EXHIBIT 99.1
Published on
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
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)
May 31, 2003,
except Note 6, which is dated June 11, 2003
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Precision Strip Companies
Combined Balance Sheets
(in thousands)
2
See accompanying notes.
3
Precision Strip Companies
Combined Statements of Income
(in thousands)
See accompanying notes.
4
Precision Strip Companies
Statements of Changes in Shareholders' Equity
(in thousands)
See accompanying notes.
5
Precision Strip Companies
Statements of Cash Flows
(in thousands)
See accompanying notes.
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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.
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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:
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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.
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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:
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.
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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.
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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:
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:
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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.
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