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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
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to __________________.
Commission File No. 0-16254
STEEL OF WEST VIRGINIA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 55-0684304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17th Street and 2nd Avenue, Huntington, West Virginia 25703
(Address of principal executive offices, zip code)
(304) 696 - 8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes (x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing price on March 2, 1998: $53,769,501.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of March 2, 1998: 6,010,795 shares of Common Stock, par value
$.01 per share.
Documents incorporated by reference:
Registrant's Proxy Statement to be
filed pursuant to Regulation 14A within
120 days after the end of Registrant's
fiscal year covered by this Form 10-K Part III
- ---------------------------------------- -----------------
(Document) (Part of Form 10-K
into which Document
incorporated)
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TABLE OF CONTENTS
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PART I..................................................................................................... 1
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 8
Item 3. Legal Proceedings........................................................................ 8
Item 4. Submission of Matters to a Vote of Security
Holders.................................................................................. 9
PART II.................................................................................................... 9
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................................................... 9
Item 6. Selected Financial Data.................................................................. 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 11
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.............................................................................. 17
Item 8. Financial Statements and Supplementary Data.............................................. 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................... 17
PART III................................................................................................... 18
Item 10. Directors and Executive Officers of the
Registrant............................................................................... 18
Item 11. Executive Compensation................................................................... 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................................................... 18
Item 13. Certain Relationships and Related
Transactions............................................................................. 18
PART IV.................................................................................................... 19
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................................................. 19
SIGNATURES................................................................................................. 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES................................................... 26
</TABLE>
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STEEL OF WEST VIRGINIA, INC.
PART I
Item 1. Business
General
Steel of West Virginia, Inc. (the "Company") owns and operates a steel
mini-mill and steel fabrication facility in Huntington, West Virginia as well as
a steel fabrication facility in Memphis, Tennessee. The Company's Huntington
facility custom designs and manufactures finished steel products on a
cost-effective basis by melting steel scrap in electric arc furnaces and
continuously casting the steel into strands of specified lengths and widths
known as billets. The billets are reheated and then moved through the Company's
rolling mills to form engineered shapes known as specialty steel sections.
Unlike most other mini-mills, the Company frequently performs additional
finishing operations on these sections at both of its facilities (such as
cutting to length, hole-punching, shotblasting, welding and coating) to create
custom-finished products that are generally placed directly into its customers'
assembly operations.
The Company's specialty steel sections and custom-finished products
(together, "Finished Products") are sold to selected niche markets and represent
over 90% of the Company's total sales. Finished Products include cross-members
and sub-frame sections ("Trailer Steel Products") used in the construction of
truck trailers; mast sections and hanger bars for industrial lift trucks
("Industrial Lift Truck Products"); sections used in manufactured housing;
guardrail posts; light rails and related accessories for the mining industries;
frame sections and cleats for off-highway construction equipment (such as
bulldozers and graders); and other miscellaneous steel products. The Company
believes that it is the dominant producer of Trailer Steel and Industrial Lift
Truck Products in the United States.
The Company enjoys a number of competitive advantages. As a mini-mill,
the Company recycles steel from scrap, resulting in lower production costs
compared to integrated steel mills, which produce steel by processing iron ore
and other raw materials in blast furnaces. The Company's location in a scrap
surplus region near its major customers reduces raw material and transportation
costs, allows for closer customer contact and enables the Company and its
customers to maintain lower inventory levels. West Virginia's abundant supply of
coal, used in producing electricity which is integral to the Company's
production process, helps to keep energy costs relatively low. In addition, the
Company's flexible manufacturing capabilities enable it to meet demand for a
variety of custom-order products, resulting in its obtaining a larger share of
its major customers' business.
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The Company's business strategy is to maintain its strong position in
each of the markets for its Finished Products by continuing to produce high
quality products on a cost-effective basis and to identify additional markets
where it can profitably supply Finished Products.
The Company's mini-mill was acquired in 1982 by SWVA, Inc. ("SWVA"),
which was organized by a group of investors including certain former members of
the Company's management. The Company was organized in the State of Delaware in
1986 by then members of management and a private investment firm specializing in
leveraged acquisitions, and the Company acquired all of the capital stock of
SWVA in December 1986. Since then, SWVA has been a wholly-owned operating
subsidiary. In October 1987, the Company sold 1.6 million shares of its Common
Stock in an initial public offering. In February 1993, the Company completed an
underwritten public offering pursuant to which it sold an additional 1.94
million shares of Common Stock and 2.66 million shares were sold by certain
non-employee stockholders of the Company.
The Company's other wholly-owned subsidiary, Marshall Steel, Inc.
("Marshall"), located in Memphis, Tennessee, was acquired in April 1993.
Marshall fabricates special steel sections for the truck trailer industry. Since
August 1993, SWVA has been the primary supplier of hot rolled steel sections to
Marshall, having replaced the previous offshore supplier.
The Company's executive offices are located at 17th Street and 2nd
Avenue, Huntington, West Virginia, 25703, and its telephone number is (304) 696-
8200. Unless the context otherwise requires, the term "Company" refers to Steel
of West Virginia, Inc., SWVA and Marshall on a consolidated basis.
Manufacturing Operations
The Company recycles steel at the Huntington facility by melting steel
scrap in two 70-ton electric arc furnaces and adding a variety of alloys to make
different grades of steel according to customer specifications. The refined
molten steel is then ladled into a three-strand continuous caster from which it
emerges as continuous strands with a cross-section ranging from approximately 16
to 64 square inches. The strands are cut into billets of specified lengths which
are moved into the Company's rolling mills where they are reheated to
approximately 2,300 degrees Fahrenheit and fed through a series of rollers to
reduce their size and form them into specialty steel sections. These sections
emerge from the rolling mills, are allowed to cool uniformly on a cooling bed,
and are cut to custom lengths. The sections produced by the Company are composed
of carbon and low alloy high-strength steels.
Depending on an individual customer's needs, many of the sections are
then cut to length, hole-punched, shotblasted, welded or coated. These
custom-finishing operations are done to customer specifications, and often were
originally
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performed by the Company's customers directly but can be done more
cost-effectively by the Company. The custom-finished products are generally
placed directly into the customers' assembly operations.
The annual equipment capacity of the melt shop furnaces and caster is
approximately 296,000 tons. The Company produced 249,000 tons of billets in
1997, or 84.1% of its melt shop capacity. The annual capacity of Finished
Products from the Company's rolling mills is currently 260,000 tons. The Company
produced 186,000 tons of Finished Products in 1997 which constituted 71.5% of
its capacity. Historically, the Company has generally been able to produce all
the billets it requires in its rolling operations, and has also generally been
able to produce additional billets for sale to help cover fixed costs. However,
the plant expansion and modernization program described under "Capital
Improvements and Expansion" is intended to increase the plant's rolling capacity
to over 420,000 tons annually. The Company will either purchase billets from an
outside vendor or upgrade the capacity of its current furnace and caster to meet
the rolling mills' new billet requirements.
The Company transports its products by common carrier, generally
shipping by truck and occasionally by rail and barge. The Huntington location
has railroad sidings and a barge loading facility.
Capital Improvements and Expansion
The Company plans to increase capacity and productivity over the next
several years by continuing to modernize the Huntington facility and possibly
through strategic acquisitions, both of which will be subject to available funds
and approval by the Company's Board of Directors. In late 1994, the Company
completed the first phase of its plant expansion and modernization program. The
project included the upgrading of one of the plant's rolling mills, as well as
the installation of additional fabrication equipment. In December 1996, the
Company's Board of Directors approved Phase II of the expansion and
modernization program. The project included a new high speed reheat furnace,
quick-change mill roll stands, new warehouse space, and other equipment
enhancements. The improvements are intended to reduce operating costs and
increase the plant's rolling capacity by approximately 62%, to over 420,000 tons
per year. The project, costing approximately $35 million (not including
capitalized interest), was completed in early 1998. The Company's expenditures
for required capital replacements are currently anticipated to average
approximately $1,000,000 to $2,000,000 annually over the next several years.
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Products
Trailer Steel Products are used in the assembly of trailers for highway
transport. These products include cross-members, which are steel mini-beams
providing floor support in truck trailers, and subframe sections which are beams
attached to the undersides of truck trailers allowing cargo weight to be
redistributed evenly over the wheels. Sales of Trailer Steel Products
represented approximately 43%, 42%, and 51% of total net sales of the Company
during the last three fiscal years ending December 31, 1997, 1996, and 1995,
respectively. The Company believes that it is the dominant producer of such
products in the United States.
The Company also produces mast sections and hanger bars for industrial
lift trucks and narrow aisle hand-operated trucks, as well as rail components
used primarily in coal mining, including light rails and joint bars used to join
rail sections. In addition, the Company produces frame sections and cleats used
in off-highway equipment (such as bulldozers and graders). The Company also
produces sections used in manufactured housing, automotive lifts, transit
systems, containers, bridges, merchant sections, rack sections, guardrail posts,
and historically, depending upon production costs and its other production
schedules, billets.
The Company manufactures most of its products to customer
specifications, and in many instances provides custom-finishing operations. Due
to the custom nature of its Finished Products, the Company generally maintains a
minimum of Finished Product inventory.
The Company regularly investigates the market potential of new
products. Products that the Company has identified for growth include structural
beams for manufactured housing, I-beams, wide flange beams and in 1998, channels
for the merchant industry, and rack sections used in warehousing applications.
Management believes that the Company's modernization project will enhance its
ability to penetrate these markets, although there can be no assurance that it
will be able to do so.
Customers
The Company sells to approximately 200 customers, and during the year
ended December 31, 1997, no single customer accounted for more than 10% of the
Company's net sales. The Company currently has no long-term agreements with its
customers, and there can be no assurance that any of the Company's customers
will continue to purchase any specific product or quantity.
Marketing
Senior management of the Company is directly involved in sales to new
customers, and in sales of new products to existing customers. The Company's
sales efforts cover all of the continental United States and certain foreign
markets, although during 1997 exports constituted less than 5% of the Company's
net sales. The
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Company services the ongoing needs of its customers through five in-house sales
representatives at its Huntington facility and two in-house sales
representatives at its Memphis facility.
Competition and Other Market Factors
The Company believes that there are many factors that distinguish it
from other steel producers, including that the majority of its Finished Products
are less volatile in their pricing than commodity steel products. Nonetheless,
both the domestic steel industry and the Company's business are highly cyclical
in nature. Management believes that its 1995 and 1997 net sales are more
indicative of the Company's performance during periods of a stronger economy.
Management believes that the Company's lower net sales during 1996 were largely
due to the effects of a downturn in certain industries the Company serves, most
significantly the truck trailer industry.
The domestic and foreign steel industries are characterized by intense
competition. The Company has identified competition from the following sources:
(1) in its truck trailer market, the Company faces competition from two North
American mills; (2) in its industrial truck market, the Company competes with
Japanese, British, West German and Italian producers who offer similar products;
(3) in its guardrail market, the Company encounters competition from many other
domestic mills; and (4) in its off-highway equipment market, the Company
competes with Italian, Japanese and British manufacturers. Despite this
competition, the Company believes that it is the dominant producer of Trailer
Steel and Industrial Lift Truck Products in the United States. Certain other
companies such as Nucor Corporation, Chaparral Steel Company, Steel Dynamics,
Inc. and one steel fabricator have announced their intention to build new plants
within the next 12-24 months, which may compete with the Company. Although
management believes that the lower production costs that are anticipated as a
result of its capital improvement plan, close involvement with customers and the
Company's geographical location are among its competitive advantages, there can
be no assurance that the foregoing competition will not have an adverse effect
on the Company in the future.
Many of the Company's customers are in mature businesses. Accordingly,
any material increase in tonnage sales of Finished Products by the Company would
likely be the result of continued improvement in the economy as a whole, an
increased share of the market for existing products, or sales by the Company of
new products. The Company regularly investigates the market potential of new
products, and it has identified certain products for growth, as described under
"Products" herein. However, no assurance can be given that the Company will be
successful in manufacturing and selling such products.
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Many steel producers that currently are competitors of the Company or
which could enter the Company's markets have financial resources substantially
greater than those available to the Company. The cost of steel scrap, the
principal raw material used in the Company's mill, is subject to market
conditions largely beyond the control of the Company. Further, rolled steel,
which is the principal raw material used in the Company's Memphis facility, may
be obtained by the Company's competitors on better terms. See "Raw Materials."
Backlog and Seasonality
At December 31, 1997, the Company had firm orders for 60,183 tons
representing sales of approximately $36,983,000, as compared with 33,015 tons
representing sales of approximately $20,222,000 at December 31, 1996. The
Company does not believe backlog is a significant indicator of future sales.
The Company's Huntington, West Virginia operations occasionally shut
down, for one to three weeks, for maintenance on a staggered basis. The
Company's operations are not otherwise subject to seasonal fluctuations in
sales.
Raw Materials
The principal raw material used in the Company's steel mill is ferrous
scrap derived from, among other sources, junked automobiles, structural steel
and machines. The purchase of steel scrap is subject to market conditions
largely beyond the control of the Company. However, the Company is located in a
scrap surplus region, and therefore typically maintains less than a one month
supply of scrap, which keeps inventory costs to a minimum. The Company has also
supplemented scrap with a mix of direct reduced iron when it was economical to
do so. The Company has historically been successful in passing on cost increases
through price increases, however, the effect of market price competition has
limited the Company's ability to increase prices. Although one scrap dealer
supplies between 25% and 30% of the Company's requirements, the Company believes
that a number of adequate sources of scrap and other raw materials that it uses
are readily available. Since August 1993, SWVA has been the primary supplier of
hot rolled steel sections to Marshall, having replaced the previous offshore
supplier.
The Company's manufacturing processes consume large amounts of energy
in the form of electricity that the Company purchases principally from American
Electric Power. The cost of electric power was approximately 6.2% of the cost of
goods sold for 1997. West Virginia's abundant supply of coal, used in producing
electricity, helps keep energy costs relatively low. The Company's current major
power supply contract with American Electric Power automatically continues until
such time as either party gives the other 12 months written notice of
cancellation. The contract provides sufficient electrical power to operate the
facility 24 hours a day, seven days a week at favorable rates. See "Business --
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Manufacturing Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Employees
As of December 31, 1997, the Company employed 590 people, approximately
82% of whom were members of the United Steelworkers of America. The Company
believes its relations with its employees are generally good. The Company's
current collective bargaining agreement at the Huntington, West Virginia
facility expires in June 1999. Under this agreement, all employees are salaried,
there are no time clocks or job descriptions, and the Company utilizes only two
basic classifications for production and maintenance personnel (steelmaker, and
trade and craft). The Company believes that its wage rates are competitive with
other mini-mills. However, there can be no assurance regarding the outcome of
any future negotiations with the Company's union.
The Company maintains a profit-sharing plan for both bargaining unit
and non-bargaining unit employees pursuant to which a percentage of pre-tax
profits are allocated to a profit-sharing retirement fund and a cash bonus.
In contrast to the retiree health insurance commonly provided in the
domestic steel industry, the Company offers no material post-retirement employee
health care or other non-pension benefit programs.
Environmental & 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 because they
produce certain types of dust containing lead, zinc and cadmium. The Company
currently collects and handles such wastes through contracts with a company
which reclaims, from the waste dust, certain materials and recycles or disposes
of the remainder. During 1997, the Company updated its radiation detection
system for incoming scrap. 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 in, generated or disposed of by the Company, 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, as to which the Company is self-insured, could be material. Changes
in federal or state laws, regulations or requirements or discovery of unknown
conditions could require additional expenditures by the Company.
The Company's operations are subject to the federal Clean Air Act which
provides for regulation, through state implementation of federal requirements,
of the
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emission of certain air pollutants. It is expected that the Environmental
Protection Agency will promulgate industry-wide standards and technology
requirements for the control of emissions of particular regulated air pollutants
that may impose more stringent requirements on the Company's operations in the
future. The Company will continue to monitor these evolving laws and regulations
and will plan and budget, as appropriate, for any such additional capital and
operating expenditures that may be required to upgrade or install new or
additional pollution control equipment and secure additional or modified
permits. There can be no assurance that these evolving federal requirements will
not require the Company to make material expenditures in the future.
Item 2. Properties
Set forth below is certain information with respect to the Company's
properties. The Company believes that its two facilities, which are located on
approximately 42 acres of land owned by the Company in downtown Huntington, West
Virginia, adjacent to rail lines and the Ohio River, and approximately 4 acres
of land owned by the Company in Memphis, Tennessee, adjacent to the Mississippi
River, are well maintained, in good condition and are adequate and suitable for
its operating needs. All of the Company's properties are currently subject to a
first mortgage in favor of the Company's senior lender.
<TABLE>
<CAPTION>
Approximate
Huntington, WV Facility Square Footage
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Rolling Mills ........................................ 309,000
Furnaces and Caster .................................. 88,500
Machine Shop, Fabrication Facilities ................. 115,075
and Miscellaneous Facilities
Administrative, Engineering and Sales Offices ........ 45,600
Memphis, TN Facility
Fabrication Facility ................................. 38,400
Administrative and Sales Office ...................... 2,600
</TABLE>
Item 3. Legal Proceedings
None.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market/SM/ under the symbol: SWVA. The following table
sets forth, for the fiscal periods indicated, the high and low last sales
prices of the Common Stock (without retail markups, markdowns or commissions)
on the Nasdaq National Market System.
<TABLE>
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High Low
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1997
Fourth Quarter...................... $ 12 $ 8
Third Quarter....................... 11 9 5/8
Second Quarter...................... 10 3/4 7 1/2
First Quarter....................... 7 3/4 6 1/4
1996
Fourth Quarter...................... $ 7 1/2 $ 5 1/4
Third Quarter....................... 9 5 1/2
Second Quarter...................... 9 3/4 8 1/2
First Quarter....................... 11 8 3/4
</TABLE>
On March 2, 1998, there were approximately 192 holders of record of the
Company's Common Stock.
The Company has paid no cash dividends in the last five years and
currently intends to retain all earnings to support the development of its
business rather than paying dividends on its Common Stock. Certain of the
Company's debt instruments restrict the payment of dividends by SWVA to the
Company to no more than 50% of SWVA's prior year's net income, subject to
limitations for maintenance of certain net worth and working capital levels.
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Item 6. Selected Financial Data
The following selected financial data for each of the five years in the
period ended December 31, 1997, are derived from the Consolidated Financial
Statements of the Company. The data should be read in conjunction with the
Consolidated Financial Statements, related Notes and other financial information
included herein.
<TABLE>
<CAPTION>
Year Ended December 31
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1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ........................... $ 112,776 $ 95,334 $ 129,341 $ 124,229 $ 106,354
Cost of sales ....................... 98,538 85,339 107,191 103,327 88,698
----------- ----------- ----------- ----------- -----------
Gross profit ........................ 14,238 9,995 22,150 20,902 17,656
Gross profit margin ................ 12.6% 10.5% 17.1% 16.8% 16.6 %
Selling and administrative expenses . 5,699 4,463 5,018 5,454 4,432
----------- ----------- ----------- ----------- -----------
Operating income .................... 8,539 5,532 17,132 15,448 13,224
Interest expense .................... 847 1,273 1,642 898 1,624
(Gain) loss on disposal of assets ... (733) 8,936 368 1,070 184
Other (income) ...................... (532) (365) (595) (976) (876)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ... 8,957 (4,312) 15,717 14,456 12,292
Income tax expense (benefit) ........ 3,698 (1,374) 6,253 5,662 5,156
----------- ----------- ----------- ----------- -----------
Net income (loss) ................... $ 5,259 $ (2,938) $ 9,464 $ 8,794 $ 7,136
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and diluted earnings (loss) per
common share (1) ................. $ .88 $ (.49) $ 1.40 $ 1.24 $ 1.03
Weighted average common shares
outstanding:
Basic ......................... 5,993,967 6,024,445 6,782,127 7,091,360 6,929,948
Diluted ....................... 6,008,934 6,024,445 6,783,515 7,091,360 6,942,835
Balance Sheet Data (end of period):
Working capital ..................... $ 15,610 $ 15,061 $ 15,514 $ 10,516 $ 14,569
Total assets ........................ 113,715 79,299 95,123 94,174 80,721
Current liabilities ................. 18,704 12,166 18,960 20,211 17,183
Long-term debt ...................... 34,339 10,975 11,978 11,542 10,211
Treasury stock ...................... 11,483 11,483 7,983 0 0
Total stockholders' equity .......... 54,302 49,007 55,415 53,934 45,140
</TABLE>
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(1) The earnings per share amounts prior to 1997 have been restated, as
required, to comply with Financial Accounting Standards Board Statement
No.128--"Earnings per Share." For further discussion of earnings per share
and the impact of FASB 128, see the Notes to the Consolidated Financial
Statements beginning on page F-5.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company believes that there are many factors that distinguish it
from other steel producers, including that the majority of its Finished Products
are less volatile in their pricing than commodity steel products. Nonetheless,
both the domestic steel industry and the Company's business are highly cyclical
in nature. Management believes that its 1995 and 1997 results are more
indicative of the Company's net sales performance during periods of a stronger
economy. Management believes that the Company's lower net sales during 1996 were
largely due to the effects of a downturn in certain industries the Company
serves, most significantly, the truck trailer industry.
In 1996, the Company amended its senior credit agreement to increase
the amount of funds available under its revolving line of credit from
$10,000,000 to $15,000,000. In 1997, the Company amended its senior credit
agreement to permit the Company to borrow $23,000,000 under an "Additional
Capital Expenditure Line" of credit.
The Company's Board of Directors has authorized management to buy back
up to 1,700,000 shares of its common stock from time to time. During 1997, the
Company did not purchase any shares of its common stock, but it has repurchased
a total of 1,105,300 shares at a cost of $11,483,000 in the two years prior
thereto.
Most companies' computer programs have applications that, if not
corrected, could fail or create erroneous results at the Year 2000, and most
companies must undertake major projects to address the Year 2000 issue.
Substantially all of the Company's critical business applications have been
modified and tested to ensure Year 2000 compliance, and are currently in use.
The remaining business programs are scheduled for completion and testing by
March 1999. The total dollar amount to be spent to remediate the Company's Year
2000 issue is not anticipated to be material.
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Results of Operations
The following table sets forth the percentages of net sales represented
by certain income and expense items and the tonnage sales for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
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1997 1996 1995
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<S> <C> <C> <C>
NET SALES .......................... 100.0% 100.0% 100.0%
COST OF SALES ...................... 87.4 89.5 82.9
----- ----- -----
GROSS PROFIT ....................... 12.6 10.5 17.1
SELLING AND ADMINISTRATIVE EXPENSES 5.0 4.7 3.9
----- ----- -----
OPERATING INCOME ................... 7.6 5.8 13.2
INTEREST EXPENSE ................... .8 1.3 1.3
(GAIN) LOSS ON DISPOSAL OF ASSETS .. (0.6) 9.4 0.3
OTHER (INCOME) ..................... (0.5) (0.4) (0.5)
----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES .. 7.9 (4.5) 12.1
INCOME TAX EXPENSE (BENEFIT) ....... 3.3 (1.4) 4.8
----- ----- -----
NET INCOME (LOSS) .................. 4.6% (3.1)% 7.3%
----- ----- -----
----- ----- -----
TONNAGE SALES (in thousands of tons) 188.1 152.9 212.7
----- ----- -----
----- ----- -----
</TABLE>
Year Ended December 31, 1997, Compared with Year Ended December 31, 1996
Net Sales. Net sales for 1997 increased by $17.5 million (18.4%) from
$95.3 million in 1996 to $112.8 million in 1997, primarily due to an increase in
the tonnage of Finished Products shipped. Total tonnage sales increased by
35,235 tons (23.0%) to 188,094 tons in 1997, reflecting a 34,749 ton increase in
the sale of Finished Products, and a 486 ton increase in the sale of billets.
Management believes that the Company's higher net sales during 1997 were largely
due to the effects of an upturn in certain industries the Company serves, most
significantly, the truck trailer industry. The average selling price per ton for
Finished Products decreased by $26 (4.1%) to $610 in 1997, due to competitive
pressures and efforts to increase market penetration, while the average selling
price per ton for billets decreased by $2 (1.0%) to $257 in 1997.
12
<PAGE>
Cost of Sales. Cost of sales for 1997 increased by $13.2 million
(15.5%) from $85.3 million in 1996 to $98.5 million in 1997. This increase was
principally due to higher production volumes. As a percentage of net sales, cost
of sales decreased from 89.5% in 1996 to 87.4% in 1997, due to fixed costs being
a smaller component of cost of goods sold at higher sales and production levels.
Gross Profit. As a result of the above, gross profit for 1997 increased
by $4.2 million (42.0%) from $10.0 million in 1996 to $14.2 million in 1997. As
a percentage of net sales, gross profit for 1997 increased from 10.5% in 1996 to
12.6% in 1997.
Selling and Administrative Expenses. Selling and administrative
expenses for 1997 were $5.7 million compared to $4.5 million in 1996. This
increase was due primarily to higher professional and consulting fees, including
fees associated with the unsolicited proposal from CPT Holdings, Inc. to enter
into discussions regarding the possible sale of the Company; the proxy contest
relating to certain of the matters that were voted on by the stockholders at the
Annual Meeting of the Stockholders; and higher travel expenses. As a percentage
of net sales, selling and administrative expenses increased from 4.7% in 1996 to
5.1% in 1997.
Interest Expense and (Gain) Loss on Disposal of Assets. Interest
expense for 1997 decreased by $426,000 (33.5%) from $1,273,000 in 1996 to
$847,000 in 1997. Interest expense decreased primarily due to $908,000 of
interest costs being capitalized in connection with Phase II of the Company's
expansion and modernization program. Gain on disposal of assets for 1997 was
$733,000 relating to the gain on the sale of certain equipment. This compares to
a loss on disposal of assets in 1996 of $8,936,000 in connection with the
Company's expansion and modernization program.
Net Income. As a result of the above, net income for 1997 increased by
$8.2 million (278.9%) from a $2.9 million loss in 1996 to $5.3 million income in
1997. As a percentage of net sales, net income increased from a 3.1% loss in
1996 to 4.7% income in 1997.
Year Ended December 31, 1996, Compared with Year Ended December 31, 1995
Net Sales. Net sales for 1996 decreased by $34 million (26.3%) from
$129.3 million in 1995 to $95.3 million in 1996, primarily due to a decrease in
the tonnage of Finished Products shipped. Total tonnage sales decreased by
59,795 tons (28.1%) to 152,857 tons in 1996, reflecting a 36,231 ton decrease in
the sale of Finished Products, and a 23,564 ton decrease in the sale of billets.
Management believes that the Company's lower net sales during 1996 were largely
due to the effects of a downturn in certain industries the Company serves, most
significantly, the truck trailer industry. The average selling price per ton for
Finished Products decreased by $28 (4.2%) to $636 in 1996, while the average
selling price per ton for billets increased by $10 (4.0%) to $259 in 1996.
13
<PAGE>
Cost of Sales. Cost of sales for 1996 decreased by $21.9 million
(20.4%) from $107.2 million in 1995 to $85.3 million in 1996. This decrease was
principally due to the decrease in Finished Product tonnage, offset by higher
natural gas and depreciation expense. As a percentage of net sales, cost of
sales increased from 82.9% in 1995 to 89.5% in 1996, due to the higher costs
described above, together with other relatively higher fixed cost levels
associated with lower volume.
Gross Profit. As a result of the above, gross profit for 1996 decreased
by $12.1 million (54.8%) from $22.1 million in 1995 to $10.0 million in 1996. As
a percentage of net sales, gross profit for 1996 decreased from 17.1% in 1995 to
10.5% in 1996 as a result of decreased higher margin Finished Product sales.
Selling and Administrative Expenses. Selling and administrative
expenses for 1996 were $4.5 million compared to $5.0 million in 1995. Lower
selling and administrative expenses were incurred due to lower salaries and
professional fees. As a percentage of net sales, selling and administrative
expenses increased from 3.9% in 1995 to 4.7% in 1996.
Interest Expense and (Gain) Loss on Disposal of Assets. Interest
expense for 1996 decreased by $369,000 (22.5%) from $1,642,000 in 1995 to
$1,273,000 in 1996. This reduction was a result of both lower interest rates and
the reduction of principal amount outstanding due to the scheduled amortization
of principal. Loss on disposal of assets for 1996 was $8,936,000 compared to
$368,000 in 1995. This increase was principally due to the estimated loss on
disposal of assets in connection with the Company's expansion and modernization
program.
Net Income. As a result of the above, net income for 1996 decreased by
$12.4 million (131.0%) from $9.5 million in 1995 to a $2.9 million loss in 1996.
As a percentage of net sales, net income decreased from 7.3% in 1995 to a 3.1%
loss in 1996.
Liquidity and Capital Resources
The Company's ability to provide funds from its operations, together
with funds available under the terms of the Company's $15,000,000 revolving line
of credit, historically have been sufficient to meet the Company's short-term
liquidity needs. The terms of the Company's senior credit agreement provide for
interest at the Chemical Bank prime rate or LIBOR plus 1-3/4%; and an annual
revolving credit line commitment fee of 1/8% of the unused balance. The total
borrowing capacity under the revolving credit line is governed by a formula
based on levels of accounts receivable and inventory. Cash provided from
operations approximated $6.1 million, $14.5 million and $8.8 million during each
of the three years ended December 31, 1997, 1996, and 1995, respectively. During
this same time period, average annual borrowings against the revolving line of
credit have been $7.8 million. At December 31, 1997, the Company had $2.5
million of the revolving credit line available for borrowing.
14
<PAGE>
During 1996, the Company embarked on Phase II of the expansion and
modernization program to the Huntington, WV plant. This project was completed in
early-1998, resulting in the Company expending approximately $35 million for
capital improvements. The program included a new high speed reheat furnace,
quick-change mill roll stands, new warehouse space, and other equipment
enhancements. During 1997 the senior credit agreement was amended, enabling the
Company to borrow an additional $23 million in term loans to finance, in part,
Phase II of the Company's expansion and modernization program. In addition, the
amendment permits the Company to convert its "Capital Expenditure Term Loans" to
a fixed interest rate until January 1, 1999.
The Company's senior credit arrangement provides that the Company's
senior lender may terminate all of the Company's loans on January 1, 2001.
Assuming payment of all scheduled amortization until then, only a portion of the
amount drawn down against the Capital Expenditure Lines, together with any
borrowings against the revolving credit line, would be outstanding at such date.
The Company is currently in compliance with the covenants of its loan agreement,
and is not aware of any reason why it would not be able to refinance its
indebtedness at its scheduled term, if its senior lender were to elect to
terminate the credit agreement. The Company has no reason to believe that its
senior lender plans to terminate the credit agreement.
The Company's expenditures for required capital replacements are
currently anticipated to average approximately $1 million-$2 million annually
over the next several years. Management has no reason to believe that internally
generated cash flow, together with borrowings under its revolving credit line,
will not be sufficient to meet the Company's ongoing liquidity needs. Other
discretionary capital spending and strategic acquisitions, if any, would also
place demands on the Company's longer-term liquidity position. In particular,
the Company plans to increase capacity and productivity over the next several
years by continuing to modernize the Huntington facility. Such expenditures,
which could be significant, and such acquisitions, would be subject to
availability of funds and approval by the Company's Board of Directors.
Impact of Inflation
Although margins can be affected by inflationary conditions, in recent
years, the Company has not experienced any material adverse effects from
inflation. The Company's principal cost components are steel scrap, labor and
energy. Scrap is purchased pursuant to monthly contracts. Although the Company
has historically been successful in passing on cost increases through price
increases, the effect of market price competition has limited the Company's
ability to increase prices. The current collective bargaining agreement is
scheduled to expire in June 1999. The Company's current major power supply
contract with American Electric Power automatically continues until such time as
either party gives the other 12 months written notice of cancellation.
15
<PAGE>
Impact of Recent Accounting Pronouncements
In 1996, the Company adopted SFAS No. 121--"Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed
Of." This pronouncement requires impairment losses to be recorded on long-lived
assets used in the Company's operations when impairment indicators are present
and the estimated undiscounted cash flows to be generated by those assets are
less than the assets' carrying value. During 1996, the Company recognized
charges of approximately $8,936,000 principally related to the disposal of
assets in connection with the Company's modernization and expansion program. The
Company continuously analyzes new processes and equipment that would allow it to
produce products more cost-effectively in order to maintain its position in each
of its niche markets or expand into related markets. In the future, material
charges against operations could result if new production processes or equipment
are identified and installed or use of certain existing processes and equipment
is discontinued.
In 1997, the Financial Accounting Standards Board issued Statement No.
130 (SFAS No. 130) "Reporting Comprehensive Income" and Statement No. 131 (SFAS
No. 131) "Disclosures about Segments of an Enterprise and Related Information"
(both of which must be adopted for fiscal years beginning after December 15,
1997). SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The Company currently has no items of other comprehensive
income; therefore, SFAS No. 130 does not currently apply. SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Management
believes the provisions of this statement will not have a material impact upon
its current reporting.
Forward Looking Statements
The Company, or its executive officers and directors on behalf of the
Company, may from time to time make "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
(collectively, the "Acts"). The Private Securities Litigation Reform Act of 1995
provides a safe harbor with respect to any such (i) forward looking statements
that may be contained in the Company's reports and other documents, including
this form 10-K, filed with the Securities and Exchange Commission under Sections
13 or 15(d) of the Securities Exchange Act of 1934 and (ii) oral forward looking
statements made by the Company's executive officers and directors on behalf of
the Company to the press, potential investors, securities analysts and others.
Such forward looking statements involve, and could involve, among other things,
statements regarding the Company's intent, belief or expectation with respect to
(i) the Company's results of operations and financial condition, (ii) the
consummation of acquisition and financing
16
<PAGE>
transactions and the effect thereof on the Company's business, and (iii) the
Company's plans and objectives for future operations and expansion. Any such
forward looking statements would be subject to the risks and uncertainties that
could cause actual results of operations, financial condition, acquisitions,
financing transactions, operations, expansion and other events to differ
materially from those expressed or implied in such forward looking statements.
Any such forward looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control. Further, the
Company's business is subject to a number of risks that would affect any such
forward looking statements. These risks and uncertainties include, but are not
limited to, the cyclical and capital intensive nature of the industry; foreign
and domestic competition; product demand and industry pricing; volatility of raw
material costs, especially steel scrap; excess industry capacity; cost of
compliance with environmental regulations; and management's estimates of niche
market data. These risks and uncertainties could cause actual results of the
Company to differ materially from those projected or implied by such forward
looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules and report of independent
auditors thereon listed in Item 14(a)(1) and (a)(2) hereof are incorporated
herein by reference and are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
17
<PAGE>
PART III
The information required by Part III (Items 10 through 13) is
incorporated herein by reference to the captions "Principal Stockholders,"
"Election of Directors" and "Executive Compensation" in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Company's fiscal year covered by this report.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) Documents filed as part of this Report:
(1) The following consolidated financial statements of
Registrant and its subsidiaries are included in Item 8 of
this report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................ F-1
Consolidated Balance Sheets - December 31, 1997
and 1996 .............................................. F-2
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995 ...................... F-3
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995 ...................... F-4
Notes to Consolidated Financial Statements ............ F-5
</TABLE>
(2) Financial Statement Schedules - Years ended December 31,
1997, 1996 and 1995.
The following consolidated financial statement schedules
of Registrant and its subsidiaries are included pursuant
to Item 14(d):
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule I - Condensed Financial Information
of Registrant ...................................... S-1
Schedule II - Valuation and Qualifying Accounts ... S-4
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
19
<PAGE>
(3) Exhibits
3.1 Certificate of Incorporation of Steel of West Virginia, Inc. (the
"Company"), as amended (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended December
31, 1995, No. 0-1689).
3.2 By-Laws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1, No.
33-16845).
4.1 Financing Agreement ("Financing Agreement"), dated December 30, 1986,
between The CIT Group/Business Credit, Inc. ("CIT") and SWVA, Inc.
(formerly Steel of West Virginia, Inc.) and Charter Acquisition
Corporation ("Acquisition") (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1, No. 33-16845).
4.1(a) Amendment to the Financing Agreement, dated August 27, 1987 ("Amendment
No. 1") (incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1, No. 33-16845).
4.1(b) Amendment to the Financing Agreement, dated September 27, 1989
("Amendment No. 2") (incorporated by reference to Exhibit 28(a) to the
Company's Current Report on Form 8-K, No. 0-16254, filed on October 10,
1989).
4.1(c) Amendment to the Financing Agreement, dated September 30, 1992
("Amendment No. 3") (incorporated by reference to Exhibit 28(b) to the
Company's Quarterly Report on Form 10-Q, No. 0-16254, filed on October
13, 1992).
4.1(d) Amendment to the Financing Agreement, dated March 17, 1993 ("Amendment
No. 4") (incorporated by reference to Exhibit 4.1(d) to the Company's
Annual Report on Form 10- K for the fiscal year ended December 31,
1993, No. 0-16254).
4.1(e) Amendment to the Financing Agreement, dated February 25, 1994
("Amendment No. 5") (incorporated by reference to Exhibit 4.1(e) to the
Company's Annual Report on Form 10- K for the Fiscal Year ended
December 31, 1994, No. 0-16254).
4.1(f) Amendment to the Financing Agreement, dated December 30, 1994
("Amendment No. 6") (incorporated by reference to Exhibit 4.1(f) to the
Company's Annual Report on Form 10-K for the Fiscal Year ended December
31, 1994, No. 0-16254).
4.1(g) Amendment to the Financing Agreement, dated February 28, 1996
("Amendment No. 7") (incorporated by reference to Exhibit 4.1(g) to the
Company's Annual Report on Form 10- K for the Fiscal Year ended
December 31, 1995, No. 0-16254).
4.1(h) Amendment to the Financing Agreement, dated April 3, 1997 ("Amendment
No. 8"), (incorporated by reference to Exhibit 4.1(h) to the Company's
Quarterly Report on Form 10-Q, No. 0-16254, filed on August 14, 1997).
4.2 Term Promissory Note (the "Original Promissory Note") issued by
Acquisition in favor of CIT, dated December 30, 1986 (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1, No. 33-16845).
20
<PAGE>
4.2(a) Amendment, dated September 27, 1989 (the "Original Promissory Note
Amendment"), to the Original Promissory Note (incorporated by reference
to Exhibit 28(f) to the Company's Current Report on Form 8-K, No.
0-16254, filed on October 10, 1989).
4.3 Promissory Note, dated September 27, 1989 ("Note 2"), in the principal
amount of $26,922,000 issued by SWVA in favor of CIT (incorporated by
reference to Exhibit 28(c) to the Company's Current Report on Form 8-K,
No. 0-16254, filed on October 10, 1989).
4.4 Promissory Note, dated September 30, 1992 ("Note 3"), in the principal
amount of $6,500,000 issued by SWVA in favor of CIT (incorporated by
reference to Exhibit 28(b) to the Company's Quarterly Report on Form
10-Q, No. 0-16254, filed on October 13, 1992).
4.5 Promissory Note, dated July 11, 1994 ("Note 4") in the principal amount
of $6,000,000 issued by SWVA in favor of CIT (incorporated by reference
to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1994, No. 0-16254).
4.6 Guaranty, dated December 30, 1986 (the "Guaranty"), by the Company in
favor of CIT relating to loan from CIT to Acquisition (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on
Form S-1, No. 33-16845).
4.7 Guaranty, dated June 9, 1993 (the "Marshall Guaranty"), by Marshall
Steel, Inc. ("Marshall") in favor of CIT (incorporated by reference to
Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, No. 0-16254).
4.8 Security Agreement, dated June 9, 1993 (the "Security Agreement"), by
Marshall in favor of CIT (incorporated by reference to Exhibit 4.1(d)
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, No. 0-16254).
4.9 Pledge Agreement, dated September 26, 1989 (the "Pledge Agreement"), by
the Company in favor of CIT (incorporated by reference to Exhibit 4.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, No. 0-16254).
4.10 Deed of Trust, Assignment of Leases and Rents and Security Agreement,
dated December 30, 1986 (the "Mortgage"), by SWVA in favor of CIT
(incorporated by reference to Exhibit 4.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992, No.
0-16254).
4.10(a) First Amendment of Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated September 27, 1989 ("Mortgage Amendment No.
1") (incorporated by reference to Exhibit 4.7(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992,
No. 0-16254).
4.10(b) Second Amendment of Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated September 30, 1992 (incorporated by reference
to Exhibit 28(c) to the Company's Quarterly Report on Form 10-Q, No.
0-16254, filed on October 13, 1992) ("Mortgage Amendment No. 2").
4.10(c) Third Amendment to Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated February 1, 1994 (filed herewith).
21
<PAGE>
4.10(d) Fourth Amendment to Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated April 3, 1997 (incorporated by reference to
Exhibit 4.10(d) to the Company's Quarterly Report on Form 10-Q, No.
0-16254, filed on August 14, 1997).
4.11 Negative Pledge Agreement, dated June 7, 1993 (the "Negative Pledge
Agreement"), by Marshall in favor of CIT (incorporated by reference to
Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, No. 0-16254).
4.12 Promissory Note, dated April 3, 1997 ("Note 5"), in the principal
amount of $23,000,000 issued by SWVA in favor of CIT (incorporated by
reference to Exhibit 4.12 to the Company's Quarterly Report on Form
10-Q, No. 0-16254, filed on August 14, 1997).
10.1 The Financing Agreement (see Exhibit 4.1).
10.1(a) Amendment No. 1 (see Exhibit 4.1(a)).
10.1(b) Amendment No. 2 (see Exhibit 4.1(b)).
10.1(c) Amendment No. 3 (see Exhibit 4.1(c)).
10.1(d) Amendment No. 4 (see Exhibit 4.1(d)).
10.1(e) Amendment No. 5 (see Exhibit 4.1(e)).
10.1(f) Amendment No. 6 (see Exhibit 4.1(f)).
10.1(g) Amendment No. 7 (see Exhibit 4.1(g)).
10.2 The Original Promissory Note (see Exhibit 4.2).
10.2(a) The Original Promissory Note Amendment (see Exhibit 4.2(a)).
10.3 Note 2 (see Exhibit 4.3).
10.4 Note 3 (see Exhibit 4.4).
10.5 Note 4 (see Exhibit 4.5).
10.6 The Guaranty (see Exhibit 4.6).
10.7 The Marshall Guaranty (see Exhibit 4.7).
10.8 The Security Agreement (see Exhibit 4.8).
10.9 The Pledge Agreement (see Exhibit 4.9).
10.10 The Mortgage (see Exhibit 4.10).
10.10(a) Mortgage Amendment No. 1 (see Exhibit 4.10(a)).
10.10(b) Mortgage Amendment No. 2 (see Exhibit 4.10(b)).
10.11 The Negative Pledge Agreement (see Exhibit 4.11).
22
<PAGE>
10.12 Sidetrack Agreement, dated June 24, 1983, between SWVA and the
Chesapeake and Ohio Railroad Company ("C&O") (incorporated by reference
to Exhibit 10.25 to the Company's Registration Statement on Form S-1,
No. 33-16845).
10.13 Lease, dated November 1, 1979, between SWVA's predecessor and C&O, as
amended by a letter dated March 2, 1983 (incorporated by reference to
Exhibit 10.36 to the Company's Registration Statement on Form S-1, No.
33-16845).
10.14(a) Agreement, dated August 30, 1993, between SWVA and Appalachian Power
Company ("Appalachian") (incorporated by reference to Exhibit 10.16(a)
to the Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1994, No. 0-16254).
10.14(b) License Agreement, dated September 29, 1992, between SWVA and
Appalachian (incorporated by reference to Exhibit 10.38 to the
Company's Registration Statement on Form S-1, No. 33-55952).
10.14(c) Agreement, dated November 24, 1992, between SWVA and Appalachian
(incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement on Form S-1, No. 33-55952).
10.15* Management Bonus Plan, effective as of October 1, 1984, for the benefit
of SWVA's eligible employees (incorporated by reference to Exhibit
10.42 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, No. 0-16254).
10.16* Management Retirement Plan, effective as of October 1, 1984, by the
Company on behalf of its management employees (including Amendment No.
I and Amendment No. II, each dated January 27, 1989) (incorporated by
reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K,
No. 016254, filed on March 29, 1990).
10.17 Collective Bargaining Agreement, dated June 10, 1996, between SWVA and
the United Steelworkers of America, AFL-CIO (the "Union") (incorporated
by reference to Exhibit 10.25 to the Company's Current Report on Form
8-K, No. 0-016254, filed on March 26, 1996).
10.18 Collective Bargaining Unit Bonus Plan, effective as of October 1, 1984,
for the benefit of SWVA's eligible employees (incorporated by reference
to Exhibit 10.46 to the Company's Registration Statement on Form S-1,
No. 33-16845).
10.19 Collective Bargaining Unit Retirement Plan, effective June 2, 1990,
between SWVA and the Union (incorporated by reference to Exhibit 10.46
to the Company's Registration Statement on Form S-1, No. 33-55952).
10.20 Indemnification and Contribution Agreement between the Company and
certain Selling Stockholders (incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, No. 0-16254).
10.21 Underwriting Agreement among the Company, certain Selling Stockholders
and Wheat, First Securities, Inc., dated January 25, 1993 (incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, No. 0-16254).
- -----------
* Required to be filed pursuant to Item 14(c) of Form 10-K.
23
<PAGE>
10.22 1995 Employee Stock Option Plan (incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1995, No. 0-16254).
10.23 1995 Non-Employee Director Stock Option Plan (incorporated by reference
to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1995, No. 0-16254).
10.24 Non-Competition Agreement, effective as of July 11, 1997, between the
Company and Robert L. Bunting, Jr. (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, No.
0-16254, filed on November 14, 1997).
10.25 Change in Control Severance Agreement, dated as of July 9, 1997,
between the Company and Timothy R. Duke (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, No.
0-16254, filed on November 14, 1997).
10.26 Change in Control Severance Agreement, dated as of July 7, 1997,
between the Company and Mark G. Meikle (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, No.
0-16254, filed on November 14, 1997).
10.27 Note 5 (see Exhibit 4.12).
11.1 Statement re Computation of Per Share Earnings (filed herewith).
21 Subsidiaries of the Company (incorporated by reference to Exhibit 22 to
the Company's Registration Statement on Form S-1, No. 33-16845).
23 Consent of Ernst & Young LLP (filed herewith).
28 Delaware General Corporation Law, Sections 102(b)-(7) and 145 (1)
(incorporated by reference to Exhibit 28 to the Company's Registration
Statement on Form S-1, No. 33- 16845).
(b) Reports on Form 8-K:
None.
24
<PAGE>
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.
STEEL OF WEST VIRGINIA, INC.
March 19, 1998 By: /s/ Timothy R. Duke
----------------------------
Timothy R. Duke
President and Chief Executive
Officer
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/ Timothy R. Duke President and Chief March 19, 1998
- ----------------------- Executive Officer
Timothy R. Duke (Principal Executive Officer)
/s/ Albert W. Eastburn Chairman of the Board March 19, 1998
- -----------------------
Albert W. Eastburn
/s/ Mark G. Meikle Vice President, Treasurer March 19, 1998
- ----------------------- and Chief Financial
Mark G. Meikle Officer (Principal
Financial and Accounting
Officer)
/s/ Stephen A. Albert Director March 19, 1998
- -----------------------
Stephen A. Albert
/s/ Daniel N. Pickens Director March 19, 1998
- -----------------------
Daniel N. Pickens
/s/ Paul E. Thompson Director March 19, 1998
- -----------------------
Paul E. Thompson
25
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Consolidated Financial Statements Page
- --------------------------------- ----
<S> <C>
Report of Independent Auditors.......................................F-1
Consolidated Balance Sheets - December 31, 1997
and 1996.........................................................F-2
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995................................F-3
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995................................F-4
Notes to Consolidated Financial Statements...........................F-5
Financial Statement Schedules
Schedule I - Condensed Financial Information
of Registrant.....................................S-1
Schedule II - Valuation and Qualifying
Accounts..........................................S-3
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Steel of West Virginia, Inc.
We have audited the accompanying consolidated balance sheets of Steel of West
Virginia, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Steel
of West Virginia, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note C to the consolidated financial statements, in 1996 the
Company adopted Financial Accounting Standards Board No. 121--"Accounting for
the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed
Of."
/s/ Ernst & Young LLP
Charleston, West Virginia
January 19, 1998
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 0 $ 0
Receivables, net of allowances of $609 and $599 11,181 6,579
Inventories 20,918 17,307
Deferred income taxes 1,555 3,121
Other current assets 660 220
------------- ----------
TOTAL CURRENT ASSETS 34,314 27,227
Property, plant, and equipment 61,002 33,298
Goodwill 17,770 18,452
Other assets 629 322
------------- ----------
TOTAL ASSETS $113,715 $79,299
------------- ----------
------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 968 $ 1,097
Accounts payable 10,880 4,161
Accrued payroll and benefits payable 3,509 3,599
Income taxes payable (refundable) 71 (1,146)
Other current liabilities 1,385 2,021
Current maturities of long-term debt 1,891 2,434
------------- ----------
TOTAL CURRENT LIABILITIES 18,704 12,166
Long-term debt 34,339 10,975
Deferred income taxes 6,194 6,332
Other long-term liabilities 176 819
------------- ----------
TOTAL LIABILITIES 59,413 30,292
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000 voting
shares authorized: 7,100,602 and 7,096,576 shares issued,
including treasury stock 71 71
Paid-in capital 26,663 26,627
Treasury stock - 1,105,300 shares at cost (11,483) (11,483)
Retained earnings 39,051 33,792
------------- ----------
TOTAL STOCKHOLDERS' EQUITY 54,302 49,007
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,715 $79,299
------------- ----------
------------- ----------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Net sales $ 112,776 $ 95,334 $ 129,341
Cost of sales 98,538 85,339 107,191
----------- ----------- -----------
GROSS PROFIT 14,238 9,995 22,150
Selling and administrative expenses 5,699 4,463 5,018
Interest expense 847 1,273 1,642
(Gain) Loss on disposal of assets (733) 8,936 368
Other (income) (532) (365) (595)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 8,957 (4,312) 15,717
Income tax expense (benefit) 3,698 (1,374) 6,253
----------- ----------- -----------
NET INCOME (LOSS) $ 5,259 $ (2,938) $ 9,464
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .88 $ (.49) $ 1.40
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding:
Basic 5,993,967 6,024,445 6,782,127
Diluted 6,008,934 6,024,659 6,783,515
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH PROVIDED BY
Operations:
Net income (loss) $ 5,259 $ (2,938) $ 9,464
Adjustments for items not affecting
funds from operations:
Depreciation and amortization 5,453 6,891 6,046
(Gain) Loss on disposal of assets (733) 8,936 368
Deferred income taxes 1,428 (1,684) (690)
Other (920) 62 (83)
-------- -------- --------
10,487 11,267 15,105
Working capital changes related to
operations:
Receivables (3,829) 6,501 (2,051)
Inventories (3,611) (212) (1,249)
Other current assets (440) 731 (801)
Accounts payable 3,046 (884) (2,849)
Accrued payroll and benefits payable (90) (1,641) 211
Accrued income taxes 1,217 (1,263) 76
Other current liabilities (636) (5) 396
-------- -------- --------
(4,343) 3,227 (6,267)
-------- -------- --------
TOTAL CASH PROVIDED BY OPERATIONS 6,144 14,494 8,838
Investment activities:
Additions to property, plant, and
equipment (28,836) (7,090) (3,361)
-------- -------- --------
CASH (USED FOR) INVESTMENT ACTIVITIES (28,836) (7,090) (3,361)
Financing activities:
Revolving credit loan 5,236 1,431 5,875
Long-term debt repayments (2,415) (5,885) (4,860)
Proceeds from debt issue 20,000 0 301
Purchase of treasury stock 0 (3,500) (7,983)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 22,821 (7,954) (6,667)
-------- -------- --------
INCREASE (DECREASE) IN CASH 129 (550) (1,190)
Cash (overdraft) net, beginning of year (1,097) (547) 643
-------- -------- --------
CASH (OVERDRAFT) NET, END OF YEAR $ (968) $ (1,097) $ (547)
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
December 31, 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business Operations: Steel of West Virginia, Inc. (the Company) conducts its
operations through two wholly-owned subsidiaries, SWVA, Inc. and Marshall Steel,
Inc. The Company operates a steel mini-mill and two steel fabrication facilities
for the manufacture and distribution of special steel sections and steel billets
in a single business segment. The Company is a supplier of products principally
to domestic equipment manufacturers serving the truck-trailer, industrial lift
truck, off-highway equipment, manufactured housing, guardrail post, and mining
industries with many of these customers being mature businesses. No single
customer accounts for more than 10% of the Company's net sales, and the
Company's operations are tied closely to general economic conditions. Principal
suppliers to the Company include scrap metal producers and an electric power
generating utility. In addition, a significant portion of the Company's labor
force is represented by the United Steelworkers of America under the terms of a
collective bargaining agreement. In contrast to the retiree health insurance
commonly provided in the domestic steel industry, the Company offers no material
postretirement employee health care or other non pension benefit programs. As is
similar with other mini-mills in the industry, 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.
Basis of Presentation: The consolidated financial statements include the
accounts of Steel of West Virginia, Inc. and its wholly-owned subsidiaries. All
significant intercompany transactions and investments have been eliminated. The
preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments: Financial instruments that could potentially subject the
Company to credit risk are trade accounts receivable. As of December 31, 1997
and 1996, the Company's accounts receivable, net of allowances, approximated
$11,181,000 and $6,579,000. Trade credit is extended by the Company based on an
evaluation of the customer's financial condition and generally collateral is not
required. Credit losses are provided for in the financial statements, and have
consistently been immaterial and within management's expectations. Management
believes that all significant financial instruments of the Company are reported
in the financial statements at carrying values that approximate market values.
Inventories: Inventories are stated at the lower of cost or market.
Cost is primarily determined by the last-in, first-out (LIFO) method. Mill
rolls, which are included in manufacturing supplies, are expensed when placed in
service.
Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation for financial statement purposes is computed on the
straight-line basis over the estimated useful life of the asset. Principal
service lives for the assets of the Company are: buildings--up to 30 years;
machinery and equipment--up to 12 years; and furniture and fixtures--up to 5
years.
Income Taxes: Deferred income taxes are provided for temporary differences
between the financial reporting and income tax bases of the Company's assets and
liabilities using the tax rates expected to be in effect when the corresponding
taxes will be paid or refunded.
Goodwill: The excess of cost over the fair value of net assets acquired
(goodwill) is being amortized on a straight-line basis over periods ranging from
15 to 40 years. Accumulated amortization approximated $5,898,000 and $5,216,000
at December 31, 1997 and 1996, respectively. The carrying value of goodwill is
periodically reviewed based upon an assessment of operations of the acquired
entity. Management is not aware of any facts or circumstances indicating that
the carrying value of goodwill has been impaired.
Stock-based Compensation: The "intrinsic" value method is used for determining
compensation cost associated with the Company's stock option plans. Under this
method, stock-based compensation is determined on the measurement date (the
first date on which both the number of shares the employee is entitled to
receive and the exercise price are known) in an amount equal to the excess of
the market price of the stock over the exercise price at such time. The exercise
price of the Company's stock options granted has been equal to the market value
of
F-5
<PAGE>
the underlying stock on the dates the options were granted and accordingly, no
compensation expense has been recorded.
Earnings per Share: Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128--"Earnings per Share." Under
SFAS 128, basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is based upon net income divided by the weighted average number of
shares outstanding increased by the number of shares of common stock that would
be issued assuming the exercise of stock options. Earnings per share amounts for
all periods presented have been restated to conform with SFAS No. 128. The
impact of this change was immaterial.
New Accounting Pronouncements: In 1997, the Financial Accounting Standards Board
issued several new statements including SFAS No. 130--"Reporting Comprehensive
Income" and SFAS No. 131--"Disclosures about Segments of an Enterprise and
Related Information." The Company is in the process of evaluating these new
pronouncements and will adopt them as required in 1998. Management does not
expect the adoption to materially affect financial position or results of
operations.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
--------------
<S> <C> <C>
Raw Materials $ 2,354 $ 1,638
Work-in-process 8,240 6,624
Finished goods 10,731 9,103
Manufacturing supplies 4,068 3,967
------- -------
25,393 21,332
Less LIFO Reserve 4,475 4,025
------- -------
$20,918 $17,307
------- -------
------- -------
</TABLE>
NOTE C--PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
--------------
<S> <C> <C>
Land $ 1,390 $ 1,390
Buildings 5,549 3,975
Machinery and equipment 63,910 49,772
Furniture and fixtures 716 699
Construction-in-process 21,085 4,613
------- -------
92,650 60,449
Less accumulated depreciation 31,648 27,151
------- -------
$61,002 $33,298
------- -------
------- -------
</TABLE>
Depreciation expense related to property, plant and equipment used in the
Company's operations approximated $4,771,000, $6,211,000 and $5,220,000 in 1997,
1996 and 1995.
F-6
<PAGE>
In 1996, the Company adopted SFAS No. 121--"Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of." This
pronouncement requires impairment losses to be recorded on long-lived assets
used in the Company's operations when impairment indicators are present and the
estimated undiscounted cash flows to be generated by those assets are less than
the assets' carrying value. During 1996, the Company recognized charges of
approximately $8.9 million principally related to the disposal of assets in
connection with the Company's modernization and expansion program. The Company
continuously analyzes new processes and equipment that would allow it to produce
products more cost-effectively in order to maintain its position in each of its
niche markets or expand into related markets. In the future, material charges
against operations could result if new production processes or equipment are
identified and installed or use of certain existing processes and equipment is
discontinued.
NOTE D--OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
-------------
1997 1996
------ ------
<S> <C> <C>
Accrued taxes, other than income taxes $1,163 $ 854
Other accrued liabilities 222 1,167
------ ------
$1,385 $2,021
------ ------
------ ------
</TABLE>
NOTE E--CREDIT ARRANGEMENTS
A summary of indebtedness under the Company's credit arrangements consists of
the following (in thousands):
<TABLE>
<CAPTION>
December 31
---------------
1997 1996
------ ------
<S> <C> <C>
Term loans $ 0 $ 1,547
Capital Expenditure Line Term Loan #1 3,420 4,280
Capital Expenditure Line Term Loan #2 20,000 0
Revolver 12,541 7,305
Other notes payable 269 277
------- -------
TOTAL 36,230 13,409
Less current maturities of long-term debt 1,891 2,434
------- -------
$34,339 $10,975
------- -------
------- -------
</TABLE>
The Company maintains a senior financing agreement that, as last amended April
1997, provides for up to $15,000,000 of revolving credit borrowings and
$26,420,000 of capital expenditure line term loans. The interest rates on these
borrowings vary based on the Chemical Bank prime rate or LIBOR plus 1-3/4%; and
the annual revolving credit line commitment fee is 1/8% of the unused balance.
Under the terms of its senior financing agreement, the Company is permitted,
through January 1, 1999, to convert its capital expenditure line indebtedness to
a fixed interest rate. Certain prepayments through January 1, 1999, could result
in prepayment fees of 1.5% of the amounts prepaid. The senior credit agreement
may be terminated by the Company or, on or after January 1, 2001 and upon 90
days written notice, by the lender.
Effective April 1997, the Company's senior lending agreement was amended to
provide, under the terms of an "Additional Capital Expenditure Line," up to
$23,000,000 additional borrowing availability to finance current machinery and
equipment expenditures, governed by a percentage of such expenditures.
F-7
<PAGE>
The final principal installment totaling $1,547,050 under the Term Loans portion
of the senior financing agreement was repaid in full on January 1, 1997. The
Capital Expenditure Line Term Loan #1 is required to be repaid in quarterly
principal installments of $215,000, with a final principal payment of $195,000
on October 1, 2001. The Capital Expenditure Line Term Loan #2 will be repaid in
equal quarterly installments of principal computed on a ten year amortization
schedule, with installments commencing on July 1, 1998 and continuing quarterly
thereafter until paid in full. As of December 31, 1997, the revolving credit
line loan balance, due January 1, 2001, was $12,541,000, and the unused
borrowing availability approximated $2,459,000.
Interest is paid monthly in accordance with the Company's lending agreement and
approximated $1,625,000, $1,301,000,and $1,411,000 during the years ended
December 31, 1997, 1996, and 1995, respectively. The weighted average interest
rate on the Company's borrowings during the years ended December 31, 1997, 1996,
and 1995 approximated 7.6%, 7.4%, and 7.8%, respectively. Interest capitalized
in connection with Phase II of the Company's expansion and modernization program
in 1997 approximated $908,000.
The Company's senior lending agreement contains various restrictive covenants,
including specified levels of working capital and net worth (as defined in the
agreement). In addition, capital expenditures and dividends are limited to the
annual amounts set forth in the agreement. At December 31, 1997, the Company's
retained earnings available for dividends is $2,630,000. As a result of the
lending agreement, substantially all of the Company's property, plant, and
equipment, inventory and accounts receivable are subject to third party security
interests.
NOTE F--SELF INSURANCE
The Company is self-insured at its Huntington, West Virginia facility for
employees' medical care costs and workers' compensation claims up to certain
specified dollar limits. Under the medical care program, the Company is insured
by a private carrier for individual claims in excess of specific dollar limits.
The Company has excess coverage provided by the West Virginia Workers'
Compensation Fund (a state agency) for certain work-related injuries. In
connection with the self-insured workers' compensation program, the Company has
obtained an irrevocable standby letter of credit in the amount of $1,000,000
(through July 1998). At its Memphis, Tennessee facility, the Company is insured
through a private carrier for medical care costs and workers' compensation
claims. A liability has been established for those illnesses and injuries
occurring on or before December 31, 1997, for which an amount of expected loss
could be reasonably estimated. Costs and expenses for medical care and workers'
compensation during the years ended December 31, 1997, 1996 and 1995
approximated $4,702,000, $5,517,000, and $5,579,000, respectively.
The Company is subject to federal and state environmental laws and regulations
concerning, among other matters, air emissions, furnace dust disposal, and waste
water effluents. Estimated costs to be incurred in connection with environmental
matters are accrued when the prospect of incurring cost for testing or remedial
action is deemed probable. Management is not aware of any material asserted or
unasserted claims or regulatory actions against the Company, and accordingly no
provision for such matters has been reflected in the Company's financial
statements.
NOTE G--PROFIT-SHARING AND BONUS COSTS
The Company has bonus and retirement arrangements at its Huntington, West
Virginia facility for both bargaining unit and non-bargaining unit employees
which, in effect, are defined contribution profit-sharing plans qualified under
Internal Revenue Code Section 501. The Company is required to contribute an
amount equal to the lesser of $125 per bargaining unit employee per month or 17%
of pre-tax profit, as defined, to a retirement trust for the future benefit of
the union employees. The amount, if any, that 17% of pre-tax profits exceeds the
retirement contribution is required to be paid to the bargaining unit employees
on a semi-annual basis as a cash bonus.
Substantially all non-bargaining unit employees of the Company are entitled
to receive a semi-annual cash bonus equal to the amount paid to bargaining
unit employees computed on a per employee basis. Additionally, the Company
contributes an amount, equal to the lesser of 5% of non-bargaining wages, or
a lower percentage if 17% of pre-tax profits is less than the $125 per month
per bargaining unit employee contribution, for the future retirement benefit
of the non-bargaining unit employees.
Costs related to cash bonuses and amounts set aside for retirement benefits
under the profit-sharing plans approximated $1,531,000 and $1,045,000 during
1997, $337,000 and $618,000 during 1996, $3,746,000 and $953,000 during 1995.
Contributions to the retirement accounts in 1997, 1996 and 1995 were $907,000,
F-8
<PAGE>
$758,000, and $946,000, respectively. The Company has complied with all funding
requirements under the terms of the retirement trusts.
NOTE H--INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets--current:
Bad debt and sales allowances $ 268 $ 264
Bonus accruals 277 98
Self-insurance 949 1,557
Inventory costing 0 585
Other 479 617
------ ------
Total current deferred tax assets 1,973 3,121
Deferred tax liabilities--current:
Inventory costing 418 0
------ ------
Net deferred tax assets--current $1,555 $3 ,121
------ ------
------ ------
Deferred tax liabilities--noncurrent:
Difference in book and tax depreciation $6,194 $6,332
------ ------
Total long-term deferred tax liabilities $6,194 $6,332
------ ------
------ ------
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal--current $ 1,810 $ 251 $ 5,916
Federal--deferred 1,118 (1,283) (639)
State--current 460 59 1,027
State-deferred 310 (401) (51)
------- ------- -------
$ 3,698 $(1,374) $ 6,253
------- -------- -------
------- -------- -------
</TABLE>
A reconciliation of statutory federal income tax rates to the Company's
effective income tax rates is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory tax rate 35.0 % 35.0 % 35.0 %
State income tax provision net of
federal tax benefits 5.6 5.2 4.0
Amortization of goodwill 2.3 (4.7) 1.3
Other, net (1.6) (3.6) (0.5)
------ ------ ------
Effective income tax rate 41.3 % 31.9 % 39.8 %
------- ------- ------
------- ------- ------
</TABLE>
F-9
<PAGE>
Income taxes paid approximated $1,530,000, $1,575,000, and $7,254,000 during the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE I--STOCK OPTION PLANS
The Company maintains a Management Option Plan and a Director Option Plan
(Plans). These plans provide that options to acquire shares of the Company's
common stock (Options) may be granted to officers, key employees and directors
of the Company or its designated subsidiaries. All options are for a period of
ten years from the date of grant and an option holder must be employed or be a
director one year from the grant date to vest in the ability to exercise the
option. Option prices range from $8.00 to $11.625 per share.
A summary of the Company's stock option activity and related information for
each of the years in the three year period ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year 85,500 $ 11.29 79,500 $ 11.625 0 $ 0
Granted 79,500 8.90 8,000 8.00 79,500 11.625
Exercised 0 0 0 0 0 0
Canceled 19,500 9.40 2,000 11.625 0 0
------- --------- ------- --------- ------- -------
Outstanding--end of year 145,500 $ 10.23 85,500 $ 11.29 79,500 $11.625
--------- ------- ------- --------- ------- -------
--------- ------- ------- --------- ------- -------
Exercisable at end of year 82,500 $ 11.28 77,500 $ 11.625 0 $ 0
--------- ------- ------- --------- ------- -------
--------- ------- ------- --------- ------- -------
</TABLE>
The exercise prices of the Company's stock options granted by the Company equals
the market value of the underlying stock at the grant dates. Accordingly, no
compensation expense has been recognized for options granted. Had compensation
cost for the stock options granted in 1997, 1996 and 1995 been determined based
on the fair value at the grant dates for awards under the Plans consistent with
the fair value method of SFAS No. 123, pro forma net income (loss) and diluted
earnings (loss) per share would have been: $5,076,000 and $.85 for 1997;
($3,040,000) and ($.50) loss for 1996; and $9,216,000 and $1.36 for 1995. These
pro forma disclosures are not likely to be representative of the effect on
reported net income and earnings per share for future years since current
options vest over a one year period. The weighted-average fair value of options
granted in 1997, 1996 and 1995 was $5.79, $5.39, and $6.94 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 of 6.59% for 1997, 6.52% for 1996 and 6.43%
for 1995; weighted average volatility of .424 for 1997 and .393 for 1996 and
1995; expected life of nine years and zero dividends.
NOTE J--STOCKHOLDERS' EQUITY
The Company's Board of Directors has authorized management to buy back up to
1,700,000 shares of its common stock. The Company has purchased 1,105,300 shares
at a cost of $11,483,000. Aside from the reported results of operations and the
aforementioned purchases of treasury shares, no other transactions significantly
affected stockholders' equity during any year in the three year period ended
December 31, 1997.
F-10
<PAGE>
NOTE K--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
1997
Net Sales $30,875 $29,550 $27,923 $24,429
Cost of goods sold 28,304 26,191 23,675 20,368
Net income 760 1,297 1,657 1,545
Basic and Diluted income per common share .13 .22 .28 .26
Weighted average shares outstanding:
Basic 5,995,191 5,994,705 5,994,114 5,991,859
Diluted 6,004,468 6,004,562 5,994,937 5,991,859
1996
Net Sales $22,661 $22,229 $23,797 $26,647
Cost of goods sold 20,444 20,225 21,429 23,240
Net income (loss) (3,579) 9 618 14
Basic and Diluted income (loss) per
common share (.60) .00 .11 .00
Weighted average shares outstanding:
Basic 5,989,275 5,987,522 5,986,588 6,134,393
Diluted 5,989,275 5,987,522 5,986,873 6,134,393
</TABLE>
F-11
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STEEL OF WEST VIRGINIA, INC.
Parent company only statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto. The investments in wholly
owned subsidiaries are stated at cost plus equity in undistributed earnings of
those subsidiaries. The Company serves as Guarantor for all of the indebtedness
incurred by its wholly owned subsidiary, SWVA, Inc., under the terms of a senior
credit agreement dated December 30, 1986, as amended and more fully described in
Note E to the Company's consolidated financial statements. At December 31, 1997,
the total amount outstanding under the terms of this agreement was $35,961,000.
The primary source of funds for any regular dividends declared by the Company is
dividends received from its subsidiaries. SWVA, Inc.'s lending agreement limits
the amount of dividends it may pay to the Company to 50% of its net income for
the preceding year, subject to further limitations relating to minimum levels of
SWVA, Inc. working capital and net worth. At December 31, 1997, $2,629,500 of
the Company's retained earnings was available for dividends in 1998.
<TABLE>
<CAPTION>
December 31
------------------------
CONDENSED BALANCE SHEETS (000's) 1997 1996
----------- -----------
<S> <C> <C>
NONCURRENT ASSETS
Investments in and advances to
wholly-owned subsidiaries $54,387 $49,026
Other assets 24 24
----------- -----------
TOTAL ASSETS $54,411 $49,050
----------- -----------
----------- -----------
LIABILITIES
Other liabilities $ 109 $ 43
EQUITY
Common Stock 71 71
Paid-in Capital 26,663 26,627
Treasury Stock (11,483) (11,483)
Retained Earnings 39,051 33,792
------------ ------------
TOTAL EQUITY 54,302 49,007
------------ ------------
TOTAL LIABILITIES AND EQUITY $54,411 $49,050
----------- -----------
----------- -----------
</TABLE>
S-1
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
STEEL OF WEST VIRGINIA, INC.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
CONDENSED STATEMENTS OF OPERATIONS (000's) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Interest Income $ 148 $ 155 $ 198
Other Revenues 39 263 125
------- ------- -------
Total Revenues 187 418 323
EXPENSES
Amortization 0 0 61
Administrative 69 63 158
------- ------- -------
Total Expenses 69 63 219
------- ------- -------
Income before income taxes
and equity in undistributed earnings of
wholly-owned subsidiaries 118 355 104
Income taxes 66 146 32
------- ------- -------
Income before equity in undistributed
earnings of wholly-owned subsidiaries 52 209 72
Equity in undistributed earnings of wholly-
owned subsidiaries 5,207 (3,147) 9,392
------- ------- -------
NET INCOME (LOSS) $ 5,259 $(2,938) $ 9,464
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------
CONDENSED STATEMENTS OF CASH FLOWS (000's) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS $ 154 $ 239 $ (13)
CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES 0 0 0
Financing activities:
Advances (to) from subsidiaries (154) 3,261 7,983
Purchase of treasury stock 0 (3,500) (7,983)
------- ------- -------
CASH (USED FOR) FINANCING ACTIVITIES (154) (239) 0
------- ------- -------
INCREASE (DECREASE) IN CASH 0 0 (13)
Cash, beginning of year 0 0 13
------- ------- -------
CASH, END OF YEAR $ 0 $ 0 $ 0
------- ------- -------
------- ------- -------
</TABLE>
S-2
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STEEL OF WEST VIRGINIA, INC.
<TABLE>
<CAPTION>
CHARGED CHARGED
BALANCE AT TO TO DEDUC- BALANCE
BEGINNING COSTS AND OTHER TIONS AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) YEAR
- -------------------------------------------------------------------------------
(000's)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
ALLOWANCE FOR:
BAD DEBTS $ 344 $ 75 $ 15 $ 404
SALES RETURNS
AND DISCOUNTS 255 0 50 205
----- ----- ----- -----
$ 599 $ 75 $ 65 $ 609
----- ----- ----- -----
----- ----- ----- -----
Year ended December 31, 1996:
ALLOWANCE FOR:
BAD DEBTS $ 405 $ 386 $ 447 $ 344
SALES RETURNS
AND DISCOUNTS 287 (32) 0 255
----- ----- ----- -----
$ 692 $ 354 $ 447 $ 599
----- ----- ----- -----
----- ----- ----- -----
Year ended December 31, 1995:
ALLOWANCE FOR:
BAD DEBTS $ 350 $ 55 $ 0 $ 405
SALES RETURNS
AND DISCOUNTS 29 258 0 287
----- ----- ----- -----
$ 379 $ 313 $ 0 $ 692
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
(1) - Accounts receivable charged against the allowance
S-3
<PAGE>
Exhibit 4.10(c)
CROSS REFERENCE TO:
Trust Deed Book 1195, Page 112
Trust Deed Book 1250, Page 628
Trust Deed Book 1329, Page 45
Land Records of Cabell County,
West Virginia
- ------------------------------------------------------------------------------
A CREDIT LINE DEED OF TRUST
This instrument is "A CREDIT LINE DEED OF TRUST" as provided in West
Virginia Code Chapter 38, Article 1, Section 14.
- ------------------------------------------------------------------------------
THIRD AMENDMENT TO DEED OF TRUST,
ASSIGNMENT OF LEASES AND RENTS
AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS
AND SECURITY AGREEMENT (this "Third Amendment") effective as of February 1,
1994 and executed as of March __, 1994, is made by and among SWVA, INC., a
Delaware corporation (successor by corporate merger to Steel of West
Virginia, Inc.), having a mailing address at 17th Street and 2nd Avenue,
Huntington, West Virginia 25726, Attention: President, party of the first
part as grantor ("Grantor"), Douglas C. McElwee, an individual resident of
the State of West Virginia, whose mailing address is 600 United Center, 500
Virginia Street East, Charleston, West Virginia 25301, party of the second
part as trustee ("Trustee") and THE CIT GROUP/BUSINESS CREDIT, INC., a New
York corporation, having a mailing address of 900 Ashwood Parkway, Atlanta,
Georgia 30338, Attention: Michael F. Lapresi, Vice President, party of the
third part as beneficiary ("Lender");
WITNESSETH:
WHEREAS, pursuant to that certain Financing Agreement (the "Original
Financing Agreement") dated December 30, 1986, by and between Grantor and
Lender, Lender extended to Grantor a certain credit facility and term debt
(the "Loan"), which Loan was evidenced by a certain Promissory Note
("Promissory Note") dated of even date therewith, made by Grantor in favor of
Lender, in the original principal amount of $20,000,000.00 and secured by
that certain Deed of Trust, Assignment of Leases and Rents and Security
Agreement (the "Original Deed of Trust"), dated as of even date therewith,
made and entered into by and among Grantor, Trustee and Lender and recorded
in Trust Deed Book 1195, beginning at page 112,
<PAGE>
Land Records of Cabell County, West Virginia, conveying to Trustee in trust
for the benefit of Lender certain improved real property located in the City
of Huntington, Cabell County, West Virginia, as more particularly described
in the Original Deed of Trust; and
WHEREAS, on September 27, 1989, Grantor and Lender amended the Original
Financing Agreement to modify certain terms and conditions of the Loan,
including, inter alia, increasing the amount of term debt and, in connection
therewith, Grantor executed that certain Term Note ("Term Note II"), dated of
even date, in favor of Lender in the principal amount of $26,922,000.00, and
Grantor, Trustee and Lender entered into that certain First Amendment to Deed
of Trust, Assignment of Leases and Rents and Security Agreement dated of even
date therewith and recorded in Trust Deed Book 1250, beginning at page 628,
aforesaid Land Records, (the "First Amendment") to reflect the modifications
to the Loan; and
WHEREAS, on September 30, 1992, Grantor and Lender further amended the
Original Financing Agreement to modify certain terms and conditions of the
Loan including, inter alia, the extension to Grantor of an additional term
loan in the principal amount of $6,500,000.00 ("Term Loan III"), Term Loan
III being evidenced by that certain term note in the original principal
amount of $6,500,000.00 ("Term Note III"), and Grantor, Trustee and Lender
entered into that certain Second Amendment to Deed of Trust, Assignment of
Leases and Rents and Security Agreement dated of even date therewith and
recorded in Trust Deed Book 1329, beginning at page 45, aforesaid Land
Records, (the "Second Amendment") to reflect the further modifications to the
Loan; and
WHEREAS, effective as of February 1, 1994, Grantor and Lender have
further amended the Original Financing Agreement (the Original Financing
Agreement, as so amended, being hereinafter referred to as the "Financing
Agreement") to modify certain terms and conditions of the Loan including,
inter alia, the extension to Grantor under the Financing Agreement of a
certain Capex Term Loan Line of Credit (as defined in the Financing
Agreement) in an aggregate principal amount of up to $16,000,000, pursuant to
which Lender shall extend certain Capex Term Loans (as defined in the
Financing Agreement) to Grantor, which Capex Term Loans shall be evidenced by
certain Promissory Notes as more particularly described in the Financing
Agreement; and
WHEREAS, Grantor, Trustee and Lender desire to further modify the terms
and conditions of the Original Deed of Trust, as amended by the First
Amendment and the Second Amendment, to reflect the above-referenced
modification to the Loan.
NOW, THEREFORE, in consideration of the foregoing premises and the sum
of TEN AND NO/100THS DOLLARS ($10.00) in hand paid by
2
<PAGE>
Lender to Grantor and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
A. Terms.
Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed thereto in the Deed of Trust.
B. Modification of the Deed of Trust. The Original Deed of Trust, as
amended by the First Amendment and the Second Amendment, is hereby further
amended as follows:
1. Paragraph (a) on page 4 of the Original Deed of Trust as amended by
the First Amendment and the Second Amendment is hereby deleted in its
entirety and the following new paragraph (a) is inserted in lieu thereof:
"(a) The term debt evidenced by (i) that certain original
Promissory Note, dated December 30, 1986, made by Charter
Acquisition Corp. (subsequently merged with and into Steel of West
Virginia, Inc., a West Virginia corporation) payable to the order
of Lender in the original principal face amount of Twenty Million
and No/100 Dollars ($20,000,000.00), as amended by that certain
agreement between Grantor and Lender, dated on or about September
26, 1989, (ii) that certain Term Note II, dated on or about
September 26, 1989, made by Grantor payable to the order of Lender
in the principal face amount of Twenty-Six Million Nine Hundred
Twenty-Two Thousand and No/100 Dollars ($26,922,000.00), (iii) that
certain Term Note III dated on or about September 30, 1992, made by
Grantor payable to the order of Lender in the principal face amount
of Six Million Five Hundred Thousand and No/100 Dollars
($6,500,000.00), and (iv) the Promissory Notes (the "Capex
Promissory Notes") to be executed and delivered in connection with
the Capex Term Loans to be extended pursuant to Section 3 of the
Financing Agreement (as hereinafter defined) in an aggregate
principal amount of up to $16,000,000 (the original Promissory
Note, Term Note II, Term Note III and the Capex Promissory Notes
are hereinafter collectively and singularly referred to as the
"Notes"), together with any and all renewals, modifications,
amendments and extensions and/or consolidations of the indebtedness
evidenced by the Notes."
3
<PAGE>
2. Section 1.15 of the Original Deed of Trust is hereby amended by
adding the following sentence at the end of said Section 1.15:
"This Deed of Trust secures obligatory future advances which
Lender has legally obligated itself to make in the advance of a
default, breach or other such event."
3. The defined term "Note" is hereby deleted wherever it appears and
the defined term "Notes" is inserted in lieu thereof.
4. The Original Deed of Trust, as amended by the First Amendment, the
Second Amendment and as further amended by this Third Amendment, is hereafter
referred to as the "Deed of Trust."
5. The Deed of Trust, the Notes and any other document heretofore, now
or hereafter executed to evidence, secure or otherwise pertain to the Loan
are hereafter collectively referred to as the "Loan Documents."
6. The mailing address of The CIT Group/Business Credit, Inc. which
appears in the opening paragraph of the Deed of Trust and in Section 3.14 of
the Deed of Trust is hereby deleted and the following mailing address is
inserted in lieu thereof: "900 Ashwood Parkway, Atlanta, Georgia 30338,
Attention: Michael F. Lapresi, Vice President."
C. Warranties.
By its execution hereof, Grantor warrants and represents to Lender that,
as of the date hereof, there does not exist a Default, Event of Default or
event or circumstance which with the passage of time or giving of notice or
both would constitute a Default or Event of Default, as the case may be,
under the Notes, the Deed of Trust or any of the other Loan Documents; by its
execution hereof, Grantor also reaffirms, as of the date hereof, all of the
representations and warranties of Grantor contained in the Notes, the Deed of
Trust and all of the other Loan Documents.
D. Ratification.
Grantor hereby acknowledges and agrees that, except as set forth herein
or expressly modified or amended hereby, the Loan Documents have not
previously been modified or amended and are in full force and effect.
Grantor hereby ratifies and confirms all of the terms, covenants and
conditions set forth in the Notes, Deed of Trust and the other Loan Documents
and hereby acknowledges that the Notes, Deed of Trust and the other Loan
Documents constitute valid and binding obligations of Grantor. Without
limiting the
4
<PAGE>
foregoing, Grantor hereby ratifies and confirms the grant and conveyance of
the "Premises" (as defined in the Deed of Trust) to Trustee for the benefit
of Lender as security for repayment of the "Indebtedness", as defined in the
Deed of Trust. Grantor further represents and warrants to Lender that the
Deed of Trust is and continues to be a first priority Deed of Trust
encumbering the Premises as security for the Loan, subject only to the
Permitted Encumbrances stated therein. Grantor further acknowledges and
agrees that the Notes, the Deed of Trust and the other Loan Documents are
enforceable in accordance with their terms and free from claims of defense,
setoff or recoupment against Lender or any other person or party.
E. Execution in Counterparts.
This Third Amendment may be executed in any number of counterparts, each
of which counterparts, when so executed and delivered, shall be deemed to be
an original and all of which counterparts, taken together, shall constitute
but one and the same agreement.
F. Successors and Assigns.
The covenants and agreements herein contained shall bind, and the rights
hereunder shall inure to, the respective successors and assigns of Lender and
Grantor. The captions and headings of the paragraphs of this Third Amendment
are for convenience only and are not to be used to interpret or define the
provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment under seal as of the day and year first above written.
GRANTOR:
Signed, sealed and delivered SWVA, INC.,
in the presence of: a Delaware corporation
_________________________ _______________________________
Witness Name:
Title:
_________________________ Attest:________________________
Witness Name:
Title:
[CORPORATE SEAL]
5
<PAGE>
[SIGNATURES CONTINUED ON NEXT PAGE]
6
<PAGE>
TRUSTEE:
Signed, sealed and delivered
in the presence of:
______________________ _________________________(SEAL)
Witness Douglas C. McElwee
______________________
Witness
[SIGNATURES CONTINUED ON NEXT PAGE]
7
<PAGE>
LENDER:
Signed, sealed and delivered THE CIT GROUP/BUSINESS CREDIT,
in the presence of: INC., a New York corporation
________________________ By:___________________________
Witness Name:
Title:
________________________ Attest:_______________________
Witness Name:
Title:
[CORPORATE SEAL]
8
<PAGE>
ACKNOWLEDGMENT
STATE OF ___________
COUNTY OF __________
I, ______________, a notary public of said State and County, do
certify that ______________ and __________________, who signed the writing
above bearing date the ____ day of March, 1994, as ________________ and
____________, respectively, of SWVA, Inc., have this day in my said County,
before me, acknowledged the said writing to be the act and deed of said
corporation.
Given under my hand and official seal this _______ day of March, 1994.
_____________________________________
Notary Public
My Commission Expires:
[NOTARIAL SEAL]
9
<PAGE>
ACKNOWLEDGMENT
STATE OF WEST VIRGINIA
COUNTY OF KANAWHA
I, _____________________, a notary public of said State and County,
do certify that Douglas C. McElwee, whose name is signed to the writing above
as Trustee, bearing date the ____ day of March, 1994, has this day
acknowledged the same before me in my said County.
Given under my hand and official seal this ____ day of March, 1994.
_____________________________
Notary Public
My Commission Expires:
[NOTARIAL SEAL]
10
<PAGE>
ACKNOWLEDGMENT
STATE OF ___________
COUNTY OF __________
I, ______________, a notary public of said State and County, do
certify that ______________ and _________________, who signed the writing
above bearing date the ____ day of March, 1994, as _______________ and
____________, respectively, of The CIT Group/Business Credit, Inc., have this
day in my said County, before me, acknowledged the said writing to be the act
and deed of said corporation.
Given under my hand and official seal this ____ day of March, 1994.
______________________________
Notary Public
My Commission Expires:
[NOTARIAL SEAL]
11
<PAGE>
<PAGE>
EXHIBIT - 11.1
COMPUTATION OF EARNINGS PER SHARE DATA
The following formulas were used to calculate the earnings per share data shown
in the Consolidated Statements of Operations for the years ended December 31,
1997 and 1996, included in this report.
<TABLE>
<CAPTION>
Calculation
-------------
Year Ended December 31
<S> <C> <C> <C> <C> <C>
1997
- ----
Basic net income per Net income = $5,259,000 = $ 0.88
common share ------------------------------ -------------
Weighted average shares of 5,993,967
common stock outstanding
during the period
Diluted net income per Net income = $5,259,000 = $ 0.88
common share ------------------------------ -------------
Weighted average shares of 6,008,934
common stock outstanding
plus the dilutive effect of
stock options
1996
- ----
Basic net income (loss) Net income (loss) = $(2,938,000) = $(0.49)
per common share ------------------------------ --------------
Weighted average shares of 6,024,445
common stock outstanding
during the period
Diluted net income (loss) Net income (loss) = $(2,938,000) = $(0.49)
per common share ------------------------------ --------------
Weighted average shares of 6,024,445
common stock outstanding
plus the dilutive effect of
options
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in Registration Statement (Form S-8
No. 333-3121) pertaining to the Employee Stock Option Plan and Non-Employee
Director Stock Option Plan of Steel of West Virginia, Inc. of our report dated
January 19, 1998, with respect to the consolidated financial statements and
schedules of Steel of West Virginia, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 11,181
<ALLOWANCES> 609
<INVENTORY> 20,918
<CURRENT-ASSETS> 34,314
<PP&E> 92,650
<DEPRECIATION> 31,648
<TOTAL-ASSETS> 113,715
<CURRENT-LIABILITIES> 18,704
<BONDS> 34,339
0
0
<COMMON> 71
<OTHER-SE> 54,231
<TOTAL-LIABILITY-AND-EQUITY> 113,715
<SALES> 112,776
<TOTAL-REVENUES> 112,776
<CGS> 98,538
<TOTAL-COSTS> 98,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 847
<INCOME-PRETAX> 8,957
<INCOME-TAX> 3,698
<INCOME-CONTINUING> 5,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,259
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
