Common Stock

OTC Disclosure & News Service


ALJ Announces Restructuring

Feb 27, 2007

OTC Disclosure & News Service

- ALJ ANNOUNCES RESTRUCTURING Financial Restructuring Allows Company to Reduce Obligations While Streamlining Corporate Operations ASHLAND, Ky., Feb. 27, 2007 - ALJ today announced an extensive financial and corporate restructuring intended to reduce obligations and streamline corporate operations. Background Information on the Mill In September 2003, ALJ acquired a minority membership interest in KES Holdings, LLC, or KESH, which was formed to acquire, through a wholly owned subsidiary named KES Acquisition Company, LLC, or KESA, certain assets of Kentucky Electric Steel, Inc., consisting of a steel mini-mill located in Ashland, Kentucky. On September 2, 2003, KESA completed the acquisition of the mill pursuant to Section 363 of the U.S. Bankruptcy Code. The mill ceased production in December 2002 and Kentucky Electric Steel filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in February 2003. Prior to ceasing operations in December 2002, the mill had been in operation for approximately 40 years. After its acquisition by KESA, the mill was refurbished and commenced generating revenues in January 2004. The mill produces bar flats that are produced to a variety of specifications and fall primarily into two general quality levels - merchant bar quality steel bar flats for generic types of applications, and special bar quality steel bar flats, where more precise customer specifications require the use of alloys, customized equipment and special production procedures to insure that the finished product meets critical end-use performance characteristics. The mill manufactures over 2,600 different bar flat items which are sold to volume niche markets, including original equipment manufacturers, cold drawn bar converters, steel service centers and the leaf-spring suspension market for light- and heavy-duty trucks, mini-vans and utility vehicles. The 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 mill employs a variety of specially designed equipment which is necessary to manufacture special bar quality flats to the specifications of the mill's customers. The current production capacity of the mill for finished products, based on the current operating structure and man-hours worked, is approximately 200,000 short tons per year, and the mill is currently operating at approximately 100% of such annualized capacity. Management is focusing on continuing to develop the business and improve operating efficiencies. Acquisition of the Mill by ALJ Effective March 1, 2005, ALJ completed the acquisition of KESA from KESH and its investors (referred to as the Sellers) through its subsidiary Youthstream Acquisition Corp., or YAC. The structure of the acquisition resulted in ALJ owning 80.01% of the outstanding common stock of YAC (consisting of 100% of the Series A voting common stock of YAC). As consideration for the purchase, YAC issued the Sellers 25,000 shares of redeemable non-convertible Series A preferred stock of YAC with an aggregate liquidation value of $25 million and a 13% cumulative dividend (referred to as the Series A Preferred Stock), 8% Subordinated Notes of YAC in the aggregate principal amount of $40 million (referred to as the Subordinated Notes), and 15,992 shares of class B non-voting common stock (representing 19.99% of the outstanding common stock of YAC). YAC, in turn, owned 37.45% of the membership interests in KESA directly, and 100% of the capital stock of Atacama KES Holding Corporation (referred to as AKHC), which in turn owned 62.55% of the membership interest in KESA. Following the acquisition, ALJ consolidated the operations of the mill through its ownership of KESA commencing March 1, 2005. As a result of the acquisition, ALJ's financial statements for periods ending after March 1, 2005 are materially different from and are not comparable to its financial statements prior to that date. Subsequent to the acquisition, the management of the mill continued unchanged. The acquisition did not result in any change in the mill's business operations or financial condition. The Restructuring Transaction Effective February 23, 2007, ALJ effected a financial and corporate restructuring designed to reduce outstanding obligations and streamline corporate operations. To streamline corporate operations, KESA and AKHC were merged into YAC, which immediately changed its name to KES Acquisition Company. As a result of the merger, ALJ now has only one operating subsidiary, KES Acquisition Company, in which it owns 80.01% of the outstanding common stock and 100% of the voting common stock. In order to reduce financial obligations, KES Acquisition Company entered into a Financing Agreement providing for a new revolving credit arrangement, or the Revolver, and two new term loans (referred to together as the Term Loan; the Revolver and the Term Loans are referred together as the Credit Facility). The Revolver is an asset-based loan with a maximum availability of $23 million and the Term Loan is a $19 million loan. Both the Revolver and the Term Loan have maturities of February 23, 2010 and the Term Loan amortizes at $1 million per quarter for the first four quarters and $1.25 million per quarter thereafter. In addition, the Credit Facility contains financial covenants requiring KES Acquisition Company to maintain certain levels of EBITDAM (earnings before interest, taxes, depreciation, amortization and management incentive fees), fixed charge coverages and leverage ratios. As part of the restructuring, KES Acquisition Company repurchased, for $18 million, $18 million in principal amount of the Subordinated Notes, plus certain accrued interest thereon, including certain notes previously issued to reflect a portion of such interest which was not paid. In addition, KES Acquisition Company restructured the remaining $22 million of Subordinated Notes and the accrued interest thereon (including certain notes previously issued to reflect a portion of such interest, which was not paid), to eliminate scheduled principal payments, extend the final maturity until 2017, capitalize the accrued but unpaid interest on such notes, and provide that in the future KES Acquisition Company has the ability to capitalize, in its discretion, future interest payments on such notes. After these transactions, the outstanding principal amount of the Subordinated Notes is $25.7 million. The Subordinated Notes will continue to bear interest at 8%. The Subordinated Notes are subordinated to the Credit Facility and are non-recourse to the assets of ALJ, but provide for a springing security interest in substantially all of the assets of KES Acquisition Company following repayment in full of the Credit Facility. The foregoing transactions resulted in KES Acquisition Company recognizing a gain of approximately $3 million. As part of the restructuring, KES Acquisition Company also repurchased $12.5 million of its 13% Series A Preferred Stock and accrued dividends thereon for aggregate consideration of $1.25 million, realizing a gain of approximately $14.5 million. The remaining shares of Series A Preferred Stock outstanding continue to have a 13% cumulative dividend. The 13% Series A Preferred Stock contains a liquidation preference equal to $1,000 per share, plus accrued but unpaid dividends, and is redeemable out of, and to the extent of, legally available funds, at a redemption price equal to the sum of $1,000 plus all accrued but unpaid dividends on the first anniversary of KES Acquisition Company's full and complete repayment of the outstanding Subordinated Notes. As a result of the restructuring, as of March 31, 2007, the aggregate liquidation amount of Series A Preferred Stock outstanding, including the cumulative dividends on the remaining outstanding shares, will be approximately $15.9 million. As of December 31, 2006, the aggregate liquidation amount of the Series A Preferred Stock outstanding, including the cumulative dividends on the shares, was approximately $31 million. Subsequent to the acquisition of the mill by the Sellers, KESA issued an aggregate of $7 million of subordinated promissory notes to the Sellers and certain of their respective affiliates (referred to as the Subordinated Promissory Notes). In August 2006, KESA repaid an aggregate of $4 million of the Subordinated Promissory Notes. In connection with the restructuring, KES Acquisition Company retired the remaining $3 million of the Subordinated Promissory Notes. Pursuant to the terms of the Credit Facility, ALJ is limited in its ability to receive cash distributions from KES Acquisition Company, but is permitted to continue to receive tax sharing payments as described below. For taxable periods beginning after February 28, 2005, KES Acquisition Company has been included in the consolidated federal income tax return filed by ALJ as the common parent. KES Acquisition Company has entered into a Tax Sharing Agreement with ALJ, pursuant to which it has agreed to pay ALJ an amount equal to 50% of its respective "separate company tax liability" (as such term is defined in the Tax Sharing Agreement), excluding the effect of certain intercompany items. ALJ has approximately $255 million of federal net operating loss carryovers currently available to offset the consolidated federal taxable income of the affiliated group in the future. Since the acquisition of the mill by the Sellers, the mill has been operating under a Management Services Agreement with Pinnacle Steel, LLC. The principals of Pinnacle Steel LLC that manage the mill have significant experience and expertise in the steel industry. As part of the restructuring, the management agreement was extended until October 2011, subject to certain extensions or earlier termination provisions contained in the agreement based on financial performance. Pinnacle is entitled to a monthly management fee and a management incentive fee under the agreement. Libra Securities, LLC, was engaged as a financial advisor to assist ALJ and its subsidiaries with respect to the restructuring. Libra was paid $630,000 for its services in connection with the restructuring. Mr. Ravich, who is the Chairman of the Board of Directors of ALJ and a director of KES Acquisition Company, a securities holder of ALJ, a holder of Subordinated Notes and Series B Common Stock of KES Acquisition Company and a holder of Subordinated Promissory Notes, is the Chief Executive Officer and principal of Libra Securities, LLC. Mr. Ravich, either directly or through his family trusts, holds 1,860,000 shares of ALJ's common stock, warrants to purchase 500,000 shares of ALJ's common stock exercisable through August 31, 2008, an option to purchase 200,000 shares of ALJ's common stock exercisable through June 26, 2013 and 812,500 shares of ALJ's redeemable preferred stock. Mr. Ravich and a certain trust for the benefit of members of his family also personally guaranteed $5 million of the Term Loan, in consideration for payments to be made by KES Acquisition Company. Libra's engagement was approved by the independent members of the Board of Directors of ALJ. The terms of the guaranty by Mr. Ravich were also approved by the independent members of the Board of Directors of ALJ. Additional related parties with respect to this transaction include Robert Scott Fritz and Hal G. Byer, both directors of ALJ, who are holders of $292,594 and $161,055, respectively, of the aggregate principal amount of the Subordinated Notes and 144 and 79, respectively, of the shares of Series B common stock of KES Acquisition Company, after giving effect to the restructuring transactions. Full financial reports are available at Certain statements in this press release are forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions regarding the expected benefits of the restructuring. Additional forward-looking statements include any other statement that is not historical fact, including any statement which is preceded by the words "aim," "anticipate," "estimate," "expect," "plan," "will" or similar words. Actual results or events could differ materially from such forward-looking statements for various reasons, including, without limitation, the following: (i) cyclical changes in market supply and demand for steel, (ii) governmental monetary or fiscal policy in the U.S. and other major international economies that might affect the price of steel, (iii) price competition resulting from domestic and global steelmaking capacity and imports of low priced steel, (iv) consolidation in the steel industry, (v) changes in the availability or cost of steel scrap, (vi) fluctuations in the availability and cost of electricity, natural gas or other utilities, (vii) unanticipated equipment failures and plant outages or other extraordinary operating expenses, (viii) customer concentration risks, (ix) labor unrest, work stoppages and/or strikes involving the company's or its suppliers' or customers' workforces, (x) the effect of weather on company's or its customers' or suppliers' production, (xi) the impact of, or changes in, environmental laws or in the application of other legal or regulatory requirements upon the company's operations, (xii) private or governmental liability claims or litigation, or the impact of any adverse outcome of any litigation on the adequacy of the company's reserves, the availability or adequacy of its insurance coverage, its financial well-being or its business and assets, (xiii) changes in interest rates or other borrowing costs, or the effect of existing loan covenants or restrictions upon the cost or availability of credit to fund operations or take advantage of other business opportunities, or (xiv) changes in the company's business strategies or development plans which it may adopt or which may be brought about in response to actions by its suppliers or customers, and any difficulty or inability to successfully consummate or implement as planned any planned or potential projects, acquisitions, joint ventures or strategic alliances. Additional risk factors are discussed in the company's periodic financial reports, which can be found on the website for the Pink Sheets, at Any forward-looking statements included in this press release are made as of the date hereof, based on information available to the company as of the date hereof, and, subject to applicable law, the company assumes no obligation to update any forward-looking statements. SOURCE: ALJ Regional Holdings CONTACT: ALJ Regional Holdings Jess Ravich, 310-312-5600

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