EXHIBIT 99.1
------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of
Pick-n-Pull Auto Dismantlers
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and partners' and member's equity and of cash
flows present fairly, in all material respects, the financial position of
Pick-n-Pull Auto Dismantlers and its subsidiaries (the Company) at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 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 audits 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.
/s/ PricewaterhouseCoopers LLP
Sacramento, California
February 28, 2003
PICK-N-PULL AUTO DISMANTLERS
COMBINED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001 (IN THOUSANDS OF DOLLARS)
================================================================================
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 6,507 $ 3,092
Accounts and other receivables 490 711
Inventories 2,526 2,365
Prepaid expenses 358 273
Deferred tax assets 149 116
Property held for sale 553 --
-------- --------
Total current assets 10,583 6,557
Property and equipment, net 26,510 28,706
Note receivable 157 157
Goodwill, net 9,980 9,980
Other intangible assets, net 113 147
Other assets 303 464
-------- --------
$ 47,646 $ 46,011
======== ========
LIABILITIES AND PARTNERS' AND MEMBER'S EQUITY
Current liabilities:
Accounts payable $ 648 $ 562
Accrued expenses 2,042 1,873
Due to related parties 3,500 1,750
Note payable to member 303 74
-------- --------
Total current liabilities 6,493 4,259
Environmental liability 2,200 100
Due to related parties 22,500 27,007
Note payable to member 2,997 5,026
-------- --------
Total liabilities 34,190 36,392
Minority interests 3,000 1,853
Commitments and contingencies (Notes 3 and 4)
Partners' and member's equity 10,456 7,766
-------- --------
$ 47,646 $ 46,011
======== ========
The accompanying notes are an integral
part of these financial statements.
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PICK-N-PULL AUTO DISMANTLERS
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' AND MEMBER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS OF DOLLARS)
================================================================================
2002 2001 2000
-------- -------- --------
Revenues:
Part sales and other revenues $ 51,176 $ 44,739 $ 38,008
Scrap metal revenues 10,088 8,553 8,194
-------- -------- --------
61,264 53,292 46,202
-------- -------- --------
Costs and expenses:
Cost of sales 21,362 21,435 20,231
Selling, general and administrative 16,423 16,760 15,371
Depreciation and amortization 3,976 3,789 3,316
Other nonrecurring charges 2,100 -- --
-------- -------- --------
43,861 41,984 38,918
-------- -------- --------
Income from operations 17,403 11,308 7,284
Other income (expense):
Interest income 65 107 96
Interest expense (857) (1,777) (2,551)
-------- -------- --------
Income before taxes and minority interests 16,611 9,638 4,829
Income taxes 1,249 546 172
-------- -------- --------
Income before minority interests 15,362 9,092 4,657
Minority interests 2,072 935 710
-------- -------- --------
Net income 13,290 8,157 3,947
Partners' and member's, beginning of year 7,766 5,109 3,762
Distributions to partners and member (10,600) (5,500) (2,600)
-------- -------- --------
Partners' and member's equity, end of year $ 10,456 $ 7,766 $ 5,109
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
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PICK-N-PULL AUTO DISMANTLERS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS OF DOLLARS)
================================================================================
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 13,290 $ 8,157 $ 3,947
Noncash items included in income:
Depreciation and amortization 3,976 3,789 3,316
Gain on disposition of assets (3) (274) (113)
Minority interests 2,072 935 710
Deferred taxes (33) 31 1
Changes in assets and liabilities:
Accounts and other receivables 221 (147) (316)
Inventories (161) 365 (438)
Prepaid expenses, intangibles and other assets 76 (43) (231)
Accounts payable 86 3 (773)
Accrued expenses 169 590 255
Environmental liability 2,100 -- --
Due to related party (2,757) -- --
-------- -------- --------
Net cash provided by operating activities 19,036 13,406 6,358
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,479) (4,189) (6,369)
Proceeds from sales of equipment 182 474 647
-------- -------- --------
Net cash used in investing activities (2,297) (3,715) (5,722)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties, net -- 81 3,641
Principal payments on long-term debt -- (624) (240)
Principal payments on notes payable to owner (1,800) (800) (900)
Distributions paid to owners (10,600) (5,500) (2,600)
Distributions paid to minority interests (924) (625) (639)
-------- -------- --------
Net cash used in financing activities (13,324) (7,468) (738)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,415 2,223 (102)
Cash and cash equivalents, beginning of year 3,092 869 971
-------- -------- --------
Cash and cash equivalents, end of year $ 6,507 $ 3,092 $ 869
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 800 $ 1,791 $ 2,576
======== ======== ========
Income taxes paid $ 598 $ 363 $ 188
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
1. ORGANIZATION, BASIS OF ACCOUNTING AND SUBSEQUENT EVENTS
The combined financial statements of Pick-n-Pull Auto Dismantlers (the
Company) include the operations of Pick-n-Pull Auto Dismantlers,
Partnership (the Partnership), and Pick-n-Pull Auto Dismantlers, Stockton,
LLC (the LLC). The Partnership is a California general partnership formed
on July 1, 1989, by Pick-n-Pull Auto Dismantling, Inc. (PNPAD) and Norprop,
Inc. (Norprop), a wholly-owned subsidiary of Schnitzer Steel Industries,
Inc. (Schnitzer). The LLC is a California limited liability corporation
with a single member who is the 100% owner of PNPAD.
On January 8, 2003, Schnitzer entered into an agreement to purchase the
remaining 50% interest of the Partnership and 100% of the ownership of the
LLC. The transaction was completed in February 2003. The Partnership and
the LLC financial statements are combined as the entities are operated as a
single business operation under common control.
At December 31, 2002 the Company, either directly or indirectly, owns and
operates 23 auto dismantling facilities in California, Nevada, Texas, Utah,
Illinois and Indiana. The Company has the following interests in other auto
dismantling entities:
PERCENTAGE
OWNERSHIP AT
ENTITY DECEMBER 31, 2002
------ -----------------
Pick-n-Pull San Jose Auto Dismantlers (San Jose) 75%
Pick-n-Pull Auto Dismantlers, Nevada, LLC (Nevada) 50%
Pick-n-Pull Auto Dismantlers, Oakland (Oakland) 67%
U-Pull-It, Inc. (U-Pull-It) 100%
Western Pick-n-Pull Auto Dismantlers (Western) 80%
Pick-n-Pull Auto Dismantlers, Chicago, LLC (Chicago) 85%
Pick-n-Pull Auto Dismantlers, LLC (Dismantlers LLC) 75%
Carson Auto Wrecking, LLC (Carson) 25%
The Company operates in a single business segment, purchasing salvaged
vehicles, selling parts from those vehicles through retail facilities and
selling the remaining portion of the vehicles for scrap. Cost of sales
includes the purchase costs of salvaged vehicles and the direct labor costs
to prepare salvaged vehicles for sale.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION. The combined financial statements include the
accounts of the Partnership, San Jose, Nevada, Oakland, U-Pull-It, Western,
Chicago, Dismantlers LLC and the LLC. The related minority interests are
reflected in the combined financial statements. All intercompany
transactions and balances have been eliminated in consolidation.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
USE OF 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 affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
OTHER NONRECURRING CHARGES. Included in other nonrecurring charges are the
estimated future costs for environmental remediation requirements which are
accrued on an undiscounted basis when it is probable that the Company has
incurred a liability and the related costs can be reasonably estimated.
When only a range of amounts is established, and no amount within the range
is better than another, the minimum amount of the range is recorded.
REVENUE RECOGNITION. The Company derives revenues from the retail sale of
salvaged vehicle parts and the related sale of salvaged vehicle scrap
metal. Revenue on scrap sales is recorded when scrap is shipped to
customers.
CASH AND CASH EQUIVALENTS. Cash equivalents include cash on hand, deposits
in banks and short-term investments with maturities of ninety days or less
when purchased. Cash and cash equivalents exceeded FDIC-insured limits at
December 31, 2002 and 2001.
INVENTORIES. Inventories consist of salvage vehicles and are stated at the
lower of average cost or market.
PROPERTY AND EQUIPMENT. Property and equipment are depreciated on a
straight-line basis over their estimated useful lives as follows:
Leasehold improvements 7 - 10 years
Buildings 20 years
Machinery, equipment and vehicles 5 - 10 years
Furniture and fixtures 5 years
Repair and maintenance costs are charged against income, while improvements
are capitalized as additions to the related assets. Retirements, sales and
disposals of assets are recorded by removing the costs and accumulated
depreciation from the asset and accumulated depreciation accounts with any
resulting gain or loss reflected in other income.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" which establishes accounting standards for the impairment of long-lived
assets. The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If such assets are considered to be impaired,
an impairment loss is recognized.
OTHER INTANGIBLE ASSETS. Other intangible assets consist of non-compete
agreements which are amortized on a straight-line basis over the five-year
term of the agreements. Accumulated amortization totaled $187 and $153 at
December 31, 2002 and 2001, respectively.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
OTHER ASSETS. Other assets consist of deposits, option payments to purchase
land that is currently leased, and an investment in Carson Auto Wrecking,
LLC. The Company has recorded its 25% investment in Carson under the equity
method of accounting, as it does not have the ability to exercise control
over operating and financial policies.
SELF-INSURANCE. The Company is self-insured for workers' compensation
claims up to specified per claim and aggregate amounts. Self-insurance
costs are accrued based upon the aggregate liability for reported and
incurred but not reported claims. These liabilities are not discounted.
ADVERTISING COSTS. The Company advertises primarily through yellow page and
radio advertisements in areas surrounding their auto dismantling stores.
Advertising costs are expensed as incurred and totaled $1,836, $1,881, and
$1,708 in 2002, 2001, and 2000, respectively.
INCOME TAXES. The taxable income, along with any tax credits, of the
Company and subsidiaries are included in the tax returns of the individual
owners. Accordingly, no provision has been made for federal or state income
taxes of the Company. The Company's U-Pull-It subsidiary, however, operates
as a C Corporation and does have a tax obligation. Deferred tax assets are
primarily the result of timing differences related to various accruals and
depreciation. No valuation allowance has been established against these
deferred tax assets as management believes that they will more likely than
not be recognized.
GOODWILL. Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired entities. Beginning January 1,
2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Financial Accounting Standards Board, "GOODWILL AND OTHER
INTANGIBLE ASSETS" which eliminates the practice of amortizing goodwill,
instead requiring the periodic evaluation of goodwill balances for
impairment. This resulted in the elimination of the routine amortization of
goodwill which amounted to $341 in the years ended December 31, 2001 and
2000.
On an ongoing basis, management assesses the carrying value of intangible
assets. If this review indicates that the carrying value of these assets
may not be recoverable, the carrying value would be reduced to its
estimated fair value. For the year ended December 31, 2002, the Company did
not recognize an impairment on its intangible assets.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
3. BALANCE SHEET COMPONENTS
Property and equipment consists of the following at December 31:
2002 2001
-------- --------
Land $ 9,013 $ 8,612
Land and leasehold improvements 14,409 15,109
Buildings 614 614
Machinery, equipment and vehicles 13,875 14,055
Furniture and fixtures 313 265
Property held for development -- 574
Construction in progress 196 65
-------- --------
38,420 39,294
Less accumulated depreciation and amortization (11,910) (10,588)
-------- --------
$ 26,510 $ 28,706
======== ========
On January 17, 2003, the Company entered into a Sale Agreement to sell its
50% interest in real property located in Maricopa, Arizona. The carrying
value of the property held for sale is $553 at December 31, 2002, which
approximates the sales price.
Accrued expenses consists of the following at December 31:
2002 2001
-------- --------
Accrued compensation $ 445 $ 696
Accrued vacation 425 411
Workers' compensation 350 260
Accrued litigation costs 100 100
Accrued taxes 664 326
Accrued interest 58 80
-------- --------
$ 2,042 $ 1,873
======== ========
4. ENVIRONMENTAL LIABILITIES
The Company regularly reviews and evaluates its environmental liabilities.
During 2002, the Company obtained additional information about the
estimated potential remediation costs related to certain of the Company's
operating sites. Based on this additional information, the Company
increased its environmental reserves by $2,100.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
5. RELATED PARTY TRANSACTIONS
Amounts due to related parties are shown below at December 31:
2002 2001
-------- --------
Schnitzer $ 26,000 $ 28,757
-------- --------
26,000 28,757
Less current portion (3,500) (1,750)
-------- --------
$ 22,500 $ 27,007
======== ========
AMOUNTS DUE TO SCHNITZER. The Company received cash advances from Schnitzer
for working capital and other purposes, with interest payable monthly at
the Wells Fargo Prime Rate less 2% (2.25% at December 31, 2002). Interest
expense relating to the advances amounted to $733, $1,453, and $1,951 in
2002, 2001, and 2000, respectively.
On February 22, 2002, the Company issued a term note to Schnitzer in the
amount of $28,300,000, which was the approximate amount due Schnitzer for
advances as of that date. Under the terms of the note, principal payments,
calculated as 25% of Company net income, as defined, are due quarterly, and
interest payments at the Wells Fargo Prime Rate less 2% are due monthly.
The unpaid balance of the term note and any related accrued interest are
due in full March 1, 2009.
In addition to the amounts due to Schnitzer discussed above, the Company
also had accrued expenses payable to Schnitzer at December 31, 2002 and
2001, in the amount of approximately $100 and $118, respectively, relating
to accrued interest and other expenses.
NOTES PAYABLE. The Company has a note payable to the member which bears
interest at the prime rate less two percent (2.25% at December 31, 2002).
The note is payable in interest only payments of approximately $12 per
month through October 2002, with principal and interest payments of $34 per
month thereafter through October 2012. Minimum principal payments are due
as follows:
2003 $ 303
2004 310
2005 318
2006 324
2007 332
Thereafter 1,713
--------
3,300
(303)
--------
$ 2,997
========
LOAN GUARANTEE. The member has loans with a bank totaling $3,300 and $5,100
at December 31, 2002 and 2001, respectively, which are guaranteed by the
Company. This guarantee includes all of bank borrowings which have been
loaned to the Company from the member as described above.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
TRANSACTIONS AFFECTING RECEIVABLES AND REVENUES. The Company sells scrap
car metal to Schnitzer at scrap prices that approximate current market
value and are renegotiated monthly. The Company also receives sales
incentives based on tonnage delivered to Schnitzer Oakland. Sales to
Schnitzer totaled $7,467, $6,376, and $6,186 in 2002, 2001, and 2000,
respectively, including incentives. Included in accounts receivable at
December 31, 2002 and 2001 is approximately $120 and $300, respectively,
due from Schnitzer.
TRANSACTIONS AFFECTING COST OF SALES. The Company purchased salvaged
vehicles from the Oakland minority interest holder totaling $761, $726 and
$684 in 2002, 2001, and 2000, respectively.
TRANSACTIONS AFFECTING OPERATING EXPENSES. The Company leases certain real
property from minority interest holders under operating leases. Rental
expense related to these leases was $1,209, $1,174, and $1,128 in 2002,
2001, and 2000, respectively. The future minimum lease payments under these
leases are as follows:
2003 $ 1,172
2004 696
2005 426
2006 220
2007 160
--------
Total $ 2,674
========
Schnitzer provides certain management and data processing services to the
Company under a shared services agreement. Charges under this agreement
totaled $10, $8, and $51 in 2002, 2001, and 2000, respectively.
6. COMMITMENTS AND CONTINGENCIES
In addition to the related party leases described in Note 5, the Company
also leases real property and improvements, operating facilities and
vehicles from unrelated parties under noncancelable operating leases with
original terms ranging up to eleven years. Rental expense related to these
leases totaled $3,275, $2,953, and $2,251 for 2002, 2001, and 2000,
respectively. The future minimum lease payments under these operating
leases are as follows:
2003 $ 2,852
2004 2,659
2005 2,189
2006 1,121
2007 728
Thereafter 1,076
--------
$ 10,625
========
Legal actions are pending against the Company in which claims for monetary
damages are asserted. The Company has accrued amounts to provide for
anticipated liabilities resulting from this litigation. Based on
information currently available and the advice of legal counsel, management
believes that the resolution of these matters will not have a significant
adverse effect on the financial position, results of operations or cash
flows of the Company.
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PICK-N-PULL AUTO DISMANTLERS
NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
================================================================================
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan (the Plan) which is available
to all full-time employees who are at least twenty-one years old and have
completed twelve months and 1,000 hours of service. Participants may elect
to contribute up to 15% of their taxable compensation or the statutorily
prescribed limit, whichever is lower, to the Plan. The Company contributes
matching funds equal to 25% of the first 6% of employee contributions.
Company contributions totaled approximately $46, $48, and $48 in 2002,
2001, and 2000, respectively.
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