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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, 2000
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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
------------------------------- -------------------------
(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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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 1, 2000
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Common stock, without par value 9,331,100
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OLYMPIC STEEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2000 and 3
December 31, 1999
Consolidated Statements of Income - for the three and nine
months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
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PART I. FINANCIAL INFORMATION
OLYMPIC STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Cash $ 704 $ 1,433
Accounts receivable 14,888 9,802
Inventories 106,240 119,585
Prepaid expenses and other 6,916 6,693
---------------- ----------------
Total current assets 128,748 137,513
---------------- ----------------
Property and equipment 161,799 156,849
Accumulated depreciation (39,242) (32,645)
---------------- ----------------
Net property and equipment 122,557 124,204
---------------- ----------------
Unexpended IRB funds 412 1,668
Goodwill 3,545 3,622
Joint venture investments and advances (578) (42)
---------------- ----------------
Total assets $ 254,684 $ 266,965
================ ================
Liabilities
Current portion of long-term debt $ 6,055 $ 6,061
Accounts payable 18,868 20,671
Accrued payroll 3,448 3,595
Other accrued liabilities 5,576 5,921
---------------- ----------------
Total current liabilities 33,947 36,248
---------------- ----------------
Revolving credit agreement 47,279 47,892
Term loans 25,015 29,076
Industrial revenue bonds 10,094 10,397
---------------- ----------------
Total long-term debt 82,388 87,365
---------------- ----------------
Deferred income taxes 6,614 6,532
---------------- ----------------
Total liabilities 122,949 130,145
---------------- ----------------
Shareholders' Equity
Preferred stock - -
Common stock 99,057 102,237
Retained earnings 32,678 34,583
---------------- ----------------
Total shareholders' equity 131,735 136,820
---------------- ----------------
Total liabilities and shareholders' equity $ 254,684 $ 266,965
================ ================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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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,
---------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Tons sold
Direct 238,288 259,808 795,413 781,470
Toll 33,295 46,287 130,919 157,224
---------------- --------------- ---------------- ----------------
271,583 306,095 926,332 938,694
================ =============== ================ ================
Net sales $ 122,548 $ 125,388 $ 406,197 $ 388,582
Cost of sales 99,079 94,563 318,962 294,592
---------------- --------------- ---------------- ----------------
Gross margin 23,469 30,825 87,235 93,990
Operating expenses
Warehouse and processing 8,644 8,849 25,706 25,760
Administrative and general 6,478 7,365 20,865 21,414
Distribution 4,682 4,583 15,359 13,808
Selling 3,047 3,673 9,542 11,315
Depreciation and amortization 2,270 1,877 6,813 5,644
Occupancy 1,039 1,086 3,438 3,438
---------------- --------------- ---------------- ----------------
Total operating expenses 26,160 27,433 81,723 81,379
---------------- --------------- ---------------- ----------------
Operating income (loss) (2,691) 3,392 5,512 12,611
Loss from joint ventures (444) (303) (933) (700)
---------------- --------------- ---------------- ----------------
Income (loss) before financing costs and taxes (3,135) 3,089 4,579 11,911
Interest expense 1,632 1,006 4,867 2,825
Receivable securitization expense 950 769 2,784 2,245
---------------- --------------- ---------------- ----------------
Income (loss) before taxes (5,717) 1,314 (3,072) 6,841
Income taxes (2,172) 506 (1,167) 2,634
---------------- --------------- ---------------- ----------------
Net income (loss) $ (3,545) $ 808 $ (1,905) $ 4,207
================ =============== ================ ================
Basic and diluted income (loss) per share $ (0.37) $ 0.08 $ (0.19) $ 0.40
================ =============== ================ ================
Weighted average shares outstanding 9,505 10,381 9,793 10,543
================ =============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(in thousands)
2000 1999
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (1,905) $ 4,207
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities-
Depreciation and amortization 6,813 5,644
Loss from joint ventures 933 700
Long-term deferred income taxes 82 1,731
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5,923 12,282
Changes in working capital:
Accounts receivable (5,086) (18,321)
Inventories 13,345 2,385
Prepaid expenses and other (251) 1,027
Accounts payable (1,803) (2,219)
Accrued payroll and other accrued liabilities (492) 2,218
-------- --------
5,713 (14,910)
-------- --------
Net cash from (used for) operating activities 11,636 (2,628)
-------- --------
Cash flows from investing activities:
Facility construction and improvements (230) (4,017)
Equipment purchases and deposits (4,310) (3,431)
Other capital expenditures, net (521) (1,441)
Investments in joint ventures (397) --
-------- --------
Net cash used for investing activities (5,458) (8,889)
-------- --------
Cash flows from financing activities:
Revolving credit agreement (613) 11,880
Term loans and IRB's (4,370) 791
Repurchase of common stock (3,180) (2,587)
Proceeds from IRB issuance -- 5,973
Unexpended IRB funds 1,256 (5,824)
-------- --------
Net cash from (used for) financing activities (6,907) 10,233
-------- --------
Cash:
Decrease (729) (1,284)
Beginning balance 1,433 1,825
-------- --------
Ending balance $ 704 $ 541
======== ========
The accompanying notes are an integral part of these statements.
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OLYMPIC STEEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
The accompanying consolidated financial statements have been prepared from the
financial records of Olympic Steel, Inc. (Olympic or the Company) and its
wholly-owned subsidiaries, without audit and reflect all 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. Certain
amounts in the 1999 consolidated financial statements have been reclassified to
conform to the 2000 presentation.
(1) SHARES OUTSTANDING AND EARNINGS PER SHARE:
During the first half of 2000, the Company completed its initial 1 million
shares repurchase program. The 1 million shares were purchased at an average
price of $5.86 per share. On July 28, 2000, the Company's board of directors
authorized a one-year program to purchase up to an additional 1 million shares
of Olympic common stock. During the third quarter of 2000, the Company purchased
360,900 at an average price of $3.88 per share. Repurchased shares are held in
treasury and are available for general corporate purposes. The Company does not
anticipate purchasing additional shares during the remainder of 2000.
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.
(2) ACCOUNTS RECEIVABLE:
As of September 30, 2000, and December 31, 1999, $51 million and $52 million,
respectively, of receivables were sold under the Company's accounts receivable
securitization program. Receivables sold are reflected as a reduction of
accounts receivable in the accompanying consolidated balance sheets.
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(3) LONG-TERM DEBT:
Interest rates under the Company's various credit agreements are generally based
on LIBOR plus a premium (the Premium) determined quarterly, which varies with
the Company's operating performance and financial leverage. The Premium has been
2.0% since December 1, 1999. Commencing October 1, 2000, the Premium increased
to 2.25%. The overall effective interest rate for all debt for the three and
nine month periods ended September 30, 2000 was 8.6% and 8.2%, respectively,
compared to 6.8% for both periods in 1999.
The Company did not meet a required interest coverage covenant contained in its
bank credit agreement at September 30, 2000. The Company's bank group has waived
the interest coverage default. The Company expects to amend the agreement during
the fourth quarter of 2000.
Included in the revolving credit balances on the accompanying consolidated
balance sheets are $7.1 million and $6.3 million of checks issued that have not
cleared the bank as of September 30, 2000, and December 31, 1999, respectively.
(4) STOCK OPTIONS:
During the second quarter of 2000, additional non-qualified options to purchase
171,500 shares of common stock were issued to the Company's outside directors,
executive officers and senior managers at an option price of $4.84, the average
market value of a share of common stock at the grant date. After issuance of the
new grants, options to purchase 441,833 shares were outstanding, of which
152,011 were exercisable at prices ranging from $7.18 to $15.50 per share.
Shares available under the stock option plan were increased to 950,000 from
450,000, by shareholder vote on April 26, 2000.
(5) JOINT VENTURES:
In February 2000, the Company advanced $147 thousand to its Trumark Steel &
Processing joint venture. In August 2000, the Company contributed $250 thousand
to its Olympic Laser Processing joint venture (OLP). An additional $250 thousand
was contributed to OLP in October 2000. The Company expects to continue to fund
the working capital and capital expenditure requirements of these operations
during the remainder of 2000.
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(6) SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the nine months ended September 30, 2000 and 1999 totaled
$4.9 million and $2.9 million, respectively. Income taxes paid during the first
nine months of 2000 and 1999 totaled $84 thousand and $224 thousand,
respectively.
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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, and work stoppages by automotive manufacturers.
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 and Georgia operations. 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
(OLP), a company formed in April 1997 to process laser welded sheet steel blanks
for the automotive industry and Trumark Steel & Processing (TSP), a company
formed in December 1997, to support the flat-rolled steel requirements of the
automotive industry as a Minority Business Enterprise (MBE). The Company's 50%
interest in OLP and 49% interest in TSP are accounted for under the equity
method. The Company guarantees portions of outstanding debt under both of the
joint ventures' bank credit facilities. As of September 30, 2000, Olympic
guaranteed 50% of OLP's $19.6 million and 49% of TSP's $2.7 million of
outstanding debt on a several basis.
OLP constructed a new facility and has equipped it with two automated
laser-welding lines, which are both in production. An additional manual-feed
line is now in production and a second manual-feed line is expected to become
operational during the next six months. Start-up costs for OLP have been
expensed as incurred.
Financing costs include interest expense on debt and costs associated
with the Company's accounts receivable securitization program (the Financing
Costs). Interest rates paid by the Company under its credit agreement are
generally based on 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.
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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.
RESULTS OF OPERATIONS
Tons sold decreased 11.3% to 272 thousand in the third quarter of 2000
from 306 thousand in the third quarter of 1999, and decreased 1.3% in the first
nine months of 2000 to 926 thousand from 939 thousand in the same period of
1999. Tons sold in the third quarter of 2000 included 239 thousand from direct
sales and 33 thousand from toll processing, compared with 260 thousand direct
tons and 46 thousand toll tons in the comparable period of last year. Tons sold
in the first nine months of 2000 included 795 thousand from direct sales and 131
thousand from toll processing, compared with 782 thousand direct tons and 157
thousand toll tons last year. The decrease in tons sold was attributable to
continued weakened customer demand for steel, which commenced in April 2000.
Lower demand was particularly evident in the Company's automotive,
transportation, construction and other service center sectors.
Net sales decreased 2.3% to $122.5 million for the third quarter of
2000 from $125.4 million for 1999. For the first nine months, net sales
increased 4.5% to $406.2 million from $388.6 million. Average selling prices
increased 10.2% and 5.9% for the three and nine month periods, respectively,
primarily due to higher selling prices for steel and a lower proportion of toll
sales in 2000.
As a percentage of net sales, gross margin decreased to 19.2% for the
third quarter of 2000 from 24.6% for 1999, and to 21.5% for the first nine
months of 2000 from 24.2% last year. The margin declines are the result of
continued sharp decreases in the market price for steel since the second quarter
of 2000, as well as a lower proportion of toll sales.
Operating expenses in the third quarter of 2000 decreased 4.6% to $26.2
million from $27.4 million in the same period last year. For the first nine
months, operating expenses increased .4% to $81.7 million from $81.4 million. As
a percentage of net sales, operating expenses decreased to 21.3% for the third
quarter of 2000 from 21.9% for 1999. For the first nine months of 2000,
operating expenses decreased to 20.1% of net sales compared to 20.9% last year.
Operating expenses were negatively impacted in the first nine months of 2000 by
rising
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distribution costs attributable to higher fuel costs, as well as depreciation
expense related to the new Chambersburg and Iowa facilities.
Losses from joint ventures totaled $444 thousand in the third quarter
of 2000, compared to $303 thousand in 1999. For the first nine months of 2000,
losses from joint ventures totaled $933 thousand compared to $700 thousand last
year.
Financing Costs in the third quarter of 2000 increased to $2.6 million
from $1.8 million in the third quarter of 1999. For the first nine months of
2000, Financing Costs increased to $7.7 million from $5.1 million. The increases
are primarily attributable to higher market interest rates and a higher Premium.
Receivable securitization expense increased due to higher commercial paper
interest rates in the current year. The Company's effective bank borrowing rates
for the three and nine-month periods of 2000 were 8.6% and 8.2%, respectively,
compared to 6.8% for both periods in 1999. The Company's Premium has been 2.0%
since December 1, 1999, and increased to 2.25% on October 1, 2000.
Loss before taxes for the third quarter of 2000 totaled $5.7 million,
compared to $1.3 million of income for 1999. For the first nine months of 2000,
loss before taxes totaled $3.1 million, compared to $6.8 million of income in
1999. An income tax benefit of approximately 38.0% was recorded in the 2000
periods compared to an income tax provision of 38.5% in 1999.
Net loss for the third quarter of 2000 totaled $3.5 million, or $.37
per share, compared to net income of $.8 million, or $.08 per share for 1999.
For the first nine months of 2000, net loss totaled $1.9 million, or $.19 per
share, compared to net income of $4.2 million, or $.40 per share in 1999. As a
result of the Stock Purchase, average shares outstanding totaled 9.5 million in
the third quarter of 2000 compared to 10.4 million in last year's third quarter.
For the first nine months of 2000, average shares outstanding were 9.8 million
compared to 10.5 million last year.
The Company expects the weakness in customer demand and compressed
gross margins experienced during the third quarter to continue throughout the
remainder of 2000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund the purchase and
upgrading of processing equipment and services, the construction and upgrading
of related facilities, its working capital requirements, and historically its
investments in joint ventures and acquisitions. The Company uses cash generated
from operations, long-term debt obligations, equity offerings, and leasing
transactions to fund these requirements. Historically, the Company has used
revolving credit borrowings and proceeds from its accounts receivable
securitization program to finance working capital requirements.
Net cash from operating activities represents primarily earnings before
non-cash charges for depreciation, amortization and losses from joint ventures,
as well as changes in working capital. During the first nine months of 2000,
$11.6 million of net cash was provided from operating activities, consisting of
$5.9 million of cash generated from earnings before non-cash charges and $5.7
million of cash generated from working capital components.
Working capital at September 30, 2000 decreased by $6.5 million since
December 31, 1999. The decrease is primarily attributable to a $13.3 million
decrease in inventory, offset by a $5.1 million increase in accounts receivable.
The decrease in inventory is the result of a focused effort to improve inventory
turns.
As of September 30, 2000, and December 31, 1999, $51 million and $52
million, respectively, of eligible receivables were sold under the Company's
accounts receivable securitization program. 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.
During the first nine months of 2000, net cash used for investing
activities totaled $5.5 million, consisting primarily of progress payments made
for a new slitter in Detroit, which is expected to become operational in the
fourth quarter of 2000, as well as final expenditures for the new Chambersburg
plate processing and machining facility.
Cash flows used for financing activities consisted primarily of
paydowns on the Company's revolving credit agreement, the Stock Purchase, and
scheduled payments under its other existing long-term agreements. On April 23,
1999, the Company's board of directors authorized a program to purchase up to 1
million shares of Olympic common stock. In June 2000, the Company completed the
1 million shares repurchase program at a total cost of $5.8 million. On July 28,
2000, the Company's board of directors authorized a one-year program to purchase
up to an additional 1 million shares of common stock. During the third quarter
of 2000,
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the Company purchased 360,900 at an average price of $3.88 per share. The
Company does not anticipate purchasing additional shares during the remainder of
2000. The cost of purchasing shares has been funded from the Company's revolving
credit facility.
The Company did not meet a required interest coverage covenant
contained in its bank credit agreement at September 30, 2000. The Company's bank
group has waived the interest coverage default. The Company expects to amend the
agreement during the fourth quarter of 2000.
As of September 30, 2000, approximately $39.7 million in unused
availability existed under the Company's revolving credit and accounts
receivable securitization facilities. The Company believes that funds available
under its revolving 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, capital
expenditure requirements, and the Stock Purchase if the Company elects to resume
this program, 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, acquisitions and
significant improvements to processing equipment to respond to customers'
demands.
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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," "anticipate," "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,
construction and other service centers markets served by the Company; work
stoppages by automotive or steel manufacturers; potential equipment installation
delays and malfunctions, particularly for the new slitter in Detroit and the
laser welding lines at OLP; the successes of its joint ventures; and the
successes of the Company's ability to increase sales volumes, improve gross
margins, quality, service and inventory turns and 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
expected, believed, anticipated 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
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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 1, 2000 By: /s/ Michael D. Siegal
-----------------------------------
MICHAEL D. SIEGAL
Chief Executive Officer
By: /s/ Richard T. Marabito
-----------------------------------
RICHARD T. MARABITO
Chief Financial Officer and Principal
Accounting Officer
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