-----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, IGF88CX7pizRK5tg6pUkgMqsOpx/fa/ABl3inAJO9SS0OSwiQwM1SzK1jYfLNnAL CoH2etYrmYN2XXi3vwkOOQ== 0000084278-98-000002.txt : 19980129 0000084278-98-000002.hdr.sgml : 19980129 ACCESSION NUMBER: 0000084278-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980128 SROS: NASD 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: 98514760 BUSINESS ADDRESS: STREET 1: P O BOX 13948 CITY: ROANOKE STATE: VA ZIP: 24038-3948 BUSINESS PHONE: 5403421831 MAIL ADDRESS: STREET 1: PO BOX 13948 CITY: ROANOKE STATE: VA ZIP: 24038-3948 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, 1997 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, 1997: $187,468,036 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of December 31, 1997. 7,474,147 Shares outstanding Portions of the following documents are incorporated by reference: (1) 1997 Annual Report to Stockholders in Part II. (2) Proxy Statement dated December 29, 1997 in Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. During the fiscal year ended October 31, 1997, the Registrant continued for the most part to operate its business as it has the past four years by manufacturing merchant steel bar products, fabricating open-web steel joists and concrete reinforcing steel, and extracting scrap steel and other materials from junked automobiles. Roanoke Technical Treatment & Services, Inc., a Roanoke, Virginia subsidiary, was formed in 1990 to license a process for the treatment of electric arc furnace dust, and currently is uncertain as to a specific time for start-up. During fiscal year 1994, the Registrant's auto shredding subsidiary, Shredded Products Corporation, completed construction of a modern facility in Rocky Mount, Virginia, and in November 1994 began operations at this locality, at a total investment in excess of $8,000,000 for plant and equipment. This facility, with its own landfill, is providing considerable savings in waste disposal costs. In addition, cost savings and better metal recoveries are being achieved through the use of the more technologically advanced equipment. During the later part of 1996, the Registrant, at its main plant, completed the installation of a new ladle refining furnace and the upgrade of an electric arc furnace, for approximately $17,000,000. With this new state-of-the-art equipment in operation, the Registrant has increased raw steel production, improved quality, reduced production costs and improved operating efficiencies. Also in 1996, the Registrant closed on an unsecured $60,000,000 credit facility with a syndicate of lenders. The facility was comprised of a $30,000,000 ten-year term loan and a $30,000,000 five-year revolver. The term loan was used to purchase additional equipment and refinance debt at much lower interest rates. The revolver replaced lines of credit that were not legally binding. This restructuring of debt provided the Registrant with the capital resources necessary to maintain its competitive position and ensure future growth. In January 1996, Socar, Inc. , a South Carolina subsidiary, sold its long-time idle plant in Bucyrus, Ohio to the unaffiliated manufacturer who had been leasing the facility for several years under a lease-purchase agreement, for a final settlement price of $130,000. The other subsidiaries of the Registrant, John W. Hancock, Jr., Inc. and RESCO Steel Products Corporation, have had no material changes in operations or in the mode of conducting their business for the past five years. John W. Hancock, Jr. founded both the Hancock joist subsidiary and its parent, Roanoke Electric Steel Corporation, and served on the Registrant's Board of Directors as Chairman of the Executive Committee until his death in March 1994. The Registrant currently anticipates no material changes in operations during the next fiscal year unless there are unforeseen changes in market conditions and profitability. PART I (con'd.) (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. FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND CLASSES OF PRODUCTS OR SERVICES 1997 1996 1995 Sales to Unaffiliated Customers: Merchant Steel $113,588,649 $104,180,746 $103,531,770 Bar Joists & Rebar $115,017,371 $112,572,549 $110,370,872 Billets $36,502,619 $29,533,357 $46,065,882 $265,108,639 $246,286,652 $259,968,524 Net Earnings from Operations $16,883,068 $15,414,834 $20,228,902 Identifiable Assets $176,860,219 $167,015,901 $157,774,658 (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. PART I (con'd.) 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. The Registrant's subsidiary, RESCO Steel Products Corporation, fabricates concrete reinforcing steel by cutting and bending rebars to contractors' specifications. The rebars are distributed to contractors from orders solicited by a paid sales staff and pursuant to successful bids placed directly by the subsidiary. (ii) The Registrant has not recently introduced a new product or begun to do business in a new industry segment that will require the investment of a material amount of assets or that otherwise is material. (iii) The Registrant's main raw material, scrap steel, is supplied for the most part by scrap dealers within a 250 mile radius of the mill. It is purchased through the David J. Joseph Company who are scrap brokers. The Shredded Products subsidiary supplies 10,000 to 15,000 tons of scrap per month. Although scrap is generally available to the Registrant, the price of scrap steel is highly responsive to changes in demand, including demand in foreign countries as well as in the United States. The ability to maintain satisfactory profit margins in times when scrap is relatively high priced is dependent upon the levels of steel prices, which are determined by market forces. Alloys and other materials needed for the melting process are provided by various domestic and foreign companies. Shredded Products Corporation often experiences difficulty in purchasing scrap automobiles at a satisfactory level. Competition from an increasing number of shredding operations and reluctance by dealers to sell scrap automobiles due to market conditions are the main causes. High offering prices generally increase the supply; however, the increased cost to produce sometimes is very competitive with the price of similar scrap that can be purchased on the outside. Substantially all of John W. Hancock, Jr., Inc.'s steel components are purchased from the Parent, which is located conveniently nearby and, therefore such components are generally available to the Company as needed. RESCO Steel Products Corporation purchases most of its steel components from suppliers within its market area, determined mainly by freight cost. Such components would be generally available to the Company, since the Parent could produce and supply this raw material, as needed. PART I (con'd.) Socar, Inc. receives most of its raw steel material from the Parent and other nearby suppliers, the determinant usually being freight cost. The availability of raw materials is not of major concern to the Company, since the Parent could supply most of its needs. (iv) The Registrant currently holds no patents, trade marks, licenses, franchises or concessions that are material to its business operations. (v) The business of the Registrant is not seasonal. (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 1997, sales (tons) by the Registrant to John W. Hancock, Jr., Inc., Socar, Inc. and RESCO Steel Products Corporation, wholly-owned subsidiaries, were approximately 11%, 7% and less than 1% of the Registrant's total sales (tons), respectively. The largest nonaffiliated customer purchased approximately 23% of total sales (tons) ---12% of total sales (dollars). Alternative marketing and production arrangements were available to the Registrant, so that the loss of this nonaffiliate would not have had a materially adverse effect on the Registrant and its subsidiaries taken as a whole. (viii) The Registrant is of the opinion that the amount of its backlog is not generally material to an understanding of the business. All backlog is shipped within the current fiscal year. (ix) None of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. (x) The Registrant competes with steel-producing mills of similar size operative within its market region and also larger mills producing similar products. The market region in which the Registrant sells its products consists of the majority of states east of the Mississippi River. Price, including transportation cost, is the major determinant in securing business. Economic recession began to intensify competition during 1990, as selling prices dropped due to a softening in demand. This trend continued through most of 1991 with sharp declines in selling prices due to poor demand and excess inventories and capacity at most mills, although by year-end prices rose slightly. In comparison to the 1991 recession lows, order rates in 1992 showed some improvement while selling prices remained flat. In 1993, market conditions and demand improved significantly, while industry-wide selling prices increased to offset higher raw material costs. Demand in 1994 was fueled by continued improvement in business conditions and economic growth, with higher raw material costs again forcing selling prices upward, although some of the PART I (con'd.) 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. The joist business is highly competitive. Due to similarity of product, relatively small price differences are often determinative in placing business. Ability to meet the customer's time requirements for delivery also is important in securing business. Competing successfully becomes more difficult with the distance to point of delivery due to transportation costs. In 1990, selling prices and order rates declined as a result of a weakened construction industry, causing increased competition. The severely depressed activity in the construction industry, due to overbuilding, again in 1991 resulted in drastic declines in selling prices and demand. In spite of depressed conditions, 1992 brought improved shipments due mainly to successful job bidding; however, in order to book a higher percentage of quotations, selling prices consequently suffered. Again in 1993, successful job bidding resulted in improved shipment levels, while higher raw material costs pushed selling prices upward, even though the construction industry remained depressed and highly competitive. In 1994, an easing of competitive conditions within the construction industry led to increased shipment levels, while selling prices were again forced upward by higher raw material costs. Reduced competition and increased activity in 1995 again led to higher shipment levels within the construction industry, as demand and increased raw material costs forced selling prices higher. Generally strong business conditions within the commercial construction industry continued during 1996 to bring improvements to selling prices for fabricated products, while shipment levels were relatively flat, as weather related construction delays offset otherwise strong demand. Even though market conditions continued to be favorable during 1997, competition within the industry forced lower selling prices for fabricated products, and also kept shipment levels flat. Billets are semi-finished products used by the Registrant in its rolling mill process to manufacture various merchant bar products. With the addition of new casting equipment in recent years, the Registrant has anticipated a growing billet market of nonaffiliated customers who further fabricate the billets for various end uses. Competition within the industry caused a drop in selling prices in 1990, with demand slowing. In 1991, selling prices trended further downward, while order rates fell due to the sagging economy. Billet sales improved significantly in 1992 as a result of increased domestic demand and entry into the much more PART I (con'd.) 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 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. (xi) During the last three fiscal years, the Registrant was not involved in any material research and development activities. (xii) The United States Environmental Protection Agency (EPA) has notified the Registrant and the County of Roanoke (County) of their potential liability and responsibility for costs of response to materials at a County-owned landfill site and adjacent streams near Salem, Virginia. The Registrant has entered into a cost-sharing agreement with the County for response action (cleanup) at the landfill site and the streams. Pursuant to a Consent Decree to which EPA, the County and the Registrant were parties, the County completed a remedial action at the landfill in 1995. Under a separate consent order with EPA, the Registrant performed a removal action at the streams, which included removal, treatment and on-site placement of materials and affected sediment and soil. EPA confirmed completion of the required work on September 14, 1997. The Registrant has not received notification of other claims associated with the landfill or streams. The Registrant does not anticipate significant future potential liability for response costs associated with the landfill or streams. The only remaining obligation under either order is reimbursement of certain EPA oversight costs. Management believes such costs would not have a materially adverse effect on the consolidated financial position, results of operations and competitive position of the Registrant. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1997 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. PART I (con'd.) Near the end of fiscal year 1996, the Registrant began treating a portion of its electric arc furnace dust, a hazardous substance, utilizing its own stabilization process. Significant savings are being realized as this process replaces off-site and more expensive treatment methods that had been used through a contract with an approved waste disposal firm. The Registrant believes it is in substantial compliance with applicable federal, state and local regulations. However, future changes in regulations may require expenditures which could adversely affect earnings in subsequent years. The Registrant has constructed over the years pollution control equipment at an aggregate cost of over $10,900,000. Annual operating expenses and depreciation of all pollution control equipment and waste disposal costs are in excess of $3,800,000 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 is not anticipated to have a materially adverse effect on the Registrant's operations, capital resources or liquidity, nor should any incremental increase in capital expenditures occur due to the Act. (xiii) At October 31, 1997, the Registrant employed 506 persons at its Roanoke plant, with no employment at its Salem division, idle since mid-1991. The Registrant's subsidiaries, John W. Hancock, Jr., Inc., Socar, Inc., Shredded Products Corporation and RESCO Steel Products Corporation employed 289, 268, 55 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, although, there were no foreign sales of excess billets or other products during fiscal years 1995, 1996 and 1997. The information required by this paragraph by geographical area, as to foreign and domestic operations, is not provided since it is identical to the table in paragraph (b) with all information pertaining to the United States. ITEM 2. PROPERTIES The Registrant owns 72 acres situated in the City of Roanoke, Virginia, which comprises its main plant, of which 25 acres are used to provide 345,000 square feet of manufacturing space with an annual billet capacity of approximately 650,000 tons. A 30 acre site is owned in Salem, Virginia, of which 10 acres were used to provide 51,355 square feet of manufacturing space, until March 1991, when the plant was idled. The Registrant acquired in 1991 a 447 acre tract of land in Franklin County, Virginia, 100 acres of which was transferred to Shredded Products PART I (con'd.) 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, 51 acres of which was sold in 1995 and 1997, will be marketed as an industrial park for Franklin County. Shredded Products Corporation operates in both Montvale and Rocky Mount, Virginia. The Montvale plant is situated on a 75 acre site owned by the Registrant, approximately 20 acres of which are regularly used in its scrap processing operation, with an annual production capacity of approximately 18,000 tons. The Rocky Mount facility is located on a 100 acre site owned by Shredded Products Corporation, partially consisting of a 25 acre industrial landfill used for the disposal of its auto fluff, and another 25 acres of which are regularly used in its shredding operation, with an annual production capacity of approximately 150,000 tons. John W. Hancock, Jr., Inc. is located in Roanoke County near Salem, Virginia. The plant is situated on a 37 acre site owned by Hancock, Inc., 17 acres of which are regularly used in its operations. Buildings on the site contain 131,614 square feet of floor space. Socar, Inc. and its subsidiary are located in Florence, South Carolina, and in Continental, Ohio. The Florence facility is located on a 28 acre site owned by Socar, Inc., 16 acres of which are regularly used in its operations. Buildings on the site contain 93,359 square feet of floor space. The plant located on a 32 acre site in Continental, Ohio, owned by Socar, Inc., has 86,400 square feet of floor space in manufacturing buildings, situated on 8 acres regularly used in its operations. RESCO Steel Products Corporation operates from a building containing 43,340 square feet of floor space, located in Salem, Virginia, on a 7 acre site owned by RESCO. The various buildings are of modern design, well-maintained, and suitable and adequate for the requirements of the business. ITEM 3. LEGAL PROCEEDINGS A County of Roanoke (County) landfill site, where the Registrant disposed of furnace dust from 1969 until 1976, was placed on the National Priorities List as a Superfund site in 1989. The United States Environmental Protection Agency (EPA) notified the Registrant and the County of their potential liability and responsibility for costs of response at the landfill site and adjacent streams. The Registrant entered into a cost-sharing agreement with the County for response action (cleanup) at the landfill site and sharing of cost reimbursement received from other potentially responsible parties, if any. The County has filed suit to recover such costs. Under EPA oversight, the County completed remediation action there in 1995. The Registrant's costs associated with that work were reflected in past financial statements or in the accompanying financial PART I (con'd.) statements. Under a consent order and EPA oversight, the Registrant completed in 1997 a removal action (cleanup) of the streams. While the cost of future response activities or any future claims associated with the streams is difficult to project, management believes such costs, if any, would not have a materially adverse effect on the consolidated financial position, results of operations and competitive position of the Registrant. See Note 7, "Commitments and Contingent Liabilities", in Notes to Consolidated Financial Statements contained in the Registrant's 1997 Annual Report to Stockholders, filed as an Exhibit to this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the fourth quarter of the fiscal year covered. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on February 17, 1998. The names, ages and positions of all of the executive officers of the Registrant as of October 31, 1997 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, 42, has served as Secretary of the Registrant since January 1985 and as Assistant Vice President since January 1993; prior thereto, he had served as Manager of Inside Sales since 1984 and as a Sales Representative since 1977. He has 20 years of service with the Registrant. Donald R. Higgins, 52, 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 32 years of service with the Registrant. John E. Morris, 56, 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 26 years of service with the Registrant. Donald G. Smith, 62, 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 40 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 1997 Annual Report to Stockholders. The Registrant did not during fiscal year 1997 make any sale of securities not registered under the Securities Act of 1993. ITEM 6. SELECTED FINANCIAL DATA The specified information required by this item is incorporated by reference to the information under the heading "Selected Financial Data" in the 1997 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The specified information 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 1997 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 1997 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 1997 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 29, 1997, 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", "Compensation Committee Interlocks and Insider Participation", "Certain Relationships and Related Transactions", "Performance Graph" and "Board of Directors and Committees -- Director Compensation" in the Proxy Statement dated December 29, 1997, 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 29, 1997, as filed with the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The specified information required by this item is incorporated by reference to the information under the heading "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Proxy Statement dated December 29, 1997, as filed with the Commission. 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 are filed as part of the 1997 Annual Report to Stockholders which is incorporated 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 19 Incorporated by Reference (b) By-Laws, as amended 20 Incorporated by Reference (4) Instruments Defining the Rights of Security Holders 21 (10) * (a) Executive Officer Incentive Arrangement 22 Incorporated by Reference * (b) Roanoke Electric Steel Corporation Employees' Stock Option Plan 22 Incorporated by Reference * (c) Roanoke Electric Steel Corporation Non-Employee Directors' Stock Option Plan 22 * (d) Roanoke Electric Steel Corporation Consulting Arrangement 22 * (e) Roanoke Electric Steel Corporation Severance Agreements 22 Incorporated by Reference (13) 1997 Annual Report to Stockholders 23 (21) Subsidiaries of the Registrant 24 (23) Consent of Independent Auditors 25 (27) Financial Data Schedule 26 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 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name and Title Date Donald G. Smith January 20, 1998 Donald G. Smith, Chairman, President, Treasurer and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Director) John E. Morris January 20, 1998 John E. Morris, Vice President - Finance and Assistant Treasurer (Principal Accounting Officer) George B. Cartledge, Jr. January 20, 1998 George B. Cartledge, Jr. Director Paul E. Torgersen January 20, 1998 Paul E. Torgersen Director William L. Neal January 20, 1998 William L. Neal Director Thomas L. Robertson January 20, 1998 Thomas L. Robertson Director John D. Wilson January 20, 1998 John D. Wilson Director EXHIBIT NO. 3 (a) ARTICLES OF INCORPORATION, AS AMENDED Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. EXHIBIT NO. 3 (b) BY-LAWS, AS AMENDED Incorporated by reference to the previously filed Form 10-Q for April 30, 1997 on file in the Commission office. EXHIBIT NO. 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS Pursuant to Item 601(b) (4) (iii) of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission, upon request, copies of the instruments defining the rights of holders of the long-term debt of Roanoke Electric Steel Corporation and its subsidiaries described in its 1997 Annual Report to Stockholders and Form 10-K. EXHIBIT NO. 10 * (a) EXECUTIVE OFFICER INCENTIVE ARRANGEMENT Incorporated by reference to the previously filed Form 10-K for October 31, 1993 on file in the Commission office. * (b) ROANOKE ELECTRIC STEEL CORPORATION EMPLOYEES' STOCK OPTION PLAN Incorporated by reference to the previously filed Form 10-K for October 31, 1992 on file in the Commission office. * (c) ROANOKE ELECTRIC STEEL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 1. Purpose. The purpose of the Roanoke Electric Steel Corporation Non-Employee Directors' Stock Option Plan (the "Plan") is to encourage ownership in the Company by non-employee members of the Board of Directors, in order to promote long-term shareholder value and to provide non-employee members of the Board with an incentive to continue as directors of the Company. 2. Definitions. As used in the Plan, the following terms have the meanings indicated: A. "Board" means the Board of Directors of the Company. B. "Company" means Roanoke Electric Steel Corporation, a Virginia corporation. C. "Committee" means Compensation and Stock Option Committee of the Board. D. "Company Stock" means the Common Stock of the Company (including, but not limited to, rights, options or warrants for the purchase of common or preferred stock of the Company issued to shareholders generally). If the par value of the Company Stock is changed, or in the event of a change in the capital structure of the Company (as provided in Section 9), the shares resulting from such a change shall be deemed to be the Company Stock within the meaning of the Plan. E. "Date of Grant" means the date as of which a director is awarded an Option pursuant to Section 7. F. "Effective Date" means February 18, 1997. G. "Eligible Director" means a director described in Section 4. H. "Exchange Act" means the Securities Exchange Act of 1934, as amended. I. "Fair Market Value" means on a specific date the closing sales price of Company Stock on a nationally recognized stock exchange or, if not traded on such an exchange, the Nasdaq Stock Market, on the date involved if that is the trading day, and if not, the first trading day prior to such day. If the Company Stock is not quoted on the Nasdaq Stock Market, then Fair Market Value shall mean the average between the bid and asked prices of the Company Stock on the date involved if that is a trading day, or if not, the first trading day prior to such day. J. "IRC" means the Internal Revenue Code of 1986, as amended. K. "Option" or "Options" means the right to purchase Company Stock subject to the terms and conditions set forth in Section 7. L. "Subsidiary" means, with respect to any corporation, a corporation more than 50% of whose voting shares are owned directly or indirectly by the Company. 3. Administration. The Plan shall be administered by the Committee. The award of Options under the Plan shall be automatic as described in Section 7. However, the Committee shall have all powers vested in it by the terms of the Plan, including, without limitation, the authority (within the limitations described herein) to prescribe the form of the agreement applicable to evidence the award of Options under the Plan, to construe the Plan, to determine all questions arising under the Plan, and to adopt and amend rules and regulations for the administration of the Plan as it may deem desirable. Any decision of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. No member of the Committee shall be liable for anything done or omitted to be done by him or any other member of the Committee in connection with the Plan, except for his own willful misconduct or as expressly provided by statute. 4. Participation in the Plan. Each director of the Company who is not otherwise an employee of the Company or any Subsidiary, shall be eligible to participate in the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Company Stock that may be issued pursuant to the exercise of Options granted pursuant to the Plan shall be 25,000. The maximum number of Shares of Company Stock that may be issued to any Eligible Director under the Plan shall be 2,000. Shares that have not been issued under the Plan allocable to Options and portions of options that expire or terminate unexercised may again be subject to the award of a new Option. For purposes of determining the number of shares that are available under the Plan, such number shall include the number of shares surrendered by an optionee in connection with the exercise of an Option. 6. Non-Statutory Stock Options. All Options granted under the Plan shall be non-statutory in nature and shall not be entitled to special tax treatment under Code Section 422. 7. Terms, Conditions and Awards of Options. Each award of an Option shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions: (a) Awards of Options. Options for the purchase of shares of Company Stock shall be awarded at the times and for the number of shares as follows: (i) Each person who is an Eligible Director on the Effective Date of the Plan shall automatically receive: (i) on the Effective Date of the Plan, an Option to purchase 1,000 shares of Company Stock; and (ii) on the one-year anniversary of the Effective Date of the Plan, an option to purchase an additional 1,000 shares of Company Stock; and (ii) A director who first becomes an Eligible Director after the Effective Date of the Plan may, upon action of the Committee, be granted an Option or Options to purchase shares of Company Stock under the Plan. (b) Option Exercise Price. The Option exercise price shall be the Fair Market Value of the shares of Company Stock subject to such Option on the Date of Grant. (c) Options Not Transferable. An Option shall not be transferable by the optionee otherwise than by will, or by the laws of descent and distribution, and shall be exercised during the lifetime of the optionee only by him. An Option transferred by will or by the laws of descent and distribution may be exercised by the optionee's personal representative as provided in Section 7(e). No Option or interest therein may be transferred, assigned, pledged or hypothecated by the optionee during his lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. (d) Exercise of Options. An Option shall be exercisable on the Date of Grant, provided, however, that no Option may be exercised: (i) before all applicable federal and state securities laws have been complied with; (ii) if the optionee was not an Eligible Director on the Date of Grant; (iii) if sooner terminated in accordance with the terms of the Plan or the Option, or later than ten (10) years from the Date of Grant; and (iv) except by written notice to the Company (as provided in the Option) at its principal office, stating the number of shares of Company Stock the optionee has elected to purchase, accompanied by payment in cash and/or by delivery to the Company of shares of Company Stock owned by the optionee (valued at Fair Market Value on the date of exercise) in the amount of the full Option exercise price for the shares of Company Stock being acquired thereunder. No Option may be exercised for a fraction of a share, and no partial exercise of any Option may be for less than 100 shares. (e) Death of Optionee. In the event of the optionee's death within the period the optionee could have exercised the Option, the Option may be exercised by the optionee's personal representative within one year from the date of death to the extent and in the manner the optionee could have exercised the Option on the date of death; provided that no Option may be exercised later than ten years from the Date of Grant. (f) Withholding. Upon the exercise of Options issued hereunder, the Company shall have the right to require the optionee to pay the Company the amount of taxes, if any, which the Company may be required to withhold with respect to such shares. 8. Limitation of Rights. (a) No Right to Continue as a Director. Neither the Plan nor the grant of an Option, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain any person as a director for any period of time. (b) No Shareholders Rights Under Options. An optionee shall have no rights as a shareholder with respect to shares of Company Stock covered by his Options until the date of exercise of the Option, and, except as permitted in Section 9, no adjustment will be made for dividends or other rights for which the record date is prior to the date of such exercise. 9. Changes in Capital Structure. (a) If the number of outstanding shares of Company Stock is increased or decreased as a result of a subdivision or consolidation of shares, the payment of a stock dividend, stock split, spin-off, or any other change in capitalization effected without receipt of consideration by the Company (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be subject to the Plan, the maximum number of shares or securities which may be delivered under the Plan, and other relevant provisions may, in its discretion, be appropriately adjusted by the Committee, whose determination shall be binding and conclusive on all persons, provided that in no event shall the rights or value of the Options be enhanced as a result of any such adjustment. (b) Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without consent of any optionee, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 10. Duration and Amendment of the Plan. There is no express limitation upon the duration of the Plan. The Board may terminate the Plan or amend the Plan in any respect; provided that any termination of the Plan will not have the effect of terminating Options then outstanding under the Plan. Such outstanding Options shall continue in effect pursuant to their terms and the terms of the Plan in effect on the date of termination of the Plan. The Plan shall not be amended more than once every six months other than an amendment required to comply with changes in the Internal Revenue Code or regulations thereunder. 11. Notice. All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (a) if to the Company - at its principal business address to the attention of the Secretary; (b) if to any optionee - at the last address of the optionee known to the sender at the time the notice or other communication is sent. 12. Construction. The terms of this Plan shall be governed by the laws of the Commonwealth of Virginia. As evidence of its adoption of the Plan, the Company has caused this document to be signed by its officer duly authorized this 18th day of February, 1997. ROANOKE ELECTRIC STEEL CORPORATION By Donald G. Smith President *(d) ROANOKE ELECTRIC STEEL CORPORATION CONSULTING ARRANGEMENT In January 1996, the Company entered into an arrangement with William L. Neal, a director of the Company and former President of John W. Hancock, Jr., Inc., whereby Mr. Neal has agreed to provide consultation and advisory services to the Company and its subsidiaries. The arrangement will continue in effect until terminated by either party. The Company has agreed to pay Mr. Neal a retainer fee of $2,000 per month and an hourly project rate of $100, plus expenses. * (e) ROANOKE ELECTRIC STEEL CORPORATION SEVERANCE AGREEMENTS Incorporated by reference to the previously filed Form 10-K for October 31, 1996 on file in the Commission office. * 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 1997 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT NO. 21 SUBSIDIARIES OF THE REGISTRANT Registrant: Roanoke Electric Steel Corporation Organized Under Subsidiary of Registrant Jurisdiction of Shredded Products Corporation Virginia John W. Hancock, Jr., Inc. Virginia Socar, Incorporated South Carolina RESCO Steel Products Corporation Virginia Roanoke Technical Treatment and Services, Inc. Virginia EXHIBIT NO. 23 DELOITTE & TOUCHE LLP Suite 1401 Telephone: (910) 721-2300 500 West Fifth Street Facsimile: (910) 721-2301 P.O. Box 20129 Winston-Salem, North Carolina 27120-0129 CONSENT OF INDEPENDENT AUDITORS Roanoke Electric Steel Corporation: We consent to the incorporation by reference in Registration Statement Nos. 33-27359, 33-35243 and 333-25299 on Form S-8 of our report dated November 18, 1997, incorporated by reference in this Annual Report on Form 10-K of Roanoke Electric Steel Corporation for the year ended October 31, 1997. Deloitte & Touche LLP Winston-Salem, North Carolina January 20, 1998 Deloitte Touche Tohmatsu International EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE EX-13 2 ROANOKE ELECTRIC STEEL CORPORATION [LOGO] ANNUAL REPORT 1997 1997 HIGHLIGHTS o Net earnings second highest on record o Sales highest in history o Continued strong earnings by our fabricating subsidiaries o Record shipments of mill products o Record production of raw steel o Record production of mill products o Record working capital of $68,028,793 o Record cash flows from operations of $28,661,003 o Record total assets of $176,860,219 o Curtailments of long-term debt of $6,749,999 o Record stockholders' equity of $106,436,269 o 16.8% return on average equity o 15.8% pretax return on average total assets o Cash dividend increased 8.3% o $5,312,273 returned to shareholders in dividends and repurchases of stock Roanoke Electric Steel Corporation and its wholly-owned subsidiaries are engaged in the manufacturing, fabricating and marketing of merchant steel products, billets, open-web steel joists and reinforcing bars. Each subsidiary is either a supplier to the parent company or a purchaser of its finished product. The main plant of Roanoke Electric Steel Corporation is a state-of-the-art steel mini-mill located in Roanoke, VA. This facility melts scrap steel in electric furnaces and continuously casts the molten steel into billets. TO OUR SHAREHOLDERS 1997 RESULTS, RECORDS AND HIGHLIGHTS Fiscal year 1997 was one of the best years in the history of our company. Revenues were up 7.6% to record levels, while earnings were the second best on record, increasing 9.5%. The year included numerous other records, as raw steel production, mill production, and shipments of mill products reached all-time highs. In addition, our fabricating subsidiaries contributed substantial earnings for the third consecutive year. This success reflects the results of strategic acquisitions and commitments of large amounts of capital for plant and equipment made over the years. The benefits from these investments are increased levels of shipments and production, lower production costs and improved margins and earnings. Earnings for the year were $16,883,068 on record sales of $265,108,639. Last year's sales and earnings were $246,286,652 and $15,414,834, respectively. Earnings per share for 1997 were $2.25 compared to $1.96 for 1996 - up 14.8%. The improved performance for the year was, primarily, due to increased shipments of mill products and billets and improved margins for mill products. The improved margins were attributable to increased selling prices and lower costs due to the efficiencies of increased production. Business conditions remained strong within the construction industry, and our fabricating subsidiaries, again, achieved excellent earnings. Other notable highlights of 1997 were: o An $8,398,604 increase in working capital to a record $68,028,793. o A $9,844,318 increase in total assets to a record $176,860,219. o An $11,494,939 increase in cash flows from operations to a record $28,661,003. o A $12,003,178 increase in stockholders' equity to a record $106,436,269. o A return on average equity of 16.8%. o A pretax return on average total assets of 15.8%. Billets are rolled into merchant steel products consisting of angles, plain rounds, flats, channels and reinforcing bars of various lengths and sizes.Excess steel billet production is sold to mills without melting facilities. Roanoke Electric Steel Corporation markets its products to steel service center and fabricators in 21 states east of the Mississippi River. IMPROVED FINANCIAL STRENGTH We continued to improve our financial condition during the year. In addition to the increases in cash flows from operations, working capital and stockholders' equity, the current ratio was 3.5 to 1, and the quick ratio was 2.0 to 1. Cash, cash equivalents and investments increased to $16,660,219. Also, we deleveraged our capital structure and decreased long-term debt as a percentage of total capitalization to 21.1%, a 22.4% improvement from 1996. The ratio of debt to equity was .66 to 1, and we reduced borrowings by $6,749,999. Our $30,000,000 revolving credit facility was unused at year end. The revolver, working capital and conservative debt level have assured the available resources to make capital and equity investments necessary for future growth and to maintain our competitive position. ENHANCED SHAREHOLDER VALUE Our strong performance, among other things, created considerable value for our shareholders during the year. The share price increased 39%, and the quarterly dividend was increased 8.3% to 13 cents per share, putting the current yield on our common stock in the 2.7% range. The annual dividend rate has increased over 60% in the past five years to the present rate of 52 cents per share. In October, 1997, the Board declared the 156th consecutive quarterly cash dividend in the amount of 13 cents per share payable November 25, 1997. Annual cash dividends in 1997 were $3,739,495. Strong cash flows allowed us to return an additional $1,572,778 to shareholders with the repurchase of 103,000 shares of our common stock during the year. In the past two years, a total of $9,308,727 has been returned to shareholders as a total of 659,200 company shares have been repurchased. The Board approved Plan authorized the repurchase of up to 750,000 shares. PREPARED FOR GROWTH We will continue to use our substantial amounts of free cash flow and debt, when necessary, to make capital investments and pursue acquisition candidates. Capital expenditures will be made in our present lines of business to improve quality and service to our customers and to increase profitability by achieving further cost reductions and operating Shredded Products, Corporation, a subsidiary with operations in Rocky Mount and Montvale, VA, extracts scrap steel and other metals from junked automobies and other waste materials. These facilities supply the main plant with a substantial amount of its raw materials. Non-ferrous metals generated in the process are sold to unrelated customers. efficiencies. Capital investments will be necessary to remain a low cost producer and a strong, competitive company. We will continue to evaluate companies that complement our existing lines of business and contribute to earnings. Generally, these are steel and steel-related businesses that allow us to add value to our existing product lines and benefit from our knowledge and expertise. We will also seek out other opportunities for growth and maximization of profits. OUTLOOK FOR 1998 The prospects for the next fiscal year are excellent. Backlogs, orders and selling prices for all our products continue to be strong. At present levels of sales and margins, we expect improved earnings in the first quarter compared to last year. With economic conditions favorable and the steel and construction industries experiencing strong business conditions, the outlook for all of fiscal year 1998 is encouraging. If market conditions allow, we are confident the substantial outlays for capital and equity investments made in the past will take us to new highs in productivity and earnings. Our sincerest desire is that the results of our efforts will translate into improved shareholder value in the long term. It has been our pleasure reporting to you the results of fiscal year 1997. We are pleased with the outcome and applaud the efforts of our 1,150 ambitious and loyal employees. We thank our valued customers for their contribution to the 1997 results. We also extend our gratitude to you, our shareholders, for your interest and investment in Roanoke Electric Steel Corporation. Sincerely, /s/ Donald G. Smith ------------------------------------------ Donald G. Smith Chairman of the Board and Chief Executive Officer John W. Hancock, Jr., and Socar, Inc. are steel fabrication subsidiaries located in Salem, VA, Florence, SC and Continental, OH. All three operations purchase rounds and angles from the main plant to fabricate long- and short-span open-web steel joists. These joists are used as horizontal supports for floors and roofs in commercial and industrial buildings. RESCO Steel Products Corporation, a Salem, VA, based subsidiary, fabricates concrete reinforcing steel by cutting and bending it to contracting specifications. SELECTED FINANCIAL DATA
Year Ended October 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Operations Sales $265,108,639 $246,286,652 $259,968,524 $215,809,228 $167,294,378 Gross earnings 51,728,996 47,914,269 56,097,685 33,732,184 22,565,662 Interest expense-net 1,627,380 1,538,191 2,053,643 1,891,263 1,730,822 Income taxes 10,206,340 9,305,808 13,035,243 5,684,150 2,785,168 Earnings before cumulative effect of change in accounting principle 16,883,068 15,414,834 20,228,902 8,766,435 4,750,106 Net earnings 16,883,068 15,414,834 20,228,902 11,860,375 4,750,106 - --------------------------------------------------------------------------------------------------------------------------- Financial Position Working capital $ 68,028,793 $ 59,630,189 $ 45,483,760 $ 34,504,420 $ 36,406,901 Total assets 176,860,219 167,015,901 157,774,658 140,473,510 130,620,435 Long-term debt 28,541,667 35,291,666 16,979,166 20,729,166 25,521,000 Stockholders' equity 106,436,269 94,433,091 90,062,598 72,417,669 63,203,577 - --------------------------------------------------------------------------------------------------------------------------- Selected Ratios Gross profit margin 19.5% 19.5% 21.6% 15.6% 13.5% Operating income margin 6.4% 6.3% 7.8% 5.5% 2.8% Effective tax rate 37.7% 37.6% 39.2% 39.3% 37.0% Current ratio 3.5 3.5 2.2 2.0 2.4 Quick ratio 2.0 2.0 1.3 1.2 1.4 Funded debt as a percentage of total capital 23.6% 29.5% 26.1% 30.7% 36.6% Pretax return on average total assets 15.8% 15.2% 22.3% 10.7% 5.9% Return on average stockholders' equity 16.8% 16.7% 24.9% 12.9%* 7.6% - --------------------------------------------------------------------------------------------------------------------------- Per Share Data Earnings before cumulative effect of change in accounting principle $2.25 $1.96 $2.51 $1.09 $0.60 Net earnings 2.25 1.96 2.51 1.48 0.60 Cash dividends 0.50 0.45 0.37 0.41 0.32 Stockholders' equity 14.24 12.52 11.16 9.03 7.94 - --------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 7,487,301 7,876,987 8,045,644 7,988,985 7,956,339
Per share information has been adjusted for a three-for-two stock split effective May 1, 1995. *1994 accounting change of $3.1 million excluded. Capitalization (in millions)
1993 1994 1995 1996 1997 Stockholders' Equity $63,203,577 72,417,669 90,062,598 94,433,091 106,436,269 Long-Term Debt 25,521,000 20,729,166 16,979,166 35,291,666 28,541,667
Working Capital (in millions) [chart] 1993 1994 1995 1996 1997 $36,406,901 34,504,420 45,483,760 59,630,189 68,028,793 Capital Expenditures And Depreciation [chart]
1993 1994 1995 1996 1997 Capital Expenditures $ 5,767,423 11,744,913 11,654,366 18,194,216 7,532,580 Depreciation 7,295,885 7,332,833 7,863,154 8,366,012 9,456,201
Cash Provided By Operations (in million) [chart] 1993 1994 1995 1996 1997 $9,641,895 14,412,573 19,733,012 17,166,064 28,661,803 Stockholders' Equity (in millions) [chart] 1993 1994 1995 1996 1997 $63,203,577 72,417,669 90,062,598 94,433,091 106,436,269 Total Assets (in millions) 1993 1994 1995 1996 1997 $130,620,435 140,473,510 157,774,658 167,015,901 176,860,219 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended October 31, 1997 1996 1995 ----------- ----------- ----------- SALES $265,108,639 $246,286,652 $259,968,524 COST OF SALES 213,379,643 198,372,383 203,870,839 ----------- ----------- ----------- GROSS EARNINGS 51,728,996 47,914,269 56,097,685 ----------- ----------- ----------- OTHER OPERATING EXPENSES Administrative 17,873,967 17,315,039 16,194,810 Interest, net 1,627,380 1,538,191 2,053,643 Profit sharing 5,138,241 4,340,397 4,585,087 ----------- ----------- ----------- Total 24,639,588 23,193,627 22,833,540 ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 27,089,408 24,720,642 33,264,145 INCOME TAX EXPENSE 10,206,340 9,305,808 13,035,243 ----------- ----------- ----------- NET EARNINGS $ 16,883,068 $ 15,414,834 $ 20,228,902 =========== =========== =========== NET EARNINGS PER SHARE OF COMMON STOCK $ 2.25 $ 1.96 $ 2.51 =========== =========== =========== CASH DIVIDENDS PER SHARE OF COMMON STOCK $ 0.50 $ 0.45 $ 0.37
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, 1994 5,946,738 $1,330,650 $9,349,429 $ 62,932,458 597,829 $ 1,194,868 Three-for-two stock split 2,984,619 - - - 298,914 - Cash paid in lieu of fractional shares on stock split (152) - - (1,776) - - Stock options exercised 39,185 398,853 - - - - Net earnings - - - 20,228,902 - - Cash dividends - - - (2,981,050) - - -------- --------- --------- ----------- -------- ---------- BALANCE, OCTOBER 31, 1995 8,970,390 1,729,503 9,349,429 80,178,534 896,743 1,194,868 Repurchase of common stock - - - - 556,200 7,735,949 Stock options exercised 23,750 187,293 - - - - Net earnings - - - 15,414,834 - - Cash dividends - - - (3,495,685) - - -------- --------- --------- ----------- -------- ---------- BALANCE, OCTOBER 31, 1996 8,994,140 1,916,796 9,349,429 92,097,683 1,452,943 8,930,817 Repurchase of common stock - - - - 103,000 1,572,778 Stock options exercised 35,950 432,383 - - - - Net earnings - - - 16,883,068 - - Cash dividends - - - (3,739,495) - - -------- --------- --------- ----------- -------- ---------- BALANCE, OCTOBER 31, 1997 9,030,090 $2,349,179 $9,349,429 $105,241,256 1,555,943 $10,503,595 ========= ========== ========== ============ ========= ===========
See notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS
1997 1996 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,844,537 $ 1,038,689 Investments 7,815,682 6,059,853 Accounts receivable 38,786,302 40,479,798 Inventories 36,814,417 34,314,899 Prepaid expenses 1,900,338 651,013 Deferred income taxes 1,211,881 1,039,542 ----------- ----------- Total current assets 95,373,157 83,583,794 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Land 4,313,060 4,291,522 Buildings 18,874,555 17,889,855 Other property and equipment 119,266,483 123,215,697 Assets under construction 921,581 1,054,026 ----------- ----------- Total 143,375,679 146,451,100 Less-accumulated depreciation 62,077,810 63,216,681 ----------- ----------- Property, plant and equipment, net 81,297,869 83,234,419 ----------- ----------- OTHER ASSETS 189,193 197,688 ----------- ----------- TOTAL $176,860,219 $167,015,901 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 4,250,000 $ 4,250,000 Accounts payable 13,050,874 10,977,510 Dividends payable 971,639 904,944 Employees' taxes withheld 151,085 284,466 Accrued profit sharing contribution 4,910,443 3,911,957 Accrued wages and expenses 2,938,065 2,745,159 Accrued income taxes 1,072,258 879,569 ----------- ----------- Total current liabilities 27,344,364 23,953,605 ----------- ----------- LONG-TERM DEBT Notes payable 32,791,667 39,541,666 Less-current portion 4,250,000 4,250,000 ----------- ----------- Long-term debt 28,541,667 35,291,666 ----------- ----------- POSTRETIREMENT LIABILITIES 990,809 742,839 ----------- ----------- DEFERRED INCOME TAXES 13,547,110 12,594,700 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7) STOCKHOLDERS' EQUITY Common stock-no par value-authorized 20,000,000 shares, issued 9,030,090 shares in 1997 and 8,994,140 in 1996 2,349,179 1,916,796 Capital in excess of stated value 9,349,429 9,349,429 Retained earnings 105,241,256 92,097,683 ----------- ----------- Total 116,939,864 103,363,908 Less-treasury stock, 1,555,943 shares in 1997 and 1,452,943 in 1996 - at cost 10,503,595 8,930,817 ----------- ----------- Total stockholders' equity 106,436,269 94,433,091 ----------- ----------- TOTAL $176,860,219 $167,015,901 =========== ===========
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31 1997 1996 1995 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $16,883,068 $15,414,834 $20,228,902 Adjustments to reconcile net earnings to net cash provided by operating activities: Postretirement liabilities 247,970 248,248 252,591 Depreciation and amortization 9,482,836 8,380,456 7,989,663 Gain on sale of investments and property, plant and equipment (1,659) (59,312) (193,926) Deferred income taxes 780,071 1,011,529 (160,859) Changes in assets and liabilities which provided (used) cash, exclusive of changes shown separately 1,268,717 (7,829,691) (8,383,359) ---------- ---------- ---------- Net cash provided by operating activities 28,661,003 17,166,064 19,733,012 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (7,532,580) (18,194,216) (11,654,366) Proceeds from sale of property, plant and equipment 17,299 200,666 952,635 Purchase of investments (6,085,692) (3,840,892) (1,879,186) Proceeds from sale of investments 4,309,012 1,910,093 3,022,446 Other - 12,328 - ---------- ---------- ---------- Net cash used in investing activities (9,291,961) (19,912,021) (9,558,471) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable - (11,000,000) 4,500,000 Cash dividends (3,739,495) (3,495,685) (2,981,050) Cash paid for fractional shares on stock split - - (1,776) Increase (decrease) in dividends payable 66,695 16,843 (449,126) Proceeds from exercise of common stock options 432,383 187,293 398,853 Payment of long-term debt (6,749,999) (15,687,500) (4,791,834) Proceeds from long-term debt - 34,500,000 - Repurchase of common stock (1,572,778) (7,735,949) - ---------- ---------- ---------- Net cash used in financing activities (11,563,194) (3,214,998) (3,324,933) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,805,848 (5,960,955) 6,849,608 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,038,689 6,999,644 150,036 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,844,537 $ 1,038,689 $ 6,999,644 ========== ========== ========== CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED (USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY (Increase) decrease in accounts receivable $ 1,693,496 $ (320,275) $ (5,318,685) (Increase) decrease in inventories (2,499,518) (3,448,661) (3,896,576) (Increase) decrease in prepaid expenses (1,249,325) 71,716 436,345 Increase (decrease) in accounts payable 2,073,364 (3,506,271) (2,076,376) Increase (decrease) in employees' taxes withheld (133,381) 57,789 (28,288) Increase (decrease) in accrued profit sharing contribution 998,486 (491,074) 1,133,391 Increase (decrease) in accrued wages and expenses 192,906 348,246 632,050 Increase (decrease) in accrued income taxes 192,689 (541,161) 734,780 ---------- ---------- ---------- Total $ 1,268,717 $ (7,829,691) $ (8,383,359) ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized) $ 2,368,369 $ 1,979,832 $ 2,484,598 ---------- ---------- ---------- Income taxes $ 9,233,580 $ 8,835,440 $12,461,322 ---------- ---------- ----------
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Roanoke Electric Steel Corporation and its wholly-owned subsidiaries, Shredded Products Corporation, John W. Hancock, Jr., Inc., Socar, Inc., RESCO Steel Products Corporation and Roanoke Technical Treatment & Services, Inc. (the "Company"). All significant intercompany accounts and transactions have been eliminated. Inventories - Inventories of the Company, with the exception of John W. Hancock, Jr., Inc., are generally valued at cost on a first-in, first-out (FIFO) method or market, if lower. A major portion of the inventories of John W. Hancock, Jr., Inc. is valued on a last-in, first-out (LIFO) method. LIFO cost is not in excess of replacement or current cost. Property, Plant and Equipment - These assets are stated at cost. Depreciation expense is computed by straight-line and declining-balance methods. Maintenance and repairs are charged against operations as incurred. Major items of renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement or other disposition of plant and equipment, the cost and related accumulated depreciation are removed from the property and allowance accounts, and the resulting gain or loss is reflected in earnings. Income Taxes - The Company applies the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are provided by the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments - Investments consist primarily of debt securities which mature between 1998 and 2022. On November 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). In accordance with the provisions of SFAS 115, management has classified its entire debt securities portfolio as "available for sale". Under SFAS 115, "available for sale" securities are reported at fair value with unrealized gains and losses reported as a separate component of equity. These investments are carried on the balance sheets at fair value, which approximates amortized cost. Accordingly, there were no adjustments to equity at October 31, 1997, 1996 and 1995. 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 12%, 11% and 15% of consolidated sales for 1997, 1996 and 1995, respectively. Concentration of Credit Risk - The Company sells to a large customer base of steel fabricators, steel service centers and construction contractors, most all of which deal primarily on 30-day credit terms. The Company believes its concentration of credit risk to be minimal in any one geographic area or market segment. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have not been significant in the past, and are generally within management's expectations. Fair Value of Financial Instruments - At October 31, 1997, the fair value of the Company's cash and cash equivalents, accounts receivable, investments and long-term debt approximated amounts recorded in the accompanying consolidated financial statements (see notes 1 and 6). Stock Options - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995. This statement adopts a "fair value based method" of accounting for employee stock option plans or similar stock-based compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service or vesting period. The statement does allow entities to continue to measure compensation using the "intrinsic value based method" of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) provided that they make pro forma disclosures on net earnings and earnings per common share as if the fair value based method of accounting had been applied. The Company has elected to continue to follow APB 25. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income - In June 1997, Statement of Financial Accounting Standards No. 130, "Comprehensive Income" (SFAS 130) was issued, establishing standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company will be required to adopt SFAS 130 in the first quarter of fiscal year 1999 and, based on current circumstances, does not believe the effect of adoption will be material. (NOTE 2) INVENTORIES If the FIFO method of valuing inventories had been used by John W. Hancock, Jr., Inc., consolidated inventories would have been $1,440,168 greater in 1997 and $1,480,377 greater in 1996. Inventories include the following major classifications: October 31, 1997 1996 1995 ---------- ---------- ---------- Scrap steel $ 7,579,552 $ 5,313,335 $ 3,728,612 Melt supplies 2,212,939 2,416,879 2,443,827 Billets 5,960,432 7,103,342 1,748,778 Mill supplies 3,484,688 3,085,749 3,210,946 Finished steel 17,576,806 16,395,594 19,734,075 ---------- ---------- ---------- Total inventories $36,814,417 $34,314,899 $30,866,238 ========== ========== ========== (NOTE 3) PROPERTIES AND DEPRECIATION Depreciation expense for the years ended October 31, 1997, 1996 and 1995 amounted to $9,456,201, $8,366,012 and $7,863,154, 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 1997, 1996 and 1995 included $54,668, $438,346, and $10,146 of interest capitalized, respectively. (NOTE 4) SHORT-TERM DEBT On February 15, 1996, the Company replaced all of its domestic bank lines of credit with a syndicated loan facility, part of which provides a five-year $30,000,000 revolver, as explained in note 6. Also provided by this credit facility is a $5,000,000 line of credit to be used to cover overdrafts in a demand deposit account. This line of credit was unused at October 31, 1997 and 1996. (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 1997, 1996 and 1995:
Year Ended October 31, 1997 1996 1995 ---------- --------- ---------- Federal tax at the statutory rate $ 9,481,293 $8,652,225 $11,642,451 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit 874,960 785,077 1,297,302 Other items, net (149,913) (131,494) 95,490 ---------- --------- ---------- Income taxes per consolidated statements of earnings $10,206,340 $9,305,808 $13,035,243 ========== ========= ========== The components of income tax expense are as follows: Year Ended October 31, 1997 1996 1995 ---------- --------- ---------- Current income taxes: Federal $ 8,156,471 $7,192,428 $11,463,015 State 1,269,798 1,101,851 1,733,087 ---------- --------- ---------- Total current income taxes 9,426,269 8,294,279 13,196,102 ---------- --------- ---------- Deferred income taxes: Federal 703,776 905,569 (122,692) State 76,295 105,960 (38,167) ---------- --------- ---------- Total deferred income taxes 780,071 1,011,529 (160,859) ---------- --------- ---------- Total income taxes $10,206,340 $9,305,808 $13,035,243 ========== ========= ==========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, and operating loss and tax credit carry forwards. As of October 31, 1997, 1996 and 1995, the Company had total deferred tax liabilities of $13,547,110, $12,594,700 and $11,669,070, respectively, and deferred tax assets of $1,211,881, $1,039,542 and $1,125,441, respectively. Deferred tax liabilities result exclusively from excess tax depreciation, and deferred tax assets result, primarily, from reserves not currently deductible of $736,340 for 1997, $675,026 for 1996 and $988,429 for 1995. There were no valuation allowances. NOTE 6 - LONG-TERM DEBT Long-term debt consisted of the following:
October 31, 1997 1996 ---------- ---------- Syndicated term loan, unsecured, payable in quarterly installments of $750,000 beginning May 21, 1996. Interest payable quarterly at the LIBOR rate of 5.72% plus .60%. Due February 21, 2006 $25,500,000 $28,500,000 Term loan, unsecured, payable in monthly installments of $104,167, plus interest at 6.44%. Due September 1, 2003. 7,291,667 8,541,666 Revolving credit agreement - 2,500,000 ---------- ---------- Total 32,791,667 39,541,666 Less - current portion 4,250,000 4,250,000 ---------- ---------- Long-term debt $28,541,667 $35,291,666 ========== ==========
In February 1996, the Company entered into a $30,000,000 revolving credit agreement with a group of banks that extends through February 21, 2001. Under the revolving credit agreement, interest is payable at October 31, 1997 and 1996, respectively, at the LIBOR rates of 5.72% plus .60% and 5.38% plus .35%. The agreement requires the Company to pay a facility fee at an annual rate of .125% for 1997 and .15% for 1996. Revolving credit debt at October 31, 1997 and 1996 was classified as long-term, based on the terms of the agreement. The Company does not use derivatives for trading purposes. Interest rate swaps, a form of derivative, are used to manage interest costs. Currently, the Company maintains an interest rate swap agreement resulting in a fixed rate of 6.68% on the notional amount of $25,500,000 through February 2006. The difference between fixed rate and floating rate interest is recognized as an adjustment to interest expense in the period incurred. The fair value of the current swap is estimated based on current settlement prices and was approximately $69,000, in favor of the lender, at October 31, 1997. Under the loan agreements, the Company must maintain consolidated current assets of not less than 1.5 times consolidated current liabilities and maintain consolidated funded debt of not greater than .5 times consolidated total capitalization. Currently, consolidated tangible net worth cannot be less than $74,689,370. In addition, the ratio of EBITDA to the sum of current maturities of long-term debt and consolidated interest expense must equal at least 1.5. The Company was in compliance with the loan agreements as of October 31, 1997 and 1996. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the year end fair value of significant financial instruments, including long-term debt. The Company's carrying value of long-term debt approximates fair value. The fair value of the 1997 swap agreement is mentioned above. Annual aggregate long-term debt maturities are $4,250,000 for each of the next five years. NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES At October 31, 1997, the Company was committed for $978,860 for purchases of equipment and production facilities. The Company and the County of Roanoke, Va. have entered into consent agreements with the United States Environmental Protection Agency (EPA) for the clean-up of specific portions of a landfill site and adjacent streams near Salem, Va. One agreement is a "remedial action" for the removal and off-site treatment and disposal of an emission control dust pile located on the site. This action was completed during 1995 with all costs reflected in the accompanying consolidated financial statements. Another agreement pertains to a "removal action" for the removal and treatment of emission dust, sediment and contaminated soil associated with the streams. The EPA approved on-site stabilization and disposal, and certified completeness of all required work on September 14, 1997. The Company has entered into a cost sharing agreement with the County of Roanoke for both response actions at the landfill. It is not known whether other potentially responsible parties will pay some of the costs. The only remaining component of the requirements of the order is reimbursement of certain EPA oversite charges. The Company received a settlement from its primary insurance carrier in 1995 and has had discussions with its excess carriers concerning possible recoveries. Additional recoveries, if any, are uncertain. 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 and 35,950 shares issued in 1997 at no stated value. 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. Earnings per share have been computed based on the weighted average number of shares outstanding of 7,487,301 for 1997, 7,876,987 for 1996 and 8,045,644 for 1995. The average number of shares outstanding were weighted after giving effect both to stock options exercised during 1997, 1996 and 1995 and to a three-for-two stock split effective May 1, 1995. Stock options are not included in the computation of earnings per share since inclusion has less than a 3% effect. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which changes the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the income statement. Basic earnings per share is computed by dividing the net income available to common shareholders 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. The statement is effective for financial statements for periods ending after December 15, 1997, and early adoption is not permitted. The pro forma basic earnings per share and diluted earnings per share calculated in accordance with SFAS 128 are as follows:
Year Ended October 31, 1997 1996 1995 ---- ---- ---- Pro forma basic earnings per share $2.25 $1.96 $2.51 ==== ==== ==== Pro forma diluted earnings per share $2.24 $1.95 $2.50 ==== ==== ====
NOTE 9 - PROFIT SHARING PLANS The Company, including Shredded Products Corporation, RESCO Steel Products Corporation and Socar, Inc., has qualified profit sharing plans which cover substantially all employees. John W. Hancock, Jr., Inc. has an unqualified plan. Socar, Inc.'s annual contribution is discretionary while the other plans' annual contribution cannot exceed 20% of their combined earnings before income taxes. Total contributions of all Companies shall not exceed the maximum amount deductible for such year under the Internal Revenue Code and amounted to $5,138,241 for 1997, $4,340,397 for 1996 and $4,585,087 for 1995. NOTE 10 - INTEREST EXPENSE Interest expense is stated net of interest income of $702,333 in 1997, $711,274 in 1996 and $400,692 in 1995. NOTE 11 - STOCK OPTIONS Under a nonqualified stock option plan approved by the stockholders in 1989, the Company may issue 75,000 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 82,000 shares were granted for 1997, for 75,000 shares for 1996, for 41,500 shares for 1995, for 36,000 shares for 1992 and for 32,500 shares for 1990. A three-for-two stock split in 1995 increased these grants an additional 32,300 shares. These options are exercisable for a term of five years for employees and ten years for directors from the date of grant, and a summary follows: Weighted Average Exercise Price Per Share Shares ----------------- ---------- Balance, November 1, 1994 $ 5.84 48,100 Granted 9.07 41,500 Stock split 7.65 32,300 Exercised 6.79 (39,185) Expired or terminated 7.15 (7,565) ------- Balance, October 31, 1995 7.77 75,150 Granted 11.90 75,000 Exercised 6.71 (23,750) Expired or terminated 4.11 (3,000) ------- Balance, October 31, 1996 10.57 123,400 Granted 13.59 82,000 Exercised 11.12 (35,950) Expired or terminated 9.91 (16,750) ------- Balance, October 31, 1997 12.35 152,700 ======= Shares available for grant at year end None ======= The Company applies APB 25 and related Interpretations in accounting for the nonqualified stock option plans. Accordingly, no compensation cost has been recognized since the exercise price approximates the fair value of the stock price at the grant dates. Had compensation cost been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended October 31, 1997 1996 1995 ---------- ---------- ---------- Net earnings: As reported $16,883,068 $15,414,834 $20,228,902 ========== ========== ========== Pro forma $16,729,358 $15,320,717 $20,187,952 ========== ========== ========== Earnings per share: As reported $ 2.25 $ 1.96 $ 2.51 ========== ========== ========== Pro forma $ 2.23 $ 1.94 $ 2.51 ========== ========== ========== The fair value of options granted during the years ended October 31, 1997, 1996 and 1995 was $15.75, $14.00 and $10.67, respectively. The following table summarizes information about stock options outstanding and exercisable at October 31, 1997: Number Remaining Outstanding and Contractual Life Exercise Prices Exercisable in Years $ 9.07 24,700 2.25 11.90 46,000 3.33 13.39 75,000 4.33 15.75 7,000 9.33 ------- 152,700 ======= 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 1997, 1996 and 1995, respectively: dividend yield of 2.90%,3.09% and 2.94%; expected volatility of 37.33%, 43.66% and 60.15%; risk-free interest rates of 5.71%, 6.07% and 5.81%; and an expected life of 5 years. NOTE 12 - HEALTH BENEFITS AND POSTRETIREMENT COSTS Effective November 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). The Company currently provides certain health care benefits for terminated employees who have completed 10 years of continuous service after age 45, and SFAS 106 requires the Company to accrue the estimated cost of such benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits as claims were incurred. SFAS 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to twenty years. The Company has elected to recognize this obligation of approximately $1,381,000 over a period of twenty years. Cash flows are not affected by implementation of SFAS 106, but implementation decreased net earnings from continuing operations for 1997, 1996 and 1995 by approximately $154,400, $154,500 and $154,200, respectively. The Company's postretirement benefit plan is not funded. The accrued postretirement benefit cost recognized in the balance sheet at October 31 is as follows:
1997 1996 1995 ---------- ---------- ---------- Accumulated postretirement benefit obligation: Retirees $ 402,724 $ 378,968 $ 347,019 Fully eligible plan participants 672,238 652,789 723,491 Other active plan participants 727,720 688,737 661,479 ---------- ---------- ---------- Accumulated postretirement benefit obligation 1,802,682 1,720,494 1,731,989 Unrecognized net actuarial gains (losses) 293,127 196,345 5,602 Unrecognized transition obligation (1,105,000) (1,174,000) (1,243,000) ---------- ---------- --------- Accrued postretirement benefit cost $ 990,809 $ 742,839 $ 494,591 ========== ========== ========== Net postretirement benefit cost consisted of the following components: Service cost $ 164,689 $ 141,393 $ 143,279 Interest cost on accumulated postretirement benefit obligation 124,877 130,705 120,658 Net amortization 54,108 64,185 69,000 ---------- ---------- ---------- Net postretirement benefit cost $ 343,674 $ 336,283 $ 332,937 ========== ========== ==========
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 10% for 1996, decreasing linearly each successive year until it reached 6.5% in 2003, 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 $127,000 and the net postretirement benefit cost by approximately $29,000. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8% for the years ended October 31, 1997 and 1996. NOTE 13 - UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 1997 follows:
Three Months Ended January 31 April 30 July 31 October 31 ---------- ---------- ---------- ---------- Sales $58,351,734 $61,299,896 $68,768,769 $76,688,240 ========== ========== ========== ========== Gross earnings $ 9,330,810 $11,851,198 $13,581,218 $16,965,770 ========== ========== ========== ========== Net earnings $ 2,584,674 $ 3,459,070 $ 4,299,552 $ 6,539,772 ========== ========== ========== ========== Earnings per share $ .34 $ .47 $ .57 $ .87 ========== ========== ========== ========== Summarized unaudited quarterly financial data for 1996 follows: Three Months Ended January 31 April 30 July 31 October 31 ---------- ---------- ---------- ---------- Sales $58,429,217 $58,144,393 $61,532,232 $68,180,810 ========== ========== ========== ========== Gross earnings $11,955,299 $11,063,635 $10,001,165 $14,894,170 ========== ========== ========== ========== Net earnings $ 3,928,413 $ 3,365,754 $ 2,954,292 $ 5,166,375 ========== ========== ========== ========== Earnings per share $ .49 $ .41 $ .39 $ .67 ========== ========== ========== ==========
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, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Corporation'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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective November 1, 1994, the Corporation changed its method of accounting for investments. /s/ Deloitte & Touche LLP ------------------------------- Winston-Salem, North Carolina November 18, 1997 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 800 shareholders of record.
1997 1996 Stock Prices Stock Prices Cash Dividends High Low High Low 1997 1996 First Quarter 17 3/8 13 1/2 18 1/4 13 First Quarter $.12 $.11 Second Quarter 16 7/8 14 1/8 16 13 1/4 Second Quarter .12 .11 Third Quarter 19 14 1/8 14 7/8 12 3/4 Third Quarter .13 .11 Fourth Quarter 23 18 1/4 14 12 Fourth Quarter .13 .12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales The 20.5% increase in sales in 1995 was the result of substantial increases in shipments of fabricated products and billets, together with much improved selling prices for all product classes, while bar products shipments were flat. Reduced competition and increased activity within the construction industry led to the higher shipment levels of fabricated products. Improved market conditions and increased domestic demand resulted in the improved billet tons shipped, as export markets were highly competitive. Inventory reductions by bar products customers accounted for the flat shipments, even though market conditions and backlogs remained strong for much of the year. Selling prices for fabricated products increased due to higher raw material costs and demand. The improved selling prices for bar products were mostly attributable to increased scrap prices and rising demand in the early part of the year, as prices fell slightly near year end. Billet selling prices were higher due to the increased scrap costs, which normally trigger changes in billet prices, and improved product mix. In 1996, sales declined 5.3% due, primarily, to sharp reductions in both selling prices for bar products and billet shipments, while selling prices for billets declined only slightly. However, sales were favorably impacted by increased bar shipments and selling prices for fabricated products, while shipments of fabricated products were flat. Selling prices for bar products declined as a result of increased competition, prompting industry-wide price reductions. The planned shutdown of the melt shop during the year to install a new ladle furnace and upgrade an electric arc furnace was unexpectedly prolonged due to problems with construction and installation, resulting in an 11% decline in billet production for the year and causing the significant reduction in billet shipments. In addition, the export markets for billets remained highly competitive. Billet selling prices declined with a downward trend in scrap prices. Bar products shipments increased as demand and backlogs remained high,in spite of the increased competition. Selling prices for fabricated products improved as a result of generally strong business conditions within the commercial construction industry. The 7.6% increase in sales in 1997 was attributable to increased shipments of bar products and billets, together with improved selling prices for bar products. Sales were negatively affected by lower selling prices for fabricated products and billets, while shipments of fabricated products were flat. Bar products shipments and selling prices increased as competition eased and order levels, backlogs and prices improved with demand. Billet shipments increased as a result of increased production, which hampered shipments last year, and improved domestic demand, while billet selling prices declined due to lower scrap prices. Competitive conditions in the commercial construction industry caused the lower selling prices for fabricated products; even though, market conditions continued to be favorable. Cost of Sales and Gross Margins In 1995, cost of sales increased, primarily, as a result of the higher shipments of fabricated products and billets in addition to increases in both scrap and other raw material costs. The decrease in cost of sales in 1996 was due, mainly, to the decreased tons of billets shipped, together with a reduction in the cost of scrap steel, in spite of the increased bar products shipments. Cost of sales increased in 1997, primarily, as a result of the increased tons shipped of bar products and billets. Gross earnings as a percentage of sales increased from 15.6% to 21.6% in 1995 due, mainly, to the higher selling prices for all product classes and increased production levels which reduced unit costs for fixed expenses, in spite of the higher scrap costs. In 1996, the gross profit percentage declined to 19.5%. The decrease was, primarily, the result of the lower selling prices for bar products and billets, and the negative effect of reduced billet production on fixed costs, which more than offset the effects of the lower scrap costs and the improvement in fabricated products selling prices. Gross earnings as a percentage of sales were flat in 1997, in spite of higher selling prices for bar products, lower scrap costs and increased production. These were offset by lower selling prices for fabricated products and billets and, more importantly, by a higher percentage of billet shipments in the total mix which carry lower margins. For 1995, the increased shipment levels at the higher gross profit margins provided the improvements in gross and net earnings. The decline in gross profit margins and the reduced billet shipments were the main causes for the lower gross profits and net earnings in 1996. For 1997, the increased shipments of bar products and billets accounted for the improved gross and net earnings. Administrative Expenses In 1995, administrative expenses increased due, mainly, to higher executive and management compensation which increased with production, shipments and earnings in accordance with various incentive arrangements. However, administrative expenses were 6.2% of sales, down from 6.5% in 1994. The majority of the increase in administrative expenses in 1996 was attributable to bad debts and insurance expenses. The percentage of administrative expenses to sales increased to 7.0%. The percentage declined in 1997 to 6.7%; even though administrative expenses increased, primarily, as a result of increased executive and management compensation as production, shipments and earnings improved significantly. Other expenses such as insurance and professional fees increased, but were offset by a reduction in bad debts. Interest Expense In 1995, interest expense increased as a result of higher interest rates, increased average borrowings and declines in interest income and capitalized interest to $400,692 and $10,146, respectively. Interest expense declined in 1996 due to lower interest rates, higher interest income of $711,274 and increased capitalized interest of $438,346, in spite of higher average borrowings. In 1997, interest expense increased as higher interest rates, reduced interest income of $702,333 and lower capitalized interest of $54,668 more than offset lower average borrowings. 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, except in years when the contribution is limited to the maximum amount deductible under the Internal Revenue Code. In 1995, the effective tax rate was affected by higher tax rates. In 1996 and 1997, income tax expense as a percentage of pretax income declined due to permanent differences in the recognition of income and expenses between tax and books, and the effective tax rates were relatively constant. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At October 31, 1997, working capital was $68,028,793. Cash, investments and accounts receivable of $55,446,521 were more than adequate to pay current liabilities of $27,344,364. Cash flows from operating activities were $28,661,003 in 1997. Repurchases of the Company's common stock, commitments for the purchase of property, plant and equipment of $978,860, and 1998 maturities of long-term debt of $4,250,000 will affect future liquidity and working capital; however, cash flows from operations should provide adequate working capital to fund these items. Long-term debt decreased $6,749,999 during the year. Our revolving credit facility of $30,000,000 was unused at year end and provides additional liquidity and capital resources. The ratio of debt to equity was only .66 to 1 - down from .77 to 1 last year. The percentage of long-term debt to total capital decreased from 27.2% to 21.1%. The revolver, working capital and conservative debt levels have provided the capital resources necessary to maintain our competitive position and ensure future growth. 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. OFFICERS Donald G. Smith, 62 Chairman, President, Treasurer and Chief Executive Officer 40 years of service Frank S. Key, Jr., 73 President, Socar, Inc. 31 years of service James F. Garlow, 61 President, John W. Hancock, Jr., Inc. 36 years of service H. James Akers, Jr., 58 Vice President, Melt Operations 41 years of service Donald R. Higgins, 52 Vice President - Sales 32 years of service Watson B. King, 58 Vice President, Mill Operations 36 years of service John E. Morris, 56 Vice President - Finance and Assistant Treasurer 26 years of service Thomas J. Crawford, 42 Assistant Vice President and Secretary 20 years of service Daniel L. Board, 60 Assistant Vice President, Purchasing 37 years of service William O. Warwick, 65 Assistant Vice President, Human Resources and Environmental Affairs 30 years of service BOARD OF DIRECTORS Frank A. Boxley President, Southwest Construction, Inc. T. A. Carter Architect George B. Cartledge, Jr. President, Grand Piano & Furniture Co., Inc. George W. Logan Chairman, Valley Financial Corporation Charles I. Lunsford, II Chairman, Charles Lunsford Sons & Associates William L. Neal Retired President, John W. Hancock, Jr., Inc. Thomas L. Robertson President and Chief Executive Officer, Carilion Health System Donald G. Smith Chairman, President, Treasurer and Chief Executive Officer, Roanoke Electric Steel Corporation Paul E. Torgersen President, Virginia Polytechnic Institute and State University John D. Wilson Retired President, Washington & Lee University COMMITTEES OF THE BOARD Executive: D. G. Smith, Chairman; T. L. Robertson, P. E. Torgersen, G. B. Cartledge, Jr. Audit: T. L. Robertson, Chairman; T. A. Carter, P. E. Torgersen Profit Sharing: C. I. Lunsford, II, Chairman; Compensation and Stock Option: G. B. Cartledge, Jr., Chairman; F. A. Boxley, C. I. Lunsford, II, J. D. Wilson CORPORATE INFORMATION Annual Meeting The 1998 annual meeting of shareholders will be held at 10:00 a.m. on Tuesday, February 17, 1998 at the American Electric Power Company Building, 40 Franklin Road, S. W., Roanoke, Virginia. General Counsel Woods, Rogers & Hazlegrove P.L.C. Roanoke, Virginia Independent Auditors Deloitte & Touche LLP Winston-Salem, North Carolina Transfer Agent Wachovia Bank, N.A. Winston-Salem, North Carolina 1-800-633-4236 Written shareholder correspondence and requests for transfer should be sent to: Wachovia Bank of North Carolina, N.A. P.O. Box 8217 Boston, Massachusetts 02266-8217 Dividend Reinvestment Plan Roanoke Electric Steel offers its shareholders a dividend reinvestment plan through its transfer agent. For more information, please contact the transfer agent or Thomas J. Crawford, Secretary. Stock Listing Nasdaq National Market; Symbol: RESC Financial Information Analysts, investors and others seeking financial information are requested to contact: John E. Morris, Vice President-Finance or Thomas J. Crawford, Assistant Vice President and Secretary. Copies of the Corporation's Annual Report or Form 10-K may be obtained without charge by writing to Mr. Crawford at the address below. Corporate Office 102 Westside Boulevard, P.O. Box 13948, Roanoke, Virginia 24038 540-342-1831 [LOGO] ROANOKE ELECTRIC STEEL CORPORATION P.O. Box 13948 Roanoke, Virginia 24038-3948 540-342-1831 EX-27 3
5 The Schedule contains summary financial information extracted from the 4th Quarter Consolidated Balance Sheets and Statement of Earnings and is qualified in its entirety by reference to such financial statements. YEAR OCT-31-1997 OCT-31-1997 8,844,537 7,815,682 38,786,302 0 36,814,417 95,373,157 143,375,679 62,077,810 176,860,219 27,344,364 28,541,667 0 0 2,349,179 104,087,090 176,860,219 265,108,639 265,108,639 213,379,643 213,379,643 23,012,208 0 1,627,380 27,089,408 10,206,340 16,883,068 0 0 0 16,883,068 2.25 2.25
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