-----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, PINDJ4aHlFnb7Aa2H7CrZw1jmN61LycowF3YmEXvxfXZ9QdCVyUiBA6SzE3Xqbcu TQa5QzyvnrTYQL3UTZzfjw== 0000084278-00-000003.txt : 20000203 0000084278-00-000003.hdr.sgml : 20000203 ACCESSION NUMBER: 0000084278-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000128 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: 515248 BUSINESS ADDRESS: STREET 1: 102 WESTSIDE BLVD N W STREET 2: P O BOX 13948 CITY: ROANOKE STATE: VA ZIP: 24038 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, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission file number 0-2389 ROANOKE ELECTRIC STEEL CORPORATION (Exact name of Registrant as specified in its charter) Virginia 54-0585263 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 13948, Roanoke, Virginia 24038-3948 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (540) 342-1831 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) State the aggregate market value of the voting stock held by nonaffiliates of the Registrant. Aggregate market value at December 31, 1999: $163,992,449 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of December 31, 1999. 10,993,388 Shares outstanding Portions of the following documents are incorporated by reference: (1) 1999 Annual Report to Stockholders in Part II. (2) Proxy Statement dated December 27, 1999 in Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. During the fiscal year ended October 31, 1999, the Registrant continued for the most part to operate its business as it has the past four years by manufacturing merchant steel bar products, fabricating open-web steel joists and concrete reinforcing steel, and extracting scrap steel and other materials from junked automobiles. Roanoke Technical Treatment & Services, Inc., a Roanoke, Virginia subsidiary, was formed in 1990 to license a process for the treatment of electric arc furnace dust, and currently is uncertain as to a specific time for start-up. During fiscal year 1994, the Registrant's auto shredding subsidiary, Shredded Products Corporation, completed construction of a modern facility in Rocky Mount, Virginia, and in November 1994 began operations at this locality, at a total investment in excess of $8,000,000 for plant and equipment. This facility, with its own landfill, is providing considerable savings in waste disposal costs. In addition, cost savings and better metal recoveries are being achieved through the use of the more technologically advanced equipment. During the later part of 1996, the Registrant, at its main plant, completed the installation of a new ladle refining furnace and the upgrade of an electric arc furnace, for approximately $17,000,000. With this new state-of-the-art equipment in operation, the Registrant has increased raw steel production, improved quality, reduced production costs and improved operating efficiencies. In January 1996, Socar, Inc. , a South Carolina subsidiary, sold its long-time idle plant in Bucyrus, Ohio to the unaffiliated manufacturer who had been leasing the facility for several years under a lease-purchase agreement, for a final settlement price of $130,000. On December 16, 1998, the Registrant acquired all of the outstanding common shares of Steel of West Virginia, Inc. ("SWVA"), a Huntington, West Virginia steel manufacturer, upon completion of its cash tender offer. The consideration given was approximately $117.1 million, including the assumption of approximately $52.3 million of indebtedness, which translates into $10.75 net per SWVA share, for approximately 6,028,000 shares on a fully-diluted basis. Upon merger, SWVA became a wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each share of SWVA common stock not purchased in the offer (approximately 3.6% of SWVA's outstanding shares) was converted, subject to appraisal rights, into the right to receive $10.75 in cash, without interest. On the date of acquisition the Registrant closed on $180,000,000 of secured credit facilities with a syndicate of four banks. The facilities are comprised of a $150,000,000 seven year term loan and a $30,000,000 five year revolver. The term loan was used to purchase all of the outstanding capital stock of SWVA, and refinance both the existing term debt of the Registrant and most of SWVA's bank debt assumed through the merger. SWVA operates a mini-mill in Huntington, West PART I (con'd.) Virginia, and steel fabrication facilities in Huntington and Memphis, Tennessee, while custom designing and manufacturing special steel products principally for use in the construction of truck trailers, industrial lift trucks, off-highway construction equipment (such as bulldozers and graders), manufactured housing, guardrail posts and mining equipment. The Registrant and SWVA do not generally compete as regards customers and products. The acquisition was accounted for as a purchase. Accordingly, the results of operations and cash flows were reflected in the consolidated financial statements from the date of acquisition, and the acquired assets and liabilities were included in the 1999 consolidated balance sheet at values based on a purchase price allocation, rendered through appraisals and other evaluations. The other subsidiaries of the Registrant, John W. Hancock, Jr., Inc. and RESCO Steel Products Corporation, have had no material changes in operations or in the mode of conducting their business for the past five years. John W. Hancock, Jr. founded both the Hancock joist subsidiary and its parent, Roanoke Electric Steel Corporation, and served on the Registrant's Board of Directors as Chairman of the Executive Committee until his death in March 1994. (b) Financial Information about Industry Segments. The Registrant's business consists of one industry segment or line of business, which is the extracting of scrap metal from discarded automobiles and the manufacturing, fabricating and marketing of merchant steel bar products, reinforcing bars, open-web steel joists and billets. The industry segment consists of three classes of products - merchant steel products, fabricated bar joists and reinforcing bars and billets. PART I (con'd.) FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND CLASSES OF PRODUCTS OR SERVICES 1999 1998 1997 Sales to Unaffiliated Customers: Merchant Steel $205,420,966 $116,226,463 $113,588,649 Bar Joists & Rebar $125,854,046 $121,000,869 $115,017,371 Billets $ 41,687,938 $ 57,976,642 $ 36,502,619 Total Consolidated Sales $372,962,950 $295,203,974 $265,108,639 Net Earnings from Operations $ 22,647,918 $ 19,875,409 $ 16,883,068 Identifiable Assets $352,129,222 $189,210,889 $176,860,219 (c) Narrative Description of Business. (1) (i) The Registrant manufactures merchant steel products consisting of Angles, Plain Rounds, Flats, Channels and Reinforcing Bars of various sizes and lengths. The principal markets for the Registrant's products are steel fabricators and steel service centers. The products are distributed directly to customers from orders solicited by a paid sales staff of the Registrant. The Registrant's subsidiary, Shredded Products Corporation, is involved in the extraction of scrap iron and steel and other metals from junked automobiles and other waste materials. Almost all of the ferrous material is used by the Parent as raw materials. The non-ferrous metals are sold to unrelated purchasers. Two other subsidiaries, John W. Hancock, Jr., Inc. and Socar, Inc., are engaged in the manufacturing of long- and short-span steel joists. Joists are open-web steel horizontal supports for floors and roofs, used primarily in the construction of commercial and industrial buildings such as shopping centers, factories, warehouses, hospitals, schools, office buildings, nursing homes, and the like. Joists are cheaper and lighter than structural steel or reinforced concrete. The joists are distributed by these subsidiaries to their customers from orders solicited by manufacturer's representatives and pursuant to successful bids placed directly by the companies. PART I (con'd.) The Registrant's subsidiary, RESCO Steel Products Corporation, fabricates concrete reinforcing steel by cutting and bending rebars to contractors' specifications. The rebars are distributed to contractors from orders solicited by a paid sales staff and pursuant to successful bids placed directly by the subsidiary. The Registrant's subsidiary, Steel of West Virginia, Inc., operates both a steel mini-mill which produces specialty steel sections, and fabrication facilities which add finishing operations to create custom-designed products placed directly into customers' assembly lines. The niche markets supplied with these cross-member and sub-frame section of products include truck trailers, industrial lift trucks, guardrail posts, manufactured housing, off-highway construction equipment, and mining equipment. These products are marketed by senior management and in-house sales representatives of SWVA, whose sales efforts cover all of the continental United States, and to a very small degree, certain foreign markets. (ii) The Registrant has not in fiscal 1999 introduced a new product or begun to do business in a new industry segment that will require the investment of a material amount of assets or that otherwise is material. (iii) The Registrant's main raw material, scrap steel, is supplied for the most part by scrap dealers within a 250 mile radius of the mill. This raw material is purchased through the David J. Joseph Company, scrap brokers. The Shredded Products subsidiary supplies 10,000 to 15,000 tons of scrap per month. Although scrap is generally available to the Registrant, the price of scrap steel is highly responsive to changes in demand, including demand in foreign countries as well as in the United States. The ability to maintain satisfactory profit margins in times when scrap is relatively high priced is dependent upon the levels of steel prices, which are determined by market forces. Alloys and other materials needed for the melting process are provided by various domestic and foreign companies. Shredded Products Corporation often experiences difficulty in purchasing scrap automobiles at a satisfactory level. Competition from an increasing number of shredding operations and reluctance by dealers to sell scrap automobiles due to market conditions are the main causes. High offering prices generally increase the supply; however, the increased cost to produce sometimes is very competitive with the price of similar scrap that can be purchased on the outside. Substantially all of John W. Hancock, Jr., Inc.'s steel components are purchased from the Parent, which is located conveniently nearby and, therefore such components are generally available to the Company as needed. PART I (con'd.) RESCO Steel Products Corporation purchases most of its steel components from suppliers within its market area, determined mainly by freight cost. Such components would be generally available to the Company, since the Parent could produce and supply this raw material, as needed. Socar, Inc. receives most of its raw steel material from the Parent and other nearby suppliers, the determinant usually being freight cost. The availability of raw materials is not of major concern to the Company, since the Parent could supply most of its needs. Steel of West Virginia, Inc., like the parent, uses scrap steel as its main raw material. Even though the purchase of steel scrap is subject to market conditions largely beyond its control, the Company is located in a scrap surplus region, and therefore typically maintains less than a one month supply of scrap, which keeps inventory costs to a minimum. Although one scrap dealer supplies 25% to 30% of SWVA's requirements, the Company believes that a number of adequate sources of scrap and other raw materials that it uses are readily available. SWVA has historically been successful in passing on scrap cost increases through price increases, however, the effect of market price competition has limited the Company's ability to increase prices. (iv) The Registrant currently holds no patents, trade marks, licenses, franchises or concessions that are material to its business operations. (v) The business of the Registrant is not seasonal. (vi) The Registrant does not offer extended payment terms to its customers nor is it normally required to carry significant amounts of inventory to meet rapid delivery requirements of customers; although, at times market conditions have required the stockpiling of popular bar products for rapid delivery. Working capital practices generally remain constant during the course of business except when the Registrant determines it to be advantageous to stockpile raw materials due to price considerations. (vii) During fiscal year 1999, sales (tons) by the Registrant to Steel of West Virginia, Inc., John W. Hancock, Jr., Inc., Socar, Inc. and RESCO Steel Products Corporation, wholly-owned subsidiaries, were approximately 5%, 10%, 6% and less than 1% of the Registrant's total sales (tons), respectively. The largest nonaffiliated customer purchased approximately 18% of total sales (tons) --- 6% of total sales (dollars). Alternative marketing and production arrangements were available to the Registrant, so that the loss of this nonaffiliate would not have had a materially adverse effect on the Registrant and its subsidiaries taken as a whole. (viii) The Registrant is of the opinion that the amount of its backlog is not generally material to an understanding of the business. All backlog is shipped within the current fiscal year. PART I (con'd.) (ix) None of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. (x) The Registrant competes with steel-producing mills of similar size operative within its market region and also larger mills producing similar products. The market region in which the Registrant sells its products mainly consists of the majority of states east of the Mississippi River. Price, including transportation cost, is the major determinant in securing business. Economic recession began to intensify competition during 1990, as selling prices dropped due to a softening in demand. This trend continued through most of 1991 with sharp declines in selling prices due to poor demand and excess inventories and capacity at most mills, although by year-end prices rose slightly. In comparison to the 1991 recession lows, order rates in 1992 showed some improvement while selling prices remained flat. In 1993, market conditions and demand improved significantly, while industry-wide selling prices increased to offset higher raw material costs. Demand in 1994 was fueled by continued improvement in business conditions and economic growth, with higher raw material costs again forcing selling prices upward, although some of the increased selling prices were demand driven. Even though market conditions and backlogs remained strong for much of 1995, shipments were flat due to customers' inventory reductions, while improved selling prices were attributable to higher raw material costs and rising demand, although by year-end prices fell slightly. Demand and backlogs continued high through 1996, allowing for increased bar product shipments, in spite of increased competition, which forced sharp reductions in selling prices throughout the industry. As competition eased during 1997, bar product shipments increased with higher demand, causing improvements in order levels, backlogs and prices. Strong business conditions kept bar prices up during fiscal 1998, in spite of the temporary drop in merchant bar shipments, caused by excess inventories at steel service centers. On December 16, 1998, the Registrant acquired 100% of the capital stock of Steel of West Virginia, Inc. ("SWVA"), a steel manufacturer, and 1999 results reflect the operations of SWVA from the date of acquisition. The 1998 financial statements have not been restated to include SWVA because the acquisition was treated as a purchase for accounting purposes. Consequently, the significant increase in 1999 sales was due, primarily, to the inclusion of SWVA's revenues in consolidated sales. Increased competition from foreign and domestic producers prompted industry-wide list price reductions for bar products at the beginning of fiscal 1999, and prices had not fully recovered by year end. Excess inventories at steel service centers and a shortage of transportation equipment contributed to the slight reduction in tons shipped of bar products as bar markets were generally good throughout the year. The joist business is highly competitive. Due to similarity of product, relatively small price differences are often determinative in placing business. Ability to meet the customer's time requirements for delivery also PART I (con'd.) is important in securing business. Competing successfully becomes more difficult with the distance to point of delivery due to transportation costs. In 1990, selling prices and order rates declined as a result of a weakened construction industry, causing increased competition. The severely depressed activity in the construction industry, due to overbuilding, again in 1991 resulted in drastic declines in selling prices and demand. In spite of depressed conditions, 1992 brought improved shipments due mainly to successful job bidding; however, in order to book a higher percentage of quotations, selling prices consequently suffered. Again in 1993, successful job bidding resulted in improved shipment levels, while higher raw material costs pushed selling prices upward, even though the construction industry remained depressed and highly competitive. In 1994, an easing of competitive conditions within the construction industry led to increased shipment levels, while selling prices were again forced upward by higher raw material costs. Reduced competition and increased activity in 1995 again led to higher shipment levels within the construction industry, as demand and increased raw material costs forced selling prices higher. Generally strong business conditions within the commercial construction industry continued during 1996 to bring improvements to selling prices for fabricated products, while shipment levels were relatively flat, as weather related construction delays offset otherwise strong demand. Even though market conditions continued to be favorable during 1997, competition within the industry forced lower selling prices for fabricated products, and also kept shipment levels flat. Continued favorable market conditions in the construction industry during fiscal 1998 led to the increased shipments and level selling prices for fabricated products. Competitive conditions within the commercial construction industry generally impact selling prices and shipment levels of fabricated products and were relatively favorable during 1999 as reflected in the higher selling prices. The reduced shipments were caused by minor factors other than competition as business conditions continued strong and backlogs remained high. Billets are semi-finished products used by the Registrant, and the SWVA subsidiary, in their rolling mill processes to manufacture various merchant bar products and specialty steel sections. With the addition of new casting equipment in recent years, and the current year acquisition of SWVA, the Registrant has anticipated a growing billet market of both nonaffiliated customers and SWVA who further fabricate the billets for various end uses. Competition within the industry caused a drop in selling prices in 1990, with demand slowing. In 1991, selling prices trended further downward, while order rates fell due to the sagging economy. Billet sales improved significantly in 1992 as a result of increased domestic demand and entry into the much more competitive export markets, although selling prices still continued to slump. Again in 1993, increased export business and improved domestic demand resulted in significantly higher billet shipments. Selling prices also rose in reaction to higher scrap steel costs. Shipments of billets declined slightly in 1994 due to a lack of export PART I (con'd.) shipments, although domestic shipments improved significantly. While the export markets were much more competitive, domestic demand improved dramatically. Higher billet prices were also driven by higher scrap steel costs, but the increased domestic billet shipments, which bring a higher price, also contributed. Improved market conditions and increased domestic demand resulted in improved 1995 billet shipments, as export markets remained highly competitive. Higher scrap steel costs and improved product mix together caused billet selling prices to climb. A planned melt shop shutdown during 1996 to install a new ladle furnace and upgrade an electric arc furnace was unexpectedly prolonged due to problems with construction and installation, resulting in a sharp decline in billet production and causing a significant reduction in billet shipments for the year, while the highly competitive export market remained in effect. Billet selling prices declined with a downward trend in scrap prices. Increased billet shipments for 1997 resulted both from increased production, which hampered shipments last year, and improved domestic demand, as export markets remained very competitive. Lower scrap prices continued to keep billet prices down. The significant increase in billet shipments for fiscal 1998 was attributable to record raw steel production, coupled with unprecedented demand. Billet prices were flat due to relatively unchanged scrap prices. A dramatic change in our market for billets during 1999 brought diminished demand and a significant decline in tons shipped. Billet selling prices declined with sharp reductions in scrap prices. (xi) During the last three fiscal years, the Registrant was not involved in any material research and development activities. (xii) The Registrant and SWVA are subject to federal, state and local environmental laws and regulations concerning, among other matters, wastewater discharge, air emissions and furnace dust disposal. As with similar mills in the industry, the Registrant's, and SWVA's, furnaces are classified as generating hazardous waste because they produce certain types of dust containing lead, zinc and cadmium. Near the end of fiscal year 1996, the Registrant began treating a portion of its electric arc furnace dust, a hazardous substance, utilizing its own stabilization process. Significant savings are being realized as this process replaces off-site and more expensive treatment methods that had been used through a contract with an approved waste disposal firm. SWVA currently collects and handles its furnace waste through contracts with a company which reclaims, from the waste dust, certain materials and recycles or disposes of the remainder. The Registrant believes it is in substantial compliance with applicable federal, state and local regulations. However, future changes in regulations may require expenditures which could adversely affect earnings in subsequent years. The Registrant has constructed over the years pollution control equipment at a net aggregate cost of over $9,800,000. Annual operating expenses and depreciation of all pollution control equipment and waste disposal PART I (con'd.) costs are in excess of $3,700,000 in the aggregate. The Registrant is expected to spend less than $1,000,000 for additional pollution control and waste disposal equipment and facilities during subsequent fiscal years. Adoption of the Clean Air Act Amendments of 1990, or any other environmental concerns, is not anticipated to have a materially adverse effect on the Registrant's operations, capital resources or liquidity, nor should any incremental increase in capital expenditures occur due to the Act. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1999 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. (xiii) At October 31, 1999, the Registrant employed 534 persons at its Roanoke plant, with no employment at its Salem division, idle since mid-1991. The Registrant's subsidiaries, Steel of West Virginia, Inc., John W. Hancock, Jr., Inc., Socar, Inc., Shredded Products Corporation and RESCO Steel Products Corporation employed 582, 328, 276, 63 and 43 persons, respectively. (d) Financial Information about Foreign and Domestic Operations and Export Sales. When the Registrant's billet production exceeds its required needs, this semi-finished product is offered for sale. During past years, a portion of the excess billets has been sold to brokers who represent foreign purchasers. During fiscal years 1997, 1998 and 1999, the Registrant did not make any foreign sales of excess billets, however, the SWVA subsidiary sold a small percentage of its products to foreign markets during these years. The information required by this paragraph by geographical area, as to foreign and domestic operations, is not provided since it is identical to the table in paragraph (b) with virtually all information pertaining to the United States. ITEM 2. PROPERTIES The Registrant owns 72 acres situated in the City of Roanoke, Virginia, which comprises its main plant, of which 25 acres are used to provide 345,000 square feet of manufacturing space with an annual billet capacity of approximately 650,000 tons and rolling mill capacity of 400,000 tons. A 30 acre site is owned in Salem, Virginia, of which 10 acres were used to provide 51,355 square feet of manufacturing space, until March 1991, when the plant was idled. The Registrant acquired in 1991 a 447 acre tract of land in Franklin County, Virginia, 100 acres of which was transferred to Shredded Products Corporation in a move of shredding operations from its Montvale location. Part of this new Shredded Products property is being used as an approved industrial landfill. The remaining 337 acres of this land, 113 acres of which was sold in 1995, 1997, 1998 and 1999, will be marketed as an industrial park for Franklin County. PART I (con'd.) Shredded Products Corporation operates in both Montvale and Rocky Mount, Virginia. The Montvale plant is situated on a 75 acre site owned by the Registrant, approximately 20 acres of which are regularly used in its scrap processing operation, with an annual production capacity of approximately 24,000 tons. The Rocky Mount facility is located on a 100 acre site owned by Shredded Products Corporation, partially consisting of a 25 acre industrial landfill used for the disposal of its auto fluff, and another 25 acres of which are regularly used in its shredding operation, with an annual production capacity of approximately 150,000 tons. John W. Hancock, Jr., Inc. is located in Roanoke County near Salem, Virginia. The plant is situated on a 37 acre site owned by Hancock, Inc., 17 acres of which are regularly used in its operations. Buildings on the site contain 131,614 square feet of floor space. Socar, Inc. and its subsidiary are located in Florence, South Carolina, and in Continental, Ohio. The Florence facility is located on a 28 acre site owned by Socar, Inc., 16 acres of which are regularly used in its operations. Buildings on the site contain 93,359 square feet of floor space. The plant located on a 32 acre site in Continental, Ohio, owned by Socar, Inc., has 86,400 square feet of floor space in manufacturing buildings, situated on 8 acres regularly used in its operations. RESCO Steel Products Corporation operates from a building containing 43,340 square feet of floor space, located in Salem, Virginia, on a 7 acre site owned by RESCO. Steel of West Virginia, Inc. and its subsidiary are located in Huntington, West Virginia and in Memphis, Tennessee. The Huntington facility is located on a 42 acre site owned by SWVA, most of which are regularly used in its operations. Buildings on the site contain 558,175 square feet of manufacturing space with an annual billet capacity of approximately 280,000 tons and rolling mill capacity of 300,000 tons. The plant located in Memphis, Tennessee owned by SWVA operates in 41,000 square feet of manufacturing space on approximately 4 acres. The various buildings are of modern design, well-maintained, and suitable and adequate for the requirements of the business. ITEM 3. LEGAL PROCEEDINGS None. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1999 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. PART I (con'd.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter of the fiscal year covered. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on February 15, 2000. The names, ages and positions of all of the executive officers of the Registrant as of October 31, 1999 are listed below with their business experience with the Registrant for the past five years. Officers are elected annually by the Board of Directors at the first meeting of directors following the annual meeting of shareholders. There are no family relationships among these officers, nor any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Thomas J. Crawford, 44, has served as Secretary of the Registrant since January 1985 and as Vice President-Administration since February 1998; prior thereto, he had served as Assistant Vice President since January 1993, as Manager of Inside Sales since 1984 and as a Sales Representative since 1977. He has 22 years of service with the Registrant. Timothy R. Duke, 48, has served as President and Chief Executive Officer of Steel of West Virginia, Inc. ("SWVA"), a wholly-owned subsidiary of the Registrant, since July 1997; prior thereto, he had served as President and Chief Operating Officer of SWVA since October 1996 and as Vice President, Treasurer and Chief Financial Officer of SWVA since February 1988. He has 12 years of service with SWVA. Donald R. Higgins, 54, has served as Vice President - Sales of the Registrant since January 1986; prior thereto, he had served as General Sales Manager since 1984 and Assistant Sales Manager since 1978. He has 34 years of service with the Registrant. John E. Morris, 58, has served as Vice President - Finance of the Registrant since October 1988 and as Assistant Treasurer since 1985; prior thereto, he had served as Controller since 1971. He has 28 years of service with the Registrant. Donald G. Smith, 64, has served as Chairman of the Board of the Registrant since February 1989, as Chief Executive Officer since November 1986, as President and Treasurer since January 1985 and as Director of the Registrant since April 1984; prior thereto, he had served as Vice President - - Administration since September 1980 and as Secretary since January 1967. He has 42 years of service with the Registrant. PART I (con'd.) FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include economic and industry conditions, availability and prices of supplies, prices of steel products, competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns, and others. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The specified information required by this item is incorporated by reference to the information under the heading "Stock Activity" in the 1999 Annual Report to Stockholders. The Registrant did not during fiscal year 1999 make any sale of securities not registered under the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The specified information required by this item is incorporated by reference to the information under the heading "Selected Financial Data" in the 1999 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The specified information, including Year 2000 compliance issues, required by this item is incorporated by reference to the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1999 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The specific information required by this item is incorporated by reference to the information under the headings "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1999 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The specified information required by this item is incorporated by reference to the information under the headings "Independent Auditors' Report", "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" in the 1999 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The specified information required by this item is incorporated by reference to the information under the heading "Information Concerning Directors and Nominees" in the Proxy Statement dated December 27, 1999, as filed with the Commission, or is included under the heading "Executive Officers of the Registrant" in Part I of this 10-K filing. The disclosure required by Item 405 of Regulation S-K is not applicable. ITEM 11. EXECUTIVE COMPENSATION The specified information required by this item is incorporated by reference to the information under the headings "Executive Compensation", "Compensation and Stock Option Committee Report on Executive Compensation", "Performance Graph" and "Board of Directors and Committees - -- Director Compensation" in the Proxy Statement dated December 27, 1999, as filed with the Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The specified information required by this item is incorporated by reference to the information under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement dated December 27, 1999, as filed with the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) The following financial statements filed as part of the 1999 Annual Report to Stockholders are incorporated herein by reference: (a) Consolidated Balance Sheets (b) Consolidated Statements of Stockholders' Equity (c) Consolidated Statements of Earnings (d) Consolidated Statements of Cash Flows (e) Notes to Consolidated Financial Statements (f) Independent Auditors' Report Individual financial statements of the Registrant are not being filed because the Registrant is primarily an operating company and its subsidiaries do not have minority equity interests and/or long-term indebtedness (including current portions) to any person outside the consolidated group (excluding long-term indebtedness which is collateralized by the Registrant by guarantee, pledge, assignment or otherwise), in amounts which together exceed 5 percent of the total consolidated assets. PART IV (con'd.) (2) Pursuant to Regulation S-K the following Exhibit Index is added immediately preceding the exhibits filed as part of the subject Form 10-K: EXHIBIT INDEX EXHIBIT NO. EXHIBIT PAGE (3) (a) Articles of Incorporation, as amended 21 Incorporated by Reference (b) By-Laws, as amended 22 Incorporated by Reference (4) Instruments Defining the Rights of Security Holders 23 (10) * (a) Executive Officer Incentive Arrangement 24 * (b) Roanoke Electric Steel Corporation Employees' Stock Option Plan 24 Incorporated by Reference * (c) Roanoke Electric Steel Corporation Non-Employee Directors' Stock Option Plan 24 Incorporated by Reference * (d) Roanoke Electric Steel Corporation Severance Agreements 24 Incorporated by Reference * (e) SWVA Collective Bargaining Agreement 24 Incorporated by Reference * (f) SWVA Employee Agreement with Timothy R. Duke 24 Incorporated by Reference (13) 1999 Annual Report to Stockholders 25 (21) Subsidiaries of the Registrant 26 (23) Independent Auditors' Consent 27 (27) Financial Data Schedule 28 PART IV (con'd.) (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Registrant during the last quarter of the fiscal period covered by the Annual Report. * Management contract, or compensatory plan or agreement, required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROANOKE ELECTRIC STEEL CORPORATION Registrant By: Donald G. Smith Donald G. Smith, Chairman,President, Treasurer and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Director) Date: January 18, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name and Title Date Donald G. Smith January 18, 2000 Donald G. Smith, Chairman, President, Treasurer and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Director) John E. Morris January 18, 2000 John E. Morris, Vice President - Finance and Assistant Treasurer (Principal Accounting Officer) George B. Cartledge, Jr. January 18, 2000 George B. Cartledge, Jr. Director Thomas L. Robertson January 18, 2000 Thomas L. Robertson Director Charles I. Lunsford, II January 18, 2000 Charles I. Lunsford, II Director Paul E. Torgersen January 18, 2000 Paul E. Torgersen Director EXHIBIT NO. 3 (a) ARTICLES OF INCORPORATION, AS AMENDED Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. EXHIBIT NO. 3 (b) BY-LAWS, AS AMENDED Incorporated by reference to the previously filed Form 10-Q for January 31, 1999 on file in the Commission office. EXHIBIT NO. 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS Pursuant to Item 601(b) (4) (iii) of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission, upon request, copies of the instruments defining the rights of holders of the long-term debt of Roanoke Electric Steel Corporation and its subsidiaries described in its 1999 Annual Report to Stockholders and Form 10-K. EXHIBIT NO. 10 * (a) EXECUTIVE OFFICER INCENTIVE ARRANGEMENT The Company has an executive officer incentive arrangement, pursuant to which up to an aggregate of 9% of the consolidated monthly gross profits (before profit sharing and taxes) of the Company or of John W. Hancock, Jr., Inc. ("Hancock") may be distributed to officers of the Company or officers of Hancock, respectively. The percentage of incentive compensation to be received by each officer, if any, is determined annually by the Company's Board of Directors. * (b) ROANOKE ELECTRIC STEEL CORPORATION EMPLOYEES' STOCK OPTION PLAN Incorporated by reference to the previously filed Form 10-K for October 31, 1998 on file in the Commission office. * (c) ROANOKE ELECTRIC STEEL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Incorporated by reference to the previously filed Form 10-K for October 31, 1997 on file in the Commission office. * (d) ROANOKE ELECTRIC STEEL CORPORATION SEVERANCE AGREEMENTS Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. (e) SWVA COLLECTIVE BARGAINING AGREEMENT Incorporated by reference to the previously filed Form 10-Q for July 31, 1999 on file in the Commission office. (f) SWVA EMPLOYMENT AGREEMENT WITH TIMOTHY R. DUKE Incorporated by reference to the previously filed Form 10-Q for January 31, 1999 on file in the Commission office. * Management contract, or compensatory plan or agreement, required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). EXHIBIT NO. 13 1999 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT NO. 21 SUBSIDIARIES OF THE REGISTRANT Registrant: Roanoke Electric Steel Corporation Organized Under Subsidiary of Registrant Jurisdiction of Shredded Products Corporation Virginia John W. Hancock, Jr., Inc. Virginia Socar, Incorporated South Carolina RESCO Steel Products Corporation Virginia Roanoke Technical Treatment and Services, Inc. Virginia Steel of West Virginia, Inc. Delaware EXHIBIT NO. 23 INDEPENDENT AUDITORS' CONSENT Roanoke Electric Steel Corporation: We consent to the incorporation by reference in Registration Statement Nos. 33-27359, 33-35243 and 333-25299 of Roanoke Electric Steel Corporation on Form S-8 of our report dated November 19, 1999, incorporated by reference in the Annual Report on Form 10-K of Roanoke Electric Steel Corporation for the year ended October 31, 1999. Deloitte & Touche LLP Winston-Salem, North Carolina January 18, 2000 EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE EX-13 2 ROANOKE ELECTRIC STEEL ANNUAL REPORT 1999 1999 Highlights o Record net earnings of $22,647,918 o Record earnings per share of $2.05 o Record sales of $372,962,950 o Acquired Steel of West Virginia, Inc. o Ranked #1 for the second consecutive year in overall customer satisfaction by Jacobson & Associates o Fabricating subsidiaries' earnings increased 29.6% o Record working capital of $116,624,568 o Record cash flows from operations of $45,362,933 o Record total assets of $352,129,222 o Record stockholders' equity of $136,541,541 o 17.7% return on average equity o Cash dividend increased 5.3% o $6,395,815 returned to shareholders in dividends and repurchases of stock (Full page photo appears here) To Our Shareholders 1999 Results and Highlights Fiscal year 1999 was the best year in the history of our Company. In addition to achieving record earnings, sales and earnings per share, a major highlight of the year was the acquisition of Steel of West Virginia, Inc. ("SWVA"), a producer of steel beams, channels and special sections. Other impressive accomplishments in 1999 are discussed throughout this report. Earnings increased for the third consecutive year to a record $22,647,918, an increase of 13.9% over 1998 earnings of $19,875,409 and 12.0% higher than our previous record earnings of $20,228,902 in 1995. Earnings per share were a record $2.05 ($2.03 diluted) - up 14.5% from the $1.79 ($1.77 diluted) earned in 1998. We also attained record sales of $372,962,950, a 26.3% increase over last year's sales of $295,203,974. Business conditions continued strong within the construction industry throughout the year, and selling prices for fabricated products increased, while raw material costs declined. As a result, our fabricating subsidiaries' earnings improved 29.6% in 1999, the fifth consecutive year they contributed substantially to consolidated earnings. Our 1999 financial results included the operations of SWVA from December 16, 1998, and the inclusion of their revenues in the consolidated financial statements accounted for most of the increased sales. SWVA contributed $.21 of the increased earnings per share after taking into account interest costs and amortization of the premium paid for the acquisition. Gross profits as a percentage of sales improved better than one-half percent, further enhancing earnings as product mix was comprised of fewer billet shipments, which carry lower margins. In addition, our 1999 earnings included a $1.8 million ($.08 per share) partial settlement from a number of our graphite electrode suppliers for antitrust violations. Earnings Per Share (Dollars) (A bar graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 1998 1999 .22 .40 .73 1.68 1.30 1.50 1.79 2.05 2 We are extremely proud to be ranked # 1, again, in overall customer satisfaction in the Jacobson & Associates Mini-mill Customer Satisfaction Report. To achieve this lofty rank, we were rated first in quality, service and price among mini-mill producers. To be selected at the top two years in a row is a special tribute to the conscientious manner in which our employees perform their duties, for which we are most grateful. SWVA Acquisition The acquisition was completed on December 16, 1998 at a cost of approximately $117.1 million, including the assumption of approximately $52.3 million of indebtedness. Funding was provided by a syndicate of four banks and was comprised of a $150,000,000 seven-year term loan and a $30,000,000 five-year revolver, both secured. The term loan was used to purchase all of the outstanding capital stock of SWVA and refinance the existing term debt of both the Company and SWVA. The excess cost of the investment over the fair value of the net assets acquired was approximately $16 million. This acquisition provides an excellent growth opportunity for our Company. In 1998, SWVA spent $35 million to increase its rolling mill capacity significantly, prompting billet requirements that far exceed its melting capabilities. This provides a captive outlet for a good portion of our excess billet capacity and makes us less dependent on selling our billets in the open market. SWVA's range of products broadens our product mix, allowing us to better serve our customers. Their increased production capacity will allow the combined companies to further expand product ranges and penetrate new markets. Our Company now has melting capacity of 900,000 tons, rolling mill capacity of 700,000 tons and over 1,800 employees. Financial Position Our financial condition changed dramatically during the year. With the consolidation of SWVA, total assets were $352,129,222, working capital reached $116,624,568 and operations provided cash flows of Sales ($Millions) (A bar graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 1998 1999 146 167 216 260 246 265 295 373 3 $45,362,933 - all new highs. At October 31, 1999, the current ratio was 3.0 to 1, and the quick ratio was 1.8 to 1. Both ratios were lower than last year, but remained at very sound levels. Stockholders' equity improved to $136,541,541 - another record. Our capital structure consisted of much more debt than last year after financing the SWVA purchase. Long-term debt as a percentage of total capitalization increased to 47.6% from 16.9% last year, but has improved from the 52.5% reported at the end of the first quarter. After subtracting from long-term debt, cash and investments totalling $45,059,836 at year end, net long-term debt as a percentage of total capitalization was 36.6% - much nearer our desired level of 30%. We have managed the higher debt well, which was attractively priced at below 7% by our banks. Cash flows have been more than adequate to service the debt, and our interest earned coverage ratio was better than 6 to 1. Our ability to remain competitive has not been jeopardized, and we are still positioned well for future growth. Our $30,000,000 revolving credit facility was unused at year end. Shareholder Value In its continuing efforts to add shareholder value, your Company increased the regular cash dividend rate by 5.3% and repurchased 126,000 shares of its common stock during the year. The dividend increase brings the annual dividend rate to 40 cents, and the yield at year end was 2.5%. Since early 1995, our dividend rate has grown 87.5%, and, in October 1999, the Board declared the 164th (41 years) consecutive quarterly cash dividend in the amount of 10 cents per share, payable November 24, 1999. Cash dividends paid to shareholders in 1999 amounted to $4,309,065, and our shareholders received an additional $2,086,750 for the repurchase of their shares. In the last four years, we have returned $14,630,317 to shareholders with the repurchase of 933,200 company shares. The retirement of these Total Assets ($Millions) (A bar graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 1998 1999 126 131 140 158 167 177 189 352 4 shares has been instrumental in the record earnings per share the past few years, and there remains 566,000 shares authorized for repurchase. In addition to the dividend yield, our share price advanced 10.3% during the year, providing a respectable return. Positioned For Growth The prospects for continued growth are encouraging. We look for increased business as we utilize the increased rolling mill capacity at SWVA to produce new products and explore new markets. New stacking and bundling equipment is now operational at our Roanoke mill, and we expect improved productivity in fiscal year 2000. Backlogs for most product classes are at high levels, and the majority of our markets are strong. We expect our fabricating subsidiaries to continue their strong contributions to earnings well into the new year. Rising prices for merchant bar products should neutralize higher scrap steel costs and maintain margins and earnings. The early indications point to another solid performance in 2000. As always, we wish to recognize our dedicated employees and loyal customers for their role in another record year. We thank our shareholders for their support and confidence as we strive to build value in the future. Sincerely, /s/ Donald G. Smith Donald G. Smith Chairman of the Board and Chief Executive Officer Cash Provided By Operations ($Millions) (A bar graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 1998 1999 5.9 9.6 14.4 19.7 17.2 28.7 34.6 45.4 5 Roanoke Electric Steel Corporation The Parent company operates a state-of-the-art steel mini-mill located in Roanoke, Virginia. This facility melts scrap steel in electric arc furnaces and continuously casts the molten steel into billets, which are hot rolled into merchant steel products consisting of angles, plain rounds, flats, channels and reinforcing bars of various lengths, sizes and grades. Excess billet production is mostly sold to rolling mills without melting facilities. The merchant bar products are distributed directly to steel service centers, steel fabricators and original equipment manufacturers from orders solicited by a paid sales staff. (Three photos appear on the right side of this page) 6 (Full page photo appears here) 7 The Parent serves approximately 300 customers, who operate 450 locations, in 22 states east of the Mississippi River. Steel service centers serve the metal supply needs of more than 300,000 manufacturers and fabricators nationwide and comprise better than 50% of the Parent's customer base. The Parent has 550 employees including the home office staff. Five subsidiaries featured throughout this report are either a supplier to the Parent or a purchaser of its products and have proven very instrumental in the success of Roanoke Electric Steel Corporation. (Two photos appear on the right side of this page) 8 (Full page photo appears here) 9 Steel of West Virginia, Inc. Like the Parent, this subsidiary is a steel mini-mill operating in Huntington, West Virginia, and produces specialty steel sections that complement the Parent's range of products. A steel fabricating subsidiary, Marshall Steel, Inc., is located in Memphis, Tennessee. Unlike most mini-mills, additional finishing operations on the products (such as cutting to length, hole-punching, shot-blasting, welding and coating) are performed at both facilities to create custom-finished products that are placed directly into customers' assembly operations. SWVA is the primary supplier of steel sections to Marshall. 10 (Full page photo appears here) 11 The specialty steel sections and custom-finished products are sold to niche markets and include cross-members and sub-frame sections used in the construction of truck trailers, mast sections and hanger bars for industrial lift trucks, guardrail posts, and light rails and related accessories for the mining industries. SWVA also produces sections used in manufactured housing, automotive lifts, transit systems, containers, bridges, rack systems and merchant sections. These products are sold to approximately 200 customers by senior management and in-house sales representatives whose sales efforts cover all of the continental United States and certain foreign markets, although foreign exports constitute a very small percentage of total sales. A total of 585 people are employed at the two locations. (Four photos appear on the right side of this page) 12 (Full page photo appears here) 13 Shredded Products Corporation This subsidiary operates two scrap yards, located in Rocky Mount and Montvale, Virginia, and extracts scrap steel and other metals from junked automobiles and other waste materials. During the year, these operations processed 115,000 automobile bodies and delivered 150,000 tons of ferrous scrap steel to the Parent for melting in its electric furnaces. The advantages of securing such large amounts of scrap from our own facility, versus buying in the open market, significantly reduces the Parent's cost of producing billets and greatly enhances earnings. Nonferrous metals (such as copper, aluminum and chrome) generated in the process are sold to unrelated customers, generally, at high prices. Total employment is 60 workers. (Photo appears with the following caption.) Rocky Mount, Virginia (Photo appears with the following caption.) Montvale, Virginia (Three more photos appear on the right side of this page) 14 (Full page photo appears here) 15 John W. Hancock, Jr., Inc. This subsidiary, located in Salem, Virginia, fabricates steel joists by cutting, bending, welding and painting angles and plain rounds supplied by the Parent. Joists are open-web steel horizontal supports for floors and roofs, used primarily in the construction of commercial and industrial buildings such as shopping centers, factories, warehouses, hospitals, schools, office buildings, nursing homes and the like. Joists are lighter and less expensive than structural steel or reinforced concrete. Hancock also acquires channels, angles and flats from the Parent to fabricate structural storage rack systems. Its main markets are the Middle Atlantic and Northeastern states in addition to Ohio, Indiana, North Carolina and South Carolina. The joists are distributed to over 200 customers pursuant to successful bids on contracts submitted by manufacturers' representatives and structural steel fabricators. Hancock has 315 employees and used 58,000 tons of the Parent's products during the year. (Four photos appear on the right side of this page) 16 (Full page photo appears here) 17 Socar, Inc. Socar is a steel fabrication subsidiary with facilities in Florence, South Carolina and Continental, Ohio. Like the Hancock subsidiary, this operation uses angles and plain rounds supplied by the Parent to fabricate steel joists for the construction industry. Ninety percent of the South Carolina facility's markets are in the states of South Carolina, North Carolina, Georgia, Florida and Tennessee. The Ohio facility's markets extend to Ohio, Indiana, Michigan, Wisconsin, Pennsylvania and Illinois. Both locations serve over 200 customers upon successfully bidding on jobs solicited by their salesmen and manufacturers' representatives. The South Carolina location has 175 employees, and the Ohio operation employs 95. During the year, the Parent supplied 37,000 tons of Socar's raw material requirements. (Photo appears with the following caption.) Florence, South Carolina (Photo appears with the following caption.) Continental, Ohio (Two photos appear on the right side of this page) 18 (Full page photo appears here) 19 RESCO Steel Products Corporation This subsidiary, located in Salem, Virginia, fabricates concrete reinforcing bars by cutting and bending rebars to specifications provided by engineers, architects and contractors. The fabricated rebars are used primarily in the construction of commercial and industrial buildings, bridges, roadways and public works and utilities projects. The company serves the needs of 20 to 30 major contractors and over 100 other customers. About 90% of its contracts are in the Virginia and North Carolina markets, and the contracts are obtained by successful job bidding. The company has a sales office in North Carolina and total employment of 40 people. The annual requirement for the supply of reinforcing bars from the Parent is 20,000 to 25,000 tons. (Three photos appear on the right side of this page) 20 (Full page photo appears here) 21 SELECTED FINANCIAL DATA
Year Ended October 31, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Sales $372,962,950 $295,203,974 $265,108,639 $246,286,652 $259,968,524 Gross earnings 75,445,544 57,720,265 51,728,996 47,914,269 56,097,685 Interest expense-net 6,964,578 830,743 1,627,380 1,538,191 2,053,643 Income taxes 14,261,230 11,568,066 10,206,340 9,305,808 13,035,243 Net earnings 22,647,918 19,875,409 16,883,068 15,414,834 20,228,902 - -------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Working capital $116,624,568 $ 74,917,878 $ 68,028,793 $ 59,630,189 $ 45,483,760 Total assets 352,129,222 189,210,889 176,860,219 167,015,901 157,774,658 Long-term debt 123,910,558 24,291,667 28,541,667 35,291,666 16,979,166 Stockholders' equity 136,541,541 119,447,888 106,436,269 94,433,091 90,062,598 - -------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Gross profit margin 20.2% 19.6% 19.5% 19.5% 21.6% Operating income margin 6.1% 6.7% 6.4% 6.3% 7.8% Effective tax rate 38.6% 36.8% 37.7% 37.6% 39.2% Current ratio 3.0 3.5 3.5 3.5 2.2 Quick ratio 1.8 2.3 2.0 2.0 1.3 Funded debt as a percentage of total capital 50.4% 19.3% 23.6% 29.5% 26.1% Return on average stockholders' equity 17.7% 17.6% 16.8% 16.7% 24.9% - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net earnings: Basic $ 2.05 $ 1.79 $ 1.50 $ 1.30 $ 1.68 Diluted 2.03 1.77 1.49 1.30 1.67 Cash dividends 0.39 0.37 0.33 0.30 0.25 Stockholders' equity 12.38 10.78 9.49 8.35 7.44 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,065,531 11,132,910 11,230,794 11,815,323 12,068,308
PER SHARE INFORMATION HAS BEEN ADJUSTED FOR A THREE-FOR-TWO STOCK SPLIT EFFECTIVE MARCH 25, 1998. CAPITALIZATION ($MILLIONS) (Bar chart appears here with the following plot points.)
1995 1996 1997 1998 1999 STOCKHOLDERS' EQUITY $90,062,598 $94,433,091 $106,436,269 $119,447,888 $136,541,541 LONG-TERM DEBT $16,979,166 $35,291,666 $ 28,541,667 $ 24,294,667 $123,910,558
CAPITAL EXPENDITURES AND DEPRECIATION ($MILLIONS) (Bar chart appears here with the following plot points.)
1995 1996 1997 1998 1999 Capital Expenditures $11,654,366 $18,194,216 $7,532,580 $12,339,553 $13,070,524 Depreciation $ 7,863,154 $ 8,366,012 $9,456,201 $9,216,133 $14,627,553
Working Capital ($Millions) (Bar chart appears here with the following plot points.) 1995 1996 1997 1998 1999 $45,486,760 $59,630,189 $68,028,793 $74,917,878 $116,624,568 Earnings ($Millions) (Bar chart appears here with the following plot points.) 1995 1996 1997 1998 1999 $20,228,902 $15,414,834 $16,883,068 $19,875,409 $22,647,918 Stockholders' Equity ($Millions) (Bar chart appears here with the following plot points.) 1995 1996 1997 1998 1999 $90,062,598 $94,433,091 $106,436,269 $119,447,888 $136,541,541 22 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended October 31, ---------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- SALES .................................. $ 372,962,950 $ 295,203,974 $ 265,108,639 COST OF SALES .......................... 297,517,406 237,483,709 213,379,643 ------------- ------------- ------------- GROSS EARNINGS ......................... 75,445,544 57,720,265 51,728,996 ------------- ------------- ------------- OTHER OPERATING EXPENSES (INCOME) Administrative ......................... 25,543,472 19,771,970 17,873,967 Interest, net .......................... 6,964,578 830,743 1,627,380 Profit sharing ......................... 7,887,891 5,674,077 5,138,241 Antitrust litigation settlement ........ (1,859,545) -- -- ------------- ------------- ------------- Total ............................... 38,536,396 26,276,790 24,639,588 ------------- ------------- ------------- EARNINGS BEFORE INCOME TAXES ........... 36,909,148 31,443,475 27,089,408 INCOME TAX EXPENSE ..................... 14,261,230 11,568,066 10,206,340 ------------- ------------- ------------- NET EARNINGS ........................... $ 22,647,918 $ 19,875,409 $ 16,883,068 ============= ============= ============= NET EARNINGS PER SHARE OF COMMON STOCK Basic .................................. $ 2.05 $ 1.79 $ 1.50 ============= ============= ============= Diluted ................................ $ 2.03 $ 1.77 $ 1.49 ============= ============= ============= CASH DIVIDENDS PER SHARE OF COMMON STOCK $ 0.390 $ 0.372 $ 0.333 ============= ============= =============
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, 1996 .......... 8,994,140 $ 1,916,796 $ 9,349,429 $ 92,097,683 1,452,943 $ 8,930,817 Repurchase of common stock .... -- -- -- -- 103,000 1,572,778 Stock options exercised ....... 35,950 432,383 -- -- -- -- Net earnings .................. -- -- -- 16,883,068 -- -- Cash dividends ................ -- -- -- (3,739,495) -- -- ------------- ------------- ------------- ------------- ------------ ------------- BALANCE, OCTOBER 31, 1997 .......... 9,030,090 2,349,179 9,349,429 105,241,256 1,555,943 10,503,595 Repurchase of common stock .... -- -- -- -- 90,000 2,387,703 Stock options exercised ....... 56,750 508,949 -- -- -- -- Three-for-two stock split ..... 4,516,120 -- -- -- 822,971 -- Cash paid in lieu of fractional shares on stock split ..... (158) -- -- (2,976) -- -- Retirement of treasury stock .. (1,195,800) -- (9,349,429) (2,724,001) (1,195,800) (12,073,430) Repurchase and retirement of common stock .............. (58,000) -- -- (847,137) -- -- Net earnings .................. -- -- -- 19,875,409 -- -- Cash dividends ................ -- -- -- (4,134,923) -- -- ------------- ------------- ------------- ------------- ------------ ------------- BALANCE, OCTOBER 31, 1998 .......... 12,349,002 2,858,128 -- 117,407,628 1,273,114 817,868 Repurchase and retirement of common stock .............. (126,000) -- -- (2,086,750) -- -- Stock options exercised ....... 75,900 841,550 -- -- -- -- Net earnings .................. -- -- -- 22,647,918 -- -- Cash dividends ................ -- -- -- (4,309,065) -- -- ------------- ------------- ------------- ------------- ------------ ------------- BALANCE, OCTOBER 31, 1999 .......... 12,298,902 $ 3,699,678 $ -- $ 133,659,731 1,273,114 $ 817,868 ============= ============= ============= ============= ============ =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 23 CONSOLIDATED BALANCE SHEETS
October 31, --------------------------- 1999 1998 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents ............................... $ 33,286,934 $ 16,167,025 Investments ............................................. 11,772,902 11,727,636 Accounts receivable, net of allowances of $2,000,327 in 1999 and $816,085 in 1998 ............... 57,692,504 42,415,061 Inventories ............................................. 63,574,029 31,902,900 Prepaid expenses ........................................ 1,476,561 1,586,357 Deferred income taxes ................................... 6,214,314 1,608,938 ------------ ------------ Total current assets .................................... 174,017,244 105,407,917 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Land .................................................... 8,077,943 4,264,165 Buildings ............................................... 40,816,558 19,621,407 Other property and equipment ............................ 189,012,488 123,615,952 Assets under construction ............................... 2,135,854 4,656,746 ------------ ------------ Total ................................................... 240,042,843 152,158,270 Less-accumulated depreciation ........................... 78,530,036 68,522,086 ------------ ------------ Property, plant and equipment, net ...................... 161,512,807 83,636,184 ------------ ------------ Goodwill ................................................ 15,488,343 -- ------------ ------------ OTHER ASSETS ................................................. 1,110,828 166,788 ------------ ------------ TOTAL ........................................................ $352,129,222 $189,210,889 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt ....................... $ 15,034,131 $ 4,250,000 Accounts payable ........................................ 22,821,864 15,273,850 Dividends payable ....................................... 1,102,579 1,052,210 Employees' taxes withheld ............................... 530,139 358,851 Accrued profit sharing contribution ..................... 6,353,611 5,335,822 Accrued wages and expenses .............................. 11,138,478 2,959,367 Accrued income taxes .................................... 411,874 1,259,939 ------------ ------------ Total current liabilities ............................... 57,392,676 30,490,039 ------------ ------------ LONG-TERM DEBT Notes payable ........................................... 138,944,689 28,541,667 Less-current portion .................................... 15,034,131 4,250,000 ------------ ------------ Long-term debt .......................................... 123,910,558 24,291,667 ------------ ------------ DEFERRED INCOME TAXES ........................................ 30,902,712 13,687,507 ------------ ------------ OTHER LIABILITIES ....................................... 3,381,735 1,293,788 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7) STOCKHOLDERS' EQUITY Common stock-no par value-authorized 20,000,000 shares, issued 12,298,902 shares in 1999 and 12,349,002 in 1998 3,699,678 2,858,128 Retained earnings ....................................... 133,659,731 117,407,628 ------------ ------------ Total ................................................... 137,359,409 120,265,756 Less-treasury stock, 1,273,114 shares at cost ........... 817,868 817,868 ------------ ------------ Total stockholders' equity .............................. 136,541,541 119,447,888 ------------ ------------ TOTAL ........................................................ $352,129,222 $189,210,889 ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31, ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings ............................................................ $ 22,647,918 $ 19,875,409 $ 16,883,068 Adjustments to reconcile net earnings to net cash provided by operating activities: Deferred compensation liability ...................................... 360,571 -- -- Postretirement liabilities ......................................... 320,449 302,979 247,970 Depreciation and amortization ...................................... 15,467,973 9,266,547 9,482,836 (Gain) loss on sale of investments and property, plant and equipment 178,950 721,509 (1,659) Deferred income taxes .............................................. 633,808 (256,660) 780,071 Changes in assets and liabilities which provided (used) cash, exclusive of changes shown separately ............... 5,753,264 4,661,843 1,268,717 ------------- ------------- ------------- Net cash provided by operating activities ............................... 45,362,933 34,571,627 28,661,003 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment ..................... (13,070,524) (12,339,553) (7,532,580) Proceeds from sale of property, plant and equipment ................ 315,533 55,395 17,299 Purchases of investments ........................................... (11,102,204) (18,427,761) (6,085,692) Proceeds from sales of investments ................................. 11,020,550 14,495,999 4,309,012 Acquisition of Steel of West Virginia, Inc. ...................... (67,921,073) -- -- Other ............................................................ (235,286) -- -- ------------- ------------- ------------- Net cash used in investing activities ................................... (80,993,004) (16,215,920) (9,291,961) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends ..................................................... (4,309,065) (4,134,923) (3,739,495) Cash paid for fractional shares on stock split ..................... -- (2,976) -- Increase in dividends payable ...................................... 50,369 80,571 66,695 Proceeds from exercise of common stock options ..................... 841,550 508,949 432,383 Payment of long-term debt .......................................... (92,432,331) (4,250,000) (6,749,999) Proceeds from long-term debt ....................................... 150,000,000 -- -- Repurchase of common stock ......................................... (2,086,750) (3,234,840) (1,572,778) Loan costs ......................................................... (513,793) -- -- Interest rate reverse swap settlement from lender .................. 1,200,000 -- -- ------------- ------------- ------------- Net cash provided by (used in) financing activities ..................... 52,749,980 (11,033,219) (11,563,194) ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS ............................... 17,119,909 7,322,488 7,805,848 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 16,167,025 8,844,537 1,038,689 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 33,286,934 $ 16,167,025 $ 8,844,537 ============= ============= ============= CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED (USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY (Increase) decrease in accounts receivable ......................... $ (246,304) $ (3,628,759) $ 1,693,496 (Increase) decrease in inventories ................................. 3,418,636 4,911,517 (2,499,518) (Increase) decrease in prepaid expenses ............................ 491,283 313,981 (1,249,325) Increase (decrease) in accounts payable ............................ (1,539,897) 2,222,976 2,073,364 Increase (decrease) in employees' taxes withheld ................... (305,801) 207,766 (133,381) Increase (decrease) in accrued profit sharing contribution ......... 774,359 425,379 998,486 Increase (decrease) in accrued wages and expenses .................. 1,228,462 21,302 192,906 Increase (decrease) in accrued income taxes ........................ 1,932,526 187,681 192,689 ------------- ------------- ------------- Total ................................................................... $ 5,753,264 $ 4,661,843 $ 1,268,717 ============= ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries, Shredded Products Corporation, John W. Hancock, Jr., Inc., Socar, Inc., RESCO Steel Products Corporation, Roanoke Technical Treatment & Services, Inc. and Steel of West Virginia, Inc. (the "Company"). All significant intercompany accounts and transactions have been eliminated. Steel of West Virginia, Inc. was acquired in December 1998 (see Note 14). The Company operates in a single business segment. INVENTORIES - Inventories of the Company, with the exception of John W. Hancock, Jr., Inc., are generally valued at cost on a first-in, first-out ("FIFO") method or market, if lower. A major portion of the inventories of John W. Hancock, Jr., Inc. is valued on a last-in, first-out ("LIFO") method. LIFO cost is not in excess of replacement or current cost. PROPERTY, PLANT AND EQUIPMENT - These assets are stated at cost. Depreciation expense is computed by straight-line and declining-balance methods. Maintenance and repairs are charged against operations as incurred. Major items of renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement or other disposition of plant and equipment, the cost and related accumulated depreciation are removed from the property and allowance accounts, and the resulting gain or loss is reflected in earnings. INCOME TAXES - The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes are provided by the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. INVESTMENTS - Investments consist primarily of debt securities which mature between 1999 and 2028. The Company complies with SFAS No.115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with the provisions of SFAS No. 115, management has classified its entire debt securities portfolio as "available for sale". Under SFAS No. 115, "available for sale" securities are reported at fair value with unrealized gains and losses reported as other comprehensive income. These investments are carried on the balance sheets at fair value, which approximates amortized cost. Accordingly, there were no adjustments to equity at October 31, 1999, 1998 and 1997. REVENUE RECOGNITION - Revenues from sales are recognized when products are shipped to customers, except for fabrication products which are recognized by the percentage-of-completion method in accordance with industry practice. Sales to an unaffiliated customer amounted to 13% and 12% of consolidated sales for 1998 and 1997, respectively. GOODWILL - The excess of cost over fair value of net assets of acquired subsidiary is amortized using the straight-line method over the estimated benefit period of 20 years. At October 31, 1999, accumulated amortization is $708,617. The carrying value of goodwill is periodically reviewed based upon an assessment of operations of the acquired entity. Management is not aware of any facts or circumstances indicating that the carrying value of goodwill has been impaired. CONCENTRATION OF CREDIT RISK - The Company sells to a large customer base of steel fabricators, steel service centers and construction contractors, most all of which deal primarily on 30-day credit terms. The Company believes its concentration of credit risk to be minimal in any one geographic area or market segment. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have not been significant in the past, and are generally within management's expectations. FAIR VALUE OF FINANCIAL INSTRUMENTS - At October 31, 1999, the fair value of the Company's cash and cash equivalents, accounts receivable, investments and long-term debt approximated amounts recorded in the accompanying consolidated financial statements (see Notes 1 and 6). STOCK OPTIONS - SFAS No. 123, "Accounting for Stock-Based Compensation", adopts a "fair value based method" of accounting for employee stock option plans or similar stock-based compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service or vesting period. The statement does allow entities to continue to measure compensation using the "intrinsic value based method" of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", provided that they make pro forma disclosures on net earnings and earnings per common share as if the fair value based method of accounting had been applied. The Company has elected to continue to follow APB No. 25. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 26 COMPREHENSIVE INCOME - In June 1997, SFAS No. 130, "Comprehensive Income", was issued, establishing standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS No. 130 in the first quarter of fiscal year 1999, but comprehensive income, and its required disclosure, is the same as that shown in the consolidated statements of earnings. SEGMENT INFORMATION - In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", was issued, establishing standards for the way public enterprises report information about operating segments in annual financial statements. The Company adopted SFAS No. 131 at the close of fiscal year 1999 (see Note 17). DERIVATIVE INSTRUMENTS - In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued, establishing standards for accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Company will be required to adopt SFAS No. 133 in the first quarter of fiscal year 2001 and is in the process of evaluating what impact SFAS No. 133 will have on its consolidated financial statements. (Note 2) Inventories If the FIFO method of valuing inventories had been used by John W. Hancock, Jr., Inc., consolidated inventories would have been $1,250,303 greater in 1999 and $1,699,417 greater in 1998. Inventories include the following major classifications: October 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Scrap steel ....... $ 5,090,322 $ 4,876,856 $ 7,579,552 Melt supplies ..... 3,520,825 2,408,961 2,212,939 Billets ........... 14,477,006 3,499,907 5,960,432 Mill supplies ..... 4,274,660 3,176,619 3,484,688 Work-in-process ... 4,234,402 -- -- Finished steel .... 31,976,814 17,940,557 17,576,806 ----------- ----------- ----------- Total inventories.. $63,574,029 $31,902,900 $36,814,417 =========== =========== =========== (Note 3) Properties and Depreciation Depreciation expense for the years ended October 31, 1999, 1998 and 1997 amounted to $14,627,553, $9,216,133 and $9,456,201, respectively. Generally, the rates of depreciation range from 3.3% to 20% for buildings and improvements and 5% to 33% for machinery and equipment. Property additions in 1999, 1998 and 1997 included $193,052, $53,722, and $54,668 of interest capitalized, respectively. During the year ended October 31, 1998, the Company recorded a $733,067 loss on assets abandoned at its Salem, Virginia plant. This loss was included in the statement of earnings in administrative expenses. (Note 4) Short-Term Debt On December 15, 1998, the Company replaced its existing credit facility with a new syndicated loan facility, part of which provides a five-year $30,000,000 revolver, as explained in Note 6. There also exists a $5,000,000 line of credit to be used to cover overdrafts in a demand deposit account. These lines of credit were unused at October 31, 1999 and 1998. (Note 5) Income Taxes The Company files a consolidated federal income tax return. The federal income tax returns through October 31, 1990 have been examined by the Internal Revenue Service with all issues settled. The following is a reconciliation of income tax expense per consolidated statements of earnings to that computed by using the federal statutory tax rate of 35% for 1999, 1998 and 1997:
Year Ended October 31, ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Federal tax at the statutory rate .................. $ 12,918,202 $ 11,005,216 $ 9,481,293 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit. 1,174,198 776,339 874,960 Other items, net .............................. 168,830 (213,489) (149,913) ------------ ------------ ------------ Income taxes per consolidated statements of earnings $ 14,261,230 $ 11,568,066 $ 10,206,340 ============ ============ ============
27 The components of income tax expense are as follows:
Year Ended October 31, ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Current income taxes: Federal ........................... $ 12,016,060 $ 10,589,161 $ 8,156,471 State ............................. 1,611,362 1,235,565 1,269,798 ------------ ------------ ------------ Total current income taxes ............. 13,627,422 11,824,726 9,426,269 ------------ ------------ ------------ Deferred income taxes (benefit): Federal ........................... 438,712 (215,462) 703,776 State ............................. 195,096 (41,198) 76,295 ------------ ------------ ------------ Total deferred income taxes (benefit) .. 633,808 (256,660) 780,071 ------------ ------------ ------------ Total income taxes ..................... $ 14,261,230 $ 11,568,066 $ 10,206,340 ============ ============ ============
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. As of October 31, 1999, 1998 and 1997, the Company had total deferred tax liabilities of $30,902,712, $13,687,507 and $13,547,110, respectively, and deferred tax assets of $6,214,314, $1,608,938 and $1,211,881, respectively. At October 31, 1999, deferred tax liabilities result from excess tax depreciation, purchase price accounting differences and change in inventory method of $27,693,846, $1,972,341 and $1,236,525, respectively, and deferred tax assets result from self-insurance, reserves not currently deductible, uniform capitalization and other accrued expenses not currently deductible of $1,417,008, $1,048,833, $975,444 and $2,773,029, respectively. At October 31, 1998, deferred tax liabilities result exclusively from excess tax depreciation of $13,687,507, and deferred tax assets result from reserves not currently deductible of $792,089 and other accrued expenses not currently deductible of $816,849. There were no valuation allowances. (Note 6) Long-Term Debt Long-term debt consisted of the following:
October 31, --------------------------- 1999 1998 ------------ ------------ Syndicated term loan, unsecured, payable in quarterly installments of $750,000. Interest payable quarterly at the LIBOR rate of 5.69% plus .60%. Due February 21, 2006 ................................ -- $ 22,500,000 Term loan, unsecured, payable in monthly installments of $104,167, plus interest at 6.44%. Due September 1, 2003 ................................. -- 6,041,667 Syndicated term loan, secured by equipment, payable in quarterly installments of $3,750,000. Interest payable quarterly at the LIBOR rate of 6.08% plus 1.05%. Due January 3, 2006 ................................. $138,750,000 -- Other notes payable ............................................................ 194,689 -- Revolving credit agreement ..................................................... -- -- ------------ ------------ Total .......................................................................... 138,944,689 28,541,667 Less-current portion ........................................................... 15,034,131 4,250,000 ------------ ------------ Long-term debt ................................................................. $123,910,558 $ 24,291,667 ============ ============
In December 1998, the Company entered into a $30,000,000 revolving credit agreement with a group of banks that extends through December 15, 2003. Under the revolving credit agreement, interest is payable at October 31, 1999 and 1998, at the LIBOR rates of 6.08% plus .40% and 5.69% plus .30%, respectively. The agreement requires the Company to pay a facility fee at an annual rate of .25% and .125% for 1999 and 1998, respectively. The Company does not use derivatives for trading purposes. Interest rate swaps, a form of derivative, are used to manage interest costs. On June 25, 1999, the Company did a reverse swap, converting $40,000,000 of term debt to a variable interest rate from a fixed rate. A fee of $1,300,000 was received and is being recorded in income ratably over the 6 1/2 years remaining to maturity of the term loan. Currently, the Company maintains an interest rate swap agreement resulting in a fixed rate of 6.61% on the notional amount of $99,750,000 through January 3, 2006. The difference between fixed rate and floating rate interest is recognized as an adjustment to interest expense in the period incurred. The $40,000,000 of variable rate term debt is subject to the risk of fluctuations in short-term interest rates; however, cash and investments at October 31, 1999 provided a hedge against rising interest rates. The fair value of the current swap is estimated based on current settlement prices and was approximately $3,200,000, in favor of the Company at October 31, 1999. Under the loan agreements, the Company must maintain consolidated current assets of not less than 1.5 times consolidated current liabilities and maintain consolidated funded debt of not greater than .55 times consolidated total capitalization. 28 In addition, consolidated funded debt cannot be greater than 3 times consolidated EBITDA, and the ratio of EBITDA to the sum of current maturities of long-term debt and consolidated interest expense must equal at least 1.5. The Company was in compliance with the loan agreements as of October 31, 1999 and 1998. SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the year end fair value of significant financial instruments, including long-term debt. The Company's carrying value of long-term debt approximates fair value. The fair value of the 1999 swap agreement is mentioned above. Annual aggregate long-term debt maturities are approximately $15,000,000 for each of the next five years. (NOTE 7) COMMITMENTS AND CONTINGENT LIABILITIES At October 31, 1999, the Company was committed for $8,538,812 for purchases of equipment and production facilities. The Company is not involved in any legal proceedings or environmental matters outside the ordinary course of business. In the opinion of management, amounts accrued for potential awards or assessments in connection with these matters at this time are adequate, and the outcome of such environmental and legal concerns currently pending will not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. The Company reassesses these matters as new facts and cases are brought to management's attention. (NOTE 8) COMMON STOCK AND EARNINGS PER SHARE Outstanding common stock consists of 560,000 shares, issued prior to October 31, 1967, at no stated value; 750,656 shares issued subsequent to October 31, 1967, at a stated value of $.50 per share; 1,310,656 shares issued in 1981 at no stated value; 1,310,656 shares, less the equivalent of 42 fractional shares, issued in 1986 at no stated value; 1,965,963 shares, less the equivalent of 151 fractional shares, issued in 1988 at no stated value; 800 shares issued in 1989 at no stated value; 3,000 shares issued in 1992 at no stated value; 1,200 shares issued in 1993 at no stated value; 44,000 shares issued in 1994 at no stated value; 3,023,804 shares, less the equivalent of 152 fractional shares, issued in 1995 at no stated value; 23,750 shares issued in 1996 at no stated value; 35,950 shares issued in 1997 at no stated value; 4,572,870 shares, less the equivalent of 158 fractional shares, issued in 1998 at no stated value, less 1,253,800 treasury (repurchased) shares retired during 1998 and 75,900 shares issued in 1999 at no stated value, less 126,000 treasury (repurchased) shares retired during 1999. During the years ended October 31, 1986 and October 31, 1996, the Company increased authorized common stock from 4,000,000 shares to 10,000,000 shares, and from 10,000,000 shares to 20,000,000 shares, respectively. The Company retired in 1998 and 1999 all of its treasury stock applicable to the shares acquired through its common stock repurchase plans. In February 1997, SFAS No. 128, "Earnings per Share", was issued, changing the method of calculating earnings per share.SFAS No. 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the statement of earnings. Basic earnings per share is computed by dividing the net income available to common stockholders by the weighted average shares of outstanding common stock. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common stock equivalents such as stock options and warrants. Basic earnings per share have been computed based on the weighted average number of shares outstanding of 11,065,531 for 1999, 11,132,910 for 1998 and 11,230,794 for 1997. The average number of shares outstanding were weighted after giving effect to both stock options exercised and repurchased common stock during 1999, 1998 and 1997 and to a three-for-two stock split effective March 25, 1998. Diluted earnings per share have been computed based on the weighted average number of shares outstanding (including outstanding and exercisable stock options) of 11,134,118 for 1999, 11,248,029 for 1998 and 11,300,634 for 1997. (NOTE 9) PROFIT SHARING PLANS The Company, including Shredded Products Corporation, RESCO Steel Products Corporation, Socar, Inc. and Steel of West Virginia, Inc. ("SWVA"), has qualified profit sharing plans which cover substantially all employees. John W. Hancock, Jr., Inc. has an unqualified plan. Socar, Inc.'s annual contribution is discretionary while the other plans', except SWVA, annual contribution cannot exceed 20% of their combined earnings before income taxes. SWVA's annual contribution cannot exceed 17% of its pretax profit for bargaining unit employees, with comparable amounts contributed ratably to the nonbargaining group. Total contributions of all Companies shall not exceed the maximum amount deductible for such year under the Internal Revenue Code and amounted to $7,887,891 for 1999, $5,674,077 for 1998 and $5,138,241 for 1997. (NOTE 10) INTEREST EXPENSE Interest expense is stated net of interest income of $1,923,754 in 1999, $1,214,017 in 1998 and $702,333 in 1997. (NOTE 11) STOCK OPTIONS Under a nonqualified stock option plan approved by the stockholders in 1989, the Company may issue 112,500 shares of unissued common stock to employees of the Company each plan year. Under a non-statutory stock option plan approved by the Board in 1997, the Company may issue 25,000 shares of unissued common stock to directors of the Company over the life of the plan. Options for 112,500 shares were granted for 1999, 84,000 shares for 1998, 82,000 shares for 1997, 75,000 29 shares for 1996, 41,500 shares for 1995, 36,000 shares for 1992 and 32,500 shares for 1990. Three-for-two stock splits in 1998 and 1995 increased these grants an additional 117,275 and 32,300 shares, respectively. These options are exercisable for a term of 5 years for employees and 10 years for directors from the date of grant, and a summary follows: Weighted Average Exercise Price Per Share Shares ---------------- --------- Balance, November 1, 1996 ............ $ 7.05 123,400 Granted .............................. 9.06 82,000 Exercised ............................ 7.41 (35,950) Expired or terminated ................ 6.61 (16,750) -------- Balance, October 31, 1997 ............ 8.23 152,700 Granted .............................. 15.16 84,000 Stock split .......................... 10.73 117,275 Exercised ............................ 7.52 (56,750) Expired or terminated ................ -- -- -------- Balance, October 31, 1998 ............ 11.31 297,225 Granted .............................. 13.77 112,500 Exercised ............................ 9.43 (75,900) Expired or terminated ................ -- -- -------- Balance, October 31, 1999 ............ 12.57 333,825 ======== Shares available for grant at year end None ======== The Company applies APB No. 25 and related Interpretations in accounting for the nonqualified stock option plans. Accordingly, compensation cost of $272,813, $295,313 and $177,188 for the years ended October 31, 1999, 1998 and 1997, respectively, was recognized for the difference between the exercise price and the fair value of the stock price at the grant date. Had compensation cost been determined based on the fair value at the grant dates consistent with the method of SFAS No.123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended October 31, ------------------------------------------ 1999 1998 1997 ----------- ----------- -------------- Net earnings: As reported ................... $22,647,918 $19,875,409 $ 16,883,068 =========== =========== ============== Pro forma ..................... $22,422,339 $19,573,253 $ 16,761,234 =========== =========== ============== Basic net earnings per share: As reported ................... $ 2.05 $ 1.79 $ 1.50 =========== =========== ============== Pro forma ..................... $ 2.03 $ 1.76 $ 1.49 =========== =========== ============== Diluted net earnings per share: As reported ................... $ 2.03 $ 1.77 $ 1.49 =========== =========== ============== Pro forma ..................... $ 2.01 $ 1.74 $ 1.48 =========== =========== ============== The fair value of options granted during the years ended October 31, 1999, 1998 and 1997 was $7.22, $7.64 and $3.90, respectively. The following table summarizes information about stock options outstanding and exercisable at October 31, 1999: Number Remaining Outstanding and Contractual Life Exercise Prices Exercisable in Years --------------- -------------- -------------- $ 6.04 14,400 .25 7.93 27,000 1.33 8.93 54,625 2.33 10.50 10,000 7.33 13.71 103,000 4.21 14.56 7,500 9.79 14.88 103,800 3.25 17.50 13,500 8.25 ---------- 333,825 ========== The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 2.42%, 2.18% and 2.90%; expected volatility of 47.81%, 47.25% and 37.33%; risk-free interest rates of 5.93%, 4.23% and 5.71%; and an expected life of 5 years. 30 (NOTE 12) HEALTH BENEFITS AND POSTRETIREMENT COSTS The Company currently provides certain health care benefits for terminated employees who have completed 10 years of continuous service after age 45, and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", requires the Company to accrue the estimated cost of such benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits as claims were incurred. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to 20 years. The Company has elected to recognize this obligation of approximately $1,381,000 over a period of 20 years. Cash flows are not affected by implementation of SFAS No.106, but implementation decreased net earnings from continuing operations for 1999, 1998 and 1997 by approximately $199,447, $188,695 and $154,400, respectively. The Company's postretirement benefit plan is not funded. The accrued postretirement benefit cost recognized in the balance sheets at October 31 is as follows:
1999 1998 1997 ----------- ----------- ----------- Accumulated postretirement benefit obligation: Retirees ............................................................. $ 408,619 $ 474,388 $ 402,724 Fully eligible plan participants ..................................... 909,362 793,117 672,238 Other active plan participants ....................................... 1,086,801 1,018,324 727,720 ----------- ----------- ----------- Accumulated postretirement benefit obligation ........................ 2,404,782 2,285,829 1,802,682 Unrecognized net actuarial gains ..................................... 176,455 43,959 293,127 Unrecognized transition obligation ................................... (967,000) (1,036,000) (1,105,000) ----------- ----------- ----------- Accrued postretirement benefit cost .................................. $ 1,614,237 $ 1,293,788 $ 990,809 =========== =========== =========== Net postretirement benefit cost consisted of the following components: Service cost ......................................................... $ 213,950 $ 194,393 $ 164,689 Interest cost on accumulated postretirement benefit obligation ....... 136,741 144,940 124,877 Net amortization ..................................................... 69,000 69,000 54,108 ----------- ----------- ----------- Net postretirement benefit cost ...................................... $ 419,691 $ 408,333 $ 343,674 =========== =========== ===========
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9% for 1998, decreasing linearly each successive year until it reaches 5.16% in 2006, after which it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately $164,000 and the net postretirement benefit cost by approximately $37,000. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 6.5% and 7.25% for the years ended October 31, 1999 and 1998, respectively. (NOTE 13) UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 1999 follows:
Three Months Ended -------------------------------------------------------------------- January 31 April 30 July 31 October 31 ---------------- ------------ ---------------- --------------- Sales ................. $ 73,403,567 $101,338,801 $ 95,879,063 $ 102,341,519 ================ ============ ================ =============== Gross earnings ........ $ 14,968,442 $ 20,802,604 $ 18,723,318 $ 20,951,180 ================ ============ ================ =============== Net earnings .......... $ 3,860,114 $ 5,771,685 $ 5,847,830 $ 7,168,289 ================ ============ ================ =============== Net earnings per share: Basic .............. $ .35 $ .52 $ .53 $ .65 ================ ============ ================ =============== Diluted ............ $ .35 $ .52 $ .52 $ .65 ================ ============ ================ ===============
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 ================ =========== ================ ==============
31 (NOTE 14) ACQUISITION On December 16, 1998, the Company acquired all of the outstanding common shares of Steel of West Virginia, Inc. ("SWVA"), a Huntington, West Virginia steel manufacturer, upon completion of its cash tender offer. The consideration given was approximately $117.1 million, including the assumption of approximately $52.3 million of indebtedness, which translates into $10.75 net per SWVA share, for approximately 6,028,000 shares on a fully-diluted basis. Upon merger, SWVA became a wholly-owned subsidiary of Roanoke Electric Steel Corporation, and each share of SWVA common stock not purchased in the offer (approximately 3.6% of SWVA's outstanding shares) was converted, subject to appraisal rights, into the right to receive $10.75 in cash, without interest. Funding for the acquisition was provided by a syndicate of four banks, including First Union National Bank, Agent. SWVA operates a mini-mill in Huntington, West Virginia, and steel fabrication facilities in Huntington and Memphis, Tennessee, while custom designing and manufacturing special steel products principally for use in the construction of truck trailers, industrial lift trucks, off-highway construction equipment (such as bulldozers and graders), manufactured housing, guardrail posts and mining equipment. The acquisition has been accounted for as a purchase. Accordingly, the results of operations and cash flows are reflected in the consolidated financial statements from the date of acquisition, and the acquired assets and liabilities are included in the accompanying 1999 consolidated balance sheet at values based on a purchase price allocation, rendered through appraisals and other evaluations. The purchase price allocation is summarized below: December 16, 1998 ----------------- Accounts and other receivables ............... $ 17,811,730 Inventories .................................. 35,089,765 Prepaid expenses and other current assets .... 1,848,853 Property, plant and equipment ................ 79,914,154 Goodwill ..................................... 16,196,961 Other assets ................................. 304,356 Accounts and other payables .................. (9,596,233) Accrued expenses and other current liabilities (7,194,079) Long-term debt ............................... (52,804,120) Other liabilities ............................ (13,650,314) ------------ Net purchase price ........................... $ 67,921,073 ============ Unaudited pro forma consolidated results of operations for the years ended October 31, 1999 and 1998, assuming the SWVA acquisition had occurred at the beginning of each period, are as follows: (Unaudited) Year Ended October 31, ------------------------------ 1999 1998 ------------ --------------- Sales ................. $385,122,061 $ 417,799,000 ============ =============== Net earnings .......... $ 21,427,126 $ 18,872,000 ============ =============== Net earnings per share: Basic ................. $ 1.94 $ 1.70 ============ =============== Diluted ............... $ 1.92 $ 1.68 ============ =============== The pro forma consolidated results of operations include adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future results of the combined operations. (NOTE 15) SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended October 31, ---------------------------------------------- Cash paid during the period for: 1999 1998 1997 ------------- ------------- ------------- Interest (net of amount capitalized) $ 8,279,679 $ 2,088,508 $ 2,368,369 ============= ============= ============= Income taxes ....................... $ 11,694,896 $ 11,637,045 $ 9,233,580 ============= ============= ============= Detail of acquisition: Fair value of assets acquired ...... $ 151,165,819 Liabilities assumed ................ (83,244,746) ------------- Net cash paid for acquisition ...... $ 67,921,073 =============
32 (NOTE 16) DEFERRED COMPENSATION PLAN The Company maintains a nonqualified deferred compensation plan (the "Executive Deferred Compensation Plan"). The purpose of the Executive Deferred Compensation Plan is to provide to certain eligible employees of the Company the opportunity to: (1) defer elements of their compensation (including any investment income thereon) which might not otherwise be deferrable under the current plans; and (2) receive the benefit of additions to their deferral comparable to those obtainable under the current plans in the absence of certain restrictions and limitations in the Code. Amounts deferred are paid into a trust owned by the Company and are included in other assets. The Company's liability and trust asset under the Executive Deferred Compensation Plan as of October 31, 1999 was $360,571. (NOTE 17) ENTERPRISE-WIDE INFORMATION The Company's business consists of one industry segment, which is the extracting of scrap metal from discarded automobiles and the manufacturing, fabricating and marketing of merchant steel bar products, reinforcing bars, open-web steel joists and billets. The industry segment consists of three classes of products - merchant steel products, fabricated bar joists and reinforcing bars and billets. Financial Information Relating to Classes of Products ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Sales to unaffiliated customers: Merchant steel ................. $205,420,966 $116,226,463 $113,588,649 Bar joists and rebar ........... 125,854,046 121,000,869 115,017,371 Billets ........................ 41,687,938 57,976,642 36,502,619 ------------ ------------ ------------ Total consolidated sales ....... $372,962,950 $295,203,974 $265,108,639 ============ ============ ============ Information relating to geographic areas indicates that significantly all of the consolidated sales are domestic, as foreign revenues are not material. INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Roanoke Electric Steel Corporation: We have audited the accompanying consolidated balance sheets of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries as of October 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries at October 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Winston-Salem, North Carolina November 19, 1999 STOCK ACTIVITY The Common Stock of Roanoke Electric Steel Corporation is traded nationally over the counter on Nasdaq National Market using the symbol RESC. At year end, there were approximately 740 shareholders of record.
1999 1998 Stock Prices Stock Prices Cash Dividends - -------------------------------------------------------------------- --------------------------------------- High Low High Low 1999 1998 - -------------------------------------------------------------------- --------------------------------------- First Quarter 16 3/4 13 1/8 17 53/64 12 53/64 First Quarter $.095 $.087 Second Quarter 15 1/4 10 3/4 21 11/64 15 53/64 Second Quarter .095 .095 Third Quarter 17 3/4 13 7/16 22 1/2 16 3/16 Third Quarter .100 .095 Fourth Quarter 17 1/2 15 3/8 17 3/4 10 1/8 Fourth Quarter .100 .095
33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES In 1997, the 7.6% increase in sales was attributable to increased shipments of bar products and billets, together with improved selling prices for bar products. Sales were negatively affected by lower selling prices for fabricated products and billets, while shipments of fabricated products were flat. Bar products shipments and selling prices increased as competition eased and order levels, backlogs and prices improved with demand. Billet shipments increased as a result of increased production, which hampered shipments in 1996, and improved domestic demand, while billet selling prices declined due to lower scrap prices, which normally trigger changes in billet prices. Competitive conditions in the commercial construction industry caused the lower selling prices for fabricated products; even though, market conditions continued to be favorable. Sales increased 11.4% in 1998 as a result of substantially increased billet shipments in addition to improved fabricated products shipments and higher selling prices for steel bar products. Shipments of bar products declined during the year, while billet and fabricated products prices were flat. Record raw steel production and unprecedented demand contributed to the 58.5% increase in billet shipments. Continued favorable market conditions in the construction industry led to the increased shipments and level selling prices for fabricated products. In spite of a 3.8% reduction in bar products shipments, business conditions remained strong and bar prices moved up 6.2% for the year. Billet prices were flat because scrap prices were relatively unchanged. On December 16, 1998, the company acquired 100% of the capital stock of Steel of West Virginia, Inc. ("SWVA"), a steel manufacturer, and 1999 results reflect the operations of SWVA from the date of acquisition. The 1998 financial statements have not been restated to include SWVA because the acquisition was treated as a purchase for accounting purposes. Consequently, the 26.3% increase in 1999 sales was due, primarily, to the inclusion of SWVA's revenues in consolidated sales. Higher selling prices for fabricated products also had a favorable impact on sales. However, sales were negatively affected by significant declines in selling prices for both merchant bar products and billets, together with reductions in tons shipped of bar products, fabricated products and billets, with the latter down substantially. Increased competition from foreign and domestic producers prompted industry-wide list price reductions for bar products at the beginning of the year, and prices have not fully recovered. Excess inventories at steel service centers and a shortage of transportation equipment contributed to the slight reduction in tons shipped of bar products as bar markets were generally good throughout the year. A dramatic change in our market for billets brought diminished demand and a 25.6% decline in tons shipped. Billet selling prices declined with sharp reductions in scrap prices. Competitive conditions within the commercial construction industry generally impact selling prices and shipment levels of fabricated products and were relatively favorable during the year as reflected in the higher selling prices. The reduced shipments were caused by minor factors other than competition as business conditions continued strong and backlogs remained high. COST OF SALES AND GROSS MARGINS Cost of sales increased in 1997, primarily, as a result of the increased tons shipped of bar products and billets. In 1998, cost of sales increased due to the improved billet and fabricated products shipments, even though shipments of bar products declined. Cost of sales increased significantly in 1999 due, principally, to the inclusion of SWVA's costs in the consolidated statements, in spite of the decreased shipments for all products classes, and the drop in the cost of scrap steel, our main raw material. Gross earnings as a percentage of sales were flat in 1997, in spite of higher selling 34 prices for bar products, lower scrap costs and increased production. These were offset by lower selling prices for fabricated products and billets and, more importantly, by a higher percentage of billet shipments in the total mix which carry lower margins. In 1998, gross earnings as a percentage of sales remained flat, even though selling prices for bar products increased and raw steel production improved by 12%. As in 1997, the increased billet shipments at lower margins negatively impacted margins. Gross earnings as a percentage of sales increased in 1999 from 19.6% to 20.2%, primarily, as a result of the impact of substantially reduced lower- margin billet shipments. In addition, lower scrap prices and higher selling prices for fabricated products were negatively affected by the lower selling prices for bar products and billets and the effects of lower production levels on costs. For 1997, the increased shipments of bar products and billets accounted for the improved gross and net earnings. The combination of increased volume at comparable margins were, primarily, responsible for the improved gross and net earnings in 1998. For 1999, the consolidation of SWVA was mainly responsible for the increased gross earnings, together with the improved margins for fabricated products, which provided the improved net earnings after subtracting higher administrative, interest and profit sharing expenses. ADMINISTRATIVE EXPENSES The percentage of administrative expenses to sales declined from 7.0% to 6.7% in 1997; even though administrative expenses increased, primarily, as a result of higher executive and management compensation which increased with substantially higher production, shipments and earnings in accordance with various incentive arrangements. Other expenses such as insurance and professional fees increased, but were offset by a reduction in bad debts. In 1998, the percentage of administrative expenses to sales remained the same at 6.7%; however, administrative expenses increased substantially. Executive and management compensation increased with the improved shipments and earnings. Other expenses such as insurance, office utilities and repairs, and selling expenses increased, while bad debts and professional expenses declined. Administrative expenses also included a charge of $733,067 for the abandonment of assets. Without this charge, administrative expenses as a percentage of sales would have been 6.4% of sales. In 1999, administrative expenses increased due, mostly, to the inclusion of SWVA's expenses in the current consolidated financial statements. Executive and management compensation increased in addition to other expenses such as insurance. Administrative expenses as a percentage of sales increased to 6.8% INTEREST EXPENSE Interest expense increased in 1997, as higher interest rates, reduced interest income of $702,333 and lower capitalized interest of $54,668 more than offset lower average borrowings. In 1998, interest expense declined 49% as a result of lower average borrowings and increased interest income of $1,214,017, while capitalized interest declined to $53,722 and interest rates were virtually unchanged. Interest expense increased significantly in 1999 due to substantially higher borrowings, related to the SWVA acquisition, and slightly higher interest rates; in spite of increased interest income of $1,923,754 and higher capitalized interest of $193,052. Profit Sharing Expense and Income Taxes Contributions to various profit sharing plans are determined as a proportion of earnings before income taxes and should normally increase and decrease with earnings. In 1997, income tax expense as a percentage of pretax income was relatively constant with prior years. The effective rate declined in 1998 due, primarily, to substantial Virginia recycling tax credits. In 1999, the effective rate increased as a result of nondeductible amortization of the excess investment in SWVA and higher West Virginia income tax rates. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Working capital increased $41,706,690 during the year to $116,624,568 resulting mostly from acquired SWVA working capital. The current ratio of 3.0 to 1 and the quick ratio of 1.8 to 1 35 were sound indicators of ample liquidity and a healthy financial condition. In addition, cash, cash equivalents and investments increased $17,165,175 during the year to $45,059,836. Due to the new credit facilities in conjunction with the SWVA acquisition, current debt maturities are approximately $15,000,000 annually, which will affect working capital and future liquidity. Our unused $30,000,000 revolving credit facility combined with continued strong earnings and the cash and investments mentioned above should provide the liquidity and capital resources necessary to remain competitive, fund operations and meet required debt retirement. At October 31, 1999, there were commitments for the purchase of property, plant and equipment of approximately $8,500,000. These commitments will also affect working capital and future liquidity and will be financed from internally generated funds, the revolving credit facility and existing cash reserves. During the year, borrowings increased to $138,944,689, and the ratio of debt to equity rose to 1.6 to 1 due to the new borrowings and other debt associated with the SWVA acquisition. The percentage of long-term debt to total capitalization increased from 16.9% to 47.6% at year end. However, net long-term debt, after deducting cash and investments, as a percentage of total capitalization was only 36.6%, much more respectable and nearer our desired level of 30%. With debt comprising a higher percentage of our capital structure, the availability of capital resources could be more limited than in the past. Since 1997, the Company has been diligently involved in converting our computer hardware and software to be Year 2000 compliant. It has been assigned the highest priority within our information systems area utilizing all internal personnel available. External resources have been added to assist in the task and continue ongoing projects. We have identified the systems in our manufacturing facilities and offices that may be affected and have completed conversion on nearly all systems. We expect to be totally compliant by December 31. To ensure compliance by third-party software vendors, we are requesting in writing from our vendors confirmation of their Year 2000 compliance. We have also purchased analytical tools to check not only our computers for compliance, but also loaded software. The Company has sent compliance questionnaires to its major suppliers to assess their readiness and our needs to seek alternate suppliers. We have not totally assessed the risks of Year 2000 issues, nor have we developed any contingency plans. We plan to utilize the remainder of 1999 for such matters and testing our conversions. However, like most companies, we cannot totally assess the risk of Year 2000 issues, nor can we develop contingency plans for all unknown events that might take place. The estimated costs of Year 2000 issues are approximately $400,000 and are not expected to have a material effect on results of operations, liquidity or capital resources. Management is of the opinion that adoption of the Clean Air Act Amendments or any other environmental concerns will not have a materially adverse effect on the Company's operations, capital resources or liquidity (see Note 7). Additional future capital expenditures are presently estimated to be less than $1,000,000. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include economic and industry conditions, availability and prices of supplies, prices of steel products, competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns and others. 36 OFFICERS
DONALD G. SMITH, 64 JAMES F. GARLOW, 63 DONALD R. HIGGINS, 54 Chairman, President, Treasurer President, John W. Hancock, Jr., Inc. Vice President - Sales and Chief Executive Officer 38 years of service 34 years of service 42 years of service H. JAMES AKERS, JR., 60 WATSON B. KING, 60 J. KENNETH CHARLES, III, 46 Vice President, Melt Operations Vice President, Mill Operations President, Socar, Inc. 43 years of service 38 years of service 22 years of service DANIEL L. BOARD, 62 JOHN E. MORRIS, 58 TIMOTHY R. DUKE, 48 Vice President, Purchasing Vice President - Finance President and 39 years of service and Assistant Treasurer Chief Executive Officer, 28 years of service Steel of West Virginia, Inc. THOMAS J. CRAWFORD, 44 12 years of service Vice President Administration and Secretary 22 years of service BOARD OF DIRECTORS FRANK A. BOXLEY GEORGE W. LOGAN DONALD G. SMITH President, Chairman, Chairman, President, Treasurer Southwest Construction, Inc. Valley Financial Corporation and Chief Executive Officer, Roanoke Electric Steel Corporation GEORGE B. CARTLEDGE, JR. CHARLES I. LUNSFORD, II Chairman, Retired Chairman, PAUL E. TORGERSEN Grand Home Furnishings Charles Lunsford Sons & Associates President, Virginia Polytechnic Institute TIMOTHY R. DUKE THOMAS L. ROBERTSON and State University President and President and Chief Executive Officer, Chief Executive Officer, Carilion Health System JOHN D. WILSON Steel of West Virginia, Inc. Retired President, Washington & Lee University COMMITTEES OF THE BOARD EXECUTIVE: AUDIT: COMPENSATION AND STOCK OPTION: D.G. Smith, Chairman; T.L. Robertson, Chairman; G.B. Cartledge, Jr., Chairman; T.L. Robertson, P.E. Torgersen, G.W. Logan, P.E. Torgersen F.A. Boxley, C.I. Lunsford, II, G.B. Cartledge, Jr. J.D. Wilson PROFIT SHARING: C.I. Lunsford, II, Chairman; D.G. Smith, J.E. Morris CORPORATE INFORMATION ANNUAL MEETING TRANSFER AGENT STOCK LISTING The 2000 annual meeting of EquiServe Trust Company, N.A. Nasdaq National Market shareholders will be held at 10:00 a.m. Boston, Massachusetts Symbol: RESC on Tuesday, February 15, 2000 at the 1-800-633-4236 American Electric Power Company Written shareholder correspondence FINANCIAL INFORMATION Building, 40 Franklin Road, S.W., and requests for transfer should be Analysts, investors and others seeking Roanoke, Virginia. sent to: financial information are requested to EquiServe Trust Company, N.A. contact: John E. Morris, Vice President- GENERAL COUNSEL P.O. Box 8218 Finance or Thomas J. Crawford, Vice Woods, Rogers & Hazlegrove P.L.C. Boston, Massachusetts 02266-8218 President Administration and Secretary. Roanoke, Virginia Copies of the Corporation's Annual DIVIDEND REINVESTMENT PLAN Report or Form 10-K may be obtained INDEPENDENT AUDITORS Roanoke Electric Steel offers its without charge by writing to Mr. Deloitte & Touche LLP shareholders a dividend reinvestment Crawford at the address below. Winston-Salem, North Carolina plan through its transfer agent. For more information, please contact CORPORATE OFFICE the transfer agent or 102 Westside Boulevard Thomas J. Crawford, Vice President P.O. Box 13948 Administration and Secretary. Roanoke, Virginia 24038-3948 540-342-1831
ROANOKE ELECTRIC STEEL CORPORATION STEEL MINI-MILLS PARENT: ROANOKE ELECTRIC STEEL CORPORATION 102 Westside Boulevard NW P.O. Box 13948, Roanoke, Virginia 24038-3948 Telephone: 540-342-1831 Sales: 800-753-3532 Fax: 540-342-6610 Web site: www.roanokesteel.com E-mail: sales@roanokesteel.com SUBSIDIARY: STEEL OF WEST VIRGINIA, INC. 17th Street & 2nd Avenue P.O. Box 2547, Huntington, West Virginia 25726-2547 Telephone: 304-696-8200 Sales: 800-624-3492 Fax: 304-529-1479 Web site: www.swvainc.com E-mail: steel@swainc.com STEEL FABRICATORS SUBSIDIARIES: JOHN W. HANCOCK, JR., INC. 2535 Duiguids Lane P.O. Box 3400, Salem, Virginia 24153 Telephone: 540-389-0211 Sales: 800-336-5773 Fax: 540-389-0378 Web site: www.hancockjoist.com E-mail: jwhmail@hancockjoist.com MARSHALL STEEL, INC. 1555 Harbor Avenue P.O. Box 13463, Memphis, Tennessee 38113-0463 Telephone: 901-946-1124 Fax: 901-946-5676 Web site: www.swvainc.com E-mail: marshallsteel@aol.com RESCO STEEL PRODUCTS CORPORATION 438 Kessler Mill Road, Salem, Virginia 24153 P.O. Box 13948 Roanoke, Virginia 24038-3948 Telephone: 540-387-0284 Sales: 800-868-0628 Fax: 540-389-4971 E-mail: rescova.ibm.net SOCAR, INC. 2527 East National Cemetary Road P.O. Box 671, Florence, South Carolina 29503 Telephone: 843-669-5183 Sales: 800-669-5183 Fax: 843-669-0675 Web site: www.socarinc.com E-mail: 1lm@socarinc.com SOCAR OF OHIO, INC. West Rice Street P.O. Box 219, Continental, Ohio 45831 Telephone: 419-596-3100 Fax: 419-596-3120 Web site: www.socarinc.com E-mail: socaroh@bright.net SCRAP STEEL PROCESSOR SUBSIDIARY: SHREDDED PRODUCTS CORPORATION 700 Commerce Road Rocky Mount, Virginia 24151 Telephone: 540-489-7599 Fax: 540-489-8431 1144 Fluff Road P.O. Box 159, Montvale, Virginia 24122 Telephone: 540-947-2225 Toll free: 877-668-8253 Fax: 540-947-5173 EX-27 3
5 The Schedule contains summary financial information extracted from the 4th Quarter Consolidated Balance Sheets and Statement of Earnings and is qualified in its entirety by reference to such financial statements. YEAR OCT-31-1999 OCT-31-1999 33,286,934 11,772,902 57,692,504 0 63,574,029 174,017,244 240,042,843 78,530,036 352,129,222 57,392,676 123,910,558 0 0 3,669,678 132,841,863 352,129,222 372,962,950 372,962,950 297,517,406 297,517,406 31,571,818 0 6,964,578 36,909,148 14,261,230 22,647,918 0 0 0 22,647,918 2.05 2.03
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