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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 1934
For the quarterly period ended March 31, 1997
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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
- ----------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
---------------
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 April 30, 1997
- -------------------------------------- --------------------------------
Common stock, without par value 10,692,000
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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
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Consolidated Balance Sheets - March 31, 1997 and 3
December 31, 1996
Consolidated Statements of Income - for the three months
ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - for the three months
ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 8-12
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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Part I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
Assets
Cash $ 3,518 $ 2,018
Accounts receivable 20,880 9,483
Inventories 137,796 138,238
Prepaid expenses and other 2,341 2,516
--------- ---------
Total current assets 164,535 152,255
--------- ---------
Property and equipment 97,093 93,954
Accumulated depreciation (16,151) (14,954)
--------- ---------
Net property and equipment 80,942 79,000
--------- ---------
Goodwill 9,810 9,875
Investments in joint ventures 5,423 --
--------- ---------
Total assets $ 260,710 $ 241,130
========= =========
Liabilities
Current portion of long-term debt $ 1,869 $ 1,869
Accounts payable 31,485 25,267
Accrued payroll 2,510 4,610
Accrued and deferred income taxes 576 280
Other accrued liabilities 4,781 4,241
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Total current liabilities 41,221 36,267
--------- ---------
Revolving credit agreement 58,429 46,457
Industrial revenue bonds 8,405 8,405
Taxable rate notes 7,200 7,200
Term loans 648 651
--------- ---------
Total long-term debt 74,682 62,713
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Deferred income taxes 5,035 4,823
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Total liabilities 120,938 103,803
--------- ---------
Shareholders' Equity
Preferred stock -- --
Common stock 106,319 106,319
Retained earnings 33,453 31,008
--------- ---------
Total shareholders' equity 139,772 137,327
--------- ---------
Total liabilities and shareholders' equity $ 260,710 $ 241,130
========= =========
The accompanying notes are an integral part of these balance sheets.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AND TONNAGE DATA)
1997 1996
-------- --------
(unaudited)
Tons sold
Direct 273,337 257,211
Toll 42,487 37,220
-------- --------
315,824 294,431
======== ========
Net sales $149,473 $142,589
Cost of sales 118,830 111,663
-------- --------
Gross margin 30,643 30,926
Operating expenses
Warehouse and processing 8,266 7,404
Administrative and general 6,603 6,091
Distribution 4,485 4,243
Selling 3,335 3,466
Occupancy 1,139 1,009
Depreciation and amortization 1,289 994
-------- --------
Total operating expenses 25,117 23,207
-------- --------
Operating income 5,526 7,719
Income from joint ventures 101 --
-------- --------
5,627 7,719
-------- --------
Interest expense 917 1,476
Receivable securitization expense 799 816
-------- --------
Income before taxes 3,911 5,427
Income taxes 1,466 2,171
-------- --------
Net income $ 2,445 $ 3,256
======== ========
Net income per share $ 0.23 $ 0.38
======== ========
Weighted average shares outstanding 10,692 8,600
======== ========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(in thousands)
1997 1996
-------- --------
(unaudited)
Cash flows from operating activities:
Net income $ 2,445 $ 3,256
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 1,289 994
Income from joint ventures (101) --
Long-term deferred income taxes 212 --
-------- --------
3,845 4,250
Changes in working capital:
Accounts receivable (11,397) (5,475)
Inventories 442 (5,135)
Prepaid expenses and other 175 (535)
Accounts payable 6,218 17,352
Accrued payroll and other accrued liabilities (1,560) 487
Accrued and deferred income taxes 296 10
-------- --------
(5,826) 6,704
-------- --------
Net cash from (used for) operating activities (1,981) 10,954
-------- --------
Cash flows from investing activities:
Investments in joint ventures (5,322) --
Lafayette plant expansion (1,156) --
Tube mill equipment deposits (1,093) --
Temper mill facility and equipment (68) (512)
Other capital expenditures, net (849) (1,495)
-------- --------
Net cash used for investing activities (8,488) (2,007)
-------- --------
Cash flows from financing activities:
Revolving credit agreement 11,972 (7,520)
Repayment of long-term debt (3) (27)
-------- --------
Net cash from (used for) financing activities 11,969 (7,547)
-------- --------
Cash:
Net increase 1,500 1,400
Beginning balance 2,018 1,884
-------- --------
Ending balance $ 3,518 $ 3,284
======== ========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. (Olympic or the Company) and its
wholly-owned subsidiaries, without audit and reflect all 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.
(1) EARNINGS PER SHARE:
Earnings per share have been calculated based on the weighted average shares
outstanding during each of the periods presented. Shares outstanding increased
from 8.6 million to 10.7 million in August 1996 as of result of the Company's
follow-on stock offering of 2.1 million shares. Primary and fully diluted
earnings per share are the same as the effect of dilutive outstanding stock
options is immaterial.
(2) INVESTMENTS IN JOINT VENTURES:
In January 1997, the Company completed the formation of Olympic Continental
Resources LLC (OCR), a joint venture with Atlas Iron Processors, Inc. (Atlas)
and Uwe T. Schmidt, OCR's Chief Executive Officer. OCR buys, sells and trades
ferrous and non-ferrous metals and alternate iron products to steel mills and
scrap processors. The venture acquired the business activities previously
conducted by Thyssen Continental Resources LLC, a profitable joint venture
between Thyssen Inc. and Atlas. The Company made a $4 million cash investment
for its 45% ownership share in OCR and guarantees up to $10 million of
outstanding debt under OCR's $35 million revolving bank credit facility.
Olympic's investment in OCR is accounted for under the equity method.
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In April 1997, the Company and the U.S. Steel Group of USX Corporation (USS)
formed Olympic Laser Processing (OLP), a joint venture to process laser welded
sheet steel blanks for the automotive industry. OLP is owned 50% by each of the
companies and plans to construct a new facility initially equipped with two
laser welding lines. Production is expected to begin in late 1998. The Company
contributed $1.3 million in cash to OLP during the first quarter of 1997 and
guarantees up to $10 million of outstanding debt under OLP's $20 million bank
loan agreement. An additional $700 thousand has been contributed to OLP in the
second quarter of 1997, bringing each of the Company's and USS's equity
contribution to $2 million. The investment in OLP is accounted for under the
equity method.
(3) LONG-TERM DEBT:
Interest rates under the Company's various credit agreements are generally based
on prime or LIBOR plus a premium determined quarterly, which varies with the
Company's operating performance and financial leverage. Borrowing rates for the
first three months of 1997 were prime plus 0% and LIBOR plus .75%. Commencing
June 1, 1997, the LIBOR premium will increase to 1.0%. The majority of the
Company's borrowings are based on the LIBOR option. The overall effective
interest rate for all debt for the three month periods amounted to 6.8% in 1997,
and 7.4% in 1996.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $13.3 million and $5.5 million of checks issued that have not
cleared the bank as of March 31, 1997 and December 31, 1996, respectively.
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the three months ended March 31, 1997 and 1996 totaled $1.0
million and $1.7 million, respectively. Income taxes paid during the three
months ended March 31, 1997 and 1996 totaled $1.1 million and $2.1 million,
respectively.
(5) IMPACT OF NEW ACCOUNTING STANDARDS:
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosure of Information about Capital Structure."
Both of these statements are effective for financial statements for periods
ending after December 15, 1997. Management does not anticipate that the
implementation of SFAS No. 128 will have any effect on the Company's historical
earnings per share data.
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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, and
steel pricing and availability.
Olympic sells a broad range of products, many of which have different
gross margins. Moreover, 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
also performs toll processing of customer-owned steel, substantially all of
which is performed by its Lafayette Steel operation. Toll processing generally
results in lower selling prices and gross margin dollars per ton but higher
gross margin percentages than the Company's historical direct sales.
During the first quarter of 1997, the Company invested in two joint
ventures, Olympic Continental Resources (OCR), which buys, sells and trades
ferrous and non-ferrous metals and alternate iron products to steel mills and
scrap processors, and Olympic Laser Processing (OLP), a company formed to
process laser welded sheet steel blanks for the automotive industry. The Company
guarantees up to $10 million of outstanding debt under each of OCR's $35 million
revolving bank credit facility and OLP's $20 million bank loan. The Company's
45% interest in OCR and 50% interest in OLP are accounted for under the equity
method.
Financing costs include interest expense on debt and costs associated
with the $65 million accounts receivable securitization program (the Financing
Costs). Interest rates paid by the Company under its credit agreement are
generally based on prime or LIBOR plus a premium (the Premium) determined
quarterly, which varies based on the Company's operating performance and
financial leverage. Receivable securitization costs are based on commercial
paper rates calculated on the amount of receivables sold.
In August 1996, the Company completed a follow-on stock offering of 2.1
million shares of common stock (the Offering). The net proceeds from the
Offering, which totaled $49.1 million, were used to repay outstanding bank debt.
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The Company sells certain products internationally, primarily in Mexico
and Puerto Rico. All international sales and payments are made in United States
dollars. These sales historically involve the Company's direct representation of
steel producers and may be covered by letters of credit or trade receivable
insurance. 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. As a result, domestic and international sales
tend to be countercyclical.
Because the Company conducts its operations generally on the basis of
short-term orders, backlog is not a meaningful indicator of future performance.
RESULTS OF OPERATIONS
Tons sold increased 7.3% to 316 thousand for the first quarter of 1997
from 294 thousand for the first quarter of 1996. Tons sold include 273 thousand
from direct sales and 43 thousand from toll processing, compared with 257
thousand direct sales tons and 37 thousand tolling tons last year. On a per day
basis, tons sold increased 10.7%, as there were two less shipping days in the
first quarter of 1997 compared to last year's first quarter.
Net sales increased 4.8% to $149.5 million for the first quarter of
1997 from $142.6 million for the first quarter of 1996. On a per day basis,
sales increased 8.2%. Average selling prices declined 2.3% between years, with
the largest decline related to stainless steel products. International sales
totaled 4.8% of consolidated net sales in 1997, compared to 5.0% last year.
As a percentage of net sales, gross margin decreased to 20.5% for the
first quarter of 1997 from 21.7% for 1996. The decrease reflects the impact of
market pressures which did not allow price increases for steel to be fully
passed on to customers.
As a percentage of net sales, operating expenses increased to 16.8% for
the first quarter of 1997 from 16.3% for 1996, due partially to the impact of
lower average selling prices in the current year. On a per ton basis, expenses
increased 0.9%, totaling $79.52 per ton in the current quarter, versus $78.82
per ton in 1996. Incremental costs in 1997 relate to the temper mill facility,
which was commencing operations in the first quarter of 1996; expansion of plate
processing capabilities in 1996; completion of the Lafayette plant expansion in
the first quarter of 1997; and continued investment in management information
systems.
Income from joint ventures totaled $101 thousand in the first quarter
of 1997.
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Financing Costs decreased to $1.7 million for the first quarter of 1997
from $2.3 million in 1996. The decrease is attributable to lower average
borrowings outstanding primarily as a result of the Offering, a decrease in the
Company's effective bank borrowing rate to 6.8% in the first quarter of 1997
from 7.4% last year, and lower costs associated with the receivable
securitization program. Effective borrowing rates were favorably impacted in the
current period by lower Premiums as a result of the Company's 1996 financial
performance and the Offering. Commencing June 1, 1997 the Company's Premium will
increase .25%.
Pretax income for the first quarter of 1997 decreased 27.9% to $3.9
million from $5.4 million for 1996. Income taxes represented 37.5% of pretax
income in the first quarter of 1997 and 40.0% in 1996. The decrease in income
taxes as a percentage of pretax income is attributable to the implementation of
tax planning strategies in the second half of 1996. Net income totaled $2.4
million, or $.23 per share, compared to $3.3 million, or $.38 per share last
year. As a result of the Offering, weighted average shares increased from 8.6
million in the first quarter of 1996 to 10.7 million in the first quarter of
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including strategic acquisitions and joint ventures, the purchase and upgrading
of processing equipment and services, the construction and upgrading of related
facilities and additional working capital. The Company uses cash generated from
operations, long-term debt obligations, proceeds from the Company's accounts
receivable securitization program and leasing transactions to fund these
requirements. Historically, the Company has used revolving credit borrowings
under its bank credit facility to finance its working capital requirements and
has financed acquisitions and capital additions from the proceeds of long-term
indebtedness, equity offerings or leases.
Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation, amortization and income from joint ventures,
and changes in working capital. During the first quarter of 1997, $2.0 million
of net cash was used for operating activities, consisting of $3.8 million of
cash generated from net income and non-cash charges offset by $5.8 million of
cash used for working capital purposes.
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Working capital at March 31, 1997 increased by $7.3 million or 6.3%
since December 31, 1996. The increase is primarily attributable to an $11.4
million increase in accounts receivable, partially offset by a $6.2 million
increase in accounts payable due to the timing of inventory purchases. The
accounts receivable increase is the result of strong March 1997 sales compared
to sales in December, which historically represent the lowest sales period of
each year for the Company.
As of March 31, 1997, $60 million of eligible receivables were sold
under the Company's accounts receivable securitization program, compared to $55
million at December 31, 1996. The amount of trade receivables sold by the
Company typically changes monthly depending upon the level of defined eligible
receivables available for sale at each month end.
During the first quarter of 1997, net cash used for investing
activities totaled $8.5 million, consisting of $5.3 million in capital
contributions to the two joint ventures, and $3.2 million in capital
expenditures, including completion of a 71,000 square foot expansion of
Lafayette Steel's existing facility, and deposits made for a new $3.5 million
tube mill in Cleveland expected to become operational in early 1998. The capital
contributions consisted of $4 million invested in OCR, and $1.3 million in OLP.
An additional $700 thousand has been contributed to OLP in the second quarter of
1997. The Company continues to evaluate investing in a second temper mill
facility in the Midstates Region of the United States and developing a more
significant presence in the Southeast Region of the country.
Cash flows used from financing activities primarily consists of net
borrowings under the Company's revolving credit agreement.
Approximately $6.6 million in unused availability existed under the
Company's revolving credit and accounts receivable securitization facilities
at March 31, 1997. The Company believes that funds available under its
revolving credit facility, other credit and financing agreements and funds
generated from operations will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital requirements and
capital expenditure requirements over the next 12 months. Capital requirements
are subject to change as business conditions warrant and opportunities arise.
In connection with its internal and external expansion strategies, the Company
may from time to time seek additional funds to finance other new facilities,
acquisitions and significant improvements to processing equipment to respond to
customers' demands.
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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 "expect," "believe," "anticipate," "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 market; work
stoppages by automotive manufacturers; potential equipment malfunction;
equipment installation delays; facility construction delays; and the successes
of joint ventures. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those expected, believed, anticipated 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10.9 - Operating Agreement of OLP, LLC, dated April 4, 1997,
by and between the U.S. Steel Group of USX Corporation and OLY
Steel Welding, Inc.
Exhibit 27 - Financial Data Schedule
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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: May 1, 1997 By: /s/ R. Louis Schneeberger
--------------------------
R. LOUIS SCHNEEBERGER
Chief Financial Officer
By: /s/ Richard T. Marabito
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RICHARD T. MARABITO
Treasurer and Corporate Controller
(Principal Accounting Officer)
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OPERATING AGREEMENT
OF
OLP, LLC
This Operating Agreement ("Agreement") is entered into this 4th day
of April, 1997 by and between the U.S. STEEL GROUP OF USX CORPORATION, a
Delaware corporation ("U Member"), and OLY STEEL WELDING, INC., a Michigan
corporation ("O Member").
ARTICLE I
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DEFINITIONS
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All terms used herein and not otherwise defined shall have the meanings
given in Attachment I.
ARTICLE II
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ORGANIZATION
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2.1 NAME. The name of the entity shall be OLP, LLC and is a limited
liability company created under the laws of Michigan. The Company shall adopt
the namestyle Olympic Laser Processing.
2.2 MEMBERS. There shall be two (2) members of the Company, U Member
and O Member, each of which shall have an equal fifty percent (50%) interest.
2.3 DURATION. The Company shall have a perpetual existence, unless
dissolved in accordance with this Agreement.
2.4 PURPOSE AND POWERS. The Company shall be for the purpose of and
have all the powers of a limited liability company under the laws of the State
of Michigan.
2.5 TAX MATTERS MEMBER. Subject to change by the Board, O Member is
appointed as tax matters Member of the Company.
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ARTICLE III
DISTRIBUTIONS AND ALLOCATIONS
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3.1 BOOKS OF ACCOUNT. The books of account of the Company that are kept
for other than tax purposes (the "GAAP Books") shall be kept in accordance with
GAAP.
3.2 DISTRIBUTIONS.
(a) Except to the extent limited by applicable law or by the
terms of any contract entered into by the Company and any lender, the Company
shall make quarterly distributions in cash on or before the fifteenth day of
January, April, July and October equal to the federal and state taxes payable by
each Member, calculated at the then applicable maximum statutory rates,
attributed to each Member for earnings of the Company,
(b) Except for distribution pursuant to (a) above, cash from
the Company, whether from Company operations or otherwise, shall be distributed
at the discretion of the Board of Directors.
3.4 ALLOCATIONS OF PROFITS AND LOSSES.
(a) GENERAL RULE. For book accounting and other purposes,
except tax matters, profits and losses for any fiscal year shall be allocated
equally between the Members and each item of income, gain, loss or deduction
comprising such profits and losses shall be allocated equally between the
Members.
(b) TAX ACCOUNTING RULES. For tax purposes, each item of gain,
loss, deduction or credit shall be allocated as set forth in the Tax Appendix.
(c) MAINTENANCE OF CAPITAL ACCOUNTS. For tax purposes, capital
accounts shall be maintained as set forth in the Tax Appendix.
3.5 FISCAL YEAR. The Company's fiscal year for all purposes shall be
the calendar year.
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ARTICLE IV
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MANAGEMENT OF COMPANY
---------------------
4.1 GENERAL PRINCIPLES.
(a) INDEPENDENCE OF COMPANY. The Company shall operate as an
independent business entity, separate and distinct from the operations of
Members or their respective affiliates, except to the extent O Member functions
as Operations Manager pursuant to Article V. Pursuant to the Michigan Limited
Liability Company Act, the separate assets of both Members are not available to
satisfy the debts of the Company.
(b) AFFILIATED PARTY TRANSACTIONS. Any contract or amendment
thereto between the Company and a Member or an affiliate of a Member shall be
negotiated at arm's length.
4.2 BOARD OF DIRECTORS.
(a) GENERAL RESPONSIBILITY. The Company shall be managed by a
committee, to be known as its "Board of Directors" or "Board." The Board shall
be responsible for overall policy matters and the business operations of the
Company. Officers and employees of the Company shall conduct the operations of
the Company and related business activities in a manner consistent with the
policies adopted from time to time by the Board.
(b) NUMBER AND TERM OF MEMBERS. During the term of this
Agreement, each Member shall have the right to appoint one to three regular
members to serve on the Board. Each Member shall have one vote that shall be
cast, as required, by its Directors.
(c) REGULAR MEETINGS. Except as otherwise decided by the
Board, the Board shall hold regular meetings at least four (4) times each year.
(d) SPECIAL MEETINGS. Either Member, any director, the General
Manager and the Finance Manager may call a special meeting. Any Director or
officer
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who calls a special meeting shall, unless the Members otherwise agree, provide
at least fifteen (15) calendar days' notice, which shall state the purpose or
purposes of the proposed meeting and the matters proposed to be acted on at the
meeting, to all the members of the Board.
(e) ACTION BY THE BOARD:
--------------------
(i) The Board may act at a meeting by the
affirmative vote of both Members; provided,
however, that at least one director appointed
by each Member is present at such meeting;
(ii) the Board may hold a meeting by means of a
conference telephone or other communications
equipment through which all persons
participating at the meeting can hear each
other and participation by such means shall
constitute presence in person at a meeting; and
(iii) the Board may act by written consent without a
meeting by a written consent signed by one
regular member of the Board appointed by each
Member.
4.3 OFFICERS.
---------
APPOINTMENT AND DISMISSAL. Initially, the Company shall have
such officers as the Board may authorize. After the facility begins producing
welded product of commercial quality, the officers of the Company shall include,
but not be limited to, a General Manager and a Finance Manager who shall have
(i) authority over the day-to-day affairs of the Company, and (ii) such other
powers as the Board may from time to time authorize. Officers may be appointed
or dismissed only by the Board.
4.4 REQUIREMENT OF BOARD ACTION ON CERTAIN MATTERS. Action of the
Board, in accordance with Section 4.2(e), shall be required in order to
constitute a valid authorization for the Company to:
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(1) Commit to any capital project or make any capital
expenditures in excess of (i) $50,000 for any single budgeted acquisition, sale,
disposition and/or abandonment of capital assets (including leases in lieu of
capital), property, equipment, real estate, mineral rights, or other assets,
(ii) $25,000 for any unbudgeted capital acquisitions with the funds being
available by reallocation from budgeted funds, and (iii) no more than $50,000 in
total for unbudgeted capital;
(2) Make any expenditure on a capital project which, when
added to all other expenditures covered by such project, would exceed the
aggregate amount approved for such project by ten percent (10%);
(3) Enter into or assume any contract that (i) is for a
duration of more than one (1) year; (ii) for the sale of processing services to
any person, other than a Member or an affiliate of a Member involving an amount
in excess of $100,000; or (iii) for the purchase or sale of goods or services,
other than processing services involving an amount in excess of $50,000;
(4) Enter into, assume, amend, modify, terminate any contract,
or suspend performance or waive any rights under any contract with a Member or
its affiliates regardless of the amount involved in such contract;
(5) Enter into, modify, amend, extend or waive any right with
respect to any contract providing for (i) the sale of any of the Company's laser
welding lines, (ii) the merger or consolidation of the Company, or (iii) any
technology related agreements;
(6) Incur or guarantee any indebtedness for money borrowed,
except for accounts payable incurred in the ordinary course of business and the
endorsement of checks and other instruments in the ordinary course of business;
(7) Approve or amend the Company's annual business plan,
including the capital budget;
(8) Approve any new or amend any existing employee benefit
plan that applies to any of the employees of the Company;
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(9) Approve any labor or personnel relations agreement,
collective bargaining agreement or any related policy;
(10) Authorize any salary or wage in excess of $75,000
annually or approve any bonus payment to any employee;
(11) Enter into any employment contract;
(12) Commence any suit or action, other than a proof of claim
in bankruptcy;
(13) Make any donation of cash or assets;
(14) Approve the annual audited financial statements of the
Company;
(15) Approve the annual tax returns of the Company;
(16) Appoint or change the Company's auditors or any
accounting principle or practice;
(17) Approve the insurance coverage maintained by the
Company;
(18) Approve or consent to the shutdown or other such
termination of operations of the Company;
(19) Agree upon or take any action with respect to any other
matter that is not in the ordinary course of business; and
(20) Make any press release or other public disclosure on
behalf of the Company.
4.5 DELEGATION OF SPECIFIED MATTERS TO INDIVIDUAL MEMBERS. In the
interest of promoting the independence of the Company, U Member shall have full
power and authority to direct the operations of the Company as they relate to O
Member or its affiliates and O Member shall have such full power and authority
to direct the operations of the Company as they relate to U Member or its
affiliates.
4.6 SUBSTANTIAL DISAGREEMENTS.
NOTICE OF SUBSTANTIAL DISAGREEMENT. At any time and from time
to time, if (i) a substantial disagreement exists between the Members over the
business,
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management or operations of the Company, and (ii) despite their best efforts,
the Members acting through their directors on the Board have been unable to
resolve such dispute, then either Member may provide written notice to the other
Member to the effect that a substantial disagreement exists. Any substantial
disagreement may, however, be resolved at any time by written agreement of both
Members, notwithstanding any prior delivery of notice pursuant to this Section.
4.7 CONCILIATION AND ARBITRATION.
(a) CONCILIATION. If, after a Member has sent notice of a
substantial disagreement pursuant to Subsection 4.6 and the Members have not
been able to resolve such substantial disagreement within sixty (60) days after
such notice, then each Member shall request the chief executive officer of its
ultimate parent entity to appoint a single delegate with full power and
authority to resolve such disagreement. Such delegates shall then meet as
necessary in order to discuss the matter of substantial disagreement and attempt
to resolve such matter by mutual agreement.
(b) ARBITRATION. If, upon the expiration of the sixty (60) day
period during which the chief executive officers' delegates have had the
opportunity to discuss the substantial disagreement, they have failed to resolve
the matter, then they shall submit the matter of substantial disagreement to a
mutually selected arbitrator or, in the event such arbitrator has not been
selected or is unavailable, to a three-member arbitral panel to which each
Member shall appoint one arbitrator and those two arbitrators shall appoint a
third arbitrator. Such arbitration shall be governed by the procedural rules of
the American Arbitration Association. Pending the issuance of an arbitral
decision, the Company shall continue its full and normal operations and the
Members shall continue to perform their obligations in accordance with this
Agreement. Unless otherwise decided in the arbitration, all arbitral awards for
the payment of money shall accrue interest at the rate of interest announced
from time to time by Morgan Guaranty Trust
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Company of New York as its prime rate starting from the date on which any amount
is determined to have become due.
(c) CONSENT TO ENFORCEABILITY. Each of the Members consents
and agrees that any arbitral award rendered pursuant to Section 4.7(b) shall be
enforceable by any court.
4.8 ULTIMATE RESORT TO TERMINATION PROCEDURE. If, for any reason
whatsoever, either Member determines that it is sufficiently dissatisfied with a
decision resulting from the arbitration procedure under Section 4.7, such Member
may elect to utilize the termination procedure under Article VIII by providing
formal, written notification to the other Member of such election within the
ninety (90) days following the award of the arbitrator.
ARTICLE V
---------
MANAGER OF OPERATIONS
---------------------
5.1 APPOINTMENT. The Members hereby appoint O Member as the of
Operations Manager ("Manager") of the Company effective as of the execution of
this Agreement.
5.2 POWERS AND DUTIES. The Manager shall (i) direct the activities of
all of the Company's employees, contractors, agents and representatives and
direct the use of all of the Company's assets, except to the extent said
employees, contractors, agents, representatives and assets are to be directed by
and responsible to the Board, (ii) for all matters pertaining to its performance
as Manager, maintain, and cause the employees of the Company to maintain,
accurate records regarding operations, (iii) report to the Board not less than
quarterly regarding the status of operations and (iv) make such other reports as
shall be requested by any Director of each Member. The Manager shall be
reimbursed for costs reasonably incurred as determined by the Board.
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5.3 ADMINISTRATIVE AND OTHER SERVICES. The Company may from time to
time enter into one or more agreements with either Member concerning the
purchase by the Company of administrative or other services from either Member
or affiliates of either Member.
5.4 MEMBERS' FEES. The Company shall pay either Member fees for such
Member's provision of services to the Company, including O Member's service as
Manager, as decided from time to time by the Board.
ARTICLE VI
----------
CERTAIN COVENANTS CONCERNING MEMBERS
------------------------------------
6.1 INDEPENDENT ACTIVITIES.
(a) Neither Member or any affiliate of a Member shall engage
- -- whether independently or as a shareholder, partner or member of another
entity -- within the United States, Canada or Mexico in the business of welding
together by any metal welding process two or more pieces of steel or any other
type of metal unless such Member or affiliate first offers to implement such
activity equally with the ultimate parent of the other Member. The immediately
preceding sentence shall not apply to (i) any arrangement either Member, or an
affiliate of either Member, enters into with an automobile manufacturer or other
consumer of welded metal products; or (ii) any acquisition or merger by either
Member, or an affiliate of either Member, of any business or entity engaged
partially in metal welding activities and partially in other activities so long
as the revenues which such business received from activities other than metal
welding exceed the revenues it receives from metal welding. Notwithstanding (i)
above, the Members agree that they shall take all reasonable steps to equally
involve the other Member in any arrangement for metal welding entered into with
an automobile manufacturer or other customer. The provisions of this Section
6.1(a) shall apply both to any new activities undertaken by either Member or an
affiliate of either Member or to
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any significant expansion by either Member of any welding activity entered into
or acquired independently as a result of the two exceptions set forth in the
second sentence of this Section 6.1(a).
(b) Except as provided above, either Member and its affiliates
may engage in whatever activities it may choose, regardless of whether such
activities compete with the Company, the other Member or an affiliate of the
other Member.
6.2 NON-DELEGATION. Except as provided herein, neither Member shall,
without the prior approval of the Board engage in any transaction, make any
other commitment, enter into any agreement or incur any obligation, whether as
principal, surety or agent, or in any other way hold itself out as acting for,
or on behalf of, the Company. Any attempted action in contravention of this
Section 6.2 shall be null, void AB INITIO and not binding upon the Company,
unless subsequently ratified by the Board.
6.3 CAPITAL CONTRIBUTIONS.
(a) INITIAL CAPITAL CONTRIBUTIONS. Each member pledges to make
an initial capital contribution of $2,000,000.
(b) FURTHER CAPITAL CONTRIBUTIONS. After such initial capital
contribution, neither Member shall be obligated to make any further capital
contribution unless agreed to by each member.
6.4 PARENT AGREEMENT. O Member will cause Olympic Steel, Inc. to enter
into a Parent Agreement substantially in the form attached hereto.
6.5 RATIFICATION OF CERTAIN ACTIONS. The members hereby ratify and
affirm as actions of the Company certain actions taken prior to the date hereof
as listed on the Schedule attached hereto. The Company agrees to assume all
matters and shall indemnify both Members and their affiliates against all such
matters.
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ARTICLE VII
-----------
DISPOSITION OF MEMBER'S INTEREST
--------------------------------
7.1 PARTIAL DISPOSITION. Under no circumstances may either Member
transfer less than its entire interest in the Company to another person other
than a partial transfer to an entity wholly-owned by USX Corporation or Olympic
Steel, Inc.
7.2 TRANSFERS TO AFFILIATES. U Member may transfer its interest at any
time to a wholly-owned subsidiary of USX Corporation provided USX enters into a
Parent Agreement substantially similar to the Olympic Steel, Inc. Parent
Agreement. O Member may transfer its interest at any time to Olympic Steel, Inc.
or a wholly-owned entity of Olympic Steel, Inc. Any Member making such a
transfer shall give prompt written notice to the other Member.
7.3 INITIAL HOLDING PERIOD. Except as permitted herein, neither Member
may transfer its interest in the Company until after December 31, 2000.
7.4 SALE OF INTEREST AFTER FIRST FOUR YEARS.
(a) RIGHT TO MATCH OFFER. In the event either Member (the
"Selling Member") elects to transfer its interest at any time after December 31,
2000, it shall notify the other Member (the "Non-Selling Member") in writing of
such intent, specifying all terms and conditions of the transaction including
the identity of the proposed purchaser. The transaction shall not include any
consideration from the purchaser other than cash and/or debt. The Non-Selling
Member may elect, by giving written notice to the Selling Member within sixty
(60) days of receipt of the notice from the Selling Member, to purchase the
interest being offered for sale, under the same terms and conditions described
in the Selling Member's notice. Said notice shall specify a closing date in
accordance with the requirements of Section 7.4(b). If the Non-Selling Member
does not exercise its right to purchase as set forth herein, the Selling Member
may, at any time within six (6) months following the expiration of the notice
period, proceed with the transaction on the same terms described in the notice
to the Non-Selling Member.
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(b) CLOSING FOR TRANSFER UNDER SECTION 7.4. If a Non-Selling
Member elects to purchase an interest, the transaction shall be consummated at a
closing to be held on a date designated by the Non-Selling Member that is a
business day not less than ten (10) days nor more than sixty (60) days after the
Selling Member has been given notice of the election of the Non-Selling Member
to purchase the interest, subject to extension to permit any applicable
governmental reviews or to obtain any necessary governmental consents or
approvals.
(c) REQUIREMENTS AND CONDITIONS. All transfers of Member
interests pursuant to this Section 7.4 shall be subject to the requirements of
Sections 7.5 and 7.6 and each Member shall cause the conditions set forth in
Section 7.5 to be satisfied before or at the closing.
7.5 CONDITIONS FOR VALID TRANSFER OF COMPANY INTEREST. The Member
having the right to accomplish a valid transfer of its interest pursuant to the
terms of this Agreement (the "Seller") and the person acquiring such interest
(the "Buyer") shall not accomplish or complete the transfer of such interest
unless (i) both Buyer and Seller shall have executed and delivered an agreement
(the "Substitution Agreement"), (ii) such interest is transferred pursuant to
the Substitution Agreement, and (iii) the Substitution Agreement provides, INTER
ALIA, that upon consummation of the transactions provided for therein at a
closing (the "Transfer Closing"):
(1) Seller shall withdraw from the Company;
(2) Seller shall transfer and convey to Buyer all of Seller's
interest;
(3) the Company shall have no further obligations to Seller
under this Agreement;
(4) Buyer shall succeed to all of Seller's interest and
Seller's rights and obligations under this Agreement to the extent that such
rights and obligations relate to future performance;
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(5) Seller shall have no right to, and shall cease using,
Company's name.
7.6 TRANSFER CLOSING. Any Transfer Closing shall be held at the
principal offices of the Company at 10:00 a.m. on a date mutually agreed upon by
Buyer and Seller, as agreed by the parties.
7.7 TAX IMPACT OF TRANSFER. Notwithstanding the other provisions of
this Article VII, neither Member may transfer its interest, as specified in
Sections 7.1 or 7.2, in the Company if such transfer will terminate the Company
for federal income tax purposes. If requested by the non-transferring Member,
the transferring Member shall provide an opinion of counsel reasonably
satisfactory to the non-transferring Member, concluding that the contemplated
transfer will not result in a termination of the Company for federal income tax
purposes.
ARTICLE VIII
------------
TERMINATION
-----------
8.1 TERMINATION EVENTS. This Company shall terminate and wind up its
affairs upon the occurrence of any of the following:
(a) At the election of either Member at any time after
December 31, 2026;
(b) The mutual election of both Members;
(c) The failure of the Company to construct and be capable of
producing welded parts of commercial quality of a laser welding facility by
December 31, 1999;
(d) The material breach of the Company under the Processing
Agreement with U Member that continues for more than ninety (90) days after
written notice;
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(e) The election of either Member pursuant to the substantial
disagreement provision of Section 4.8;
(f) A material breach of either Member of this Agreement or
any other material agreement which a Member or an affiliate of a Member has with
the Company which continues for more than ninety (90) days after written notice;
(g) The Bankruptcy of this Company, either Member, Olympic
Steel, Inc. or USX Corporation. Bankruptcy shall mean the filing of a voluntary
petition for relief under the Bankruptcy Code, the filing of an involuntary
petition for relief that is not dismissed or stayed within 60 days, the making
of an assignment for the benefit of creditors or insolvency of any such party;
and
(h) The occurrence of a "Change of Control." Change of Control
shall mean the control by a person or group, as defined by the Securities and
Exchange Commission, of 50% or more of the common stock of Olympic Steel, Inc.,
or 50% or more of the U.S. Steel Group common stock of USX Corporation, or the
election of directors of USX Corporation or Olympic Steel, Inc. who constitute
more than one-third of the number of directors of such corporation and who were
neither directors of such corporation immediately preceding such election or
were not recommended for election as directors by the then current board of
directors of such corporation. Notwithstanding the foregoing, the succession of
an independent company to the assets and business of the U.S. Steel Group of USX
pursuant to the Certificate of Incorporation of USX Corporation shall not
constitute a Change in Control.
8.2 PURCHASE OPTION.
(a) VALUATION. In the event of a termination pursuant to
Section 8.1, the Members shall promptly negotiate in good faith to determine a
fair market value on a going concern basis of the Company which shall be the
going concern value of the Company which a non-affiliated third party would
purchase for cash all of the Company's assets and assume all of its liabilities,
both absolute and contingent. If the Members
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cannot agree upon such a value within sixty (60) days after the termination
event, they shall either (i) jointly appoint a nationally recognized investment
banking firm, commercial bank or accounting firm; or (ii) if they cannot agree
upon such an appointment, they shall appoint the Company's then current auditors
to determine the value within sixty (60) days of such appointment (the "Value").
(b) PURCHASE OPTION. In the case of the termination event
specified in Section 8.1(a), the Member that has not given notice of its
election to terminate shall have the option to purchase the terminating Member's
interest in the Company for fifty percent (50%) of the Value. The
non-terminating Member shall have sixty (60) days after the determination of
Value to make an irrevocable election to make such a purchase and, if no
election is made within such time, then the terminating Member shall have the
same right for the next sixty (60) days. If neither Member exercises such right,
the Company shall be liquidated in accordance with Section 8.3.
(c) ALTERNATIVE PURCHASE OPTION. In the case of the
termination events specified in Section 8.1 (b) - (e), U Member shall have the
option to purchase O Member's interest in the Company for fifty percent (50%) of
the Value. U Member shall have sixty (60) days after the determination of the
Value to make an irrevocable election to make such a purchase, and, if no
election is make within such time, then O Member shall have the same right for
the next sixty (60) days. If neither Member exercises such right, the Company
shall be liquidated in accordance with Section 8.3.
(d) DEFAULT PURCHASE OPTION. In case of the termination events
specified in Section 8.1 f. - h., the non-defaulting, non-bankrupt or
non-changing Member shall have the right to purchase the defaulting Member's
interest in the Company for forty-five percent (45%) of the Value. If the
non-defaulting Member does not make an irrevocable election to so purchase
within sixty (60) days of the determination of Value, then the defaulting Member
shall have the option to purchase the non-defaulting Member's interest in the
Company for fifty percent (50%) of the
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Value. If neither Member purchases the other, the Company shall be liquidated in
accordance with Section 8.3.
(e) CONDITIONS TO VALID TRANSFER. The consummation of any such
purchase and sale shall be made in accordance with Section 7.5.
8.3 LIQUIDATION. If the Company is liquidating, such liquidation shall
be conducted in accordance with the then applicable Michigan Limited Liability
Company Act, the Internal Revenue Code and all regulations under either statute.
The liabilities of a defaulting Member to the non-defaulting Member shall be
paid out of the defaulting Member's share of such distribution.
8.4 EXCLUSIVITY. The provisions of this Article VIII are the exclusive
means by which the Company may be terminated and each Member waives any rights
it may have, whether statutory or otherwise, to withdraw capital, terminate the
Company or otherwise cease its participation in the Company.
ARTICLE IX
----------
INDEMNIFICATION
---------------
9.1 STANDARD OF CONDUCT. The Company shall, to the maximum extent
permitted by law, indemnify and hold harmless each Member; each director,
officer, employee and agent of the Company, either Member or the affiliates of
either Member; and all other heirs, executors, successors and assigns of each of
the foregoing against any and all losses, damages, liabilities, costs and
expenses (including reasonable attorneys' fees) by reason of the fact that such
entity or person is or was serving as a Member, director, officer, employee or
agent of the Company provided that (a) such entity or person acted in good
faith; (b) in a criminal action, such entity or person reasonably believed its
conduct was lawful and (c) in the case of an action initiated by such person or
entity, the initiation of such action was approved by the Board.
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9.2 ADVANCE OF EXPENSES. The Company shall advance to all indemnified
entities and persons the costs and expenses of any covered proceeding provided
such indemnified entity or person provides the Company with an affidavit made in
good faith that he, she or it qualifies for such indemnification.
9.3 DUAL REPRESENTATION. Subject to applicable professional conflict of
interest rules, the Company and one or more indemnified entity or person may be
jointly represented by a single counsel.
9.4 NOTICE. Any person claiming indemnification shall give the Company
prompt notice of its right to indemnification and the failure to give such
notice shall except the indemnification obligation to the extent the failure to
give such notice is materially prejudicial to the Company.
ARTICLE X
---------
MISCELLANEOUS
-------------
10.1 INSPECTIONS. Each Member shall at all reasonable times have the
right to inspect, audit and evaluate the Company's files, books, records,
computer data, contracts, assets, leased assets and operations, including, but
not limited to, the right to enter upon, investigate, and collect air, surface
water, ground water and soil samples, provided that such entry, investigation
and sampling shall not interfere with the normal business and operations of the
Company.
10.2 RIGHTS AND REMEDIES. The rights and remedies granted under this
Agreement shall not be exclusive, but shall be in addition to all other rights
and remedies available at law or in equity. The parties expressly agree that the
obligations of each party hereunder are expressly made enforceable by specific
performance. Neither party, however, shall be liable to the other for any
indirect, special or consequential damages as a result of a breach of any
provision of this Agreement.
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10.3 EXPENSES. Except as specifically provided herein or in any other
agreements between the Members or their affiliates to the contrary, any costs,
expenses and charges incurred by either of the parties hereto in connection with
this Agreement shall be borne by the party incurring such costs, expenses or
charges.
10.4 NOTICES. All notices and other communications hereunder shall be
effective upon receipt and shall be in writing and personally delivered or
mailed by courier or sent by facsimile as follows:
If to U Member:
U.S. Steel Group of USX Corporation
600 Grant Street
Pittsburgh, PA 15219-2749
Attention: Executive Vice President-Sheet Products
with a copy to:
Charles A. Rea, Esquire
U.S. Steel Group of USX Corporation
600 Grant Street - Room 1500
Pittsburgh, PA 15219-2749
Telephone number:(412) 433-2900
Facsimile number:(412) 433-2811
If to O Member:
OLY Steel Welding, Inc.
c/o Olympic Steel, Inc.
5080 Richmond Road
Bedford Heights, OH 44146
Attention: Chairman of the Board
Telephone number:(216) 292-3800
Facsimile number:(216) 292-3974
or to such other address as hereafter shall be furnished as provided in this
Section by one of the parties hereto to the other party hereto.
10.5 SUCCESSION AND ASSIGNMENT. Except as expressly contemplated
herein, no party shall assign this Agreement or any rights hereunder, or
delegate performance of any of its obligations hereunder, without the prior
consent of the other, and any such
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attempted assignment or delegation without such consent shall be null, void AB
INITIO and of no force or effect. Any permitted assignment of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
10.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single instrument.
10.7 ENTIRE AGREEMENT. This Agreement (including the Attachments
hereto) sets forth the entire understanding and agreement between the parties as
to the matters covered herein and supersedes and replaces any prior
understanding, agreement or statement of intent, in each case, written or oral.
10.8 HEADINGS. The headings set forth in this Agreement are for
convenience of reference only and do not qualify or affect in any way the
meaning or interpretation of this Agreement.
10.9 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of Michigan.
10.10 NO THIRD PARTY RIGHTS. This Agreement is intended to be solely
for the benefit of the parties hereto and is not intended to confer any benefits
upon, or create any rights in favor of, any person other than the parties
hereto.
10.11 SEVERABILITY. In case any one or more of the provisions contained
in this Agreement is adjudged invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby, except to the
extent that doing so would be unjust or inequitable.
10.12 AMENDMENTS. No amendment, modification or waiver of any term or
condition of this Agreement shall be valid or of any force or effect unless in a
writing signed by the party against which enforcement is sought.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
U MEMBER
U.S. STEEL GROUP OF USX CORPORATION
By: /s/ R. E. Dorrance
-------------------------------
Name:
Title:
O MEMBER
OLY STEEL WELDING, INC.
By: /s/ Michael Siegal
-------------------------------
Name: Michael Siegal
Title: CEO