-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RpRyx023mWjiHpQVHccuTs58657EWeaA0X18nWJxYxLMOWHZvhKoRKCezLrc8z5u e/rlhKMCGjYwGNtiFBq6gQ== 0000950152-99-002135.txt : 19990322 0000950152-99-002135.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950152-99-002135 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLYMPIC STEEL INC CENTRAL INDEX KEY: 0000917470 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 341245650 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23320 FILM NUMBER: 99568723 BUSINESS ADDRESS: STREET 1: 5080 RICHMOND RD CITY: BEDFORD HEIGHTS STATE: OH ZIP: 44146 BUSINESS PHONE: 2162923800 10-K 1 OLYMPIC STEEL, INC. ANUUAL REPORT FORM 10-K 1 ================================================================================ 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 ----------------- ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-23320 ------- OLYMPIC STEEL, INC. (Exact name of registrant as specified in its charter) OHIO 34-1245650 - ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5096 Richmond Road, Bedford Heights, Ohio 44146 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (216) 292-3800 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. ================================================================================ 2 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. 3 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 4 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. 5 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. 6 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 7 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. 8 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. 9 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 EX-4.5 2 EXHIBIT 4.5 1 Exhibit 4.5 FOURTH AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of December 8, 1998, (this "Fourth Amendment"), is by and among OLYMPIC STEEL, INC., an Ohio corporation ("Borrower"), and NATIONAL CITY BANK ("NCB") and the group of other banks signatory hereto or that become parties to the Credit Agreement hereafter identified by amendment or supplement thereto (NCB and the banks comprising such group at any specific time, hereinafter referred to as the "Banks") and NATIONAL CITY BANK, as agent for the Banks (in that capacity, "NCB-Agent"). RECITALS -------- A. Borrower, the Banks and NCB-Agent entered into a Credit Agreement, dated as of October 4, 1996 (the "Credit Agreement"), pursuant to which Borrower may obtain, among other things, (i) loans ratably from the Banks that are on a revolving credit basis and (ii) subject LCs issued by NCB in which the Banks agree to ratably share the obligations in respect thereof, in each case until the expiration date. B. Borrower, the Banks and NCB-Agent entered into the First Amendment to Credit Agreement, dated as of January 24, 1997 (the "First Amendment"), in order to increase the amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs by Ten Million Dollars ($10,000,000) and to permit Borrower to make certain joint venture investments and guarantees of indebtedness of the joint venture entities. C. Borrower, the Banks and NCB-Agent entered into the Second Amendment to Credit Agreement, dated as of May 30, 1997 (the "Second Amendment"), in order to increase the amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs by Eight Million Dollars ($8,000,000), to add a commitment by Banks for new Series A term loans in the amount of Seventeen Million Dollars ($17,000,000), to permit certain borrowing from other lenders, to permit the Borrower to allow certain of its property to become encumbered by liens in favor of other lenders and to extend the expiration date to June 30, 2000. D. Borrower, the Banks and NCB-Agent entered into the Third Amendment to Credit Agreement, dated as of July 14, 1997 (the "Third Amendment") in order to add an additional bank as a party to Credit Agreement, adjust the ratable share of the obligations among the Banks which were original parties to the Credit Agreement, decrease the aggregate amount of the commitments by the Banks for existing subject LCs, and make appropriate changes to the Credit Agreement in recognition that some or all of the proceeds of the subject loans would be used by a new subsidiary of Borrower, Olympic Steel Iowa, Inc., for the purpose of acquiring land and constructing a temper mill facility in Bettendorf, Iowa. E. Borrower, the Banks and NCB-Agent desire to again amend the Credit Agreement by this Fourth Amendment to Credit Agreement (the "Fourth Amendment") in order to (1) authorize Borrower to borrow funds from Mellon Bank, N.A. ("Mellon"), one of the Banks, pursuant to a discretionary Swing Line of Credit facility (the "Swing Loan") as an additional exception to the prohibition against incurring indebtedness under Section 3D.02 of the Credit Agreement; (2) grant to Mellon a one-time right to have the Banks refund the outstanding Swing Loan as a subject revolving credit loan; and (3) adjust Mellon's subject commitment with respect to the subject loans made pursuant to the Credit Agreement until such time as the Swing Loan is refunded at Mellon's request by a subject revolving credit loan. 2 AGREEMENT --------- Accordingly, the parties have agreed and do hereby agree as follows: 1. The following new Subsection 2A.06 shall be added to the Credit Agreement immediately following Subsection 2A.05 thereof: 2A.06 MELLON SWING LOAN, REFUNDING THEREOF, AND ADJUSTMENT OF SUBJECT --------------------------------------------------------------------- COMMITMENTS - ----------- (a) Subject to the terms and conditions of a discretionary Swing Line Loan Agreement, Borrower shall have the right to obtain and have outstanding from time to time the Swing Loan from Mellon in aggregate principal amount not exceeding at any time $16,000,000.00 as such amount may be reduced at Mellon's sole discretion (the "Maximum Swing Loan Amount"). Notwithstanding the provisions of Section 2A.01 or any other provision hereof, at all times during the Swing Loan Availability Period (as defined in Subsection (b) below), the aggregate amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs and Series A subject term loans shall be reduced by the value of the Maximum Swing Loan Amount, whether or not there is any amount outstanding under the Swing Loan. Such reduction shall not affect the commitment fees payable pursuant to Section 2A.04 hereof. (b) (i) Except as set forth in subsection (b)(ii) below, during the period (the "Swing Loan Availability Period") from and after the effective date hereof and until the earlier of (A) the date on which the Banks refund the Swing Loan pursuant to paragraph (c) below (the "Refunding Date") or (B) the expiration date, or (C) the date Mellon terminates the Swing Loan's availability to Borrower (a "Swing Loan Availability Termination"), the proportion (expressed as a percentage) that the amount of the subject commitment of Mellon bears to the aggregate of all subject commitments pursuant to the Credit Agreement shall be reduced to eleven percent (11%) and the amount of each Bank's commitment to make subject revolving credit loans and additional subject LCs and Series A subject term loans to Borrower, and the proportion (expressed as a percentage) that each Bank's subject commitment bears to all of the subject commitments, are set forth opposite the Bank's name on SCHEDULE 2A.06 hereto. (ii) In the event that during the Swing Loan Availability Period, Mellon elects to reduce the Maximum Swing Loan Amount (a "Swing Loan Reduction"), the subject commitment of each Bank shall be adjusted to the percentages of the aggregate subject commitments of the Banks set forth in Schedule 2A.06(b)(ii) hereto. (c) On any day when the Swing Loan is outstanding prior to the expiration date (whether before or after the maturity thereof or the occurrence of an event of default under the Swing Loan Agreement or under this Credit Agreement), Mellon shall have the one-time right to request that the Banks refund the outstanding principal amount of the Swing Loan and any accrued but unpaid 3 interest thereon as a subject revolving credit loan obtained by Borrower by written notice thereof by Mellon to NCB-Agent, the Banks and Borrower not later than 1:00 p.m. Cleveland time on a Banking Day. Any such notice by Mellon shall be deemed to be a "credit request" by Borrower for purposes of Section 2D.01 of the Credit Agreement for disbursement of a sum equal to the principal amount of the Swing Loan and accrued but unpaid interest thereon. Promptly following receipt of such notice from Mellon to NCB-Agent, NCB-Agent shall promptly notify each Bank thereof (by facsimile or telephone, confirmed in writing) and the amount required from each Bank on account thereof following which each Bank shall cause the required subject loan to be disbursed to NCB-Agent, in immediately available funds, not later than 12:00 Noon, Cleveland time, on the next Banking Day, to be held for the benefit of Mellon at its direction, provided, however, the amount required from each Bank shall in no event exceed such Bank's subject commitment with respect to the subject revolving credit loan to Borrower pursuant to the Credit Agreement. On such next Banking Day, the subject commitments of Mellon and the other Banks in the subject loans shall revert to the amounts and percentages set forth on SCHEDULE 2A.01 of the Credit Agreement and in Subsection 2A.01.1(c) of the Credit Agreement. The obligations of the Banks to refund the Swing Loan in accordance with this Subsection 2A.06(c) shall be absolute and unconditional and not subject to Section 2.D of the Credit Agreement and irrespective of the existence of an event of default by any Bank or Borrower hereunder or under the Swing Loan Agreement or any set-off, counterclaim, recoupment, defense or other right such Bank may have against Mellon or the Borrower or any adverse change in Borrower's condition, financial or otherwise or any other circumstance, happening or event whatsoever. (d) Mellon shall promptly give NCB-Agent and the other Banks written notice of a Swing Loan Reduction or Swing Loan Availability Termination. On the next Banking Day thereafter, the subject commitments of Mellon and the other Banks in the subject loans shall change, in the case of a Swing Loan Reduction, to the percentages of the aggregate subject commitments of the Banks as set forth in Schedule 2A.06(b)(ii) hereto or, in the case of a Swing Loan Availability 4 Termination, to the amounts and percentages set forth in Schedule 2A.01 of the Credit Agreement and in Subsection 2A.01.1(c) of the Credit Agreement. (e) Mellon shall discontinue making further advances of the Swing Loan as promptly as practicable after receipt of notice from NCB-Agent that the Banks, other than Mellon, require discontinuation of such further advances as a result of an Event of Default under the Credit Agreement. (f) Notwithstanding any provision to the contrary contained in the Credit Agreement, no part of this Section 2A.06 may be modified or amended without the prior written consent of Mellon. 2. Subsection 3D.02 BORROWINGS of the Credit Agreement shall be deleted in its entirety and the following shall be substituted in place thereof: 3D.02 BORROWINGS - Borrower will not, nor permit OSLI, OSMI or OSII to create, assume or have outstanding at any time any indebtedness for borrowed money (or become a guarantor in respect any indebtedness for borrowed money) the incurrence of which would create a default under this Agreement, including, without limitation, a default under section 3B.01 or 3B.03; PROVIDED, that this subsection shall not apply to any indebtedness existing on October 4, 1996 or any Swing Loan indebtedness authorized under Subsection 2A.06 hereof. 3. Section 9 DEFINITIONS of the Agreement is amended to delete the definition of EXPIRATION DATE therein and substitute the following therefor: EXPIRATION DATE means the date referred to as such in subsection 2A.02 or such later date, if any, as may be established pursuant to subsection 2A.05. 4. Section 2A.03 of the Agreement is amended by adding the following language after the first sentence: Borrower shall simultaneously deliver a copy of such notice to Mellon. 5. Section 2D.01 of this Agreement is amended by adding the following language at the end of the first sentence: with immediate notice thereof delivered to Mellon utilizing the same method of delivery as utilized to deliver the credit request 6. From and after the effective date of this Fourth Amendment, references in the Credit Agreement (as amended by the First Amendment, the Second Amendment, the Third Amendment and this Fourth Amendment thereto) shall be deemed to be references to the Agreement as amended by all such amendments (unless otherwise expressly indicated). 7. Borrower restates and reaffirms all of its representations and warranties set forth in Section 4B of the Credit Agreement as of the date hereof. 8. This Fourth Amendment and the modifications set forth herein shall be and become effective as of the date hereof. 5 9. The Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and this Fourth Amendment, is hereby ratified and confirmed. 10. This Fourth Amendment may be executed in one or more counterparts, each counterpart to be executed by Borrower, by NCB-Agent and by one or more or all of the Banks. Each such executed counterpart shall be deemed to be an executed original for all purposes but all such counterparts taken together shall constitute one agreement, which agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. 11. This Fourth Amendment may be executed by representatives of the Banks using facsimile signatures and facsimilied signature pages shall in all respects be binding on all parties hereto and thereto as if such signature pages were originally delivered. Original signature pages for all facsimilied signature pages shall be delivered to NCB-Agent not later than December ___, 1998. IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as of the date first above written. NATIONAL CITY BANK, AGENT OLYMPIC STEEL, INC. By: By: ----------------------- ---------------------- Donald B. Hayes, Jr. Richard T. Marabito Senior Vice President Treasurer NATIONAL CITY BANK MELLON BANK, N.A. By: By: ------------------------- ------------------ Donald B. Hayes, Jr. John K. Walsh Senior Vice President Vice President COMERICA BANK PNC BANK, NATIONAL ASSOCIATION By: By: -------------------- ---------------------- Richard S. Arceci Mark W. Rutherford Vice President Vice President 6 SCHEDULE 2A.06(B)(II) --------------------- ADJUSTMENT OF BANKS' SUBJECT COMMITMENTS AS A RESULT OF A SWING LOAN REDUCTION
- ------------------------------ --------------------------------------------------------------------------------------- If the Maximum Then the percentage of the aggregate Swing Loan Amount is: subject commitment of the Banks is: - -------------------------------- --------------------- --------------------- --------------------- --------------------- PNC BANK NATIONAL CITY COMERICA NATIONAL MELLON BANK BANK BANK ASSOCIATION - -------------------------------- --------------------- --------------------- --------------------- --------------------- $16,000,000 11% 44% 28% 17% - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $16,000,000 but 12% 43.5% 27.7% 16.8% greater or equal to $14,222,222 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $14,222,222 but 13% 43% 27.4% 16.6% greater or equal to $12,444,444 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $12,444,444 but 14% 42.5% 27.1% 16.4% greater or equal to $10,666,667 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $10,666,667 but 15% 42.1% 26.8% 16.1% greater or equal to $8,888,889 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $8,888,889 but 16% 41.7% 26.5% 15.8% greater or equal to $7,111,111 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $7,111,111 but 17% 41.3% 26.1% 15.6% greater or equal to $5,333,333 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $5,333,333 but 18% 40.8% 25.8% 15.4% greater or equal to $3,555,556 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $3,555,556 but 19% 40.4% 25.4% 15.2% greater or equal to $1,777,778 - -------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $1,777,778 20% 40% 25% 15% - -------------------------------- --------------------- --------------------- --------------------- ---------------------
7 SCHEDULE 2A.06 -------------- ADJUSTED SUBJECT COMMITMENTS RESULTING FROM SWING LOAN
Subject commitments for subject revolving credit loans and subject LCs Schedule 2A.01 ========================== ============================ ===================== ====================== ============== Bank Subject revolving credit Existing subject Aggregate Subject Percentage loans and additional LCs* Commitment* subject LCs (excluding existing subject LCs) - -------------------------- ---------------------------- --------------------- ---------------------- -------------- National City Bank $22,880,000 $3,556,691 $26,436,691 44% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Comerica Bank $14,560,000 $2,263,349 $16,823,349 28% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Mellon Bank, N.A. $5,720,000 $889,173 $6,609,173 11% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- PNC Bank, National Association $8,840,000 $1,374,176 $10,214,176 17% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Total $52,000,000 $8,083,389 $60,083,389 100% ========================== ============================ ===================== ====================== ==============
* Rounded to the nearest whole dollar (as of 12/03/98). Series A term loan subject commitments Section 2A.01.1(c)
============================================== ====================================== ============================== Bank Series A Subject Term Loan Percentage - ---------------------------------------------- -------------------------------------- ------------------------------ National City Bank $7,480,000 44% - ---------------------------------------------- -------------------------------------- ------------------------------ Comerica Bank $4,760,000 28% - ---------------------------------------------- -------------------------------------- ------------------------------ Mellon Bank, N.A. $1,870,000 11% - ---------------------------------------------- -------------------------------------- ------------------------------ PNC Bank, National Association $2,890,000 17% - ---------------------------------------------- -------------------------------------- ------------------------------ Total $17,000,000 100% ============================================== ====================================== ==============================
EX-4.6 3 EXHIBIT 4.6 1 Exhibit 4.6 FIFTH AMENDMENT TO CREDIT AGREEMENT ----------------------------------- THIS FIFTH AMENDMENT TO CREDIT AGREEMENT, dated as of March ___, 1999, (this "Fifth Amendment"), is by and among OLYMPIC STEEL, INC., an Ohio corporation ("Borrower"), and NATIONAL CITY BANK ("NCB") and the group of other banks signatory hereto or that become parties to the Credit Agreement hereafter identified by amendment or supplement thereto (NCB and the banks comprising such group at any specific time, hereinafter referred to as the "Banks") and NATIONAL CITY BANK, as agent for the Banks (in that capacity, "NCB-Agent"). RECITALS -------- A. Borrower, the Banks and NCB-Agent entered into a Credit Agreement, dated as of October 4, 1996 (the "Credit Agreement"), pursuant to which Borrower may obtain, among other things, (i) loans ratably from the Banks that are on a revolving credit basis and (ii) subject LCs issued by NCB in which the Banks agree to ratably share the obligations in respect thereof, in each case until the expiration date. B. Borrower, the Banks and NCB-Agent entered into the First Amendment to Credit Agreement, dated as of January 24, 1997 (the "First Amendment"), in order to increase the amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs by Ten Million Dollars ($10,000,000) and to permit Borrower to make certain joint venture investments and guarantees of indebtedness of the joint venture entities. C. Borrower, the Banks and NCB-Agent entered into the Second Amendment to Credit Agreement, dated as of May 30, 1997 (the "Second Amendment"), in order to increase the amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs by Eight Million Dollars ($8,000,000), to add a commitment by Banks for new Series A term loans in the amount of Seventeen Million Dollars ($17,000,000), to permit certain borrowing from other lenders, to permit the Borrower to allow certain of its property to become encumbered by liens in favor of other lenders and to extend the expiration date to June 30, 2000. D. Borrower, the Banks and NCB-Agent entered into the Third Amendment to Credit Agreement, dated as of July 14, 1997 (the "Third Amendment") in order to add an additional bank as a party to Credit Agreement, to adjust the ratable share of the obligations among the Banks which were original parties to the Credit Agreement, to decrease the aggregate amount of the commitments by the Banks for existing subject LCs, and to make appropriate changes to the Credit Agreement in recognition that some or all of the proceeds of the subject loans would be used by a new subsidiary of Borrower, Olympic Steel Iowa, Inc., for the purpose of acquiring land and constructing a temper mill facility in Bettendorf, Iowa. E. Borrower, the Banks and NCB-Agent entered into the Fourth Amendment to Credit Agreement, dated December 8, 1998 (the "Fourth Amendment") in order to authorize Borrower to borrow funds from Mellon Bank, N.A. ("Mellon"), one of the Banks, pursuant to a discretionary Swing Line of Credit facility (the "Swing Loan") as an additional exception to the prohibition against incurring indebtedness under Section 3D.02 of the Credit Agreement; to grant 2 to Mellon a one-time right to have the Banks refund the outstanding Swing Loan as a subject revolving credit loan; and to adjust Mellon's subject commitment with respect to the subject loans made pursuant to the Credit Agreement until such time as the Swing Loan is refunded at Mellon's request by a subject revolving credit loan. F. Borrower, the Banks and NCB-Agent desire to again amend the Credit Agreement by this Fifth Amendment to Credit Agreement (the "Fifth Amendment") in order to extend the expiration date until June 30, 2002; to increase the amount of the series A subject term loan commitment by $4,000,000, to waive certain covenant requirements and exclude certain charges therefrom and modify the interest rates payable by Borrower based on Borrower's EBIT-to-interest ratio. AGREEMENT --------- Accordingly, the parties have agreed and do hereby agree as follows: 1. Subsection 2A.01.1 SERIES A TERM LOANS of the Agreement shall be deleted in its entirety and the following shall be substituted in place thereof: 2A.01.1 SERIES A TERM LOANS - (a) The aggregate amount of the series A subject term loans shall be an amount up to, but not exceeding, Twenty One Million Dollars ($21,000,000). The series A subject term loans shall be made and disbursed not more frequently than once each calendar month and the aggregate amount thereof shall not exceed eighty percent (80%) of costs reasonably incurred and paid by Borrower or OSII for construction of a temper mill facility in Bettendorf, Iowa (the "Iowa Mill Project"). With each request for a series A subject term loan advance, Borrower or OSII shall submit to NCB-Agent evidence of such costs so incurred and paid and such other information as NCB-Agent may request with respect to the Iowa Mill Project including, without limitation, the estimated cost of completing the same. The subject commitments for any amount of the series A subject term loans not disbursed on or before April 29, 1999, shall automatically and immediately expire on April 30, 1999 without any notice to Borrower. (b) Beginning May 30, 1999, the outstanding principal amount of the series A subject term loans shall be reduced annually prior to the expiration date by an amount equal to ten percent (10%) of the aggregate amount thereof outstanding and disbursed prior to April 30, 1999,(for example, if the aggregate amount of the series A subject term loans disbursed is $21,000,000, then the amount of each principal reduction prior to the expiration date shall be $2,100,000). A principal payment of the series A subject term loans shall be made on each May 30 commencing on May 30, 1999 with a final payment of the entire outstanding amount of the series A subject term loans being due and payable on the expiration date. (c) The amount of each Bank's subject commitment to make series A subject term loans (which is subject to termination pursuant to Section 5B), and the proportion (expressed as a percentage) that it bears to all of the subject commitments relating thereto is set forth opposite the Bank's name below. 3
=========================================== ====================================== ================================== Bank Series A Subject Term Loan Percentage - ------------------------------------------- -------------------------------------- ---------------------------------- National City Bank $8,400,000 40% - ------------------------------------------- -------------------------------------- ---------------------------------- Comerica Bank $5,250,000 25% - ------------------------------------------- -------------------------------------- ---------------------------------- Mellon Bank, N.A. $4,200,000 20% - ------------------------------------------- -------------------------------------- ---------------------------------- PNC Bank, National Association $3,150,000 15% - ------------------------------------------- -------------------------------------- ---------------------------------- Total $21,000,000 100% =========================================== ====================================== ==================================
(d) Anything contained in this subsection 2A.01.1 to the contrary notwithstanding, no term loan shall be made or disbursed by any of the Banks prior to compliance by Borrower with the conditions set forth in section 2B of this Agreement. 2. Subsection 2A.02 TERM of Credit Agreement shall be deleted in its entirety and the following shall be substituted in place thereof: 2A.02 TERM - The subject commitment of each Bank and the subject commitments in the aggregate shall remain in effect until June 30, 2002 (the "expiration date") EXCEPT that (i) a later expiration date may be established from time to time pursuant to subsection 2A.05. (ii) the subject commitments shall end in any event upon any earlier reduction thereof to zero pursuant to subsection 2A.03 or any earlier termination pursuant to Section 5B, (iii) the commitment relating to any existing LC shall remain in effect until the stated expiration date thereof, even if such date is later than the expiration date; and (iv) the commitments for the series A subject term loans not disbursed on or prior to April 29, 1999, will expire automatically and immediately on April 30, 1999. The series A term loans shall be disbursed pursuant to subsection 2A.01.1(a). 3. Subsection 2A.06 MELLON SWING LOAN, REFUNDING THEREOF, AND ADJUSTMENT OF SUBJECT COMMITMENTS shall be deleted in its entirety and the following shall be substituted in place thereof: 2A.06 MELLON SWING LOAN, REFUNDING THEREOF, AND ADJUSTMENT OF SUBJECT COMMITMENTS (a) Subject to the terms and conditions of a discretionary Swing Line Loan Agreement, Borrower shall have the right to obtain and have outstanding from time to time the Swing Loan from Mellon in aggregate principal amount not exceeding at any time $16,000,000.00 as such amount may be reduced at Mellon's sole discretion (the "Maximum Swing Loan Amount"). Notwithstanding the provisions of subsection 2A.01 or any other provision hereof, at all times during the Swing Loan Availability Period (as defined in Subsection (b) below), the aggregate amount of the commitments by the Banks for subject revolving credit loans and additional subject LCs and Series A subject term loans 4 shall be reduced by the value of the Maximum Swing Loan Amount, whether or not there is any amount outstanding under the Swing Loan. Such reduction shall not affect the commitment fees payable pursuant to subsection 2A.04 hereof. (b) (i) Except as set forth in subsection (b)(ii) below, during the period (the "Swing Loan Availability Period") from and after the effective date hereof and until the earlier of (A) the date on which the Banks refund the Swing Loan pursuant to paragraph (c) below (the "Refunding Date") or (B) the expiration date, or (C) the date Mellon terminates the Swing Loan's availability to Borrower (a "Swing Loan Availability Termination"), the proportion (expressed as a percentage) that the amount of the subject commitment of Mellon bears to the aggregate of all subject commitments pursuant to the Credit Agreement shall be reduced to eleven percent (11%) and the amount of each Bank's commitment to make subject revolving credit loans and additional subject LCs and Series A subject term loans to Borrower, and the proportion (expressed as a percentage) that each Bank's subject commitment bears to all of the subject commitments, are set forth opposite the Bank's name on SCHEDULE 2A.06 hereto dated March, 1999. (ii) In the event that during the Swing Loan Availability Period, Mellon elects to reduce the Maximum Swing Loan Amount (a "Swing Loan Reduction"), the aggregate subject commitment of the Banks shall increase by the amount of the reduction and the subject commitment of each Bank shall be adjusted to the percentages of the aggregate subject commitments of the Banks set forth in SCHEDULE 2A.06(b)(ii) hereto dated March, 1999. (c) On any day when the Swing Loan is outstanding prior to the expiration date (whether before or after the maturity thereof or the occurrence of an event of default under the Swing Loan Agreement or under this Credit Agreement), Mellon shall have the one-time right to request that the Banks refund the outstanding principal amount of the Swing Loan and any accrued but unpaid interest thereon as a subject revolving credit loan obtained by Borrower by written notice thereof by Mellon to NCB-Agent, the Banks and Borrower not later than 1:00 p.m. Cleveland time on a Banking Day. Any such notice by Mellon shall be deemed to be a "credit request" by Borrower for purposes of subsection 2D.01 of the Credit Agreement for disbursement of a sum equal to the principal amount of the Swing Loan and accrued but unpaid interest thereon. Promptly following receipt of such notice from Mellon to NCB-Agent, NCB-Agent shall promptly notify each Bank thereof (by facsimile or telephone, confirmed in writing) and the amount required from each Bank on account thereof following which each Bank shall cause the required subject loan to be disbursed to NCB-Agent, in immediately available funds, not later than 12:00 Noon, Cleveland time, on the next Banking Day, to be held for the benefit of Mellon at its direction, provided, however, the amount required from each Bank shall in no event exceed such Bank's subject commitment with respect to the subject revolving credit loan to 5 Borrower pursuant to the Credit Agreement. On such next Banking Day, the subject commitments of Mellon and the other Banks in the subject loans shall revert to the amounts and percentages set forth on SCHEDULE 2A.01 of the Credit Agreement and in Subsection 2A.01.1(c) of the Credit Agreement. The obligations of the Banks to refund the Swing Loan in accordance with this Subsection 2A.06(c) shall be absolute and unconditional and not subject to Section 2.D of the Credit Agreement and irrespective of the existence of an event of default by any Bank or Borrower hereunder or under the Swing Loan Agreement or any set-off, counterclaim, recoupment, defense or other right such Bank may have against Mellon or the Borrower or any adverse change in Borrower's condition, financial or otherwise or any other circumstance, happening or event whatsoever. (d) Mellon shall promptly give NCB-Agent and the other Banks written notice of a Swing Loan Reduction or Swing Loan Availability Termination. On the next Banking Day thereafter, the subject commitments of Mellon and the other Banks in the subject loans shall change, in the case of a Swing Loan Reduction, to the percentages of the aggregate subject commitments of the Banks as set forth in SCHEDULE 2A.06(b)(ii) hereto or, in the case of a Swing Loan Availability Termination, to the amounts and percentages set forth in Schedule 2A.01 of the Credit Agreement and in subsection 2A.01.1(c) of the Credit Agreement. (e) Mellon shall discontinue making further advances of the Swing Loan as promptly as practicable after receipt of notice from NCB-Agent that the Banks, other than Mellon, require discontinuation of such further advances as a result of an Event of Default under the Credit Agreement. (f) Notwithstanding any provision to the contrary contained in the Credit Agreement, no part of this subsection 2A.06 may be modified or amended without the prior written consent of Mellon. 4. Subsection 2B.01 SUBJECT NOTES of the Credit Agreement shall be deleted in its entirety and the following shall be substituted in place thereof: 2B.01 SUBJECT NOTES - Each Bank's subject revolving credit loan and participation in respect of additional subject LCs and existing subject LCs shall be evidenced by subject notes executed and delivered by Borrower, payable to the order of that Bank aggregating in the principal amount equal to the dollar amount of that Bank's aggregate subject commitment therefor set forth in subsection 2A.01. Each subject note shall be in the form and substance of EXHIBIT 2B.01 with the blanks appropriately completed. Each of the subject term loans by each Bank shall be evidenced by a separate subject note or notes executed and delivered by Borrower, payable to the order of the Bank in principal amount equal to the dollar amount of Bank's subject commitment therefor; each such note shall be in form and substance of EXHIBIT 2B.01T with the blanks appropriately completed. The subject term loans are represented by series A subject term loan notes dated July 14, 1997 aggregating $17,000,000.00 and supplemental series A 6 subject term loan notes dated as of the date hereof aggregating $4,360,000.00 which includes a supplemental series A subject term loan note in the principal amount of $800,000.00 payable to Mellon for the maximum dollar amount of its subject commitment with respect to the increase in the aggregate series A subject term loan commitment of the Banks evidenced by the supplemental series A subject term loan notes dated as of the date hereof if the subject commitment of each of the Banks with respect to the series A subject term loan were adjusted pursuant to subsection 2A.06 hereof. (a) Whenever Borrower obtains a series of subject loans pursuant to this Agreement, each Bank shall make an appropriate entry into a loan account maintained in that Bank's books and records. Each entry shall be prima facie evidence of the data so entered; but such entries shall not be a condition to Borrower's obligation to pay. (b) No holder of any subject note shall transfer a subject note, or seek a judgment or file a proof of claim based on a subject note without in each case first endorsing the subject note to reflect the true amount owing thereon. 5. Subsection 2B.07 INTEREST RATES AND LETTER OF CREDIT COMMISSIONS of the Credit Agreement shall be deleted in its entirety and the following shall be substituted in place thereof: 2B.07 INTEREST RATES AND LETTER OF CREDIT COMMISSIONS - (a) Prior to maturity, the principal of subject revolving credit loans and term loans shall bear interest at the per annum rates and the commissions on the subject letters of credit (in both cases, computed in accordance with subsection 8.10) as calculated based on the following: (i) Prime rate loans shall bear interest at a fluctuating rate equal to the prime rate from time to time in effect, with each change in the prime rate automatically and immediately changing the rate thereafter applicable to the prime rate loans plus the applicable prime rate margin as determined in accordance with the following table; (ii) LIBOR loans shall bear interest at a rate equal to the LIBOR pre-margin rate in effect at the start of the applicable contract period (except that any change in the FRB reserve percentage shall automatically and immediately change the LIBOR pre-margin rate thereafter applicable to the LIBOR loans) plus the applicable LIBOR margin as determined in accordance with the following table; (iii) Commissions on existing subject LCs have been paid in advance through the respective dates set forth on EXHIBIT 2(B).07(iii). Commencing after such dates commissions on all subject LCs shall be adjusted quarterly on the last business day of each March, June, September and December of each year on the basis of the applicable percentage as determined in accordance with the following table: 7
============================= ============================== ===================================== ================== If the Borrower's and the Borrower's Then, both the applicable LIBOR And the Liabilities-to-Worth EBIT-to-Interest Ratio LIBOR margin and the applicable Ratio is: is: applicable letter of credit Prime rate commission shall be equal to: margin equals: - ----------------------------- ------------------------------ ------------------------------------- ------------------ less than or equal to Greater than or equal to 62.5 basis points 0 .75:1 4.50:1 - ----------------------------- ------------------------------ ------------------------------------- ------------------ greater than .75:1 but less Less than 4.50:1 but greater 75 basis points 0 than or equal to 1.25:1 than or equal to 3.50:1 - ----------------------------- ------------------------------ ------------------------------------- ------------------ Greater than 1.25:1 but Less than 3.50:1 but greater 100 basis points 0 less than or equal to 1.75:1 than or equal to 3.00:1 - ----------------------------- ------------------------------ ------------------------------------- ------------------ greater than 1.75:1 Less than 3.00:1 but greater 125 basis points 0 than or equal to 2.50:1 - ----------------------------- ------------------------------ ------------------------------------- ------------------ greater than 1.75:1 Less than 2.50:1 150 basis points 0 ============================= ============================== ===================================== ==================
Both the liabilities-to-worth ratio and EBIT-to-interest ratio must be satisfied in order for the corresponding applicable prime rate margin, applicable LIBOR margin and applicable letter of credit commission to be effective, and if either the specific liabilities-to-worth ratio or EBIT-to-interest ratio is not satisfied, then the next highest prime rate margin, LIBOR margin or applicable letter of credit commission shall be applicable. (b) After maturity (whether occurring by lapse of time or by acceleration), the prime rate loans shall bear interest at a fluctuating rate equal to the prime rate from time to time in effect plus two percent (2%) per annum; PROVIDED, that in no event shall the rate applicable to the prime rate loans after the maturity thereof be less than the rate applicable thereto immediately before maturity and each LIBOR loan shall bear interest computed and payable in the same manner as in the case of prime rate loans EXCEPT that in no event shall any LIBOR loan bear interest after maturity at a lesser rate than that applicable thereto immediately before maturity. 5. Subsection 3B.03 INTEREST COVERAGE of the Credit Agreement shall be deleted in its entirety and the following substituted in place thereof: 3B.03 INTEREST COVERAGE - On a consolidated statement basis, Borrower will not, as at the end of the fiscal quarter during any fiscal year of Borrower (commencing with the present year), suffer or permit its EBIT-to-interest ratio to be less than two and one-half to one (2.50:1) except as hereinafter provided. The Banks waive Borrower's compliance with the foregoing EBIT-to-interest ratio requirement as of December 31, 1998, and confirm that Borrower's EBIT determined as of December 31, 1998, shall not include, for purposes of determining Borrower's EBIT-to-interest ratio, the 1998 fiscal year-end asset valuation accounting adjustments totaling approximately $19,056,000.00 to eliminate the carrying value of OSLI's goodwill and to reduce to fair market value certain OSLI fixed assets and Borrower's investment in the OCR scrap trading joint venture. Further, notwithstanding the foregoing, Borrower's EBIT-to- 8 interest ratio for the fiscal quarter ending March 31, 1999 shall be not less than 1.65:1 and for the fiscal quarter ending June 30, 1999 shall be not less than 1.90:1. For purposes of calculating this ratio, Borrower's interest figure initially was based on the Borrower's actual interest expenses for the third quarter of 1996 annualized. On December 31, 1996, the interest figure was based on such actual expenses for the preceding six (6) months annualized. On March 31, 1997, the interest figure was based on such actual expenses for the preceding nine (9) months annualized. On June 30, 1997, and for every twelve (12) month period thereafter, the interest figure was and is to be based on the preceding twelve (12) months annualized. 6. Subsection 3D.04 FIXED ASSETS of the Credit Agreement shall be deleted in its entirety and the following substituted in its place thereof: 3D.04 FIXED ASSETS - Borrower will not, nor permit OSLI or OSMI to, invest (net after trade-ins, if any) in any fiscal year in fixed assets and leasehold improvements during any fiscal year (commencing with 1997) of more than Fifteen Million Dollars ($15,000,000). Notwithstanding the foregoing, expenditures made by Borrower during 1999 with respect to improving and equipping facilities at Chambersburg, Pennsylvania shall be excluded from such limitation to the extent financed pursuant to industrial development revenue bonds. 7. Prior to or at the execution and delivery of this Fifth Amendment, Borrower shall have complied with or caused compliance with each of the following: (a) Borrower shall have executed and delivered to the appropriate Bank a supplemental series A subject term loan note dated as of the date hereof in the following principal amounts which reflect the maximum dollar amount of each Bank's share of the increase in the aggregate series A subject term loan commitment of the Banks:
------------------------------------------------ --------------------------------------------------------- BANK SUPPLEMENTAL SERIES A SUBJECT TERM LOAN NOTE AMOUNT ------------------------------------------------ --------------------------------------------------------- ------------------------------------------------ --------------------------------------------------------- National City Bank $1,760,000.00 ------------------------------------------------ --------------------------------------------------------- Comerica Bank 1,120,000.00 ------------------------------------------------ --------------------------------------------------------- Mellon Bank, N.A. 800,000.00 ------------------------------------------------ --------------------------------------------------------- PNC Bank National Association 680,000.00 ---------- ------------------------------------------------ --------------------------------------------------------- Total $4,360,000.00 ============= ------------------------------------------------ ---------------------------------------------------------
(b) OSII shall have executed and delivered to NCB-Agent a supplement to the OSII Guaranty of Payment dated July 17, 1997 and OSII Security Agreement dated July __, 1998 in form and substance satisfactory to NCB-Agent so as to extend the amount of OSII's subject guaranty and the security interest securing such subject guaranty to include the increased amount of the series A subject term loan commitment of the Banks. (c) Borrower's secretary shall have certified to each Bank resolutions duly adopted by Borrower's board of directors in respect of this Fifth Amendment and the matters 9 contemplated hereby and authorizing execution, delivery and performance of this Fifth Amendment and the subject notes to be delivered by Borrower pursuant to this Fifth Amendment. (d) OSII's secretary shall have certified to each Bank resolutions duly adopted by OSII's board of directors authorizing the execution, delivery and performance of the supplement to OSII's subject guaranty and the OSII Security Agreement dated July __, 1998. (e) Borrower shall pay or cause to be paid to NCB-Agent a waiver and amendment fee in the amount of $85,000.00 to be shared ratably among the Banks. 8. From and after the effective date of this Fifth Amendment, references in the Credit Agreement and the subject notes (as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment and this Fifth Amendment thereto or pursuant to such amendments) to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended by all such amendments (unless otherwise expressly indicated) and the subject notes shall be deemed to include the revolving credit loan notes and replacements thereof and the series A subject term loan notes and the supplemental series A subject term loan notes executed and delivered pursuant to this Fifth Amendment. 9. Borrower restates and reaffirms all of its representations and warranties set forth in Section 4B of the Credit Agreement as of the date hereof. 10. This Fifth Amendment and the modifications set forth herein shall be and become effective as of the date hereof. 11. The Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and this Fifth Amendment, is hereby ratified and confirmed. 12. This Fifth Amendment may be executed in one or more counterparts, each counterpart to be executed by Borrower, by NCB-Agent and by one or more or all of the Banks. Each such executed counterpart shall be deemed to be an executed original for all purposes but all such counterparts taken together shall constitute one agreement, which agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. 13. This Fifth Amendment may be executed by representatives of the Banks using facsimile signatures and facsimilied signature pages shall in all respects be binding on all parties hereto and thereto as if such signature pages were originally delivered. Original signature pages for all facsimilied signature pages shall be delivered to NCB-Agent not later than March 15, 1999. IN WITNESS WHEREOF, the parties have executed this Fifth Amendment as of the date first above written. 10 NATIONAL CITY BANK, AGENT OLYMPIC STEEL, INC. By: By: ------------------------------- ---------------------------- Sean P. Richardson Richard T. Marabito Vice President Treasurer NATIONAL CITY BANK MELLON BANK, N.A. By: By: ------------------------------ ---------------------------- Sean P. Richardson John K. Walsh Vice President Vice President COMERICA BANK PNC BANK, NATIONAL ASSOCIATION By: By: ------------------------------ ---------------------------- Richard S. Arceci Mark W. Rutherford Vice President Vice President 11 SCHEDULE 2A.06 -------------- DATED MARCH, 1999 ADJUSTED SUBJECT COMMITMENTS RESULTING FROM SWING LOAN Subject commitments for subject revolving credit loans and subject LCs Schedule 2A.01
- -------------------------- ---------------------------- --------------------- ---------------------- -------------- Subject revolving credit Bank loans and additional Existing subject Aggregate Subject Percentage subject LCs (excluding LCs* Commitment* existing subject LCs) - -------------------------- ---------------------------- --------------------- ---------------------- -------------- National City Bank $22,880,000 $3,556,691 $26,436,691 44% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Comerica Bank $14,560,000 $2,263,349 $16,823,349 28% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Mellon Bank, N.A. $5,720,000 $889,173 $6,609,173 11% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- PNC Bank, National Association $8,840,000 $1,374,176 $10,214,176 17% - -------------------------- ---------------------------- --------------------- ---------------------- -------------- Total $52,000,000 $8,083,389 $60,083,389 100% - -------------------------- ---------------------------- --------------------- ---------------------- --------------
* Rounded to the nearest whole dollar (as of 12/03/98).
Series A term loan subject commitments Section 2A.01.1(c) ============================================== ====================================== ============================== Bank Series A Subject Term Loan Percentage - ---------------------------------------------- -------------------------------------- ------------------------------ National City Bank $9,240,000 44% - ---------------------------------------------- -------------------------------------- ------------------------------ Comerica Bank $5,880,000 28% - ---------------------------------------------- -------------------------------------- ------------------------------ Mellon Bank, N.A. $2,310,000 11% - ---------------------------------------------- -------------------------------------- ------------------------------ PNC Bank, National Association $3,570,000 17% - ---------------------------------------------- -------------------------------------- ------------------------------ Total $21,000,000 100% ============================================== ====================================== ==============================
12 SCHEDULE 2A.06(b) (II) ---------------------- DATED MARCH, 1999 ADJUSTMENT OF BANKS' SUBJECT COMMITMENTS AS A RESULT OF A SWING LOAN REDUCTION
- ------------------------------ --------------------------------------------------------------------------------------- If the Maximum Then the percentage of the aggregate Swing Loan Amount is: subject commitment of the Banks is: - ---------------------------------- --------------------- --------------------- --------------------- --------------------- PNC BANK NATIONAL CITY COMERICA NATIONAL MELLON BANK BANK BANK ASSOCIATION - ---------------------------------- --------------------- --------------------- --------------------- --------------------- $16,000,000 11% 44% 28% 17% - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $16,000,000 but 12% 43.5% 27.7% 16.8% greater than or equal to $14,222,222 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $14,222,222 but 13% 43% 27.4% 16.6% greater than or equal to $12,444,444 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $12,444,444 but 14% 42.5% 27.1% 16.4% greater than or equal to $10,666,667 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $10,666,667 but 15% 42.1% 26.8% 16.1% greater than or equal to $8,888,889 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $8,888,889 but 16% 41.7% 26.5% 15.8% greater than or equal to $7,111,111 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $7,111,111 but 17% 41.3% 26.1% 15.6% greater than or equal to $5,333,333 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $5,333,333 but 18% 40.8% 25.8% 15.4% greater than or equal to $3,555,556 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $3,555,556 but 19% 40.4% 25.4% 15.2% greater than or equal to $1,777,778 - ---------------------------------- --------------------- --------------------- --------------------- --------------------- Less than $1,777,778 20% 40% 25% 15% - ---------------------------------- --------------------- --------------------- --------------------- ---------------------
EX-10.7 4 EXHIBIT 10.7 1 Exhibit 10.7 OLYMPIC STEEL, INC. CARRIER CONTRACT AGREEMENT This Agreement, made and entered into on August 1, 1998, between Lincoln Trucking Company, of Bedford Heights, Ohio, an Ohio Corporation ("hereinafter referred to as "Carrier"), and Olympic Steel, Inc, an Ohio Corporation of Bedford Heights, Ohio (hereinafter referred to as "Shipper"). Whereas, Olympic Steel tenders inbound and outbound freight shipments from and to its vendors, suppliers, and customers, all shall hereinafter be referred to as "Shipper". Whereas, Lincoln Trucking Company, represents that it has all necessary operating authority, insurance certification and means to transport general commodities and provide specialized contract carrier services. That "Carrier" holds and will continue to register and hold said Permit as a Motor Contract Carrier issued by the Interstate Commerce Commission ("ICC") and identified by Permit No. MC 343708 which indicates that "Carrier", holds permanent operating authority as a contract carrier. Whereas, Lincoln Trucking Company represents that "Carrier" holds a permit to operate as a "Contract Motor Carrier" as is defined under Chapter 4923 of the Ohio Revised Code, and issued by the Public Utilities Commission of Ohio ("PUCO") and identified as Permit No. 128797-P, which was issued pursuant to Ohio Law, as previously referenced. "Carrier" will continue to register its ICC authority with the PUCO in accordance with all-applicable laws, rules and regulations. Now, therefore, the parties hereto agree to enter into this contract, binding themselves to the mutual covenants, terms, and conditions. Olympic Steel and "Carrier" agree as follows: VOLUME ------ Olympic Steel will offer "Carrier" from time to time, a series of shipments to and from such points between which service may be required and "Carrier" is authorized to operate. Olympic Steel makes no commitment to tender or cause to be tendered any specific number of shipments or revenue to "Carrier". This Agreement does not grant "Carrier" an exclusive right to perform transportation and related services for Olympic Steel, Inc. its vendors, suppliers, or customers. Shipper shall not be liable for any failure to tender shipments to "Carrier". 2 SERVICES -------- "Carrier" agrees to meet the distinct needs of Olympic Steel and its vendors, suppliers and customers by transporting specifically tendered shipments between the designated origins and destinations within the service parameters required by Olympic Steel. These service and equipment requirements unless herein stated, shall be further set forth in Schedule(s), which shall become part of this Agreement. "Carrier" shall dedicate to Shipper, for Shipper's exclusive use, a minimum of 8 trucks daily, during the term of this agreement and transport customers freight without delay caused by anything in Carriers control. "Carrier" shall immediately communicate all occurrences, which would be probable or certain to cause delay, to Olympic Steel. "Carrier agrees to always tarp and secure all of Shipper's commodities at Carrier's expense. "Carrier" shall obtain and provide equipment at its sole expense. Shipper agrees to make reasonable efforts to advise "Carrier" of any other equipment or services required by Shipper in connection with delivery of Shipper's commodities. "Carrier" covenants and agrees at its sole cost and expense to keep its equipment in good repair, mechanical condition and running order. RATES AND CHARGES ----------------- Rates and charges for shipments transported under this Agreement shall be agreed to in writing between Olympic Steel and "Carrier" and are set forth in the Schedule A & B attached. Schedules contain conditions applicable to linehaul rates, non-linehaul rates, and assessorial charges. "Carrier" represents and warrants that there are no other applicable rates or charges except those established and agreed to in the Schedule(s) attached, and that if there are no charges in a Schedule, then Carrier's rates shall be all inclusive. Rates may be established and changed by agreement between the parties in order to meet specific time requirements and shall be deemed "in writing" and supplement this Agreement if "Carrier" faxes a signed copy of the applicable rates and charges to Olympic Steel and Olympic accepts and returns a signed faxed copy of same to the Carrier. Attached to this agreement are the two (2) formal Rate Schedules to become effective at execution of this agreement : Schedule A (Rates for Ohio Points) and Schedule B (Rates for Out of Ohio points) TERMS OF PAYMENT ---------------- Olympic Steel agrees to pay "Carrier" for services performed under this Agreement in accordance with the rates and charges set forth in the Schedules A & B. Olympic Steel shall pay "Carrier" within Seven (7) days (unless otherwise agreed to in separate Schedule) following receipt of "Carrier's" freight bill accompanied by a signed clear delivery receipt, bill of lading, or dray ticket, whichever may be required based on service(s) performed. 3 INSURANCE --------- "Carrier", at Carrier's expense, shall maintain the following minimum insurance at all times, while under agreement with Olympic Steel: 1) Automobile liability insurance on all trucks and other equipment used by Carrier in an amount not less than $ 1,000,000 per occurrence with a deductible or self-insured amount not to exceed $10,000 2) General liability insurance with minimum limits not less than $1,000,000 per occurrence with a deductible or self-insured amount not to exceed $10,000 3) Cargo liability insurance with minimum limits of not less than $100,000 per shipment with a deductible or self-insured amount not to exceed $10,000 "Carrier" shall furnish a copy of policy, certificate of insurance or other acceptable proof of insurance naming Olympic Steel as additional insured. Carrier's insurance shall be primary and required to respond and pay prior to any other available coverage. "Carrier" agrees that Carrier, Carrier's insurer(s), and anyone claiming through Carrier shall have no claim, right of action, or right of subrogation against Olympic Steel or its vendor, supplier or customers based on any loss or liability insured under the foregoing insurance. Olympic Steel shall be notified in writing by Carrier's insurance company at least 10 days prior to cancellation, change or non-renewal of submitted insurance policies. INDEMNIFICATION --------------- "Carrier" agrees to indemnify, defend and hold Olympic Steel and its vendors, suppliers, and customers (including their officers, directors, employees, subcontractors and agents) harmless from and against any and all liabilities, damages, fines, penalties, costs, claim demands and expenses (including costs of defense, settlement, and reasonable attorneys fees) of whatever type or nature, including damage or destruction of any property, or injury (including death) to any person, arising out of or related to, directly or indirectly ( 1) the transportation and related services rendered by the Carrier, (2) any act or omission by Carrier, its agents, employees or subcontractors, (3) any claims or actions by Carrier's agents, employees or subcontractors, (4) the failure of Carrier, its agents or subcontractors to comply with this Agreement or any applicable United States or Canadian federal, provincial, state or local law, statute, regulation, rule ordinance or government directive which may directly or indirectly regulate or affect the obligations of Carrier under this Agreement. The obligations of "Carrier" under this Section shall survive the termination of this Agreement. 4 FORCE MAJEURE CLAUSE -------------------- "Carrier", to the same extent Olympic Steel, Inc. is not held liable by its customer, vendor or supplier, shall not be held liable for failure to perform any of it's obligations under this Agreement or schedules if such failure is caused by acts of God, war, civil disorder or through compliance with any legally constituted order of civil or military authorities. CLAIMS ------ "Carrier" shall be liable as a contract carrier for loss, damage to or destruction of any and all of Olympic Steel's ("Shipper") property, which is under "Carrier" care, custody or control. The liability shall be the invoice cost of the lost or damaged property or in the absence of such invoice, liability shall be actual cash market value of the property. Olympic Steel's loss shall be determined in accordance with common law. Such liability shall begin at time the property is loaded on equipment at point of origin and released to "Carrier". Carrier's liability shall end when it delivers property to designated consignee and receives signed documentation of clear and full acceptance by consignee. Cargo which has been tendered to "Carrier" dry and intact and released by Carrier in a wet or damaged condition or lost, visible or concealed, shall be presumed to have been damaged, lost or destroyed by Carrier unless Carrier can provide clear and convincing evidence to the contrary. Olympic Steel may deduct the full amount of loss from any compensation Olympic Steel owes Carrier or demand carrier pay loss directly to Olympic Steel. Carrier shall settle and pay all claims within 60 days of receipt of claim. In return, Olympic Steel shall be held responsible for reasonable payment of damages to "carrier" equipment while under Olympics' control ( on our property without "carrier" driver or carrier representative present) with said damages clearly found to have been caused by Olympic Steel personnel, only. Olympic will not be held liable or responsible for drivers personal property left behind in the equipment. RELATIONSHIP ------------ The "Carrier" agrees that the relationship to Olympic Steel shall, at all times, be that of an independent contractor. "Carrier" and not Olympic Steel has the sole responsibility for the safe and proper operation of equipment used by Carrier in performance of this Agreement. "Carrier" agrees that all its equipment and drivers are in full compliance with all applicable Federal and State and Local regulations. "Carrier" acknowledges full responsibility for the payment of all expenses, including but not limited to, insurance, federal, state, and local taxes and assessments, and all other cost related, directly or indirectly, to the performance of the transportation and related services of this Agreement. "Carrier" shall indemnify, defend, and hold 5 Olympic Steel and its vendors, suppliers, and customers harmless from and against any and all liabilities of any type. TERMS AND NOTICE ---------------- The term of this Agreement shall cover all shipments made by "Carrier" for "Shipper" commencing on the date of execution hereof and shall remain in effect for a period of ONE (1) YEAR so long as services in the agreement and Schedule(s) remain in effect. Agreement shall be automatically renewed for like periods unless canceled by either party hereto upon thirty (30) days written and certified notice to the other. Either party may cancel or terminate this agreement at any time for any reason upon not less than thirty (30) days written and certified notice of one party to the other. Notices under this Agreement shall be in writing and sent to the parties' addresses below by fax and certified U.S.Mail. "SHIPPER": "CARRIER" OLYMPIC STEEL, INC. LINCOLN TRUCKING COMPANY 5080 Richmond Road 5060 Richmond Road Bedford Heights, OH 44146 Bedford Heights, OH 44146 Attn: VP, Corporate Logistics Attn: President FAX: (216) 292-3974 FAX: (216) 292-0291 ENTIRE AGREEMENT ---------------- This Agreement, including the Schedules (A & B) constitutes the entire agreement between the parties with respect to the subject matter of this Agreement. Any clause of this Agreement found to be invalid will invalidate that clause only. All other terms and conditions will remain in effect. This agreement shall supercede all prior written and oral agreements between Carrier and Olympic Steel, Inc. MODIFICATION ------------ No Waiver, alteration or modification of any of the provisions of this Agreement or any Schedule, shall be binding upon either party, unless in writing signed by the duly authorized representative of the party against whom such waiver, alteration or modification is sought to be enforced. Waiver by either party of any breach or failure to comply with any provisions of this Agreement or any Schedule by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of 6 any other breach of, or failure to comply with any other provisions of this Agreement or and Schedule. APPLICABLE LAW -------------- The terms and conditions of this Agreement shall be governed by, and enforced in accordance with, the laws of the state of Ohio, and any suit or action enforcing the terms and conditions of this Agreement shall be brought and adjudicated in the court of general jurisdiction for Cuyahoga County, Ohio. MUTUAL COOPERATION AND RESOLUTION OF DISPUTES --------------------------------------------- Both parties understand and agree that they must cooperate in order to ensure the best, most efficient, and economical transportation and related services. If any dispute arises in connection with this Agreement or any Schedule, the representatives of Olympic Steel and "Carrier" primarily responsible for the negotiation and performance of the applicable Schedule(s) shall attempt to resolve such dispute. If the representatives are unable, after reasonably diligent effort, to resolve the dispute, it shall be referred in a panel consisting of an executive of Olympic Steel and of "Carrier" for resolution. If the Panel is unable to resolve the dispute after reasonably diligent effort, the matter may, by mutual agreement, be referred to binding arbitration, or either party may resort to litigation. In the event the matter is referred to arbitration or litigated, the non-prevailing party shall bear all related costs, including the prevailing party's reasonable attorneys' fees. In witness whereof, the parties hereto have caused this Agreement to be executed on the day and year first above written. "SHIPPER" "CARRIER" OLYMPIC STEEL, INC. LINCOLN TRUCKING COMPANY By: By: ----------------------- --------------------------- Name: THOMAS A. POLIDORO Name: LYNNE ZIMET Title: V.P.,Corporate Logistics Title: President Date: Date: --------------------- ------------------------- EX-21 5 EXHIBIT 21 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF OLYMPIC STEEL, INC.
NAME OF SUBSIDIARY STATE OF ORGANIZATION % OWNERSHIP - ------------------ --------------------- ----------- Olympia International, Inc. U.S. Virgin Islands 100% Olympic Steel Lafayette, Inc. Ohio 100% Olympic Steel Minneapolis, Inc. Minnesota 100% Olympic Steel Receivables, Inc. Delaware 100% Olympic Steel Receivables LLC Delaware 100% (a) Olympic Steel Trading, Inc. Ohio 100% Oly Steel Welding, Inc. Michigan 100% Olympic Steel Iowa, Inc. Iowa 100% (b) Olympic Continental Resources LLC Ohio 45% (c) OLP LLC Michigan 50% (d) Trumark Steel & Processing LLC Michigan 49% (e)
(a) Owned 100% by Olympic Steel, Inc. and Olympic Steel Receivables, Inc. (b) Owned 100% by Olympic Steel Minneapolis, Inc. (c) Owned 45% by Olympic Steel Trading, Inc. (d) Owned 50% by Oly Steel Welding, Inc. (e) Owned 49% by Oly Steel Welding, Inc. EX-23 6 EXHIBIT 23 1 ================================================================================ EXHIBIT 23 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation of our report dated February 1, 1999, included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement File No. 333-10679. Arthur Andersen LLP Cleveland, Ohio March 12, 1999 EX-24 7 EXHIBIT 24 1 EXHIBIT 24 POWERS OF ATTORNEY ------------------ OLYMPIC STEEL, INC. ------------------- KNOW ALL MEN BY THESE PRESENTS, that OLYMPIC STEEL, INC., an Ohio corporation, and each person whose name is signed below hereby constitute and appoint Michael D. Siegal, R. Louis Schneeberger and Richard T. Marabito their attorneys-in-fact and agents, with full power of substitution and resubstitution, for and on behalf of Olympic Steel, Inc. and the undersigned Directors and officers of Olympic Steel, Inc., and each of such Directors and officers, to sign Olympic Steel, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998, any or all amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorneys-in-fact and agents or their substitute or substitutes may do or cause to be done by virtue hereof. This Power of Attorney of Olympic Steel, Inc., and the Directors and officers of Olympic Steel, Inc. may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it. IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 12th day of March, 1999. OLYMPIC STEEL, INC. By: /s/ R. Louis Schneeberger --------------------------------------- R. Louis Schneeberger, Chief Financial Officer DIRECTORS AND OFFICERS: /s/ Martin H. Elrad /s/ R. Louis Schneeberger - ----------------------------- ------------------------------------------- Martin H. Elrad, Director R. Louis Schneeberger, Chief Financial Officer and Director /s/ Thomas M. Forman /s/ Michael D. Siegal - ----------------------------- ------------------------------------------- Thomas M. Forman, Director Michael D. Siegal, President, Chief Executive Officer and Chairman of the Board /s/ Suren A. Hovsepian /s/ David A. Wolfort - ----------------------------- ------------------------------------------- Suren A. Hovsepian, David A. Wolfort, Consultant and Director Chief Operating Officer and Director /s/ Betsy S. Atkins /s/ Richard T. Marabito - ----------------------------- ------------------------------------------- Betsy S. Atkins, Director Richard T. Marabito, Treasurer and Corporate Controller (Principal Accounting Officer) EX-27 8 EXHIBIT 27
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,825 0 3,096 0 121,407 132,080 144,762 (25,450) 256,108 43,225 39,070 0 0 106,319 31,424 256,108 576,189 576,189 455,544 455,544 125,184 0 3,856 (12,490) (4,059) (8,431) 0 0 0 (8,431) (0.79) (0.79)
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