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, 1999
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 December 31, 1999: $163,992,449
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of December 31, 1999.
10,993,388 Shares outstanding
Portions of the following documents are incorporated by reference:
(1) 1999 Annual Report to Stockholders in Part II.
(2) Proxy Statement dated December 27, 1999 in Part III.
PART I
ITEM 1. BUSINESS
(a) General Development of Business.
During the fiscal year ended October 31, 1999, 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. 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.
On December 16, 1998, the Registrant acquired all of the
outstanding common shares of Steel of West Virginia, Inc. ("SWVA"), a
Huntington, West Virginia steel manufacturer, upon completion of its cash
tender offer. The consideration given was approximately $117.1 million,
including the assumption of approximately $52.3 million of indebtedness,
which translates into $10.75 net per SWVA share, for approximately
6,028,000 shares on a fully-diluted basis. Upon merger, SWVA became a
wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each
share of SWVA common stock not purchased in the offer (approximately 3.6%
of SWVA's outstanding shares) was converted, subject to appraisal rights,
into the right to receive $10.75 in cash, without interest. On the date of
acquisition the Registrant closed on $180,000,000 of secured credit
facilities with a syndicate of four banks. The facilities are comprised of
a $150,000,000 seven year term loan and a $30,000,000 five year revolver.
The term loan was used to purchase all of the outstanding capital stock of
SWVA, and refinance both the existing term debt of the Registrant and most
of SWVA's bank debt assumed through the merger. SWVA operates a mini-mill
in Huntington, West
PART I
(con'd.)
Virginia, and steel fabrication facilities in Huntington and Memphis,
Tennessee, while custom designing and manufacturing 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, guardrail posts and mining equipment. The
Registrant and SWVA do not generally compete as regards customers and
products. The acquisition was accounted for as a purchase. Accordingly,
the results of operations and cash flows were reflected in the consolidated
financial statements from the date of acquisition, and the acquired assets
and liabilities were included in the 1999 consolidated balance sheet at
values based on a purchase price allocation, rendered through appraisals
and other evaluations.
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.
(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
1999 1998 1997
Sales to Unaffiliated Customers:
Merchant Steel $205,420,966 $116,226,463 $113,588,649
Bar Joists & Rebar $125,854,046 $121,000,869 $115,017,371
Billets $ 41,687,938 $ 57,976,642 $ 36,502,619
Total Consolidated Sales $372,962,950 $295,203,974 $265,108,639
Net Earnings from Operations $ 22,647,918 $ 19,875,409 $ 16,883,068
Identifiable Assets $352,129,222 $189,210,889 $176,860,219
(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.
The Registrant's subsidiary, Steel of West Virginia, Inc.,
operates both a steel mini-mill which produces specialty steel sections,
and fabrication facilities which add finishing operations to create
custom-designed products placed directly into customers' assembly lines.
The niche markets supplied with these cross-member and sub-frame section of
products include truck trailers, industrial lift trucks, guardrail posts,
manufactured housing, off-highway construction equipment, and mining
equipment. These products are marketed by senior management and in-house
sales representatives of SWVA, whose sales efforts cover all of the
continental United States, and to a very small degree, certain foreign
markets.
(ii) The Registrant has not in fiscal 1999 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. This raw material is purchased through the David J. Joseph Company,
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.
PART I
(con'd.)
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.
Steel of West Virginia, Inc., like the parent, uses scrap steel
as its main raw material. Even though the purchase of steel scrap is
subject to market conditions largely beyond its control, the Company is
located in a scrap surplus region, and therefore typically maintains less
than a one month supply of scrap, which keeps inventory costs to a minimum.
Although one scrap dealer supplies 25% to 30% of SWVA's requirements, the
Company believes that a number of adequate sources of scrap and other raw
materials that it uses are readily available. SWVA has historically been
successful in passing on scrap cost increases through price increases,
however, the effect of market price competition has limited the Company's
ability to increase prices.
(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.
(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 1999, sales (tons) by the Registrant to
Steel of West Virginia, Inc., John W. Hancock, Jr., Inc., Socar, Inc. and
RESCO Steel Products Corporation, wholly-owned subsidiaries, were
approximately 5%, 10%, 6% and less than 1% of the Registrant's total sales
(tons), respectively. The largest nonaffiliated customer purchased
approximately 18% of total sales (tons) --- 6% 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.
PART I
(con'd.)
(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 mainly 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
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. On December 16,
1998, the Registrant acquired 100% of the capital stock of Steel of West
Virginia, Inc. ("SWVA"), a steel manufacturer, and 1999 results reflect the
operations of SWVA from the date of acquisition. The 1998 financial
statements have not been restated to include SWVA because the acquisition
was treated as a purchase for accounting purposes. Consequently, the
significant increase in 1999 sales was due, primarily, to the inclusion of
SWVA's revenues in consolidated sales. Increased competition from foreign
and domestic producers prompted industry-wide list price reductions for bar
products at the beginning of fiscal 1999, and prices had not fully
recovered by year end. Excess inventories at steel service centers and a
shortage of transportation equipment contributed to the slight reduction in
tons shipped of bar products as bar markets were generally good throughout
the year.
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
PART I
(con'd.)
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. Competitive conditions within the commercial
construction industry generally impact selling prices and shipment levels
of fabricated products and were relatively favorable during 1999 as
reflected in the higher selling prices. The reduced shipments were caused
by minor factors other than competition as business conditions continued
strong and backlogs remained high.
Billets are semi-finished products used by the Registrant, and the
SWVA subsidiary, in their rolling mill processes to manufacture various
merchant bar products and specialty steel sections. With the addition of
new casting equipment in recent years, and the current year acquisition of
SWVA, the Registrant has anticipated a growing billet market of both
nonaffiliated customers and SWVA 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. A dramatic
change in our market for billets during 1999 brought diminished demand and
a significant decline in tons shipped. Billet selling prices declined with
sharp reductions in scrap prices.
(xi) During the last three fiscal years, the Registrant was not
involved in any material research and development activities.
(xii) The Registrant and SWVA are subject to federal, state and
local environmental laws and regulations concerning, among other matters,
wastewater discharge, air emissions and furnace dust disposal. As with
similar mills in the industry, the Registrant's, and SWVA's, furnaces are
classified as generating hazardous waste because they produce certain types
of dust containing lead, zinc and cadmium. 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. SWVA currently collects and handles
its furnace waste through contracts with a company which reclaims, from the
waste dust, certain materials and recycles or disposes of the remainder.
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 $9,800,000. Annual operating
expenses and depreciation of all pollution control equipment and waste
disposal
PART I
(con'd.)
costs are in excess of $3,700,000 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.
See Note 7, "Commitments and Contingent Liabilities", in Notes
to Consolidated Financial Statements contained in the Registrant's 1999
Annual Report to Stockholders, filed as an Exhibit to this Form 10-K.
(xiii) At October 31, 1999, the Registrant employed 534 persons
at its Roanoke plant, with no employment at its Salem division, idle since
mid-1991. The Registrant's subsidiaries, Steel of West Virginia, Inc.,
John W. Hancock, Jr., Inc., Socar, Inc., Shredded Products Corporation and
RESCO Steel Products Corporation employed 582, 328, 276, 63 and 43 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. During fiscal years 1997, 1998 and 1999, the
Registrant did not make any foreign sales of excess billets, however, the
SWVA subsidiary sold a small percentage of its products to foreign markets
during these years. 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 virtually 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 and rolling mill capacity of 400,000
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 of this new Shredded Products
property is being used as an approved industrial landfill. The remaining
337 acres of this land, 113 acres of which was sold in 1995, 1997, 1998 and
1999, will be marketed as an industrial park for Franklin County.
PART I
(con'd.)
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.
Steel of West Virginia, Inc. and its subsidiary are located in
Huntington, West Virginia and in Memphis, Tennessee. The Huntington
facility is located on a 42 acre site owned by SWVA, most of which are
regularly used in its operations. Buildings on the site contain 558,175
square feet of manufacturing space with an annual billet capacity of
approximately 280,000 tons and rolling mill capacity of 300,000 tons. The
plant located in Memphis, Tennessee owned by SWVA operates in 41,000 square
feet of manufacturing space on approximately 4 acres.
The various buildings are of modern design, well-maintained, and
suitable and adequate for the requirements of the business.
ITEM 3. LEGAL PROCEEDINGS
None.
See Note 7, "Commitments and Contingent Liabilities", in Notes
to Consolidated Financial Statements contained in the Registrant's 1999
Annual Report to Stockholders, filed as an Exhibit to this Form 10-K.
PART I
(con'd.)
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 15, 2000.
The names, ages and positions of all of the executive officers of
the Registrant as of October 31, 1999 are listed below with their business
experience with the Registrant for the past five years. Officers are
elected annually by the Board of Directors at the first meeting of
directors following the annual meeting of 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, 44, 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 22 years of service with the Registrant.
Timothy R. Duke, 48, has served as President and Chief Executive
Officer of Steel of West Virginia, Inc. ("SWVA"), a wholly-owned subsidiary
of the Registrant, since July 1997; prior thereto, he had served as
President and Chief Operating Officer of SWVA since October 1996 and as
Vice President, Treasurer and Chief Financial Officer of SWVA since
February 1988. He has 12 years of service with SWVA.
Donald R. Higgins, 54, 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 34
years of service with the Registrant.
John E. Morris, 58, 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 28 years of
service with the Registrant.
Donald G. Smith, 64, 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 42 years of service with the Registrant.
PART I
(con'd.)
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 1999
Annual Report to Stockholders. The Registrant did not during fiscal year
1999 make any sale of securities not registered under the Securities Act of
1933.
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 1999 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 1999 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 1999 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 1999 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 27, 1999, as
filed with the Commission, or is included under the heading "Executive
Officers of the Registrant" in Part I of this 10-K filing. The disclosure
required by Item 405 of Regulation S-K is 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 27, 1999,
as filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The specified information required by this item is incorporated
by reference to the information under the headings "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the
Proxy Statement dated December 27, 1999, as filed with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The following financial statements filed as part of the
1999 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 21
Incorporated by
Reference
(b) By-Laws, as amended 22
Incorporated by
Reference
(4) Instruments Defining the Rights
of Security Holders 23
(10) * (a) Executive Officer Incentive Arrangement 24
* (b) Roanoke Electric Steel Corporation
Employees' Stock Option Plan 24
Incorporated by
Reference
* (c) Roanoke Electric Steel Corporation
Non-Employee Directors' Stock Option Plan 24
Incorporated by
Reference
* (d) Roanoke Electric Steel Corporation
Severance Agreements 24
Incorporated by
Reference
* (e) SWVA Collective Bargaining Agreement 24
Incorporated by
Reference
* (f) SWVA Employee Agreement with Timothy R. Duke 24
Incorporated by
Reference
(13) 1999 Annual Report to Stockholders 25
(21) Subsidiaries of the Registrant 26
(23) Independent Auditors' Consent 27
(27) Financial Data Schedule 28
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: January 18, 2000
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 January 18, 2000
Donald G. Smith, Chairman, President,
Treasurer and Chief Executive Officer
(Principal Executive Officer, Principal
Financial Officer and Director)
John E. Morris January 18, 2000
John E. Morris, Vice President - Finance
and Assistant Treasurer (Principal
Accounting Officer)
George B. Cartledge, Jr. January 18, 2000
George B. Cartledge, Jr. Director
Thomas L. Robertson January 18, 2000
Thomas L. Robertson Director
Charles I. Lunsford, II January 18, 2000
Charles I. Lunsford, II Director
Paul E. Torgersen January 18, 2000
Paul E. Torgersen 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
January 31, 1999 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 1999 Annual Report to Stockholders and Form 10-K.
EXHIBIT NO. 10
* (a)
EXECUTIVE OFFICER INCENTIVE ARRANGEMENT
The Company has an executive officer incentive arrangement,
pursuant to which up to an aggregate of 9% of the consolidated monthly
gross profits (before profit sharing and taxes) of the Company or of John
W. Hancock, Jr., Inc. ("Hancock") may be distributed to officers of the
Company or officers of Hancock, respectively. The percentage of incentive
compensation to be received by each officer, if any, is determined annually
by the Company's Board of Directors.
* (b)
ROANOKE ELECTRIC STEEL CORPORATION
EMPLOYEES' STOCK OPTION PLAN
Incorporated by reference to the previously filed Form 10-K for
October 31, 1998 on file in the Commission office.
* (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 SEVERANCE AGREEMENTS
Incorporated by reference to the previously filed Form 10-K for
October 31, 1996 on file in the Commission office.
(e)
SWVA COLLECTIVE BARGAINING AGREEMENT
Incorporated by reference to the previously filed Form 10-Q for
July 31, 1999 on file in the Commission office.
(f)
SWVA EMPLOYMENT AGREEMENT WITH TIMOTHY R. DUKE
Incorporated by reference to the previously filed Form 10-Q for
January 31, 1999 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
1999 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
Steel of West Virginia, Inc. Delaware
EXHIBIT NO. 23
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 19, 1999, incorporated by reference
in the Annual Report on Form 10-K of Roanoke Electric Steel Corporation for
the year ended October 31, 1999.
Deloitte & Touche LLP
Winston-Salem, North Carolina
January 18, 2000
EXHIBIT NO. 27
FINANCIAL DATA SCHEDULE
ROANOKE ELECTRIC
STEEL
ANNUAL REPORT 1999
<PAGE>
1999 Highlights
o Record net earnings of $22,647,918
o Record earnings per share of $2.05
o Record sales of $372,962,950
o Acquired Steel of West Virginia, Inc.
o Ranked #1 for the second consecutive year in overall
customer satisfaction by Jacobson & Associates
o Fabricating subsidiaries' earnings increased 29.6%
o Record working capital of $116,624,568
o Record cash flows from operations of $45,362,933
o Record total assets of $352,129,222
o Record stockholders' equity of $136,541,541
o 17.7% return on average equity
o Cash dividend increased 5.3%
o $6,395,815 returned to shareholders in dividends
and repurchases of stock
<PAGE>
(Full page photo appears here)
<PAGE>
To Our Shareholders
1999 Results and Highlights
Fiscal year 1999 was the best year in the history of our Company. In
addition to achieving record earnings, sales and earnings per share, a major
highlight of the year was the acquisition of Steel of West Virginia, Inc.
("SWVA"), a producer of steel beams, channels and special sections. Other
impressive accomplishments in 1999 are discussed throughout this report.
Earnings increased for the third consecutive year to a record
$22,647,918, an increase of 13.9% over 1998 earnings of $19,875,409 and 12.0%
higher than our previous record earnings of $20,228,902 in 1995. Earnings per
share were a record $2.05 ($2.03 diluted) - up 14.5% from the $1.79 ($1.77
diluted) earned in 1998. We also attained record sales of $372,962,950, a 26.3%
increase over last year's sales of $295,203,974.
Business conditions continued strong within the construction industry
throughout the year, and selling prices for fabricated products increased, while
raw material costs declined. As a result, our fabricating subsidiaries' earnings
improved 29.6% in 1999, the fifth consecutive year they contributed
substantially to consolidated earnings. Our 1999 financial results included the
operations of SWVA from December 16, 1998, and the inclusion of their revenues
in the consolidated financial statements accounted for most of the increased
sales. SWVA contributed $.21 of the increased earnings per share after taking
into account interest costs and amortization of the premium paid for the
acquisition. Gross profits as a percentage of sales improved better than
one-half percent, further enhancing earnings as product mix was comprised of
fewer billet shipments, which carry lower margins. In addition, our 1999
earnings included a $1.8 million ($.08 per share) partial settlement from a
number of our graphite electrode suppliers for antitrust violations.
Earnings Per Share
(Dollars)
(A bar graph appears here with the following plot points.)
1992 1993 1994 1995 1996 1997 1998 1999
.22 .40 .73 1.68 1.30 1.50 1.79 2.05
2
<PAGE>
We are extremely proud to be ranked # 1, again, in overall customer
satisfaction in the Jacobson & Associates Mini-mill Customer Satisfaction
Report. To achieve this lofty rank, we were rated first in quality, service and
price among mini-mill producers. To be selected at the top two years in a row is
a special tribute to the conscientious manner in which our employees perform
their duties, for which we are most grateful.
SWVA Acquisition
The acquisition was completed on December 16, 1998 at a cost of
approximately $117.1 million, including the assumption of approximately $52.3
million of indebtedness. Funding was provided by a syndicate of four banks and
was comprised of a $150,000,000 seven-year term loan and a $30,000,000 five-year
revolver, both secured. The term loan was used to purchase all of the
outstanding capital stock of SWVA and refinance the existing term debt of both
the Company and SWVA. The excess cost of the investment over the fair value of
the net assets acquired was approximately $16 million.
This acquisition provides an excellent growth opportunity for our
Company. In 1998, SWVA spent $35 million to increase its rolling mill capacity
significantly, prompting billet requirements that far exceed its melting
capabilities. This provides a captive outlet for a good portion of our excess
billet capacity and makes us less dependent on selling our billets in the open
market. SWVA's range of products broadens our product mix, allowing us to better
serve our customers. Their increased production capacity will allow the combined
companies to further expand product ranges and penetrate new markets. Our
Company now has melting capacity of 900,000 tons, rolling mill capacity of
700,000 tons and over 1,800 employees.
Financial Position
Our financial condition changed dramatically during the year. With the
consolidation of SWVA, total assets were $352,129,222, working capital reached
$116,624,568 and operations provided cash flows of
Sales
($Millions)
(A bar graph appears here with the following plot points.)
1992 1993 1994 1995 1996 1997 1998 1999
146 167 216 260 246 265 295 373
3
<PAGE>
$45,362,933 - all new highs. At October 31, 1999, the current ratio was 3.0 to
1, and the quick ratio was 1.8 to 1. Both ratios were lower than last year, but
remained at very sound levels. Stockholders' equity improved to $136,541,541 -
another record. Our capital structure consisted of much more debt than last year
after financing the SWVA purchase. Long-term debt as a percentage of total
capitalization increased to 47.6% from 16.9% last year, but has improved from
the 52.5% reported at the end of the first quarter. After subtracting from
long-term debt, cash and investments totalling $45,059,836 at year end, net
long-term debt as a percentage of total capitalization was 36.6% - much nearer
our desired level of 30%. We have managed the higher debt well, which was
attractively priced at below 7% by our banks. Cash flows have been more than
adequate to service the debt, and our interest earned coverage ratio was better
than 6 to 1. Our ability to remain competitive has not been jeopardized, and we
are still positioned well for future growth. Our $30,000,000 revolving credit
facility was unused at year end.
Shareholder Value
In its continuing efforts to add shareholder value, your Company
increased the regular cash dividend rate by 5.3% and repurchased 126,000 shares
of its common stock during the year. The dividend increase brings the annual
dividend rate to 40 cents, and the yield at year end was 2.5%. Since early 1995,
our dividend rate has grown 87.5%, and, in October 1999, the Board declared the
164th (41 years) consecutive quarterly cash dividend in the amount of 10 cents
per share, payable November 24, 1999. Cash dividends paid to shareholders in
1999 amounted to $4,309,065, and our shareholders received an additional
$2,086,750 for the repurchase of their shares. In the last four years, we have
returned $14,630,317 to shareholders with the repurchase of 933,200 company
shares. The retirement of these
Total Assets
($Millions)
(A bar graph appears here with the following plot points.)
1992 1993 1994 1995 1996 1997 1998 1999
126 131 140 158 167 177 189 352
4
<PAGE>
shares has been instrumental in the record earnings per share the past few
years, and there remains 566,000 shares authorized for repurchase. In addition
to the dividend yield, our share price advanced 10.3% during the year, providing
a respectable return.
Positioned For Growth
The prospects for continued growth are encouraging. We look for
increased business as we utilize the increased rolling mill capacity at SWVA to
produce new products and explore new markets. New stacking and bundling
equipment is now operational at our Roanoke mill, and we expect improved
productivity in fiscal year 2000. Backlogs for most product classes are at high
levels, and the majority of our markets are strong. We expect our fabricating
subsidiaries to continue their strong contributions to earnings well into the
new year. Rising prices for merchant bar products should neutralize higher scrap
steel costs and maintain margins and earnings. The early indications point to
another solid performance in 2000.
As always, we wish to recognize our dedicated employees and loyal
customers for their role in another record year. We thank our shareholders for
their support and confidence as we strive to build value in the future.
Sincerely,
/s/ Donald G. Smith
Donald G. Smith
Chairman of the Board and Chief Executive Officer
Cash Provided By Operations
($Millions)
(A bar graph appears here with the following plot points.)
1992 1993 1994 1995 1996 1997 1998 1999
5.9 9.6 14.4 19.7 17.2 28.7 34.6 45.4
5
<PAGE>
Roanoke Electric Steel Corporation
The Parent company operates a state-of-the-art steel mini-mill located
in Roanoke, Virginia.
This facility melts scrap steel in electric arc furnaces and
continuously casts the molten steel into billets, which are hot rolled into
merchant steel products consisting of angles, plain rounds, flats, channels and
reinforcing bars of various lengths, sizes and grades.
Excess billet production is mostly sold to rolling mills without
melting facilities.
The merchant bar products are distributed directly to steel service
centers, steel fabricators and original equipment manufacturers from orders
solicited by a paid sales staff.
(Three photos appear on the right side of this page)
6
<PAGE>
(Full page photo appears here)
7
<PAGE>
The Parent serves approximately 300 customers, who operate 450
locations, in 22 states east of the Mississippi River.
Steel service centers serve the metal supply needs of more than 300,000
manufacturers and fabricators nationwide and comprise better than 50% of the
Parent's customer base.
The Parent has 550 employees including the home office staff.
Five subsidiaries featured throughout this report are either a supplier
to the Parent or a purchaser of its products and have proven very instrumental
in the success of Roanoke Electric Steel Corporation.
(Two photos appear on the right side of this page)
8
<PAGE>
(Full page photo appears here)
9
<PAGE>
Steel of West Virginia, Inc.
Like the Parent, this subsidiary is a steel mini-mill operating in
Huntington, West Virginia, and produces specialty steel sections that complement
the Parent's range of products.
A steel fabricating subsidiary, Marshall Steel, Inc., is located in
Memphis, Tennessee.
Unlike most mini-mills, additional finishing operations on the products
(such as cutting to length, hole-punching, shot-blasting, welding and coating)
are performed at both facilities to create custom-finished products that are
placed directly into customers' assembly operations.
SWVA is the primary supplier of steel sections to Marshall.
10
<PAGE>
(Full page photo appears here)
11
<PAGE>
The specialty steel sections and custom-finished products are sold to
niche markets and include cross-members and sub-frame sections used in the
construction of truck trailers, mast sections and hanger bars for industrial
lift trucks, guardrail posts, and light rails and related accessories for the
mining industries.
SWVA also produces sections used in manufactured housing, automotive
lifts, transit systems, containers, bridges, rack systems and merchant sections.
These products are sold to approximately 200 customers by senior
management and in-house sales representatives whose sales efforts cover all of
the continental United States and certain foreign markets, although foreign
exports constitute a very small percentage of total sales.
A total of 585 people are employed at the two locations.
(Four photos appear on the right side of this page)
12
<PAGE>
(Full page photo appears here)
13
<PAGE>
Shredded Products Corporation
This subsidiary operates two scrap yards, located in Rocky Mount and
Montvale, Virginia, and extracts scrap steel and other metals from junked
automobiles and other waste materials.
During the year, these operations processed 115,000 automobile bodies
and delivered 150,000 tons of ferrous scrap steel to the Parent for melting in
its electric furnaces.
The advantages of securing such large amounts of scrap from our own
facility, versus buying in the open market, significantly reduces the Parent's
cost of producing billets and greatly enhances earnings.
Nonferrous metals (such as copper, aluminum and chrome) generated in
the process are sold to unrelated customers, generally, at high prices.
Total employment is 60 workers.
(Photo appears with the following caption.)
Rocky Mount, Virginia
(Photo appears with the following caption.)
Montvale, Virginia
(Three more photos appear on the right side of this page)
14
<PAGE>
(Full page photo appears here)
15
<PAGE>
John W. Hancock, Jr., Inc.
This subsidiary, located in Salem, Virginia, fabricates steel joists by
cutting, bending, welding and painting angles and plain rounds supplied by the
Parent.
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 lighter and less expensive
than structural steel or reinforced concrete.
Hancock also acquires channels, angles and flats from the Parent to
fabricate structural storage rack systems. Its main markets are the Middle
Atlantic and Northeastern states in addition to Ohio, Indiana, North Carolina
and South Carolina.
The joists are distributed to over 200 customers pursuant to successful
bids on contracts submitted by manufacturers' representatives and structural
steel fabricators.
Hancock has 315 employees and used 58,000 tons of the Parent's products
during the year.
(Four photos appear on the right side of this page)
16
<PAGE>
(Full page photo appears here)
17
<PAGE>
Socar, Inc.
Socar is a steel fabrication subsidiary with facilities in Florence,
South Carolina and Continental, Ohio.
Like the Hancock subsidiary, this operation uses angles and plain
rounds supplied by the Parent to fabricate steel joists for the construction
industry.
Ninety percent of the South Carolina facility's markets are in the
states of South Carolina, North Carolina, Georgia, Florida and Tennessee. The
Ohio facility's markets extend to Ohio, Indiana, Michigan, Wisconsin,
Pennsylvania and Illinois. Both locations serve over 200 customers upon
successfully bidding on jobs solicited by their salesmen and manufacturers'
representatives.
The South Carolina location has 175 employees, and the Ohio operation
employs 95. During the year, the Parent supplied 37,000 tons of Socar's raw
material requirements.
(Photo appears with the following caption.)
Florence, South Carolina
(Photo appears with the following caption.)
Continental, Ohio
(Two photos appear on the right side of this page)
18
<PAGE>
(Full page photo appears here)
19
<PAGE>
RESCO Steel Products Corporation
This subsidiary, located in Salem, Virginia, fabricates concrete
reinforcing bars by cutting and bending rebars to specifications provided by
engineers, architects and contractors.
The fabricated rebars are used primarily in the construction of
commercial and industrial buildings, bridges, roadways and public works and
utilities projects.
The company serves the needs of 20 to 30 major contractors and over 100
other customers. About 90% of its contracts are in the Virginia and North
Carolina markets, and the contracts are obtained by successful job bidding.
The company has a sales office in North Carolina and total employment
of 40 people.
The annual requirement for the supply of reinforcing bars from the
Parent is 20,000 to 25,000 tons.
(Three photos appear on the right side of this page)
20
<PAGE>
(Full page photo appears here)
21
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended October 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Sales $372,962,950 $295,203,974 $265,108,639 $246,286,652 $259,968,524
Gross earnings 75,445,544 57,720,265 51,728,996 47,914,269 56,097,685
Interest expense-net 6,964,578 830,743 1,627,380 1,538,191 2,053,643
Income taxes 14,261,230 11,568,066 10,206,340 9,305,808 13,035,243
Net earnings 22,647,918 19,875,409 16,883,068 15,414,834 20,228,902
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $116,624,568 $ 74,917,878 $ 68,028,793 $ 59,630,189 $ 45,483,760
Total assets 352,129,222 189,210,889 176,860,219 167,015,901 157,774,658
Long-term debt 123,910,558 24,291,667 28,541,667 35,291,666 16,979,166
Stockholders' equity 136,541,541 119,447,888 106,436,269 94,433,091 90,062,598
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Gross profit margin 20.2% 19.6% 19.5% 19.5% 21.6%
Operating income margin 6.1% 6.7% 6.4% 6.3% 7.8%
Effective tax rate 38.6% 36.8% 37.7% 37.6% 39.2%
Current ratio 3.0 3.5 3.5 3.5 2.2
Quick ratio 1.8 2.3 2.0 2.0 1.3
Funded debt as a percentage of total capital 50.4% 19.3% 23.6% 29.5% 26.1%
Return on average stockholders' equity 17.7% 17.6% 16.8% 16.7% 24.9%
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net earnings:
Basic $ 2.05 $ 1.79 $ 1.50 $ 1.30 $ 1.68
Diluted 2.03 1.77 1.49 1.30 1.67
Cash dividends 0.39 0.37 0.33 0.30 0.25
Stockholders' equity 12.38 10.78 9.49 8.35 7.44
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,065,531 11,132,910 11,230,794 11,815,323 12,068,308
</TABLE>
PER SHARE INFORMATION HAS BEEN ADJUSTED FOR A THREE-FOR-TWO STOCK SPLIT
EFFECTIVE MARCH 25, 1998.
CAPITALIZATION
($MILLIONS)
(Bar chart appears here with the following plot points.)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY $90,062,598 $94,433,091 $106,436,269 $119,447,888 $136,541,541
LONG-TERM DEBT $16,979,166 $35,291,666 $ 28,541,667 $ 24,294,667 $123,910,558
</TABLE>
CAPITAL EXPENDITURES
AND DEPRECIATION
($MILLIONS)
(Bar chart appears here with the following plot points.)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Capital Expenditures $11,654,366 $18,194,216 $7,532,580 $12,339,553 $13,070,524
Depreciation $ 7,863,154 $ 8,366,012 $9,456,201 $9,216,133 $14,627,553
</TABLE>
Working Capital
($Millions)
(Bar chart appears here with the following plot points.)
1995 1996 1997 1998 1999
$45,486,760 $59,630,189 $68,028,793 $74,917,878 $116,624,568
Earnings
($Millions)
(Bar chart appears here with the following plot points.)
1995 1996 1997 1998 1999
$20,228,902 $15,414,834 $16,883,068 $19,875,409 $22,647,918
Stockholders' Equity
($Millions)
(Bar chart appears here with the following plot points.)
1995 1996 1997 1998 1999
$90,062,598 $94,433,091 $106,436,269 $119,447,888 $136,541,541
22
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
SALES .................................. $ 372,962,950 $ 295,203,974 $ 265,108,639
COST OF SALES .......................... 297,517,406 237,483,709 213,379,643
------------- ------------- -------------
GROSS EARNINGS ......................... 75,445,544 57,720,265 51,728,996
------------- ------------- -------------
OTHER OPERATING EXPENSES (INCOME)
Administrative ......................... 25,543,472 19,771,970 17,873,967
Interest, net .......................... 6,964,578 830,743 1,627,380
Profit sharing ......................... 7,887,891 5,674,077 5,138,241
Antitrust litigation settlement ........ (1,859,545) -- --
------------- ------------- -------------
Total ............................... 38,536,396 26,276,790 24,639,588
------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES ........... 36,909,148 31,443,475 27,089,408
INCOME TAX EXPENSE ..................... 14,261,230 11,568,066 10,206,340
------------- ------------- -------------
NET EARNINGS ........................... $ 22,647,918 $ 19,875,409 $ 16,883,068
============= ============= =============
NET EARNINGS PER SHARE OF COMMON STOCK
Basic .................................. $ 2.05 $ 1.79 $ 1.50
============= ============= =============
Diluted ................................ $ 2.03 $ 1.77 $ 1.49
============= ============= =============
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ 0.390 $ 0.372 $ 0.333
============= ============= =============
</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, 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
Repurchase and retirement of
common stock .............. (126,000) -- -- (2,086,750) -- --
Stock options exercised ....... 75,900 841,550 -- -- -- --
Net earnings .................. -- -- -- 22,647,918 -- --
Cash dividends ................ -- -- -- (4,309,065) -- --
------------- ------------- ------------- ------------- ------------ -------------
BALANCE, OCTOBER 31, 1999 .......... 12,298,902 $ 3,699,678 $ -- $ 133,659,731 1,273,114 $ 817,868
============= ============= ============= ============= ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................... $ 33,286,934 $ 16,167,025
Investments ............................................. 11,772,902 11,727,636
Accounts receivable, net of allowances of
$2,000,327 in 1999 and $816,085 in 1998 ............... 57,692,504 42,415,061
Inventories ............................................. 63,574,029 31,902,900
Prepaid expenses ........................................ 1,476,561 1,586,357
Deferred income taxes ................................... 6,214,314 1,608,938
------------ ------------
Total current assets .................................... 174,017,244 105,407,917
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land .................................................... 8,077,943 4,264,165
Buildings ............................................... 40,816,558 19,621,407
Other property and equipment ............................ 189,012,488 123,615,952
Assets under construction ............................... 2,135,854 4,656,746
------------ ------------
Total ................................................... 240,042,843 152,158,270
Less-accumulated depreciation ........................... 78,530,036 68,522,086
------------ ------------
Property, plant and equipment, net ...................... 161,512,807 83,636,184
------------ ------------
Goodwill ................................................ 15,488,343 --
------------ ------------
OTHER ASSETS ................................................. 1,110,828 166,788
------------ ------------
TOTAL ........................................................ $352,129,222 $189,210,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ....................... $ 15,034,131 $ 4,250,000
Accounts payable ........................................ 22,821,864 15,273,850
Dividends payable ....................................... 1,102,579 1,052,210
Employees' taxes withheld ............................... 530,139 358,851
Accrued profit sharing contribution ..................... 6,353,611 5,335,822
Accrued wages and expenses .............................. 11,138,478 2,959,367
Accrued income taxes .................................... 411,874 1,259,939
------------ ------------
Total current liabilities ............................... 57,392,676 30,490,039
------------ ------------
LONG-TERM DEBT
Notes payable ........................................... 138,944,689 28,541,667
Less-current portion .................................... 15,034,131 4,250,000
------------ ------------
Long-term debt .......................................... 123,910,558 24,291,667
------------ ------------
DEFERRED INCOME TAXES ........................................ 30,902,712 13,687,507
------------ ------------
OTHER LIABILITIES ....................................... 3,381,735 1,293,788
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7)
STOCKHOLDERS' EQUITY
Common stock-no par value-authorized 20,000,000 shares,
issued 12,298,902 shares in 1999 and 12,349,002 in 1998 3,699,678 2,858,128
Retained earnings ....................................... 133,659,731 117,407,628
------------ ------------
Total ................................................... 137,359,409 120,265,756
Less-treasury stock, 1,273,114 shares at cost ........... 817,868 817,868
------------ ------------
Total stockholders' equity .............................. 136,541,541 119,447,888
------------ ------------
TOTAL ........................................................ $352,129,222 $189,210,889
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ............................................................ $ 22,647,918 $ 19,875,409 $ 16,883,068
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Deferred compensation liability ...................................... 360,571 -- --
Postretirement liabilities ......................................... 320,449 302,979 247,970
Depreciation and amortization ...................................... 15,467,973 9,266,547 9,482,836
(Gain) loss on sale of investments and property, plant and equipment 178,950 721,509 (1,659)
Deferred income taxes .............................................. 633,808 (256,660) 780,071
Changes in assets and liabilities which provided
(used) cash, exclusive of changes shown separately ............... 5,753,264 4,661,843 1,268,717
------------- ------------- -------------
Net cash provided by operating activities ............................... 45,362,933 34,571,627 28,661,003
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment ..................... (13,070,524) (12,339,553) (7,532,580)
Proceeds from sale of property, plant and equipment ................ 315,533 55,395 17,299
Purchases of investments ........................................... (11,102,204) (18,427,761) (6,085,692)
Proceeds from sales of investments ................................. 11,020,550 14,495,999 4,309,012
Acquisition of Steel of West Virginia, Inc. ...................... (67,921,073) -- --
Other ............................................................ (235,286) -- --
------------- ------------- -------------
Net cash used in investing activities ................................... (80,993,004) (16,215,920) (9,291,961)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends ..................................................... (4,309,065) (4,134,923) (3,739,495)
Cash paid for fractional shares on stock split ..................... -- (2,976) --
Increase in dividends payable ...................................... 50,369 80,571 66,695
Proceeds from exercise of common stock options ..................... 841,550 508,949 432,383
Payment of long-term debt .......................................... (92,432,331) (4,250,000) (6,749,999)
Proceeds from long-term debt ....................................... 150,000,000 -- --
Repurchase of common stock ......................................... (2,086,750) (3,234,840) (1,572,778)
Loan costs ......................................................... (513,793) -- --
Interest rate reverse swap settlement from lender .................. 1,200,000 -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities ..................... 52,749,980 (11,033,219) (11,563,194)
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................... 17,119,909 7,322,488 7,805,848
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 16,167,025 8,844,537 1,038,689
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 33,286,934 $ 16,167,025 $ 8,844,537
============= ============= =============
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED
(USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
(Increase) decrease in accounts receivable ......................... $ (246,304) $ (3,628,759) $ 1,693,496
(Increase) decrease in inventories ................................. 3,418,636 4,911,517 (2,499,518)
(Increase) decrease in prepaid expenses ............................ 491,283 313,981 (1,249,325)
Increase (decrease) in accounts payable ............................ (1,539,897) 2,222,976 2,073,364
Increase (decrease) in employees' taxes withheld ................... (305,801) 207,766 (133,381)
Increase (decrease) in accrued profit sharing contribution ......... 774,359 425,379 998,486
Increase (decrease) in accrued wages and expenses .................. 1,228,462 21,302 192,906
Increase (decrease) in accrued income taxes ........................ 1,932,526 187,681 192,689
------------- ------------- -------------
Total ................................................................... $ 5,753,264 $ 4,661,843 $ 1,268,717
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<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, Roanoke Technical Treatment & Services,
Inc. and Steel of West Virginia, Inc. (the "Company"). All significant
intercompany accounts and transactions have been eliminated. Steel of West
Virginia, Inc. was acquired in December 1998 (see Note 14). The Company operates
in a single business segment.
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 ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS
No. 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 1999 and 2028. The Company complies with SFAS No.115, "Accounting for
Certain Investments in Debt and Equity Securities". In accordance with the
provisions of SFAS No. 115, management has classified its entire debt securities
portfolio as "available for sale". Under SFAS No. 115, "available for sale"
securities are reported at fair value with unrealized gains and losses reported
as other comprehensive income. 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, 1999, 1998 and 1997.
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% and 12% of consolidated sales for
1998 and 1997, respectively.
GOODWILL - The excess of cost over fair value of net assets of acquired
subsidiary is amortized using the straight-line method over the estimated
benefit period of 20 years. At October 31, 1999, accumulated amortization is
$708,617. The carrying value of goodwill is periodically reviewed based upon an
assessment of operations of the acquired entity. Management is not aware of any
facts or circumstances indicating that the carrying value of goodwill has been
impaired.
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, 1999, 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 - SFAS No. 123, "Accounting for Stock-Based Compensation", 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 ("APB") No. 25, "Accounting
for Stock Issued to Employees", 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
No. 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.
26
<PAGE>
COMPREHENSIVE INCOME - In June 1997, SFAS No. 130, "Comprehensive Income", 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 adopted SFAS No. 130 in the first quarter of fiscal year 1999, but
comprehensive income, and its required disclosure, is the same as that shown in
the consolidated statements of earnings.
SEGMENT INFORMATION - In June 1997, SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", was issued, establishing standards for
the way public enterprises report information about operating segments in annual
financial statements. The Company adopted SFAS No. 131 at the close of fiscal
year 1999 (see Note 17).
DERIVATIVE INSTRUMENTS - In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", 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 No. 133 in the first quarter of fiscal year 2001 and is in the process of
evaluating what impact SFAS No. 133 will have on its consolidated financial
statements.
(Note 2) Inventories
If the FIFO method of valuing inventories had been used by John W. Hancock, Jr.,
Inc., consolidated inventories would have been $1,250,303 greater in 1999 and
$1,699,417 greater in 1998.
Inventories include the following major classifications:
October 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Scrap steel ....... $ 5,090,322 $ 4,876,856 $ 7,579,552
Melt supplies ..... 3,520,825 2,408,961 2,212,939
Billets ........... 14,477,006 3,499,907 5,960,432
Mill supplies ..... 4,274,660 3,176,619 3,484,688
Work-in-process ... 4,234,402 -- --
Finished steel .... 31,976,814 17,940,557 17,576,806
----------- ----------- -----------
Total inventories.. $63,574,029 $31,902,900 $36,814,417
=========== =========== ===========
(Note 3) Properties and Depreciation
Depreciation expense for the years ended October 31, 1999, 1998 and 1997
amounted to $14,627,553, $9,216,133 and $9,456,201, 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 1999, 1998 and 1997
included $193,052, $53,722, and $54,668 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 December 15, 1998, the Company replaced its existing credit facility with a
new syndicated loan facility, part of which provides a five-year $30,000,000
revolver, as explained in Note 6. There also exists a $5,000,000 line of credit
to be used to cover overdrafts in a demand deposit account. These lines of
credit were unused at October 31, 1999 and 1998.
(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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal tax at the statutory rate .................. $ 12,918,202 $ 11,005,216 $ 9,481,293
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit. 1,174,198 776,339 874,960
Other items, net .............................. 168,830 (213,489) (149,913)
------------ ------------ ------------
Income taxes per consolidated statements of earnings $ 14,261,230 $ 11,568,066 $ 10,206,340
============ ============ ============
</TABLE>
27
<PAGE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current income taxes:
Federal ........................... $ 12,016,060 $ 10,589,161 $ 8,156,471
State ............................. 1,611,362 1,235,565 1,269,798
------------ ------------ ------------
Total current income taxes ............. 13,627,422 11,824,726 9,426,269
------------ ------------ ------------
Deferred income taxes (benefit):
Federal ........................... 438,712 (215,462) 703,776
State ............................. 195,096 (41,198) 76,295
------------ ------------ ------------
Total deferred income taxes (benefit) .. 633,808 (256,660) 780,071
------------ ------------ ------------
Total income taxes ..................... $ 14,261,230 $ 11,568,066 $ 10,206,340
============ ============ ============
</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. As of October 31, 1999, 1998 and
1997, the Company had total deferred tax liabilities of $30,902,712, $13,687,507
and $13,547,110, respectively, and deferred tax assets of $6,214,314, $1,608,938
and $1,211,881, respectively. At October 31, 1999, deferred tax liabilities
result from excess tax depreciation, purchase price accounting differences and
change in inventory method of $27,693,846, $1,972,341 and $1,236,525,
respectively, and deferred tax assets result from self-insurance, reserves not
currently deductible, uniform capitalization and other accrued expenses not
currently deductible of $1,417,008, $1,048,833, $975,444 and $2,773,029,
respectively. At October 31, 1998, deferred tax liabilities result exclusively
from excess tax depreciation of $13,687,507, and deferred tax assets result from
reserves not currently deductible of $792,089 and other accrued expenses not
currently deductible of $816,849. There were no valuation allowances.
(Note 6) Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 31,
---------------------------
1999 1998
------------ ------------
<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
Term loan, unsecured, payable in monthly installments of $104,167,
plus interest at 6.44%. Due September 1, 2003 ................................. -- 6,041,667
Syndicated term loan, secured by equipment, payable in quarterly installments of
$3,750,000. Interest payable quarterly at the LIBOR
rate of 6.08% plus 1.05%. Due January 3, 2006 ................................. $138,750,000 --
Other notes payable ............................................................ 194,689 --
Revolving credit agreement ..................................................... -- --
------------ ------------
Total .......................................................................... 138,944,689 28,541,667
Less-current portion ........................................................... 15,034,131 4,250,000
------------ ------------
Long-term debt ................................................................. $123,910,558 $ 24,291,667
============ ============
</TABLE>
In December 1998, the Company entered into a $30,000,000 revolving credit
agreement with a group of banks that extends through December 15, 2003. Under
the revolving credit agreement, interest is payable at October 31, 1999 and
1998, at the LIBOR rates of 6.08% plus .40% and 5.69% plus .30%, respectively.
The agreement requires the Company to pay a facility fee at an annual rate of
.25% and .125% for 1999 and 1998, respectively.
The Company does not use derivatives for trading purposes. Interest rate swaps,
a form of derivative, are used to manage interest costs. On June 25, 1999, the
Company did a reverse swap, converting $40,000,000 of term debt to a variable
interest rate from a fixed rate. A fee of $1,300,000 was received and is being
recorded in income ratably over the 6 1/2 years remaining to maturity of the
term loan. Currently, the Company maintains an interest rate swap agreement
resulting in a fixed rate of 6.61% on the notional amount of $99,750,000 through
January 3, 2006. The difference between fixed rate and floating rate interest is
recognized as an adjustment to interest expense in the period incurred. The
$40,000,000 of variable rate term debt is subject to the risk of fluctuations in
short-term interest rates; however, cash and investments at October 31, 1999
provided a hedge against rising interest rates. The fair value of the current
swap is estimated based on current settlement prices and was approximately
$3,200,000, in favor of the Company at October 31, 1999.
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 .55 times consolidated total
capitalization.
28
<PAGE>
In addition, consolidated funded debt cannot be greater than 3 times
consolidated EBITDA, and 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, 1999 and
1998.
SFAS 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 1999 swap agreement is mentioned
above.
Annual aggregate long-term debt maturities are approximately $15,000,000 for
each of the next five years.
(NOTE 7) COMMITMENTS AND CONTINGENT LIABILITIES
At October 31, 1999, the Company was committed for $8,538,812 for purchases of
equipment and production facilities.
The Company is not involved in any legal proceedings or environmental matters
outside the ordinary course of business. In the opinion of management, amounts
accrued for potential awards or assessments in connection with these matters at
this time are adequate, and the outcome of such environmental and legal concerns
currently pending will not have a material effect on the Company's consolidated
financial position, results of operations, or cash flows. The Company reassesses
these matters as new facts and cases are brought to management's attention.
(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; 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 and 75,900 shares issued in
1999 at no stated value, less 126,000 treasury (repurchased) shares retired
during 1999. 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 and 1999 all of its treasury stock applicable to the
shares acquired through its common stock repurchase plans.
In February 1997, SFAS No. 128, "Earnings per Share", was issued, changing the
method of calculating earnings per share.SFAS No. 128 requires the presentation
of "basic" earnings per share and "diluted" earnings per share on the face of
the statement of earnings. Basic earnings per share is 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 11,065,531 for 1999, 11,132,910 for 1998 and 11,230,794
for 1997. The average number of shares outstanding were weighted after giving
effect to both stock options exercised and repurchased common stock during 1999,
1998 and 1997 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 11,134,118 for 1999, 11,248,029 for 1998 and 11,300,634 for 1997.
(NOTE 9) PROFIT SHARING PLANS
The Company, including Shredded Products Corporation, RESCO Steel Products
Corporation, Socar, Inc. and Steel of West Virginia, Inc. ("SWVA"), 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', except SWVA, annual contribution cannot
exceed 20% of their combined earnings before income taxes. SWVA's annual
contribution cannot exceed 17% of its pretax profit for bargaining unit
employees, with comparable amounts contributed ratably to the nonbargaining
group. Total contributions of all Companies shall not exceed the maximum amount
deductible for such year under the Internal Revenue Code and amounted to
$7,887,891 for 1999, $5,674,077 for 1998 and $5,138,241 for 1997.
(NOTE 10) INTEREST EXPENSE
Interest expense is stated net of interest income of $1,923,754 in 1999,
$1,214,017 in 1998 and $702,333 in 1997.
(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 112,500 shares
were granted for 1999, 84,000 shares for 1998, 82,000 shares for 1997, 75,000
29
<PAGE>
shares for 1996, 41,500 shares for 1995, 36,000 shares for 1992 and 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 5 years for employees and 10 years for directors from
the date of grant, and a summary follows:
Weighted Average
Exercise Price
Per Share Shares
---------------- ---------
Balance, November 1, 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
Granted .............................. 13.77 112,500
Exercised ............................ 9.43 (75,900)
Expired or terminated ................ -- --
--------
Balance, October 31, 1999 ............ 12.57 333,825
========
Shares available for grant at year end None
========
The Company applies APB No. 25 and related Interpretations in accounting for the
nonqualified stock option plans. Accordingly, compensation cost of $272,813,
$295,313 and $177,188 for the years ended October 31, 1999, 1998 and 1997,
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 No.123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
Year Ended October 31,
------------------------------------------
1999 1998 1997
----------- ----------- --------------
Net earnings:
As reported ................... $22,647,918 $19,875,409 $ 16,883,068
=========== =========== ==============
Pro forma ..................... $22,422,339 $19,573,253 $ 16,761,234
=========== =========== ==============
Basic net earnings per share:
As reported ................... $ 2.05 $ 1.79 $ 1.50
=========== =========== ==============
Pro forma ..................... $ 2.03 $ 1.76 $ 1.49
=========== =========== ==============
Diluted net earnings per share:
As reported ................... $ 2.03 $ 1.77 $ 1.49
=========== =========== ==============
Pro forma ..................... $ 2.01 $ 1.74 $ 1.48
=========== =========== ==============
The fair value of options granted during the years ended October 31, 1999, 1998
and 1997 was $7.22, $7.64 and $3.90, respectively. The following table
summarizes information about stock options outstanding and exercisable at
October 31, 1999:
Number Remaining
Outstanding and Contractual Life
Exercise Prices Exercisable in Years
--------------- -------------- --------------
$ 6.04 14,400 .25
7.93 27,000 1.33
8.93 54,625 2.33
10.50 10,000 7.33
13.71 103,000 4.21
14.56 7,500 9.79
14.88 103,800 3.25
17.50 13,500 8.25
----------
333,825
==========
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 1999, 1998 and 1997, respectively: dividend yield
of 2.42%, 2.18% and 2.90%; expected volatility of 47.81%, 47.25% and 37.33%;
risk-free interest rates of 5.93%, 4.23% and 5.71%; and an expected life of 5
years.
30
<PAGE>
(NOTE 12) HEALTH BENEFITS AND POSTRETIREMENT COSTS
The Company currently provides certain health care benefits for terminated
employees who have completed 10 years of continuous service after age 45, and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", 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 No. 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 20 years. The Company
has elected to recognize this obligation of approximately $1,381,000 over a
period of 20 years. Cash flows are not affected by implementation of SFAS
No.106, but implementation decreased net earnings from continuing operations for
1999, 1998 and 1997 by approximately $199,447, $188,695 and $154,400,
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................................. $ 408,619 $ 474,388 $ 402,724
Fully eligible plan participants ..................................... 909,362 793,117 672,238
Other active plan participants ....................................... 1,086,801 1,018,324 727,720
----------- ----------- -----------
Accumulated postretirement benefit obligation ........................ 2,404,782 2,285,829 1,802,682
Unrecognized net actuarial gains ..................................... 176,455 43,959 293,127
Unrecognized transition obligation ................................... (967,000) (1,036,000) (1,105,000)
----------- ----------- -----------
Accrued postretirement benefit cost .................................. $ 1,614,237 $ 1,293,788 $ 990,809
=========== =========== ===========
Net postretirement benefit cost consisted of the following components:
Service cost ......................................................... $ 213,950 $ 194,393 $ 164,689
Interest cost on accumulated postretirement benefit obligation ....... 136,741 144,940 124,877
Net amortization ..................................................... 69,000 69,000 54,108
----------- ----------- -----------
Net postretirement benefit cost ...................................... $ 419,691 $ 408,333 $ 343,674
=========== =========== ===========
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% for 1998, decreasing linearly each
successive year until it reaches 5.16% in 2006, 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 $164,000 and the net postretirement benefit cost by approximately
$37,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.25% for the years ended October
31, 1999 and 1998, respectively.
(NOTE 13) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 1999 follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
January 31 April 30 July 31 October 31
---------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Sales ................. $ 73,403,567 $101,338,801 $ 95,879,063 $ 102,341,519
================ ============ ================ ===============
Gross earnings ........ $ 14,968,442 $ 20,802,604 $ 18,723,318 $ 20,951,180
================ ============ ================ ===============
Net earnings .......... $ 3,860,114 $ 5,771,685 $ 5,847,830 $ 7,168,289
================ ============ ================ ===============
Net earnings per share:
Basic .............. $ .35 $ .52 $ .53 $ .65
================ ============ ================ ===============
Diluted ............ $ .35 $ .52 $ .52 $ .65
================ ============ ================ ===============
</TABLE>
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>
31
<PAGE>
(NOTE 14) ACQUISITION
On December 16, 1998, the Company acquired all of the outstanding common shares
of Steel of West Virginia, Inc. ("SWVA"), a Huntington, West Virginia steel
manufacturer, upon completion of its cash tender offer. The consideration given
was approximately $117.1 million, including the assumption of approximately
$52.3 million of indebtedness, which translates into $10.75 net per SWVA share,
for approximately 6,028,000 shares on a fully-diluted basis. Upon merger, SWVA
became a wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each
share of SWVA common stock not purchased in the offer (approximately 3.6% of
SWVA's outstanding shares) was converted, subject to appraisal rights, into the
right to receive $10.75 in cash, without interest. Funding for the acquisition
was provided by a syndicate of four banks, including First Union National Bank,
Agent. SWVA operates a mini-mill in Huntington, West Virginia, and steel
fabrication facilities in Huntington and Memphis, Tennessee, while custom
designing and manufacturing 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, guardrail
posts and mining equipment. The acquisition has been accounted for as a
purchase. Accordingly, the results of operations and cash flows are reflected in
the consolidated financial statements from the date of acquisition, and the
acquired assets and liabilities are included in the accompanying 1999
consolidated balance sheet at values based on a purchase price allocation,
rendered through appraisals and other evaluations. The purchase price allocation
is summarized below:
December 16, 1998
-----------------
Accounts and other receivables ............... $ 17,811,730
Inventories .................................. 35,089,765
Prepaid expenses and other current assets .... 1,848,853
Property, plant and equipment ................ 79,914,154
Goodwill ..................................... 16,196,961
Other assets ................................. 304,356
Accounts and other payables .................. (9,596,233)
Accrued expenses and other current liabilities (7,194,079)
Long-term debt ............................... (52,804,120)
Other liabilities ............................ (13,650,314)
------------
Net purchase price ........................... $ 67,921,073
============
Unaudited pro forma consolidated results of operations for the years ended
October 31, 1999 and 1998, assuming the SWVA acquisition had occurred at the
beginning of each period, are as follows:
(Unaudited)
Year Ended October 31,
------------------------------
1999 1998
------------ ---------------
Sales ................. $385,122,061 $ 417,799,000
============ ===============
Net earnings .......... $ 21,427,126 $ 18,872,000
============ ===============
Net earnings per share:
Basic ................. $ 1.94 $ 1.70
============ ===============
Diluted ............... $ 1.92 $ 1.68
============ ===============
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt and
certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
(NOTE 15) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------
Cash paid during the period for: 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest (net of amount capitalized) $ 8,279,679 $ 2,088,508 $ 2,368,369
============= ============= =============
Income taxes ....................... $ 11,694,896 $ 11,637,045 $ 9,233,580
============= ============= =============
Detail of acquisition:
Fair value of assets acquired ...... $ 151,165,819
Liabilities assumed ................ (83,244,746)
-------------
Net cash paid for acquisition ...... $ 67,921,073
=============
</TABLE>
32
<PAGE>
(NOTE 16) DEFERRED COMPENSATION PLAN
The Company maintains a nonqualified deferred compensation plan (the "Executive
Deferred Compensation Plan"). The purpose of the Executive Deferred Compensation
Plan is to provide to certain eligible employees of the Company the opportunity
to: (1) defer elements of their compensation (including any investment income
thereon) which might not otherwise be deferrable under the current plans; and
(2) receive the benefit of additions to their deferral comparable to those
obtainable under the current plans in the absence of certain restrictions and
limitations in the Code. Amounts deferred are paid into a trust owned by the
Company and are included in other assets. The Company's liability and trust
asset under the Executive Deferred Compensation Plan as of October 31, 1999 was
$360,571.
(NOTE 17) ENTERPRISE-WIDE INFORMATION
The Company's business consists of one industry segment, 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.
Financial Information Relating
to Classes of Products
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Sales to unaffiliated customers:
Merchant steel ................. $205,420,966 $116,226,463 $113,588,649
Bar joists and rebar ........... 125,854,046 121,000,869 115,017,371
Billets ........................ 41,687,938 57,976,642 36,502,619
------------ ------------ ------------
Total consolidated sales ....... $372,962,950 $295,203,974 $265,108,639
============ ============ ============
Information relating to geographic areas indicates that significantly all of the
consolidated sales are domestic, as foreign revenues are not material.
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, 1999 and
1998, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the three years in the period ended October 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Winston-Salem, North Carolina
November 19, 1999
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 740 shareholders of record.
<TABLE>
<CAPTION>
1999 1998
Stock Prices Stock Prices Cash Dividends
- -------------------------------------------------------------------- ---------------------------------------
High Low High Low 1999 1998
- -------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 16 3/4 13 1/8 17 53/64 12 53/64 First Quarter $.095 $.087
Second Quarter 15 1/4 10 3/4 21 11/64 15 53/64 Second Quarter .095 .095
Third Quarter 17 3/4 13 7/16 22 1/2 16 3/16 Third Quarter .100 .095
Fourth Quarter 17 1/2 15 3/8 17 3/4 10 1/8 Fourth Quarter .100 .095
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
In 1997, the 7.6% increase in sales 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 in 1996, and improved
domestic demand, while billet selling prices declined due to lower scrap prices,
which normally trigger changes in billet 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.
On December 16, 1998, the company acquired 100% of the capital stock of
Steel of West Virginia, Inc. ("SWVA"), a steel manufacturer, and 1999 results
reflect the operations of SWVA from the date of acquisition. The 1998 financial
statements have not been restated to include SWVA because the acquisition was
treated as a purchase for accounting purposes. Consequently, the 26.3% increase
in 1999 sales was due, primarily, to the inclusion of SWVA's revenues in
consolidated sales. Higher selling prices for fabricated products also had a
favorable impact on sales. However, sales were negatively affected by
significant declines in selling prices for both merchant bar products and
billets, together with reductions in tons shipped of bar products, fabricated
products and billets, with the latter down substantially. Increased competition
from foreign and domestic producers prompted industry-wide list price reductions
for bar products at the beginning of the year, and prices have not fully
recovered. Excess inventories at steel service centers and a shortage of
transportation equipment contributed to the slight reduction in tons shipped of
bar products as bar markets were generally good throughout the year. A dramatic
change in our market for billets brought diminished demand and a 25.6% decline
in tons shipped. Billet selling prices declined with sharp reductions in scrap
prices. Competitive conditions within the commercial construction industry
generally impact selling prices and shipment levels of fabricated products and
were relatively favorable during the year as reflected in the higher selling
prices. The reduced shipments were caused by minor factors other than
competition as business conditions continued strong and backlogs remained high.
COST OF SALES AND GROSS MARGINS
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. Cost of sales increased significantly
in 1999 due, principally, to the inclusion of SWVA's costs in the consolidated
statements, in spite of the decreased shipments for all products classes, and
the drop in the cost of scrap steel, our main raw material.
Gross earnings as a percentage of sales were flat in 1997, in spite of
higher selling
34
<PAGE>
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. Gross earnings as a percentage of sales
increased in 1999 from 19.6% to 20.2%, primarily, as a result of the impact of
substantially reduced lower- margin billet shipments. In addition, lower scrap
prices and higher selling prices for fabricated products were negatively
affected by the lower selling prices for bar products and billets and the
effects of lower production levels on costs.
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. For 1999, the consolidation of SWVA was mainly responsible for
the increased gross earnings, together with the improved margins for fabricated
products, which provided the improved net earnings after subtracting higher
administrative, interest and profit sharing expenses.
ADMINISTRATIVE EXPENSES
The percentage of administrative expenses to sales declined from 7.0%
to 6.7% in 1997; 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 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. In 1999, administrative expenses increased due,
mostly, to the inclusion of SWVA's expenses in the current consolidated
financial statements. Executive and management compensation increased in
addition to other expenses such as insurance. Administrative expenses as a
percentage of sales increased to 6.8%
INTEREST EXPENSE
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. Interest expense increased significantly in 1999 due to substantially
higher borrowings, related to the SWVA acquisition, and slightly higher interest
rates; in spite of increased interest income of $1,923,754 and higher
capitalized interest of $193,052.
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 1997, income tax expense as a percentage of pretax income was
relatively constant with prior years. The effective rate declined in 1998 due,
primarily, to substantial Virginia recycling tax credits. In 1999, the effective
rate increased as a result of nondeductible amortization of the excess
investment in SWVA and higher West Virginia income tax rates.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $41,706,690 during the year to $116,624,568
resulting mostly from acquired SWVA working capital. The current ratio of 3.0 to
1 and the quick ratio of 1.8 to 1
35
<PAGE>
were sound indicators of ample liquidity and a healthy financial condition. In
addition, cash, cash equivalents and investments increased $17,165,175 during
the year to $45,059,836. Due to the new credit facilities in conjunction with
the SWVA acquisition, current debt maturities are approximately $15,000,000
annually, which will affect working capital and future liquidity. Our unused
$30,000,000 revolving credit facility combined with continued strong earnings
and the cash and investments mentioned above should provide the liquidity and
capital resources necessary to remain competitive, fund operations and meet
required debt retirement.
At October 31, 1999, there were commitments for the purchase of
property, plant and equipment of approximately $8,500,000. These commitments
will also affect working capital and future liquidity and will be financed from
internally generated funds, the revolving credit facility and existing cash
reserves.
During the year, borrowings increased to $138,944,689, and the ratio of debt to
equity rose to 1.6 to 1 due to the new borrowings and other debt associated with
the SWVA acquisition. The percentage of long-term debt to total capitalization
increased from 16.9% to 47.6% at year end. However, net long-term debt, after
deducting cash and investments, as a percentage of total capitalization was only
36.6%, much more respectable and nearer our desired level of 30%. With debt
comprising a higher percentage of our capital structure, the availability of
capital resources could be more limited than in the past.
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 have completed
conversion on nearly all systems. We expect to be totally compliant by December
31. 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 the
remainder of 1999 for such matters and testing our conversions. However, like
most companies, we cannot totally assess the risk of Year 2000 issues, nor can
we develop contingency plans for all unknown events that might take place. The
estimated costs of Year 2000 issues are approximately $400,000 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.
36
<PAGE>
OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
DONALD G. SMITH, 64 JAMES F. GARLOW, 63 DONALD R. HIGGINS, 54
Chairman, President, Treasurer President, John W. Hancock, Jr., Inc. Vice President - Sales
and Chief Executive Officer 38 years of service 34 years of service
42 years of service
H. JAMES AKERS, JR., 60 WATSON B. KING, 60
J. KENNETH CHARLES, III, 46 Vice President, Melt Operations Vice President, Mill Operations
President, Socar, Inc. 43 years of service 38 years of service
22 years of service
DANIEL L. BOARD, 62 JOHN E. MORRIS, 58
TIMOTHY R. DUKE, 48 Vice President, Purchasing Vice President - Finance
President and 39 years of service and Assistant Treasurer
Chief Executive Officer, 28 years of service
Steel of West Virginia, Inc. THOMAS J. CRAWFORD, 44
12 years of service Vice President Administration
and Secretary
22 years of service
BOARD OF DIRECTORS
FRANK A. BOXLEY GEORGE W. LOGAN DONALD G. SMITH
President, Chairman, Chairman, President, Treasurer
Southwest Construction, Inc. Valley Financial Corporation and Chief Executive Officer,
Roanoke Electric Steel Corporation
GEORGE B. CARTLEDGE, JR. CHARLES I. LUNSFORD, II
Chairman, Retired Chairman, PAUL E. TORGERSEN
Grand Home Furnishings Charles Lunsford Sons & Associates President,
Virginia Polytechnic Institute
TIMOTHY R. DUKE THOMAS L. ROBERTSON and State University
President and President and Chief Executive Officer,
Chief Executive Officer, Carilion Health System JOHN D. WILSON
Steel of West Virginia, Inc. Retired President,
Washington & Lee University
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 2000 annual meeting of EquiServe Trust Company, N.A. Nasdaq National Market
shareholders will be held at 10:00 a.m. Boston, Massachusetts Symbol: RESC
on Tuesday, February 15, 2000 at the 1-800-633-4236
American Electric Power Company Written shareholder correspondence FINANCIAL INFORMATION
Building, 40 Franklin Road, S.W., and requests for transfer should be Analysts, investors and others seeking
Roanoke, Virginia. sent to: financial information are requested to
EquiServe Trust Company, N.A. contact: John E. Morris, Vice President-
GENERAL COUNSEL P.O. Box 8218 Finance or Thomas J. Crawford, Vice
Woods, Rogers & Hazlegrove P.L.C. Boston, Massachusetts 02266-8218 President Administration and Secretary.
Roanoke, Virginia
Copies of the Corporation's Annual
DIVIDEND REINVESTMENT PLAN Report or Form 10-K may be obtained
INDEPENDENT AUDITORS Roanoke Electric Steel offers its without charge by writing to Mr.
Deloitte & Touche LLP shareholders a dividend reinvestment Crawford at the address below.
Winston-Salem, North Carolina plan through its transfer agent.
For more information, please contact CORPORATE OFFICE
the transfer agent or 102 Westside Boulevard
Thomas J. Crawford, Vice President P.O. Box 13948
Administration and Secretary. Roanoke, Virginia 24038-3948
540-342-1831
</TABLE>
<PAGE>
ROANOKE ELECTRIC STEEL CORPORATION
STEEL MINI-MILLS
PARENT:
ROANOKE ELECTRIC STEEL CORPORATION
102 Westside Boulevard NW
P.O. Box 13948, Roanoke, Virginia 24038-3948
Telephone: 540-342-1831 Sales: 800-753-3532 Fax: 540-342-6610
Web site: www.roanokesteel.com E-mail: [email protected]
SUBSIDIARY:
STEEL OF WEST VIRGINIA, INC.
17th Street & 2nd Avenue
P.O. Box 2547, Huntington, West Virginia 25726-2547
Telephone: 304-696-8200 Sales: 800-624-3492 Fax: 304-529-1479
Web site: www.swvainc.com E-mail: [email protected]
STEEL FABRICATORS
SUBSIDIARIES:
JOHN W. HANCOCK, JR., INC.
2535 Duiguids Lane
P.O. Box 3400, Salem, Virginia 24153
Telephone: 540-389-0211 Sales: 800-336-5773 Fax: 540-389-0378
Web site: www.hancockjoist.com E-mail: [email protected]
MARSHALL STEEL, INC.
1555 Harbor Avenue
P.O. Box 13463, Memphis, Tennessee 38113-0463
Telephone: 901-946-1124 Fax: 901-946-5676
Web site: www.swvainc.com E-mail: [email protected]
RESCO STEEL PRODUCTS CORPORATION
438 Kessler Mill Road, Salem, Virginia 24153
P.O. Box 13948 Roanoke, Virginia 24038-3948
Telephone: 540-387-0284 Sales: 800-868-0628 Fax: 540-389-4971
E-mail: rescova.ibm.net
SOCAR, INC.
2527 East National Cemetary Road
P.O. Box 671, Florence, South Carolina 29503
Telephone: 843-669-5183 Sales: 800-669-5183 Fax: 843-669-0675
Web site: www.socarinc.com E-mail: [email protected]
SOCAR OF OHIO, INC.
West Rice Street
P.O. Box 219, Continental, Ohio 45831
Telephone: 419-596-3100 Fax: 419-596-3120
Web site: www.socarinc.com E-mail: [email protected]
SCRAP STEEL PROCESSOR
SUBSIDIARY:
SHREDDED PRODUCTS CORPORATION
700 Commerce Road
Rocky Mount, Virginia 24151
Telephone: 540-489-7599 Fax: 540-489-8431
1144 Fluff Road
P.O. Box 159, Montvale, Virginia 24122
Telephone: 540-947-2225 Toll free: 877-668-8253
Fax: 540-947-5173
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information
extracted from the 4th Quarter Consolidated Balance Sheets
and Statement of Earnings and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 33,286,934
<SECURITIES> 11,772,902
<RECEIVABLES> 57,692,504
<ALLOWANCES> 0
<INVENTORY> 63,574,029
<CURRENT-ASSETS> 174,017,244
<PP&E> 240,042,843
<DEPRECIATION> 78,530,036
<TOTAL-ASSETS> 352,129,222
<CURRENT-LIABILITIES> 57,392,676
<BONDS> 123,910,558
0
0
<COMMON> 3,669,678
<OTHER-SE> 132,841,863
<TOTAL-LIABILITY-AND-EQUITY> 352,129,222
<SALES> 372,962,950
<TOTAL-REVENUES> 372,962,950
<CGS> 297,517,406
<TOTAL-COSTS> 297,517,406
<OTHER-EXPENSES> 31,571,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,964,578
<INCOME-PRETAX> 36,909,148
<INCOME-TAX> 14,261,230
<INCOME-CONTINUING> 22,647,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,647,918
<EPS-BASIC> 2.05
<EPS-DILUTED> 2.03
</TABLE>
