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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission file number 0-14061
STEEL TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0712014
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15415 Shelbyville Road, Louisville, KY 40245
(Address of principal executive offices)
Registrant's telephone number, including area code: 502-245-2110
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
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, 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 amendments to
this Form 10-K. [X]
Aggregate market value of the voting stock (which consists solely of shares of
common stock) held by non-affiliates of the registrant as of December 6, 2002,
computed by reference to the closing price of the registrant's common stock, as
quoted in the Nasdaq National Market System on such date: $162,176,302.
Number of shares of the registrant's Common Stock outstanding at December 6,
2002: 9,722,217.
1
Portions of the registrant's annual report to shareholders for the fiscal year
ended September 30, 2002 are incorporated by reference into Part II. Portions of
the definitive proxy statement furnished to shareholders of the registrant in
connection with the annual meeting of shareholders to be held on January 23,
2003 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Steel Technologies Inc. ("the Company") was incorporated under the laws of the
state of Kentucky in 1971 as Southern Strip Steel, Inc. In June 1985, the name
of the corporation was changed to Steel Technologies Inc.
The Company is an intermediate steel processor engaged in the business of
processing flat rolled steel to specified close tolerances in response to orders
from industrial customers who require steel of precise thickness, width, temper,
finish and shape for their manufacturing purposes. The Company purchases
commercial tolerance steel in coils up to 72 inches in width from major steel
mills, processing it to customer specification. The processed steel is
distributed from facilities located in Indiana, Kentucky, Michigan, Missouri,
North Carolina, Ohio and South Carolina in the U.S. and three facilities in
Mexico. The Company has customers in 34 states primarily in the East, Midwest
and South, as well as into Mexico and Canada. The Company's principal processed
products are: cold-rolled strip and sheet, cold-rolled one-pass strip, high
carbon and alloy strip and sheet, hot-rolled strip and sheet, high strength low
alloy strip and sheet, hot-rolled pickle and oil and coated strip and sheet,
pickling of hot-rolled black coils, blanking and cut-to-length processing of
coil steel, and fabrication and welding of steel sheets and plates.
Intermediate steel processors occupy a niche between the primary steel producers
and industrial customers who need processed steel for their end-product
manufacturing purposes. The primary producers have historically emphasized the
sale of commercial tolerance steel to large volume purchasers and have generally
viewed the intermediate steel processor as an integral part of this customer
base. Furthermore, end-product manufacturers have increasingly sought to
purchase steel with closer tolerances, on shorter lead times, and with more
reliable and more frequent delivery than the primary producers can efficiently
provide. Additionally, most manufacturers are not willing to commit to the
investment in technology, equipment and inventory required to further process
the steel for use in their manufacturing operations. These industry forces have
created a market in which the strength of the Company's business is based upon
its capability to process steel to more precise specifications and to service
the steel purchasing and delivery requirements of its customers more
expeditiously than the primary producers.
STEEL PROCESSING
The Company maintains inventory of coiled steel purchased from the primary
producers and mini-mills. This steel, purchased as a continuous sheet, typically
36 to 72 inches wide and between .015 and .625 inches thick is known as
"commercial tolerance" because its ranges of thickness, width and temper are
established by general industry standards which may not be of sufficient quality
for the manufacturing purposes of the Company's customers.
Customer orders are entered in a computerized order entry system, 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 from its inventory by scheduling customer orders to use to the
fullest extent practicable the purchased widths of its coils. One of the first
processing functions involves the pickling of hot rolled black coil steel. This
process is a cleaning process that improves the quality of hot rolled steel by
removing the scale on the surface of the steel and prepares the hot rolled steel
for further processing. The next processing function typically involves slitting
coils to specified widths subject to close tolerances. After slitting, the
processed product is ready for either delivery to the customer or additional
processing.
1
Many of the Company's orders involve an additional process known as "cold
reduction." Cold reduction reduces the thickness of the steel to a customer's
specification by passing the steel through a set of rolls under pressure. This
process significantly increases the value added by the Company to the product.
During the rolling process the edges of the steel may also be conditioned into
square, full round or partially round shapes. After cold reduction, it is
sometimes necessary to subject the rolled steel to high temperatures for long
periods of time in order to "anneal" or soften the steel. This annealing
capability is accomplished in the Company's own furnaces and is particularly
suitable for high carbon and alloy strip orders. After annealing, orders are
then ready for additional slitting and cold reduction and subsequent shipment to
the customer.
The Company has achieved high quality and productivity levels through its
commitment to modern and efficient equipment used to perform the pickling,
slitting, cold reduction, annealing and blanking processes. The Company's
pickling facility is capable of high volume pickling, leveling, coating and
slitting of hot rolled steel to greater than industry standards. The Company's
slitting lines are capable of maintaining width tolerances of +/- .002 inches.
The Company has computerized all of its rolling equipment, which has improved
its capability to deliver flat rolled steel products processed to closer than
standard tolerances. The Company's computerized rolling mills are capable of
maintaining thickness tolerances of +/-.0003 inches. Computers monitor thickness
during the cold reduction process, rapidly adjusting roll position to maintain
the proper tolerance as the steel passes through the rolling mill. The computers
also provide both visual displays and documented records of the thickness
maintained throughout the entire coil. Annealing is accomplished in high
convection bell furnaces. These furnaces feature extraordinary thermal
consistency, rapid water cooling and advanced atmosphere controls for good
surface cleanliness of the rolled steel product. The Company's blanking lines
are capable of producing blanks from coils up to 84 inches in width and maximum
gauge of .25 inches thick. Flatness of the steel is controlled by an automatic
hydraulic leveler and diagnostic equipment that continually monitors the steel
during processing to minimize scrap and provide up-to-the minute production
information.
QUALITY CONTROL
The ability to obtain high quality steel from its suppliers on a consistent
basis is critical to the Company's business. Most of any nonconforming raw
material is diverted to less critical applications. The Company, through its
technical services department, has instituted strict quality control measures to
assure that the quality of purchased raw materials will allow the Company to
meet the specifications of its customers and to reduce the costs of production
interruptions resulting from poor quality steel. Physical, chemical, and
metallographic analyses are performed on selected raw materials to verify that
their mechanical and dimensional properties, cleanliness, surface
characteristics, and chemical content are acceptable. Similar analyses are
conducted on processed steel on a selected basis before delivery to the
customer. The Company also uses statistical process control techniques to
monitor its slitting and cold reduction processes so management can document to
customers that required tolerances have been continuously maintained throughout
processing. This close attention to product quality has enabled the Company to
limit the amount of customer returns and allowances. The Company's technical
services department is located in the research and development engineering and
technology center in Louisville, Kentucky. The Company's metallurgical
laboratory is located in the Eminence, Kentucky plant.
MARKETING
The Company's marketing staff consists of sales personnel located throughout the
United States and Mexico. In addition to cultivating additional business from
existing customers and developing new accounts, these sales personnel are
responsible for identifying market trends in their assigned areas. The marketing
staff consists of one Senior Vice President-Sales, five regional Vice
Presidents-Sales, and by the Company's technical services department, which
develops application engineering ideas. The Company is frequently requested to
recommend the type of steel which can best serve a customer's specific needs.
2
CUSTOMERS AND DISTRIBUTION
The Company produces to customer order rather than for inventory. Although some
blanket orders are taken for periods of up to one year, such blanket orders
represent a projection of anticipated customer requirements and do not become
firm orders until the customer calls for delivery of specified quantities of
particular products at specified times. The Company is therefore required to
maintain a substantial inventory of raw materials to meet the short lead times
and just-in-time delivery requirements of many of its customers. Customers
typically place firm orders for delivery within two to three weeks.
The Company processes steel for sale to a variety of industrial customers,
including those in the automotive, automotive supply, appliance, lawn and
garden, railcar, machinery and office equipment industries. In fiscal 2002,
2001, and 2000 sales to the automotive industry directly accounted for 10% of
the Company's sales and sales to the automotive supply industry accounted for
50%. The Company believes its long-term relationships with its major customers
are a significant factor in its business.
The Company supplies processed steel to more than approximately 900 active
accounts. These customers are generally located within 300 miles of one of the
Company's plants. The location of Company facilities near a great number of
customers permits the efficient distribution of the Company's products by truck.
Independent trucking companies afford a convenient and expeditious means for
shipping approximately two-thirds of the Company's products to its customers.
The Company also maintains a small number of tractor-trailer trucks to provide
flexible delivery service to those customers who do not arrange for their own
shipping needs.
SUPPLIERS
In 2002, the Company obtained its steel for processing from a number of
integrated and mini mill sources close to its facilities and a limited number of
foreign steel companies. The Company obtains its raw material requirements by
ordering steel possessing specified physical qualities and alloy content. The
Company believes that it is not dependent on any one of its suppliers for raw
materials and that its relationships with its suppliers are good.
JOINT VENTURES
In April 1987, the Company formed Mi-Tech Steel, Inc. (Mi-Tech Steel), a 50%
owned corporate joint venture with Mitsui Steel Development Co., Inc. Mi-Tech
Steel was established to own and operate high-volume steel slitting facilities
to serve Japanese and domestic automotive and appliance parts manufacturers
located in the United States. The initial processing facility was opened in
December 1987 in Murfreesboro, Tennessee. In January 1990, a second Mi-Tech
Steel processing facility opened in Greensburg, Indiana. A third processing
facility, the first for Mi-Tech Steel with pickling and slitting capabilities
opened in December 1997 in Decatur, Alabama. During the second quarter of 2001,
Mi-Tech Steel discontinued it Decatur, Alabama operation. Mi-Tech Steel is
pursuing alternatives to sell its assets in Decatur. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
Mi-Tech Steel recorded an impairment charge associated with this facility based
on its estimates of fair value. The Company's share of Mi-Tech Steel's
impairment charges recorded during the second quarter of fiscal 2001 was
approximately $6.5 million. Steel Technologies is also providing management
services for the Mi-Tech Steel operations.
In October 1990, Processing Technology, Inc. (Processing Technology), was
established. The Company holds a 5% investment in the common stock of this
corporate joint venture with LTV Steel Company and Mitsui Steel Development Co.,
Inc. Processing Technology operates facilities in Perrysburg, Ohio and Burns
Harbor, Indiana, which process flat rolled steel and provide steel storage
principally for LTV Steel Company. Both facilities began operations in fiscal
1992. During the second quarter of fiscal 2001, the Company determined that
Processing Technology was not able to sustain an earnings capacity which
justified the carrying amount of its investment due to the deteriorating
financial condition of PTI and its principal customer. Accordingly, the Company
wrote off its approximate $1 million investment in PTI in accordance with
Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
3
In September 2001, the Company purchased 49% of Ferrolux Metals Co., LLC
(Ferrolux) from Ferragon Corporation. Ferrolux operates a facility in Wayne,
Michigan as a steel processor specializing in exposed automotive products.
COMPETITION
Steel processing is highly competitive. The Company primarily competes with a
number of other intermediate steel processors who are capable of processing
steel to closer than standard tolerance. The primary characteristics of
competition encountered by the Company are quality of product, reliability of
delivery and price.
ENVIRONMENTAL MATTERS
The Company's manufacturing facilities are subject to many existing and proposed
federal, state and foreign regulations designed to protect the environment.
Presently, the Company has no knowledge of any material pending or threatened
litigation or administrative proceeding against the Company involving
environmental matters. Management believes the Company's manufacturing
facilities are in compliance with applicable federal, state and foreign
environmental regulations, and is not presently aware of any fact or
circumstance which would require the expenditure of material amounts for
environmental compliance in the future.
EMPLOYEES
As of September 30, 2002, the Company employed approximately 983 full-time
people, of which approximately 104 are represented by collective bargaining
agreements. The Company has never experienced a significant work stoppage and
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's principal processing plants and distribution facilities are as
follows:
Square Year Opened/
Plant Location Footage Acquired
- -------------- ------- ------------
Eminence, Kentucky 180,000 sq.ft. 1971
Portage, Indiana 242,000 sq.ft. 1987
Canton, Michigan 230,000 sq.ft. 1991
Monterrey, Mexico 80,000 sq.ft. 1994
Ghent, Kentucky 230,000 sq.ft. 1995
Puebla, Mexico 20,000 sq.ft. 1997
Clinton, No. Carolina 110,000 sq.ft. 1997
Willoughby, Ohio 75,000 sq.ft. 1998
Huger, So. Carolina 84,000 sq.ft. 1999
Kennett, Missouri 94,000 sq.ft. 2000
Wurtland, Kentucky 47,000 sq.ft. 2000
Matamoros, Mexico 80,000 sq.ft. 2000
All of these facilities are owned by the Company except for the Puebla facility
which is leased. In 1999, the Company purchased the real property used for
processing in North Carolina and Ohio. Prior to that, the company had lease
arrangements with these facilities subsequently purchased. The Company's Elkton,
Maryland facility, consisting of 60,000 square feet, was opened in 1989, ceased
operations during 2002 and is currently available for sale.
The Company's executive offices are located in Louisville, Kentucky in a 30,000
square foot building owned by the Company. The Company's administrative services
offices are also located in 4,400 square feet of space leased in Louisville,
Kentucky.
4
Mi-Tech Steel currently operates two high volume steel slitting operations. The
Murfreesboro, Tennessee plant and Greensburg, Indiana Plant consist of 300,000
and 160,000 square feet respectively. Mi-Tech Steel is pursuing alternatives to
sell its two facilities in Decatur, Alabama which comprise 160,000 square feet.
All operating properties are in good repair and in suitable condition for the
purposes for which they are used.
Mi-Tech Steel currently operates two high volume steel slitting operations. The
Murfreesboro, Tennessee plant and Greensburg, Indiana Plant consist of 300,000
and 160,000 square feet respectively. Mi-Tech Steel is pursuing alternatives to
sell its two facilities in Decatur, Alabama which comprise 160,000 square feet.
All operating properties are in good repair and in suitable condition for the
purposes for which they are used. The Company's Elkton, Maryland and Kennett,
Missouri processing plants and the executive office building are subject to
outstanding mortgages covering certain long-term financing arrangements.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, positions held and ages of all the
executive officers of the Company:
Name Age Title
- ---- --- -----
Merwin J. Ray 73 Founding Chairman of the Board
Bradford T. Ray 44 Chairman of the Board and Chief Executive Officer
Michael J. Carroll 45 President and Chief Operating Officer
Howard F. Bates, Jr. 56 Vice President-Technical Services
Joseph P. Bellino 52 Chief Financial Officer and Treasurer
Brad A. Goranson 48 Senior Vice President-Sales
Officers are elected annually by and serve at the discretion of the Board of
Directors. All of the above listed officers except for Brad A. Goranson are
members of the Company's Board of Directors.
Mr. Merwin J. Ray has served as Founding Chairman since January 2002. He
previously held the position of Chairman of the Board from the inception of the
Company in 1971 to January 2002 and Chief Executive Officer from May 1985 to
November 1999. Mr. Ray is the father of Bradford T. Ray, Chairman of the Board &
Chief Executive Officer of the Company.
Mr. Bradford T. Ray has served as Chairman of the Board since January 2002 and
Vice Chairman and Chief Executive Officer since November 1999. He previously
held the positions President and Chief Operating Officer from November 1994
until November 1999, Executive Vice President from April 1993 to November 1994
and Vice President-Manufacturing of the Company from January 1987 to April 1993.
Mr. Michael J. Carroll has served as President and Chief Operating Officer since
November 1999. He previously held the positions of Executive Vice President from
January 1995 until November 1999, Senior Vice President-Sales from April 1993 to
January 1995 and Vice President-Sales from July 1987 to April 1993.
Mr. Howard F. Bates, Jr. has served as Vice President-Technical Services since
November 1981. From August 1977 to November 1981, he held the position of
Manager of Technical Services.
Mr. Joseph P. Bellino has served as Chief Financial Officer and Treasurer of the
Company since October 1997. He previously held the position of President of
Beacon Capital Advisors Company from 1996 to 1997. Beacon Capital provides
consulting in the areas of mergers and acquisitions, valuations and executive
advisory services.
5
Mr. Brad A. Goranson has served as Senior Vice President - Sales of the Company
since July 2000. He previously served as Vice President - Manufacturing from
August 1998 to July 2000 and Vice President - Sales, Midwest Region from August
1991 to July 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Except as presented below, the information required for Item 5 is incorporated
by reference herein, pursuant to General Instruction G(2), from the information
provided under the section entitled "Market Price and Dividend Information" on
page 5 of the Company's annual report to shareholders for the year ended
September 30, 2002.
Equity Compensation Plan Information
The Company maintains two plans that may grant equity compensation: the
shareholder-approved Steel Technologies Inc. 2000 Stock Option Plan and the
Second Steel Technologies Inc. Nonemployee Directors Stock Plan.
- ---------------------------- ----------------------- -------------------- -------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
Plan Category warrants and rights warrants and rights
- ---------------------------- ----------------------- -------------------- -------------------------------
Equity compensation plans
approved by security holders 570,650 $8.94 286,000
Equity compensation plans not
approved by security holders 0(Note 1) Note 2 13,059
- ---------------------------- ----------------------- -------------------- -------------------------------
Total 570,650 $8.94 299,059
Note 1: In order to align the interests of the Company's nonemployee directors
with those of its shareholders, Directors who are not officers or employees of
the Company receive an annual fee of $20,000 for their services as a director
and are reimbursed for travel and other expenses incurred in connection with
their attendance at meetings of the Board. All nonemployee directors who, as of
the first day of any calendar year, have not attained the age of 60, receive
one-half of their annual retainer fee in the form of shares of the Company's
common stock. Any nonemployee director may elect to receive all of the remaining
portion of his or her annual retainer fee in the form of Common Stock.
Note 2: The number of shares issued to each eligible director is determined
quarterly based upon the fair market value of the Company's stock as of the
first trading day of the week of the scheduled date of the regular meeting of
the Board of Directors .
ITEM 6. SELECTED FINANCIAL DATA
The information required for Item 6 is incorporated by reference herein,
pursuant to General Instruction G(2), from the information provided under the
section entitled "Selected Financial Data" on page 4 of the Company's annual
report to shareholders for the year ended September 30, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required for Item 7 is incorporated by reference herein,
pursuant to General Instruction G(2), from the information provided under the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 6 through 10 of the Company's annual report
to shareholders for the year ended September 30, 2002.
6
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to changes in interest rates. To
manage interest rate exposures, the Company uses fixed and variable debt and
interest rate swap contracts. The Company does not enter into derivative
financial instrument transactions for speculative purposes.
In order to mitigate a portion of the market risk on its variable rate debt, the
Company entered into interest rate swap contracts with major financial
institutions on August 30, 2001. Under terms of these separate contracts the
Company receives a LIBOR based variable interest rate and pays a fixed interest
rate of 4.24% and 4.48% on notional amounts of $15 million each which mature in
August 2003 and February 2004, respectively. The variable interest rate paid on
the contracts is determined based on LIBOR on the last day of the applicable
month, which is consistent with the variable rate determination on the
underlying debt.
The following table summarizes principal cash flows and related interest rates
of the Company's long-term debt and interest rate swaps at September 30, 2002 by
expected maturity dates. The weighted average interest rate of the fixed-rate
debt is based on the actual average rates at September 30, 2002. The
variable-rate debt is based on actual rates at September 30, 2002. The
variable-rate debt consists primarily of the line of credit of which $63,500,000
is outstanding at September 30, 2002.
(In thousands except for interest rates) September 30, 2002
Fair
2003 2004 2005 Thereafter Total Value
----------------------------------------------------
Long-term debt
(fixed) $5,759 $ 5,720 $5,680 $ - $17,159 $18,186
Weighted average
interest rates 8.52% 8.52% 8.52%
Long-term debt
(variable) $ - $66,100 $ - $ - $63,500 $63,500
Weighted average
interest rates 3.46% 3.46%
Interest rate
swaps, net $ 762 $ 237 $ - $ - $ 999 $ 999
Foreign currency exposures arise from transactions denominated in a currency
other than the Company's functional currency and from foreign denominated
revenues and profits translated into U.S. dollars. The primary currency to which
the company is exposed to is the peso. However, this exposure is mitigated
somewhat by a large percentage of transactions denominated in the U.S. dollar.
Management does not consider its exposure to exchange rate risks to be material
and considers the Mexican peso a relatively stable currency. The Company does
not typically manage its related foreign currency exchange rate risk through the
use of financial instruments.
7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Steel Technologies Inc. and
Subsidiaries on pages 11 through 24 and Report of Independent Accountants on
page 25 are included in the Company's annual report to shareholders for the year
ended September 30, 2002, and the sections entitled "Selected Quarterly
Financial Data" and "Market Price and Dividend Information" on page 5 thereof
are incorporated herein by reference.
Consolidated Balance Sheets - September 30, 2002 and 2001
Consolidated Statements of Income - Years ended September 30, 2002, 2001
and 2000
Consolidated Statements of Comprehensive Income - Years ended September 30,
2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity -
Years ended September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows -Years ended September 30, 2002, 2001
and 2000
Notes to Consolidated Financial Statements
Report of Independent Accountants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3), the information required by Item 10 is
incorporated by reference herein from the material under the section entitled
"Election of Directors" contained on pages 3 through 7, and "Election of
Directors Section 16(a) Beneficial Ownership Reporting Compliance" on page 7 in
the Company's definitive proxy statement filed with the Securities and Exchange
Commission related to the annual meeting of shareholders of Steel Technologies
Inc. to be held on January 23, 2003. The information regarding Executive
Officers required by Item 401 of Regulation S-K is included in Part I hereof
under the section entitled "Executive Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), the information required by Item 11 is
incorporated by reference herein from the material under the sections entitled
"Election of Directors - Compensation of Directors" contained on page 7 and
"Executive Compensation" contained on pages 8 through 11 in the Company's
definitive proxy statement filed with the Securities and Exchange Commission
related to the Company's annual meeting of shareholders to be held on January
23, 2003.
Information appearing in the sections entitled "Compensation Committee Report on
Executive Compensation" contained on pages 11 through 13 and "Performance Graph"
contained on page 15 in the Company's definitive proxy statement filed with the
Securities and Exchange Commission related to the Company's annual meeting of
shareholders to be held on January 23, 2003 shall not be deemed to be
incorporated by reference in this report, notwithstanding any general statement
contained herein incorporating portions of such proxy statement by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), the information required by Item 12 is
incorporated by reference herein from the material under the sections entitled
"Voting Securities" contained on pages 2 through 3 and "Election of Directors"
contained on pages 3 through 7 in the Company's definitive proxy statement filed
with the Securities and Exchange Commission related to the Company's annual
meeting of shareholders to be held on January 23, 2003.
8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information required by Item 13 is
incorporated by reference herein from the material under the sections entitled
"Certain Transactions" contained on page 13 and "Election of Directors"
contained on pages 4 through 9 in the Company's definitive proxy statement filed
with the Securities and Exchange Commission related to the Company's annual
meeting of shareholders to be held on January 24, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, management, including
the Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures with respect to the information generated for use in this Annual
Report on Form 10-K. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective to ensure that material information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is made known to us by others within the Company, including its
consolidated subsidiaries.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation or any corrective actions with regard to significant
deficiencies or material weaknesses.
9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The response to this portion of Item 14 is submitted as a separate
section of this report--See List of Financial Statements under Item 8.
(a) (2) The following consolidated financial statement schedule of Steel
Technologies Inc. and Subsidiaries is included in a separate section of
this report, following the index to exhibits on page E-1:
Valuation and Qualifying Accounts - Schedule II
Report of Independent Accountants
The following is a list of financial statements of Mi-Tech Steel,
Inc., which are included as Exhibit 99 pursuant to Rule 3.09 of
Regulation S-X.
Report of Independent Accountants
Consolidated Balance Sheets - September 30, 2002 and 2001
Consolidated Statements of Operations - Years ended September 30,
2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity -Years ended
September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows -Years ended September 30,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(a) (3) Listing of Exhibits--See Index to Exhibits contained herein on page E-1
of this report. The index to exhibits specifically identifies each
management contract or compensatory plan required to be filed as an
Exhibit to this Form 10-K.
(b) No report on Form 8-K was filed for the quarter ended September 30,
2002.
(c) Exhibits filed with this report are attached hereto.
10
Page E-1
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001
Ref. Exhibit
# # Description
- --- ------- -------------------------------------------------------
(i) 3.1 Second Restated Articles of Incorporation of the
Registrant
(i) 3.2 Second Amended By-Laws of the Registrant
(j) 10.1 Loan Agreement dated as of August 31, 2001, between the
Registrant and PNC Bank, National Association, National
City Bank of Kentucky, SunTrust Bank, Firstar Bank, N.A.
and Bank One, Kentucky N.A.
(e) 10.2(a) Note Agreement dated as of March 1, 1995, between the
Registrant and Principal Mutual Life Insurance
Company, Lincoln National Investment Management
Company, Jefferson-Pilot Life Insurance Company and
Northern Life Insurance Company
(e) 10.2(b) Request for Consent to Amendment of Note Agreement
(e) 10.2(c) Request for Consent to Second Amendment of Note
Agreement
(j) 10.2(d) Third Amendment of Note Agreement
(j) 10.2(e) Waiver and Fourth Amendment to Note Agreement
(b) 10.3(a) Incentive Stock Option Plan of the Registrant *
(a) 10.3(b) Amendment #1, dated April 7, 1987 to the Incentive
Stock Option Plan of the Registrant *
(e) 10.3(c) Registrant's 1995 Stock Option Plan *
(i) 10.3(d) Registrant's 2000 Stock Option Plan *
(f) 10.4 Stock Purchase Agreement between Registrant and
Shareholders of Atlantic Coil Processing, Inc.
effective April 1, 1997.
(c) 10.5(a) Revised Employee Bonus Plan of the Registrant *
(i) 10.5(b) Employment Agreement between Registrant and Vice
Chairman and Chief Executive Officer effective as of
March 16, 2000 and Promissory Note*
(a) 10.6(a) Joint Venture Agreement dated March 30, 1987 between
Mitsui & Co., LTD., Mitsui & Co. (U.S.A.), Inc.,
Mitsui Steel Development Co., Inc., and the Registrant
(c) 10.6(b) Amendment #1, dated February 28, 1989 to the Joint
Venture Agreement dated March 30, 1987 between Mitsui
& Co., LTD., Mitsui & Co. (U.S.A.), Inc., Mitsui Steel
Development Co., Inc., and the Registrant
(d) 10.8 Joint Venture Agreement dated October 16, 1990 among
Mitsui Steel Development Co., Inc. and LTV Steel
Company, Inc. and the Registrant
(d) 10.9 Form of Indemnification Agreement between the
Registrant and its Directors *
(i) 10.10(a)Steel Technologies Inc. Restated Retirement Savings
Plan
(i) 10.10(b)Amendment No. 1 to the Steel Technologies Inc.
Retirement Savings Plan
(h) 10.12 Amended and restated Nonemployee Directors Stock Plan *
(l) 10.12(a)Second Amended and restated Nonemployee Directors Stock Plan *
(g) 10.13 Confirmation of Interest Rate Swap Transaction dated
July 31, 1998 between the Registrant and SunTrust
Bank, Atlanta.
(g) 10.14 Stock Purchase Agreement between Registrant and
Stockholders of Roberts Steel Company effective July
1, 1998.
(k) 10.15 Redemption and Noncompetition Agreement*
11
Page E-1 (continued)
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001
Ref. Exhibit
# # Description
- --- ------- -------------------------------------------------------
13 2001 Annual Report to Shareholders, filed herewith.
The annual report shall not be deemed to be filed with
the Commission except to the extent that information
is specifically incorporated by reference herein
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
99 Financial statements of M-Tech Steel, Inc.
99.1 Certification of Chief Executive Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Alphabetic filed exhibit reference:
(a) Incorporated herein by reference to exhibits filed with the Company's
Annual Report on Form 10-K (file # 0-14061) for the fiscal year ended
September 30, 1987.
(b) Incorporated herein by reference to exhibits filed with the Company's Form
S-1 Registration Statement under the Securities Act of 1933 (No. 2-98617),
which became effective August 27, 1985.
(c) Incorporated herein by reference to exhibits filed with the Company's
Annual Report on Form 10-K (file # 0-14061) for the fiscal year ended
September 30, 1989.
(d) Incorporated herein by reference to exhibits filed with the Company's
Annual Report on Form 10-K (file # 0-14061) for the fiscal year ended
September 30, 1990.
(e) Incorporated herein by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q (file # 0-14061) for the quarter ended March
31, 1995.
(f) Incorporated herein by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q (file # 0-14061) for the quarter ended March
31, 1997.
(g) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10K (file #0-14061) for the fiscal year ended
September 30, 1998.
(h) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10K (file #0-14061) for the fiscal year ended
September 30, 1999.
(i) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10K (file #0-14061) for the fiscal year ended
September 30, 2000.
(j) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10K (file #0-14061) for the fiscal year ended
September 30, 2001.
(k) Incorporated herein by reference to exhibits filed with the Company's
Quarterly Report of Form 10Q (file #0-14061) for the quarter ended December
31, 2001.
(l) Incorporated herein by reference to exhibits filed with the Company's Form
S-8 Registration Statement under the Securities Act of 1933 (No.
333-91798), which became effective June 14, 2002.
* Indicates management contract or compensatory plan and arrangement
12
STEEL TECHNOLOGIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Additions Charged to Balance at
Beginning Costs and Charged to Other End of
of Period Expenses Other Deductions Period
---------- ---------- ---------- ----------- ----------
Year Ended September 30, 2002:
(A) $2,671,387 $1,165,022 $ - $2,340,162(C) $1,496,247
Year Ended September 30, 2001:
(A) $1,327,400 $1,789,676 $ - $ 445,689(C) $2,671,387
Year Ended September 30, 2000:
(A) $1,046,558 $ 329,000 $ 85,108(B) $ 133,266(C) $1,327,400
(A) Allowance for doubtful accounts
(B) Uncollectible accounts charged off, less recoveries.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
Board of Directors and Shareholders
Steel Technologies Inc.:
Our audits of the consolidated financial statements referred to in our report
dated October 28, 2002 appearing on page 25 of the 2002 Annual Report to
Shareholders of Steel Technologies Inc. and subsidiaries (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the consolidated financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this consolidated financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Louisville, Kentucky
October 28, 2002
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STEEL TECHNOLOGIES INC.
Dated: December 26, 2002 By:/S/Joseph P. Bellino
________________________
Joseph P. Bellino
Chief Financial Officer,
and Treasurer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Date Title
- --------- -------- -----
/s/ Bradford T. Ray 12/26/02 Director, Vice Chairman and Chief Executive
____________________ Officer (Principal Executive Officer)
Bradford T. Ray
/s/ Michael J. Carroll 12/26/02 Director, President and Chief
___________________ Operating Officer
Michael J. Carroll
/s/ Joseph P. Bellino 12/26/02 Chief Financial Officer and Director
___________________
Joseph P. Bellino
/s/ Howard F. Bates, Jr. 12/26/02 Director and Vice President-
___________________ Technical Services
Howard F. Bates, Jr.
/s/ Stuart N. Ray 12/26/02 Director and Vice President,
____________________ President, Mi-Tech Steel, Inc.
Stuart N. Ray
/s/ Merwin J. Ray 12/26/02 Founding Chairman and Director
___________________ (Principal Executive Officer)
Merwin J. Ray
/s/ Ralph W. McIntyre 12/26/02 Director
___________________
Ralph W. McIntyre
/s/ William E. Hellmann 12/26/02 Director
___________________
William E. Hellman
/s/ Jimmy Dan Conner 12/26/02 Director
___________________
Jimmy Dan Conner
/s/ Andrew J. Payton 12/26/02 Director
___________________
Andrew J. Payton
/s/ Doug A. Bawel 12/26/02 Director
___________________
Doug A. Bawel
14
CERTIFICATIONS
I, Bradford T. Ray, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 26, 2002
/s/ Bradford. T. Ray
____________________
Bradford T. Ray
Chief Executive Officer
15
I, Joseph P. Bellino, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 26, 2002
/s/ Joseph P. Bellino
_____________________
Joseph P. Bellino
Chief Financial Officer
16
EXHIBIT 13 2002
ANNUAL REPORT TO SHAREHOLDERS
Steel Technologies Inc.
Selected Financial Data
(In thousands, except per share results)
Years Ended September 30
------------------------
INCOME STATEMENT DATA 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Sales(1) $475,398 $436,655 $469,632 $418,159 $390,244
Cost of goods sold(1) 415,763 388,363 418,680 361,192 346,143
Gross profit 59,635 48,292 50,952 56,967 44,101
Selling, general and
administrative expenses 30,024 29,535 28,251 26,108 22,144
Equity in net income (loss) of
unconsolidated corporate
joint ventures(2) 1,540 (6,832) 898 1,095 537
Operating income 31,151 11,925 23,599 31,954 22,494
Income before income taxes 25,465 5,497 16,177 25,233 16,410
Net income 15,794 764 10,212 15,572 9,803
Diluted earnings per common share $ 1.60 $ 0.07 $ 0.94 $ 1.38 $ 0.82
Diluted weighted average number
of common shares outstanding 9,886 10,308 10,857 11,256 11,989
Basic earnings per common share $ 1.62 $ 0.07 $ 0.94 $ 1.39 $ 0.82
Basic weighted average number of
common shares outstanding 9,762 10,267 10,818 11,230 11,942
Cash dividends per common share $ 0.16 $ 0.12 $ 0.12 $ 0.11 $ 0.10
September 30
--------------------------------------------
BALANCE SHEET DATA 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Working capital $ 82,213 $ 80,427 $ 97,428 $ 89,418 $ 80,319
Total assets 307,115 289,103 315,389 289,105 266,481
Long-term debt 74,900 89,110 115,394 90,209 88,300
Shareholders' equity 131,730 124,985 127,032 124,439 113,676
Years Ended September 30
------------------------
OTHER DATA 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Capital expenditures, including
acquisitions and investments in
joint ventures $ 7,128 $ 11,033 $ 32,010 $ 18,304 $ 25,414
Shareholders' equity per common
share 13.63 12.23 12.14 11.17 9.81
Depreciation and amortization 15,108 15,351 13,929 12,852 11,860
(1) Losses on disposals/writeoffs of property, plant and equipment have been
reclassified from sales and are now shown as a separate line item. Foreign
currency transaction gains and losses have been reclassified from interest
expense, net to sales.
(2) 2001 includes $7.5 million impairment charge (see Note 5 of the Company's
Notes to Consolidated Financial Statements)
1
Steel Technologies Inc.
Selected Quarterly Financial Data
(In thousands, except per share results)
Fiscal Year 2002 First Second Third Fourth
- ------------------------------------------------------------------------
Sales(1) $101,576 $114,703 $128,037 $131,081
Gross profit 10,903 13,315 16,236 19,081
Net income 1,864 2,852 4,968 6,110
Diluted earnings per common share $ 0.18 $ 0.29 $ 0.51 $ 0.62
Basic earnings per common share $ 0.18 $ 0.29 $ 0.52 $ 0.64
Fiscal Year 2001 First Second Third Fourth
- ------------------------------------------------------------------------
Sales(1) $112,636 $108,674 $109,420 $105,925
Gross profit 11,241 12,359 13,068 11,624
Net income (loss) 1,782 (5,356) 2,571 1,767
Diluted earnings (loss) per
common share $ 0.33 $ 0.30 $ 0.24 $ 0.07
Basic earnings (loss) per
common sharee $ 0.33 $ 0.30 $ 0.24 $ 0.07
(1) Losses on disposals/writeoffs or property, plant and equipment have been
reclassified from sales and are now shown as a separate line item. Foreign
currency transaction gains and losses have been reclassified from interest
expense, net to sales.
Market Price and Dividend Information:
The Company's common stock trades on The Nasdaq Stock Market under the symbol
STTX. At October 31, 2002, there were approximately 435 shareholders of record.
The Company's current dividend policy provides for semiannual payments of cash
dividends. The following table shows cash dividends and high and low prices for
the common stock for each quarter of fiscal 2002 and 2001. Nasdaq National
Market System quotations are based on actual transactions.
Stock Price
------------------------------------
Fiscal Year 2002 High Low Dividends
- --------------------------------------------------------------------------------
First Quarter $ 9.250 $ 7.250 $ 0.08
Second Quarter $ 9.153 $ 7.890
Third Quarter $13.600 $ 8.400 $ 0.08
Fourth Quarter $19.050 $ 9.600
Stock Price
------------------------------------
Fiscal Year 2001 High Low Dividends
- --------------------------------------------------------------------------------
First Quarter $ 6.500 $ 4.750 $ 0.06
Second Quarter $ 7.063 $ 5.250
Third Quarter $ 7.500 $ 5.688 $ 0.06
Fourth Quarter $ 8.380 $ 6.060
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
When used in the following discussion, the word "expects" and other 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 forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Specific risks and uncertainties include, but are not limited
to, general business and economic conditions; cyclicality of demand in the steel
industry, specifically in the automotive market; work stoppages; risk of
business interruptions affecting automotive manufacturers; competitive factors
such as pricing and availability of steel; reliance on key customers; and
potential equipment malfunctions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date hereof.
Application of Critical Accounting Policies
- -------------------------------------------
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from these estimates under different
assumptions or conditions. On an ongoing basis, the Company monitors and
evaluates its estimates and assumptions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements and the consolidated financial statements of Mi-Tech Steel,
Inc. (Mi-Tech Steel), a 50% owned corporate joint venture of the Company:
Allowance for Doubtful Accounts Receivable
- ------------------------------------------
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
allowance is maintained at a level considered appropriate based on historical
and other factors that affect collectibility. The factors include historical
trends of write-offs, recoveries and credit losses; the monitoring of portfolio
credit quality; and current and projected economic and market conditions. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of the ability to make payments, additional allowances may be
required.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews the carrying value of its long-lived assets for impairment
whenever changes in events and circumstances indicate that the carrying amount
of the assets may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with an asset would be
compared to the asset's carrying value to determine if a write-down to market
value or undiscounted cash flows value is required. Future changes in
circumstances, cash flow estimates and estimates of fair value could affect the
valuations.
RESULTS OF OPERATIONS - FISCAL 2002 COMPARED TO FISCAL 2001
Steel Technologies posted sales of $475,398,000 in fiscal 2002, an increase of
9% from 2001 sales of $436,655,000. Tons shipped of Company-owned steel products
in fiscal 2002 increased approximately 13% compared to fiscal 2001 while the
average selling price of Company-owned steel products for the year decreased
approximately 4% from the previous year.
3
The Company focuses significant resources on the automotive industry and
generates a major portion of business from selling manufacturing component parts
to the automotive industry. The Company continues to increase market share and
to develop a substantial amount of new business with both existing and new
customers.
The gross profit margin was 12.5% in 2002 compared to 11.1% in 2001. The
increase is attributable to higher sales volume spread over certain fixed
manufacturing expenses, operating efficiencies and improved productivity as a
result of equipment improvements and upgrades at several facilities in recent
years. The Company expects average raw material costs in fiscal 2003 to exceed
average raw material costs in fiscal 2002. Raw material prices have increased as
a result of idled domestic steel producing capacity and the reduction in foreign
steel imports resulting from the Section 201 trade tariffs. Should raw material
costs increase significantly and not be offset by corresponding price increases,
gross margins could be negatively impacted. In general, production cost
efficiencies and product mix improvements may positively impact gross margins
and somewhat offset rising raw material costs.
Selling, general and administrative costs increased approximately 1.7% in fiscal
2002 primarily as a result of higher sales volume and the write-off of
unamortized loan costs relating to two industrial revenue bonds issued in
Maryland and Missouri that were retired before their scheduled maturity.
Selling, general and administrative costs were 6.3% and 6.8% of sales in 2002
and 2001, respectively. Steel Technologies continues to actively manage the
level at which selling, general and administrative costs are added to its cost
structure.
The Company's share of income (loss) of its joint venture operations was
$1,540,000 in 2002 and ($6,832,000) in 2001. The results in 2002 include
improved results from the Mi-Tech Steel joint venture primarily as a result of
closing its Decatur, Alabama facility in March 2001 and the Company's share of
income from Ferrolux Metals Co., LLC (Ferrolux) a 49% owned joint venture
acquired in September 2001. The results in 2001 include the Company's share of
approximately $7.5 million of asset impairment charges recorded during the
second fiscal quarter of 2001 relating to its joint venture operations (see Note
5 of the Company's Notes to Consolidated Financial Statements).
Net interest expense decreased to $4,872,000 in 2002 from $6,346,000 in 2001.
The decrease is primarily the result of lower average borrowings and declining
interest rates experienced by the Company on its variable rate debt in fiscal
2002.
Loss on disposals/writeoffs of property, plant and equipment increased from
$82,000 in 2001 to $814,000 in 2002 as a result of recent equipment improvements
and upgrades.
The Company's effective income tax rate was approximately 38.0% in 2002 compared
to 40.3% in 2001, excluding the asset impairment charges included in equity in
net income (loss) of joint ventures during the second quarter of fiscal 2001 and
the related tax benefit of approximately $500,000. The decrease is attributable
to a higher percentage of overall earnings from the Mi-Tech Steel joint venture,
which are not fully taxable to the Company, and higher earnings in 2002 which
resulted in a lower percentage of items not deductible for tax purposes
including goodwill amortization.
RESULTS OF OPERATIONS - FISCAL 2001 COMPARED TO FISCAL 2000
Steel Technologies posted sales of $436,655,000 in fiscal 2001, a decrease of 7%
from 2000 sales of $469,632,000. Tons shipped of Company-owned steel products in
fiscal 2001 decreased approximately 2% compared to fiscal 2000 while the average
selling price of Company-owned steel products for the year decreased
approximately 5% from the previous year.
The gross profit margin was 11.1% in 2001 and was relatively consistent with the
gross profit margin in 2000 of 10.8%. The lower selling prices were offset by
production cost efficiencies and slightly lower raw material costs in 2001
compared to 2000. In general, production cost efficiencies and product mix
improvements may positively impact gross margins and somewhat offset rising raw
material costs.
4
Sales, general and administrative costs increased 4.5% in fiscal 2001 and were
6.8% and 6.0% of sales in 2001 and 2000, respectively. The increase was
primarily a result of additional expenses from the acquisition of Custom Steel
Inc. and Custom Steel Processing Corp., collectively Custom Steel (now wholly
owned subsidiaries of the Company) in January 2000 and an increase in the
allowance for doubtful accounts attributable to the weakening economy. Steel
Technologies continues to actively manage the level at which selling, general
and administrative expenses are added to its cost structure.
The Company's share of income (loss) of its joint venture operations was
($6,832,000) in 2001 and $898,000 in 2000. This includes approximately $7.5
million of asset impairment charges before taxes recorded by the Company during
the second fiscal quarter of 2001 relating to its joint venture operations (see
Note 5 of the Company's Notes to Consolidated Financial Statements).
Net interest expense decreased to $6,346,000 in 2001 from $7,399,000 in 2000.
The decrease is attributable to lower average borrowings and declining interest
rates experienced by the Company on its variable rate debt in fiscal 2001.
Excluding the asset impairment charges included in equity in net income (loss)
of joint ventures during the second quarter of fiscal 2001 and the related tax
benefit of approximately $500,000, the Company's effective income tax rate was
approximately 40.3% in fiscal 2001 compared to 36.9% in fiscal 2000. The
increase in 2001 is attributable to lower earnings for 2001 which resulted in a
higher percentage of items not deductible for tax purposes including goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, Steel Technologies had $82,213,000 of working capital,
maintained a current ratio of 1.95:1 and had total debt at 38% of total
capitalization. The Company continues to manage the levels of accounts
receivable, inventories and other working capital items in relation to the
trends in sales and overall market. During 2002, accounts receivable,
inventories and other working capital needs have increased to support the
increase in sales. This increase has been financed primarily through income from
operations. These factors, along with non-cash charges for depreciation and
amortization, contributed to $26,713,000 of cash provided by operations in 2002
compared to $37,547,000 in 2001.
Capital expenditures for 2002 totaled $7,132,000. The major expenditures were
certain productivity and capacity improvement projects. Steel Technologies
continues to expand production capacity to serve the growing needs of customers
and invest in automation to improve productivity and make its operations more
efficient. For fiscal 2003, the capital additions to all facilities are expected
to approximate $15,000,000.
Steel Technologies maintains an equity investment of approximately $18,244,000
in its 90%-owned Mexican subsidiary. Additional investments in the Company's
Mexican operations, if required, would be financed with available funds from the
Company's bank line of credit.
The translation of the financial statements of the Company's Mexican subsidiary
from local currencies to the U.S. dollar subjects the Company to exposure
relating to fluctuating exchange rates. However, this exposure is mitigated
somewhat by a large percentage of transactions denominated in the U.S. dollar.
Management does not consider its exposure to exchange rate risks to be material
and considers the Mexican peso a relatively stable currency. The Company does
not typically manage its related foreign currency exchange rate risk through the
use of financial instruments. Foreign currency transaction gains (losses)
included in sales were $371,000, ($256,000) and $356,000 during 2002, 2001 and
2000, respectively.
The Company maintains a 50% equity investment in Mi-Tech Steel and a 49% equity
investment in Ferrolux Metals Co., LLC. Additional equity contributions to the
Company's joint venture operations are not expected for the foreseeable future,
but, if required, would be financed with available funds from the Company's bank
line of credit.
5
During 2002, the Company borrowed $24,000,000 and repaid $38,735,000 in debt. A
portion of the borrowings under the line of credit agreement were used to retire
industrial revenue bonds in Maryland and Missouri as well as to remit the annual
principal payment of $5,700,000 in conjunction with the Company's ten-year note
described below.
The Company has a $125,000,000 line of credit agreement expiring on August 31,
2004, with various variable options on the interest rate, none of which are
greater than the bank's prime. At September 30, 2002 and 2001, there was
$63,500,000 and $66,000,000, respectively, outstanding on the credit facility.
Cash flows from operations and available borrowing capabilities are expected to
meet the needs of the Company throughout fiscal 2003. Operating cash flows are
somewhat influenced by cyclicality of demand in the steel industry, especially
in the automotive market.
The Company has approximately $17,100,000 outstanding at September 30, 2002 on
the ten-year note which requires annual principal payments of approximately
$5,700,000 through March 2005. Any additional funds will be used for growth,
including strategic acquisitions, investment in joint ventures, construction of
new plant capacity, and investment in production and processing capabilities.
The form of such financing may vary depending upon the prevailing market and
related conditions, and may include short or long-term borrowings or the
issuance of debt or equity securities.
Provisions contained in the Company's various debt agreements require the
Company to maintain specified levels of net worth, maintain certain financial
ratios and limit the addition of substantial debt. The Company's line of credit
agreement and private placement note contain cross-default provisions with
respect to the line of credit agreement and private placement note. The Company
is in compliance with all of its loan covenants, and none of these covenants
would restrict the completion of currently planned capital expenditures or
acquisitions.
The following table summarizes the amounts of outstanding long-term debt as of
September 30, 2002:
Payments Due By Period (in thousands of dollars)
------------------------------------------------
Total 2003 2004 2005
----- ---- ---- ----
Debt $80,659 $5,759 $69,220 $5,680
In June 2002, the Company entered into a contract to purchase electricity
through June 2005 to meet its needs for its Canton, Michigan facility. However,
there is no minimum energy consumption required during the term of the contract.
At this time, the Company has no other known material obligations, commitments
or demands that must be met beyond the next twelve months.
On January 22, 1998, the Board of Directors approved a plan under which Steel
Technologies may repurchase up to 500,000 shares of its common stock.
Subsequently, the Board of Directors authorized repurchase of an additional
1,000,000 shares on September 30, 1998 and another additional 1,000,000 shares
on April 30, 2000 for a total of 2,500,000 shares. Shares may be purchased from
time to time at prevailing prices in open market transactions, subject to market
conditions, share price and other considerations. The Company has completed the
program with 2,500,000 shares for an aggregate of $21,795,000 as of September
30, 2002. During fiscal 2002 and 2001, the Company repurchased approximately
677,000 and 253,000 shares of common stock for $6,592,000 and $1,392,000,
respectively.
Steel Technologies believes all manufacturing facilities are in compliance with
applicable federal and state environmental regulations. The Company is not
presently aware of any fact or circumstance, which would require the expenditure
of material amounts for environmental compliance.
6
Related Party Transactions
- --------------------------
The Company has various transactions with Mi-Tech Steel (see Note 5 of the
Company's Notes to Consolidated Financial Statements ).
The Company has recorded sales of $4,674,000, $3,629,000 and $5,007,000 in 2002,
2001 and 2000, respectively and accounts receivable of $1,029,000 and $836,000
as of September 30, 2002 and 2001, respectively, for products sold to a company
owned by certain officers and directors of the Company. The Company believes
these transactions are in the best interests of the Company and the terms and
conditions of these transactions are in the aggregate not materially more
favorable or unfavorable to the Company than would be obtained on an arm's
length basis from unaffiliated parties. See also information contained under
"Certain Transactions" included in the Company's 2003 Proxy Statement.
During 2002, the Company repurchased 600,000 shares of its common stock from its
founding chairman for $6,000,000.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
---------------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations," which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS No.
141 apply to all business combinations initiated or completed after June 30,
2001. The Company will apply the provisions of SFAS No. 141 to any future
business combinations.
In addition, the FASB issued Statement of Financial Accounting Standards No. 142
(SFAS No. 142), "Goodwill and Other Intangible Assets," which establishes the
accounting for goodwill and other intangible assets following their recognition.
SFAS No. 142 applies to all goodwill and other intangible assets whether
acquired singly, as part of a group, or in a business combination. SFAS No. 142
provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS No. 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 142 is effective for the Company beginning on October 1, 2002.
The Company is in the process of preparing for its adoption of SFAS No. 142 and
is making the determinations as to the fair value of its reporting units and
what amounts of goodwill, assets and liabilities should be allocated to those
reporting units. In connection with the adoption of SFAS No. 142, the Company
expects that it will no longer record $733,000 of annual amortization expense
relating to its existing goodwill and that it will not reclassify any goodwill
to intangible assets.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first quarter of 2003. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. Any impairment loss resulting from the
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of fiscal 2003. The Company
has not yet determined what effect these impairment tests will have on the
Company's earnings and financial position.
7
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144). SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 121 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The objectives of SFAS No. 144 are to address significant issues
relating to the implementation of SFAS No. 121 and to develop a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. Management of the Company is currently analyzing the impact of
SFAS No. 144 but currently does not believe the impact of the adoption of SFAS
No. 144 as of October 1, 2002 will be significant.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including certain lease
termination costs and severance-type costs under a one-time benefit arrangement
rather than an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 requires liabilities associated
with exit or disposal activities to be expensed as incurred and will impact the
timing of recognition for exit or disposal activities that are initiated after
December 31, 2002. The Company will apply the provisions of SFAS No. 146 to any
future exit or disposal activities that are initiated after December 31, 2002.
8
STEEL TECHNOLOGIES INC.
Consolidated Balance Sheets
(In thousands, except shares)
September 30
--------------------------
2002 2001
- ----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,127 $ 3,380
Trade accounts receivable, less
allowance for doubtful accounts:
$1,496 in 2001 and $2,671 in 2000.......... 74,000 64,632
Inventories.................................. 87,741 66,951
Deferred income taxes........................ 1,841 3,226
Prepaid expenses and other assets............ 2,789 2,581
--------- ---------
Total current assets .................... 169,498 140,770
--------- ---------
Property, plant and equipment (at cost), net of
accumulated depreciation 102,560 112,405
--------- ---------
Investments in corporate joint ventures 16,590 15,127
Goodwill, net of amortization ................. 18,148 18,879
Other assets .................................. 1,319 1,922
--------- ---------
$ 307,115 $ 289,103
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 65,446 $ 43,088
Accrued liabilities ........................ 12,922 9,623
Income taxes payable ....................... 2,158 1,349
Long-term debt due within one year ......... 5,759 6,283
--------- ---------
Total current liabilities ............... 86,285 60,343
Long-term debt ................................ 74,900 89,110
Deferred income taxes ......................... 14,200 14,665
--------- ---------
Total liabilities ........................ 175,385 164,118
--------- ---------
Commitments and contingencies ................. -- --
Shareholders' equity:
Preferred stock, no par value;
authorized shares: 500,000 shares;
none issued or outstanding ............... -- --
Common stock, no par value; 50,000,000 shares
authorized; issued and outstanding shares:
9,663,468 in 2002 and 10,216,949 in 2001 . 18,733 17,348
Treasury stock at cost: 2,519,000 shares in
2002 and 1,823,000 shares in 2001 ........ (22,090) (15,203)
Additional paid-in capital ................. 4,909 4,909
Retained earnings .......................... 133,869 119,652
Accumulated other comprehensive loss ....... (3,691) (1,721)
--------- ---------
Total shareholders' equity ............... 131,730 124,985
--------- ---------
$ 307,115 $ 289,103
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
9
STEEL TECHNOLOGIES INC.
Consolidated Statements of Income
(In thousands, except per share results)
For the Years Ended September 30
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------
Sales .................................. $475,398 $436,655 $469,632
Cost of goods sold ..................... 415,763 388,363 418,680
-------- -------- --------
Gross profit ......................... 59,635 48,292 50,952
Selling, general and administrative
expenses ............................. 30,024 29,535 28,251
Equity in net income (loss) of
unconsolidated corporate joint
ventures (including impairment charge
of $7.5 million in 2001) ............. 1,540 (6,832) 898
-------- -------- --------
Operating income ..................... 31,151 11,925 23,599
Interest expense ....................... 4,872 6,346 7,399
Loss on disposals/writeoffs of property,
plant and equipment .................. 814 82 23
-------- -------- --------
Income before income taxes ........... 25,465 5,497 16,177
Provision for income taxes ............. 9,671 4,733 5,965
-------- -------- --------
Net income ........................... $ 15,794 $ 764 $ 10,212
======== ======== ========
Weighted average number of common shares
outstanding-diluted .................. 9,886 10,308 10,857
-------- -------- --------
Diluted earnings per common share ...... $ 1.60 $ 0.07 $ 0.94
-------- -------- --------
Weighted average number of common shares
outstanding-basic .................... 9,762 10,267 10,818
-------- -------- --------
Basic earnings per common share ........ $ 1.62 $ 0.07 $ 0.94
-------- -------- --------
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended September 30
--------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------
Net income ............................. $ 15,794 $ 764 $ 10,212
Foreign currency translation
adjustment ......................... (1,714) 121 320
Change in unrealized loss on cash flow
hedges, net of tax benefit of $153
in 2002 and $227 in 2001 ........... (256) (364) --
-------- -------- -------
Comprehensive income ................... $ 13,824 $ 521 $ 10,532
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
10
STEEL TECHNOLOGIES INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except per share amounts)
For the Years Ended September 30, 2002, 2001 and 2000
-----------------------------------------------------------------------------------------------
Common Stock Treasury Stock Accumulated
------------------ -------------------- Additional Other
Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1999 ...... 11,137 $ 17,140 880 $ (7,123) $ 4,909 $111,311 $ (1,798) $124,439
Net income ........................ 10,212 10,212
Net issuance of common stock under
incentive stock option plan ..... 13 147 (87) 60
Repurchase of common stock under
stock repurchase program ....... (690) 690 (6,688) (6,688)
Cash dividends on common stock
($.12 per share)................. (1,311) (1,311)
Foreign currency translation
adjustment ...................... 320 320
------- -------- ----- -------- -------- -------- --------- --------
Balances, September 30, 2000 ...... 10,460 $ 17,287 1,570 $(13,811) $ 4,909 $120,125 $ (1,478) $127,032
Net income ........................ 764 764
Net issuance of common stock under
incentive stock option plan..... 10 61 61
Repurchase of common stock under
stock repurchase program........ (253) 253 $ (1,392) (1,392)
Cash dividends on common stock
($.12 per share)................. (1,237) (1,237)
Foreign currency translation
adjustment ...................... 121 121
Change in unrealized loss on cash
flow hedges, net of tax ......... (364) (364)
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2001 ...... 10,217 $ 17,348 1,823 $(15,203) $ 4,909 $119,652 $ (1,721) $124,985
Net income ........................ 15,794 15,794
Net issuance of common stock under
incentive stock option plan..... 123 1,385 19 (295) 1,090
Repurchase of common stock under
stock repurchase program........ (677) 677 $ (6,592) (6,592)
Cash dividends on common stock
($.16 per share)................. (1,577) (1,577)
Foreign currency translation
adjustment ...................... (1,714) (1,714)
Change in unrealized loss on cash
flow hedges, net of tax ......... (256) (256)
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2002 ...... 9,663 $ 18,733 2,519 $(22,090) $ 4,909 $133,869 $ (3,691) $131,730
======= ======== ===== ======== ======== ========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
11
STEEL TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended September 30
--------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 15,794 $ 764 $ 10,212
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................. 14,375 14,620 13,306
Amortization ................................................. 733 731 623
Deferred income taxes ........................................ 1,272 (995) 1,924
Equity in net loss (income) of corporate joint ventures ...... (1,540) 6,832 (898)
Loss on disposals/writeoffs of of property, plant
and equipment .............................................. 814 82 23
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable ................................ (10,233) 2,428 (10,614)
Inventories .............................................. (21,518) 12,981 2,744
Prepaid expenses and other assets ........................ (1,094) (665) (688)
Accounts payable ......................................... 22,779 (1,544) (2,264)
Accrued liabilities ...................................... 5,331 2,313 (4,288)
-------- -------- --------
Net cash provided by operating activities .......................... 26,713 37,547 10,080
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................... (7,132) (9,830) (19,888)
Proceeds from sale of property, plant and equipment .............. 865 977 327
Acquisition, net of cash acquired ................................ -- -- (12,122)
Distributions from unconsolidated corporate joint venture ........ 73 -- --
Investment in unconsolidated corporate joint venture ............ 4 (1,203) --
-------- -------- --------
Net cash used in investing activities .............................. (6,190) (10,056) (31,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ..................................... 24,000 70,000 49,000
Principal payments on long-term debt ............................. (38,735) (96,249) (26,839)
Cash dividends on common stock ................................... (1,577) (1,237) (1,311)
Repurchase of common stock ....................................... (6,887) (1,392) (6,688)
Net issuance of common stock under
stock option plans ............................................. 1,385 61 60
Other ............................................................. 175 175 (700)
-------- -------- --------
Net cash (used in) provided byfinancing activities ................. (21,639) (28,642) 13,522
-------- -------- --------
Effect of exchange rate changes on cash ............................ (137) 62 (28)
-------- -------- --------
Net decrease in cash and cash equivalents .......................... (1,253) (1,089) (8,109)
Cash and cash equivalents, beginning of year ....................... 3,380 4,469 12,578
-------- -------- --------
Cash and cash equivalents, end of year ............................. $ 2,127 $ 3,380 $ 4,469
======== ======== ========
Supplemental Cash Flow Disclosures:
Cash payments for interest ....................................... $ 5,162 $ 7,232 $ 7,887
Cash payments for taxes .......................................... $ 6,219 $ 3,955 $ 7,151
Supplemental Schedule of Noncash Investing and Financing Activities:
Fair value of assets acquired, net of cash acquired of
$1,228 and $457, respectively .................................... $ -- $ -- $ 17,914
Liabilities assumed ................................................ -- -- 5,792
-------- -------- --------
Net cash paid ...................................................... $ -- -- $ 12,122
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
12
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Business: Steel Technologies Inc. is an intermediate steel
processor engaged in the business of processing flat rolled steel to specified
thickness, width, temper and finish requirements for customers' manufacturing
processes. A majority of its sales are to industrial customers in North America,
manufacturing component parts for use in the automotive industry. Steel
Technologies Inc. operates in one reportable segment.
Principles of Consolidation: The consolidated financial statements include the
accounts of Steel Technologies Inc. and its majority-owned subsidiaries (the
Company). The Company's investments in corporate joint ventures are accounted
for by the cost or equity method based on the percentage of common ownership and
control. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents: Cash and cash equivalents include highly liquid
investments with an original maturity of three months or less. The carrying
value of cash equivalents approximates fair value due to the short-term maturity
of the securities.
Allowance for Doubtful Accounts Receivable: The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance is maintained at a level
considered appropriate based on historical and other factors that affect
collectibility. The factors include historical trends of write-offs, recoveries
and credit losses; the monitoring of portfolio credit quality; and current and
projected economic and market conditions. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of the
ability to make payments, additional allowances may be required.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for all inventories.
Depreciation and Amortization: Depreciation is computed using the straight-line
method with the following estimated useful lives:
Buildings and improvements 20-45 years
Machinery and equipment 3-12 years
When properties are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts with any resulting gain
or loss reflected in results of operations. Maintenance and repairs are expensed
in the year incurred. The Company capitalizes interest costs as part of the cost
of constructing major facilities. Interest costs of $80,000, $285,000 and
$481,000 were capitalized in 2002, 2001 and 2000, respectively.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired through acquisitions accounted for using the purchase method of
accounting. Goodwill is being amortized on a straight-line basis over a 30 year
life. Accumulated amortization approximated $3,039,000 and $2,306,000 at
September 30, 2002 and 2001, respectively.
In the event that facts and circumstances indicate that the carrying value of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with an asset would be compared to the asset's carrying value
to determine if a write-down to market value or discounted cash flow value is
required.
Revenue Recognition: The Company recognizes revenue when the customer takes
title to goods shipped and risk of loss passes to the customer.
13
Earnings Per Common Share: Earnings per share for all periods presented have
been calculated and presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic earnings per
share excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Foreign Currency Translation: The Mexican subsidiary uses the peso as the
functional currency and the assets and liabilities of the Mexican subsidiary are
translated into U.S. dollars at the year-end rate of exchange, and revenues and
expenses are translated at average rates of exchange in effect during the
period. Resulting translation adjustments are reported as a component of
comprehensive income. Foreign currency transaction gains (losses) are included
in sales when incurred and were $371,000, ($256,000) and $356,000 for the fiscal
years ending 2002, 2001 and 2000, respectively.
Comprehensive Income: Accumulated other comprehensive loss consists of the
following:
September 30
------------------------------
(In thousands) 2002 2001
-------------- ---- ----
Cumulative translation adjustment $3,071 $1,357
Unrealized loss on cash flow hedges, net of tax 620 364
------ ------
$3,691 $1,721
------ ------
Use of 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.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current year presentation with no effect on net income or shareholders'
equity.
2. ACQUISITIONS:
On January 12, 2000 the Company completed the purchase of Custom Steel, Inc. and
Custom Steel Processing Corp., collectively referred to as Custom, for
approximately $12,122,000 in cash and assumption of $5,792,000 of liabilities.
Additional contingent payments of up to $2,190,000 may also be made during the
next two years if Custom generates a certain amount of earnings before interest,
taxes, depreciation and amortization.
The Company financed the acquisition with existing credit facilities. The excess
of the purchase price over the acquired net assets has been recorded as
goodwill. The acquisitions has been recorded under the purchase method of
accounting, with the operating results of Custom being included in the Company's
consolidated financial statements since the date of acquisition.
The pro forma impact of the acquisition was not material for year ended
September 30, 2000.
14
3. INVENTORIES:
Inventories consist of:
September 30
------------------------
(In thousands) 2002 2001
-------------- ------------------------
Raw materials $ 66,535 $ 47,159
Finished goods and work in process 21,206 19,792
--------- ---------
$ 87,741 $ 66,951
========= =========
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and related accumulated depreciation at September
30, 2002 and 2001 consist of the following:
September 30
------------------------
(In thousands) 2002 2001
-------------- ------------------------
Land and improvements $ 4,026 $ 6,147
Buildings and improvements 59,717 60,009
Machinery and equipment 134,199 137,841
Construction in progress 3,142 2,545
Assets held for sale 1,854 --
-------- --------
202,938 206,542
Less accumulated depreciation 100,378 94,137
-------- --------
$102,560 $112,405
======== ========
5. INVESTMENTS IN UNCONSOLIDATED CORPORATE JOINT VENTURES:
Mi-Tech Steel owns and operates two high-volume steel slitting facilities to
serve Japanese and domestic automotive and appliance parts manufacturers in the
United States. Summarized condensed financial information of Mi-Tech Steel, a
fifty percent owned corporate joint venture accounted for by the equity method
follows:
September 30
BALANCE SHEET (In thousands) 2002 2001
----------------------------- ------------------------
Assets:
Current assets $ 51,374 $ 39,287
Other assets 27,660 30,316
Liabilities:
Current liabilities $ 48,573 $ 28,203
Long-term liabilities -- 13,553
For the Years Ended September 30
---------------------------------------
INCOME STATEMENT (In thousands) 2002 2001 2000
---------------------------------------
Net Sales $141,323 $137,336 $154,451
Net Income (Loss) $ 2,614 $(11,559) $ 1,796
The Company's equity in undistributed net income of Mi-Tech Steel was $5,631,000
and $4,324,000 at September 30, 2002 and 2001, respectively.
15
In March 2001, Mi-Tech Steel discontinued its Decatur, Alabama operation.
Mi-Tech Steel is pursuing alternatives to sell its assets in Decatur. In
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," Mi-Tech Steel recorded an impairment charge associated with this facility
based on its estimates of fair value. The Company's share of Mi-Tech Steel's
impairment charges recorded during the second quarter of fiscal 2001 was
approximately $6.5 million.
The Company has various transactions with Mi-Tech Steel. The Company has
recorded sales of $2,767,000, $2,579,000 and $2,564,000 in 2002, 2001 and 2000,
respectively and accounts receivable of $209,000 and $173,000 as of September
30, 2002 and 2001, respectively for products and services sold at prevailing
market prices to Mi-Tech Steel. Included in operating income of the Company are
management fees and equity from the joint venture earnings (losses) totaling
$2,003,000, ($5,084,000) and $1,594,000 in 2002, 2001 and 2000, respectively.
During the second quarter of fiscal 2001, the Company determined that Processing
Technology Inc. (PTI), an unconsolidated corporate joint venture accounted for
by the cost method, was not able to sustain an earnings capacity which justified
the carrying amount of its investment due to the deteriorating financial
condition of PTI and its principal customer. Accordingly, the Company wrote off
its approximate $1 million investment in PTI in accordance with Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
In September 2001, the Company purchased 49% of Ferrolux Metals Co., LLC
(Ferrolux) from Ferragon Corporation. Ferrolux operates a facility in Wayne,
Michigan as a steel processor specializing in exposed automotive products. The
Ferrolux joint venture is accounted for by the equity method of accounting.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30
-----------------------------
(In thousands) 2002 2001
-------------- -----------------------------
Notes payable to bank, unsecured under
current line of credit; interest rates at
September 30, 2002 and 2001 ranged from
3.43% to 4.75% and 4.77% to 5.65%,
respectively $ 63,500 $ 66,000
Notes payable, unsecured, interest due
monthly at 8.52% 17,120 22,840
Variable rate industrial development
revenue bonds; interest rate at
September 30, 2001 was 2.45% -- 4,000
Industrial development revenue bonds:
interest rates at September 30, 2001
ranged from 7.38% to 8.13% -- 2,210
Mortgage notes; interest rates averaging 8.15%
at September 30, 2001 -- 267
Other 39 76
------- -------
80,659 95,393
Less amount due within one year 5,759 6,283
-------- --------
$ 74,900 $ 89,110
======== ========
Steel Technologies has a $125,000,000 line of credit agreement expiring on
August 31, 2004 with various variable options on the interest rate, none of
which are greater than the bank's prime. The Company has elected to use both the
LIBOR based interest rate and the prime interest rate on its outstanding
borrowings under the agreement. At September 30, 2002, there was $63,500,000
outstanding on the credit facility.
In April 1995, the Company entered into a $40,000,000 private placement note.
Annual principal payments of $5,720,000 began March 1, 1999 and continue through
March 1, 2005.
16
The aggregate amounts of all long-term debt to be repaid for the years following
September 30, 2002, are: 2003, $5,759,000; 2004, $69,220,000; 2005, $5,680,000.
Provisions contained in the Company's various debt agreements require the
Company to maintain specified levels of net worth, maintain certain financial
ratios and limit the addition of substantial debt. The Company estimates that
the fair value of fixed interest debt instruments approximate $18,186,000 at
September 30, 2002. The fair value of the Company's debt is estimated based on
quoted market rates or current rates offered to the Company on comparable
remaining maturities.
On June 30, 1999, the Company terminated its long-term interest rate swap
agreement, which was entered into to reduce the risk of interest rate
variability. Under the contract, the Company agreed with another party to
exchange quarterly the difference between variable-rate and fixed-rate amounts
calculated on a notional principal amount of $30,000,000. The termination
generated a deferred gain of $958,000, which was being amortized over a period
of 30 months (the remaining term of the underlying debt instrument) as a
reduction of interest expense beginning in July 1999. On August 31, 2001, the
Company refinanced its existing credit facilities (the underlying debt
instrument) and the remaining unamortized gain of approximately $128,000 was
recognized as a reduction in interest expense.
7. FINANCIAL INSTRUMENTS: In order to mitigate a portion of the market risk on
its variable rate debt, the Company entered into interest rate swap contracts
with major financial institutions on August 30, 2001. Under terms of these
separate contracts the Company receives a LIBOR based variable interest rate and
pay a fixed interest rate of 4.24% and 4.48% on notional amounts of $15 million
each which mature in August 2003 and February 2004, respectively. The variable
rate interest rate paid on the contracts is determined based on LIBOR on the
last day of the applicable month, which is consistent with the variable rate
determination on the underlying debt.
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended, which established accounting and
reporting standards requiring that every derivative financial instrument be
recorded on the balance sheet at its fair value. SFAS No. 133 requires all
derivatives be recognized as either assets or liabilities in the balance sheet
at their fair value, and sets forth the manner in which gains and losses thereon
are to be recorded. The treatment of such gains or losses is dependent upon the
type of exposure, if any, for which the derivative is designated as a hedge.
Gains and losses for qualifying hedges can be deferred in accumulated other
comprehensive loss and recognized in the income statement along with the related
results of the hedged item. SFAS No. 133 requires that the Company formally
document, designate and assess the effectiveness of such transactions in order
to qualify for hedge accounting treatment.
The Company has designated its interest rate swap contracts as cash flow hedges
of anticipated interest payments under its variable rate line of credit
agreement. Gains and losses on these swaps that are recorded in accumulated
other comprehensive loss will be reclassified into net income as interest
expense, net in the periods in which the related variable interest is paid.
The adoption of SFAS No. 133 did not have any impact on the Company's results of
operations or its financial position. The Company expects to reclassify
approximately $454,000 of the $620,000 recorded in accumulated other
comprehensive loss into net income as interest expense, net over the next twelve
months.
8. SHAREHOLDERS' EQUITY: In April 1998, the Company adopted a shareholder rights
plan by declaring a dividend of one right for each share of Common Stock
outstanding payable to shareholders of record on May 14, 1998. Each right
entitles shareholders to buy one one-hundredth of a share of series A junior
participating preferred stock for $50 per share. The rights may be exercised
only if a person or group acquires 20% or more of the outstanding shares of
common stock or announces a tender offer or exchange offer that would result in
ownership of 20% or more of the common stock. The rights currently trade with
the Company's common stock and may be redeemed by the Board of Directors for one
cent per right until they become exercisable, and thereafter under certain
circumstances. The rights expire in 2008.
17
The Company's Articles of Incorporation authorized 500,000 shares of no par
value preferred stock, of which 200,000 shares have been reserved and designated
Series A 1998 junior participating preferred stock for possible issuance under
the Company's shareholder rights plan. As of September 30, 2002, no preferred
shares have been issued.
During 2000, the Company amended its restated articles of incorporation to
increase the number of authorized common shares from 20,000,000 to 50,000,000.
On January 22, 1998, the Board of Directors approved a plan under which Steel
Technologies may repurchase up to 500,000 shares of its common stock.
Subsequently, the Board of Directors authorized repurchase of an additional
1,000,000 shares on September 30, 1998 and another additional 1,000,000 shares
on April 30, 2000 for a total of 2,500,000 shares. Shares may be purchased from
time to time at prevailing prices in open market transactions, subject to market
conditions, share price and other considerations. The Company has completed the
program with 2,500,000 shares for an aggregate of $21,795,000 as of September
30, 2002. During fiscal 2002, 2001 and 2000, the Company repurchased
approximately 677,000, 253,000 and 690,000 shares of common stock for
$6,592,000, $1,392,000 and $6,688,000, respectively.
9. RETIREMENT PLAN:
The Company maintains a 401(k) defined contribution pension plan. Annual expense
provisions are based upon the level of employee participation, as the plan
requires the Company to match a certain portion of the employees' contributions.
Total retirement plan expense was $948,000 in 2002, $792,000 in 2001 and
$716,000 in 2000. The Company follows the policy of funding retirement plan
contributions as accrued.
10. INCOME TAXES:
The following table represents the components of the provision for income taxes:
For the Years Ended September 30
---------------------------------------
(In thousands) 2002 2001 2000
-------------- ---------------------------------------
Current:
Federal $ 7,073 $ 4,057 $ 4,535
State, local and foreign 1,346 1,671 (494)
------- ------- -------
8,419 5,728 4,041
======= ======= =======
Deferred:
Federal 521 (154) 105
State, local and foreign 731 (841) 1,819
------- -------- --------
1,252 (995) 1,924
------- -------- --------
$ 9,671 $ 4,733 $ 5,965
======= ======== ========
18
Deferred income taxes are recorded at currently enacted rates and result from
temporary differences in the recognition of revenues and expenses for tax and
financial statement purposes. The primary temporary differences giving rise to
the Company's deferred tax assets and liabilities are as follows:
September 30
-----------------------------
(In thousands) 2002 2001
-------------- -----------------------------
Deferred tax assets:
Inventory capitalization $ 4 $ 720
Provision for doubtful accounts 504 983
Interest rate swap 380 227
Non deductible liabilities 953 1,296
--------- ---------
Total deferred tax assets 1,841 3,226
Deferred tax liabilities:
Accelerated depreciation 10,631 11,374
Other, net 3,569 3,291
--------- ---------
Total deferred tax liabilities 14,200 14,665
--------- ---------
Net deferred tax liabilities $(12,359) $(11,439)
========= =========
A reconciliation of the provision for income taxes with amounts computed by
applying the federal statutory rate to income before income taxes follows:
For the Years Ended September 30
--------------------------------
2002 2001 2000
---- ---- ----
Tax at U.S. federal statutory rate 35.0 34.2% 34.2%
State and local income taxes, net
of U.S. federal tax benefit 3.0 3.5 3.5
Equity in net (income) loss of
unconsolidated corporate joint ventures (1.8) 45.0 (1.9)
Other, net 1.8 3.4 1.1
---- ---- ----
38.0% 86.1% 36.9%
==== ==== ====
11. STOCK OPTION PLANS:
Under its employee stock option plans, the Company may grant employees incentive
stock options to purchase shares at not less than 100% of market value at date
of grant or non-qualified stock options at a price determined by the
Compensation Committee of the Company's Board of Directors. Generally, options
are exercisable at the rate of 20% a year beginning one year from date of grant
and expire ten years from the date of grant.
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock option plans. Generally, the exercise price of options
awarded under these plans has been equal to the fair market value of the
underlying common stock on the date of grant. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation", net income and earnings per share would have been
reduced to the pro forma amounts indicated in the table below.
19
For the Years Ended September 30
--------------------------------
(In thousands, except per share results) 2002 2001 2000
---------------------------------------- ---- ---- ----
Net income - as reported $15,794 $ 764 $10,212
Net income - pro forma $15,804 $ 459 $ 9,912
Diluted net income per share - as reported $ 1.60 $0.07 $ 0.94
Diluted net income per share - pro forma $ 1.60 $0.04 $ 0.91
Basic net income per share - as reported $ 1.62 $0.07 $ 0.94
Basic net income per share - pro forma $ 1.62 $0.04 $ 0.92
The pro forma effects on net income are not necessarily representative of the
pro forma effect on net income in future years. The fair value of options
granted during 2001 and 2000 are $4.40 and $2.19, respectively. There were no
options granted during 2002.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the years
ended September 30, 2001 and 2000:
2001 2000
---- ----
Expected dividend yield 1.9% 1.3%
Expected stock price volatility 46.0% 46.0%
Weighted average risk-free interest rate 5.9% 6.1%
Expected life of options (years) 7.0 7.0
The summary of the status of all of the Company's stock incentive plans as of
September 30, 2002, 2001 and 2000 and changes during the years then ended is
presented below:
Average
Shares Under Range of Option Exercise
Plans Prices Per Share Price
------------ --------------------- --------
Balance, September 30, 1999 633,500 $ 6.67 - $ 12.79 $ 10.64
Granted 10,000 $ 11.94 $ 11.94
Exercised (16,000) $ 6.67 - $ 10.67 $ 8.79
Canceled - $ - $ -
------- --------------------- -------
Balance, September 30, 2000 627,500 $ 6.67 - $ 12.79 $ 10.71
Granted 214,000 $ 5.34 $ 5.34
Exercised - $ - $ -
Canceled (50,000) $ 6.67 - $ 12.79 $ 9.12
------- --------------------- -------
Balance, September 30, 2001 791,500 $ 5.34 - $ 12.51 $ 9.36
Granted - $ - $ -
Exercised (135,850) $ 5.34 - $ 12.00 $ 9.76
Canceled (85,000) $ 8.73 - $ 12.51 $ 11.54
------- --------------------- -------
Balance, September 30, 2002 570,650 $ 5.34 - $ 12.00 $ 8.94
------- --------------------- -------
20
The following table summarizes information about stock options outstanding and
exercisable:
September 30, 2002
---------------------------------------------------------------------------------
Options Outstanding: Options Exercisable:
------------------------------------------------- ----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted
Exercise Prices at 9/30/02 Contracted Life Exercise Price at 9/30/02 Exercise Price
- -----------------------------------------------------------------------------------------------------
$ 5.34 - $ 8.00 251,400 7.69 years $ 5.91 53,000 $ 6.74
$ 8.00 - $12.00 319,250 3.83 years $11.32 283,250 $11.31
- ---------------- ------- ---------- ------ ------- -------
$ 5.34 - $12.00 570,650 5.53 years $ 8.94 336,250 $10.59
At September 30, 2002, there were 286,000 shares available for granting of stock
options under the Company's stock option plans. All unexercised options expire
not later than the year 2010.
12. NET INCOME PER SHARE COMPUTATIONS:
The following is a reconciliation of the numerator of the basic and diluted per
share computations:
For the Years Ended
September 30
--------------------------
(In thousands, except for share results) 2002 2001 2000
- -------------------------------------------------------------------------------
Net income ................................... $15,794 $ 764 $10,212
------- ------- -------
Shares (denominator) used for diluted share
computations:
Weighted average shares of common stock
outstanding ................................... 9,762 10,267 10,818
Plus: dilutive effect of stock options ........ 124 41 39
------- ------- -------
Adjusted weighted average shares .......... 9,886 10,308 10,857
------- ------- -------
Shares (denominator) used for basic per share
computations:
Weighted average shares of common stock
outstanding ................................... 9,762 10,267 10,818
------- ------- -------
Net income per share data:
Basic ..................................... $ 1.62 $ 0.07 $ 0.94
Diluted ................................... $ 1.60 $ 0.07 $ 0.94
All outstanding options are included in the diluted earnings per share
calculation above for the year ended September 30, 2002. Options to purchase
567,500 and 597,500 shares for the years ended September 30, 2001 and 2000,
respectively were excluded from the calculations above because the exercise
prices of the options were greater than the average market price of the
Company's stock during the periods.
21
13. RELATED PARTY TRANSACTIONS:
The Company has various transactions with Mi-Tech Steel (see Note 5).
The Company has recorded sales of $4,674,000, $3,629,000 and $5,007,000 in 2002,
2001 and 2000, respectively and accounts receivable of $1,029,000 and $836,000
as of September 30, 2002 and 2001, respectively, for products sold to a company
owned by certain officers and directors of the Company. The Company believes
these transactions are in the best interests of the Company and the terms and
conditions of these transactions are in the aggregate not materially more
favorable or unfavorable to the Company than would be obtained on an arm's
length basis from unaffiliated parties.
During 2002, the Company repurchased 600,000 shares of its common stock from its
founding chairman for $6,000,000.
14. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations," which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS No.
141 apply to all business combinations initiated or completed after June 30,
2001. The Company will apply the provisions of SFAS No. 141 to any future
business combinations.
In addition, the FASB issued Statement of Financial Accounting Standards No. 142
(SFAS No. 142), "Goodwill and Other Intangible Assets," which establishes the
accounting for goodwill and other intangible assets following their recognition.
SFAS No. 142 applies to all goodwill and other intangible assets whether
acquired singly, as part of a group, or in a business combination. SFAS No. 142
provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS No. 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 142 is effective for the Company beginning on October 1, 2002.
The Company is in the process of preparing for its adoption of SFAS No. 142 and
is making the determinations as to the fair value of its reporting units and
what amounts of goodwill, assets and liabilities should be allocated to those
reporting units. In connection with the adoption of SFAS No. 142, the Company
expects that it will no longer record $733,000 of annual amortization expense
relating to its existing goodwill and that it will not reclassify any goodwill
to intangible assets.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first quarter of 2003. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. Any impairment loss resulting from the
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of fiscal 2003. The Company
has not yet determined what effect these impairment tests will have on the
Company's earnings and financial position.
22
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.
144). SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 121 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The objectives of SFAS No. 144 are to address significant issues
relating to the implementation of SFAS No. 121 and to develop a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. Management of the Company is currently analyzing the impact of
SFAS No. 144 but currently does not believe the impact of the adoption of SFAS
No. 144 as of October 1, 2002 will be significant.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including certain lease
termination costs and severance-type costs under a one-time benefit arrangement
rather than an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 requires liabilities associated
with exit or disposal activities to be expensed as incurred and will impact the
timing of recognition for exit or disposal activities that are initiated after
December 31, 2002. The Company will apply the provisions of SFAS No. 146 to any
future exit or disposal activities that are initiated after December 31, 2002.
23
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Steel Technologies Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Steel Technologies Inc. and its subsidiaries at September 30, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLC
Louisville, Kentucky
October 28, 2002
24
EXHIBIT 21.1
STEEL TECHNOLOGIES INC.
SUBSIDIARIES AND AFFILIATES
Percentage of
Voting
Names Under Securities
Jurisdiction of Which Business Owned By
Name Incorporation Transacted Registrant
- --------------------------------------------------------------------------------
Steel Technologies, LLC
(Formerly Steel Technologies
Carolinas, Inc.) South Carolina Steel Technologies Carolinas 100%
Steel Technologies, L.P. Delaware Steel Technologies General Partner
Limited partner
is Steel
Technologies,
LLC (SC)
Steel Technologies Corp.
(Formerly Roberts Steel
Company) Ohio Steel Technologies Ohio 100%
Steel Technologies, LLC Ohio Steel Technologies 100% owned by
Steel
Technologies
Corp.
Wabash Steel Corporation
(Formerly Southern Strip
Steel-Peru, Inc.) Indiana Wabash Steel Corporation 100%
Steel Technologies Ohio,
Inc. (formerly
Southern Strip Steel-
Columbus, Inc) Ohio Steel Technologies Ohio 100%
Steel Technologies de
Mexico (formerly
Transformadora y
Commercializadora de
Metales, S.A. de C.V.)Mexico Steel Technologies de Mexico 90%
Custom Steel Corp. Kentucky Custom Steel 100%
Custom Steel Processing,
Inc. Ohio Custom SteelProcessing 100%
Mi-Tech Steel, Inc. Delaware Mi-Tech Steel, Inc. 50%
Ferrolux Metals Co., LCC Ohio Ferrolux 49%
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-66318, 333-21279 and 333-21359) of Steel
Technologies Inc. and Subsidiaries of our report dated October 28, 2002,
relating to the consolidated financial statements, which appears in the Annual
Report to Shareholders, which is incorporated in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
October 28, 2002 relating to the financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Louisville, Kentucky
December 26, 2002
Exhibit 99
Financial Statements of Mi-Tech Steel Inc.
Mi-Tech Steel, Inc. and Subsidiary
Report on Audits of Consolidated Financial Statements
for the years ended September 30, 2002, 2001 and 2000
C O N T E N T S
Pages
-----
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-12
Report of Independent Accountants
Board of Directors
Mi-Tech Steel, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and cash flows
present fairly, in all material respects, the financial position of Mi-Tech
Steel, Inc. and Subsidiary at September 30, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
October 28, 2002
1
Mi-Tech Steel, Inc. and Subsidiary
Consolidated Balance Sheets
September 30
-----------------------------
2002 2001
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 719,026 $ 2,419,325
Trade accounts receivable, less
allowance for doubtful accounts:
$483,706 in 2002 and $425,000 in 2001 ..... 18,124,061 17,942,987
Inventories.................................. 32,102,365 17,609,025
Deferred income taxes........................ 304,442 912,971
Income taxes refundable...................... -- 285,055
Prepaid expenses and other assets............ 124,224 117,449
------------- -------------
Total current assets .................... 51,374,118 39,286,812
------------- -------------
Property, plant and equipment (at cost), net... 25,817,874 28,033,534
------------- -------------
Deferred income taxes - long-term.............. 1,787,014 2,250,307
Other assets .................................. 55,534 32,535
------------- -------------
$ 79,034,540 $ 69,603,188
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 22,030,913 $ 17,049,206
Accrued liabilities ........................ 2,041,802 2,100,990
Long-term debt due within one year ......... 24,500,000 9,052,640
------------- -------------
Total current liabilities ............... 48,572,715 28,202,836
Long-term debt ................................ -- 13,552,600
------------- -------------
Total liabilities ........................ 48,572,715 41,755,436
------------- -------------
Commitments and contingencies ................. -- --
Shareholders' equity:
Common stock:
Class A, $4,000 par value; 2,400 shares
authorized, issued and outstanding ....... 9,600,000 9,600,000
Class B, $4,000 par value; 2,400 shares
authorized, issued and outstanding ....... 9,600,000 9,600,000
Retained earnings .......................... 11,261,825 8,647,752
------------- -------------
Total shareholders' equity ............... 30,461,825 27,847,752
------------- -------------
$ 79,034,540 $ 69,603,188
============= =============
The accompanying notes are an integral part of
the consolidated financial statements.
2
Mi-Tech Steel, Inc. and Subsidiary
Consolidated Statements of Operations
For the Years Ended September 30
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------
Sales .............................. $141,322,783 $137,335,909 $154,451,316
Cost of goods sold ................. 130,950,677 127,597,551 143,287,002
------------ ------------ ------------
Gross profit ..................... 10,372,106 9,738,358 11,164,314
Selling, general and administrative
expenses ......................... 5,448,108 5,430,143 5,369,156
Asset impairment charge (Note 4).... -- 18,962,106 --
------------ ------------ ------------
Operating income (loss) .......... 4,923,998 (14,653,891) 5,795,158
Loss on disposals/writeoffs of
property, plant and equipment .... 27,949 14,476 1,290
Interest expense, net .............. 568,476 2,203,238 2,802,180
------------ ------------ ------------
Income (loss) before income taxes. 4,327,573 (16,871,605) 2,991,688
Provision (benefit) for income
taxes ............................ 1,713,500 (5,312,453) 1,195,121
------------ ------------ ------------
Net income (loss) ................ $ 2,614,073 $(11,559,152) $ 1,796,567
============ ============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
3
Mi-Tech Steel, Inc. and Subsidiary
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 2002, 2001 and 2000
------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
--------------------- -------------------
Retained
Shares Amount Shares Amount Earnings Total
- -------------------------------------------------------------------------------------------------------------
Balances, September 30, 1999 ...... 2,400 $9,600,000 2,400 $9,600,000 $18,410,337 $37,610,337
Net income ........................ -- -- -- -- 1,796,567 1,796,567
------- ---------- ----- ---------- ----------- -----------
Balances, September 30, 2000 ...... 2,400 9,600,000 2,400 9,600,000 20,206,904 39,406,904
Net loss .......................... -- -- -- -- (11,559,152) (11,559,152)
------- ---------- ----- ---------- ----------- -----------
Balances, September 30, 2001 ...... 2,400 9,600,000 2,400 9,600,000 8,647,752 27,847,752
Net income ........................ -- -- -- -- 2,614,073 2,614,073
------- ---------- ----- ---------- ----------- -----------
Balances, September 30, 2001 ...... 2,400 $9,600,000 2,400 $9,600,000 $11,261,825 $30,461,825
======= ========== ===== ========== =========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
4
Mi-Tech Steel, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended September 30
---------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 2,614,073 $(11,559,152) $ 1,796,567
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Asset impairment charge (Note 4) ......................... -- 18,962,106 --
Depreciation and amortization ............................ 2,349,177 3,172,617 4,570,222
Deferred income taxes .................................... 1,071,822 (5,468,334) 392,056
Provision for bad debts on trade accounts receivable ..... 75,000 102,000 58,000
Loss on disposals/writeoffs of property plant
and equipment ......................................... 27,949 14,476 1,289
Increase (decrease) in cash resulting from changes in:
Trade accounts receivable ............................ (256,074) (1,512,761) 4,869,620
Inventories .......................................... (14,493,340) 16,171,391 (1,771,618)
Prepaid expenses and other assets .................... (29,774) 116,399 (158,689)
Accounts payable ..................................... 4,981,707 (2,499,222) (6,288,359)
Accrued liabilities and income taxes refundable ...... 225,867 (250,710) 561,524
------------- ------------ ------------
Net cash (used in) provided by operating activities ............ (3,433,593) 17,248,810 4,030,612
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................... (1,225,303) (1,476,163) (1,815,356)
Proceeds from sale of property, plant and equipment .......... 1,063,837 63,609 --
------------- ------------- ------------
Net cash used in investing activities .......................... (161,466) (1,412,554) (1,815,356)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ................................. 10,000,000 5,000,000 2,500,000
Principal payments on long-term debt ......................... (8,105,240) (21,302,640) (4,802,640
------------- ------------ ------------
Net cash provided by (used in) financing activities ............ 1,894,760 (16,302,640) (2,302,640)
------------- ------------ ------------
Net decrease increase in cash and cash equivalents ............. (1,700,299) (466,384) (87,384)
Cash and cash equivalents, beginning of year ................... 2,419,325 2,885,709 2,973,093
------------ ------------ -------------
Cash and cash equivalents, end of year ......................... $ 719,026 $ 2,419,325 $ 2,885,709
============ ============ =============
Supplemental Cash Flow Disclosures:
Cash payments for interest ................................... $ 927,000 $ 2,480,000 $ 2,196,000
Cash payments for taxes ...................................... $ 293,000 $ 42,000 $ 979,000
The accompanying notes are an integral part of
the consolidated financial statements.
5
Mi-Tech Steel, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Description of Business: Mi-Tech Steel, Inc. and Subsidiary (the Company)
owns and operates two high-volume steel slitting facilities to serve
Japanese and domestic parts manufacturers in the Southeastern and
Midwestern United States. A significant amount of sales is generated by
selling manufacturing component parts to the automotive industry. In March
2001, the Company discontinued its Decatur, Alabama operations (see Note
4).
Principles of Consolidation: The consolidated financial statements include
the accounts of Mi-Tech Steel, Alabama, Inc., a wholly-owned subsidiary.
All significant intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents: Cash and cash equivalents includes highly liquid
investments with an original maturity of three months or less. Carrying
value approximates fair value due to the short-term maturities of the
investments.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for all inventories.
Allowance for Doubtful Accounts Receivable: The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The allowance is
maintained at a level considered appropriate based on historical and other
factors that affect collectibility. The factors include historical trends
of write-offs, recoveries and credit losses; the monitoring of portfolio
credit quality; and current and projected economic and market conditions.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of the ability to make payments, additional
allowances may be required.
Depreciation: Depreciation is computed using the straight-line method with
the following estimated useful lives:
Buildings and improvements 5-25 years
Machinery and equipment 2-12 years
When properties are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts with any resulting
gain or loss reflected in results of operations. Maintenance and repairs
are expensed in the year incurred. The Company capitalized interest costs
as part of the cost of constructing major facilities. There were no
capitalized interest costs in fiscal 2002. Interest costs of approximately
$10,000 and $8,000 were capitalized in 2001 and 2000, respectively.
Revenue Recognition: The Company recognizes revenue when the customer takes
title to goods shipped and risk of loss passes to the customer.
6
Use of 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
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Reclassifications: Certain prior year amounts have been reclassified to
conform with the current year presentation with no effect on net income or
shareholders' equity.
2. Inventories: Inventories at September 30 consist of:
September 30
------------------------
2002 2001
------------------------
Raw materials $26,838,175 $13,309,635
Finished goods and work in process 5,264,190 4,299,390
----------- -----------
$32,102,365 $17,609,025
=========== ===========
3. Property, Plant and Equipment
Property, plant and equipment and related accumulated depreciation at
September 30 consist of the following:
September 30
----------------------------
2002 2001
----------------------------
Land and improvements $ 774,846 $ 873,396
Buildings and improvements 14,537,927 14,407,241
Machinery and equipment 19,948,090 19,570,145
Construction in progress 268,194 27,715
Assets available for sale 8,769,237 9,830,047
------------ ------------
44,298,294 44,708,544
Less accumulated depreciation (18,480,420) (16,675,010)
------------ ------------
$ 25,817,874 $ 28,033,534
============ ============
7
4. Asset Impairment Charge:
In January 2001, the Company announced the closure of its Decatur, Alabama
operation which was completed during fiscal 2001. The closure occurred as a
result of a weaker steel market in the southeastern United States region
serviced by the Decatur operation. The Company is pursuing alternatives to
sell its assets in Decatur which consist of land, two buildings and
machinery and equipment. In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the Company recorded
an impairment charge of approximately $17.8 million based on its estimate
of fair value. At September 30, 2002, the net assets of Decatur have an
estimated fair value of approximately $8.8 million. The Company estimates
it will complete the sale of these assets by the end of 2004.
During the second quarter of fiscal 2001, the Company determined that its
30% interest in San Diego Coil Center (SDCC), an unconsolidated corporate
joint venture between the Company and Mitsui and Co., Ltd. accounted for by
the cost method, was not able to sustain an earnings capacity which
justified the carrying amount of its investment. In accordance with
Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock," the Company wrote off its $1.2
million investment in SDCC.
5. Long-Term Debt:
Long-term debt at September 30 consists of the following:
September 30
-----------------------------
2002 2001
-----------------------------
Term note, due February 2003; interest rate
at 2.39% and 4.93% at September 30, 2002
and 2001, respectively $12,500,000 $12,500,000
Notes payable to bank, collateralized, due
June 2003; interest rate 2.30% at September
30, 2002 and 4.50% at September 30, 2001 7,000,000 8,000,000
Notes payable to bank, dollateralized
under urrent line of credit due
February 2003; interest rate 3.50% at
September 30, 2002 5,000,000 --
Term note, collateralized, interest rate
was 5.72% at September 30, 2001 -- 2,105,240
----------- -----------
24,500,000 22,605,240
Less amount due within one year 24,500,000 9,052,640
----------- -----------
$ -- $13,552,600
=========== ===========
8
In February 1998, the Company entered into a term loan for $12,500,000 with
a banking institution independent of the bank providing the Company's
existing line of credit. The loan is collateralized by a letter of
awareness from a shareholder and is due February 9, 2003. The agreement
bears interest at no greater than the federal funds rate. Management
expects to refinance this credit agreement prior to February 9, 2003.
In September 2002, the Company continued an uncommitted line of credit
agreement for $15,000,000. The line was entered into for working capital
purposes and is due June 2003. Management expects to refinance this credit
agreement prior to June 2003. Borrowings under the agreement are limited to
certain percentages of accounts receivable and inventory. The agreement
bears interest at no greater than the federal funds rate. At September 30,
2002, there was $7,000,000 outstanding on this credit facility.
The Company has an $8,250,000 bank line of credit agreement collateralized
by certain assets of the company. The agreement matures in February 2003 at
which time the Company expects to refinance this credit agreement. The
agreement bears various interest rate options on the variable interest
rate, none of which are greater than the bank's prime. At September 30,
2002, there was $5,000,000 outstanding on this credit facility.
Provisions contained in the Company's various debt agreements require the
Company to maintain specified levels of net worth and comply with certain
financial ratios. The lenders have the ability to call the debt if debt
covenants were to be violated.
The carrying value of the Company's long-tem debt approximates fair value.
6. Retirement Plan:
The Company maintains a 401(k) defined contribution pension plan. Annual
expense provisions are based upon the level of employee participation, as
the plan requires the Company to match a certain portion of the employees'
contributions. The total expense under the plan was approximately $191,000
in 2002, $90,000 in 2001 and $103,000 in 2000. The Company follows the
policy of funding retirement plan contributions as accrued.
9
7. Income Taxes:
The following table represents the components of the provision for income
taxes:
For the Years Ended September 30
-----------------------------------------
2002 2001 2000
-----------------------------------------
Current:
Federal $ 441,630 $ 143,789 $ 703,487
State and local 200,048 12,092 99,578
----------- ----------- -----------
641,678 155,881 803,065
=========== =========== ===========
Deferred:
Federal 1,108,263 (5,381,403) 341,792
State and local (36,441) (86,931) 50,264
------------ ------------ -----------
1,071,822 (5,468,334) 392,056
------------ ------------ -----------
$ 1,713,500 $(5,312,453) $ 1,195,121
============ ============ ===========
Deferred income taxes are recorded at currently enacted rates and result
from temporary differences in the recognition of revenues and expenses for
tax and financial reporting purposes. The primary temporary differences
giving rise to the Company's deferred tax assets and liabilities are as
follows:
September 30
------------------------------
2002 2001
------------------------------
Deferred tax assets:
Asset impairment charge $ 6,039,116 $ 6,011,910
Alternative minimum tax carryforwards 304,442 912,971
Provision for doubtful accounts 188,645 148,955
Inventory capitalization 92,200 76,687
Other, net 165,701 49,369
----------- ------------
Total deferred tax assets 6,790,104 7,199,892
Deferred tax liabilities:
Accelerated depreciation (4,698,648) (4,036,614)
----------- -----------
Total deferred tax liabilities (4,698,648) (4,036,614)
----------- -----------
Net deferred tax liabilities $ 2,091,456 $ 3,163,278
=========== ===========
10
A reconciliation of the income tax provision with amounts computed by
applying the federal statutory income tax rate to income before income
taxes follows:
For the Years Ended September 30
--------------------------------
2002 2001 2000
---- ---- ----
(Benefit) tax at U.S. federal
statutory rate 34.0% (34.0)% 34.0%
State and local income taxes, net
of U.S. federal tax benefit 3.9 -- 3.9
Non-deductible capital loss -- 2.4 --
Other, net 1.7 0.1 2.1
---- ---- ----
39.6% (31.5)% 40.0%
==== ==== ====
8. Related Party Transactions:
The Company is involved in various transactions with its shareholders.
These transactions involve the purchases, processing and sales of
inventories between companies and the payment of fees for services
performed for the Company.
The following presents the related party transactions between the Company
and its shareholders for each of the three years ended September 30:
2002 2001 2000
----------- ----------- -----------
Purchases of inventory $49,863,000 $41,484,000 $62,549,000
Sales of inventory 1,176,000 1,330,000 4,933,000
Management and construction fees 996,000 996,000 981,000
Sale of equipment 975,000 -- --
The following presents the related party balances between the Company and
its shareholders at September 30:
2002 2001
----------- -----------
Accounts payable - affiliate $11,015,000 $8,933,000
Accounts receivable from shareholders 2,305,000 315,000
The Company has a management fee agreement with SDCC for certain services
performed by the Company. The total fee income recorded was $232,800,
$259,800, and $340,800 in 2002, 2001 and 2000, respectively.
11
The Company recorded sales of $1,185,000, $990,000 and $1,229,000 in 2002,
2001 and 2000, respectively and had accounts receivable of $293,000 and
$188,000 as of September 30, 2002 and 2001, respectively, for products sold
to a company owned by a certain officer of the Company. The Company
believes these transactions are in the best interests of the Company and
the terms and conditions of these transactions are in the aggregate not
materially more favorable or unfavorable to the Company than would be
obtained on an arm's length basis from unaffiliated parties.
9. Major Customers:
Sales to three customers accounted for 37%, 32% and 39% of the Company's
sales in fiscal 2002, 2001 and 2000, respectively. Amounts receivable from
these customers totaled approximately $8,925,000 and $7,196,000 at
September 30, 2002 and 2001, respectively. The loss of one of these
customers could have a material adverse effect on the Company's results of
operations, financial position and cash flows.
12
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, I, Bradford T. Ray, Chief
Executive Officer of Steel Technologies Inc., (the Company) certify, to the best
of my knowledge, based upon a review of the Annual Report on Form 10-K of the
Company for the year ended September 30, 2002:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Bradford T. Ray
___________________
Bradford T. Ray
Chief Executive Officer
Date: December 26, 2002
EXHIBIT 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, I, Joseph P. Bellino, Chief
Financial Officer of Steel Technologies Inc., (the Company) certify, to the best
of my knowledge, based upon a review of the Annual Report on Form 10-K of the
Company for the year ended September 30, 2002:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joseph P. Bellino
_____________________
Joseph P. Bellino
Chief Financial Officer
Date: December 26, 2002