FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to __________________.
Commission File No. 0-16254
STEEL OF WEST VIRGINIA, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 55-0684304
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
17th Street and 2nd Avenue, Huntington, West Virginia 25703
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(Address of principal executive offices, zip code)
(304) 696 - 8200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes (x) No ( )
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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing price on March 1, 1996: $54,867,278
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 1, 1996: 6,086,060 shares of Common
Stock, par value $.01 per share.
Documents incorporated by reference:
Registrant's Proxy Statement to be
filed pursuant to Regulation 14A within
120 days after the end of Registrant's
fiscal year covered by this Form 10-K Part III
- --------------------------------------- -------------------------
(Document) (Part of Form 10-K
into which Document
incorporated)
TABLE OF CONTENTS
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Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 12
Item 8. Financial Statements and Supplementary Data . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . 18
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . 18
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . . 18
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES . . . . . . . 25
ii
STEEL OF WEST VIRGINIA, INC.
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PART I
Item 1. Business
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GENERAL
Steel of West Virginia, Inc. (the "Company") owns and operates a
steel mini-mill and steel fabrication facility in Huntington, West Virginia
as well as a steel fabrication facility in Memphis, Tennessee. The
Company's Huntington facility custom designs and manufactures finished
steel products on a cost-effective basis by melting steel scrap in electric
arc furnaces and continuously casting the steel into strands of specified
lengths and widths known as billets. The billets are reheated and then
moved through the Company's rolling mills to form engineered shapes known
as specialty steel sections. Unlike most other mini-mills, the Company
frequently performs additional finishing operations on these sections at
both of its facilities (such as hole-punching, shotblasting, welding and
painting) to create custom-finished products which are generally placed
directly into its customers' assembly operations.
The Company's specialty steel sections and custom-finished
products (together, "Finished Products") are sold to selected niche markets
and represent over 90% of the Company's total sales. Finished Products
include cross-members and sub-frame sections ("Trailer Steel Products")
used in the construction of truck trailers; mast sections and hanger bars
for industrial lift trucks; guardrail post; light rails, mine ties and
related accessories for the mining industries; frame sections and cleats
for off-highway construction equipment (such as bulldozers and graders);
and other miscellaneous steel products. The Company is the dominant
producer of Trailer Steel Products in the United States and has a leading
position in certain of its niche markets for its other Finished Products.
The Company enjoys a number of competitive advantages. As a
mini-mill, the Company recycles steel from scrap, resulting in lower
production costs compared to integrated steel mills, which produce steel by
processing iron ore and other raw materials in blast furnaces. The
Company's location in a scrap surplus region near its major customers
reduces raw material and transportation costs, allows for closer customer
contact and enables the Company and its customers to maintain lower
inventory levels. West Virginia's abundant supply of coal, used in
producing electricity which is integral to the Company's production
process, helps to keep energy costs relatively low. In addition, the
Company's flexible manufacturing capabilities enable it to meet demand for
a variety of custom-order products, resulting in its obtaining a larger
share of its major customers' business.
1
The Company's business strategy is to maintain its strong
position in each of the markets for its Finished Products by continuing to
produce high quality products on a cost-effective basis and to identify and
capture additional niche markets where it can profitably supply Finished
Products. The Company believes that the majority of its Finished Products
will continue to command higher less volatile prices and profit margins
than commodity steel products. The Company believes that this business
strategy has enabled it to operate at a profit and has left it well
positioned to benefit from any future improvement in the economy.
The Company's mini-mill was acquired in 1982 by SWVA, Inc.
("SWVA"), which was organized by a group of investors including certain
members of the Company's management. The Company was organized in the
State of Delaware by members of management and a private investment firm
specializing in leveraged buy-out acquisitions. This group acquired all of
the capital stock of SWVA in December 1986. Since then, SWVA has been a
wholly-owned operating subsidiary. In October 1987 the Company sold 1.6
million shares of its Common Stock in an initial public offering. In
February 1993, the Company completed an underwritten public offering (the
"1993 Public Offering") pursuant to which it sold an additional 1.94
million shares of Common Stock and 2.66 million shares were sold by certain
non-employee stockholders of the Company.
The Company's other wholly-owned subsidiary, Marshall Steel, Inc.
("Marshall") located in Memphis, Tennessee, was acquired in April 1993.
Marshall fabricates special steel sections for the truck trailer industry.
Since August 1993, SWVA has been the primary supplier of hot rolled steel
sections to Marshall, having replaced the previous offshore supplier.
The Company's executive offices are located at 17th Street and
2nd Avenue, Huntington, West Virginia, 25703, and its telephone number is
(304) 696-8200. Unless the context otherwise requires, the term the
"Company" refers to Steel of West Virginia, Inc., SWVA and Marshall on a
consolidated basis.
MANUFACTURING OPERATIONS
The Company recycles steel at the Huntington facility by melting
steel scrap in two 70-ton electric arc furnaces and adding a variety of
alloys to make different grades of steel according to customer
specifications. The refined molten steel is then ladled into a three-
strand continuous caster from which it emerges as continuous strands with a
cross-section ranging from approximately 16 to 64 square inches. The
strands are cut into billets of specified lengths which are moved into the
Company's rolling mills where they are reheated to approximately 2,300
degrees Fahrenheit and fed through a series of rollers to reduce their size
and form them into specialty steel sections. These sections emerge from
the rolling mills, are allowed to cool uniformly on a cooling bed, and
2
are cut to custom lengths. The sections produced by the Company are
composed of carbon and low alloy high-strength steels.
Depending on an individual customer's needs, many of the sections
are then hole-punched, shotblasted, welded or painted. These custom-
finishing operations are done to customer specifications, and often were
originally performed by the Company's customers directly but can be done
more cost-effectively by the Company. The custom-finished products are
generally placed directly into the customers' assembly operations.
The annual equipment capacity of the melt shop furnaces and
caster is approximately 260,000 tons, of which the Company produced 251,000
tons of billets in 1995 which constituted 96.5% of its equipment capacity.
The annual capacity of Finished Products from the Company's rolling mills
is 260,000 tons. The Company produced 187,000 tons of Finished Products
in 1995 which constituted 71.9% of its capacity. As a result, the Company
has generally been able to produce all the billets it requires in its
rolling operations, and the Company believes that it has the ability to
increase its annual production of Finished Products to capacity without
upgrading or increasing the capacity of its furnaces or caster. The
Company has also generally been able to produce additional billets for sale
to help cover fixed costs. The market for billets, however, is subject to
intense competition and their profitability is contingent on, among other
things, production costs including electricity rates and the Company's
production schedules for Finished Products.
The Company transports its products by common carrier, generally
shipping by truck and occasionally by rail and barge transportation. The
Huntington location has railroad sidings and a barge loading facility.
CAPITAL IMPROVEMENTS AND EXPANSION
The Company's expenditures for required capital replacements are
currently anticipated to average approximately $1,000,000 annually over the
next several years. However, the Company plans to increase capacity and
productivity over the next several years by continuing to modernize the
Huntington facility and possibly through strategic acquisitions, although
such expenditures will be subject to available funds and approval by the
Company's Board of Directors. In late 1993, the Company's Board of
Directors approved the first phase of a plant expansion and modernization
program which was completed in late 1994. The project included the
upgrading of one of the plant's rolling mills, as well as the installation
of an automated fabrication system to punch, weld and powder paint truck
trailer cross members.
3
PRODUCTS
Trailer Steel Products are used in the assembly of trailers for
highway transport. These products include cross-members, which are steel
mini-beams providing floor support in truck trailers, and subframe sections
which are beams attached to the undersides of truck trailers allowing cargo
weight to be redistributed evenly over the wheels. Sales of Trailer Steel
Products represented approximately 51%, 50%, and 47% of total net sales of
the Company during the last three fiscal years ending December 31, 1995.
The Company is the dominant producer of such products in the United States.
The Company also produces mast sections and hanger bars for
industrial lift trucks and narrow aisle hand-operated trucks, as well as
rail components used primarily in coal mining, including light rails, mine
ties which support the rails, and joint bars used to join rail sections.
In addition, the Company produces frame sections and cleats used in off-
highway equipment (such as bulldozers and graders). The Company has a
leading position in certain of its niche markets. The Company also
produces sections used in automotive lifts, transit systems, containers,
bridges, guardrail posts, rack sections and, depending upon production
costs and its other production schedules, billets.
The Company manufactures most of its products to customer
specifications, and in many instances provides custom-finishing operations.
Due to the custom nature of its Finished Products, the Company generally
maintains a minimum of Finished Product inventory.
The Company regularly investigates the market potential of new
products. Products that the Company has identified for future growth
include roof channels for mines, guardrail posts, and rack sections used in
warehousing applications. Of these products, the Company shipped 6,400
tons of guardrail post and 190 tons of roof channel in 1995. Management
believes that the total market for these products is 90,000 tons for
guardrail post, 60,000 tons for rack sections and 10,000 tons for roof
channel, and that the Company's modernization project will enhance its
ability to penetrate these markets, although there can be no assurance that
it will be able to do so.
CUSTOMERS
The Company sells to approximately 200 customers, and in the year
ended December 31, 1995, no single customer accounted for more than 10% of
the Company's net sales. The Company is a leading supplier of certain
products to most equipment manufacturers in the truck trailer, off-highway
equipment and mining industries. The Company currently has no long-term
agreements with its customers, and there can be no assurance that any of
the Company's customers will continue to purchase any specific product or
quantity.
4
MARKETING
Senior management of the Company is directly involved in sales to
new customers, and in sales of new products to existing customers. The
Company's sales efforts cover all of the continental United States and
certain foreign markets, although during 1995 exports constituted less than
5% of the Company's net sales. The Company services the ongoing needs of
its customers through three in-house sales representatives at its
Huntington facility and two in-house sales representatives at its Memphis
facility.
COMPETITION AND OTHER MARKET FACTORS
The Company believes that there are many factors which
distinguish it from other steel producers and that its Finished Products
are less volatile in their pricing than commodity steel products.
Nonetheless, both the domestic steel industry and the Company's business
are highly cyclical in nature. Because the Company's net sales are
affected by the performance of the economy as a whole, net sales for 1991
were substantially lower than in 1992 and 1993. While the Company's net
sales in 1994 and 1995 increased substantially over net sales in 1993 in
part due to the improved economy, there can be no assurance that the
Company will continue to benefit from any such improvement.
The domestic and foreign steel industries are characterized by
intense competition. The Company has identified competition from the
following sources: (1) in its truck trailer market, the Company faces
competition from two North American mills; (2) in its industrial truck
market, the Company competes with Japanese, British, West German and
Italian producers who offer similar products; (3) in its mining industry
market, the Company encounters competition from foreign producers and
domestic manufacturers of cold-rolled mine ties; and (4) in its off-highway
equipment market, the Company competes with Italian, Japanese and British
manufacturers. Despite this competition, the Company is the dominant
producer of Trailer Steel Products in the United States and has a leading
position in certain of its niche markets for its other principal products.
Although management believes that its lower production costs, close
involvement with customers and the Company's geographical location are
among its competitive advantages, there can be no assurance that such
competition will not have an adverse effect on the Company in the future.
Many of the Company's customers are in mature businesses.
Accordingly, any material increase in tonnage sales of Finished Products by
the Company would likely be the result of continued improvement in the
economy as a whole, an increased share of the market for existing products
or sales by the Company of new products. The Company regularly
investigates the market potential of new products. However, no assurance
can be given that the
5
Company will be successful in manufacturing and selling such products.
Until recently, overall consumption of steel products in the
United States did not grow with the economy as a whole. While the
operations of domestic steel producers have been scaled back through
corporate reorganizations or as a result of bankruptcy proceedings, there
still exists, taking into account current levels of imports, significant
excess capacity in the domestic steel industry as a whole. While the
Company believes that the nature of its Finished Products and its other
competitive advantages distinguish it from other steel producers, there can
be no assurance that such excess capacity will not have an adverse effect
on the Company in the future.
Many steel producers which are currently competitors of the
Company or which could enter the Company's markets have financial resources
substantially greater than those available to the Company. The cost of
steel scrap, the principal raw material used in the Company's mill, is
subject to market conditions largely beyond the control of the Company.
See "Raw Materials."
BACKLOG AND SEASONALITY
Due to the nature of its operations, the Company generally fills
orders within 21 days. This enables the Company's customers to maintain
low inventory levels. At December 31, 1995, the Company had firm orders
for 50,654 tons representing approximately $31,650,000, as compared with
52,900 tons representing approximately $30,512,000 at December 31, 1994.
The Company does not believe backlog is a significant indicator of future
sales.
The Company's Huntington, West Virginia operations occasionally
shut down for maintenance on a staggered basis over a two week period in
the summer and for one week in the fourth quarter. The Company's
operations are not otherwise subject to seasonal fluctuations in sales.
RAW MATERIALS
The principal raw material used in the Company's steel mill is
ferrous scrap derived from, among other sources, junked automobiles,
structural steel and machines. The purchase of steel scrap is subject to
market conditions largely beyond the control of the Company. However, the
Company is located in a scrap surplus region, and therefore typically
maintains less than a one month supply of scrap, which keeps inventory
costs to a minimum. The Company has also supplemented scrap with a mix of
direct reduced iron when it was economical to do so. Historically, price
fluctuations of scrap have not had a material impact due to the Company's
ability, in most instances, to pass through increases in the cost of scrap
to its customers in the form of higher prices or surcharges. Although one
scrap dealer supplies between 30% and 35%
6
of the Company's requirements, the Company believes that a number of
adequate sources of scrap and other raw materials that it uses are readily
available.
The Company's manufacturing processes consume large amounts of
energy in the form of electricity, which the Company purchases from
American Electric Power and Memphis Light, Gas and Water. The cost of
electric power was approximately 6.8% of the cost of goods sold for 1995.
West Virginia's abundant supply of coal, used in producing electricity,
helps keep energy costs relatively low. The Company's two major power
supply contracts with American Electric Power automatically continue until
such time as either party gives the other 12 months written notice of
cancellation. Under both agreements, the Company may use electricity at
any hour of the day or night, provided that the electricity supplier may
impose a surcharge on the Company if it exceeds certain specified levels of
use. One of the agreements also provides that the electricity supplier may
interrupt the Company's use during times of peak demand, although it is
required to provide at least 145 hours of electricity during each calendar
week, a level which the Company believes would be adequate to avoid any
significant impact on its operations at currently foreseeable levels. See
"Business -- Manufacturing Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
EMPLOYEES
As of December 31, 1995, the Company employed 589 people, of
which approximately 82% were members of the United Steelworkers of America.
The Company believes its relations with its employees are generally good.
The Company's current collective bargaining agreement at the Huntington,
West Virginia facility expires in June 1999 provided that, under the terms
of the agreement, during the 45-day period prior to June 7, 1996 the
Company and the union have agreed to conduct "normal negotiations", and if
all issues are not resolved by the end of that period either party may
notify the other that the collective bargaining agreement will terminate on
December 6, 1996. Under this agreement, all employees are salaried, there
are no time clocks or job descriptions, and the Company utilizes only two
basic classifications for production and maintenance personnel (steelmaker,
and trade and craft). The Company believes that its wage rates are
competitive with other mini-mills. However, there can be no assurance
regarding the outcome of any future negotiations with the Company's union.
The Company maintains a profit-sharing plan for both bargaining
unit and non-bargaining unit employees pursuant to which a percentage of
pre-tax profits are allocated to a profit-sharing fund and a cash bonus.
See Note H of the Notes to Consolidated Financial Statements of the
Company.
7
In contrast to the retiree health insurance commonly provided in
the domestic steel industry, the Company offers no material postretirement
employee health care benefits or other benefit program subject to
accounting under the provisions of Statement of Financial Accounting
Standards No. 106 -- "Employers' Accounting for Postretirement Benefits
other than Pensions" which became effective in 1993. Under informal
arrangements, the Company currently provides postemployment health care
benefits to each person who becomes disabled, is not expected to return to
the active work force and is not covered by another health insurance plan.
As of December 31, 1995, 20 such disabled former employees had been
identified as current or potential recipients of this benefit. The
expected cost of such benefits has been accrued in accordance with
Statement of Financial Accounting Standards No. 112 -- "Employers'
Accounting for Postemployment Benefits."
ENVIRONMENTAL & REGULATORY MATTERS
The Company is subject to federal, state and local environmental
laws and regulations concerning, among other matters, wastewater discharge,
air emissions and furnace dust disposal. As with similar mills in the
industry, the Company's furnaces are classified as generating hazardous
waste because they produce certain types of dust containing lead, zinc and
cadmium. The Company currently collects and handles such wastes through
contracts with a company which reclaims, from the waste dust, certain
materials and recycles or disposes of the remainder. The Company believes
it is in substantial compliance with applicable environmental laws and
regulations. Notwithstanding such compliance, if damage to persons or
property or contamination of the environment has been or is caused by the
conduct of the Company's business or by hazardous substances or wastes used
in, generated or disposed of by the Company, the Company may be held liable
for such damages and be required to pay the cost of investigation and
remediation of such contamination. The amount of such liability, as to
which the Company is self-insured, could be material. Changes in federal
or state laws, regulations or requirements or discovery of unknown
conditions could require additional expenditures by the Company.
The Company's operations are subject to the federal Clean Air Act
which provides for regulation, through state implementation of federal
requirements, of the emission of certain air pollutants. It is expected
that the Environmental Protection Agency will promulgate industry-wide
standards and technology requirements for the control of emissions of
particular regulated air pollutants that may impose more stringent
requirements on the Company's operations beginning in the future. The
Company will continue to monitor these evolving laws and regulations and
will plan and budget, as appropriate, for any such additional capital and
operating expenditures that may be required to upgrade or install new or
additional pollution control equipment and secure additional or modified
permits. There can be no assurance that these evolving
8
federal requirements will not require the Company to make material
expenditures in the future.
Item 2. Properties
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Set forth below is certain information with respect to the
Company's properties. The Company believes that its two facilities, which
are located on approximately 42 acres of land owned by the Company in
downtown Huntington, West Virginia, adjacent to rail lines and the Ohio
River, and approximately 4 acres of land owned by the Company in Memphis,
Tennessee, adjacent to the Mississippi River, are well maintained, in good
condition and are adequate and suitable for its operating needs. All of
the Company's Huntington, West Virginia properties are currently subject to
a first mortgage in favor of the Company's senior lender and the Memphis,
Tennessee properties are pledged to the Company's senior lender.
Approximate
Huntington, WV Facility Square Footage
----------------------- --------------
Rolling Mills 309,000
Furnaces and Caster 88,500
Machine Shop, Fabrication Facilities 115,075
and Miscellaneous Facilities
Administrative, Engineering and Sales Offices 45,600
Memphis, TN Facility
--------------------
Fabrication Facility 38,400
Administrative and Sales Offices 2,600
Item 3. Legal Proceedings
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None.
9
Item 4. Submission of Matters to a Vote of Security Holders
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None.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
-------------------------------------
The Company's common stock trades on the Nasdaq National Market
tier of The Nasdaq Stock MarketSM under the symbol: SWVA. The following
table sets forth, for the fiscal periods indicated, the high and low last
sales prices of the Common Stock (without retail markups, markdowns or
commissions) on the NASDAQ National Market System.
High Low
1995
Fourth Quarter . . . . . . . . . . . . . . . $10 5/8 $ 8 3/8
Third Quarter . . . . . . . . . . . . . 13 1/2 8 3/4
Second Quarter . . . . . . . . . . . . . 12 1/4 11
First Quarter . . . . . . . . . . . . . 12 1/2 11
1994
Fourth Quarter . . . . . . . . . . . . . $13 $ 8 1/4
Third Quarter . . . . . . . . . . . . . . . 13 1/4 12 1/4
Second Quarter . . . . . . . . . . . . . . . 13 1/4 10 1/2
First Quarter . . . . . . . . . . . . . . . 14 3/4 10 3/4
On March 1, 1996, there were approximately 209 holders of record
of the Company's Common Stock, and the Company believes there are
approximately 1,532 beneficial shareholders.
The Company paid no cash dividends in 1994 or 1995 and currently
intends to retain all earnings to support the development of its business
rather than paying dividends on its Common Stock. Certain of the Company's
debt instruments restrict the payment of dividends by SWVA to the Company
to no more than 50% of SWVA's prior year's net income, subject to
limitations for maintenance of certain net worth and working capital
levels. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note E of the Notes to Consolidated
Financial Statements of the Company.
10
Item 6. Selected Financial Data
-----------------------
The following selected financial data for each of the five years
in the period ended December 31, 1995, are derived from the Consolidated
Financial Statements of the Company. The data should be read in
conjunction with the Consolidated Financial Statements, related Notes and
other financial information included herein.
Year Ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- --------- --------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . . . . . . . $129,341 $124,229 $106,354 $ 82,537 $ 71,478
Cost of sales . . . . . . . . . . . . . . . . . 107,191 103,327 88,698 64,359 58,391
Gross profit . . . . . . . . . . . . . . . . . 22,150 20,902 17,656 18,178 13,087
-------- -------- -------- --------- --------
Gross profit margin . . . . . . . . . . . . . 17.1% 16.8% 16.6% 22.0% 18.3%
Selling and administrative expenses . . . . . . 5,018 5,454 4,432 4,587 4,592
-------- -------- -------- --------- --------
Operating income . . . . . . . . . . . . . . . 17,132 15,448 13,224 13,591 8,495
Interest expense . . . . . . . . . . . . . . . 1,642 898 1,624 3,507 4,163
Other expense (income) . . . . . . . . . . . . (227) 94 (692) 460 (304)
-------- -------- -------- --------- --------
Income before income taxes . . . . . . . . . . 15,717 14,456 12,292 9,624 4,636
Income taxes . . . . . . . . . . . . . . . . . 6,253 5,662 5,156 4,766 2,308
-------- -------- -------- --------- --------
Net income . . . . . . . . . . . . . . . . . . $ 9,464 $ 8,794 $ 7,136 $ 4,858 $ 2,328
======== ======== ======== ========= ========
Net income per common share . . . . . . . . . . $ 1.40 $ 1.24 $ 1.03 $ .94 $ .45
Common shares outstanding(1) . . . . . . . . . 6,782 7,091 6,930 5,155 5,155
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficit) . . . . . . . . . . . $ 15,514 $ 10,516 $ 14,569 $ 6,877 $(12,034)(2)
Total assets . . . . . . . . . . . . . . . . . 95,123 94,174 80,721 68,946 68,243
Current liabilities . . . . . . . . . . . . . . 18,960 20,211 17,183 17,442 32,399(2)
Long-term debt . . . . . . . . . . . . . . . . 11,978 11,542 10,211 24,181 14,514(2)
Stockholders' equity . . . . . . . . . . . . . 55,415 53,934 45,140 20,317 15,459
- --------------------
(1)
Weighted average number of common and common equivalent shares
outstanding.
(2)
Prior to its amendment on September 30, 1992, the Company's senior loan
agreement provided that it could be terminated by the Company's lender
in 1992.
Accordingly, at December 31, 1991, the entire $21.5 million then
outstanding was included in current liabilities. Under subsequent
amendment, the loan is not fully repayable until January 1, 1998.
11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
GENERAL
The Company believes that there are many factors that distinguish
it from other steel producers and the majority of its Finished Products are
less volatile in their pricing than commodity steel products. Nonetheless,
both the domestic steel industry and the Company's business are highly
cyclical in nature. Management believes that the Company's lower net sales
during 1991 were a result of generally poor economic conditions during that
period. Management believes that the 1994 and 1995 results are more
indicative of the Company's performance during periods of a stronger
economy.
In March 1993, the Company voluntarily prepaid $5 million of its
senior term loans with a portion of the Company's net proceeds of the 1993
Public Offering and the remainder of such term loans were amended to reduce
interest rates. During 1994 the Company amended its senior credit
agreement to permit the Company to borrow $6 million in 1994 under a new
"Capital Expenditure Line" of credit. The February 1994 Amendment also
reduced the interest rates on all borrowings under the financing agreement.
In 1994 and 1995, the Company's Board of Directors authorized
management to buy back up to 1,200,000 shares of its common stock from time
to time. During 1995 the Company purchased 755,300 shares.
12
RESULTS OF OPERATIONS
The following table sets forth the percentages of net sales
represented by certain income and expense items and the tonnage sales for
the periods indicated.
YEAR ENDED
DECEMBER 31
------------------------
1995 1994 1993
---- ---- ----
NET SALES 100.0% 100.0% 100.0%
COST OF SALES 82.9 83.2 83.4
----- ----- -----
GROSS PROFIT 17.1 16.8 16.6
SELLING AND ADMINISTRATIVE EXPENSES 3.9 4.4 4.2
----- ----- -----
OPERATING INCOME 13.2 12.4 12.4
INTEREST EXPENSE 1.3 .7 1.5
OTHER EXPENSE (INCOME) (0.2) .1 ( .6)
----- ----- -----
INCOME BEFORE INCOME TAXES 12.1 11.6 11.5
INCOME TAXES 4.8 4.5 4.8
----- ----- -----
NET INCOME 7.3% 7.1% 6.7%
===== ===== =====
TONNAGE SALES (in thousands of tons) 212.7 214.1 206.4
===== ===== =====
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH
YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales for 1995 increased by $5.1 million (4.1%)
---------
from $124.2 million in 1994 to $129.3 million in 1995, primarily due to an
increase in the tonnage of Finished Products shipped, coupled with
selective price increases. Total tonnage sales decreased by 1,462 tons
(.7%) to 212,652 tons in 1995, reflecting a 2,783 ton increase in the sale
of Finished Products, and a 4,245 ton decrease in the sale of billets.
The average selling price per ton for Finished Products increased by $22
(3.4%) to $664 in 1995, while the average selling price per ton for billets
increased by $9 (3.8%) to $249 in 1995.
Cost of Sales. Cost of sales for 1995 increased by $3.9 million
-------------
(3.7%) from $103.3 million in 1994 to $107.2 million in 1995. This
increase was principally due to the increase in Finished Product tonnage
sales coupled with higher raw material prices, depreciation and maintenance
expense. As a percentage of
13
net sales, cost of sales decreased from 83.2% in 1994 to 82.9% in 1995.
For a description of fluctuations in the price of raw materials, see
"Business -- Raw Materials."
Gross Profit. As a result of the above, gross profit for 1995
------------
increased by $1.2 million (6.0%) from $20.9 million in 1994 to $22.1
million in 1995. As a percentage of net sales, gross profit for 1995
increased from 16.8% in 1994 to 17.1% in 1995 as a result of increased
higher margin Finished Product sales.
Selling and Administrative Expenses. Selling and administrative
-----------------------------------
expenses for 1995 were $5.0 million compared to $5.5 million in 1994.
Lower selling and administrative expenses were incurred due to lower
salaries and professional fees. As a percentage of net sales, selling and
administrative expenses decreased from 4.4% in 1994 to 3.9% in 1995.
Operating Income. For the reasons described above, operating
----------------
income increased by $1.6 million (10.9%) from $15.5 million in 1994 to
$17.1 million in 1995. As a percentage of net sales, operating income
increased to 13.2% in 1995 from 12.4% in 1994.
Interest Expense and Other Expense (Income). Interest expense
-------------------------------------------
for 1995 increased by $744,000 (82.9%) from $898,000 in 1994 to $1,642,000
in 1995. This increase was attributed to the debt incurred during the
Company's plant expansion and modernization program. Other expense
(income) changed by $321,000 from $94,000 of expense in 1994 to $227,000 of
income in 1995. This was principally due to reduced losses from the
disposal of fixed assets.
Net Income. As a result of the above, net income for 1995
----------
increased by $670,000 (7.6%) from $8.8 million in 1994 to $9.5 million in
1995. As a percentage of net sales, net income increased from 7.1% in 1994
to 7.3% in 1995.
Year Ended December 31, 1994, Compared with
Year Ended December 31, 1993
Net Sales. Net sales for 1994 increased by $17.8 million (16.8%)
---------
from $106.4 million in 1993 to $124.2 million in 1994, primarily due to an
increase in the tonnage of Finished Products shipped, which include
shipments by Marshall for the entire period in 1994 (See Note A of the
Notes to Consolidated Financial Statements) coupled with selective price
increases. Total tonnage sales increased by 7,734 tons (3.7%) to 214,114
tons in 1994, reflecting a 21,254 ton increase in the sale of Finished
Products, and a 13,520 ton decrease in the sale of billets. The average
selling price per ton for Finished Products increased by $40 (6.6%) to $642
in 1994, while the average selling price per ton for billets increased by
$25 (11.6%) to $240 in 1994.
14
Cost of Sales. Cost of sales for 1994 increased by $14.6 million
-------------
(16.5%) from $88.7 million in 1993 to $103.3 million in 1994. This
increase was principally due to the increase in total tonnage sales coupled
with higher raw material prices, depreciation and mill roll expense. As a
percentage of net sales, cost of sales decreased from 83.4% in 1993 to
83.2% in 1994. For a description of fluctuations in the price of raw
materials, see "Business -- Raw Materials."
Gross Profit. As a result of the above, gross profit for 1994
------------
increased by $3.2 million (18.4%) from $17.7 million in 1993 to $20.9
million in 1994. As a percentage of net sales, gross profit for 1994
increased from 16.6% in 1993 to 16.8% in 1994 as a result of increased
higher margin Finished Product sales.
Selling and Administrative Expenses. Selling and administrative
-----------------------------------
expenses for 1994 were $5.5 million compared to $4.4 million in 1993.
Higher selling and administrative expenses were incurred due to a full 12
months of operations of Marshall coupled with higher legal and professional
fees. As a percentage of net sales, selling and administrative expenses
increased from 4.2% in 1993 to 4.4% in 1994.
Operating Income. For the reasons described above, operating
----------------
income increased by $2.3 million (16.8%) from $13.2 million in 1993 to
$15.5 million in 1994. As a percentage of net sales, operating income
remained unchanged from the 12.4% in 1993.
Interest Expense and Other Expense (Income). Interest expense
-------------------------------------------
for 1994 decreased by $726,000 (44.7%) from $1.6 million in 1993 to
$900,000 in 1994. This reduction was a result of both lower interest rates
and the reduction of principal amount outstanding due to the scheduled
amortization of principal and the capitalization of interest expense on the
Company's plant expansion and modernization program. Other expense
(income) changed by $786,000 from $692,000 of income in 1993 to $94,000 of
expense in 1994. This was due to the losses from the disposal of fixed
assets offset by income from scrap sales and mill roll expense
reimbursement.
Net Income. As a result of the above and a lower effective
----------
income tax rate, net income for 1994 increased by $1.7 million (23.2%) from
$7.1 million in 1993 to $8.8 million in 1994. As a percentage of net
sales, net income increased from 6.7% in 1993 to 7.1% in 1994.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to provide funds from its operations,
together with funds available under the terms of the Company's $10,000,000
revolving line of credit, historically have been sufficient to meet the
Company's short-term liquidity needs. The total borrowing capacity under
the revolving credit line is governed by a formula based on levels of
accounts receivable and inventory. Cash provided from operations
approximated $8.8 million, $16.3 million and $7.9 million during each of
the three years ended December 31, 1995, 1994, and 1993, respectively.
During this same time period, average annual borrowings against the
revolving line of credit have been less than $1 million and at December 31,
1995, the Company had $4.1 million of the revolving credit line available
for borrowing.
In early 1993, the Company completed the sale of 1,936,942 newly
issued shares of Common Stock resulting in $17,687,000 proceeds to the
Company that were used to voluntarily prepay $13 million of the Company's
term indebtedness and provide sufficient funds to complete its $4.6 million
acquisition of Marshall. Also during 1993, the Company embarked on a plan
to significantly expand and modernize its Huntington facility. This
project, completed in late 1994, resulted in the Company expending nearly
$20.6 million for capital improvements in 1994. Including these
expenditures, the Company's level of annual average capital expenditures
has historically approximated $5.2 million. Accordingly, during 1994 the
Company amended its senior credit agreement to permit the Company to borrow
$6 million in 1994 under a new "Capital Expenditure Line" of credit. The
terms of the loan amendment also enabled the Company to then reduce the
interest rates on its existing revolving credit line and term loans
outstanding from the greater of 7% or 3/4% over prime and the greater of 7%
or 1% over prime, respectively, to the Chemical Bank prime rate or LIBOR
plus 1-3/4%; reduce the annual revolving credit line commitment fee from
1/2% to 1/8% of the unused balance; and extend the term of the revolving
credit line to January 1, 1998. In addition, the amendment permits the
Company to convert up to $7 million of its indebtedness to a fixed interest
rate.
On January 1, 1998 the Company's senior lender may terminate all
of the Company's loans. Assuming payment of all scheduled amortization
until then, only a portion of the amount drawn down against the Capital
Expenditure Line, together with any borrowings against the revolving credit
line, would be outstanding at such date. The Company is currently in
compliance with the covenants of its loan agreements, and is not aware of
any reason why it would not be able to refinance its indebtedness at its
scheduled term.
The Company's expenditures for required capital replacements are
currently anticipated to average approximately $1 million annually over the
next several years. Management has no
16
reason to believe that internally generated cash flow, together with
borrowings under its Capital Expenditure Line and revolving credit line,
will not be sufficient to meet the Company's ongoing liquidity needs. Other
discretionary capital spending and strategic acquisitions, if any, would
also place demands on the Company's longer-term liquidity position. Such
expenditures and acquisitions would be subject to availability of funds and
approval by the Company's Board of Directors.
IMPACT OF INFLATION
In recent years, the Company has not experienced any material
adverse effects from inflation due to its historical ability to pass price
increases through to its customers. The Company's principal cost
components are steel scrap, labor and energy. Scrap is purchased pursuant
to monthly contracts. Scrap prices are subject to volatility, although the
Company endeavors to recoup the higher scrap prices through a scrap
surcharge. The current collective bargaining agreement is scheduled to
expire in June 1999 subject to the right of both parties to terminate the
agreement on December 6, 1996 if, as provided in the agreement, the "normal
negotiations" between the parties during the 45-day period prior to June 7,
1996 do not result in a resolution of all open issues. See "Business --
Employees." The Company's two major power supply contracts with American
Electric Power automatically continue until such time as either party gives
the other 12 months written notice of cancellation. See "Business --
Competition and Other Market Factors," "-- Raw Materials" and "--
Manufacturing Operations."
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In contrast to the retiree health insurance commonly provided in
the domestic steel industry, the Company offers no material postretirement
employee healthcare or other benefit program subject to accounting under
the provisions of Statement of Financial Accounting Standards No. 106 --
"Employers' Accounting for Postretirement Benefits Other than Pensions,"
which became effective in 1993. Under informal arrangements, the Company
currently provides postemployment health care benefits to each person who
becomes disabled, is not expected to return to the active work force and is
not covered by another health insurance plan. As of December 31, 1995, 20
such disabled former employees have been identified as current or potential
recipients of this benefit. The expected cost of such benefits has been
accrued in accordance with the provisions of Statement of Financial
Accounting Standards No. 112 -- "Employers' Accounting for Postemployment
Benefits."
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 121 -- "Accounting
for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be
Disposed Of," which must be adopted for fiscal years beginning after
December 15, 1995. This statement requires impairment losses to be
recorded on long-lived assets used
17
in operations, including related goodwill, when impairment indicators are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying value. The Company will adopt
this statement effective January 1, 1996. The Company continually analyzes
new processes and equipment that would allow the Company to produce
products on a cost-effective basis so as to enable the Company to maintain
its strong position in each of its niche markets and expand into related
markets. This could result in material write-offs if new production
processes or equipment are identified and installed or certain present
processes become impaired.
In October 1995 the FASB issued Statement of Financial Accounting
Standards No. 123 -- "Accounting for Stock-Based Compensation" effective in
1996. This statement permits, and the Company intends to continue to use,
the "intrinsic" value method, as set forth in Accounting Principles Board
Opinion Number 25, for determining compensation cost associated with the
Company's stock option plans. Under this method, stock-based compensation
expense is determined on the first date that both the number of shares the
employee is entitled to receive and the exercise price are known, in an
amount equivalent to the excess of the market price over the exercise
price. Statement No. 123 encourages the use of the "fair value" method
that results in compensation expense being measured at the date options are
granted, and reported as a charge against operations over the exercise
period. The new pronouncement will require the Company to make additional
disclosures about its stock option plans, including the pro forma
disclosures of net income and earnings per share, as if the "fair value"
based method of accounting had been applied. The Company anticipates
adopting this statement in the first quarter of 1996.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements and schedules and report of independent
auditors thereon listed in Item 14(a)(1) and (a)(2) hereof are incorporated
herein by reference and are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
------------------------------------------------
Not applicable.
PART III
The information required by Part III (Items 10 through 13) is
incorporated herein by reference to the captions "Principal Stockholders",
"Election of Directors" and "Executive Compensation" in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within
120 days after the end of the Company's fiscal year covered by this report.
18
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
---------------------------------------
(a) Documents filed as part of this Report:
(1) The following consolidated financial statements of
Registrant and its subsidiaries are included in
Item 8 of this report on Form 10-K:
Page
----
Report of Independent Auditors. F-1
Consolidated Balance Sheets - December 31, 1995, F-2
and December 31, 1994.
Consolidated Statements of Income - years ended F-3
December 31, 1995, December 31, 1994, and December
31, 1993.
Consolidated Statements of Cash Flows - years F-4
ended December 31, 1995, December 31, 1994 and
December 31, 1993.
Notes to Consolidated Financial Statements. F-5
(2) Financial Statement Schedules for the years ended
December 31, 1995, December 31, 1994, and December
31, 1993.
The following consolidated financial statement
schedules of Registrant and its subsidiaries are
included pursuant to Item 14 (d):
Page
----
Schedule I - Condensed Financial Information of Registrant S-1
Schedule II - Valuation and Qualifying Accounts S-4
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
19
(3) Exhibits
3.1 Certificate of Incorporation of Steel of West Virginia, Inc. (the
"Company"), as amended (filed herewith).
3.2 By-Laws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1,
No. 33-16845).
4.1 Financing Agreement ("Financing Agreement"), dated December 30,
1986, between The CIT Group/Business Credit, Inc. ("CIT") and
SWVA, Inc. (formally Steel of West Virginia, Inc.) and Charter
Acquisition Corporation ("Acquisition") (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-
1, No. 33-16845).
4.1(a) Amendment to the Financing Agreement, dated August 27, 1987
("Amendment No. 1") (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1, No. 33-16845).
4.1(b) Amendment to the Financing Agreement, dated September 27, 1989
("Amendment No. 2") (incorporated by reference to Exhibit 28(a) to
the Company's Current Report on Form 8-K, No. 0-16254, filed on
October 10, 1989).
4.1(c) Amendment to the Financing Agreement, dated September 30, 1992
("Amendment No. 3") (incorporated by reference to Exhibit 28(b) to
the Company's Quarterly Report on Form 10-Q, No. 0-16254, filed on
October 13, 1992).
4.1(d) Amendment to the Financing Agreement, dated March 17, 1993
("Amendment No. 4") (incorporated by reference to Exhibit 4.1(d)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, No. 0-16254).
4.1(e) Amendment to the Financing Agreement, dated February 25, 1994
("Amendment No. 5").
4.1(f) Amendment to the Financing Agreement, dated December 30, 1994
("Amendment No. 6").
4.1(g) Amendment to the Financing Agreement, dated February 28, 1996
("Amendment No. 7") (filed herewith).
4.2 Term Promissory Note (the "Original Promissory Note") issued by
Acquisition in favor of CIT, dated December 30, 1986 (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-16845).
4.2(a) Amendment, dated September 27, 1989 (the "Original Promissory Note
Amendment"), to the Original Promissory Note (incorporated by
reference to Exhibit 28(f) to the Company's Current Report on Form
8-K, No. 0-16254, filed on October 10, 1989).
4.3 Promissory Note, dated September 27, 1989 ("Note 2"), in the
principal amount of $26,922,000 issued by SWVA in favor of CIT
(incorporated by reference to Exhibit 28(c) to the Company's
Current Report on Form 8-K, No. 0-16254, filed on October 10,
1989).
4.4 Promissory Note, dated September 30, 1992 ("Note 3"), in the
principal amount of $6,500,000 issued by SWVA in favor of CIT
(incorporated by reference to Exhibit 28(b) to the Company's
Quarterly Report on Form 10-Q, No. 0-16254, filed on October 13,
1992).
20
4.5 Promissory Note, dated July 11, 1994 ("Note 4") in the principal
amount of $6,000,000 issued by SWVA in favor of CIT.
4.6 Guaranty, dated December 30, 1986 (the "Guaranty"), by the Company
in favor of CIT relating to loan from CIT to Acquisition
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, No. 33-16845).
4.7 Guaranty, dated June 9, 1993 (the "Marshall Guaranty"), by
Marshall Steel, Inc. ("Marshall") in favor of CIT (incorporated by
reference to Exhibit 4.1(d) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, No. 0-16254).
4.8 Security Agreement, dated June 9, 1993 (the "Security Agreement"),
by Marshall in favor of CIT (incorporated by reference to Exhibit
4.1(d) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, No. 0-16254).
4.9 Pledge Agreement, dated September 26, 1989 (the "Pledge
Agreement"), by the Company in favor of CIT (incorporated by
reference to Exhibit 4.6 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, No. 0-16254).
4.10 Deed of Trust, Assignment of Leases and Rents and Security
Agreement, dated December 30, 1986 (the "Mortgage"), by SWVA in
favor of CIT (incorporated by reference to Exhibit 4.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, No. 0-16254).
4.10(a) First Amendment of Deed of Trust, Assignment of Leases and Rents
and Security Agreement, dated September 27, 1989 ("Mortgage
Amendment No. 1") (incorporated by reference to Exhibit 4.7(a) to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, No. 0-16254).
4.10(b) Second Amendment of Deed of Trust, Assignment of Leases and Rents
and Security Agreement, dated September 30, 1992 (incorporated by
reference to Exhibit 28(c) to the Company's Quarterly Report on
Form 10-Q, No. 0-16254, filed on October 13, 1992) ("Mortgage
Amendment No. 2").
4.11 Negative Pledge Agreement, dated June 7, 1993 (the "Negative
Pledge Agreement"), by Marshall in favor of CIT (incorporated by
reference to Exhibit 4.1(d) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, No. 0-16254).
10.1 The Financing Agreement (see Exhibit 4.1).
10.1(a) Amendment No. 1 (see Exhibit 4.1(a)).
10.1(b) Amendment No. 2 (see Exhibit 4.1(b)).
10.1(c) Amendment No. 3 (see Exhibit 4.1(c)).
10.1(d) Amendment No. 4 (see Exhibit 4.1(d)).
10.1(e) Amendment No. 5 (see Exhibit 4.1(e)).
10.1(f) Amendment No. 6 (see Exhibit 4.1(f)).
10.1(g) Amendment No. 7 (see Exhibit 4.1(g)).
10.2 The Original Promissory Note (see Exhibit 4.2).
21
10.2(a) The Original Promissory Note Amendment (see Exhibit 4.2(a)).
10.3 Note 2 (see Exhibit 4.3).
10.4 Note 3 (see Exhibit 4.4).
10.5 Note 4 (see Exhibit 4.5).
10.6 The Guaranty (see Exhibit 4.6).
10.7 The Marshall Guaranty (see Exhibit 4.7).
10.8 The Security Agreement (see Exhibit 4.8).
10.9 The Pledge Agreement (see Exhibit 4.9).
10.10 The Mortgage (see Exhibit 4.10).
10.10(a) Mortgage Amendment No. 1 (see Exhibit 4.10(a)).
10.10(b) Mortgage Amendment No. 2 (see Exhibit 4.10(b)).
10.11 The Negative Pledge Agreement (see Exhibit 4.11).
10.12 Sidetrack Agreement, dated June 24, 1983, between SWVA and the
Chesapeake and Ohio Railroad Company ("C&O") (incorporated by
reference to Exhibit 10.25 to the Company's Registration Statement
on Form S-1, No. 33-16845).
10.13 Lease, dated November 1, 1979, between SWVA's predecessor and C&O,
as amended by a letter dated March 2, 1983 (incorporated by
reference to Exhibit 10.36 to the Company's Registration Statement
on Form S-1, No. 33-16845).
10.14(a) Agreement, dated August 30, 1993, between SWVA and Appalachian
Power Company ("Appalachian").
10.14(b) License Agreement, dated September 29, 1992, between SWVA and
Appalachian (incorporated by reference to Exhibit 10.38 to the
Company's Registration Statement on Form S-1, No. 33-55952).
10.14(c) Agreement, dated November 24, 1992, between SWVA and Appalachian
(incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement on Form S-1, No. 33-55952).
10.15* Employment Agreement, dated as of January 1, 1992, between SWVA
and Robert L. Bunting, Jr. (incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form S-1, No. 33-
55952).
10.15(a)* Amendment No. 1 to Employment Agreement dated as of August 5,
1993, between SWVA and Robert L. Bunting, Jr. (incorporated by
reference to Exhibit 4.1(d) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, No. 0-16254).
10.16* Management Bonus Plan, effective as of October 1, 1984, for the
benefit of SWVA's eligible employees (incorporated by reference to
Exhibit 10.42 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, No. 0-16254).
____________
* Required to be filed pursuant to Item 14(c) of Form 10-K.
22
10.17* Management Retirement Plan, effective as of October 1, 1984, by
the Company on behalf of its management employees (including
Amendment No. I and Amendment No. II, each dated January 27, 1989)
(incorporated by reference to Exhibit 10.49 to the Company's
Annual Report on Form 10-K, No. 016254, filed on March 29, 1990).
10.18 Collective Bargaining Agreement, dated June 7, 1993, between SWVA
and the United Steelworkers of America, AFL-CIO (the "Union")
(incorporated by reference to Exhibit 10.26 to the Company's
Current Report on Form 8-K, No. 0-016254, filed on June 9, 1993).
10.19 Collective Bargaining Unit Bonus Plan, effective as of October 1,
1984, for the benefit of SWVA's eligible employees (incorporated
by reference to Exhibit 10.46 to the Company's Registration
Statement on Form S-1, No. 33-16845).
10.20 Collective Bargaining Unit Retirement Plan, effective June 2,
1990, between SWVA and the Union (incorporated by reference to
Exhibit 10.46 to the Company's Registration Statement on Form S-1,
No. 33-55952).
10.21 Indemnification and Contribution Agreement between the Company and
certain Selling Stockholders (incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992, No. 0-16254).
10.22 Underwriting Agreement among the Company, certain selling
stockholders and Wheat, First Securities, Inc., dated January 25,
1993 (incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992, No. 0-16254).
10.23 1995 Employee Stock Option Plan (filed herewith).
10.24 1995 Non-Employee Director Stock Option Plan (filed herewith).
11.1 Statement re Computation of Per Share Earnings (filed herewith).
21 Subsidiaries of the Company (incorporated by reference to Exhibit
22 to the Company's Registration Statement on Form S-1, No. 33-
16845).
28 Delaware General Corporation Law, Sections 102(b)-(7) and 145 (1)
(incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-1, No. 33-16845).
(b) Reports on Form 8-K:
None.
____________
* Required to be filed pursuant to Item 14(c) of Form 10-K.
23
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.
STEEL OF WEST VIRGINIA, INC.
March 8, 1996 By: /s/ Robert L. Bunting, Jr.
----------------------------------------
Robert L. Bunting, Jr.
President, Chief Executive
Officer and Chairman of the
Board
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.
Signatures Title Date
---------- ----- ----
/s/ Robert L. Bunting, Jr. President, Chief Executive March 8, 1996
- ---------------------------- Officer and Chairman of
Robert L. Bunting, Jr. the Board (Principal
Executive Officer)
/s/ Timothy R. Duke Vice President, Treasurer March 8, 1996
- ---------------------------- and Chief Financial
Timothy R. Duke Officer (Principal
Financial and Accounting
Officer)
/s/ Stephen A. Albert Director March 8, 1996
- ----------------------------
Stephen A. Albert
/s/ Albert W. Eastburn Director March 8, 1996
- ----------------------------
Albert W. Eastburn
/s/ Daniel N. Pickens Director March 8, 1996
- ----------------------------
Daniel N. Pickens
/s/ Paul E. Thompson Director March 8, 1996
- ----------------------------
Paul E. Thompson
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements Page
- ---------------------------------- ----
Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets - December 31, 1995,
and December 31, 1994............................................ F-2
Consolidated Statements of Income - years ended
December 31, 1995, December 31, 1994, and
December 31, 1993................................................ F-3
Consolidated Statements of Cash Flows - years ended
December 31, 1995, December 31, 1994, and
December 31, 1993................................................ F-4
Notes to Consolidated Financial Statements......................... F-5
Financial Statement Schedules
- -----------------------------
Schedule I - Condensed Financial Information
of Registrant..................................... S-1
Schedule II - Valuation and Qualifying
Accounts.......................................... S-4
25
ERNST & YOUNG LLP 900 United Center Phone: 304 343 8971
500 Virgina Street East (25301) Fax: 304 343 9383
P.O. Box 2906
Charleston, West Virgina 25330
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Steel of West Virginia, Inc.
We have audited the accompanying consolidated balance sheets of Steel of
West Virginia, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income and cash flows for each of
the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules 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 presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Steel of West Virginia, Inc. and subsidiaries at December 31,
1995, 1994 and 1993, and the consolidated results of their operations and
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Charleston, West Virginia
January 19, 1996
CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except share data)
December 31
1995 1994
--------------------
ASSETS
CURRENT ASSETS
Cash $ 100 $ 1,400
Receivables, net of allowances of $692 and $379 13,148 11,097
Inventories 17,095 15,846
Deferred income taxes 3,110 2,143
Other current assets 1,021 241
---------- --------
TOTAL CURRENT ASSETS 34,474 30,727
Property, plant, and equipment 40,807 43,011
Goodwill 19,134 19,817
Other assets 708 619
---------- --------
TOTAL ASSETS $95,123 $94,174
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 647 $ 757
Accounts payable 5,045 7,894
Accrued payroll and benefits payable 5,240 5,029
Income taxes payable 117 41
Other current liabilities 2,026 1,630
Current maturities of long-term debt 5,885 4,860
---------- --------
TOTAL CURRENT LIABILITIES 18,960 20,211
Long-term debt 11,978 11,542
Deferred income taxes 8,005 7,728
Other long-term liabilities 765 759
---------- --------
TOTAL LIABILITIES 39,708 40,240
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000 voting
shares authorized, 7,091,360 issued and
outstanding 71 71
Paid-in capital 26,597 26,597
Treasury stock (7,983) 0
Retained earnings 36,730 27,266
---------- --------
TOTAL STOCKHOLDERS' EQUITY 55,415 53,934
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,123 $94,174
========== ========
See notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
Year Ended December 31
1995 1994 1993
-----------------------------------
Net sales $129,341 $124,229 $106,354
Cost of sales 107,191 103,327 88,698
----------- ---------- ----------
GROSS PROFIT 22,150 20,902 17,656
Selling and administrative expenses 5,018 5,454 4,432
Interest expense 1,642 898 1,624
Other (income) expense (227) 94 (692)
----------- ---------- ----------
INCOME BEFORE INCOME TAXES 15,717 14,456 12,292
Income taxes 6,253 5,662 5,156
----------- ---------- ----------
NET INCOME $ 9,464 $ 8,794 $ 7,136
=========== ========== ==========
NET INCOME PER COMMON SHARE $ 1.40 $ 1.24 $ 1.03
=========== ========== ==========
See notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
Year Ended December 31
1995 1994 1993
-----------------------------------
CASH PROVIDED BY
Operations:
Net income $ 9,464 $ 8,794 $ 7,136
Adjustments for items not
affecting funds from
operations:
Depreciation and amortization 6,046 4,954 4,308
Loss on disposal of assets 368 1,070 184
Deferred income taxes (690) (101) 75
Other (83) 523 132
----------- ---------- ----------
15,105 15,240 11,835
Working capital changes related to
operations:
Receivables (2,051) (945) (905)
Inventories (1,249) (123) (2,374)
Other current assets (801) 56 (167)
Accounts payable (2,849) 2,678 (247)
Accrued payroll and benefits
payable 211 (12) 603
Accrued income taxes 76 (545) (605)
Other current liabilities 396 (96) (202)
----------- ---------- ----------
(6,267) 1,013 (3,897)
----------- ---------- ----------
TOTAL CASH PROVIDED BY OPERATIONS 8,838 16,253 7,938
Investment activities:
Additions to property, plant, and
equipment (3,361) (20,596) (3,120)
Acquisition of Marshall Steel, Inc. (4,617)
----------- ---------- ----------
CASH (USED FOR) INVESTMENT ACTIVITIES (3,361) (20,596) (7,737)
Financing activities:
Revolving credit loan 5,875
Long-term debt repayments (4,860) (4,000) (16,264)
Proceeds from debt issue 301 6,000
Purchase of treasury stock (7,983)
Proceeds from sale of common stock 17,687
----------- ---------- ----------
CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES (6,667) 2,000 1,423
----------- ---------- ----------
(DECREASE) INCREASE IN CASH (1,190) (2,343) 1,624
Cash (overdraft) net, beginning of year 643 2,986 1,362
----------- ---------- ----------
CASH (OVERDRAFT) NET, END OF YEAR $ (547) $ 643 $ 2,986
=========== ========== ==========
See notes to consolidated financial statements.
F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
December 31, 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business Operations: Steel of West Virginia, Inc. (the Company) conducts
- -------------------
its operations through two wholly-owned subsidiaries, SWVA, Inc. and
Marshall Steel, Inc. (acquired on April 8, 1993). The Company operates a
steel mini-mill and two steel fabrication facilities for the manufacture
and distribution of special steel sections and steel billets in a single
business segment. The Company is a supplier of products principally to
domestic equipment manufacturers serving the truck-trailer, industrial lift
truck, off-highway equipment, and mining industries with many of these
customers being mature businesses. No single customer accounts for more
than 10% of the Company's net sales, and the Company's operations are tied
closely to general economic conditions. Principal suppliers to the Company
include scrap metal producers and electric power generating utilities. In
addition, a significant portion of the Company's labor force is represented
by the United Steelworkers of America under the terms of a collective
bargaining agreement. As is similar with other mini-mills in the industry,
the Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, wastewater discharge, air
emissions and furnace dust disposal.
Basis of Presentation: The preparation of financial statements in
- ---------------------
conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. The consolidated financial
statements include the accounts of Steel of West Virginia, Inc. and its
wholly-owned subsidiaries. All significant intercompany transactions and
investments have been eliminated.
Financial Instruments: Financial instruments that could potentially
- ---------------------
subject the Company to credit risk are trade accounts receivable. As of
December 31, 1995 and 1994, the Company's accounts receivable from
customers in its principal markets approximated $11,065,000 and $9,646,000.
Trade credit is extended by the Company based on an evaluation of the
customer's financial condition and generally collateral is not required.
Credit losses are provided for in the financial statements, and have
consistently been immaterial and within management's expectations.
Management believes that all significant financial instruments of the
Company are reported in the financial statements at carrying values that
approximate market values.
Inventories: Inventories are stated at the lower of cost or market. Cost
- -----------
is primarily determined by the last-in, first-out (LIFO) method. Mill
rolls, which are included in manufacturing supplies, are expensed when
placed in service.
Property, Plant and Equipment: Property, plant and equipment is stated on
- -----------------------------
the basis of cost. Depreciation for financial statement purposes is
computed on the straight-line basis over the estimated useful life of the
asset. Principal service lives for the assets of the Company are:
buildings--up to 30 years; machinery and equipment--up to 12 years; and
furniture and fixtures--up to 5 years.
In March, 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to Be Disposed Of" that requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and estimated cash flows from those assets are less
than the assets' carrying value. The Company will adopt Statement No. 121
in the first quarter of 1996. The Company continually analyzes new
processes and equipment that would allow the Company to produce products on
a cost-effective basis so as to enable the Company to maintain its strong
position in each of its niche markets and expand into related markets.
This could result in material write-offs if new production
F-5
processes or equipment are identified and installed or certain present
processes become impaired.
Income Taxes: The Company adopted Financial Accounting Standards Board
- ------------
Statement SFAS No. 109, "Accounting for Income Taxes," ("SFAS 109") in the
first quarter of 1993, and, as permitted under this new accounting
standard, did not restate any prior year financial statements. In
accordance with SFAS 109, deferred income taxes are recognized under the
"liability method" and are provided for temporary differences between the
financial reporting and income tax bases of the Company's assets and
liabilities using the tax rates anticipated to be in effect when the
corresponding taxes will be paid or refunded.
Goodwill: The excess of cost over the fair market value of net assets
- --------
acquired (goodwill) is being amortized on a straight-line basis over
periods ranging from 15 to 40 years. Accumulated amortization approximated
$4,534,000 and $3,851,000 at December 31, 1995 and 1994, respectively. The
carrying value of goodwill is periodically reviewed based upon an
assessment of operations of the acquired entity. Management is not aware
of any facts or circumstances indicating that the carrying value of
goodwill has been impaired.
Stock-based Compensation: The Company determines compensation cost
- ------------------------
associated with its stock option plans using the "intrinsic" value method
set forth in Accounting Principles Board Opinion No. 25. Under this
method, stock-based compensation expense is measured on the first date that
both the number of shares the employee is entitled to receive and the
exercise price are known, in an amount equivalent to the excess of the
market price over the exercise price. In October 1995, the FASB issued
Statement No. 123 -- "Accounting for Stock-Based Compensation." This
statement, effective in 1996, permits, and the Company intends, to continue
its present accounting practice, but will require additional disclosures
about the Company's stock-based compensation plans, including pro forma
disclosures of net income and earnings per share as if the "fair value"
based method of accounting for stock-based compensation had been applied.
The Company anticipates adopting Statement No. 123 in the first quarter of
1996.
Net Income Per Common Share: Net income per common share is calculated
- ---------------------------
based on the 6,782,127, 7,091,360, and 6,929,948 weighted average number of
common shares and common share equivalents outstanding during the years
ended December 31, 1995, 1994, and 1993, respectively.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
December 31
1995 1994
----------------
Raw materials $ 2,013 $ 1,908
Work-in-process 6,089 4,846
Finished goods 10,633 10,372
Manufacturing supplies 3,288 2,750
------- -------
22,023 19,876
Less LIFO reserve 4,928 4,030
------- -------
$17,095 $15,846
======= =======
F-6
NOTE C--PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following (in thousands):
December 31
1995 1994
----------------
Land $ 1,355 $ 1,355
Buildings 3,965 3,644
Machinery and equipment 60,882 59,397
Furniture and fixtures 632 622
Construction-in-process 930 168
------- -------
67,764 65,186
Less accumulated depreciation 26,957 22,175
------- -------
$40,807 $43,011
======= =======
NOTE D--OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
December 31
1995 1994
----------------
Accrued taxes, other than income taxes $ 1,326 $ 1,268
Other accrued liabilities 700 362
------- -------
$ 2,026 $ 1,630
======= =======
NOTE E--CREDIT ARRANGEMENTS
The Company entered into a senior financing agreement on December 30, 1986,
as subsequently amended, that provides for revolving credit borrowings and
term loans. During 1994, the Company amended its senior credit agreement
to permit the Company to borrow $6 million in 1994 under a new "Capital
Expenditure Line" of credit, and extend the term of the revolving credit
line to January 1, 1998. The loan amendment also enabled the Company to
reduce the interest rates on its existing revolving credit line and term
loans outstanding from the greater of 7% or 3/4% over prime and the greater
of 7% or 1% over prime, respectively, to the Chemical Bank prime rate or
LIBOR plus 1-3/4%; and reduce the annual revolving credit line commitment
fee from 1/2% to 1/8% of the unused balance. In addition, the amendment
permits the Company to convert up to $7 million of its indebtedness to a
fixed interest rate. The senior credit agreement may be terminated by the
Company or, on or after January 1, 1998 and upon 90 days written notice, by
the lender.
A summary of indebtedness under the Company's credit arrangements consists
of the following (in thousands):
December 31
1995 1994
-----------------
Term loan II $ 4,740 $ 7,636
Term loan III 1,807 2,911
Capital Expenditure Line 5,140 6,000
Revolver 5,875 -
Other notes payable 301 -
Unamortized debt financing costs - (145)
------- -------
TOTAL 17,863 16,402
Less current maturities of long-term debt 5,885 4,860
------- -------
$11,978 $11,542
======= =======
Amounts outstanding under the term loan portion of the senior financing
agreement are scheduled to be repaid in quarterly principal installments
totaling as follows: 1996--$5,000,000; 1997--$1,547,050. The Capital
Expenditure Line
F-7
portion of the loan agreement is required to be repaid in 27 quarterly
principal installments of $215,000, beginning January 1, 1995, with a final
principal payment of $195,000. As of December 31, 1995, the revolving
credit line loan balance, due January 1, 1998, was $5,875,000, and the
unused borrowing availability approximated $4,125,000.
Interest is paid monthly in accordance with the Company's lending agreement
and approximated $1,411,000, $1,087,000, and $2,074,000 during the years
ended December 31, 1995, 1994, and 1993, respectively. The weighted
average interest rate on short-term borrowings during the years ended
December 31, 1995, 1994, and 1993 approximated 7.8%, 6.6%, and 7.0%,
respectively.
The Company's senior lending agreement contains various restrictive
covenants, including that the Company must maintain specified levels of
working capital and net worth (as defined in the agreement). In addition,
capital expenditures and dividends are limited to the annual amounts set
forth in the agreement. At December 31, 1995, the Company's retained
earnings available for dividends in 1996 is $4,710,000. As a result of the
lending agreement, substantially all of the Company's property, plant, and
equipment, inventory and accounts receivable are subject to a third party's
security interests.
NOTE F--SELF INSURANCE
The Company is self-insured at its Huntington, West Virginia facility for
employees' medical care costs and workers' compensation claims up to
certain specified dollar limits. The Company has excess coverage provided
by the West Virginia Workers' Compensation Fund (a state agency) for
certain work-related injuries. In connection with the self-insured
workers' compensation program, the Company has obtained an irrevocable
standby letter of credit in the amount of $1,000,000 (through July 1996).
Under the medical care program, the Company is insured by a private carrier
for individual claims in excess of specific dollar limits. At its Memphis,
Tennessee facility, the Company is insured through a private carrier for
medical care costs and workers' compensation claims. A liability has been
established for those illnesses and injuries occurring on or before
December 31, 1995, for which an amount of expected loss could be reasonably
estimated. Costs and expenses for medical care and workers' compensation
during the years ended December 31, 1995, 1994 and 1993 approximated
$5,579,000, $4,815,000, and $5,144,000, respectively.
Under informal arrangements, the Company currently provides post-employment
health care benefits to each person who becomes disabled, is not expected
to return to the active work force and is not covered by another health
insurance plan. The expected cost of such benefits is accrued in amounts
which are reasonably estimable upon a determination that such costs are
probable of occurring, and included in the costs and expenses for medical
care and workers' compensation disclosed above. In contrast to the retiree
health insurance commonly provided in the domestic steel industry, the
Company offers no material postretirement employee health care or other
benefit program subject to accounting under the provisions of Statement of
Financial Accounting Standards No. 106--"Employers' Accounting for
Postretirement Benefits Other Than Pensions," which became effective in
1993.
The Company is subject to federal and state environmental laws and
regulations concerning, among other matters, air emissions, furnace dust
disposal, and waste water effluents. Estimated costs to be incurred in
connection with environmental matters are accrued when the prospect of
incurring cost for testing or remedial action is deemed probable.
Management is not aware of any asserted or unasserted claims or regulatory
actions against the Company, and accordingly no provision for such matters
has been reflected in the Company's financial statements.
NOTE G--STOCKHOLDERS' EQUITY
In February 1993, the Company completed the sale of 1,936,942 newly issued
shares of its voting common stock resulting in net proceeds to the Company
of $17,687,000. In addition, certain of the Company's stockholders,
together with the Company's senior lender, simultaneously completed the
sale of 2,663,058 shares of previously outstanding, but unregistered shares
of the Company's common
F-8
stock. The Company bore the entire costs of registering and issuing all of
the shares of common stock, except for underwriters' commissions relative
to the sale of the previously outstanding shares. The proceeds to the
Company were used to voluntarily prepay its subordinated indebtedness, and
provide approximately $9,057,000 of additional funds for general corporate
purposes, of which $5,000,000 was used to voluntarily prepay a portion of
the Company's senior debt.
In 1994 and 1995, the Company's Board of Directors authorized management to
buy back up to 1,200,000 shares of its common stock from time to time.
During 1995 the Company purchased 755,300 shares at a cost of $7,983,000.
On March 16, 1995, the Board of Directors adopted and the stockholders
subsequently approved the Management Option Plan and the Director Option
Plan (Plans). These plans provide that options to acquire shares of the
Company's Common Stock (Options) may be granted to officers, key employees
and directors of the Company or its designated subsidiaries. Under the
Plans, an option holder must be employed or be a director one year from the
grant date to vest in the ability to exercise the option.
A summary of transactions in the plans are as follows:
1995
-------
Options granted during and outstanding at end of year 79,500
Option price $11 5/8
At December 31, 1995, under vesting provisions of the plans, no options
were exercisable.
NOTE H--PROFIT-SHARING AND BONUS COSTS
The Company has bonus and retirement arrangements at its Huntington, West
Virginia facility for both bargaining unit and non-bargaining unit
employees which, in effect, are defined contribution profit-sharing plans
qualified under Internal Revenue Code Section 501. The Company is required
to contribute an amount equal to the lesser of $125 per bargaining unit
employee per month or 17% of pre-tax profit, as defined, to a retirement
trust for the future benefit of the union employees. The amount, if any,
that 17% of pre-tax profits exceeds the retirement contribution, is
required to be paid to the bargaining unit employees on a semi-annual basis
as a cash bonus.
Substantially all non-bargaining unit employees of the Company are entitled
to receive a semi-annual cash bonus equal to the amount paid to bargaining
unit employees computed on a per employee basis. Additionally, the Company
contributes an amount, equal to the lesser of 5% of non-bargaining wages or
a lower percentage if 17% of pre-tax profits is less than the $125 per
month per bargaining unit employee contribution, for the future retirement
benefit of the non-bargaining unit employees.
Costs related to cash bonuses and amounts set aside for retirement benefits
under the profit-sharing plans approximated $3,746,000 and $953,000 during
1995, $3,310,000 and $942,000 during 1994, and $2,890,000 and $888,000
during 1993. Contributions to the retirement accounts in 1995, 1994 and
1993 were $946,000, $937,000, and $870,000, respectively. The Company has
complied with all funding requirements under the terms of the retirement
trusts.
F-9
NOTE I--INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
December 31
1995 1994
Deferred tax assets--current: ----------------------
Bad debt and sales allowances $ 290 $ 218
Bonus accruals 554 459
Self-insurance 1,685 1,671
Other 727 307
Total current deferred tax assets 3,256 2,655
--------- --------
Deferred tax liabilities--current:
Inventory costing 146 512
--------- ---------
Net deferred tax assets--current $ 3,110 $ 2,143
========= =========
Deferred tax liabilities--noncurrent:
Differences in basis of fixed assets
arising from purchase accounting
and accelerated depreciation $ 8,005 $ 7,728
--------- ---------
Total long-term deferred tax liabilities $8,005 $7,728
========= =========
The provision for income taxes consists of the following (in thousands):
Year Ended December 31
1995 1994 1993
-----------------------------------------
Federal--current $5,916 $5,061 $3,916
Federal--deferred (639) (16) 68
State--current 1,027 702 1,165
State-deferred (51) (85) 7
---------- ---------- ----------
$6,253 $5,662 $5,156
========== ========== ==========
A reconciliation of statutory federal income tax rates to the Company's
effective income tax rates is as follows:
Year Ended December 31
1995 1994 1993
------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax provision net
of federal tax benefits 4.0 2.8 6.2
Amortization of goodwill 1.3 1.4 1.6
Other, net (.5) 0.0 (.9)
-------- -------- --------
Effective income tax rate 39.8% 39.2% 41.9%
======== ======== ========
Income taxes paid approximated $7,254,000, $6,307,000, and $5,284,000
during the years ended December 31, 1995, 1994 and 1993, respectively.
F-10
NOTE J--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994:
Three Months Ended
December 31 September 30 June 30 March 31
--------------------------------------------------
(In thousands, except per share amounts)
1995
- ----
Net Sales $32,249 $32,551 $31,641 $32,900
Cost of goods sold 26,800 26,789 26,043 27,559
Net income 2,307 2,449 2,513 2,195
Net income per common share .36 .37 .36 .31
1994
- ----
Net sales $30,351 $34,106 $31,410 $28,362
Cost of goods sold 25,435 28,630 26,146 23,116
Net income 2,026 2,160 2,480 2,128
Net income per common share .29 .30 .35 .30
Primary and fully dilutive per share amounts are the same. Per share
amounts in 1995 are based upon weighted average number of shares
outstanding for the quarters ended March 31, June 30, September 30, and
December 31 of 7,091,360, 6,951,693, 6,630,260 and 6,455,193, respectively.
Per share amounts in 1994 are based upon 7,091,360 weighted average number
of shares outstanding for all quarters.
F-11
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Steel of West Virginia, Inc.
December 31
CONDENSED BALANCE SHEETS (000'S) 1995 1994
------------------------
CURRENT ASSETS
Cash $ 0 $ 13
NONCURRENT ASSETS
Investments in and advances to
wholly-owned subsidiaries 55,171 53,762
Other assets 294 165
---------- ----------
TOTAL ASSETS $55,465 $53,940
========== ==========
LIABILITIES
Accrued payroll and benefits payable $ 0 $ 6
Other liabilities 50 0
---------- ----------
TOTAL LIABILITIES 50 6
EQUITY
Common Stock 71 71
Paid-in Capital 26,597 26,597
Treasury Stock (7,983) 0
Retained Earnings 36,730 27,266
---------- ----------
TOTAL EQUITY 55,415 53,934
---------- ----------
TOTAL LIABILITIES AND EQUITY $55,465 $53,940
========== ==========
Year Ended December 31
CONDENSED STATEMENT OF INCOME (000'S) 1995 1994 1993
-----------------------------------
REVENUES
Interest Income $ 198 $ 212 $ 237
EXPENSES
Amortization 61 81 81
Administrative 33 91 0
---------- ---------- ---------
Income before income taxes
and equity in undistributed
earnings of wholly-owned
subsidiaries 104 40 156
32 15 42
Income taxes ---------- ---------- ---------
Income before equity in
undistributed earnings of wholly-owned
subsidiaries 72 25 114
Equity in undistributed earnings of
wholly-owned subsidiaries 9,392 8,769 7,022
---------- ---------- ---------
NET INCOME $ 9,464 $ 8,794 $ 7,136
S-1
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
Steel of West Virginia, Inc.
Year Ended December 31
CONDENSED STATEMENT OF CASH FLOWS (000'S) 1995 1994 1993
--------------------------------
CASH (USED FOR) PROVIDED BY OPERATIONS $ (13) $ 127 $ 0
Investment activities:
Investment in Steel Ventures, Inc. 0 (23) 0
Investment in Marshall Steel, Inc. 0 0 (1,000)
---------- ---------- --------
CASH (USED FOR) INVESTMENT ACTIVITIES 0 (23) (1,000)
Financing activities:
Advances from subsidiaries 7,983 (91) 0
Advances to subsidiaries 0 (16,687)
Purchase of treasury stock (7,983) 0 0
Proceeds from sale of common stock 0 0 17,687
---------- ---------- --------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 0 (91) 1,000
(DECREASE) INCREASE IN CASH (13) 13 0
Cash, beginning of year 13 0 0
---------- ---------- --------
CASH, END OF YEAR $ 0 $ 13 $ 0
========== ========== ========
See note to condensed financial statements of registrant.
S-2
NOTE A TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
Basis of Presentation: The investments in wholly owned subsidiaries are
- ---------------------
stated at cost plus equity in undistributed earnings of those subsidiaries.
Parent company only statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
Guarantee: The Company serves as Guarantor for all of the indebtedness
- ---------
incurred by its wholly owned subsidiary, SWVA, Inc. under the terms of a
senior credit agreement dated December 30, 1986, as amended and more fully
described in Note E to the Company's consolidated financial statements. At
December 31, 1995, the total amount outstanding under the terms of this
agreement was $17,562,000. The primary source of funds for any regular
dividends declared by the Company is dividends received from its
subsidiaries. SWVA, Inc.'s lending agreement limits the amount of
dividends it may pay to the Company to 50% of its net income for the
preceding year, subject to further limitations relating to minimum levels
of SWVA, Inc. working capital and net worth. At December 31, 1995, the
Company's retained earnings available for dividends in 1996 is $4,710,000.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Steel of West Virginia, Inc.
BALANCE AT CHARGED TO CHARGED DEDUC- BALANCE
BEGINNING COSTS AND TO OTHER TIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD
- -------------- -------------- ------------- ------------- ----------- ----------
(000'S)
Year ended December 31, 1995:
ALLOWANCE FOR $350 $55 $405
BAD DEBTS
Year ended December 31, 1994:
ALLOWANCE FOR $318 $32 $350
BAD DEBTS
Year ended December 31, 1993:
ALLOWANCE FOR $300 $18 $318
BAD DEBTS
(1) - Accounts receivable charged against the allowance
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