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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-23320
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OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1245650
--------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5096 Richmond Road, Bedford Heights, Ohio 44146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
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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 the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of August 9, 2002
-------------------------------------- --------------------------------
Common stock, without par value 9,638,100
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
PAGE NO.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2002 and 3
December 31, 2001
Consolidated Statements of Income - for the three and six 4
months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows - for the six 5
months ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements 6-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-15
CONDITION AND RESULTS OF OPERATIONS
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 16
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBITS 19
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PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2002 2001
---------------- ----------------
(unaudited) (audited)
Assets
Cash $ 1,112 $ 1,054
Accounts receivable 59,983 38,754
Inventories 75,962 72,287
Prepaid expenses and other 9,006 3,514
Assets held for sale 2,535 1,660
---------------- ----------------
Total current assets 148,598 117,269
---------------- ----------------
Property and equipment, at cost 153,195 159,544
Accumulated depreciation (50,103) (48,433)
---------------- ----------------
Net property and equipment 103,092 111,111
---------------- ----------------
Investments in joint ventures 724 31
Other assets 2,881 3,589
Goodwill - 3,415
---------------- ----------------
Total assets $255,295 $235,415
================ ================
Liabilities
Current portion of long-term debt $ 5,292 $ 4,786
Accounts payable 22,090 20,143
Accrued payroll 3,023 3,200
Other accrued liabilities 7,002 4,326
---------------- ----------------
Total current liabilities 37,407 32,455
---------------- ----------------
Credit facility revolver 40,325 24,359
Term loans 47,113 48,237
Industrial revenue bonds 6,900 7,117
---------------- ----------------
Total long-term debt 94,338 79,713
---------------- ----------------
Deferred income taxes 4,790 1,975
---------------- ----------------
Total liabilities 136,535 114,143
---------------- ----------------
Shareholders' Equity
Preferred stock - -
Common stock 99,754 99,733
Officer note receivable (675) (675)
Retained earnings 19,681 22,214
---------------- ----------------
Total shareholders' equity 118,760 121,272
---------------- ----------------
Total liabilities and shareholders' equity $255,295 $235,415
================ ================
The accompanying notes are an integral part of these balance sheets.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND TONNAGE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(unaudited)
Tons sold
Direct 278,624 251,408 551,814 506,204
Toll 41,305 32,807 81,672 66,522
---------------- ---------------- ---------------- ----------------
319,929 284,215 633,486 572,726
---------------- ---------------- ---------------- ----------------
Net sales $ 123,701 $ 108,707 $ 235,718 $ 225,827
Cost of sales 93,422 82,007 178,448 172,683
---------------- ---------------- ---------------- ----------------
Gross margin 30,279 26,700 57,270 53,144
Operating expenses
Warehouse and processing 8,437 7,532 15,965 15,660
Administrative and general 6,321 6,454 12,674 13,196
Distribution 4,847 4,297 9,223 8,297
Selling 3,544 3,164 6,896 6,450
Occupancy 1,134 1,086 2,293 2,586
Depreciation and amortization 2,603 2,322 5,198 4,637
Plant shutdown charge 3,300 - 3,300 -
---------------- ---------------- ---------------- ----------------
Total operating expenses 30,186 24,855 55,549 50,826
---------------- ---------------- ---------------- ----------------
Operating income 93 1,845 1,721 2,318
Income (loss) from joint ventures 501 59 693 (164)
---------------- ---------------- ---------------- ----------------
Income before interest and taxes 594 1,904 2,414 2,154
Interest expense 1,599 973 3,090 2,173
Receivable securitization expense - 566 - 1,260
---------------- ---------------- ---------------- ----------------
Income (loss) before taxes (1,005) 365 (676) (1,279)
Income tax provision (benefit) (387) 141 (260) (492)
---------------- ---------------- ---------------- ----------------
Income (loss) before cumulative effect of change in
accounting principle (618) 224 (416) (787)
Cumulative effect of change in accounting principle,
net of tax of $1,298 - - 2,117 -
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (618) $ 224 $ (2,533) $ (787)
================ ================ ================ ================
Basic and diluted net income (loss) per share $ (0.06) $ 0.02 $ (0.26) $ (0.08)
================ ================ ================ ================
Weighted average shares outstanding 9,635 9,631 9,633 9,545
================ ================ ================ ================
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
2002 2001
---------------- ----------------
(unaudited)
Cash flows from operating activities:
Net loss $ (2,533) $ (787)
Adjustments to reconcile net loss to net cash
from (used for) operating activities-
Depreciation and amortization 5,198 4,637
Non-cash plant shutdown charge 2,600 -
(Income) loss from joint ventures (693) 164
Loss on disposition of property and equipment 218 -
Cumulative effect of change in accounting
principle, net of tax 2,117 -
Long-term deferred income taxes 4,113 970
---------------- ----------------
11,020 4,984
Changes in working capital:
Accounts receivable (21,229) (46,429)
Inventories (3,675) 8,535
Prepaid expenses and other (5,492) (4,776)
Accounts payable 1,947 1,616
Accrued payroll and other accrued liabilities 2,499 370
---------------- ----------------
(25,950) (40,684)
---------------- ----------------
Net cash used for operating activities (14,930) (35,700)
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (1,477) (1,792)
Proceeds from disposition of property and equipment 1,313 -
Investments in joint ventures - (871)
---------------- ----------------
Net cash used for investing activities (164) (2,663)
---------------- ----------------
Cash flows from financing activities:
Credit facility revolver 15,966 17,708
Term loans and IRB's (835) 21,822
Net proceeds from sale of common stock 21 -
---------------- ----------------
Net cash from financing activities 15,152 39,530
---------------- ----------------
Cash:
Net increase 58 1,167
Beginning balance 1,054 1,449
---------------- ----------------
Ending balance $ 1,112 $ 2,616
================ ================
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(dollars in thousands, except share and per share amounts)
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries
(collectively Olympic or the Company), without audit and reflect all normal and
recurring adjustments which are, in the opinion of management, necessary to
fairly present the results of the interim periods covered by this report. All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in the Company's joint ventures are accounted for
under the equity method.
(1) JOINT VENTURES:
On April 1, 2002, Michael J. Guthrie and Carlton L. Guthrie (the Guthries)
withdrew as majority members of Trumark Steel & Processing, LLC (TSP). On that
date, Thomas A. Goss and Gregory F. Goss, executive officers of the Goss Group,
Inc., an insurance enterprise, assumed the Guthries 51% majority ownership
interest. On May 17, 2002, TSP's name was changed to G.S.P., LLC (GSP). GSP is a
certified member of the Michigan Minority Business Development Council.
On April 30, 2002, the Company's Olympic Laser Processing, LLC (OLP) joint
venture entered into a new 2-year bank financing agreement.
As of June 30, 2002, Olympic guaranteed 50% of OLP's $17,443 and 49% of GSP's
$1,982 of outstanding debt on a several basis.
(2) GOODWILL:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
Company estimated the fair value of its reporting units using a present value
method that discounted future cash flows. The cash flow estimates incorporate
assumptions on future cash flow growth, terminal values and discount rates. Any
such valuation is sensitive to these assumptions. Because the fair value of each
reporting unit was below its carrying value (including goodwill), application of
SFAS 142 required the Company to complete the second step of the goodwill
impairment test and compare
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the implied fair value of each reporting unit's goodwill with the carrying value
of that goodwill. As a result, the Company recorded a before tax impairment
charge of $3,415 ($2,117 after tax) to write-off the entire goodwill amount as a
cumulative effect of a change in accounting principle.
The Financial Accounting Standards Board also issued Statement of Accounting
Standards No. 141 (SFAS 141), "Business Combinations," which requires all
business combinations after June 30, 2001 to be accounted for under the purchase
method.
As a result of adopting SFAS 142 and SFAS 141, the accounting policy for excess
of cost over net assets acquired is as follows, effective January 1, 2002:
Excess of Cost Over Net Assets Acquired: The Company recognizes the excess of
the cost of an acquired entity over the net amount assigned to assets acquired
and liabilities assumed as goodwill. Goodwill is tested for impairment on an
annual basis and between annual tests in certain circumstances. Impairment loss
is recognized whenever the implied fair value of goodwill is less than its
carrying value. Prior to January 1, 2002, goodwill was amortized over periods
ranging from 15 to 40 years. Beginning January 1, 2002, goodwill is no longer
amortized.
The following table presents a comparison of first half 2002 results to first
half 2001 adjusted to exclude goodwill amortization expense:
Six Months Ended, June 30,
--------------------------
(in thousands, except per share data) 2002 2001
----------- ----------
Loss before cumulative effect of change in accounting principle $ (416) $ (787)
Cumulative effect of change in accounting principle, net of tax (2,117) --
----------- ----------
Reported net loss (2,533) (787)
Addback: goodwill amortization, net of tax -- 32
----------- ----------
Adjusted net loss $(2,533) $ (755)
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Basic and Diluted Net Loss Per Share:
- ------------------------------------
Loss before cumulative effect of change in accounting principle $ (.04) $ (.08)
Cumulative effect of change in accounting principle, net of tax (.22) --
----------- ----------
Reported net loss (.26) (.08)
Addback: goodwill amortization, net of tax -- --
----------- ----------
Adjusted net loss $ (.26) $ (.08)
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(3) DEBT:
In June 2001, the Company entered into a 3-year, $135,000 secured financing
agreement (The Credit Facility). The Credit Facility is secured by the Company's
accounts receivable, inventories, and substantially all property and equipment.
Borrowings under the Credit Facility are limited to the lesser of a borrowing
base, comprised of eligible receivables, inventories and property and equipment,
or $135,000 in the aggregate. The Company has the option to borrow based on the
agent bank's base rate or London Interbank Offered Rates (LIBOR) plus a premium
(the Premium). The Company's effective borrowing rate for the first half of 2002
was 8.0% compared to 8.2% in 2001.
On January 1, 2002, the $20,000 term loan B component deferred pay rate declined
from 9.0% to 7.0%. Beginning March 1, 2002, the Premium for both the revolver
and term loan A component of the Credit Facility decreased 25 basis points based
on the Company's excess availability. Additionally, on March 1, 2002, the
Company's commitment fee on any unused portion of the Credit Facility was
reduced from .5% to .375% based on the Company's excess availability. Term loan
A monthly principal repayments of $167 commenced April 1, 2002.
The Credit Facility requires the Company to comply with various covenants, the
most significant of which include: (i) minimum excess availability of $10,000,
(ii) a minimum fixed charge coverage ratio, which commences in December 2002,
(iii) restrictions on additional indebtedness, and (iv) limitations on capital
expenditures. At June 30, 2002, the Company had $38,628 of excess availability
under its Credit Facility. The Company was in compliance with its various
covenants at June 30, 2002.
Included in the Credit Facility revolver balances on the accompanying
consolidated balance sheets are $10,830 and $5,187 of checks issued that have
not cleared the bank as of June 30, 2002, and December 31, 2001, respectively.
(4) PLANT SHUTDOWN CHARGE:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 provides a single, comprehensive accounting model
for impairment and disposal of long-lived assets and discontinued operations. In
the second quarter of 2002, the Company recorded a before tax $3,300 plant
shutdown charge in connection with the closure of its tube operation in
Cleveland, Ohio. The non-cash portion of the charge totaled $2,600 to write-down
property and equipment to estimated sales value in accordance with SFAS 144. The
remainder of the charge
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primarily related to employee and tenancy costs. The Company anticipates selling
these assets within the next 12 months and will use the proceeds to reduce
long-term debt. The property and equipment for sale are included in assets held
for sale on the accompanying June 30, 2002 consolidated balance sheet.
(5) SHARES OUTSTANDING AND EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average number of
shares outstanding. Basic and diluted earnings per share are the same, as the
effect of outstanding stock options is not dilutive.
(6) STOCK OPTIONS:
Shares available under the Stock Option Plan were increased from 950,000 to
1,300,000 by shareholder vote on April 26, 2002. Options to purchase 1,023,833
shares are currently outstanding, of which 446,500 are exercisable at prices
ranging from $1.97 to $15.50 per share. During the second quarter of 2002,
options to purchase 7,000 shares were exercised at prices ranging from $2.63 to
$4.84.
(7) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the first half of 2002 and 2001 totaled $2,110 and $2,216,
respectively. Income taxes paid during the first half of 2002 and 2001 totaled
$93 and $51, respectively.
On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was
signed into law. A significant portion of this law is a temporary extension of
the net operating loss carryback period from two to five years for net operating
losses arising in taxable years ending in 2001 and 2002. As a result of this
change in tax law, the Company received a $3.7 million tax refund in July 2002
after filing its federal income tax return for the fiscal year ended December
31, 2001 and the related carryback claim. As of June 30, 2002 the benefit
associated with this tax refund is classified as prepaid expenses and other on
the accompanying consolidated balance sheets.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by numerous external factors,
such as general economic and political conditions, competition, steel pricing
and availability, energy prices, customer demand for steel, and layoffs or work
stoppages by suppliers' or customers' personnel.
Olympic sells a broad range of products, many of which have different gross
margins. Products that have more value-added processing generally have a greater
gross margin. Accordingly, the Company's overall gross margin is affected by
product mix and the amount of processing performed, as well as volatility in
selling prices and material purchase costs. The Company performs toll processing
of customer-owned steel, the majority of which is performed by its Detroit
operation. Toll processing generally results in lower selling prices and gross
margin dollars per ton but higher gross margin percentages than the Company's
direct sales.
The Company's two joint ventures include: Olympic Laser Processing, LLC (OLP), a
company that processes laser welded sheet steel blanks for the automotive
industry, and G.S.P., LLC (GSP) (formerly Trumark Steel & Processing, LLC), a
certified Minority Business Enterprise company supporting the flat-rolled steel
requirements of the automotive industry. The Company's 50% interest in OLP and
49% interest in GSP are accounted for under the equity method. The Company
guarantees portions of outstanding debt under both of the joint venture
companies' bank credit facilities. As of June 30, 2002, Olympic guaranteed 50%
of OLP's $17.4 million and 49% of GSP's $2.0 million of outstanding debt on a
several basis.
Financing costs historically included interest expense on debt and costs
associated with the Company's accounts receivable securitization program (the
Financing Costs). In connection with the refinancing of its bank credit
agreement on June 28, 2001 (the Credit Facility), the Company's accounts
receivable securitization program was terminated. Receivable securitization
expense was based on commercial paper rates calculated on the amount of
receivables sold.
The Company sells certain products internationally, primarily in Puerto Rico and
Mexico. All international sales and payments are made in United States dollars.
These sales historically involve the Company's direct representation of steel
producers. Typically, international sales are more transactional in nature with
lower gross margins than domestic sales. Domestic steel producers generally
supply domestic customers before meeting foreign demand, particularly during
periods of supply constraints.
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RESULTS OF OPERATIONS
Tons sold increased 12.6% to 320 thousand in the second quarter of 2002 from 284
thousand in the second quarter of 2001. Tons sold in the second quarter of 2002
included 279 thousand from direct sales and 41 thousand from toll processing,
compared with 251 thousand direct tons and 33 thousand toll tons in the
comparable period of last year. Tons sold in the first half of 2002 increased
10.6% to 633 thousand from 573 thousand last year. Tons sold in the first half
of 2002 included 552 thousand from direct sales and 81 thousand from toll
processing, compared with 506 thousand direct tons and 67 thousand toll tons in
the comparable period of last year. The increases in direct and toll tons sold
were primarily attributable to the Company's automotive customer base. The
Company believes customer demand for steel and consumer confidence remain
suspect and are significant risk factors to maintaining its tons sold levels for
the remainder of 2002.
Net sales increased 13.8% to $123.7 million for the second quarter of 2002 from
$108.7 million in the second quarter of 2001. Second quarter average selling
prices increased 1.1% from last year's second quarter and 8.2% from first
quarter 2002. The average selling price increase from first quarter to second
quarter 2002 was the first quarterly increase in the last seven quarters. For
the first half of 2002, net sales increased 4.4% to $235.7 million from $225.8
million last year, in spite of an average selling price decline of 5.6%.
As a percentage of net sales, gross margin decreased to 24.5% for the second
quarter of 2002 from 24.6% in the second quarter of 2001. For the first half of
2002, gross margin increased to 24.3% from 23.5% in last year's first half. The
gross margin percentage increase in the first half of 2002 somewhat reflects the
Company's general success in passing on increasing steel costs to its customer
base. The Company continues to experience a significant increase in its material
purchase costs as a result of tightening steel supply caused by the idling or
closure of domestic steel production facilities as well as lower import levels.
Due to competitive pressures on pricing in its market segments, the Company may
not be able to pass along all of the increased costs to its customers, which may
result in decreased gross margins.
Operating expenses in the second quarter of 2002 include a $3.3 million plant
shutdown charge associated with the Company's closure of its tubing operation.
Excluding the plant shutdown charge, second quarter operating expenses increased
8.2% to $26.9 million from $24.9 million in last year's second quarter. For the
first half of 2002, operating expenses excluding the plant shutdown charge
increased 2.8% to $52.2 million from $50.8 million in the comparable 2001
period. The operating expense increases are the result of increased sales levels
and the inclusion of over $690 thousand of incremental financing fee
amortization in the first half of 2002 associated with the refinancing of the
Company's Credit Facility. As a percentage of net sales,
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operating expenses excluding the plant shutdown charge decreased to 21.7% for
the second quarter of 2002 from 22.9% in the comparable 2001 period. For the
first half, operating expenses excluding the plant shutdown charge decreased to
22.2% of net sales from 22.5% in the comparable 2001 period.
Income from joint ventures totaled $501 thousand in the second quarter of 2002,
compared with $59 thousand in the second quarter of 2001. For the first half of
2002, income from joint ventures totaled $693 thousand, compared with losses of
$164 thousand in 2001.
Financing Costs in the second quarter of 2002 increased to $1.6 million from
$1.5 million in the second quarter of 2001. The Company's effective bank
borrowing rate, excluding receivable securitization borrowings in 2001,
increased to 7.8% in the second quarter of 2002 from 7.7% in the comparable 2001
period. For the first six months of 2002, Financing Costs decreased to $3.1
million from $3.4 million last year. The first half decrease was primarily
attributable to a $18.4 million reduction in average borrowing levels inclusive
of receivables sold under the Company's former accounts receivable
securitization program. The Company's effective bank borrowing rate, excluding
receivable securitization borrowings in 2001, decreased to 8.0% in the first
half of 2002 from 8.2% in the comparable 2001 period.
Loss before taxes for the second quarter of 2002 totaled $1.0 million, compared
with income before taxes of $365 thousand in the comparable 2001 period. An
income tax benefit of 38.5% was recorded in the second quarter of 2002, compared
with an income tax provision of 38.5% in the comparable 2001 period. Excluding
the plant shutdown charge, income before taxes totaled $2.3 million in the
second quarter of 2002. For the first six months of 2002, loss before taxes
totaled $676 thousand compared to $1.3 million in 2001. An income tax benefit of
38.5% was recorded in the first half for both 2002 and 2001. Excluding the plant
shutdown charge, income before taxes totaled $2.6 million in the first half of
2002.
Net loss for the second quarter of 2002 totaled $618 thousand, or $.06 per
share, compared to net income of $224 thousand, or $.02 per share for 2001.
Excluding the plant shutdown charge in the second quarter of 2002, net income
totaled $1.4 million or $.15 per share. For the first six months of 2002, net
loss totaled $2.5 million, or $.26 per share, compared to a net loss of $787
thousand, or $.08 per share in 2001. Included in the first half 2002 results is
an after tax charge of $2.1 million, or $.22 per share, from the Company's
adoption of Financial Accounting Standards Board Statement No. 142 (SFAS 142)
"Goodwill and Other Intangible Assets." SFAS 142 requires an annual assessment
of goodwill impairment by applying a fair-value-based test. As a result of this
assessment, the Company wrote off its entire goodwill amount as of January 1,
2002 as a cumulative effect of change in accounting principle. Excluding both
the plant
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shutdown and goodwill charges, net income totaled $1.6 million or $.17 per share
in the first half of 2002.
Weighted average shares outstanding totaled 9.6 million for the second quarter
of 2002 and 2001. For the first half of 2002, weighted average shares
outstanding totaled 9.6 million compared to 9.5 million in last year's first
half.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund its working capital
needs, its upgrade of information technology and business system software, the
purchase and upgrading of processing equipment and facilities, and its
investments in joint ventures. The Company uses cash generated from operations,
leasing transactions, and its Credit Facility to fund these requirements.
Working capital at June 30, 2002 increased $26.4 million from the end of the
prior year. The increase was primarily attributable to a $21.2 million increase
in accounts receivable, a $5.5 million increase in prepaid expenses, and a $3.7
million increase in inventories. Offsetting these increases was a combined $4.4
million increase in accounts payable, accrued payroll and other accrued
liabilities. The increase in accounts receivable was the result of increased
sales from the fourth quarter of 2001. Prepaid expenses increased as a result of
an income tax receivable of $3.7 million, which the Company received in July.
Also included in prepaid expenses are net deposits of $521 thousand for
processing equipment the Company intends to lease in Minneapolis.
Net cash used for operating activities totaled $14.9 million for the six months
ended June 30, 2002. Cash generated from earnings before non-cash charges
totaled $11.0 million, while cash used for working capital components totaled
$25.9 million.
During the first six months of 2002, net cash used for investing activities
totaled $164 thousand. Proceeds from the disposition of property and equipment
totaled $1.3 million and capital spending totaled $1.5 million consisting
primarily of information technology spending and progress payments for a new
slitter in Minneapolis.
During the first six months of 2002, net cash provided by financing activities
totaled $15.2 million and primarily consisted of borrowings on the Company's
Credit Facility to fund working capital requirements.
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On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was
signed into law. A significant portion of this law is a temporary extension of
the net operating loss carryback period from two to five years for net operating
losses arising in taxable years ending in 2001 and 2002. As a result of this
change in tax law, the Company received a $3.7 million tax refund in July 2002
after filing its federal income tax return for the fiscal year ended December
31, 2001 and the related carryback claim. As of June 30, 2002 the benefit
associated with this tax refund is classified as prepaid expenses and other on
the accompanying consolidated balance sheets.
As of June 30, 2002, the Company had approximately $38.6 million of excess
availability under its Credit Facility and was in compliance with all of its
bank covenants. The Company believes that funds available under its Credit
Facility, together with funds generated from operations, will be sufficient to
provide the Company with the liquidity necessary to fund its anticipated working
capital requirements, capital expenditure requirements, and scheduled debt
maturities over the next 12 months. Capital requirements are subject to change
as business conditions warrant and opportunities arise.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates and judgments, including those related to accounts
receivable, inventories, deferred tax assets, equity investments, goodwill and
intangible assets, and revenue recognition. Estimates and judgments are based on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
For further information regarding the accounting policies that we believe to be
critical accounting policies and that affect our more significant judgments and
estimates used in preparing our consolidated financial statements, see Footnote
1 of Notes to Consolidated Financial Statements from our December 31, 2001 Form
10-K.
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FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "expect," "believe," "estimated," "project," "plan" and similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks, uncertainties
and assumptions including, but not limited to: general business and economic
conditions; competitive factors such as the availability and pricing of steel
and fluctuations in demand, specifically in the automotive, transportation, and
other service centers markets served by the Company; layoffs or work stoppages
by the Company's, suppliers', or customers' personnel; potential equipment
malfunction; equipment installation delays; the adequacy of information
technology and business system software investment; the successes of its joint
ventures; the successes of the Company's efforts and initiatives to: (i)
increase sales volumes; (ii) maintain gross margins--especially during periods
of increased material purchase costs and tightened steel availability; (iii)
improve cash flows and reduce debt; (iv) maintain or improve inventory turns;
and (v) reduce its costs. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, expected, believed, estimated,
projected or planned. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.
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QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change during the six months ended June 30, 2002 from
the disclosures about market risk provided in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. However, the Company is
currently experiencing a significant increase in its material purchase costs as
a result of tightening steel supply caused by the idling or closure of domestic
steel production facilities as well as lower import levels. Due to competitive
pressures on pricing in its market segments, the Company may not be able to pass
along all of the increased costs to its customers, which may result in decreased
gross margins.
The Company's collective bargaining agreement covering its Detroit hourly plant
maintenance personnel (7 employees) has been extended to August 31, 2002. The
Company's collective bargaining agreement covering its Minneapolis coil
processing facility expires on September 30, 2002. While the Company expects to
be able to negotiate new agreements or extensions of the existing agreements,
there can be no assurance that such resolutions will occur. The Company has
never experienced a work stoppage and believes that its relationship with its
employees is good. However, any prolonged disruption in business arising from
work stoppages by Company personnel represented by collective bargaining units
could have a material adverse effect on the Company's results of operations.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of shareholders was held on April 26,
2002.
(b) At the annual meeting, the Company's shareholders elected David A.
Wolfort, Martin H. Elrad, and Suren A. Hovsepian as Directors for a
two-year term, which expires at the annual meeting of shareholders in
2004.
The following tabulation represents voting for the Directors:
For Against
--- -------
David A. Wolfort 8,080,988 928,210
Martin H. Elrad 8,068,321 940,877
Suren A. Hovsepian 8,062,874 946,324
(c) At the annual meeting, the Company's shareholders ratified the
adoption of the Olympic Steel, Inc. Employee Stock Purchase Plan. The
holders of 3,921,187 shares of Common Stock voted to ratify the Plan,
the holders of 469,218 shares voted against the ratification, and the
holders of 48,540 shares abstained. The balance of the shares
represented at the meeting were broker non-votes.
(d) At the annual meeting, the Company's shareholders approved amending
the Company's Stock Option Plan to increase the number of shares
available for issuance under the Plan and to extend the term of the
Plan. The holders of 3,215,542 shares of Common Stock voted to ratify
the Plan, the holders of 1,148,548 shares voted against the
ratification, and the holders of 74,855 shares abstained. The balance
of the shares represented at the meeting were broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
The Company filed a Form 8-K on May 3, 2002 in connection with a change
in its certifying accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
OLYMPIC STEEL, INC.
(Registrant)
Date: August 13, 2002 By: /s/ Michael D. Siegal
---------------------------
MICHAEL D. SIEGAL
Chairman of the Board and Chief
Executive Officer
By: /s/ Richard T. Marabito
---------------------------
RICHARD T. MARABITO
Chief Financial Officer and
Treasurer (Principal Accounting
Officer)
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