-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ELt5mCUO5UaHIxruYCFn4daVi3UwZ3rvB3s1R8Mio41Ob4dZM1EKSxgmrHIa5hAS DWDImXku7rmtrkRw1bS05g== 0001005477-97-000749.txt : 19970314 0001005477-97-000749.hdr.sgml : 19970314 ACCESSION NUMBER: 0001005477-97-000749 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEEL OF WEST VIRGINIA INC CENTRAL INDEX KEY: 0000820960 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 550684304 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16254 FILM NUMBER: 97555786 BUSINESS ADDRESS: STREET 1: 17TH ST & 2ND AVE CITY: HUNTINGTON STATE: WV ZIP: 25703 BUSINESS PHONE: 3046968200 MAIL ADDRESS: STREET 1: 17TH STREET & 2ND AVENUE CITY: HUNTINGTON STATE: WV ZIP: 25703 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to __________________. Commission File No. 0-16254 STEEL OF WEST VIRGINIA, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 55-0684304 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 17th Street and 2nd Avenue, Huntington, West Virginia 25703 ----------------------------------------------------------- (Address of principal executive offices, zip code) (304) 696-8200 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on March 3, 1997: $34,707,770. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 3, 1997: 5,991,276 shares of Common Stock, par value $.01 per share. Documents incorporated by reference: Registrant's Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal year covered by this Form 10-K Part III - ------------------------------------------- ---------------------------- (Document) (Part of Form 10-K into which Document incorporated) TABLE OF CONTENTS Page ---- PART I..................................................................... 1 Item 1. Business................................................... 1 Item 2. Properties................................................. 8 Item 3. Legal Proceedings.......................................... 8 Item 4. Submission of Matters to a Vote of Security Holders.................................................... 8 PART II.................................................................... 9 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 9 Item 6. Selected Financial Data.................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11 Item 8. Financial Statements and Supplementary Data................ 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 17 PART III................................................................... 17 Item 10. Directors and Executive Officers of the Registrant................................................. 17 Item 11. Executive Compensation..................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 17 Item 13. Certain Relationships and Related Transactions............................................... 17 PART IV.................................................................... 18 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 18 SIGNATURES................................................................. 23 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES................... 24 ii STEEL OF WEST VIRGINIA, INC. PART I Item 1. Business General Steel of West Virginia, Inc. (the "Company") owns and operates a steel mini-mill and steel fabrication facility in Huntington, West Virginia as well as a steel fabrication facility in Memphis, Tennessee. The Company's Huntington facility custom designs and manufactures finished steel products on a cost-effective basis by melting steel scrap in electric arc furnaces and continuously casting the steel into strands of specified lengths and widths known as billets. The billets are reheated and then moved through the Company's rolling mills to form engineered shapes known as specialty steel sections. Unlike most other mini-mills, the Company frequently performs additional finishing operations on these sections at both of its facilities (such as cutting to length, hole-punching, shotblasting, welding and coating) to create custom-finished products that are generally placed directly into its customers' assembly operations. The Company's specialty steel sections and custom-finished products (together, "Finished Products") are sold to selected niche markets and represent over 90% of the Company's total sales. Finished Products include cross-members and sub-frame sections ("Trailer Steel Products") used in the construction of truck trailers; mast sections and hanger bars for industrial lift trucks ("Industrial Lift Truck Products"); guardrail post; light rails, mine ties and related accessories for the mining industries; frame sections and cleats for off-highway construction equipment (such as bulldozers and graders); and other miscellaneous steel products. The Company is the dominant producer of Trailer Steel and Industrial Lift Truck Products in the United States. The Company enjoys a number of competitive advantages. As a mini-mill, the Company recycles steel from scrap, resulting in lower production costs compared to integrated steel mills, which produce steel by processing iron ore and other raw materials in blast furnaces. The Company's location in a scrap surplus region near its major customers reduces raw material and transportation costs, allows for closer customer contact and enables the Company and its customers to maintain lower inventory levels. West Virginia's abundant supply of coal, used in producing electricity which is integral to the Company's production process, helps to keep energy costs relatively low. In addition, the Company's flexible manufacturing capabilities enable it to meet demand for a variety of custom-order products, resulting in its obtaining a larger share of its major customers' business. The Company's business strategy is to maintain its strong position in each of the markets for its Finished Products by continuing to produce high quality products on a 1 cost-effective basis and to identify and capture additional niche markets where it can profitably supply Finished Products. The Company believes that the majority of its Finished Products will continue to command higher less volatile prices and profit margins than commodity steel products. The Company believes that this business strategy has left it well positioned to benefit from any future improvement in the economy. The Company's mini-mill was acquired in 1982 by SWVA, Inc. ("SWVA"), which was organized by a group of investors including certain members of the Company's management. The Company was organized in the State of Delaware by members of management and a private investment firm specializing in leveraged buy-out acquisitions. This group acquired all of the capital stock of SWVA in December 1986. Since then, SWVA has been a wholly-owned operating subsidiary. In October 1987, the Company sold 1.6 million shares of its Common Stock in an initial public offering. In February 1993, the Company completed an underwritten public offering pursuant to which it sold an additional 1.94 million shares of Common Stock and 2.66 million shares were sold by certain non-employee stockholders of the Company. The Company's other wholly-owned subsidiary, Marshall Steel, Inc. ("Marshall") located in Memphis, Tennessee, was acquired in April 1993. Marshall fabricates special steel sections for the truck trailer industry. Since August 1993, SWVA has been the primary supplier of hot rolled steel sections to Marshall, having replaced the previous offshore supplier. The Company's executive offices are located at 17th Street and 2nd Avenue, Huntington, West Virginia, 25703, and its telephone number is (304) 696-8200. Unless the context otherwise requires, the term the "Company" refers to Steel of West Virginia, Inc., SWVA and Marshall on a consolidated basis. Manufacturing Operations The Company recycles steel at the Huntington facility by melting steel scrap in two 70-ton electric arc furnaces and adding a variety of alloys to make different grades of steel according to customer specifications. The refined molten steel is then ladled into a three-strand continuous caster from which it emerges as continuous strands with a cross-section ranging from approximately 16 to 64 square inches. The strands are cut into billets of specified lengths which are moved into the Company's rolling mills where they are reheated to approximately 2,300 degrees Fahrenheit and fed through a series of rollers to reduce their size and form them into specialty steel sections. These sections emerge from the rolling mills, are allowed to cool uniformly on a cooling bed, and are cut to custom lengths. The sections produced by the Company are composed of carbon and low alloy high-strength steels. Depending on an individual customer's needs, many of the sections are then cut to length, hole-punched, shotblasted, welded or coated. These custom-finishing operations are done to customer specifications, and often were originally performed by the 2 Company's customers directly but can be done more cost-effectively by the Company. The custom-finished products are generally placed directly into the customers' assembly operations. The annual equipment capacity of the melt shop furnaces and caster is approximately 304,000 tons. The Company produced 187,000 tons of billets in 1996, or 61.5% of its equipment capacity. The annual capacity of Finished Products from the Company's rolling mills is currently 260,000 tons. The Company produced 145,000 tons of Finished Products in 1996 which constituted 55.8% of its capacity. Historically, the Company has generally been able to produce all the billets it requires in its rolling operations, and has also generally been able to produce additional billets for sale to help cover fixed costs. However, in connection with the plant expansion and modernization program described under "Capital Improvements and Expansion," the Company is intending to increase the plant's rolling capacity to over 420,000 tons annually. The Company would either purchase billets from an outside vendor or upgrade the capacity of its current furnace and caster to meet the rolling mills new billet requirements. The Company transports its products by common carrier, generally shipping by truck and occasionally by rail and barge. The Huntington location has railroad sidings and a barge loading facility. Capital Improvements and Expansion The Company's expenditures for required capital replacements are currently anticipated to average approximately $1,000,000 annually over the next several years. However, the Company plans to increase capacity and productivity over that time frame by continuing to modernize the Huntington facility and possibly through strategic acquisitions, although such expenditures will be subject to available funds and approval by the Company's Board of Directors. In late 1994, the Company completed the first phase of its plant expansion and modernization program. The project included the upgrading of one of the plant's rolling mills, as well as the installation of additional fabrication equipment. In December 1996, the Company's Board of Directors approved phase II of the expansion and modernization program. The project includes a new high speed reheat furnace, quick-change mill roll stands, new warehouse space, and other miscellaneous equipment enhancements. The improvements are intended to reduce operating costs and increase the plant's rolling capacity by approximately 62%, to over 420,000 tons per year. The project, which is subject to financing, is expected to cost approximately $28 million (not including capitalized interest) and is scheduled to be completed by mid-1998 without material disruptions to existing operations. The Company anticipates funding the project from a combination of internally generated cash flow and bank debt. 3 Products Trailer Steel Products are used in the assembly of trailers for highway transport. These products include cross-members, which are steel mini-beams providing floor support in truck trailers, and subframe sections which are beams attached to the undersides of truck trailers allowing cargo weight to be redistributed evenly over the wheels. Sales of Trailer Steel Products represented approximately 42%, 51%, and 50% of total net sales of the Company during the last three fiscal years ending December 31, 1996. The Company is the dominant producer of such products in the United States. The Company also produces mast sections and hanger bars for industrial lift trucks and narrow aisle hand-operated trucks, as well as rail components used primarily in coal mining, including light rails, mine ties which support the rails, and joint bars used to join rail sections. In addition, the Company produces frame sections and cleats used in off-highway equipment (such as bulldozers and graders). The Company also produces sections used in automotive lifts, transit systems, containers, bridges, merchant sections, rack sections, guardrail posts, and, historically depending upon production costs and its other production schedules, billets. The Company manufactures most of its products to customer specifications, and in many instances provides custom-finishing operations. Due to the custom nature of its Finished Products, the Company generally maintains a minimum of Finished Product inventory. The Company regularly investigates the market potential of new products. Products that the Company has identified for future growth include structural beams for manufactured housing, I-beams, wide flange beams and channels for the merchant industry, roof channels for mines, and rack sections used in warehousing applications. Management believes that the Company's modernization project will enhance its ability to penetrate these markets, although there can be no assurance that it will be able to do so. Customers The Company sells to approximately 200 customers, and in the year ended December 31, 1996, no single customer accounted for more than 10% of the Company's net sales. The Company currently has no long-term agreements with its customers, and there can be no assurance that any of the Company's customers will continue to purchase any specific product or quantity. Marketing Senior management of the Company is directly involved in sales to new customers, and in sales of new products to existing customers. The Company's sales efforts cover all of the continental United States and certain foreign markets, although during 1996 exports constituted less than 5% of the Company's net sales. The Company services the 4 ongoing needs of its customers through three in-house sales representatives at its Huntington facility and two in-house sales representatives at its Memphis facility. Competition and Other Market Factors The Company believes that there are many factors that distinguish it from other steel producers including that the majority of its Finished Products are less volatile in their pricing than commodity steel products. Nonetheless, both the domestic steel industry and the Company's business are highly cyclical in nature. Management believes that the Company's lower net sales during 1996 were largely due to the effects of a downturn in certain industries the Company serves, most significantly, the truck trailer industry. Management believes that the 1994 and 1995 results are more indicative of the Company's performance during periods of a stronger economy. The domestic and foreign steel industries are characterized by intense competition. The Company has identified competition from the following sources: (1) in its truck trailer market, the Company faces competition from two North American mills; (2) in its industrial truck market, the Company competes with Japanese, British, West German and Italian producers who offer similar products; (3) in its guardrail market, the Company encounters competition from many other domestic mills; and (4) in its off-highway equipment market, the Company competes with Italian, Japanese and British manufacturers. Despite this competition, the Company is the dominant producer of Trailer Steel and Industrial Lift Truck Products in the United States. Although management believes that its lower production costs, close involvement with customers and the Company's geographical location are among its competitive advantages, there can be no assurance that such competition will not have an adverse effect on the Company in the future. Many of the Company's customers are in mature businesses. Accordingly, any material increase in tonnage sales of Finished Products by the Company would likely be the result of continued improvement in the economy as a whole, an increased share of the market for existing products or sales by the Company of new products. The Company regularly investigates the market potential of new products. However, no assurance can be given that the Company will be successful in manufacturing and selling such products. Until recently, overall consumption of steel products in the United States did not grow with the economy as a whole. While the operations of domestic steel producers have been scaled back through corporate reorganizations or as a result of bankruptcy proceedings, there still exists, taking into account current levels of imports, significant excess capacity in the domestic steel industry as a whole. While the Company believes that the nature of its Finished Products and its other competitive advantages distinguish it from other steel producers, there can be no assurance that such excess capacity will not have an adverse effect on the Company in the future. Many steel producers that currently are competitors of the Company or which could enter the Company's markets have financial resources substantially greater than those available to the Company. The cost of steel scrap, the principal raw material used in the 5 Company's mill, is subject to market conditions largely beyond the control of the Company. See "Raw Materials." Backlog and Seasonality Due to the nature of its operations, the Company generally fills orders within 21 days. This enables the Company's customers to maintain low inventory levels. At December 31, 1996, the Company had firm orders for 33,015 tons representing sales of approximately $20,222,000, as compared with 50,654 tons representing sales of approximately $31,650,000 at December 31, 1995. The Company does not believe backlog is a significant indicator of future sales. The Company's Huntington, West Virginia operations occasionally shut down, for one to three weeks, for maintenance on a staggered basis. The Company's operations are not otherwise subject to seasonal fluctuations in sales. Raw Materials The principal raw material used in the Company's steel mill is ferrous scrap derived from, among other sources, junked automobiles, structural steel and machines. The purchase of steel scrap is subject to market conditions largely beyond the control of the Company. However, the Company is located in a scrap surplus region, and therefore typically maintains less than a one month supply of scrap, which keeps inventory costs to a minimum. The Company has also supplemented scrap with a mix of direct reduced iron when it was economical to do so. Historically, price fluctuations of scrap have not had a material impact due to the Company's ability, in many instances, to pass through increases in the cost of scrap to its customers in the form of higher prices or surcharges. Although one scrap dealer supplies between 30% and 35% of the Company's requirements, the Company believes that a number of adequate sources of scrap and other raw materials that it uses are readily available. The Company's manufacturing processes consume large amounts of energy in the form of electricity, which the Company purchases from American Electric Power and Memphis Light, Gas and Water. The cost of electric power was approximately 6.9% of the cost of goods sold for 1996. West Virginia's abundant supply of coal, used in producing electricity, helps keep energy costs relatively low. The Company's current major power supply contract with American Electric Power automatically continues until such time as either party gives the other 12 months written notice of cancellation. The contract provides sufficient electrical power to operate the facility 24 hours a day, seven days a week at favorable rates. See "Business -- Manufacturing Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 6 Employees As of December 31, 1996, the Company employed 488 people, of which approximately 80% were members of the United Steelworkers of America. The Company believes its relations with its employees are generally good. The Company's current collective bargaining agreement at the Huntington, West Virginia facility expires in June 1999. Under this agreement, all employees are salaried, there are no time clocks or job descriptions, and the Company utilizes only two basic classifications for production and maintenance personnel (steelmaker, and trade and craft). The Company believes that its wage rates are competitive with other mini-mills. However, there can be no assurance regarding the outcome of any future negotiations with the Company's union. The Company maintains a profit-sharing plan for both bargaining unit and non-bargaining unit employees pursuant to which a percentage of pre-tax profits are allocated to a profit-sharing fund and a cash bonus. In contrast to the retiree health insurance commonly provided in the domestic steel industry, the Company offers no material postretirement employee health care or other non pension benefit programs. Under informal arrangements, the Company currently provides postemployment health care benefits to each person who becomes disabled, is not expected to return to the active work force and is not covered by another health insurance plan. As of December 31, 1996, 16 such disabled former employees had been identified as current or potential recipients of this benefit, and the expected cost of such benefits has been accrued in the Company's financial statements. Environmental & Regulatory Matters The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. As with similar mills in the industry, the Company's furnaces are classified as generating hazardous waste because they produce certain types of dust containing lead, zinc and cadmium. The Company currently collects and handles such wastes through contracts with a company which reclaims, from the waste dust, certain materials and recycles or disposes of the remainder. The Company believes it is in substantial compliance with applicable environmental laws and regulations. Notwithstanding such compliance, if damage to persons or property or contamination of the environment has been or is caused by the conduct of the Company's business or by hazardous substances or wastes used in, generated or disposed of by the Company, the Company may be held liable for such damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability, as to which the Company is self-insured, could be material. Changes in federal or state laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by the Company. The Company's operations are subject to the federal Clean Air Act which provides for regulation, through state implementation of federal requirements, of the emission of certain air pollutants. It is expected that the Environmental Protection Agency 7 will promulgate industry-wide standards and technology requirements for the control of emissions of particular regulated air pollutants that may impose more stringent requirements on the Company's operations beginning in the future. The Company will continue to monitor these evolving laws and regulations and will plan and budget, as appropriate, for any such additional capital and operating expenditures that may be required to upgrade or install new or additional pollution control equipment and secure additional or modified permits. There can be no assurance that these evolving federal requirements will not require the Company to make material expenditures in the future. Item 2. Properties Set forth below is certain information with respect to the Company's properties. The Company believes that its two facilities, which are located on approximately 42 acres of land owned by the Company in downtown Huntington, West Virginia, adjacent to rail lines and the Ohio River, and approximately 4 acres of land owned by the Company in Memphis, Tennessee, adjacent to the Mississippi River, are well maintained, in good condition and are adequate and suitable for its operating needs. All of the Company's Huntington, West Virginia properties are currently subject to a first mortgage in favor of the Company's senior lender and the Memphis, Tennessee properties are pledged to the Company's senior lender. Approximate Huntington, WV Facility Square Footage ----------------------- -------------- Rolling Mills 309,000 Furnaces and Caster 88,500 Machine Shop, Fabrication Facilities 115,075 and Miscellaneous Facilities Administrative, Engineering and Sales Offices 45,600 Memphis, TN Facility Fabrication Facility 38,400 Administrative and Sales Offices 2,600 Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol: SWVA. The following table sets forth, for the fiscal periods indicated, the high and low last sales prices of the Common Stock (without retail markups, markdowns or commissions) on the NASDAQ National Market System. High Low 1996 Fourth Quarter....................... $ 7 1/2 $ 5 1/4 Third Quarter........................ 9 5 1/2 Second Quarter....................... 9 3/4 8 1/2 First Quarter........................ 11 8 3/4 1995 Fourth Quarter....................... $ 10 5/8 $ 8 3/8 Third Quarter........................ 13 1/2 8 3/4 Second Quarter....................... 12 1/4 11 First Quarter........................ 12 1/2 11 On March 3, 1997, there were approximately 188 holders of record of the Company's Common Stock. The Company paid no cash dividends in 1995 or 1996 and currently intends to retain all earnings to support the development of its business rather than paying dividends on its Common Stock. Certain of the Company's debt instruments restrict the payment of dividends by SWVA to the Company to no more than 50% of SWVA's prior year's net income, subject to limitations for maintenance of certain net worth and working capital levels. 9 Item 6. Selected Financial Data The following selected financial data for each of the five years in the period ended December 31, 1996, are derived from the Consolidated Financial Statements of the Company. The data should be read in conjunction with the Consolidated Financial Statements, related Notes and other financial information included herein.
Year Ended December 31 ----------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (In thousands, except per share data) Income Statement Data: Net sales ......................... $ 95,334 $ 129,341 $ 124,229 $ 106,354 $ 82,537 Cost of sales ..................... 85,339 107,191 103,327 88,698 64,359 --------- --------- --------- --------- --------- Gross profit ...................... 9,995 22,150 20,902 17,656 18,178 Gross profit margin ............... 10.5% 17.1% 16.8% 16.6% 22.0% Selling and administrative expenses 4,463 5,018 5,454 4,432 4,587 --------- --------- --------- --------- --------- Operating income .................. 5,532 17,132 15,448 13,224 13,591 Interest expense .................. 1,273 1,642 898 1,624 3,507 Loss on disposal of assets ...... 8,936 368 1,070 184 694 Other (income) .................... (365) (595) (976) (876) (234) --------- --------- --------- --------- --------- Income (loss) before income taxes (4,312) 15,717 14,456 12,292 9,624 Income tax expense (benefit) ...... (1,374) 6,253 5,662 5,156 4,766 --------- --------- --------- --------- --------- Net income (loss) ................. $ (2,938) $ 9,464 $ 8,794 $ 7,136 $ 4,858 ========= ========= ========= ========= ========= Net income (loss) per common share $ (.49) $ 1.40 $ 1.24 $ 1.03 $ .94 Common shares outstanding(1) ...... 6,024 6,782 7,091 6,930 5,155 Balance Sheet Data (end of period): Working capital ................... $ 15,061 $ 15,514 $ 10,516 $ 14,569 $ 6,877 Total assets ...................... 79,299 95,123 94,174 80,721 68,946 Current liabilities ............... 12,166 18,960 20,211 17,183 17,442 Long-term debt .................... 10,975 11,978 11,542 10,211 24,181 Treasury stock .................. 11,483 7,983 0 0 0 Total stockholders' equity ........ 49,007 55,415 53,934 45,140 20,317
- ---------- (1) Weighted average number of common and common equivalent shares outstanding. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company believes that there are many factors that distinguish it from other steel producers, including that the majority of its Finished Products are less volatile in their pricing than commodity steel products. Nonetheless, both the domestic steel industry and the Company's business are highly cyclical in nature. Management believes that the Company's lower net sales during 1996 were largely due to the effects of a downturn in certain industries the Company serves, most significantly, the truck trailer industry. Management believes that the 1994 and 1995 results are more indicative of the Company's performance during periods of a stronger economy. During 1994 the Company amended its senior credit agreement to permit the Company to borrow $6 million in 1994 under a new "Capital Expenditure Line" of credit. The February 1994 Amendment also reduced the interest rates on all borrowings under the financing agreement. In 1996, the Company amended its senior credit agreement to increase the amount of funds available under the revolving line of credit from $10,000,000 to $15,000,000. The Company's Board of Directors has authorized management to buy back up to 1,700,000 shares of its common stock from time to time. During 1996 and 1995, the Company purchased 350,000 shares at a cost of $3,500,000 and 755,300 shares at a cost of $7,983,000, respectively. 11 Results of Operations The following table sets forth the percentages of net sales represented by certain income and expense items and the tonnage sales for the periods indicated. YEAR ENDED DECEMBER 31 -------------------------------- 1996 1995 1994 ------ ------ ------ NET SALES 100.0% 100.0% 100.0% COST OF SALES 89.5 82.9 83.2 ------ ------ ------ GROSS PROFIT 10.5 17.1 16.8 SELLING AND ADMINISTRATIVE EXPENSES 4.7 3.9 4.4 ------ ------ ------ OPERATING INCOME 5.8 13.2 12.4 INTEREST EXPENSE 1.3 1.3 0.7 LOSS ON DISPOSAL OF ASSETS 9.4 0.3 0.9 OTHER (INCOME) (0.4) (0.5) (0.8) ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (4.5) 12.1 11.6 INCOME TAX (BENEFIT) EXPENSE (1.4) 4.8 4.5 ------ ------ ------ NET INCOME (LOSS) (3.1)% 7.3% 7.1% ====== ====== ====== TONNAGE SALES (in thousands of tons) 152.9 212.7 214.1 ====== ====== ====== Year Ended December 31, 1996, Compared with Year Ended December 31, 1995 Net Sales. Net sales for 1996 decreased by $34 million (26.3%) from $129.3 million in 1995 to $95.3 million in 1996, primarily due to a decrease in the tonnage of Finished Products shipped. Total tonnage sales decreased by 59,795 tons (28.1%) to 152,857 tons in 1996, reflecting a 36,231 ton decrease in the sale of Finished Products, and a 23,564 ton decrease in the sale of billets. Management believes that the Company's lower net sales during 1996 were largely due to the effects of a downturn in certain industries the Company serves, most significantly, the truck trailer industry. The average selling price per ton for Finished 12 Products decreased by $28 (4.2%) to $636 in 1996, while the average selling price per ton for billets increased by $10 (4.0%) to $259 in 1996. Cost of Sales. Cost of sales for 1996 decreased by $21.9 million (20.4%) from $107.2 million in 1995 to $85.3 million in 1996. This decrease was principally due to the decrease in Finished Product tonnage, offset by higher natural gas and depreciation expense. As a percentage of net sales, cost of sales increased from 82.9% in 1995 to 89.5% in 1996, due to the higher costs described above, together with relatively higher fixed cost levels associated with lower volume. Gross Profit. As a result of the above, gross profit for 1996 decreased by $12.1 million (54.8%) from $22.1 million in 1995 to $10.0 million in 1996. As a percentage of net sales, gross profit for 1996 decreased from 17.1% in 1995 to 10.5% in 1996 as a result of decreased higher margin Finished Product sales. Selling and Administrative Expenses. Selling and administrative expenses for 1996 were $4.5 million compared to $5.0 million in 1995. Lower selling and administrative expenses were incurred due to lower salaries and professional fees. As a percentage of net sales, selling and administrative expenses increased from 3.9% in 1995 to 4.7% in 1996. Interest Expense, Loss on Disposal of Assets and Other Expense (Income). Interest expense for 1996 decreased by $369,000 (22.5%) from $1,642,000 in 1995 to $1,273,000 in 1996. This reduction was a result of both lower interest rates and the reduction of principal amount outstanding due to the scheduled amortization of principal. Loss on disposal of assets for 1996 was $8,936,000 compared to $368,000 in 1995. This increase was principally due to the estimated loss on disposal of assets in connection with the Company's expansion and modernization program, subject to the requirements of FASB 121. Other expense (income) for 1996 was $365,000 of income compared to $595,000 of income in 1995. This was principally due to a decrease in mill roll income. Net Income. As a result of the above, net income for 1996 decreased by $12.4 million (131.0%) from $9.5 million in 1995 to a $2.9 million loss in 1996. As a percentage of net sales, net income decreased from 7.3% in 1995 to a 3.1% loss in 1996. Year Ended December 31, 1995, Compared with Year Ended December 31, 1994 Net Sales. Net sales for 1995 increased by $5.1 million (4.1%) from $124.2 million in 1994 to $129.3 million in 1995, primarily due to an increase in the tonnage of Finished Products shipped, coupled with selective price increases. Total tonnage sales decreased by 1,462 tons (.7%) to 212,652 tons in 1995, reflecting a 2,783 ton increase in the sale of Finished Products, and a 4,245 ton decrease in the sale of billets. The average selling price per ton for Finished Products increased by $22 (3.4%) to $664 in 1995, while the average selling price per ton for billets increased by $9 (3.8%) to $249 in 1995. Cost of Sales. Cost of sales for 1995 increased by $3.9 million (3.7%) from $103.3 million in 1994 to $107.2 million in 1995. This increase was principally due to the 13 increase in Finished Product tonnage sales coupled with higher raw material prices, depreciation and maintenance expense. As a percentage of net sales, cost of sales decreased from 83.2% in 1994 to 82.9% in 1995. Gross Profit. As a result of the above, gross profit for 1995 increased by $1.2 million (6.0%) from $20.9 million in 1994 to $22.1 million in 1995. As a percentage of net sales, gross profit for 1995 increased from 16.8% in 1994 to 17.1% in 1995 as a result of increased higher margin Finished Product sales. Selling and Administrative Expenses. Selling and administrative expenses for 1995 were $5.0 million compared to $5.5 million in 1994. Lower selling and administrative expenses were incurred due to lower salaries and professional fees. As a percentage of net sales, selling and administrative expenses decreased from 4.4% in 1994 to 3.9% in 1995. Interest Expense and Other Expense (Income). Interest expense for 1995 increased by $744,000 (82.9%) from $898,000 in 1994 to $1,642,000 in 1995. This increase was attributed to the debt incurred during the Company's plant expansion and modernization program. Other expense (income) changed by $321,000 from $94,000 of expense in 1994 to $227,000 of income in 1995. This was principally due to reduced losses from the disposal of fixed assets. Net Income. As a result of the above, net income for 1995 increased by $670,000 (7.6%) from $8.8 million in 1994 to $9.5 million in 1995. As a percentage of net sales, net income increased from 7.1% in 1994 to 7.3% in 1995. Liquidity and Capital Resources The Company's ability to provide funds from its operations, together with funds available under the terms of the Company's $15,000,000 revolving line of credit, historically have been sufficient to meet the Company's short-term liquidity needs. The total borrowing capacity under the revolving credit line is governed by a formula based on levels of accounts receivable and inventory. Cash provided from operations approximated $14.5 million, $8.8 million and $16.3 million during each of the three years ended December 31, 1996, 1995, and 1994, respectively. During this same time period, average annual borrowings against the revolving line of credit have been $4.6 million and at December 31, 1996, the Company had $3.2 million of the revolving credit line available for borrowing. During 1993, the Company embarked on a plan to significantly expand and modernize its Huntington facility. The initial phase of this project, completed in late 1994, resulted in the Company expending nearly $20.6 million for capital improvements in 1994. Including these expenditures, the Company's level of annual average capital expenditures has historically approximated $5.3 million. Accordingly, during 1994 the Company amended its senior credit agreement to permit the Company to borrow $6 million in 1994 under a new "Capital Expenditure Line" of credit. The terms of the loan amendment also enabled the Company to then reduce the interest rates on its existing revolving credit line and term loans outstanding from the greater of 7% or 3/4% over prime and the greater of 7% or 1% over 14 prime, respectively, to the Chemical Bank prime rate or LIBOR plus 1-3/4%; to reduce the annual revolving credit line commitment fee from 1/2% to 1/8% of the unused balance; and to extend the term of the revolving credit line to January 1, 1998. In addition, the amendment permits the Company to convert up to $7 million of its indebtedness to a fixed interest rate. In December 1996, the Company's Board of Directors approved Phase II of the Company's expansion and modernization program to the Huntington, West Virginia plant. The program includes a new high speed reheat furnace, quick-change mill roll stands, new warehouse space, and other miscellaneous equipment enhancements. The project, which is subject to financing, is expected to cost approximately $28 million (not including capitalized interest) and is scheduled to be completed by mid-1998 without material disruptions to existing operations. The Company anticipates funding the project from a combination of internally generated cash flow and bank debt. The Company's senior credit arrangement provides that the Company's senior lender may terminate all of the Company's loans on January 1, 1998. Assuming payment of all scheduled amortization until then, only a portion of the amount drawn down against the Capital Expenditure Line, together with any borrowings against the revolving credit line, would be outstanding at such date without regard to any amendments to the senior credit agreement that may be entered into in connection with the financing of the Company's capital expansion and modernization program. The Company is currently in compliance with the covenants of its loan agreement, and is not aware of any reason why it would not be able to refinance its indebtedness at its scheduled term, if its senior lender were to elect to terminate the credit agreement. The Company has no reason to believe that its senior lender plans to terminate the credit agreement. The Company's expenditures for required capital replacements are currently anticipated to average approximately $1 million annually over the next several years. Management has no reason to believe that internally generated cash flow, together with borrowings under its revolving credit line, will not be sufficient to meet the Company's ongoing liquidity needs. Other discretionary capital spending and strategic acquisitions, if any, would also place demands on the Company's longer-term liquidity position. Such expenditures and acquisitions would be subject to availability of funds and approval by the Company's Board of Directors. Impact of Inflation In recent years, the Company has not experienced any material adverse effects from inflation due to its historical ability to pass price increases through to its customers. The Company's principal cost components are steel scrap, labor and energy. Scrap is purchased pursuant to monthly contracts. While the Company has generally been successful in passing on cost increases through price increases, the effect of market price competition could, in the future, limit the Company's ability to increase prices. The current collective bargaining agreement is scheduled to expire in June 1999. The Company's current major power supply contract with American Electric Power automatically continues until such time as either party gives the other 12 months written notice of cancellation. 15 Impact of Recent Accounting Pronouncements In 1996, the Company adopted SFAS No. 121--"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of." This pronouncement requires impairment losses to be recorded on long-lived assets used in the Company's operations when impairment indicators are present and the estimated undiscounted cash flows to be generated by those assets are less than the assets' carrying value. During 1996, the Company recognized charges of approximately $8,936,000 principally related to the disposal of assets in connection with the Company's modernization and expansion program. The Company continuously analyzes new processes and equipment that would allow it to produce products more cost-effectively in order to maintain its position in each of its niche markets or expand into related markets. In the future, material charges against operations could result if new production processes or equipment are identified and installed or use of certain existing processes and equipment is discontinued. In October 1995, the FASB issued SFAS No. 123--"Accounting for Stock-Based Compensation," effective in 1996. The Company adopted this statement in the first quarter of 1996 and intends to continue using the "intrinsic" value method for determining compensation cost associated with the Company's stock option plans. Under this method, stock-based compensation expense is determined on the first date that both the number of shares the employee is entitled to receive and the exercise price are known, in an amount equivalent to the excess of the market price over the exercise price. As required by the pronouncement, the Company must make pro forma disclosures of net income and earnings per share determined by applying the "fair value" method to calculate stock-based compensation, as recommended by SFAS No. 123, in the event such calculation results in amounts that materially differ from the Company's method of accounting. Forward Looking Statements The Company, or its executive officers and directors on behalf of the Company, may from time to time make "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 (collectively, the "Acts"). The Company is filing this Annual Report on Form 10-K to avail itself of the safe harbor provided in the Acts with respect to any such (i) forward looking statements that may be contained in the Company's reports and other documents filed with the Securities and Exchange Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and (ii) oral forward looking statements made by the Company's executive officers and directors on behalf of the Company to the press, potential investors, securities analysts and others. Such forward looking statements could involve, among other things, statements regarding the Company's intent, belief or expectation with respect to (i) the Company's results of operations and financial condition, (ii) the consummation of acquisition and financing transactions and the effect thereof on the Company's business, and (iii) the Company's plans and objectives for future operations and expansion. Any such forward looking statements would be subject to the risks and uncertainties that could cause actual results of operations, financial condition, acquisitions, financing transactions, operations, expansion and other events to differ materially from those expressed or implied in such forward looking statements. Any such forward looking statements would be subject to a number of 16 assumptions regarding, among other things, future economic, competitive and market conditions generally. Such assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control. Further, the Company's business is subject to a number of risks that would affect any such forward looking statements. These risks and uncertainties include, but are not limited to, the cyclical and capital intensive nature of the industry; foreign and domestic competition; product demand and industry pricing; volatility of raw material costs, especially steel scrap; excess industry capacity; cost of compliance with environmental regulations; and management's estimates of niche market data. These risks and uncertainties could cause actual results of the Company to differ materially from those projected or implied by such forward looking statements. Item 8. Financial Statements and Supplementary Data The financial statements and schedules and report of independent auditors thereon listed in Item 14(a)(1) and (a)(2) hereof are incorporated herein by reference and are filed as part of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III The information required by Part III (Items 10 through 13) is incorporated herein by reference to the captions "Principal Stockholders," "Election of Directors" and "Executive Compensation" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year covered by this report. 17 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this Report: (1) The following consolidated financial statements of Registrant and its subsidiaries are included in Item 8 of this report on Form 10-K: Page ---- Report of Independent Auditors. F-1 Consolidated Balance Sheets - December 31, 1996 F-2 and December 31, 1995. Consolidated Statements of Operations - F-3 Years ended December 31, 1996, December 31, 1995 and December 31, 1994. Consolidated Statements of Cash Flows - F-4 Years ended December 31, 1996, December 31, 1995 and December 31, 1994. Notes to Consolidated Financial Statements. F-5 (2) Financial Statement Schedules - Years ended December 31, 1996, December 31, 1995 and December 31, 1994. The following consolidated financial statement schedules of Registrant and its subsidiaries are included pursuant to Item 14(d): Page ---- Schedule I - Condensed Financial Information of Registrant S-1 Schedule II - Valuation and Qualifying Accounts S-4 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 18 (3) Exhibits 3.1 Certificate of Incorporation of Steel of West Virginia, Inc. (the "Company"), as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1995, No. 0-1689). 3.2 By-Laws of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-16845). 4.1 Financing Agreement ("Financing Agreement"), dated December 30, 1986, between The CIT Group/Business Credit, Inc. ("CIT") and SWVA, Inc. (formerly Steel of West Virginia, Inc.) and Charter Acquisition Corporation ("Acquisition") (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, No. 33-16845). 4.1(a) Amendment to the Financing Agreement, dated August 27, 1987 ("Amendment No. 1") (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, No. 33-16845). 4.1(b) Amendment to the Financing Agreement, dated September 27, 1989 ("Amendment No. 2") (incorporated by reference to Exhibit 28(a) to the Company's Current Report on Form 8-K, No. 0-16254, filed on October 10, 1989). 4.1(c) Amendment to the Financing Agreement, dated September 30, 1992 ("Amendment No. 3") (incorporated by reference to Exhibit 28(b) to the Company's Quarterly Report on Form 10-Q, No. 0-16254, filed on October 13, 1992). 4.1(d) Amendment to the Financing Agreement, dated March 17, 1993 ("Amendment No. 4") (incorporated by reference to Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, No. 0-16254). 4.1(e) Amendment to the Financing Agreement, dated February 25, 1994 ("Amendment No. 5") (incorporated by reference to Exhibit 4.1(e) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994, No. 0-16254). 4.1(f) Amendment to the Financing Agreement, dated December 30, 1994 ("Amendment No. 6") (incorporated by reference to Exhibit 4.1(f) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994, No. 0-16254). 4.1(g) Amendment to the Financing Agreement, dated February 28, 1996 ("Amendment No. 7") (incorporated by reference to Exhibit 4.1(g) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1995, No. 0-16254). 4.2 Term Promissory Note (the "Original Promissory Note") issued by Acquisition in favor of CIT, dated December 30, 1986 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 33-16845). 4.2(a) Amendment, dated September 27, 1989 (the "Original Promissory Note Amendment"), to the Original Promissory Note (incorporated by reference to Exhibit 28(f) to the Company's Current Report on Form 8-K, No. 0-16254, filed on October 10, 1989). 4.3 Promissory Note, dated September 27, 1989 ("Note 2"), in the principal amount of $26,922,000 issued by SWVA in favor of CIT (incorporated by reference to Exhibit 28(c) to the Company's Current Report on Form 8-K, No. 0-16254, filed on October 10, 1989). 19 4.4 Promissory Note, dated September 30, 1992 ("Note 3"), in the principal amount of $6,500,000 issued by SWVA in favor of CIT (incorporated by reference to Exhibit 28(b) to the Company's Quarterly Report on Form 10-Q, No. 0-16254, filed on October 13, 1992). 4.5 Promissory Note, dated July 11, 1994 ("Note 4") in the principal amount of $6,000,000 issued by SWVA in favor of CIT (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994, No. 0-16254). 4.6 Guaranty, dated December 30, 1986 (the "Guaranty"), by the Company in favor of CIT relating to loan from CIT to Acquisition (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, No. 33-16845). 4.7 Guaranty, dated June 9, 1993 (the "Marshall Guaranty"), by Marshall Steel, Inc. ("Marshall") in favor of CIT (incorporated by reference to Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, No. 0-16254). 4.8 Security Agreement, dated June 9, 1993 (the "Security Agreement"), by Marshall in favor of CIT (incorporated by reference to Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, No. 0-16254). 4.9 Pledge Agreement, dated September 26, 1989 (the "Pledge Agreement"), by the Company in favor of CIT (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, No. 0-16254). 4.10 Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated December 30, 1986 (the "Mortgage"), by SWVA in favor of CIT (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, No. 0- 16254). 4.10(a) First Amendment of Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated September 27, 1989 ("Mortgage Amendment No. 1") (incorporated by reference to Exhibit 4.7(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, No. 0-16254). 4.10(b) Second Amendment of Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated September 30, 1992 (incorporated by reference to Exhibit 28(c) to the Company's Quarterly Report on Form 10-Q, No. 0-16254, filed on October 13, 1992) ("Mortgage Amendment No. 2"). 4.11 Negative Pledge Agreement, dated June 7, 1993 (the "Negative Pledge Agreement"), by Marshall in favor of CIT (incorporated by reference to Exhibit 4.1(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, No. 0-16254). 10.1 The Financing Agreement (see Exhibit 4.1). 10.1(a) Amendment No. 1 (see Exhibit 4.1(a)). 10.1(b) Amendment No. 2 (see Exhibit 4.1(b)). 10.1(c) Amendment No. 3 (see Exhibit 4.1(c)). 10.1(d) Amendment No. 4 (see Exhibit 4.1(d)). 10.1(e) Amendment No. 5 (see Exhibit 4.1(e)). 20 10.1(f) Amendment No. 6 (see Exhibit 4.1(f)). 10.1(g) Amendment No. 7 (see Exhibit 4.1(g)). 10.2 The Original Promissory Note (see Exhibit 4.2). 10.2(a) The Original Promissory Note Amendment (see Exhibit 4.2(a)). 10.3 Note 2 (see Exhibit 4.3). 10.4 Note 3 (see Exhibit 4.4). 10.5 Note 4 (see Exhibit 4.5). 10.6 The Guaranty (see Exhibit 4.6). 10.7 The Marshall Guaranty (see Exhibit 4.7). 10.8 The Security Agreement (see Exhibit 4.8). 10.9 The Pledge Agreement (see Exhibit 4.9). 10.10 The Mortgage (see Exhibit 4.10). 10.10(a) Mortgage Amendment No. 1 (see Exhibit 4.10(a)). 10.10(b) Mortgage Amendment No. 2 (see Exhibit 4.10(b)). 10.11 The Negative Pledge Agreement (see Exhibit 4.11). 10.12 Sidetrack Agreement, dated June 24, 1983, between SWVA and the Chesapeake and Ohio Railroad Company ("C&O") (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1, No. 33-16845). 10.13 Lease, dated November 1, 1979, between SWVA's predecessor and C&O, as amended by a letter dated March 2, 1983 (incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1, No. 33-16845). 10.14(a) Agreement, dated August 30, 1993, between SWVA and Appalachian Power Company ("Appalachian") (incorporated by reference to Exhibit 10.16(a) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994, No. 0-16254). 10.14(b) License Agreement, dated September 29, 1992, between SWVA and Appalachian (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1, No. 33-55952). 10.14(c) Agreement, dated November 24, 1992, between SWVA and Appalachian (incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1, No. 33-55952). 21 10.15* Management Bonus Plan, effective as of October 1, 1984, for the benefit of SWVA's eligible employees (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, No. 0-16254). 10.16* Management Retirement Plan, effective as of October 1, 1984, by the Company on behalf of its management employees (including Amendment No. I and Amendment No. II, each dated January 27, 1989) (incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K, No. 0-16254, filed on March 29, 1990). 10.17 Collective Bargaining Agreement, dated June 7, 1993, between SWVA and the United Steelworkers of America, AFL-CIO (the "Union") (incorporated by reference to Exhibit 10.26 to the Company's Current Report on Form 8-K, No. 0-16254, filed on June 9, 1993). 10.18 Collective Bargaining Unit Bonus Plan, effective as of October 1, 1984, for the benefit of SWVA's eligible employees (incorporated by reference to Exhibit 10.46 to the Company's Registration Statement on Form S-1, No. 33-16845). 10.19 Collective Bargaining Unit Retirement Plan, effective June 2, 1990, between SWVA and the Union (incorporated by reference to Exhibit 10.46 to the Company's Registration Statement on Form S-1, No. 33-55952). 10.20 Indemnification and Contribution Agreement between the Company and certain Selling Stockholders (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, No. 0-16254). 10.21 Underwriting Agreement among the Company, certain selling stockholders and Wheat, First Securities, Inc., dated January 25, 1993 (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, No. 0- 16254). 10.22 1995 Employee Stock Option Plan (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1995, No. 0-16254). 10.23 1995 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1995, No. 0- 16254). 11.1 Statement re Computation of Per Share Earnings (filed herewith). 21 Subsidiaries of the Company (incorporated by reference to Exhibit 22 to the Company's Registration Statement on Form S-1, No. 33-16845). 23 Consent of Ernst & Young LLP (filed herewith). 28 Delaware General Corporation Law, Sections 102(b)-(7) and 145 (1) (incorporated by reference to Exhibit 28 to the Company's Registration Statement on Form S-1, No. 33-16845). (b) Reports on Form 8-K: None. - ---------- * Required to be filed pursuant to Item 14(c) of Form 10-K. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STEEL OF WEST VIRGINIA, INC. March 12, 1997 By: /s/ Timothy R. Duke ---------------------- Timothy R. Duke President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ Robert L. Bunting, Jr. Chief Executive Officer March 12, 1997 - ------------------------------ and Chairman of the Board Robert L. Bunting, Jr. (Principal Executive Officer) /s/ Timothy R. Duke President and Chief March 12, 1997 - ------------------------------ Operating Officer Timothy R. Duke /s/ Mark G. Meikle Vice President, Treasurer March 12, 1997 - ------------------------------ and Chief Financial Mark G. Meikle Officer (Principal Financial and Accounting Officer) /s/ Stephen A. Albert Director March 12, 1997 - ------------------------------ Stephen A. Albert /s/ Albert W. Eastburn Director March 12, 1997 - ------------------------------ Albert W. Eastburn /s/ Daniel N. Pickens Director March 12, 1997 - ------------------------------ Daniel N. Pickens /s/ Paul E. Thompson Director March 12, 1997 - ------------------------------ Paul E. Thompson 23 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Consolidated Financial Statements Page - --------------------------------- ---- Report of Independent Auditors.............................................F-1 Consolidated Balance Sheets - December 31, 1996 and December 31, 1995.................................................F-2 Consolidated Statements of Operations - Years ended December 31, 1996, December 31, 1995 and December 31, 1994.....................................................F-3 Consolidated Statements of Cash Flows - Years ended December 31, 1996, December 31, 1995 and December 31, 1994.....................................................F-4 Notes to Consolidated Financial Statements.................................F-5 Financial Statement Schedules Schedule I - Condensed Financial Information of Registrant.............................................S-1 Schedule II - Valuation and Qualifying Accounts..................................................S-4 24 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Steel of West Virginia, Inc. We have audited the accompanying consolidated balance sheets of Steel of West Virginia, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Steel of West Virginia, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note B to the consolidated financial statements, in 1996 the Company adopted Financial Accounting Standards Board No. 121--"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of." /s/ Ernst & Young LLP Charleston, West Virginia January 20, 1997 F-1 CONSOLIDATED BALANCE SHEETS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands, except share data) December 31 1996 1995 ------------------- ASSETS CURRENT ASSETS Cash $ 0 $ 100 Receivables, net of allowances of $599 and $692 6,579 13,148 Inventories 17,307 17,095 Deferred income taxes 3,121 3,110 Other current assets 220 1,021 -------- -------- TOTAL CURRENT ASSETS 27,227 34,474 Property, plant, and equipment 33,298 40,807 Goodwill 18,452 19,134 Other assets 322 708 -------- -------- TOTAL ASSETS $ 79,299 $ 95,123 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft $ 1,097 $ 647 Accounts payable 4,161 5,045 Accrued payroll and benefits payable 3,599 5,240 Income taxes (refundable) payable (1,146) 117 Other current liabilities 2,021 2,026 Current maturities of long-term debt 2,434 5,885 -------- -------- TOTAL CURRENT LIABILITIES 12,166 18,960 Long-term debt 10,975 11,978 Deferred income taxes 6,332 8,005 Other long-term liabilities 819 765 -------- -------- TOTAL LIABILITIES 30,292 39,708 STOCKHOLDERS' EQUITY Common stock, $.01 par value: 12,000,000 voting shares authorized, 7,091,360 issued, including treasury stock 71 71 Paid-in capital 26,627 26,597 Treasury stock - 1,105,300 and 755,300 shares at cost (11,483) (7,983) Retained earnings 33,792 36,730 -------- -------- TOTAL STOCKHOLDERS' EQUITY 49,007 55,415 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 79,299 $ 95,123 ======== ======== See notes to consolidated financial statements. F-2 CONSOLIDATED STATEMENTS OF OPERATIONS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands, except per share amounts) Year Ended December 31 1996 1995 1994 -------------------------------- Net sales $ 95,334 $ 129,341 $ 124,229 Cost of sales 85,339 107,191 103,327 -------- --------- --------- GROSS PROFIT 9,995 22,150 20,902 Selling and administrative expenses 4,463 5,018 5,454 Interest expense 1,273 1,642 898 Loss on disposal of assets 8,936 368 1,070 Other (income) (365) (595) (976) -------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (4,312) 15,717 14,456 Income tax (benefit) expense (1,374) 6,253 5,662 -------- --------- --------- NET INCOME (LOSS) $ (2,938) $ 9,464 $ 8,794 ======== ========= ========= NET INCOME (LOSS) PER COMMON SHARE $ (.49) $ 1.40 $ 1.24 ======== ========= ========= See notes to consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF CASH FLOWS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands)
Year Ended December 31 1996 1995 1994 ------------------------------ CASH PROVIDED BY Operations: Net income (loss) $ (2,938) $ 9,464 $ 8,794 Adjustments for items not affecting funds from operations: Depreciation and amortization 6,891 6,046 4,954 Loss on disposal of assets 8,936 368 1,070 Deferred income taxes (1,684) (690) (101) Other 62 (83) 523 -------- -------- -------- 11,267 15,105 15,240 Working capital changes related to operations: Receivables 6,501 (2,051) (945) Inventories (212) (1,249) (123) Other current assets 731 (801) 56 Accounts payable (884) (2,849) 2,678 Accrued payroll and benefits payable (1,641) 211 (12) Accrued income taxes (1,263) 76 (545) Other current liabilities (5) 396 (96) -------- -------- -------- 3,227 (6,267) 1,013 -------- -------- -------- TOTAL CASH PROVIDED BY OPERATIONS 14,494 8,838 16,253 Investment activities: Additions to property, plant, and equipment (7,090) (3,361) (20,596) -------- -------- -------- CASH (USED FOR) INVESTMENT ACTIVITIES (7,090) (3,361) (20,596) Financing activities: Revolving credit loan 1,431 5,875 Long-term debt repayments (5,885) (4,860) (4,000) Proceeds from debt issue 0 301 6,000 Purchase of treasury stock (3,500) (7,983) -------- -------- -------- CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (7,954) (6,667) 2,000 -------- -------- -------- (DECREASE) IN CASH (550) (1,190) (2,343) Cash (overdraft) net, beginning of year (547) 643 2,986 -------- -------- -------- CASH (OVERDRAFT) NET, END OF YEAR $ (1,097) $ (547) $ 643 ======== ======== ========
See notes to consolidated financial statements. F-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES December 31, 1996 NOTE A--SIGNIFICANT ACCOUNTING POLICIES Business Operations: Steel of West Virginia, Inc. (the Company) conducts its operations through two wholly-owned subsidiaries, SWVA, Inc. and Marshall Steel, Inc. The Company operates a steel mini-mill and two steel fabrication facilities for the manufacture and distribution of special steel sections and steel billets in a single business segment. The Company is a supplier of products principally to domestic equipment manufacturers serving the truck-trailer, industrial lift truck, off-highway equipment, and mining industries with many of these customers being mature businesses. No single customer accounts for more than 10% of the Company's net sales, and the Company's operations are tied closely to general economic conditions. Principal suppliers to the Company include scrap metal producers and electric power generating utilities. In addition, a significant portion of the Company's labor force is represented by the United Steelworkers of America under the terms of a collective bargaining agreement. As is similar with other mini-mills in the industry, the Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. Basis of Presentation: The preparation of financial statements in conformity with generally accepted accounting principles requires that management make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Steel of West Virginia, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and investments have been eliminated. Financial Instruments: Financial instruments that could potentially subject the Company to credit risk are trade accounts receivable. As of December 31, 1996 and 1995, the Company's accounts receivable, net of allowances, approximated $6,579,000 and $13,148,000. Trade credit is extended by the Company based on an evaluation of the customer's financial condition and generally collateral is not required. Credit losses are provided for in the financial statements, and have consistently been immaterial and within management's expectations. Management believes that all significant financial instruments of the Company are reported in the financial statements at carrying values that approximate market values. Inventories: Inventories are stated at the lower of cost or market. Cost is primarily determined by the last-in, first-out (LIFO) method. Mill rolls, which are included in manufacturing supplies, are expensed when placed in service. Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation for financial statement purposes is computed on the straight-line basis over the estimated useful life of the asset. Principal service lives for the assets of the Company are: buildings--up to 30 years; machinery and equipment--up to 12 years; and furniture and fixtures--up to 5 years. Income Taxes: Deferred income taxes are recognized under the "liability method" and are provided for temporary differences between the financial reporting and income tax bases of the Company's assets and liabilities using the tax rates in effect when the corresponding taxes will be paid or refunded. Goodwill: The excess of cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over periods ranging from 15 to 40 years. Accumulated amortization approximated $5,216,000 and $4,534,000 at December 31, 1996 and 1995, respectively. The carrying value of goodwill is periodically reviewed based upon an assessment of operations of the acquired entity. Management is not aware of any facts or circumstances indicating that the carrying value of goodwill has been impaired. F-5 Stock-based Compensation: The Company adopted SFAS No. 123 -- "Accounting for Stock-based Compensation" in the first quarter of 1996. As permitted by the Statement, the Company has elected to continue applying the "intrinsic" value method for determining compensation cost associated with its stock option plans. Under this method, stock-based compensation is determined on the measurement date on which both the number of shares the employee is entitled to receive and the exercise price are known, in an amount equal to the excess of the market price of the stock over the exercise price on the measurement date. Net Income Per Common Share: Net income per common share is calculated based on the 6,024,445, 6,782,127, and 7,091,360 weighted average number of common shares and common share equivalents outstanding during the years ended December 31, 1996, 1995, and 1994, respectively. NOTE B--INVENTORIES Inventories consist of the following (in thousands): December 31 1996 1995 ------------------------ Raw Materials $ 1,638 $ 2,013 Work-in-process 6,624 6,089 Finished goods 9,103 10,633 Manufacturing supplies 3,967 3,288 ------- ------- 21,332 22,023 Less LIFO Reserve 4,025 4,928 ------- ------- $17,307 $17,095 ======= ======= NOTE C--PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following (in thousands): December 31 1996 1995 ------------------------ Land $ 1,390 $ 1,355 Buildings 3,975 3,965 Machinery and equipment 49,772 60,882 Furniture and fixtures 699 632 Construction-in-process 4,613 930 ------- ------- 60,449 67,764 Less accumulated depreciation 27,151 26,957 ------- ------- $33,298 $40,807 ======= ======= Depreciation expense related to property, plant and equipment used in the Company's operations approximated $6,211,000, $5,220,000 and $4,056,000 in 1996, 1995 and 1994. F-6 In 1996, the Company adopted SFAS No. 121--"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of." This pronouncement requires impairment losses to be recorded on long-lived assets used in the Company's operations when impairment indicators are present and the estimated undiscounted cash flows to be generated by those assets are less than the assets' carrying value. During 1996, the Company recognized charges of approximately $8,936,000 principally related to the disposal of assets in connection with the Company's modernization and expansion program. The Company continuously analyzes new processes and equipment that would allow it to produce products more cost-effectively in order to maintain its position in each of its niche markets or expand into related markets. In the future, material charges against operations could result if new production processes or equipment are identified and installed or use of certain existing processes and equipment is discontinued. NOTE D--OTHER CURRENT LIABILITIES Other current liabilities consist of the following (in thousands): December 31 1996 1995 ------------------- Accrued taxes, other than income taxes $ 854 $1,326 Other accrued liabilities 1,167 700 ------ ------ $2,021 $2,026 ====== ====== NOTE E--CREDIT ARRANGEMENTS A summary of indebtedness under the Company's credit arrangements consists of the following (in thousands): December 31 1996 1995 -------------------- Term loan II $ 1,120 $ 4,740 Term loan III 427 1,807 Capital Expenditure Line 4,280 5,140 Revolver 7,305 5,875 Other notes payable 277 301 ------- ------- TOTAL 13,409 17,863 Less current maturities of long-term debt 2,434 5,885 ------- ------- $10,975 $11,978 ======= ======= The Company maintains a senior financing agreement that provides for up to $15,000,000 of revolving credit borrowings, a $6,000,000 capital expenditure line, and term loans. The interest rates on its existing credit lines and term loans vary based on the Chemical Bank prime rate or LIBOR plus 1-3/4%; and the annual revolving credit line commitment fee is 1/8% of the unused balance. Under the terms of its senior financing agreement, the Company is permitted to convert up to $7 million of its indebtedness to a fixed interest rate. The senior credit agreement may be terminated by the Company or, on or after January 1, 1998 and upon 90 days written notice, by the lender. F-7 At December 31, 1996, amounts outstanding under the term loan portions of the senior financing agreement are scheduled to be repaid in full during 1997. The Capital Expenditure Line portion of the loan agreement is required to be repaid in 27 quarterly principal installments of $215,000, beginning January 1, 1995, with a final principal payment of $195,000. As of December 31, 1996, the revolving credit line loan balance, due January 1, 1998, was $7,305,000, and the additional borrowing capacity approximated $3,195,000. Interest is paid monthly in accordance with the Company's lending agreement and approximated $1,301,000, $1,411,000, and $1,087,000 during the years ended December 31, 1996, 1995, and 1994, respectively. The weighted average interest rate on short-term borrowings during the years ended December 31, 1996, 1995, and 1994 approximated 7.4%, 7.8%, and 6.6%, respectively. The Company's senior lending agreement contains various restrictive covenants, including maintenance of specified levels of working capital and net worth (as defined in the agreement). In addition, capital expenditures and dividends are limited by the agreement. At December 31, 1996, the Company has no retained earnings available for dividends in 1997. As a result of the lending agreement, substantially all of the Company's property, plant, and equipment, inventory and accounts receivable are subject to a third party's security interests. NOTE F--SELF INSURANCE The Company is self-insured at its Huntington, West Virginia facility for employees' medical care costs and workers' compensation claims up to certain specified dollar limits. The Company has excess coverage provided by the West Virginia Workers' Compensation Fund (a state agency) for certain work-related injuries. In connection with the self-insured workers' compensation program, the Company has obtained an irrevocable standby letter of credit in the amount of $1,000,000 (through July 1997). Under the medical care program, the Company is insured by a private carrier for individual claims in excess of specific dollar limits. At its Memphis, Tennessee facility, the Company is insured through a private carrier for medical care costs and workers' compensation claims. A liability has been established for those illnesses and injuries occurring on or before December 31, 1996, for which an amount of expected loss could be reasonably estimated. Costs and expenses for medical care and workers' compensation during the years ended December 31, 1996, 1995 and 1994 approximated $5,517,000, $5,579,000, and $4,815,000, respectively. In contrast to the retiree health insurance commonly provided in the domestic steel industry, the Company offers no material postretirement employee health care or other non pension benefit programs. However, under informal arrangements, the Company currently provides post-employment health care benefits to each person who becomes disabled, is not expected to return to the active work force and is not covered by another health insurance plan. As of December 31, 1996, 16 such disabled former employees have been identified as current or potential recipients of this benefit. The expected cost of such benefits is accrued in amounts that are reasonably estimable upon a determination that such costs are probable of occurring, and included in the costs and expenses for medical care and workers' compensation disclosed above. The Company is subject to federal and state environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal, and waste water effluents. Estimated costs to be incurred in connection with environmental matters are accrued when the prospect of incurring cost for testing or remedial action is deemed probable. Management is not aware of any asserted or unasserted claims or regulatory actions against the Company, and accordingly no provision for such matters has been reflected in the Company's financial statements. NOTE G--PROFIT-SHARING AND BONUS COSTS The Company has bonus and retirement arrangements at its Huntington, West Virginia facility for both bargaining unit and non-bargaining unit employees which, in effect, are defined contribution profit-sharing plans qualified under Internal Revenue Code Section 501. The Company is required to contribute an amount equal to the lesser of $125 per bargaining unit employee per month or 17% of pre-tax profit, as defined, to a retirement trust for the future benefit of the union employees. The amount, if any, that 17% of pre-tax F-8 profits exceeds the retirement contribution is required to be paid to the bargaining unit employees on a semi-annual basis as a cash bonus. Substantially all non-bargaining unit employees of the Company are entitled to receive a semi-annual cash bonus equal to the amount paid to bargaining unit employees computed on a per employee basis. Additionally, the Company contributes an amount, equal to the lesser of 5% of non-bargaining wages, or a lower percentage if 17% of pre-tax profits is less than the $125 per month per bargaining unit employee contribution, for the future retirement benefit of the non-bargaining unit employees. Costs related to cash bonuses and amounts set aside for retirement benefits under the profit-sharing plans approximated $337,000 and $618,000 during 1996, $3,746,000 and $953,000 during 1995, and $3,310,000 and $942,000 during 1994. Contributions to the retirement accounts in 1996, 1995 and 1994 were $758,000, $946,000, and $937,000, respectively. The Company has complied with all funding requirements under the terms of the retirement trusts. NOTE H--INCOME TAXES Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31 1996 1995 ---------------- Deferred tax assets--current: Bad debt and sales allowances $ 264 $ 290 Bonus accruals 98 554 Self-insurance 1,557 1,685 Inventory costing 585 183 Other 617 398 ------ ------ Net deferred tax assets--current $3,121 $3,110 ====== ====== Deferred tax liabilities--noncurrent: Differences in basis of fixed assets arising from purchase accounting and accelerated depreciation $6,332 $8,005 ------ ------ Total long-term deferred tax liabilities $6,332 $8,005 ====== ====== The provision for income taxes consists of the following (in thousands): Year Ended December 31 1996 1995 1994 --------------------------------------- Federal--current $ 251 $ 5,916 $ 5,061 Federal--deferred (1,283) (639) (16) State--current 59 1,027 702 State-deferred (401) (51) (85) ------- ------- ------- $(1,374) $ 6,253 $ 5,662 ======= ======= ======= F-9 A reconciliation of statutory federal income tax rates to the Company's effective income tax rates is as follows: Year Ended December 31 1996 1995 1994 ---------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% State income tax provision net of federal tax benefits 5.2 4.0 2.8 Amortization of goodwill (4.7) 1.3 1.4 Other, net (3.6) (0.5) 0.0 ---- ---- ---- Effective income tax rate 31.9% 39.8% 39.2% ==== ==== ==== Income taxes paid approximated $1,575,000, $7,254,000, and $6,307,000 during the years ended December 31, 1996, 1995 and 1994, respectively. NOTE I--STOCK OPTION PLANS On March 16, 1995, the Board of Directors adopted and the stockholders subsequently approved the Management Option Plan and the Director Option Plan (Plans). These plans provide that options to acquire shares of the Company's Common Stock (Options) may be granted to officers, key employees and directors of the Company or its designated subsidiaries. All options are for a period of ten years from the date of grant and an option holder must be employed or be a director one year from the grant date to vest in the ability to exercise the option. During 1996 and 1995, the Company granted options to acquire 8,000 and 79,500 shares at exercise prices of $9 and $11.625 per share, respectively, none of which have been exercised. Because the exercise price of the Company's employee stock options was equal to the market price of the underlying stock on the date of grant, no compensation expense has been recognized in the Company's financial statements. Pro forma application of the fair value method prescribed by SFAS 123 produces amounts that are not materially different than the amounts reported herein using the intrinsic value method. NOTE J--STOCKHOLDERS' EQUITY The Company's Board of Directors has authorized management to buy back up to 1,700,000 shares of its common stock from time to time. During 1996 and 1995, the Company purchased 350,000 shares at a cost of $3,500,000 and 755,300 shares at a cost of $7,983,000, respectively. Aside from the reported results of operations and the aforementioned purchases of treasury shares, no other transactions significantly affected stockholders' equity during any year in the three year period ended December 31, 1996. F-10 NOTE K--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995:
Three Months Ended December 31 September 30 June 30 March 31 -------------------------------------------------- (In thousands, except per share amounts) 1996 Net Sales $ 22,661 $ 22,229 $ 23,797 $ 26,647 Cost of goods sold 20,444 20,225 21,429 23,240 Net income (loss) (3,579) 9 618 14 Net income (loss) per common share (.60) .00 .11 .00 1995 Net Sales $ 32,249 $ 32,551 $ 31,641 $ 32,900 Cost of goods sold 26,800 26,789 26,043 27,559 Net income 2,307 2,449 2,513 2,195 Net income per common share .36 .37 .36 .31
Primary and fully dilutive per share amounts are the same. Per share amounts in 1996 are based upon weighted average number of shares outstanding for the quarters ended March 31, June 30, September 30, and December 31 of 6,134,393, 5,986,588, 5,987,522 and 5,989,275, respectively. Per share amounts in 1995 are based upon weighted average number of shares outstanding for the quarters ended March 31, June 30, September 30, and December 31 of 7,091,360, 6,951,693, 6,630,260 and 6,455,193, respectively. F-11 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STEEL OF WEST VIRGINIA, INC. December 31 CONDENSED BALANCE SHEETS (000's) 1996 1995 ----------------------- NONCURRENT ASSETS Investments in and advances to wholly-owned subsidiaries $ 49,026 $ 55,338 Other assets 24 127 -------- -------- TOTAL ASSETS $ 49,050 $ 55,465 ======== ======== LIABILITIES Other liabilities $ 43 $ 50 EQUITY Common Stock 71 71 Paid-in Capital 26,627 26,597 Treasury Stock (11,483) (7,983) Retained Earnings 33,792 36,730 -------- -------- TOTAL EQUITY 49,007 55,415 -------- -------- TOTAL LIABILITIES AND EQUITY $ 49,050 $ 55,465 ======== ======== Year Ended December 31 CONDENSED STATEMENTS OF OPERATIONS (000's) 1996 1995 1994 ------- ------- ------- REVENUES Interest Income $ 155 $ 198 $ 212 Other Revenues 263 125 0 ------- ------- ------- Total Revenues 418 323 212 EXPENSES Amortization 0 61 81 Administrative 63 158 91 ------- ------- ------- Total Expenses 63 219 172 Income before income taxes and equity in undistributed earnings of wholly-owned subsidiaries 355 104 40 Income taxes 146 32 15 ------- ------- ------- Income before equity in undistributed earnings of wholly-owned subsidiaries 209 72 25 Equity in undistributed earnings of wholly- owned subsidiaries (3,147) 9,392 8,769 ------- ------- ------- NET INCOME (LOSS) $(2,938) $ 9,464 $ 8,794 ======= ======= ======= S-1 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) STEEL OF WEST VIRGINIA, INC. Year Ended December 31 CONDENSED STATEMENT OF CASH FLOWS (000's) 1996 1995 1994 ------------------------------- CASH (USED FOR) PROVIDED BY OPERATIONS $ 239 $ (13) $ 127 Investment activities: Investment in Steel Ventures, Inc. 0 0 (23) ------- ------- ------- CASH (USED FOR) INVESTMENT ACTIVITIES 0 0 (23) Financing activities: Advances from subsidiaries 3,261 7,983 (91) Purchase of treasury stock (3,500) (7,983) 0 ------- ------- ------- CASH (USED FOR) FINANCING ACTIVITIES (239) 0 (91) INCREASE (DECREASE) IN CASH 0 (13) 13 Cash, beginning of year 0 13 0 ------- ------- ------- CASH, END OF YEAR $ 0 $ 0 $ 13 ======= ======= ======= See note to condensed financial information of registrant. S-2 NOTE A TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT Basis of Presentation: The investments in wholly owned subsidiaries are stated at cost plus equity in undistributed earnings of those subsidiaries. Parent company only statements should be read in conjunction with the Company's consolidated financial statements and notes thereto. Certain amounts in the prior year's condensed financial information have been reclassified to conform to the current year presentation. Guarantee: The Company serves as Guarantor for all of the indebtedness incurred by its wholly owned subsidiary, SWVA, Inc., under the terms of a senior credit agreement dated December 30, 1986, as amended and more fully described in Note E to the Company's consolidated financial statements. At December 31, 1996, the total amount outstanding under the terms of this agreement was $13,132,000. The primary source of funds for any regular dividends declared by the Company is dividends received from its subsidiaries. SWVA, Inc.'s lending agreement limits the amount of dividends it may pay to the Company to 50% of its net income for the preceding year, subject to further limitations relating to minimum levels of SWVA, Inc. working capital and net worth. At December 31, 1996, none of the Company's retained earnings was available for dividends in 1997. S-3 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS STEEL OF WEST VIRGINIA, INC. BALANCE CHARGED CHARGED BALANCE AT TO TO DEDUC- AT END BEGINNING COSTS AND OTHER TIONS OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD - -------------------- --------- --------- -------- ------ ------- (000's) Year ended December 31, 1996: ALLOWANCE FOR: BAD DEBTS $405 $386 $447 $344 SALES RETURNS AND DISCOUNTS 287 (32) 0 255 ---- ---- ---- ---- $692 $354 $447 $599 ==== ==== ==== ==== Year ended December 31, 1995: ALLOWANCE FOR: BAD DEBTS $350 $ 55 $405 SALES RETURNS AND DISCOUNTS 29 258 287 ---- ---- ---- $379 $313 $692 ==== ==== ==== Year ended December 31, 1994: ALLOWANCE FOR: BAD DEBTS $318 $ 32 $350 SALES RETURNS AND DISCOUNTS 2 27 29 ---- ---- ---- $320 $ 59 $379 ==== ==== ==== (1) - Accounts receivable charged against the allowance S-4 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE DATA EXHIBIT - 11.1 COMPUTATION OF EARNINGS PER SHARE DATA The following formulas were used to calculate the earnings per share data shown in the Consolidated Statements of Income and Retained Earnings for the year ended December 31, 1996 and December 31, 1995 included in this Report. Calculation
Year Ended December 31, 1996 Net Income Net Income/(Loss) = $(2,938,000) = $(.49) per common ------------------------ ------------ share Weighted average shares 6,024,445 of Common Stock for the period December 31, 1995 Net Income Net Income = $ 9,464,000 = $1.40 per common ------------------------ ------------ share Weighted average shares 6,782,127 of Common Stock for the period
For purposes of calculating earnings per share, there were 6,024,445 and 6,782,127 weighted number of common shares outstanding during the twelve month periods ending December 31, 1996 and 1995. Effective April 1, 1996, the Company granted options of 8,000 shares of common stock and on April 1, 1995, the Company granted options of 79,500 shares of common stock. As of December 31, 1996, these common stock equivalents are not included in the earnings per share calculation as they have an anti-dilutive effect. EX-23 3 CONSENT EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in Registration Statement (Form S-8 No. 333-3121) pertaining to the Employee Stock Option Plan and Non-Employee Director Stock Option Plan of Steel of West Virginia, Inc. of our report dated January 20, 1997, with respect to the consolidated financial statements and schedules of Steel of West Virginia, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Charleston, West Virginia March 10, 1997 EX-27 4 FDS -- FOR 12-31-96 FORM 10-K
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 0 0 6,579 599 17,307 27,227 60,449 27,151 79,299 12,166 10,975 0 0 71 48,936 79,299 95,334 95,334 85,339 85,339 0 386 1,273 (4,312) (1,374) (2,938) 0 0 0 (2,938) (.49) (.49)
-----END PRIVACY-ENHANCED MESSAGE-----