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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1998
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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
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(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of March 5, 1999, the aggregate market value of voting stock held by
nonaffiliates of the registrant based on the closing price at which such stock
was sold on The NASDAQ Stock Market on such date approximated $68,833,000. The
number of shares of Common Stock outstanding as of March 5, 1999 was 10,692,000.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange
Act of 1934 within 120 days of the close of its fiscal year ended December 31,
1998, portions of which document shall be deemed to be incorporated by reference
in Part I and Part III of this Annual Report on Form 10-K from the date such
document is filed.
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PART I
ITEM 1. BUSINESS
THE COMPANY
The Company is a leading North American steel service center that
processes and distributes flat-rolled carbon, stainless and tubular steel
products from 14 facilities in eight midwestern and eastern states. The Company
is constructing its fifteenth facility in Chambersburg, Pennsylvania and has
also invested in two joint ventures with facilities located in Michigan. The
Company operates as an intermediary between steel producers and manufacturers
that require processed steel for their operations. The Company purchases
flat-rolled steel typically from steel producers and responds to its customers'
needs by processing steel to customer specifications and by providing critical
inventory and just-in-time delivery services. Such services reduce customers'
inventory levels, as well as save time, labor and expense for customers, thereby
reducing their overall production costs. The Company's services include both
traditional service center processes of cutting-to-length, slitting, shearing
and roll forming and higher value-added processes of blanking, tempering, plate
burning, and precision machining of steel parts.
The Company is organized into regional operations with domestic
processing and distribution facilities in Connecticut, Georgia, Pennsylvania,
Ohio, Michigan, Illinois, Iowa, and Minnesota, servicing a diverse base of over
3,300 active customers located throughout the midwestern, eastern and southern
United States. Its international sales office is located in Pittsburgh,
Pennsylvania and services customers primarily in Mexico and Puerto Rico.
The Company is incorporated under the laws of the State of Ohio. The
Company's executive offices are located at 5096 Richmond Road, Cleveland, Ohio
44146. Its telephone number is (216) 292-3800.
INDUSTRY OVERVIEW
The steel industry is comprised of three types of entities: steel
producers, intermediate steel processors and steel service centers. Steel
producers have historically emphasized the sale of steel to volume purchasers
and have generally viewed intermediate steel processors and steel service
centers as part of their customer base. However, all three entities can compete
for certain customers who purchase large quantities of steel. Intermediate steel
processors tend to serve as processors in large quantities for steel producers
and major industrial consumers of processed steel, including automobile and
appliance manufacturers.
Services provided by steel service centers can range from storage and
distribution of unprocessed metal products to complex, precision value-added
steel processing. Steel service centers respond directly to customer needs and
emphasize value-added processing of flat-rolled steel and plate pursuant to
specific customer demands, such as cutting-to-length, slitting, shearing, roll
forming, shape correction and surface improvement, blanking, tempering, plate
burning and stamping. These processes produce steel to specified lengths,
widths, shapes and surface characteristics through the use of specialized
equipment. Steel service centers typically have lower cost structures and
provide services and value-added processing not otherwise available from steel
producers.
End product manufacturers and other steel distributors have
increasingly sought to purchase steel on shorter lead times and with more
frequent and reliable deliveries than can normally be provided by steel
producers. Steel service centers generally have lower labor costs than steel
producers and consequently process steel on a more cost-effective basis. In
addition, due to this lower cost structure, steel service centers are able to
handle orders in quantities smaller than would be economical for steel
producers. The net results to customers purchasing products from steel service
centers are lower inventory levels, lower overall cost of raw materials and
decreased manufacturing time and operating expense. The Company believes that
the increasing prevalence of just-in-time delivery requirements has made the
value-added inventory, processing and delivery functions performed by steel
service centers increasingly important.
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CORPORATE HISTORY
The Company was founded in 1954 by the Siegal family as a general steel
service center. Michael Siegal (CEO), the son of one of the founders, began
working at the Company in the early 1970's and became President and CEO at the
end of 1983. In an effort to broaden the management base for future expansion,
David Wolfort (COO) was hired as general manager at the end of 1983, and Louis
Schneeberger (CFO) joined the Company as chief financial officer in 1987.
The new management team changed the Company's business strategy from a
focus on warehousing and distributing steel from a single facility with no major
processing equipment to a focus on growth, geographic and customer diversity and
value-added processing. An integral part of the Company's growth has been the
acquisition and start-up of several processing and sales operations.
In March 1994, the Company completed an initial public offering of 4
million shares of its Common Stock (the IPO). Most of the net proceeds of the
IPO were used to reduce borrowings under its revolving credit agreement, which
allowed the Company to continue to fund its growth, including the 1995
acquisition of Lafayette Steel and expansion projects in Cleveland and
Minneapolis. In August 1996, the Company completed a follow-on offering of 2.1
million shares of its Common Stock (the Offering). The $49.1 million of net
proceeds from the Offering were used to repay outstanding bank debt.
BUSINESS STRATEGY
The Company believes that the steel service center and processing
industry continues to be driven by four primary trends: consolidation of
industry participants; increased outsourcing of manufacturing processes by
domestic manufacturers; shift by customers to fewer and larger suppliers; and
increased customer demand for higher quality products and services.
In recognition of these industry dynamics, the Company has focused its
business strategy on achieving profitable growth through the acquisition of
service centers, processors, and related businesses, the formation of joint
ventures, and investments in higher value-added processing equipment and
services, while continuing its commitment to expanding and improving its sales
force and information systems. In addition, the Company plans to expand into new
domestic and international markets, increase sales to existing customers,
aggressively pursue new customers, and supply its larger customers on a national
account basis. Olympic believes its depth of management, strategically located
facilities, advanced information systems, reputation for quality and customer
service, extensive and experienced sales force and supplier relationships
provide a strong foundation for implementation of its strategy. Key elements of
the Company's strategy are set forth below.
ACQUISITIONS. It is the Company's strategy to continue to make
selective acquisitions of profitable or turnaround steel service centers,
processors and related businesses. Since 1987, the Company has made five major
acquisitions of other steel service centers or processors:
Effective June 1, 1997, the Company acquired Southeastern
Metal Processing, Inc. and Southeastern Transshipping Realty
(Southeastern) for approximately $13.7 million. Southeastern, which
historically operated as a metals toll processor and storage operation,
is located near Atlanta, Georgia. The acquisition provides the Company
with a physical presence in the southeastern market, which initially
supported its sales office in Greenville, South Carolina. In 1999, the
Company closed its Greenville office after consolidating its southern
sales function into its Georgia operation. In 1998, the Company
completed a $2.7 million, 35,000 square foot facility expansion and
cut-to-length line upgrade project. After the expansion, Southeastern
has five major pieces of processing equipment and a 240,000 square foot
facility, which allows the Company to now service its southern
customers with an expanded product and processing base on a
just-in-time delivery basis.
In January 1995, the Company completed the acquisition of
Lafayette Steel for approximately $52.3 million. The acquisition
provided the Company an entry to the automotive industry. Lafayette
Steel is a Detroit-based service center and toll processor primarily
serving Michigan, Illinois, Indiana and Ohio. Lafayette Steel's 10
major pieces of processing equipment, including six presses, have
enabled the Company to broaden its value-added processes by offering
first stage blanking to its existing and
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prospective customers. Since the acquisition, Olympic has made
significant operational and personnel changes, including establishing a
new management team. In 1997, the Company completed a 71,000 square
foot expansion of its warehouse, which now houses a new cut-to-length
line. The new line replaced three decoilers acquired in the
acquisition. In addition, the Company has determined to dispose of
several other non-productive pieces of equipment in 1999. These changes
are expected to improve productivity and reduce expenses.
Eastern Steel & Metal Company ("Eastern Steel") had ceased
operations prior to its purchase by the Company in June 1990. The
acquisition provided the Company with access to the eastern market, as
well as Eastern Steel's processing equipment and its distribution
facility that included seven major pieces of processing equipment. In
addition, the acquisition provided the Company's Philadelphia operation
with processing support. Olympic has supported the operation by
purchasing and upgrading its processing equipment, disposing of
unproductive equipment, adding new plate processing equipment in 1999,
and providing working capital.
In January 1990, Olympic purchased Juster Steel, Inc., a
profitable steel service center in Minneapolis, Minnesota, to expand
into the upper midwest and farmbelt states. One of the former owners
and executive officers is now the regional vice president of the
Company's Minneapolis and Iowa operations. The Company has added sales
and other personnel and invested capital to purchase and upgrade major
processing equipment and facilities, including the new temper mill and
plate processing facility in Bettendorf, Iowa,and the Minneapolis plate
processing facility completed in 1995. Since 1997, the Company has
purchased a cut-to-length line and additional plate processing
equipment in Minneapolis, and a slitter in Iowa, which brings its total
to 30 major pieces of processing equipment in the midstates region.
In 1987, the Company acquired Viking Steel Company ("Viking
Steel"), located in Chicago. Prior to the acquisition, Viking Steel's
sales had decreased significantly for several years. The acquisition
broadened the Company's geographic coverage through expansion into the
Chicago market, the largest steel consuming market in the United
States, and extended its product line into stainless steel. Olympic
replaced the original management team, purchased a new cut-to-length
line, purchased a second facility in Schaumburg, Illinois during 1992,
and has added two pieces of plate processing equipment to the
Schaumburg facility since 1996.
In June 1998, the Company made a strategic acquisition of JNT Precision
Machining (JNT), a machining center located in McConnellsburg, Pennsylvania. JNT
allows the Company to provide additional value added services to its existing
and prospective customers that continue to outsource. Additionally, the
processes performed by JNT augment the Company's plate processing currently
performed at its Philadelphia operation. JNT operates lathes, machining centers,
drills and saws from its current facility until it is relocated to a new 87,000
square foot facility being constructed in nearby Chambersburg, Pennsylvania. The
Company plans to spend approximately $7 million to construct the facility,
relocate existing machining equipment, and purchase new plate processing
equipment. The new facility is projected to be operational by the end of the
third quarter of 1999.
The Company's strategy is to continue to expand geographically by
making acquisitions, with a particular focus on the central and southern United
States.
INVESTMENTS IN JOINT VENTURES. In 1997, the Company diversified its
selling and processing capabilities by entering into three joint venture
relationships:
In January 1997, the Company invested $4 million for its 45% interest
in Olympic Continental Resources (OCR), a joint venture with Atlas Iron
Processors, Inc. (Atlas) and 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. OCR generates a significant portion of its revenue from
Atlas or affiliates of Atlas. As a result, OCR maintains significant receivable
balances with Atlas. OCR's receivables from Atlas totaled approximately $6.2
million at December 31, 1998, which represented 31% of OCR's total accounts
receivable. The Company believes that OCR's receivable from Atlas is
uncollectible, and therefore wrote-down its entire $4.7 million investment in
OCR in the fourth quarter of 1998.
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In April 1997, the Company formed Olympic Laser Processing (OLP), a 50%
joint venture with the U.S. Steel Group of USX Corporation. OLP constructed a
new facility in Michigan and has initially equipped it with two laser-welding
lines. During 1998, OLP began prototyping and limited production of laser-welded
sheet steel blanks for the automotive industry. Demand for laser-welded parts is
rapidly expanding due to benefits of reduced auto body weight. The Company
expects that both welding lines will be operating at full capacity in 2000 as
new weld-part contracts for model year 2000 autos are awarded during 1999. OLP
obtained its QS-9000 quality certification in 1998.
In December 1997, the Company invested $147 thousand for its 49%
interest in Trumark Steel & Processing (TSP), a joint venture formed in Michigan
with Michael J. Guthrie and Carlton L. Guthrie (the Guthries). The Guthries are
also the executive officers of Trumark Inc., a privately held supplier of metal
stamped assemblies to the automotive industry located in Michigan. TSP was
formed to support the flat-rolled steel requirements of the automotive industry
as a Minority Business Enterprise (MBE). TSP obtained certification as an MBE
from the Michigan Minority Business Development Council in December 1998, and
anticipates operating at full capacity in the second quarter of 1999. During the
fourth quarter of 1998, TSP obtained its QS-9000 quality certification, and in
January 1999, obtained a significant contract from a first-tier automotive
stamper.
INVESTMENT IN VALUE-ADDED PROCESSING EQUIPMENT. An integral part of the
Company's growth has been the purchase of major processing equipment and
construction of facilities. Olympic will continue to invest to support its
growth through the addition of major equipment for its existing facilities. The
Company's philosophy is that equipment purchases should be driven by customer
demand. When the results of sales and marketing efforts indicate that there is
sufficient customer demand for a particular product or service, the Company will
purchase the equipment to satisfy that demand. In addition, the Company is
constantly evaluating existing equipment to ensure that it remains productive.
This includes upgrading or replacing equipment wherever necessary.
In 1987, the Company constructed a facility to house its first major
piece of processing equipment, a heavy gauge, cut-to-length line. The Company
now has approximately 82 major pieces of processing equipment. Certain equipment
was purchased directly from equipment manufacturers while the balance was
acquired in the Company's acquisitions of other steel service centers and
related businesses.
In response to customer demands for higher tolerances and flatness
specifications, in 1996 the Company began operating a customized four-high 1/2"
by 72" temper mill and heavy gauge cut-to-length line, housed in a 127,000
square foot building constructed on property adjoining the Company's Cleveland
facilities. It is one of only few of its kind in the United States and
incorporates state-of-the-art technology and unique design specifications. The
equipment permits the Company to process steel to a more uniform thickness and
flatness, upgrades the quality and consistency of certain of the Company's
products, and enables the Company to produce tempered sheet or coil to customer
specifications in smaller quantities than is available from other sources. By
offering customers greater flexibility with respect to order size, the Company
believes it has captured additional market share. The new facility and
equipment, which was constructed at a cost of $18.1 million, has increased the
Company's annual processing capacity by more than 120,000 tons.
Customer response to this equipment has been so strong, especially by
agricultural equipment manufacturers and plate fabricators located in the
central states region, that the Company has constructed and equipped a new,
190,000 square foot temper mill, sheet processing, and plate burning facility in
Bettendorf, Iowa. The Iowa facility became operational in the fourth quarter of
1998 at a cost of approximately $26.4 million.
Over the past three years, the Company has significantly expanded its
plate processing capacity. In 1995, the Company constructed a $7.4 million,
112,200 square foot facility in Minneapolis which houses laser, plasma and
oxygen burning tables and shot blasting equipment. Response to the Minneapolis
plate burning capabilities has exceeded expectations, leading the Company to
purchase additional plasma and laser burning tables for its Minneapolis and Iowa
facilities. Two other plate burning tables have been added in Chicago and one in
Philadelphia since 1996. A new plasma burning table is currently being installed
in Connecticut. Finally, the Company is in the process of constructing an 87,000
square foot facility in Chambersburg, Pennsylvania to house existing machining
equipment as well as new plate processing equipment. These investments in plate
processing equipment have allowed the Company to further increase its higher
value-added processing services. The Company believes it is among the largest
processors and distributors of steel plate in the United States.
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In addition to the plate burning and temper mill investments described
above, since 1997 the Company has also invested in a new tube mill and end
finishing equipment in Cleveland, a new cut-to-length line in Detroit, a
cut-to-length line for Minneapolis, and a slitter for Iowa. During 1998 the
Company also upgraded a cut-to-length line in Georgia. As part of its strategy
to evaluate and upgrade or replace non-productive equipment, the new line in
Detroit replaced three older decoilers, which were sold, and the new tube mill
replaced three older mills, which were also sold.
The expansion of the Company's plate processing and tempering
capabilities were made in response to the growing trend among capital equipment
manufacturers to outsource non-core production processes, such as plate
processing, and to concentrate on engineering, design and assembly. The Company
expects to further benefit from this trend and will continue to purchase new
equipment and upgrade existing equipment to meet this demand.
SALES AND MARKETING. The Company believes that its commitment to
quality, service and just-in-time delivery has enabled it to build and maintain
strong customer relationships, while expanding its geographic growth through the
continued upgrading and addition of sales personnel. The Company believes it has
among the largest and most experienced sales force in the industry which is a
significant competitive advantage. The Company's sales force has grown to
approximately 140 from 80 at the beginning of 1994. The efforts of these
individuals translate into approximately 300 direct daily sales calls to
customers in virtually all states in the continental United States. The
continuous interaction between the Company's sales force and active and
prospective customers provides the Company with valuable market information and
sales opportunities, including opportunities for outsourcing and increased
sales.
The Company's sales efforts are further supported by metallurgical
engineers and technical service personnel, who have specific expertise in carbon
and stainless steel and alloy plate.
In the international market, the Company's objective is to service
foreign customers by matching their steel requirements to a specific primary
steel producer. The Company functions as the sales and logistics arm of primary
producers, giving them access to customers that they might otherwise not sell or
service. This approach differs from the typical international steel trader that
emphasizes large commodity shipments. Although the Company works principally
with domestic steel producers, it continues to develop relationships with
foreign steel producers. All international sales and payments are made in United
States dollars. International sales have represented less than 6% of net sales
in each of the last three years.
DEPTH OF MANAGEMENT. The Company attributes a portion of its success
to the depth of its management. In addition to the three principal executive
officers, the Company's management team includes two regional vice presidents
and twelve general managers, its Directors of Investor Relations, Taxes & Risk
Management, MIS, Materials Management, Human Resources, and Logistics, and its
Treasurer - Corporate Controller. Members of the management team have a
diversity of backgrounds within the steel industry, including management
positions at steel producers and other steel service centers. They average 20
years of experience in the steel industry and 8 years with the Company. This
depth of management allows the Company to pursue and implement its growth
strategy.
PRODUCTS, PROCESSING SERVICES, AND QUALITY STANDARDS
The Company maintains a substantial inventory of coil and plate steel.
Coil is in the form of a continuous sheet, typically 36 to 96 inches wide,
between 0.015 and 0.625 inches thick, and rolled into 10 to 30 ton coils.
Because of the size and weight of these coils and the equipment required to move
and process them into smaller sizes, such coils do not meet the requirements,
without further processing, of most customers. Plate is typically thicker than
coil and is processed by laser, plasma or oxygen burning.
Customer orders are entered into computerized order entry systems, and
appropriate inventory is then selected and scheduled for processing in
accordance with the customer's specified delivery date. The Company attempts to
maximize yield by combining customer orders for processing each purchased coil
or plate to the fullest extent practicable.
The Company's services include both traditional service center
processes of cutting-to-length, slitting, shearing and roll forming and higher
value-added processes of blanking, tempering, plate burning, and machining
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to process steel to specified lengths, widths and shapes pursuant to specific
customer orders. Cutting-to-length involves cutting steel along the width of the
coil. Slitting involves cutting steel to specified widths along the length of
the coil. Shearing is the process of cutting sheet steel, while roll forming is
the process in which flat rolled coils are formed into tubing and welded.
Blanking cuts the steel into specific shapes with close tolerances. Tempering
improves the uniformity of the thickness and flatness of the steel through a
cold rolling process. Plate burning is the process of cutting steel into
specific shapes and sizes. The Company's machining activities include drilling,
bending, milling, tapping, boring and sawing.
The following table sets forth the major pieces of processing equipment
used by geographic location.
(a) (b) (b) (b)
Processing Cleveland Chicago Detroit Minneapolis Iowa South Connecticut Philadelphia Total
---------- --------- ------- ------- ----------- ----- ----- ----------- ------------ -----
Cutting-to-length 3 1 2 4 1 3 3 -- 17
Blanking -- -- 6 -- -- -- -- 1 7
Tempering 1 -- -- -- 1 -- -- -- 2
Plate Processing 2 2 -- 10 4 -- 2 3 23
Slitting -- -- 2 2 1 2 2 -- 9
Shearing (c) 3 1 -- 6 -- -- -- -- 10
Roll forming 2 -- -- -- -- -- -- -- 2
Machining -- -- -- -- -- -- -- 11 11
Shot blasting -- -- -- 1 -- -- -- -- 1
---------- --------- -------- ----------- ------ -------- ------------ ----------- -------
Total 11 4 10 23 7 5 7 15 82
---------- --------- -------- ----------- ------ -------- ------------ ----------- -------
(a) Consists of four facilities.
(b) Consists of two facilities.
(c) Shearing for Cleveland includes two new recut lines added at the Tubing
facility in 1998.
The Company's quality control system establishes controls and
procedures covering all aspects of its products from the time the material is
ordered through receipt, processing and shipment to the customer. These controls
and procedures encompass periodic supplier audits, inspection criteria,
traceability and certification. From time to time, the Company has undergone
quality audits by certain of its customers and has met all requirements of those
customers. In addition, the Philadelphia and Minneapolis operations are both ISO
9002 certified, while certain of the Company's other operations are currently
seeking to obtain the ISO certification. Lafayette Steel is one of only a few
domestic service centers to earn Ford's Q1 quality rating, and is also QS-9000
certified. The TSP and OLP joint ventures also obtained QS-9000 certification in
1998. The Company has a quality testing lab adjacent to its temper mill facility
in Cleveland.
CUSTOMERS AND DISTRIBUTION
The Company processes steel for sale to over 3,300 domestic and foreign
customers. The Company has a diversified customer and geographic base, which
reduces the cyclicality of its business. The top 20 customers accounted for less
than 20% of net sales in both 1998 and 1997. In addition, the Company's largest
customer accounted for less than 3% and 4% of net sales in 1998 and 1997,
respectively. Major domestic customers include manufacturers and fabricators of
transportation and material handling equipment, automobiles, construction and
farm machinery, storage tanks, environmental equipment, appliances, food service
and electrical equipment, as well as general and plate fabricators, and steel
service centers. Sales to the three largest U.S. automobile manufacturers and
their suppliers, made principally by the Company's Lafayette Steel operation,
and sales to other steel service centers, accounted for approximately 20% and
11%, respectively, of the Company's net sales in 1998, and 23% and 12% of net
sales in 1997.
While the Company ships products throughout the United States, most of
its customers are located in the midwestern, eastern and southern regions of the
United States. Most domestic customers are located within a 250-mile radius of
one of the Company's processing facilities, thus enabling an efficient delivery
system capable of handling a high frequency of short lead-time orders. The
Company transports most of its products directly to customers via independent
trucking firms, although the Company also owns and operates some trucks in
different locations to facilitate short-distance, multi-stop deliveries.
International products are shipped either directly from the steel producers to
the customer or to an intermediate processor, and then to the customer by rail,
truck or ocean carrier.
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The Company processes its steel to specific customer orders as well as
for stock. Many of the Company's customers commit to purchase on a regular basis
with the customer notifying the Company of specific release dates as the
processed products are required. Customers typically notify the Company of
release dates anywhere from a just-in-time basis up to three weeks before the
release date. Therefore, the Company is required to carry sufficient inventory
of raw materials to meet the short lead time and just-in-time delivery
requirements of its customers.
SUPPLIERS
Olympic concentrates on developing relationships with high-quality
domestic integrated and mini mills, as well as foreign steel producers, and
becoming an important customer to such producers. The Company is a major
customer of flat-rolled coil and plate for many of its principal suppliers, but
is not dependent on any one supplier. The Company purchases in bulk from steel
producers in quantities that are efficient for such producers. This enables the
Company to maintain a continued source of supply at what it believes to be
competitive prices. Olympic believes the accessibility and proximity of its
facilities to major domestic steel producers will continue to be an important
factor in maintaining strong relationships with them.
The Company purchases flat-rolled steel for processing at regular
intervals from a number of domestic and foreign producers of primary steel,
including LTV Corporation, U.S. Steel Corporation, National Steel Corporation,
Bethlehem Steel, Nucor Corporation, North Star BHP Steel, AK Steel, Ipsco, and
Citisteel. The Company believes that its relationships with its suppliers are
good. The Company has no long-term commitments with any of its suppliers.
COMPETITION
The principal markets served by the Company are highly competitive.
The Company competes with other regional and national steel service centers,
single location service centers and, to a certain degree, steel producers and
intermediate steel processors on a regional basis. The Company has different
competitors for each of its products and within each region. The Company
competes on the basis of price, product selection and availability, customer
service, quality and geographic proximity. Certain of the Company's competitors
have financial and operating resources in excess of those of the Company.
With the exception of certain Canadian operations, foreign steel
service centers are not a material factor in the Company's principal domestic
markets. The Company competes for international sales with many domestic and
foreign steel traders and producers, none of whom dominates or controls the
international markets served by the Company. Many of these international
competitors are also suppliers to the Company.
MANAGEMENT INFORMATION SYSTEMS
Information systems are a critical component of Olympic's growth
strategy. The Company has invested, and will continue to invest, in the advanced
technologies and human resources required in this area. The Company believes
that its information systems provide it with a significant competitive advantage
over smaller competitors with less resources than Olympic. The Company's
information systems focus on the following core application areas:
INVENTORY MANAGEMENT. The Company's information systems track the
status of inventories in all locations on a daily basis. This real-time
information is essential in allowing the Company to closely monitor its
inventory and to continue to improve its inventory turns.
DIFFERENTIATED SERVICES TO CUSTOMERS. The Company's information systems
allow it to provide value-added services to customers, including quality control
monitoring and reporting, just-in-time inventory management and shipping
services and EDI communications.
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ADVANCED CUSTOMER INTERACTION. The Company is actively pursuing
opportunities to streamline the cost and time associated with customer and
supplier communications, including direct links from Olympic to key customer
information systems and access to information through the Internet.
INTERNAL COMMUNICATIONS. The Company believes that its ability to
quickly and efficiently share information across its operations is critical to
the Company's success. The Company continues to invest in various communications
and workgroup technologies which enables employees to remain effective and
responsive as the Company grows.
YEAR 2000 COMPLIANCE. The Company has established processes to evaluate
and manage the risks and costs associated with ensuring its software and
application systems will properly recognize and process the year 2000 and
beyond. Refer to the Management Discussion & Analysis section of this document
for a complete Y2K disclosure.
EMPLOYEES
At December 31, 1998, the Company employed 1,079 people. Approximately
300 of the Company's hourly plant personnel at the Minneapolis and Lafayette
Steel facilities are represented by four separate collective bargaining units.
In September 1998, the two collective bargaining agreements at Lafayette were
renewed to July 2001 and July 2002, respectively, and the agreement covering
personnel at the Minneapolis coil facility was renewed to September 30, 2002.
The agreement covering the Minneapolis plate processing facility personnel
expires March 31, 1999. The Company has never experienced a work stoppage and
believes that its relationship with its employees is good.
In 1999, the Company changed its senior management compensation
program to better align such compensation with shareholder and corporate
objectives.
SERVICE MARKS, TRADE NAMES AND PATENTS
The Company conducts its business under the name "Olympic Steel." A
provision of federal law grants exclusive rights to the word "Olympic" to the
U.S. Olympic Committee. The U.S. Supreme Court has recognized, however, that
certain users may be able to continue to use the word based on long-term and
continuous use. The Company has used the name Olympic Steel since 1954, but is
prevented from registering the name "Olympic" and from being qualified to do
business as a foreign corporation under that name in certain states. In such
states, the Company has registered under different names, including "Oly Steel"
and "Olympia Steel." The Company's wholly-owned subsidiary, Olympic Steel
Lafayette, Inc., does business in certain states under the names "Lafayette
Steel and Processing" and "Lafayette Steel," and the Company's operation in
Georgia does business under the name "Southeastern Metal Processing."
GOVERNMENT REGULATION
The Company's operations are governed by many laws and regulations,
including those relating to workplace safety and worker health, principally the
Occupational Safety and Health Act and regulations thereunder. The Company
believes that it is in material compliance with these laws and regulations and
does not believe that future compliance with such laws and regulations will have
a material adverse effect on its results of operations or financial condition.
ENVIRONMENTAL
The Company's facilities are subject to certain federal, state and
local requirements relating to the protection of the environment. The Company
believes that it is in material compliance with all environmental laws, does not
anticipate any material expenditures to meet environmental requirements and does
not believe that compliance with such laws and regulations will have a material
adverse effect on its results of operations or financial condition.
10
CYCLICALITY IN THE STEEL INDUSTRY; IMPACT OF CHANGING STEEL PRICES
The principal raw material used by the Company is flat-rolled carbon
and stainless steel that the Company typically purchases from steel producers.
The steel industry as a whole is cyclical, and at times pricing and availability
in the steel industry can be volatile due to numerous factors beyond the control
of the Company, including general, domestic and international economic
conditions, labor costs, production levels, competition, import duties and
tariffs and currency exchange rates. This volatility can significantly affect
the availability and costs of raw materials for the Company.
Steel service centers maintain substantial inventories of steel to
accommodate the short lead times and just-in-time delivery requirements of their
customers. Accordingly, the Company purchases steel in an effort to maintain its
inventory at levels that it believes to be appropriate to satisfy the
anticipated needs of its customers based upon historic buying practices,
contracts with customers and market conditions. The Company's commitments for
steel purchases are generally at prevailing market prices in effect at the time
the Company places its orders. The Company has no long-term, fixed-price steel
purchase contracts. When raw material prices increase, competitive conditions
will influence how much of the steel price increases can be passed on to the
Company's customers. When raw material prices decline, customer demands for
lower prices could result in lower sale prices and, as the Company uses existing
steel inventory, lower margins. Changing steel prices therefore could adversely
affect the Company's net sales, gross margins and net income.
CYCLICALITY OF DEMAND; SALES TO THE AUTOMOTIVE INDUSTRY
Certain of the Company's products are sold to industries that
experience significant fluctuations in demand based on economic conditions or
other matters beyond the control of the Company. The Company's diversified
customer and geographic base reduce such cyclicality; however, no assurance can
be given that the Company will be able to increase or maintain its level of
sales in periods of economic stagnation or downturn.
Sales of the Company's products for use in the automotive industry
accounted for approximately 20% and 23% of the Company's net sales in 1998 and
1997, respectively. Such sales include sales directly to automotive
manufacturers and to manufacturers of automotive components and parts. The
automotive industry experiences significant fluctuations in demand based on
numerous factors such as general economic conditions and consumer confidence.
The automotive industry is also subject, from time to time, to labor problems.
Any prolonged disruption in business arising from work stoppages by automotive
manufacturers or by steel manufacturers could have a material adverse effect on
the Company's results of operations.
The volatility in steel pricing and sales to automotive customers
described above adversely impacted the Company in 1998. During 1998, global
financial crises led to unrestrained, massive imports of steel into the United
States. These imports resulted in excess domestic steel supply even though the
demand for steel remained strong. When combined with a 50-day General Motors
(GM) strike that commenced in June 1998, excess domestic supply peaked,
resulting in significant steel price declines in the second half of 1998. The
Company's Lafayette operation in Detroit was significantly impacted by the GM
strike in terms of sales volume and profitability, while all of the Company's
operations were impacted by lower steel pricing.
11
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," "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, those identified
above; potential equipment malfunction; equipment installation and facility
construction delays especially as related to the Iowa and Chambersburg projects;
the adequacy of computer system investments and the impact of Year 2000 issues;
the successes of joint ventures; and the availability of acquisition
opportunities. 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, 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.
12
ITEM 2. PROPERTIES
The Company believes that its properties are strategically situated
relative to its customers and each other, allowing the Company to support
customers from multiple locations. This permits the Company to provide inventory
and processing services which are available at one operation but not another.
Steel is shipped from the most advantageous facility, regardless of where the
order was taken. The facilities are located in the hubs of major steel
consumption markets, and within a 250-mile radius of most of the Company's
customers, a distance approximating the one-day driving and delivery limit for
truck shipments. The following table sets forth certain information concerning
the Company's properties:
SQUARE OWNED OR
OPERATION LOCATION FEET FUNCTION LEASED
--------- -------- ---- -------- ------
Cleveland Bedford Heights, 127,000 Corporate headquarters and coil Owned
Ohio(1) processing and distribution center
Bedford Heights, 121,500 Coil processing, distribution center Owned
Ohio(1) and offices
Bedford Heights, 59,500 Plate processing and distribution Leased(2)
Ohio(1) center
Cleveland, Ohio 118,500 Roll form processing, distribution Owned
center and offices
Minneapolis Plymouth, Minnesota 196,800 Coil processing, distribution center Owned
and offices
Plymouth, Minnesota 112,200 Plate processing, distribution center Owned
and offices
Lafayette Detroit, Michigan 256,000 Coil processing, distribution center Owned
and offices
South Winder, Georgia 240,000 Coil processing, distribution center Owned
and offices
Iowa Bettendorf, Iowa 190,000 Coil and plate processing, Owned
distribution center and offices
Chicago Schaumburg, Illinois 80,500 Plate processing, distribution center
and offices
Elk Grove Village, 48,000 Coil processing and distribution center Owned
Illinois
Philadelphia Lester, Pennsylvania 92,500 Plate processing, distribution center Leased
and offices
JNT McConnellsburg, 12,000 Machining and distribution center Leased
Pennsylvania (3)
- --------------------
(1) The Bedford Heights facilities are all adjacent properties.
(2) This facility is leased from a related party pursuant to the terms of
a triple net lease for $195,300 per year. The lease expires in June
2000, subject to two ten-year renewal options.
(3) An 87,000 square foot machining and plate processing facility is under
construction in Chambersburg, Pennsylvania. When complete, the
equipment in McConnellsburg will be relocated here.
The Company's international sales office is located in Pittsburgh,
Pennsylvania. All of the properties listed in the table as owned are subject to
mortgages securing industrial revenue bonds, taxable rate notes, term loans and
the Company's credit agreement. Management believes that the Company will be
able to accommodate its capacity needs for the immediate future at its existing
facilities.
13
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal actions that it believes are
ordinary in nature and incidental to the operation of its business. In the
opinion of management, the outcome of the proceedings to which the Company is
currently a party will not have a material adverse effect upon its operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included in this Report pursuant to Instruction 3
of Item 401(b) of Regulation S-K. The following is a list of the executive
officers of the Company and a brief description of their business experience.
Each executive officer will hold office until his successor is chosen and
qualified.
Michael D. Siegal, age 46, has served as President and Chief Executive
Officer of the Company since 1984, and as Chairman of the Board of Directors
since January 1, 1994. He has been employed by the Company in a variety of
capacities since 1974. Mr. Siegal is a member of the Executive Committee for the
Steel Service Center Institute (SSCI). He is also a member of the American Iron
and Steel Institute. He served as National Chairman of Israel Bonds during the
period 1991-1993 and presently serves as Vice Chairman of the Executive
Committee of the Development Corporation for Israel and as an officer for the
Cleveland Jewish Community Federation. He is a member of the Board of Directors
of American National Bank (Cleveland, Ohio) and the Cleveland Lumberjacks, a
professional hockey team.
R. Louis Schneeberger, age 44, has served as Chief Financial Officer
and director of the Company since 1987. Prior to that time, Mr. Schneeberger was
employed by Arthur Andersen LLP for ten years, concentrating on mergers,
acquisitions, and auditing. He is also Chairman of the Board of Directors of
Royal Appliance Mfg. Co. (a New York Stock Exchange listed company that is an
assembler and distributor of vacuum cleaners and other floor care products), a
certified public accountant, a trustee and Treasurer of the Achievement Centers
for Children, and a member of the Business Advisory Council of Kent State
University.
David A. Wolfort, age 46, has served as Chief Operating Officer since
1995 and a director of the Company since 1987. He previously served as Vice
President - Commercial from 1987 to 1995, after having joined the Company in
1984 as General Manager. Mr. Wolfort's duties include the management of all
sales, purchasing and operational aspects of each region. Prior to joining the
Company, Mr. Wolfort spent eight years with Sharon Steel, a primary steel
producer, in a variety of sales assignments, including General Manager-Field
Sales, Sharon Steel Products and was a steel fellow with the American Iron and
Steel Institute. Mr. Wolfort is the past president of SSCI's Northern Ohio
Chapter and is presently Chairman of its Governmental Affairs Committee and a
National Chapter Director. He is also a trustee of Health Hill Hospital for
Children and a member of the Northern Ohio Regional Board of the Anti-Defamation
League.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on NASDAQ under the symbol "ZEUS."
The following table sets forth, for each quarter in the two year period ended
December 31, 1998, the high and low closing prices of the Company's Common Stock
on NASDAQ:
HIGH LOW
---------------- -----------------
1998
First quarter.................... $17.13 $13.69
Second quarter................... 16.25 12.50
Third quarter.................... 12.88 6.13
Fourth quarter................... 7.94 5.00
1997
First quarter.................... $26.13 $16.50
Second quarter................... 17.50 13.63
Third quarter.................... 21.38 15.38
Fourth quarter................... 16.75 12.38
HOLDERS OF RECORD
On February 26, 1999, the Company believed there were approximately
7,300 beneficial holders of the Company's Common Stock.
DIVIDENDS
The Company presently retains all of its earnings, and anticipates that
all of its future earnings will be retained to finance the expansion of its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. Any determination to pay cash dividends in the future
will be at the discretion of the Board of Directors after taking into account
various factors, including the Company's financial condition, results of
operations, current and anticipated cash needs, plans for expansion and
restrictions under the Company's credit agreements.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected data of the Company for each of
the five years in the period ended December 31, 1998. The data presented should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31,
(in thousands, except per share data)
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
INCOME STATEMENT DATA:
Tons sold
Direct 1,070 1,111 1,022 931 685
Toll 231 219 150 155 10
Total 1,301 1,330 1,172 1,086 695
Net sales $576,189 $608,076 $560,062 $554,469 $381,906
Cost of sales 455,544 483,071 436,553 446,513 304,777
Gross margin 120,645 125,005 123,509 107,956 77,129
Operating expenses (a) 125,184 102,898 93,127 85,855 58,836
Operating income (loss) (4,539) 22,107 30,382 22,101 18,293
Income (start-up costs) from joint (322) 11 -- -- --
ventures
Interest expense 3,856 4,172 4,301 10,746 3,761
Receivable securitization expense 3,773 3,791 3,393 107 --
Income (loss) before taxes (12,490) 14,155 22,688 11,248 14,532
Income taxes (4,059) 5,308 8,569 4,504 5,834
Reinstatement of deferred income -- -- -- -- 7,800
taxes (b)
Net income (loss) (8,431) 8,847 14,119 6,744 898
Net income (loss) per share ($0.79) $0.83 $1.50 $0.78 $0.12
Weighted average shares outstanding 10,692 10,692 9,427 8,600 7,778
Pro forma net income (c) $9,049
Pro forma net income per share (d) $1.05
Pro forma weighted average
shares outstanding (d) 8,600
BALANCE SHEET DATA:
Current assets $132,080 $142,175 $152,255 $124,371 $155,178
Current liabilities 43,225 37,126 36,267 31,226 37,767
Working capital 88,855 105,049 115,988 93,145 117,411
Total assets 256,108 265,534 241,130 202,072 200,987
Total debt 76,520 79,924 64,582 98,540 93,437
Shareholders' equity 137,743 146,174 137,327 73,984 67,240
(a) 1998 operating expenses include a non-recurring asset write-down
charge of $19,056.
(b) Effective January 1, 1994, the Company changed its income tax status
from an S corporation to a C corporation. This change required a
reinstatement of deferred income taxes as a one-time charge of $7,800
to 1994 earnings.
(c) Unaudited pro forma net income reflects: (i) the reduction in interest
expense resulting from the application of net proceeds from the sale of
4 million shares of Common Stock on March 17, 1994, (ii) the reduction
of certain compensation expense, net of additional costs to be incurred
as a public company, and (iii) assumes the Company is subject to income
tax as a C corporation.
(d) Unaudited pro forma net income per share has been calculated by
dividing pro forma net income by 8,600 shares, the number of shares
outstanding after the March 1994 initial public offering date.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, and work stoppages by automotive manufacturers.
The Company's 1998 and 1997 results include the results of the
Company's Southeastern operation (Southeastern), the net assets of which were
acquired effective June 1, 1997. Southeastern has historically operated as a
metals toll processor, and is located near Atlanta, Georgia. Additionally,
effective June 26, 1998, the Company's consolidated balance sheet reflects the
acquired net assets of JNT Precision Machining, Inc. (JNT), a machining center
located in McConnellsburg, Pennsylvania. JNT's results of operations are
included in the Company's results commencing in the third quarter of 1998.
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 Lafayette Steel and Southeastern operations. 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.
The Company's financial statements include the results of its three
joint ventures: Olympic Continental Resources (OCR), a company formed in January
1997 to buy, sell and trade ferrous and non-ferrous metals and alternate iron
products to steel mills and scrap processors; Olympic Laser Processing (OLP), a
company formed in April 1997 to process laser welded sheet steel blanks for the
automotive industry; and Trumark Steel & Processing (TSP), a company formed in
December 1997, to support the flat-rolled steel requirements of the automotive
industry as a Minority Business Enterprise (MBE). The Company's 45% interest in
OCR, 50% interest in OLP and 49% interest in TSP are accounted for under the
equity method. The Company guarantees portions of outstanding debt under all
three of the joint venture companies' bank credit facilities. As of December 31,
1998, Olympic guaranteed 50% of OCR's $15 million of outstanding debt on a joint
and several basis, and 50% of OLP's $15.8 million and 49% of TSP's $2.7 million
of outstanding debt on a several basis. OCR generates a significant portion of
its revenue from one of its joint venture partners, Atlas Iron Processors, Inc.
(Atlas) or affiliates of Atlas. As a result, OCR maintains significant
receivable balances with Atlas. OCR's receivable from Atlas totaled
approximately $6.2 million at December 31, 1998, which represented 31% of OCR's
total accounts receivable balances at that date. The Company believes that OCR's
receivable from Atlas is uncollectible, and therefore wrote-down its entire $4.7
million investment in OCR at December 31, 1998. The OLP and TSP ventures are
still in startup and do not have significant receivables from joint venture
partners.
OLP has constructed a new facility and has initially equipped it with
two laser-welding lines. Prototyping has begun on both welding lines and
production has begun on one line. The Company expects OLP start-up costs to
continue through 1999, as both welding lines are not expected to be operating at
full capacity until the beginning of 2000. TSP obtained certification as an MBE
from the Michigan Minority Business Development Council in December 1998, and
anticipates ramping up to full production in the second quarter of 1999.
Start-up costs for both OLP and TSP have been expensed as incurred.
Financing costs include interest expense on debt and costs associated
with the Company's accounts receivable securitization program (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.
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.
17
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.
Four separate collective bargaining units represent approximately 300
of the Company's hourly plant personnel at its Minneapolis and Lafayette Steel
facilities. In September 1998, the two collective bargaining agreements at
Lafayette were renewed to July 2001 and July 2002, respectively, and the
agreement covering personnel at the Minneapolis coil facility was renewed to
September 30, 2002. The Minneapolis plate processing facility agreement expires
on March 31, 1999. The Company has never experienced a work stoppage and
believes that its relationship with its employees is good.
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
The following table sets forth certain income statement data expressed
as a percentage of net sales:
1998 1997 1996
------------ ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.1 79.4 77.9
------------ ----------- -----------
Gross margin 20.9 20.6 22.1
Operating expenses before asset writedown 18.4 16.9 16.6
Asset write-down 3.3 -- --
------------ ----------- -----------
Operating income (loss) (0.8) 3.6 5.4
Interest and receivable securitization expense 1.3 1.3 1.4
------------ ----------- -----------
Income (loss) before taxes (2.2) 2.3 4.1
Income taxes (0.7) 0.9 1.5
------------ ----------- -----------
Net income (loss) (1.5)% 1.5% 2.5%
============ =========== ===========
1998 COMPARED TO 1997
Tons sold decreased 2.1% to 1,301 thousand in 1998 from 1,330 thousand
in 1997. Tons sold in 1998 include 1,070 thousand from direct sales and 231
thousand from toll processing, compared with 1,111 thousand from direct sales
and 219 thousand from toll processing in 1997. The increase in tolling tons is
attributable to Southeastern, offset by a reduction at Lafayette attributable to
the impact of the General Motors (GM) strike in 1998 (the Strike). The decrease
in direct tons is primarily attributable to Lafayette, again impacted by the
Strike, and a decrease in international sales to Mexico.
Net sales decreased by $31.9 million, or 5.2%, to $576.2 million from
$608.1 million in 1997. Average selling prices declined 3.2% due to 1998 market
conditions which resulted in decreased prices for steel, and an increased
proportion of tolling sales in 1998. International sales declined $13.9 million
in 1998, as a result of declining participation in the Mexican market.
The Company's sales to GM decreased $7.9 million, or 42% in 1998, due
to the impact of the Strike, as well as a continued decline in the Company's
participation with GM. The Company's sales to suppliers of GM also declined in
the second half of 1998 due to the Strike. Approximately 20% of the Company's
1998 net sales were made to customers in the automotive industry, compared to
approximately 23% in 1997.
As a percentage of net sales, gross margin increased to 20.9% from
20.6% last year. The increase reflects the impact of enhanced margins from the
Company's non-automotive sales, lower international sales, and an increase in
the proportion of tolling sales in 1998.
Operating expenses totaled $125.2 million in 1998, and included a
one-time asset write-down charge of $19.1 million. The charge consisted of $14.4
million to write-off goodwill and write-down certain fixed assets at
18
Lafayette, and $4.7 million to write-down the Company's investment in OCR. The
Lafayette charge was taken in accordance with accounting regulations which
require long-lived assets such as goodwill and fixed assets to be written down
to fair market value when circumstances indicate that their carrying values are
impaired. The changing dynamics in the automotive marketplace over the past 18
months, including GM's introduction of new processing capabilities at its
regional distribution center, adversely impacted Lafayette's cash flows and
operating earnings. These dynamics not only resulted in a loss of sales volume
to GM but also left a portion of Lafayette's processing equipment non-productive
and thereby non-competitive in the automotive marketplace. The Company disposed
of four pieces of processing equipment in the third quarter of 1998, and
developed a plan to dispose of the remaining non-competitive equipment in 1999.
Accordingly, the Company recorded a charge of $5.0 million to write-down certain
processing equipment and other fixed assets, and $9.4 million to write-off all
goodwill at Lafayette. Separately, the OCR investment write-down was required
because, in Olympic's judgement, OCR's entire $6.2 million receivable from its
largest customer, Atlas, is considered uncollectible. The Company is presently
reviewing its strategic alternatives for its future scrap trading plans.
Excluding the asset write-down, operating expenses increased to $106.1
million from $102.9 million. On a per ton basis, operating expenses increased
5.4% to $81.55 from $77.39 in 1997. As a percentage of net sales, operating
expenses before the asset write-down increased to 18.4% in 1998 from 16.9% in
1997. The increases are primarily due to lower sales volume; lower average
selling prices; start-up costs; increased spending on information technology,
including Y2K costs; and $432 thousand of non-recurring costs associated with
the disposition of fixed assets. Start-up costs included in operating expenses
in 1998 totaled $1.9 million compared to $400 thousand in 1997. These costs
primarily relate to the $26 million temper mill and plate processing facility in
Bettendorf, Iowa (the Iowa Facility) and the new tube mill in Cleveland.
Start-up costs for the Iowa Facility are expected to continue in the first
quarter of 1999, as the facility becomes fully operational.
Income from the OCR joint venture in 1998 totaled $495 versus $449
thousand in 1997. Olympic's share of OLP and TSP start-up costs totaled $553
thousand and $264 thousand, respectively in 1998, and $429 thousand and $9
thousand, respectively in 1997.
Financing Costs decreased 4.2% to $7.6 million in 1998 from $8.0
million in 1997. Average borrowings outstanding in 1998 decreased approximately
$5.2 million, primarily as a result of lower inventory levels in 1998, offset by
increased borrowings on the Iowa Facility term loan. Interest costs associated
with the Iowa Facility term loan were capitalized through December 1998. The
Company's overall effective borrowing rate increased to 6.9% in 1998 from 6.7%
in 1997. The Premium for 1998 averaged 1.15%, compared to .9% in 1997. The
Company's Premium increased 25 basis points to 1.5% effective March 1, 1999.
Costs associated with the accounts receivable securitization program decreased
slightly in 1998 as a result of lower commercial paper rates, offset by a $.4
million increase in the amount of average receivables sold in 1998 compared to
1997.
Pretax loss for 1998 totaled $12.5 million compared to $14.2 million of
pretax income in 1997. Excluding the impact of the asset write-down, 1998 pretax
income totaled $6.6 million. In 1998, the income tax benefit approximated 32.5%
of pretax loss, compared to income tax expense recorded at 37.5% of pretax
income in 1997. The decrease in the tax rate between years was attributable to
the 1998 asset write-down charge. The Company expects its 1999 income tax rate
to approximate 38.5% of pretax income.
Net loss totaled $8.4 million or $.79 per share in 1998, compared to
net income of $8.8 million or $.83 per share in 1997. Excluding the impact of
the asset writedown, 1998 net income totaled $4.1 million, or $.38 per share.
1997 COMPARED TO 1996
Tons sold increased 13.5% to 1,330 thousand in 1997 from 1,172 thousand
in 1996. Tons sold in 1997 included 1,111 thousand from direct sales and 219
thousand from toll processing, compared with 1,022 thousand from direct sales
and 150 thousand from toll processing in 1996. All of the Company's domestic
operations achieved increases in tons sold in 1997. Substantially all of the
increase in tolling tons was attributable to Southeastern.
Net sales increased by $48 million, or 8.6%, to $608.1 million in 1997
from $560.1 million in 1996. Average selling prices declined 4.3%, primarily due
to an increased proportion of tolling sales in 1997, and a
19
decline in direct average selling prices related to stainless steel products.
International sales were less than 6% of net sales in both 1997 and 1996.
As a percentage of net sales, gross margin decreased to 20.6% from
22.1% in 1996. The decrease was primarily the result of 1997 market conditions,
which did not allow increased prices for steel to be fully recovered in the
selling cycle.
On a per ton basis, operating expenses decreased 2.6% to $77.39 from
$79.44 in 1996. As a percentage of net sales, operating expenses increased to
16.9% in 1997 from 16.6% in 1996. The increase as a percentage of net sales was
due to the impact of lower average selling prices and increased warehouse and
depreciation expense in 1997. The increase in warehouse and depreciation expense
primarily related to the Southeastern acquisition; the Cleveland temper mill
facility; completion of the Lafayette plant expansion; and continued investment
in management information systems.
Income from the OCR joint venture in 1997 totaled $449 thousand.
Olympic's share of OLP and TSP start-up costs in 1997 totaled $429 thousand and
$9 thousand, respectively.
Financing Costs increased 3.5% to $8.0 million in 1997 from $7.7
million in 1996. Average borrowings outstanding in 1997 increased primarily as a
result of higher inventory levels, the acquisition of Southeastern, and capital
expenditures. Overall effective borrowing rates decreased to 6.7% in 1997 from
7.1% in 1996. Lower Premiums as a result of the 1996 stock offering favorably
impacted effective borrowing rates for 1997. Costs associated with the accounts
receivable securitization program increased slightly in 1997 as a result of
higher commercial paper rates.
Income before taxes totaled $14.2 million in 1997 compared to $22.7
million in 1996. Income taxes computed on 1997 earnings represented 37.5% of
pretax income or $5.3 million versus 37.8% or $8.6 million in 1996.
Net income totaled $8.8 million or $.83 per share in 1997, compared to
$14.1 million or $1.50 per share in 1996. As a result of the 1996 stock
offering, weighted average shares outstanding increased from 9.4 million in 1996
to 10.7 million in 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 requirements. The Company uses cash
generated from operations, long-term debt obligations, equity offerings, and
leasing transactions to fund these requirements. Historically, the Company has
used revolving credit borrowings under its bank credit facility and proceeds
from its receivable securitization program to finance its working capital
requirements.
Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation, amortization and start-up costs / income from
joint ventures, as well as changes in working capital. During 1998, $31 million
of net cash was provided from operating activities, consisting of $15.8 million
of cash generated from net income and non-cash charges and $15.2 million of cash
from working capital components.
Working capital at December 31, 1998 decreased $16.2 million from the
end of 1997. The decrease is primarily attributable to a $10.9 million decrease
in inventory and a $3.3 million decrease in accounts receivable.
As of December 31, 1998, $57 million of eligible receivables were sold
under the Company's accounts receivable securitization program, compared to $64
million at December 31, 1997. 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.
Net cash used for investing activities in 1998 totaled $27.5 million,
primarily consisting of $16.8 million spent for the Iowa Facility, which became
operational late in the fourth quarter of 1998. The Company also made final
payments on its new tube mill in Cleveland and new cut-to-length line in
Detroit, which were both installed
20
during the first quarter of 1998. The cut-to-length line became fully
operational in the second quarter of 1998, while the tube mill reached rated
capacity in the first quarter of 1999. During the fourth quarter of 1998, the
Company also exercised a $1.8 million early buyout option of equipment
previously leased at its Minneapolis coil processing facility, and completed a
$2.7 million, 35,000 square foot facility expansion and cut-to-length line
upgrade project at its Southeastern operation.
JNT is operating from its current facility in McConnellsburg until it
is relocated to a new 87,000 square foot facility being constructed in nearby
Chambersburg, Pennsylvania. Olympic plans to spend approximately $7 million, (of
which $1 million was spent in 1998) to construct the facility, relocate existing
machining equipment, and purchase new plate processing equipment. The new
facility is projected to be operational by the end of the third quarter of 1999.
The Company expects to finance the Chambersburg project with the proceeds from
industrial revenue bonds.
The Company's 1999 capital spending plan approximates $13 million,
consisting primarily of $6 million to complete the Chambersburg project and $3
million for additional laser plate processing equipment.
Cash flows used from financing activities primarily consists of net
borrowings under the Company's revolving credit agreement and term loan draws
for the Iowa Facility, offset by scheduled payments under other existing
long-term debt agreements.
The Company's bank credit agreement was amended in March 1999 (the
Credit Facility). The amendment increased the Iowa term loan from $17 million to
$21 million to accommodate additional 1998 spending for plate processing
equipment at the facility, extended the agreement expiration date to June 30,
2002, waived an interest coverage covenant violation at December 31, 1998 and
amended future interest coverage requirements, and added a 25 basis point
pricing tier to the Premium schedule. The Credit Facility also includes letter
of credit commitments, which totaled approximately $78.9 million at December 31,
1998, and contains restrictive covenants which require minimum net worth levels,
maintenance of certain financial ratios and limitations on capital expenditures.
The Company is in compliance with all covenants after obtaining the interest
coverage waiver.
As of December 31, 1998, approximately $43.6 million was available
under the Company's revolving credit and accounts receivable securitization
facilities, and $17 million was borrowed under the $21 million Iowa term loan.
The Company believes that funds available under the 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 and equipment, acquisitions and
significant improvements to processing equipment to respond to customers'
demands.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
personnel, processing equipment, purchased steel, and borrowings under the
various credit agreements. The Company does not believe that inflation has had a
material effect on its operating income over the periods presented. However, it
has and could have a material effect on interest expense based on inflation's
impact on amounts borrowed and prime and LIBOR borrowing rates. Conversely, when
raw material prices decline, as in 1998, customer demands for lower prices have
and could result in lower selling prices and, as the Company uses existing steel
inventory, lower margins. Changing steel prices therefore could adversely affect
the Company's net sales, gross margins and net income.
YEAR 2000 COMPLIANCE
The year 2000 (Y2K) problem refers to computer applications using only
the last two digits to refer to a year rather than all four digits. As a result,
these applications could fail or create erroneous results if they
21
recognize "00" as the year 1900 rather than the year 2000, or if they will not
recognize "00" as a legitimate year value.
Olympic recognizes the significance of these issues and also
understands that it is affected by the Y2K problem. The Company has had a
project in place since the second half of 1996 to deal with these issues.
Olympic has budgeted approximately $1 million to remediate its affected systems.
This funding has come from normal MIS budgets during the years 1996 through
1999. The Company is currently on budget and on schedule for the project. The
project has been staffed by in-house personnel with the exception of the plant
equipment assessment, which was carried out by outside experts. The project
consists of awareness, inventory, planning, assessment, remediation, testing,
and implementation phases.
In addressing the Y2K issues, Olympic has taken initiatives in three
general areas: (i) information technology (IT) and communication systems, (ii)
non-IT systems and (iii) related third party issues. The following is a summary
of these programs and their current status.
IT AND COMMUNICATION SYSTEMS
- ----------------------------
Since late 1996, Olympic, in support of its long-range strategic plans,
has significantly upgraded and continues to upgrade its information technology
and communication systems. This upgrade includes migration to new mid-range host
systems and to client/server based systems; upgraded personal computers (PCs);
upgraded PC software (standardized on Windows 95 and Microsoft Office Suite);
Lotus Notes (email, workgroup and intranet software); local area networks
(LANs), wide area networks (WANs); and network integration of Internet and
remote access systems. A by-product of these endeavors is that a large portion
of the Company's IT and non-voice communication systems, and many of its voice
communication systems are now Y2K compliant.
Olympic's exceptions to Y2K compliance at this time are:
(i) Integrated business application software. Olympic maintains three
mid-range host systems running essentially custom application software
specific to the service center and outside processor industry. The
three host operating systems have been certified by their vendors to be
Y2K compliant. The three systems run different application software as
a result of acquisitions and unique industry requirements at their
locations. All source code has been remediated. The Company is now in
the testing phase to assure proper handling of date logic. This testing
is expected to be complete by April 30, 1999.
(ii) New Payroll/H-R system. This new system was acquired as a routine
business upgrade to meet expanded business requirements. It is
currently in the implementation phase. The new system is represented by
the vendor to be Y2K compliant. The system is expected to be "live" by
the end of the third quarter 1999. Olympic's existing payroll system is
expected to be Y2K compliant in 1999 as a contingency.
(iii) Network hardware and software. The Company's network operating
systems require patches from the vendor to be Y2K compliant. These are
being installed currently. Certain network hardware components require
replacement. These are being currently installed. This work is expected
to be complete by March 31, 1999.
(iv) Voice mail system. The Company is awaiting an upgrade from its
vendor which is supposed to be available in April 1999.
(v) Other office equipment. Other intelligent office equipment
operating in a stand-alone mode such as fax machines, copiers, etc. may
not be Y2K compliant. These are not considered critical and will be
addressed in the second quarter of 1999.
In all cases, the Company has obtained representations from its
hardware and software suppliers that its installed versions of their products
are Y2K compliant. These representations have been in the form of direct written
assurances or material posted on the vendor's web sites. The Company is relying
on these assurances in order to satisfy itself of compliance and to prepare
assurances for its trading partners and other third parties.
22
NON-IT SYSTEMS
- --------------
The Company's internal non-IT systems consist mainly of building air
management systems, security and fire control systems, safety systems, equipment
operating and control systems, electrical and natural gas systems, and equipment
such as lift trucks, cranes, etc. These have been assessed at all locations by
third party consultants specializing in Y2K compliance and remediation planning.
Olympic has received assurances from most of its equipment and plant system
vendors that their products are compliant. The Company is still awaiting
responses from a few equipment vendors. Results to date suggest that there is
minimal exposure with any non-IT systems. Remediation, if necessary, is expected
to be complete by March 31, 1999, pending vendor responses to inquiries.
THIRD PARTIES
- -------------
Olympic has third party relationships with hundreds of large OEM
customers, steel suppliers and suppliers of financial and outsourced investor
and employee information and management services. Many of these third parties
are publicly traded corporations subject to disclosure requirements. Olympic is
presently engaged in ongoing discussions and evaluations of these third parties'
Y2K readiness, while simultaneously advising them of Olympic's readiness.
Olympic intends to monitor Y2K disclosures in SEC filings of these third parties
in 1999.
Olympic has sent questionnaires to over 2,000 critical and non-critical
vendors inquiring of their Y2K status and plans. Most of these vendors are not
critical to the Company's on-going operation. The response rate was only about
25%. Most of those who have responded understood the issue and are taking
appropriate action. Few are compliant yet. Olympic intends to contact critical
vendors individually during the second quarter of 1999 and continue to actively
track their Y2K status throughout the year.
The Company has handled many inquiries from its customers about its Y2K
status and plans, and has responded to all of those inquiries. Major customers
report having had Y2K compliance programs running for at least one to two years
and indicate that their systems that interact with Olympic are or will be
compliant for Y2K. Based on discussions with these customers, assessment of the
customers' capability, and long time customer operating practices, Olympic
believes that these key customers will be Y2K compliant in all material matters
affecting Olympic. Olympic will continue to monitor its customers' Y2K
compliance.
Olympic is also in ongoing discussion with key suppliers of outsourced
services including, but not limited to, stock transfer, debt servicing, banking,
collection and disbursements, and benefit programs. At this time, Olympic has
concluded that all material suppliers of these services are or will be Y2K
compliant by the middle of calendar 1999. Olympic will continue to monitor their
Y2K compliance.
With the exception of steel products purchased from the large
aforementioned suppliers, other outside steel processing services, packaging
supplies such as lumber and banding, and miscellaneous supplies are purchased
from numerous small suppliers who Olympic believes are able to manually execute
their business and are readily replaceable. Olympic has concluded there is no
material risk of being unable to procure these needed raw materials or
processing services.
The specific Y2K IT and communication system remediation tasks
previously outlined are being accomplished by in-house MIS and user personnel
whose costs are recorded as normal operating expense.
The IT system software upgrades are being executed under ongoing
maintenance and support agreements with software vendors, and the upgrades to
certain hardware are being executed under similar arrangements with hardware
vendors. Network hardware component replacement costs, along with copiers and
fax machine replacement costs, are not expected to be material. Olympic is not
yet in a position to estimate the cost of non-IT system and third party
compliance issues, but has no reason to believe, based upon its evaluations done
to date, that such costs, in the aggregate, would be material. All Y2K
compliance costs are included in normal IT budgets. Some previously planned IT
projects have been deferred to allow proper handling of the Y2K issues.
23
Y2K RISKS
- ---------
There are several classes of risk and sources of risk that Olympic
faces in connection with the Y2K problem.
(i) Economic infrastructure risks. The Company is dependent on public
utilities for electrical power, natural gas, and telephone network services, and
would be seriously impacted by outages of these services for an extended period.
The Company has sufficient backup electrical generation capacity, powered by a
natural gas generator, to support its IT and communications systems at its
corporate location. However, this would not serve its remote locations and would
not provide for operation of its plant facilities. Olympic is dependent on
common carriers for transportation of incoming steel as well as outbound
customer shipments, and would be seriously impacted if these services were
disrupted for an extended period.
(ii) Accounting system risks. There is a possibility that the Company's
accounting systems would be materially disrupted. The Company considers this
risk as small and manual procedures are in place as a backup. Also, there is a
small risk that payroll services would be disrupted. Again, this risk is
considered small since the Company processes its own payroll and expects to have
a compliant system. However, Olympic does transmit weekly ACH direct deposit
information to a bank via a dial-up file transfer. The bank assures the Company
that this process will not be affected on their end.
(iii) Overseas risks. Olympic purchases some steel overseas to
supplement domestic sources. This is not a major component of sourcing, but it
may cause some difficulty in some locations or for some customers.
(iv) Key personnel risks. There is some risk that key people might not
be available for remediation projects, or in the critical period immediately
after the beginning of the year 2000. Olympic believes that this risk is small
and a SWAT team is planned to be on site or available at all locations to deal
with unexpected problems.
(v) Cost escalation risks. There is a small risk that testing will
disclose new problems which will require substantial time or expense to
remediate. Since these are unknown at this time, the Company cannot estimate
what the impact will be.
(vi) Project risks. The principal risks to Olympic relating to the
completion of its compliance conversion efforts related to its IT and
communications systems are:
(a) Inability to retain key staff. At this point, however,
this is believed to be only a small risk.
(b) Failure to successfully complete remediation and testing
of application code in the three data centers. If this should
occur, Olympic has standard manual procedures in place for
carrying out normal order processing, production, and shipping
in the event of computer outage. These procedures could be
used for a duration of about three days without great impact
on the business.
Olympic believes that adequate replacements for non-compliant network
components, PC's, copiers and fax machines are commercially available at
reasonable prices and in good supply. Olympic believes that adequate time and
resources are available to remediate these areas as needed.
The principal risks to Olympic relating to non-IT systems are failures
in control systems for significant machinery or facility systems. These risks
are presently being evaluated based on the assessment of the individual plant
systems. Until this evaluation is completed, Olympic has no basis to form an
estimate of risks. Based on the work to date, the Company believes that the risk
of failure of these systems is small.
The principal risks to Olympic in its relationship with third parties
are (i) failure of third party systems used to conduct such third party's
business including customers, steel suppliers and suppliers of financial and
outsourced investor and employee information and management services; and (ii)
failure to implement compliant EDI systems with key customers. Olympic's systems
are expected to be compliant, and its EDI VAN (Sterling Commerce) is also
expected to be compliant.
Based on Y2K compliance work done to date, Olympic believes its key
steel suppliers and customers are currently Y2K compliant or will be Y2K
compliant in all material respects and that service suppliers will be Y2K
compliant or can be replaced within an acceptable time frame.
24
CONTINGENCY PLANS
- -----------------
Olympic intends to develop detailed contingency plans during the latter
part of the second quarter of 1999, after the results of the assessment,
remediation in progress, and testing have been ascertained.
Olympic plans to create a SWAT team of key personnel at all locations
and those people will be on-site at each location during the first critical
hours of the new year. The team will rehearse a plan for assessing critical
systems and coordinating responses. Standard procedures and checklists will be
prepared to assist in this assessment. Olympic has designated Friday, December
31, 1999 and Monday, January 3, 2000 as company holidays. This will provide
additional time to assess the specific situation at each Olympic location, as
well as to assess the general situation in the country as a whole.
All Olympic locations and departments have existing current manual
procedures for operation which are used for normal brief outages of IT and
communications systems. It is expected that these procedures would be used to
cover brief periods while program code or other components are repaired. Other
actions being considered include adding selective system redundancies and backup
vendors.
Olympic's description of its Y2K compliance issue is based upon
information obtained by Olympic through evaluations of Olympic's IT and
communication systems, and customer and supplier Y2K compliance assurances. No
assurance can be given that the Company will be able to address the Y2K issues
for all of its software and applications in a timely manner or that it will not
encounter unexpected difficulties or significant expenses relating to adequately
addressing the Y2K issue. If Olympic or the major customers or suppliers with
whom Olympic does business fail to address adequately the Y2K issues, or Olympic
fails to successfully integrate or convert its computer systems generally,
Olympic's business or results of operations could be materially adversely
affected.
The Company is unable to provide assurances for eventualities not known
in advance, or for multiple or simultaneous occurrences beyond our capability to
handle with the resources available. The Y2K disclosures presented in this
section are considered to be a "Year 2000 Readiness Disclosure" under the
provisions of the "Year 2000 Information and Readiness Disclosure Act" of 1998.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
the Board of Directors of
Olympic Steel, Inc.:
We have audited the accompanying consolidated balance sheets of Olympic
Steel, Inc. (an Ohio corporation) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Olympic Steel, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
February 1, 1999.
26
ITEM 8. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
1998 1997 1996
----------------- ----------------- -----------------
Net sales $ 576,189 $ 608,076 $ 560,062
Cost of sales 455,544 483,071 436,553
----------------- ----------------- -----------------
Gross margin 120,645 125,005 123,509
Operating expenses
Warehouse and processing 35,456 33,579 29,881
Administrative and general 27,166 27,458 25,089
Distribution 18,024 18,046 16,585
Selling 14,209 13,745 13,475
Occupancy 4,300 4,067 3,769
Depreciation and amortization 6,973 6,003 4,328
Asset write-down 19,056 -- --
----------------- ----------------- -----------------
Total operating expenses 125,184 102,898 93,127
----------------- ----------------- -----------------
Operating income (loss) (4,539) 22,107 30,382
Income (start-up costs) from joint ventures (322) 11 --
----------------- ----------------- -----------------
Income (loss) before interest and taxes (4,861) 22,118 30,382
Interest expense 3,856 4,172 4,301
Receivable securitization expense 3,773 3,791 3,393
----------------- ----------------- -----------------
Income (loss) before taxes (12,490) 14,155 22,688
Income taxes (4,059) 5,308 8,569
----------------- ----------------- -----------------
Net income (loss) $ (8,431) $ 8,847 $ 14,119
================= ================= =================
Net income (loss) per share $ (0.79) $ 0.83 $ 1.50
================= ================= =================
Weighted average shares outstanding 10,692 10,692 9,427
The accompanying notes are an integral part of these statements.
27
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(in thousands)
1998 1997
----------------- ----------------
ASSETS
Cash $ 1,825 $ 1,748
Accounts receivable 3,096 6,417
Inventories 121,407 132,230
Prepaid expenses and other 5,752 1,780
----------------- ----------------
Total current assets 132,080 142,175
----------------- ----------------
Property and equipment 144,762 124,292
Accumulated depreciation (25,450) (20,301)
----------------- ----------------
Net property and equipment 119,312 103,991
----------------- ----------------
Goodwill 3,726 13,278
Investments in joint ventures 990 6,090
----------------- ----------------
Total assets $ 256,108 $ 265,534
================= ================
LIABILITIES
Current portion of long-term debt $ 4,888 $ 3,722
Accounts payable 28,911 24,266
Accrued payroll 2,977 3,618
Other accrued liabilities 6,449 5,520
----------------- ----------------
Total current liabilities 43,225 37,126
----------------- ----------------
Revolving credit agreement 37,450 48,809
Term loans 28,097 20,148
Industrial revenue bonds 6,085 7,245
----------------- ----------------
Total long-term debt 71,632 76,202
----------------- ----------------
Deferred income taxes 3,508 6,032
----------------- ----------------
Total liabilities 118,365 119,360
----------------- ----------------
SHAREHOLDERS' EQUITY
Preferred stock, without par value, 5,000 shares authorized,
no shares issued or outstanding -- --
Common stock, without par value, 20,000 shares authorized,
10,692 issued and outstanding 106,319 106,319
Retained earnings 31,424 39,855
----------------- ----------------
Total shareholders' equity 137,743 146,174
----------------- ----------------
Total liabilities and shareholders' equity $ 256,108 $ 265,534
================= ================
The accompanying notes are an integral part of these balance sheets.
28
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
1998 1997 1996
--------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (8,431) $ 8,847 $ 14,119
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities-
Depreciation and amortization 6,973 6,003 4,328
Asset write-down 19,056 -- --
Loss on sale of fixed assets 432 -- --
(Income) start-up costs from joint ventures 322 (11) --
Long-term deferred income taxes (2,524) 1,209 1,733
--------------- --------------- ---------------
15,828 16,048 20,180
Changes in working capital:
Accounts receivable 3,321 3,829 (2,388)
Inventories 10,904 6,008 (25,252)
Prepaid expenses and other (3,721) 910 (420)
Accounts payable 4,645 (1,165) 10,047
Accrued payroll and other accrued liabilities (12) (128) (2,107)
--------------- --------------- ---------------
15,137 9,454 (20,120)
--------------- --------------- ---------------
Net cash from operating activities 30,965 25,502 60
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisitions of JNT and Southeastern (795) (13,689) --
Equipment purchases and deposits (16,904) (12,611) (3,477)
Facility purchases and construction (8,368) (4,297) (10,411)
Other capital expenditures, net (1,319) (1,195) (1,614)
Investments in joint ventures (98) (6,222) --
--------------- --------------- ---------------
Net cash used for investing activities (27,484) (38,014) (15,502)
--------------- --------------- ---------------
Cash flows from financing activities:
Revolving credit agreement (11,359) 2,352 (4,881)
Term loans and IRB's 7,955 9,890 (28,767)
Net proceeds from sale of common stock and stock options exercised -- -- 49,224
--------------- --------------- ---------------
Net cash from (used for) financing activities (3,404) 12,242 15,576
--------------- --------------- ---------------
Cash:
Net change 77 (270) 134
Beginning balance 1,748 2,018 1,884
--------------- --------------- ---------------
Ending balance $ 1,825 $ 1,748 $ 2,018
=============== =============== ===============
The accompanying notes are an integral part of these statements.
29
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Common Retained
Stock Earnings
------------------ -----------------
Balance at December 31, 1995 $ 57,095 $ 16,889
Net proceeds from sale of 2,084 shares of common stock 49,100 --
Exercise of 8 stock options 124 --
Net income -- 14,119
------------------ -----------------
Balance at December 31, 1996 106,319 31,008
Net income -- 8,847
------------------ -----------------
Balance at December 31, 1997 106,319 39,855
Net loss -- (8,431)
------------------ -----------------
Balance at December 31, 1998 $ 106,319 $ 31,424
================== =================
The accompanying notes are an integral part of these statements.
30
OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively the Company
or Olympic), after elimination of intercompany accounts and transactions.
Investments in the Company's three joint ventures are accounted for under the
equity method.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION RISKS
The Company is a major customer of flat-rolled coil and plate steel for many of
its principal suppliers, but is not dependent on any one supplier. The Company
purchased approximately 16% and 22% of its total steel requirements from its
single largest supplier in 1998 and 1997, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market and include the costs of
purchased steel, internal and external processing, and freight. Cost is
determined using the specific identification method.
PROPERTY AND EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives ranging from 3 to 30 years.
GOODWILL AND AMORTIZATION
Goodwill includes the cost in excess of fair value of the net assets acquired
and is being amortized on a straight-line method ranging from 15 to 40 years.
The Company evaluates facts and circumstances to determine if the value of
goodwill or other long-lived assets may be impaired. In 1998, the Company
determined that goodwill and certain fixed assets at its Lafayette operation
were impaired and recorded an asset write-down to market value. Goodwill
amortization expense totaled $358 in 1998, $314 in 1997, and $260 in 1996.
Accumulated amortization of goodwill totaled $152 at December 31, 1998 after the
goodwill write-down, and $834 at December 31, 1997.
REVENUE RECOGNITION
Revenue is recognized when steel is shipped to the customer. Sales returns and
allowances are treated as reductions to sales and are provided for based on
historical experience and current estimates.
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average number of
shares outstanding. In August 1996, the Company completed a follow-on stock
offering of 2.1 million shares of common stock. As such, shares outstanding were
8.6 million through August 8, 1996 and 10.7 million since August 9, 1996. The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," which became effective for
financial statements for periods ending after December 15, 1997. The
implementation of SFAS No. 128 had no effect on the Company's earnings per share
data. Basic and diluted earnings per share are the same, as the effect of
dilutive outstanding stock options is immaterial.
31
IMPACT OF NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which requires reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 has no impact on Olympic, as the Company's comprehensive income
consists of net income only. In addition, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits" have
been issued and are effective for yearend 1998. These statements also do not
have an impact on the Company's disclosures, as Olympic operates as one
reportable segment, and has no postretirement benefit plans.
2. ASSET WRITE-DOWN:
-----------------
The Company recorded an asset write-down charge of $19,056 in the fourth quarter
of 1998. The charge consisted of $14,356 to write-off of goodwill and write-down
certain fixed assets at the Company's Lafayette operation in Detroit. The
remaining $4,700 of the charge related to the write-down of Olympic's investment
in its Olympic Continental Resources joint venture (OCR). In the Company's
judgement, the OCR investment write-down was required because Olympic considers
OCR's entire $6,200 receivable from its largest customer to be uncollectible.
The Lafayette charge was taken in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which requires assets such as goodwill and fixed assets to be written down
to fair market value when circumstances indicate that their carrying values are
impaired. The changing dynamics in the Detroit automotive marketplace over the
past 18 months, including General Motors' introduction of new processing
capabilities at its regional distribution center, have adversely impacted
Lafayette's cash flows and operating earnings. These dynamics have not only
resulted in a loss of sales volume to General Motors but have also left a
portion of Lafayette's processing equipment non-productive, and thereby
non-competitive in the automotive marketplace. The Company has disposed of four
pieces of Lafayette's processing equipment, and has developed a plan to dispose
of the remaining non-competitive equipment. Accordingly, a charge of $5,000 to
write-down certain processing equipment and other fixed assets, and $9,400 to
write-off all goodwill at Lafayette was recorded.
3. ACQUISITIONS:
-------------
Effective June 26, 1998, the Company acquired certain assets and assumed certain
liabilities of JNT Precision Machining, Inc. (JNT), a machining center located
in McConnellsburg, Pennsylvania, which operates lathes, machine centers, drills
and saws. The preliminary cash purchase price, which is subject to post-closing
adjustments and includes a loan to the sellers, totaled $795. The acquisition
has been accounted for as a purchase and, accordingly, assets and liabilities
are reflected at estimated fair values. The preliminary purchase price
allocation resulted in goodwill of $162, which is being amortized over 15 years.
The JNT operation is currently operating from its facility in McConnellsburg,
until a new facility is constructed in nearby Chambersburg, Pennsylvania.
Olympic plans to spend approximately $7,000 to construct an 87,000 square foot
facility to house the existing JNT operation and new plate processing equipment.
The new facility is projected to be operational by the end of the third quarter
of 1999.
Effective June 1, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Southeastern Metal Processing, Inc. and
Southeastern Transshipping Realty (Southeastern). Southeastern operated as a
metals toll processor and is located near Atlanta, Georgia. The purchase price,
which included assumed liabilities, totaled approximately $17,200. The adjusted
cash portion of the purchase price, including fees and expenses and the
repayment of $2,500 of Southeastern's bank debt, approximated $13,700. The
acquisition has been accounted for as a purchase and, accordingly, assets and
liabilities were reflected at estimated fair values. The purchase price
allocation resulted in goodwill of approximately $3,700 which is being amortized
over 40 years.
32
4. 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 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. The Company made a $4,000 cash investment for
its 45% ownership share in OCR. OCR generates a significant portion of its
revenue from Atlas or affiliates of Atlas. As a result, OCR maintains
significant receivable balances with Atlas. OCR's receivable from Atlas totaled
approximately $6,200 at December 31, 1998, which represented approximately 31%
of OCR's total accounts receivable at that date. The Company believes that OCR's
receivable from Atlas is uncollectible, and therefore wrote-down its entire
$4,700 investment in OCR at December 31, 1998. The Company and Atlas each
jointly and severally guarantee 50% of OCR's outstanding debt under its $35,000
revolving bank credit facility, up to a maximum of $10,000. OCR revolving credit
debt outstanding at December 31, 1998 totaled $15,047.
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. OLP has constructed a new facility and initially equipped it with two
laser-welding lines. Prototyping has begun on both welding lines and production
has begun on one line. OLP start-up costs are being expensed as incurred. The
Company and USS each contributed $2,000 in cash to OLP during the first half of
1997 and each guarantees, on a several basis, 50% of OLP's outstanding debt
under its $20,000 bank loan agreement. OLP debt outstanding at December 31, 1998
totaled $15,800. OLP is still in its startup phase and does not have significant
receivables from its joint venture partners.
In December 1997, the Company, Michael J. Guthrie and Carlton L. Guthrie (the
Guthries) completed the formation of Trumark Steel & Processing, LLC (TSP), a
joint venture to support the flat-rolled steel requirements of the automotive
industry. The Guthries are also the executive officers of Trumark Inc., a
privately held supplier of metal stamped assemblies to the automotive industry
located in Michigan. In 1997, the Company made a $147 cash contribution to TSP
for its 49% ownership interest in the venture. In December 1998, an additional
$98 was contributed to TSP by Olympic. TSP start-up costs are being expensed as
incurred. The Company and the Guthries severally guarantee outstanding debt
under TSP's $3,880 credit facility in proportion to each member's ownership
interest. TSP debt outstanding at December 31, 1998 totaled $2,739. TSP is still
in its startup phase and does not have significant receivables from its joint
venture partners.
5. ACCOUNTS RECEIVABLE:
--------------------
Since 1995, the Company has operated under an agreement to sell, on a revolving
basis, through its wholly-owned subsidiary, Olympic Steel Receivables LLC, an
undivided interest in a designated pool of its trade accounts receivable. The
maximum amount of receivables available for sale under the agreement, which
expires July 31, 2000, is $70,000. The Company, as agent for the purchaser of
the receivables, retains collection and administrative responsibilities for the
participating interests sold. As collections reduce the receivables included in
the pool, the Company may sell additional undivided interests in new receivables
up to the $70,000 limit. The amount of receivables sold by the Company typically
will change monthly depending upon the level of defined eligible receivables
available for sale at each month end settlement date.
As of December 31, 1998 and 1997, $57,000 and $64,000, respectively, of
receivables were sold and reflected as a reduction of accounts receivable in the
accompanying consolidated balance sheets. Costs of the program, which primarily
consist of the purchaser's financing cost of issuing commercial paper backed by
the receivables, totaled $3,773 in 1998, $3,791 in 1997, and $3,393 in 1996, and
have been classified as Receivable Securitization Expense in the accompanying
consolidated statements of income.
Accounts receivable are presented net of allowances for doubtful accounts of
$455 and $506 as of December 31, 1998 and 1997, respectively. Bad debt expense
totaled $98 in 1998, $155 in 1997, and $268 in 1996.
33
6. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consists of the following:
DECEMBER 31,
-------------------------------
1998 1997
-------------- -------------
Land and improvements $ 10,101 $ 8,755
Buildings and improvements 53,075 46,974
Machinery and equipment 70,744 45,066
Furniture and fixtures 4,181 3,834
Computer equipment 5,037 4,448
Vehicles 291 344
Construction in progress 1,333 14,871
-------------- -------------
144,762 124,292
Less accumulated depreciation (25,450) (20,301)
============== =============
Net property and equipment $ 119,312 $ 103,991
============== =============
Construction in progress at December 31, 1998 primarily consisted of payments
made for the construction and equipping of the Chambersburg facility and
progress payments for new plate processing equipment. Construction in progress
at December 31, 1997 primarily consisted of progress payments for the
construction and equipping of the Iowa temper mill facility, installation of a
new tube mill in Cleveland and a new cut-to-length line in Detroit.
7. REVOLVING CREDIT AGREEMENT:
---------------------------
The Company has been operating under various multi-bank revolving credit
agreements for many years. The Company's bank credit agreement (the Credit
Facility) currently consists of a $68,000 revolving credit component, a $21,000
term loan component to finance the Iowa temper mill and plate processing
facility (the Iowa Term Loan), and letter of credit commitments of $78,855.
Letter of credit commitments include $71,400 related to the Company's accounts
receivable securitization agreement. The respective assets financed
collateralize the Iowa Term Loan and the letters of credit. Each year, the
Company may request to extend its maturity date one year with the approval of
the bank group.
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 Premium
is determined every three months based on the Company's operating performance
and leverage ratio. As of December 31, 1998, the interest rates were base or
LIBOR plus 1.25%. The effective interest rate for revolving credit borrowings
amounted to 7.2% in 1998, 7.0% in 1997, and 7.5% in 1996. Interest on the base
rate option is payable quarterly in arrears while interest on the LIBOR option
is payable at the end of the LIBOR interest period, which ranges from one to six
months. The agreement also includes a commitment fee of .25% of the unused
portions of the revolver and Iowa Term Loan, payable quarterly in arrears. The
Company's borrowing rate increased to LIBOR plus 1.5% commencing March 1, 1999.
In March 1999, the Credit Facility was amended to increase the Iowa Term Loan
component from $17,000 to $21,000, to extend the agreement expiration date to
June 30, 2002, to waive an interest coverage covenant violation at December 31,
1998 and amend future interest coverage requirements, and to add an additional
25 basis point pricing tier to the Premium schedule. The Company is in
compliance with all covenants after obtaining the interest coverage waiver.
The revolving credit agreement balance includes $2,353 and $5,199 of checks
issued that have not cleared the bank as of December 31, 1998 and 1997,
respectively.
34
8. TERM LOANS:
-----------
In May 1997, the Company entered into a $10,000 loan agreement with a domestic
bank to finance the fixed asset portion of the Southeastern acquisition. The
loan agreement includes a 10 year $3,500 term loan component, and a seven year
$6,500 term loan component (the Southeastern Term Loans). The term loans are
secured by the real estate and equipment acquired from Southeastern and are
repayable in quarterly installments that commenced September 1, 1997. Interest
is charged at LIBOR plus the same Premium associated with the Company's Credit
Facility.
In 1993, the Company completed a $10,000 refinancing of certain of its real
estate in Minnesota, Connecticut, Illinois, and Ohio in the form of taxable rate
notes. The term of the notes is 15 years with annual principal payments of $700
for the first 10 years and $600 for years 11 through 15. The notes are backed by
a three year bank letter of credit, expiring October 15, 2001, and are secured
by mortgages on the real estate financed. The interest rate changes each week
based on the taxable rate note market.
The amended Iowa Term Loan allows draws to be made through April 30, 1999 and
requires annual principal repayments of 10% of the amount borrowed to commence
May 30, 1999.
The long-term portion of term loans at December 31, 1998 and 1997, consisted of
the following:
Effective Interest
Description Rate at 12/31/98 1998 1997
------------ ---------------- ------------ ----------
Southeastern Term Loans 6.5% $ 6,804 $ 8,081
Taxable rate notes 6.9% 5,800 6,500
Iowa Term Loan 6.6% 15,300 5,500
Other 4.0% 193 67
------------ ----------
$ 28,097 $ 20,148
------------ ----------
9. INDUSTRIAL REVENUE BONDS:
-------------------------
The long-term portion of industrial revenue bonds at December 31, 1998 and 1997,
consisted of the following:
Effective Interest
Description of Bonds Rate at 12/31/98 1998 1997
-------------------- ---------------- ---------- ----------
$6,000 variable rate bonds due 1995 through 2004 5.6% $ 3,000 $ 3,600
$4,800 variable rate bonds due 1992 through 2004 5.5% 2,000 2,350
$2,660 variable rate bonds due 1992 through 2004 5.2% 1,085 1,295
---------- ----------
$ 6,085 $ 7,245
---------- ----------
These bonds are backed by standby letters of credit, expiring June 30, 2002 with
the revolving credit bank group, which has a first lien on certain land,
building and equipment.
10. SCHEDULED DEBT MATURITIES, INTEREST, DEBT CARRYING VALUES AND COVENANTS:
------------------------------------------------------------------------
Scheduled maturities of all long-term debt for the years succeeding December 31,
1998 are $4,888 in 1999, $4,864 in 2000, $4,869 in 2001, $4,876 in both 2002 and
2003, and $14,697 thereafter. These scheduled maturities include amortization of
the $17,000 outstanding at December 31, 1998 under the Iowa Term Loan, which
allows draws for up to $21,000 to be made through April 30, 1999.
35
The overall effective interest rate for all debt amounted to 6.9% in 1998, 6.7%
in 1997, and 7.1% in 1996. Interest paid totaled $5,124, $4,579, and $4,628, for
the years ended December 31, 1998, 1997 and 1996, respectively. Amounts paid
relative to the accounts receivable securitization program totaled $3,858 in
1998, $3,736 in 1997 and $3,236 in 1996. Interest of $1,082, $156, and $92, was
capitalized in 1998, 1997 and 1996, respectively, in connection with
constructing and equipping facilities.
Management believes the carrying values of its long-term debt approximate their
fair values, as each of the Company's debt arrangements bear interest at rates
that vary based on a bank's base rate, LIBOR, the short-term tax exempt revenue
bond index or taxable rate note market.
Under its debt agreements, the Company is subject to certain covenants such as
minimum net worth, capital expenditure limitations, and interest coverages. The
Company is in compliance with all of its covenants after obtaining a waiver from
its lenders for a December 31, 1998 interest coverage covenant violation.
11. INCOME TAXES:
-------------
The components of the Company's net deferred tax asset or liability at December
31 are as follows:
Asset / (Liability) 1998 1997
------------------- ------------ -------------
Accrued income taxes $ 1,642 $ (695)
Current deferred income taxes:
LIFO inventory reserves (583) (583)
Asset write-down 1,774 --
Tax credit carryforward 861 --
Other temporary items 475 942
------------ --------------
Total current deferred income taxes 2,527 359
------------ --------------
Accrued and deferred income taxes 4,169 (336)
------------ --------------
Long-term deferred income taxes:
Goodwill 1,643 (1,483)
LIFO inventory reserve -- (583)
Tax in excess of book depreciation (4,702) (4,112)
Other temporary items (449) 146
------------ --------------
Total long-term deferred income taxes (3,508) (6,032)
============ ==============
Total current and deferred income taxes $ 661 $ (6,368)
============ ==============
The following table reconciles the U.S. federal statutory rate to the Company's
effective tax rate:
1998 1997 1996
----------- ----------- ------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit 2.0 2.0 2.5
Asset write-down (5.5) -- --
All other, net 1.0 0.5 0.3
----------- ----------- ------------
Effective income tax rate 32.5% 37.5% 37.8%
----------- ----------- ------------
The tax provision includes a current provision of $1,255, $4,495, and $9,266,
and a deferred expense or (benefit) of ($5,314), $813, and ($697), in 1998, 1997
and 1996, respectively. Income taxes paid in 1998, 1997 and 1996, totaled
$3,202, $4,459, and $10,113, respectively.
36
12. RETIREMENT PLANS:
-----------------
The Company has several retirement plans consisting of a profit-sharing plan and
a 401(k) plan covering all non-union employees, and two separate 401(k) plans
covering all union employees.
Company contributions for the non-union profit-sharing plan are in discretionary
amounts as determined annually by the Board of Directors. For each of the last
three years, Company contributions were 4% of each eligible employee's W-2
earnings. The non-union 401(k) retirement plan allows eligible employees to
contribute up to 10% of their W-2 earnings. The Company contribution is
determined annually by the Board of Directors and is based on a percentage of
eligible employees' contributions. For each of the last three years, the Company
matched one half of each eligible employee's contribution.
Company contributions for each of the last three years for the union plans were
3% of eligible W-2 wages plus one half of the first 4% of each employee's
contribution.
Retirement plan expense amounted to $2,346, $2,258, and $2,001 for the years
ended December 31, 1998, 1997, and 1996, respectively.
13. STOCK OPTIONS:
--------------
In January 1994, the Stock Option Plan (Option Plan) was adopted by the Board of
Directors and approved by the shareholders of the Company. Pursuant to the
provisions of the Option Plan, key employees of the Company, non-employee
directors and consultants may be offered the opportunity to acquire shares of
Common Stock by the grant of stock options, including both incentive stock
options (ISOs) and nonqualified stock options. ISOs are not available to
non-employee directors or consultants. A total of 450,000 shares of Common Stock
has been reserved for options under the Option Plan. The purchase price of a
share of Common Stock pursuant to an ISO will not be less than the fair market
value of a share of Common Stock at the grant date. Options vest over a period
of five years at a rate of 20% per year commencing on the first anniversary of
the date of grant, and expire 10 years after the date of grant. The Option Plan
will terminate on January 5, 2004. Termination of the Option Plan will not
affect outstanding options.
During 1997 and 1996, nonqualified options to purchase 8,000, and 12,500 shares,
respectively, were issued under the Option Plan to the Company's outside
directors and certain key employees. No options were issued in 1998. All
outstanding options have been issued at an exercise price of $15.50 per share,
except for the 1997 options, which were issued at $14.63 per share. Since
adoption of the Option Plan, options to purchase 8,000 shares have been
exercised, all during 1996. Options to purchase 142,500 shares were outstanding
at December 31, 1998, of which 95,800 were exercisable.
In 1996, the Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Black-Scholes option-pricing
model was used to determine that the pro forma impact of compensation expense
from options granted was immaterial for all years presented.
14. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company leases certain warehouses, sales offices and processing equipment
under long-term lease agreements. The leases are classified as operating and
expire at various dates through 2004. In some cases the leases include options
to extend. Rent expense was $2,278, $2,175, and $2,634 for the years ended
December 31, 1998, 1997 and 1996, respectively.
37
Future minimum lease payments as of December 31, 1998 are as follows:
1999 $ 1,320
2000 1,168
2001 988
2002 800
2003 588
Thereafter 421
--------------
$ 5,285
==============
The Company is a defendant in various legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the outcome of
the proceedings to which the Company is currently a party will not have a
material adverse effect upon its operations or financial position.
15. RELATED PARTY TRANSACTIONS:
---------------------------
A related entity handles a portion of the freight activity for the Company's
Cleveland division. Payments to this entity approximated $2,383, $2,906, and
$3,117 for the years ended December 31, 1998, 1997 and 1996, respectively. There
is no common ownership or management of this entity with the Company. Another
related entity owns one of the Cleveland warehouses and leases it to the Company
at an annual rental of $195. The lease expires June 2000 and has two remaining
renewal options of 10 years each.
38
SUPPLEMENTARY FINANCIAL INFORMATION
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
(in thousands, except per share amounts)
1998 1ST 2ND 3RD 4TH(b) YEAR
- ---- --------- --------- --------- --------- ---------
Net sales $ 155,707 $ 152,254 $ 132,035 $ 136,193 $ 576,189
Gross margin 32,298 32,009 27,827 28,511 120,645
Operating income (loss) 5,633 5,254 1,497 (16,923) (4,539)
Income (loss) before taxes 3,644 3,292 (482) (18,944) (12,490)
Net income (loss) $ 2,259 $ 2,041 $ (299) $ (12,432) $ (8,431)
Net income (loss) per share $ 0.21 $ 0.19 $ (0.03) $ (1.16) $ (0.79)
Weighted average shares outstanding 10,692 10,692 10,692 10,692 10,692
Market price of common stock: (a)
High $ 17.13 $ 16.25 $ 12.88 $ 7.94 $ 17.13
Low 13.69 12.50 6.13 5.00 5.00
1997 1ST 2ND 3RD 4TH YEAR
- ---- --------- --------- --------- --------- ---------
Net sales $ 149,473 $ 157,595 $ 145,223 $ 155,785 $ 608,076
Gross margin 30,643 32,392 30,145 31,825 125,005
Operating income 5,526 6,227 5,094 5,260 22,107
Income before taxes 3,911 4,304 2,744 3,196 14,155
Net income $ 2,445 $ 2,689 $ 1,715 $ 1,998 $ 8,847
Net income per share $ 0.23 $ 0.25 $ 0.16 $ 0.19 $ 0.83
Weighted average shares outstanding 10,692 10,692 10,692 10,692 10,692
Market price of common stock: (a)
High $ 26.13 $ 17.50 $ 21.38 $ 16.75 $ 26.13
Low 16.50 13.63 15.38 12.38 12.38
(a) Represents high and low closing quotations as reported by NASDAQ.
(b) Includes an asset write-down charge of $19,056 recorded in fourth quarter
1998 operating expenses.
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 as to the Directors of the Registrant will be
incorporated herein by reference to the information set forth under the captions
"Election of Directors and Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's definitive proxy statement for its April 23,
1999 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 will be incorporated herein by reference to the
information set forth under the caption "Executive Officers' Compensation" in
the Registrant's definitive proxy statement for its April 23, 1999 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 will be incorporated herein by reference to the
information set forth under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Registrant's
definitive proxy statement for its April 23, 1999 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 will be incorporated herein by reference to the
information set forth under the caption "Related Transactions and Compensation
Interlocks" in the Registrant's definitive proxy statement for its April 23,
1999 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART II,
ITEM 8:
Report of Independent Public Accountants
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted
since the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the financial statements including
notes thereto.
(a)(3) EXHIBITS. The Exhibits filed herewith are set forth on the Index
to Exhibits filed as part of this report.
(b) REPORTS ON FORM 8-K. No reports were filed on Form 8-K during the
fourth quarter of 1998.
40
OLYMPIC STEEL, INC.
INDEX TO EXHIBITS
Exhibit Description Of Document Sequential Page No.
- ------- ----------------------- ------------------
3.1(i) Amended and Restated Articles of Incorporation (a)
3.1(ii) Amended and Restated Code of Regulations (a)
4.1 Credit Agreement dated October 4, 1996 by and among the Registrant, three (b)
banks and National City Bank, Agent
4.2 First Amendment to Credit Agreement dated January 24, 1997 by and among the (c)
Registrant, three banks and National City Bank, Agent
4.3 Second Amendment to Credit Agreement, dated May 30, 1997 (d)
4.4 Third Amendment to Credit Agreement, dated July 14, 1997 (d)
4.5 Fourth Amendment to Credit Agreement, dated December 8, 1998 43-49
4.6 Fifth Amendment to Credit Agreement, dated March 10, 1999 50-61
4.7 Receivables Purchase Agreement dated December 19, 1995 among the Registrant, (e)
Olympic Steel Receivables LLC, Olympic Steel Receivables, Inc. and Clipper
Receivables Corporation as Purchaser
4.8 Second Amendment to Receivables Purchase Agreement, dated July 14, 1997 (d)
Information concerning certain of the Registrant's other long-term debt is
set forth in Notes 7, 8 and 9 of Notes to Consolidated Financial Statements.
The Registrant hereby agrees to furnish copies of such instruments to the
Commission upon request.
10.1 Olympic Steel, Inc. Stock Option Plan (a)
10.2 Lease, dated as of July 1, 1980, as amended, between S.M.S. Realty Co., a (a)
lessor, and the Registrant, as lessee, relating to one of the Cleveland
facilities
10.4 Lease, dated as of November 30, 1987, as amended, between Tinicum Properties (a)
Associates L.P., as lessor, and the Registrant, as lessee, relating to
Registrant's Lester, Pennsylvania facility
10.5 Executive and General Managers Bonus Plans (a)
10.6 Operating Agreement of Trumark Steel & Processing, LLC, dated December 12, (f)
1997, by and among Michael J. Guthrie, Carlton L. Guthrie and Oly Steel
Welding, Inc.
10.7 Carrier Contract Agreement for Transportation Services, dated August 1, 1998, 62-67
between Lincoln Trucking Company and the Registrant
10.8 Operating Agreement of Olympic Continental Resources, L.L.C. by and among (c)
Thyssen-Continental Resources LLC, Olympic Steel Trading, Inc. and Uwe T.
Schmidt
10.9 Operating Agreement of OLP, LLC, dated April 4, 1997, by and between the U.S. (g)
Steel Group of USX Corporation and Oly Steel Welding, Inc.
41
OLYMPIC STEEL, INC.
INDEX TO EXHIBITS
Exhibit Description Of Document Sequential Page No.
------- ----------------------- -------------------
21 List of Subsidiaries 68
23 Consent of Arthur Andersen LLP 69
24 Directors and Officers Powers of Attorney 70
27 Financial Data Schedule (EDGAR Filing Only)
(a) Incorporated by reference to the Exhibit with the same exhibit number
included in Registrant's Registration Statement on Form S-1 (No.
33-73992) filed with the Commission on January 12, 1994.
(b) Incorporated by reference to an Exhibit included in Registrant's Form
10-Q filed with the Commission on November 4, 1996.
(c) Incorporated by reference to an Exhibit included in Registrant's Form
10-K filed with the Commission on March 7, 1997.
(d) Incorporated by reference to an Exhibit included in Registrant's Form
10-Q filed with the Commission on August 5, 1997.
(e) Incorporated by reference to an Exhibit included in Registrant's Form
10-K filed with the Commission on March 29, 1996.
(f) Incorporated by reference to an Exhibit included in Registrant's Form
10-K filed with the Commission on March 9, 1998
(g) Incorporated by reference to an Exhibit included in Registrant's Form
10-Q filed with the Commission on May 2, 1997.
42
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
OLYMPIC STEEL, INC.
March 12, 1999 By: /s/ R. Louis Schneeberger
-------------------------
R. Louis Schneeberger,
Chief Financial Officer and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES
INDICATED AND ON THE 12TH DAY OF MARCH, 1999.
March 12, 1999 /s/ Michael D. Siegal *
-----------------------
Michael D. Siegal
President, Chairman of the Board
and Chief Executive Officer
March 12, 1999 /s/ R. Louis Schneeberger *
---------------------------
R. Louis Schneeberger
Chief Financial Officer
and Director
March 12, 1999 /s/ David A. Wolfort *
----------------------
David A. Wolfort
Chief Operating Officer
and Director
March 12, 1999 /s/ Suren A. Hovsepian *
------------------------
Suren A. Hovsepian
Business Consultant and Director
March 12, 1999 /s/ Richard T. Marabito *
-------------------------
Richard T. Marabito
Treasurer and Corporate Controller
(Principal Accounting Officer)
March 12, 1999 /s/ Martin H. Elrad *
---------------------
Martin H. Elrad, Director
March 12, 1999 /s/ Thomas M. Forman *
------------------------
Thomas M. Forman, Director
March 12, 1999 /s/ Betsy S. Atkins *
---------------------
Betsy S. Atkins, Director
* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and Directors of the Company and filed with the Securities
and Exchange Commission on behalf of such officers and Directors.
By: /s/ R. Louis Schneeberger March 12, 1999
---------------------------------------------
R. Louis Schneeberger, Attorney-in-Fact