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