10.14 Contract with EMC International, Inc. for Ladle Metallurgy Facility, filed as Exhibit 10.15 to Registrant's Form 10-Q, No. 0-22416, filed on May 16, 1995, and incorporated by reference herein. 10.15 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. 10.16 Rights Agreement between Kentucky Electric Steel, Inc. and Wachovia Bank of North Carolina, N.A., dated as of February 27, 1996, filed as Exhibit 4 to Registrant's Form 8-K, File No. 0- 22416, filed on February 28, 1996 and incorporated by reference herein. 10.17 First Addendum to Agreement with Morgan-Pomini Company for Rolling and Finishing Fund Modernization, filed as Exhibit 10.15 to Registrant's Form 10-Q, No. 0-22416, filed on February 11, 1997, and incorporated by reference herein. 10.18 Remediation and Waste Disposal Agreement - Zhagrus Environmental, Inc., filed as Exhibit 10.16 to Registrant's Form 10-Q, No. 0- 22416 filed on May 12, 1997 and incorporated by reference herein. 10.19 The Kentucky Electric Steel, Inc. Share Plan for Non-Employee Directors. 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 27, 1997. 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 12, 1997 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. Signatures Title Date \s\Charles C. Hanebuth President, Chief Executive Officer December 12, 1997 Charles C. Hanebuth and Chairman \s\William J. Jessie Vice President, Secretary, December 12, 1997 William J. Jessie Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) \s\Clifford R. Borland Director December 12, 1997 Clifford R. Borland \s\Carl E. Edwards, Jr. Director December 12, 1997 Carl E. Edwards, Jr. \s\J. Marvin Quin, II Director December 12, 1997 J. Marvin Quin, II \s\David C. Struve Director December 12, 1997 David C. Struve INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements Page Report of Independent Public Accountants ...................... F-1 Consolidated Balance Sheets - September 28, 1996 and September 27, 1997 ............................................ F-2 Consolidated Statements of Operations - Years ended September 30, 1995, September 28, 1996 and September 27, 1997 . F-3 Consolidated Statements of Changes in Shareholders' Equity - Years ended September 30, 1995, September 28, 1996, and September 27, 1997 ............................................ F-4 Consolidated Statements of Cash Flows - Years ended September 30, 1995, September 28, 1996 and September 27, 1997 . 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 KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data)

KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Years in the Period Ended September 27, 1997 (Dollars in Thousands)

KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)

KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of Operations Kentucky Electric Steel, Inc. (KESI or the Company) owns and operates a steel mini-mill near Ashland, Kentucky. The Company manufactures special bar quality alloy and carbon steel bar flats to precise customer specifications for sale in a variety of niche markets. KESI was capitalized in an initial public offering of its common stock on October 6, 1993. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Kentucky Electric Steel, Inc. and its wholly-owned subsidiary, KESI Finance Company, which was formed in October 1996 to finance the ladle metallurgy facility. All significant intercompany accounts and transactions have been eliminated. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash includes currency on-hand and deposits with financial institutions. Cash equivalents consist of investments with maturities of three months or less. Amounts are stated at cost, which approximates market value. Inventories Inventory costs include material, labor and manufacturing overhead. Inventories are valued at the lower of average cost or market. Property, Plant and Equipment and Depreciation Property, plant and equipment is recorded at cost, less accumulated depreciation. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally 3 to 12 years for machinery and equipment and 15 to 30 years for buildings and improvements. Depreciation for income tax purposes is computed using accelerated methods. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals which extend the useful life of any asset are capitalized. The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company capitalizes interest costs as part of the historical cost of acquiring major capital assets. Interest costs of $262,000 and $11,000 were capitalized for the year ended September 28, 1996 and September 27, 1997, respectively. Income Taxes The Company accounts for income taxes pursuant to the asset and liability method. Deferred tax assets and liabilities are recognized based upon the estimated increase or decrease in taxes payable or refundable in future years expected to result from reversal of temporary differences and utilization of carryforwards which exist at the end of the current year. Temporary differences represent the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates scheduled to apply to taxable income in the years in which the temporary differences are expected to be settled, and are adjusted in the period of enactment for the effect of a change in tax law or rates. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128 (SFAS No. 128) Earnings Per Share. This Statement replaces the presentation of primary E.P.S. with a presentation of basic E.P.S. and 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 will adopt SFAS No. 128 during the first quarter of fiscal 1998. Applying the provisions of SFAS No. 128, basic and diluted earnings per share for the fiscal years 1995, 1996, and 1997 would have been the same as previously reported. In June 1997, the Financial Accounting Standards Board issued Statement No. 130 (SFAS No. 130) "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The Company currently has no items of other comprehensive income; therefore, SFAS No. 130 does not currently apply. The Company is required to adopt SFAS No. 130 effective with the fiscal year ending September 25, 1999. In June 1997, the Financial Accounting Standards Board issued Statement No. 131 (SFAS No. 131) "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management is currently evaluating the provisions of this statement to determine its impact upon current reporting. The Company is required to adopt SFAS No. 131 effective with the fiscal year ending September 25, 1999. 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, 1995 consists of fifty-three weeks. Net Income per Common Share Net income per share is calculated using the weighted average number of shares of common stock equivalents outstanding during the period. The effect of stock options outstanding is not material and therefore is not included in the computation of net income per share. (3) Inventories Inventories at September 28, 1996 and September 27, 1997 consist of the following ($000's): 1996 1997 Raw materials $ 4,069 $ 3,280 Semi-finished and finished goods 13,298 13,258 Total inventories $ 17,367 $ 16,538 (4) Insurance Claim Receivable and Environmental Liabilities The Company's melt shop operations were shut down for twelve days during the third quarter of fiscal 1997 in order to decontaminate its baghouse facilities after detection of a radioactive substance in the baghouse dust, a by-product of the melting process. The financial statements include a receivable of $.9 million which represents the estimated balance due from the insurance carrier on the total projected reimbursement of $6.7 million, which reimburses the costs incurred in the radiation contamination clean-up, the disposal cost, and business interruption. To date, the Company has received $5.8 million from the insurance carrier for payment of costs incurred. The $1.0 million in environmental liabilities recorded as a current liability on the balance sheet represents final payment due an environmental services company for treatment and disposal of the contaminated baghouse dust. Payment for the disposal will occur within the next twelve months. Although it is possible that the ultimate disposal costs may change from current estimates, the effect of the change, if any, is not expected to be material to the financial statements due to the Company having appplicable insurance coverage. (5) Accrued Liabilities Accrued liabilities at September 28, 1996 and September 27, 1997 consist of the following ($000's): 1996 1997 Accrued payroll and related liabilities $ 1,442 $ 1,431 Accrued insurance and workers' compensation 950 1,085 Accrued interest payable 697 679 Other 550 505 $ 3,639 $ 3,700 (6) Long-Term Debt Long-term debt of the Company at September 28, 1996 and September 27, 1997 consists of the following ($000's): 1996 1997 Unsecured senior notes, due in equal annual installments from November 2000 through 2005, interest at 7.66% $ 20,000 $ 20,000 Other 125 125 20,125 20,125 Less - Current portion (125) (125) $ 20,000 $ 20,000 The unsecured senior notes require no principal payments for the first five years. Principal payments commence on November 1, 2000 and are due in equal annual installments over six years. These notes bear interest at the rate of 7.66% per annum, with interest paid semi-annually. The Company has a $17.5 million unsecured bank credit facility. 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 higher of 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 27, 1997, approximately $10.6 million was outstanding under the bank credit facility, approximately $1.6 million was utilized to collateralize various letters of credit and $3.8 million was available for additional borrowings. The weighted average interest rate on short term borrowings as of September 28, 1996 and September 27, 1997 were 7.5% and 7.3%, respectively. The Company's unsecured senior notes and bank credit facility agreements were amended, effective December 28, 1996, to reduce the required fixed charge coverage ratio, increase the minimum net worth requirement and revise other miscellaneous provisions of the agreements. In connection with the amendment, the amount of the Company's unsecured bank credit facility was reduced from $24.5 million to $17.5 million. With this amendment, the Company continues to be in compliance with the financial covenants and management believes it is probable that the Company will continue to be in compliance with the amended covenants. 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 27, 1997. The fair value of the unsecured senior notes was approximately $19.7 million as of September 27, 1997. (7) Significant Customers and Foreign Sales The Company grants trade credit to customers within the markets it serves, the most significant of these are the leaf-spring suspension and cold drawn bar converter markets. Sales to the leaf-springs suspension market represented 32.0%, 25.3%, and 18.6% of total sales for 1995, 1996 and 1997, respectively. Sales to the cold drawn bar converter market represented 15.7%, 19.3%, and 29.2% of total sales for 1995, 1996, and 1997, respectively. One company, through several wholly-owned subsidiaries which are customers of the Company, represented 16.2%, 11.7% and 9.6% of net sales in fiscal 1995, 1996 and 1997, respectively. Another customer, through two wholly-owned subsidiaries which are customers of the Company, accounted for 14.0% of net sales in fiscal 1997. No other customer accounted for more than 10% of net sales. The Company's foreign sales represented 6.3%, 8.8%, and 8.5% of total sales for 1995, 1996 and 1997, respectively. (8) Income Taxes The provision (credit) for income taxes consists of the following ($000's): 1995 1996 1997 Current: Federal $ 916 $(2,510) $ (900) State - (379) - 916 (2,889) (900) Deferred: Federal 1,616 2,541 (498) State 280 383 (201) 1,896 2,924 (699) Total provision (credit) for income taxes $ 2,812 $ 35 $(1,599) The provision (credit) for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons ($000's): 1995 1996 1997 Income tax provision (credit) at Statutory tax rate of 34% $ 2,537 $ 32 $(1,438) State income taxes, net of federal effect 185 1 (103) Other, net 90 2 (58) $ 2,812 $ 35 $(1,599) The components of the net deferred tax asset at September 28, 1996 and September 27, 1997 are as follows ($000's): Sept. 28, Sept. 27, 1996 1997 Deferred tax components: Property, plant and equipment $ 3,323 $ 1,126 Intangibles 2,949 2,737 AMT credit carryforwards 2,023 1,197 NOL carryforward 1,604 4,682 Other (275) 555 9,624 10,297 Valuation allowance (2,681) (2,681) Net deferred tax assets $ 6,943 $ 7,616 For Federal income tax purposes the Company has alternative minimum tax carryforwards of approximately $1.2 million, which are not limited by expiration dates. The Company also has gross operating tax loss carryforwards of approximately $13.8 million which expire beginning in 2011. The Company has recorded deferred tax assets related to these carryforwards. The realization of deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management has considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. Taking into consideration historical pre-tax income levels, the nature of certain events which adversely affected operations in fiscal 1996 and 1997, the results of operations in the third and fourth quarters of fiscal 1997, 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 $751,000, $213,000, and $219,000 in 1995, 1996 and 1997, respectively. (10) 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 became 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 become exercisable over a three year period which began on approval by the shareholders of the 1993 Employee Stock Option/Restricted Stock Plan in February 1994. All unexercised options expire ten years after the date of grant. Option and restricted stock prices range from $5.56 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 vest on a pro rata basis over a period of four years beginning one year after the grant date. Compensation expense of $240,000 and $208,000 was recognized in fiscal 1996 and 1997, 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 $261,000 and $53,000 as of September 28, 1996 and September 27, 1997, respectively. A summary of transactions in the plans for fiscal 1996 and 1997 are as follows: 1996 1997 Weighted- Weighted- Average Average Stock Exercise Stock Exercise Options Price Options Price Options outstanding, beginning of year 240,284 $11.06 327,976 $10.11 Options granted 91,192 7.63 89,192 5.56 Options forfeited (3,500) 10.49 (12,000) 9.69 ------- ----- ------- ----- Options outstanding, end of year 327,976 $10.11 405,168 $ 9.12 Options exercisable, end of year 102,009 $11.50 186,505 $10.96 Restricted shares granted - - Options and restricted shares available for grant 87,925 10,733 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 1996 and 1997 are as follows: 1996 1997 Weighted- Weighted- Average Average Stock Exercise Stock Exercise Options Price Options Price Options outstanding, beginning of year 177,422 $14.02 169,430 $14.00 Options granted - - - - Options forfeited (7,992) 14.35 (10,728) 13.06 ------- ----- ------- ----- Options outstanding, end of year 169,430 $14.00 158,702 $14.06 Options exercisable, end of year 149,814 $14.69 149,720 $14.38 The Financial Accounting Standard Board issued Statement No. 123 (SFAS No. 123) related to accounting for stock based compensation. The statement encourages the use of the fair value based method to measure compensation cost for stock-based employee compensation plans. As permitted, the Company continues to account for its stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25 and related Interpretations. Accordingly, no compensation cost has been recognized for the Company's Employee Stock Option Plan for fiscal years 1996 and 1997. Had compensation cost for the stock options granted in fiscal 1996 and 1997 been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123, pro forma net income and earnings per share would have been a net loss of $192,000 and loss per share of $.04 for fiscal 1996 and a net loss of $2.8 million and $.61 per share for fiscal 1997. These pro forma disclosures are not likely to be representative of the effect on reported net income and earnings per share for future years since current options vest over a three to four year period and additional options are generally granted each year. The weighted-average fair value of options granted in fiscal 1996 and fiscal 1997 was $4.38 and $3.15 per share, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions: weighted average risk free interest rate of 6.96% for fiscal 1996 and 6.59% for fiscal 1997, weighted average volatility of 38.4%, expected life of eight years and zero dividends. The following table summarizes information about stock options outstanding at September 27, 1997 under the Employee Stock Option/Restricted Stock Plans and the Transition Plan: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 9/27/97 Life Price at 9/27/97 Price Employee Stock Option/Restricted Stock Plans: $ 5.56 - 7.63 176,384 9.12 Years $ 6.58 21,797 $ 7.63 9.13 - 12.31 228,784 7.01 Years 11.08 164,708 11.40 ------------ ------- ---------- ----- ------- ----- 5.56 - 12.31 405,168 7.92 Years 9.12 186,505 10.96 Transition Plan: 8.76 - 9.05 69,810 4.86 Years 8.86 60,828 8.88 14.40 - 20.86 88,892 1.18 Years 18.15 88,892 18.15 ------------- ------- ---------- ----- ------- ----- $ 8.76 - 20.86 158,702 2.80 Years $14.06 149,720 $14.38 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 deduction of shareholders' equity and was $160,000 and $117,000 as of September 28, 1996 and September 27, 1997, respectively. In fiscal 1996 and fiscal 1997, the Company recognized $43,000 each year 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. 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 1997, 3,889 shares were issued at stock prices ranging from $5.13 to $5.50 per share. (11) 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, 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. (12) Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability and other matters, which seek remedies or damages. The Company believes that any liability that may ultimately be determined will not have a material effect on its financial position or results of operations. The Company generates both hazardous wastes and non-hazardous wastes which are subject to various governmental regulations. Estimated costs to be incurred in connection with environmental matters are accrued when the prospect of incurring costs for testing or remedial action is deemed probable. The Company is not aware of any asserted or unasserted environmental claims against the Company and no accruals for such matters have been recorded in the accompanying balance sheets except as disclosed in Note 4. However, discovery of unknown conditions could result in the recording of accruals in the periods in which they become known. (13) Quarterly Financial Data (Unaudited) Quarterly results of operations (in thousands, except per share amounts) for fiscal 1996 and fiscal 1997 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter 1996 Net sales $ 23,688 $ 24,625 $ 26,483 $ 23,524 Gross profit $ 2,576 $ 2,447 $ 2,669 $ 845 Net income (loss) $ 162 $ 243 $ 319 $ (666) Net income (loss) per common share $ .03 $ .05 $ .07 $ (.14) Weighted average shares outstanding 4,871,140 4,828,055 4,790,885 4,729,566 1997 Net sales $ 23,382 $ 23,159 $ 22,724 $ 25,387 Gross profit (loss) $ (14) $ (456) $ 2,370 $ 2,760 Net income (loss) $ (1,384) $ (1,659) $ 45 $ 366 Net income (loss) per common share $ (.30) $ (.36) $ .01 $ .08 Weighted average shares outstanding 4,658,691 4,626,639 4,622,062 4,626,414 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 24, 1997. 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 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 24, 1997 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 24, 1994 .......................... $ 355 Additions: Charged to costs and expenses .................... 507 Deductions: Net charge-off of accounts deemed uncollectible .. (237) --- BALANCE, September 30, 1995 .......................... $ 625 Additions: Charged to costs and expenses .................... 651 Deductions: Net charge-off of accounts deemed uncollectible .. (886) --- BALANCE, September 28, 1996 .......................... $ 390 Additions: Charged to costs and expenses .................... 120 Deductions: Net charge-off of accounts deemed uncollectible .. (40) --- BALANCE, September 27, 1997 ......................... $ 470 (1) Deducted from accounts receivable. EX-10.19 2 KENTUCKY ELECTRIC STEEL, INC. SHARE PLAN FOR NON-EMPLOYEE DIRECTORS I. Name and Purpose of Plan 1.1 Establishment. This plan created in accordance with the terms hereof shall be known as the "Kentucky Electric Steel, Inc. Share Plan for Non-Employee Directors" (the "Plan"). 1.2 Purposes. The purposes of this Plan are to encourage the Non- Employee Directors of Kentucky Electric Steel, Inc. (the "Company") to own shares of the Company's stock and thereby to align their interests more closely with the interests of the other shareholders of the Company, to encourage the highest level of director performance by providing the Non- Employee Directors with a direct interest in the Company's attainment of its financial goals, and to provide a financial incentive that will help attract and retain the most qualified directors. II. Definitions 2.1 Definitions. The following terms shall have the meanings set forth below: (a) "Board" shall mean the Board of Directors of the Company. (b) "Non-Employee Director" shall mean an individual duly elected or chosen as a member of the Board who is not an employee of the Company. (c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (d) "Fair Market Value" means the average of the highest sale price and the lowest sale price of a Share on the date the value of a Share is to be determined, as reported on the NASDAQ System, and published in the Wall Street Journal, or if no sale is reported for such date, then on the next preceding date for which a sale is reported or, if the Shares are no longer traded on the NASDAQ System, the determination of such value shall be made by the Board. (e) "Fees" shall mean the amount of the fees to be paid to each Non-Employee Director for services as a director (including all meetings of the full Board and all committee meetings) for each fiscal quarter, as determined by the Board from time to time. (f) "Shares" shall mean the common stock, par value $.01 per share, of the Company. 2.2 Gender and Number. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. III. Stock Subject to the Plan A total of 25,000 Shares are authorized for issuance under this Plan in accordance with the provisions of this Plan. This authorization may be increased from time to time by approval of the Board and by the shareholders of the Company if, in the opinion of counsel for the Company, such shareholder approval is required. IV. Participation Each Non-Employee Director of the Company may receive Shares pursuant to this Plan on the terms and conditions set forth herein. Each Non-Employee Director shall, if required by the Board, enter in an agreement with the Company, in such form as the Board shall determine and which is consistent with the provisions of this Plan. In the event of any inconsistency between the provisions of this Plan and any such agreement entered into hereunder, the provisions of this Plan shall govern. V. Stock Issuances Promptly following each Board meeting or meeting of a committee of the Board during a fiscal quarter commencing on or after September 27, 1997, the Company shall issue to each Non-Employee Director the number of Shares (rounded to the nearest whole number) obtained by dividing the "Applicable Portion" of such Non-Employee Director's Fees by the Fair Market Value of a Share on the date of the applicable Board or committee meeting. No fractional Share shall be issued by the Company under this Plan. The "Applicable Portion" shall be 60% of the Fees payable with respect to the applicable meeting for each Non-Employee Director, or such higher percentage that any individual Non-Employee Director elects for himself, such election to be filed in writing with the Chief Financial Officer of the Company prior to the first day of the fiscal quarter during which the applicable meeting occurs. VI. General Provisions 6.1 Non-transferability. No rights to the issuance of Shares pursuant to this Plan shall be assigned, pledged, hypothecated or otherwise transferred by a Non-Employee Director or any other person, voluntarily or involuntarily, other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. 6.2 Investment Representations; Restricted Stock. The Company may require any Non-Employee Director to whom Shares are to be issued pursuant to this Plan, as a condition of receiving such Shares, to given written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Shares for his own account for investment and not with any present intention of selling or otherwise distributing the same, that the Shares issued pursuant to this Plan have not been registered pursuant to any applicable securities law and can only be transferred upon compliance with such laws, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. The Shares issued pursuant to this Plan will bear an appropriate legend. 6.3 Compliance with Laws. (a) Each issuance of Shares pursuant to this Plan shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance of Shares thereunder, such Shares may not be issued unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board. (b) This Plan and the issuance of Shares pursuant to this Plan are intended to comply with Rule 16b-3 promulgated under the Exchange Act; and the Board shall interpret and administer the provisions of this Plan in a manner consistent therewith. (c) The issuance of Shares and the payment of cash pursuant to this Plan shall be subject to all applicable laws, rules and regulations. VII. Plan Amendment and Termination The Board may at any time terminate, and from time to time amend or modify this Plan; provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable this Plan to satisfy any applicable statutory or regulatory requirements, or if the Company, on the advice of counsel, determines that shareholder approval is otherwise necessary or desirable. VIII. Miscellaneous 8.1 Retention as Director. Nothing contained in this Plan shall interfere with or limit in any way the right of the shareholders or the Directors of the Company to remove any Director from the Board pursuant to the bylaws of the Company, nor confer upon any Director any right to continue in the service of the Company. 8.2 Relationship to Other Plans. The adoption of this Plan shall not affect any other compensation plan in effect for the Company. Furthermore, this Plan shall not preclude the Company from establishing any other form of incentive or other compensation arrangement for Directors of the Company. 8.3 Plan Binding on Successors. This Plan shall be binding upon the successors and assigns of the Company. 8.4 Governing Law. The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of Delaware. 8.5 Headings. Headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such headings, numberings and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Plan or any provisions thereof. IX. Effective Date The effective date of this Plan shall be the date of its adoption by the Board. EX-23 3 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included in this Form 10-K into the Company's previously filed Registration Statements File Nos. 33-73042 and 33- 77598. Arthur Andersen LLP Cincinnati, Ohio, December 12, 1997 EX-27 4 ART. 5 FDS FOR 10-K
5 This schedule contains summary financial information extracted from Kentucky Electric Steel, Inc.'s condensed financial statements as of and for the twelve month period ended September 27, 1997 included in this Company's quarterly report on Form 10-K and is qualified in its entirety by reference to such condensed financial statements. 0000910394 KENTUCKY ELECTRIC STEEL, INC. 1,000 U.S. DOLLARS 12-MOS SEP-27-1997 SEP-29-1996 SEP-27-1997 1 127 0 12,047 470 16,538 35,301 46,761 11,229 78,770 23,966 20,000 50 0 0 34,161 78,770 94,652 94,652 89,992 89,992 0 0 2,125 (4,231) (1,599) (2,632) 0 0 0 (2,632) (.57) (.57)

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