EXHIBIT 99.2
COMBINED FINANCIAL STATEMENTS
Precision Strip Companies
June 30, 2003 and December 31, 2002 and the six months ended June 30, 2003 and
the year ended December 31, 2002 with Report of Independent Auditors
Precision Strip Companies
Combined Financial Statements
June 30, 2003 and December 31, 2002 and the six months ended June 30, 2003
and the year ended December 31, 2002
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 June 30, 2003 and December 31, 2002 and the
related combined statements of income, changes in shareholders' equity, and cash
flows for the six months ended June 30, 2003 and year ended December 31, 2002.
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 June 30, 2003 and December 31, 2002 and the combined results of its
operations and its cash flows for the six months ended June 30, 2003 and year
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
[ERNST & YOUNG LLP LOGO]
July 17, 2003
Dayton, Ohio
1
Precision Strip Companies
Combined Balance Sheets
(in thousands)
JUNE 30, DECEMBER 31,
2003 2002
---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 42 $ 32
Accounts receivable, net of allowance of $600 and $0 at
June 30, 2003 and December 31, 2002, respectively 19,961 18,521
Prepaid expenses 103 192
Steel inventories 690 132
-------------------
Total current assets 20,796 18,877
Property and equipment, at cost:
Land and land improvements 3,503 3,503
Machinery and equipment 113,577 105,675
Buildings 56,265 56,268
Leasehold improvements 7,918 7,467
Furniture and fixtures 5,658 5,402
Automobiles and trucks 10,539 9,730
Construction-in-process 9,943 13,409
-------------------
207,403 201,454
Less accumulated depreciation and amortization 62,672 57,854
-------------------
Net property and equipment 144,731 143,600
Covenant not to compete, net of amortization of $3,611 and
$3,430, respectively - 181
Trust assets primarily in fixed income securities 1,980 1,877
Other assets 76 94
-------------------
Total assets $167,583 $164,629
===================
2
JUNE 30, DECEMBER 31,
2003 2002
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,182 $ 3,721
Income taxes payable 70 87
Accrued liabilities:
Payroll 2,579 3,238
Insurance 750 243
Taxes, other than income 1,512 1,149
Other 161 157
Long-term obligations due within one year 396 396
-------------------
Total current liabilities 7,650 8,991
Long-term obligations due after one year 25,197 17,236
Deferred compensation liabilities 1,980 1,877
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 129,301 133,070
-------------------
Total shareholders' equity 132,756 136,525
-------------------
Total liabilities and shareholders' equity $167,583 $164,629
===================
See accompanying notes
3
Precision Strip Companies
Combined Statements of Income
(in thousands)
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2003 2002
-----------------------------
Net sales $ 63,189 $ 121,801
Operating costs and expenses:
Cost of sales 38,504 72,518
Selling, general and administrative 7,501 13,915
----------------------
46,005 86,433
----------------------
Operating income 17,184 35,368
Other (expense) income:
Interest expense (247) (786)
Amortization (192) (383)
Other expenses (151) (870)
Other income 133 217
----------------------
132,756 136,525
----------------------
Income before income taxes 16,727 33,546
State and local income taxes 170 217
----------------------
Net income $ 16,557 $ 33,329
======================
See accompanying notes.
4
Precision Strip Companies
Combined Statements of Changes in Shareholders' Equity
(in thousands)
COMMON SHARES
--------------------- ADDITIONAL RETAINED
CLASS A CLASS B CAPITAL EARNINGS TOTAL
----------------------------------------------------------
Balances at January 1, 2002 $ 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
Net income - - - 16,557 16,557
Dividends paid (Note 5) - - - (20,326) (20,326)
----------------------------------------------------------
Balances at December 31, 2003 $ 1,970 $ 120 $ 1,365 $ 129,301 $ 132,756
==========================================================
See accompanying notes.
5
Precision Strip Companies
Combined Statements of Cash Flows
(in thousands)
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2003 2002
------------------------------
OPERATING ACTIVITIES
Net income $ 16,557 $ 33,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,466 9,824
Amortization 192 383
Changes in operating assets and liabilities:
Accounts receivable (1,440) (749)
Prepaid expenses 89 5
Steel inventories (558) (132)
Other assets 18 74
Accounts payable (1,539) (171)
Accrued liabilities and income taxes payable 198 767
----------------------------
Net cash provided by operating activities 18,983 43,330
INVESTING ACTIVITIES
Additions to property and equipment, net of
nominal disposals (6,608) (18,667)
----------------------------
Net cash used by investing activities (6,608) (18,667)
FINANCING ACTIVITIES
Dividends paid (20,326) (10,774)
Net borrowings (payments) under revolving line of
credit agreement 8,159 (13,490)
Payment of long-term debt and notes payable (198) (396)
----------------------------
Net cash used by financing activities (12,365) (24,660)
----------------------------
Net increase in cash and cash equivalents 10 3
Cash and cash equivalents at beginning of year 32 29
----------------------------
Cash and cash equivalents at end of year $ 42 $ 32
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 257 $ 814
============================
Income taxes $ 187 $ 217
============================
See accompanying notes.
6
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMBINED 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 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.
On June 30, 2003, Precision Strip Leasing, Inc. and Precision Strip Kenton, Inc.
merged with and into Precision Strip, Inc. Precision Strip Kenton, LTD, PSI
Limited Partnership, and J.E. Rentals contributed or otherwise transferred to
Precision Strip, Inc. all of their assets and liabilities as of June 30, 2003.
7
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF COMBINATION
The combined statements of the Company as of June 30, 2003 include the accounts
of Precision Strip, Inc. and Precision Strip Transport, Inc. The combined
statements of the Company as of December 31, 2002 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.
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 $600
at June 30, 2003 and zero at December 31, 2002.
CONCENTRATION OF CREDIT RISK
Two customers accounted for approximately 45% and 55% of total accounts
receivable at June 30, 2003 and December 31, 2002, respectively. Total sales for
the two customers accounted for approximately 43% and 52% for the six months
ended June 30, 2003 and the year ended December 31, 2002, 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.
1
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 following
estimated useful lives:
Buildings 40 years
Machinery and equipment 10-20 years
Vehicles 5 years
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. As of June 30, 2003, the covenant not to compete was fully
amortized.
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 the six months ended June 30, 2003
and the year ended December 31, 2002 was approximately $1,699 and $3,285,
respectively.
2
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 OBLIGATIONS AND GUARANTEES
The Company's long-term obligations at June 30, 2003 and December 31, 2002
consisted of the following:
JUNE 30, DECEMBER 31,
2003 2002
--------------------
Amount due under shared revolving line of credit $23,672 $15,513
Fixed term loan, due in monthly installments of $33 plus interest
through March 1, 2008, bearing interest at 6.53%, secured by
certain equipment 1,921 2,119
-----------------
25,593 17,632
Less current maturities of long-term obligations 396 396
-----------------
$25,197 $17,236
=================
3
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
2. LONG-TERM OBLIGATIONS AND GUARANTEES (CONTINUED)
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 (1.32% 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.
The Company's future maturities of long-term obligations at June 30, 2003 are
approximately as follows: 2004 -- $396, 2005 -- $24,068, 2006 -- $396, 2007 --
$396, 2008 -- $337, and thereafter -- $0.
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 2003, 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 2003, this monthly minimum was $88.
4
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
3. OPERATING LEASE COMMITMENTS (CONTINUED)
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 2003, this monthly
minimum was $13.
The Company entered into an operating lease for its Bowling Green facility,
which expires in April 2009. Future minimum rental commitments under operating
leases at June 30, 2003 are as follows:
2004 $ 982
2005 982
2006 982
2007 982
2008 982
Thereafter 2,117
---------
Future minimum operating lease commitments $ 7,027
=========
Rent expense for the six months ended June 30, 2003 and the year ended December
31, 2002 was approximately $503 and $984, respectively.
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.
5
Precision Strip Companies
Notes to Combined Financial Statements
June 30, 2003
(In thousands, except per share information)
4. INCOME TAXES (CONTINUED)
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 are as follows:
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------------------
Precision Strip, Inc. $ 5.35 $ 4.39
Precision Strip Transport, Inc. 0.00 31.23
Precision Strip Leasing, Inc. 33.50 6.72
6. SUBSEQUENT EVENT
On July 1, 2003, the shareholders of Precision Strip, Inc. sold all of their
shares of stock in Precision Strip, Inc. to RSAC Management Corp., a wholly
owned subsidiary of Reliance Steel & Aluminum Co. and the shareholders of
Precision Strip Transport, Inc. sold all of their shares of stock in Precision
Strip Transport, Inc. to RSAC Management Corp. Effective July 1, 2003, RSAC
Management Corp. repaid the long-term debt in full.
6