-----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, I8N0LniqDgDRn0ugcOGHdu2fONuePasP29oyrDI0Vgb0vD2zWLcmbanfZeYO7B04 aEQZXgDx61/YqPKllsDi+w== 0000910394-99-000005.txt : 19991223 0000910394-99-000005.hdr.sgml : 19991223 ACCESSION NUMBER: 0000910394-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991222 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: 99778880 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 25, 1999 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________________ to ________________. Commission File No. 0-22416 KENTUCKY ELECTRIC STEEL, INC. (Exact name of Registrant as specified in its charter) Delaware 61-1244541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 3500, Ashland, Kentucky 41105-3500 (Address of principal executive office, Zip code) (606) 929-1222 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) (Cover Page 1 of 2 Pages Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on December 10, 1999: $9,452,707. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of December 10, 1999: 4,075,358 shares of Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14(a) are incorporated herein by reference in response to items 10 through 13 in Part III of this report. (Cover Page 2 of 2 Pages) KENTUCKY ELECTRIC STEEL, INC. FORM 10-K TABLE OF CONTENTS Page PART I .......................................................... 4 Item 1. Business .......................................... 4 Item 2. Properties ........................................ 10 Item 3. Legal Proceedings ................................. 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II ......................................................... 12 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ............................... 12 Item 6. Selected Financial Data ........................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 13 Item 7A. Qualitative and Quantitative Disclosure about Market Risk ....................................... 20 Item 8. Financial Statements and Supplementary Data ....... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 20 PART III ........................................................ 21 Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation ............................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 21 Item 13. Certain Relationships and Related Transactions .... 21 PART IV ......................................................... 22 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 22 SIGNATURES ...................................................... 25 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE ..................... 26 KENTUCKY ELECTRIC STEEL, INC. PART I Item 1. Business General Kentucky Electric Steel, Inc., a Delaware corporation incorporated in August, 1993 (the "Company"), owns and operates a steel mini-mill near Ashland, Kentucky. As a mini-mill producer of bar flats, the Company recycles steel from scrap, a process designed to result in lower production costs than those of integrated steel mills, which produce steel by processing iron ore and other raw materials in blast furnaces. Bar flats are produced to a variety of specifications and fall primarily into two general quality levels - merchant bar quality steel bar flats ("MBQ Bar Flats") for generic types of applications, and special bar quality steel bar flats ("SBQ Bar Flats"), where more precise customer specifications require the use of various alloys, customized equipment and special production procedures to insure that the finished product meets critical end-use performance characteristics. The Company is a leading manufacturer of SBQ Bar Flats for the cold drawn bar converter and truck trailer support beam markets. Approximately 80% of the Company's sales are of SBQ Bar Flats. The Company completed a two-phase capital expenditure program in fiscal 1996. The first phase expanded the Company's casting, rolling and finishing capacity and increased the size range of products the Company produces. The second phase, installation of a ladle metallurgy facility, removed the refining cycle from the electric arc furnace, thereby increasing total melting capacity. The Company manufactures over 2,600 different SBQ Bar Flat items which are sold to a variety of relatively small volume niche markets, including the leaf-spring suspension market for light and heavy-duty trucks, mini-vans and utility vehicles, cold drawn bar converters, certain specialty applications for steel service centers, truck trailer manufacturers and other miscellaneous markets. The Company's mill was specifically designed to manufacture wider and thicker bar flats up to three inches in thickness and twelve inches in width that are required by these markets. In addition, the Company employs a variety of specially designed equipment which is necessary to manufacture SBQ Bar Flats to the specifications demanded by its customers. Although the Company specializes in SBQ Bar Flats, particularly in the thicker and wider sections, it also, to a much lesser extent, competes in the MBQ Bar Flat market. The Company's business strategy is to increase its share of the SBQ Bar Flat market and to expand into related niche market applications where it can profitably supply products for special customer needs. The completion of the capital expenditure program increased the range of thickness and width of the Company's products, thereby creating the capacity for the Company to expand its business primarily by increasing the number of products it sells to existing customers and the development of new customers. The Company has increased its shipments of the thicker, wider products from fiscal 1998 to fiscal 1999 and has continued to limit its sales to the leaf- spring suspension market. Manufacturing Operations The Company recycles steel by melting steel scrap in two 50-ton electric arc furnaces. The molten steel is then taken to the ladle metallurgy facility where a variety of alloys are added to make different grades of steel in accordance with customer specifications. The refined molten steel is then poured into a continuous caster to produce continuous strands of steel with cross-sectional dimensions ranging from approximately 16 to 72 square inches. The Company can utilize up to four continuous strands in producing certain sizes. The strands are cut to produce billets of specified length which are reheated to approximately 2,300 degrees Fahrenheit at the Company's rolling mill and fed through a series of roll stands to reduce their size and form them into steel bar sections. These sections emerge from the rolling mill, are uniformly cooled on a cooling bed, and are cut to lengths specified by the customer. The cut bar flats are stacked into bundles ready for shipment. The production capacity of finished products from the Company's rolling and finishing facilities is approximately 400,000 tons per year but can vary with product mix. The annual production capacity of the melting and casting operation is approximately 330,000 tons of finished product. Thus, the Company is able to finish more product in its rolling operations than it is capable of producing with its melting facilities. The Company's ultimate goal is to balance its operations at approximately 400,000 tons per year. The Company sold 244,000 tons of finished goods in 1999 which constitutes 74% of its melting and casting capacity. The Company transports its products by common carrier, generally shipping by truck and by rail. The Company has railroad sidings at its facilities. Capital Improvements and Expansion Annual capital expenditures over the last five fiscal years have averaged $7.2 million, which includes $2.8 million expended in fiscal year 1999. The Board of Directors has approved the fiscal 2000 capital expenditure plan for approximately $1.7 million, which includes completion of various projects began in fiscal 1999, as well as equipment upgrades and replacements. Primary Markets and Products The Company is primarily a special bar quality ("SBQ") producer of alloy and carbon steel bar flats. Its primary markets are manufacturers of leaf-spring suspensions, cold drawn bar converters, flat bed truck trailer manufacturers and steel service centers. Leaf-Spring Suspension Market. High tensile SBQ spring steel is produced to customer and industry specifications for use in leaf- spring assemblies. These assemblies are utilized in light, medium and heavy duty trucks, trailers, mini-vans and four-wheel drive vehicles with off-road capability. The trend toward tapered leaf-spring products and air-ride suspension continues. These products use somewhat less steel but they are manufactured from larger cross section bar flats that match the Company's manufacturing strengths. Cold Drawn Bar Converters Market. The Company sells its expanded range of SBQ hot rolled bar products to cold drawn bar manufacturers. KESI's product range, 1/4" through 3" in thickness and 2" through 12" in width, enables the Company to supply practically all the sizes needed by the converters. The converters remove the scale from the hot rolled bar and draw it through a carbide die. The drawing reduces the cross section, improves surface and internal properties, and produces a more exacting tolerance bar. The end product is sold directly to original equipment manufacturers and through distributors, with the majority being sold by steel service centers. Steel Service Centers Market. Approximately 30% of all steel shipments to the end-user are distributed through steel service centers, making this the largest single market for steel manufacturers. The Company sells both MBQ and SBQ bar flats into this market. The majority of its sales consist of the less competitive heavier section sizes and difficult to make grades. Truck Trailers Market. The Company is a significant supplier of SBQ Bar Flats for flat bed trailer support beam flange material. This material is engineered and produced to exacting specifications consistent with trailer manufacturers' requirements. Miscellaneous Markets. The Company supplies other markets including metal building, grader blades, agricultural equipment, construction/ fabricating, railroad and industrial chain manufacturers. The products furnished to these markets are primarily SBQ Bar Flats along with a mixture of MBQ Bar Flats. Although the Company has not focused its sales efforts on MBQ Bar Flats, attention to select sizes of MBQ Bar Flats has provided good balance for the Company's manufacturing facilities. Within the MBQ Bar Flat market, the Company has concentrated its sales on specialty items as opposed to higher volume commodity products. Targeted opportunities within this market match the Company's ability to produce thicker, wider bar flats described in "Business - General." Customers The Company sells to over 350 customers. Several wholly-owned subsidiaries of Republic Technologies International represented approximately 13.5% of sales for fiscal 1999. Two wholly-owned subsidiaries of Niagara Corporation represented 11.0% of net sales for fiscal 1999. No other customer accounted for more than 10% of sales in fiscal 1999. The loss of a principal customer could have a material adverse effect on the Company's operations. The Company's foreign sales as a percentage of total sales were 8.6% in fiscal 1999. These sales consisted primarily of leaf-spring suspension products shipped to Canada and Mexico. Marketing Senior management of the Company is directly involved in sales to new and existing customers. Sales are nationwide and in certain foreign markets. Sales efforts are performed by seven in-house sales personnel and six manufacturers' representative companies. The efforts of these sales representatives are directed by the Company's Vice President, Sales and Marketing. Competition and Other Market Factors The domestic and foreign steel industries are characterized by intense competition. The Company competes with domestic and foreign producers, many of whom have financial resources substantially greater than those available to the Company. The Company has identified its principal competition from the following sources: (i) in its leaf- spring suspension market, the Company faces competition from five North American mills; (ii) in its cold drawn bar converters market, the Company competes with five North American mills; (iii) in the steel service center market, the Company encounters competition from numerous North American mills; and (iv) in its truck trailer market, the Company competes with one North American mill. One company, which competes in the leaf spring market, is currently in the construction phase of a plan to increase the capacity of its plant and to expand the size range of the products it manufactures. The Company believes that the principal competitive factors affecting its business are quality, service, price and geographic location. Backlog and Seasonality As of September 25, 1999, the Company had firm orders for approximately 52,000 tons representing approximately $24.1 million in sales, as compared with approximately 54,000 tons representing approximately $26.0 million in sales, at September 26, 1998. The Company operates on a continuous basis with only occasional scheduled shutdowns for heavy maintenance work. The Company's operations are not subject to seasonal fluctuations in operations or sales. Raw Materials The principal raw material used in the Company's steel mill is ferrous scrap. Ferrous scrap is derived from, among other sources, discarded automobiles, appliances, structural steel, railroad cars and machinery. The purchase price of scrap is subject to market conditions largely beyond the control of the Company. The Company is located in an area where scrap is generally available and typically maintains less than one month of scrap supply. Historically, price fluctuations of scrap have had no material long-term impact on the Company. However, while the Company has generally been successful in passing on scrap cost increases through price increases, the effect of steel imports, market price competition and under-utilized industry capacity has in the past, and could in the future, limit the Company's ability to increase prices. One scrap dealer supplied approximately 34% of the Company's scrap in fiscal 1999. In an attempt to insure an adequate source of raw materials, however, the Company has identified, inspected and purchased scrap from over 30 dealers. The Company's manufacturing process consumes large amounts of electricity, which the Company purchases from Kentucky Power Company, d/b/a American Electric Power ("AEP"). An abundant regional supply of coal, used in producing electricity, helps keep the Company's energy costs relatively low. Prior to November 13, 1997, the Company purchased electricity from AEP under an Interruptible Power Contract ("Prior Contract") which was terminable by either party upon 12 months notice and under which AEP could interrupt service during times of peak demand. Effective November 13, 1997, the Company and AEP entered into a contract for Operating Reserve Interruptible Electric Service ("1997 Contract") which will have a minimum term of five years unless the Company gives AEP at least one year's notice of termination. The 1997 Contract limits AEP's right to interrupt service to only those instances that an AEP unit goes offline or that AEP is responsible to share reserves with other electrical generators pursuant to the East Central Area Reliability Coordination Agreement (ECAR), and any such interruption can be no more than 30 minutes in duration. Employees As of September 25, 1999, the Company employed 407 people, approximately 77% of whom are members of the United Steelworkers of America. The Company's current five-year collective bargaining agreement expires in September 2004. The Company believes that its wage rates and benefits are competitive with other mini-mills. The Company offers no postretirement employee health care benefits or other benefit program subject to accounting under the provisions of Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits other than Pensions". Environmental and Regulatory Matters The Company is subject to federal, state, and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. As with similar mills in the industry, the Company's furnaces are classified as generating hazardous waste (K061) because they produce certain types of dust containing lead, chromium and cadmium ("Furnace Dust"). The Company currently collects and handles Furnace Dust through a contract with Horsehead Resource Development Company, Inc. ("HRD"), which reclaims from the waste dust certain materials for reuse and arranges for further recycling or disposal of the residual material. Some of the Furnace Dust generated by the Company and shipped to HRD was processed at HRD's Palmerton, Pennsylvania facility (the "Palmerton Site"), which is the subject of a civil action ("Civil Action") filed in the United States District Court for the Middle District of Pennsylvania by USEPA (No. CV. 98-654) seeking recovery of costs for alleged environmental contamination at the Palmerton Site. HRD has negotiated a Consent Decree and a settlement of $4,984,000 with USEPA for the approximately 250 companies which sent 3,348,287 tons of Furnace Dust to the Palmerton Site. On October 16, 1998, the Company executed the Consent Decree in the Civil Action. On December 10, 1999, the U. S. District Court approved and entered the Consent Decree, which will require the payment of $64,950.18 for the Company's 1.3032 percent volumetric share of the Furnace Dust sent to the Palmerton Site. In consideration of this payment, the Company will be relieved of any liability that the Company may have for contribution or claims for response costs incurred in connection with the Palmerton Site as provided by Sections 113(f)(2) and 122(g)(5) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. HRD has represented to the Company that HRD will pay USEPA the entire settlement of $4,984,000. However, should HRD not pay the $4,984,000 to USEPA, the Company will be required to pay $64,950.18. Between 1981 and 1983, the prior operator (the "Prior Operator") disposed of Furnace Dust in the Cooksey Brother's landfill, in Cannonsburg, Kentucky ("Cooksey Landfill"). Before 1981 the Prior Operator disposed of Furnace Dust in other locations, including a strip mine. The Company did not assume any liability for disposal at the Cooksey Landfill or such other sites in the acquisition agreement pursuant to which the Company acquired its mini-mill in 1993. The Cooksey Landfill is operating pursuant to a permit and bond issued and approved by the Kentucky Division of Waste Management, and the Company has no reason to believe that the Cooksey Landfill or other sites are likely targets for listing as a Kentucky "uncontrolled site" or federal superfund site. On May 5, 1999, the Company was notified by the Kentucky Division of Waste Management ("DWM") that as a result of a RCRA Facility Assessment ("RFA") conducted in 1986 and 1987 while the Company's mill was operated by the Prior Operator, that DWM requests that the Company undertake a RCRA Facility Investigation ("RFI") and, if necessary, therefore, a RCRA Corrective Measures Study ("CMS") and, if necessary, therefore, a RCRA Corrective Measures Implementation ("CMI"). On June 8, 1999, the Company was notified by DWM that the Company's mill had been listed with 32 other sites in Kentucky as a high priority for clean-up on the RCRA Corrective Action Baseline List of Facilities. The Company has not made a determination as to whether the Prior Operator released any hazardous waste at its site and has not agreed to undertake the RFI and is continuing negotiations with DWM. The Company, however, could incur investigation and/or clean-up expenses in the future with respect to the operation of the Company's facility by the Prior Operator with respect to the Cooksey Landfill or such other sites if (1) the sites are listed as a Kentucky "Uncontrolled Site" or Federal Superfund Site, (2) DWM required the Company to undertake an RFI, CMS and CMI, and (3) the Company is not successful in obtaining full indemnification from the Prior Operator. The Company's operations are subject to the Federal Clean Air Act which provides for regulation, through state implementation of federal requirements, of the emission of certain air pollutants. As required by applicable regulations, on December 14, 1996, the Company filed a Title V permit application with the Kentucky Division for Air Quality ("DAQ"). On June 2, 1999, DAQ issued to the Company its Title V Operating Permit ("Air Permit") with an expiration date of June 2, 2004. As with similar mills in the industry, the Federal Clean Air Act required that the Permit include emission limitations and standards as well as monitoring, recordkeeping, reporting, inspection and entry requirements to assure compliance with those limits. The Company does not know whether it will be able to comply with the Air Permit without additional capital and/or operating expense. The Company's operations are also subject to the Federal Clean Water Act which provides for regulation through state implementation of federal requirements of the discharge of certain water pollutants. On March 19, 1999, the Kentucky Division of Water ("DOW") issued the Company its Kentucky Pollutant Discharge Elimination System Permit ("Water Permit") with an expiration date of May 31, 2002. In its application for the Water Permit, the Company requested that DOW re- evaluate the temperature limits established in its prior permit. DOW has agreed to determine allowable surface water temperatures on a site-specific basis and has included in the Water Permit a requirement that the Company conduct a year-long thermal plume study to assess the impact of the effluent temperature on the aquatic biota in the receiving stream. At the completion of the study, DOW will determine allowable surface water temperatures on a site-specific basis utilizing available data and the results of the thermal plume study. The Company, therefore, does not know whether it will be able to comply with temperature limits without additional capital and/or operating expense when the limits are determined by DOW. Further, there can be no assurance that evolving federal and state environmental requirements or discovery of unknown conditions will not (1) require the Company to make material expenditures in the future or (2) affect the Company's ability to obtain permits for its existing operations or any future expansion. The Company will continue to plan and budget, as appropriate, for any additional capital and operating expenses that may be required to upgrade or install new or additional pollution control equipment in order to comply with all permits. On April 29, 1997, the Company ceased melting operations due to the melting of a radioactive source. The Company restarted its melt shop operations on May 11, 1997, after decontamination of the melt shop and related facilities. The melting of the radioactive source resulted in the classification of approximately 13,530 cubic feet of Furnace Dust and 7,000 cubic feet of baghouse filter bags and related supplies removed during decontamination as a mixed waste ("Mixed Waste") as defined in the Federal Facility Compliance Act. On July 29, 1997, the Company entered into a contract with Zhagrus Environmental, Inc. ("Zhagrus"), an affiliate of Envirocare of Utah, Inc. ("Envirocare"), for the packaging, transportation, treatment and disposal of the Mixed Waste at the waste disposal facility of Envirocare at Clive, Utah (the "Envirocare Facility"). The Envirocare Facility is licensed by the State of Utah to handle and dispose of the Mixed Waste. On April 9, 1999, Zhagrus certified to the Company that Zhagrus has completed the treatment and disposal of the Mixed Waste at the Envirocare Facility. Except as otherwise indicated, the Company believes it is in substantial compliance with applicable environmental laws and regulations. Notwithstanding such compliance, if damage to persons or property or contamination of the environment has been or is caused by the conduct of the Company's business or by hazardous substances or wastes used, generated or disposed of by the Company (or possibly by prior operators of the Company's mini-mill or by third parties), the Company may be held liable for such damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability to the Company could be material. Changes in federal or state laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by the Company. Item 2. Properties The Company's operations are located on approximately 122 acres of land near Ashland, Kentucky, next to an interstate highway and a rail line. The Company believes that its facilities are well maintained, in good condition and adequate and suitable for its operating needs. The Company has completed certain capital expenditures with respect to its properties. See Item 1 - Business - "Manufacturing Operations" and "Capital Improvements and Expansion." Item 3. Legal Proceedings The Company is subject to various claims and lawsuits arising in the ordinary course of business with respect to commercial, product liability and other matters, which seek remedies or damages. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's business, financial position, results of operations or cash flows. See also Item 1 "Business - Environmental and Regulatory Matters." Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of shareholders during the fourth quarter of the fiscal year ended September 25, 1999. Executive Officers of the Registrant Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held February 1, 2000. The names, ages and positions of all of the executive officers of the Registrant as of September 25, 1999 are listed below with their business experience with the Registrant for the past five years. Officers are elected annually by the Board of Directors at the first meeting of directors following the annual meeting of stockholders. There are no family relationships among these officers, nor any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Charles C. Hanebuth, 55, has been President and Chief Executive Officer of the Company since its formation in August 1993. From November 1990 to October 1993, Mr. Hanebuth was President and Chief Operating Officer of Kentucky Electric Steel Corporation, a wholly- owned subsidiary of NS Group, Inc. Mr. Hanebuth has 20 years management experience in the steel industry. Mr. Hanebuth is a advisory director of Fifth Third Bank Ohio Valley and a director of Ashland Hospital Corporation, which operates King's Daughters' Medical Center. William J. Jessie, 49, a certified public accountant, has been Vice President, Secretary, Treasurer and Chief Financial Officer of the Company since its formation in August 1993. Prior to August 1993, he was Controller of Kentucky Electric Steel Corporation since 1986. Mr. Jessie has 21 years of public accounting experience with national and local accounting firms. Joseph E. Harrison, 55, has been Vice President of Sales and Marketing of the Company since its formation in August 1993. From February 1991 to August 1993 he was General Sales Manager of Kentucky Electric Steel Corporation. Mr. Harrison has over 29 years of sales experience in the steel industry. William H. Gerak, 54, has been Vice President of Administration of the Company since January 1994. From February 1988 to December 1993 he was the Director of Human Resources and Labor Relations for Heekin Can, Inc., a wholly-owned subsidiary of Ball Corporation, a producer of steel food and aerosol containers, head-quartered in Cincinnati, Ohio. Mr. Gerak has over 25 years of human resource and administrative experience. Year Ended Sept. 30, Sept. 28, Sept. 27, Sept. 26, Sept. 25, 1995 1996 1997 1998 1999 (In thousands, except share and per share data) Income Statement Data: Net sales ............ $107,402 $ 98,320 $ 94,652 $109,456 $105,389 Cost of goods sold ... 91,642 89,783 89,992 97,720 95,140 ------- ------- ------- ------- ------- Gross profit ....... 15,760 8,537 4,660 11,736 10,249 Selling and admini- strative expenses .. 7,696 7,391 6,800 7,011 7,627 ------- ------- ------- ------- ------- Operating income (loss) 8,064 1,146 (2,140) 4,725 2,622 Interest expense ..... (658) (1,453) (2,125) (2,395) (2,274) Interest income and other .............. 57 31 34 80 1,234 Gain on involuntary con- version of equipment - 369 - - - ------- ------- ------- ------- ------- Income (loss) before income taxes ...... 7,463 93 (4,231) 2,410 1,582 Income taxes ......... 2,812 35 (1,599) 916 604 ------- ------- ------- ------- ------- Net income (loss) $ 4,651 $ 58 $ (2,632) $ 1,494 $ 978 Net income (loss) per common share - basic and diluted... $ .95 $ .01 $ (.57) $ .32 $ .24 Weighted average shares outstanding-basic 4,905,456 4,806,161 4,633,315 4,624,671 4,085,480 Weighted average shares outstanding-diluted 4,909,575 4,806,485 4,633,315 4,630,920 4,089,219 Balance Sheet Data: Working capital ..... $ 10,324 $14,963 $11,335 $14,153 $15,718 Total assets ........ 72,625 78,433 78,770 80,251 82,941 Long-term debt (1) .. 7,287 20,000 20,000 20,000 20,000 Shareholders' equity 38,097 37,110 34,211 35,192 35,252 (1) Net of current portion. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of results of operations and financial condition of the Company should be read in conjunction with "Selected Financial Data" and Financial Statements and Supplementary Data included elsewhere herein. General The Company manufactures special bar quality alloy and carbon steel bar flats to precise customer specification for sale in a variety of niche markets. As a result, while the Company's business is cyclical in nature, the Company has historically generated sufficient cash flow to meet its capital expenditure and debt service requirements. Results of Operations The following table sets forth the percentages of the Company's net sales represented by certain income and expense items for the periods indicated. Year Ended September September September 27, 1997 26, 1998 25, 1999 Net sales .................... 100.0% 100.0% 100.0% Cost of goods sold ........... 95.1 89.3 90.3 ----- ----- ----- Gross profit ................. 4.9 10.7 9.7 Selling and administrative expenses ................... 7.2 6.4 7.2 ----- ----- ----- Operating income (loss) ...... (2.3) 4.3 2.5 Interest expense ............. (2.2) (2.2) (2.2) Interest income and other .... - .1 1.2 ----- ----- ----- Income (loss) before income taxes ............... (4.5) 2.2 1.5 Income taxes ................ (1.7) .8 .6 ----- ----- ----- Net income (loss) ............ (2.8%) 1.4% .9% Year Ended September 25, 1999 Compared with Year Ended September 26, 1998 Net Sales. Net sales for fiscal 1999 decreased by $4.1 million (3.7%) to $105.4 million from $109.5 million in fiscal 1998. The decrease in net sales is attributable to a 5.2% decline in average selling prices due to market price reductions, offset by an increase in tons shipped. Shipments increased by 1.5% from 240,300 tons in fiscal 1998 to 244,000 tons in fiscal 1999. Cost of Goods Sold. Cost of goods sold for fiscal 1999 decreased by $2.6 million, or 2.6% to $95.1 million from $97.7 million in fiscal 1998. As a percentage of net sales, cost of goods sold increased from 89.3% in fiscal 1998 to 90.3% in fiscal 1999. The decrease in cost of goods sold reflects a decrease in the per ton cost of tons shipped offset by the increase in tons shipped. The decrease in the per ton cost of tons shipped during fiscal 1999 as compared to fiscal 1998 resulted from lower scrap prices offset by higher conversion costs primarily due to lower production caused by equipment problems in the melt shop. Gross Profit. As a result of the above, gross profit for fiscal 1999 decreased by $1.5 million from $11.7 million in fiscal 1998 to $10.2 million in fiscal 1999. As a percentage of net sales, gross profit decreased from 10.7% in fiscal 1998 to 9.7% in fiscal 1999. Selling and Administrative Expenses. Selling and administrative expenses include salaries and benefits, corporate overhead, insurance, sales commissions and other expenses incurred in the executive, sales and marketing, shipping, human resources, and other administrative departments. Selling and administrative expenses for fiscal 1999 increased $.6 million, or 8.8% to $7.6 million from $7.0 million for fiscal 1998. As a percentage of net sales, such expenses increased from 6.4% for fiscal 1998 to 7.2% for fiscal 1999. The increase in selling and administrative expenses is due primarily to an increase in legal and professional fees and self-insured health care costs incurred during fiscal 1999. The increase in legal and professional fees is primarily due to legal and consulting fees related to the Company's electric service contract and a pending trade case with the Department of Commerce. Operating Income. For the reasons described above, operating income decreased by $2.1 million (44.5%) from $4.7 million in fiscal 1998 to $2.6 million in fiscal 1999. As a percentage of net sales, operating income decreased from 4.3% in fiscal 1998 to 2.5% in fiscal 1999. Interest Expense. Interest expense decreased by $.1 million to $2.3 million in fiscal 1999 from $2.4 million in fiscal 1998. The decrease in interest expense is due to a decrease in both the average interest rate and the average amount outstanding on the line of credit. Provision (Credit) for Income Taxes. The Company has recorded a tax provision of approximately $.6 million in fiscal 1999 as compared to a tax provision of approximately $.9 million in fiscal 1998 at an effective tax rate of 38% for both years. As of September 25, 1999 the Company has net deferred tax assets of $5.9 million, which is net of a $2.7 million valuation allowance. Included in the $8.6 million of gross deferred tax assets is $6.4 million of net operating tax loss carryforwards which expire beginning in 2011. The realization of the deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management has considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. Taking into consideration historical pre-tax income levels, the nature of certain events which adversely affected operations in fiscal 1997, the results of operations for fiscal 1998 and 1999 and other factors, management believes it is more likely than not that the net deferred tax asset, after consideration of the valuation allowance which has been established, will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in future years if estimates of future taxable income during the carryforward period are reduced. Interest Income and Other. Interest and other income increased by $1.2 million for fiscal 1999 from $.1 million in fiscal 1998. Fiscal 1999 includes other income of $1.1 million from a claim settlement pertaining to the Company's purchase of electrodes during the years 1992 through 1997. Net Income. As a result of the above, net income decreased by $.5 million from $1.5 million in fiscal 1998 to $1.0 million in fiscal 1999. As a percentage of net sales, net income decreased from 1.4% in fiscal 1998 to .9% in fiscal 1999. Year Ended September 26, 1998 Compared with Year Ended September 27, 1997 Net Sales. Net sales for fiscal 1998 increased by $14.8 million, or 15.6%, to $109.5 million from $94.7 million in fiscal 1997. The increase in sales is attributed to an increase in shipments and an increase in average selling price. Shipments increased by 10.7% from 217,000 tons in fiscal 1997 to 240,300 tons in fiscal 1998. The increase in shipments resulted from the strong demand for the Company's products during the first three quarters of fiscal 1998, and from the increase in tons available for shipment due to improvements in productivity. Also, shipments for fiscal 1997 were negatively impacted by the effect on production of the melt shop operations being shut down for twelve days in order to decontaminate the baghouse facility, after the detection of a radioactive substance in the baghouse dust. The increase in average selling price is attributed to the price increases implemented on many products during the first half of fiscal 1998. Cost of Goods Sold. Cost of goods sold for fiscal 1998 increased $7.7 million, or 8.6%, to $97.7 million from $90.0 million in fiscal 1997. As a percentage of net sales, cost of goods sold decreased from 95.1% in fiscal 1997 to 89.3% in fiscal 1998. The increase in cost of goods sold reflects the increase in shipments offset by a decrease in the per ton cost of tons shipped. The decrease in the per ton cost of tons shipped during fiscal 1998 as compared to fiscal 1997 resulted from lower conversion costs due to improvements in productivity, offset partially by an increase in scrap costs. The cost of goods sold for fiscal 1997 includes a $2.3 million reimbursement from business interruption insurance related to the decontamination of the baghouse. Gross Profit. As a result of the above, gross profit for fiscal 1998 increased by $7.0 million from $4.7 million in fiscal 1997 to $11.7 million in fiscal 1998. As a percentage of net sales, gross profit increased from 4.9% in fiscal 1997 to 10.7% in fiscal 1998. Selling and Administrative Expenses. Selling and administrative expenses include salaries and benefits, corporate overhead, insurance, sales commissions and other expenses incurred in the executive, sales and marketing, shipping, human resources, and other administrative departments. Selling and administrative expenses for fiscal 1998 increased $.2 million, or 3.1%, to $7.0 million from $6.8 million for fiscal 1997. As a percentage of net sales, such expenses decreased from 7.2% for fiscal 1997 to 6.4% for fiscal 1998. The decrease as a percentage of sales is primarily the result of an increase in net sales (as discussed above) for fiscal 1998. Operating Income. Fiscal year 1998 reflected operating income of $4.7 million as compared to an operating loss of $2.1 million for fiscal 1997. As a percentage of net sales, operating income increased from (2.3%)in fiscal 1997 to 4.3% for fiscal 1998. Interest Expense. Interest expense increased by $.3 million to $2.4 million in fiscal 1998 from $2.1 million in fiscal 1997, net of interest capitalized of $11,000 for fiscal 1997. The increase is the result of additional borrowings on the Company's line of credit. Provision (Credit) for Income Taxes. The Company has recorded a tax provision of approximately $.9 million in fiscal 1998 as compared to a benefit of $1.6 million in fiscal 1997 at an effective tax rate of 38% for both years. As of September 26, 1998 the Company has net deferred tax assets of $6.6 million, which is net of a $2.7 million valuation allowance. Included in the $9.3 million of gross deferred tax assets is $5.4 million of net operating tax loss carryforwards which expire beginning in 2011. The realization of the deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management has considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. Taking into consideration historical pre-tax income levels, the nature of certain events which adversely affected operations in fiscal 1996 and 1997, the results of operations for fiscal 1998 and other factors, management believes it is more likely than not that the net deferred tax asset, after consideration of the valuation allowance which has been established, will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced, in the future, if estimates of future taxable income during the carryforward period are reduced. Net Income. As a result of the above, fiscal 1998 reflected net income of $1.5 million as compared to a net loss of $2.6 million in fiscal 1997. As a percentage of net sales, net income increased from (2.8%) in fiscal 1997 to 1.4% in fiscal 1998. Liquidity and Capital Resources Cash flows from operating activities amounted to $2.5 million, $2.3 million, and $1.3 million in fiscal 1997, 1998 and 1999, respectively. Fiscal 1997 operating cash flows reflect the net loss of $2.6 million and the increase in the net deferred tax asset of $.7 million, which has been partially offset by depreciation of $3.7 million, decrease in accounts receivable of $.5 million and inventories of $.8 million, and an increase in accounts payable of $.8 million. The additional depreciation is related to the start-up of the ladle metallurgy facility. The decrease in inventories is primarily related to a reduction in scrap inventory. Fiscal 1998 operating cash flows reflect net income of $1.5 million, depreciation and amortization of $3.7 million, and the decrease in the net deferred tax asset of $1.0 million. Operating cash flows were negatively impacted by a $3.8 million increase in inventories. The increase in inventories is primarily attributed to an increase in finished goods inventory offset somewhat by a decrease in scrap inventory. The increase in finished goods inventory is due to lower than anticipated fourth quarter shipments in fiscal 1998 and lower than normal inventories in fiscal 1997 due to production problems. Fiscal 1999 operating cash flows reflect net income of $1.0 million, depreciation and amortization of $3.6 million and the decrease in the net deferred tax asset of $.7 million. Operating cash flows were negatively impacted by increases in accounts receivable and inventories of $2.1 million and $2.4 million, respectively. Also, operating cash flows were positively impacted by an increase of $1.7 million in trade accounts payable. The increase in inventories and accounts payable is primarily due to an increase in scrap and billet inventory. The increase in accounts receivable reflects the higher sales level in the latter part of fiscal 1999. Cash flows used by investing activities consist of capital expenditures, net of changes in capital expenditures payables, of $5.1 million, $2.5 million, and $3.4 million in fiscal 1997, 1998 and 1999, respectively. The increase in capital expenditures in fiscal 1999 is primarily due to the payment of retainage on projects completed during the year. Cash flows provided from financing activities amounted to $2.6 million, $.2 million, and $2.2 million in fiscal 1997, 1998, and 1999, respectively. The $2.6 million in fiscal 1997 reflects $3.1 million in advances on the Company's line of credit facility offset by $.5 million used for the purchases of treasury stock. The $.2 million in fiscal 1998 reflects $.8 million in advances on the Company's line of credit facility offset by $.6 used for the purchase of treasury stock. The $2.2 million in fiscal 1999 reflects $3.1 million in advances on the Company's line of credit facility offset by $1.0 million used to purchase treasury stock. Working capital at September 25, 1999, was $15.7 million as compared to $14.2 million at September 26, 1998. The current ratio was 1.6 to 1.0 at September 25, 1999 as compared to 1.6 to 1.0 at September 26, 1998. The increase in working capital is primarily attributed to cash flow generated by operations combined with the Company's return to a more routine maintenance capital expenditure level. The Company completed its 500,000 share buyback program during fiscal 1998 and the Board of Directors authorized the repurchase of an additional 500,000 shares of the Company's common stock. During the fiscal year ended September 25 1999, the Company repurchased 405,585 shares of its common stock. The Company's primary ongoing cash requirements are for current capital expenditures. In addition, principal payments on the unsecured senior notes commence on November 1, 2000 and are due in equal annual installments over six years. The two sources for the Company's liquidity are internally generated funds and its bank credit facility. The Company has a $24.5 million unsecured bank credit facility which expires January 31, 2002. Borrowings are limited to defined percentages of eligible inventory and accounts receivable. As of September 25, 1999, the Company had $14.5 million outstanding and $6.0 million available under its line of credit. The Company believes that the bank credit facility and internally generated funds will be sufficient to fund its ongoing cash needs. Year 2000 Compliance The following Year 2000 discussion is provided in response to the Securities and Exchange Commission's recent interpretative statement expressing its view that public companies should include detailed discussion of Year 2000 issues in their MD&A. The Company has completed an organized program assessing the issues confronting it related to the "Year 2000 problem", which is the result of the inability of many computer systems and electronic equipment to distinguish the Year 2000 from the year 1900. The program was designed to assure the Company's information technology systems and related infrastructure will be Year 2000 compliant. The Company divided its Year 2000 issues into three areas including: computer hardware and software business systems, manufacturing processing control devices and related systems, and facility support systems. The Company's Year 2000 program included three phases: (1) an audit and assessment phase designed to identify Year 2000 issues; (2) a modification phase designed to correct Year 2000 issues (this phase included testing of individual modifications as they were installed); and (3) a testing phase to test entire systems for Year 2000 compliance after individual modifications were installed and tested. All phases of the Company's Year 2000 program are substantially complete. The estimated cost for correction of Year 2000 issues, including any software and hardware changes and the cost of personnel involved in working on the project, is approximately $260,000, substantially all of which has been incurred to date. The Year 2000 updates were funded out of funds generated from operations and account for less than 30% of the Company's information technology budget. The Company's Year 2000 program also included investigation of the Year 2000 readiness status of our major vendors and customers. The Company used letters, questionnaires and protocols to determine its vendors' and customers' 2000 readiness. The Company has contacted all major vendors including energy and scrap suppliers and external service providers including banks, insurance companies and phone service providers to determine their Year 2000 compliance status. The Company has also contacted significant customers to determine their progress towards Year 2000 compliance and to identify issues, if any, which might develop if a customer is unable to become year 2000 compliant on a timely basis. Based upon the responses received, all of our major vendors and customers indicated they are addressing the Year 2000 issues on a timely basis. The Company has developed a Year 2000 contingency plan in the event we experience Year 2000 related problems. The plan includes, among other actions, reverting to manual systems and controls and setting internal clocks to earlier dates. The Company believes that with the modifications made to its computer systems and electronic equipment, the Year 2000 issue will not result in significant operational problems. However, because of the uncertainties associated with addressing the Year 2000 problem for both internal and external systems critical to the Company's operations, there is a risk of a material adverse effect on the Company's operations. While the Company is not aware of any significant exposure, there can be no assurance that the Year 2000 issue will not have a material impact on the Company's business and operations. Impact of Inflation and Changing Prices While the Company has not experienced any material long-term adverse effects on operations in recent years because of inflation, margins have been affected by inflationary conditions. The Company's primary cost components are steel scrap, labor, and energy, all of which are susceptible to domestic inflationary pressures. Scrap costs are frequently influenced by supply and demand factors as well as general economic conditions. Finished product prices are influenced by nationwide economic trends and manufacturing capacity within the steel industry. While the Company has generally been successful in passing on cost increases through price increases, the effect of steel imports, market price competition and under-utilized industry capacity has in the past, and could in the future, limit the Company's ability to increase prices. See "Business - Employees," "Competition and Other Market Factors," "Raw Materials" and "Manufacturing Operation." Forward Looking Statements The matters discussed or incorporated by reference in this Report on Form 10-K that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. These risks and uncertainties include, but are not limited to: the reliance on truck and utility vehicle industry; excess industry capacity; product demand and industry pricing; volatility of raw material costs, especially steel scrap; intense foreign and domestic competition; management's estimates of niche market data; the cyclical and capital intensive nature of the industry; and cost of compliance with environmental regulations. These risks and uncertainties could cause actual results of the Company to differ materially from those projected or implied by such forward-looking statements. Without limiting the foregoing, various statements in the previous discussion of Year 2000 are likewise forward-looking statements. These statements include statements of the Company's expectations, statements with regard to schedules and expected completion dates and statements regarding expected Year 2000 compliance. These forward-looking statements are subject to various risk factors which may materially affect the Company's efforts to achieve Year 2000 compliance. These risk factors include, but are not limited to: the inability of the Company to complete the plans and modifications that it has identified; the failure of software vendors to deliver the upgrades and repairs to which they have committed; the wide variety of information technology systems and components, both hardware and software, that must be evaluated; and the large number of vendors and customers with which the Company interacts. The Company's assessments of the effects of Year 2000 on the Company are based, in part, upon information received from third parties and the Company's reasonable reliance on that information. Therefore, the risk that inaccurate information is supplied by third parties upon which the Company reasonably relied must be considered as a risk factor that might affect the Company's Year 2000 efforts. The Company is attempting to reduce the risks by utilizing an organized approach, extensive testing, and allowance of ample contingency time to address issues identified by tests. Impact of Recent Accounting Pronouncements See Note 2 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements of the Company. Item 7A. Qualitative and Quantitative Disclosure about Market Risk Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. Item 8. Financial Statements and Supplementary Data The financial statements and schedules referenced in Item 14(a)(1) and (a)(2) hereof are included herein and are filed as part of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The specified information required by this item is incorporated by reference to the information under the heading "Proposal I: Election of Directors" in the Proxy Statement as filed with the Commission or is included under the heading "Executive Officers of the Registrant" in Part I of this 10-K filing. The disclosure required by Item 405 of Regulation S-K is incorporated by reference to the information under the heading "Compliance with Section 16(a)" of the Proxy Statement. Item 11. Executive Compensation The specified information required by this item is incorporated by reference to the information under the heading "Executive Compensation" in the Proxy Statement as filed with the Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management The specified information required by this item is incorporated by reference to the information in the table under the heading "Voting Securities and Principal Holders Thereof" in the Proxy Statement as filed with the Commission. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. See Index to Financial Statements and Schedule (a)2. See Index to Financial Statements and Schedule (a)3. Exhibits 3.1 Certificate of Incorporation of Kentucky Electric Steel, Inc., filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 3.2 By-Laws of Kentucky Electric Steel, Inc., filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein. 4.1 Senior Note Agreement between Registrant and a group of institutional investors. Filed as Exhibit 4.1 to Registrant's Form 10-K for the fiscal year ended September 30, 1995, File No. 0-22416, and incorporated by reference herein. 4.2 Amended and Restated Loan Agreement between Registrant and National City Bank, Kentucky, dated November 1, 1995. Filed as Exhibit 4.2 to Registrant's Form 10-K for the fiscal year ended September 30, 1995, File No. 0-22416, and incorporated by reference herein. 4.3 Amended and Restated Export Financing Agreement between Registrant and National City Bank, Kentucky, dated November 1, 1995. Filed as Exhibit 4.3 to Registrant's Form 10-K for the fiscal year ended September 30, 1995, File No. 0-22416, and incorporated by reference herein. 4.4 First Amendment Agreement to Senior Note Agreement between Registrant and a group of institutional investors. Filed as Exhibit 4.4 to Registrant's Form 10-Q, No. 0-22416, filed on February 11, 1997, and incorporated by reference herein. 4.5 Amendment No. 1 to Amended and Restated Loan Agreement between Registrant and National City Bank, Kentucky. Filed as Exhibit 4.5 to Registrant's Form 10-Q No. 0- 22416, filed on February 11, 1997, and incorporated by reference herein. 4.6 Amendment No. 2 to Amended and Restated Loan Agreement between Registrant and National City Bank, Kentucky. Filed as Exhibit 4.6 to Registrant's Form 10-Q, No. 0- 22416, filed on February 9, 1998, and incorporated by reference herein. 4.7 Amendment No. 1 to Amended and Restated Export Financing Agreement between Registrant and National City Bank, Kentucky. Filed as Exhibit 4.7 to Registrant's Form 10-Q, No. 0-22416, filed on February 9, 1998, and incorporated by reference herein. 10.1 Transfer Agreement between NS Group, Inc., Kentucky Electric Steel Corporation, and Registrant, filed as Exhibit 10.2 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.2 Tax Agreement between NS Group, Inc., Kentucky Electric Steel Corporation and Registrant, filed as Exhibit 10.3 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.3 Form of Indemnification Agreement between Registrant and Its Executive Officers and Directors, filed as Exhibit 10.4 to Amend- ment No. 1 to Registrant's Registration Statement on Form S-1 (No. 33-67140), and incorporated by reference herein.* 10.4 Registration Rights Agreement between Registrant and NS Group, Inc., filed as Exhibit 10.7 to Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 0-22416, and incorporated by reference herein. 10.5 Kentucky Electric Steel, Inc. 1993 Employee Stock Option/ Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-77598), filed on April 12, 1994, and incorporated by reference herein.* 10.6 Kentucky Electric Steel, Inc. 1993 Transition Stock Option Plan, filed on Registrant's Form S-8 (No. 33-77598), filed on April 12, 1994, and incorporated by reference herein. 10.7 Contract with Morgan-Pomini Company for Rolling and Finishing End Modernization filed as Exhibit 10.8 to Registrant's Form 10-Q, No. 0-22416, filed on May 4, 1994, and incorporated by reference herein. 10.8 The Kentucky Electric Steel, Inc. Salary Continuation Plan, effective June 7, 1994, as amended, for the benefit of the Company's eligible salaried employees, filed as Exhibit 10.8 to Registrant's Form 10-Q, File No. 0-22416, filed on August 6, 1999, and incorporated by reference herein.* 10.9 The Kentucky Electric Steel, Inc. Executive Severance Plan, effective June 7, 1994, as amended, for the benefit of the Company's eligible Executive Officers, filed as Exhibit 10.9 to Registrant's Form 10-Q, File No. 0-22416, filed on August 6, 1999, and incorporated by reference herein.* 10.10 Employment agreements dated June 7, 1994, as amended, between Kentucky Electric Steel, Inc. and its four Executive Officers, filed as Exhibit 10.10 to Registrant's Form 10-Q, file No. 0-22416, filed on August 6, 1999 and incorporated by reference herein.* 10.11 Form of Salary Continuation Agreements entered into between Kentucky Electric Steel, Inc. and its four Executive Officers, filed herewith.* 10.12 The Kentucky Electric Steel, Inc. Key Employee Stock/Loan Plan, effective February 2, 1995 for the benefit of the Company's Executive Officers, filed as Exhibit 10.14 to Registrant's Form 10-Q, No. 0-22416, filed on February 9, 1995, and incorporated by reference herein.* 10.13 Contract with EMC International, Inc. for Ladle Metallurgy Facility, filed as Exhibit 10.15 to Registrant's Form 10- Q, No. 0-22416, filed on May 16, 1995, and incorporated by reference herein. 10.14 Kentucky Electric Steel, Inc. 1994 Employee Stock Option/ Restricted Stock Plan, filed on Registrant's Form S-8 (No. 33-301218), filed on February 12, 1996, and incorporated by reference herein.* 10.15 Rights Agreement between Kentucky Electric Steel, Inc. and EquiServe Trust Company, N.A., dated as of September 1, 1999, filed as Exhibit 4.8 to Registrant's Form 8-K, File No. 0-22416, filed on September 14, 1999 and incorporated by reference herein. 10.16 First Addendum to Agreement with Morgan-Pomini Company for Rolling and Finishing Fund Modernization, filed as Exhibit 10.15 to Registrant's Form 10-Q, No. 0-22416, filed on February 11, 1997, and incorporated by reference herein. 10.17 Remediation and Waste Disposal Agreement - Zhagrus Environmental, Inc., filed as Exhibit 10.16 to Registrant's Form 10-Q, No. 0-22416 filed on May 12, 1997 and incorporated by reference herein. 10.18 The Kentucky Electric Steel, Inc. 1999 Share Plan for Non- Employee Directors, filed as Exhibit 10.18 to Registrant's Form 10-Q, No. 0-22416 filed on August 6, 1999 and incorporated by reference herein.* 10.19 Form of Promissory Note dated October 6, 1999, between Kentucky Electric Steel, Inc. and its four executive officers, filed herewith.* 10.20 Form of Loan Forgiveness Agreement dated October 6, 1999, between Kentucky Electric Steel, Inc. and its four executive officers, filed herewith.* 10.21 Trust Under Certain Kentucky Electric Steel Salary Continuation Agreements dated October 14, 1999, filed herewith.* 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 25, 1999. * Indicates management contracts or compensatory plans or arrangements in which one or more Directors or Executive Officers of the Company participate or is a party. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KENTUCKY ELECTRIC STEEL, INC. December 10, 1999 By: \s\Charles C. Hanebuth Charles C. Hanebuth President, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date \s\Charles C. Hanebuth President, Chief Executive Officer December 10, 1999 Charles C. Hanebuth and Chairman \s\William J. Jessie Vice President, Secretary, December 10, 1999 William J. Jessie Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) \s\Clifford R. Borland Director December 10, 1999 Clifford R. Borland \s\Carl E. Edwards, Jr. Director December 10, 1999 Carl E. Edwards, Jr. \s\J. Marvin Quin, II Director December 10, 1999 J. Marvin Quin, II \s\David C. Struve Director December 10, 1999 David C. Struve
KENTUCKY ELECTRIC STEEL, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements Page(s) Report of Independent Public Accountants .............. F-1 Consolidated Balance Sheets - September 26, 1998 and September 25, 1999 .................................... F-2 Consolidated Statements of Operations - Years ended September 27, 1997, September 26, 1998 and September 25, 1999 ................................ F-3 Consolidated Statements of Changes in Shareholders' Equity - Years ended September 27, 1997, September 26, 1998, and September 25, 1999 .......................... F-4 Consolidated Statements of Cash Flows - Years ended September 27, 1997, September 26, 1998 and September 25, 1999 ................................ F-5 Notes to Consolidated Financial Statements ............ F-6 Financial Statement Schedule Report of Independent Public Accountants .............. S-1 Schedule II Valuation and Qualifying Accounts ........ S-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Electric Steel, Inc.: We have audited the accompanying consolidated balance sheets of Kentucky Electric Steel, Inc. (a Delaware corporation) and subsidiary as of September 26, 1998 and September 25, 1999, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 25, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky Electric Steel, Inc. and subsidiary as of September 26, 1998 and September 25, 1999 and the results of their operations and their cash flows for each of the three years in the period ending September 25, 1999 in conformity with generally accepted accounting principles. Arthur Andersen LLP Cincinnati, Ohio, October 27, 1999 KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September September 26, 1998 25, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 150 $ 184 Accounts receivable, less allowance for doubtful accounts of $460 in 1998 and $430 in 1999 12,037 14,180 Inventories 20,363 22,751 Operating supplies and other current assets 5,206 5,294 Refundable income taxes - 315 Deferred tax assets 648 683 ------- ------- Total current assets 38,404 43,407 ------- ------- PROPERTY, PLANT AND EQUIPMENT Land and buildings 4,532 4,621 Machinery and equipment 42,004 45,324 Construction in progress 3,031 2,470 Less - accumulated depreciation (14,772) (18,307) ------- ------- Net property, plant and equipment 34,795 34,108 ------- ------- DEFERRED TAX ASSETS 5,990 5,253 ------- ------- OTHER ASSETS 1,062 173 ------- ------- Total assets $ 80,251 $ 82,941 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Advances on line of credit $ 11,397 $ 14,510 Accounts payable 7,056 8,731 Capital expenditures payable 857 335 Accrued liabilities 3,834 3,988 Environmental liabilities 982 - Current portion of long-term debt 125 125 ------- ------- Total current liabilities 24,251 27,689 ------- ------- LONG-TERM DEBT 20,000 20,000 ------- ------- OTHER LIABILITIES 808 - ------- ------- Total liabilities 45,059 47,689 ------- ------- SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued - - Common stock, $.01 par value, 15,000,000 shares authorized 4,985,937 and 5,003,874 shares issued, respectively 50 50 Additional paid-in capital 15,671 15,728 Less treasury stock - 526,996 and 932,581 shares at cost, respectively (3,254) (4,272) Deferred compensation (73) (30) Retained earnings 22,798 23,776 ------- ------- Total shareholders' equity 35,192 35,252 ------- ------- Total liabilities and shareholders' equity $ 80,251 $ 82,941 See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Share and Per Share Data)
Year Ended September September September 27, 1997 26, 1998 25, 1999 NET SALES $ 94,652 $109,456 $105,389 COST OF GOODS SOLD 89,992 97,720 95,140 ------- ------- ------- Gross profit 4,660 11,736 10,249 SELLING AND ADMINISTRATIVE EXPENSES 6,800 7,011 7,627 ------- ------- ------- Operating income (loss) (2,140) 4,725 2,622 INTEREST EXPENSE (2,125) (2,395) (2,274) INTEREST INCOME AND OTHER 34 80 1,234 ------- ------- ------- Income (loss) before income taxes (4,231) 2,410 1,582 PROVISION (CREDIT) FOR INCOME TAXES (1,599) 916 604 ------- ------- ------- Net income (loss) $ (2,632) $ 1,494 $ 978 NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (.57) $ .32 $ .24 WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,633,315 4,624,671 4,085,480 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 4,633,315 4,630,920 4,089,219 See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Years in the Period Ended September 25, 1999
(Dollars in Thousands) Addi- De- tional ferred Common Stock Paid-In Treasury Stock Compen- Retained Shares Amount Capital Shares Amount sation Earnings Total BALANCE, Sept. 28, 1996 4,974,099 $50 $15,710 (273,000) $(2,165) $(421) $23,936 $37,110 Tax effect of restricted stock recognized differ- ently for financial reporting and tax purposes - - (66) - - - - (66) Amortization of deferred comp- ensation - - - - - 251 - 251 Issuance of stock 3,889 - 21 - - - - 21 Purchases of treasury stock - - - (77,976) (473) - - (473) Net loss - - - - - - (2,632) (2,632) --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 27, 1997 4,977,988 50 15,665 (350,976) (2,638) (170) 21,304 34,211 Tax effect of restricted stock recognized differ- ently for financial reporting and tax purposes - - (42) - - - - (42) Amortization of deferred comp- ensation - - - - - 97 - 97 Issuance of stock 7,949 - 48 - - - - 48 Purchases of treasury stock - - - (176,020) (616) - - (616) Net income - - - - - - 1,494 1,494 --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 26, 1998 4,985,937 $50 $15,671 (526,996) $(3,254) $(73) $22,798 $35,192 Amortization of deferred comp- ensation - - - - - 43 - 43 Issuance of Stock 17,937 - 57 - - - - 57 Purchases of treasury stock - - - (405,585) (1,018) - - (1,018) Net income - - - - - - 978 978 --------- -- ------ ------- ----- --- ------ ------ BALANCE, Sept. 25, 1999 5,003,874 $50 $15,728 (932,581) $(4,272) $(30) $23,776 $35,252 See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Year Ended September September September 27, 1997 26, 1998 25, 1999 Cash Flows From Operating Activities: Net income (loss) $(2,632) $ 1,494 $ 978 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 3,737 3,683 3,636 Change in deferred taxes (896) 1,169 737 Change in other (158) (154) 23 Changes in current assets and current liabilities: Accounts receivable 536 (460) (2,143) Insurance claim receivable (900) 900 - Inventories 829 (3,825) (2,388) Operating supplies and other current assets 265 (404) (88) Refundable income taxes (360) 900 (315) Deferred tax assets 223 (191) (35) Accounts payable 763 (921) 1,675 Accrued liabilities 61 134 154 Environmental liabilities 982 - (982) ------ ------ ------ Net cash flows from operating activities 2,450 2,325 1,252 ------ ------ ------ Cash Flows From Investing Activities: Capital expenditures (3,226) (2,806) (2,848) Change in capital expenditures payable (1,858) 310 (522) ------ ------ ------ Net cash flows from investing activities (5,084) (2,496) (3,370) ------ ------ ------ Cash Flows From Financing Activities: Net advances on line of credit 3,089 762 3,113 Issuance of common stock 21 48 57 Purchases of treasury stock (473) (616) (1,018) ------ ------ ------ Net cash flows from financing activities 2,637 194 2,152 ------ ------ ------ Net increase in cash and cash equivalents 3 23 34 Cash and Cash Equivalents - Beginning of Period 124 127 150 ------ ------ ------ Cash and Cash Equivalents - End of Period $ 127 $ 150 $ 184 Interest Paid, net of amount capitalized $ 2,142 $ 2,371 $ 2,263 Income Taxes Paid $ - $ 200 $ 216 See notes to consolidated financial statements
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of Operations Kentucky Electric Steel, Inc. (KESI or the Company) owns and operates a steel mini-mill near Ashland, Kentucky. The Company manufactures special bar quality alloy and carbon steel bar flats to precise customer specifications for sale in a variety of niche markets. KESI was capitalized in an initial public offering of its common stock on October 6, 1993. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Kentucky Electric Steel, Inc. and its wholly-owned subsidiary, KESI Finance Company, which was formed in October 1996 to finance the ladle metallurgy facility. All significant intercompany accounts and transactions have been eliminated. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash includes currency on-hand and deposits with financial institutions. Cash equivalents consist of investments with original maturities of three months or less. Amounts are stated at cost, which approximates market value. Inventories Inventory costs include material, labor and manufacturing overhead. Inventories are valued at the lower of average cost or market. Property, Plant and Equipment and Depreciation Property, plant and equipment is recorded at cost, less accumulated depreciation. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally 3 to 12 years for machinery and equipment and 15 to 30 years for buildings and improvements. Depreciation for income tax purposes is computed using accelerated methods. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals, which extend the useful life of any asset, are capitalized. The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company capitalizes interest costs as part of the historical cost of acquiring major capital assets. Interest cost of $11,000 was capitalized for the year ended September 27, 1997. No interest was capitalized for the years ended September 26, 1998 and September 25, 1999, respectively. Income Taxes The Company accounts for income taxes pursuant to the asset and liability method. Deferred tax assets and liabilities are recognized based upon the estimated increase or decrease in taxes payable or refundable in future years expected to result from reversal of temporary differences and utilization of carryforwards which exist at the end of the current year. Temporary differences represent the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates scheduled to apply to taxable income in the years in which the temporary differences are expected to be settled, and are adjusted in the period of enactment for the effect of a change in tax law or rates. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No 130), "Reporting Comprehensive Income", which established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements. The Company adopted SFAS No. 130 in the quarter ended December 26, 1998. For the periods presented herein, comprehensive income is equal to net income reported. In June 1997, the Financial Accounting Standards Board issued Statement No. 131 (SFAS No. 131) "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has determined it has no reportable segments as defined under SFAS No. 131. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not currently have any derivative financial instruments; therefore, SFAS No. 133 does not currently apply. The Company is required to adopt SFAS No. 133 effective as of the beginning of the first quarter of fiscal 2001. Fiscal Year End The Company's fiscal year ends on the last Saturday of September. (3) Inventories Inventories at September 26, 1998 and September 25, 1999 consist of the following ($000's): 1998 1999 Raw materials $ 1,984 $ 2,824 Semi-finished and finished goods 18,379 19,927 Total inventories $20,363 $22,751 (4) Environmental Liabilities The Company's melt shop operations were shut down for twelve days during the third quarter of fiscal 1997 in order to decontaminate its baghouse facilities after detection of a radioactive substance in the baghouse dust, a by-product of the melting process. The $1.0 million in environmental liabilities recorded as a current liability on the balance sheet at September 26, 1998 represents final payment due an environmental services company for treatment and disposal of the contaminated baghouse dust. Payment for the disposal occurred during fiscal 1999. (5) Accrued Liabilities Accrued liabilities at September 26, 1998 and September 25, 1999 consist of the following ($000's): 1998 1999 Accrued payroll and related liabilities $ 1,431 $ 1,498 Accrued insurance and workers' compensation 820 945 Accrued interest payable 702 714 Other 881 831 $ 3,834 $ 3,988 (6) Long-Term Debt Long-term debt of the Company at September 26, 1998 and September 25, 1999 consists of the following ($000's): 1998 1999 Unsecured senior notes, due in equal annual installments from November 2000 through 2005, interest at 7.66% $ 20,000 $20,000 Other 125 125 20,125 20,125 Less - Current portion (125) (125) $ 20,000 $20,000 Principal payments on the unsecured senior notes commence on November 1, 2000 and are due in equal annual installments over six years. These notes bear interest at a fixed rate of 7.66% per annum, with interest paid semi-annually. The Company has a $24.5 million unsecured bank credit facility which expires January 31, 2002. Borrowings are limited to defined percentages of eligible inventory and accounts receivable. Interest on borrowings accrue at the rate of LIBOR plus 1.35% or the prime rate minus 1/2%. The notes and bank credit facility contain restrictive covenants, which include, among other restrictions, a maximum ratio of total funded debt to total capitalization, a minimum fixed charge coverage ratio, a minimum net worth requirement and restrictions on the payment of dividends. As of September 25, 1999, approximately $14.5 million was outstanding under the bank credit facility, approximately $.9 million was utilized to collateralize various letters of credit and $6.0 million was available for additional borrowings. The weighted average interest rate on short-term borrowings as of September 26, 1998 and September 25, 1999 were 7.3% and 7.1%, respectively. The estimated fair value of the Company's unsecured senior notes is estimated using discounted cash flow analysis, based upon the estimated market rate as of September 25, 1999. The fair value of the unsecured senior notes was approximately $19.7 million as of September 25, 1999 and as of September 26, 1998. (7) Significant Customers and Foreign Sales The Company grants trade credit to customers within the markets it serves. Sales to the leaf-springs suspension market represented 18.6%, 14.2%, and 12.5% of total sales for fiscal 1997, 1998 and 1999, respectively. One company, through several wholly-owned subsidiaries, which are customers of the Company, represented 8.7%, 10.4%, and 13.5% of net sales in fiscal 1997, 1998, and 1999, respectively. Another customer, through two wholly-owned subsidiaries, which are customers of the Company, accounted for 14.0%, 10.4%, and 11.0% of net sales in fiscal 1997, 1998, and 1999, respectively. No other customer accounted for more than 10% of net sales. The Company's foreign sales represented 8.5%, 7.5%, and 8.6% of total sales for 1997, 1998 and 1999, respectively. (8) Income Taxes The provision (credit) for income taxes consists of the following ($000's): 1997 1998 1999 Current: Federal $ (900) $ 200 $ (98) State - - - (900) 200 (98) Deferred: Federal (498) 596 626 State (201) 120 76 (699) 716 702 Total provision (credit) for income taxes $(1,599) $ 916 $ 604 The provision (credit) for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons ($000's): 1997 1998 1999 Income tax provision (credit) at statutory tax rate of 34% $(1,438) $ 819 $ 538 State income taxes, net of federal effect (103) 64 50 Other, net (58) 33 16 $(1,599) $ 916 $ 604 The components of the net deferred tax asset at September 26, 1998 and September 25, 1999 are as follows ($000's): Sept. 26, Sept. 25, 1998 1999 Deferred tax components: Property, plant and equipment $ (307) $(1,398) Intangibles 2,526 2,314 AMT credit carryforwards 1,177 1,038 NOL carryforward 5,429 6,405 Other 494 258 9,319 8,617 Valuation allowance (2,681) (2,681) Net deferred tax assets $ 6,638 $ 5,936 For Federal income tax purposes the Company has alternative minimum tax credit carryforwards of approximately $1.0 million, which are not limited by expiration dates. The Company also has gross operating tax loss carryforwards of approximately $18.8 million, which expire beginning in 2011. The Company has recorded deferred tax assets related to these carryforwards. The realization of deferred tax assets is dependent in part upon generation of sufficient future taxable income. Management has considered the levels of currently anticipated pre-tax income in assessing the required level of the deferred tax asset valuation allowance. Taking into consideration historical pre-tax income levels, the nature of certain events which adversely affected operations in fiscal 1997, the results of operations for fiscal 1998 and 1999, and other factors, management believes it is more likely than not that the net deferred tax asset, after consideration of the valuation allowance which has been established, will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. (9) Profit Sharing Plans The Company has established profit sharing plans for its bargaining unit (hourly) and salaried employees. Generally, the plans require mandatory contributions of five percent of pretax profits (with a guaranteed minimum based on hours worked) for the hourly employees, and an additional discretionary contribution set by the Board of Directors for salaried employees. Expense for contributions was approximately $219,000, $226,000 and $219,000 in fiscal 1997, 1998 and 1999, respectively. (10) Earnings Per Share Statement of Financial Accounting Standards No. 128 (SFAS No. 128) related to earnings per share requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The Company adopted SFAS No. 128 during fiscal 1998. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. For the Year Ended For the Year Ended September 27, 1997 September 26, 1998 Per Per Share Share (Loss) Shares Amount Income Shares Amount Amounts for Basic Earnings (Loss) Per Share $(2,632) 4,633,315 $(.57) $1,494 4,624,671 $.32 Effect of Dilutive Securities Options -__ - - - 6,249 - Amounts for Diluted Earnings (Loss) Per Share $(2,632) 4,633,315 $(.57) $1,494 4,630,920 $.32 For the Year Ended September 25, 1999 Per Share Income Shares Amount Amounts for Basic Earnings Per Share $ 978 4,085,480 $.24 Effect of Dilutive Securities Options - 3,739 - Amounts for Diluted Earnings Per Share $ 978 4,089,219 $.24 The following options were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the applicable period: 1997 1998 1999 Transition stock options 158,702 92,335 56,061 Employee stock options 405,168 301,976 378,668 563,870 394,311 434,729 See Note 11 for further information regarding options outstanding. (11) Stock Option/Restricted Stock Plan The Company has Employee Stock Option/Restricted Stock Plans which provide shares of common stock for awards to eligible employees in the form of stock options and restricted stock. Awards under the Plans may be made to any officer or other key employees of the Company. The options become exercisable on a pro rata basis over a period of four years beginning one year after the grant date, except for options issued in conjunction with the initial public offering, which became exercisable over a three-year period, which began on approval by the stockholders of the 1993 Employee Stock Option/Restricted Stock Plan in February 1994. All unexercised options expire ten years after the date of grant. Option and restricted stock prices range from $3.03 to $12.31 per share. The plans also provide for the issuance of restricted stock. The restricted shares vest three years after the grant date. During 1994 in connection with the initial public offering, 18,000 restricted shares were granted and issued, and vested on a pro rata basis over a period of four years beginning one year after the grant date. Compensation expense of $208,000, $53,000 and $0 was recognized in fiscal 1997, 1998 and 1999, respectively, as a result of amortization of restricted stock grants over the vesting periods. The unamortized portion of the restricted stock is reflected in deferred compensation and was $53,000 as of September 27, 1997. The restricted stock was fully amortized as of September 26, 1998. A summary of transactions in the above plans for fiscal 1998 and 1999 are as follows: 1998 1999 Weighted- Weighted- Average Average Stock Exercise Stock Exercise Options Price Options Price Options outstanding, beginning of year 405,168 $ 9.12 386,668 $ 9.15 Options granted - - 91,192 3.03 Options forfeited (18,500) 8.46 (8,000) 8.66 Options outstanding, end of year 386,668 $ 9.15 469,860 $ 7.97 Options exercisable, end of year 263,877 $10.24 318,022 $ 9.72 Restricted shares granted - - Options and restricted shares available for grant 29,233 191,041 The 1993 Transition Stock Option Plan (the "Transition Plan") was approved by the shareholders in 1994. The Transition Plan was designed to substitute KESI stock options for previously issued NS Group stock options. KESI incentive stock options for 186,539 shares of Common Stock were issued in 1994, with exercise prices varying from $8.76 per share to $20.86 per share. A summary of transactions in the plan for fiscal 1998 and 1999 are as follows: 1998 1999 Weighted- Weighted- Average Average Stock Exercise Stock Exercise Options Price Options Price Options outstanding, beginning of year 158,702 $14.06 92,335 $10.84 Options granted - - - - Options forfeited (24,892) 14.69 (6,340) 11.01 Options expired (41,475) 20.86 (29,934) 14.40 Options outstanding, end of year 92,335 $10.84 56,061 $ 8.93 Options exercisable, end of year 92,335 $10.84 56,061 $ 8.93 The Company accounts for its stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25 and related interpretations. Under this method, no compensation cost has been recognized for the Company's Employee Stock Option Plan for fiscal years 1997, 1998, and 1999. Had compensation cost for the stock option plans been determined based on the fair value of the options at the grant dates, under those plans consistent with the fair value method, pro forma net income and basic and diluted earnings per share would have been a net loss of $2.7 million and $.59 per share for fiscal 1997, net income of $1.4 million or $.30 per share for fiscal 1998, and net income of $.9 million and $.21 per share for fiscal 1999. These pro forma disclosures are not likely to be representative of the effect on reported net income and basic and diluted earnings per share for future years since current options vest over a three to four year period and additional options are generally granted each year. In addition, the pro forma fair value method has not been applied to options granted in years prior to fiscal 1996. The weighted-average fair value of options granted in fiscal 1997 and 1999 was $3.15 and $1.64 per share, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions: weighted average risk free interest rate of 6.59% for fiscal 1997 and 5.1% for fiscal 1999, weighted average volatility of 38.4% for fiscal 1997 and 39.4% for fiscal 1999, expected life of eight years and zero dividends. The Company did not grant any options in fiscal 1998. The following table summarizes information about stock options outstanding at September 25, 1999 under the Employee Stock Option/Restricted Stock Plans and the Transition Plan: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 9/25/99 Life Price at 9/25/99 Price Employee Stock Option/Restricted Stock Plans: $ 3.03 - 3.03 91,192 9.39 Years $ 3.03 - $ - 5.56 - 7.63 161,884 7.13 Years 6.57 101,238 6.78 9.13 - 12.31 216,784 4.99 Years 11.10 216,784 11.10 $ 3.03 - 12.31 469,860 6.58 Years $ 7.97 318,022 $ 9.72 Transition Plan: $ 8.76 - 9.05 55,706 2.88 Years $ 8.86 55,706 $ 8.86 19.57 - 19.57 355 .67 Years 19.57 355 19.57 $ 8.76 - 19.57 56,061 2.87 Years $ 8.93 56,061 $ 8.93
The Company has a key employees' stock loan plan which provides for the granting of loans to eligible employees for the purchase of the Company's common stock in the open market. Under the terms of the plan, the loans are forgiven, and the related amounts expensed, on a pro-rata basis over a five-year period of service beginning at the date of grant. The unamortized balance due from eligible employees under the plan is reflected as deferred compensation and shown as a reduction of shareholders' equity and was $73,000 and $30,000 as of September 26, 1998 and September 25, 1999, respectively. In fiscal 1998 and 1999, the Company recognized $44,000 and $43,000 of compensation expense related to the plan. During 1997, the Board of Directors established the Kentucky Electric Steel, Inc. Share Plan for Non-Employee Directors (the "Plan"), which provides for the issuance of stock in lieu of cash for director services. Under the Plan, 25,000 shares were authorized for issuance. In May 1999, the Board of Directors approved the 1999 Share Plan for Non-Employee Directors, which authorized 25,000 of additional shares to be used for Directors' compensation. The Plan provides for issuance of common stock for at least 60% of the fees payable with respect to the applicable meeting for each Non-Employee Director. During fiscal 1998, 7,949 shares were issued at stock prices ranging from $3.50 to $6.94 per share. During fiscal 1999, 17,937 shares were issued at stock prices ranging from $2.91 to $3.41 per share. (12) Shareholders' Equity Each share of common stock outstanding (and each share of common stock issued prior to the occurrence of certain events) carries with it one Preferred Stock Purchase Right (a Right) to purchase at a price of $40, one-hundredth of a share of Series A Junior Participating Preferred Stock. The Rights are exercisable only if a person or group acquires or announces a tender offer which would result in ownership of 20% or more of the common stock. The Company can redeem the Rights for $.01 per Right at any time prior to the time a person or group acquires 20% or more of the Company's shares. Following the acquisition of 20% or more of the Company's common stock by a person or group, the holders of the Rights will be entitled to purchase additional shares of Company common stock at one-half the then current market price, and, in the event of a subsequent merger or other acquisition of the Company, to buy shares of common stock of the acquiring entity at one-half of the market price of those shares. In neither event, however, would the acquiring person or group be entitled to purchase shares at the reduced price. In connection with the shareholder rights plan, which was adopted by the Board of Directors on February 27, 1996 and amended and restated as of September 1, 1999, 150,000 shares of the Company's 1,000,000 authorized shares of preferred stock have been designated as Series A Junior Participating Preferred Stock. No shares of the Series A Junior Participating Preferred Stock have been issued. (13) Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, environmental and other matters, which seek remedies or damages. Costs to be incurred in connection with environmental matters are accrued when the prospect of incurring costs for testing or remedial action is deemed probable and such amounts can be estimated. The Company has no recorded reserves for environmental matters as of September 25, 1999. However, new information or developments with respect to known matters or unknown conditions could result in the recording of accruals in the periods in which they become known. The Company believes that any liability that may ultimately be determined with respect to commercial, product liability, environmental or other matters will not have a material effect on its financial condition or results of operations. (14) Quarterly Financial Data (Unaudited) Quarterly results of operations (in thousands, except share and per share amounts) for fiscal 1998 and fiscal 1999 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter 1998 Net sales $ 26,020 $ 29,610 $ 27,751 $ 26,075 Gross profit $ 2,340 $ 3,423 $ 3,457 $ 2,516 Net income $ 41 $ 563 $ 652 $ 238 Net income per common share - basic and diluted $ .01 $ .12 $ .14 $ .05 Weighted average shares outstanding - basic 4,626,383 4,626,033 4,626,375 4,619,893 Weighted average shares outstanding - diluted 4,643,073 4,630,520 4,630,192 4,619,893 1999 Net sales $ 25,624 $ 25,952 $ 27,421 $ 26,392 Gross profit $ 2,075 $ 1,961 $ 3,711 $ 2,502 Net income (loss) $ (88) $ (327) $ 1,269 $ 124 Net income (loss) per common share - basic and diluted $ (.02) $ (.08) $ .31 $ .03 Weighted average shares outstanding - basic 4,147,178 4,060,355 4,064,920 4,069,469 Weighted average shares outstanding - diluted 4,147,178 4,060,355 4,064,920 4,080,212
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Electric Steel, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Kentucky Electric Steel, Inc.'s annual report on Form 10-K, and have issued our report thereon dated October 27, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in item 14(a)2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Cincinnati, Ohio, October 27, 1999 SCHEDULE II KENTUCKY ELECTRIC STEEL, INC. VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Doubtful Accounts (1) BALANCE, September 28, 1996 ....................... 390 Additions: Charged to costs and expenses ................. 120 Deductions: Net charge-off of accounts deemed uncollectible (40) --- BALANCE, September 27, 1997 ....................... 470 Additions: Charged to costs and expenses ................. (10) Deductions: Net charge-off of accounts deemed uncollectible - --- BALANCE, September 26, 1998 ....................... $ 460 Additions: Charged to costs and expenses ................. (30) Deductions: Net charge-off of accounts deemed uncollectible - --- BALANCE, September 25, 1999 ....................... $ 430 (1) Deducted from accounts receivable. EX-10.11 2 EXHIBIT 10.11 KENTUCKY ELECTRIC STEEL, INC. SALARY CONTINUATION AGREEMENT This Agreement is entered into between Kentucky Electric Steel, Inc., a corporation having its principal office in Ashland, Kentucky, (herein called the "Company") and _________________ (herein called the "Executive"). WITNESSETH: WHEREAS, the Executive is employed by the Company in the capacity of _____________________________________ and by reason thereof has acquired experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to the Executive to remain employed by compensating him beyond his regular salary for service which he has rendered or will hereafter render; and WHEREAS, the Company and the Executive entered into a Salary Continuation Agreement effective September 22, 1994 (the "Agreement") which was amended and restated in its entirety on September 1, 1998; and WHEREAS, the parties desire to further amend and restate the Agreement to modify certain terms and conditions: NOW, THEREFORE, the Agreement is amended and restated in its entirety to read as follows: 1. If the Executive remains in the continuous employ of the Company he shall retire from active employment with the Company on his sixty-second (62nd) birthday, unless by action of the Board of Directors of the Company his period of active employment shall be shortened, or, with his consent, extended. 2. Upon said retirement, the Company shall pay the Executive __________ per month to age eight-five (85) and ____________ per month thereafter for life commencing with the first day of the month following the date of said retirement. Notwithstanding the foregoing, the amount of monthly payments provided under this Section 2, shall be reduced (but not below zero) by the Monthly Amount (as hereinafter defined). The "Monthly Amount" is the monthly benefit which the cash surrender value of the life insurance policies issued by Pacific Life, Policy Number _________ Minnesota Life, Policy Number ___________ on the life of the Executive ("Policies") would provide over the period of time until Executive reaches age 85 as of the time of the Executive's termination of employment as determined by a life insurance agent satisfactory to both the Company and the Executive, adjusted upward to the amount which said monthly benefit would equal if it were fully taxable to the Executive and results in said monthly benefit after payment of taxes. The insurance agent will calculate the Monthly Amount by assuming that (a) the Policies have remained in effect until the date of the calculation, (b) the cash surrender value of the Policies is first withdrawn in an amount equal to the Executive's tax basis in the Policies, and (c) loans are then taken out on the Policies but not in excess of the amount which would reduce the remaining cash surrender value in the Policies below the amount necessary to keep the Policies in effect until age 100 based upon the insurance carrier's current crediting rates, expenses, and mortality assumptions in effect on the date of calculation. If less than one hundred twenty (120) such monthly payments shall be made prior to the death of the Executive, such monthly payments shall continue to whomever the Executive shall have designated, on the most recent Salary Continuation Agreement Designation of Beneficiary form filed with the Company (the "Beneficiary"), until the full number of one hundred twenty (120) monthly payments have been made; provided, that the amount of such monthly payments to the Beneficiary shall be reduced (but not below zero) by the monthly benefit the death benefit paid under the Policies would have provided over such remaining number of months as determined by a life insurance agent satisfactory to both the Company and the Beneficiary, said monthly benefit to be adjusted upward in the same manner as provided above to determine the Monthly Amount. 3. In the event the Executive terminates employment on account of permanent and total disability (as determined by the Board of Directors of the Company), he shall receive one hundred percent (100%) of the benefit described in Section 2 commencing at age sixty- two (62). In the event the Executive terminates employment for any reason other than permanent and total disability (as determined by the Board of Directors of the Company) or death, he shall receive such percentage of the benefit described in Section 2 commencing at age sixty-two (62) which the Compensation Committee of the Company's Board of Directors shall from time to time determine. Provided, that in no event shall such percentage be reduced below a percentage previously set by such Committee. Provided, further, that upon a change of control (as hereinafter defined) of the Company the Executive shall be entitled to receive one hundred percent (100%) of the benefit described in Section 2 commencing at age sixty-two (62) so long as he continues to comply with the provisions of Section 4 of this Agreement. For purposes of this Agreement, the term "change of control" shall mean (i) the consummation of (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, or (ii) the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company, other than in connection with a bankruptcy or reorganization proceeding of the Company under applicable federal or state bankruptcy laws, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, becoming the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately-negotiated purchases or otherwise, or (iv) at any time during a period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company ceasing for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period. 4. The Executive agrees that he will not, during or after his employment under this Agreement, engage in "Competitive Activity," as it is defined in Section V of the Executive's Employment Agreement with the Company, as amended, directly or indirectly, or, without the specific authority of the Board of Directors of the Company, serve as a director or employee of any corporation or business entity so engaged. The Executive further agrees that he will not, either during or after his employment under this Agreement, disclose to anyone not legally entitled thereto any "Confidential Information" as defined in Section VI of such Employment Agreement. The Executive also agrees to make himself available for such consulting services as the Company may reasonably request during the period in which payments are being made to the Executive under this Agreement, but in no event shall the Executive be required to devote more than ten (10) hours per month for such consulting services. The Company agrees to pay the Executive's reasonable fees and expenses in respect of the consulting services the Executive in fact renders. 5. The Executive agrees that if he shall breach any covenant of Section 4 of this Agreement, and shall continue to breach such covenant for a period of thirty (30) days after the Company shall have requested him to desist from such breach, then, any provisions hereof to the contrary notwithstanding, no further payments shall be due or payable by the Company hereunder either to the Executive or to his wife or other designee, and the Company shall have no further liability hereunder. 6. The Company shall pay all administrative expenses of the Trust Agreement entered into as of 10/6/99 between the Executive and Fifth Third Bank, Ohio Valley, as Trustee (the "Trustee") including, but not limited to, fees for legal services rendered to the Trustee, any taxes levied or assessed under existing or future laws upon or against the Trustee, actuarial fees, accounting fees, and to pay compensation to the Trustee or other persons. If the Company pays any premium on the Policies, the Executive shall incur income on such payment for tax purposes ("Premium Payment Income"). As Executive incurs Premium Payment Income, the Company shall pay to Executive a payment (a "Gross-Up Payment") in an amount sufficient to enable Executive to pay all income and employment taxes (including any interest or penalties imposed with respect to such income and employment taxes) on the Premium Payment Income as well as all such income and employment taxes imposed upon the Gross-Up Payment. 7. It is agreed that neither the Executive, nor his wife, nor any other designee, shall have any right to sell, assign, transfer or otherwise convey the right to receive any payments hereunder which payments and the right thereto are expressly declared to be non- assignable. Any attempted sale, assignment, transfer or conveyance shall be null and void and the Company shall have no further liability hereunder after any such attempt. 8. The Company agrees that it will not merge or consolidate with any other company or organization, or permit its business activities to be taken over by any other organization unless and until the succeeding or continuing company or other organization shall expressly assume all obligations and liabilities herein set forth. 9. This Agreement may be revoked or amended in whole or in part only by mutual consent of the parties hereto. This Agreement shall be construed and administered in accordance with the laws of the Commonwealth of Kentucky without regard to the principles of conflicts of law which might otherwise apply. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed this 6th day of October, 1999. ATTEST: KENTUCKY ELECTRIC STEEL, INC. _______________________________ By: ________________________________ Secretary _______________________________ By: ________________________________ Witness Kentucky Electric Steel, Inc. Supplemental Schedule for Exhibit 10.11 Salary Continuation Agreement
Monthly Monthly Retirement Retirement Benefit Benefit (Ten Year Certain) After Age 85 Name Title Age 62 to Age 85 for Life Charles C. Hanebuth President & Chief Executive Officer $13,518.00 $6,200.00 William J. Jessie V. P. and Chief Financial Officer $ 6,636.00 $ 0.00 Joseph E. Harrison Vice President, Sales & Marketing $ 6,320.00 $ 0.00 William H. Gerak Vice President, Administration $ 5,495.00 $ 0.00
EX-10.19 3 Exhibit 10.19 PROMISSORY NOTE Coalton, Kentucky FOR VALUE RECEIVED, _____________ ("Borrower") hereby promises to pay to the order of Kentucky Electric Steel, Inc. (the "Company"), at its offices in Coalton, Kentucky, the principal amount of _______________. Subject to the terms of that certain Loan Forgiveness Agreement between the Company and Borrower of even date herewith, (the "Agreement"), the principal amount outstanding under this Note shall be due and payable in full on January 1, 2008. This Note shall bear interest at the rate of five and thirty-seven hundredths percent (5.37%) per annum, payable on each Forgiveness Date (as defined in the Agreement) subject to the terms of the Agreement. If this Note is placed in the hands of an attorney for collection, or suit is brought on same, or same is collected through probate, or bankruptcy, or insolvency proceedings of any nature, or by other judicial proceedings, Borrower agrees to pay a reasonable attorney's fee in addition to the principal and interest then owing. Borrower hereby waives presentment for payment, demand, notice of nonpayment, protest, and notice of protest. _____________________________________ October 6, 1999 Date Kentucky Electric Steel, Inc. Supplemental Schedule for Exhibit 10.19 Promissory Note
Amount of Name Title Notes Charles C. Hanebuth President and Chief Executive Officer $213,862 William J. Jessie Vice President & Chief Financial Officer $ 69,315 Joseph E. Harrison Vice President, Sales & Marketing $101,470 William H. Gerak Vice President, Administration $ 84,740
EX-10.20 4 Exhibit 10.20 LOAN FORGIVENESS AGREEMENT LOAN FORGIVENESS AGREEMENT (this "Agreement") dated and effective as of October 6, 1999 (the "Effective Date") between KENTUCKY ELECTRIC STEEL, INC., a Delaware corporation (the "Company"), and ___________________ ("Executive"), an individual. W I T N E S S E T H: WHEREAS, the Company has secured a "split-dollar" life insurance policy on the life of Executive pursuant to a Split Dollar Insurance Agreement dated September 1, 1998 between the Company and Executive; WHEREAS, the Company desires to transfer to Executive the applicable life insurance policy and to terminate the Split Dollar Insurance Agreement, and in connection therewith to loan to Executive, pursuant to that certain Promissory Note in the original principal amount of_______________________________________ executed and delivered by Executive in favor of the Company on the date hereof (the "Note"), which represents 90% of the aggregate federal and state income taxes due from Executive on account of such life insurance policy transfer; and WHEREAS, subject to the terms and conditions set forth herein, the Company further desires to provide for the forgiveness of the principal and interest due under the Note. NOW, THEREFORE, in consideration of the mutual covenants set forth herein and for other good and valuable consideration the parties hereby agree as follows: 1. Loan Forgiveness. On the first day of each of the following nine calendar years, beginning with January 1, 2000 (each of such dates being a "Forgiveness Date"), Executive shall be relieved of the obligation to pay (i) _______________ of the principal and (ii) all accrued interest due under the Note as of each such Forgiveness Date. Such amounts shall be automatically and immediately forgiven and canceled, provided that the following conditions have been met as of the applicable Forgiveness Date: 1.1 Executive shall have continued employment with the Company through the close of business of such Forgiveness Date; or 1.2 In the event Executive shall have been terminated (whether due to death, disability or otherwise) or have retired or resigned from his employment with the Company, that he shall have at all times been in full and complete compliance with his obligations not to compete with the Company and maintain confidentiality as set forth in Section 2 of this Agreement. Provided that the foregoing conditions have been met, at the close of business on the 9th of such Forgiveness Dates, the Company shall cancel the Note, record such cancellation on the books and records of the Company and deliver the original Note, marked canceled, to Executive, provided however, that the Company's failure to perform any of the foregoing acts shall not in any way affect the automatic cancellation of the debts and obligations of Executive under the Note. However, if the requirement set forth in subsection 1.1 above is not satisfied on any Forgiveness Date, or if the requirement set forth in Section 1.2 above has not at any time been satisfied, Executive shall be obligated to repay in cash to the Company the balance of the Note plus accrued interest, less only those amounts previously forgiven in accordance with this Agreement. 1.3 As a result of the loan forgiveness provided under this Section, Executive shall incur forgiveness of indebtedness income for tax purposes ("Forgiveness Income"). As Executive incurs Forgiveness Income, the Company shall pay to Executive a payment (a "Gross-Up Payment") in an amount sufficient to enable Executive to pay all income and employment taxes (including any interest or penalties imposed with respect to such income and employment taxes) on the Forgiveness Income as well as all such income and employment taxes imposed upon the Gross-Up Payment. 2. Covenant Not to Compete and Confidentiality 2.1. For the period beginning upon the termination of the Executive's employment with the Company for any reason or upon Executive's resignation and retirement, and ending on the 9th Forgiveness Date, the Executive shall not engage or attempt to engage on his own behalf or on behalf of a third party, in any "Competitive Activity". The term "Competitive Activity" shall mean participation by the Executive, without the written consent of the Board of Directors of the Company, in the management of any business operation of any enterprise if such operation (a "Competitive Operation") engages in substantial and direct competition with any business operation activity conducted by the Company or its subsidiaries at the time of the termination of the Executive's employment. A business operation shall be considered a Competitive Operation if such business operation's sales of any product or service competitive with any product or service of the Company amounts to thirty percent (30%) of that business operation's total sales and if the Company's sales of said product or service of its comparable business operation amounts to thirty percent (30%) of the Company's total sales. "Competitive Activity" shall not include (i) the mere ownership of securities in any enterprise, or (ii) participation in the management of any enterprise or any business operation thereof other than in connection with a Competitive Operation of such enterprise. Without limiting the generality of the foregoing, Competitive Activity shall include becoming employed by or associated with Stelco-McMaster Ltd. or Slater Steels. The Executive agrees that if he shall breach any covenant of this Section 2.1, and shall continue to breach such covenant for a period of thirty (30) days after the Company shall have requested him to desist from such breach, then, any provisions hereof to the contrary notwithstanding, the full unpaid balance of the Note shall become immediately due and payable. 2.2. If the restrictions set forth in the preceding paragraph or any part thereof should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restriction shall not thereby be adversely affected. The Executive agrees that the foregoing territorial and time limitations are reasonable and properly required for the adequate protection of the business of the Company and that in the event that any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, then the Executive agrees and submits to the reduction of either said territorial or time limitation to such an area or period as said court shall deem reasonable. 2.3. The Executive agrees to receive Confidential Information (as defined in this Section 2.3) of the Company in confidence, and not to disclose to others, assist others in the application of, or use for his own gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means, except in the ordinary course of the Company's business, without the express written consent of the Board of Directors of the Company. The Executive further agrees that, upon termination of his employment with the Company, all documents, records, notebooks and similar repositories containing Confidential Information, including copies thereof, then in the Executive's possession, whether prepared by him or others, shall be left with the Company. For the purpose of this Agreement, "Confidential Information" means information disclosed to the Executive or known by the Company, not generally known in the industry in which the Company is or may become engaged, about the Company's products, processes or services. 3. Jurisdiction, Venue and Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Kentucky (regardless of that jurisdiction or any other jurisdiction's choice of law principles). To the extent permitted by law, the parties hereto agree that all actions or proceedings arising in connection herewith, shall be litigated in the state and federal courts located in the State of Kentucky, and each party hereby waives any right it may have to object to venue. The parties each hereby stipulate that the state and federal courts located in the County of Boyd, State of Kentucky, shall have personal jurisdiction and venue over each party for the purpose of litigating any such dispute, controversy or proceeding arising out of or related to this Agreement. 4. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 5. Attorneys' Fees. The prevailing party shall be entitled to recover from the losing party its attorneys fees and costs incurred in any action or proceeding, including arbitration, brought to interpret this Agreement or to enforce any right arising out of this Agreement. 6. No Waiver of Rights. The delay or failure of either party to enforce at any time any provision of this Agreement shall in no way be considered a waiver of any such provision, or any other provision, of this Agreement. No waiver of, or delay or failure to enforce any provision of this Agreement shall in any way be considered a continuing waiver or be construed as a subsequent waiver of any such provision, or any other provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. Executive KENTUCKY ELECTRIC STEEL, INC. _______________________________ By:________________________________ Kentucky Electric Steel, Inc. Supplemental Schedule for Exhibit 10.20 Loan Forgiveness Agreement
Name Title Amount Charles C. Hanebuth President and Chief Executive Officer $213,862 William J. Jessie Vice President & Chief Financial Officer $ 69,315 Joseph E. Harrison Vice President, Sales & Marketing $101,470 William H. Gerak Vice President, Administration $ 84,740
EX-10.21 5 Exhibit 10.21 TRUST UNDER CERTAIN KENTUCKY ELECTRIC STEEL, INC. SALARY CONTINUATION AGREEMENTS This Agreement made this 14th day of October, 1999 by and between Kentucky Electric Steel, Inc. ("Company") and Fifth Third Bank, Ohio Valley ("Trustee"). WHEREAS, Company has adopted the Salary Continuation Agreements listed in Appendix A (each, an "Agreement" and collectively, the "Agreements"); WHEREAS, Company has incurred or expects to incur liability under the terms of such Agreements with respect to the individuals participating in such Agreements (said individuals are hereinafter referred to as "Participants" or "Beneficiaries" but only as long as they remain entitled to a benefit under an Agreement), said liabilities to be reduced by the monthly benefit payments the cash surrender value of certain insurance policies listed in the Agreements ("Policies") may provide; WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid under the Agreements; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Agreements as unfunded Agreements maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Agreements; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: I. Establishment of Trust. A. Company hereby deposits with Trustee in trust one dollar ($1.00) which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. B. The Trust hereby established is revocable by Company, it shall become irrevocable upon a Change of Control (as defined herein). C. The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. D. The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Agreements and this Trust Agreement shall be mere unsecured contractual rights of Participants and their Beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section III-A herein. E. Upon a Change of Control, Company shall, as soon as possible, but in no event longer than 5 days following the Change of Control (as defined herein), make an irrevocable contribution to the Trust ("Change of Control Contribution") in an amount that is sufficient to (a) pay all premiums which shall thereafter become due to fully fund the Policies to provide the "Monthly Amount" for each Participant described on Appendix B attached hereto as calculated by the insurer under each of the Policies and (b) pay the Gross Up Payment as described in II-A, below. The Policies are identified as follows: Policy Number Insurer 1A22856570 Pacific Life 1A22856560 Pacific Life 1A22856540 Pacific Life 1A22856530 Pacific Life 1953997V Minnesota Life II. Payments of Premiums on the Policies. A. After the Change of Control Contribution has been made, the Trustee shall thereafter pay all future premiums, to the extent that funds are available, on each of the Policies until the earliest of (a) the insured's death, (b) the date that the Policy value is sufficient to provide the Monthly Amount described in I-E, above, (c) the date the Policy is canceled by the insured, or (d) the date the Participant violates Section 5 of his Agreement. As the Trustee pays premiums on the Policies, the Executive shall incur income on such payment for tax purposes ("Premium Payment Income"). As Executive incurs Premium Payment Income, the Trustee shall pay to Executive, to the extent that funds are available, a payment (a "Gross-Up Payment") in an amount sufficient to enable Executive to pay all income and employment taxes (including any interest or penalties imposed with respect to such income and employment taxes) on the Premium Payment Income as well as all such income and employment taxes imposed upon the Gross-Up Payment. B. The entitlement of a Participant or his or her Beneficiaries to benefits under the Agreements shall be determined by Company or such party as it shall designate under the Agreements, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Agreements. III. Trustee Responsibility Regarding Payments to Insurance Companies When Company Is Insolvent. A. Trustee shall cease payment of premiums on the Policies if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. B. At all times during the continuance of this Trust, as provided in Section I-D hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. C. The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of premiums on the Policies. D. Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. E. If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments of premiums on the Policies and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Agreements or otherwise. F. Trustee shall resume the payment of premiums on the Policies in accordance with Section II of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). G. Provided that there are sufficient assets, if Trustee discontinues the payment of premiums on the Policies pursuant to Section III-A hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due under the policies for the period of such discontinuance, less the aggregate amount of any premium payments made by Company in lieu of the payments provided for hereunder during any such period of discontinuance. IV. Payments to Company. A. Except as provided in Section III hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of premiums have been made on the Policies. V. Investment Authority. A. In no event may Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by Company, other than a de minimis amount held in common investment vehicles in which Trustee invests. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Participants. VI. Disposition of Income. A. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. VII. Accounting by Trustee. A. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within ninety (90) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. VIII. Responsibility of Trustee. A. Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Agreements or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. B. If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. C. Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. D. Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. E. Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. F. Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. IX. Compensation and Expenses of Trustee. A. Company shall pay all administrative and Trustee's fees and expenses. X. Resignation and Removal of Trustee. A. Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise. B. Trustee may be removed by Company on ten (10) days notice or upon shorter notice accepted by Trustee. C. Upon a Change of Control, as defined herein, Trustee may not be removed by Company without the unanimous consent of the Participants. D. If Trustee resigns within three (3) years after a Change of Control, as defined herein, Company shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions unless the Company and all Participants agree upon a successor Trustee. E. If Trustee resigns or is removed within three (3) years of a Change of Control, as defined herein, Trustee shall select a successor Trustee in accordance with the provisions of Section XI-B hereof prior to the effective date of Trustee's resignation or removal. F. Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. G. If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section XI hereof, by the effective date of resignation or removal under paragraph(s) A or B of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. XI. Appointment of Successor. A. If Trustee resigns or is removed in accordance with Section X-A or B hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. B. If Trustee resigns or is removed pursuant to the provisions of Section X-E hereof and selects a successor Trustee, Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. C. The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. XII. Amendment or Termination. A. This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Agreements or shall make the Trust revocable after it has become irrevocable in accordance with Section I-B hereof. B. The Trust shall not terminate until the date on which all premiums have been paid on the Policies as required by Section II. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. C. This Trust Agreement may not be amended by Company following a Change of Control, as defined herein without the unanimous consent of the Participants. XIII. Miscellaneous. A. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. B. Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. C. This Trust Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Kentucky without regard to the principles of conflicts of law which might otherwise apply. D. For purposes of this Trust, Change of Control shall mean (i) the consummation of (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, or (ii) the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company, other than in connection with a bankruptcy or reorganization proceeding of the Company under applicable federal or state bankruptcy laws, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, becoming the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately-negotiated purchases or otherwise, or (iv) at any time during a period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company ceasing for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's shareholders of each new director during such two-year period was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such two-year period. XIV. Effective Date. A. The effective date of this Trust Agreement shall be ______________, 1999. FIFTH THIRD BANK, OHIO VALLEY KENTUCKY ELECTRIC STEEL, INC. By:____________________________ By:________________________________ APPENDIX A Salary Continuation Agreements 1. Agreement dated October 6, 1999 between Company and Charles C. Hanebuth 2. Agreement dated October 6, 1999 between Company and William J. Jessie 3. Agreement dated October 6, 1999 between Company and William H. Gerak 4. Agreement dated October 6, 1999 between Company and Joseph E. Harrison APPENDIX B Name of Participant Charles C. Hanebuth Monthly Amount The "Monthly Amount" for Charles C. Hanebuth ("Participant") is the monthly benefit which the cash surrender value of the life insurance policies issued by Pacific Life, Policy Number 1A22856570 and Minnesota Life, Policy Number 1953997V on the life of the Participant ("Policies") would provide over the same period of time as of the time of the Participant's termination of employment as determined by a life insurance agent satisfactory to both the Company and the Participant, adjusted upward to the amount which said monthly benefit would equal if it were fully taxable to the Participant and results in said monthly benefit after payment of taxes. The insurance agent will calculate the Monthly Amount by assuming that (a) the Policies have remained in effect until the date of the calculation, (b) the cash surrender value of the Policies is first withdrawn in an amount equal to the Participant's tax basis in the Policies, and (c) loans are then taken out on the Policies but not in excess of the amount which would reduce the remaining cash surrender value in the Policies below the amount necessary to keep the Policies in effect until age 100 based upon the insurance carrier's current crediting rates, expenses, and mortality assumptions in effect on the date of calculation. Name of Participant William H. Gerak Monthly Amount The "Monthly Amount" for William H. Gerak ("Participant") is the monthly benefit which the cash surrender value of the life insurance policy issued by Pacific Life, Policy Number 1A22856530 on the life of the Participant ("Policy") would provide over the same period of time as of the time of the Participant's termination of employment as determined by a life insurance agent satisfactory to both the Company and the Participant, adjusted upward to the amount which said monthly benefit would equal if it were fully taxable to the Participant and results in said monthly benefit after payment of taxes. The insurance agent will calculate the Monthly Amount by assuming that (a) the Policy has remained in effect until the date of the calculation, (b) the cash surrender value of the Policy is first withdrawn in an amount equal to the Participant's tax basis in the Policy, and (c) loans are then taken out on the Policy but not in excess of the amount which would reduce the remaining cash surrender value in the Policy below the amount necessary to keep the Policy in effect until age 100 based upon the insurance carrier's current crediting rates, expenses, and mortality assumptions in effect on the date of calculation. Name of Participant William J. Jessie Monthly Amount The "Monthly Amount" for William J. Jessie ("Participant") is the monthly benefit which the cash surrender value of the life insurance policy issued by Pacific Life, Policy Number 1A22856560 on the life of the Participant ("Policy") would provide over the same period of time as of the time of the Participant's termination of employment as determined by a life insurance agent satisfactory to both the Company and the Participant, adjusted upward to the amount which said monthly benefit would equal if it were fully taxable to the Participant and results in said monthly benefit after payment of taxes. The insurance agent will calculate the Monthly Amount by assuming that (a) the Policy has remained in effect until the date of the calculation, (b) the cash surrender value of the Policy is first withdrawn in an amount equal to the Participant's tax basis in the Policy, and (c) loans are then taken out on the Policy but not in excess of the amount which would reduce the remaining cash surrender value in the Policy below the amount necessary to keep the Policy in effect until age 100 based upon the insurance carrier's current crediting rates, expenses, and mortality assumptions in effect on the date of calculation. Name of Participant Joseph E. Harrison Monthly Amount The "Monthly Amount" for Joseph E. Harrison ("Participant") is the monthly benefit which the cash surrender value of the life insurance policy issued by Pacific Life , Policy Number 1A22856540 on the life of the Participant ("Policy") would provide over the same period of time as of the time of the Participant's termination of employment as determined by a life insurance agent satisfactory to both the Company and the Participant, adjusted upward to the amount which said monthly benefit would equal if it were fully taxable to the Participant and results in said monthly benefit after payment of taxes. The insurance agent will calculate the Monthly Amount by assuming that (a) the Policy has remained in effect until the date of the calculation, (b) the cash surrender value of the Policy is first withdrawn in an amount equal to the Participant's tax basis in the Policy, and (c) loans are then taken out on the Policy but not in excess of the amount which would reduce the remaining cash surrender value in the Policy below the amount necessary to keep the Policy in effect until age 100 based upon the insurance carrier's current crediting rates, expenses, and mortality assumptions in effect on the date of calculation. EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included in this Form 10-K into the Company's previously filed Registration Statements File Nos. 33-301218 and 33-77598. Arthur Andersen LLP Cincinnati, Ohio, December 20, 1999 EX-27 7 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 25, 1999 included in this Company's annual report on Form 10-K and is qualified in its entirety by reference to such condensed financial statements. 0000910394 KENTUCKY ELECTRIC STEEL, INC. 1,000 U.S. DOLLARS 12-MOS SEP-25-1999 SEP-26-1998 SEP-25-1999 1 184 0 14,610 430 22,751 43,407 52,415 18,307 82,941 27,689 20,000 50 0 0 35,202 82,941 105,389 105,389 95,140 95,140 0 0 2,274 1,582 604 978 0 0 0 978 .24 .24
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