-----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, TFowF0754pDosOEmTPXqDInMfRYOsJdynLFr5HmQoVs5nAgo5ijGU/BLPxSWbHNT cQOKFBh2l4bH89T/RaHADw== 0001005477-98-001574.txt : 19980515 0001005477-98-001574.hdr.sgml : 19980515 ACCESSION NUMBER: 0001005477-98-001574 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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-Q SEC ACT: SEC FILE NUMBER: 000-16254 FILM NUMBER: 98619965 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-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _________________________ Commission file number 0-16254 ------- Steel of West Virginia, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 55-0684304 - --------------------------------- ------------------------------ (State or other jurisdiction I.R.S. Employer of incorporation or organization) Identification No. 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) 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 |_| The number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 1998, is as follows: 6,010,795 shares of common stock, par value $.01 per share. STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of 3 March 31, 1998 and December 31, 1997 Condensed Consolidated Statements of Income for 4 the Three-Month Periods Ended March 31, 1998 and 1997 Condensed Consolidated Statements of Cash Flows 5 for the Three-Month Periods Ended March 31, 1998 and 1997 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 10 2 PART I. FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands, except per share amounts) March 31 December 31 1998 1997 --------- ---------- ASSETS CURRENT ASSETS Cash $ 0 $ 0 Receivables, net of allowances of $609 15,436 11,181 Inventories 24,155 20,918 Deferred income taxes 1,555 1,555 Other current assets 639 660 --------- --------- TOTAL CURRENT ASSETS 41,785 34,314 Property, plant, and equipment 67,294 61,002 Goodwill 17,599 17,770 Other assets 572 629 --------- --------- TOTAL ASSETS $ 127,250 $ 113,715 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Overdraft $ 1,530 $ 968 Accounts payable 12,443 10,880 Accrued payroll and benefits payable 4,083 3,509 Income taxes payable 909 71 Other current liabilities 1,689 1,385 Current maturities of long-term debt 2,616 1,891 --------- --------- TOTAL CURRENT LIABILITIES 23,270 18,704 Long-term debt 41,897 34,339 Deferred income taxes 6,194 6,194 Other long-term liabilities 179 176 --------- --------- TOTAL LIABILITIES 71,540 59,413 STOCKHOLDERS' EQUITY Common stock, $.01 par value: 12,000,000 voting shares authorized, 7,096,576 and 7,091,360 issued, including treasury stock 71 71 Paid-in capital 26,785 26,663 Treasury stock - 1,105,300 shares at cost (11,483) (11,483) Retained earnings 40,337 39,051 --------- --------- TOTAL STOCKHOLDERS' EQUITY 55,710 54,302 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,250 $ 113,715 ========= ========= NOTE: The balance sheet at December 31, 1997, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands, except share and per share data) Three Months Ended March 31 1998 1997 ---------------------- Net sales $ 32,160 $ 24,429 Cost of sales 28,794 20,368 --------- --------- GROSS PROFIT 3,366 4,061 Selling and administrative expenses 1,480 1,409 Interest Expense 350 260 Gain on disposal of assets (496) (223) Other income (178) (67) --------- --------- INCOME BEFORE INCOME TAXES 2,210 2,682 Income Taxes 924 1,137 --------- --------- NET INCOME $ 1,286 $ 1,545 ========= ========= BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .21 $ .26 ========= ========= Weighted average common shares outstanding: Basic 6,010,795 5,991,859 Diluted 6,011,675 5,991,859 See notes to condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES (In thousands) Three Months Ended March 31 1998 1997 ---------------------- CASH (USED IN) PROVIDED FROM OPERATIONS Net income $ 1,286 $ 1,545 Adjustments for items not affecting funds from operations: Depreciation and amortization 1,772 1,324 Gain on disposal of assets (495) (223) Other 520 (158) Working capital changes related to operations (6,924) (2,078) --------- --------- CASH (USED IN) PROVIDED FROM OPERATIONS (3,841) 410 INVESTMENT ACTIVITIES Additions to property, plant, and equipment (5,004) (3,410) FINANCING ACTIVITIES Revolving credit loan 5,506 4,235 Proceeds from debt issue 3,000 0 Long-term debt repayments (223) (1,769) --------- --------- 8,283 2,466 DECREASE IN CASH $ (562) $ (534) ========= ========= See notes to condensed consolidated financial statements. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES March 31, 1998 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Steel of West Virginia, Inc. (the Company) and its wholly-owned subsidiaries SWVA, Inc. and Marshall Steel, Inc. Such condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10- K for the year ended December 31, 1997. The preparation of the condensed consolidated 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. Basic earnings per share excludes any dilutive effects of stock options and is computed by dividing net income by the weighted average shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The effect of dilutive stock options on weighted average shares outstanding was 880 and 0 for the quarters ended March 31, 1998 and 1997. NOTE B--INVENTORIES Inventories consist of the following (in thousands): March 31 December 31 1998 1997 --------- ---------- Raw materials $ 1,666 $ 2,354 Work-in-process 9,600 8,240 Finished goods 12,208 10,731 Manufacturing supplies 5,321 4,068 --------- --------- 28,795 25,393 Less LIFO reserve 4,640 4,475 --------- --------- $ 24,155 $ 20,918 ========= ========= At the end of each year, management determines inventory levels based on the taking of a physical inventory. The amount of inventories at March 31, 1998, has been determined based upon inventory levels indicated by perpetual inventory accounting records. In addition, an actual valuation of inventory under the LIFO method can be 6 made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Since these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. NOTE C--CREDIT ARRANGEMENTS A summary of indebtedness under the Company's credit arrangements is as follows (in thousands): March 31 December 31 1998 1997 ------- ----------- Capital Expenditure Line Term Loan #1 $ 3,205 $ 3,420 Capital Expenditure Line Term Loan #2 23,000 20,000 Revolver 18,047 12,541 Other notes payable 261 269 ------- ------- TOTAL 44,513 36,230 Less current maturities of long-term debt (2,616) (1,891) ------- ------- $41,897 $34,339 ======= ======= The Company maintains a senior financing agreement that, as last amended April 1998, provides for up to $21,000,000 of revolving credit borrowings and capital expenditure line term loans. The interest rates on the Company's existing revolving 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. As of March 31, 1998, the revolving credit line loan balance, due January 1, 2001, was $18,047,000, and the unused borrowing availability approximated $2,953,000. Under the terms of its senior financing agreement, the Company is permitted to convert its Capital Expenditure Line Term Loan #1 indebtedness to a fixed interest rate. Effective with the April 1998 amendment, the Company's borrowing availability under the Capital Expenditure Line Term Loan #2 was increased to $28,000,000 to finance current machinery and equipment expenditures, as governed by a percentage of such expenditures. The Company is permitted, at its election through January 1, 1999, to convert such indebtedness to a fixed interest rate. The Capital Expenditure Line Term Loan #1 portion of the loan agreement is required to be repaid in quarterly installments of $215,000, with a final principal payment of $195,000 on October 1, 2001. The Capital Expenditure Line Term Loan #2 will be repaid in 40 equal quarterly installments of principal over ten years commencing July 1, 1998. The Company's senior lending agreement may be terminated by the Company or, on or after January 1, 2001 and upon 90 days written notice, by the lender. The agreement contains various restrictive covenants, including specified levels of working capital and net worth (as defined in the agreement). In addition, capital expenditures and dividends are limited to the annual amounts set forth in the agreement. At March 31, 1998, the Company's retained earnings available for dividends is $2,629,500. As a result of the lending agreement, substantially all of 7 the Company's property, plant, and equipment, inventory and accounts receivable are subject to a third party's security interests. NOTE D--COMMITMENTS AND CONTINGENCIES The Company is principally self-insured for employees' medical care costs and workers' compensation claims up to certain specified dollar limits. Under the medical care program, the Company is insured by a private carrier for individual claims in excess of specified dollar limits. The Company also has excess coverage provided by the West Virginia Workers' Compensation Fund (a state agency) for certain work related injuries. In connection with the self-insured workers' compensation program, the Company has obtained an irrevocable standby letter of credit in the amount of $1,000,000 (through July 1998). A liability has been established for those illnesses and injuries occurring on or before March 31, 1998, for which an amount of expected loss could be reasonably estimated. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Sales Net sales increased 31.6% in the first quarter of 1998 to $32,160,000 up $7,731,000 from the first quarter of 1997, primarily due to an increase in tonnage of products shipped. Finished tonnage sales increased to 50,924 tons in the first quarter of 1998 from 37,457 tons for the first quarter of 1997. Billet sales decreased to 697 tons for the first quarter of 1998 from 2,010 tons in the first quarter of 1997. The average selling price per ton for finished products decreased to $628 in the first quarter of 1998 compared to $638 per ton in the first quarter of 1997 due to competitive pressures and efforts to increase market penetration. The average selling price per ton for billets decreased to $256 in the first quarter of 1998 compared to $271 in the first quarter of 1997. Cost of Sales Cost of sales increased to 89.5% of net sales or $28,794,000 for the first quarter of 1998 from 83.4% of net sales or $20,368,000 for the first quarter of 1997. The percent increase in cost of goods sold is principally due to the effect of a shutdown of approximately two weeks of the #2 Mill for installation and start-up of new equipment, as well as higher alloy and mill roll expense. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the first quarter of 1998 were $1,480,000 as compared to $1,409,000 for the first quarter of 1997. This increase was due primarily to higher consulting fees. As a percentage of net sales, selling and administrative expense was 4.6% in the first quarter of 1998 and 5.8% for the comparable period in 1997. Interest Expense, Gain on Disposal of Assets and Other Operating Income Interest expense for the first quarter of 1998 was $350,000, compared to $260,000 for the first quarter of 1997 due to increased borrowings associated with the Company's recently completed Phase II expansion and modernization program. The Company recognized a gain on the disposal of assets during the first quarter of 1998 in the amount of $496,000 as compared to a $223,000 gain in the first quarter of 1997. Included in the gain on disposal of assets during the first quarter of 1998 was a favorable settlement of $700,000 with regard to equipment previously purchased from one of the Company's vendors. Other operating income for the first quarter of 1998 was $178,000 compared to $67,000 for the first quarter of 1997. Net Income Net income for the first quarter of 1998 decreased by $259,000 to $1,286,000 from $1,545,000 for the first quarter of 1997. This decrease in net income was due primarily to a decrease in gross profit. As a percentage of net sales, net income was 4.0% for the first quarter of 1998, compared to 6.3% for the first quarter of 1997. 9 Liquidity and Sources of Capital The Company's primary ongoing cash needs are for working capital, debt service and capital expenditures. The Company's three sources of liquidity are internally generated funds, a capital expenditure term loan line, and the Company's revolving credit facility, which the Company anticipates will be sufficient for its ongoing cash needs. Working capital at the end of the first quarter of 1998 was $18,515,000, compared to $15,610,000 at the end of the prior fiscal year. This increase in working capital was funded by proceeds from the Company's credit arrangements with its senior lender. The Company's expenditures for required capital replacements are currently anticipated to average approximately $1,000,000 to $2,000,000 annually over the next several years. In February 1998 the Company completed Phase II of its expansion and modernization program to the Huntington, West Virginia plant. The program included a new high speed reheat furnace, quick-change mill roll stands, new warehouse space, and other miscellaneous equipment enhancements. The project, costing approximately $36,000,000 (not including capitalized interest) was completed without material disruptions to existing operations. The Company funded the project with a combination of internally generated cash and bank debt. From time to time, the Company evaluates discretionary capital expenditures and acquisition opportunities. Any such expenditures would be subject to availability of funds and approval by the Company's Board of Directors. Forward Looking Statements Any Forward Looking Statements contained herein are subject to the section on Forward Looking Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, including the following risk factors set forth therein: the cyclical and capital intensive nature of the industry; pressure resulting from foreign and domestic competition; reduction in demand for the Company's products and industry pricing; volatility of raw material costs, especially steel scrap, resulting in reduced profit margins; excess industry capacity resulting in reduced profit margins; and the cost of compliance with environmental regulations. In addition, the Forward Looking Statements contained herein are also subject to the Company's ability to effectively integrate new equipment. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None 10 SIGNATURES PURSUANT TO THE REQUIREMENTS 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. DATED: May 14, 1998 STEEL OF WEST VIRGINIA, INC. ------------------------------- (Registrant) /s/ Timothy R. Duke ------------------------------- Timothy R. Duke, President and Chief Executive Officer /s/ Mark G. Meikle ------------------------------- Mark G. Meikle, Vice President, Treasurer and Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 MAR-31-1998 0 0 15,436 609 24,155 41,785 100,388 (33,094) 127,250 23,270 44,513 0 0 71 55,639 27,250 32,160 32,160 28,794 28,794 0 0 350 2,210 924 1,286 0 0 0 1,286 .21 .21
-----END PRIVACY-ENHANCED MESSAGE-----