EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
To the Members and the
Board of Directors
Of OLP LLC:
In our opinion, the accompanying balance sheets and the related statements of
operations, cash flows and members' equity (deficit) present fairly, in all
material respects, the financial position of OLP LLC at December 31, 2003 and
December 31, 2002 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 1, 2004
OLP LLC
STATEMENTS OF OPERATIONS
(in thousands)
2003 2002 2001
-------- -------- --------
Net sales $ 30,060 $ 25,014 $ 15,966
Cost of sales 19,263 14,238 9,425
-------- -------- --------
Gross margin 10,797 10,776 6,541
Operating expenses
Warehouse and processing 7,415 4,665 2,658
Depreciation and amortization 1,509 1,552 1,490
Administrative and general 1,732 1,520 1,258
Occupancy 677 540 421
Distribution 495 320 213
-------- -------- --------
Total operating expenses 11,828 8,597 6,040
-------- -------- --------
Operating income (loss) (1,031) 2,179 501
Interest expense 696 736 886
-------- -------- --------
Net income (loss) $ (1,727) $ 1,443 $ (385)
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The accompanying notes are an integral part of these statements.
OLP LLC
BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(in thousands)
2003 2002
-------- --------
ASSETS
Cash $ 30 $ 63
Accounts receivable, net 3,986 3,348
Inventories 1,118 1,012
Prepaid expenses and other 230 556
-------- --------
Total current assets 5,364 4,979
-------- --------
Property and equipment, at cost 25,479 22,013
Accumulated depreciation (6,911) (5,402)
-------- --------
Net property and equipment 18,568 16,611
-------- --------
Total assets $ 23,932 $ 21,590
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current portion of long-term debt $ 1,920 $ 1,920
Accounts payable 2,742 2,474
Other accrued liabilities 503 665
Due to Olympic Steel, Inc. 1,114 184
-------- --------
Total current liabilities 6,279 5,243
-------- --------
Credit facility revolver 14,439 15,406
-------- --------
Total liabilities 20,718 20,649
-------- --------
Contributed capital 10,600 6,600
Retained deficit (7,386) (5,659)
-------- --------
Total members' equity 3,214 941
-------- --------
Total liabilities and members' equity $ 23,932 $ 21,590
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The accompanying notes are an integral part of these statements.
OLP LLC
Statements of Cash Flows
(in thousands)
2003 2002 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss) $(1,727) $ 1,443 $ (385)
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities-
Depreciation and amortization 1,509 1,552 1,490
------- ------- -------
(218) 2,995 1,105
Changes in working capital:
Accounts receivable (638) (573) (2,594)
Inventories (106) (285) (727)
Prepaid expenses and other 326 (274) (70)
Accounts payable and other accrued liabilities 106 62 2,607
------- ------- -------
(312) (1,070) (784)
------- ------- -------
Net cash from (used for) operating activities (530) 1,925 321
------- ------- -------
Cash flows from investing activities:
Capital expenditures (3,466) (510) (953)
------- ------- -------
Net cash used for investing activities (3,466) (510) (953)
------- ------- -------
Cash flows from financing activities:
Credit facility revolver, net (967) (1,511) (1,017)
Contributed capital from members 4,000 - 1,600
Due to (from) Olympic Steel, Inc. 930 131 47
------- ------- -------
Net cash (used for) from financing activities 3,963 (1,380) 630
------- ------- -------
Cash:
Net change (33) 35 (2)
Beginning balance 63 28 30
------- ------- -------
Ending balance $ 30 $ 63 $ 28
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The accompanying notes are an integral part of these statements.
OLP LLC
Statements of Members' Equity (Deficit)
For the Years Ended December 31, 2003 and 2002
(in thousands)
Contributed Retained
Capital Deficit
------- -------
Balance at December 31, 2001 $ 6,600 $(7,102)
Net income - 1,443
Contributed capital - -
------- -------
Balance at December 31, 2002 6,600 (5,659)
NET LOSS - (1,727)
CONTRIBUTED CAPITAL 4,000 -
------- -------
BALANCE AT DECEMBER 31, 2003 $10,600 $(7,386)
======= =======
The accompanying notes are an integral part of these statements.
OLP LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands)
1. BUSINESS ACTIVITIES:
OLP LLC ("OLP" or "the Company") is a joint venture formed by the United
States Steel Corporation ("USS") and Olympic Steel, Inc. ("Olympic") in
April 1997 to process laser welded sheet steel blanks for the automotive
industry. OLP conducts its operations from an owned 155,000 square foot
facility located in Belleville, Michigan. The building is currently
equipped with three automated laser welding lines and two manual laser
welding lines. The Company conducts business under the trade name Olympic
Laser Processing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that could affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH
Cash includes cash on hand and in checking accounts.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of reserves of $476 and $165 as of
December 31, 2003 and 2002, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market and include the
costs of purchased steel, inbound freight, external processing, and
applicable labor and overhead costs related to internal processing. Cost
is determined using the specific identification method.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives ranging from 5
to 30 years. Accelerated depreciation methods are used for income tax
purposes.
REVENUE RECOGNITION
Revenue is recognized when steel is shipped to the customer and title has
transferred. In addition to direct sales, the Company performs toll
processing of customer-owned steel. Toll processing generally results in
lower selling prices than the Company's direct sales. Total tolling sales
were $7,130, $7,080, and $4,485 in 2003, 2002, and 2001, respectively.
Sales returns and allowances are treated as reductions to sales and are
provided for based on historical experience and current estimates.
3. JOINT VENTURE OWNERSHIP:
OLP is a Michigan Limited Liability Company owned 50% each by USS and Oly
Steel Welding, Inc., a wholly owned subsidiary of Olympic (the Members).
Each Member has contributed $5,300 in cash to capitalize OLP. Olympic is
the primary operating Member, while USS is the primary marketing Member.
Since formation of the Company, there have been no equity distributions.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
DECEMBER 31,
-----------------------
2003 2002
-------- --------
Processing machinery and equipment $ 19,507 $ 15,589
Building 4,679 4,679
Land 702 702
Land improvements 342 342
Computer equipment 103 171
Office furniture and equipment 146 150
Construction in progress -- 380
-------- --------
25,479 22,013
Less accumulated depreciation (6,911) (5,402)
-------- --------
Net property and equipment $ 18,568 $ 16,611
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5. DEBT:
In April 2002, OLP entered into a two-year secured $20,000 bank financing
agreement (the "Credit Facility"). The Credit Facility is collateralized
by OLP's accounts receivable, inventories, and all of its property and
equipment. The Credit Facility is comprised of a revolving credit
component of up to $5,500 and $14,500 of term loans. Borrowings under the
revolving credit component are subject to a borrowing base formula
calculated on eligible receivables and inventories. At December 31, 2003,
the Company had approximately $1,245 of availability under its Credit
Facility.
On January 30, 2004, OLP amended its Credit Facility to reduce the term
loan commitment to $13,500 and to reduce the total Credit Facility amount
to $19,000. At the time of the amendment, the Company had approximately
$1,900 of availability under its amended Credit Facility.
The Company has the option to borrow based on the bank's prime rate or
the Eurocurrency Rate (Euro) plus a premium (the Premium). The Premiums
are determined quarterly based upon the average of the Members' borrowing
rates plus 0.5%. The Premium may be removed after September 30, 2004 if
certain financial performance measures are met. At December 31, 2003, the
Company's effective borrowing rate approximated 4.21%.
Outstanding borrowings are guaranteed equally up to $9,500 each by
Olympic and USS on a several basis. The amended Credit Facility is also
supported by a $3,000 letter of credit by USS.
The Amended Credit Facility requires OLP to comply with various
covenants, the most significant of which are a quarterly minimum fixed
charge coverage ratio, restrictions on additional indebtedness, and
limitations on capital expenditures. In connection with the amended
Credit Facility, OLP paid $190 of fees in January 2004, which are being
amortized to expense over the term of the agreement.
The revolving credit component expires on April 1, 2005. The term loan
components expire on February 1, 2007. Scheduled maturities of term debt
are $1,617, $1,590, and $1,590 for 2004, 2005, and 2006, respectively.
Management believes the carrying values of its long-term debt approximate
their fair values, as each of the Company's variable rate debt
arrangements bear interest at rates that fluctuate based on a bank's
prime rate or Euro.
The Company has not entered into interest rate transactions for
speculative purposes or otherwise. The Company does not hedge its
exposure to floating interest rate risk.
Interest payments totaled $624, $680, and $975 in 2003, 2002, and 2001,
respectively.
6. INCOME TAXES:
As a Michigan Limited Liability Corporation, OLP is taxed as a
partnership for federal income tax purposes. Profits, losses and credits
flow through to each Member based upon each Member's respective ownership
interest in the Company.
All federal income taxes are paid at the Member level. The Company is
liable for Michigan Single Business (MSB) tax. OLP paid $25 of MSB taxes
in 2003 and $0 in 2002 and 2001, respectively.
7. RETIREMENT PLAN:
OLP has a 401(k) retirement plan for all eligible employees. The plan
allows eligible employees to contribute up to 10% of their eligible W-2
earnings. The Company's contribution is determined annually by its Board
of Directors and is based on a percentage of eligible employees'
contributions. For 2003, 2002, and 2001, OLP matched one half of each
eligible employee's contribution, which amounted to $26, $38, and $27,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
The Company is party to various legal actions that it believes are
ordinary in nature and incidental to the operation of its business. In
the opinion of management, the outcome of the proceedings to which the
Company is currently a party will not have a material adverse effect upon
its operations or financial position.
In 2001, the Company leased a forklift under a long-term lease agreement.
The lease is classified as operating and expires in March 2006. For the
years ended December 31, 2003, 2002, and 2001, rent expense was $163,
$56, and $36, respectively.
Future minimum lease commitments as of December 31, 2003 are as follows:
2004 $29
2005 29
2006 and thereafter 5
---
$63
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9. RELATED PARTY TRANSACTIONS:
As of December 31, 2003, approximately $490 or 12% of OLP accounts
receivable, net of credits, related to USS. As of December 31, 2002,
approximately $416 or 14% of OLP accounts receivable, net of credits,
related to USS. For the years ended December 31, 2003, 2002, and 2001,
sales to USS were $6,650, $6,245, and $3,751, respectively.
During 2003 and 2002, Olympic paid for certain expenditures incurred on
behalf of OLP which are reimbursable according to the provisions of the
joint venture operating agreement. For the years ended December 31, 2003,
2002, and 2001, total reimbursable expenses incurred by Olympic amounted
to $1,143, $1,313, and $369, respectively.