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 March 31, 2003 -------------- ( ) 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ( ) No (X) 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 May 13, 2003 -------------------------------------- ------------------------------ Common stock, without par value 9,645,038 1 of 26
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 - March 31, 2003 and 3 December 31, 2002 Consolidated Statements of Operations - for the three months 4 ended March 31, 2003 and 2002 Consolidated Statements of Cash Flows - for the three 5 months ended March 31, 2003 and 2002 Notes to Consolidated Financial Statements 6-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-17 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 18 ITEM 4. CONTROLS AND PROCEDURES 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20 CERTIFICATIONS 21-24 EXHIBITS 25-26 </TABLE> Page 2 of 26
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OLYMPIC STEEL, INC. CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> March 31, December 31, 2003 2002 ---------------- ---------------- (unaudited) Assets <S> <C> <C> Cash $ 4,094 $ 1,736 Accounts receivable, net 59,167 48,877 Inventories 92,435 101,837 Prepaid expenses and other 4,432 9,399 Assets held for sale 837 837 --------- --------- Total current assets 160,965 162,686 --------- --------- Property and equipment, at cost 151,648 151,563 Accumulated depreciation (56,317) (54,240) --------- --------- Net property and equipment 95,331 97,323 --------- --------- Investments in joint ventures 608 637 Deferred financing fees, net 2,078 2,265 --------- --------- Total assets $ 258,982 $ 262,911 ========= ========= Liabilities Current portion of long-term debt $ 4,493 $ 6,973 Accounts payable 23,633 28,665 Accrued payroll 2,519 2,498 Other accrued liabilities 5,021 5,826 --------- --------- Total current liabilities 35,666 43,962 --------- --------- Credit facility revolver 63,177 57,560 Term loans 37,317 38,056 Industrial revenue bonds 4,093 4,204 --------- --------- Total long-term debt 104,587 99,820 --------- --------- Deferred income taxes 3,705 3,634 --------- --------- Total liabilities 143,958 147,416 --------- --------- Shareholders' Equity Preferred stock -- -- Common stock 99,771 99,766 Officer note receivable (723) (726) Retained earnings 15,976 16,455 --------- --------- Total shareholders' equity 115,024 115,495 --------- --------- Total liabilities and shareholders' equity $ 258,982 $ 262,911 ========= ========= </TABLE> The accompanying notes are an integral part of these balance sheets. 3 of 26
OLYMPIC STEEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, (in thousands, except per share and tonnage data) <TABLE> <CAPTION> 2003 2002 ---------------- ---------------- (unaudited) <S> <C> <C> Tons sold Direct 229,501 268,725 Toll 39,434 40,367 --------- --------- 268,935 309,092 --------- --------- Net sales $ 114,880 $ 110,239 Cost of materials sold 90,987 82,094 --------- --------- Gross profit 23,893 28,145 Operating expenses Warehouse and processing 7,988 8,929 Administrative and general 5,808 6,188 Distribution 3,764 4,288 Selling 2,754 3,293 Occupancy 1,113 1,039 Depreciation 2,087 2,138 --------- --------- Total operating expenses 23,514 25,875 --------- --------- Operating income 379 2,270 Income (loss) from joint ventures (29) 192 --------- --------- Income before financing costs and income taxes 350 2,462 Interest and other expense on debt 1,148 1,727 --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle (798) 735 Income tax benefit (provision) 319 (283) --------- --------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle (479) 452 Discontinued operations: Loss from discontinued tube operation, net of income tax benefit of $156 in 2002 -- (250) --------- --------- Income (loss) before cumulative effect of a change in accounting principle (479) 202 Cumulative effect of a change in accounting principle, net of income tax benefit of $1,298 in 2002 -- (2,117) --------- --------- Net loss $ (479) $ (1,915) ========= ========= Basic and diluted net income (loss) per share: Income (loss) from continuing operations $ (0.05) $ 0.05 Loss from discontinued operations -- (0.03) Cumulative effect of a change in accounting principle -- (0.22) --------- --------- Net loss per share $ (0.05) $ (0.20) ========= ========= Weighted average shares outstanding 9,644 9,631 </TABLE> The accompanying notes are an integral part of these statements. 4 of 26
OLYMPIC STEEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (in thousands) <TABLE> <CAPTION> 2003 2002 -------- -------- (unaudited) <S> <C> <C> Cash flows from operating activities: Net loss $ (479) $ (1,915) Adjustments to reconcile net loss to net cash from operating activities- Depreciation and amortization 2,274 2,595 (Income) loss from joint ventures 29 (192) Cumulative effect of a change in accounting principle, net of tax -- 2,117 Long-term deferred income taxes 71 145 -------- -------- 1,895 2,750 Changes in working capital: Accounts receivable (11,562) (17,097) Inventories 9,402 1,683 Prepaid expenses and other 4,967 (1,005) Accounts payable (5,032) 3,977 Accrued payroll and other accrued liabilities (784) 1,022 -------- -------- (3,009) (11,420) -------- -------- Net cash used for operating activities (1,114) (8,670) -------- -------- Cash flows from investing activities: Capital expenditures (95) (449) Proceeds from disposition of property and equipment 1,275 -- -------- -------- Net cash from (used for) investing activities 1,180 (449) -------- -------- Cash flows from financing activities: Credit facility revolver borrowings, net 5,617 8,894 Term loans and industrial revenue bonds (3,330) (61) Proceeds from employee stock purchases 5 -- -------- -------- Net cash from financing activities 2,292 8,833 -------- -------- Cash: Net change 2,358 (286) Beginning balance 1,736 1,054 -------- -------- Ending balance $ 4,094 $ 768 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 5 of 26
OLYMPIC STEEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (dollars in thousands, except share and per share amounts) (1) BASIS OF PRESENTATION: 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. Cost of materials sold primarily includes the costs of the purchased steel, external processing, and inbound freight. As of January 1, 2003, the Company reclassified internal processing costs for toll processing sales from cost of materials sold to operating expenses. Prior year results have been reclassified to conform to the current year presentation. (2) INVESTMENTS IN JOINT VENTURES: 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), a certified Minority Business Enterprise company supporting the flat-rolled steel requirements of the automotive industry. As of March 31, 2003, Olympic guaranteed 50% of OLP's $16,258 and 49% of GSP's $1,422 of outstanding debt on a several basis. The following table sets forth selected data for the Company's OLP joint venture: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, ---------------------- RESULTS OF OPERATIONS: 2003 2002 - ---------------------- ------ ------ <S> <C> <C> Net sales $7,014 $6,453 Gross profit 2,737 2,392 Operating income 231 553 Net income $ 55 $ 397 </TABLE> 6 of 26
(3) GOODWILL: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which required that the Company cease amortization of goodwill and conduct periodic impairment tests of goodwill. The Company estimated the fair value of its reporting units using a present value method that discounted future cash flows. The cash flow estimates incorporated 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 No. 142 required the Company to complete the second step of the goodwill impairment test and compare the implied fair value of each reporting unit's goodwill with the carrying value of that goodwill. As a result of this assessment, the Company recorded a non-cash, 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. (4) DEBT: In December 2002, the Company entered into a new 3-year, $132,000 secured bank-financing agreement (the Credit Facility) comprised of a revolver and two term loan components. The Credit Facility is collateralized by the Company's accounts receivable, inventories, and substantially all property and equipment. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $90,000 in the aggregate. The Company has the option to borrow based on the agent bank's base rate or Eurodollar Rates (EURO) plus a premium. The Company incurred $2,225 of closing fees and expenses in connection with the new Credit Facility, which have been capitalized and included in "Deferred Financing Fees, Net" on the accompanying consolidated balance sheets. These costs are being amortized to interest and other expense on debt over the 3-year term of the agreement. The Company's effective borrowing rate inclusive of deferred financing fees for the first three months of 2003 was 5.0% compared to 10.0% in 2002. Monthly principal repayments of $367 commenced February 1, 2003 for the term loan components of the Credit Facility. The Credit Facility requires the Company to comply with various covenants, the most significant of which include: (i) minimum availability of $10,000, tested monthly, (ii) a minimum fixed charge coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are tested quarterly commencing March 31, 2003, (iii) restrictions on additional indebtedness, and (iv) limitations on capital expenditures. At March 31, 2003, the Company had $22,264 of availability under its Credit Facility and was in compliance with its various covenants. 7 of 26
Included in the Credit Facility revolver balances on the accompanying consolidated balance sheets are $6,839 and $2,065 of checks issued that have not cleared the bank as of March 31, 2003, and December 31, 2002, respectively. (5) DISCONTINUED OPERATIONS: In 2002, the Company closed its unprofitable tube processing operation (Tubing) in Cleveland, Ohio. In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," Tubing has been accounted for as a discontinued operation. As a result, Tubing's after-tax operating loss of $250 for the first three months of 2002 is shown separate from the Company's results from continuing operations. In December 2002, the Company sold the equipment located at the Tubing operation for $1,275 (its approximate appraised and net book value) and used the proceeds from the sale to reduce debt. The Tubing real estate is recorded as "Assets Held for Sale" on the accompanying consolidated balance sheets for $837. The Company anticipates selling the Tubing real estate during 2003 and will use the proceeds to reduce debt. During the first three months of 2003, the Company paid $51 of post-closure tenancy costs related to the Tubing facility. The accompanying March 31, 2003 and December 31, 2002 consolidated balance sheets include $263 and $314, respectively, in "Other Accrued Liabilities" for remaining Tubing liabilities, which the Company expects to be paid in 2003. Operating results of the discontinued Tubing operation were as follows for the quarter ended March 31, 2002: <TABLE> <S> <C> Net sales $ 1,778 Loss before income taxes (406) Income tax benefit 156 ------- Net loss from discontinued operations $ (250) ======= Basic and diluted net loss per share from discontinued operations $ (.03) ======= </TABLE> (6) SHARES OUTSTANDING AND EARNINGS PER SHARE: Earnings per share have been calculated based on the weighted average number of shares outstanding. Basic and diluted weighted average shares outstanding were 9.6 million for both periods presented. Stock options to purchase 982,833 shares at March 31, 2003 and 885,833 at 8 of 26
March 31, 2002, were not dilutive and therefore were not included in the computation of diluted loss per share amounts. (7) STOCK OPTIONS: Options to purchase 982,833 shares are currently outstanding, of which 492,666 are exercisable at prices ranging from $1.97 to $15.50 per share. Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date under SFAS No. 123, net income and earnings per share would have been reduced by the amounts shown below: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, ------------------------- 2003 2002 ------- ------- <S> <C> <C> Net loss, as reported $ (479) $(1,915) Pro forma expense, net of tax (59) (33) ------- ------- Pro forma net loss $ (538) $(1,948) ======= ======= Basic and diluted net loss per share: As reported $ (0.05) $ (0.20) ======= ======= Pro forma $ (0.06) $ (0.20) ======= ======= </TABLE> 9 of 26
(8) SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the first three months of 2003 and 2002 totaled $607 and $1,138, 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 income tax refunds of $3,684 in July 2002 and $1,157 in March 2003 after filing its federal income tax returns for the fiscal years ended December 31, 2001 and 2002, respectively, and the related carryback claims. Income tax refunds in the first three months of 2003 totaled $1,182, compared to $42 of income tax payments made in the first three months of 2002. 10 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates under different assumptions or conditions. On an ongoing basis, the Company monitors and evaluates its estimates and assumptions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its consolidated financial statements: Allowance for Doubtful Accounts Receivable The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance is maintained at a level considered appropriate based on historical experience and specific customer collection issues that the Company has identified. Estimation of such losses requires adjusting historical loss experience for current economic conditions and judgments about the probable effects of economic conditions on certain customers. The Company can not guarantee that the rate of future credit losses will be similar to past experience. The Company considers all available information when assessing each quarter the adequacy of its allowance for doubtful accounts. Inventory Valuation The Company's inventories are stated at the lower of cost or market and include the costs of the purchased steel, internal and external processing, and inbound freight. Cost is determined using the specific identification method. The Company regularly reviews its inventory on hand and records provisions for obsolete and slow-moving inventory based on historical and current sales trends. Changes in product demand and the Company's customer base may affect the value of inventory on hand, which may require higher provisions for obsolete or slow-moving inventory. 11 of 26
Impairment of Long-Lived Assets The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances which could trigger an impairment review include significant underperformance relative to the expected historical or projected future operating results, significant changes in the manner of the use of the acquired assets or the strategy for the overall business or significant negative industry or economic trends. The Company records an impairment or change in useful life whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Income Taxes The Company records operating loss and tax credit carryforwards and the estimated effect of temporary differences between the tax basis of assets and liabilities and the reported amounts in its consolidated balance sheets. The Company follows detailed guidelines in each tax jurisdiction when reviewing tax assets recorded on the balance sheet and provides for valuation allowances as required. Deferred tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies and, most importantly, on projections of future taxable income. The projections of future taxable income require assumptions regarding volume, selling prices, gross profits, expense levels and industry cyclicality. If the Company is unable to generate sufficient future taxable income in certain tax jurisdictions, the Company will be required to record a valuation allowance against its deferred tax assets. OVERVIEW The Company's results of operations are affected by numerous external factors, such as general business, 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 profits. Products that have more value-added processing generally have a greater gross profit. Accordingly, the Company's overall gross profit 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 12 of 26
Detroit and Georgia operations. As of January 1, 2003, the Company reclassified internal processing costs for toll processing sales from cost of materials sold to operating expenses. Prior year results have been reclassified to conform to the current year presentation. 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), 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 March 31, 2003, Olympic guaranteed 50% of OLP's $16.3 million and 49% of GSP's $1.4 million of outstanding debt on a several basis. Financing costs include interest expense on debt and deferred financing fees amortized to expense over the terms of the Company's bank-financing agreements (the Financing Costs). 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. Domestic steel producers generally supply domestic customers before meeting foreign demand, particularly during periods of supply constraints. In 2002, the Company closed its unprofitable tube processing operation (Tubing) in Cleveland, Ohio. In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," Tubing has been accounted for as a discontinued operation. As a result, Tubing's after-tax operating loss of $250 thousand for the first three months of 2002 is shown separate from the Company's results from continuing operations. In December 2002, the Company sold the equipment located at the Tubing operation for $1.3 million (its approximate appraised and net book value) and used the proceeds from the sale to reduce debt. The Tubing real estate is recorded as "Assets Held for Sale" on the accompanying consolidated balance sheets for $837 thousand. The Company anticipates selling the Tubing real estate during 2003 and will use the proceeds to reduce debt. In April 2003, the Company's collective bargaining agreement covering its Minneapolis plate processing facility was renewed to March 31, 2006. The Company's collective bargaining agreement covering its Detroit hourly plant maintenance personnel (6 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, there can be no assurance that such a resolution will occur. The Company has never experienced a work 13 of 26
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. RESULTS OF OPERATIONS Tons sold decreased 13.0% to 269 thousand in the first quarter of 2003 from 309 thousand in the first quarter of 2002. Tons sold in the first quarter of 2003 included 230 thousand from direct sales and 39 thousand from toll processing, compared with 269 thousand direct tons and 40 thousand toll tons in the comparable period of last year. The decrease in tons sold was attributable to depressed customer demand across substantially all markets served by the Company. The Company does not expect shipment levels to improve in the second quarter of 2003, as demand for flat-rolled steel remains weak. Net sales increased 4.2% to $114.9 million in the first quarter of 2003 from $110.2 million in the first quarter of 2002. First quarter average selling prices increased 19.8% from last year's first quarter but declined 1.2% from the fourth quarter 2002. As a percentage of net sales, gross profit decreased to 20.8% in the first quarter of 2003 from 25.5% in the first quarter of 2002. The gross profit decrease was primarily attributable to selling higher-priced steel purchased during tight supply conditions experienced during the first nine months of 2002 coupled with soft demand. Material purchase costs for hot rolled steel (the majority of Olympic's revenues) have declined approximately 25% from October 2002 to March 2003 as demand for steel weakened. This downward pricing trend has continued into the second quarter of 2003. As a result, the Company expects its second quarter 2003 gross profit percentages to remain consistent with first quarter 2003 performance. Operating expenses in the first quarter of 2003 decreased 9.1% to $23.5 million from $25.9 million in last year's first quarter. The operating expense decreases are the result of personnel reductions and additional cost cutting measures, as well as decreased sales volumes. As a percentage of net sales, operating expenses decreased to 20.5% for the first quarter of 2003 from 23.5% in the comparable 2002 period. Loss from joint ventures totaled $29 thousand in the first quarter of 2003, compared to income of $192 thousand in the first quarter of 2002. 14 of 26
Financing Costs in the first quarter of 2003 decreased to $1.1 million from $1.7 million in the first quarter of 2002. The Company's effective borrowing rate inclusive of deferred financing fees for the first three months of 2003 was 5.0% compared to 10.0% in 2002. Effective borrowing rates decreased as a result of the Company's new credit facility completed in December 2002. For the first quarter of 2003, the Company reported a loss from continuing operations before income taxes of $798 thousand. In the 2002 first quarter, income from continuing operations before income taxes and cumulative effect of a change in accounting principle totaled $735 thousand. An income tax benefit of 40.0% was recorded in the first quarter of 2003 compared to an income tax provision of 38.5% in the first quarter of 2002. Loss from the discontinued Tubing operation, net of a 38.5% income tax benefit, totaled $250 thousand or $.03 per share in the first quarter of 2002. Included in the Company's first quarter 2002 net loss is an after-tax cumulative effect of a change in accounting principle charge of $2.1 million, or $.22 per share, from the Company's adoption of Financial Accounting Standards Board Statement No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." Net loss for the first quarter of 2003 totaled $479 thousand, or $.05 per share, compared to a net loss of $1.9 million, or $.20 per share, in the first quarter of 2002. Weighted average shares outstanding totaled 9.6 million for both periods presented. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund its working capital needs, 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 March 31, 2003 increased $6.6 million from the end of the prior year. The increase was primarily attributable to a $10.3 million increase in accounts receivables and a $5.0 million decrease in accounts payable. Offsetting these increases was a $9.4 million reduction of inventory from December 31, 2002. The increase in accounts receivable at March 31, 2003 was the result of seasonal increased tonnage sales in the first quarter of 2003 as compared to the fourth quarter of 2002. 15 of 26
Net cash used for operating activities totaled $1.1 million for the three months ended March 31, 2003. Cash generated from earnings before non-cash items totaled $1.9 million, while cash used for working capital purposes totaled $3.0 million. During the first three months of 2003, net cash generated from investing activities totaled $1.2 million. Proceeds from the disposition of the Company's discontinued Tubing operation equipment totaled $1.3 million. Capital spending totaled $95 thousand in the first quarter of 2003. Net cash provided by financing activities totaled $2.3 million and primarily consisted of borrowings on the Company's credit facility to fund working capital requirements offset by scheduled principal repayments under the Company's debt agreements. 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 income tax refunds of $3.7 million in July 2002 and $1.2 million in March 2003 after filing its federal income tax returns for the fiscal years ended December 31, 2001 and 2002, respectively, and the related carryback claims. In December 2002, the Company entered into a new 3-year, $132 million secured bank-financing agreement (the Credit Facility) which significantly reduced the Company's financing costs. The Credit Facility is comprised of a revolver and two term loan components. The Credit Facility is collateralized by the Company's accounts receivable, inventories, and substantially all property and equipment. Revolver borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $90 million in the aggregate. The Company has the option to borrow based on the agent bank's base rate or Eurodollar Rates (EURO) plus a premium. The Company incurred $2.2 million of closing fees and expenses in connection with the new Credit Facility, which have been capitalized and included in "Deferred Financing Fees, Net" on the accompanying consolidated balance sheets. These costs are being amortized to interest and other expense on debt over the 3-year term of the agreement. The Company's effective borrowing rate inclusive of deferred financing fees for the first three months of 2003 was 5.0% compared to 10.0% in 2002. Monthly principal repayments of $367 thousand commenced February 1, 2003 for the term loan components of the Credit Facility. The Credit Facility requires the Company to comply with various covenants, the most significant of which include: (i) minimum availability of $10 million, tested monthly, (ii) a minimum fixed 16 of 26
charge coverage ratio of 1.25, and a maximum leverage ratio of 1.75, which are tested quarterly commencing March 31, 2003, (iii) restrictions on additional indebtedness, and (iv) limitations on capital expenditures. At March 31, 2003, the Company had $22.3 million of availability under its Credit Facility and was in compliance with its various 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. 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, economic and political conditions; competitive factors such as the availability and pricing of steel and fluctuations in customer demand; layoffs or work stoppages by the Company's, suppliers', or customers' personnel; equipment malfunctions or installation delays; the adequacy of information technology and business system software investment; the successes of its joint ventures; the successes of the Company's strategic efforts and initiatives to increase sales volumes, improve cash flows and reduce debt, maintain or improve inventory turns and reduce its costs; and customer, supplier, and competitor consolidation or insolvency. Should one or more of these or other 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. 17 of 26
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Raw material prices for the Company's products have significantly decreased over the last 6 months. When raw material prices decline, customer demands for lower prices result in lower selling prices and, as the Company uses existing steel inventory, lower gross profit dollars. Declining steel prices therefore adversely affected the Company's results of operations in the first quarter of 2003. The Company expects the current environment of weak steel pricing and depressed customer demand to continue to negatively impact its 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. 18 of 26
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 99.1 - Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 - Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 19 of 26
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: May 13, 2003 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 (Principal Accounting Officer) 20 of 26
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; 21 of 26
(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 --------------------- Michael D. Siegal Olympic Steel, Inc. Chairman & Chief Executive Officer May 13, 2003 22 of 26
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; 23 of 26
(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/ Richard T. Marabito ----------------------- Richard T. Marabito Olympic Steel, Inc. Chief Financial Officer May 13, 2003 24 of 26