UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-2389
ROANOKE ELECTRIC STEEL CORPORATION
(Exact name of Registrant as specified in its charter)
Virginia 54-0585263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 13948, Roanoke, Virginia 24038-3948
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 342-1831
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(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, 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. (x)
State the aggregate market value of the voting stock held by nonaffiliates
of the Registrant.
Aggregate market value at November 30, 1998: $150,806,409
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 30, 1998.
11,075,888 Shares outstanding
Portions of the following documents are incorporated by reference:
(1) 1998 Annual Report to Stockholders in Part II.
(2) Proxy Statement dated December 28, 1998 in Part III.
PART I
ITEM 1. BUSINESS
(a) General Development of Business.
During the fiscal year ended October 31, 1998, the Registrant
continued for the most part to operate its business as it has the past four
years by manufacturing merchant steel bar products, fabricating open-web
steel joists and concrete reinforcing steel, and extracting scrap steel and
other materials from junked automobiles. Roanoke Technical Treatment &
Services, Inc., a Roanoke, Virginia subsidiary, was formed in 1990 to
license a process for the treatment of electric arc furnace dust, and
currently is uncertain as to a specific time for start-up. During fiscal
year 1994, the Registrant's auto shredding subsidiary, Shredded Products
Corporation, completed construction of a modern facility in Rocky Mount,
Virginia, and in November 1994 began operations at this locality, at a
total investment in excess of $8,000,000 for plant and equipment. This
facility, with its own landfill, is providing considerable savings in waste
disposal costs. In addition, cost savings and better metal recoveries are
being achieved through the use of the more technologically advanced
equipment. During the later part of 1996, the Registrant, at its main
plant, completed the installation of a new ladle refining furnace and the
upgrade of an electric arc furnace, for approximately $17,000,000. With
this new state-of-the-art equipment in operation, the Registrant has
increased raw steel production, improved quality, reduced production costs
and improved operating efficiencies. Also in 1996, the Registrant closed
on an unsecured $60,000,000 credit facility with a syndicate of lenders.
The facility was comprised of a $30,000,000 ten-year term loan and a
$30,000,000 five-year revolver. The term loan was used to purchase
additional equipment and refinance debt at much lower interest rates. The
revolver replaced lines of credit that were not legally binding. This
restructuring of debt provided the Registrant with the capital resources
necessary to maintain its competitive position and ensure future growth.
In January 1996, Socar, Inc., a South Carolina subsidiary, sold its
long-time idle plant in Bucyrus, Ohio to the unaffiliated manufacturer who
had been leasing the facility for several years under a lease-purchase
agreement, for a final settlement price of $130,000. The other
subsidiaries of the Registrant, John W. Hancock, Jr., Inc. and RESCO Steel
Products Corporation, have had no material changes in operations or in the
mode of conducting their business for the past five years. John W.
Hancock, Jr. founded both the Hancock joist subsidiary and its parent,
Roanoke Electric Steel Corporation, and served on the Registrant's Board of
Directors as Chairman of the Executive Committee until his death in March
1994.
After the close of fiscal 1998, the Registrant announced that it will,
pursuant to an agreement signed November 10, 1998, acquire, through a
tender offer followed by a merger, Steel of West Virginia, Inc. ("SWVA"), a
Huntington, West Virginia, steel manufacturer. The transaction
contemplates that the Registrant will pay $10.75 per share of each
outstanding share of common stock of SWVA, on a fully-diluted basis, and
assume all of SWVA's indebtedness, in a transaction worth
PART I
(con'd.)
approximately $116.7 million. The transaction has been unanimously
approved by the Boards of Directors of both companies, and the Board of
SWVA has recommended that its shareholders accept the Registrant's offer.
The offer is subject to customary conditions, including the tender of a
majority of the shares of SWVA common stock and termination of the
Hart-Scott-Rodino waiting period. Through the merger, SWVA will become a
wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each
share of SWVA common stock not purchased in the offer will be converted to
the right to receive the cash price paid per share in the offer. The
obligations of Roanoke Electric Steel Corporation are not subject to any
financing condition. However, a bank syndicate has been arranged for
financing the transaction. As part of the transaction, SWVA has granted an
option to the Registrant to purchase up to 1,196,148 newly issued shares of
SWVA common stock, exercisable upon the occurrence of certain events, and
to pay a $5,000,000 "break-up" fee under certain circumstances. Finally,
as a part of the transaction, SWVA amended its Shareholder Rights Plan to
provide that Roanoke Electric Steel Corporation will not become and
"Acquiring Person" or trigger the dilution provisions of that Plan by
preceding with this transaction. SWVA operates a mini-mill in Huntington,
West Virginia, and steel fabrication facilities in Huntington and Memphis,
Tennessee. The company earned approximately $5,000,000 on sales of
approximately $113,000,000 in 1997. Employment is approximately 600 in
West Virginia and Tennessee. SWVA, headquartered in Huntington, West
Virginia, custom designs and manufactures special steel products
principally for use in the construction of truck trailers, industrial lift
trucks, off-highway construction equipment (such as bulldozers and
graders), manufactured housing, guard rail post and mining equipment. The
Registrant and SWVA do not generally compete as regards customers and
products.
(b) Financial Information about Industry Segments.
The Registrant's business consists of one industry segment or
line of business, which is the extracting of scrap metal from discarded
automobiles and the manufacturing, fabricating and marketing of merchant
steel bar products, reinforcing bars, open-web steel joists and billets.
The industry segment consists of three classes of products - merchant steel
products, fabricated bar joists and reinforcing bars and billets.
PART I
(con'd.)
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
AND CLASSES OF PRODUCTS OR SERVICES
1998 1997 1996
Sales to Unaffiliated Customers:
Merchant Steel $116,226,463 $113,588,649 $104,180,746
Bar Joists & $121,000,869 $115,017,371 $112,572,549
Billets $57,976,642 $36,502,619 $29,533,357
$295,203,974 $265,108,639 $246,286,652
Net Earnings from Operations $19,875,409 $16,883,068 $15,414,834
Identifiable Assets $189,210,889 $176,860,219 $167,015,901
(c) Narrative Description of Business.
(1) (i) The Registrant manufactures merchant steel products
consisting of Angles, Plain Rounds, Flats, Channels and Reinforcing Bars of
various sizes and lengths. The principal markets for the Registrant's
products are steel fabricators and steel service centers. The products are
distributed directly to customers from orders solicited by a paid sales
staff of the Registrant.
The Registrant's subsidiary, Shredded Products Corporation, is
involved in the extraction of scrap iron and steel and other metals from
junked automobiles and other waste materials. Almost all of the ferrous
material is used by the Parent as raw materials. The non-ferrous metals
are sold to unrelated purchasers.
Two other subsidiaries, John W. Hancock, Jr., Inc. and Socar,
Inc., are engaged in the manufacturing of long- and short-span steel
joists. Joists are open-web steel horizontal supports for floors and
roofs, used primarily in the construction of commercial and industrial
buildings such as shopping centers, factories, warehouses, hospitals,
schools, office buildings, nursing homes, and the like. Joists are
cheaper and lighter than structural steel or reinforced concrete. The
joists are distributed by these subsidiaries to their customers from orders
solicited by manufacturer's representatives and pursuant to successful bids
placed directly by the companies.
PART I
(con'd.)
The Registrant's subsidiary, RESCO Steel Products Corporation,
fabricates concrete reinforcing steel by cutting and bending rebars to
contractors' specifications. The rebars are distributed to contractors
from orders solicited by a paid sales staff and pursuant to successful bids
placed directly by the subsidiary.
(ii) The Registrant has not in fiscal 1998 introduced a new
product or begun to do business in a new industry segment that will require
the investment of a material amount of assets or that otherwise is
material.
(iii) The Registrant's main raw material, scrap steel, is
supplied for the most part by scrap dealers within a 250 mile radius of the
mill. It is purchased through the David J. Joseph Company who are scrap
brokers. The Shredded Products subsidiary supplies 10,000 to 15,000 tons
of scrap per month. Although scrap is generally available to the
Registrant, the price of scrap steel is highly responsive to changes in
demand, including demand in foreign countries as well as in the United
States. The ability to maintain satisfactory profit margins in times when
scrap is relatively high priced is dependent upon the levels of steel
prices, which are determined by market forces. Alloys and other materials
needed for the melting process are provided by various domestic and foreign
companies.
Shredded Products Corporation often experiences difficulty in
purchasing scrap automobiles at a satisfactory level. Competition from an
increasing number of shredding operations and reluctance by dealers to sell
scrap automobiles due to market conditions are the main causes. High
offering prices generally increase the supply; however, the increased cost
to produce sometimes is very competitive with the price of similar scrap
that can be purchased on the outside.
Substantially all of John W. Hancock, Jr., Inc.'s steel
components are purchased from the Parent, which is located conveniently
nearby and, therefore such components are generally available to the
Company as needed.
RESCO Steel Products Corporation purchases most of its steel
components from suppliers within its market area, determined mainly by
freight cost. Such components would be generally available to the Company,
since the Parent could produce and supply this raw material, as needed.
Socar, Inc. receives most of its raw steel material from the
Parent and other nearby suppliers, the determinant usually being freight
cost. The availability of raw materials is not of major concern to the
Company, since the Parent could supply most of its needs.
(iv) The Registrant currently holds no patents, trade marks,
licenses, franchises or concessions that are material to its business
operations.
(v) The business of the Registrant is not seasonal.
PART I
(con'd.)
(vi) The Registrant does not offer extended payment terms to its
customers nor is it normally required to carry significant amounts of
inventory to meet rapid delivery requirements of customers; although, at
times market conditions have required the stockpiling of popular bar
products for rapid delivery. Working capital practices generally remain
constant during the course of business except when the Registrant
determines it to be advantageous to stockpile raw materials due to price
considerations.
(vii) During fiscal year 1998, sales (tons) by the Registrant to
John W. Hancock, Jr., Inc.,
Socar, Inc. and RESCO Steel Products Corporation, wholly-owned
subsidiaries, were approximately 9%, 6% and less than 1% of the
Registrant's total sales (tons), respectively. The largest nonaffiliated
customer purchased approximately 25% of total sales (tons) ---13% of total
sales (dollars). Alternative marketing and production arrangements were
available to the Registrant, so that the loss of this nonaffiliate would
not have had a materially adverse effect on the Registrant and its
subsidiaries taken as a whole.
(viii) The Registrant is of the opinion that the amount of its
backlog is not generally material to an understanding of the business. All
backlog is shipped within the current fiscal year.
(ix) None of the business of the Registrant is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the Government.
(x) The Registrant competes with steel-producing mills of
similar size operative within its market region and also larger mills
producing similar products. The market region in which the Registrant
sells its products consists of the majority of states east of the
Mississippi River. Price, including transportation cost, is the major
determinant in securing business. Economic recession began to intensify
competition during 1990, as selling prices dropped due to a softening in
demand. This trend continued through most of 1991 with sharp declines in
selling prices due to poor demand and excess inventories and capacity at
most mills, although by year-end prices rose slightly. In comparison to
the 1991 recession lows, order rates in 1992 showed some improvement while
selling prices remained flat. In 1993, market conditions and demand
improved significantly, while industry-wide selling prices increased to
offset higher raw material costs. Demand in 1994 was fueled by continued
improvement in business conditions and economic growth, with higher raw
material costs again forcing selling prices upward, although some of the
increased selling prices were demand driven. Even though market conditions
and backlogs remained strong for much of 1995, shipments were flat due to
customers' inventory reductions, while improved selling prices were
attributable to higher raw material costs and rising demand, although by
year-end prices fell slightly. Demand and backlogs continued high through
1996, allowing for increased bar product shipments, in spite of increased
competition, which forced sharp reductions in selling prices throughout the
industry. As competition eased during 1997, bar product shipments
PART I
(con'd.)
increased with higher demand, causing improvements in order levels,
backlogs and prices. Strong business conditions kept bar prices up during
fiscal 1998, in spite of the temporary drop in merchant bar shipments,
caused by excess inventories at steel service centers.
The joist business is highly competitive. Due to similarity of
product, relatively small price differences are often determinative in
placing business. Ability to meet the customer's time requirements for
delivery also is important in securing business. Competing successfully
becomes more difficult with the distance to point of delivery due to
transportation costs. In 1990, selling prices and order rates declined as
a result of a weakened construction industry, causing increased
competition. The severely depressed activity in the construction industry,
due to overbuilding, again in 1991 resulted in drastic declines in selling
prices and demand. In spite of depressed conditions, 1992 brought improved
shipments due mainly to successful job bidding; however, in order to book a
higher percentage of quotations, selling prices consequently suffered.
Again in 1993, successful job bidding resulted in improved shipment levels,
while higher raw material costs pushed selling prices upward, even though
the construction industry remained depressed and highly competitive. In
1994, an easing of competitive conditions within the construction industry
led to increased shipment levels, while selling prices were again forced
upward by higher raw material costs. Reduced competition and increased
activity in 1995 again led to higher shipment levels within the
construction industry, as demand and increased raw material costs forced
selling prices higher. Generally strong business conditions within the
commercial construction industry continued during 1996 to bring
improvements to selling prices for fabricated products, while shipment
levels were relatively flat, as weather related construction delays offset
otherwise strong demand. Even though market conditions continued to be
favorable during 1997, competition within the industry forced lower selling
prices for fabricated products, and also kept shipment levels flat.
Continued favorable market conditions in the construction industry during
fiscal 1998 led to the increased shipments and level selling prices for
fabricated products.
Billets are semi-finished products used by the Registrant in its
rolling mill process to manufacture various merchant bar products. With
the addition of new casting equipment in recent years, the Registrant has
anticipated a growing billet market of nonaffiliated customers who further
fabricate the billets for various end uses. Competition within the
industry caused a drop in selling prices in 1990, with demand slowing. In
1991, selling prices trended further downward, while order rates fell due
to the sagging economy. Billet sales improved significantly in 1992 as a
result of increased domestic demand and entry into the much more
competitive export markets, although selling prices still continued to
slump. Again in 1993, increased export business and improved domestic
demand resulted in significantly higher billet shipments. Selling prices
also rose in reaction to higher scrap steel costs. Shipments of billets
declined slightly in 1994 due to a lack of export
PART I
(con'd.)
shipments, although domestic shipments improved significantly. While the
export markets were much more competitive, domestic demand improved
dramatically. Higher billet prices were also driven by higher scrap steel
costs, but the increased domestic billet shipments, which bring a higher
price, also contributed. Improved market conditions and increased domestic
demand resulted in improved 1995 billet shipments, as export markets
remained highly competitive. Higher scrap steel costs and improved product
mix together caused billet selling prices to climb. A planned melt shop
shutdown during 1996 to install a new ladle furnace and upgrade an electric
arc furnace was unexpectedly prolonged due to problems with construction
and installation, resulting in a sharp decline in billet production and
causing a significant reduction in billet shipments for the year, while the
highly competitive export market remained in effect. Billet selling prices
declined with a downward trend in scrap prices. Increased billet shipments
for 1997 resulted both from increased production, which hampered shipments
last year, and improved domestic demand, as export markets remained very
competitive. Lower scrap prices continued to keep billet prices down. The
significant increase in billet shipments for fiscal 1998 was attributable
to record raw steel production, coupled with unprecedented demand. Billet
prices were flat due to relatively unchanged scrap prices.
(xi) During the last three fiscal years, the Registrant was not
involved in any material research and development activities.
(xii) The United States Environmental Protection Agency (EPA)
notified the Registrant and the County of Roanoke (County) of their
potential liability and responsibility for costs of response to materials
at a County-owned landfill site and adjacent streams near Salem, Virginia.
The Registrant entered into a cost-sharing agreement with the County for
response action (cleanup) at the landfill site and the streams. Pursuant
to a Consent Decree to which EPA, the County and the Registrant were
parties, the County completed a remedial action at the landfill in 1995.
Under a separate consent order with EPA, the Registrant performed a removal
action at the streams, which included removal, treatment and on-site
placement of materials and affected sediment and soil. EPA confirmed
completion of the required work on September 14, 1997. The only remaining
obligation under either order was reimbursement of certain EPA oversight
costs, which were paid during 1998. The Registrant has not received
notification of other claims associated with the landfill or streams. The
Registrant does not anticipate significant future potential liability for
response or oversight costs associated with the landfill or streams.
Management believes such costs, if any, would not have a materially adverse
effect on the consolidated financial position, results of operations and
competitive position of the Registrant. See Note 7, "Commitments and
Contingent Liabilities", in Notes to Consolidated Financial Statements
contained in the Registrant's 1998 Annual Report to Stockholders, filed as
an Exhibit to this Form 10-K.
PART I
(con'd.)
Near the end of fiscal year 1996, the Registrant began treating a
portion of its electric arc furnace dust, a hazardous substance, utilizing
its own stabilization process. Significant savings are being realized as
this process replaces off-site and more expensive treatment methods that
had been used through a contract with an approved waste disposal firm. The
Registrant believes it is in substantial compliance with applicable
federal, state and local regulations. However, future changes in
regulations may require expenditures which could adversely affect earnings
in subsequent years.
The Registrant has constructed over the years pollution control
equipment at a net aggregate cost of over $8,000,000. Annual operating
expenses and depreciation of all pollution control equipment and waste
disposal costs are in excess of $3,600,000 in the aggregate. The
Registrant is expected to spend less than $1,000,000 for additional
pollution control and waste disposal equipment and facilities during
subsequent fiscal years. Adoption of the Clean Air Act Amendments of 1990,
or any other environmental concerns, is not anticipated to have a
materially adverse effect on the Registrant's operations, capital resources
or liquidity, nor should any incremental increase in capital expenditures
occur due to the Act.
(xiii) At October 31, 1998, the Registrant employed 531 persons
at its Roanoke plant, with no employment at its Salem division, idle since
mid-1991. The Registrant's subsidiaries, John W. Hancock, Jr., Inc.,
Socar, Inc., Shredded Products Corporation and RESCO Steel Products
Corporation employed 317, 268, 58 and 41 persons, respectively.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
When the Registrant's billet production exceeds its required
needs, this semi-finished product is offered for sale. During past years,
a portion of the excess billets has been sold to brokers who represent
foreign purchasers, although, there were no foreign sales of excess billets
or other products during fiscal years 1996, 1997 and 1998. The information
required by this paragraph by geographical area, as to foreign and domestic
operations, is not provided since it is identical to the table in paragraph
(b) with all information pertaining to the United States.
ITEM 2. PROPERTIES
The Registrant owns 72 acres situated in the City of Roanoke,
Virginia, which comprises its main plant, of which 25 acres are used to
provide 345,000 square feet of manufacturing space with an annual billet
capacity of approximately 650,000 tons. A 30 acre site is owned in Salem,
Virginia, of which 10 acres were used to provide 51,355 square feet of
manufacturing space, until March 1991, when the plant was idled. The
Registrant acquired in 1991 a 447 acre tract of land in Franklin County,
Virginia, 100 acres of which was transferred to Shredded Products
Corporation in a move of shredding operations from its Montvale location.
PART I
(con'd.)
Part of this new Shredded Products property is being used as an approved
industrial landfill. The remaining 337 acres of this land, 64 acres of
which was sold in 1995, 1997 and 1998 will be marketed as an industrial
park for Franklin County.
Shredded Products Corporation operates in both Montvale and Rocky
Mount, Virginia. The Montvale plant is situated on a 75 acre site owned by
the Registrant, approximately 20 acres of which are regularly used in its
scrap processing operation, with an annual production capacity of
approximately 24,000 tons. The Rocky Mount facility is located on a 100
acre site owned by Shredded Products Corporation, partially consisting of a
25 acre industrial landfill used for the disposal of its auto fluff, and
another 25 acres of which are regularly used in its shredding operation,
with an annual production capacity of approximately 150,000 tons.
John W. Hancock, Jr., Inc. is located in Roanoke County near
Salem, Virginia. The plant is situated on a 37 acre site owned by Hancock,
Inc., 17 acres of which are regularly used in its operations. Buildings on
the site contain 131,614 square feet of floor space.
Socar, Inc. and its subsidiary are located in Florence, South
Carolina, and in Continental, Ohio. The Florence facility is located on a
28 acre site owned by Socar, Inc., 16 acres of which are regularly used in
its operations. Buildings on the site contain 93,359 square feet of floor
space. The plant located on a 32 acre site in Continental, Ohio, owned by
Socar, Inc., has 86,400 square feet of floor space in manufacturing
buildings, situated on 8 acres regularly used in its operations.
RESCO Steel Products Corporation operates from a building
containing 43,340 square feet of floor space, located in Salem, Virginia,
on a 7 acre site owned by RESCO.
The various buildings are of modern design, well-maintained, and
suitable and adequate for the requirements of the business.
ITEM 3. LEGAL PROCEEDINGS
A County of Roanoke (County) landfill site, where the Registrant
disposed of furnace dust from 1969 until 1976, was placed on the National
Priorities List as a Superfund site in 1989. The United States
Environmental Protection Agency (EPA) notified the Registrant and the
County of their potential liability and responsibility for costs of
response at the landfill site and adjacent streams. The Registrant entered
into a cost-sharing agreement with the County for response action (cleanup)
at the landfill site and sharing of cost reimbursement received from other
potentially responsible parties, if any. The County has filed suit to
recover such costs. Under EPA oversight, the County completed remediation
action there in 1995. The Registrant's costs associated with that work
were reflected in past financial statements. Under a consent order and EPA
oversight, the Registrant completed in 1997 a removal action (cleanup) of
the streams, and in 1998 final
PART I
(con'd.)
oversight costs were paid. While the cost of future response activities or
any future claims associated with the landfill or streams is difficult to
project, management believes such costs, if any, would not have a
materially adverse effect on the consolidated financial position, results
of operations and competitive position of the Registrant. See Note 7,
"Commitments and Contingent Liabilities", in Notes to Consolidated
Financial Statements contained in the Registrant's 1998 Annual Report to
Stockholders, filed as an Exhibit to this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during
the fourth quarter of the fiscal year covered.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following
list is included as an unnumbered Item in Part I of this report in lieu of
being included in the Proxy Statement for the Annual Meeting of
Shareholders to be held on February 16, 1999.
The names, ages and positions of all of the executive officers of
the Registrant as of October 31, 1998 are listed below with their business
experience with the Registrant for the past five years. Officers are
elected annually by the Board of Directors at the first meeting of
directors following the annual meeting of shareholders. There are no family
relationships among these officers, nor any agreement or understanding
between any officer and any other person pursuant to which the officer was
selected.
Thomas J. Crawford, 43, has served as Secretary of the Registrant
since January 1985 and as Vice President-Administration since February
1998; prior thereto, he had served as Assistant Vice President
since January 1993, as Manager of Inside Sales since 1984 and as a Sales
Representative since 1977. He has 21 years of service with the Registrant.
Donald R. Higgins, 53, has served as Vice President - Sales of
the Registrant since January 1986; prior thereto, he had served as General
Sales Manager since 1984 and Assistant Sales Manager since 1978. He has 33
years of service with the Registrant.
John E. Morris, 57, has served as Vice President - Finance of the
Registrant since October 1988 and as Assistant Treasurer since 1985; prior
thereto, he had served as Controller since 1971. He has 27 years of
service with the Registrant.
PART I
(con'd.)
Donald G. Smith, 63, has served as Chairman of the Board of the
Registrant since February 1989, as Chief Executive Officer since November
1986, as President and Treasurer since January 1985 and as Director of the
Registrant since April 1984; prior thereto, he had served as Vice President
- - Administration since September 1980 and as Secretary since January 1967.
He has 41 years of service with the Registrant.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include economic and
industry conditions, availability and prices of supplies, prices of steel
products, competition, governmental regulations, interest rates, inflation,
labor relations, environmental concerns, and others.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The specified information required by this item is incorporated by
reference to the information under the heading "Stock Activity" in the 1998
Annual Report to Stockholders. The Registrant did not during fiscal year
1998 make any sale of securities not registered under the Securities Act of
1993.
ITEM 6. SELECTED FINANCIAL DATA
The specified information required by this item is incorporated
by reference to the information under the heading "Selected Financial Data"
in the 1998 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The specified information, including Year 2000 compliance issues,
required by this item is incorporated by reference to the information under
the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 1998 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The specific information required by this item is incorporated
by reference to the information under the headings "Notes to Consolidated
Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1998 Annual Report to
Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The specified information required by this item is incorporated
by reference to the information under the headings "Independent Auditors'
Report", "Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements" in the 1998 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The specified information required by this item is incorporated
by reference to the information under the heading "Information Concerning
Directors and Nominees" in the Proxy Statement dated December 28, 1998, to
be filed with the Commission, or is included under the heading "Executive
Officers of the Registrant" in Part I of this 10-K filing. The disclosure
required by Item 405 of Regulation S-K is not applicable.
ITEM 11. EXECUTIVE COMPENSATION
The specified information required by this item is incorporated
by reference to the information under the headings "Executive
Compensation", "Compensation and Stock Option Committee Report on Executive
Compensation", "Performance Graph" and "Board of Directors and Committees
- -- Director Compensation" in the Proxy Statement dated December 28, 1998,
to be filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The specified information required by this item is incorporated
by reference to the information under the headings "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the
Proxy Statement dated December 28, 1998, to be filed with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The following financial statements filed as part of the
1998 Annual Report to Stockholders are incorporated herein by reference:
(a) Consolidated Balance Sheets
(b) Consolidated Statements of Stockholders' Equity
(c) Consolidated Statements of Earnings
(d) Consolidated Statements of Cash Flows
(e) Notes to Consolidated Financial Statements
(f) Independent Auditors' Report
Individual financial statements of the Registrant are not being
filed because the Registrant is primarily an operating company and its
subsidiaries do not have minority equity interests and/or long-term
indebtedness (including current portions) to any person outside the
consolidated group (excluding long-term indebtedness which is
collateralized by the Registrant by guarantee, pledge, assignment or
otherwise), in amounts which together exceed 5 percent of the total
consolidated assets.
PART IV
(con'd.)
(2) Pursuant to Regulation S-K the following Exhibit Index is
added immediately preceding the exhibits filed as part of the subject Form
10-K:
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT PAGE
(3) (a) Articles of Incorporation, as amended 20
Incorporated by
Reference
(b) By-Laws, as amended 21
Incorporated by
Reference
(4) Instruments Defining the Rights of
Security Holders 22
(10) * (a) Executive Officer Incentive Arrangement 23
Incorporated by
Reference
* (b) Roanoke Electric Steel Corporation
Employees' Stock Option Plan 23
* (c) Roanoke Electric Steel Corporation
Non-Employee Directors' Stock Option Plan 23
Incorporated by
Reference
* (d) Roanoke Electric Steel Corporation
Consulting Arrangement 23
* (e) Roanoke Electric Steel Corporation
Severance Agreements 23
Incorporated by
Reference
(f) Merger Agreement of Steel of West Virginia, Inc.
into Roanoke Electric Steel Corporation 23
Incorporated by
Reference
(13) 1998 Annual Report to Stockholders 24
(21) Subsidiaries of the Registrant 25
(23) Independent Auditors' Consent 26
(27) Financial Data Schedule 27
PART IV
(con'd.)
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Registrant during
the last quarter of the fiscal period covered by the Annual Report.
* Management contract, or compensatory plan or agreement, required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).
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.
ROANOKE ELECTRIC STEEL CORPORATION
Registrant
By: Donald G. Smith
Donald G. Smith, Chairman, President,
Treasurer and Chief Executive Officer
(Principal Executive Officer, Principal
Financial Officer and Director)
Date: December 14, 1998
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.
Name and Title Date
Donald G. Smith December 14, 1998
Donald G. Smith, Chairman, President,
Treasurer and Chief Executive Officer
(Principal Executive Officer, Principal
Financial Officer and Director)
John E. Morris December 14, 1998
John E. Morris, Vice President - Finance
and Assistant Treasurer (Principal
Accounting Officer)
George B. Cartledge, Jr. December 14, 1998
George B. Cartledge, Jr. Director
Frank A. Boxley December 14, 1998
Frank A. Boxley Director
Charles I. Lunsford, II December 14, 1998
Charles I. Lunsford, II Director
John C. Wilson December 14, 1998
John D. Wilson Director
EXHIBIT NO. 3 (a)
ARTICLES OF INCORPORATION, AS AMENDED
Incorporated by reference to the previously filed Form 10-K for
October 31, 1996 on file in the Commission office.
EXHIBIT NO. 3 (b)
BY-LAWS, AS AMENDED
Incorporated by reference to the previously filed Form 10-Q for
April 30, 1997 on file in the Commission office.
EXHIBIT NO. 4
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Pursuant to Item 601(b) (4) (iii) of Regulation S-K, the
Registrant hereby undertakes to furnish to the Commission, upon request,
copies of the instruments defining the rights of holders of the long-term
debt of Roanoke Electric Steel Corporation and its subsidiaries described
in its 1998 Annual Report to Stockholders and Form 10-K.
EXHIBIT NO. 10
* (a)
EXECUTIVE OFFICER INCENTIVE ARRANGEMENT
Incorporated by reference to the previously filed Form 10-K for
October 31, 1993 on file in the Commission office.
* (b)
ROANOKE ELECTRIC STEEL CORPORATION
EMPLOYEES' STOCK OPTION PLAN
EXHIBIT NO. 10 (b)
ROANOKE ELECTRIC STEEL CORPORATION
EMPLOYEES' STOCK OPTION PLAN
1. Purpose. The Roanoke Electric Steel Corporation Employees'
Stock Option Plan (the "Plan") is intended to advance the interests of
Roanoke Electric Steel Corporation (the "Company"), its stockholders and
its subsidiaries by encouraging and enabling selected officers and other
employees, especially key employees, upon whose judgment, initiative and
efforts the Company is largely dependent for the successful conduct of
its business, to acquire and retain a proprietary interest in the
Company by ownership of its stock. The taxation of options granted under
the Plan is intended to be governed by Section 83 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the options are not
intended to meet the requirements of Section 422A of the Code.
2. Definitions. The following words and phrases as used herein
shall have the meanings indicated below:
A. "Board" means the Board of Directors of the Company.
B. "Committee" means the body administering the Plan as
contemplated by paragraph 3 of this document.
C. "Common Stock" means the Company's no par value Common Stock.
D. "Date of Grant" means the date upon which an option is granted
under the Plan.
E. "Fair Market Value" means on a specific date the closing sales
price of the Common Stock on a nationally recognized stock exchange or,
if not traded on such an exchange, the NASDAQ National Market System on
the date involved if that is a trading day, or if not, the first trading
day prior to such day. If the Common Stock is not quoted on the NASDAQ
National Market System, then Fair Market Value shall mean the average
between the bid and asked prices on the date involved if that is a trading
day, or if not, the first trading day prior to such day.
F. "Option" means an option granted under the Plan.
G. "Optionee" means a person to whom an Option which has not
expired has been granted under the Plan.
H. "Plan Year" means the period beginning November 1 and ending
October 31, except that the first Plan Year shall begin with the date of
stockholder approval described in paragraph 10 and end on October 31, 1989.
I. "Subsidiary" means a subsidiary corporation of the Company which
is controlled by the Company directly or indirectly within the meaning of
Section 368(c) of the Code.
3. Administration of Plan. The Board shall appoint a Committee to
administer the Plan. The Committee shall consist of not less than three (3)
members of the Board. No member of the Board shall be a member of the
Committee if he is at the time or has at any time within the one year prior
to his potential appointment to the Committee been eligible to receive an
Option under the Plan or any other plan of the Company or any of its
affiliates entitling the participants therein to acquire stock, stock
options or stock appreciation rights of the Company or any of its affiliates.
The Committee shall report all action taken by it to the Board. The
Committee shall have full and final authority in its sole discretion,
subject to the provisions of the Plan, to determine the individuals to
whom and the time or times at which Options shall be granted and the number
of shares of Common Stock covered by each Option, to construe and interpret
the Plan, to determine the terms and provisions of the respective option
agreements (which need not be identical), and to make all other
determinations and take all other actions deemed necessary or advisable for
the proper administration of the Plan. The Committee may correct any
defects, omissions or ambiguities, or reconcile any inconsistencies in the
Plan or in any document issued pursuant to the Plan in the manner and to
the extent it shall deem reasonably desirable. All such actions and
determinations shall be conclusively binding for all purposes upon all
persons.
4. Committee Procedures. The Committee shall select one of its
members as its chairman and shall hold its meetings at such times and
places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by not less than
a majority of its members. Any decision or determination reduced to writing
and signed by all members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held. The Committee may
appoint a secretary, shall keep minutes of its meetings and shall make such
rules and regulations for the conduct of its business as it shall deem
advisable.
5. Participants. Options may be granted under the Plan to any
person who is an officer or employee (including officers and employees who
are also directors) of the Company or any of its Subsidiaries. A director
of the Company or any of its Subsidiaries who is not also an employee will
not be eligible to receive an Option. In determining the employees to whom
Options will be granted and the number of shares to be covered by each
Option, the Committee may take into account the nature of the services
rendered by the respective employees, their present and potential
contributions to the Company's success and such other factors as the
Committee in its discretion shall deem relevant. An employee who has been
granted an Option under the Plan may be granted an additional Option or
Options under the Plan if the Committee shall so determine in accordance
with the provisions hereof.
6. Shares Available. The aggregate number of shares of the
Company's Common Stock which may be issued upon the exercise of options
granted under the Plan shall not exceed 50,000 per Plan Year, subject to
adjustment under the provisions of paragraph 7. The shares of Common Stock
to be issued upon the exercise of options may be authorized but unissued
shares or shares issued and reacquired by the Company. In the event any
Option shall, for any reason, terminate or expire or be surrendered without
having been exercised in full, the shares subject to such Option but not
purchased thereunder shall again be available for Options to be granted
under the Plan.
7. Adjustments. Each Option agreement may contain such provisions
as the Committee shall determine to be appropriate for the adjustment of the
number and class of shares subject to such Option and option price in the
event of changes in the outstanding Common Stock by reason of any stock
dividend, split-up, recapitalization, combination or exchange of shares,
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation and the like, and, in the event of any such
change in the outstanding Common Stock, the aggregate number and class of
shares available under the Plan shall be appropriately adjusted by the
Committee, whose determination shall be conclusive.
8. Terms and Conditions of Options. Any Option granted under the
Plan shall be evidenced by an agreement executed by the Company and the
applicable officer or employee and shall contain such terms and be in such
form as the Committee may from time to time approve, subject to the
following limitations and conditions:
A. Option price. The option price per share with respect
to each Option shall be equal to 85% of the Fair Market Value of a share
of the Common Stock on the Date of Grant.
B. Period of Option. The expiration date of each Option
shall be fixed by the Committee, however, such expiration date shall not
be more than five (5) years from the Date of Grant.
C. Vesting of Stockholder Rights. An Optionee shall have
none of the rights of a stockholder of the Company until the certificates
evidencing the shares purchased are delivered to such Optionee.
D. Exercise of Option. Each Option shall be exercisable
from time to time over a period commencing on the Date of Grant and ending
upon the expiration or termination of the Option, provided, however, that
the Committee may, by the provisions of any option agreement, limit the
number of shares purchasable thereunder in any period or periods of time
during which the Option is exercisable. An Option shall not be exercisable
in whole or in part prior to the date of stockholder approval of the Plan.
E. Termination of Option. Each Option held by an Optionee
shall terminate upon the earlier of the following:
(i) The expiration date stated in the Option;
(ii) The death of the Optionee;
(iii) The termination of employment of the Optionee with
the Company or with any of its Subsidiaries for any
reason other than total and permanent disability;
(iv) The date which is the twelve (12) month anniversary
of the date upon which the Optionee became totally
and permanently disabled; or
(v) The date which is thirty (30) days prior to the
scheduled date of termination of employment of the
Optionee with the Company or with any of its
Subsidiaries for any reason other than total and
permanent disability.
Total and permanent disability under this Plan shall be determined by the
Committee on the basis of competent medical evidence, but the entitlement
of the Optionee to disability benefits under federal Social Security laws
shall be conclusive evidence of total and permanent disability.
F. Method of Exercising Option. An Option may be exercised
by giving written notice of exercise to the Company specifying the number of
shares to be purchased and by paying in full in cash the exercise price
and any additional sums required as hereinafter described. The proceeds
received by the Company in cash will be used for general corporate purposes.
Upon notification of the amount due and prior to or concurrently with the
delivery to the Optionee of certificate representing any shares purchased
pursuant to the exercise of an Option, the Optionee shall promptly pay to
the Company any amount necessary to satisfy applicable income, employment,
federal, state or local tax withholding or other requirements, and the
Optionee shall not be entitled to a certificate until such amounts are paid.
Furthermore, if the Optionee does not realize income at the time of the
exercise of the Option, then within five (5) business days of the date of
realization of income by the Optionee pursuant to the provisions of
Section 83 of the Code, the Optionee shall notify the Company of such event
and the Optionee shall pay the Company upon demand the amount of any income,
employment, or other taxes, whether federal, state or local, if any, which
are required by law to be withheld or otherwise paid with regard to such
event. The Optionee shall indemnify the Company and its Subsidiaries for
any loss they incur by reason of Optionee's failure to comply with the
previous sentence.
G. Nontransferability of Option. No Option shall be
transferable or assignable by an Optionee, and each Option shall be
exercisable during the Optionee's lifetime only by him or by his guardian
or legal representative. No Option shall be pledged or hypothecated in any
way and no Option shall be subject to execution, attachment, or similar
process except with the express consent of the Committee.
9. Restrictions on Issuing Shares. The exercise of each Option
shall be subject to the condition that if at any time the Company shall
determine in its discretion that the listing, registration, or qualification
of any shares otherwise deliverable upon such exercise upon any securities
exchange or under any state or federal law, or that the consent or approval
of any regulatory body, is necessary or desirable as a condition of, or in
connection with, such exercise or the delivery or purchase of shares pursuant
thereto, then in such event such exercise shall not be effective unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
10. Effective Date of Plan. The Plan is subject to approval of the
stockholders of the Company and will become effective on the date approved
by said stockholders.
11. Amendment or Termination of Plan. There is no express limitation
upon the duration of the Plan. However, the Plan may be terminated, modified
or amended by the Board at any time, provided, however, that the Board may
not, without the approval of the majority of the outstanding stock of the
Company having general voting power increase the maximum number of shares for
which options may be granted under the Plan, increase the periods during
which options may be granted or exercised, change the Option price or change
the class of employees eligible to be granted Options. No termination,
modification or amendment of the Plan may, without the consent of the
employee to whom any Option shall theretofore have been granted, adversely
affect the rights of such employee under such Option.
As evidence of its adoption of the Plan, the Company has caused this
document to be signed by its officer duly authorized, this 15th day of
November, 1988.
ROANOKE ELECTRIC STEEL
CORPORATION
By: Donald G. Smith
President
* (c)
ROANOKE ELECTRIC STEEL CORPORATION
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Incorporated by reference to the previously filed Form 10-K for
October 31, 1997 on file in the Commission office.
*(d)
ROANOKE ELECTRIC STEEL CORPORATION
CONSULTING ARRANGEMENT
In January 1996, the Company entered into an arrangement with
William L. Neal, a director of the Company and former President of John W.
Hancock, Jr., Inc., whereby Mr. Neal agreed to provide consultation and
advisory services to the Company and its subsidiaries. The arrangement
will continue in effect until terminated by either party. The Company has
agreed to pay Mr. Neal a retainer fee of $2,000 per month and an hourly
project rate of $100, plus expenses. Mr. Neal retired as director during
fiscal 1998.
* (e)
ROANOKE ELECTRIC STEEL CORPORATION
SEVERANCE AGREEMENTS
Incorporated by reference to the previously filed Form 10-K for
October 31, 1996 on file in the Commission office.
(f)
MERGER AGREEMENT OF STEEL OF WEST VIRGINIA, INC.
INTO ROANOKE ELECTRIC STEEL CORPORATION
Incorporated by reference to Exhibit (c)(1) of the previously
filed Schedule 14D-1 (Dated November 17, 1998), as amended and supplemented,
on file in the Commission office.
* Management contract, or compensatory plan or agreement, required to
be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).
EXHIBIT NO. 13
1998 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT NO. 21
SUBSIDIARIES OF THE REGISTRANT
Registrant: Roanoke Electric Steel Corporation
Organized Under
Subsidiary of Registrant Jurisdiction of
Shredded Products Corporation Virginia
John W. Hancock, Jr., Inc. Virginia
Socar, Incorporated South Carolina
RESCO Steel Products Corporation Virginia
Roanoke Technical Treatment and Services, Inc. Virginia
EXHIBIT NO. 23
DELOITTE & TOUCHE LLP
Suite 1401 Telephone: (336) 721-2300
500 West Fifth Street Facsimile: (336) 721-2301
P.O. Box 20129
Winston-Salem, North Carolina 27120-0129
INDEPENDENT AUDITORS' CONSENT
Roanoke Electric Steel Corporation:
We consent to the incorporation by reference in Registration Statement Nos.
33-27359, 33-35243 and 333-25299 of Roanoke Electric Steel Corporation on
Form S-8 of our report dated November 18, 1998, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Roanoke
Electric Steel Corporation for the year ended October 31, 1998.
Deloitte & Touche LLP
Winston-Salem, North Carolina
December 14, 1998
EXHIBIT NO. 27
FINANCIAL DATA SCHEDULE
[RES LOGO]
ROANOKE ELECTRIC STEEL
ANNUAL REPORT 1998
<PAGE>
1998 HIGHLIGHTS
o Record earnings per share
o Near record net earnings
o Sales highest in history, approach $300 million
o Continued strong earnings by our fabricating subsidiaries
o Record shipments of billets
o Record production of raw steel
o Record working capital of $74,917,878
o Record cash flows from operations of $34,571,627
o Record total assets of $189,210,889
o Record stockholders' equity of $119,447,888
o 17.6% return on average equity
o 17.2% pretax return on average total assets
o Cash dividend increased 9.6%
o $7,372,739 returned to shareholders in dividends
and repurchases of stock
o Three-for-two common stock split declared
o ISO 9002 certification achieved
<PAGE>
ROANOKE ELECTRIC STEEL CORPORATION
Roanoke Electric Steel Corporation and its wholly-owned subsidiaries are
engaged in the manufacturing, fabricating and marketing of merchant steel
products, billets, open-web steel joists and reinforcing bars. Each subsidiary
is either a supplier to the parent company or a purchaser of its finished
product.
The main plant of Roanoke Electric Steel Corporation is a state-of-the-art
steel mini-mill located in Roanoke, Virginia. This facility melts scrap steel in
electric furnaces and continuously casts the molten steel into billets. These
billets are rolled into merchant steel products consisting of angles, plain
rounds, flats, channels and reinforcing bars of various lengths and sizes.
Excess steel billet production is sold to mills without melting facilities.
Roanoke Electric Steel Corporation markets its products to steel service centers
and fabricators in 21 states east of the Mississippi River.
Shredded Products Corporation, a subsidiary with operations in Rocky Mount
and Montvale, Virginia, extracts scrap steel and other metals from junked
automobiles and other waste materials. These facilities supply the main plant
with a substantial amount of its raw materials. Non-ferrous metals generated in
the process are sold to unrelated customers.
John W. Hancock, Jr., Inc. and Socar, Inc. are steel fabrication
subsidiaries located in Salem, Virginia, Florence, South Carolina and
Continental, Ohio. All three operations purchase rounds and angles from the main
plant to fabricate long- and short-span open-web steel joists. These joists are
used as horizontal supports for floors and roofs in commercial and industrial
buildings.
RESCO Steel Products Corporation, a Salem, Virginia based subsidiary,
fabricates concrete reinforcing steel by cutting and bending it to contractor
specifications.
1
<PAGE>
TO OUR SHAREHOLDERS
1998 PERFORMANCE AND ACHIEVEMENTS
The year ended October 31, 1998, was another record-breaking year.
Sales, earnings per share, billet shipments and raw steel production reached
new highs. Earnings increased for the second consecutive year to
$19,875,409, an increase of 17.7% over 1997 earnings of $16,883,068 and were
exceeded only by 1995 earnings of $20,228,902. Earnings per share were a
record $1.79 ($1.77 diluted) - up 19.3% over the $1.50 ($1.49 diluted)
earned in 1997 and 6.5% higher than 1995 earnings per share of $1.68 ($1.67
diluted). These results were achieved on record sales of $295,203,974, an
11.4% increase over last year's sales of $265,108,639.
Market conditions remained strong for all business segments throughout
1998. Our fabricating subsidiaries recorded strong earnings for the fourth
consecutive year, as the construction industry continued to flourish, and
shipments of fabricated products increased 5.2%. Our billet business surged,
as shipments increased a robust 58.5%, and strong demand for steel bar
products pushed selling prices up 6.2%. Margins as a percentage of sales
were fractionally improved, which is particularly gratifying, considering
the increased shipments of lower-margin billets.
Other achievements in 1998 were:
o a $6,889,085 increase in working capital to a record $74,917,878.
o a $12,350,670 increase in total assets to a record $189,210,889.
o a $5,910,624 increase in cash flows from operations to a record
$34,571,627.
o a $13,011,619 increase in stockholders' equity to a
record $119,447,888.
o a pretax return on average total assets of 17.2%.
o a return on average equity of 17.6%.
STRONGER FINANCIAL POSITION
Our financial condition strengthened throughout the year. In addition
to the improvements in cash flows from operations, working capital and
stockholders' equity, the quick ratio increased to 2.3 to 1, while the
current ratio remained the same at 3.5 to 1. Cash, cash equivalents and
investments increased $11,234,442 to $27,894,661. Our capital structure
[Forbes
THE 200
BEST SMALL COMPANIES
PICTURE]
In its November 2, 1998 issue, Forbes magazine named Roanoke Electric Steel
one of the 200 Best Small Companies in America.
2
<PAGE>
EARNINGS PER SHARE (DOLLARS)
1991 .02
1992 .22
1993 .40
1994 .73
1995 1.68
1996 1.30
1997 1.50
1998 1.79
<PAGE>
was comprised of less debt than in 1997, as long-term debt as a
percentage of total capitalization declined to 16.9% from 21.1% last year.
We are positioned well for future growth with our low leverage, free cash
flow and available capital resources. Our $30,000,000 revolving credit
facility was unused at year end.
MORE SHAREHOLDER VALUE
We continued to create value for our shareholders during the year as our
share price increased 11.5% during the year. In addition, the Board of
Directors declared a 3-for-2 common stock split, the second in three years,
effective in March 1998, and increased the regular quarterly cash dividend
rate by 9.6%. The stock split was intended to further broaden the market for
our common stock, while the dividend increase reflected the strong
conditions in the steel industry and the Board's confidence in the Company's
ability to sustain excellent earnings. Since May 1997, the regular quarterly
dividend has increased 18.8%, and in October 1998, the Board declared the
160th consecutive quarterly cash dividend in the amount of 9.5 cents per
share, payable November 25, 1998. Our dividend yield at October 31, 1998,
was 2.6%, and annual cash dividends paid to shareholders in 1998 amounted to
$4,137,899. We returned an additional $3,234,840 to our shareholders during
the year with the repurchase of 148,000 shares of our common stock. In the
past three years, we have returned $12,543,567 to shareholders with the
repurchase of 807,200 company shares. These repurchases helped to achieve
the record earnings per share for 1998. The Board-approved plans authorized
the repurchase of up to 1,500,000 shares.
In other Board matters, T. A. Carter and William L. Neal retired as
members of our Board of Directors during the year. We express our gratitude
to them for their years of service and their contribution to our success.
Mr. Neal retired in January 1996, as President of our subsidiary, John W.
Hancock, Jr., Inc., after 40 years of service. We thank him for his
dedication, leadership and role in the growth and development of the Hancock
subsidiary.
PROSPECTS FOR GROWTH
As we went to press with this report, our Company had entered into
a definitive agreement to acquire Steel of West Virginia, Inc. ("SWVA").
The acquisition was pending shareholder approval. SWVA operates a steel
mini-mill in Huntington, West
[JACOBSON & ASSOCIATES
Steel Customer
Satisfaction Report
1996-1998
picture]
Jacobson & Associates, a steel industry consultant, in their steel customer
satisfaction report, ranked Roanoke Electric Steel #1 in overall customer
satisfaction. The June 1998 report was based on a 3-year survey of 5,000
steel customers factoring quality, service, price and on-time delivery.
4
<PAGE>
SALES ($MILLIONS)
1991 126,977,104
1992 146,036,301
1993 167,294,378
1994 215,809,228
1995 259,968,524
1996 246,286,652
1997 265,108,639
1998 295,203,974
<PAGE>
Virginia and has fabricating facilities in Huntington and Memphis,
Tennessee. SWVA custom designs and manufactures special steel products for
use in the construction of truck trailers, industrial lift trucks,
off-highway construction equipment, manufactured housing, guard rail posts
and mining equipment. The acquisition provides a captive outlet for our
excess billet capacity, and SWVA's excess rolling mill capacity will enable
them to manufacture products that complement our present range of products,
allowing us to better serve our customers. SWVA's excess rolling mill
capacity, made possible by the completion of a $35,000,000 expansion in
early 1998, will also allow them to penetrate new markets. We see this
acquisition as a significant growth opportunity for our Company.
In our continuing efforts to remain competitive and improve production
methods and quality, we received certification on August 21, 1998, to ISO
9002, the system of international quality standards. Our certification will
continue to assure both our present and prospective customers that our
products are produced to highest quality standards.
LOOKING FORWARD
We begin fiscal year 1999 with good backlogs and margins, and prospects
for the first quarter are favorable. Due to a continued strong construction
industry, our fabricating subsidiaries should perform well. We hope the
general economy and conditions within the steel construction industries will
allow us to continue our growth in sales and earnings. We are confident we
will continue to perform well in comparison to the industry. We expect the
acquisition of Steel of West Virginia, Inc. to contribute to earnings
immediately and are hopeful the incremental earnings will bring improved
1999 results and shareholder value.
The record-breaking year would not have been possible without the
efforts of our loyal employees and valued customers to whom we are most
grateful. We hope our shareholders are pleased with the 1998 performance. We
look forward to bringing you even stronger results in the years to
come.
Sincerely,
/s/ Donald G. Smith
-----------------------------
Donald G. Smith
Chairman of the Board and Chief Executive Officer
[Quarterly, The Wachovia Magazine For Business Picture]
Quarterly, The Wachovia Magazine For Business, featured Roanoke Electric
Steel in its Spring, 1998 issue.
6
<PAGE>
TOTAL ASSETS ($MILLIONS)
1991 124,648,573
1992 125,558,910
1993 130,620,435
1994 140,473,510
1995 157,774,658
1996 167,015,901
1997 176,860,219
1998 189,210,889
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended October 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations
Sales $295,203,974 $265,108,639 $246,286,652 $259,968,524 $215,809,228
Gross earnings 57,720,265 51,728,996 47,914,269 56,097,685 33,732,184
Interest expense-net 830,743 1,627,380 1,538,191 2,053,643 1,891,263
Income taxes 11,568,066 10,206,340 9,305,808 13,035,243 5,684,150
Earnings before cumulative effect
of change in accounting principle 19,875,409 16,883,068 15,414,834 20,228,902 8,766,435
Net earnings 19,875,409 16,883,068 15,414,834 20,228,902 11,860,375
- --------------------------------------------------------------------------------------------------------------------------
Financial Position
Working capital $ 74,917,878 $ 68,028,793 $ 59,630,189 $ 45,483,760 $ 34,504,420
Total assets 189,210,889 176,860,219 167,015,901 157,774,658 140,473,510
Long-term debt 24,291,667 28,541,667 35,291,666 16,979,166 20,729,166
Stockholders' equity 119,447,888 106,436,269 94,433,091 90,062,598 72,417,669
- --------------------------------------------------------------------------------------------------------------------------
Selected Ratios
Gross profit margin 19.6% 19.5% 19.5% 21.6% 15.6%
Operating income margin 6.7% 6.4% 6.3% 7.8% 5.5%
Effective tax rate 36.8% 37.7% 37.6% 39.2% 39.3%
Current ratio 3.5 3.5 3.5 2.2 2.0
Quick ratio 2.3 2.0 2.0 1.3 1.2
Funded debt as a percentage of total capital 19.3% 23.6% 29.5% 26.1% 30.7%
Pretax return on average total assets 17.2% 15.8% 15.2% 22.3% 10.7%
Return on average stockholders' equity 17.6% 16.8% 16.7% 24.9% 12.9%
- --------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings before cumulative effect
of change in accounting principle $1.79 $1.50 $1.30 $1.68 $0.73
Net earnings:
Basic 1.79 1.50 1.30 1.68 0.99
Diluted 1.77 1.49 1.30 1.67 0.98
Cash dividends 0.37 0.33 0.30 0.25 0.27
Stockholders' equity 10.78 9.49 8.35 7.44 6.02
- --------------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 11,132,910 11,230,794 11,815,323 12,068,308 11,983,320
</TABLE>
Per share information has been adjusted for three-for-two stock splits
effective March 25, 1998 and May 1, 1995.
*1994 accounting change of $3.1 million excluded.
CAPITALIZATION ($MILLIONS)
STOCKHOLDERS' EQUITY
1994 72,417,669
1995 90,062,598
1996 94,433,091
1997 106,436,269
1998 119,447,888
LONG-TERM DEBT
1994 20,729,166
1995 16,979,166
1996 35,291,666
1997 28,541,667
1998 24,291,667
CAPITAL EXPENDITURES
AND DEPRECIATION ($MILLIONS)
CAPITAL EXPENDITURES
1994 11,744,913
1995 11,654,366
1996 18,194,216
1997 7,532,580
1998 12,339,553
DEPRECIATION
1994 7,332,833
1995 7,863,154
1996 8,366,012
1997 9,456,201
1998 9,216,133
WORKING CAPITAL
($MILLIONS)
1994 34,504,420
1995 45,483,760
1996 59,630,189
1997 68,028,793
1998 74,917,878
EARNINGS ($MILLIONS)
1994 8,766,435
1995 20,228,902
1996 15,414,834
1997 16,883,068
1998 19,875,409
STOCKHOLDERS' EQUITY
($MILLIONS)
1994 72,417,669
1995 90,062,598
1996 94,433,091
1997 106,436,269
1998 119,447,888
8
<PAGE>
CASH PROVIDED BY OPERATIONS
($MILLIONS)
1991 8,964,504
1992 5,871,368
1993 9,641,895
1994 14,412,573
1995 19,733,012
1996 17,166,064
1997 28,661,003
1998 34,571,627
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES ........................................ $295,203,974 $265,108,639 $246,286,652
COST OF SALES ................................ 237,483,709 213,379,643 198,372,383
----------- ----------- -----------
GROSS EARNINGS ............................... 57,720,265 51,728,996 47,914,269
----------- ----------- -----------
OTHER OPERATING EXPENSES
Administrative ............................. 19,771,970 17,873,967 17,315,039
Interest, net .............................. 830,743 1,627,380 1,538,191
Profit sharing ............................. 5,674,077 5,138,241 4,340,397
----------- ----------- -----------
Total ................................... 26,276,790 24,639,588 23,193,627
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES ................. 31,443,475 27,089,408 24,720,642
INCOME TAX EXPENSE ........................... 11,568,066 10,206,340 9,305,808
----------- ----------- -----------
NET EARNINGS ................................. $ 19,875,409 $ 16,883,068 $ 15,414,834
=========== =========== ===========
NET EARNINGS PER SHARE OF COMMON STOCK
Basic ...................................... $ 1.79 $ 1.50 $ 1.30
=========== =========== ===========
Diluted .................................... $ 1.77 $ 1.49 $ 1.30
=========== =========== ===========
CASH DIVIDENDS PER SHARE OF COMMON STOCK...... $ 0.372 $ 0.333 $ 0.300
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Treasury Stock
Common Stock Excess of (At Cost)
------------------------ Stated Retained ----------------------
Shares Amount Value Earnings Shares Amount
--------- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1995 .............. 8,970,390 $1,729,503 $9,349,429 $ 80,178,534 896,743 $ 1,194,868
Repurchase of common stock ........... - - - - 556,200 7,735,949
Stock options exercised .............. 23,750 187,293 - - - -
Net earnings ......................... - - - 15,414,834 - -
Cash dividends ....................... - - - (3,495,685) - -
---------- ---------- ---------- ------------ --------- ------------
BALANCE, OCTOBER 31, 1996 .............. 8,994,140 1,916,796 9,349,429 92,097,683 1,452,943 8,930,817
Repurchase of common stock ........... - - - - 103,000 1,572,778
Stock options exercised .............. 35,950 432,383 - - - -
Net earnings ......................... - - - 16,883,068 - -
Cash dividends ....................... - - - (3,739,495) - -
---------- ---------- ---------- ------------ --------- ------------
BALANCE, OCTOBER 31, 1997 .............. 9,030,090 2,349,179 9,349,429 105,241,256 1,555,943 10,503,595
Repurchase of common stock ........... - - - - 90,000 2,387,703
Stock options exercised .............. 56,750 508,949 - - - -
Three-for-two stock split ............ 4,516,120 - - - 822,971 -
Cash paid in lieu of fractional
shares on stock split .............. (158) - - (2,976) - -
Retirement of treasury stock ......... (1,195,800) - (9,349,429) (2,724,001) (1,195,800) (12,073,430)
Repurchase and retirement of
common stock ....................... (58,000) - - (847,137) - -
Net earnings ......................... - - - 19,875,409 - -
Cash dividends ....................... - - - (4,134,923) - -
---------- ---------- ---------- ------------ --------- ------------
BALANCE, OCTOBER 31, 1998 .............. 12,349,002 $2,858,128 $ - $117,407,628 1,273,114 $ 817,868
========== ========== ========== ============ ========= ============
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 16,167,025 $ 8,844,537
Investments ....................................................... 11,727,636 7,815,682
Accounts receivable ............................................... 42,415,061 38,786,302
Inventories ....................................................... 31,902,900 36,814,417
Prepaid expenses .................................................. 1,586,357 1,900,338
Deferred income taxes ............................................. 1,608,938 1,211,881
----------- -----------
Total current assets ............................................ 105,407,917 95,373,157
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land .............................................................. 4,264,165 4,313,060
Buildings ......................................................... 19,621,407 18,874,555
Other property and equipment ...................................... 123,615,952 119,266,483
Assets under construction ......................................... 4,656,746 921,581
----------- -----------
Total ........................................................... 152,158,270 143,375,679
Less-accumulated depreciation ..................................... 68,522,086 62,077,810
----------- -----------
Property, plant and equipment, net .............................. 83,636,184 81,297,869
----------- -----------
OTHER ASSETS ........................................................ 166,788 189,193
----------- -----------
TOTAL ............................................................... $189,210,889 $176,860,219
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ................................. $ 4,250,000 $ 4,250,000
Accounts payable .................................................. 15,273,850 13,050,874
Dividends payable ................................................. 1,052,210 971,639
Employees' taxes withheld ......................................... 358,851 151,085
Accrued profit sharing contribution ............................... 5,335,822 4,910,443
Accrued wages and expenses ........................................ 2,959,367 2,938,065
Accrued income taxes .............................................. 1,259,939 1,072,258
----------- -----------
Total current liabilities ....................................... 30,490,039 27,344,364
----------- -----------
LONG-TERM DEBT
Notes payable ..................................................... 28,541,667 32,791,667
Less-current portion .............................................. 4,250,000 4,250,000
----------- -----------
Long-term debt .................................................. 24,291,667 28,541,667
----------- -----------
POSTRETIREMENT LIABILITIES .......................................... 1,293,788 990,809
----------- -----------
DEFERRED INCOME TAXES ............................................... 13,687,507 13,547,110
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7)
STOCKHOLDERS' EQUITY
Common stock-no par value-authorized 20,000,000 shares,
issued 12,349,002 shares in 1998 and 13,544,977 in 1997....... 2,858,128 2,349,179
Capital in excess of stated value ................................. - 9,349,429
Retained earnings ................................................. 117,407,628 105,241,256
----------- -----------
Total ........................................................... 120,265,756 116,939,864
Less-treasury stock, 1,273,114 shares in 1998
and 2,333,914 in 1997 - at cost .............................. 817,868 10,503,595
----------- -----------
Total stockholders' equity ...................................... 119,447,888 106,436,269
----------- -----------
TOTAL ............................................................... $189,210,889 $176,860,219
=========== ===========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................................$ 19,875,409 $16,883,068 $15,414,834
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Postretirement liabilities ................................................ 302,979 247,970 248,248
Depreciation and amortization ............................................. 9,266,547 9,482,836 8,380,456
(Gain) loss on sale of investments and property, plant and equipment ...... 721,509 (1,659) (59,312)
Deferred income taxes ..................................................... (256,660) 780,071 1,011,529
Changes in assets and liabilities which provided
(used) cash, exclusive of changes shown separately ...................... 4,661,843 1,268,717 (7,829,691)
---------- ---------- ----------
Net cash provided by operating activities ................................... 34,571,627 28,661,003 17,166,064
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment ............................ (12,339,553) (7,532,580) (18,194,216)
Proceeds from sale of property, plant and equipment ....................... 55,395 17,299 200,666
Purchases of investments .................................................. (18,427,761) (6,085,692) (3,840,892)
Proceeds from sales of investments ........................................ 14,495,999 4,309,012 1,910,093
Other ..................................................................... - - 12,328
---------- ---------- ----------
Net cash used in investing activities ....................................... (16,215,920) (9,291,961) (19,912,021)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable ................................................. - - (11,000,000)
Cash dividends ............................................................ (4,134,923) (3,739,495) (3,495,685)
Cash paid for fractional shares on stock split ............................ (2,976) - -
Increase in dividends payable ............................................. 80,571 66,695 16,843
Proceeds from exercise of common stock options ............................ 508,949 432,383 187,293
Payment of long-term debt ................................................. (4,250,000) (6,749,999) (15,687,500)
Proceeds from long-term debt .............................................. - - 34,500,000
Repurchase of common stock ................................................ (3,234,840) (1,572,778) (7,735,949)
---------- ---------- ----------
Net cash used in financing activities ....................................... (11,033,219) (11,563,194) (3,214,998)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 7,322,488 7,805,848 (5,960,955)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................ 8,844,537 1,038,689 6,999,644
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................................$ 16,167,025 $ 8,844,537 $ 1,038,689
========== ========== ==========
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED
(USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
(Increase) decrease in accounts receivable ................................$ (3,628,759) $ 1,693,496 $ (320,275)
(Increase) decrease in inventories ........................................ 4,911,517 (2,499,518) (3,448,661)
(Increase) decrease in prepaid expenses ................................... 313,981 (1,249,325) 71,716
Increase (decrease) in accounts payable ................................... 2,222,976 2,073,364 (3,506,271)
Increase (decrease) in employees' taxes withheld .......................... 207,766 (133,381) 57,789
Increase (decrease) in accrued profit sharing contribution ................ 425,379 998,486 (491,074)
Increase (decrease) in accrued wages and expenses ......................... 21,302 192,906 348,246
Increase (decrease) in accrued income taxes ............................... 187,681 192,689 (541,161)
---------- ---------- ----------
Total .......................................................................$ 4,661,843 $ 1,268,717 $ (7,829,691)
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) .....................................$ 2,088,508 $ 2,368,369 $ 1,979,832
========== ========== ==========
Income taxes ..............................................................$ 11,637,045 $ 9,233,580 $ 8,835,440
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Roanoke Electric Steel Corporation and
its wholly-owned subsidiaries, Shredded Products Corporation, John
W. Hancock, Jr., Inc., Socar, Inc., RESCO Steel Products Corporation
and Roanoke Technical Treatment & Services, Inc. (the "Company"). All
significant intercompany accounts and transactions have been
eliminated.
Inventories - Inventories of the Company, with the exception of John
W. Hancock, Jr., Inc., are generally valued at cost on a first-in,
first-out (FIFO) method or market, if lower. A major portion of the
inventories of John W. Hancock, Jr., Inc. is valued on a
last-in, first-out (LIFO) method. LIFO cost is not in excess of
replacement or current cost.
Property, Plant and Equipment - These assets are stated at
cost. Depreciation expense is computed by straight-line and
declining-balance methods. Maintenance and repairs are charged
against operations as incurred. Major items of renewals and
betterments are capitalized and depreciated over their estimated
useful lives. Upon retirement or other disposition of plant and
equipment, the cost and related accumulated depreciation are removed
from the property and allowance accounts, and the resulting
gain or loss is reflected in earnings.
Income Taxes - The Company applies the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are
provided by the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the future
tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
Cash and Cash Equivalents - The Company considers all highly liquid
debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
Investments - Investments consist primarily of debt securities which
mature between 1998 and 2027. The Company complies with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). In accordance
with the provisions of SFAS 115, management has classified its entire
debt securities portfolio as "available for sale". Under SFAS
115, "available for sale" securities are reported at fair value
with unrealized gains and losses reported as a separate component
of equity. These investments are carried on the balance sheets at
fair value, which approximates amortized cost. Accordingly,
there were no adjustments to equity at October 31, 1998, 1997 and
1996.
Revenue Recognition - Revenues from sales are recognized when
products are shipped to customers, except for fabrication products
which are recognized by the percentage-of-completion method in
accordance with industry practice. Sales to an unaffiliated customer
amounted to 13%, 12% and 11% of consolidated sales for 1998, 1997 and
1996, respectively.
Concentration of Credit Risk - The Company sells to a large customer
base of steel fabricators, steel service centers and construction
contractors, most all of which deal primarily on 30-day credit
terms. The Company believes its concentration of credit risk to be
minimal in any one geographic area or market segment. The Company
performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses
have not been significant in the past, and are generally within
management's expectations.
Fair Value of Financial Instruments - At October 31, 1998, the fair
value of the Company's cash and cash equivalents, accounts receivable,
investments and long-term debt approximated amounts recorded in the
accompanying consolidated financial statements (see notes 1 and 6).
Stock Options - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 is
effective for transactions entered into in fiscal years that
begin after December 15, 1995. This statement adopts a "fair
value based method" of accounting for employee stock option plans or
similar stock-based compensation plans. Under the fair value based
method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service or
vesting period. The statement does allow entities to continue to
measure compensation using the "intrinsic value based method" of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) provided that they make pro forma
disclosures on net earnings and earnings per common share as if the
fair value based method of accounting had been applied. The Company
has elected to continue to follow APB 25.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive Income - In June 1997, Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" (SFAS 130)
was issued, establishing standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company will be required
to adopt SFAS 130 in the first quarter of fiscal year 1999 and,
based on current circumstances, does not believe the required
disclosures, if any, will be material.
Segment Information - In June 1997, Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131) was issued,
establishing standards for the way public enterprises report
information about operating segments in annual financial
statements. This statement also requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. The Company will be required
to adopt SFAS 131 in the first quarter of fiscal year 1999 and, based
on current circumstances, does not believe the effect of adoption
will be significant.
Derivative Instruments - In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) was issued, establishing standards
for accounting and reporting derivative instruments, including
certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. The Company will be required to adopt SFAS 133 in
the first quarter of fiscal year 2000 and is in the process of
evaluating what impact SFAS 133 will have on its consolidated
financial statements.
13
<PAGE>
(NOTE 2) INVENTORIES
If the FIFO method of valuing inventories had been used by John W. Hancock,
Jr., Inc., consolidated inventories would have been $1,699,417 greater in 1998
and $1,440,168 greater in 1997.
Inventories include the following major classifications:
October 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
Scrap steel .........$ 4,876,856 $ 7,579,552 $ 5,313,335
Melt supplies ....... 2,408,961 2,212,939 2,416,879
Billets ............. 3,499,907 5,960,432 7,103,342
Mill supplies ....... 3,176,619 3,484,688 3,085,749
Finished steel ...... 17,940,557 17,576,806 16,395,594
---------- ---------- ----------
Total inventories $31,902,900 $36,814,417 $34,314,899
========== ========== ==========
(NOTE 3) PROPERTIES AND DEPRECIATION
Depreciation expense for the years ended October 31, 1998, 1997
and 1996 amounted to $9,216,133, $9,456,201 and $8,366,012,
respectively. Generally, the rates of depreciation range from
3.3% to 20% for buildings and improvements and 5% to 33% for
machinery and equipment. Property additions in 1998, 1997 and 1996
included $53,722, $54,668 and $438,346 of interest capitalized,
respectively.
During the year ended October 31, 1998, the Company recorded a
$733,067 loss on assets abandoned at its Salem, Virginia plant.
This loss was included in the statement of earnings in
administrative expenses.
(NOTE 4) SHORT-TERM DEBT
On February 15, 1996, the Company replaced all of its domestic bank
lines of credit with a syndicated loan facility, part of which
provides a five-year $30,000,000 revolver, as explained in note 6.
Also provided by this credit facility is a $5,000,000 line of credit
to be used to cover overdrafts in a demand deposit account. This
line of credit was unused at October 31, 1998 and 1997.
(NOTE 5) INCOME TAXES
The Company files a consolidated federal income tax return. The
federal income tax returns through October 31, 1990 have been
examined by the Internal Revenue Service with all issues settled.
The following is a reconciliation of income tax expense per
consolidated statements of earnings to that computed by using the
federal statutory tax rate of 35% for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal tax at the statutory rate .....................$11,005,216 $ 9,481,293 $ 8,652,225
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit ...... 776,339 874,960 785,077
Other items, net .................................... (213,489) (149,913) (131,494)
---------- ---------- ----------
Income taxes per consolidated statements of earnings ..$11,568,066 $10,206,340 $ 9,305,808
========== ========== ==========
The components of income tax expense are as follows:
<CAPTION>
Year Ended October 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current income taxes:
Federal ...........................................$10,589,161 $ 8,156,471 $ 7,192,428
State ............................................. 1,235,565 1,269,798 1,101,851
---------- ---------- ----------
Total current income taxes .......................... 11,824,726 9,426,269 8,294,279
---------- ---------- ----------
Deferred income taxes (benefit):
Federal ........................................... (215,462) 703,776 905,569
State ............................................. (41,198) 76,295 105,960
---------- ---------- ----------
Total deferred income taxes (benefit) ............... (256,660) 780,071 1,011,529
---------- ---------- ----------
Total income taxes ..................................$11,568,066 $10,206,340 $ 9,305,808
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes and tax credit carryforwards.
As of October 31, 1998, 1997 and 1996, the Company had total deferred tax
liabilities of $13,687,507, $13,547,110 and $12,594,700, respectively, and
deferred tax assets of $1,608,938, $1,211,881 and $1,039,542, respectively.
Deferred tax liabilities result exclusively from excess tax depreciation, and
deferred tax assets result, primarily, from reserves not currently deductible
of $792,089 for 1998, $736,340 for 1997 and $675,026 for 1996. There were no
valuation allowances.
14
<PAGE>
(NOTE 6) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Syndicated term loan, unsecured, payable in quarterly installments of
$750,000. Interest payable quarterly at the LIBOR
rate of 5.69% plus .60%. Due February 21, 2006 .......................................$22,500,000 $25,500,000
Term loan, unsecured, payable in monthly installments of $104,167,
plus interest at 6.44%. Due September 1, 2003. ....................................... 6,041,667 7,291,667
Revolving credit agreement .............................................................. - -
---------- ----------
Total ................................................................................... 28,541,667 32,791,667
Less - current portion .................................................................. 4,250,000 4,250,000
---------- ----------
Long-term debt ..........................................................................$24,291,667 $28,541,667
========== ==========
</TABLE>
In February 1996, the Company entered into a $30,000,000 revolving credit
agreement with a group of banks that extends through February 21, 2001. Under
the revolving credit agreement, interest is payable at October 31, 1998 and
1997, at the LIBOR rates of 5.69% plus .30% and 5.72% plus .30%, respectively.
The agreement requires the Company to pay a facility fee at an annual rate of
.125% for 1998 and 1997.
The Company does not use derivatives for trading purposes. Interest rate
swaps, a form of derivative, are used to manage interest costs. Currently, the
Company maintains an interest rate swap agreement resulting in a fixed rate of
6.68% on the notional amount of $22,500,000 through February 2006. The
difference between fixed rate and floating rate interest is recognized as an
adjustment to interest expense in the period incurred. The fair value of the
current swap is estimated based on current settlement prices and was
approximately $893,000, in favor of the lender, at October 31, 1998.
Under the loan agreements, the Company must maintain consolidated current
assets of not less than 1.5 times consolidated current liabilities and
maintain consolidated funded debt of not greater than .5 times consolidated
total capitalization. Currently, consolidated tangible net worth cannot be
less than $80,651,993. In addition, the ratio of EBITDA to the sum of current
maturities of long-term debt and consolidated interest expense must equal at
least 1.5. The Company was in compliance with the loan agreements as of
October 31, 1998 and 1997.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of the year end fair
value of significant financial instruments, including long-term debt. The
Company's carrying value of long-term debt approximates fair value. The fair
value of the 1998 swap agreement is mentioned above.
Annual aggregate long-term debt maturities are $4,250,000 for each of the next
four years and $4,041,667 in 2003.
(NOTE 7) COMMITMENTS AND CONTINGENT LIABILITIES
At October 31, 1998, the Company was committed for $6,239,602 for purchases of
equipment and production facilities.
The Company and the County of Roanoke, Va., in 1988, entered into consent
agreements with the United States Environmental Protection Agency (EPA) for
the clean-up of specific portions of a landfill site and adjacent streams near
Salem, Va. One agreement was a "remedial action" for the removal and off-site
treatment and disposal of an emission control dust pile located on the site.
This action was completed during 1995 with all costs reflected in the
consolidated financial statements through that period. Another agreement
pertained to a "removal action" for the removal and treatment of emission
dust, sediment and contaminated soil associated with the streams. The EPA
approved on-site stabilization and disposal, and certified completeness of all
required work on September 14, 1997, all costs for which are reflected in the
accompanying consolidated financial statements. The Company entered into a
cost sharing agreement with the County of Roanoke for both response actions at
the landfill. It is not known whether other potentially responsible parties
will pay some of the costs. The final component of the requirements of the
order was reimbursement of certain EPA oversight charges, which were paid
during the current year.
(NOTE 8) COMMON STOCK AND EARNINGS PER SHARE
Outstanding common stock consists of 560,000 shares, issued prior to October
31, 1967, at no stated value; 750,656 shares issued subsequent to October 31,
1967, at a stated value of $.50 per share; 1,310,656 shares issued in 1981 at
no stated value; 1,310,656 shares, less the equivalent of 42 fractional
shares, issued in 1986 at no stated value; 1,965,963 shares, less the
equivalent of 151 fractional shares, issued in 1988 at no stated value; 800
shares issued in 1989 at no stated value; 3,000 shares issued in 1992 at no
stated value; 1,200 shares issued in 1993 at no stated value; 44,000 shares
issued in 1994 at no stated value; 3,023,804 shares, less the equivalent of
152 fractional shares, issued in 1995 at no stated value; 23,750 shares issued
in 1996 at no stated value; 35,950 shares issued in 1997 at no stated value
and 4,572,870 shares, less the equivalent of 158 fractional shares, issued in
1998 at no stated value, less 1,253,800 treasury (repurchased) shares retired
during 1998. During the years ended October 31, 1986 and October 31, 1996, the
Company increased authorized common stock from 4,000,000 shares to 10,000,000
shares, and from 10,000,000 shares to 20,000,000 shares, respectively. The
Company retired in 1998 all of its treasury stock applicable to the shares
acquired through its common stock repurchase plans.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
changes the method of calculating earnings per share. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" earnings per share on
the face of the statement of earning. Basic earnings per share is
15
<PAGE>
computed by dividing the net income available to common stockholders by the
weighted average shares of outstanding common stock. The calculation of
diluted earnings per share is similar to basic earnings per share except that
the denominator includes dilutive common stock equivalents such as stock
options and warrants. Basic earnings per share have been computed based on the
weighted average number of shares outstanding of 11,132,910 for 1998,
11,230,794 for 1997 and 11,815,323 for 1996. The average number of shares
outstanding were weighted after giving effect to both stock options exercised
and repurchased common stock during 1998, 1997 and 1996 and to a three-for-two
stock split effective March 25, 1998. Diluted earnings per share have been
computed based on the weighted average number of shares outstanding (including
outstanding and exercisable stock options) of 11,248,029 for 1998, 11,300,634
for 1997 and 11,870,704 for 1996.
(NOTE 9) PROFIT SHARING PLANS
The Company, including Shredded Products Corporation, RESCO Steel Products
Corporation and Socar, Inc., has qualified profit sharing plans which cover
substantially all employees. John W. Hancock, Jr., Inc. has an unqualified
plan. Socar, Inc.'s annual contribution is discretionary while the other
plans' annual contribution cannot exceed 20% of their combined earnings before
income taxes. Total contributions of all Companies shall not exceed the
maximum amount deductible for such year under the Internal Revenue Code and
amounted to $5,674,077 for 1998, $5,138,241 for 1997 and $4,340,397 for 1996.
(NOTE 10) INTEREST EXPENSE
Interest expense is stated net of interest income of $1,214,017
in 1998, $702,333 in 1997 and $711,274 in 1996.
(NOTE 11) STOCK OPTIONS
Under a nonqualified stock option plan approved by the stockholders in 1989,
the Company may issue 112,500 shares of unissued common stock to employees of
the Company each plan year. Under a non-statutory stock option plan approved
by the Board in 1997, the Company may issue 25,000 shares of unissued common
stock to directors of the Company over the life of the plan. Options for
84,000 shares were granted for 1998, for 82,000 shares for 1997, for 75,000
shares for 1996, for 41,500 shares for 1995, for 36,000 shares for 1992 and
for 32,500 shares for 1990. Three-for-two stock splits in 1998 and 1995
increased these grants an additional 117,275 and 32,300 shares, respectively.
These options are exercisable for a term of five years for employees and ten
years for directors from the date of grant, and a summary follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Per Share Shares
--------------- ---------
<S> <C> <C>
Balance, November 1, 1995 ........................................................... $ 5.18 75,150
Granted ............................................................................. 7.93 75,000
Exercised ........................................................................... 4.47 (23,750)
Expired or terminated ............................................................... 2.74 (3,000)
-------
Balance, October 31, 1996 ........................................................... 7.05 123,400
Granted ............................................................................. 9.06 82,000
Exercised ........................................................................... 7.41 (35,950)
Expired or terminated ............................................................... 6.61 (16,750)
-------
Balance, October 31, 1997 ........................................................... 8.23 152,700
Granted ............................................................................. 15.16 84,000
Stock split ......................................................................... 10.73 117,275
Exercised ........................................................................... 7.52 (56,750)
Expired or terminated ............................................................... - -
-------
Balance, October 31, 1998 ........................................................... 11.31 297,225
=======
Shares available for grant at year end .............................................. None
=======
</TABLE>
The Company applies APB 25 and related Interpretations in accounting for the
nonqualified stock option plans. Accordingly, compensation cost of $295,313,
$177,188 and $157,500 for the years ended October 31, 1998, 1997 and 1996,
respectively, was recognized for the difference between the exercise price and
the fair value of the stock price at the grant date. Had compensation cost
been determined based on the fair value at the grant dates consistent with the
method of SFAS 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings:
As reported ........................................................ $19,875,409 $16,883,068 $15,414,834
========== ========== ==========
Pro forma .......................................................... $19,573,253 $16,761,234 $15,307,091
========== ========== ==========
Basic net earnings per share:
As reported ........................................................ $ 1.79 $ 1.50 $ 1.30
========== ========== ==========
Pro forma .......................................................... $ 1.76 $ 1.49 $ 1.30
========== ========== ==========
Diluted net earnings per share:
As reported ........................................................ $ 1.77 $ 1.49 $ 1.30
========== ========== ==========
Pro forma .......................................................... $ 1.74 $ 1.48 $ 1.29
========== ========== ==========
</TABLE>
16
<PAGE>
The fair value per share of options granted during the years ended October 31,
1998, 1997 and 1996 was $7.64, $3.90 and $3.78, respectively. The following
table summarizes information about stock options outstanding and exercisable
at October 31, 1998:
<TABLE>
<CAPTION>
Number Remaining
Outstanding and Contractual Life
Exercise Prices Exercisable in Years
--------------- --------------- ----------------
<S> <C> <C> <C>
$ 6.04 15,600 1.25
7.93 47,125 2.33
8.93 98,500 3.33
10.50 10,000 8.33
14.88 112,500 4.25
17.50 13,500 9.25
-------
297,225
=======
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yield of 2.18%, 2.90% and 3.09%; expected volatility of 47.25%, 37.33% and
43.66%; risk-free interest rates of 4.23%, 5.71% and 6.07%; and an expected
life of 5 years.
(NOTE 12) HEALTH BENEFITS AND POSTRETIREMENT COSTS
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106). The Company currently provides
certain health care benefits for terminated employees who have completed 10
years of continuous service after age 45, and SFAS 106 requires the Company to
accrue the estimated cost of such benefit payments during the years the
employee provides services. The Company previously expensed the cost of these
benefits as claims were incurred. SFAS 106 allows recognition of the
cumulative effect of the liability in the year of adoption or the amortization
of the obligation over a period of up to twenty years. The Company has elected
to recognize this obligation of approximately $1,381,000 over a period of
twenty years. Cash flows are not affected by implementation of SFAS 106, but
implementation decreased net earnings from continuing operations for 1998,
1997 and 1996 by approximately $188,695, $154,400 and $154,500, respectively.
The Company's postretirement benefit plan is not funded. The accrued
postretirement benefit cost recognized in the balance sheets at October 31 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ..............................................................$ 474,388 $ 402,724 $ 378,968
Fully eligible plan participants ...................................... 793,117 672,238 652,789
Other active plan participants ........................................ 1,018,324 727,720 688,737
---------- ---------- ----------
Accumulated postretirement benefit obligation ......................... 2,285,829 1,802,682 1,720,494
Unrecognized net actuarial gains ........................................ 43,959 293,127 196,345
Unrecognized transition obligation ...................................... (1,036,000) (1,105,000) (1,174,000)
---------- ---------- ---------
Accrued postretirement benefit cost ................................... $1,293,788 $ 990,809 $ 742,839
========== ========== ==========
Net postretirement benefit cost consisted of the following components:
Service cost .......................................................... $ 194,393 $ 164,689 $ 141,393
Interest cost on accumulated postretirement benefit obligation ........ 144,940 124,877 130,705
Net amortization ...................................................... 69,000 54,108 64,185
---------- ---------- ----------
Net postretirement benefit cost ....................................... $ 408,333 $ 343,674 $ 336,283
========== ========== ==========
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% for 1997, decreasing linearly each
successive year until it reaches 5.75% in 2005, after which it remains
constant. A one-percentage-point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement benefit
obligation by approximately $153,000 and the net postretirement benefit cost
by approximately $30,000. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% and 8% for the years
ended October 31, 1998 and 1997, respectively.
(NOTE 13) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 1998 follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
January 31 April 30 July 31 October 31
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales ................................................ $71,603,735 $73,778,930 $73,119,315 $76,701,994
========== ========== ========== ==========
Gross earnings ....................................... $12,907,751 $13,394,849 $14,182,084 $17,235,581
========== ========== ========== ==========
Net earnings ......................................... $ 4,250,992 $ 4,038,995 $ 4,509,449 $ 7,075,973
========== ========== ========== ==========
Net earnings per share:
Basic ............................................. $ .38 $ .36 $ .41 $ .64
========== ========== ========== ==========
Diluted ........................................... $ .38 $ .36 $ .40 $ .63
========== ========== ========== ==========
</TABLE>
17
<PAGE>
Summarized unaudited quarterly financial data for 1997 follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
January 31 April 30 July 31 October 31
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales ................................................ $58,351,734 $61,299,896 $68,768,769 $76,688,240
========== =========== ========== ==========
Gross earnings ....................................... $ 9,330,810 $11,851,198 $13,581,218 $16,965,770
========== =========== ========== ==========
Net earnings ......................................... $ 2,584,674 $ 3,459,070 $ 4,299,552 $ 6,539,772
========== =========== ========== ==========
Net earnings per share:
Basic ............................................. $ .23 $ .31 $ .38 $ .58
========== =========== ========== ==========
Diluted ........................................... $ .23 $ .31 $ .38 $ .58
========== =========== ========== ==========
</TABLE>
(NOTE 14) SUBSEQUENT EVENT
On November 10, 1998, the Company announced that it had entered into a
definitive agreement to acquire Steel of West Virginia, Inc. ("SWVA"). The
transaction, to be accounted for under the purchase method, contemplates that
the Company will pay cash of $10.75 per share for each of the approximately
6,000,000 outstanding shares of common stock of SWVA, on a fully-diluted
basis, including the assumption of all of SWVA's indebtedness. Under the terms
of the agreement, which was unanimously approved by the Boards of Directors of
both companies, the offer to purchase is subject to customary conditions,
including the tender of a majority of the shares of SWVA common stock and
termination of the Hart-Scott-Rodino waiting period. Upon merger, SWVA will
become a wholly-owned subsidiary of Roanoke Electric Steel Corporation. The
obligations of the Company are not subject to any financing condition, as a
bank syndicate has been arranged for financing the transaction. SWVA,
headquartered in Huntington, West Virginia, operates a mini-mill in Huntington
as well as steel fabrication facilities in Huntington and Memphis, Tennessee,
custom designing and manufacturing special steel products principally for use
in the construction of truck trailers, industrial lift trucks, off-highway
construction equipment, manufactured housing, guard rail posts, and mining
equipment.
For the year ended December 31, 1997, SWVA reported net sales, net income and
total stockholders' equity of $112,776,000, $5,259,000 and $54,302,000,
respectively.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Roanoke Electric Steel
Corporation:
We have audited the accompanying consolidated balance sheets of Roanoke Electric
Steel Corporation and its wholly-owned subsidiaries as of October 31, 1998 and
1997, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the three years in the period ended October 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Roanoke Electric Steel Corporation
and its wholly-owned subsidiaries at October 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Winston-Salem, North Carolina
November 18, 1998
STOCK ACTIVITY
The Common Stock of Roanoke Electric Steel Corporation is traded nationally over
the counter on Nasdaq National Market using the symbol RESC. At year end, there
were approximately 770 shareholders of record.
<TABLE>
<CAPTION>
1998 1997
Stock Prices Stock Prices Cash Dividends
- ------------------------------------------------------------------------ ----------------------------------------------
High Low High Low 1998 1997
- ------------------------------------------------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <S> <C> <C>
First Quarter ................ 17 53/64 12 53/64 11 37/64 9 First Quarter ................. $.087 $.080
Second Quarter ............... 21 11/64 15 53/64 11 1/4 9 27/64 Second Quarter ................ .095 .080
Third Quarter ................ 22 1/2 16 3/16 12 43/64 9 27/64 Third Quarter ................. .095 .087
Fourth Quarter ............... 17 3/4 10 1/8 15 21/64 12 11/64 Fourth Quarter ................ .095 .086
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
In 1996, sales declined 5.3% due, primarily, to sharp reductions in both
selling prices for bar products and billet shipments, while selling prices for
billets declined only slightly. However, sales were favorably impacted by
increased bar shipments and selling prices for fabricated products, while
shipments of fabricated products were flat. Selling prices for bar products
declined as a result of increased competition, prompting industry-wide price
reductions. The planned shutdown of the melt shop during the year to install a
new ladle furnace and upgrade an electric arc furnace was unexpectedly
prolonged due to problems with construction and installation, resulting in an
11% decline in billet production for the year and causing the significant
reduction in billet shipments. In addition, the export markets for billets
remained highly competitive. Billet selling prices declined with a downward
trend in scrap prices, which normally trigger changes in billet prices. Bar
products shipments increased as demand and backlogs remained high, in spite of
the increased competition. Selling prices for fabricated products improved as
a result of generally strong business conditions within the commercial
construction industry.
The 7.6% increase in sales in 1997 was attributable to increased
shipments of bar products and billets, together with improved selling prices
for bar products. Sales were negatively affected by lower selling prices for
fabricated products and billets, while shipments of fabricated products were
flat. Bar products shipments and selling prices increased as competition eased
and order levels, backlogs and prices improved with demand. Billet shipments
increased as a result of increased production, which hampered shipments last
year, and improved domestic demand, while billet selling prices declined due
to lower scrap prices. Competitive conditions in the commercial construction
industry caused the lower selling prices for fabricated products; even though,
market conditions continued to be favorable.
Sales increased 11.4% in 1998 as a result of substantially increased
billet shipments in addition to improved fabricated products shipments and
higher selling prices for steel bar products. Shipments of bar products
declined during the year, while billet and fabricated products prices were
flat. Record raw steel production and unprecedented demand contributed to the
58.5% increase in billet shipments. Continued favorable market conditions in
the construction industry led to the increased shipments and level selling
prices for fabricated products. In spite of a 3.8% reduction in bar products
shipments, business conditions remained strong and bar prices moved up 6.2%
for the year. Billet prices were flat because scrap prices were relatively
unchanged.
COST OF SALES AND GROSS MARGINS
The decrease in cost of sales in 1996 was due, mainly, to the decreased
tons of billets shipped, together with a reduction in the cost of scrap steel,
in spite of the increased bar products shipments. Cost of sales increased in
1997, primarily, as a result of the increased tons shipped of bar products and
billets. In 1998, cost of sales increased due to the improved billet and
fabricated products shipments, even though shipments of bar products declined.
In 1996, the gross profit percentage declined to 19.5%. The decrease was,
primarily, the result of the lower selling prices for bar products and
billets, and the negative effect of reduced billet production on fixed costs,
which more than offset the effects of the lower scrap costs and the
improvement in fabricated products selling prices. Gross earnings as a
percentage of sales were flat in 1997, in spite of higher selling prices for
bar products, lower scrap costs and increased production. These were offset by
lower selling prices for fabricated products and billets and, more
importantly, by a higher percentage of billet shipments in the total mix which
carry lower margins. In 1998, gross earnings as a percentage of sales remained
flat, even though selling prices for bar products increased and raw steel
production improved by 12%. As in 1997, the increased billet shipments at
lower margins negatively impacted margins.
The decline in gross profit margins and the reduced billet shipments were
the main causes for the lower gross profits and net earnings in 1996. For
1997, the increased shipments of bar products and billets accounted for the
improved gross and net earnings. The combination of increased volume at
comparable margins were, primarily, responsible for the improved gross and net
earnings in 1998.
ADMINISTRATIVE EXPENSES
In 1996, the majority of the increase in administrative expenses was
attributable to bad debts and insurance expenses. The percentage of
administrative expenses to sales increased from 6.2% to 7.0%. The percentage
declined in 1997 to 6.7%; even though administrative expenses increased,
primarily, as a result of higher executive and management compensation which
increased with substantially higher production, shipments and earnings in
accordance with various incentive arrangements. Other expenses such as
insurance and professional fees increased, but were offset by a reduction in
bad debts. In 1998, the percentage of administrative expenses to sales
remained the same at 6.7%; however, administrative expenses increased
substantially. Executive and management compensation increased with the
improved shipments and earnings. Other expenses such as insurance, office
utilities and repairs, and selling expenses increased, while bad debts and
19
<PAGE>
professional expenses declined. Administrative expenses also included a charge
of $733,067 for the abandonment of assets. Without this charge, administrative
expenses as a percentage of sales would have been 6.4% of sales.
INTEREST EXPENSE
In 1996, interest expense declined due to lower interest rates, higher
interest income of $711,274 and increased capitalized interest of $438,346, in
spite of higher average borrowings. Interest expense increased in 1997, as
higher interest rates, reduced interest income of $702,333 and lower
capitalized interest of $54,668 more than offset lower average borrowings. In
1998, interest expense declined 49% as a result of lower average borrowings
and increased interest income of $1,214,017, while capitalized interest
declined to $53,722 and interest rates were virtually unchanged.
PROFIT SHARING EXPENSE AND INCOME TAXES
Contributions to various profit sharing plans are determined as a
proportion of earnings before income taxes and should normally increase and
decrease with earnings.
In 1996 and 1997, income tax expense as a percentage of pretax income was
relatively constant. The effective rate declined in 1998 due, primarily, to
substantial Virginia recycling tax credits.
FINANCIAL CONDITION, LIQUIDITY
AND CAPITAL RESOURCES
At October 31, 1998, working capital was $74,917,878. Cash, investments
and accounts receivable of $70,309,722 were more than adequate to pay current
liabilities of $30,490,039. Cash flows from operating activities were
$34,571,627 in 1998. Repurchases of the Company's common stock, commitments
for the purchase of property, plant and equipment of $6,239,602, and 1999
maturities of long-term debt of $4,250,000 will affect future liquidity and
working capital; however, cash flows from operations should provide adequate
working capital to fund these items. The pending merger with Steel of West
Virginia, if approved, will affect liquidity and capital resources as
borrowings will increase substantially.
Long-term debt decreased $4,250,000 during the year. Our revolving credit
facility of $30,000,000 was unused at year end and provides additional
liquidity and capital resources. The ratio of debt to equity was only .58 to 1
- down from .66 to 1 last year. The percentage of long-term debt to total
capital decreased from 21.1% to 16.9%. The revolver, working capital and
conservative debt levels have provided the capital resources necessary to
maintain our competitive position and ensure future growth.
Since 1997, the Company has been diligently involved in converting our
computer hardware and software to be Year 2000 compliant. It has been assigned
the highest priority within our information systems area utilizing all
internal personnel available. External resources have been added to assist in
the task and continue ongoing projects. We have identified the systems in our
manufacturing facilities and offices that may be affected and established a
completion goal of December 31, 1998. Conversion of a number of systems has
been completed on schedule. To ensure compliance by third-party software
vendors, we are requesting in writing from our vendors confirmation of their
Year 2000 compliance. We have also purchased analytical tools to check not
only our computers for compliance, but also loaded software. The Company has
sent compliance questionnaires to its major suppliers to assess their
readiness and our needs to seek alternate suppliers. We have not totally
assessed the risks of Year 2000 issues, nor have we developed any contingency
plans. We plan to utilize all of 1999 for such matters and testing our
conversions. The estimated costs of Year 2000 issues are approximately
$300,000 and are not expected to have a material effect on results of
operations, liquidity or capital resources.
Management is of the opinion that adoption of the Clean Air Act
Amendments or any other environmental concerns will not have a materially
adverse effect on the Company's operations, capital resources or liquidity
(see note 7). Additional future capital expenditures are presently estimated
to be less than $1,000,000.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include economic and industry conditions, availability and prices of
supplies, prices of steel products, competition, governmental regulations,
interest rates, inflation, labor relations, environmental concerns and others.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
OFFICERS
Donald G. Smith, 63 H. James Akers, Jr., 59 Donald R. Higgins, 53
Chairman, President, Treasurer Vice President, Melt Operations Vice President - Sales
and Chief Executive Officer 42 years of service 33 years of service
41 years of service
Frank S. Key, Jr., 74 Daniel L. Board, 61 Watson B. King, 59
President, Socar, Inc. Vice President, Purchasing Vice President, Mill Operations
32 years of service 38 years of service 37 years of service
James F. Garlow, 62 Thomas J. Crawford, 43 John E. Morris, 57
President, John W. Hancock, Jr., Inc. Vice President Administration Vice President - Finance
37 years of service and Secretary and Assistant Treasurer
21 years of service 27 years of service
BOARD OF DIRECTORS
Frank A. Boxley Charles L. Lunsford, II Paul E. Torgersen
President, Retired Chairman, President,
Southwest Construction, Inc. Charles Lunsford Sons & Associates Virginia Polytechnic Institute
and State University
George B. Cartledge, Jr. Thomas L. Robertson
President, President and Chief Executive Officer, John D. Wilson
Grand Home Furnishings Carilion Health System Retired President,
Washington & Lee University
George W. Logan Donald G. Smith
Chairman, Chairman, President, Treasurer
Valley Financial Corporation and Chief Executive Officer,
Roanoke Electric Steel Corporation
COMMITTEES OF THE BOARD
Executive: Audit: Compensation and Stock Option:
D.G. Smith, Chairman; T.L. Robertson, Chairman; G.B. Cartledge, Jr., Chairman;
T.L. Robertson, P.E. Torgersen, G.W. Logan, P.E. Torgersen F.A. Boxley, C.I. Lunsford, II,
G.B. Cartledge, Jr. J.D. Wilson
Profit Sharing:
C.I. Lunsford, II, Chairman;
D.G. Smith, J.E. Morris
CORPORATE INFORMATION
Annual Meeting Transfer Agent Stock Listing
The 1999 annual meeting of Wachovia Bank, N.A. Nasdaq National Market; Symbol; RESC
shareholders will be held at Boston, Massachusetts
10:00 a.m. on Tuesday, February 16, 1-800-633-4236 Financial Information
1999 at the American Electric Analysts, investors and others seeking
Power Company Building, 40 Franklin Written shareholder correspondence financial information are requested to
Road, S.W., Roanoke, Virginia. and requests for transfer should be contact; John E. Morris, Vice President-
sent to: Finance or Thomas J. Crawford, Vice
General Counsel Wachovia Bank, N.A. President Administration and Secretary.
Woods, Rogers & Hazlegrove P.L.C. c/o Boston EquiServe
Roanoke, Virginia P.O. Box 8218 Copies of the Corporation's Annual Report
Boston, Massachusetts 02266-8218 or Form 10-K may be obtained without
Independent Auditors charge by writing to Mr. Crawford at the
Deloitte & Touche LLP Dividend Reinvestment Plan address below.
Winston-Salem, North Carolina Roanoke Electric Steel offers its
shareholders a dividend reinvestment Corporate Office
plan through its transfer agent. 102 Westside Boulevard
For more information, please contact P.O. Box 13948
the transfer agent or Roanoke, Virginia 24038
Thomas J. Crawford, Vice President 540-342-1831
Administration and Secretary.
</TABLE>
<PAGE>
[LOGO] ROANOKE ELECTRIC
STEEL CORPORATION
P.O. Box 13948
Roanoke, Virginia 24038-3948
540-342-1831
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted
from the 4th Quarter Consolidated Balance Sheets and Statment
of Earnings and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 16,167,025
<SECURITIES> 11,727,636
<RECEIVABLES> 42,415,061
<ALLOWANCES> 0
<INVENTORY> 31,902,900
<CURRENT-ASSETS> 105,407,917
<PP&E> 152,158,270
<DEPRECIATION> 68,522,086
<TOTAL-ASSETS> 189,210,889
<CURRENT-LIABILITIES> 30,490,039
<BONDS> 24,291,667
0
0
<COMMON> 2,858,128
<OTHER-SE> 116,589,760
<TOTAL-LIABILITY-AND-EQUITY> 189,210,889
<SALES> 295,203,974
<TOTAL-REVENUES> 295,203,974
<CGS> 237,483,709
<TOTAL-COSTS> 237,483,709
<OTHER-EXPENSES> 25,446,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 830,743
<INCOME-PRETAX> 31,443,475
<INCOME-TAX> 11,568,066
<INCOME-CONTINUING> 19,875,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,875,409
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.77
</TABLE>
