-----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, TqByUiKq1QY7StqOXbkmbiylUqU5PetT9zHahIEMbbwlJ0LBXQ/ADsZ2S4AngX5q oO3CPdqjLxqvOoydK4N6+A== 0000084278-98-000015.txt : 19981215 0000084278-98-000015.hdr.sgml : 19981215 ACCESSION NUMBER: 0000084278-98-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROANOKE ELECTRIC STEEL CORP CENTRAL INDEX KEY: 0000084278 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 540585263 STATE OF INCORPORATION: VA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02389 FILM NUMBER: 98768922 BUSINESS ADDRESS: STREET 1: 102 WESTSIDE BLVD N W STREET 2: P O BOX 13948 CITY: ROANOKE STATE: VA ZIP: 24017 BUSINESS PHONE: 5403421831 MAIL ADDRESS: STREET 1: 102 WESTSIDE BLVD N W CITY: ROANOKE STATE: VA ZIP: 24017 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-2389 ROANOKE ELECTRIC STEEL CORPORATION (Exact name of Registrant as specified in its charter) Virginia 54-0585263 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 13948, Roanoke, Virginia 24038-3948 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (540) 342-1831 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) State the aggregate market value of the voting stock held by nonaffiliates of the Registrant. Aggregate market value at November 30, 1998: $150,806,409 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 30, 1998. 11,075,888 Shares outstanding Portions of the following documents are incorporated by reference: (1) 1998 Annual Report to Stockholders in Part II. (2) Proxy Statement dated December 28, 1998 in Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. During the fiscal year ended October 31, 1998, the Registrant continued for the most part to operate its business as it has the past four years by manufacturing merchant steel bar products, fabricating open-web steel joists and concrete reinforcing steel, and extracting scrap steel and other materials from junked automobiles. Roanoke Technical Treatment & Services, Inc., a Roanoke, Virginia subsidiary, was formed in 1990 to license a process for the treatment of electric arc furnace dust, and currently is uncertain as to a specific time for start-up. During fiscal year 1994, the Registrant's auto shredding subsidiary, Shredded Products Corporation, completed construction of a modern facility in Rocky Mount, Virginia, and in November 1994 began operations at this locality, at a total investment in excess of $8,000,000 for plant and equipment. This facility, with its own landfill, is providing considerable savings in waste disposal costs. In addition, cost savings and better metal recoveries are being achieved through the use of the more technologically advanced equipment. During the later part of 1996, the Registrant, at its main plant, completed the installation of a new ladle refining furnace and the upgrade of an electric arc furnace, for approximately $17,000,000. With this new state-of-the-art equipment in operation, the Registrant has increased raw steel production, improved quality, reduced production costs and improved operating efficiencies. Also in 1996, the Registrant closed on an unsecured $60,000,000 credit facility with a syndicate of lenders. The facility was comprised of a $30,000,000 ten-year term loan and a $30,000,000 five-year revolver. The term loan was used to purchase additional equipment and refinance debt at much lower interest rates. The revolver replaced lines of credit that were not legally binding. This restructuring of debt provided the Registrant with the capital resources necessary to maintain its competitive position and ensure future growth. In January 1996, Socar, Inc., a South Carolina subsidiary, sold its long-time idle plant in Bucyrus, Ohio to the unaffiliated manufacturer who had been leasing the facility for several years under a lease-purchase agreement, for a final settlement price of $130,000. The other subsidiaries of the Registrant, John W. Hancock, Jr., Inc. and RESCO Steel Products Corporation, have had no material changes in operations or in the mode of conducting their business for the past five years. John W. Hancock, Jr. founded both the Hancock joist subsidiary and its parent, Roanoke Electric Steel Corporation, and served on the Registrant's Board of Directors as Chairman of the Executive Committee until his death in March 1994. After the close of fiscal 1998, the Registrant announced that it will, pursuant to an agreement signed November 10, 1998, acquire, through a tender offer followed by a merger, Steel of West Virginia, Inc. ("SWVA"), a Huntington, West Virginia, steel manufacturer. The transaction contemplates that the Registrant will pay $10.75 per share of each outstanding share of common stock of SWVA, on a fully-diluted basis, and assume all of SWVA's indebtedness, in a transaction worth PART I (con'd.) approximately $116.7 million. The transaction has been unanimously approved by the Boards of Directors of both companies, and the Board of SWVA has recommended that its shareholders accept the Registrant's offer. The offer is subject to customary conditions, including the tender of a majority of the shares of SWVA common stock and termination of the Hart-Scott-Rodino waiting period. Through the merger, SWVA will become a wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each share of SWVA common stock not purchased in the offer will be converted to the right to receive the cash price paid per share in the offer. The obligations of Roanoke Electric Steel Corporation are not subject to any financing condition. However, a bank syndicate has been arranged for financing the transaction. As part of the transaction, SWVA has granted an option to the Registrant to purchase up to 1,196,148 newly issued shares of SWVA common stock, exercisable upon the occurrence of certain events, and to pay a $5,000,000 "break-up" fee under certain circumstances. Finally, as a part of the transaction, SWVA amended its Shareholder Rights Plan to provide that Roanoke Electric Steel Corporation will not become and "Acquiring Person" or trigger the dilution provisions of that Plan by preceding with this transaction. SWVA operates a mini-mill in Huntington, West Virginia, and steel fabrication facilities in Huntington and Memphis, Tennessee. The company earned approximately $5,000,000 on sales of approximately $113,000,000 in 1997. Employment is approximately 600 in West Virginia and Tennessee. SWVA, headquartered in Huntington, West Virginia, custom designs and manufactures special steel products principally for use in the construction of truck trailers, industrial lift trucks, off-highway construction equipment (such as bulldozers and graders), manufactured housing, guard rail post and mining equipment. The Registrant and SWVA do not generally compete as regards customers and products. (b) Financial Information about Industry Segments. The Registrant's business consists of one industry segment or line of business, which is the extracting of scrap metal from discarded automobiles and the manufacturing, fabricating and marketing of merchant steel bar products, reinforcing bars, open-web steel joists and billets. The industry segment consists of three classes of products - merchant steel products, fabricated bar joists and reinforcing bars and billets. PART I (con'd.) FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND CLASSES OF PRODUCTS OR SERVICES 1998 1997 1996 Sales to Unaffiliated Customers: Merchant Steel $116,226,463 $113,588,649 $104,180,746 Bar Joists & $121,000,869 $115,017,371 $112,572,549 Billets $57,976,642 $36,502,619 $29,533,357 $295,203,974 $265,108,639 $246,286,652 Net Earnings from Operations $19,875,409 $16,883,068 $15,414,834 Identifiable Assets $189,210,889 $176,860,219 $167,015,901 (c) Narrative Description of Business. (1) (i) The Registrant manufactures merchant steel products consisting of Angles, Plain Rounds, Flats, Channels and Reinforcing Bars of various sizes and lengths. The principal markets for the Registrant's products are steel fabricators and steel service centers. The products are distributed directly to customers from orders solicited by a paid sales staff of the Registrant. The Registrant's subsidiary, Shredded Products Corporation, is involved in the extraction of scrap iron and steel and other metals from junked automobiles and other waste materials. Almost all of the ferrous material is used by the Parent as raw materials. The non-ferrous metals are sold to unrelated purchasers. Two other subsidiaries, John W. Hancock, Jr., Inc. and Socar, Inc., are engaged in the manufacturing of long- and short-span steel joists. Joists are open-web steel horizontal supports for floors and roofs, used primarily in the construction of commercial and industrial buildings such as shopping centers, factories, warehouses, hospitals, schools, office buildings, nursing homes, and the like. Joists are cheaper and lighter than structural steel or reinforced concrete. The joists are distributed by these subsidiaries to their customers from orders solicited by manufacturer's representatives and pursuant to successful bids placed directly by the companies. PART I (con'd.) The Registrant's subsidiary, RESCO Steel Products Corporation, fabricates concrete reinforcing steel by cutting and bending rebars to contractors' specifications. The rebars are distributed to contractors from orders solicited by a paid sales staff and pursuant to successful bids placed directly by the subsidiary. (ii) The Registrant has not in fiscal 1998 introduced a new product or begun to do business in a new industry segment that will require the investment of a material amount of assets or that otherwise is material. (iii) The Registrant's main raw material, scrap steel, is supplied for the most part by scrap dealers within a 250 mile radius of the mill. It is purchased through the David J. Joseph Company who are scrap brokers. The Shredded Products subsidiary supplies 10,000 to 15,000 tons of scrap per month. Although scrap is generally available to the Registrant, the price of scrap steel is highly responsive to changes in demand, including demand in foreign countries as well as in the United States. The ability to maintain satisfactory profit margins in times when scrap is relatively high priced is dependent upon the levels of steel prices, which are determined by market forces. Alloys and other materials needed for the melting process are provided by various domestic and foreign companies. Shredded Products Corporation often experiences difficulty in purchasing scrap automobiles at a satisfactory level. Competition from an increasing number of shredding operations and reluctance by dealers to sell scrap automobiles due to market conditions are the main causes. High offering prices generally increase the supply; however, the increased cost to produce sometimes is very competitive with the price of similar scrap that can be purchased on the outside. Substantially all of John W. Hancock, Jr., Inc.'s steel components are purchased from the Parent, which is located conveniently nearby and, therefore such components are generally available to the Company as needed. RESCO Steel Products Corporation purchases most of its steel components from suppliers within its market area, determined mainly by freight cost. Such components would be generally available to the Company, since the Parent could produce and supply this raw material, as needed. Socar, Inc. receives most of its raw steel material from the Parent and other nearby suppliers, the determinant usually being freight cost. The availability of raw materials is not of major concern to the Company, since the Parent could supply most of its needs. (iv) The Registrant currently holds no patents, trade marks, licenses, franchises or concessions that are material to its business operations. (v) The business of the Registrant is not seasonal. PART I (con'd.) (vi) The Registrant does not offer extended payment terms to its customers nor is it normally required to carry significant amounts of inventory to meet rapid delivery requirements of customers; although, at times market conditions have required the stockpiling of popular bar products for rapid delivery. Working capital practices generally remain constant during the course of business except when the Registrant determines it to be advantageous to stockpile raw materials due to price considerations. (vii) During fiscal year 1998, sales (tons) by the Registrant to John W. Hancock, Jr., Inc., Socar, Inc. and RESCO Steel Products Corporation, wholly-owned subsidiaries, were approximately 9%, 6% and less than 1% of the Registrant's total sales (tons), respectively. The largest nonaffiliated customer purchased approximately 25% of total sales (tons) ---13% of total sales (dollars). Alternative marketing and production arrangements were available to the Registrant, so that the loss of this nonaffiliate would not have had a materially adverse effect on the Registrant and its subsidiaries taken as a whole. (viii) The Registrant is of the opinion that the amount of its backlog is not generally material to an understanding of the business. All backlog is shipped within the current fiscal year. (ix) None of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. (x) The Registrant competes with steel-producing mills of similar size operative within its market region and also larger mills producing similar products. The market region in which the Registrant sells its products consists of the majority of states east of the Mississippi River. Price, including transportation cost, is the major determinant in securing business. Economic recession began to intensify competition during 1990, as selling prices dropped due to a softening in demand. This trend continued through most of 1991 with sharp declines in selling prices due to poor demand and excess inventories and capacity at most mills, although by year-end prices rose slightly. In comparison to the 1991 recession lows, order rates in 1992 showed some improvement while selling prices remained flat. In 1993, market conditions and demand improved significantly, while industry-wide selling prices increased to offset higher raw material costs. Demand in 1994 was fueled by continued improvement in business conditions and economic growth, with higher raw material costs again forcing selling prices upward, although some of the increased selling prices were demand driven. Even though market conditions and backlogs remained strong for much of 1995, shipments were flat due to customers' inventory reductions, while improved selling prices were attributable to higher raw material costs and rising demand, although by year-end prices fell slightly. Demand and backlogs continued high through 1996, allowing for increased bar product shipments, in spite of increased competition, which forced sharp reductions in selling prices throughout the industry. As competition eased during 1997, bar product shipments PART I (con'd.) increased with higher demand, causing improvements in order levels, backlogs and prices. Strong business conditions kept bar prices up during fiscal 1998, in spite of the temporary drop in merchant bar shipments, caused by excess inventories at steel service centers. The joist business is highly competitive. Due to similarity of product, relatively small price differences are often determinative in placing business. Ability to meet the customer's time requirements for delivery also is important in securing business. Competing successfully becomes more difficult with the distance to point of delivery due to transportation costs. In 1990, selling prices and order rates declined as a result of a weakened construction industry, causing increased competition. The severely depressed activity in the construction industry, due to overbuilding, again in 1991 resulted in drastic declines in selling prices and demand. In spite of depressed conditions, 1992 brought improved shipments due mainly to successful job bidding; however, in order to book a higher percentage of quotations, selling prices consequently suffered. Again in 1993, successful job bidding resulted in improved shipment levels, while higher raw material costs pushed selling prices upward, even though the construction industry remained depressed and highly competitive. In 1994, an easing of competitive conditions within the construction industry led to increased shipment levels, while selling prices were again forced upward by higher raw material costs. Reduced competition and increased activity in 1995 again led to higher shipment levels within the construction industry, as demand and increased raw material costs forced selling prices higher. Generally strong business conditions within the commercial construction industry continued during 1996 to bring improvements to selling prices for fabricated products, while shipment levels were relatively flat, as weather related construction delays offset otherwise strong demand. Even though market conditions continued to be favorable during 1997, competition within the industry forced lower selling prices for fabricated products, and also kept shipment levels flat. Continued favorable market conditions in the construction industry during fiscal 1998 led to the increased shipments and level selling prices for fabricated products. Billets are semi-finished products used by the Registrant in its rolling mill process to manufacture various merchant bar products. With the addition of new casting equipment in recent years, the Registrant has anticipated a growing billet market of nonaffiliated customers who further fabricate the billets for various end uses. Competition within the industry caused a drop in selling prices in 1990, with demand slowing. In 1991, selling prices trended further downward, while order rates fell due to the sagging economy. Billet sales improved significantly in 1992 as a result of increased domestic demand and entry into the much more competitive export markets, although selling prices still continued to slump. Again in 1993, increased export business and improved domestic demand resulted in significantly higher billet shipments. Selling prices also rose in reaction to higher scrap steel costs. Shipments of billets declined slightly in 1994 due to a lack of export PART I (con'd.) shipments, although domestic shipments improved significantly. While the export markets were much more competitive, domestic demand improved dramatically. Higher billet prices were also driven by higher scrap steel costs, but the increased domestic billet shipments, which bring a higher price, also contributed. Improved market conditions and increased domestic demand resulted in improved 1995 billet shipments, as export markets remained highly competitive. Higher scrap steel costs and improved product mix together caused billet selling prices to climb. A planned melt shop shutdown during 1996 to install a new ladle furnace and upgrade an electric arc furnace was unexpectedly prolonged due to problems with construction and installation, resulting in a sharp decline in billet production and causing a significant reduction in billet shipments for the year, while the highly competitive export market remained in effect. Billet selling prices declined with a downward trend in scrap prices. Increased billet shipments for 1997 resulted both from increased production, which hampered shipments last year, and improved domestic demand, as export markets remained very competitive. Lower scrap prices continued to keep billet prices down. The significant increase in billet shipments for fiscal 1998 was attributable to record raw steel production, coupled with unprecedented demand. Billet prices were flat due to relatively unchanged scrap prices. (xi) During the last three fiscal years, the Registrant was not involved in any material research and development activities. (xii) The United States Environmental Protection Agency (EPA) notified the Registrant and the County of Roanoke (County) of their potential liability and responsibility for costs of response to materials at a County-owned landfill site and adjacent streams near Salem, Virginia. The Registrant entered into a cost-sharing agreement with the County for response action (cleanup) at the landfill site and the streams. Pursuant to a Consent Decree to which EPA, the County and the Registrant were parties, the County completed a remedial action at the landfill in 1995. Under a separate consent order with EPA, the Registrant performed a removal action at the streams, which included removal, treatment and on-site placement of materials and affected sediment and soil. EPA confirmed completion of the required work on September 14, 1997. The only remaining obligation under either order was reimbursement of certain EPA oversight costs, which were paid during 1998. The Registrant has not received notification of other claims associated with the landfill or streams. The Registrant does not anticipate significant future potential liability for response or oversight costs associated with the landfill or streams. Management believes such costs, if any, would not have a materially adverse effect on the consolidated financial position, results of operations and competitive position of the Registrant. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1998 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. PART I (con'd.) Near the end of fiscal year 1996, the Registrant began treating a portion of its electric arc furnace dust, a hazardous substance, utilizing its own stabilization process. Significant savings are being realized as this process replaces off-site and more expensive treatment methods that had been used through a contract with an approved waste disposal firm. The Registrant believes it is in substantial compliance with applicable federal, state and local regulations. However, future changes in regulations may require expenditures which could adversely affect earnings in subsequent years. The Registrant has constructed over the years pollution control equipment at a net aggregate cost of over $8,000,000. Annual operating expenses and depreciation of all pollution control equipment and waste disposal costs are in excess of $3,600,000 in the aggregate. The Registrant is expected to spend less than $1,000,000 for additional pollution control and waste disposal equipment and facilities during subsequent fiscal years. Adoption of the Clean Air Act Amendments of 1990, or any other environmental concerns, is not anticipated to have a materially adverse effect on the Registrant's operations, capital resources or liquidity, nor should any incremental increase in capital expenditures occur due to the Act. (xiii) At October 31, 1998, the Registrant employed 531 persons at its Roanoke plant, with no employment at its Salem division, idle since mid-1991. The Registrant's subsidiaries, John W. Hancock, Jr., Inc., Socar, Inc., Shredded Products Corporation and RESCO Steel Products Corporation employed 317, 268, 58 and 41 persons, respectively. (d) Financial Information about Foreign and Domestic Operations and Export Sales. When the Registrant's billet production exceeds its required needs, this semi-finished product is offered for sale. During past years, a portion of the excess billets has been sold to brokers who represent foreign purchasers, although, there were no foreign sales of excess billets or other products during fiscal years 1996, 1997 and 1998. The information required by this paragraph by geographical area, as to foreign and domestic operations, is not provided since it is identical to the table in paragraph (b) with all information pertaining to the United States. ITEM 2. PROPERTIES The Registrant owns 72 acres situated in the City of Roanoke, Virginia, which comprises its main plant, of which 25 acres are used to provide 345,000 square feet of manufacturing space with an annual billet capacity of approximately 650,000 tons. A 30 acre site is owned in Salem, Virginia, of which 10 acres were used to provide 51,355 square feet of manufacturing space, until March 1991, when the plant was idled. The Registrant acquired in 1991 a 447 acre tract of land in Franklin County, Virginia, 100 acres of which was transferred to Shredded Products Corporation in a move of shredding operations from its Montvale location. PART I (con'd.) Part of this new Shredded Products property is being used as an approved industrial landfill. The remaining 337 acres of this land, 64 acres of which was sold in 1995, 1997 and 1998 will be marketed as an industrial park for Franklin County. Shredded Products Corporation operates in both Montvale and Rocky Mount, Virginia. The Montvale plant is situated on a 75 acre site owned by the Registrant, approximately 20 acres of which are regularly used in its scrap processing operation, with an annual production capacity of approximately 24,000 tons. The Rocky Mount facility is located on a 100 acre site owned by Shredded Products Corporation, partially consisting of a 25 acre industrial landfill used for the disposal of its auto fluff, and another 25 acres of which are regularly used in its shredding operation, with an annual production capacity of approximately 150,000 tons. John W. Hancock, Jr., Inc. is located in Roanoke County near Salem, Virginia. The plant is situated on a 37 acre site owned by Hancock, Inc., 17 acres of which are regularly used in its operations. Buildings on the site contain 131,614 square feet of floor space. Socar, Inc. and its subsidiary are located in Florence, South Carolina, and in Continental, Ohio. The Florence facility is located on a 28 acre site owned by Socar, Inc., 16 acres of which are regularly used in its operations. Buildings on the site contain 93,359 square feet of floor space. The plant located on a 32 acre site in Continental, Ohio, owned by Socar, Inc., has 86,400 square feet of floor space in manufacturing buildings, situated on 8 acres regularly used in its operations. RESCO Steel Products Corporation operates from a building containing 43,340 square feet of floor space, located in Salem, Virginia, on a 7 acre site owned by RESCO. The various buildings are of modern design, well-maintained, and suitable and adequate for the requirements of the business. ITEM 3. LEGAL PROCEEDINGS A County of Roanoke (County) landfill site, where the Registrant disposed of furnace dust from 1969 until 1976, was placed on the National Priorities List as a Superfund site in 1989. The United States Environmental Protection Agency (EPA) notified the Registrant and the County of their potential liability and responsibility for costs of response at the landfill site and adjacent streams. The Registrant entered into a cost-sharing agreement with the County for response action (cleanup) at the landfill site and sharing of cost reimbursement received from other potentially responsible parties, if any. The County has filed suit to recover such costs. Under EPA oversight, the County completed remediation action there in 1995. The Registrant's costs associated with that work were reflected in past financial statements. Under a consent order and EPA oversight, the Registrant completed in 1997 a removal action (cleanup) of the streams, and in 1998 final PART I (con'd.) oversight costs were paid. While the cost of future response activities or any future claims associated with the landfill or streams is difficult to project, management believes such costs, if any, would not have a materially adverse effect on the consolidated financial position, results of operations and competitive position of the Registrant. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1998 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter of the fiscal year covered. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on February 16, 1999. The names, ages and positions of all of the executive officers of the Registrant as of October 31, 1998 are listed below with their business experience with the Registrant for the past five years. Officers are elected annually by the Board of Directors at the first meeting of directors following the annual meeting of shareholders. There are no family relationships among these officers, nor any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Thomas J. Crawford, 43, has served as Secretary of the Registrant since January 1985 and as Vice President-Administration since February 1998; prior thereto, he had served as Assistant Vice President since January 1993, as Manager of Inside Sales since 1984 and as a Sales Representative since 1977. He has 21 years of service with the Registrant. Donald R. Higgins, 53, has served as Vice President - Sales of the Registrant since January 1986; prior thereto, he had served as General Sales Manager since 1984 and Assistant Sales Manager since 1978. He has 33 years of service with the Registrant. John E. Morris, 57, has served as Vice President - Finance of the Registrant since October 1988 and as Assistant Treasurer since 1985; prior thereto, he had served as Controller since 1971. He has 27 years of service with the Registrant. PART I (con'd.) Donald G. Smith, 63, has served as Chairman of the Board of the Registrant since February 1989, as Chief Executive Officer since November 1986, as President and Treasurer since January 1985 and as Director of the Registrant since April 1984; prior thereto, he had served as Vice President - - Administration since September 1980 and as Secretary since January 1967. He has 41 years of service with the Registrant. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include economic and industry conditions, availability and prices of supplies, prices of steel products, competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns, and others. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The specified information required by this item is incorporated by reference to the information under the heading "Stock Activity" in the 1998 Annual Report to Stockholders. The Registrant did not during fiscal year 1998 make any sale of securities not registered under the Securities Act of 1993. ITEM 6. SELECTED FINANCIAL DATA The specified information required by this item is incorporated by reference to the information under the heading "Selected Financial Data" in the 1998 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The specified information, including Year 2000 compliance issues, required by this item is incorporated by reference to the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The specific information required by this item is incorporated by reference to the information under the headings "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The specified information required by this item is incorporated by reference to the information under the headings "Independent Auditors' Report", "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" in the 1998 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The specified information required by this item is incorporated by reference to the information under the heading "Information Concerning Directors and Nominees" in the Proxy Statement dated December 28, 1998, to be filed with the Commission, or is included under the heading "Executive Officers of the Registrant" in Part I of this 10-K filing. The disclosure required by Item 405 of Regulation S-K is not applicable. ITEM 11. EXECUTIVE COMPENSATION The specified information required by this item is incorporated by reference to the information under the headings "Executive Compensation", "Compensation and Stock Option Committee Report on Executive Compensation", "Performance Graph" and "Board of Directors and Committees - -- Director Compensation" in the Proxy Statement dated December 28, 1998, to be filed with the Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The specified information required by this item is incorporated by reference to the information under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement dated December 28, 1998, to be filed with the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) The following financial statements filed as part of the 1998 Annual Report to Stockholders are incorporated herein by reference: (a) Consolidated Balance Sheets (b) Consolidated Statements of Stockholders' Equity (c) Consolidated Statements of Earnings (d) Consolidated Statements of Cash Flows (e) Notes to Consolidated Financial Statements (f) Independent Auditors' Report Individual financial statements of the Registrant are not being filed because the Registrant is primarily an operating company and its subsidiaries do not have minority equity interests and/or long-term indebtedness (including current portions) to any person outside the consolidated group (excluding long-term indebtedness which is collateralized by the Registrant by guarantee, pledge, assignment or otherwise), in amounts which together exceed 5 percent of the total consolidated assets. PART IV (con'd.) (2) Pursuant to Regulation S-K the following Exhibit Index is added immediately preceding the exhibits filed as part of the subject Form 10-K: EXHIBIT INDEX EXHIBIT NO. EXHIBIT PAGE (3) (a) Articles of Incorporation, as amended 20 Incorporated by Reference (b) By-Laws, as amended 21 Incorporated by Reference (4) Instruments Defining the Rights of Security Holders 22 (10) * (a) Executive Officer Incentive Arrangement 23 Incorporated by Reference * (b) Roanoke Electric Steel Corporation Employees' Stock Option Plan 23 * (c) Roanoke Electric Steel Corporation Non-Employee Directors' Stock Option Plan 23 Incorporated by Reference * (d) Roanoke Electric Steel Corporation Consulting Arrangement 23 * (e) Roanoke Electric Steel Corporation Severance Agreements 23 Incorporated by Reference (f) Merger Agreement of Steel of West Virginia, Inc. into Roanoke Electric Steel Corporation 23 Incorporated by Reference (13) 1998 Annual Report to Stockholders 24 (21) Subsidiaries of the Registrant 25 (23) Independent Auditors' Consent 26 (27) Financial Data Schedule 27 PART IV (con'd.) (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Registrant during the last quarter of the fiscal period covered by the Annual Report. * Management contract, or compensatory plan or agreement, required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROANOKE ELECTRIC STEEL CORPORATION Registrant By: Donald G. Smith Donald G. Smith, Chairman, President, Treasurer and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Director) Date: December 14, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name and Title Date Donald G. Smith December 14, 1998 Donald G. Smith, Chairman, President, Treasurer and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Director) John E. Morris December 14, 1998 John E. Morris, Vice President - Finance and Assistant Treasurer (Principal Accounting Officer) George B. Cartledge, Jr. December 14, 1998 George B. Cartledge, Jr. Director Frank A. Boxley December 14, 1998 Frank A. Boxley Director Charles I. Lunsford, II December 14, 1998 Charles I. Lunsford, II Director John C. Wilson December 14, 1998 John D. Wilson Director EXHIBIT NO. 3 (a) ARTICLES OF INCORPORATION, AS AMENDED Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. EXHIBIT NO. 3 (b) BY-LAWS, AS AMENDED Incorporated by reference to the previously filed Form 10-Q for April 30, 1997 on file in the Commission office. EXHIBIT NO. 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS Pursuant to Item 601(b) (4) (iii) of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission, upon request, copies of the instruments defining the rights of holders of the long-term debt of Roanoke Electric Steel Corporation and its subsidiaries described in its 1998 Annual Report to Stockholders and Form 10-K. EXHIBIT NO. 10 * (a) EXECUTIVE OFFICER INCENTIVE ARRANGEMENT Incorporated by reference to the previously filed Form 10-K for October 31, 1993 on file in the Commission office. * (b) ROANOKE ELECTRIC STEEL CORPORATION EMPLOYEES' STOCK OPTION PLAN EXHIBIT NO. 10 (b) ROANOKE ELECTRIC STEEL CORPORATION EMPLOYEES' STOCK OPTION PLAN 1. Purpose. The Roanoke Electric Steel Corporation Employees' Stock Option Plan (the "Plan") is intended to advance the interests of Roanoke Electric Steel Corporation (the "Company"), its stockholders and its subsidiaries by encouraging and enabling selected officers and other employees, especially key employees, upon whose judgment, initiative and efforts the Company is largely dependent for the successful conduct of its business, to acquire and retain a proprietary interest in the Company by ownership of its stock. The taxation of options granted under the Plan is intended to be governed by Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), and the options are not intended to meet the requirements of Section 422A of the Code. 2. Definitions. The following words and phrases as used herein shall have the meanings indicated below: A. "Board" means the Board of Directors of the Company. B. "Committee" means the body administering the Plan as contemplated by paragraph 3 of this document. C. "Common Stock" means the Company's no par value Common Stock. D. "Date of Grant" means the date upon which an option is granted under the Plan. E. "Fair Market Value" means on a specific date the closing sales price of the Common Stock on a nationally recognized stock exchange or, if not traded on such an exchange, the NASDAQ National Market System on the date involved if that is a trading day, or if not, the first trading day prior to such day. If the Common Stock is not quoted on the NASDAQ National Market System, then Fair Market Value shall mean the average between the bid and asked prices on the date involved if that is a trading day, or if not, the first trading day prior to such day. F. "Option" means an option granted under the Plan. G. "Optionee" means a person to whom an Option which has not expired has been granted under the Plan. H. "Plan Year" means the period beginning November 1 and ending October 31, except that the first Plan Year shall begin with the date of stockholder approval described in paragraph 10 and end on October 31, 1989. I. "Subsidiary" means a subsidiary corporation of the Company which is controlled by the Company directly or indirectly within the meaning of Section 368(c) of the Code. 3. Administration of Plan. The Board shall appoint a Committee to administer the Plan. The Committee shall consist of not less than three (3) members of the Board. No member of the Board shall be a member of the Committee if he is at the time or has at any time within the one year prior to his potential appointment to the Committee been eligible to receive an Option under the Plan or any other plan of the Company or any of its affiliates entitling the participants therein to acquire stock, stock options or stock appreciation rights of the Company or any of its affiliates. The Committee shall report all action taken by it to the Board. The Committee shall have full and final authority in its sole discretion, subject to the provisions of the Plan, to determine the individuals to whom and the time or times at which Options shall be granted and the number of shares of Common Stock covered by each Option, to construe and interpret the Plan, to determine the terms and provisions of the respective option agreements (which need not be identical), and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. The Committee may correct any defects, omissions or ambiguities, or reconcile any inconsistencies in the Plan or in any document issued pursuant to the Plan in the manner and to the extent it shall deem reasonably desirable. All such actions and determinations shall be conclusively binding for all purposes upon all persons. 4. Committee Procedures. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. 5. Participants. Options may be granted under the Plan to any person who is an officer or employee (including officers and employees who are also directors) of the Company or any of its Subsidiaries. A director of the Company or any of its Subsidiaries who is not also an employee will not be eligible to receive an Option. In determining the employees to whom Options will be granted and the number of shares to be covered by each Option, the Committee may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. An employee who has been granted an Option under the Plan may be granted an additional Option or Options under the Plan if the Committee shall so determine in accordance with the provisions hereof. 6. Shares Available. The aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 50,000 per Plan Year, subject to adjustment under the provisions of paragraph 7. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares or shares issued and reacquired by the Company. In the event any Option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such Option but not purchased thereunder shall again be available for Options to be granted under the Plan. 7. Adjustments. Each Option agreement may contain such provisions as the Committee shall determine to be appropriate for the adjustment of the number and class of shares subject to such Option and option price in the event of changes in the outstanding Common Stock by reason of any stock dividend, split-up, recapitalization, combination or exchange of shares, merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation and the like, and, in the event of any such change in the outstanding Common Stock, the aggregate number and class of shares available under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. 8. Terms and Conditions of Options. Any Option granted under the Plan shall be evidenced by an agreement executed by the Company and the applicable officer or employee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: A. Option price. The option price per share with respect to each Option shall be equal to 85% of the Fair Market Value of a share of the Common Stock on the Date of Grant. B. Period of Option. The expiration date of each Option shall be fixed by the Committee, however, such expiration date shall not be more than five (5) years from the Date of Grant. C. Vesting of Stockholder Rights. An Optionee shall have none of the rights of a stockholder of the Company until the certificates evidencing the shares purchased are delivered to such Optionee. D. Exercise of Option. Each Option shall be exercisable from time to time over a period commencing on the Date of Grant and ending upon the expiration or termination of the Option, provided, however, that the Committee may, by the provisions of any option agreement, limit the number of shares purchasable thereunder in any period or periods of time during which the Option is exercisable. An Option shall not be exercisable in whole or in part prior to the date of stockholder approval of the Plan. E. Termination of Option. Each Option held by an Optionee shall terminate upon the earlier of the following: (i) The expiration date stated in the Option; (ii) The death of the Optionee; (iii) The termination of employment of the Optionee with the Company or with any of its Subsidiaries for any reason other than total and permanent disability; (iv) The date which is the twelve (12) month anniversary of the date upon which the Optionee became totally and permanently disabled; or (v) The date which is thirty (30) days prior to the scheduled date of termination of employment of the Optionee with the Company or with any of its Subsidiaries for any reason other than total and permanent disability. Total and permanent disability under this Plan shall be determined by the Committee on the basis of competent medical evidence, but the entitlement of the Optionee to disability benefits under federal Social Security laws shall be conclusive evidence of total and permanent disability. F. Method of Exercising Option. An Option may be exercised by giving written notice of exercise to the Company specifying the number of shares to be purchased and by paying in full in cash the exercise price and any additional sums required as hereinafter described. The proceeds received by the Company in cash will be used for general corporate purposes. Upon notification of the amount due and prior to or concurrently with the delivery to the Optionee of certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Company any amount necessary to satisfy applicable income, employment, federal, state or local tax withholding or other requirements, and the Optionee shall not be entitled to a certificate until such amounts are paid. Furthermore, if the Optionee does not realize income at the time of the exercise of the Option, then within five (5) business days of the date of realization of income by the Optionee pursuant to the provisions of Section 83 of the Code, the Optionee shall notify the Company of such event and the Optionee shall pay the Company upon demand the amount of any income, employment, or other taxes, whether federal, state or local, if any, which are required by law to be withheld or otherwise paid with regard to such event. The Optionee shall indemnify the Company and its Subsidiaries for any loss they incur by reason of Optionee's failure to comply with the previous sentence. G. Nontransferability of Option. No Option shall be transferable or assignable by an Optionee, and each Option shall be exercisable during the Optionee's lifetime only by him or by his guardian or legal representative. No Option shall be pledged or hypothecated in any way and no Option shall be subject to execution, attachment, or similar process except with the express consent of the Committee. 9. Restrictions on Issuing Shares. The exercise of each Option shall be subject to the condition that if at any time the Company shall determine in its discretion that the listing, registration, or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in such event such exercise shall not be effective unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 10. Effective Date of Plan. The Plan is subject to approval of the stockholders of the Company and will become effective on the date approved by said stockholders. 11. Amendment or Termination of Plan. There is no express limitation upon the duration of the Plan. However, the Plan may be terminated, modified or amended by the Board at any time, provided, however, that the Board may not, without the approval of the majority of the outstanding stock of the Company having general voting power increase the maximum number of shares for which options may be granted under the Plan, increase the periods during which options may be granted or exercised, change the Option price or change the class of employees eligible to be granted Options. No termination, modification or amendment of the Plan may, without the consent of the employee to whom any Option shall theretofore have been granted, adversely affect the rights of such employee under such Option. As evidence of its adoption of the Plan, the Company has caused this document to be signed by its officer duly authorized, this 15th day of November, 1988. ROANOKE ELECTRIC STEEL CORPORATION By: Donald G. Smith President * (c) ROANOKE ELECTRIC STEEL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Incorporated by reference to the previously filed Form 10-K for October 31, 1997 on file in the Commission office. *(d) ROANOKE ELECTRIC STEEL CORPORATION CONSULTING ARRANGEMENT In January 1996, the Company entered into an arrangement with William L. Neal, a director of the Company and former President of John W. Hancock, Jr., Inc., whereby Mr. Neal agreed to provide consultation and advisory services to the Company and its subsidiaries. The arrangement will continue in effect until terminated by either party. The Company has agreed to pay Mr. Neal a retainer fee of $2,000 per month and an hourly project rate of $100, plus expenses. Mr. Neal retired as director during fiscal 1998. * (e) ROANOKE ELECTRIC STEEL CORPORATION SEVERANCE AGREEMENTS Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. (f) MERGER AGREEMENT OF STEEL OF WEST VIRGINIA, INC. INTO ROANOKE ELECTRIC STEEL CORPORATION Incorporated by reference to Exhibit (c)(1) of the previously filed Schedule 14D-1 (Dated November 17, 1998), as amended and supplemented, on file in the Commission office. * Management contract, or compensatory plan or agreement, required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). EXHIBIT NO. 13 1998 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT NO. 21 SUBSIDIARIES OF THE REGISTRANT Registrant: Roanoke Electric Steel Corporation Organized Under Subsidiary of Registrant Jurisdiction of Shredded Products Corporation Virginia John W. Hancock, Jr., Inc. Virginia Socar, Incorporated South Carolina RESCO Steel Products Corporation Virginia Roanoke Technical Treatment and Services, Inc. Virginia EXHIBIT NO. 23 DELOITTE & TOUCHE LLP Suite 1401 Telephone: (336) 721-2300 500 West Fifth Street Facsimile: (336) 721-2301 P.O. Box 20129 Winston-Salem, North Carolina 27120-0129 INDEPENDENT AUDITORS' CONSENT Roanoke Electric Steel Corporation: We consent to the incorporation by reference in Registration Statement Nos. 33-27359, 33-35243 and 333-25299 of Roanoke Electric Steel Corporation on Form S-8 of our report dated November 18, 1998, appearing in and incorporated by reference in the Annual Report on Form 10-K of Roanoke Electric Steel Corporation for the year ended October 31, 1998. Deloitte & Touche LLP Winston-Salem, North Carolina December 14, 1998 EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE EX-13 2 [RES LOGO] ROANOKE ELECTRIC STEEL ANNUAL REPORT 1998 1998 HIGHLIGHTS o Record earnings per share o Near record net earnings o Sales highest in history, approach $300 million o Continued strong earnings by our fabricating subsidiaries o Record shipments of billets o Record production of raw steel o Record working capital of $74,917,878 o Record cash flows from operations of $34,571,627 o Record total assets of $189,210,889 o Record stockholders' equity of $119,447,888 o 17.6% return on average equity o 17.2% pretax return on average total assets o Cash dividend increased 9.6% o $7,372,739 returned to shareholders in dividends and repurchases of stock o Three-for-two common stock split declared o ISO 9002 certification achieved ROANOKE ELECTRIC STEEL CORPORATION Roanoke Electric Steel Corporation and its wholly-owned subsidiaries are engaged in the manufacturing, fabricating and marketing of merchant steel products, billets, open-web steel joists and reinforcing bars. Each subsidiary is either a supplier to the parent company or a purchaser of its finished product. The main plant of Roanoke Electric Steel Corporation is a state-of-the-art steel mini-mill located in Roanoke, Virginia. This facility melts scrap steel in electric furnaces and continuously casts the molten steel into billets. These billets are rolled into merchant steel products consisting of angles, plain rounds, flats, channels and reinforcing bars of various lengths and sizes. Excess steel billet production is sold to mills without melting facilities. Roanoke Electric Steel Corporation markets its products to steel service centers and fabricators in 21 states east of the Mississippi River. Shredded Products Corporation, a subsidiary with operations in Rocky Mount and Montvale, Virginia, extracts scrap steel and other metals from junked automobiles and other waste materials. These facilities supply the main plant with a substantial amount of its raw materials. Non-ferrous metals generated in the process are sold to unrelated customers. John W. Hancock, Jr., Inc. and Socar, Inc. are steel fabrication subsidiaries located in Salem, Virginia, Florence, South Carolina and Continental, Ohio. All three operations purchase rounds and angles from the main plant to fabricate long- and short-span open-web steel joists. These joists are used as horizontal supports for floors and roofs in commercial and industrial buildings. RESCO Steel Products Corporation, a Salem, Virginia based subsidiary, fabricates concrete reinforcing steel by cutting and bending it to contractor specifications. 1 TO OUR SHAREHOLDERS 1998 PERFORMANCE AND ACHIEVEMENTS The year ended October 31, 1998, was another record-breaking year. Sales, earnings per share, billet shipments and raw steel production reached new highs. Earnings increased for the second consecutive year to $19,875,409, an increase of 17.7% over 1997 earnings of $16,883,068 and were exceeded only by 1995 earnings of $20,228,902. Earnings per share were a record $1.79 ($1.77 diluted) - up 19.3% over the $1.50 ($1.49 diluted) earned in 1997 and 6.5% higher than 1995 earnings per share of $1.68 ($1.67 diluted). These results were achieved on record sales of $295,203,974, an 11.4% increase over last year's sales of $265,108,639. Market conditions remained strong for all business segments throughout 1998. Our fabricating subsidiaries recorded strong earnings for the fourth consecutive year, as the construction industry continued to flourish, and shipments of fabricated products increased 5.2%. Our billet business surged, as shipments increased a robust 58.5%, and strong demand for steel bar products pushed selling prices up 6.2%. Margins as a percentage of sales were fractionally improved, which is particularly gratifying, considering the increased shipments of lower-margin billets. Other achievements in 1998 were: o a $6,889,085 increase in working capital to a record $74,917,878. o a $12,350,670 increase in total assets to a record $189,210,889. o a $5,910,624 increase in cash flows from operations to a record $34,571,627. o a $13,011,619 increase in stockholders' equity to a record $119,447,888. o a pretax return on average total assets of 17.2%. o a return on average equity of 17.6%. STRONGER FINANCIAL POSITION Our financial condition strengthened throughout the year. In addition to the improvements in cash flows from operations, working capital and stockholders' equity, the quick ratio increased to 2.3 to 1, while the current ratio remained the same at 3.5 to 1. Cash, cash equivalents and investments increased $11,234,442 to $27,894,661. Our capital structure [Forbes THE 200 BEST SMALL COMPANIES PICTURE] In its November 2, 1998 issue, Forbes magazine named Roanoke Electric Steel one of the 200 Best Small Companies in America. 2 EARNINGS PER SHARE (DOLLARS) 1991 .02 1992 .22 1993 .40 1994 .73 1995 1.68 1996 1.30 1997 1.50 1998 1.79 was comprised of less debt than in 1997, as long-term debt as a percentage of total capitalization declined to 16.9% from 21.1% last year. We are positioned well for future growth with our low leverage, free cash flow and available capital resources. Our $30,000,000 revolving credit facility was unused at year end. MORE SHAREHOLDER VALUE We continued to create value for our shareholders during the year as our share price increased 11.5% during the year. In addition, the Board of Directors declared a 3-for-2 common stock split, the second in three years, effective in March 1998, and increased the regular quarterly cash dividend rate by 9.6%. The stock split was intended to further broaden the market for our common stock, while the dividend increase reflected the strong conditions in the steel industry and the Board's confidence in the Company's ability to sustain excellent earnings. Since May 1997, the regular quarterly dividend has increased 18.8%, and in October 1998, the Board declared the 160th consecutive quarterly cash dividend in the amount of 9.5 cents per share, payable November 25, 1998. Our dividend yield at October 31, 1998, was 2.6%, and annual cash dividends paid to shareholders in 1998 amounted to $4,137,899. We returned an additional $3,234,840 to our shareholders during the year with the repurchase of 148,000 shares of our common stock. In the past three years, we have returned $12,543,567 to shareholders with the repurchase of 807,200 company shares. These repurchases helped to achieve the record earnings per share for 1998. The Board-approved plans authorized the repurchase of up to 1,500,000 shares. In other Board matters, T. A. Carter and William L. Neal retired as members of our Board of Directors during the year. We express our gratitude to them for their years of service and their contribution to our success. Mr. Neal retired in January 1996, as President of our subsidiary, John W. Hancock, Jr., Inc., after 40 years of service. We thank him for his dedication, leadership and role in the growth and development of the Hancock subsidiary. PROSPECTS FOR GROWTH As we went to press with this report, our Company had entered into a definitive agreement to acquire Steel of West Virginia, Inc. ("SWVA"). The acquisition was pending shareholder approval. SWVA operates a steel mini-mill in Huntington, West [JACOBSON & ASSOCIATES Steel Customer Satisfaction Report 1996-1998 picture] Jacobson & Associates, a steel industry consultant, in their steel customer satisfaction report, ranked Roanoke Electric Steel #1 in overall customer satisfaction. The June 1998 report was based on a 3-year survey of 5,000 steel customers factoring quality, service, price and on-time delivery. 4 SALES ($MILLIONS) 1991 126,977,104 1992 146,036,301 1993 167,294,378 1994 215,809,228 1995 259,968,524 1996 246,286,652 1997 265,108,639 1998 295,203,974 Virginia and has fabricating facilities in Huntington and Memphis, Tennessee. SWVA custom designs and manufactures special steel products for use in the construction of truck trailers, industrial lift trucks, off-highway construction equipment, manufactured housing, guard rail posts and mining equipment. The acquisition provides a captive outlet for our excess billet capacity, and SWVA's excess rolling mill capacity will enable them to manufacture products that complement our present range of products, allowing us to better serve our customers. SWVA's excess rolling mill capacity, made possible by the completion of a $35,000,000 expansion in early 1998, will also allow them to penetrate new markets. We see this acquisition as a significant growth opportunity for our Company. In our continuing efforts to remain competitive and improve production methods and quality, we received certification on August 21, 1998, to ISO 9002, the system of international quality standards. Our certification will continue to assure both our present and prospective customers that our products are produced to highest quality standards. LOOKING FORWARD We begin fiscal year 1999 with good backlogs and margins, and prospects for the first quarter are favorable. Due to a continued strong construction industry, our fabricating subsidiaries should perform well. We hope the general economy and conditions within the steel construction industries will allow us to continue our growth in sales and earnings. We are confident we will continue to perform well in comparison to the industry. We expect the acquisition of Steel of West Virginia, Inc. to contribute to earnings immediately and are hopeful the incremental earnings will bring improved 1999 results and shareholder value. The record-breaking year would not have been possible without the efforts of our loyal employees and valued customers to whom we are most grateful. We hope our shareholders are pleased with the 1998 performance. We look forward to bringing you even stronger results in the years to come. Sincerely, /s/ Donald G. Smith ----------------------------- Donald G. Smith Chairman of the Board and Chief Executive Officer [Quarterly, The Wachovia Magazine For Business Picture] Quarterly, The Wachovia Magazine For Business, featured Roanoke Electric Steel in its Spring, 1998 issue. 6 TOTAL ASSETS ($MILLIONS) 1991 124,648,573 1992 125,558,910 1993 130,620,435 1994 140,473,510 1995 157,774,658 1996 167,015,901 1997 176,860,219 1998 189,210,889 SELECTED FINANCIAL DATA
Year Ended October 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Operations Sales $295,203,974 $265,108,639 $246,286,652 $259,968,524 $215,809,228 Gross earnings 57,720,265 51,728,996 47,914,269 56,097,685 33,732,184 Interest expense-net 830,743 1,627,380 1,538,191 2,053,643 1,891,263 Income taxes 11,568,066 10,206,340 9,305,808 13,035,243 5,684,150 Earnings before cumulative effect of change in accounting principle 19,875,409 16,883,068 15,414,834 20,228,902 8,766,435 Net earnings 19,875,409 16,883,068 15,414,834 20,228,902 11,860,375 - -------------------------------------------------------------------------------------------------------------------------- Financial Position Working capital $ 74,917,878 $ 68,028,793 $ 59,630,189 $ 45,483,760 $ 34,504,420 Total assets 189,210,889 176,860,219 167,015,901 157,774,658 140,473,510 Long-term debt 24,291,667 28,541,667 35,291,666 16,979,166 20,729,166 Stockholders' equity 119,447,888 106,436,269 94,433,091 90,062,598 72,417,669 - -------------------------------------------------------------------------------------------------------------------------- Selected Ratios Gross profit margin 19.6% 19.5% 19.5% 21.6% 15.6% Operating income margin 6.7% 6.4% 6.3% 7.8% 5.5% Effective tax rate 36.8% 37.7% 37.6% 39.2% 39.3% Current ratio 3.5 3.5 3.5 2.2 2.0 Quick ratio 2.3 2.0 2.0 1.3 1.2 Funded debt as a percentage of total capital 19.3% 23.6% 29.5% 26.1% 30.7% Pretax return on average total assets 17.2% 15.8% 15.2% 22.3% 10.7% Return on average stockholders' equity 17.6% 16.8% 16.7% 24.9% 12.9% - -------------------------------------------------------------------------------------------------------------------------- Per Share Data Earnings before cumulative effect of change in accounting principle $1.79 $1.50 $1.30 $1.68 $0.73 Net earnings: Basic 1.79 1.50 1.30 1.68 0.99 Diluted 1.77 1.49 1.30 1.67 0.98 Cash dividends 0.37 0.33 0.30 0.25 0.27 Stockholders' equity 10.78 9.49 8.35 7.44 6.02 - -------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 11,132,910 11,230,794 11,815,323 12,068,308 11,983,320
Per share information has been adjusted for three-for-two stock splits effective March 25, 1998 and May 1, 1995. *1994 accounting change of $3.1 million excluded. CAPITALIZATION ($MILLIONS) STOCKHOLDERS' EQUITY 1994 72,417,669 1995 90,062,598 1996 94,433,091 1997 106,436,269 1998 119,447,888 LONG-TERM DEBT 1994 20,729,166 1995 16,979,166 1996 35,291,666 1997 28,541,667 1998 24,291,667 CAPITAL EXPENDITURES AND DEPRECIATION ($MILLIONS) CAPITAL EXPENDITURES 1994 11,744,913 1995 11,654,366 1996 18,194,216 1997 7,532,580 1998 12,339,553 DEPRECIATION 1994 7,332,833 1995 7,863,154 1996 8,366,012 1997 9,456,201 1998 9,216,133 WORKING CAPITAL ($MILLIONS) 1994 34,504,420 1995 45,483,760 1996 59,630,189 1997 68,028,793 1998 74,917,878 EARNINGS ($MILLIONS) 1994 8,766,435 1995 20,228,902 1996 15,414,834 1997 16,883,068 1998 19,875,409 STOCKHOLDERS' EQUITY ($MILLIONS) 1994 72,417,669 1995 90,062,598 1996 94,433,091 1997 106,436,269 1998 119,447,888 8 CASH PROVIDED BY OPERATIONS ($MILLIONS) 1991 8,964,504 1992 5,871,368 1993 9,641,895 1994 14,412,573 1995 19,733,012 1996 17,166,064 1997 28,661,003 1998 34,571,627 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended October 31, ---------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- SALES ........................................ $295,203,974 $265,108,639 $246,286,652 COST OF SALES ................................ 237,483,709 213,379,643 198,372,383 ----------- ----------- ----------- GROSS EARNINGS ............................... 57,720,265 51,728,996 47,914,269 ----------- ----------- ----------- OTHER OPERATING EXPENSES Administrative ............................. 19,771,970 17,873,967 17,315,039 Interest, net .............................. 830,743 1,627,380 1,538,191 Profit sharing ............................. 5,674,077 5,138,241 4,340,397 ----------- ----------- ----------- Total ................................... 26,276,790 24,639,588 23,193,627 ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES ................. 31,443,475 27,089,408 24,720,642 INCOME TAX EXPENSE ........................... 11,568,066 10,206,340 9,305,808 ----------- ----------- ----------- NET EARNINGS ................................. $ 19,875,409 $ 16,883,068 $ 15,414,834 =========== =========== =========== NET EARNINGS PER SHARE OF COMMON STOCK Basic ...................................... $ 1.79 $ 1.50 $ 1.30 =========== =========== =========== Diluted .................................... $ 1.77 $ 1.49 $ 1.30 =========== =========== =========== CASH DIVIDENDS PER SHARE OF COMMON STOCK...... $ 0.372 $ 0.333 $ 0.300 =========== =========== ===========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in Treasury Stock Common Stock Excess of (At Cost) ------------------------ Stated Retained ---------------------- Shares Amount Value Earnings Shares Amount --------- --------- --------- ----------- -------- ---------- BALANCE, NOVEMBER 1, 1995 .............. 8,970,390 $1,729,503 $9,349,429 $ 80,178,534 896,743 $ 1,194,868 Repurchase of common stock ........... - - - - 556,200 7,735,949 Stock options exercised .............. 23,750 187,293 - - - - Net earnings ......................... - - - 15,414,834 - - Cash dividends ....................... - - - (3,495,685) - - ---------- ---------- ---------- ------------ --------- ------------ BALANCE, OCTOBER 31, 1996 .............. 8,994,140 1,916,796 9,349,429 92,097,683 1,452,943 8,930,817 Repurchase of common stock ........... - - - - 103,000 1,572,778 Stock options exercised .............. 35,950 432,383 - - - - Net earnings ......................... - - - 16,883,068 - - Cash dividends ....................... - - - (3,739,495) - - ---------- ---------- ---------- ------------ --------- ------------ BALANCE, OCTOBER 31, 1997 .............. 9,030,090 2,349,179 9,349,429 105,241,256 1,555,943 10,503,595 Repurchase of common stock ........... - - - - 90,000 2,387,703 Stock options exercised .............. 56,750 508,949 - - - - Three-for-two stock split ............ 4,516,120 - - - 822,971 - Cash paid in lieu of fractional shares on stock split .............. (158) - - (2,976) - - Retirement of treasury stock ......... (1,195,800) - (9,349,429) (2,724,001) (1,195,800) (12,073,430) Repurchase and retirement of common stock ....................... (58,000) - - (847,137) - - Net earnings ......................... - - - 19,875,409 - - Cash dividends ....................... - - - (4,134,923) - - ---------- ---------- ---------- ------------ --------- ------------ BALANCE, OCTOBER 31, 1998 .............. 12,349,002 $2,858,128 $ - $117,407,628 1,273,114 $ 817,868 ========== ========== ========== ============ ========= ============
See notes to consolidated financial statements. 10 CONSOLIDATED BALANCE SHEETS
October 31, ----------------------------- 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents ......................................... $ 16,167,025 $ 8,844,537 Investments ....................................................... 11,727,636 7,815,682 Accounts receivable ............................................... 42,415,061 38,786,302 Inventories ....................................................... 31,902,900 36,814,417 Prepaid expenses .................................................. 1,586,357 1,900,338 Deferred income taxes ............................................. 1,608,938 1,211,881 ----------- ----------- Total current assets ............................................ 105,407,917 95,373,157 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Land .............................................................. 4,264,165 4,313,060 Buildings ......................................................... 19,621,407 18,874,555 Other property and equipment ...................................... 123,615,952 119,266,483 Assets under construction ......................................... 4,656,746 921,581 ----------- ----------- Total ........................................................... 152,158,270 143,375,679 Less-accumulated depreciation ..................................... 68,522,086 62,077,810 ----------- ----------- Property, plant and equipment, net .............................. 83,636,184 81,297,869 ----------- ----------- OTHER ASSETS ........................................................ 166,788 189,193 ----------- ----------- TOTAL ............................................................... $189,210,889 $176,860,219 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt ................................. $ 4,250,000 $ 4,250,000 Accounts payable .................................................. 15,273,850 13,050,874 Dividends payable ................................................. 1,052,210 971,639 Employees' taxes withheld ......................................... 358,851 151,085 Accrued profit sharing contribution ............................... 5,335,822 4,910,443 Accrued wages and expenses ........................................ 2,959,367 2,938,065 Accrued income taxes .............................................. 1,259,939 1,072,258 ----------- ----------- Total current liabilities ....................................... 30,490,039 27,344,364 ----------- ----------- LONG-TERM DEBT Notes payable ..................................................... 28,541,667 32,791,667 Less-current portion .............................................. 4,250,000 4,250,000 ----------- ----------- Long-term debt .................................................. 24,291,667 28,541,667 ----------- ----------- POSTRETIREMENT LIABILITIES .......................................... 1,293,788 990,809 ----------- ----------- DEFERRED INCOME TAXES ............................................... 13,687,507 13,547,110 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7) STOCKHOLDERS' EQUITY Common stock-no par value-authorized 20,000,000 shares, issued 12,349,002 shares in 1998 and 13,544,977 in 1997....... 2,858,128 2,349,179 Capital in excess of stated value ................................. - 9,349,429 Retained earnings ................................................. 117,407,628 105,241,256 ----------- ----------- Total ........................................................... 120,265,756 116,939,864 Less-treasury stock, 1,273,114 shares in 1998 and 2,333,914 in 1997 - at cost .............................. 817,868 10,503,595 ----------- ----------- Total stockholders' equity ...................................... 119,447,888 106,436,269 ----------- ----------- TOTAL ............................................................... $189,210,889 $176,860,219 =========== ===========
See notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings ................................................................$ 19,875,409 $16,883,068 $15,414,834 Adjustments to reconcile net earnings to net cash provided by operating activities: Postretirement liabilities ................................................ 302,979 247,970 248,248 Depreciation and amortization ............................................. 9,266,547 9,482,836 8,380,456 (Gain) loss on sale of investments and property, plant and equipment ...... 721,509 (1,659) (59,312) Deferred income taxes ..................................................... (256,660) 780,071 1,011,529 Changes in assets and liabilities which provided (used) cash, exclusive of changes shown separately ...................... 4,661,843 1,268,717 (7,829,691) ---------- ---------- ---------- Net cash provided by operating activities ................................... 34,571,627 28,661,003 17,166,064 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment ............................ (12,339,553) (7,532,580) (18,194,216) Proceeds from sale of property, plant and equipment ....................... 55,395 17,299 200,666 Purchases of investments .................................................. (18,427,761) (6,085,692) (3,840,892) Proceeds from sales of investments ........................................ 14,495,999 4,309,012 1,910,093 Other ..................................................................... - - 12,328 ---------- ---------- ---------- Net cash used in investing activities ....................................... (16,215,920) (9,291,961) (19,912,021) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in notes payable ................................................. - - (11,000,000) Cash dividends ............................................................ (4,134,923) (3,739,495) (3,495,685) Cash paid for fractional shares on stock split ............................ (2,976) - - Increase in dividends payable ............................................. 80,571 66,695 16,843 Proceeds from exercise of common stock options ............................ 508,949 432,383 187,293 Payment of long-term debt ................................................. (4,250,000) (6,749,999) (15,687,500) Proceeds from long-term debt .............................................. - - 34,500,000 Repurchase of common stock ................................................ (3,234,840) (1,572,778) (7,735,949) ---------- ---------- ---------- Net cash used in financing activities ....................................... (11,033,219) (11,563,194) (3,214,998) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 7,322,488 7,805,848 (5,960,955) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................ 8,844,537 1,038,689 6,999,644 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR ......................................$ 16,167,025 $ 8,844,537 $ 1,038,689 ========== ========== ========== CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED (USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY (Increase) decrease in accounts receivable ................................$ (3,628,759) $ 1,693,496 $ (320,275) (Increase) decrease in inventories ........................................ 4,911,517 (2,499,518) (3,448,661) (Increase) decrease in prepaid expenses ................................... 313,981 (1,249,325) 71,716 Increase (decrease) in accounts payable ................................... 2,222,976 2,073,364 (3,506,271) Increase (decrease) in employees' taxes withheld .......................... 207,766 (133,381) 57,789 Increase (decrease) in accrued profit sharing contribution ................ 425,379 998,486 (491,074) Increase (decrease) in accrued wages and expenses ......................... 21,302 192,906 348,246 Increase (decrease) in accrued income taxes ............................... 187,681 192,689 (541,161) ---------- ---------- ---------- Total .......................................................................$ 4,661,843 $ 1,268,717 $ (7,829,691) ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized) .....................................$ 2,088,508 $ 2,368,369 $ 1,979,832 ========== ========== ========== Income taxes ..............................................................$ 11,637,045 $ 9,233,580 $ 8,835,440 ========== ========== ==========
See notes to consolidated financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries, Shredded Products Corporation, John W. Hancock, Jr., Inc., Socar, Inc., RESCO Steel Products Corporation and Roanoke Technical Treatment & Services, Inc. (the "Company"). All significant intercompany accounts and transactions have been eliminated. Inventories - Inventories of the Company, with the exception of John W. Hancock, Jr., Inc., are generally valued at cost on a first-in, first-out (FIFO) method or market, if lower. A major portion of the inventories of John W. Hancock, Jr., Inc. is valued on a last-in, first-out (LIFO) method. LIFO cost is not in excess of replacement or current cost. Property, Plant and Equipment - These assets are stated at cost. Depreciation expense is computed by straight-line and declining-balance methods. Maintenance and repairs are charged against operations as incurred. Major items of renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement or other disposition of plant and equipment, the cost and related accumulated depreciation are removed from the property and allowance accounts, and the resulting gain or loss is reflected in earnings. Income Taxes - The Company applies the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are provided by the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments - Investments consist primarily of debt securities which mature between 1998 and 2027. The Company complies with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). In accordance with the provisions of SFAS 115, management has classified its entire debt securities portfolio as "available for sale". Under SFAS 115, "available for sale" securities are reported at fair value with unrealized gains and losses reported as a separate component of equity. These investments are carried on the balance sheets at fair value, which approximates amortized cost. Accordingly, there were no adjustments to equity at October 31, 1998, 1997 and 1996. Revenue Recognition - Revenues from sales are recognized when products are shipped to customers, except for fabrication products which are recognized by the percentage-of-completion method in accordance with industry practice. Sales to an unaffiliated customer amounted to 13%, 12% and 11% of consolidated sales for 1998, 1997 and 1996, respectively. Concentration of Credit Risk - The Company sells to a large customer base of steel fabricators, steel service centers and construction contractors, most all of which deal primarily on 30-day credit terms. The Company believes its concentration of credit risk to be minimal in any one geographic area or market segment. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have not been significant in the past, and are generally within management's expectations. Fair Value of Financial Instruments - At October 31, 1998, the fair value of the Company's cash and cash equivalents, accounts receivable, investments and long-term debt approximated amounts recorded in the accompanying consolidated financial statements (see notes 1 and 6). Stock Options - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995. This statement adopts a "fair value based method" of accounting for employee stock option plans or similar stock-based compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service or vesting period. The statement does allow entities to continue to measure compensation using the "intrinsic value based method" of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) provided that they make pro forma disclosures on net earnings and earnings per common share as if the fair value based method of accounting had been applied. The Company has elected to continue to follow APB 25. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income - In June 1997, Statement of Financial Accounting Standards No. 130, "Comprehensive Income" (SFAS 130) was issued, establishing standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company will be required to adopt SFAS 130 in the first quarter of fiscal year 1999 and, based on current circumstances, does not believe the required disclosures, if any, will be material. Segment Information - In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) was issued, establishing standards for the way public enterprises report information about operating segments in annual financial statements. This statement also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company will be required to adopt SFAS 131 in the first quarter of fiscal year 1999 and, based on current circumstances, does not believe the effect of adoption will be significant. Derivative Instruments - In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) was issued, establishing standards for accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Company will be required to adopt SFAS 133 in the first quarter of fiscal year 2000 and is in the process of evaluating what impact SFAS 133 will have on its consolidated financial statements. 13 (NOTE 2) INVENTORIES If the FIFO method of valuing inventories had been used by John W. Hancock, Jr., Inc., consolidated inventories would have been $1,699,417 greater in 1998 and $1,440,168 greater in 1997. Inventories include the following major classifications: October 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Scrap steel .........$ 4,876,856 $ 7,579,552 $ 5,313,335 Melt supplies ....... 2,408,961 2,212,939 2,416,879 Billets ............. 3,499,907 5,960,432 7,103,342 Mill supplies ....... 3,176,619 3,484,688 3,085,749 Finished steel ...... 17,940,557 17,576,806 16,395,594 ---------- ---------- ---------- Total inventories $31,902,900 $36,814,417 $34,314,899 ========== ========== ========== (NOTE 3) PROPERTIES AND DEPRECIATION Depreciation expense for the years ended October 31, 1998, 1997 and 1996 amounted to $9,216,133, $9,456,201 and $8,366,012, respectively. Generally, the rates of depreciation range from 3.3% to 20% for buildings and improvements and 5% to 33% for machinery and equipment. Property additions in 1998, 1997 and 1996 included $53,722, $54,668 and $438,346 of interest capitalized, respectively. During the year ended October 31, 1998, the Company recorded a $733,067 loss on assets abandoned at its Salem, Virginia plant. This loss was included in the statement of earnings in administrative expenses. (NOTE 4) SHORT-TERM DEBT On February 15, 1996, the Company replaced all of its domestic bank lines of credit with a syndicated loan facility, part of which provides a five-year $30,000,000 revolver, as explained in note 6. Also provided by this credit facility is a $5,000,000 line of credit to be used to cover overdrafts in a demand deposit account. This line of credit was unused at October 31, 1998 and 1997. (NOTE 5) INCOME TAXES The Company files a consolidated federal income tax return. The federal income tax returns through October 31, 1990 have been examined by the Internal Revenue Service with all issues settled. The following is a reconciliation of income tax expense per consolidated statements of earnings to that computed by using the federal statutory tax rate of 35% for 1998, 1997 and 1996:
Year Ended October 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Federal tax at the statutory rate .....................$11,005,216 $ 9,481,293 $ 8,652,225 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit ...... 776,339 874,960 785,077 Other items, net .................................... (213,489) (149,913) (131,494) ---------- ---------- ---------- Income taxes per consolidated statements of earnings ..$11,568,066 $10,206,340 $ 9,305,808 ========== ========== ========== The components of income tax expense are as follows: Year Ended October 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Current income taxes: Federal ...........................................$10,589,161 $ 8,156,471 $ 7,192,428 State ............................................. 1,235,565 1,269,798 1,101,851 ---------- ---------- ---------- Total current income taxes .......................... 11,824,726 9,426,269 8,294,279 ---------- ---------- ---------- Deferred income taxes (benefit): Federal ........................................... (215,462) 703,776 905,569 State ............................................. (41,198) 76,295 105,960 ---------- ---------- ---------- Total deferred income taxes (benefit) ............... (256,660) 780,071 1,011,529 ---------- ---------- ---------- Total income taxes ..................................$11,568,066 $10,206,340 $ 9,305,808 ========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes and tax credit carryforwards. As of October 31, 1998, 1997 and 1996, the Company had total deferred tax liabilities of $13,687,507, $13,547,110 and $12,594,700, respectively, and deferred tax assets of $1,608,938, $1,211,881 and $1,039,542, respectively. Deferred tax liabilities result exclusively from excess tax depreciation, and deferred tax assets result, primarily, from reserves not currently deductible of $792,089 for 1998, $736,340 for 1997 and $675,026 for 1996. There were no valuation allowances. 14 (NOTE 6) LONG-TERM DEBT Long-term debt consisted of the following:
October 31, ---------------------------- 1998 1997 ---------- ---------- Syndicated term loan, unsecured, payable in quarterly installments of $750,000. Interest payable quarterly at the LIBOR rate of 5.69% plus .60%. Due February 21, 2006 .......................................$22,500,000 $25,500,000 Term loan, unsecured, payable in monthly installments of $104,167, plus interest at 6.44%. Due September 1, 2003. ....................................... 6,041,667 7,291,667 Revolving credit agreement .............................................................. - - ---------- ---------- Total ................................................................................... 28,541,667 32,791,667 Less - current portion .................................................................. 4,250,000 4,250,000 ---------- ---------- Long-term debt ..........................................................................$24,291,667 $28,541,667 ========== ==========
In February 1996, the Company entered into a $30,000,000 revolving credit agreement with a group of banks that extends through February 21, 2001. Under the revolving credit agreement, interest is payable at October 31, 1998 and 1997, at the LIBOR rates of 5.69% plus .30% and 5.72% plus .30%, respectively. The agreement requires the Company to pay a facility fee at an annual rate of .125% for 1998 and 1997. The Company does not use derivatives for trading purposes. Interest rate swaps, a form of derivative, are used to manage interest costs. Currently, the Company maintains an interest rate swap agreement resulting in a fixed rate of 6.68% on the notional amount of $22,500,000 through February 2006. The difference between fixed rate and floating rate interest is recognized as an adjustment to interest expense in the period incurred. The fair value of the current swap is estimated based on current settlement prices and was approximately $893,000, in favor of the lender, at October 31, 1998. Under the loan agreements, the Company must maintain consolidated current assets of not less than 1.5 times consolidated current liabilities and maintain consolidated funded debt of not greater than .5 times consolidated total capitalization. Currently, consolidated tangible net worth cannot be less than $80,651,993. In addition, the ratio of EBITDA to the sum of current maturities of long-term debt and consolidated interest expense must equal at least 1.5. The Company was in compliance with the loan agreements as of October 31, 1998 and 1997. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the year end fair value of significant financial instruments, including long-term debt. The Company's carrying value of long-term debt approximates fair value. The fair value of the 1998 swap agreement is mentioned above. Annual aggregate long-term debt maturities are $4,250,000 for each of the next four years and $4,041,667 in 2003. (NOTE 7) COMMITMENTS AND CONTINGENT LIABILITIES At October 31, 1998, the Company was committed for $6,239,602 for purchases of equipment and production facilities. The Company and the County of Roanoke, Va., in 1988, entered into consent agreements with the United States Environmental Protection Agency (EPA) for the clean-up of specific portions of a landfill site and adjacent streams near Salem, Va. One agreement was a "remedial action" for the removal and off-site treatment and disposal of an emission control dust pile located on the site. This action was completed during 1995 with all costs reflected in the consolidated financial statements through that period. Another agreement pertained to a "removal action" for the removal and treatment of emission dust, sediment and contaminated soil associated with the streams. The EPA approved on-site stabilization and disposal, and certified completeness of all required work on September 14, 1997, all costs for which are reflected in the accompanying consolidated financial statements. The Company entered into a cost sharing agreement with the County of Roanoke for both response actions at the landfill. It is not known whether other potentially responsible parties will pay some of the costs. The final component of the requirements of the order was reimbursement of certain EPA oversight charges, which were paid during the current year. (NOTE 8) COMMON STOCK AND EARNINGS PER SHARE Outstanding common stock consists of 560,000 shares, issued prior to October 31, 1967, at no stated value; 750,656 shares issued subsequent to October 31, 1967, at a stated value of $.50 per share; 1,310,656 shares issued in 1981 at no stated value; 1,310,656 shares, less the equivalent of 42 fractional shares, issued in 1986 at no stated value; 1,965,963 shares, less the equivalent of 151 fractional shares, issued in 1988 at no stated value; 800 shares issued in 1989 at no stated value; 3,000 shares issued in 1992 at no stated value; 1,200 shares issued in 1993 at no stated value; 44,000 shares issued in 1994 at no stated value; 3,023,804 shares, less the equivalent of 152 fractional shares, issued in 1995 at no stated value; 23,750 shares issued in 1996 at no stated value; 35,950 shares issued in 1997 at no stated value and 4,572,870 shares, less the equivalent of 158 fractional shares, issued in 1998 at no stated value, less 1,253,800 treasury (repurchased) shares retired during 1998. During the years ended October 31, 1986 and October 31, 1996, the Company increased authorized common stock from 4,000,000 shares to 10,000,000 shares, and from 10,000,000 shares to 20,000,000 shares, respectively. The Company retired in 1998 all of its treasury stock applicable to the shares acquired through its common stock repurchase plans. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which changes the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the statement of earning. Basic earnings per share is 15 computed by dividing the net income available to common stockholders by the weighted average shares of outstanding common stock. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common stock equivalents such as stock options and warrants. Basic earnings per share have been computed based on the weighted average number of shares outstanding of 11,132,910 for 1998, 11,230,794 for 1997 and 11,815,323 for 1996. The average number of shares outstanding were weighted after giving effect to both stock options exercised and repurchased common stock during 1998, 1997 and 1996 and to a three-for-two stock split effective March 25, 1998. Diluted earnings per share have been computed based on the weighted average number of shares outstanding (including outstanding and exercisable stock options) of 11,248,029 for 1998, 11,300,634 for 1997 and 11,870,704 for 1996. (NOTE 9) PROFIT SHARING PLANS The Company, including Shredded Products Corporation, RESCO Steel Products Corporation and Socar, Inc., has qualified profit sharing plans which cover substantially all employees. John W. Hancock, Jr., Inc. has an unqualified plan. Socar, Inc.'s annual contribution is discretionary while the other plans' annual contribution cannot exceed 20% of their combined earnings before income taxes. Total contributions of all Companies shall not exceed the maximum amount deductible for such year under the Internal Revenue Code and amounted to $5,674,077 for 1998, $5,138,241 for 1997 and $4,340,397 for 1996. (NOTE 10) INTEREST EXPENSE Interest expense is stated net of interest income of $1,214,017 in 1998, $702,333 in 1997 and $711,274 in 1996. (NOTE 11) STOCK OPTIONS Under a nonqualified stock option plan approved by the stockholders in 1989, the Company may issue 112,500 shares of unissued common stock to employees of the Company each plan year. Under a non-statutory stock option plan approved by the Board in 1997, the Company may issue 25,000 shares of unissued common stock to directors of the Company over the life of the plan. Options for 84,000 shares were granted for 1998, for 82,000 shares for 1997, for 75,000 shares for 1996, for 41,500 shares for 1995, for 36,000 shares for 1992 and for 32,500 shares for 1990. Three-for-two stock splits in 1998 and 1995 increased these grants an additional 117,275 and 32,300 shares, respectively. These options are exercisable for a term of five years for employees and ten years for directors from the date of grant, and a summary follows:
Weighted Average Exercise Price Per Share Shares --------------- --------- Balance, November 1, 1995 ........................................................... $ 5.18 75,150 Granted ............................................................................. 7.93 75,000 Exercised ........................................................................... 4.47 (23,750) Expired or terminated ............................................................... 2.74 (3,000) ------- Balance, October 31, 1996 ........................................................... 7.05 123,400 Granted ............................................................................. 9.06 82,000 Exercised ........................................................................... 7.41 (35,950) Expired or terminated ............................................................... 6.61 (16,750) ------- Balance, October 31, 1997 ........................................................... 8.23 152,700 Granted ............................................................................. 15.16 84,000 Stock split ......................................................................... 10.73 117,275 Exercised ........................................................................... 7.52 (56,750) Expired or terminated ............................................................... - - ------- Balance, October 31, 1998 ........................................................... 11.31 297,225 ======= Shares available for grant at year end .............................................. None =======
The Company applies APB 25 and related Interpretations in accounting for the nonqualified stock option plans. Accordingly, compensation cost of $295,313, $177,188 and $157,500 for the years ended October 31, 1998, 1997 and 1996, respectively, was recognized for the difference between the exercise price and the fair value of the stock price at the grant date. Had compensation cost been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended October 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net earnings: As reported ........................................................ $19,875,409 $16,883,068 $15,414,834 ========== ========== ========== Pro forma .......................................................... $19,573,253 $16,761,234 $15,307,091 ========== ========== ========== Basic net earnings per share: As reported ........................................................ $ 1.79 $ 1.50 $ 1.30 ========== ========== ========== Pro forma .......................................................... $ 1.76 $ 1.49 $ 1.30 ========== ========== ========== Diluted net earnings per share: As reported ........................................................ $ 1.77 $ 1.49 $ 1.30 ========== ========== ========== Pro forma .......................................................... $ 1.74 $ 1.48 $ 1.29 ========== ========== ==========
16 The fair value per share of options granted during the years ended October 31, 1998, 1997 and 1996 was $7.64, $3.90 and $3.78, respectively. The following table summarizes information about stock options outstanding and exercisable at October 31, 1998:
Number Remaining Outstanding and Contractual Life Exercise Prices Exercisable in Years --------------- --------------- ---------------- $ 6.04 15,600 1.25 7.93 47,125 2.33 8.93 98,500 3.33 10.50 10,000 8.33 14.88 112,500 4.25 17.50 13,500 9.25 ------- 297,225 =======
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 2.18%, 2.90% and 3.09%; expected volatility of 47.25%, 37.33% and 43.66%; risk-free interest rates of 4.23%, 5.71% and 6.07%; and an expected life of 5 years. (NOTE 12) HEALTH BENEFITS AND POSTRETIREMENT COSTS Effective November 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). The Company currently provides certain health care benefits for terminated employees who have completed 10 years of continuous service after age 45, and SFAS 106 requires the Company to accrue the estimated cost of such benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits as claims were incurred. SFAS 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to twenty years. The Company has elected to recognize this obligation of approximately $1,381,000 over a period of twenty years. Cash flows are not affected by implementation of SFAS 106, but implementation decreased net earnings from continuing operations for 1998, 1997 and 1996 by approximately $188,695, $154,400 and $154,500, respectively. The Company's postretirement benefit plan is not funded. The accrued postretirement benefit cost recognized in the balance sheets at October 31 is as follows:
1998 1997 1996 ---------- ---------- ---------- Accumulated postretirement benefit obligation: Retirees ..............................................................$ 474,388 $ 402,724 $ 378,968 Fully eligible plan participants ...................................... 793,117 672,238 652,789 Other active plan participants ........................................ 1,018,324 727,720 688,737 ---------- ---------- ---------- Accumulated postretirement benefit obligation ......................... 2,285,829 1,802,682 1,720,494 Unrecognized net actuarial gains ........................................ 43,959 293,127 196,345 Unrecognized transition obligation ...................................... (1,036,000) (1,105,000) (1,174,000) ---------- ---------- --------- Accrued postretirement benefit cost ................................... $1,293,788 $ 990,809 $ 742,839 ========== ========== ========== Net postretirement benefit cost consisted of the following components: Service cost .......................................................... $ 194,393 $ 164,689 $ 141,393 Interest cost on accumulated postretirement benefit obligation ........ 144,940 124,877 130,705 Net amortization ...................................................... 69,000 54,108 64,185 ---------- ---------- ---------- Net postretirement benefit cost ....................................... $ 408,333 $ 343,674 $ 336,283 ========== ========== ==========
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.5% for 1997, decreasing linearly each successive year until it reaches 5.75% in 2005, after which it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately $153,000 and the net postretirement benefit cost by approximately $30,000. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 8% for the years ended October 31, 1998 and 1997, respectively. (NOTE 13) UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 1998 follows:
Three Months Ended -------------------------------------------------------------- January 31 April 30 July 31 October 31 ---------- ---------- ---------- ---------- Sales ................................................ $71,603,735 $73,778,930 $73,119,315 $76,701,994 ========== ========== ========== ========== Gross earnings ....................................... $12,907,751 $13,394,849 $14,182,084 $17,235,581 ========== ========== ========== ========== Net earnings ......................................... $ 4,250,992 $ 4,038,995 $ 4,509,449 $ 7,075,973 ========== ========== ========== ========== Net earnings per share: Basic ............................................. $ .38 $ .36 $ .41 $ .64 ========== ========== ========== ========== Diluted ........................................... $ .38 $ .36 $ .40 $ .63 ========== ========== ========== ==========
17 Summarized unaudited quarterly financial data for 1997 follows:
Three Months Ended ------------------------------------------------------------- January 31 April 30 July 31 October 31 ---------- ---------- ---------- ---------- Sales ................................................ $58,351,734 $61,299,896 $68,768,769 $76,688,240 ========== =========== ========== ========== Gross earnings ....................................... $ 9,330,810 $11,851,198 $13,581,218 $16,965,770 ========== =========== ========== ========== Net earnings ......................................... $ 2,584,674 $ 3,459,070 $ 4,299,552 $ 6,539,772 ========== =========== ========== ========== Net earnings per share: Basic ............................................. $ .23 $ .31 $ .38 $ .58 ========== =========== ========== ========== Diluted ........................................... $ .23 $ .31 $ .38 $ .58 ========== =========== ========== ==========
(NOTE 14) SUBSEQUENT EVENT On November 10, 1998, the Company announced that it had entered into a definitive agreement to acquire Steel of West Virginia, Inc. ("SWVA"). The transaction, to be accounted for under the purchase method, contemplates that the Company will pay cash of $10.75 per share for each of the approximately 6,000,000 outstanding shares of common stock of SWVA, on a fully-diluted basis, including the assumption of all of SWVA's indebtedness. Under the terms of the agreement, which was unanimously approved by the Boards of Directors of both companies, the offer to purchase is subject to customary conditions, including the tender of a majority of the shares of SWVA common stock and termination of the Hart-Scott-Rodino waiting period. Upon merger, SWVA will become a wholly-owned subsidiary of Roanoke Electric Steel Corporation. The obligations of the Company are not subject to any financing condition, as a bank syndicate has been arranged for financing the transaction. SWVA, headquartered in Huntington, West Virginia, operates a mini-mill in Huntington as well as steel fabrication facilities in Huntington and Memphis, Tennessee, custom designing and manufacturing special steel products principally for use in the construction of truck trailers, industrial lift trucks, off-highway construction equipment, manufactured housing, guard rail posts, and mining equipment. For the year ended December 31, 1997, SWVA reported net sales, net income and total stockholders' equity of $112,776,000, $5,259,000 and $54,302,000, respectively. INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Roanoke Electric Steel Corporation: We have audited the accompanying consolidated balance sheets of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries as of October 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries at October 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Winston-Salem, North Carolina November 18, 1998 STOCK ACTIVITY The Common Stock of Roanoke Electric Steel Corporation is traded nationally over the counter on Nasdaq National Market using the symbol RESC. At year end, there were approximately 770 shareholders of record.
1998 1997 Stock Prices Stock Prices Cash Dividends - ------------------------------------------------------------------------ ---------------------------------------------- High Low High Low 1998 1997 - ------------------------------------------------------------------------ ---------------------------------------------- First Quarter ................ 17 53/64 12 53/64 11 37/64 9 First Quarter ................. $.087 $.080 Second Quarter ............... 21 11/64 15 53/64 11 1/4 9 27/64 Second Quarter ................ .095 .080 Third Quarter ................ 22 1/2 16 3/16 12 43/64 9 27/64 Third Quarter ................. .095 .087 Fourth Quarter ............... 17 3/4 10 1/8 15 21/64 12 11/64 Fourth Quarter ................ .095 .086
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES In 1996, sales declined 5.3% due, primarily, to sharp reductions in both selling prices for bar products and billet shipments, while selling prices for billets declined only slightly. However, sales were favorably impacted by increased bar shipments and selling prices for fabricated products, while shipments of fabricated products were flat. Selling prices for bar products declined as a result of increased competition, prompting industry-wide price reductions. The planned shutdown of the melt shop during the year to install a new ladle furnace and upgrade an electric arc furnace was unexpectedly prolonged due to problems with construction and installation, resulting in an 11% decline in billet production for the year and causing the significant reduction in billet shipments. In addition, the export markets for billets remained highly competitive. Billet selling prices declined with a downward trend in scrap prices, which normally trigger changes in billet prices. Bar products shipments increased as demand and backlogs remained high, in spite of the increased competition. Selling prices for fabricated products improved as a result of generally strong business conditions within the commercial construction industry. The 7.6% increase in sales in 1997 was attributable to increased shipments of bar products and billets, together with improved selling prices for bar products. Sales were negatively affected by lower selling prices for fabricated products and billets, while shipments of fabricated products were flat. Bar products shipments and selling prices increased as competition eased and order levels, backlogs and prices improved with demand. Billet shipments increased as a result of increased production, which hampered shipments last year, and improved domestic demand, while billet selling prices declined due to lower scrap prices. Competitive conditions in the commercial construction industry caused the lower selling prices for fabricated products; even though, market conditions continued to be favorable. Sales increased 11.4% in 1998 as a result of substantially increased billet shipments in addition to improved fabricated products shipments and higher selling prices for steel bar products. Shipments of bar products declined during the year, while billet and fabricated products prices were flat. Record raw steel production and unprecedented demand contributed to the 58.5% increase in billet shipments. Continued favorable market conditions in the construction industry led to the increased shipments and level selling prices for fabricated products. In spite of a 3.8% reduction in bar products shipments, business conditions remained strong and bar prices moved up 6.2% for the year. Billet prices were flat because scrap prices were relatively unchanged. COST OF SALES AND GROSS MARGINS The decrease in cost of sales in 1996 was due, mainly, to the decreased tons of billets shipped, together with a reduction in the cost of scrap steel, in spite of the increased bar products shipments. Cost of sales increased in 1997, primarily, as a result of the increased tons shipped of bar products and billets. In 1998, cost of sales increased due to the improved billet and fabricated products shipments, even though shipments of bar products declined. In 1996, the gross profit percentage declined to 19.5%. The decrease was, primarily, the result of the lower selling prices for bar products and billets, and the negative effect of reduced billet production on fixed costs, which more than offset the effects of the lower scrap costs and the improvement in fabricated products selling prices. Gross earnings as a percentage of sales were flat in 1997, in spite of higher selling prices for bar products, lower scrap costs and increased production. These were offset by lower selling prices for fabricated products and billets and, more importantly, by a higher percentage of billet shipments in the total mix which carry lower margins. In 1998, gross earnings as a percentage of sales remained flat, even though selling prices for bar products increased and raw steel production improved by 12%. As in 1997, the increased billet shipments at lower margins negatively impacted margins. The decline in gross profit margins and the reduced billet shipments were the main causes for the lower gross profits and net earnings in 1996. For 1997, the increased shipments of bar products and billets accounted for the improved gross and net earnings. The combination of increased volume at comparable margins were, primarily, responsible for the improved gross and net earnings in 1998. ADMINISTRATIVE EXPENSES In 1996, the majority of the increase in administrative expenses was attributable to bad debts and insurance expenses. The percentage of administrative expenses to sales increased from 6.2% to 7.0%. The percentage declined in 1997 to 6.7%; even though administrative expenses increased, primarily, as a result of higher executive and management compensation which increased with substantially higher production, shipments and earnings in accordance with various incentive arrangements. Other expenses such as insurance and professional fees increased, but were offset by a reduction in bad debts. In 1998, the percentage of administrative expenses to sales remained the same at 6.7%; however, administrative expenses increased substantially. Executive and management compensation increased with the improved shipments and earnings. Other expenses such as insurance, office utilities and repairs, and selling expenses increased, while bad debts and 19 professional expenses declined. Administrative expenses also included a charge of $733,067 for the abandonment of assets. Without this charge, administrative expenses as a percentage of sales would have been 6.4% of sales. INTEREST EXPENSE In 1996, interest expense declined due to lower interest rates, higher interest income of $711,274 and increased capitalized interest of $438,346, in spite of higher average borrowings. Interest expense increased in 1997, as higher interest rates, reduced interest income of $702,333 and lower capitalized interest of $54,668 more than offset lower average borrowings. In 1998, interest expense declined 49% as a result of lower average borrowings and increased interest income of $1,214,017, while capitalized interest declined to $53,722 and interest rates were virtually unchanged. PROFIT SHARING EXPENSE AND INCOME TAXES Contributions to various profit sharing plans are determined as a proportion of earnings before income taxes and should normally increase and decrease with earnings. In 1996 and 1997, income tax expense as a percentage of pretax income was relatively constant. The effective rate declined in 1998 due, primarily, to substantial Virginia recycling tax credits. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At October 31, 1998, working capital was $74,917,878. Cash, investments and accounts receivable of $70,309,722 were more than adequate to pay current liabilities of $30,490,039. Cash flows from operating activities were $34,571,627 in 1998. Repurchases of the Company's common stock, commitments for the purchase of property, plant and equipment of $6,239,602, and 1999 maturities of long-term debt of $4,250,000 will affect future liquidity and working capital; however, cash flows from operations should provide adequate working capital to fund these items. The pending merger with Steel of West Virginia, if approved, will affect liquidity and capital resources as borrowings will increase substantially. Long-term debt decreased $4,250,000 during the year. Our revolving credit facility of $30,000,000 was unused at year end and provides additional liquidity and capital resources. The ratio of debt to equity was only .58 to 1 - down from .66 to 1 last year. The percentage of long-term debt to total capital decreased from 21.1% to 16.9%. The revolver, working capital and conservative debt levels have provided the capital resources necessary to maintain our competitive position and ensure future growth. Since 1997, the Company has been diligently involved in converting our computer hardware and software to be Year 2000 compliant. It has been assigned the highest priority within our information systems area utilizing all internal personnel available. External resources have been added to assist in the task and continue ongoing projects. We have identified the systems in our manufacturing facilities and offices that may be affected and established a completion goal of December 31, 1998. Conversion of a number of systems has been completed on schedule. To ensure compliance by third-party software vendors, we are requesting in writing from our vendors confirmation of their Year 2000 compliance. We have also purchased analytical tools to check not only our computers for compliance, but also loaded software. The Company has sent compliance questionnaires to its major suppliers to assess their readiness and our needs to seek alternate suppliers. We have not totally assessed the risks of Year 2000 issues, nor have we developed any contingency plans. We plan to utilize all of 1999 for such matters and testing our conversions. The estimated costs of Year 2000 issues are approximately $300,000 and are not expected to have a material effect on results of operations, liquidity or capital resources. Management is of the opinion that adoption of the Clean Air Act Amendments or any other environmental concerns will not have a materially adverse effect on the Company's operations, capital resources or liquidity (see note 7). Additional future capital expenditures are presently estimated to be less than $1,000,000. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include economic and industry conditions, availability and prices of supplies, prices of steel products, competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns and others. 20
OFFICERS Donald G. Smith, 63 H. James Akers, Jr., 59 Donald R. Higgins, 53 Chairman, President, Treasurer Vice President, Melt Operations Vice President - Sales and Chief Executive Officer 42 years of service 33 years of service 41 years of service Frank S. Key, Jr., 74 Daniel L. Board, 61 Watson B. King, 59 President, Socar, Inc. Vice President, Purchasing Vice President, Mill Operations 32 years of service 38 years of service 37 years of service James F. Garlow, 62 Thomas J. Crawford, 43 John E. Morris, 57 President, John W. Hancock, Jr., Inc. Vice President Administration Vice President - Finance 37 years of service and Secretary and Assistant Treasurer 21 years of service 27 years of service BOARD OF DIRECTORS Frank A. Boxley Charles L. Lunsford, II Paul E. Torgersen President, Retired Chairman, President, Southwest Construction, Inc. Charles Lunsford Sons & Associates Virginia Polytechnic Institute and State University George B. Cartledge, Jr. Thomas L. Robertson President, President and Chief Executive Officer, John D. Wilson Grand Home Furnishings Carilion Health System Retired President, Washington & Lee University George W. Logan Donald G. Smith Chairman, Chairman, President, Treasurer Valley Financial Corporation and Chief Executive Officer, Roanoke Electric Steel Corporation COMMITTEES OF THE BOARD Executive: Audit: Compensation and Stock Option: D.G. Smith, Chairman; T.L. Robertson, Chairman; G.B. Cartledge, Jr., Chairman; T.L. Robertson, P.E. Torgersen, G.W. Logan, P.E. Torgersen F.A. Boxley, C.I. Lunsford, II, G.B. Cartledge, Jr. J.D. Wilson Profit Sharing: C.I. Lunsford, II, Chairman; D.G. Smith, J.E. Morris CORPORATE INFORMATION Annual Meeting Transfer Agent Stock Listing The 1999 annual meeting of Wachovia Bank, N.A. Nasdaq National Market; Symbol; RESC shareholders will be held at Boston, Massachusetts 10:00 a.m. on Tuesday, February 16, 1-800-633-4236 Financial Information 1999 at the American Electric Analysts, investors and others seeking Power Company Building, 40 Franklin Written shareholder correspondence financial information are requested to Road, S.W., Roanoke, Virginia. and requests for transfer should be contact; John E. Morris, Vice President- sent to: Finance or Thomas J. Crawford, Vice General Counsel Wachovia Bank, N.A. President Administration and Secretary. Woods, Rogers & Hazlegrove P.L.C. c/o Boston EquiServe Roanoke, Virginia P.O. Box 8218 Copies of the Corporation's Annual Report Boston, Massachusetts 02266-8218 or Form 10-K may be obtained without Independent Auditors charge by writing to Mr. Crawford at the Deloitte & Touche LLP Dividend Reinvestment Plan address below. Winston-Salem, North Carolina Roanoke Electric Steel offers its shareholders a dividend reinvestment Corporate Office plan through its transfer agent. 102 Westside Boulevard For more information, please contact P.O. Box 13948 the transfer agent or Roanoke, Virginia 24038 Thomas J. Crawford, Vice President 540-342-1831 Administration and Secretary.
[LOGO] ROANOKE ELECTRIC STEEL CORPORATION P.O. Box 13948 Roanoke, Virginia 24038-3948 540-342-1831 EX-27 3
5 The Schedule contains summary financial information extracted from the 4th Quarter Consolidated Balance Sheets and Statment of Earnings and is qualified in its entirety by reference to such financial statements. YEAR OCT-31-1998 OCT-31-1998 16,167,025 11,727,636 42,415,061 0 31,902,900 105,407,917 152,158,270 68,522,086 189,210,889 30,490,039 24,291,667 0 0 2,858,128 116,589,760 189,210,889 295,203,974 295,203,974 237,483,709 237,483,709 25,446,047 0 830,743 31,443,475 11,568,066 19,875,409 0 0 0 19,875,409 1.79 1.77
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