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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1996
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-23320
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OLYMPIC STEEL, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1245650
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5096 Richmond Road, Bedford Heights, Ohio 44146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 292-3800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of March 6, 1997, the aggregate market value of voting stock held by
nonaffiliates of the registrant based on the closing price at which such stock
was sold on The NASDAQ Stock Market on such date approximated $141,248,000. The
number of shares of Common Stock outstanding as of March 6, 1997 was 10,692,000.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange
Act of 1934 within 120 days of the close of its fiscal year ended December 31,
1996, portions of which document shall be deemed to be incorporated by reference
in Part I and Part III of this Annual Report on Form 10-K from the date such
document is filed.
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PAGE 1 OF 88
Exhibit Index Appears on Page 35
2
PART I
ITEM 1. BUSINESS
THE COMPANY
The Company is a leading steel service center that processes and
distributes flat-rolled carbon, stainless and tubular steel products from 11
facilities in six midwestern and eastern states. The Company operates as an
intermediary between steel producers and manufacturers that require processed
steel for their operations. The Company purchases flat-rolled steel typically
from steel producers and responds to its customers' needs by processing steel to
customer specifications and by providing critical inventory and just-in-time
delivery services. Such services reduce customers' inventory levels, as well as
save time, labor and expense for customers, thereby reducing their overall
production costs. The Company's services include both traditional service center
processes of cutting-to-length, slitting, shearing and roll forming and higher
value-added processes of blanking, tempering and plate burning.
The Company is organized into regional operations with domestic
processing and distribution facilities in Connecticut, Pennsylvania, Ohio,
Michigan, Illinois and Minnesota, servicing a diverse base of over 3,400 active
customers located throughout the midwestern, eastern and southern United States.
The Company maintains a southern sales office in Greenville, South Carolina. Its
international sales office is located in Pittsburgh, Pennsylvania and services
customers primarily in Mexico and Puerto Rico.
The Company is incorporated under the laws of the State of Ohio. The
Company's executive offices are located at 5096 Richmond Road, Cleveland, Ohio
44146. Its telephone number is (216) 292-3800.
INDUSTRY OVERVIEW
The steel industry is comprised of three types of entities: steel
producers, intermediate steel processors and steel service centers. Steel
producers have historically emphasized the sale of steel to volume purchasers
and have generally viewed intermediate steel processors and steel service
centers as part of their customer base. However, all three entities can compete
for certain customers who purchase large quantities of steel. Intermediate steel
processors tend to serve as processors in large quantities for steel producers
and major industrial consumers of processed steel, including automobile and
appliance manufacturers.
Services provided by steel service centers can range from storage and
distribution of unprocessed metal products to complex, precision value-added
steel processing. Steel service centers respond directly to customer needs and
emphasize value-added processing of flat-rolled steel and plate pursuant to
specific customer demands, such as cutting-to-length, slitting, shearing, roll
forming, shape correction and surface improvement, blanking, tempering, plate
burning and stamping. These processes produce steel to specified lengths,
widths, shapes and surface characteristics through the use of specialized
equipment. Steel service centers typically have lower cost structures and
provide services and value-added processing not otherwise available from steel
producers.
End product manufacturers and other steel distributors have
increasingly sought to purchase steel on shorter lead times and with more
frequent and reliable deliveries than can normally be provided by steel
producers. Steel service centers generally have lower labor costs than steel
producers and consequently process steel on a more cost-effective basis. In
addition, due to this lower cost structure, steel service centers are able to
handle orders in quantities smaller than would be economical for steel
producers. The net results to customers purchasing products from steel service
centers are lower inventory levels, lower overall cost of raw materials and
decreased manufacturing time and operating expense. The Company believes that
the increasing prevalence of just-in-time inventory needs has made the
value-added inventory, processing and delivery functions performed by steel
service centers increasingly important.
PAGE 2 of 88
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CORPORATE HISTORY
The Company was founded in 1954 as a general steel service center. In
the early 1970's, Michael Siegal (CEO) and Bruce Adelstein (VP-Operations), sons
of two of the principals, began working at the Company. At the end of 1983, they
completed the purchase of the Company, assumed management control and, as part
of an effort to broaden the management base for future expansion, hired David
Wolfort (COO) as general manager. In 1987, Louis Schneeberger (CFO) joined the
Company as chief financial officer.
After acquiring control of the Company, management changed the
Company's business strategy from a focus on warehousing and distributing steel
from a single facility with no major processing equipment to a focus on growth,
geographic and customer diversity and value-added processing. An integral part
of the Company's growth has been the acquisition and start-up of several
processing and sales operations.
In March 1994, the Company completed an initial public offering of 4
million shares of its Common Stock (the IPO), which generated net proceeds of
$57.0 million. Most of the net proceeds of the IPO were used to reduce
borrowings under its revolving credit agreement, which allowed the Company to
continue to fund its growth, including the 1995 acquisition of Lafayette Steel
and its expansion projects in Cleveland and Minneapolis. In August 1996, the
Company completed a follow-on offering of 2.1 million shares of its Common Stock
(the Offering). The $49.1 million of net proceeds from the Offering were used to
repay outstanding bank debt.
BUSINESS STRATEGY
The Company believes that the steel service center and processing
industry continues to be driven by four primary trends: consolidation of
industry participants; increased outsourcing of manufacturing processes by
domestic manufacturers; shift by customers to fewer and larger suppliers; and
increased customer demand for higher quality products and services.
In recognition of these industry dynamics, the Company has focused its
business strategy on achieving profitable growth through the acquisition of
service centers and related businesses and investments in higher value-added
processing equipment and services, while continuing its commitment to expanding
and improving its sales force and information systems. In addition, the Company
plans to expand into new domestic and international markets, increase sales to
existing customers and aggressively pursue new customers. Olympic believes its
depth of management, strategically located facilities, advanced information
systems, reputation for quality and customer service, extensive and experienced
sales force and supplier relationships provide a strong foundation for
implementation of its strategy. Key elements of the Company's strategy are set
forth below.
ACQUISITIONS. It is the Company's strategy to continue to make
selective acquisitions of profitable or turnaround steel service centers and
related businesses. Since 1987, the Company has made four major acquisitions of
other steel service centers:
In January 1995, the Company completed the acquisition of
Lafayette Steel for approximately $52.3 million. The acquisition has
provided the Company an entry to the automotive industry. Lafayette
Steel is a Detroit-based service center and toll processor primarily
serving Michigan, Illinois, Indiana and Ohio. Lafayette Steel's 14
major pieces of processing equipment, including eight presses, have
enabled the Company to broaden its value-added processes by offering
first stage blanking to its existing and prospective customers. Since
the acquisition, Olympic has made significant operational changes. From
a purchasing perspective, Lafayette Steel has benefited from Olympic's
critical mass, purchasing discipline, and inventory management. From a
personnel standpoint, several key changes have been made to complement
the existing management team. These initial changes have focused on
internal functions such as plant operations, information systems,
financial controls, and sales management. The Company recently
completed a 71,000 square foot expansion of its warehouse, at an
estimated cost of approximately $6.1 million. The expansion is expected
to result in a significant reduction in outside storage and freight
costs commencing in the second quarter of 1997.
PAGE 3 of 88
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Eastern Steel & Metal Company ("Eastern Steel") had ceased
operations prior to its purchase by the Company in 1990. The
acquisition provided the Company with access to the eastern market, as
well as Eastern Steel's processing equipment and its distribution
facility that included seven major pieces of processing equipment. In
addition, the acquisition provided the Company's Philadelphia operation
with processing support. Olympic has supported the operation by
purchasing and upgrading its processing equipment and providing working
capital.
In 1990, Olympic purchased Juster Steel, Inc., a profitable
steel service center in Minneapolis, Minnesota, to expand into the
upper midwest and farmbelt states. Two of the former owners and
executive officers are now the general managers for the Company's
Minneapolis operation. The Company has added sales and other personnel
and invested capital to purchase and upgrade major processing equipment
and facilities, including a new plate processing facility which was
completed in 1995. During 1996 the Company purchased additional new
equipment for the plate facility. The Minneapolis operation currently
has 20 major pieces of processing equipment.
In 1987, the Company acquired Viking Steel Company ("Viking
Steel"), located in Chicago. Prior to the acquisition, Viking Steel's
sales had decreased significantly for several years. The acquisition
broadened the Company's geographic coverage through expansion into the
Chicago market, the largest steel consuming market in the United
States, and extended its product line into stainless steel. Olympic
replaced the original management team, purchased a new cut-to-length
line, purchased a second facility in Schaumburg, Illinois during 1992,
and added plate processing equipment to the Schaumburg facility in
1996.
The Company's strategy is to continue to expand geographically by
making acquisitions, primarily east of the Rocky Mountains, with a particular
focus on the southeastern and southern United States.
INVESTMENT IN VALUE-ADDED PROCESSING EQUIPMENT. An integral part of the
Company's growth has been the purchase of major processing equipment and
construction of facilities. Olympic will continue to invest to support its
growth through the addition of major equipment for its existing facilities. The
Company's philosophy is that equipment purchases should be driven by customer
demand. When the results of sales and marketing efforts to, and communication
with, existing and potential customers indicate that there is sufficient
customer demand for a particular product or service, the Company will purchase
the equipment to satisfy that demand.
In 1987, the Company constructed a facility to house its first major
piece of processing equipment, a heavy gauge, cut-to-length line. Since that
time, the Company has added approximately 60 major pieces of processing
equipment. Certain equipment was purchased directly from equipment manufacturers
while the balance was acquired in the Company's acquisitions of other steel
service centers and related businesses.
Over the past two years, the Company has more than doubled its plate
processing capacity. The Company completed a $7.4 million expansion project in
Minneapolis in early 1995. The project included the construction of a new
112,200 square foot plate processing facility to house laser, plasma and oxygen
burning tables and shot blasting equipment. This investment in plate processing
equipment will enable the Company to respond to an accelerating trend of
domestic manufacturers outsourcing certain manufacturing processes and will
allow the Company to further increase its higher value-added processing
services. The Company believes it is among the largest processors and
distributors of steel plate in the United States. Since the response to the
Company's new plate burning capabilities exceeded expectations, the Company
purchased an additional plasma burning table and an additional laser burning
table for the Minneapolis plate processing facility during the fourth quarter of
1996. Two other plate burning tables also were added in the Chicago and
Philadelphia facilities in 1996.
PAGE 4 of 88
5
In response to customer demands for higher tolerances and flatness
specifications, the Company purchased a four-high 1/2" by 72" temper mill and
heavy gauge cut-to-length line with a recoil option based on a customized
design. The new equipment, which is housed in a 127,000 square foot building
that was constructed on property adjoining the Company's Cleveland facilities,
is one of only few of its kind in the United States and incorporates
state-of-the-art technology and unique design specifications. The new equipment
permits the Company to process steel to a more uniform thickness and flatness,
upgrades the quality and consistency of certain of the Company's products and
increases the Company's processing capacity by 120,000 tons per year. The new
facility was constructed at a cost of $18.1 million. Start-up operations
commenced in January 1996 and the facility was operating at full capacity during
the third quarter of 1996. The new equipment has been designed to enable the
Company to produce tempered sheet or coil to customer specifications in smaller
quantities than is available from other sources. By offering customers greater
flexibility with respect to order size, the Company believes it can capture
additional market share.
The expansion of plate processing capacity at the Minneapolis,
Philadelphia and Chicago facilities, and the addition of the new temper mill
facility in Cleveland, were made in response to the growing trend among capital
equipment manufacturers to outsource non-core production processes, such as
plate processing, and to concentrate on engineering, design and assembly. The
Company expects to further benefit from this trend and will continue to purchase
new equipment and upgrade existing equipment to meet this demand.
In January 1997, the Company announced the formation of Olympic Laser
Processing (OLP), a joint venture with the U.S. Steel Group of USX Corporation.
OLP is expected to begin processing laser-welded steel parts for the automotive
industry in 1998. At the same time, the Company also placed an order for a new
$3.5 million tube mill which is expected to replace three of the existing four
mills currently operating in Cleveland. The new mill is expected to become
operational in early 1998. In addition, Olympic is also evaluating the
possibility of constructing a second temper mill facility in the Midstates
Region of the United States, in response to demand for tempered product by
agricultural equipment manufacturers located in the region.
SALES AND MARKETING. The Company believes that its commitment to
quality, service and just-in-time delivery has enabled it to build and maintain
strong customer relationships, while expanding its geographic growth through the
continued upgrading and addition of sales personnel. The Company believes it has
among the largest and most experienced sales force in the industry which is a
significant competitive advantage. The Company's sales force has grown to
approximately 125 from 80 at the beginning of 1994. The efforts of these
individuals translate into approximately 300 direct daily sales calls to
customers in virtually all states in the continental United States. The
continuous interaction between the Company's sales force and active and
prospective customers provides the Company with valuable market information and
sales opportunities, including opportunities for outsourcing and increased
sales.
The Company's sales efforts are further supported by metallurgical
engineers and technical service personnel, who have specific expertise in carbon
and stainless steel and alloy plate.
In the international market, the Company's objective is to service
foreign customers by matching their steel requirements to a specific primary
steel producer. The Company functions as the sales arm of primary producers,
giving them access to customers that they might otherwise not sell or service.
This approach differs from the typical international steel trader that
emphasizes large commodity shipments. Although the Company works principally
with domestic steel producers, it continues to develop relationships with
foreign steel producers. All international sales and payments are made in United
States dollars. International sales were approximately 5.6% of net sales in
1996, and less than 5% of total net sales in both 1995 and 1994.
In January 1997, the Company invested $4 million in Olympic Continental
Resources (OCR), a joint venture with Atlas Iron Processors, Inc. (Atlas) and
Uwe T. Schmidt, OCR's Chief Executive Officer. OCR buys, sells and trades
ferrous and non-ferrous metals and alternate iron products to steel mills and
scrap processors. The venture acquired the business activities previously
conducted by Thyssen Continental Resources LLC, a joint venture between Thyssen
Inc. and Atlas that had revenues of $145 million for fiscal 1996. Olympic has
a 45% share interest in OCR, which is headquartered in Cleveland, Ohio. OCR's
operating results will be included in the Company's 1997 financial statements
accounted for under the equity method.
PAGE 5 of 88
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DEPTH OF MANAGEMENT. The Company attributes a portion of its success
to the depth of its management. In addition to the four principal executive
officers, the Company's management team includes three regional vice presidents
and ten general managers, its MIS Director and its Treasurer - Corporate
Controller. Members of the management team have a diversity of backgrounds
within the steel industry, including management positions at steel producers and
other steel service centers. They average 23 years of experience in the steel
industry and 9 years with the Company. This depth of management allows the
Company to pursue and implement its growth strategy.
PRODUCTS, PROCESSING SERVICES, AND QUALITY STANDARDS
The Company maintains a substantial inventory of coil and plate steel
generally purchased from steel producers. Coil is in the form of a continuous
sheet, typically 36 to 96 inches wide, between 0.015 and 0.625 inches thick, and
rolled into 10 to 30 ton coils. Because of the size and weight of these coils
and the equipment required to move and process them into smaller sizes, such
coils do not meet the requirements, without further processing, of many
customers. Plate is typically thicker than coil and is processed by laser,
plasma or oxygen burning.
Customer orders are entered into computerized order entry systems, and
appropriate inventory is then selected and scheduled for processing in
accordance with the customer's specified delivery date. The Company attempts to
maximize yield by combining customer orders for processing each purchased coil
to the fullest extent practicable.
The Company's services include both traditional service center
processes of cutting-to-length, slitting, shearing and roll forming and higher
value-added processes of blanking, tempering and plate burning to process steel
to specified lengths, widths and shapes pursuant to specific customer orders.
Cutting-to-length involves cutting steel along the width of the coil. Slitting
involves cutting steel to specified widths along the length of the coil.
Shearing is the process of cutting sheet steel, while roll forming is the
process in which flat rolled coils are formed into tubing. Blanking cuts the
steel into specific shapes with close tolerances. Tempering improves the
uniformity of the thickness and flatness of the steel through a cold rolling
process. Plate burning is the process of cutting steel into specific shapes and
sizes.
The following table sets forth the major pieces of processing equipment
used by geographic location.
Processing Cleveland Chicago Detroit Minneapolis Connecticut Philadelphia Total
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(a) (b) (b)
Cutting-to-length /
Decoiling 3 1 3 3 3 -- 13
Blanking -- -- 8 -- -- -- 8
Tempering 1 -- -- -- -- -- 1
Plate processing 2 1 -- 7 2 3 15
Slitting -- -- 3 2 3 -- 8
Shearing 1 1 -- 7 2 -- 11
Roll forming 4 -- -- -- -- -- 4
Shot blasting -- -- -- 1 -- -- 1
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 11 3 14 20 10 3 61
---------- ---------- ---------- ---------- ---------- ---------- ----------
(a) Consists of four facilities.
(b) Consists of two facilities.
The Company's quality control system establishes controls and
procedures covering all aspects of its products from the time the material is
ordered through receipt, processing and shipment to the customer. These controls
and procedures encompass periodic supplier audits, inspection criteria,
traceability and certification. From time to time, the Company has undergone
quality audits by certain of its customers and has met all requirements of those
customers. In addition, the Philadelphia and Minneapolis operations are both ISO
9002 certified, while certain of the Company's other operations are currently
seeking to obtain the ISO certification. Lafayette Steel is one of only a few
domestic service centers to earn Ford's Q1 quality rating. A quality testing lab
was constructed adjacent to the new temper mill facility in Cleveland.
PAGE 6 of 88
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CUSTOMERS AND DISTRIBUTION
The Company processes steel for sale to over 3,400 domestic and foreign
customers. The Company has a diversified customer and geographic base, which
reduces the cyclicality of its business. The top 20 customers accounted for less
than 21% and 23% of net sales in 1996 and 1995, respectively. In addition, the
Company's largest customer accounted for less than 5% and 6% of net sales in
1996 and 1995, respectively. Major domestic customers include automobile
manufacturers and stampers, manufacturers of transportation equipment, material
handling equipment, electrical machinery, storage tanks, food service equipment,
construction equipment, agricultural equipment and appliances, general and plate
fabricators, and steel service centers. Sales to the three largest U.S.
automobile manufacturers and their suppliers, made principally by the Company's
Lafayette Steel operation, and sales to other steel service centers, accounted
for approximately 23% and 13%, respectively, of the Company's net sales in 1996,
and 25% and 11% of net sales in 1995.
While the Company ships products throughout the United States, most of
its customers are located in the midwestern, eastern and southern regions of the
United States. Most domestic customers are located within a 250-mile radius of
one of the Company's processing facilities, thus enabling an efficient delivery
system capable of handling a high frequency of short lead-time orders. The
Company transports most of its products directly to customers via independent
trucking firms, although the Company also owns and operates some trucks in
different locations to facilitate short-distance, multi-stop deliveries.
International products are shipped either directly from the steel producers to
the customer or to an intermediate processor, and then to the customer by rail,
truck or ocean carrier.
The Company produces its processed steel products to specific customer
orders as well as for stock. Many of the Company's customers commit to purchase
on a regular basis with the customer notifying the Company of specific release
dates as the processed products are required. Customers typically notify the
Company of release dates anywhere from a just-in-time basis up to three weeks
before the release date. Therefore, the Company is required to carry sufficient
inventory of raw materials to meet the short lead time and just-in-time delivery
requirements of its customers.
SUPPLIERS
Olympic concentrates on developing relationships with high-quality
domestic integrated and mini mills, as well as foreign steel producers, and
becoming an important customer to such producers. The Company is a major
customer of flat-rolled coil and plate for many of its principal suppliers, but
is not dependent on any one supplier. The Company purchases in bulk from steel
producers in quantities that are efficient for such producers. This enables the
Company to maintain a continued source of supply at what it believes to be
competitive prices. Olympic believes the accessibility and proximity of its
facilities to major domestic steel producers will continue to be an important
factor in maintaining strong relationships with them.
The Company purchases flat-rolled steel for processing at regular
intervals from a number of domestic and foreign producers of primary steel,
including LTV Corporation, U.S. Steel Corporation, National Steel Corporation,
Bethlehem Steel, Rouge Steel, Geneva Steel and Citisteel. The Company believes
that its relationships with its suppliers are good. The Company has no long-term
commitments with any of its suppliers.
COMPETITION
The principal markets served by the Company are highly competitive.
The Company competes with other regional and national steel service centers,
single location service centers and, to a certain degree, steel producers and
intermediate steel processors on a regional basis. The Company has different
competitors for each of its products and within each region. The Company
competes on the basis of price, product selection and availability, customer
service, quality and geographic proximity. Certain of the Company's competitors
have financial and operating resources in excess of those of the Company.
PAGE 7 of 88
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With the exception of certain Canadian operations, foreign steel
service centers are not a material factor in the Company's principal domestic
markets. The Company competes for international sales with many domestic and
foreign steel traders and producers, none of whom dominates or controls the
international markets served by the Company. Many of these international
competitors are also suppliers to the Company.
MANAGEMENT INFORMATION SYSTEMS
Information systems are a critical component of Olympic's growth
strategy. The Company has invested, and will continue to invest, in the advanced
technologies and human resource training required in this area. The Company
believes that its information systems provide it with a significant competitive
advantage. The Company's information systems focus on the following core
application areas:
INVENTORY MANAGEMENT. The Company's information systems track the
status of inventories in all locations on a daily basis. This real-time
information is essential in allowing the Company to closely monitor its
inventory and to continue to improve its inventory turns.
DIFFERENTIATED SERVICES TO CUSTOMERS. The Company's information
services allow it to provide value-added services to customers, including
quality control monitoring and reporting, just-in-time inventory management and
shipping services and on-line order status information.
ADVANCED CUSTOMER INTERACTION. The Company is actively pursuing
opportunities to streamline the cost and time associated with customer and
supplier communications, including electronic data interchange, direct links
from Olympic to key customer information systems and access to information
through the Internet.
INTERNAL COMMUNICATIONS. The Company believes that the continuous
interaction between its sales force and its customer base provides Olympic with
valuable market information and sales opportunities. Transactions are summarized
continuously and the systems generate reports that allow management to monitor
operational performance, as well as the performance for any particular customer.
EMPLOYEES
At December 31, 1996, the Company employed 952 people. Approximately
330 of the Company's hourly plant personnel at the Minneapolis and Lafayette
Steel facilities are represented by four separate collective bargaining units.
Collective bargaining agreements with these units expire in 1998 and 1999. The
Company has never experienced a work stoppage and believes that its relationship
with its employees is good.
SERVICE MARKS, TRADE NAMES AND PATENTS
The Company conducts its business under the name "Olympic Steel." A
provision of federal law grants exclusive rights to the word "Olympic" to the
U.S. Olympic Committee. The U.S. Supreme Court has recognized, however, that
certain users may be able to continue to use the word based on long-term and
continuous use. The Company has used the name Olympic Steel since 1954, but is
prevented from registering the name "Olympic" and from being qualified to do
business as a foreign corporation under that name in certain states. In such
states, the Company has registered under different names, including "Oly Steel"
and "Olympia Steel." The Company's wholly-owned subsidiary, Olympic Steel
Lafayette, Inc., does business in certain states under the names "Lafayette
Steel and Processing" and "Lafayette Steel."
PAGE 8 of 88
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GOVERNMENT REGULATION
The Company's operations are governed by many laws and regulations,
including those relating to workplace safety and worker health, principally the
Occupational Safety and Health Act and regulations thereunder. The Company
believes that it is in material compliance with these laws and regulations and
does not believe that future compliance with such laws and regulations will have
a material adverse effect on its results of operations or financial condition.
ENVIRONMENTAL
The Company's facilities are subject to certain federal, state and
local requirements relating to the protection of the environment. The Company
believes that it is in material compliance with all environmental laws, does not
anticipate any material expenditures to meet environmental requirements and does
not believe that compliance with such laws and regulations will have a material
adverse effect on its results of operations or financial condition.
CYCLICALITY IN THE STEEL INDUSTRY; IMPACT OF CHANGING STEEL PRICES
The principal raw material used by the Company is flat-rolled carbon
and stainless steel that the Company typically purchases from steel producers.
The steel industry as a whole is cyclical, and at times pricing and availability
in the steel industry can be volatile due to numerous factors beyond the control
of the Company, including general, domestic and international economic
conditions, labor costs, production levels, competition, import duties and
tariffs and currency exchange rates. This volatility can significantly affect
the availability and costs of raw materials for the Company.
Steel service centers maintain substantial inventories of steel to
accommodate the short lead times and just-in-time delivery requirements of their
customers. Accordingly, the Company purchases steel in an effort to maintain its
inventory at levels that it believes to be appropriate to satisfy the
anticipated needs of its customers based upon historic buying practices,
contracts with customers and market conditions. The Company's commitments for
steel purchases are generally at prevailing market prices in effect at the time
the Company places its orders. The Company has no long-term, fixed-price steel
purchase contracts. When raw material prices increase, competitive conditions
will influence how much of the steel price increases can be passed on to the
Company's customers. When raw material prices decline, customer demands for
lower prices could result in lower sale prices and, as the Company uses existing
steel inventory, lower margins. Changing steel prices therefore could adversely
affect the Company's net sales, gross margins and net income.
CYCLICALITY OF DEMAND; SALES TO THE AUTOMOTIVE INDUSTRY
Certain of the Company's products are sold to industries that
experience significant fluctuations in demand based on economic conditions or
other matters beyond the control of the Company. The Company's diversified
customer and geographic base reduce such cyclicality; however, no assurance can
be given that the Company will be able to increase or maintain its level of
sales in periods of economic stagnation or downturn.
Sales of the Company's products for use in the automotive industry
accounted for approximately 23% of the Company's net sales in 1996 and
approximately 25% in 1995. Such sales include sales directly to automotive
manufacturers and to manufacturers of automotive components and parts. The
automotive industry experiences significant fluctuations in demand based on
numerous factors such as general economic conditions and consumer confidence.
The automotive industry is also subject, from time to time, to labor problems.
The contracts between the United Automobile Workers ("UAW") and the Canadian
Auto Workers ("CAW") and General Motors Corporation, Chrysler Corporation and
The Ford Motor Company in both the United States and Canada were extended in
1996. There can be no assurance, however, that the new agreements will preclude
future work stoppages. Any prolonged disruption in business arising from work
stoppages by automotive manufacturers could have a material adverse effect on
the Company's results of operations.
PAGE 9 of 88
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FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "expect," "believe," "estimated," "project" and similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks, uncertainties
and assumptions including, but not limited to, those identified above; potential
equipment malfunction; equipment installation and construction delays; the
adequacy of computer system investments; the successes of joint ventures; and
the availability of acquisition opportunities. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those expected, believed, estimated or
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.
PAGE 10 of 88
11
ITEM 2. PROPERTIES
The Company believes that its properties are strategically situated
relative to its customers and each other, allowing the Company to support
customers from multiple locations. This permits the Company to provide inventory
and processing services which are available at one operation but not another.
Steel is shipped from the most advantageous facility, regardless of where the
order was taken. The facilities are located in the hubs of major steel
consumption markets, and within a 250-mile radius of most of the Company's
customers, a distance approximating the one-day driving and delivery limit for
truck shipments. The following table sets forth certain information concerning
the Company's properties:
SQUARE OWNED OR
OPERATION LOCATION FEET FUNCTION LEASED
--------- -------- ---- -------- ------
Cleveland Bedford Heights, 127,000 Corporate headquarters and coil Owned
Ohio(1) processing and distribution center
Bedford Heights, 121,500 Coil processing, distribution center Owned
Ohio(1) and offices
Bedford Heights, 59,500 Plate processing and distribution Leased(2)
Ohio(1) center
Cleveland, Ohio 118,500 Roll form processing, distribution Owned
center and offices
Minneapolis Plymouth, Minnesota 196,800 Coil processing, distribution center Owned
and offices
Plymouth, Minnesota 112,200 Plate processing, distribution center Owned
and offices
Lafayette Detroit, Michigan 256,000 Coil processing, distribution center Owned
and offices
Connecticut Milford, Connecticut 134,000 Coil and plate processing, Owned
distribution center and offices
Chicago Schaumburg, Illinois 80,500 Plate processing, distribution center
and offices
Elk Grove Village, 48,000 Coil processing and distribution center Owned
Illinois
Philadelphia Lester, Pennsylvania 92,500 Plate processing, distribution center Leased
and offices
- -----------------
(1) The Bedford Heights facilities are all adjacent properties.
(2) This facility is leased from a related party pursuant to the terms of
a triple net lease for $195,300 per year. The lease expires in June
2000, subject to two ten-year renewal options.
The Company also has a sales office in Greenville, South Carolina. Its
international sales office is located in Pittsburgh, Pennsylvania. All of the
properties listed in the table as owned are subject to mortgages securing
industrial revenue bonds, taxable rate notes and the Company's credit agreement.
Management believes that the Company will be able to accommodate its capacity
needs for the immediate future at its existing facilities.
PAGE 11 of 88
12
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal actions that it believes are
ordinary in nature and incidental to the operation of its business. In the
opinion of management, the outcome of the proceedings to which the Company is
currently a party will not have a material adverse effect upon its operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included in this Report pursuant to Instruction 3
of Item 401(b) of Regulation S-K. The following is a list of the executive
officers of the Company and a brief description of their business experience.
Each executive officer will hold office until his successor is chosen and
qualified.
Michael D. Siegal, age 44, has served as President and Chief Executive
Officer of the Company since 1984, and as Chairman of the Board of Directors
since January 1, 1994. He has been employed by the Company in a variety of
capacities since 1974. Mr. Siegal is a member of the Executive Committee for the
Steel Service Center Institute (SSCI). He is also a member of the American Iron
and Steel Institute, presently serving on its Associate Member Committee. He
served as National Chairman of Israel Bonds during the period 1991-1993 and
presently serves as a member of the Executive Committee of the Development
Corporation for Israel and as budget chairman for the Cleveland Jewish Community
Federation. He is a member of the Board of Directors of American National Bank
(Cleveland, Ohio) and the Cleveland Lumberjacks, a professional hockey team.
R. Louis Schneeberger, age 42, has served as Chief Financial Officer
and director of the Company since 1987. Prior to that time, Mr. Schneeberger was
employed by Arthur Andersen LLP for ten years, concentrating on mergers,
acquisitions, and auditing. He is also Chairman of the Board of Directors of
Royal Appliance Mfg. Co. (a New York Stock Exchange listed company that is an
assembler and distributor of vacuum cleaners and other floor care products), a
certified public accountant, a trustee of the Achievement Center for Children,
and a member of the Business Advisory Council of Kent State University.
David A. Wolfort, age 44, has served as Chief Operating Officer since
1995 and a director of the Company since 1987. He previously served as Vice
President - Commercial from 1987 to 1995, after having joined the Company in
1984 as General Manager. Mr. Wolfort's duties include the management of all
sales, purchasing and operational aspects of each region. Prior to joining the
Company, Mr. Wolfort spent eight years with Sharon Steel, a primary steel
producer, in a variety of sales assignments, including General Manager-Field
Sales, Sharon Steel Products and was a steel fellow with the American Iron and
Steel Institute. Mr. Wolfort is the past president of SSCI's Northern Ohio
Chapter and is presently Vice Chairman of its Governmental Affairs Committee and
a National Chapter Director. He is also a trustee of Health Hill Hospital for
Children.
Bruce S. Adelstein, age 43, serves as Vice President - Operations. He
has served as a Vice President and a director of the Company since 1984. He has
been employed by the Company in a variety of operating capacities since 1972.
Mr. Adelstein's duties include the supervision of steel processing, corporate
regional steel purchasing and specific regional sales.
PAGE 12 of 88
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on NASDAQ under the symbol "ZEUS."
The following table sets forth, for each quarter in the two year period ended
December 31, 1996, the high and low sales prices of the Company's Common Stock
on NASDAQ:
HIGH LOW
---------------- -----------------
1995
First quarter...................... 11.50 9.50
Second quarter..................... 11.00 9.00
Third quarter...................... 10.88 8.88
Fourth quarter..................... 10.13 7.50
1996
First quarter...................... 10.88 8.50
Second quarter..................... 28.63 10.13
Third quarter...................... 30.25 22.38
Fourth quarter..................... 29.75 20.25
HOLDERS OF RECORD
On March 6, 1997, the Company believed there were approximately 12,000
beneficial holders of the Company's Common Stock.
DIVIDENDS
The Company presently retains all of its earnings, and anticipates that
all of its future earnings will be retained to finance the expansion of its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. Any determination to pay cash dividends in the future
will be at the discretion of the Board of Directors after taking into account
various factors, including the Company's financial condition, results of
operations, current and anticipated cash needs, plans for expansion and
restrictions under the Company's credit agreements.
PAGE 13 of 88
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected data of the Company for each of
the five years in the period ended December 31, 1996. The data presented should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31,
(in thousands, except per share data)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Tons sold
Direct 1,022 931 685 618 565
Toll 150 155 10 3 2
Total 1,172 1,086 695 621 567
Net sales $560,062 $554,469 $381,906 $313,810 $275,415
Cost of sales 436,553 446,513 304,777 250,707 220,626
Gross margin 123,509 107,956 77,129 63,103 54,789
Operating expenses 93,127 85,855 58,836 50,519 46,635
Operating income 30,382 22,101 18,293 12,584 8,154
Interest expense 4,301 10,746 3,761 4,480 4,699
Receivable securitization expense 3,393 107 -- -- --
Income before taxes 22,688 11,248 14,532 8,104 3,455
Income taxes 8,569 4,504 5,834 -- --
Reinstatement of deferred income taxes (a) -- -- 7,800 -- --
Net income 14,119 6,744 898 8,104 3,455
Net income per share (b) $ 1.50 $ 0.78 $ 0.12
Weighted average shares outstanding (b) 9,427 8,600 7,778
Pro forma net income (c) $ 9,049 $ 7,376
Pro forma net income per share (d) $ 1.05 $ 0.86
Pro forma weighted average
shares outstanding (d) 8,600 8,600
Balance Sheet Data:
Current assets $152,255 $124,371 $155,178 $123,787 $105,196
Current liabilities 36,267 31,226 37,767 48,930 29,381
Working capital 115,988 93,145 117,411 74,857 75,815
Total assets 241,130 202,072 200,987 151,947 133,102
Total debt 64,582 98,540 93,437 95,330 83,970
Shareholders' equity 137,327 73,984 67,240 9,347 20,993
(a) Effective January 1, 1994, the Company changed its income tax status
from an S corporation to a C corporation. This change required a
reinstatement of deferred income taxes as a one-time charge of $7,800
to 1994 earnings.
(b) Shares outstanding and net income per share data prior to 1994 is not
meaningful and therefore has not been presented.
(c) Unaudited pro forma net income reflects: (i) the reduction in interest
expense resulting from the application of net proceeds from the sale of
4 million shares of Common Stock on March 17, 1994, (ii) the reduction
of certain compensation expense, net of additional costs to be incurred
as a public company, and (iii) assumes the Company is subject to income
tax as a C corporation.
(d) Unaudited pro forma net income per share has been calculated by
dividing pro forma net income by 8,600 shares, the number of shares
outstanding after the March 1994 initial public offering date.
PAGE 14 of 88
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by numerous external
factors, such as general economic and political conditions, competition, and
steel pricing and availability.
Olympic sells a broad range of products, many of which have different
gross margins. Moreover, products that have more value-added processing
generally have a greater gross margin. Accordingly, the Company's overall gross
margin is affected by product mix and the amount of processing performed, as
well as volatility in selling prices and material purchase costs. With the
acquisition of Lafayette Steel as of January 1, 1995, the Company performs toll
processing of customer-owned steel. Toll processing, substantially all of which
is performed by Lafayette Steel, generally results in lower selling prices and
gross margin dollars per ton but higher gross margin percentages than the
Company's historical direct sales.
Financing costs include interest expense on debt and costs associated
with the $65 million three year accounts receivable securitization program which
commenced in December 1995 (the Financing Costs). Interest rates paid by the
Company under its credit agreement are generally based on prime or LIBOR plus a
premium (the Premium) determined quarterly, which varies based on the Company's
operating performance and financial leverage. Receivable securitization costs
are based on commercial paper rates calculated on the amount of receivables
sold.
In March 1994, the Company completed its initial public offering of 4
million shares of its Common Stock (the IPO), which generated net proceeds of
$57.0 million. In August 1996, the Company completed a follow-on stock offering
of 2.1 million shares of common stock (the Offering). The net proceeds from the
Offering, which totaled $49.1 million, were used to repay outstanding bank
debt.
The Company sells certain products internationally, primarily in Mexico
and Puerto Rico. All international sales and payments are made in United States
dollars. These sales historically involve the Company's direct representation of
steel producers and may be covered by letters of credit or trade receivable
insurance. Typically, international sales are more transactional in nature with
lower gross margins than domestic sales. Domestic steel producers generally
supply domestic customers before meeting foreign demand, particularly during
periods of supply constraints. As a result, domestic and international sales
tend to be countercyclical.
Because the Company conducts its operations generally on the basis of
short-term orders, backlog is not a meaningful indicator of future performance.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data expressed
as a percentage of net sales:
1996 1995 1994
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.9 80.5 79.8
------ ------ ------
Gross margin 22.1 19.5 20.2
Operating expenses 16.6 15.5 15.4
------ ------ ------
Operating income 5.4 4.0 4.8
Interest and receivable securitization expense 1.4 2.0 1.0
------ ------ ------
Income before taxes 4.1 2.0 3.8
Income taxes 1.5 0.8 1.5
Reinstatement of deferred income taxes 0.0 0.0 2.0
------ ------ ------
Net income 2.5% 1.2% 0.2%
====== ====== ======
PAGE 15 of 88
16
1996 COMPARED TO 1995
Tons sold increased 7.9% to 1,172 thousand in 1996 from 1,086 thousand
in 1995. Tons sold in 1996 include 1,022 thousand from direct sales and 150
thousand from toll processing, compared with 931 thousand from direct sales and
155 thousand from toll processing in 1995. All but one of the Company's
operations achieved increases in tons sold in 1996.
Net sales increased by $5.6 million, or 1.0%, to $560.1 million from
$554.5 million in 1995, despite a 6.4% decline in average selling prices. The
largest decline in average selling prices related to stainless steel products.
International sales represented 5.6% of consolidated net sales in 1996, compared
to 4.7% in 1995.
As a percentage of net sales, gross margin increased to 22.1% from
19.5% last year. The increase is attributable to the impact of centralized steel
purchasing efforts, improved inventory turns, and an increase in higher
value-added processing in 1996.
As a percentage of net sales, operating expenses increased to 16.6% in
1996 from 15.5% in 1995. The increase is primarily attributable to lower average
selling prices in 1996. On a per ton basis, operating expenses remained
constant, totaling $79 in both 1996 and 1995. Operating expenses in 1996 include
incremental costs associated with the new Cleveland temper mill and Minneapolis
plate processing facilities, expansion of plate processing capabilities in
Philadelphia, the addition and training of a third shift at the Minneapolis coil
processing facility and increased management information systems expenditures.
Financing Costs decreased 29.1% to $7.7 million in 1996 from $10.9
million in 1995. The decrease is attributable to lower average borrowings
outstanding in 1996, primarily as a result of the Offering and lower average
inventory levels. The decrease was further effected by lower borrowing rates in
1996 and rate savings associated with the receivable securitization program
implemented in December 1995. Overall effective borrowing rates decreased to
7.1% in 1996 from 7.7% in 1995 as a result of lower prime and LIBOR rates and
lower Premiums in the current year. Premiums for the quarter commencing March 1,
1997, will continue to be 0% for prime and .75% for LIBOR.
Income before taxes increased $11.4 million, or 101.7%, to $22.7
million in 1996 from $11.2 million in 1995. Income taxes computed on 1996
earnings represented 37.8% of pre-tax income or $8.6 million versus 40.0% or
$4.5 million last year. The decrease in income taxes as a percentage of pretax
income is attributable to the implementation of tax planning strategies in 1996.
Income taxes for 1997 are expected to approximate the 1996 percentage.
Net income increased to $14.1 million or $1.50 per share in 1996, from
$6.7 million, or $.78 per share in 1995. As a result of the Offering, weighted
average shares outstanding increased from 8.6 million in 1995 to 9.4 million in
1996. Total shares outstanding since the Offering have approximated 10.7
million.
1995 COMPARED TO 1994
Tons sold increased 56.4% to 1,086 thousand in 1995 from 695 thousand
in 1994. Tons sold in 1995 include 931 thousand from direct sales and 155
thousand from toll processing, compared with 685 thousand from direct sales and
10 thousand from toll processing in 1994.
Net sales increased by $172.6 million, or 45.2%, to $554.5 million in
1995 from $381.9 million in 1994. The increase was primarily attributable to the
inclusion of Lafayette Steel's results of operations in 1995. All but one of the
Company's other operations achieved net sales increases in 1995. International
sales, which were less than 5% of total net sales in both 1995 and 1994, nearly
tripled between years as a result of domestic steel producers seeking foreign
markets for their products during the last half of 1995.
As a percentage of net sales, gross margin decreased to 19.5% from
20.2% in 1994. The decrease is attributable to the impact of Lafayette Steel,
which had gross margins lower than the Company's other domestic operations, and
an increase in the comparatively lower margin international sales, offset by
higher gross margins from the Company's other domestic operations.
PAGE 16 of 88
17
As a percentage of net sales, operating expenses remained relatively
constant between years. Operating expenses include start-up costs related to the
Cleveland temper mill and Minneapolis plate processing facilities in 1995.
Interest expense increased $7.0 million to $10.7 million in 1995 from
$3.8 million in 1994. The increase was attributable to higher average borrowings
associated with the Lafayette Steel acquisition, the effect of higher priced
steel in inventory in 1995, and higher effective borrowing rates. Overall
effective borrowing rates increased to 7.7% in 1995 from 5.7% in 1994 as a
result of increases in the prime rate and LIBOR in 1995, and higher Premiums.
Premiums in 1995 ranged from .25% to 1% for prime, and 1.25% to 2% for LIBOR.
Income before taxes decreased $3.3 million, or 22.6%, to $11.2 million
in 1995 from $14.5 million in 1994. Income taxes computed on 1995 earnings
represented 40.0% of pre-tax income or $4.5 million versus 40.1% or $5.8 million
in 1994. A one-time $7.8 million charge to record deferred income taxes
associated with the IPO was also recorded in 1994.
Net income totaled $6.7 million or $.78 per share in 1995, compared to
$.9 million, or $.12 per share in 1994 after recording the reinstatement of
deferred income taxes. Excluding the reinstatement of deferred income taxes in
1994, net income would have been $1.12 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including strategic acquisitions, the purchase and upgrading of processing
equipment and services, the construction and upgrading of related facilities and
additional working capital. The Company uses cash generated from operations,
long-term debt obligations, proceeds from the Company's accounts receivable
securitization program and leasing transactions to fund these requirements.
Historically, the Company has used revolving credit borrowings under its bank
credit facility to finance its working capital requirements and has financed
acquisitions and capital additions from the proceeds of long-term indebtedness
or leases.
Net cash from operating activities primarily represents net income plus
non-cash charges for depreciation and amortization, and changes in working
capital. During 1996, $20.2 million of cash generated from net income and
non-cash charges was offset by $20.1 million of cash used for working capital
purposes.
Working capital at December 31, 1996 increased $22.8 million or 24.5%
from the end of the prior year. The increase is primarily attributable to a
$25.3 million increase in inventory offset in part by a $10.0 million increase
in accounts payable resulting from foreign inventory purchases received at the
end of 1996.
As of December 31, 1996, $55.0 million of eligible receivables were
sold under the Company's accounts receivable securitization program, compared to
$53.7 million at December 31, 1995. The amount of trade receivables sold by the
Company typically changes monthly depending upon the level of defined eligible
receivables available for sale at each month end.
Net cash used for investing activities in 1996 consisted of $15.5
million of capital expenditures, primarily related to the construction of a
71,000 square foot expansion of Lafayette Steel's existing facility, completion
of the temper mill facility, processing equipment purchased under a lease buyout
option, additional plasma burning tables, upgrading the Company's information
systems, and construction of additional office space. Significant investing
activities for 1997 include $6.0 million in capital contributions for two joint
ventures and the purchase of a new $3.5 million tubing mill, which is
anticipated to become operational in 1998. The Company is also evaluating the
possibility of constructing a second temper mill facility in the Midstates
Region of the United States, and developing a more significant presence in the
Southeast Region of the country.
Cash flows from financing activities in 1996 consisted of $49.1 million
of net proceeds from the Offering, offset by net debt repayments of $33.6
million.
PAGE 17 of 88
18
At December 31, 1996, the Company's bank group credit agreement
consists of an unsecured revolving credit component of $50 million and letter of
credit commitments of approximately $76.1 million (the Credit Facility). In
January 1997, the revolving credit component was increased to $60 million. The
Credit Facility, which matures on June 30, 1999, contains restrictive covenants
which require minimum net worth levels, maintenance of certain financial ratios
and limitations on capital expenditures. The Company is in compliance with all
covenants. At December 31, 1996, approximately $3.5 million in unused revolving
credit borrowing availability existed under the Credit Facility.
The Company believes that funds available under the Credit Facility,
other credit and financing agreements and funds generated from operations will
be sufficient to provide the Company with the liquidity necessary to fund its
anticipated working capital requirements and capital expenditure requirements
over the next 12 months. Capital requirements are subject to change as business
conditions warrant and opportunities arise. In connection with its internal and
external expansion strategies, the Company may from time to time seek additional
funds to finance other new facilities and significant improvements to processing
equipment to respond to customers' demands.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
personnel, processing equipment, purchased steel, and borrowings under the
various credit agreements. The Company does not believe that inflation has had a
material effect on its operating income over the periods presented. However, it
has and could have a material effect on interest expense based on inflation's
impact on amounts borrowed and prime and LIBOR borrowing rates.
PAGE 18 of 88
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
the Board of Directors of
Olympic Steel, Inc.:
We have audited the accompanying consolidated balance sheets of Olympic
Steel, Inc. (an Ohio corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Olympic Steel, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
February 3, 1997.
PAGE 19 OF 88
20
ITEM 8. FINANCIAL STATEMENTS
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands, except per share data)
1996 1995 1994
----------- ----------- ----------
Net sales $ 560,062 $ 554,469 $ 381,906
Cost of sales 436,553 446,513 304,777
--------- --------- ---------
Gross margin 123,509 107,956 77,129
Operating expenses
Warehouse and processing 29,881 28,307 19,806
Administrative and general 25,089 21,345 14,090
Distribution 16,585 16,155 11,734
Selling 13,475 13,692 9,466
Occupancy 3,769 3,092 1,906
Depreciation and amortization 4,328 3,264 1,834
--------- --------- ---------
Total operating expenses 93,127 85,855 58,836
--------- --------- ---------
Operating income 30,382 22,101 18,293
Interest expense 4,301 10,746 3,761
Receivable securitization expense 3,393 107 --
--------- --------- ---------
Income before taxes 22,688 11,248 14,532
Income taxes 8,569 4,504 5,834
Reinstatement of deferred income taxes -- -- 7,800
--------- --------- ---------
Net income $ 14,119 $ 6,744 $ 898
========= ========= =========
Net income per share $ 1.50 $ 0.78 $ 0.12
========= ========= =========
Weighted average shares outstanding 9,427 8,600 7,778
Pro forma income data (unaudited):
Income before taxes $ 14,532
Supplemental pro forma adjustments:
Interest savings 501
Reduction in compensation 83
Income taxes (6,067)
---------
Pro forma net income $ 9,049
=========
Pro forma net income per share $ 1.05
=========
Pro forma weighted average shares outstanding 8,600
The accompanying notes are an integral part of these statements.
PAGE 20 of 88
21
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(in thousands)
1996 1995
----------- ---------
ASSETS
Cash $ 2,018 $ 1,884
Accounts receivable 9,483 7,405
Inventories 138,238 112,986
Prepaid expenses and other 2,516 2,096
--------- ---------
Total current assets 152,255 124,371
--------- ---------
Property and equipment 93,954 78,452
Accumulated depreciation (14,954) (10,886)
--------- ---------
Net property and equipment 79,000 67,566
--------- ---------
Goodwill 9,875 10,135
--------- ---------
Total assets $ 241,130 $ 202,072
========= =========
LIABILITIES
Current portion of long-term debt $ 1,869 $ 4,768
Accounts payable 25,267 15,220
Accrued payroll 4,610 2,922
Accrued and deferred income taxes 280 3,246
Other accrued liabilities 4,241 5,070
--------- ---------
Total current liabilities 36,267 31,226
--------- ---------
Revolving credit agreement 46,457 51,338
Industrial revenue bonds 8,405 9,565
Taxable rate notes 7,200 7,900
Term loans 651 24,969
--------- ---------
Total long-term debt 62,713 93,772
--------- ---------
Deferred income taxes 4,823 3,090
--------- ---------
Total liabilities 103,803 128,088
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, without par value, 5,000 shares authorized,
no shares issued or outstanding -- --
Common stock, without par value, 20,000 shares authorized,
10,692 and 8,600 issued and outstanding in 1996 and 1995, respectively 106,319 57,095
Retained earnings 31,008 16,889
--------- ---------
Total shareholders' equity 137,327 73,984
--------- ---------
Total liabilities and shareholders' equity $ 241,130 $ 202,072
========= =========
The accompanying notes are an integral part of these balance sheets.
PAGE 21 of 88
22
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income $ 14,119 $ 6,744 $ 898
Adjustments to reconcile net income to net
cash from (used for) operating activities-
Depreciation and amortization 4,328 3,264 1,834
Long-term deferred income taxes 1,733 (1,713) 4,803
-------- -------- --------
20,180 8,295 7,535
Changes in working capital:
Accounts receivable (2,388) 54,076 (7,018)
Inventories (25,252) 24,310 (23,713)
Prepaid expenses and other (420) (165) (491)
Accounts payable 10,047 (27,590) 109
Accrued payroll and other accrued liabilities 859 959 2,648
Accrued and deferred income taxes (2,966) (134) 2,980
-------- -------- --------
(20,120) 51,456 (25,485)
-------- -------- --------
Net cash from (used for) operating activities 60 59,751 (17,950)
-------- -------- --------
Cash flows from investing activities:
Acquisition of Lafayette Steel (including working capital of $28,532) -- (52,345) --
Temper mill facility and equipment (1,411) (7,979) (8,689)
Plate facility and processing equipment (1,419) (2,063) (5,327)
Lafayette Steel facility expansion (4,445) -- --
Purchase of previously leased processing equipment (1,855) -- --
Tubing facility and equipment -- (1,448) (1,401)
Other capital expenditures, net (6,372) (1,249) (1,653)
-------- -------- --------
Net cash used for investing activities (15,502) (65,084) (17,070)
-------- -------- --------
Cash flows from financing activities:
Revolving credit agreement (4,881) (8,414) (18,233)
Net proceeds from sale of common stock 49,100 -- 56,995
Proceeds from stock options exercised 124 -- --
Proceeds from term loans and IRB's -- 16,100 18,000
Repayments of term loans, IRB's, and taxable rate notes (28,767) (3,468) (1,660)
Unexpended industrial revenue bond funds -- 2,281 (2,281)
S corporation dividends paid -- -- (17,500)
-------- -------- --------
Net cash from financing activities 15,576 6,499 35,321
-------- -------- --------
Cash:
Net increase 134 1,166 301
Beginning balance 1,884 718 417
-------- -------- --------
Ending balance $ 2,018 $ 1,884 $ 718
======== ======== ========
The accompanying notes are an integral part of these statements.
PAGE 22 of 88
23
OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
COMMON RETAINED
STOCK EARNINGS
---------- ---------
Balance at December 31, 1993 $ 100 $ 9,247
Net income -- 898
Net proceeds from sale of 4,000 shares of common stock 56,995 --
-------- --------
Balance at December 31, 1994 57,095 10,145
Net income -- 6,744
-------- --------
Balance at December 31, 1995 57,095 16,889
NET INCOME -- 14,119
NET PROCEEDS FROM SALE OF 2,084 SHARES OF COMMON STOCK 49,100 --
EXERCISE OF 8 STOCK OPTIONS 124 --
-------- --------
BALANCE AT DECEMBER 31, 1996 $106,319 $ 31,008
======== ========
The accompanying notes are an integral part of these statements.
PAGE 23 of 88
24
OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively the Company
or Olympic), after elimination of intercompany accounts and transactions.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION RISKS
The Company is a major customer of flat-rolled coil and plate steel for many of
its principal suppliers, but is not dependent on any one supplier. In 1996, the
Company purchased approximately 18% of its total steel requirements from a
single supplier.
INVENTORIES
Inventories are stated at the lower of cost or market and include the cost of
purchased steel, internal and external processing and freight. Cost is
determined using the specific identification method.
PROPERTY AND EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives ranging from 3 to 30 years.
GOODWILL AND AMORTIZATION
Goodwill includes the cost in excess of fair value of the net assets acquired
and is being amortized on a straight-line method over 40 years. In the event
that facts and circumstances indicate that the value of goodwill or other
long-lived assets may be impaired, the Company evaluates recoverability to
determine if a write-down to market value is required. Goodwill amortization
expense totaled $260 in both 1996 and 1995. Amortization expense in 1994 totaled
$132 and related to a covenant not to compete agreement that expired in 1994.
Accumulated amortization of goodwill totaled $520 and $260 at December 31, 1996
and 1995, respectively.
REVENUE RECOGNITION
Revenue is recognized when steel is shipped to the customer. Sales returns and
allowances are treated as reductions to sales and are provided for based on
historical experience and current estimates.
INCOME TAXES
In the first quarter of 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 utilizes the liability method and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
and tax bases of assets and liabilities given the provisions of enacted tax
laws.
EARNINGS PER SHARE
Earnings per share has been calculated based on the weighted average number of
shares outstanding. Shares outstanding were 4.6 million from January 1, 1994
through March 16, 1994, 8.6 million from March 17, 1994 through August 8, 1996
and 10.7 million since August 9, 1996. Primary and fully diluted earnings per
share are the same as the effect of dilutive outstanding stock options is
immaterial.
PAGE 24 of 88
25
2. PUBLIC OFFERINGS OF COMMON STOCK:
--------------------------------
The Company completed its initial public offering of 4 million common shares in
March, 1994. The $56,995 of net proceeds were used to pay a $17,500 final S
corporation dividend, and the remaining proceeds were used to repay $39,495 of
borrowings under the revolving credit agreement. In August, 1996, the Company
completed the sale of an additional 2.1 million shares of common stock. The net
proceeds of $49,100 were used to repay borrowings outstanding under the
Company's bank credit agreements.
3. ACQUISITION:
-----------
Effective January 1, 1995, the Company completed the acquisition of
substantially all of the assets and assumed certain liabilities of Lafayette
Steel Company (Lafayette Steel). Lafayette Steel is an intermediate steel
processor headquartered in Detroit, Michigan, primarily serving the automotive
industry.
The final purchase price totaled $69,833 and exceeded the net book value of the
assets acquired by $13,000. The adjusted cash portion of the purchase price,
including fees and expenses and the repayment of $30,069 of Lafayette Steel's
existing bank debt, totaled $52,345.
The acquisition has been accounted for as a purchase and, accordingly, assets
and liabilities are reflected at estimated fair values. The final purchase price
allocation resulted in goodwill of $10,395, which is being amortized over 40
years.
The following unaudited pro forma condensed statement of income for 1994 gives
effect to the acquisition of Lafayette Steel as if it had occurred on January 1,
1994. The pro forma information is based upon the historical financial
statements of Olympic Steel and Lafayette Steel, giving effect to the
acquisition under the purchase method of accounting. The pro forma financial
information has been prepared by Olympic's management based upon the audited
financial statements of Lafayette Steel. This pro forma information is presented
in response to applicable accounting rules relating to business acquisitions. It
is not necessarily indicative of the actual results that would have been
achieved had the acquisition occurred as of January 1, 1994, and is not
necessarily indicative of future results of the combined companies.
PRO FORMA PRO FORMA
OLYMPIC LAFAYETTE ADJUSTMENTS OLYMPIC
----------- ----------- ----------- -----------
NET SALES $ 381,906 $ 148,996 $ - $ 530,902
COST OF SALES 304,777 127,603 (1,888) (A) 430,492
----------- ----------- ----------- -----------
GROSS MARGIN 77,129 21,393 1,888 100,410
OPERATING EXPENSES 58,836 22,441 (1,282) (B) 79,995
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 18,293 (1,048) 3,170 20,415
INTEREST EXPENSE 3,761 2,194 949 (C) 6,904
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME 14,532 (3,242) 2,221 13,511
TAXES
INCOME TAXES 5,834 - (410) (D) 5,424
REINSTATEMENT OF DEFERRED
INCOME TAXES 7,800 - - 7,800
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 898 $ (3,242) $ 2,631 $ 287
=========== =========== =========== ===========
NET INCOME PER SHARE $ 0.12 $ 0.04
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,778 7,778
=========== ===========
(a) Reflects restatement of inventory from LIFO to the specific identification
costing method.
(b) To reduce shareholder and executive compensation and benefits, to reduce
depreciation expense for the difference between historical cost and the
fair value of assets acquired, to reduce certain professional fees,
including those relating to the acquisition, and to record goodwill
amortization.
(c) To record interest expense relating to incremental debt incurred for the
acquisition.
(d) To record an income tax benefit for Lafayette Steel's pre-tax loss, after
giving effect to pro forma adjustments, at Olympic's 1994 effective income
tax rate.
PAGE 25 of 88
26
4. ACCOUNTS RECEIVABLE:
-------------------
On December 19, 1995, the Company entered into a three-year agreement to sell,
on a revolving basis, through its wholly-owned entity, Olympic Steel Receivables
LLC, an undivided interest in a designated pool of its trade accounts
receivable. The maximum amount of receivables that can be sold is $65,000, with
the amount sold at any month end measurement date dependent upon the level of
defined eligible receivables. The Company, as agent for the purchaser of the
receivables, retains collection and administrative responsibilities for the
participating interests sold. As collections reduce the receivables included in
the pool, the Company may sell additional undivided interests in new receivables
up to the $65,000 limit. The amount of receivables sold by the Company typically
will change monthly depending upon the level of defined eligible receivables
available for sale each month end.
As of December 31, 1996 and 1995, $55,000 and $53,671, respectively, of
receivables were sold and reflected as a reduction of accounts receivable in the
accompanying consolidated balance sheets. Proceeds from the initial sale were
used to reduce borrowings under the Company's revolving credit agreement and are
reflected as operating cash flows in the accompanying 1995 consolidated
statement of cash flows. Costs of the program, which primarily consist of the
purchaser's financing cost of issuing commercial paper backed by the
receivables, totaled $3,393 in 1996 and $107 in 1995, and have been classified
as Receivable Securitization Expense in the accompanying consolidated statements
of income.
Accounts receivable are presented net of allowances for doubtful accounts of
$485 and $811 as of December 31, 1996 and 1995, respectively. Bad debt expense
totaled $268 in 1996, $763 in 1995, and $362 in 1994.
5. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consists of the following:
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
Land and improvements $ 8,037 $ 7,128
Buildings and improvements 40,105 25,975
Machinery and equipment 37,292 22,588
Furniture and fixtures 3,315 2,039
Computer equipment 3,604 2,817
Vehicles 378 358
Construction in progress 1,223 17,547
-------- --------
93,954 78,452
Less accumulated depreciation (14,954) (10,886)
-------- --------
Total property and equipment $ 79,000 $ 67,566
======== ========
Construction in progress at December 31, 1996 primarily consists of material
handling equipment to be added to a blanking press in 1997 and management
information system enhancements in-process. Construction in progress at December
31, 1995 primarily related to the Cleveland temper mill facility and equipment
which became fully operational in 1996.
PAGE 26 of 88
27
6. REVOLVING CREDIT AGREEMENT:
--------------------------
The Company has been operating under various multi-bank revolving credit
agreements for many years. As of December 31, 1996, the facility consisted of an
unsecured revolving credit component of $50,000, and letter of credit
commitments of $76,141. Letters of credit are collateralized by the respective
assets financed. On January 24, 1997, the credit agreement was amended to
increase the revolving credit availability to $60,000 and to authorize the
Company's investment in two joint ventures. The agreement matures on June 30,
1999. Each year, the Company may request to extend its maturity date one year
with the approval of the bank group.
The revolving credit agreement balance includes $5,487 and $9,768 of checks
issued that have not cleared the bank as of December 31, 1996 and 1995,
respectively.
The Company has the option to borrow based on the agent bank's base rate or the
London Interbank Offered Rate (LIBOR). The interest rate changes every three
months based on the Company's operating performance and leverage ratio. As of
December 31, 1996, the interest rates were base plus 0% or LIBOR plus .75%. The
effective interest rate for credit agreement borrowings amounted to 7.5% in
1996, 7.9% in 1995, and 5.6% in 1994. Interest on the base rate option is
payable quarterly in arrears while interest on the LIBOR option is payable at
the end of the LIBOR interest period, which ranges from one to six months. The
agreement also includes a commitment fee of .25% of the unused portion of the
revolver which is payable quarterly in arrears.
7. TAXABLE RATE NOTES:
------------------
In October 1993, the Company completed a $10,000 refinancing of its real estate
in Minneapolis, Minnesota; Milford, Connecticut; Elk Grove Village, Illinois;
and Cleveland, Ohio. The refinancing was in the form of taxable rate notes. The
term of the notes is 15 years with annual principal payments of $700 for the
first 10 years and $600 for years 11 through 15. As of December 31, 1996, $7,900
was outstanding. The notes are backed by a three year bank letter of credit,
expiring October 15, 1999, and are secured by a first mortgage on the Chicago,
Connecticut and Minneapolis land and buildings and a second mortgage on certain
Cleveland real estate. The interest rate changes each week based on the taxable
rate note market. As of December 31, 1996, the effective interest rate was 7.4%.
8. INDUSTRIAL REVENUE BONDS:
------------------------
The long-term portion of industrial revenue bonds at December 31, 1996 and 1995,
consisted of the following:
Effective Interest
Description of Bonds Rate at 12/31/96 1996 1995
-------------------- ---------------- ---------- ----------
$6,000 variable rate bonds due 1995 through 2004 6.8% $4,200 $4,800
$2,660 variable rate bonds due 1992 through 2004 6.1% 1,505 1,715
$4,800 variable rate bonds due 1992 through 2004 6.5% 2,700 3,050
---------- ----------
$8,405 $9,565
---------- ----------
These bonds are backed by standby letters of credit, expiring June 30, 1999 with
the revolving credit bank group which has a first lien on certain land, building
and equipment.
PAGE 27 of 88
28
9. SCHEDULED DEBT MATURITIES, INTEREST, DEBT CARRYING VALUES AND COVENANTS:
-----------------------------------------------------------------------
Scheduled maturities of all long-term debt for the years succeeding December 31,
1996 are $1,869 in 1997, $2,444 in 1998, $1,870 in both 1999 and 2000, $1,875 in
2001 and $8,197 thereafter.
The overall effective interest rate for all debt amounted to 7.1% in 1996, 7.7%
in 1995, and 5.7% in 1994. Interest paid totaled $4,628, $11,823, and $3,843 for
the years ended December 31, 1996, 1995 and 1994, respectively. Amounts paid
relative to the accounts receivable securitization program totaled $3,236 in
1996. Interest expense of $92, $1,021 and $208 was capitalized in 1996, 1995 and
1994, respectively, in conjunction with constructing and equipping new
facilities.
Management believes the carrying values of its long-term debt approximate their
fair values, as each of the Company's debt arrangements bear interest at rates
that vary based on a bank's base rate, LIBOR, the short-term tax exempt revenue
bond index or taxable rate note market.
Under its debt agreements, the Company is subject to certain covenants such as
minimum net worth, capital expenditure limitations, and interest coverages. The
Company was in compliance with all covenants as of December 31, 1996.
10. INCOME TAXES:
------------
Prior to January 1, 1994, the Company was treated as an S corporation. In
connection with the initial public offering, the Company terminated its S
corporation election and became fully subject to federal and state income
taxation as a C corporation. As a result, deferred income tax liabilities of
$7,800 as of January 1, 1994 were reinstated and included in income tax expense
in 1994.
The components of the Company's net deferred tax liability at December 31 are as
follows:
Asset / (Liability) 1996 1995
------------------- -------- -------
Accrued income taxes $ (681) $(2,092)
Current deferred income taxes:
LIFO inventory reserves (583) (1,842)
Other temporary items 984 688
------- -------
Total current deferred income taxes 401 (1,154)
------- -------
Accrued and deferred income taxes (280) (3,246)
------- -------
Long-term deferred income taxes:
Goodwill (1,365) --
LIFO inventory reserve (1,167) (1,655)
Tax in excess of book depreciation (2,291) (1,435)
------- -------
Total long-term deferred income taxes (4,823) (3,090)
------- -------
Total current and deferred income taxes $(5,103) $(6,336)
======= =======
The following table reconciles the U.S. federal statutory rate to the Company's
effective tax rate:
1996 1995 1994
------ ------ ------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit 2.5 4.4 5.0
All other, net 0.3 0.6 0.1
---- ---- ----
Effective income tax rate 37.8% 40.0% 40.1%
---- ---- ----
The tax provision includes a current provision of $9,266, $6,443 and $8,024, and
a deferred benefit of $697, $1,939 and $2,190 in 1996, 1995 and 1994,
respectively. Income taxes paid in 1996, 1995 and 1994, totaled $10,113, $6,191
and $5,944, respectively.
PAGE 28 of 88
29
11. RETIREMENT PLANS:
----------------
The Company has several retirement plans consisting of a profit-sharing plan and
a 401(k) plan covering all non-union employees, and two separate 401(k) plans
covering all union employees.
Company contributions for the non-union profit-sharing plan are in discretionary
amounts as determined annually by the Board of Directors. For each of the last
three years, Company contributions were 4% of each eligible employee's W-2
earnings. The non-union 401(k) retirement plan allows eligible employees to
contribute up to 10% of their W-2 earnings. The Company contribution is
determined annually by the Board of Directors and is based on a percentage of
eligible employees' contributions. For each of the last three years, the Company
matched one half of each eligible employee's contribution.
Company contributions for each of the last three years for the union plans were
3% of eligible W-2 wages plus one half of the first 4% of each employee's
contribution.
Retirement plan expense amounted to $2,001, $1,762, and $1,035 for the years
ended December 31, 1996, 1995, and 1994, respectively.
12. STOCK OPTIONS:
-------------
In January 1994, the Stock Option Plan (Option Plan) was adopted by the Board of
Directors and approved by the shareholders of the Company. Pursuant to the
provisions of the Option Plan, key employees of the Company, non-employee
directors and consultants may be offered the opportunity to acquire shares of
Common Stock by the grant of stock options, including both incentive stock
options (ISOs) and nonqualified stock options. ISOs are not available to
non-employee directors or consultants. A total of 450,000 shares of Common Stock
has been reserved for options under the Option Plan. The purchase price of a
share of Common Stock pursuant to an ISO will not be less than the fair market
value of a share of Common Stock at the grant date. Options vest over a period
of five years at a rate of 20% per year commencing on the first anniversary of
the date of grant, and expire 10 years after the date of grant. The Option Plan
will terminate on January 5, 2004. Termination of the Option Plan will not
affect outstanding options.
During 1996, 1995 and 1994, nonqualified options to purchase 12,500, 20,000 and
120,000 shares, respectively, were issued under the Option Plan to the Company's
key employees and outside directors, all at an exercise price of $15.50 per
share. During 1996, options to purchase 8,000 shares were exercised. Options to
purchase 144,500 shares were outstanding at December 31, 1996.
In 1996, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Black-Scholes option-pricing model was used to determine that
the pro forma impact of compensation expense from options granted was
immaterial.
PAGE 29 of 88
30
13. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company leases certain warehouses, sales offices and processing equipment
under long-term lease agreements. The leases are classified as operating and
expire at various dates through 2004. In some cases the leases include options
to extend. Rent expense was $2,634, $2,873 and $2,512 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Future minimum lease payments as of December 31, 1996 are as follows:
1997 $ 2,008
1998 1,764
1999 1,430
2000 921
2001 687
Thereafter 1,518
----------
$ 8,328
==========
The Company is a defendant in various legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the outcome of
the proceedings to which the Company is currently a party will not have a
material adverse effect upon its operations or financial position.
14. RELATED PARTY TRANSACTIONS:
--------------------------
A related entity handles a portion of the freight activity for the Company's
Cleveland division. Payments to this entity approximated $3,117, $3,199, and
$2,880 for the years ended December 31, 1996, 1995 and 1994, respectively. There
is no common ownership or management of this entity with the Company. Another
related entity owns one of the Cleveland warehouses and leases it to the Company
at an annual rental of $195. The lease expires June 2000 and has two remaining
renewal options of 10 years each.
15. SUBSEQUENT EVENTS:
-----------------
In January 1997, the Company completed the formation of Olympic Continental
Resources LLC (OCR), a joint venture with Atlas Iron Processors, Inc. (Atlas)
and Uwe T. Schmidt, OCR's Chief Executive Officer. OCR buys, sells and trades
ferrous and non-ferrous metals and alternate iron products to steel mills and
scrap processors. The venture acquired the business activities previously
conducted by Thyssen Continental Resources LLC, a joint venture between Thyssen
Inc. and Atlas that had profitable revenues of $145,000 for fiscal 1996. The
Company made a $4,000 cash investment for its 45% ownership share in OCR and
guarantees up to $10,000 of outstanding debt under OCR's $35,000 revolving bank
credit facility. Olympic's investment in OCR will be accounted for under the
equity method.
On January 20, 1997, the Company and the U.S. Steel Group of USX Corporation,
announced that the two companies will form a joint venture to process laser
welded sheet steel blanks. The joint venture will be owned 50% by each of the
companies and will conduct business as Olympic Laser Processing (OLP). OLP plans
to construct a new facility initially equipped with two laser welding lines.
Production is expected to begin in 1998. The investment in OLP will be accounted
for under the equity method.
PAGE 30 of 88
31
16. UNAUDITED PRO FORMA INFORMATION:
-------------------------------
Unaudited pro forma net income for the year ended December 31, 1994 reflects (i)
the reduction in interest expense resulting from the application of net proceeds
from the sale of 4 million shares of Common Stock on March 17, 1994 (the
Offering), to repay approximately $39,495 of indebtedness with a weighted
average interest rate of 6.0% in 1994, (ii) the reduction of compensation
expense for officers and certain retiring employees net of additional costs to
be incurred as a public company and (iii) assumes the Company is subject to
income tax as a C corporation, and excludes the one-time $7,800 income tax
charge for the reinstatement of deferred income taxes resulting from the change
in the Company's income tax status from an S corporation to a C corporation.
Unaudited pro forma net income per share has been calculated by dividing pro
forma net income by the number of shares outstanding after the Offering.
PAGE 31 of 88
32
SUPPLEMENTARY FINANCIAL INFORMATION
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
(in thousands, except per share amounts)
1996 1ST 2ND 3RD 4TH YEAR
- ---- ---------- ---------- ---------- ---------- ----------
Net sales $142,589 $146,697 $134,971 $135,805 $560,062
Gross margin 30,926 32,815 30,403 29,365 123,509
Operating income 7,719 9,545 7,263 5,855 30,382
Income before taxes 5,427 7,219 5,516 4,526 22,688
Net income $ 3,256 $ 4,331 $ 3,530 $ 3,002 $ 14,119
Net income per share $ 0.38 $ 0.50 $ 0.36 $ 0.28 $ 1.50
Weighted average shares outstanding 8,600 8,600 9,801 10,689 9,427
Market price of common stock: (a)
High $ 10.88 $ 28.63 $ 30.25 $ 29.75 $ 30.25
Low 8.50 10.13 22.38 20.25 8.50
1995 1ST 2ND 3RD 4TH YEAR
- ---- ---------- ---------- ---------- ---------- ----------
Net sales $149,058 $142,095 $132,673 $130,643 $554,469
Gross margin 30,012 27,343 24,887 25,714 107,956
Operating income 7,717 5,713 4,269 4,402 22,101
Income before taxes 5,150 2,866 1,375 1,857 11,248
Net income $ 3,067 $ 1,721 $ 835 $ 1,121 $ 6,744
Net income per share $ 0.36 $ 0.20 $ 0.10 $ 0.13 $ 0.78
Weighted average shares outstanding 8,600 8,600 8,600 8,600 8,600
Market price of common stock: (a)
High $ 11.50 $ 11.00 $ 10.88 $ 10.13 $ 11.50
Low 9.50 9.00 8.88 7.50 7.50
(a) Represents high and low closing quotations as reported by NASDAQ.
PAGE 32 of 88
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 as to the Directors of the Registrant will be
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Registrant's definitive proxy statement for its
April 24, 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 will be incorporated herein by reference to the
information set forth under caption "Executive Officers' Compensation" in the
Registrant's definitive proxy statement for its April 24, 1997 Annual Meeting
of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 will be incorporated herein by reference to the
information set forth under the caption "Security Ownership of Management" in
the Registrant's definitive proxy statement for its April 24, 1997 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 will be incorporated herein by reference to the
information set forth under the caption "Related Transactions and Compensation
Interlocks" in the Registrant's definitive proxy statement for its April 24,
1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART II, ITEM 8:
Report of Independent Public Accountants
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted since
the required information is not present or not present in amounts sufficient
to require submission of the schedule, or because the information required
is included in the financial statements including notes thereto.
(a)(3) EXHIBITS. The Exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report.
(b) REPORTS ON FORM 8-K. No reports were filed on Form 8-K during the fourth
quarter of 1996.
PAGE 33 of 88
34
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
OLYMPIC STEEL, INC.
March 7, 1997 By: /s/ R. Louis Schneeberger
-------------------------------------------
R. Louis Schneeberger,
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
and on the 7th day of March, 1996.
March 7, 1997 /s/ Michael D. Siegal *
-------------------------------------------
Michael D. Siegal
President, Chairman of the Board
and Chief Executive Officer
March 7, 1997 /s/ R. Louis Schneeberger *
-------------------------------------------
R. Louis Schneeberger
Chief Financial Officer
and Director
March 7, 1997 /s/ David A. Wolfort *
-------------------------------------------
David A. Wolfort
Chief Operating Officer
and Director
March 7, 1997 /s/ Bruce S. Adelstein *
-------------------------------------------
Bruce S. Adelstein
Vice President - Operations
and Director
March 7, 1997 /s/ Richard T. Marabito *
-------------------------------------------
Richard T. Marabito
Treasurer and Corporate Controller
(Principal Accounting Officer)
March 7, 1997 /s/ Martin H. Elrad *
-------------------------------------------
Martin H. Elrad, Director
March 7, 1997 /s/ Thomas M. Forman *
-------------------------------------------
Thomas M. Forman, Director
March 7, 1997 /s/ Janice M. Margheret *
-------------------------------------------
Janice M. Margheret, Director
* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and Directors of the Company and filed with the Securities
and Exchange Commission on behalf of such officers and Directors.
By: /s/ R. Louis Schneeberger March 7, 1997
---------------------------------------
R. Louis Schneeberger, Attorney-in-Fact
Page 34 of 88
35
OLYMPIC STEEL, INC.
INDEX TO EXHIBITS
Exhibit Description of Document Sequential Page No.
------- ----------------------- -------------------
3.1(i) Amended and Restated Articles of Incorporation *
3.1(ii) Amended and Restated Code of Regulations *
4.1 Credit Agreement dated October 4, 1996 by and among the Registrant, three **
banks and National City Bank, Agent
4.2 First Amendment to Credit Agreement dated January 24, 1997 by and among the 36-38
Registrant, three banks and National City Bank, Agent
4.4 Receivables Purchase Agreement dated December 19, 1995 among the Registrant, ***
Olympic Steel Receivables LLC, Olympic Steel Receivables, Inc. and Clipper
Receivables Corporation as Purchaser
4.5 Purchase and Sale Agreement dated December 19, 1995 among the Registrant, ***
Olympic Steel Lafayette, Inc. and Olympic Steel Receivables LLC
Information concerning certain of the Registrant's other long-term debt is
set forth in Notes 7 and 8 of Notes to Consolidated Financial Statements.
The Registrant hereby agrees to furnish copies of such instruments to the
Commission upon request.
10.1 Olympic Steel, Inc. Stock Option Plan *
10.2 Lease, dated as of July 1, 1980, as amended, between S.M.S. Realty Co., a *
lessor, and the Registrant, as lessee, relating to one of the Cleveland
facilities
10.4 Lease, dated as of November 30, 1987, as amended, between Tinicum Properties *
Associates L.P., as lessor, and the Registrant, as lessee, relating to
Registrant's Lester, Pennsylvania facility
10.5 Executive and General Managers Bonus Plans *
10.6 Tax Indemnification Agreement among the Registrant and each of its principal *
shareholders
10.7 Contract Carrier Contract for Transportation Services, dated January 1, 1991, *
between Bedford Trucking Company and the Registrant
10.8 Operating Agreement of Olympic Continental Resources, L.L.C. by and among
Thyssen-Continental Resources LLC, Olympic Steel Trading, Inc. and Uwe T. 39-83
Schmidt
21 List of subsidiaries 84
23 Consent of Arthur Andersen LLP 85
24 Directors and Officers Powers of Attorney 86
27 Financial Data Schedule (EDGAR Filing Only)
* Incorporated by reference to the Exhibit with the same exhibit number
included in Registrant's Registration Statement on Form S-1 (No. 33-73992)
filed with the Commission on January 12, 1994.
** Incorporated by reference to an Exhibit included in Registrant's Form 10-Q
filed with the Commission on November 4, 1996.
*** Incorporated by reference to an Exhibit included in Registrant's Form 10-K
filed with the Commission on March 29, 1996.
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