EXHIBIT 99.2
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION:
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On February 14, 2003, Schnitzer Steel Industries, Inc.'s ("the Company")
wholly-owned subsidiary, Norprop, Inc. ("Norprop"), closed its acquisition of
all of the stock of Pick and Pull Auto Dismantling, Inc., which is Norprop's 50%
partner in Pick-N-Pull Auto Dismantlers, a California general partnership (the
"Joint Venture"). In addition, Norprop purchased all of the membership interests
in Pick-N-Pull Auto Dismantlers, Stockton, LLC ("Stockton"), which is not part
of the Joint Venture, but operates the single largest volume Pick-N-Pull store.
Both of these entities (collectively referred to as "Pick-N-Pull") were acquired
from Bob Spence, who has managed the business of the Joint Venture.
The following unaudited pro forma combined financial statements have been
prepared to give effect to the acquisition using the purchase method of
accounting. The assumptions and adjustments are described in the accompanying
notes to the unaudited pro forma combined financial statements. Additionally,
the Joint Venture and Stockton financial statements have been combined as the
entities are operated as a single business operation under common control. The
pro forma Balance Sheet as of November 30, 2002, has been prepared as if the
transaction had been completed on that date. The pro forma Statements of Income
for the year ended August 31, 2002 and the three-month period ended November 30,
2002, have been prepared as if the transaction had been completed on September
1, 2001. The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
transaction occurred on those dates, nor is it necessarily indicative of the
future financial position or results of operations.
The pro forma combined financial statements include adjustments, which are based
upon preliminary estimates, to reflect the allocation of purchase price to the
acquired assets and assumed liabilities of Pick-N-Pull. The final allocation of
the purchase price is being determined and will be based upon actual net
tangible and intangible assets acquired and liabilities assumed. The preliminary
purchase price allocation for Pick-N-Pull is subject to revision as more
detailed analysis is completed and additional information on the fair values of
Pick-N-Pull's assets and liabilities becomes available. Any change in the fair
value of the net assets of Pick-N-Pull will change the amount of the purchase
price allocable to goodwill. Additionally, the initial purchase price is subject
to the terms of the Purchase Agreement, which provides for a purchase price
adjustment one year after closing based upon calendar year 2002 and 2003
earnings before interest, taxes, depreciation and amortization (EBITDA) of
Pick-N-Pull. As defined by the Purchase Agreement, the contingent future
adjustment may increase or decrease the initial purchase price by up to $12
million. Therefore, final purchase accounting adjustments may differ materially
from the pro forma adjustments presented herein.
These unaudited pro forma combined financial statements are based upon the
respective historical consolidated financial statements of the Company and
Pick-N-Pull. They should be read in conjunction with the historical consolidated
financial statements of the Company, related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
reports and other information the Company has on file with the SEC as well as
the audited historical financial statements and related notes of Pick-N-Pull
filed as Exhibit 99.1 of this 8-K/A current report.
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of November 30, 2002
(In thousands)
Historical Pro Forma
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Schnitzer Steel
Industries, Inc. Pick-N-Pull Adjustments Combined
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ASSETS
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Current Assets:
Cash $ 2,608 $ 8,158 $ $ 10,766
Accounts receivable, net 18,406 276 18,682
Accounts receivable from related parties 894 -- 894
Inventories 72,952 1,958 (300)h 74,610
Deferred income taxes 3,966 149 4,115
Prepaid expenses and other 4,817 683 5,500
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Total current assets 103,643 11,224 (300) 114,567
Net property, plant and equipment 111,987 27,286 2,717 f 141,990
Other assets:
Investment in and advances to joint venture partnerships 100,715 42 (5,052)e 95,705
Notes receivable, net of current portion 26,035 157 (25,000)b 1,192
Goodwill 35,754 9,980 (8,280)c
70,036 c 107,490
Intangibles and other 2,154 392 2,546
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TOTAL ASSETS $ 380,288 $ 49,081 $ 34,121 $ 463,490
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LIABILITIES AND SHAREHOLDERS'EQUITY
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Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 37,620 $ -- $ 74,700 a $ 112,320
Accounts payable 14,139 531 14,670
Accrued payroll liabilities 4,326 889 5,215
Due to related parties -- 3,803 (3,500)b
(303)a --
Current portion of environmental liabilities 3,028 -- g 3,028
Other accrued liabilities 5,232 1,808 700 i 7,740
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Total current liabilities 64,345 7,031 71,597 142,973
Deferred income taxes 30,859 -- 30,859
Long-term debt net of current portion 8,210 26,097 (21,500)b
(2,997)a 9,810
Environmental liabilities, net of current portion 17,733 100 g 17,833
Other long-term liabilities 2,780 -- 2,780
Minority interests -- 2,874 2,874
Commitments and contingencies -- -- --
Shareholders' equity:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,025 shares issued and outstanding 5,025 -- 5,025
Class B common stock--25,000 shares $1 par value
authorized, 4,180 shares issued and outstanding 4,180 -- 4,180
Partners & member's equity -- 12,979 (12,979)d --
Additional paid-in capital 96,074 -- -- 96,074
Retained earnings 151,082 -- -- 151,082
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Total shareholders' equity 256,361 12,979 (12,979) 256,361
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TOTAL LIABILITES AND SHAREHOLDERS' EQUITY $ 380,288 $ 49,081 $ 34,121 $ 463,490
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The accompanying notes are an integral part of these
unaudited pro forma combined financial statements.
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UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
(In thousands, except per share amounts)
Historical Pro Forma
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Schnitzer Steel
Industries, Inc. Pick-N-Pull Adjustments Combined
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Revenues $ 350,648 $ 58,142 $ (6,517)h $ 402,273
Cost and expenses:
Cost of goods sold and other operating expenses 324,360 25,965 (6,423)h 343,902
Impairment and non-recurring charges 7,100 -- 7,100
Selling and commission expenses 3,620 -- 3,620
General and administrative expenses 25,806 16,853 42,659
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Income (loss) from wholly-owned operations (10,238) 15,324 (94)h 4,992
Income from joint ventures 19,390 -- (4,916)j 14,474
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Income from operations 9,152 15,324 (5,010) 19,466
Other income (expense):
Interest expense (2,314) (929) 826 k (2,417)
Gain (loss) on sale of assets (84) -- (84)
Other income 893 72 (826)k 139
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(1,505) (857) -- (2,362)
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Income before income taxes and minority interests 7,647 14,467 (5,010) 17,104
Income tax provision (1,094) (1,085) (2,439)l (4,618)
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Income before minority interests 6,553 13,382 (7,449) 12,486
Minority interest, net of taxes -- (1,130) (1,130)
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Net income $ 6,553 $ 12,252 $ (7,449) $ 11,356
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Basic earnings per share $ 0.72 $ 1.24
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Diluted earnings per share $ 0.71 $ 1.22
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Basic shares outstanding 9,148 9,148
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Diluted shares outstanding 9,283 9,283
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The accompanying notes are an integral part of these
unaudited pro forma combined financial statements.
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UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
For the Three Months Ended November 30, 2002
(In thousands, except per share amounts)
Historical Pro Forma
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Schnitzer Steel
Industries, Inc. Pick-N-Pull Adjustments Combined
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Revenues $ 76,500 $ 16,139 $ (1,972)h $ 90,667
Cost and expenses:
Cost of goods sold and other operating expenses 69,466 6,663 (1,582)h 74,547
Selling and commission expenses 763 -- 763
General and administrative expenses 5,883 4,027 9,910
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Income from wholly-owned operations 388 5,449 (390)h 5,447
Income from joint ventures 5,045 -- (1,871)j 3,174
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Income from operations 5,433 5,449 (2,261) 8,621
Other income (expense):
Interest expense (354) (196) 170 k (380)
Other income (expense) 3 25 (170)k (142)
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(351) (171) -- (522)
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Income before income taxes and minority interests 5,082 5,278 (2,261) 8,099
Income tax provision (1,208) (807) (171)l (2,186)
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Income before minority interests 3,874 4,471 (2,432) 5,913
Minority interest, net of tax -- (447) -- (447)
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Net income (1) $ 3,874 $ 4,024 $ (2,432) $ 5,466
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Basic earnings per share (1) $ 0.42 $ 0.59
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Diluted earnings per share (1) $ 0.41 $ 0.58
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Basic shares outstanding 9,205 9,205
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Diluted shares outstanding 9,355 9,355
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(1) Net income for Schnitzer Steel Industries, Inc. is presented before
cumulative effect of change in accounting principle.
The accompanying notes are an integral part of these
unaudited pro forma combined financial statements.
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
On February 14, 2003, Schnitzer Steel Industries, Inc. ("the Company") closed
its acquisition (the "Acquisition" ) of all of the stock of Pick and Pull Auto
Dismantling, Inc., which was the Company's 50% partner in Pick-N-Pull Auto
Dismantlers, a California general partnership (the "Joint Venture"), and all of
the membership interests in Pick-N-Pull Auto Dismantlers, Stockton, LLC
("Stockton"). The cost of the Acquisition consisted of $71.4 million cash paid
to the seller at closing, $3.3 million of debt assumed and immediately paid off,
and $0.7 million of acquisition costs. In addition, Norprop assumed
approximately $12.5 million of debt owed by the Joint Venture to the Company
bringing the total purchase price to $87.9 million (or $84.3 million net of the
seller's $3.6 million share of the Joint Venture's cash on hand at closing). The
Company accounted for the acquisition using the purchase method of accounting.
The unaudited pro forma combined Balance Sheet at November 30, 2002 is presented
to give effect to the Acquisition as if the transaction had been consummated on
that date. The unaudited pro forma combined Statements of Income for the year
ended August, 2002, and the three-month period ending November 30, 2002 are
presented as if the transaction had been consummated on September 1, 2001.
Additionally, the Joint Venture and Stockton financial statements have been
combined as the entities are operated as a single business operation under
common control (collectively referred to as "Pick-N-Pull").
The purchase price of the Acquisition was allocated to tangible and intangible
identifiable assets and liabilities assumed based on an estimate of their fair
values. Certain tangible net assets, such as real estate, are being valued by
independent third parties and the equipment is being valued by Company
management. The excess of the aggregate purchase price over the fair value of
the identifiable net assets acquired of approximately $70.5 million was
recognized as goodwill. Approximately $3.7 million of goodwill existed on the
Joint Venture's balance sheet prior to the Acquisition, but the Company's $1.7
million share of this amount was not shown separately in the Company's
consolidated balance sheet in accordance with the equity method of accounting.
Therefore, the total increase to goodwill related to the Acquisition was $72.2
million.
The initial purchase price is subject to the terms of the Purchase Agreement,
which provides for a purchase price adjustment one year after closing based upon
calendar year 2002 and 2003 earnings before interest, taxes, depreciation and
amortization (EBITDA) of Pick-N-Pull. As defined by the Purchase Agreement, the
contingent future adjustment may increase or decrease the initial purchase price
by up to $12 million.
The purchase price allocation has been prepared on a preliminary basis, and
reasonable changes are expected as additional information becomes available. The
following is a summary of the estimated fair values of the assets acquired and
liabilities assumed as of the date of the acquisition (in millions):
Property, plant and equipment $ 16.3
Other tangible assets 5.6
Liabilities (4.5)
Goodwill 70.5
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Total $ 87.9
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Goodwill of $70.5 million represents the excess of purchase price over the fair
value of the net tangible assets acquired, and the majority of it is not
deductible for tax purposes. In accordance with SFAS 142, goodwill is not
amortized and will be tested for impairment at least annually. The preliminary
purchase price allocation for Pick-N-Pull is subject to revision as more
detailed analysis is completed and additional information on the fair values of
Pick-N-Pull's assets and liabilities becomes available. Any change in the fair
value of the net assets of Pick-N-Pull will change the amount of the purchase
price allocable to goodwill. Final purchase accounting adjustments may therefore
differ materially from the pro forma adjustments presented here.
The Company adopted the provisions of SFAS 142 on September 1, 2002 and
Pick-N-Pull's adoption date was January 1, 2002. If both parties had adopted the
provisions of this pronouncement on September 1, 2001, amortization expense of
the combined companies of approximately $1.3 million would not have been
reflected in the unaudited pro forma combined Statements of Income for the
fiscal year ended August 31, 2002. The pro forma income and diluted pro forma
income per share would have been $12.7 million and $1.36, respectively.
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2. Pro Forma Adjustments
Certain reclassifications have been made to conform Pick-N-Pull's historical
amounts to the Company's financial statement presentation.
The accompanying unaudited pro forma combined financial statements reflect the
following pro forma adjustments:
(a) To reflect the cash payments for the acquisition of $74.7 million,
which consisted of cash paid to the seller at closing of $71.4
million and $3.3 million of related party debt assumed and
immediately paid off. Not reflected is approximately $0.6 million of
principal payments on related party debt made by Stockton between
November 30, 2002 and February 14, 2003. If the transaction had
occurred on November 30, 2002, the Company would have financed these
cash payments by increasing borrowings under its existing credit
facility.
(b) To eliminate the $25.0 million note payable owed by the Joint Venture
to the Company as of the closing date (both the Seller's $12.5
million share and the Company's $12.5 million share), and to
eliminate the Company's corresponding note receivable. Not reflected
is the $1.0 million principal payment made by the Joint Venture on
this obligation between November 30, 2002 and February 14, 2003.
(c) To eliminate Stockton's previously existing goodwill of $6.2 million
and all but the Company's $1.7 million share of the Joint Venture's
previously existing goodwill and to establish goodwill resulting from
the Acquisition of $70.0 million. The pro forma adjustment assumes
the Acquisition occurred as of November 30, 2002. The amount will
differ slightly from the amount recorded on February 14, 2003, due to
changes in net assets of Pick-N-Pull between these two dates.
(d) To eliminate historical equity of Pick-N-Pull.
(e) To eliminate the Company's equity investment in the Joint Venture.
(f) To record the increase in fair market value of the property, plant
and equipment acquired, the majority of which was land that is not
depreciated.
(g) Subsequent to November 30, 2002, the Company conducted an
environmental due diligence investigation. Based on new information
obtained in this investigation, the Joint Venture accrued $2.1
million in environmental liabilities for probable and reasonably
estimable future remediation costs. This amount is excluded from the
unaudited pro forma combined balance sheet because the new
information was not available as of November 30, 2002.
(h) To eliminate intercompany revenues and the related cost of sales and
profit, including profit remaining in ending inventory.
(i) To record estimated accrued acquisition costs.
(j) To eliminate the Company's share of income from the Joint Venture.
(k) To eliminate the Company's interest income on the Joint Venture's
note receivable and the Joint Venture's corresponding interest
expense on its note payable to the Company.
(l) To adjust the provision (benefit) for income taxes to reflect the
impact of the pro forma adjustments based on the Company's rates that
would have been effective during the periods presented had the
acquisition occurred during that timeframe.
3. Pro Forma Combined Net Income Per Share
Shares used to calculate unaudited pro forma combined net income per basic and
diluted share were computed using the Company's weighted average shares
outstanding during the respective periods.
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