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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, 2003
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 March 31, 2003,
computed by reference to the closing price of the registrant's common stock, as
quoted in the Nasdaq National Market System on such date: $87,477,470.
Number of shares of the registrant's Common Stock outstanding at November 28,
2003: 9,782,602
Portions of the registrant's annual report to shareholders for the fiscal year
ended September 30, 2003 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 22,
2004 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 type, 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
integrated steel mills and mini-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 processing capabilities, among others, include:
- - pickling, a chemical process using an acidic solution to remove surface oxide
which develops on hot-rolled steel and may also be performed in conjunction with
coating and lubricating steel;
- - slitting, which cuts steel to specific widths. Coils of fully-processed strip
or wide sheet coil are unwound, passed through rotary slitting knives and
rewound in narrow-width coils as required by customer specifications;
- - precision rolling, a method of applying pressure to achieve close tolerances
of thickness and temper for steel;
- - annealing, a thermal process that changes the hardness and certain
metallurgical characteristics of steel; cutting-to-length, which cuts flattened
steel to exact lengths;
- -blanking, by which steel is cut into specific shapes; oscillating, a means of
producing exceptionally long lengths of narrow strip steel by winding
consecutive coils, much like thread is wound on a spool;
- - custom steel fabrication, by which steel sheets and plates are cut and welded
together.
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, hot-rolled pickled and oiled sheet, tin plate,
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
1
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.
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.
2
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, four 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.
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 also "toll processes" steel for steel mills, large end-users,
service centers and other processors. Under toll processing, the customer
retains title to the steel and has the responsibility for the end product.
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 2003,
2002, and 2001 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.
3
SUPPLIERS
In 2003, 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.
UNCONSOLIDATED AFFILIATES
In April 1987, the Company formed Mi-Tech Steel, Inc. (Mi-Tech Steel), a 50%
owned unconsolidated affiliate with Mitsui Steel Development Co., Inc (Mitsui).
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. A fourth processing
facility was opened in September 2003 in Madison, Mississippi.
In March 2001, Mi-Tech Steel discontinued its Decatur, Alabama operation. 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. In addition, Mi-Tech Steel wrote down its
minority investment in San Diego Coil Center in March 2001 when it determined
that operation was not able to sustain an earnings capacity that justified the
carrying amount of its investment. The Company's share of Mi-Tech Steel's
impairment charges recorded during the second quarter of fiscal 2001 was
approximately $6.5 million. In April 2003, Mi-Tech Steel restarted its slitting
operations in Decatur and is being reimbursed for operating costs by the Company
and Mitsui. Mi-Tech Steel is pursuing alternatives to sell its pickling
equipment and facility in Decatur. Steel Technologies is also providing
management services for the Mi-Tech Steel operations.
In October 1990, Processing Technology, Inc. (PTI), was established by LTV Steel
Company, Mitsui and the Company. The Company held a 5% investment in the common
stock of PTI. During the second quarter of fiscal 2001, the Company determined
that PTI, an unconsolidated affiliate 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 2002, PTI
filed a Certificate of Dissolution with its state of incorporation.
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.
4
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 October 31, 2003, the Company employed approximately 1,039 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.
AVAILABLE INFORMATION
The Company maintains an Internet website at www.steeltechnologies.com. We make
available, free of charge, on or through this web site, our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). We also make available through our
website other reports filed with the SEC under the Exchange Act, including our
proxy statements and reports filed by our officers and directors under Section
16 of that Act. We do not intend for information contained in our website to be
part of this Annual Report on Form 10-K.
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
Matamoros, Mexico 80,000 sq.ft. 2000
Ottawa, Ohio 145,000 sq.ft. 2003
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 sold in 2003.
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.
5
Mi-Tech Steel currently operates four high volume steel slitting operations. The
Murfreesboro, Tennessee plant and Greensburg, Indiana Plant consist of 300,000
and 160,000 square feet respectively. Decatur, Alabama consists of two
facilities - an active slitting facility consisting of 120,000 square feet and
in idled pickling facility consisting of 40,000 square feet. In April 2003,
Mi-Tech Steel restarted its slitting operations in Decatur and is being
reimbursed for operating costs by Steel Technologies Inc. and Mitsui. Mi-Tech
Steel is pursuing alternatives to sell its 40,000 square foot pickling facility.
The Madison, Mississippi facility opened in September 2003 and comprises 84,000
square feet.
All operating properties are in good repair and in suitable condition for the
purposes for which they are used.
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
- ---- --- -----
Bradford T. Ray 45 Chairman of the Board and Chief Executive Officer
Michael J. Carroll 46 President and Chief Operating Officer
Howard F. Bates, Jr. 57 Vice President-Technical Services
Joseph P. Bellino 53 Chief Financial Officer and Treasurer
Brad A. Goranson 49 Senior Vice President-Sales
Officers are elected annually by and serve at the discretion of the Board of
Directors. Mr. Bradford T. Ray and Mr. Michael J. Carroll are members of the
Company's Board of Directors.
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.
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.
6
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 7 of the Company's annual report to shareholders for the year ended
September 30, 2003.
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
Number remaining
of securities available
to be issued Weighted-average for future
upon exercise exercise price of issuance
of outstanding outstanding under equity
option, warrants options, warrants compensation
Plan Category and rights and rights plans
- -------------------------- ---------------- ----------------- ------------
Equity compensation plans
approved by security holders 614,265 $9.16 286,000
Equity compensation plans not
approved by security holders 0(Note 1) Note 2 7,837
- ---------------------------- ---------------- ------------------ ------------
Total 614,265 $9.16 293,837
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 6 of the Company's annual
report to shareholders for the year ended September 30, 2003.
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 8 through 12 of the Company's annual report
to shareholders for the year ended September 30, 2003.
7
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 two separate interest rate swap contracts with major
financial institutions on August 30, 2001. Under the terms of the first contract
which matured in August 2003, the Company received a LIBOR based variable
interest rate and paid a fixed interest rate of 4.24% on a notional amount of
$15 million. Under the terms of the second contract which matures in February
2004, the Company receives a LIBOR based variable interest rate and pays a fixed
interest rate of 4.48% on a notional amount of $15 million. 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, 2003 by
expected maturity dates. The weighted average interest rate of the fixed-rate
debt is based on the actual average rates at September 30, 2003. The
variable-rate debt is based on actual rates at September 30, 2003. The
variable-rate debt consists primarily of the line of credit of which $89,000,000
is outstanding at September 30, 2003.
(In thousands except for interest rates)
Fair
2004 2005 Thereafter Total Value
----------------------------------------------------
Long-term debt
(fixed) $5,720 $ 5,680 $ - $11,400 $18,186
Weighted average
interest rates 8.52% 8.52%
Long-term debt
(variable) $ - $89,000 $ - $89,000 $89,000
Weighted average
interest rates 2.88% 2.88%
Interest rate
swaps, net $ 252 $ - $ - $ 252 $ 252
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.
8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Steel Technologies Inc. and
Subsidiaries on pages 13 through 29 and Report of Independent Auditors on page
30 which are included in the Company's annual report to shareholders for the
year ended September 30, 2003, and the sections entitled "Selected Quarterly
Financial Data" and "Market Price and Dividend Information" on page 7 thereof
are incorporated herein by reference.
Consolidated Balance Sheets - September 30, 2003 and 2002
Consolidated Statements of Income - Years ended September 30, 2003, 2002
and 2001
Consolidated Statements of Comprehensive Income - Years ended September 30,
2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity - Years ended
September 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows -Years ended September 30, 2003, 2002
and 2001
Notes to Consolidated Financial Statements
Report of Independent Auditors
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation as of September 30, 2003 pursuant to Exchange Act Rule
13a-15(b), the company's management, including its Chief Executive Officer and
Chief Financial Officer, believe the company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the
company's internal controls over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) by the company's management, including its Chief Executive
Officer and Chief Financial Officer, no changes during the quarter ended
September 30, 2003 were identified that have materially affected, or are
reasonably likely to materially affect, the company's internal controls over
financial reporting.
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 sections entitled
"Election of Directors" contained on pages 3 through 8, "Committees of the
Board" on page 7, "Election of Directors Section 16(a) Beneficial Ownership
Reporting Compliance" on page 8 and "Audit Committee Report" on Pages 15 through
16 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 22, 2004. 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".
In November 2003, the Company adopted a Code of Ethics for the Chief Executive
Officer, Financial Executives, and Financial Professionals. This Code of Ethics
contains specific principles to which the Chief Executive Officer, Chief
Financial Officer, Controller, and Tax Manager are expected to adhere. The full
text of the Code of Ethics for Financial Executives is attached as Exhibit 14 in
this Annual Report on Form 10-K.
9
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 - Independence and Compensation of Directors" contained
on pages 7 through 8 and "Executive Compensation" contained on pages 8 through
12 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 22, 2004.
Information appearing in the sections entitled "Compensation Committee Report on
Executive Compensation" contained on pages 12 through 14 and "Performance Graph"
contained on page 17 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 22, 2004 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 8 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 22, 2004.
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 pages 11 through 12 and "Election of
Directors" contained on pages 3 through 8 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 22, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to General Instruction G(3), the information required by Item 14 is
incorporated by reference herein from the material under the section entitled
"Audit Committee Report" contained on pages 15 through 16 and "Election of
Directors" contained on pages 3 through 8 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 22, 2004.
10
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 its 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 Auditors
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 Auditors
Consolidated Balance Sheets - September 30, 2003 and 2002
Consolidated Statements of Operations - Years ended September 30,
2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity -Years ended
September 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows -Years ended September 30,
2003, 2002 and 2001
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) The following reports on Form 8-K were filed with or furnished to the
Securities and Exchange Commission during the three months ended
September 30, 2003:
On July 24, 2003, the Company furnished a current report on Form 8-K
under Item 9, pursuant to Item 12, concerning the issuance of the
press release reporting its financial results for the third quarter
ended June 30, 2003.
On September 26, 2003, the Company furnished a current report on Form
8-K under Item 9, pursuant to Item 12, concerning the issuance of the
press release reporting its financial results for the fourth quarter
ended September 30, 2003.
(c) Exhibits filed with this report are attached hereto.
11
Page E-1
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2003
Ref. Exhibit
# # Description
- --- ------- -------------------------------------------------------
(h) 3.1 Second Restated Articles of Incorporation of the
Registrant
(h) 3.2 Second Amended By-Laws of the Registrant
(f) 4.1 Rights Agreement dated as of April 24, 1998, between Steel
Technologies Inc. and First Chicago Trust Company of New York,
as Rights Agent
(i) 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.
10.1(a) First Amendment to Credit Agreement dated as of December 10,
2002
10.1(b) Second Amendment to Credit Agreement dated as of April 25, 2003
(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
(i) 10.2(d) Third Amendment of Note Agreement
(i) 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 *
(h) 10.3(d) Registrant's 2000 Stock Option Plan *
(c) 10.5(a) Revised Employee Bonus Plan of the Registrant *
(h) 10.5(b) Employment Agreement between Registrant and Chairman and Chief
Executive Officer effective as of March 16, 2000 and Promissory
Note*
10.6(a) Agreement dated March 30, 1987 between Mitsui & Co., LTD.,
Mitsui & Co. (U.S.A.), Inc., Mitsui Steel Development Co., Inc.,
and the Registrant
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) 10.9 Form of Indemnification Agreement between the
Registrant and its Directors *
(h) 10.10(a)Steel Technologies Inc. Restated Retirement Savings
Plan
(h) 10.10(b)Amendment No. 1 to the Steel Technologies Inc.
Retirement Savings Plan
(g) 10.12 Amended and restated Nonemployee Directors Stock Plan *
(k) 10.12(a)Second Amended and restated Nonemployee Directors Stock Plan *
(j) 10.15 Redemption and Noncompetition Agreement*
12
Page E-1 (continued)
STEEL TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2003
Ref. Exhibit
# # Description
- --- ------- -------------------------------------------------------
13 2003 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
14 Code of Ethics for the Chief Executive Officer, Financial
Executives, and Financial Professionals
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
31.1 Certification of Chief Executive Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Title 18,
United States Code, Section 1350 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 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
32.2 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
99 Financial statements of M-Tech Steel, Inc.
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
Current Report on Form 8-K (file # 0-14061) filed April 24, 1998.
(g) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10-K (file #0-14061) for the fiscal year ended
September 30, 1999.
(h) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10-K (file #0-14061) for the fiscal year ended
September 30, 2000.
(i) Incorporated herein by reference to exhibits filed with the Company's
Annual Report of Form 10-K (file #0-14061) for the fiscal year ended
September 30, 2001.
(j) Incorporated herein by reference to exhibits filed with the Company's
Quarterly Report of Form 10-K (file #0-14061) for the quarter ended
December 31, 2001.
(k) 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
13
STEEL TECHNOLOGIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Deductions Period
---------- ---------- ---------- -----------
Year Ended September 30, 2003:
$1,496,247 $1,273,994 $ 962,294(A) $1,807,947
Year Ended September 30, 2002:
$2,671,387 $1,165,022 $2,340,162(A) $1,496,247
Year Ended September 30, 2001:
$1,327,400 $1,789,676 $ 445,689(A) $2,671,387
(A) Uncollectible accounts charged off, less recoveries.
REPORT OF INDEPENDENT AUDITORS 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 29, 2003 appearing on page 30 in the 2003 Annual Report to
Shareholders of Steel Technologies Inc. and its 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 15(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 29, 2003
14
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 12, 2003 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 12/12/03 Director, Chairman and Chief Executive
____________________ Officer (Principal Executive Officer)
Bradford T. Ray
/s/ Michael J. Carroll 12/12/03 Director, President and Chief
___________________ Operating Officer
Michael J. Carroll
/s/ Joseph P. Bellino 12/12/03 Chief Financial Officer and Director
___________________
Joseph P. Bellino
/s/ Howard F. Bates, Jr. 12/12/03 Director and Vice President-
___________________ Technical Services
Howard F. Bates, Jr.
/s/ Stuart N. Ray 12/12/03 Director and Vice President,
____________________ President, Mi-Tech Steel, Inc.
Stuart N. Ray
/s/ Merwin J. Ray 12/12/03 Founding Chairman and Director
___________________
Merwin J. Ray
/s/ Doug A. Bawel 12/12/03 Director
___________________
Doug A. Bawel
/s/ Jimmy Dan Conner 12/12/03 Director
___________________
Jimmy Dan Conner
/s/ Mark G. Essig 12/12/03 Director
___________________
Mark G. Essig
/s/ William E. Hellmann 12/12/03 Director
___________________
William E. Hellman
/s/ Andrew J. Payton 12/12/03 Director
___________________
Andrew J. Payton
15
EXHIBIT 10.1(a)
FIRST AMENDMENTS TO CREDIT AGREEMENTS
FIRST AMENDMENT
to
CREDIT AGREEMENT
by and among
STEEL TECHNOLOGIES INC.
and
THE GUARANTORS PARTY HERETO
and
THE BANKS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, As Agent
and
SUNTRUST BANK, As Syndication Agent
and
BANK ONE, KENTUCKY, N.A. , As Documentation Agent
Dated as of December __, 2002
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "First Amendment") dated as
of December __, 2002, by and among STEEL TECHNOLOGIES INC. (the "Borrower") and
the GUARANTORS party hereto (the "Guarantors"), the Banks party hereto (the
"Banks"), PNC Bank, National Association, As Agent (the "Agent"), SUNTRUST BANK,
As Syndication Agent ("Syndication Agent") and BANK ONE, KENTUCKY, N.A., As
Documentation Agent ("Documentation Agent"). WHEREAS, reference is made to the
Credit Agreement dated August 31, 2001 (the "Credit Agreement") by and among the
Borrower, the Guarantors, the Banks, the Agent and the Syndication Agent;
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Credit Agreement; and
WHEREAS, the parties to the Credit Agreement desire to amend the Credit
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Amendments.
A. Definitions--Expiration Date (Section 1.1). The definition of the term
"Expiration Date" contained in Section 1.1 of the Credit Agreement is
hereby amended and restated to read as follows: "Expiration Date shall
mean, with respect to the Commitments, August 31, 2005."
B. Extension by Banks of the Expiration Date (Section 2.12). The text of
Section 2.12 [Extension by Banks of the Expiration Date] is hereby deleted
and the words: "Intentionally Omitted" are inserted in lieu thereof. 2.
Warranties
A. Warranties Under the Credit Agreement
The representations and warranties of Loan Parties contained in the Credit
Agreement are true and correct on and as of the date hereof with the same force
and effect as though made by the Loan Parties on such date, except to the extent
that any such representation or warranty expressly relates solely to a previous
date. The Loan Parties are in compliance with all terms, conditions, provisions,
and covenants contained in the Credit Agreement.
1
B. Power and Authority; Validity and Binding Effect; No Conflict.
Each Loan Party has full power to enter into, execute, deliver and carry
out this First Amendment, and such actions have been duly authorized by all
necessary proceedings on its part. This First Amendment has been duly and
validly executed and delivered by each Loan Party. This First Amendment
constitutes the legal, valid and binding obligation of each Loan Party which is
enforceable against such Loan Party in accordance with its terms. Neither the
execution and delivery of this First Amendment nor the consummation of the
transactions herein contemplated will conflict with, constitute a default under
or result in any breach of (i) the terms and conditions of any organizational
documents of any Loan Party or (ii) any Law or any material agreement or
instrument or other obligation to which any Loan Party or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries is bound, or
result in the creation or enforcement of any Lien upon any property of any Loan
Party or any of its Subsidiaries other than as set forth herein.
C. Consents and Approvals; No Event of Default.
No consent, approval, exemption, order or authorization of any Person other
than the parties hereto is required by any Law or any agreement in connection
with the execution, delivery and carrying out of this First Amendment. No event
has occurred and is continuing and no condition exists or will exist after
giving effect to this First Amendment which constitutes an Event of Default or
Potential Default.
3. Conditions to Effectiveness.
The effectiveness of this First Amendment is subject to satisfaction of
each of the following conditions on or before the date hereof:
A. Representations and Warranties.
Each of the representations and warranties under Section 1.B hereof are
true and correct on the date hereof.
B. Execution by Banks, Agent and Loan Parties.
This First Amendment shall have been executed by all of the Banks, the
Agent and the Loan Parties on or before the date hereof.
2
C. Opinion of Counsel.
The Loan Parties shall have delivered an opinion of their counsel
confirming the warranties in Section 3 hereof.
D. Amendment Fees.
The Borrower shall pay to the Agent for the ratable benefit of the Banks a
fee in the amount of $125,000.
4. References to Credit Agreement, Loan Documents.
Any reference to the Credit Agreement or other Loan Documents in any
document, instrument, or agreement shall hereafter mean and include the Credit
Agreement or such Loan Document, including such schedules and exhibits, as
amended hereby. In the event of irreconcilable inconsistency between the terms
or provisions hereof and the terms or provisions of the Credit Agreement or such
Loan Document, including such schedules and exhibits, the terms and provisions
hereof shall control.
5. Force and Effect.
The Borrower reconfirms, restates, and ratifies the Credit Agreement and
all other Loan Documents executed in connection therewith except to the extent
any such documents are expressly modified by this First Amendment and Borrower
confirms that all such documents have remained in full force and effect since
the date of their execution.
6. Governing Law.
This First Amendment shall be deemed to be a contract under the laws of the
Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed and enforced in accordance with the internal laws of the Commonwealth
of Pennsylvania without regard to its conflict of laws principles.
7. Counterparts; Effective Date.
This First Amendment may be signed in any number of counterparts each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. This First Amendment shall become effective when it
has been executed by the Agent, the Loan Parties and all of the Banks and each
of the other conditions set forth in Section 3 of this First Amendment has been
satisfied.
[SIGNATURE PAGES TO FOLLOW]
3
[SIGNATURE PAGE 1 OF 5 TO FIRST AMENDMENT]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this First Amendment as of the day and year above
written.
BORROWER:
STEEL TECHNOLOGIES INC.
By:
Title:
By:
Title:
GUARANTORS:
STEEL TECHNOLOGIES CORP.
By:
Title:
By:
Title:
CUSTOM STEEL PROCESSING CORP.
By:
Title:
By:
Title:
4
[SIGNATURE PAGE 2 OF 5 TO FIRST AMENDMENT]
WABASH STEEL CORPORATION
By:
Title:
By:
Title:
STEEL TECHNOLOGIES, L.P.
By:
Title:
By:
Title:
STEEL TECHNOLOGIES, LLC,
a South Carolina limited liability company
By:
Title:
By:
Title:
5
[SIGNATURE PAGE 3 OF 5 TO FIRST AMENDMENT]
STEEL TECHNOLOGIES, LLC,
an Ohio limited liability company
By:
Title:
By:
Title:
CUSTOM STEEL, INC.
By:
Title:
By:
Title:
6
[SIGNATURE PAGE 4 OF 5 TO FIRST AMENDMENT]
PNC BANK, NATIONAL ASSOCIATION, individually and as
Agent
By:
Title:
SUNTRUST BANK,
individually and as Syndication Agent
By:
Title:
NATIONAL CITY BANK OF KENTUCKY
By:
Title:
BANK ONE, KENTUCKY, N.A., individually and as
Documentation Agent
By:
Title:
7
[SIGNATURE PAGE 5 OF 5 TO FIRST AMENDMENT]
FIRSTAR BANK, N.A.
By:
Title:
8
EXHIBIT 10.1(b)
SECOND AMENDMENT TO CREDIT AGREEMENT
SECOND AMENDMENT
to
CREDIT AGREEMENT
by and among
STEEL TECHNOLOGIES INC.
and
THE GUARANTORS PARTY HERETO
and
THE BANKS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, As Agent
and
SUNTRUST BANK, As Syndication Agent
and
BANK ONE, KENTUCKY, N.A. , As Documentation Agent
Dated as of April ___, 2003
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Second Amendment") dated as
of April ___, 2003, by and among STEEL TECHNOLOGIES INC. (the "Borrower") and
the GUARANTORS party hereto (the "Guarantors"), the Banks party hereto (the
"Banks"), PNC Bank, National Association, As Agent (the "Agent"), SUNTRUST BANK,
As Syndication Agent ("Syndication Agent") and BANK ONE, KENTUCKY, N.A., As
Documentation Agent ("Documentation Agent").
WHEREAS, reference is made to the Credit Agreement dated as of August 31,
2001, as amended by that First Amendment to Credit Agreement dated as of
December 10, 2002 (as amended, restated, modified or supplemented, the "Credit
Agreement") by and among the Borrower, the Guarantors, the Banks, the Agent and
the Syndication Agent;
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Credit Agreement; and
WHEREAS, the parties to the Credit Agreement desire to amend the Credit
Agreement to, inter alia, increase the Revolving Credit Commitments to an
aggregate amount of [$151,000,000], subject to the terms and conditions as set
forth herein.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Amendments.
A. Increase in Revolving Credit Commitments -- Schedule 1.1(B). Schedule
1.1(B) to the Credit Agreement is hereby amended and restated in its
entirety to read as set forth on Schedule 1.1(B) hereto.
B. Amendments to Revolving Credit Notes. The Revolving Credit Notes made by
Borrower in favor of each Bank that is increasing its Revolving Credit
Commitment pursuant to this Second Amendment (each an "Increasing Bank"),
are hereby amended and restated to reflect the Revolving Credit Commitment
of each such Bank on the date hereof after giving effect hereto, and the
Borrower shall execute and deliver new Revolving Credit Notes evidencing
such increased Revolving Credit Commitments on the date hereof.
2. Warranties
A. Warranties Under the Credit Agreement
The representations and warranties of Loan Parties contained in the Credit
Agreement are true and correct on and as of the date hereof with the same force
and effect as though made by the Loan Parties on such date, except to the extent
that any such representation or warranty expressly relates solely to a previous
date. The Loan Parties are in compliance with all terms, conditions, provisions,
and covenants contained in the Credit Agreement.
1
B. Power and Authority; Validity and Binding Effect; No Conflict.
Each Loan Party has full power to enter into, execute, deliver and carry
out this Second Amendment, and such actions have been duly authorized by all
necessary proceedings on its part. This Second Amendment has been duly and
validly executed and delivered by each Loan Party. Each of this Second Amendment
and the new Notes constitutes the legal, valid and binding obligation of each
Loan Party which is enforceable against such Loan Party in accordance with its
terms. Neither the execution and delivery of this Second Amendment or the new
Notes nor the consummation of the transactions herein contemplated will conflict
with, constitute a default under or result in any breach of (i) the terms and
conditions of any organizational documents of any Loan Party or (ii) any Law or
any material agreement or instrument or other obligation to which any Loan Party
or any of its Subsidiaries is a party or by which it or any of its Subsidiaries
is bound, or result in the creation or enforcement of any Lien upon any property
of any Loan Party or any of its Subsidiaries other than as set forth herein.
C. Consents and Approvals; No Event of Default.
No consent, approval, exemption, order or authorization of any Person other
than the parties hereto is required by any Law or any agreement in connection
with the execution, delivery and carrying out of this Second Amendment. No event
has occurred and is continuing and no condition exists or will exist after
giving effect to this Second Amendment which constitutes an Event of Default or
Potential Default.
3. Conditions to Effectiveness.
The effectiveness of this Second Amendment is subject to satisfaction of each
of the following conditions on or before the date hereof:
A. Representations and Warranties.
Each of the representations and warranties under Section 2.A hereof are true and
correct on the date hereof.
B. Execution by Banks, Agent and Loan Parties.
This Second Amendment shall have been executed by all of the Banks, the Agent
and the Loan Parties and delivered to the Agent on or before the date
hereof.
2
C. Execution of Revolving Credit Notes.
The Borrower shall have executed and delivered to the Agent, for the
benefit of each Increasing Bank, a Revolving Credit Note in favor of such
Increasing Bank evidencing the total amount of Revolving Credit Commitment of
such Bank after giving effect hereto.
D. Secretary's Certificate.
There shall have been delivered to the Agent for the Benefit of each Bank a
certificate dated as of the date hereof and signed by the Secretary or an
Assistant Secretary of each of the Loan Parties certifying as appropriate to:
(a) all corporate action taken by each Loan Party in connection with this
Amendment No. 3 together with a copy of the resolutions of each Loan Party
evidencing same; (b) the names of the officer or officers authorized to sign
this Second Amendment and the true signatures of such officer or officers and
specifying the officers authorized to act on behalf of each Loan Party for
purposes of this Second Amendment and the true signatures of such officers, on
which the Agent and each Bank may conclusively rely; and (c) a certificate from
the Secretary or Assistant Secretary stating that each Loan Party's
organizational documents, including its certificate or articles of
incorporation, bylaws, certificate of limited partnership, partnership
agreement, certificate of formation, and limited liability company agreement
have not changed since the Closing Date and are in effect on the date hereof as
on the Closing Date together with certificates of the appropriate state
officials as to the continued existence and good standing of each Loan Party in
each state where organized or qualified to do business
E. Opinion of Counsel.
The Loan Parties shall have delivered an opinion of their counsel
confirming the warranties in Section 2 hereof.
F. Amendment of Intercreditor Agreement.
The Intercreditor Agreement shall have been amended in form and substance
satisfactory to the Agent permitting the increase in the maximum amount of the
Loans to an amount not less than $160,000,000 and such amendment shall have been
executed and delivered to the Agent by all parties to the Intercreditor
Agreement.
3
G. Repayment of Loans.
The Borrower shall repay all of the Loans, subject to the Borrower's
obligation under Section 4.6.2 [Indemnity] of the Credit Agreement, on the date
hereof. The Borrower shall re-borrow the same amount of Loans on such date
without the necessity of a Loan Request or without other notice to the Agent or
the Banks. The Banks shall (i) participate in the new Loans, (ii) make
Participation Advances for Letters of Credit, and (iii) make Revolving Credit
Loans to repay Swing Loans on and after the date hereof ratably according to
their Revolving Credit Commitments as modified on the date hereof.
H. Amendment Fees.
The Borrower shall pay to the Agent for the ratable benefit of each Increasing
Bank on the date hereof a fee in the amount of 0.25% times the difference
between the Revolving credit Commitment of such Increasing Bank on the date
hereof after giving effect to the increase in commitments provided for
herein and its Revolving Credit Commitment immediately prior to the date
hereof (without giving effect hereto).
4. References to Credit Agreement, Loan Documents.
Any reference to the Credit Agreement or other Loan Documents in any
document, instrument, or agreement shall hereafter mean and include the Credit
Agreement or such Loan Document, including such schedules and exhibits, as
amended hereby. In the event of irreconcilable inconsistency between the terms
or provisions hereof and the terms or provisions of the Credit Agreement or such
Loan Document, including such schedules and exhibits, the terms and provisions
hereof shall control.
5. Force and Effect.
Each of the Loan Parties reconfirms, restates, and ratifies the Credit
Agreement and all other Loan Documents executed in connection therewith except
to the extent any such documents are expressly modified by this Second Amendment
and each of the Loan Parties confirms that all such documents have remained in
full force and effect since the date of their execution.
6. Governing Law.
This Second Amendment shall be deemed to be a contract under the laws of
the Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed and enforced in accordance with the internal laws of the Commonwealth
of Pennsylvania without regard to its conflict of laws principles.
4
7. Counterparts; Effective Date.
This Second Amendment may be signed in any number of counterparts each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. This Second Amendment shall become effective when
it has been executed by the Agent, the Loan Parties and all of the Banks and
each of the other conditions set forth in Section 3 of this Second Amendment has
been satisfied.
[SIGNATURE PAGES TO FOLLOW]
5
[SIGNATURE PAGE 1 OF 5 TO SECOND AMENDMENT]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this Second Amendment as of the day and year above
written.
BORROWER:
STEEL TECHNOLOGIES INC.
By:
Title:
By:
Title:
GUARANTORS:
STEEL TECHNOLOGIES CORP.
By:
Title:
By:
Title:
CUSTOM STEEL PROCESSING CORP.
By:
Title:
By:
Title:
6
[SIGNATURE PAGE 2 OF 5 TO SECOND AMENDMENT]
WABASH STEEL CORPORATION
By:
Name:
Title:
By:
Name:
Title:
STEEL TECHNOLOGIES, L.P.
By:
Name:
Title:
By:
Name:
Title:
STEEL TECHNOLOGIES, LLC,
a South Carolina limited liability company
By:
Name:
Title:
By:
Name:
Title:
7
[SIGNATURE PAGE 3 OF 5 TO SECOND AMENDMENT]
STEEL TECHNOLOGIES, LLC,
an Ohio limited liability company
By:
Name:
Title:
By:
Name:
Title:
CUSTOM STEEL, INC.
By:
Name:
Title:
By:
Name:
Title:
8
[SIGNATURE PAGE 4 OF 5 TO SECOND AMENDMENT]
PNC BANK, NATIONAL ASSOCIATION, individually and as
Agent
By:
Name:
Title:
SUNTRUST BANK,
individually and as Syndication Agent
By:
Name:
Title:
NATIONAL CITY BANK OF KENTUCKY
By:
Name:
Title:
BANK ONE, KENTUCKY, N.A., individually and as
Documentation Agent
By:
Name:
Title:
9
[SIGNATURE PAGE 5 OF 5 TO SECOND AMENDMENT]
FIRSTAR BANK, N.A.
By:
Name:
Title:
10
SCHEDULE 1.1(B)
COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
Page 1 of 2
Part 1 - Revolving Credit Commitments of Banks and Addresses for Notices to
Banks
Amount of
Commitment for
Bank Revolving Credit
Loans Ratable Share
Name: PNC Bank, National Association
Address: One PNC Plaza, 249 Fifth
Avenue, Pittsburgh, PA 15222
Attention: Louis McLinden
Telephone: (412)-762-8830
Telecopy: (412)-705-3231 $ ________________ ____%
Name: Bank One, Kentucky, N.A.
Address: 416 West Jefferson Street,
Louisville, KY 40202
Attention: Thelma Ferguson
Telephone: (502)-566-2821
Telecopy: (502)-566-8339 $ ____%
_________________
Name: SunTrust Bank
Address: 201 Fourth Avenue North,
3rd floor, Nashville, TN 37219
Attention: Scott Corley
Telephone: (615)-748-5715
Telecopy: (615)-748-5269 $ ____%
_________________
Name: National City Bank of Kentucky
Address: 101 South Fifth Street,
Louisville, KY 40202
Attention: Deroy Scott
Telephone: (502)-581-7821
Telecopy: (502)-581-4224 $ ____%
__________________
Name: Firstar Bank, N.A.
Address: One Financial Square,
Louisville, KY 40202-3322
Attention: Toby Rau
Telephone: (502)-562-6648
Telecopy: (502)-562-6460 $ ________________ ____%
Total $________________ 100.000%
11
SCHEDULE 1.1(B)
COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
Page 2 of 2
Part 2 - Addresses for Notices to Borrower and Guarantors:
AGENT:
Name: PNC Bank, National Association
Address: One PNC Plaza, 249 Fifth Avenue,
Pittsburgh, PA 15222
Attention: Louis McLinden
Telephone: (412)-762-8830
Telecopy: (412)-705-3231
BORROWER AND GUARANTORS:
Name: Steel Technologies Inc.
Address: 15415 Shelbyville Road
Post Office Box 43339
Louisville, KY 40253-0339
Attention: Joseph P. Bellino
Telephone: (502) 254-0204
Telecopy: (502) 254-3821
12
EXHIBIT 10.6(a)
JOINT VENTURE AGREEMENT BETWEEN
MITSUI & CO., LTD., MITSUI & CO. (U.S.A.), INC.
MITSUI STEEL DEVELOPMENT CO., INC., AND
STEEL TECHNOLOGIES INC.
THIS JOINT VENTURE AGREEMENT (the "Agreement") made and entered into as of
this 30th 7day of March, 1987, by and between:
I. STEEL TECHNOLOGIES INC., a company duly organized and existing under the
laws of Kentucky, the United States of America, having its principal office
at Louisville, Kentucky, United States of America (hereinafter referred to
as "STEEL TECH"); and
II. MITSUI & CO., LTD., a corporation duly organized and existing under the
laws of Japan, having its principal office at Tokyo, Japan, (hereinafter
referred to as "MITSUI JAPAN"); and
III. MITSUI & CO. (U.S.A.), INC., a company duly organized and existing under
the laws of New York, the United States of America, having its principal
office at New York, New York, United States of America (hereinafter
referred to as "MITSUI U.S.A."); and
IV. MITSUI STEEL DEVELOPMENT CO., INC., a company duly organized and existing
under the laws of Delaware, the United States of America, having its
principal office at New York, New York, the United States of America,
(hereinafter referred to as "MITSUI DEVELOPMENT"); (the parties described
in II, III and IV collectively referred to as "MITSUI");
W I T N E S S E T H:
1. WHEREAS, STEEL TECH is a processor of steel, having established operations
which are engaged in the processing of raw steel; and
2. WHEREAS, STEEL TECH is interested in cooperating with MITSUI through
formation of a jointly owned corporation and in making available its
technology, know-how and ser-vices to the said corporation (hereinafter
referred to as "COMPANY:") concerning the establishment of high volume
steel slitting service centers to service Japanese and domestic auto and
appliance part manufacturers and other applications, which are or may be
established in the United States of America; and
1
3. WHEREAS, STEEL TECH and MITSUI, desire that the COMPANY will engage in the
business of owning and operating one or more high volume steel slitting
service centers upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, STEEL TECH and MITSUI agree as follows:
DEFINITIONS AND INTERPRETATIONS
ARTICLE 1
The following terms shall have the meaning set forth respectively wherever the
same appear in this Agree-ment, unless the context otherwise requires.
A. "EXHIBIT" means a document attached to this Agreement at the time of the
approval and execution of this Agreement by all of the PARTIES.
B. "ARTICLES OF INCORPORATION" means the Arti-cles of Incorporation of the
COMPANY attached hereto as EXHIBIT A.
C. "BYLAWS" means the Bylaws of the COMPANY attached hereto as EXHIBIT B.
D. "COMPANY" means the entity to be established in accordance with Article 3
hereof.
E. "EFFECTIVE DATE" means the date to be determined pursuant to Article 34
hereof.
F. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means accounting principles
generally accepted by account-ants in the United States of America,
consistently applied.
G. "LAWS OF DELAWARE" means all applicable legislation, including executive
and administrative regula-tions and policies of the State of Delaware.
H. "MITSUI PARTY" means any of [i] MITSUI JAPAN, [ii] MITSUI U.S.A. or [iii]
MITSUI DEVELOPMENT.
I. "MITSUI SHAREHOLDER" means any MITSUI PARTY, as a shareholder of the
COMPANY.
J. "STEEL TECH SHAREHOLDER" means STEEL TECH, as a shareholder of the COMPANY.
K. "SHAREHOLDERS" means the STEEL TECH SHAREHOLDER and the MITSUI
SHAREHOLDERS.
L. "{HAREHOLDER" means any of the SHAREHOLDERS.
M. "SHAREHOLDERS' MEETING" means a meeting of the SHAREHOLDERS in their
capacity as SHAREHOLDERS in the COMPANY pursuant to the ARTICLES OF
INCORPORATION and BYLAWS of the COMPANY.
2
N. "SHARES" means shares in the capital of the COMPANY.
O. "PARTIES" means STEEL TECH and the MITSUI PARTIES.
P. "PARTY" means any of the PARTIES.
Q. "PROJECT FACILITIES" means a facility ini-tially comprising [a] a plant
located at or near Mur-freesboro, Tennessee for a high volume steel
slitting operation for automotive, appliance and other applications; and
[b] all related facilities and utilities, which may be changed from time to
time by unanimous agreement of the SHAREHOLDERS at a SHAREHOLDERS' MEETING.
R. "AGREED UPON PRODUCTS" are flat rolled steel in varying widths and gauges
and types.
S. "AGREED UPON SERVICES" are storage and slitting of flat rolled steel
products.
T. "TOTAL FUNDS" means the total funds required to complete construction of
the PROJECT FACILITIES, together with initial working capital for the
COMPANY as described in Articles 4.1.1 through 4.2.1 of this Agreement, the
total of which is US $4,866,000 (Four Million Eight Hundred Sixty-six
Thousand United States Dollars).
U. "AFFILIATE" means an entity in which any PARTY holds a majority ownership
interest, or which holds a majority ownership interest in any PARTY, or
which is controlled by or controls any PARTY, or a subsidiary of such an
entity.
SCOPE OF THE COMPANY
ARTICLE 1
2.1. Without prejudice to the objects of the COMPANY as described in the
ARTICLES OF INCORPORATION, the limited scope of the COMPANY is to
construct, own and operate the PROJECT FACILITIES and to carry on the
business of owning and operating high volume steel slitting service centers
in the United States of America for automotive, appliance and other
applications as the PARTIES may agree.
2.2. The extent of the PROJECT FACILITIES as described above may be changed from
time to time by unani-mous agreement of the PARTIES prior to formation of
the COMPANY, or by a resolution adopted by unanimous vote at a
SHAREHOLDERS' MEETING after formation of the COMPANY, but always subject to
the LAWS OF DELAWARE.
3
2.3. Upon approval by the SHAREHOLDERS, the COMPANY may enter into an agreement
for the acquisition of land for the location of the PROJECT FACILITIES and
may enter into agreements for the construction of PROJECT FACILITIES.
ESTABLISHMENT OF JOINT VENTURE COMPANY
ARTICLE 2
3.1. The SHAREHOLDERS will incorporate a joint venture corporation under the
LAWS OF DELAWARE, United States of America, in accordance with this
Agreement.
3.1.1The COMPANY shall bear the name of Mi-Tech Steel, Inc. or such other name
as shall be agreed to by the PARTIES and approved by the appropriate
authorities.
3.1.2. Unless otherwise agreed, the COMPANY shall have its principal place of
business at or near Murfreesboro, Tennessee and registered office at the
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, United States of America, and may establish
branches and/or representative offices and/or service centers in other
places inside the United States of America as may be decided from time to
time by the Board of Directors with the prior approval of the SHAREHOLDERS.
3.2. Purposes and objects.
3.2.1. The object for which the COMPANY is established is to engage in the
business of owning and operating high volume steel slitting service centers
in the United States of America (the "Project").
3.2.2. In order to attain the above-men-tioned object, the COMPANY shall carry
on its business in the field of: a. Production: To produce the AGREED UPON
PRODUCTS under the trademarks or licenses of the COMPANY. b. Services: To
engage in the AGREED UPON SERVICES. c. Trade: Subject to the laws of the
United States of America, to engage in distributional and trading
activities inside the United States of America related to the AGREED UPON
PRODUCTS and AGREED UPON SERVICES, as well as purchase and import of goods
related to the AGREED UPON PRODUCTS and AGREED UPON SERVICES, among
4
others, raw materials, auxiliary materials and manufacturing and processing
equipment.
3.3. The ARTICLES OF INCORPORATION shall be in a form substantially as set forth
in EXHIBIT A, subject to the LAWS OF DELAWARE. The COMPANY shall qualify to
transact business in those states wherein it has offices.
3.4. The BYLAWS shall be in a form substantially as set forth in EXHIBIT B,
subject to the LAWS OF DELAWARE.
3.5. The capital of the COMPANY shall consist of 1000 (One Thousand) SHARES of
common stock as provided in Article 4. All SHARES shall carry the same
rights as to entitlement to profit distribution and to distribution of
capital and surplus upon winding up of the COMPANY in proportion to the
current shareholdings.
3.6. The Management of the COMPANY shall be determined pursuant to Articles 9
and 17 hereof and the BYLAWS.
3.7. The COMPANY shall be established for a period of perpetual duration
commencing from the date the COMPANY has become a legal entity.
FINANCING
ARTICLE 3
4.1. The Capital Investment and Cost of Compon-ents. 4.1.1. The TOTAL FUNDS are
agreed to consist of the following budgeted line items:
Plant and Equipment US $ 3,446,000
Land 270,000
Start Up 200,000
Working Capital 950,000
US $4,866,000
4.1.2. The TOTAL FUNDS will be covered by share capital and by loans as provided
in this Article 4.
4.1.3. The PARTIES agree to finance the share capital as follows:
4.1.3.1. The authorized share capital of the COMPANY shall be the equivalent of
US$4,000,000 (Four Million United States Dollars) divided into two classes
of capital stock consisting of: [i] 500 (Five Hundred) SHARES of Class A
common stock of US$4,000.00 (Four Thousand United States Dollars) par value
each; and [ii] 500 (Five Hundred) SHARES of Class B common stock of
5
US$4,000.00 (Four Thousand United States Dollars) par value each.
4.1.3.2. The aforesaid authorized share capital shall be subscribed by and
issued to: a. MITSUI DEVELOPMENT: Fifty percent (50%) consisting of 500
(Five Hundred) SHARES of Class A common stock at US$4,000.00 (Four Thousand
United States Dollars) par value per share in cash; b. STEEL TECH: Fifty
percent (50%) consisting of 500 (Five Hundred) SHARES of Class B common
stock at US$4,000.00 (Four Thousand United States Dollars) par value per
share in cash.
4.2. MITSUI JAPAN or MITSUI U.S.A. guarantee the performance of MITSUI
DEVELOPMENT hereunder and will provide any loan guarantees required of
MITSUI DEVELOPMENT by Article 4.3 of this Agreement.
4.3. The loan capital, including funds for equipment purchases and initial
working capital, and other needs of the Project shall be obtained from
banks or other lenders and on terms mutually acceptable to the PARTIES. All
such loans to the COMPANY shall be guaranteed (if required by the lender)
by each PARTY in proportion to its initial ownership in the COMPANY.
Provided, however, in no event shall the aggregate amount of any guaranty
or guaranties of the COMPANY'S debt exceed US$1,500,000 (One Million Five
Hundred Thousand United States Dollars) for either STEEL TECH or MITSUI.
4.4. Subject to Section 4.3 hereof, the SHARE-HOLDERS agree that they shall
assist the COMPANY to secure any additional funds as the COMPANY may from
time to time require in addition to that required for TOTAL FUNDS re-ferred
to in Article 4.1 above. Such financing requirement of the COMPANY and the
form such financing is to take shall be discussed with and reported to the
PARTIES in advance of each fiscal year by the Board of Directors and on
such other occasions as the Board of Directors may deem necessary.
SHARES AND SHARE CERTIFICATES
ARTICLE 5
5.1. The SHARES of the COMPANY shall be regis-tered shares.
5.2. At the request of any shareholder a "collective certificate" may be issued
which shall give evidence of ownership of two or more SHARES owned by the
said SHAREHOLDER in the COMPANY.
6
5.3. Duplicates of certificates may be issued in lieu of damaged or lost
certificates in accordance with the procedures set forth in the BYLAWS.
5.4. A register of all SHAREHOLDERS shall be kept at the principal office of the
COMPANY in which shall be recorded the full names and addresses of the
SHAREHOLDERS.
5.5. The share register shall constitute the conclusive evidence regarding the
ownership of all SHARES.
5.6. If any PARTY wishes to sell or otherwise transfer all or any part of its
SHARES in the COMPANY pursuant to a bona fide arms length offer made by a
person or entity who is not a SHAREHOLDER or a permitted transferee under
Article 5.13, the intending transferor shall first offer all such SHARES to
the COMPANY by written notice, at the price and upon all other terms and
conditions offered by the non-SHAREHOLDER, and the COMPANY may elect to
purchase all and not part only of the offered SHARES within a period of
sixty (60) days after the receipt of the said notice.
5.7. If the COMPANY does not exercise its right to purchase all of such SHARES
within the 60 (sixty) day period specified in Article 5.6 hereof, subject
to the provisions of Article 5.10, the other PARTY may elect to purchase
all and not part only of the offered SHARES at the price and upon all other
terms and conditions offered by the non-SHAREHOLDER within an additional 60
(sixty) day period commencing the day after the expiration of the initial
60 (sixty) day period specified in Article 5.6 hereof.
5.8. In the event that neither the COMPANY nor the other PARTY is willing or
able to purchase all of the offered shares pursuant to Articles 5.6 and 5.7
of this Agreement, the COMPANY and the other PARTY may each purchase some
of the offered SHARES in whatever proportion they desire, provided that all
offered SHARES are purchased within the time periods provided by Articles
5.6 and 5.7.
5.9. In the event that the COMPANY or the other PARTY, or the COMPANY and the
other PARTY, do not exercise their right to purchase the offered SHARES
within the time periods and on the terms specified in Articles 5.6, 5.7 and
5.8 hereof, subject to the provisions in Article 5.10, the intending
transferor is free to sell all SHARES covered by the said notice to the
offering non-SHAREHOLDER, provided that:
7
5.9.1. The number of SHARES to be sold equals the number of SHARES offered under
Article 5.6 hereof;
5.9.2. The other terms and conditions of the offer are no more favorable to the
transferee than those offered under Article 5.6 hereof; and
5.9.3. The transferee agrees in writing to execute and be governed by the terms
and provisions of this Agreement.
If the SHARES to be sold are not transferred to such offering
non-SHAREHOLDER within 90 (ninety) days following expiration or termination
of the 60 (sixty) day first refusal period designated in Article 5.7
hereof, then the intending transferor must again e procedure in Articles
5.6 and 5.7 hereof if it still wishes to sell its SHARES.follow the
procedure in Articles 5.6 and 5.7 hereof if it still wishes to sell its
SHARES.
5.10.None of the PARTIES shall pledge, encumber or otherwise use as collateral
or for any other purpose the SHARES of the COMPANY unless consent to such
pledge, hypo-thecation or other such application has been received in
writing from the other PARTY.
5.11.The COMPANY shall place a legend on the certificates representing all
SHARES of the COMPANY con-taining a reference to the substantive terms of
this Article 5 so as to give notice thereof to any purchaser.
5.12.If any of the PARTIES should cease to hold any SHARES in the COMPANY, it
shall thereupon cease to be a PARTY for the purposes hereof without
prejudice to any liabilities of such PARTY to the COMPANY and the other
SHAREHOLDERS existing at that time, which liabilities shall survive until
fully satisfied.
5.13.Notwithstanding the provisions of this Article 5, the PARTIES are free to
transfer SHARES as follows:
5.13.1. STEEL TECH may transfer its SHARES to a wholly owned subsidiary which is
carrying on the business of STEEL TECH or to a company which wholly owns
STEEL TECH;
5.13.2. The SHARES owned by MITSUI DEVELOP-MENT may be transfered among the
MITSUI PARTIES or to a wholly owned subsidiary of one of the MITSUI PARTIES
or to a company which wholly owns the MITSUI PARTIES.
5.14.Unless the SHAREHOLDERS' MEETING unanimous-ly decides otherwise for
special cases, the transfer of SHARES may only be affected in accordance
with the pro-visions of this Article 5.
8
5.15.Each SHAREHOLDER shall have the preemptive right to subscribe to any
additional SHARES issued by the COMPANY in proportion to the SHAREHOLDER'S
ownership in the number of SHARES issued and outstanding immediately prior
to the issuance of the additional SHARES.
SHAREHOLDERS' MEETINGS
ARTICLE 6
6.1. The annual SHAREHOLDERS' MEETING shall be held once a year not later than
the month of May, unless otherwise agreed by SHAREHOLDERS, beginning in the
year 1987.
6.1.1. At the said annual SHAREHOLDERS'
MEETING:
a. The Board of Directors shall report on the affairs of the COMPANY and the
results achieved in the preceding financial year especially on its
management;
b. The balance sheet and profit and loss account of the preceding
fiscal year shall be presented for consideration and approval;
c. A new Board of Directors shall be nominated and elected
pursuant to Article 9.2 hereof;
d. Policies for the coming fiscal year shall be determined and
the supervision of their imple-mentation shall be entrusted
to the Board of Directors; and
e. Matters presented by the Board of Directors and SHAREHOLDERS
shall be discussed.
6.1.2. The proposals of the SHAREHOLDERS may only be included in the agenda of a
meeting if a request in writing is made to the Board of Directors by a
SHAREHOLDER and if the proposal concerned is received at such time so as to
give the Board of Directors sufficient time to announce the same to the
SHAREHOLDERS, with due observance of the time required for calling a
SHAREHOLDERS' MEETING.
6.2. An extraordinary SHAREHOLDERS' MEETING shall be convened whenever deemed
necessary by the Board of Directors.
6.2.1. The Board of Directors shall also call and convene an extraordinary
SHAREHOLDERS' MEETING at the request in writing of one (1) or more
SHAREHOLDERS, in which request the business to be transacted shall be
speci-fied.
9
6.2.2. If the Board of Directors fails to convene the said meeting within one
(1) month after receipt of the request, the requesting SHAREHOLDER(s) may
call the meeting at the expense of the COMPANY, with due observance of the
provisions of the ARTICLES OF INCORPORATION, BYLAWS and this Agreement.
6.3. All SHAREHOLDERS' MEETINGS shall be held at the principal office of the
COMPANY or at any place within or without the United States of America
designated by the Board of Directors.
6.3.1. The notice calling a SHAREHOLDERS' MEETING shall be given in writing,
confirmed by cable or telex sent to the SHAREHOLDERS according to their
last recorded addresses in the share register, at least 20 (twenty) days
prior to the meeting (not including the date of the meeting), and if in the
opinion of the Board of Directors, there are matters which must be settled
without delay, this period may be reduced to 10 (ten) days.
6.3.2. Such notice shall specify the day, date, hour and place of the meeting
and, in brief, the business to be transacted.
6.3.3. If all SHAREHOLDERS are present or represented by proxy at the meeting,
the prior notice as stipulated above shall not be required and at such
meeting binding resolutions may be adopted on any business trans-acted,
provided that such resolution(s) are not in contravention with the
provisions of this Agreement, the ARTICLES OF INCORPORATION, or BYLAWS, and
such meeting may be convened at any place so designated by the Board of
Directors.reement, the ARTICLES OF INCORPORATION, or BYLAWS, and such
meeting may be convened at any place so designated by the Board of
Directors.
CHAIRMAN OF THE SHAREHOLDERS' MEETING
ARTICLE 7
7.1. Unless otherwise stipulated in this Agree-ment, all SHAREHOLDERS' MEETINGS
shall be chaired by the President. In case of disability of the President
to chair the meeting for whatever reason, the meeting shall be chaired by
another member of the Board of Directors, and if none of the Directors are
present, the meeting shall be chaired by a person elected by the
SHAREHOLDERS from among those present.
7.2. Minutes shall be taken of the business transacted at such meeting. Such
minutes shall be rendered in the English language and shall be signed by
the chairman of the meeting and by one (1) of the SHAREHOLDERS present at
the meeting and the executed minutes shall be kept by the COMPANY, and the
contents thereof shall be concrete
10
evidence to all the SHAREHOLDERS of actions taken by the SHARE-HOLDERS.
SHAREHOLDERS' VOTING RIGHTS AND RESOLUTIONS
ARTICLE 8
8.1. Unless otherwise stipulated in this Agree-ment, all resolutions of the
SHAREHOLDERS' MEETING shall be adopted by a three-fourths (3/4ths) majority
vote of all outstanding SHARES regardless of class.
8.2. At the SHAREHOLDERS' MEETING, each share shall have the right to cast one
(1) vote.
8.3. A shareholder may be represented at the SHAREHOLDERS' MEETING only by
another SHAREHOLDER or by another person appointed by a proxy in writing or
by tele-gram or by telex.
8.4. The Secretary of the COMPANY shall have the right to request that all
proxies be produced to him during the meeting.
8.5. Unless otherwise decided by the SHARE-HOLDERS' MEETING, voting regarding
the election of persons to any office shall be effected by ballots and
regarding other matters the voting shall be done verbally.
8.6. A quorum of the SHAREHOLDERS' MEETING shall exist if more than
three-quarters (3/4ths) of the number of the subscribed shares of all
classes of the COMPANY are present or represented by proxy at the said
meeting.
8.7. The SHAREHOLDERS may also adopt valid resolutions outside the meeting
provided all SHAREHOLDERS have approved in writing the resolution(s) to be
adopted. Such resolution(s) shall be recorded in the minutes as if they
were adopted at a meeting of the SHAREHOLDERS.
8.8. The following decisions or actions of the COMPANY shall require the
approval of the SHAREHOLDERS, by vote as provided in Article 8 hereof: a.
An expansion or other change in the scope of the COMPANY'S objectives. b.
Amendment or any alteration of ARTICLES OF INCORPORATION or BYLAWS. c. Any
merger, consolidation, dis-solution or other important change in the
organization or legal status of the COMPANY or disposition of any
substantial part of the assets or termination of business of the COMPANY.
d. Subject to Article 9.2, the ap-pointment, election and suspension from
office of any member of the Board of Directors. e. Any agreement between
the COMPANY and any of the PARTIES, SHAREHOLDERS or their respective
11
AFFILIATES or any entity in which any PARTY or SHAREHOLDER has an ownership
interest or with whom any PARTY or SHAREHOLDER has common management
personnel. f. Any other matter as to which the vote of the SHAREHOLDERS is
required by applicable laws.
BOARD OF DIRECTORS
ARTICLE 9
9.1. The COMPANY shall be managed by a Board of Directors, consisting of four
(4) persons.
9.2. Each member of the Board of Directors shall be nominated and elected by the
SHAREHOLDERS' MEETING for a term of one (1) year, or until his successor is
duly elected and qualified, as follows:
9.2.1. Two (2) directors shall be nominated and elected by a majority vote of
the SHARES of Class A common stock. 9.2.2. Two (2) directors shall be
nominated and elected by a majority vote of the SHARES of Class B common
stock.
9.3. After the expiration of their respective term of office, the members of the
Board of Directors shall be eligible for reelection for the same term. Any
vacancy on the Board of Directors shall be filled by the SHARE-HOLDERS of
the particular class of common stock having previously elected the director
to the director position then vacant.
9.4. The Board of Directors shall meet so often as may be necessary for and
shall undertake the proper conduct and management of the COMPANY in
accordance with the BYLAWS.
9.5. A majority of the Board of Directors shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors.
9.6. The act of the majority of the. members of the Board of Directors shall be
the act of the Board of Directors.
9.7. The Board of Directors shall approve all purchases and sales of property,
plant and equipment by the COMPANY (including any related purchases in the
aggregate) which exceeds US$25,000 (Twenty-Five Thousand United States
Dollars); provided, however, the purchase of raw materials and the tolling
and sales of steel sheet and coils, shall not require Board of Director's
approval to the extent same is conducted in the ordinary course of
business.
9.8. The following decisions or actions of the COMPANY shall require the
approval of the Board of Direc-tors, by vote as provided in Article 10
hereof:
12
9.8.1. Approval of the final PROJECT speci-fications, final cost estimates and
construction schedule for the PROJECT FACILITIES and any production unit
forming part thereof, and the final financing plan for the construction of
the PROJECT FACILITIES.
9.8.2. Approval of the Annual Report includ-ing balance sheet, profit and loss
account, and other financial statements.
9.8.3. Determination of policies as to the application or distribution of
profits.
9.8.4. Any other matter as to which the vote of the Board of Directors is
required by applicable laws.
MEETINGS OF THE BOARD OF DIRECTORS
ARTICLE 10
10.1.A meeting of the Board of Directors shall be convened at any time the
business of the COMPANY requires or at the request of one (1) of the
DIRECTORS.
10.2.The notice calling the meeting of the Board of Directors shall be given in
writing at least 20 (twenty) days before such meeting: provided, however,
in urgent matters and if all directors have agreed in writing, notice may
be given a minimum of 3 (three) days before such meet-ing. In the event
that all members of the Board of Direc-tors are present at a meeting, prior
notice of meeting shall not be required.
10.3.The President will call the meeting of the Board of Directors to order,
and will be the Chairman of such meeting. In the case of disability of the
President to call the meeting to order or to act as Chairman, one of the
other Directors may call the meeting to order and may act as Chairman.
10.4.A meeting of the members of the Board of Directors is only lawful if any
three (3) of the four (4) members are present in person or by means of
telephonic communication whereby each person present shall be able to hear
and be heard by all other persons present.son or by means of telephonic
communication whereby each person present shall be able to hear and be
heard by all other persons present.
10.5.At the meeting of the Board of Directors each member is entitled to cast
one (1) vote.
10.6.All resolutions at the meeting of the Board of Directors shall be adopted
by vote of a majority of the entire Board of Directors, whether or not the
entire Board of Directors is present at the meeting. In case of an equality
of votes, the proposal is deemed rejected and shall be submitted to a
SHAREHOLDERS' MEETING for a decision.
13
10.7.The Board of Directors may also adopt binding resolutions without
convening a meeting of the Board of Directors, if all members have
indicated in writing their respective approval of the resolution(s) to be
adopted.
10.8.Minutes shall be taken of the business transacted at the meeting of the
Board of Directors. Such minutes shall be rendered in the English language
and shall be signed by the Chairman and members of the Board of Directors
present at the meeting and kept by the COMPANY.
MANAGEMENT COMMITTEE
ARTICLE 11
11.1.The Management Committee shall consist of the President of the COMPANY and
the Executive Vice Presi-dent of the COMPANY.
11.2.The Management Committee shall meet so often as may be necessary and shall
decide all matters concerning the management and operation of the COMPANY
delegated to the Management Committee in the BYLAWS or otherwise by the
Board of Directors.
11.3.Except as provided in the following sen-tence, the Management Committee
shall approve all purchases and sales of property, plant and equipment by
the COMPANY (including any related purchases in the aggregate) which exceed
US$5,000 (Five Thousand United States Dollars), subject to Article 9.7
hereof. The Management Committee shall review all actions and inactions of
the President, including all purchases of raw materials and tolling and
sales of steel sheet and coils.
11.4.The Management Committee shall act through the unanimous decision of its
members.
11.5.The Management Committee shall not be construed to constitute an
"Executive Committee" under the LAWS OF DELAWARE.
OFFICERS
ARTICLE 12
12.1.The officers of the COMPANY shall consist of a President, Executive Vice
President, Secretary and Treasurer.
12.1.1. The President and Treasurer shall be members of the Board of Directors
which members were nomi-nated and elected by the Class B common stock.
12.1.2. The Executive Vice President and Secretary shall be members of the Board
of Directors
14
which members
were nominated and elected by the Class A common stock.
12.1.3. The officers shall be appointed by the Board of Directors and shall have
those respective duties set forth in the BYLAWS and shall be subject to the
policy direction of the Board of Directors.
GENERAL MANAGER
ARTICLE 13
The COMPANY shall employ a General Manager of PROJECT FACILITIES, upon the
recommendation of STEEL TECH, who shall have the day to day responsibility for
the operation of the PROJECT FACILITIES, subject to the direction of the
Manage-ment Committee described in Article 11.
BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
ARTICLE 14
14.1.The fiscal year of the COMPANY shall be the first day of October up to and
including the thirtieth (30th) day of September of every year. The books of
the COMPANY shall be closed at the end of the month of September of every
year.
14.2.From the books that have been closed, the Board of Directors shall have
prepared the balance sheet and profit and loss account together with other
annual reports of conduct of business which shall be opened to the
inspect-tion of SHAREHOLDERS at the offices of the COMPANY not later than
ninety (90) days before the annual SHAREHOLDERS' MEETING described
hereafter.
14.3.The said balance sheet and profit and loss account shall be executed by
the President or by another individual delegated by him, after having been
audited by an independent certified public accountant appointed by the
Board of Directors for the purpose of examining and auditing the accounts
of the COMPANY, who will give a statement to the effect that it has audited
the balance sheet and profit and loss account and same has been prepared in
accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP").
14.4.The balance sheet and profit and loss account shall be submitted by the
Board of Directors to the SHAREHOLDERS' MEETING for the approval of the
SHAREHOLDERS.
14.5.The Board of Directors shall have prepared in accordance with GAAP
consistently applied a quarterly unaudited balance sheet and profit and
loss statement which
15
shall be submitted to the Board of Directors for review each calendar
quarter.
PROFITS AND DIVIDENDS
ARTICLE 15
The Board of Directors may declare dividends out of surplus, as defined in
and computed in accordance with SS 154 and 244 of the General Corporation Law of
Delaware, or if none, out of net profits earned by the COMPANY during the fiscal
year in which a dividend is declared and/or the preceding fiscal year; provided,
any such declaration and the amount thereof shall be ratified by the
SHAREHOLDERS. The PARTIES acknowledge and agree that no dividend shall be paid
until such time as the profits generated from the operations of the COMPANY are
sufficient to adequately provide for expenses, debt service and cash flow
requirements.
PRINCIPLES OF OPERATION AND BASIC POLICIES
ARTICLE 16
16.1.Nothing in this Agreement shall be deemed to prohibit Steel Tech or any
Mitsui Party from conducting the businesses presently operated by Steel
Tech and any Mitsui Party.
16.2.The COMPANY will function as an independent business enterprise,
maintaining arms-length relationships with the PARTIES, SHAREHOLDERS and
their AFFILIATES or any entity in which any PARTY or SHAREHOLDER has an
ownership interest or with whom any PARTY or SHAREHOLDER has common
management personnel.
16.3.The COMPANY will be managed and operated on a sound and efficient
commercial basis in accordance with the laws of the United States of
America.
16.4.The books and records, including but not limited to all purchases,
processing and sales orders, and invoices, of the COMPANY shall be complete
and accurate in order that financial statements can be prepared in
accor-dance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Such records and
supporting documents shall be available for inspection by the PARTIES at
all reasonable times.
16.5.The books and records of the COMPANY shall be audited at the end of each
financial year during the term of this Agreement by the COMPANY'S
independent certified public accountant referred to in Article 14.3 above.
Such firm shall provide the PARTIES with the financial report in the
English language in accordance with GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. Copies of the
16
audit shall be pro-vided to the PARTIES at the COMPANY'S expense. Such
audits shall be final and binding upon the PARTIES as to the revenue, cost,
fees, expenses, losses and profits of the COMPANY absent manifest error and
fraud.
16.6.The COMPANY will maintain or cause to be maintained, at its own cost, with
financially sound and reputable insurers, such insurance with respect to
its properties, assets and business, against loss or damage of the kinds
customarily insured against by corporations of established reputation
engaged in the same or a similar business and similarly situated, of such
types and in amounts as are customarily carried under similar
circum-stances by such other corporations in amounts determined by the
Management Committee, but in no event less than: [i] insurance on its
properties and assets against loss or damage by fire, lightning, hail,
windstorm, riot, riot attending a strike, civil commotion, explosion,
aircraft, vehicle and smoke, and such other risks, if any, as from time to
time may be included in "Broad Form" policies, in amounts sufficient to
prevent the COMPANY from becoming a co-insurer of any partial loss under
the applicable poli-cies; [ii] insurance against flood, if properties
insured by the COMPANY are located in a flood zone, and against hurri-cane
in amounts identical to [i) above if, in each case, such insurance is
available; [iii] comprehensive public liability insurance against claims
for bodily injury or death of persons and damage to or destruction of
property; [iv] workers' compensation insurance to the extent and in such
amounts as are customarily carried (or maintained) by corporations of
established reputation operating similar properties in comparable
locations, but in any event not less than required by all applicable legal
requirements; [v] product liability insurance against claims for bodily
injury or death of persons and damages to or destruction of property; and
[vi] business interruption insurance for lost profits caused by damage to
or destruction of the COMPANY'S business premises. Except as otherwise
agreed by the SHAREHOLDERS, the Parties shall be named as "additional
insureds" on all insurance required by this Article 16.6.
CONSULTATION AND MANAGEMENT SERVICES AGREEMENT
ARTICLE 17
Under the terms and conditions of this Agreement, STEEL TECH and the COMPANY
shall enter into a Consultation and Management Services Agreement substantially
in the form of attached EXHIBIT C pursuant to
17
which STEEL TECH shall provide consulting and management services, including:
sales, purchasing, technical, accounting, and administrative services to the
COMPANY upon completion of construction of PROJECT FACILITIES and commencement
of commercial operations. The Consultation and Management Service Agreement will
provide for a service fee to be paid to STEEL TECH, which service fee shall be
subject to annual review and adjustment by the Board of Directors of the
COMPANY.
CONSTRUCTION AND OPERATION MANAGEMENT
ARTICLE 18
18.1.All the activities of the COMPANY, include-ing planning, preparation,
coordination and supervision of the design and construction of the PROJECT
FACILITIES and all necessary procurement, review of detailed engineering,
operation, preparation of engineering bid specifications and all the day to
day activities shall be conducted by the COMPANY with the assistance and
expertise of the SHARE-HOLDERS and PARTIES as and when required.
18.2.Subject to Article 8.8(e), any SHAREHOLDER or PARTY may enter into
separate arms-length agreements with the COMPANY to provide management,
technological, procure-ment, engineering, construction, operation and/or
marketing assistance to the COMPANY in the construction aspect of the
PROJECT FACILITIES or the operation of the PROJECT FACIL-ITIES and the
PROJECT for any period as may be required by the COMPANY.
18.3.MITSUI SHAREHOLDER will endeavor diligently and in good faith to solicit
Japanese auto and appliance parts manufacturers which are or may be
established in the United States of America as customers for the COMPANY
and will assist the COMPANY in purchasing raw materials. STEEL TECH
SHAREHOLDER will endeavor diligently and in good faith to solicit domestic
customers of the United States of America for the COMPANY and will assist
the COMPANY in purchasing raw materials.
TERM
ARTICLE 19
This Agreement shall continue in effect so long as the COMPANY is in existence
unless earlier terminated pursuant to Article 20 of this Agreement.
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TERMINATION
ARTICLE 20
20.1.This Agreement shall be automatically terminated upon the occurrence of
any of the following events:
20.1.1. Dissolution of the COMPANY; or
20.1.2. By mutual agreement of the PARTIES in writing.
20.2.Termination of this Agreement shall be without prejudice to the accrued
rights and liabilities of the PARTIES at the date of termination.
NON-WAIVER/OTHER REMEDIES
ARTICLE 21
21.1.Failure to insist upon the strict and punctual performance of any
provision hereof shall not constitute waiver of the right to require such
performance, nor should a waiver in one case constitute a waiver with
respect to a later breach, whether of similar nature or otherwise. Nothing
shall constitute or have the effect of waiver except an instrument in
writing, signed by a duly authorized officer or representative of the PARTY
or SHAREHOLDER against whom the waiver is sought to be enforced, which
expressly waives an option, election or right under this Agreement.
21.2.This Agreement may not be released, dis-charged or abandoned (other than
as a result of the termina-tion of this Agreement as provided herein) or
changed or modified in any manner except by an instrument in writing signed
by the duly authorized officer or representative of all the PARTIES.
21.3.The failure at any time of any PARTY or SHAREHOLDER to enforce any option,
election or right which is herein provided shall in no way be construed to
be a waiver of such provisions, nor in any way to effect the validity of
this Agreement or any part thereof or the right of any PARTY or SHAREHOLDER
to thereafter enforce each and every such provision and to exercise any
such option, election or right.
UNENFORCEABLE TERMS
ARTICLE 22
If any terms of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, each PARTY shall endeavor to agree to such
amendments as shall be necessary to validly give effect to the intentions herein
set out. If such amendments adversely affect any PARTY to a material degree,
such PARTY shall have the right
19
to terminate this Agreement by giving at least 90 (ninety) days prior written
notice.
FORCE MAJEURE
ARTICLE 23
23.1.The failure or delay of any of the PARTIES hereto to perform any
obligation under this Agreement solely by reason of Acts of God, acts of
Government, riots, wars, strikes, lockouts, accidents in transportation
other causes beyond its control shall not be deemed to be a breach of this
Agreement; provided, however, that the PARTY so pre-vented from complying
herewith shall continue to take all actions within its power to comply as
fully as possible herewith.
23.2.Except where the nature of the events shall prevent it from doing so, the
PARTY suffering such force majeure shall notify the other PARTY in writing
within 10 (ten) days after the occurrence of such force majeure and shall
in every instance, to the extent it is capable of doing so, use its best
efforts to remove or remedy such cause with all reasonable dispatch.
DISCLAIMER
ARTICLE 24
This Agreement shall not be deemed to constitute the COMPANY as an agent of any
PARTY hereto, or any PARTY as an agent of the COMPANY, nor shall the COMPANY or
any PARTY be deemed to be a partner of any other PARTY. The relationship of
MITSUI and STEEL TECH pursuant to this Agreement shall be limited to the scope
of this Agreement and the express purposes set forth herein.
ASSIGNABILITY
ARTICLE 25
This Agreement and each and every covenant, term and condition hereof shall be
binding upon, and inure to the benefit of, the PARTIES and their respective
successors, assigns and transferees, but neither this Agreement nor any rights
hereunder shall be assignable directly or indirectly (including by operation of
law) by any PARTY without the prior written consent of the other PARTY;
provided, however, each of the PARTIES may assign this Agreement to a wholly
owned subsidiary which is carrying on the business of the assigning PARTY or to
a company which wholly owns the PARTY, if the assigning PARTY guarantees the
performance of its assignee.
20
IMPLEMENTATION OF THIS AGREEMENT
ARTICLE 26
26.1. Each of the PARTIES undertakes to the other.
26.1.1. To ensure (as far as it is able by the exercise of voting rights or
otherwise) that the COMPANY will at all times perform and observe all of
the provisions of this Agreement and any agreements which may be entered
into between the COMPANY and any of the PARTIES;
26.1.2. To take all necessary steps on its part to give full effect to the
provisions of this Agree-ment; and
26.1.3. Without prejudice to the generality of the foregoing to exercise and
ensure that every person representing it will exercise or refrain from
exercising any rights of voting, as the case may be, at any meeting of the
SHAREHOLDERS of the COMPANY or the Board of Directors so as to ensure the
passing of any and every resolution necessary or desirable to ensure that
the affairs of the COMPANY are conducted in accordance with this Agreement
and otherwise to give full effect to the provisions of this Agreement and
likewise so as to ensure that no resolution is passed which does not accord
with such provisions.
26.2.Each Party undertakes to carry out this Agreement in good faith and to
respect the spirit as well as the letter of its provisions.
26.3.Each party warrants and represents to the others that it has no outstanding
commitments or obligations which would impede its ability and right to
enter into this Agreement and/or fulfill its obligation hereunder except
those which have been disclosed in writing at the time of the execution of
this Agreement.
26.4.The PARTIES agree to enter into and execute any and all such further
agreements, documents and the like as may be necessary or beneficial to
carry out the purposes of this Agreement.
26.5.Each PARTY hereby represents and warrants to the other PARTIES that it is
duly organized and validly existing as heretofore set forth in this
Agreement; that its execution and delivery of this Agreement has been duly
authorized; that its execution and delivery of this Agree-ment and the
performance required hereunder will not violate any existing contract,
agreement, commitment, pledge, security interest, restriction, regulation,
statute or order applicable to it; and that this Agreement is a valid and
binding obligation of said PARTY.
21
26.6.STEEL TECH hereby represents and warrants to MITSUI that STEEL TECH has
the requisite expertise, knowledge and experience to perform its
obligations and responsibilities under this Agreement and under the
Con-sultation and Management Services Agreement ("EXHIBIT C").
COSTS
ARTICLE 27
All or any part of the cost, fees, and expenses, which are estimated to be
approximately US$13,000 (Thirteen Thousand United States Dollars), as may be
agreed upon at the SHAREHOLDERS' MEETING in connection with the investiga-tion,
establishment and formation of the COMPANY whether incurred prior to or upon or
incidental to the establishment of the COMPANY whether prior to or subsequent to
the date of this Agreement shall be reimbursed to the PARTY incurring such
costs, fee or expense by the COMPANY within thirty (30) days of the
incorporation and issuance of stock by the Company.
ENFORCEMENT COSTS/ INDEMNIFICATION
ARTICLE 28
28.1.Each PARTY hereto agrees to pay and dis-charge all reasonable costs,
attorney fees and expenses, (including, but not limited to the costs of
litigation or arbitration) that are incurred by the other PARTY in
en-forcing the terms of this Agreement, provided that such other shall
prevail in such proceedings.
28.2.Each PARTY shall indemnify the other PARTY and hold the other PARTY
harmless from, any and all claims, actions, damages, expenses (including
court costs, arbi-tration costs, and reasonable attorney's fees),
obligations, losses, liabilities and liens, imposed or incurred by, or
asserted against the other PARTY, its successors or assigns, occurring
solely as a result of its breach of this Agree-ment. Notwithstanding the
above to the contrary, in no event shall any PARTY be liable to any other
PARTY for incidental or consequential damages for its breach of this
Agreement.
22
NOTICE
ARTICLE 29
29.1.Any notice required or permitted to be given hereunder shall be in
writing, confirmed by cable or telex to the following addresses:
TO: Steel Technologies Inc.
AT: 11605 Shelbyville Road
P.O. Box 43339
Louisville, Kentucky 40243
ATTENTION: Daryl A. Elser, President
TELEX NUMBER: 502-245-3821
TO: Mitsui & Co., Ltd.
AT: 2-1 Ohtemachi-l-chome, Chiyoda-ku
Tokyo, 100 Japan
ATTENTION: Steel Structure & Project
Development Division (TKIDZ
TELEX NUMBER: J22253 (Answer Back Mitsui J22253)
CABLE: Mitsui Tokyo
TO: Mitsui & Co. (U.S.A.), Inc.
AT: 200 Park Avenue
New York, New York 10166-0130
ATTENTION: Project Department
TELEX NUMBER: 232613 (Answer Back 232613 MBK UR)
TO: Mitsui Steel Development Co., Inc.
AT: 200 Park Avenue
New York, New York 10166-0130
TELEX NUMBER: 229149 (Answer Back 229149 NYMSD UR)
29.2. Any notice so given shall be deemed to be received if by letter:
29.2.1. Upon receipt or 20 (twenty) days after posting, whichever is less, for
air mail sent between Japan and the United States of America or any other
country; or
29.2.2. Upon receipt or 5 (five) days after posting, whichever is less for mail
sent within the United States of America or any other country; or
29.2.3. If by telex or cable, 12 (twelve) hours after dispatched.
29.3.To prove service of notice, it shall be sufficient to prove that a letter,
telex or cable
23
containing the notice was properly addressed and properly dispatched or
posted.
LANGUAGE
ARTICLE 30
This Agreement is written in the English language and executed in four (4)
counterparts, each of which shall be deemed an original.
DISPUTES
ARTICLE 31
All disputes, controversies or differences which may arise between the PARTIES
out of or in relation to this Agreement or the breach thereof shall be settled
by mutual consulation and consent. If the PARTIES should be unable to reach such
mutual consent for disputes, controversies or differences other than those set
forth in Article 32, the matter in question shall be finally settled under the
Rules and Procedures of the American Arbitration Association by three (3)
arbitrators in accordance with such Rules. The place of arbitration shall be New
York, New York, or such other place as the PARTIES may agree. The decision of
the arbitrators shall be final and binding and shall be limited to an
interpretation and application of the terms of this Agreement and any
supplemental agreements or documents. The arbitrators shall have no authority to
add to, delete from or modify the terms of this Agreement or any supplemental
agreements or documents.
BUY-SELL
ARTICLE 32
32.1.In the event the laws of Japan, the laws of the United States of America or
the laws of any state in the United States shall at any time substantially
frustrate the accomplishment of the purposes and objectives for which the
COMPANY was established; or in the event the SHARE-HOLDERS are unable in
good faith to reach agreement with respect to the operations and/or
management of the COMPANY or the PROJECT and said disagreement unreasonably
interferes with the management and operation of the COMPANY or the PROJECT
resulting in the inability of the COMPANY to effec- tively and profitably
perform the objectives and purposes for which it was organized for a period
of 6 (six) months or more; or in the event the SHAREHOLDERS are unable in
good faith to agree upon the desirability of discontinuing the PROJECT and
disposing of the assets of
24
the COMPANY; or in the event a PARTY acts or
threatens to act in such a manner as will irreparably harm the COMPANY,
then, in any of those events, any SHAREHOLDER shall have the right to
institute the following compulsory buy-sell procedures. The SHARE-HOLDER or
SHAREHOLDERS to whom the compulsory buy-sell offer is made are referred to
as the "Of feree(s)." The SHARE-HOLDER or SHAREHOLDERS making the offer are
referred to as the "of feror(s)."
32.1.1. The Offeror(s) may make to the Offeree(s) an offer that, at the option
of the Offeree(s), the Offeror(s) will sell all the SHARES of the
Offeror(s) or purchase all the SHARES of the Offeree(s) (the "Offer").
Except as expressly provided in clauses 32.1.2 or 32.1.3 of this Article
32, no Offer shall be subject to the provisions of this Article 32 unless
such Offer is both an Offer to sell all the SHARES of the Offeror(s) and an
Offer to purchase all the SHARES of the Offeree(s). The Offer must specify
that the price of the SHARES to be sold or trans-ferred is payable in cash
or by bank certified or cashier's check, and must be accompanied by
evidence of the Offeror(s) ability to pay the full selling price at the
closing for the sale of any such SHARES. The per share selling price and
the per share purchase price specified in such Offer must be identical in
amount and must be proportionate to the respective shareholdings of the
Offeree(s) (that is, the selling price and the purchase price so specified
must be identical on a per share basis). Such Offer shall be irrevocable
for a period of 30 (thirty) days, and the Offeree(s) may, on or before the
30th (thirtieth) day after the date of such Offer, accept either the Offer
to sell or the offer to purchase (not both), and upon acceptance the
Offeror(s) shall be required to sell or to purchase, as the case may be. If
the Offeree(s) fail within such 30 (thirty) day period to accept either of
such Offers, then the Offer shall automatically expire and be of no further
force or effect; provided, however, that the Offeror(s) shall thereupon
have the right, on or before the 30th (thirtieth) day after the expiration
of such 30 (thirty) day period, to purchase the SHARES of the Offeree(s),
at the applicable price specified in the original Offer, and if the
Offeror(s) exercise such right, the Offeree(s) shall be required to sell
their SHARES, notwithstanding any other provisions of this Agreement to the
contrary. If the Offeror(s) fail to exercise their right to buy within the
time specified, the Offeror(s) may thereafter make a new Offer pursuant to
this Article 32.
25
32.1.2. Any Offer shall be an Offer to sell all the SHARES of the Offeror to the
Offeree(s) and to purchase all the SHARES of each Offeree. As among the
Offeree(s) the Offer to sell shall be an Offer to sell to each Offeree the
proportion of all the Offeror(s)' SHARES which the number of all SHARES
held by such Offeree bears to the number of all SHARES held by all
Offeree(s), but by agreement among the Offeree(s) such offer to sell may be
accepted in varying proportions. In the event that less than all of the
Offeree (s) act, the Offeror(s) shall there-upon have the right, on or
before the 30th (thirtieth) day after the expiration of the original 30
(thirty) day period, to purchase the SHARES of all the Offeree(s), at the
appli-cable price specified in the original offer, and if the Offeror(s)
exercise such right the Offeree(s) shall be required to sell their SHARES.
32.1.3. The Offeree(s) may accept all offers to sell or all Offers to buy (but
may not accept one or more Offers to buy and one or more Offers to sell),
and may not accept with respect to one Offeror and fail to accept with
respect to other Offeroe(s). If the Offeree(s) fail within such original 30
(thirty) day period to accept either all Offers to sell or all Offers to
buy, then the Offeror(s) shall thereupon have the right, on or before the
30th (thirtieth) day after the expiration of such 30 (thirty) day period,
to purchase all the SHARES of the Offeree(s) at the price specified in the
original Offer, and if the Offeror(s) exercise such right, the Offeree(s)
shall be required to sell all their respective SHARES.
32.1.4. If the Offeror (s) or Offeree(s), as the case may be, exercise their
rights hereunder to buy or sell, a closing thereunder shall be held at the
time and place and on a date specified by the purchaser(s) by written
notice to the seller(s) which dates shall in any case be on or prior to the
30th (thirtieth) day after such right to buy or sell has been exercised.
32.2.The PARTIES, individually and as SHARE-HOLDERS, as the case may be, agree
that the procedures set forth in this Article 32 shall be the "plan"
referred to in SS 273 of the General Corporation Law of Delaware and that
each PARTY, individually and as a SHAREHOLDER, as the case may be, hereby
irrevocably appoints each other PARTY or SHAREHOLDER, as the case may be,
its lawful attorney-in-fact for the purposes of: [i] making any appropriate
filing pursuant to S 273 of the General Corporation Law of Delaware in
order to prevent the dissolution of the COMPANY pursuant to said statute
and [ii] transferring any SHARES
26
on the stock register of the COMPANY upon exercising its rights pursuant to
the provisions of this Article 32.
GOVERNING LAW
ARTICLE 33
This Agreement shall be interpreted in accordance with and governed by the LAWS
OF DELAWARE.
EFFECTIVE DATE AND CONSENT
ARTICLE 34
This Agreement shall come into effect upon the first date by which all PARTIES
hereto have affixed their signa-tures on this Agreement.
34.1.Notwithstanding any other provisions hereof, this Agreement is conditioned
upon all necessary and appropriate governmental and other approvals,
consents and validations being obtained for the incorporation of the
COMPANY in form and substance mutually acceptable to the PARTIES.
34.2.The PARTIES shall cooperate to ensure that all necessary consents,
approvals and validations are obtained and shall keep the other PARTIES
informed of the steps taken for such purpose.
COMPLIANCE WITH LAW
ARTICLE 35
The PARTIES shall at all times act to assure that the COMPANY shall comply with
the laws of the United States of America and the states of its incorporation and
places of business.
ENTIRE AGREEMENT/MODIFICATION
ARTICLE 36
36.1.This Agreement supersedes all previous representations, understandings or
agreements, oral or written, between the PARTIES with respect to the
subject matter hereof, and together with the documents contemplated hereby
contains the entire understanding of the PARTIES as to the terms and
conditions of their relationship.
36.2.This Agreement may not be released, dis-charged, abandoned (other than as
a result of the termina-tion of this Agreement as provided herein), changed
or modified in any manner except by an instrument in writing signed by the
duly authorized officer or representative of each of the PARTIES.
36.3.The table of contents and Article headings in this Agreement are for
convenience only and do not substantively affect the terms of this
Agreement.
27
COUNSEL
ARTICLE 37
Legal counsel acceptable to the PARTIES will be re-tained on behalf of the
COMPANY to prepare all appropriate ARTICLES OF INCORPORATION, BYLAWS, contracts,
agreements, and related documents necessary for the operation of the PROJECT by
the COMPANY.
CONFIDENTIALITY
ARTICLE 38
38.1.Each PARTY agrees that it will maintain, and cause its officers,
directors, employees and agents to maintain, the confidentiality of all
patents, trade secrets, technology, know-how, customer lists, financial
projections, business plans, designs, processes, machinery, devices, or
materials with respect to any past, present, or future engineering,
developmental efforts, or operations, research and/or manufacturing
relating to the COMPANY's business, products or activities, information or
documentation re-lating to the records of SHAREHOLDERS' MEETING, meetings
of the Board of Directors, or other corporate activities of the COMPANY, or
other proprietary information (collectively referred to hereafter as
"Proprietary Information") of the COMPANY that has or becomes known to any
PARTY as the result of the discussions heretofore or hereafter conducted
between the PARTIES with respect to the COMPANY, or the PROJECT, or as the
result of management and/or operation of the COMPANY, except for such
information which: (a) such PARTY may be required to disclose [i] at the
express direction of any authorized government agency, [ii] pursuant to a
subpoena or other court process, or [iii] as otherwise required by law or
regulation, or order of any regulatory body; (b) prior to the date of this
Agreement, has become generally available to the public or was within the
public domain at the time it was disclosed; (c) was generally available or
known to such other PARTY on a non-confidential basis prior to its
disclo-sure by the other PARTY hereunder; or (d) prior to the date of this
Agreement was lawfully received by such PARTY from a source other than the
other PARTY or the COMPANY.
38.2.The PARTIES further agree to maintain as confidential the proposed Project
and agree that neither PARTY will disclose to the news media or any other
person the facts or substance of their negotiations or discussions or plans
with the other PARTY for the Project without first obtaining the consent of
the other PARTY, which shall not
28
be unreasonably withheld, unless such PARTY is advised by counsel that such
disclosure is required by law.
38.3.Each PARTY acknowledges, confirms, and agrees that the other PARTY and the
COMPANY would be irre-pairably damaged in the event that any of the
Proprietary Information is disclosed in violation of this Agreement and
further agrees that the COMPANY or the other nondisclosing PARTY shall be
entitled to obtain restraining orders, an injunction or injunctions or
other appropriate means to prevent any actual or threatened breach of this
Article and to specifically enforce each of the terms and provisions of
this Article in any action or proceedings instituted in any court or other
appropriate tribunal having subject matter jurisdiction. The remedies
provided herein shall not be exclusive and shall be in addition to any
other remedy to which the COMPANY or any PARTY or any of them may be
entit-led to seek or obtain in law and equity.
PATENTS AND INVENTIONS
ARTICLE 39
Except as limited by any licensing agreements between any PARTY and the COMPANY,
each PARTY agrees that all patents, inventions and discoveries made or obtained
by the COMPANY, or any of its employees or agents shall belong to and be the
property of the COMPANY.
Notwithstanding the above, the parties shall, and shall cause the COMPANY to,
enter into the licensing agreements more fully set forth in Exhibits D and E
whereby permanent, royalty-free licenses are granted individually from STEEL
TECH and MITSUI to the COMPANY, and from the COMPANY to STEEL TECH and MITSUI,
individually, regarding all patents, inventions and discoveries made or obtained
by any of them regarding the operations, processes and equipment of the COMPANY.
IN WITNESS WHEREOF, the authorized representatives of the PARTIES have set their
hands the day and year first above written.
STEEL TECHNOLOGIES, INC.
BY:
Chairman and Chief Executive
Officer
MITSUI & CO., LTD.
BY:
Attorney-In-Fact
29
MITSUI & CO. (U.S.A.), INC.
BY:
Senior Vice President
MITSUI STEEL DEVELOPMENT CO., INC.
BY:
President
30
EXHIBIT 10.6(b)
AMENDMENT TO JOINT VENTURE AGREEMENT BETWEEN
MITSUI & CO., LTD., MITSUI & CO. (U.S.A.), INC.,
MITSUI STEEL DEVELOPMENT CO., INC.,
AND STEEL TECHNOLOGIES INC.
The Joint Venture Agreement between the above parties dated March 30, 1987 shall
be and hereby is amended as follows:
(1) The second line of Section 3.5 shall be changed to delete "1,000 (One
Thousand)" substituting therefore "2,000 (Two Thousand)". The first
sentence of Section 3.5 shall now read: "The capital of the COMPANY shall
consist of 2,000 (Two Thousand) SHARES of common stock as provided in
Article 4."
(2) Section 4.1.1 shall be deleted and the following inserted in lieu thereof:
"The TOTAL FUNDS are agreed to consist of the budgeted line items set forth
on Schedule A hereto."
(3) Section 4.1.3.1 shall be deleted in its entirety and the following
substituted therefor:
"The authorized share capital of the COMPANY shall be the equivalent of US
$8,000,000 (Eight Million United States Dollars) divided into two classes
of capital stock consisting of: (i) 1,000 (One Thousand) SHARES of Class A
Common Stock of US $4,000.00 (Four Thousand United States Dollars) par
value each; and (ii) 1,000 (One Thousand) SHARES of Class B Common Stock of
US $4,000.00 (Four Thousand United States Dollars) par value each."
(4) Section 4.1.3.2(a) shall be amended by deleting "500 (Five Hundred)" and
substituting therefor "1,000 (One Thousand)".
(5) Section 4.1.3.2(a) shall now read:
"MITSUI DEVELOPMENT: Fifty percent (50%) consisting of 1,000 (One Thousand)
SHARES of Class A Common Stock at US $4,000.00 (Four Thousand United States
Dollars) par value per share in cash."
(6) Section 4.1.3.2(b) shall be amended by deleting "500 (Five Hundred)" and
substituting therefor "1,000 (One Thousand)".
(7) Section 4.1.3.2(b) shall now read:
"STEEL TECH: Fifty Percent (50%) consisting of 1,000 (One Thousand) SHARES
of Class B Common Stock at US $4,000.00 (Four Thousand United States
Dollars) par value per share in cash."
1
(8) The last sentence of Section 4.3 shall be changed to delete "US$1,500,000
(One Million Five Hundred Thousand United States Dollars)" and substituting
therefor "US$3,500,000 (Three Million Five Hundred Thousand United States
Dollars)". The last sentence of Section 4.3 shall now read:
"Provided however in no event shall the aggregate amount of any guaranty or
guaranties of the COMPANY'S debt exceed US$3,500,000 (Three Million Five
Hundred Thousand United
States Dollars) for either STEEL TECH or MITSUI."
The foregoing amendments are agreed to and accepted this day 28TH day of
February, 1989.
MITSUI & CO., LTD.
By:
Title: Genera1 Manager
Steel Project Development Div.
MITSUI & CO. (U.S.A.), INC.
By:
Title: SVP & COO
MITSUI STEEL DEVELOPMENT CO., INC.
By:
Title: President
STEEL TECHNOLOGIES INC.
By:
Title: Executive V.P.
2
EXHIBIT 13
2003 ANNUAL REPORT TO SHAREHOLDERS
Steel Technologies Inc.
Selected Financial Data
(In thousands, except per share results)
Years Ended September 30
------------------------
INCOME STATEMENT DATA 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------
Sales $512,704 $475,398 $436,655 $469,632 $418,159
Cost of goods sold 467,780 415,763 388,363 418,680 361,192
Gross profit 44,924 59,635 48,292 50,952 56,967
Selling, general and
administrative expenses 28,337 30,024 29,535 28,251 26,108
Equity in net income (loss) of
unconsolidated affiliates(1) 1,058 1,540 (6,832) 898 1,095
Operating income 17,645 31,151 11,925 23,599 31,954
Income before income taxes 13,292 25,465 5,497 16,177 25,233
Net income 9,152 15,794 764 10,212 15,572
Diluted earnings per common share $ 0.92 $ 1.60 $ 0.07 $ 0.94 $ 1.38
Diluted weighted average number
of common shares outstanding 9,899 9,886 10,308 10,857 11,256
Basic earnings per common share $ 0.94 $ 1.62 $ 0.07 $ 0.94 $ 1.39
Basic weighted average number of
common shares outstanding 9,748 9,762 10,267 10,818 11,230
Cash dividends per common share $ 0.20 $ 0.16 $ 0.12 $ 0.12 $ 0.11
September 30
--------------------------------------------
BALANCE SHEET DATA 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------
Working capital $101,798 $ 82,352 $ 80,427 $ 97,428 $ 89,418
Total assets 313,175 305,912 289,103 315,389 289,105
Long-term debt 94,680 74,900 89,110 115,394 90,209
Shareholders' equity 137,941 131,730 124,985 127,032 124,439
Years Ended September 30
------------------------
OTHER DATA 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------
Capital expenditures, including
acquisitions and investments in
and advances to unconsolidated
affiliates $ 26,462 $ 7,128 $ 11,033 $ 32,010 $ 18,304
Shareholders' equity per common
share 14.13 13.63 12.23 12.14 11.17
Depreciation and amortization 13,878 15,108 15,351 13,929 12,852
(1) 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 2003 First Second Third Fourth
- ------------------------------------------------------------------------
Sales $126,009 $130,140 $129,603 $126,952
Gross profit 13,770 11,161 9,235 10,758
Net income 3,790 1,992 972 2,398
Diluted earnings per common share $ 0.38 $ 0.20 $ 0.10 $ 0.24
Basic earnings per common share $ 0.39 $ 0.20 $ 0.10 $ 0.25
Fiscal Year 2002 First Second Third Fourth
- ------------------------------------------------------------------------
Sales $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
Market Price and Dividend Information:
The Company's common stock trades on The Nasdaq Stock Market under the symbol
STTX. At October 31, 2003, there were approximately 428 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 2003 and 2002. Nasdaq National
Market System quotations are based on actual transactions.
Stock Price
---------------------------------------------
Fiscal Year 2003 High Low Close Dividends
- --------------------------------------------------------------------------------
First Quarter $23.25 $15.01 $16.96 $ 0.10
Second Quarter $19.45 $ 8.50 $ 8.96
Third Quarter $11.50 $ 8.75 $10.11 $ 0.10
Fourth Quarter $13.00 $ 9.53 $12.47
Stock Price
---------------------------------------------
Fiscal Year 2002 High Low Close Dividends
- --------------------------------------------------------------------------------
First Quarter $ 9.25 $ 7.25 $ 9.08 $ 0.08
Second Quarter $ 9.15 $ 7.89 $ 8.53
Third Quarter $13.60 $ 8.40 $13.18 $ 0.08
Fourth Quarter $19.05 $ 9.60 $16.96
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 unconsolidated affiliate 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.
Goodwill is reviewed annually for impairment using the present value technique
to determine the estimated fair value of goodwill associated with each reporting
entity. Considerable management judgment is necessary to assess impairment and
estimate fair value. The assumptions used in our evaluations, such as forecasted
growth rates, cost of capital, tax rates and residual values, are consistent
with our internal projections and operating plans.
3
RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002
Steel Technologies posted sales of $512,704,000 in fiscal 2003, an increase of
8% from 2002 sales of $475,398,000. Tons shipped of Company-owned steel products
in fiscal 2003 decreased approximately 3% compared to fiscal 2002 while the
average selling price of Company-owned steel products for the year increased
approximately 11% from the previous year.
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. Year-to-date production levels in the North American
automotive industry over the Company's 2003 fiscal year decreased 3% as compared
to fiscal 2002, which has adversely impacted the Company's sales. The Company
attempts to increase market share utilizing its network of resources by
developing a substantial amount of new business with both existing and new
customers.
The gross profit margin was 8.8% in 2003 compared to 12.5% in 2002. The decrease
in gross profit margin is a result of higher priced inventory acquired in the
first half of fiscal 2003 which was not fully offset by price increases to
customers, and lower volume spread over certain fixed manufacturing expenses
which adversely impacted production cost efficiencies. The Company expects
average raw material costs in fiscal 2004 to increase slightly from fiscal 2003.
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.
Selling, general and administrative costs decreased approximately 5.6% in fiscal
2003 primarily as a result of the reduction of goodwill amortization as a result
of adopting FAS 142 (see Note 6 of the Company's Notes to Consolidated Financial
Statements) and the continued efforts by the Company to manage the level at
which selling, general and administrative costs are added to its cost structure.
These decreases were offset by an increase in bad debt expense resulting from
the bankruptcy of a significant customer. Selling, general and administrative
costs were 5.5% and 6.3% of sales in 2003 and 2002, respectively.
The Company's share of income of its unconsolidated affiliates was $1,058,000 in
2003 and $1,540,000 in 2002. Mi-Tech Steel's earnings have declined as a result
of higher priced inventory which was not fully offset by price increases to
customers, lower operating levels and pre-operation expenses incurred in
connection with its Canton, Mississippi and Decatur, Alabama steel processing
operations.
Net interest expense decreased to $4,722,000 in 2003 from $4,872,000 in 2002.
The decrease is primarily the result of lower interest rates on the Company's
variable rate debt in fiscal 2003 as compared to fiscal 2002 offset by higher
average borrowings during fiscal 2003.
In fiscal 2003, the Company recorded a $369,000 pre-tax gain on
disposals/writeoffs of property, plant and equipment primarily from the sale of
its Elkton, Maryland facility. In fiscal 2002, the Company recorded a loss on
disposals/writeoffs of property, plant and equipment of $814,000 as a result of
equipment improvements and upgrades.
The Company's effective income tax rate was approximately 31.1% in 2003. During
fiscal 2003, the Company recorded an income tax benefit attributable to state
and foreign income tax apportionment that was more favorable than originally
estimated and recognized a non-recurring state income tax benefit. These items
decreased the effective income tax by 3.8% in fiscal 2003.
The Company's effective income tax rate was approximately 38.0% in 2002.
Non-deductible goodwill amortization expense of approximately $733,000 recorded
during fiscal 2002 (see Note 6 of the Company's Notes to Consolidated Financial
Statements) increased the effective tax rate by 1.1% in fiscal 2002.
4
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.
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.
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.
The Company's share of income (loss) of its unconsolidated affiliates was
$1,540,000 in 2002 and ($6,832,000) in 2001. The results in 2002 include
improved results from Mi-Tech Steel 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 unconsolidated affiliate
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 unconsolidated affiliates (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 86.1% in 2001. The decrease is primarily attributable to the asset impairment
charges included in equity in net income (loss) of unconsolidated affiliates
during the second quarter of fiscal 2001 and the related tax benefit of
approximately $500,000. The asset impairment charges increased the effective
income tax rate by 45.8% in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, Steel Technologies had $101,798,000 of working capital,
maintained a current ratio of 2.55:1 and had total debt at 42% 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 fiscal 2003, the Company decreased
inventory levels. However, the Company improved payment days to its suppliers
which was financed primarily through borrowings on the Company's line of credit
facility. These factors, along with non-cash charges for depreciation
contributed to $6,102,000 of cash provided by operations in 2003 compared to
$26,693,000 in 2002.
Capital expenditures for 2003 totaled $14,637,000. 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 2004, the capital additions to all facilities are expected
to approximate $14,000,000.
5
On March 7, 2003 the Company completed the purchase of certain assets from Cold
Metal Products, Inc. (Cold Metal Products) as approved by the U.S. Bankruptcy
Court in Youngstown, Ohio. The purchase price consisted of approximately
$9,825,000 and the assumption of approximately $20,000 of liabilities. The
assets purchased included land, building and certain steel processing equipment
at the Ottawa, Ohio facility, certain equipment located in Indianapolis,
Indiana, and selected inventory and accounts receivable. The Company financed
the acquisition with its existing credit facility.
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 $353,000, $371,000 and ($256,000) during 2003, 2002 and
2001, respectively.
The Company maintains a 50% equity investment in Mi-Tech Steel and a 49% equity
investment in Ferrolux Metals Co., LLC. Pursuant to an agreement, the Company
loaned Mi-Tech Steel $2,000,000 on September 30, 2003. The loan is subordinate
to all existing Mi-Tech Steel loans and matures September 30, 2006. Interest is
paid at maturity at a LIBOR based interest rate. Additional equity contributions
to the Company's unconsolidated affiliates are not expected for the foreseeable
future, but, if required, would be financed with available funds from the
Company's bank line of credit.
An increase in borrowings, primarily to acquire Cold Metal Products and improve
payment days to suppliers in 2003, contributed to cash provided by (used in)
financing activities of $18,527,000 in 2003 compared to ($21,639,000) in 2002.
The Company has a $151,000,000 line of credit agreement expiring on August 31,
2005, with various variable options on the interest rate, none of which are
greater than the bank's prime rate. At September 30, 2003 and 2002, there was
$89,000,000 and $63,500,000, respectively, outstanding on the credit facility.
The Company has approximately $11,400,000 outstanding at September 30, 2003 on
the ten-year note which requires annual principal payments of $5,720,000 in
March 2004 and $5,680,000 in March 2005. During 2003, the Company borrowed
$58,500,000 on its line of credit facility and repaid $38,759,000 on its line of
credit facility and ten-year note.
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.
Cash flows from operations and available borrowing capabilities are expected to
meet the needs of the Company throughout fiscal 2004. Any additional funds will
be used for growth, including strategic acquisitions, investment in
unconsolidated affiliates, 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.
Operating cash flows are somewhat influenced by cyclicality of demand in the
steel industry, especially in the automotive market.
6
The following table summarizes the annual payments of outstanding debt and
non-cancelable operating leases required as of September 30, 2003.
Payments Due By Period (in thousands of dollars)
------------------------------------------------
2004 2005 2006 2007 2008 after 2008 Total
---- ---- ---- ---- ---- ---------- -----
Debt $5,720 $94,680 $ - $ - $ - $ - $100,400
Operating Leases $ 737 $ 661 $ 515 $ 430 $ 295 $ 115 $ 2,753
In June 2002, the Company entered into a contract to purchase electricity
through February 2004 to meet its minimum needs for its Canton, Michigan
facility. During 2003, the Company entered into a contract to purchase
electricity through March 2006 to meet its minimum needs for its Ottawa, Ohio
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.
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.
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 $6,936,000, $4,674,000 and $3,629,000 in 2003,
2002 and 2001, respectively and accounts receivable of $1,337,000 and $1,029,000
as of September 30, 2003 and 2002, 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 2004 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 October 2001, the Financial Accounting Standards Board (FASB) issued
"Impairment or Disposal of Long-Lived Assets". 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 Company adopted SFAS
No.
7
144 on October 1, 2002 and the adoption of SFAS No. 144 did not have a material
impact on our financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." 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 adopted the provisions of SFAS No. 146 during the
quarter ended March 31, 2003 and the adoption of SFAS No. 146 did not have a
material impact on our financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34," (FIN 45). FIN 45
requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The adoption of the recognition provision of FIN 45 did not have a
material impact on our financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" (FIN 46). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting right
(variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46, as amended by FASB Staff Position 46-6, "Effective Date of
FIN 46," are effective immediately for VIEs created after January 31, 2003 and
no later than December 31, 2003 for VIEs created before February 1, 2003. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest make additional disclosure in
filings issued after January 31, 2003. The Company is in the process of
evaluating the effect of FIN 46 and had not determined whether its adoption will
have a material impact on our financial position, results of operations or cash
flows.
The FASB also recently issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Standard requires that certain freestanding financial instruments be classified
as liabilities, including mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. The provisions of SFAS
No. 150 relating to certain mandatorily redeemable noncontrolling interests, as
amended by FASB Staff Position 150-3, "Effective Date, Disclosures, and
Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS
No. 150," have been deferred indefinitely. The provisions of SFAS No. 150 are
effective immediately for all other financial instruments. The adoption of SFAS
No. 150 did not have a material impact on our financial position, results of
operations or cash flows.
8
STEEL TECHNOLOGIES INC.
Consolidated Balance Sheets
(In thousands, except shares)
September 30
--------------------------
2003 2002
- ----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,758 $ 2,127
Trade accounts receivable, less
allowance for doubtful accounts:
$1,808 in 2003 and $1,496 in 2002.......... 74,595 72,658
Inventories.................................. 84,301 87,741
Deferred income taxes........................ 1,198 1,980
Prepaid expenses and other assets............ 4,628 2,789
--------- ---------
Total current assets .................... 167,480 167,295
--------- ---------
Property, plant and equipment (at cost), net of
accumulated depreciation 106,615 102,560
--------- ---------
Investments in and advances to unconsolidated
affilliates................................. 19,604 16,590
Goodwill....................................... 18,148 18,148
Other assets .................................. 1,328 1,319
--------- ---------
$ 313,175 $ 305,912
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 49,609 $ 65,446
Accrued liabilities ........................ 10,353 11,580
Income taxes payable ....................... - 2,158
Long-term debt due within one year ......... 5,720 5,759
--------- ---------
Total current liabilities ............... 65,682 84,943
Long-term debt ................................ 94,680 74,900
Deferred income taxes ......................... 14,872 14,339
--------- ---------
Total liabilities ........................ 175,234 174,182
--------- ---------
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:
9,765,409 in 2003 and 9,663,468 in 2002 .. 20,371 18,733
Treasury stock at cost: 2,574,000 shares in
2003 and 2,519,000 shares in 2002 ........ (23,169) (22,090)
Additional paid-in capital ................. 5,098 4,909
Retained earnings .......................... 141,073 133,869
Accumulated other comprehensive loss ....... (5,432) (3,691)
--------- ---------
Total shareholders' equity ............... 137,941 131,730
--------- ---------
$ 313,175 $ 305,912
========= =========
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
--------------------------------
2003 2002 2001
- --------------------------------------------------------------------------
Sales .................................. $512,704 $475,398 $436,655
Cost of goods sold ..................... 467,780 415,763 388,363
-------- -------- --------
Gross profit ......................... 44,924 59,635 48,292
Selling, general and administrative
expenses ............................. 28,337 30,024 29,535
Equity in net income (loss) of
unconsolidated affiliates (including
impairment charge of $7.5 million
in 2001) ............................. 1,058 1,540 (6,832)
-------- -------- --------
Operating income ..................... 17,645 31,151 11,925
Interest expense, net................... 4,722 4,872 6,346
(Gain) loss on disposals/writeoffs of
property, plant and equipment ........ (369) 814 82
-------- -------- --------
Income before income taxes ........... 13,292 25,465 5,497
Provision for income taxes ............. 4,140 9,671 4,733
-------- -------- --------
Net income ........................... $ 9,152 $ 15,794 $ 764
======== ======== ========
Weighted average number of common shares
outstanding-diluted .................. 9,899 9,886 10,308
-------- -------- --------
Diluted earnings per common share ...... $ 0.92 $ 1.60 $ 0.07
-------- -------- --------
Weighted average number of common shares
outstanding-basic .................... 9,748 9,762 10,267
-------- -------- --------
Basic earnings per common share ........ $ 0.94 $ 1.62 $ 0.07
-------- -------- --------
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended September 30
--------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------
Net income ............................. $ 9,152 $ 15,794 $ 764
Foreign currency translation
adjustment ......................... (2,201) (1,714) 121
Change in unrealized loss on cash flow
hedges, net of tax expense (benefit)
of $287 in 2003, ($153) in 2002 and
($227) in 2001 ..................... 460 (256) (364)
-------- -------- -------
Comprehensive income ................... $ 7,411 $ 13,824 $ 521
======== ======== =======
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, 2003, 2002 and 2001
-----------------------------------------------------------------------------------------------
Common Stock Treasury Stock Accumulated
------------------ -------------------- Additional Other
Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
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) $131,730
Net income ........................ 9,152 9,152
Net issuance of common stock under
incentive stock option plan..... 102 1,638 55 (1,079) 559
Tax iffect of options exercised -
disqualifying dispositions...... 189 189
Cash dividends on common stock
($.20 per share)................. (1,948) (1,948)
Foreign currency translation
adjustment ...................... (2,201) (2,201)
Change in unrealized loss on cash
flow hedges, net of tax ......... 460 460
------- -------- ----- -------- -------- --------- -------- --------
Balances, September 30, 2003 ...... 9,765 $ 20,371 2,574 $(23,169) $ 5,098 $141,073 $ (5,432) $137,941
======= ======== ===== ======== ======== ========= ======== ========
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
--------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................ $ 9,152 $ 15,794 $ 764
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation .......................... 13,878 14,375 14,620
Amortization .......................... -- 733 731
Deferred income taxes ................. 1,315 1,252 (995)
Equity in net (income) loss of
unconsolidated affiliates............ (1,058) (1,540) 6,832
(Gain) loss on disposals/writeoffs of
property, plant and equipment ....... (369) 814 82
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable ......... (948) (8,891) 2,428
Inventories ....................... 3,608 (21,518) 12,981
Prepaid expenses and other assets . (1,805) (1,094) (665)
Accounts payable .................. (15,193) 22,779 (1,544)
Accrued liabilities ............... (2,478) 3,989 2,313
-------- -------- --------
Net cash provided by operating activities ... 6,102 26,693 37,547
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment. (14,637) (7,132) (9,830)
Proceeds from sale of property,
plant and equipment ..................... 2,603 865 977
Acquisition................................ (9,825) -- --
Distributions from unconsolidated
affiliates............................... 45 73 --
Investment in and advances to
unconsolidated affiliates................ (2,000) 4 (1,203)
-------- -------- --------
Net cash used in investing activities ....... (23,814) (6,190) (10,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .............. 58,500 24,000 70,000
Principal payments on long-term debt ...... (38,759) (38,735) (96,249)
Cash dividends on common stock ............ (1,948) (1,577) (1,237)
Repurchase of common stock ................ (1,079) (6,887) (1,392)
Net issuance of common stock under
stock option plans ...................... 1,638 1,385 61
Other ...................................... 175 175 175
-------- -------- --------
Net cash provided by (used in) financing
activities ................................ 18,527 (21,639) (28,642)
-------- -------- --------
Effect of exchange rate changes on cash ..... (184) (117) 62
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents .......................... 631 (1,253) (1,089)
Cash and cash equivalents, beginning of year. 2,127 3,380 4,469
-------- -------- --------
Cash and cash equivalents, end of year ...... $ 2,758 $ 2,127 $ 3,380
======== ======== ========
Supplemental Cash Flow Disclosures:
Cash payments for interest ................ $ 4,878 $ 5,162 $ 7,232
Cash payments for taxes ................... $ 5,636 $ 6,219 $ 3,955
Supplemental Schedule of Noncash Investing and Financing Activities:
Fair value of assets acquired.............. $ 9,845 $ -- $ --
Liabilities assumed ......................... 20 -- --
-------- -------- --------
Net cash paid ............................... $ 9,825 $ -- $ --
======== ======== ========
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 unconsolidated affiliates are accounted
for by the 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 10 - 25 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 $167,000, $80,000 and
$285,000 were capitalized in 2003, 2002 and 2001, 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. Effective October 1, 2002, the Company adopted Statement of
Financial Accounting Standard No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets" and ceased amortization of goodwill (see Note 6).
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.
13
Revenue Recognition: The Company recognizes revenue when the customer takes
title to goods shipped and risk of loss passes to the customer.
Stock-Based Compensation: At September 30, 2003, the Company had stock-based
compensation plans which are described more fully in Note 13. As permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation" and amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure," the
Company follows the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock option plans under the intrinsic value based method.
Accordingly, no stock-based compensation expense has been recognized for stock
options issued under the plans as all stock options granted under the plans had
an exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. Had compensation expense been determined
based on the fair value of the stock options at the grant date consistent with
the provisions of SFAS No. 123, the Company's net income and basic and diluted
net income per share would have been impacted as follows (in thousands except
per share data):
For the Years Ended September 30
--------------------------------
(In thousands, except per share results 2003 2002 2001
----------------------------------------------------------------------------
Net income - as reported $9,152 $15,794 $ 764
Total stock-based employee compensation expense
(benefit) determined under fair value based
method for all awards, net of taxes 160 (10) 305
------- ------- ------
Net income - pro forma $8,992 $15,804 $ 459
======= ======= ======
Diluted net income per share - as reported $ 0.92 $ 1.60 $ 0.07
Diluted net income per share - pro forma $ 0.91 $ 1.60 $ 0.04
Basic net income per share - as reported $ 0.94 $ 1.62 $ 0.07
Basic net income per share - pro forma $ 0.92 $ 1.62 $ 0.04
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 $353,000, $371,000 and ($256,000) for the fiscal
years ending 2003, 2002 and 2001, respectively.
Comprehensive Loss: Accumulated other comprehensive loss consists of the
following:
September 30
------------------------------
(In thousands) 2003 2002
--------------------------------------------------------------------------
Cumulative translation adjustment $5,272 $3,071
Unrealized loss on cash flow hedges, net of tax 160 620
------ ------
$5,432 $3,691
------ ------
14
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 March 7, 2003 the Company completed the purchase of certain assets from Cold
Metal Products, Inc. (Cold Metal Products) as approved by the U.S. Bankruptcy
Court in Youngstown, Ohio. The purchase price consisted of approximately
$9,825,000 and the assumption of approximately $20,000 of liabilities. The
assets purchased included land, building and certain steel processing equipment
at the Ottawa, Ohio facility, certain equipment located in Indianapolis, Indiana
and selected inventory and accounts receivable. The Company financed the
acquisition with its existing credit facility.
The acquisition has been recorded under the purchase method of accounting, with
the operating results being included in the Company's consolidated financial
statements since the date of acquisition. The following unaudited pro forma
consolidated results of operations have been prepared as if the acquisition of
the assets of Cold Metal Products had occurred at the beginning of the
corresponding period.
Years Ended September 30
(In thousands except per share data) ----------------------------
(Unaudited) 2003 2002 2001
- ---------------------------------------------------------------------------
Sales $524,368 $512,867 $474,217
Net income $ 9,039 $ 16,233 $ 3,023
Diluted net income per share $ 0.91 $ 1.64 $ 0.29
Basic net income per share $ 0.93 $ 1.66 $ 0.29
This unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of future operating results.
3. INVENTORIES:
Inventories consist of:
September 30
------------------------
(In thousands) 2003 2002
----------------------------------------------------------------------------
Raw materials $ 58,204 $ 66,535
Finished goods and work in process 26,097 21,206
--------- ---------
$ 84,301 $ 87,741
========= =========
15
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and related accumulated depreciation at September
30, 2003 and 2002 consist of the following:
September 30
------------------------
(In thousands) 2003 20021
----------------------------------------------------------------------------
Land and improvements $ 5,953 $ 4,026
Buildings and improvements 60,732 59,717
Machinery and equipment 141,104 134,199
Construction in progress 10,517 3,142
Assets held for sale 200 1,854
-------- --------
218,506 202,938
Less accumulated depreciation 111,891 100,378
-------- --------
$106,615 $102,560
======== ========
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
Mi-Tech Steel owns and operates four 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 company accounted for by the equity method follows:
September 30
BALANCE SHEET (In thousands) 2003 2002
------------------------------------------------------------------------
Assets:
Current assets $ 54,247 $ 51,374
Other assets 31,796 27,660
Liabilities:
Current liabilities $ 31,610 $ 48,573
Long-term liabilities 22,390 --
For the Years Ended September 30
---------------------------------------
INCOME STATEMENT (In thousands) 2003 2002 2001
---------------------------------------
Net Sales $142,559 $141,323 $137,336
Net Income (Loss) $ 1,581 $ 2,614 $(11,559)
The Company's equity in undistributed net income of Mi-Tech Steel was $6,421,000
and $5,631,000 at September 30, 2003 and 2002, respectively. Pursuant to an
agreement, the Company loaned Mi-Tech Steel $2,000,000 on September 30, 2003.
The loan is subordinate to all existing Mi-Tech Steel loans and matures
September 30, 2006. Interest is paid at maturity at a LIBOR based interest rate.
In March 2001, Mi-Tech Steel discontinued its Decatur, Alabama operation. 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. In addition, Mi-Tech Steel wrote down its
minority investment in San Diego Coil Center in March 2001 when it determined
operation was not able to sustain an earnings capacity that justified the
carrying amount of its investment. The Company's share of Mi-Tech Steel's
impairment charges recorded during the second quarter of fiscal 2001 was
approximately $6.5 million.
16
In April 2003, Mi-Tech Steel restarted its slitting operations in Decatur and is
being reimbursed for operating costs by Steel Technologies Inc. and Mi-Tech
Steel's other owner. Mi-Tech Steel is pursuing alternatives to sell its pickling
equipment and facility in Decatur.
The Company has various transactions with Mi-Tech Steel. The Company has
recorded sales of $1,931,000, $2,767,000 and $2,579,000 in 2003, 2002 and 2001,
respectively and accounts receivable of $53,000 and $209,000 as of September 30,
2003 and 2002, respectively for products and services sold at prevailing market
prices to Mi-Tech Steel. The Company has also purchased equipment from Mi-Tech
Steel during 2002 for $975,000. Included in operating income of the Company are
management fees, Decatur operating expense reimbursement and equity from the net
income (losses) of Mi-Tech Steel totaling $1,131,000, $2,003,000 and
($5,084,000) in 2003, 2002 and 2001, respectively.
During the second quarter of fiscal 2001, the Company determined that Processing
Technology Inc. (PTI), an unconsolidated affiliate 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 2002, PTI filed a Certificate of Dissolution
with its state of incorporation.
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 affiliate is accounted for by the equity method of accounting.
6. GOODWILL:
The Company adopted Statement of Financial Accounting Standard No. 142 (SFAS No.
142), "Goodwill and Other Intangible Assets" effective October 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized but is tested for impairment
annually using a fair-value based approach. During the quarter ended December
31, 2002, the Company performed the initial impairment test of goodwill and no
impairments were indicated. The annual impairment test was performed during the
fourth quarter of fiscal 2003 and no impairments were indicated.
The following table adjusts reported net income and earnings per share for the
years ended September 30, 2002 and 2001 to exclude amortization of goodwill.
September 30
--------------------------
(In thousands except per share data) 2003 2002 2001
- ------------------------------------------------------------------------------
Net income as reported $ 9,152 $15,794 $ 764
Add back amortization of goodwill -- 733 731
------- ------- -------
Adjusted net income $ 9,152 $16,527 $ 1,495
======= ======= =======
Earnigns per common share as reported - diluted $0.92 $1.60 $0.07
Add back amortization of goodwill -- 0.07 0.07
------- ------- -------
Adjusted earnings per common share - diluted $0.92 $1.67 $0.14
======= ======= =======
Earnigns per common share as reported - basic $0.94 $1.62 $0.07
Add back amortization of goodwill -- 0.07 0.07
------- ------- -------
Adjusted earnings per common share - basic $0.94 $1.69 $0.14
======= ======= =======
17
7. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30
-----------------------------
(In thousands) 2003 2002
------------------------------------------------------------------------
Notes payable to bank, unsecured under
current line of credit; interest rates at
September 30, 2003 and 2002 ranged from
2.79% to 4.00% and 3.43% to 4.75%,
respectively $ 89,000 $ 63,500
Notes payable, unsecured, interest due
monthly at 8.52% 11,400 17,120
Other -- 76
-------- --------
100,400 80,659
Less amount due within one year 5,720 5,759
-------- --------
$ 94,680 $ 74,900
======== ========
During 2003, the Company reached an agreement with its bank group to increase
availability under its unsecured line of credit from $125,000,000 to
$151,000,000 and extend the maturity date to August 31, 2005. Interest on the
line of credit in paid 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, 2003, there was $89,000,000
outstanding on the credit facility.
In April 1995, the Company entered into a $40,000,000 private placement note.
The Company has approximately $11,400,000 outstanding at September 30, 2003 on
the ten-year note which requires annual principal payments of $5,720,000 in
March 2004 and $5,680,000 in March 2005.
The aggregate amounts of all long-term debt to be repaid for the years following
September 30, 2003, are: 2004, $5,720,000; 2005, $94,680,000. 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 approximates $11,887,000 at September
30, 2003. 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.
8. FINANCIAL INSTRUMENTS:
In order to mitigate a portion of the market risk on its variable rate debt, the
Company entered into two separate interest rate swap contracts with major
financial institutions on August 30, 2001. Under the terms of the first contract
which matured in August 2003, the Company received a LIBOR based variable
interest rate and paid a fixed interest rate of 4.24% on a notional amount of
$15 million. Under the terms of the second contract which matures in February
2004, the Company receives a LIBOR based variable interest rate and pays a fixed
interest rate of 4.48% on a notional amount of $15 million. 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.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended, establishes
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.
18
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
Company expects to reclassify approximately $160,000 recorded in accumulated
other comprehensive loss into net income as interest expense, net over the next
fiscal year.
9. 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.
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, 2003, no preferred
shares have been issued.
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 were 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.
10. 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 $1,015,000 in 2003, $948,000 in 2002 and
$792,000 in 2001. The Company follows the policy of funding retirement plan
contributions as accrued.
19
11. INCOME TAXES:
The following table represents the components of the provision for income taxes:
For the Years Ended September 30
---------------------------------------
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Current:
Federal $ 3,043 $ 7,073 $ 4,057
State, local and foreign (218) 1,346 1,671
------- ------- -------
2,825 8,419 5,728
======= ======= =======
Deferred:
Federal 166 521 (154)
State, local and foreign 1,149 731 (841)
------- -------- --------
1,315 1,252 (995)
------- -------- --------
$ 4,140 $ 9,671 $ 4,733
======= ======== ========
Undistributed earnings of the Company's foreign subsidiaries at September 30,
2003, are considered to be indefinitely reinvested. Accordingly, the calculation
of and provision for deferred taxes are not practicable. Upon distribution of
those earnings in the form of dividends or otherwise, the earnings may become
taxable.
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) 2003 2002
-------------- -----------------------------
Deferred tax assets:
Inventory capitalization $ 177 $ 4
Provision for doubtful accounts 370 570
Interest rate swap 92 380
Non deductible liabilities 559 1,029
--------- ---------
Total deferred tax assets 1,198 1,980
Deferred tax liabilities:
Accelerated depreciation 10,113 10,631
Assets deductible for tax purposes 3,715 3,056
Undistributed earnings of
unconsolidated affiliate 494 434
Other, net 550 218
--------- ---------
Total deferred tax liabilities 14,872 14,339
--------- ---------
Net deferred tax liabilities $(13,674) $(12,359)
========= =========
20
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
--------------------------------
2003 2002 2001
---- ---- ----
Tax at U.S. federal statutory rate 34.0% 35.0% 34.2%
State and local income taxes, net
of U.S. federal tax benefit 3.1 3.0 3.5
Equity in net (income) loss of
unconsolidated affiliates (2.2) (1.8) 45.0
Revision of prior year income tax
estimates and adjustment for
non-recurring state income tax matter (4.2) (0.4) -
Other, net 0.4 2.2 3.4
---- ---- ----
31.1% 38.0% 86.1%
==== ==== ====
12. OPERATING LEASES:
The Company leases certain property and equipment from third parties under
non-cancelable operating lease agreements. Rent expense under operating leases
was $1,540,000, $1,671,000 and $1,736,000 for the years ended September 30,
2003, 2002 and 2001, respectively. Future minimum lease payments for
non-cancelable operating leases having a remaining term in excess of one year at
September 30, 2003 are as follows (in thousands):
Amount
------
2004 $ 737
2005 661
2006 515
2007 430
2008 295
Thereafter 115
------
Total $2,753
======
13. 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.
As permitted under APB 25, the Company does not recognize compensation expense
related to stock options, as no stock options are granted below the market price
on the date of grant (see Note 1).
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, 2003 and 2001:
2003 2002
---- ----
Expected dividend yield 1.5% 1.9%
Expected stock price volatility 46.0% 46.0%
Weighted average risk-free interest rate 3.5% 5.9%
Expected life of options (years) 7.0 7.0
The fair value of options granted during 2003 and 2001 are $6.13 and $4.40 per
share, respectively. There were no options granted during 2002.
21
The summary of the status of all of the Company's stock incentive plans as of
September 30, 2003, 2002 and 2001 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, 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
Granted 195,000 $ 10.49 - $ 11.54 $ 10.72
Exercised (150,385) $ 5.34 - $ 11.63 $ 10.33
Canceled (1,000) $ 11.38 $ 11.38
------- --------------------- -------
Balance, September 30, 2003 614,265 $ 5.34 - $ 12.00 $ 9.16
------- --------------------- -------
The following table summarizes information about stock options outstanding and
exercisable:
September 30, 2003
---------------------------------------------------------------
Options Outstanding: Options Exercisable:
------------------------------------ -------------------------
Weighted
Average Weighted
Number Remaining Average Number
Range of Outstanding Contract Exercise Exercisable Weighted
Exercise Prices at 9/30/02 Life Price at 9/30/02 Exercise Price
- --------------------------------------------------------------------------------
$ 5.34 - $ 8.00 223,600 6.74 years $ 5.83 76,600 $ 6.32
$ 8.00 - $12.00 390,665 6.76 years $11.06 191,665 $11.39
- ---------------- ------- ---------- ------ ------- -------
$ 5.34 - $12.00 614,265 6.75 years $ 9.16 268,265 $ 9.94
At September 30, 2003, there were 91,000 shares available for granting of stock
options under the Company's stock option plans. All unexercised options expire
from 2004 to 2013.
22
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) 2003 2002 2001
- -------------------------------------------------------------------------------
Net income ................................... $ 9,152 $15,794 $ 764
------- ------- -------
Shares (denominator) used for diluted share
computations:
Weighted average shares of common stock
outstanding ................................... 9,748 9,762 10,267
Plus: dilutive effect of stock options ........ 151 124 41
------- ------- -------
Adjusted weighted average shares .......... 9,899 9,886 10,308
------- ------- -------
Shares (denominator) used for basic per share
computations:
Weighted average shares of common stock
outstanding ................................... 9,748 9,762 10,267
------- ------- -------
Net income per share data:
Basic ..................................... $ 0.94 $ 1.62 $ 0.07
Diluted ................................... $ 0.92 $ 1.60 $ 0.07
Options to purchase 175,665 and 567,500 shares for the years ended September 30,
2003 and 2001, 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. All outstanding options are included in
the diluted earnings per share calculation above for the year ended September
30, 2002.
15. RELATED PARTY TRANSACTIONS:
The Company has various transactions with Mi-Tech Steel (see Note 5).
The Company has recorded sales of $6,936,000, $4,674,000 and $3,629,000 in 2003,
2002 and 2001, respectively and has accounts receivable of $1,337,000 and
$1,029,000 as of September 30, 2003 and 2002, 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.
16. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 Company adopted SFAS
No. 144 on October 1, 2002 and the adoption of SFAS No. 144 did not have a
material impact on our financial position, results of operations or cash flows.
23
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." 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 adopted the provisions of SFAS No. 146 during the
quarter ended March 31, 2003 and the adoption of SFAS No. 146 did not have a
material impact on our financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34," (FIN 45). FIN 45
requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The adoption of the recognition provision of FIN 45 did not have a
material impact on our financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" (FIN 46). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting right
(variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46, as amended by FASB Staff Position 46-6, "Effective Date of
FIN 46," are effective immediately for VIEs created after January 31, 2003 and
no later than December 31, 2003 for VIEs created before February 1, 2003. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest make additional disclosure in
filings issued after January 31, 2003. The Company is in the process of
evaluating the effect of FIN 46 and has not determined whether its adoption will
have a material impact on our financial position, results of operations or cash
flows.
The FASB also recently issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Standard requires that certain freestanding financial instruments be classified
as liabilities, including mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. The provisions of SFAS
No. 150 relating to certain mandatorily redeemable noncontrolling interests, as
amended by FASB Staff Position 150-3, "Effective Date, Disclosures, and
Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS
No. 150," have been deferred indefinitely. The provisions of SFAS No. 150 are
effective immediately for all other financial instruments. The adoption of SFAS
No. 150 did not have a material impact on our financial position, results of
operations or cash flows.
24
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2003, 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.
As discussed in Note 1 to consolidated financial statements, the Company ceased
amortizing goodwill effective October 1, 2002.
PricewaterhouseCoopers LLP
Louisville, Kentucky
October 29, 2003
24
EXHIBIT 14
Code of Ethics for the Chief Executive Officer, Financial Executives, and
Financial Professionals
Steel Technologies Inc. is strongly committed to conducting its business with
honesty and integrity and in compliance with all applicable laws and
regulations. Financial executives and professionals hold important positions in
our corporate governance structure because of their role in balancing,
protecting and preserving the interests of all of our stakeholders. This Code of
Ethics for the Chief Executive Officer, Financial Executives, and Financial
Professionals contains specific principles to which the Chief Executive Officer,
Chief Financial Officer, Controller, and Tax Manager are expected to adhere.
This Code of Ethics is intended to supplement the Code of Business Conduct. This
code is intended to be our Code of Ethics pursuant to the provisions of Section
406 of the Sarbanes-Oxley Act of 2002 and related rules of the Securities and
Exchange Commission.
All such executives and professionals will:
1. Act with honesty and integrity, avoiding actual or apparent conflicts of
interest in personal and professional relationships.
2. Provide our stakeholders with information that is accurate, complete,
objective, relevant, timely and understandable.
3. Comply with rules and regulations of federal, state, provincial and local
governments, and other appropriate private and public regulatory agencies.
4. Act in good faith, responsibly, with due care, competence and diligence,
without misrepresenting material facts or allowing one's independent
judgment to be subordinated.
5. Respect the confidentiality of information acquired in the course of one's
work except when authorized or otherwise legally obligated to disclose.
Confidential information acquired in the course of one's work will not be
used for personal advantage.
6. Share knowledge and maintain skills important and relevant to our
stakeholders' needs.
7. Proactively promote ethical behavior as a responsible partner among peers
in one's work environment.
8. Achieve responsible use of and control over all assets and resources
employed or entrusted to us.
9. Report known or suspected violations of this Code in accordance with all
applicable rules of procedure.
10. Be accountable for adhering to this Code.
11. Not unduly or fraudulently influence, coerce, manipulate or mislead any
authorized audit or interfere with any auditor engaged in the performance
of an internal or independent audit of our financial statements or
accounting books and records.
We will promptly disclose the nature of any amendment (other than administrative
or non-substantive amendments) to or waiver from this Code of Ethics as may be
required by applicable rules of the Securities and Exchange Commission and the
Nasdaq Stock Market.
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%
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, 333-21359 and 333-91798)
of Steel Technologies Inc. and Subsidiaries of our report dated October 29,
2003, 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 29, 2003 relating to the financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Louisville, Kentucky
December 16, 2003
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradford T. Ray, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies Inc.
for the fiscal year ending September 30, 2003;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 12, 2003
/s/ Bradford. T. Ray
- --------------------
Bradford T. Ray
Chief Executive Officer
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph P. Bellino, certify that:
1. I have reviewed this annual report on Form 10-K of Steel Technologies Inc.
for the fiscal year ending September 30, 2003;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 12, 2003
/s/ Joseph P. Bellino
- ---------------------
Joseph P. Bellino
Chief Financial Officer
EXHIBIT 32.1
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, 2003:
(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 12, 2003
EXHIBIT 32.2
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, 2003:
(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 12, 2003
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, 2003, 2002 and 2001
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 6-14
Report of Independent Auditors
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 Subsidiaries at September 30, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2003, 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 29, 2003
1
Mi-Tech Steel, Inc. and Subsidiary
Consolidated Balance Sheets
September 30
-----------------------------
2003 2002
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 5,562,207 $ 719,026
Trade accounts receivable, less
allowance for doubtful accounts:
$534,006 in 2003 and $483,706 in 2002 ..... 18,733,434 17,722,796
Inventories.................................. 29,012,390 32,102,365
Deferred income taxes........................ 286,348 304,442
Income taxes refundable...................... 574,116 --
Prepaid expenses and other assets............ 78,825 124,224
------------- -------------
Total current assets .................... 54,247,320 50,972,853
------------- -------------
Property, plant and equipment (at cost), net... 30,578,547 25,817,874
------------- -------------
Deferred income taxes - long-term.............. 1,005,341 1,787,014
Other assets .................................. 211,926 55,534
------------- -------------
$ 86,043,134 $ 78,633,275
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 25,665,052 $ 22,030,913
Accrued liabilities ........................ 2,005,007 1,640,537
Long-term debt due within one year ......... 3,940,000 24,500,000
------------- -------------
Total current liabilities ............... 31,610,059 48,171,450
Long-term debt ................................ 22,390,349 --
------------- -------------
Total liabilities ........................ 54,000,408 48,171,450
------------- -------------
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 .......................... 12,842,726 11,261,825
------------- -------------
Total shareholders' equity ............... 32,042,726 30,461,825
------------- -------------
$ 86,043,134 $ 78,633,275
============= =============
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
--------------------------------
2003 2002 2001
- --------------------------------------------------------------------------
Sales .............................. $142,558,685 $141,322,783 $137,335,909
Cost of goods sold ................. 133,730,277 130,950,677 127,597,551
------------ ------------ ------------
Gross profit ..................... 8,828,408 10,372,106 9,738,358
Selling, general and administrative
expenses ......................... 5,609,844 5,448,108 5,430,143
Asset impairment charge (Note 4).... -- -- 18,962,106
------------ ------------ ------------
Operating income (loss) .......... 3,218,564 4,923,998 (14,653,891)
Loss on disposals/writeoffs of
property, plant and equipment .... 33,823 27,949 14,476
Interest expense, net .............. 679,173 568,476 2,203,238
------------ ------------ ------------
Income (loss) before income taxes. 2,505,568 4,327,573 (16,871,605)
Provision (benefit) for income
taxes
Current........................ 124,900 641,678 155,881
Deferred....................... 799,767 1,071,822 (5,468,334)
------------ ------------ ------------
924,667 1,713,500 (5,312,453)
------------ ------------ ------------
Net income (loss) ................ $ 1,580,901 $ 2,614,073 $(11,559,152)
============ ============ ============
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, 2003, 2002 and 2001
---------------------------------------------------------
Class A Class B
Common Stock Common Stock
-------------- --------------
Retained
Shares Amount shares Amount Earnings Total
- --------------------------------------------------------------------------------
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, 2002.. 2,400 $9,600,000 2,400 $9,600,000 $11,261,825 $30,461,825
Net income .......... -- -- -- -- 1,580,901 1,580,901
------ ---------- ----- ---------- ----------- -----------
Balances
September 30, 2003.. 2,400 $9,600,000 2,400 $9,600,000 $12,842,726 $32,042,726
====== ========== ===== ========== =========== ===========
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
---------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................. $ 1,580,901 $ 2,614,073 $(11,559,152)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation ..................... 2,426,109 2,349,177 3,172,617
Deferred income taxes ............ 799,767 1,071,822 (5,468,334)
Provision for losses on trade
accounts receivable.............. 60,000 75,000 102,000
Loss on dispos`als/writeoffs of
property plant and equipment .... 33,823 27,949 14,476
Asset impairment charge (Note 4) . -- -- 18,962,106
(Decrease) Increase in cash
resulting from changes in:
Trade accounts receivable .... (1,070,638) 145,191 (1,512,761)
Inventories .................. 3,089,975 (14,493,340) 16,171,391
Prepaid expenses and other
assets ..................... (110,933) (29,774) 116,399
Accounts payable ............. 3,634,139 4,981,707 (2,499,222)
Accrued liabilities and income
taxes refundable ........... (209,646) (175,398) (250,710)
------------- ------------ ------------
Net cash provided by (used in)
operating activities ............... 10,233,437 (3,433,593) 17,248,810
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment ........................ (7,221,416) (1,225,303) (1,476,163)
Proceeds from sale of property,
plant and equipment .............. 811 1,063,837 63,609
------------- ------------ ------------
Net cash used in investing activities (7,220,605) (161,466) (1,412,554)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ....... 14,250,349 10,000,000 5,000,000
Principal payments on long-term debt (12,420,000) (8,105,240) (21,302,640)
------------- ------------ ------------
Net cash provided by (used in)
financing activities ................ 1,830,349 1,894,760 (16,302,640)
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents .................... 4,843,181 (1,700,299) (466,384)
Cash and cash equivalents, beginning
of year ............................. 719,026 2,419,325 2,885,709
------------ ------------- -------------
Cash and cash equivalents, end
of year ............................ $ 5,562,207 $ 719,026 $ 2,419,325
============ ============ ============
Supplemental Cash Flow Disclosures:
Cash payments for interest ....... $ 774,000 $ 927,000 $ 2,480,000
Cash payments for taxes .......... $ 797,000 $ 293,000 $ 42,000
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 subsidiaries (the Company) owns
and operates four 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.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Mi-Tech Steel,
Alabama, Inc. and Mi-Tech Steel, Mississippi LLC. 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.
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: Depreciation is computed using the straight-line method with the
following estimated useful lives:
Buildings and improvements 10-25 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. Interest costs of approximately $70,000 and
$10,000 were capitalized in 2003 and 2001, respectively. There were no
capitalized interest costs in fiscal 2002.
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
6
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.
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 $22,873,195 $26,838,175
Finished goods and work in process 6,139,195 5,264,190
----------- -----------
$29,012,390 $32,102,365
=========== ===========
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 $ 1,742,025 $ 774,846
Buildings and improvements 19,971,202 14,537,927
Machinery and equipment 23,072,180 19,948,090
Construction in progress 2,309,242 268,194
Assets available for sale 3,834,000 8,769,237
------------ ------------
50,928,649 44,298,294
Less accumulated depreciation (20,350,102) (18,480,420)
------------ ------------
$ 30,578,547 $ 25,817,874
============ ============
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 slitting and pickling operations. In accordance with
Statement of Financial Accounting Standards (SFAS) 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.
In April 2003, the Company restarted its slitting operations in Decatur and is
being reimbursed for operating costs by its shareholders. The Company is
pursuing alternatives to sell its pickling equipment and facility in Decatur,
which has a net book value of approximately $3.8 million at September 30, 2003,
and has classified the assets as held for sale in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which amended
SFAS No. 121.
During the second quarter of fiscal 2001, the Company determined that its 30%
interest in San Diego Coil Center (SDCC), an unconsolidated affiliate 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.
8
5. Long-Term Debt:
Long-term debt at September 30 consists of the following:
September 30
-----------------------------
2003 2002
-----------------------------
Term loan, collateralized, due January
2006; interest rate 2.13% at
September 30, 2003 $12,080,000 $ --
Term loan, collateralized, due February
2003; interest rate 2.39% at
September 30, 2002 -- 12,500,000
Notes payable to bank, collateralized, due
June 2004; interest rate 1.75 and 2.30% at
September 30, 2003 and 2002, respectively 2,000,000 7,000,000
Term loan, collateralized, due June 2006;
interest rate 4.44$ at September 30, 2003 8,250,000 --
Notes payable to bank, collateralized under
line of credit due February 2003; interest
rate 3.50% at September 30, 2002 -- 5,000,000
Notes payable to shareholders,
uncollateralized, due September 2006;
interest rate 3.14% at September 30, 2003 4,000,349 --
----------- -----------
26,330,349 24,500,000
Less amount due within one year 9,940,000 24,500,000
----------- -----------
$22,390,349 $ --
=========== ===========
In January 2003, 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. This term loan requires quarterly principal payments of $210,000
with a final payment of $10,190,000 upon its maturity in January 2006. The loan
is collateralized by certain assets of the Company. The agreement bears interest
at no greater than the federal funds rate. At September 30, 2003, there was
$12,080,000 outstanding on this term loan. This term loan replaced an existing
term loan which had an outstanding balance of $12,500,000 at September 30, 2002
In September 2002, the Company continued an uncommitted line of credit agreement
for $15,000,000, collateralized by certain assets of the Company. The line was
entered into for working capital purposes and is due June 2004. 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, 2003, there was $2,000,000 outstanding on this credit
facility.
9
In September 2003, the Company entered into an $8,250,000 term loan
collateralized by certain assets of the Company. This term loan bears various
interest rate options on the variable interest rate, none of which are greater
than the bank's prime rate. The Company has elected to use the LIBOR based
interest rate on its outstanding borrowings under the agreement. The agreement
requires monthly principal payments of $100,000 beginning November 2003 with a
final payment of $5,150,000 at maturity in June 2006. At September 30, 2003,
there was $8,250,000 outstanding on this term loan. This term loan replaced an
existing line of credit facility which had an outstanding balance of $5,000,000
at September 30, 2002.
Pursuant to an agreement, the Company borrowed a total of $4,000,000 in the form
of $2,000,000 from each of its shareholders on September 30, 2003. The loans are
subordinate to all existing loans and mature September 30, 2006. Principal and
interest are paid at maturity at a LIBOR based interest rate.
The aggregate amount of all long-term debt to be repaid for the years following
September 30, 2003 are:
Amount
-----------
2004 $ 3,940,000
2005 2,040,000
2006 20,350,349
-----------
Total $26,330,349
===========
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 $183,000 in 2003, $191,000 in
2002, and $90,000 in 2001. The Company follows the policy of funding retirement
plan contributions as accrued.
10
7. Income Taxes:
The following table represents the components of the provision for income
taxes:
For the Years Ended September 30
-----------------------------------------
2003 2002 2001
-----------------------------------------
Current:
Federal $ -- $ 441,630 $ 143,789
State and local 124,900 200,048 12,092
----------- ----------- -----------
124,900 641,678 155,881
=========== =========== ===========
Deferred:
Federal 734,921 1,108,263 (5,381,403)
State and local 64,846 (36,441) (86,931)
----------- ----------- -----------
799,767 1,071,822 (5,468,334)
----------- ----------- -----------
$ 924,667 $ 1,713,500 $(5,312,453)
=========== =========== ===========
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
------------------------------
2003 2002
------------------------------
Deferred tax assets:
Asset impairment charge $6,036,544 $ 6,039,116
Alternative minimum tax carryforwards 219,155 304,442
Provision for doubtful accounts 208,262 188,645
Inventory capitalization 84,766 92,200
Other, net 14,770 165,701
----------- ------------
Total deferred tax assets 6,563,497 6,790,104
Deferred tax liabilities:
Accelerated depreciation (5,271,808) (4,698,648)
----------- -----------
Total deferred tax liabilities (5,271,808) (4,698,648)
----------- -----------
Net deferred tax asset $ 1,291,689 $ 2,091,456
=========== ===========
11
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
---- ---- ----
Provision (benefit)at federal
statutory rate 34.0% 34.0% (34.0)%
State and local income taxes, net
of income tax benefit 3.0 3.9 --
Non-deductible capital loss -- -- 2.4
Other (0.1) 1.7 0.1
----- ----- -----
36.9% 39.6% (31.5)%
===== ===== =====
8. Operating Leases:
The Company leases certain property and equipment from third parties under
non-cancelable operating lease agreements. Rent expense under operating leases
was $534,000, $530,000 and $529,000 for the years ended September 30, 2003,
2002, and 2001, respectively. Future minimum lease payments for non-cancelable
operating leases having an initial or remaining term in excess of one year at
September 30, 2003 are as follows:
Amount
-----------
2004 $ 139,000
2005 129,000
2006 99,000
2007 85,000
2008 78,000
Thereafter 99,000
-----------
Total $ 629,000
===========
12
9. 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:
2003 2002 2001
----------- ----------- -----------
Purchases of inventory $41,260,000 $49,863,000 $41,484,000
Sales of inventory 1,865,000 1,176,000 1,330,000
Management fees 1,041,000 996,000 996,000
Operating expense reimbursement 801,000 -- --
Sale of equipment -- 975,000 --
The following presents the related party balances between the Company and its
shareholders at September 30:
2003 2002
----------- -----------
Accounts payable - shareholders $ 8,784,000 $11,015,000
Accounts receivable from shareholders 206,000 2,305,000
Notes payable - shareholders (see Note 5) 4,000,349 --
The Company has a management fee agreement with SDCC for certain services
performed by the Company. The total fee income recorded was $149,600, $232,800,
and $259,800 in 2003, 2002 and 2001, respectively.
13
The Company recorded sales of $1,740,000, $1,185,000, and $990,000 in 2003, 2002
and 2001 respectively and had accounts receivable of $344,000 and $293,000 as of
September 30, 2003 and 2002, 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.
10. Major Customers:
Sales to two customers accounted for 27%, 30% and 23% of the Company's sales in
fiscal 2003, 2002 and 2001, respectively. Accounts receivable from these
customers totaled approximately $6,189,000 and $7,316,000 at September 30, 2003
and 2002, 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.
11.
Subsequent Event (unaudited):
On October 31, 2003, the Company entered into an interest rate swap contract
with a major financial institution in order to mitigate a portion of the market
risk on its $8,250,000 term loan. Under the terms of the contract which matures
in November 2005, the Company will receive a LIBOR based variable interest rate
and will pay a fixed interest rate of 2.42% on a notional amount of $5 million.
The variable interest rate paid on the contract 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.
14