EX-99.1 3 a97077exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 COMBINED FINANCIAL STATEMENTS PRECISION STRIP COMPANIES Years ended December 31, 2002 and 2001 with Report of Independent Auditors . . . Precision Strip Companies Combined Financial Statements Years ended December 31, 2002 and 2001 TABLE OF CONTENTS Report of Independent Auditors...................................... 1 Audited Combined Financial Statements Combined Balance Sheets............................................. 2 Combined Statements of Income....................................... 4 Combined Statements of Changes in Shareholders' Equity ............. 5 Combined Statements of Cash Flows................................... 6 Notes to Combined Financial Statements.............................. 7
Report of Independent Auditors The Board of Directors Precision Strip Companies We have audited the accompanying combined balance sheets of Precision Strip Companies (the Company) as of December 31, 2002 and 2001 and the related combined statements of income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the combined financial position of Precision Strip Companies at December 31, 2002 and 2001 and the combined results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. [ERNST & YOUNG LLP LOGO] May 31, 2003, except Note 6, which is dated June 11, 2003 Dayton, Ohio Precision Strip Companies Combined Balance Sheets (in thousands)
DECEMBER 31 2002 2001 ------------------- ASSETS Current assets: Cash and cash equivalents $ 32 $ 29 Accounts receivable 18,521 17,772 Prepaid expenses 192 197 Steel inventories 132 - ------------------- Total current assets 18,877 17,998 Property and equipment, at cost: Land and land improvements 3,503 3,194 Machinery and equipment 105,675 95,815 Buildings 56,268 45,648 Leasehold improvements 7,467 6,419 Furniture and fixtures 5,402 5,325 Automobiles and trucks 9,730 8,281 Construction-in-process 13,409 19,791 ------------------- 201,454 184,473 Less accumulated depreciation and amortization 57,854 49,694 ------------------- Net property and equipment 143,600 134,779 Covenant not to compete, net of amortization of $3,430 and $3,069, respectively Trust assets primarily in fixed income securities 1,877 2,105 Other assets 94 168 ------------------- Total assets $164,629 $155,592 ===================
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DECEMBER 31 2002 2001 ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,721 $ 3,892 Income taxes payable 87 87 Accrued liabilities: Payroll 3,238 2,753 Insurance 243 170 Taxes, other than income 1,149 812 Other 157 285 Long-term obligations due within one year 396 396 ------------------- Total current liabilities 8,991 8,395 Long-term obligations due after one year 17,236 31,122 Deferred compensation liabilities 1,877 2,105 Shareholders' equity: Class A voting common stock, no par value: Authorized shares - 2,400 Issued and outstanding shares - 1,132 at stated value after deducting 48 shares held in treasury 1,970 1,970 Class B nonvoting common stock, no par value: Authorized shares - 5,850 Issued and outstanding shares - 2,472 at stated value after deducting 1,648 shares held in treasury 120 120 Additional capital 1,365 1,365 Retained earnings 133,070 110,515 ------------------- Total shareholders' equity 136,525 113,970 ------------------- Total liabilities and shareholders' equity $164,629 $155,592 ===================
See accompanying notes. 3 Precision Strip Companies Combined Statements of Income (in thousands)
YEAR ENDED DECEMBER 31 2002 2001 ---------------------- Net sales $ 121,801 $ 113,514 Operating costs and expenses: Cost of sales 72,518 64,667 Selling, general, and administrative 13,915 12,547 ---------------------- 86,433 77,214 ---------------------- Operating income 35,368 36,300 Other (expense) income: Interest expense (786) (1,621) Amortization (383) (383) Other expenses (870) (943) Other income 217 121 ---------------------- (1,822) (2,826) ---------------------- Income before income taxes 33,546 33,474 State and local income taxes 217 392 ---------------------- Net income $ 33,329 $ 33,082 ======================
See accompanying notes. 4 Precision Strip Companies Statements of Changes in Shareholders' Equity (in thousands)
COMMON SHARES ADDITIONAL RETAINED CLASS A CLASS B CAPITAL EARNINGS TOTAL ---------------------------------------------------------- Balances at January 1, 2001 $ 1,970 $ 120 $ 1,365 $ 94,987 $ 98,442 Net income - - - 33,082 33,082 Dividends paid (Note 5) - - - (17,554) (17,554) ---------------------------------------------------------- Balances at December 31, 2001 1,970 120 1,365 110,515 113,970 Net income - - - 33,329 33,329 Dividends paid (Note 5) - - - (10,774) (10,774) ---------------------------------------------------------- Balances at December 31, 2002 $ 1,970 $ 120 $ 1,365 $ 133,070 $ 136,525 ==========================================================
See accompanying notes. 5 Precision Strip Companies Statements of Cash Flows (in thousands)
YEAR ENDED DECEMBER 31 2002 2001 ---------------------- OPERATING ACTIVITIES Net income $ 33,329 $ 33,082 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,824 9,412 Amortization 383 383 Imputed interest on noninterest-bearing obligation - 52 Changes in operating assets and liabilities: Accounts receivable (749) 735 Prepaid expenses 5 (133) Steel inventories (132) - Other assets 74 53 Accounts payable (171) 1,504 Accrued liabilities and income taxes payable 767 307 -------------------- Net cash provided by operating activities 43,330 45,395 INVESTING ACTIVITIES Additions to property and equipment, net of nominal disposals (18,667) (23,312) -------------------- Net cash used by investing activities (18,667) (23,312) FINANCING ACTIVITIES Dividends paid (10,774) (17,554) Payments under revolving line-of-credit agreement (net of nominal borrowings) (13,490) (114) Payment of long-term debt and notes payable (396) (4,396) -------------------- Net cash used by financing activities (24,660) (22,064) -------------------- Net increase in cash and cash equivalents 3 19 Cash and cash equivalents at beginning of year 29 10 -------------------- Cash and cash equivalents at end of year $ 32 $ 29 ==================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 814 $ 1,716 ==================== Income taxes $ 217 $ 395 ====================
See accompanying notes. 6 Precision Strip Companies Notes to Financial Statements December 31, 2002 ($ in thousands) 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Precision Strip Companies (the Company) is comprised of the following entities: Precision Strip, Inc., Precision Strip Transport, Inc., Precision Strip Leasing, Inc., Precision Strip Kenton, Inc., Precision Strip Kenton, LTD., PSI Limited Partnership, and John R. Eiting (d/b/a J.E. Rentals). Precision Strip, Inc. is engaged in metals processing (primarily slitting) and storage and distribution of customer products. The Company's facilities are located in Minster, Kenton, Middletown, and Tipp City, Ohio, Rockport and Anderson, Indiana, Bowling Green, Kentucky and Talladega, Alabama. Precision Strip Transport, Inc. offers transportation services to Precision Strip, Inc.'s customers. These services are offered from the Minster, Kenton, Middletown, and Tipp City, Ohio plants as well as Anderson, Indiana; Bowling Green, Kentucky; and Talladega, Alabama locations. Precision Strip Leasing, Inc. leases three processing lines to two customers in Indiana. The lines are covered by contracts that specify production and pricing requirements. Precision Strip Kenton, LTD., PSI Limited Partnership, and John R. Eiting (d/b/a J.E. Rentals) own and lease certain property to Precision Strip, Inc. and Precision Strip Transport, Inc. Precision Strip Kenton, Inc. and Precision Strip, Inc. own 99% and 1%, respectively, of Precision Strip Kenton, LTD. PRINCIPLES OF COMBINATION The combined statements of the Company include the accounts of Precision Strip, Inc., Precision Strip Transport, Inc., Precision Strip Leasing, Inc., Precision Strip Kenton, Inc., Precision Strip Kenton, LTD., PSI Limited Partnership, and John R. Eiting (d/b/a J.E. Rentals). All significant intercompany accounts and transactions have been eliminated in the combination. 7 Precision Strip Companies Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. ACCOUNTS RECEIVABLE The accounts receivable relates to customers located primarily in the United States. To reduce the credit risk, the Company performs credit investigations prior to establishing customer credit limits and reviews customer credit profiles on a continuous basis. The Company provides an allowance for doubtful accounts, which is determined, based upon specific identification. The allowance for doubtful accounts was zero at December 31, 2002 and 2001. CONCENTRATION OF CREDIT RISK Two customers accounted for approximately 55% and 69% of total accounts receivable at December 31, 2002 and 2001, respectively. Total sales for the two customers accounted for approximately 52% and 55% for the years ending December 31, 2002 and 2001, respectively. The Company extends trade credit to its customers on terms that are generally practiced in the industry, which generally does not require collateral or other security. REVENUE RECOGNITION Revenue is recognized at the time services are provided. Shipping and handling costs are included in cost of sales on the statements of income. DEPRECIATION AND AMORTIZATION Depreciation is provided for on the straight-line method over the estimated useful lives: Buildings 40 years Machinery and equipment 10-20 years Vehicles 5 years 8 Precision Strip Companies Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION AND AMORTIZATION (CONTINUED) Leasehold improvements are amortized on the straight-line method over the remaining term of the lease. The covenant not to compete is being amortized over ten years by the straight-line method. The Company's normal policy is to expense repairs made to capital assets as incurred. Repairs to machinery and equipment must result in an addition to the useful life of the asset before the costs are capitalized. PROFIT SHARING PLAN The Company sponsors a contributory profit sharing plan that covers substantially all employees. Contributions are based upon a percentage of qualifying wages. Profit sharing expense for 2002 and 2001 was approximately $3,285 and $2,787, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company in estimating the fair value of financial instruments used the following methods and assumptions: Cash and cash equivalents - the amounts reported approximate market value. Trust assets - the amounts reported are at market value. Market values are based on quoted market prices. Long-term obligations - the amounts reported are at a carrying value, which approximates market value. Market values are determined using similar debt instruments currently available to the Company that are consistent with the terms, interest rates and maturities. 9 Precision Strip Companies Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. LONG-TERM DEBT AND GUARANTEES The Company's long-term debt at December 31 consisted of the following:
2002 2001 ----------------- Amount due under shared revolving line of credit $15,513 $29,003 Fixed term loan, due in monthly installments of $33 plus interest through March 1, 2008, bearing interest at 6.53%, secured by certain equipment 2,119 2,515 ----------------- 17,632 31,518 Less current maturities of long-term obligations 396 396 ----------------- $17,236 $31,122 =================
The Company participates in a revolving line of credit agreement with a bank, which allows for borrowings of up to $40,000 at 0.50 percent above the LIBOR Rate (1.93% at December 31, 2002). The unsecured revolving line of credit agreement expires on February 1, 2005. The revolving line-of-credit and the fixed term loan have certain restrictive covenants including a maximum leverage ratio and minimum current and cash flow ratios and capital requirements. In 1993, the Company entered into stock redemption agreements with two shareholders for the redemption of all their outstanding Class A and Class B shares. Each shareholder was paid $10,000 for his or her shares, of which $7,500 was in the form of a long-term note payable bearing interest at 133 percent of the prime rate (as defined). The notes were payable in 20 consecutive quarterly installments of $375, which commenced in March 31, 1997 and ended on December 31, 2001. 10 Precision Strip Companies Notes to Financial Statements (continued) 2. LONG-TERM DEBT AND GUARANTEES (CONTINUED) The Company also entered into covenants not to compete with such shareholders for a period of ten years for an aggregate amount of $5,000,000 to be paid in five annual installments of $1,000,000, which commenced on July 1, 1997 and ended on July 1, 2001. These liabilities were subordinated to the Company's revolving line-of-credit agreement. The Company's future maturities of the fixed term loan at December 31, 2002 are approximately as follows: 2003 - $396, 2004 - $396, 2005 - $15,909, 2006 - $396, 2007 - $396 and thereafter - $139. 3. OPERATING LEASE COMMITMENTS Precision Strip Leasing, Inc. leases three processing lines at two locations in Indiana. The first processing line is located in New Carlisle, Indiana and was constructed in 1992. The initial contract was signed in July 1992 and was amended in 2000 to extend to December 31, 2007. Annual revenues are based upon actual production tons multiplied by a tiered pricing structure as certain production volumes are met. Precision Strip Leasing, Inc. is guaranteed a monthly minimum payment. For 2002, this monthly minimum was $60. The second processing line is located in East Chicago, Indiana and was constructed in 1994. The initial contract was signed in April 1994 and the initial eight year term expired in April of 2002. The lease automatically renews for successive one-year periods unless the customer provides six months notice prior to the annual expiration that they wish to terminate. Annual revenues are based upon actual production tons multiplied by a tiered pricing structure as certain production volumes are met. Pricing is adjusted annually for changes in the CPI index. Precision Strip Leasing, Inc. is guaranteed a monthly minimum payment. For 2002, this monthly minimum was $88. The third processing line is also located in New Carlisle, Indiana. The initial contract was signed in February 1997 and the initial five year term expired in August of 2002. The extended term runs through December 31, 2007. The customer may cancel the contract at any time during the extended term. If cancelled, the customer is responsible to pay $200 in liquidated damages multiplied by the percentage of time remaining on the extended term at the time of termination. Annual revenues are based upon actual production tons multiplied by a tiered pricing structure as certain production volumes are met. Precision Strip Leasing, Inc. is guaranteed a monthly minimum payment. For 2002, this monthly minimum was $13. 11 Precision Strip Companies Notes to Financial Statements (continued) 3. OPERATING LEASE COMMITMENTS (CONTINUED) The Company entered into an operating lease for its Bowling Green facility, which expires in April 2009. Future minimum rental commitments under all operating leases at December 31, 2002 are as follows: 2003 $ 982 2004 982 2005 982 2006 982 2007 982 Thereafter 2,610 ------ Future minimum operating lease commitments $7,520 ======
4. INCOME TAXES Precision Strip, Inc., Precision Strip, Transport, Inc., Precision Strip Leasing, Inc., and Precision Strip Kenton, Inc., have elected to be treated as subchapter S corporations. As a result, the shareholders of these entities include the taxable income or loss of the company in their respective personal income tax returns and no provision for federal income tax is recorded. The election may be revoked by action of a majority of the shareholders in future years or may otherwise become inapplicable so that these entities would be subject to federal income tax. PSI Limited Partnership and Precision Strip Kenton, Ltd are partnerships that file information tax return. The items of income and expense are allocated to the partners pursuant to the terms of the Partnership Agreement. Income taxes applicable to the Partnership's results of operations are the responsibility of the individual partners and have not been provided for in the accounts of the Partnership. 5. DIVIDENDS PAID Dividends paid per company per share for the years ended December 31 are as follows:
2002 2001 ---------------------- Precision Strip, Inc. $ 4.39 $ 2.49 Precision Strip Transport, Inc. 31.23 24.60 Precision Strip Leasing, Inc. 6.72 8.40
12 Precision Strip Companies Notes to Financial Statements (continued) 6. SUBSEQUENT EVENT On June 11, 2003, it was announced the Reliance Steel & Aluminum Co. signed an agreement to acquire the stock of the Company. The transactions is expected to be finalized within 30 days, subject to regulatory approvals. 13