================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 ------------------ ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-23320 ------- OLYMPIC STEEL, INC. (Exact name of registrant as specified in its charter) Ohio 34-1245650 - --------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5096 Richmond Road, Bedford Heights, Ohio 44146 - ----------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (216) 292-3800 -------------- 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 the number of shares of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of November 11, 2002 ------------------------------- ----------------------------------- Common stock, without par value 9,641,080 ================================================================================ 1 of 30
OLYMPIC STEEL, INC. Index to Form 10-Q <TABLE> <CAPTION> PAGE NO. -------------- <S> <C> <C> <C> Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - September 30, 2002 and 3 December 31, 2001 Consolidated Statements of Income - for the three and nine 4 months ended September 30, 2002 and 2001 Consolidated Statements of Cash Flows - for the nine 5 months ended September 30, 2002 and 2001 Notes to Consolidated Financial Statements 6-10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-16 CONDITION AND RESULTS OF OPERATIONS Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 17 Item 4. CONTROLS AND PROCEDURES 17 Part II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURES 19 SARBANES-OXLEY CERTIFICATIONS 20-25 EXHIBITS 26-30 </TABLE> 2 of 30
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Olympic Steel, Inc. Consolidated Balance Sheets (in thousands) <TABLE> <CAPTION> September 30, December 31, 2002 2001 ------------ ------------- (unaudited) (audited) Assets <S> <C> <C> Cash $ 400 $ 1,054 Accounts receivable 59,544 38,754 Inventories 99,289 72,287 Prepaid expenses and other 5,361 3,514 Assets held for sale 2,235 1,660 ------------ ------------ Total current assets 166,829 117,269 ------------ ------------ Property and equipment, at cost 154,723 159,544 Accumulated depreciation (52,172) (48,433) ------------ ------------ Net property and equipment 102,551 111,111 ------------ ------------ Investments in joint ventures 693 31 Other assets 2,527 3,589 Goodwill -- 3,415 ------------ ------------ Total assets $ 272,600 $ 235,415 ============ ============ Liabilities Current portion of long-term debt $ 5,297 $ 4,786 Accounts payable 28,810 20,143 Accrued payroll 3,212 3,200 Other accrued liabilities 6,069 4,326 ------------ ------------ Total current liabilities 43,388 32,455 ------------ ------------ Credit facility revolver 62,790 24,359 Term loans 35,575 48,237 Industrial revenue bonds 6,793 7,117 ------------ ------------ Total long-term debt 105,158 79,713 ------------ ------------ Deferred income taxes 5,144 1,975 ------------ ------------ Total liabilities 153,690 114,143 ------------ ------------ Shareholders' Equity Preferred stock -- -- Common stock 99,754 99,733 Officer note receivable (675) (675) Retained earnings 19,831 22,214 ------------ ------------ Total shareholders' equity 118,910 121,272 ------------ ------------ Total liabilities and shareholders' equity $ 272,600 $ 235,415 ============ ============ </TABLE> The accompanying notes are an integral part of these balance sheets. 3 of 30
Olympic Steel, Inc. Consolidated Statements of Income (in thousands, except per share and tonnage data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (unaudited) Tons sold <S> <C> <C> <C> <C> Direct 244,192 226,726 796,006 732,930 Toll 35,542 30,703 117,214 97,225 ------------ ------------ ------------ ------------ 279,734 257,429 913,220 830,155 ------------ ------------ ------------ ------------ Net sales $ 116,465 $ 96,770 $ 352,183 $ 322,597 Cost of sales 90,356 72,244 268,804 244,927 ------------ ------------ ------------ ------------ Gross margin 26,109 24,526 83,379 77,670 Operating expenses Warehouse and processing 7,819 7,318 23,784 22,978 Administrative and general 6,069 6,022 18,743 19,218 Distribution 4,321 3,840 13,544 12,137 Selling 3,286 2,988 10,182 9,438 Occupancy 944 977 3,237 3,563 Depreciation and amortization 2,426 2,799 7,624 7,436 Plant shutdown charge -- -- 3,300 -- ------------ ------------ ------------ ------------ Total operating expenses 24,865 23,944 80,414 74,770 ------------ ------------ ------------ ------------ Operating income 1,244 582 2,965 2,900 Income (loss) from joint ventures (31) (50) 662 (214) ------------ ------------ ------------ ------------ Income before interest and taxes 1,213 532 3,627 2,686 Interest expense 969 2,156 4,059 4,329 Receivable securitization expense -- -- -- 1,260 ------------ ------------ ------------ ------------ Income (loss) before taxes 244 (1,624) (432) (2,903) Income tax provision (benefit) 94 (626) (166) (1,118) ------------ ------------ ------------ ------------ Income (loss) before cumulative effect of change in accounting principle 150 (998) (266) (1,785) Cumulative effect of change in accounting principle, net of tax of $1,298 -- -- 2,117 -- ------------ ------------ ------------ ------------ Net income (loss) $ 150 $ (998) $ (2,383) $ (1,785) ============ ============ ============ ============ Basic and diluted net income (loss) per share $ 0.02 $ (0.10) $ (0.25) $ (0.19) ============ ============ ============ ============ Weighted average shares outstanding 9,638 9,631 9,635 9,574 ============ ============ ============ ============ </TABLE> The accompanying notes are an integral part of these statements. 4 of 30
Olympic Steel, Inc. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (in thousands) <TABLE> <CAPTION> 2002 2001 ------------ ------------ (unaudited) <S> <C> <C> Cash flows from operating activities: Net loss $ (2,383) $ (1,785) Adjustments to reconcile net loss to net cash from (used for) operating activities- Depreciation and amortization 7,624 7,436 Non-cash plant shutdown charge 2,600 -- (Income) loss from joint ventures (662) 214 Loss on disposition of property and equipment 219 -- Cumulative effect of change in accounting principle, net of tax 2,117 -- Long-term deferred income taxes 4,467 (380) ------------ ------------ 13,982 5,485 Changes in working capital: Accounts receivable (20,790) (43,890) Inventories (27,002) 11,913 Prepaid expenses and other (1,847) (4,363) Accounts payable 8,667 (1,571) Accrued payroll and other accrued liabilities 1,755 944 ------------ ------------ (39,217) (36,967) ------------ ------------ Net cash used for operating activities (25,235) (31,482) ------------ ------------ Cash flows from investing activities: Capital expenditures (3,011) (2,301) Proceeds from disposition of property and equipment 1,615 -- Investments in joint ventures -- (1,012) ------------ ------------ Net cash used for investing activities (1,396) (3,313) ------------ ------------ Cash flows from financing activities: Credit facility revolver 38,431 11,903 Term loans and IRB's (12,475) 21,758 Proceeds from exercise of stock options 21 -- ------------ ------------ Net cash from financing activities 25,977 33,661 ------------ ------------ Cash: Net decrease (654) (1,134) Beginning balance 1,054 1,449 ------------ ------------ Ending balance $ 400 $ 315 ============ ============ </TABLE> The accompanying notes are an integral part of these statements. 5 of 30
OLYMPIC STEEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (dollars in thousands, except share and per share amounts) The accompanying consolidated financial statements have been prepared from the financial records of Olympic Steel, Inc. and its wholly-owned subsidiaries (collectively Olympic or the Company), without audit and reflect all normal and recurring adjustments which are, in the opinion of management, necessary to fairly present the results of the interim periods covered by this report. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in the Company's joint ventures are accounted for under the equity method. (1) JOINT VENTURES: On April 1, 2002, Michael J. Guthrie and Carlton L. Guthrie (the Guthries) withdrew as majority members of Trumark Steel & Processing, LLC (TSP). On that date, Thomas A. Goss and Gregory F. Goss, executive officers of the Goss Group, Inc., an insurance enterprise, assumed the Guthries 51% majority ownership interest. On May 17, 2002, TSP's name was changed to G.S.P., LLC (GSP). GSP is a certified member of the Michigan Minority Business Development Council. On April 30, 2002, the Company's Olympic Laser Processing, LLC (OLP) joint venture entered into a new 2-year bank financing agreement. As of September 30, 2002, Olympic guaranteed 50% of OLP's $17,130 and 49% of GSP's $1,822 of outstanding debt on a several basis. (2) GOODWILL: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company estimated the fair value of its reporting units using a present value method that discounted future cash flows. The cash flow estimates incorporate assumptions on future cash flow growth, terminal values and discount rates. Any such valuation is sensitive to these assumptions. Because the fair value of each reporting unit was below its carrying value (including goodwill), application of SFAS 142 required the Company to complete the second step of the goodwill impairment test and compare 6 of 30
the implied fair value of each reporting unit's goodwill with the carrying value of that goodwill. As a result, the Company recorded a before tax impairment charge of $3,415 ($2,117 after tax) to write-off the entire goodwill amount as a cumulative effect of a change in accounting principle. The Financial Accounting Standards Board also issued Statement of Accounting Standards No. 141 (SFAS 141), "Business Combinations," which requires all business combinations after June 30, 2001 to be accounted for under the purchase method. As a result of adopting SFAS 142 and SFAS 141, the accounting policy for excess of cost over net assets acquired is as follows, effective January 1, 2002: Excess of Cost Over Net Assets Acquired: The Company recognizes the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances. Impairment loss is recognized whenever the implied fair value of goodwill is less than its carrying value. Prior to January 1, 2002, goodwill was amortized over periods ranging from 15 to 40 years. Beginning January 1, 2002, goodwill is no longer amortized. The following table presents a comparison of the first nine months of 2002 results to the first nine months of 2001 adjusted to exclude goodwill amortization expense: <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------------------- (in thousands, except per share data) 2002 2001 ------------ ------------ <S> <C> <C> Loss before cumulative effect of change in accounting principle $ (266) $ (1,785) Cumulative effect of change in accounting principle, net of tax (2,117) -- ------------ ------------ Reported net loss (2,383) (1,785) Addback: goodwill amortization, net of tax -- 48 ------------ ------------ Adjusted net loss $ (2,383) $ (1,737) ============ ============ Basic and diluted net loss per share: - ------------------------------------- Loss before cumulative effect of change in accounting principle $ (.03) $ (.19) Cumulative effect of change in accounting principle, net of tax (.22) -- ------------ ------------ Reported net loss (.25) (.19) Addback: goodwill amortization, net of tax -- -- ------------ ------------ Adjusted net loss $ (.25) $ (.19) ============ ============ </TABLE> 7 of 30
(3) DEBT: In June 2001, the Company entered into a 3-year, $135,000 secured financing agreement (The Credit Facility). The Credit Facility is secured by the Company's accounts receivable, inventories, and substantially all property and equipment. Borrowings under the Credit Facility are limited to the lesser of a borrowing base, comprised of eligible receivables, inventories and property and equipment, or $135,000 in the aggregate. The Company has the option to borrow based on the agent bank's base rate or London Interbank Offered Rates (LIBOR) plus a premium. In August 2002, the Credit Facility was amended to allow the Company to prepay and permanently reduce $10,000 of the outstanding term B loan. The Company borrowed $10,000 from the revolver component of its Credit Facility to pay down the term B loan. In connection with the prepayment, the agent bank waived $617 of deferred pay interest, which the Company previously expensed. The accompanying third quarter and year-to-date 2002 consolidated income statements reflect the waived amount as a reduction to interest expense. The Company's effective borrowing rate for the first nine months of 2002, excluding the waived deferred pay interest, was 7.7% compared to 8.8% in 2001. On January 1, 2002, the term loan B component deferred pay rate declined from 9.0% to 7.0%. Term loan A monthly principal repayments of $167 commenced April 1, 2002. The Credit Facility requires the Company to comply with various covenants, the most significant of which include: (i) minimum excess availability of $10,000, (ii) a minimum fixed charge coverage ratio, which commences in December 2002, (iii) restrictions on additional indebtedness, and (iv) limitations on capital expenditures. At September 30, 2002, the Company had $29,514 of excess availability under its Credit Facility and was in compliance with its various covenants. Included in the Credit Facility revolver balances on the accompanying consolidated balance sheets are $9,409 and $5,187 of checks issued that have not cleared the bank as of September 30, 2002, and December 31, 2001, respectively. 8 of 30
(4) PLANT SHUTDOWN CHARGE: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. In the second quarter of 2002, the Company recorded a before tax $3,300 plant shutdown charge in connection with the closure of its tube operation in Cleveland, Ohio. The non-cash portion of the charge totaled $2,600 to write-down property and equipment to estimated sales value in accordance with SFAS 144. The cash portion of the charge, recorded in accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity", totaled $700 and primarily related to employee and tenancy costs. Through September 30, 2002, the Company has paid or incurred $161 of the $700 cash portion of the charge. The Company anticipates selling these assets within the next 12 months and will use the proceeds to reduce long-term debt. The property and equipment for sale are included in assets held for sale on the accompanying September 30, 2002 consolidated balance sheet. (5) SHARES OUTSTANDING AND EARNINGS PER SHARE: Earnings per share have been calculated based on the weighted average number of shares outstanding. Basic and diluted earnings per share are the same, as the effect of outstanding stock options is not dilutive. (6) STOCK OPTIONS: Shares available under the Stock Option Plan were increased from 950,000 to 1,300,000 by shareholder vote on April 26, 2002. Options to purchase 996,333 shares are currently outstanding, of which 427,500 are exercisable at prices ranging from $1.97 to $15.50 per share. During the nine months ended September 30, 2002, options to purchase 9,000 shares were exercised at prices ranging from $2.63 to $4.84. 9 of 30
(7) SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the first nine months of 2002 and 2001 totaled $4,006 and $2,824, respectively. On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was signed into law. A significant portion of this law is a temporary extension of the net operating loss carryback period from two to five years for net operating losses arising in taxable years ending in 2001 and 2002. As a result of this change in tax law, the Company received a $3.7 million tax refund in July 2002 after filing its federal income tax return for the fiscal year ended December 31, 2001 and the related carryback claim. The Company received $3.6 million of net income tax refunds in the first nine months of 2002, compared to $98 of income tax payments made in the first nine months of 2001. 10 of 30
ITEM 2. 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, steel pricing and availability, energy prices, customer demand for steel, and layoffs or work stoppages by suppliers' or customers' personnel. Olympic sells a broad range of products, many of which have different gross margins. Products that have more value-added processing generally have a greater gross margin. Accordingly, the Company's overall gross margin is affected by product mix and the amount of processing performed, as well as volatility in selling prices and material purchase costs. The Company performs toll processing of customer-owned steel, the majority of which is performed by its Detroit operation. Toll processing generally results in lower selling prices and gross margin dollars per ton but higher gross margin percentages than the Company's direct sales. The Company's two joint ventures include: Olympic Laser Processing, LLC (OLP), a company that processes laser welded sheet steel blanks for the automotive industry, and G.S.P., LLC (GSP) (formerly Trumark Steel & Processing, LLC), a certified Minority Business Enterprise company supporting the flat-rolled steel requirements of the automotive industry. The Company's 50% interest in OLP and 49% interest in GSP are accounted for under the equity method. The Company guarantees portions of outstanding debt under both of the joint venture companies' bank credit facilities. As of September 30, 2002, Olympic guaranteed 50% of OLP's $17.1 million and 49% of GSP's $1.8 million of outstanding debt on a several basis. Financing costs historically included interest expense on debt and costs associated with the Company's accounts receivable securitization program (the Financing Costs). In connection with the refinancing of its bank credit agreement on June 28, 2001 (the Credit Facility), the Company's accounts receivable securitization program was terminated. Receivable securitization expense was based on commercial paper rates calculated on the amount of receivables sold. The Company sells certain products internationally, primarily in Puerto Rico and Mexico. All international sales and payments are made in United States dollars. These sales historically involve the Company's direct representation of steel producers. 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. 11 of 30
RESULTS OF OPERATIONS Tons sold increased 8.7% to 280 thousand in the third quarter of 2002 from 257 thousand in the third quarter of 2001. Tons sold in the third quarter of 2002 included 244 thousand from direct sales and 36 thousand from toll processing, compared with 227 thousand direct tons and 30 thousand toll tons in the comparable period of last year. Tons sold in the first nine months of 2002 increased 10.0% to 913 thousand from 830 thousand last year. Tons sold in the first nine months of 2002 included 796 thousand from direct sales and 117 thousand from toll processing, compared with 733 thousand direct tons and 97 thousand toll tons in the comparable period of last year. The increases in direct and toll tons sold were primarily attributable to the Company's automotive customer base. However, customer demand for steel and consumer confidence remain weak and are significant risk factors to maintaining fourth quarter 2002 tons sold levels compared to the first nine months of 2002. Net sales increased 20.4% to $116.5 million in the third quarter of 2002 from $96.8 million in the third quarter of 2001. Third quarter average selling prices increased 10.7% from last year's third quarter and 16.6% from first quarter 2002. For the first nine months of 2002, net sales increased 9.2% to $352.2 million from $322.6 million last year, in spite of an average selling price decline of 0.8%. As a percentage of net sales, gross margin decreased to 22.4% in the third quarter of 2002 from 25.3% in the third quarter of 2001. For the first nine months of 2002, gross margin decreased to 23.7% from 24.1% in the comparable period of 2001. During the first nine months of 2002, the Company has experienced a significant increase in its material purchase costs as a result of tightening steel supply caused by the idling or closure of domestic steel production facilities as well as U.S. government imposed import restrictions placed on certain steel products. Although the Company has generally been successful in passing on price increases to its customers, competitive pressures on pricing in its market segments have resulted in lower gross margins compared to last year. Operating expenses in the third quarter of 2002 increased 3.8% to $24.9 million from $23.9 million in last year's third quarter. Operating expenses in the first nine months of 2002 include a $3.3 million plant shutdown charge associated with the Company's closure of its tubing operation. Excluding the plant shutdown charge, operating expenses in the first nine months increased 3.1% to $77.1 million from $74.8 million in the comparable 2001 period. The operating expense increases are the result of increased sales levels and $1.0 million of incremental financing fee amortization in the first nine months of 2002 associated with the refinancing of the Company's Credit Facility. As a percentage of net sales, operating expenses decreased to 21.3% for the third quarter of 2002 from 24.7% in the comparable 2001 period. For 12 of 30
the first nine months of 2002, operating expenses excluding the plant shutdown charge decreased to 21.9% of net sales from 23.2% in the comparable 2001 period. Loss from joint ventures totaled $31 thousand in the third quarter of 2002, compared to a loss of $50 thousand in the third quarter of 2001. For the first nine months of 2002, income from joint ventures totaled $662 thousand, compared to a loss of $214 thousand in 2001. In August 2002, the Credit Facility was amended to allow the Company to prepay and permanently reduce $10.0 million of the outstanding term B loan. The Company borrowed $10.0 million from the revolver component of its Credit Facility to pay down the term B loan. The prepayment will allow the Company to recognize on-going savings as the revolver carries an effective interest rate of approximately 5.0%, compared to 15.0% for the term B loan. In connection with the prepayment, the agent bank waived $617 of deferred pay interest, which the Company previously expensed. The accompanying third quarter and year-to-date consolidated income statements reflect the waived amount as a reduction to interest expense. As a result of the Credit Facility amendment and lower base borrowing rates, Financing Costs in the third quarter of 2002 decreased to $969 thousand from $2.2 million in the third quarter of 2001. For the first nine months of 2002, Financing Costs decreased to $4.1 million from $5.6 million in the comparable 2001 period. Effective interest rates, excluding the waived deferred pay interest, were 7.1% and 7.7% for the three and nine month periods ended September 30, 2002, compared to 9.4% and 8.8%, respectively, in 2001. Income before taxes for the third quarter of 2002 totaled $244 thousand, compared with a loss before taxes of $1.6 million in the comparable 2001 period. An income tax provision of 38.5% was recorded in the third quarter of 2002, compared with an income tax benefit of 38.5% in the comparable 2001 period. For the first nine months of 2002, loss before taxes totaled $432 thousand compared to a loss of $2.9 million in the comparable 2001 period. An income tax benefit of 38.5% was recorded in the first nine months for both 2002 and 2001. Excluding the plant shutdown charge, income before taxes totaled $2.9 million in the first nine months of 2002. Net income for the third quarter of 2002 totaled $150 thousand, or $.02 per share, compared to a net loss of $998 thousand, or $.10 per share, in the third quarter of 2001. For the first nine months of 2002, net loss totaled $2.4 million, or $.25 per share, compared to a net loss of $1.8 million, or $.19 per share in the comparable 2001 period. Included in the first nine months of 2002 results is an after tax charge of $2.1 million, or $.22 per share, from the Company's adoption of Financial Accounting Standards Board Statement No. 142 (SFAS 142) "Goodwill and Other Intangible Assets." SFAS 142 requires an annual assessment of goodwill impairment by applying a fair-value-based test. As a result of this assessment, the Company wrote off its 13 of 30
entire goodwill amount as of January 1, 2002 as a cumulative effect of change in accounting principle. Excluding both the plant shutdown and goodwill charges, net income totaled $1.8 million or $.18 per share in the first nine months of 2002. Weighted average shares outstanding totaled 9.6 million for all periods presented. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund its working capital needs, its development of information technology and business systems, the purchase and upgrading of processing equipment and facilities, and its investments in joint ventures. The Company uses cash generated from operations, leasing transactions, and its Credit Facility to fund these requirements. Working capital at September 30, 2002 increased $38.6 million from the end of the prior year. The increase was primarily attributable to a $27.0 million increase in inventories and a $20.8 million increase in accounts receivable. Offsetting these increases was a combined $10.4 million increase in accounts payable, accrued payroll and other accrued liabilities. The increase in accounts receivable at September 30, 2002 was the result of increased sales as compared to the fourth quarter of 2001. The inventory increase is primarily related to increased steel prices as well as increased tonnage levels due to lower than anticipated sales volumes in the third quarter of 2002. Net cash used for operating activities totaled $25.2 million for the nine months ended September 30, 2002. Cash generated from earnings before non-cash charges totaled $14.0 million, while cash used for working capital components totaled $39.2 million. During the first nine months of 2002, net cash used for investing activities totaled $1.4 million. Proceeds from the disposition of the Company's Elk Grove Village, Illinois facility and a slitter in Iowa totaled $1.6 million. During the first nine months of 2002, capital spending totaled $3.0 million, consisting primarily of progress payments for a new slitter in Minneapolis and information technology spending. During the first nine months of 2002, net cash provided by financing activities totaled $26.0 million and primarily consisted of borrowings on the Company's Credit Facility to fund working capital requirements and the $10.0 million term B loan prepayment. 14 of 30
On March 9, 2002 the "Job Creation and Worker Assistance Act" (H.R. 3090) was signed into law. A significant portion of this law is a temporary extension of the net operating loss carryback period from two to five years for net operating losses arising in taxable years ending in 2001 and 2002. As a result of this change in tax law, the Company received a $3.7 million tax refund in July 2002 after filing its federal income tax return for the fiscal year ended December 31, 2001 and the related carryback claim. As of September 30, 2002, the Company had approximately $29.5 million of excess availability under its Credit Facility and was in compliance with all of its bank covenants. The Company believes that funds available under its Credit Facility, together with funds generated from operations, will be sufficient to provide the Company with the liquidity necessary to fund its anticipated working capital requirements, capital expenditure requirements, and scheduled debt maturities over the next 12 months. Capital requirements are subject to change as business conditions warrant and opportunities arise. CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments 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. On an on-going basis, the Company evaluates its estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, equity investments, goodwill and intangible assets, and revenue recognition. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information regarding the accounting policies the Company believes to be critical accounting policies and that affect the more significant judgments and estimates used in preparing the consolidated financial statements, see Footnote 1 of Notes to Consolidated Financial Statements from the Company's December 31, 2001 Form 10-K. 15 of 30
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 "anticipate," "expect," "believe," "estimated," "project," "plan" and similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, uncertainties and assumptions including, but not limited to: general business and economic conditions; competitive factors such as the availability and pricing of steel and fluctuations in demand, specifically in the automotive, transportation, and other service centers markets served by the Company; layoffs or work stoppages by the Company's, suppliers', or customers' personnel; potential equipment malfunction; equipment installation delays; the adequacy of information technology and business system investment; the successes of its joint ventures; the successes of the Company's efforts and initiatives to: (i) increase sales volumes; (ii) maintain gross margins--especially during periods of increased material purchase costs and tightened steel availability; (iii) improve cash flows and reduce debt; (iv) maintain or improve inventory turns; and (v) reduce its costs. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, believed, estimated, projected or planned. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. 16 of 30
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK There has been no material change during the nine months ended September 30, 2002 from the disclosures about market risk provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. However, the Company is experiencing a significant increase in its material purchase costs as a result of tightening steel supply caused by the idling or closure of domestic steel production facilities as well as U.S. government imposed import restrictions placed on certain steel products. Due to competitive pressures on pricing in its market segments, the Company has not been able to pass along all of the increased costs to its customers, which has resulted in decreased gross margins. In October 2002, the Company's collective bargaining agreement covering its Minneapolis coil processing facility was renewed to September 30, 2005. The Company's collective bargaining agreement covering its Detroit hourly plant maintenance personnel (7 employees) expired on July 31, 2002. Employees covered under this agreement continue to operate as a new agreement is negotiated. While the Company expects to be able to negotiate a new agreement or an extension of the existing agreement, there can be no assurance that such resolutions will occur. The Company has never experienced a work stoppage and believes that its relationship with its employees is good. However, any prolonged disruption in business arising from work stoppages by Company personnel represented by collective bargaining units could have a material adverse effect on the Company's results of operations. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The Company has evaluated the effectiveness of the design and operation of disclosure controls and procedures under supervision and with the participation of management, including Olympic's Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic Securities and Exchange Commission filings. No significant changes were made to the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. 17 of 30
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 4.3 - First Amendment to Credit and Security Agreement dated August 23, 2002 by and among the Registrant, six banks and National City Commercial Finance, Inc., as Administrative Agent. 18 of 30
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. OLYMPIC STEEL, INC. (Registrant) Date: November 11, 2002 By: /s/ Michael D. Siegal -------------------------------------- MICHAEL D. SIEGAL Chairman of the Board and Chief Executive Officer By: /s/ Richard T. Marabito -------------------------------------- RICHARD T. MARABITO Chief Financial Officer and Treasurer (Principal Accounting Officer) 19 of 30
Certification of the Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Michael D. Siegal, Chairman and Chief Executive Officer of Olympic Steel, Inc. (the "Company"), certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002, of the Company (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Michael D. Siegal -------------------------------------- Michael D. Siegal Olympic Steel, Inc. Chairman & Chief Executive Officer November 11, 2002 20 of 30
Certification of the Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Richard T. Marabito, Chief Financial Officer of Olympic Steel, Inc. (the "Company"), certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the Company (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Richard T. Marabito ------------------------------------ Richard T. Marabito Olympic Steel, Inc. Chief Financial Officer November 11, 2002 21 of 30
Certification of the Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) I, Michael D. Siegal, the Chairman & Chief Executive Officer of Olympic Steel, Inc. (the "Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 22 of 30
(5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Michael D. Siegal CEO ----------------------------------- Michael D. Siegal Olympic Steel, Inc. Chairman & Chief Executive Officer November 11, 2002 23 of 30
Certification of the Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) I, Richard T. Marabito, the Chief Financial Officer of Olympic Steel, Inc. (the "Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 24 of 30
(5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Richrd T. Marabito ------------------------------- Richard T. Marabito Olympic Steel, Inc. Chief Financial Officer November 11, 2002 25 of 30