Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
OCTOBER 1, 2004 1-11781
DAYTON SUPERIOR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0676346
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
7777 Washington Village Dr., Suite 130
Dayton, Ohio 45459
- --------------------------------------- --------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 937-428-6360
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by mark whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
4,585,871 Common Shares were outstanding as of November 11, 2004
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Dayton Superior Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
As of October 1, 2004 and December 31, 2003
(Amounts in thousands)
(Unaudited)
October 1, December 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash $ - $ 1,995
Accounts receivable, net of allowances for doubtful accounts and
sales returns and allowances of $4,605 and $4,939 77,681 64,849
Inventories 63,416 49,437
Prepaid expenses and other current assets 10,373 4,610
Prepaid income taxes 1,453 956
Deferred income taxes 5,176 5,368
------------ ------------
Total current assets 158,099 127,215
------------ ------------
Rental equipment, net of accumulated depreciation of $36,503 and $27,794 76,454 78,042
------------ ------------
Property, plant and equipment 117,468 113,366
Less accumulated depreciation (57,518) (51,128)
------------ ------------
Net property, plant and equipment 59,949 62,238
------------ ------------
Goodwill 110,618 110,308
Intangible assets, net of accumulated amortization 7,935 10,532
Deferred income taxes 295 -
Other assets 4,873 5,049
------------ ------------
Total assets $ 418,223 $ 393,384
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 2,527 $ 3,067
Accounts payable 23,550 20,526
Accrued compensation and benefits 16,920 19,704
Other accrued liabilities 14,853 12,324
------------ ------------
Total current liabilities 57,850 55,621
Long-term debt, net of current portion 381,813 338,823
Other long-term liabilities 6,203 6,207
------------ ------------
Total liabilities 445,866 400,651
------------ ------------
Shareholders' deficit:
Common shares 116,024 115,951
Loans to shareholders (2,757) (2,729)
Treasury shares, at cost, 36,747 shares in 2004 and 2003 (1,184) (1,184)
Cumulative other comprehensive loss (1,238) (1,209)
Accumulated deficit (138,488) (118,096)
------------ ------------
Total shareholders' deficit (27,643) (7,267)
------------ ------------
Total liabilities and shareholders' deficit $ 418,223 $ 393,384
============ ============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
2
Dayton Superior Corporation and Subsidiaries
Consolidated Statements of Operations
For The Three and Nine Fiscal Months Ended October 1, 2004 and
September 26, 2003
(Amounts in thousands)
(Unaudited)
Three Fiscal Months Ended Nine Fiscal Months Ended
------------------------------ ------------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
------------ ------------- ------------ -------------
Product sales $ 96,640 $ 85,695 $ 273,101 $ 229,247
Rental revenue 11,449 10,391 30,792 24,021
Used rental equipment sales 6,459 5,202 14,978 26,190
------------ ------------ ------------ ------------
Net sales 114,548 101,288 318,871 279,458
------------ ------------ ------------ ------------
Product cost of sales 71,266 67,854 204,948 177,417
Rental cost of sales 8,480 7,717 23,852 19,153
Used rental equipment cost of sales 2,743 2,079 5,956 7,797
------------ ------------ ------------ ------------
Cost of sales 82,489 77,650 234,756 204,367
------------ ------------ ------------ ------------
Product gross profit 25,374 17,841 68,153 51,830
Rental gross profit 2,969 2,674 6,940 4,868
Used rental equipment gross profit 3,716 3,123 9,022 18,393
------------ ------------ ------------ ------------
Gross profit 32,059 23,638 84,115 75,091
Selling, general and administrative expenses 21,757 21,980 66,294 61,036
Facility closing and severance expenses 429 499 1,393 1,243
Loss (gain) on disposals of property, plant, and
equipment (464) 72 (386) 138
Amortization of intangibles 302 184 857 443
------------ ------------ ------------ ------------
Income from operations 10,035 903 15,957 12,231
Other expenses
Interest expense 11,923 11,199 35,507 28,272
Loss on early extinguishment of long-term debt
- - 842 2,480
Other expense (income) (45) (42) - 29
------------ ------------ ------------ ------------
Loss before benefit for income taxes (1,843) (10,254) (20,392) (18,550)
Benefit for income taxes - (3,861) - (6,307)
------------ ------------ ------------ ------------
Net loss $ (1,843) $ (6,393) $ (20,392) $ (12,243)
============ ============ ============ ============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
3
Dayton Superior Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For The Nine Fiscal Months Ended October 1, 2004 and September 26, 2003
(Amounts in thousands)
(Unaudited)
Nine Fiscal Months Ended
------------------------------
October 1, September 26,
2004 2003
------------ -------------
Cash Flows From Operating Activities:
Net loss $ (20,392) $ (12,243)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 20,369 18,110
Amortization of intangibles 857 443
Loss on early extinguishment of long-term debt 842 2,480
Deferred income taxes (103) (801)
Amortization of deferred financing costs and debt discount 3,914 2,229
Gain on sales of rental equipment (9,022) (18,393)
(Gain) loss on sales of property, plant and equipment (386) 138
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable (12,832) (10,817)
Inventories (13,979) (2,802)
Accounts payable 3,024 (1,494)
Accrued liabilities and other long-term liabilities (259) (3,645)
Prepaid expenses and other assets (5,913) (1,268)
------------ -------------
Net cash used in operating activities (33,880) (28,063)
------------ -------------
Cash Flows From Investing Activities:
Property, plant and equipment additions (3,819) (5,932)
Proceeds from sales of property, plant and equipment 689 82
Rental equipment additions (16,671) (21,501)
Proceeds from sales of rental equipment 14,978 26,190
Acquisition (245) (13,535)
------------ -------------
Net cash used in investing activities (5,068) (14,696)
------------ -------------
Cash Flows From Financing Activities:
Repayments of long-term debt (2,185) (176,563)
Issuance of long-term debt 41,675 206,195
Financing costs incurred (2,553) (1,278)
Changes in loans to shareholders (28) 154
Issuance of common shares 73 13,049
------------ -------------
Net cash provided by financing activities 36,982 41,557
------------ -------------
Effect of Exchange Rate Changes on Cash (29) 466
------------ -------------
Net decrease in cash (1,995) (736)
Cash, beginning of period 1,995 2,404
------------ -------------
$ - $ 1,668
============ ============
Cash, end of period
Supplemental Disclosures:
Cash paid (refunded) for income taxes $ 573 $ (3,531)
Cash paid for interest 30,578 21,596
Purchases of equipment on capital leases 389 2,958
Issuance of note with in conjunction with acquisition - 6,965
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
Dayton Superior Corporation and Subsidiaries
Consolidated Statements of Comprehensive Loss
For The Three and Nine Fiscal Months Ended October 1, 2004 and
September 26, 2003
(Amounts in thousands)
(Unaudited)
Three Fiscal Months Ended Nine Fiscal Months Ended
---------------------------- ----------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
---------- ------------- ------------ -------------
Net loss $ (1,843) $ (6,393) $ (20,392) $ (12,243)
Other comprehensive income (loss):
Foreign currency translation adjustment 201 (25) (29) 466
---------- ---------- ---------- ------------
Comprehensive loss $ (1,642) $ (6,418) $ (20,421) $ (11,777)
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
5
DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements included herein have been
prepared by the Company, without audit, and include, in the opinion of
management, all adjustments necessary to state fairly the information set
forth therein. Any such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's annual financial statements for the year ended December 31,
2003. The interim results may not be indicative of future periods.
(2) ACQUISITION
On July 29, 2003 we acquired substantially all of the fixed assets and
rental fleet assets of Safway Formwork Systems, L.L.C. for $20,878, after
purchase price adjustments and including acquisition costs of $1,090. The
initial purchase price of $19,965 was comprised of $13,000 in cash and a
$12,000 non-interest bearing (other than in the case of default) senior
unsecured note with an initial present value of $6,965 payable to the
seller. The note was issued at a discount, which is being accreted to the
face value using the effective interest method and is reflected as
interest expense. The note has a net book value of $6,115 as of October 1,
2004. For purposes of calculating the net present value of the senior
unsecured note, the Company has assumed an interest rate of 14.5%. The
$13,000 of cash was funded through the issuance of common shares to the
Company's majority shareholder. The first $250 installment payment on the
note was paid on September 30, 2003, and an additional $750 installment
payment was due on December 31, 2003. The settlement of normal purchase
price adjustments resulted in a $417 reduction in the payment made in
December to $333. A subsequent purchase price adjustment of $240 was paid
in March 2004. The September 30, 2004 installment of $1,000 was paid and
annual payments of $1,000 are due on September 30 of each year from 2005
through 2008, with a final balloon payment of $6,000 due on December 31,
2008.
The Company exercised its option to acquire additional rental equipment
from Safway. The Company issued a non-interest bearing note, which is
being accreted to its face value using the effective interest method with
an interest rate of 6% and is reflected as interest expense. The net
present value of the note at October 1, 2004 was $1,487. Minimum payments
are $50 for the remainder of 2004, $282 in 2005, $398 in 2006, $563 in
2007, and $464 in 2008. Payments may be accelerated if certain revenue
targets are met.
The acquisition has been accounted for as a purchase, and the results of
Safway have been included in the Company's consolidated financial
statements from the date of acquisition. The Company received the final
valuation of the acquired assets in the first quarter of 2004. As a
result, the value of rental equipment and goodwill increased by
approximately $1,800 and $300, respectively, and intangible assets
decreased by approximately $2,100. The purchase price has been allocated
based on the estimated fair value of the assets acquired, as follows:
Rental equipment $ 15,837
Property, plant and equipment 798
Goodwill 2,844
Intangible assets 2,970
Accrued liabilities (1,571)
---------
Purchase price, including acquisition costs of $1,090 $ 20,878
=========
6
Components of the purchase price are as follows:
Cash paid at closing $ 13,000
Acquisition costs 1,085
Initial purchase price adjustment (417)
---------
2003 Cash portion of acquisition 13,668
Present value of seller note 6,965
2004 purchase price adjustment 240
Acquisition costs 5
---------
Total purchase price $ 20,878
=========
The following pro forma information sets forth the consolidated results of
operations for the three and nine fiscal months ended October 1, 2003 as
though the acquisition had been completed at the beginning of the period
presented:
Pro Forma Pro Forma
Three fiscal months Nine fiscal months
ended ended
September 26, 2003 September 26, 2003
------------------- ------------------
Net sales $ 102,650 $ 292,054
Loss before benefit for income taxes $ (11,095) $ (21,559)
In accordance with SEC rules and regulations, pro forma information does
not exclude costs that are expected to be eliminated under the company's
ownership.
(3) ACCOUNTING POLICIES
The interim consolidated financial statements have been prepared in
accordance with the accounting policies described in the notes to the
Company's consolidated financial statements for the year ended December
31, 2003. While management believes that the procedures followed in the
preparation of interim financial information are reasonable, the accuracy
of some estimated amounts is dependent upon facts that will exist or
calculations that will be made at year end. Examples of such estimates
include changes in the deferred tax accounts and management bonuses, among
others. Any adjustments pursuant to such estimates during the fiscal
quarter were of a normal recurring nature.
(a) Fiscal Quarter -- The Company's fiscal year end is December 31. The
Company's fiscal quarters are defined as the 13-week periods ending
on a Friday near the end of March, June and September.
(b) Inventories -- The Company values all inventories at the lower of
first-in, first-out ("FIFO") cost or market. The Company provides
net realizable value reserves which reflect the Company's best
estimate of the excess of the cost of potential obsolete and slow
moving inventory over the expected net realizable value.
Following is a summary of the components of inventories as of
October 1, 2004 and December 31, 2003:
October 1, 2004 December 31, 2003
--------------- -----------------
Raw materials $ 18,894 $ 9,588
Work in progress 4,289 2,742
Finished goods 40,233 37,107
--------- ---------
Total Inventory $ 63,416 $ 49,437
========= =========
7
(c) New Accounting Pronouncements -- In May 2003, the FASB issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." SFAS No. 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics
of both liabilities and equity to be classified as liabilities. The
provisions of SFAS 150 are effective for financial instruments entered
into or modified after May 31, 2003 and to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of a nonpublic entity, this statement was effective for
periods beginning after December 15, 2003. The adoption of this
pronouncement did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of APB No.
50." FIN No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or annual
period beginning after December 15, 2003. The adoption of this
pronouncement did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In December 2003, FASB issued a revised interpretation of FIN No. 46, "FIN
No. 46-R." This supercedes Fin No. 46 and clarifies and expands current
accounting guidance for variable interest entities. Fin No. 46 and Fin No.
46-R are effective immediately for all variable interest entities created
after January 31, 2003, and for variable interest entities created prior
to February 1, 2003, no later than the end of the first reporting period
after March 15, 2004. We have not utilized such entities and therefore the
adoption of Fin No. 46 and FIN No. 46-R had no effect on our consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
statement revises the disclosures required for pension plans and other
postretirement benefit plans. The company adopted this revised statement
effective December 31, 2003. See Note 6 to the consolidated financial
statements for the revised disclosures.
(d) Stock Options -- The Company measures compensation cost for stock options
issued using the intrinsic value-based method of accounting in accordance
with Accounting Principles Board Opinion (APB) No. 25. If compensation
cost for the Company's stock options had been determined based on the fair
value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss and net loss per share would have been increased to
the pro forma amounts as follows:
Three fiscal months ended Nine fiscal months ended
--------------------------- ---------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
---------- ------------ ---------- -------------
Net income (loss) As Reported $ (1,843) $ (6,393) $ (20,392) $ (12,243)
Deduct: Total stock-based
employee compensation
expense determined under
fair value-based method for
all awards, net of related
tax effect (61) (62) (186) (193)
---------- ----------- ---------- ----------
Pro Forma $ (1,904) $ (6,455) $ (20,578) $ (12,436)
========== =========== ========== ==========
8
(e) Reclassifications -- Certain reclassifications have been made to the
2003 amounts to conform to their 2004 classifications.
(4) CREDIT ARRANGEMENTS
Following is a summary of the Company's long-term debt as of October 1, 2004 and
December 31, 2003:
October 1, December 31,
2004 2003
---------- ------------
Revolving credit facility, weighted average interest rate of 4.35% $ 66,050 $ 24,375
Senior Second Secured Notes, interest rate of 10.75% 165,000 165,000
Debt discount on Senior Second Secured Notes (6,526) (7,454)
Senior Subordinated Notes, interest rate of 13.0% 154,729 154,729
Debt discount on Senior Subordinated Notes (7,688) (8,514)
Notes payable to seller of Safway, non-interest bearing, accreted at
6.0% to 14.5% 7,602 7,999
Debentures previously held by Dayton Superior Capital Trust, interest
rate of 9.1%, due on demand 1,102 1,110
Capital lease obligations 4,047 4,590
City of Parsons, Kansas Economic Development Loan, interest rate of
7.0% 24 55
---------- -----------
Total long-term debt 384,340 341,890
Less current maturities (2,527) (3,067)
---------- -----------
Long-term portion $ 381,813 $ 338,823
========== ===========
As of October 1, 2004, the senior second secured notes (the "Senior Notes") have
a principal amount of $165,000 and mature in June 2008. The Notes were issued in
June 2003 at a discount, which is being accreted to the face value using the
effective interest method and is reflected as interest expense. The proceeds of
the offering of the Senior Notes were $156,895 and were used to repay the
Company's acquisition credit facility, certain of the Company's then current
debt, and a portion of the revolving credit facility. As a result of the
transactions, the Company incurred a loss on the early extinguishment of
long-term debt of $2,550 in the second quarter of 2003, due to the expensing of
deferred financing costs. The estimated fair value of the notes is $176.6
million as of October 1, 2004. The senior second secured notes are secured by
substantially all assets of the Company and its domestic subsidiaries.
As of October 1, 2004, the Senior Subordinated Notes (the "Notes") have a
principal amount of $154,729 and mature in June 2009. During the second quarter
of 2003, the Company repurchased a portion of the Notes. A principal amount of
$15,271, with a net book value of $14,381, was repurchased using the revolving
credit facility for $14,311, resulting in a gain on the early extinguishment of
long-term debt of $70. The Notes were issued at a discount, which is being
accreted to the face value using the effective interest method and is reflected
as interest expense. The Notes were issued with warrants that allow the holders
to purchase 117,276 of the Company's Common Shares for $0.01 per share. The
estimated fair value of the notes is $151.6 million as of October 1, 2004.
The Company has a $95,000 senior secured revolving credit facility that matures
on January 30, 2007. The credit facility has no financial covenants.
Availability of borrowings is limited to 85% of eligible accounts receivable and
60% of eligible inventories and rental equipment, less $10,000. At October 1,
2004, all $95,000 was available under the calculation and the Company had
outstanding letters of credit of $7,265 and available borrowings of $21,685. The
credit facility is secured by substantially all assets of the Company and its
domestic subsidiaries.
9
The average borrowings, maximum borrowings and weighted average interest rates
on the revolving credit facility and its predecessor for the periods indicated
were as follows:
Three fiscal months ended Nine fiscal months ended
------------------------- -------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
-------- -------- -------- --------
Revolving Credit Facility:
Average borrowings $ 63,198 $ 18,508 $ 51,763 $ 22,787
Maximum borrowing 71,900 25,875 71,900 35,225
Weighted average interest rate 4.4% 5.9% 4.4% 5.5%
The Company's wholly owned domestic subsidiaries (Aztec Concrete Accessories,
Inc.; Trevecca Holdings, Inc.; Dayton Superior Specialty Chemical Corp.; Symons
Corporation; Dur-O-Wal, Inc.; and Southern Construction Products, Inc.) have
guaranteed the Notes and the Senior Notes on a full, unconditional and joint and
several basis. Pursuant to Regulation S-X, Rule 3-10(f), separate financial
statements have not been presented for the guarantor subsidiaries. The wholly
owned foreign subsidiary of the Company is not a guarantor of the Notes or the
Senior Notes and does not have any credit arrangements senior to the Notes or
the Senior Notes. The following supplemental consolidating condensed balance
sheets as of October 1, 2004 and December 31, 2003 and the supplemental
consolidating condensed statements of operations for the three and nine fiscal
months ended October 1, 2004 and September 26, 2003 and cash flows for the nine
fiscal months ended October 1, 2004 and September 26, 2003 depict in separate
columns, the parent company, those subsidiaries which are guarantors, those
subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. This financial information may not necessarily be indicative
of the result of operations or financial position of the subsidiaries had they
been operated as independent entities.
10
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Balance Sheet
As of October 1, 2004
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
ASSETS
Cash $ (2,398) $ 1,175 $ 1,223 $ - $ -
Accounts receivable, net 47,192 27,579 2,910 - 77,681
Inventories 33,519 28,922 975 - 63,416
Intercompany 64,136 (63,699) (437) - -
Other current assets 14,052 2,893 57 - 17,002
------------ ------------ ------------- ----------- -----------
TOTAL CURRENT ASSETS 156,501 (3,130) 4,728 - 158,099
Rental equipment, net 3,983 72,197 274 - 76,454
Property, plant and equipment, net 24,156 35,607 186 - 59,949
Investment in subsidiaries 123,041 - - (123,041) -
Other assets 50,816 72,892 13 - 123,721
------------ ------------ ------------- ----------- -----------
TOTAL ASSETS $ 358,497 $ 177,566 $ 5,201 $ (123,041) $ 418,223
============ ============ ============= =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current maturities of long-term debt $ 2,285 $ 242 $ - $ - $ 2,527
Accounts payable 10,863 12,384 303 - 23,550
Accrued liabilities 25,778 5,314 681 - 31,773
------------ ------------ ------------- ----------- -----------
TOTAL CURRENT LIABILITIES 38,926 17,940 984 - 57,850
Long-term debt, net 380,121 1,692 - - 381,813
Other long-term liabilities (8,783) 14,986 - - 6,203
Total shareholders' equity (deficit) (51,767) 142,948 4,217 (123,041) (27,643)
------------ ------------ ------------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 358,497 $ 177,566 $ 5,201 $ (123,041) $ 418,223
============ ============ ============= =========== ===========
11
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Balance Sheet
As of December 31, 2003
Dayton Non
Superior Guarantor Guarantor
Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
ASSETS
Cash $ 860 $ (1,240) $ 2,375 $ - $ 1,995
Accounts receivable, net 37,123 26,500 1,226 - 64,849
Inventories 27,016 21,776 645 - 49,437
Intercompany 61,638 (61,549) (89) - -
Other current assets 12,901 (1,432) (535) - 10,934
----------- ----------- ------------ ----------- ----------
TOTAL CURRENT ASSETS 139,538 (15,945) 3,622 - 127,215
Rental equipment, net 3,609 74,342 91 - 78,042
Property, plant and equipment, net 24,919 37,135 184 - 62,238
Investment in subsidiaries 123,041 - - (123,041) -
Other assets 50,628 75,261 - 125,889
----------- ----------- ------------ ----------- ----------
TOTAL ASSETS $ 341,735 $ 170,793 $ 3,897 $(123,041) $ 393,384
=========== =========== ============ ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current maturities of long-term debt $ 2,132 $ 935 $ - $ - $ 3,067
Accounts payable 10,722 9,537 267 - 20,526
Accrued liabilities 20,793 11,019 216 - 32,028
----------- ----------- ------------ ----------- ----------
TOTAL CURRENT LIABILITIES 33,647 21,491 483 - 55,621
Long-term debt, net 337,413 1,410 - - 338,823
Other long-term liabilities (4,341) 10,525 23 - 6,207
Total shareholders' equity (deficit) (24,984) 137,367 3,391 (123,041) (7,267)
----------- ----------- ------------ ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 341,735 $ 170,793 $ 3,897 $(123,041) $ 393,384
=========== =========== ============ ========= =========
12
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Operations
Three Fiscal Months Ended October 1, 2004
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
Net sales $ 43,236 $ 67,081 $ 4,231 $ 114,548
Cost of sales 30,268 49,977 2,244 82,489
----------- ----------- ------------ -------------
Gross profit 12,968 17,104 1,987 32,059
Selling, general and administrative expenses 8,023 13,202 532 21,757
Facility closing and severance expenses 105 324 - 429
Management fees (93) - 93 -
Amortization of intangibles 30 272 - 302
Loss (gain) on disposals on property, plant, and
equipment - (464) - (464)
----------- ----------- ------------ -------------
Income from operations 4,903 3,770 1,362 10,035
Other expenses
Interest expense 11,896 27 - 11,923
Loss on early extinguishment of long-term debt - - - -
Other expense (income) 1 (32) (14) (45)
----------- ----------- ------------ -------------
Income (loss) before provision (benefit) for
income taxes (6,994) 3,775 1,376 (1,843)
Provision (benefit) for income taxes - - - -
----------- ----------- ------------ -------------
Net income (loss) available to common shareholders $ (6,994) $ 3,775 $ 1,376 $ (1,843)
=========== =========== ============ =============
13
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Operations
Three Fiscal Months Ended September 26, 2003
Dayton Non
Superior Guarantor Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
Net sales $ 43,054 $ 55,963 $ 2,271 $ 101,288
Cost of sales 28,011 47,737 1,902 77,650
----------- ----------- ----------- ------------
Gross profit 15,043 8,226 369 23,638
Selling, general and administrative
expenses 9,993 11,468 519 21,980
Facility closing and severance expenses 312 187 - 499
Amortization of intangibles 73 111 - 184
Management fees (96) - 96 -
Loss (gain) on disposals on property, plant, and
equipment 72 - - 72
----------- ----------- ----------- ------------
Income from operations 4,689 (3,540) (246) 903
Other expenses
Interest expense 11,034 165 - 11,199
Loss on early extinguishment of long-term debt - - - -
Other expense 7 11 (60) (42)
----------- ----------- ----------- ------------
Loss before benefit for income taxes (6,352) (3,716) (186) (10,254)
Benefit for income taxes (3,260) (570) (31) (3,861)
----------- ----------- ----------- ------------
Net loss available to common shareholders $ (3,092) $ (3,146) $ (155) $ (6,393)
=========== =========== =========== ============
14
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Operations
Nine Fiscal Months Ended October 1, 2004
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
Net sales $ 129,392 $ 180,006 $ 9,473 $ 318,871
Cost of sales 91,606 137,947 5,203 234,756
----------- ----------- ----------- ------------
Gross profit 37,786 42,059 4,270 84,115
Selling, general and administrative
expenses 24,355 40,462 1,477 66,294
Facility closing and severance expenses 678 715 - 1,393
Management fees (281) - 281 -
Amortization of intangibles 93 764 - 857
Loss (gain) on disposals on property, plant, and
equipment - (386) - (386)
----------- ----------- ----------- ------------
Income from operations 12,941 504 2,512 15,957
Other expenses
Interest expense 35,329 178 - 35,507
Loss on early extinguishment of long-term debt 842 - - 842
Other expense (income) (20) 20 - -
----------- ----------- ----------- ------------
Income (loss) before provision (benefit) for
income taxes (23,210) 306 2,512 (20,392)
Provision (benefit) for income taxes - - - -
----------- ----------- ----------- ------------
Net income (loss) available to common shareholders $ (23,210) $ 306 $ 2,512 $ (20,392)
=========== =========== =========== ============
15
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Operations
Nine Fiscal Months Ended September 26, 2003
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
Net sales $ 114,860 $ 157,232 $ 7,366 $ 279,458
Cost of sales 86,710 112,447 5,210 204,367
----------- ----------- ----------- ------------
Gross profit 28,150 44,785 2,156 75,091
Selling, general and administrative
expenses 27,225 32,396 1,415 61,036
Facility closing and severance expenses 1,014 229 - 1,243
Management fees (246) - 246 -
Amortization of intangibles 219 224 - 443
Loss (gain) on disposals on property, plant, and
equipment 72 66 - 138
----------- ----------- ----------- ------------
Income from operations (134) 11,870 495 12,231
Other expenses
Interest expense 28,047 225 - 28,272
Loss on early extinguishment of long-term debt 2,480 - - 2,480
Other expense (income) 61 - (32) 29
----------- ----------- ----------- ------------
Income (loss) before provision (benefit) for
income taxes (30,722) 11,645 527 (18,550)
Provision (benefit) for income taxes (10,445) 3,959 179 (6,307)
----------- ----------- ----------- ------------
Net income (loss) available to common shareholders $ (20,277) $ 7,686 $ 348 $ (12,243)
=========== =========== =========== ============
16
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Cash Flows
Nine Fiscal Months Ended October 1, 2004
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (23,211) $ 307 $ 2,512 $ (20,392)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,604 16,575 47 21,226
Loss on early extinguishment of long-term debt 842 - - 842
Deferred income taxes (103) - - (103)
Amortization of deferred financing costs and
debt discount 3,914 - - 3,914
Gain on sales of rental equipment and property,
plant and equipment (295) (8,972) (141) (9,408)
Change in assets and liabilities, net of the effects
of acquisitions (22,071) (3,819) (4,069) (29,959)
---------- ----------- ----------- ------------
Net cash provided by (used in) operating
activities (36,320) 4,091 (1,651) (33,880)
---------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,056) (1,733) (30) (3,819)
Proceeds from sales of property, plant and equipment - 689 - 689
Rental equipment additions (875) (15,557) (239) (16,671)
Proceeds from sales of rental equipment 1,062 13,467 449 14,978
Acquisition - (245) - (245)
---------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities (1,869) (3,379) 180 (5,068)
---------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,738) (447) - (2,185)
Issuance of long-term debt 41,675 - - 41,675
Financing costs incurred (2,554) - - (2,554)
Issuance of common shares 73 - - 73
Changes in loans to shareholders (27) - - (27)
Intercompany (2,498) 2,150 348 -
---------- ----------- ----------- ------------
Net cash provided by financing activities 34,931 1,703 348 36,982
---------- ----------- ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (29) (29)
---------- ----------- ----------- ------------
Net increase (decrease) in cash (3,258) 2,415 (1,152) (1,995)
CASH, beginning of period 860 (1,240) 2,375 1,995
---------- ----------- ----------- ------------
CASH, end of period $ (2,398) $ 1,175 $ 1,223 $ -
========== =========== =========== ============
17
Dayton Superior Corporation and Subsidiaries
Supplemental Consolidating Condensed Statement of Cash Flows
Nine Fiscal Months Ended September 26, 2003
Dayton
Superior Guarantor Non-Guarantor
Corporation Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (20,277) $ 7,686 $ 348 $ (12,243)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,002 14,511 40 18,553
Loss on early extinguishment of long-term debt 2,480 - - 2,480
Deferred income taxes (801) - - (801)
Amortization of deferred financing costs and
debt discount 2,229 - - 2,229
Gain on sales of rental equipment and
property, plant and equipment (1,128) (17,108) (19) (18,255)
Change in assets and liabilities, net of the
effects of acquisitions (15,756) (3,494) (776) (20,026)
---------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities (29,251) 1,595 (407) (28,063)
---------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,002) (3,922) (8) (5,932)
Proceeds from sales of property, plant and
equipment - 82 - 82
Rental equipment additions (588) (20,849) (64) (21,501)
Proceeds from sales of rental equipment 1,444 24,714 32 26,190
Acquisition - (13,535) - (13,535)
---------- ----------- ------------ ------------
Net cash used in investing activities (1,146) (13,510) (40) (14,696)
---------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (176,563) - - (176,563)
Issuance of long-term debt, net 206,195 - - 206,195
Financing costs incurred (1,278) - - (1,278)
Issuance of common shares 13,049 - - 13,049
Changes in loans to shareholders 154 - - 154
Intercompany (11,635) 11,582 53 -
---------- ----------- ------------ ------------
Net cash provided by financing activities 29,922 11,582 53 41,557
---------- ----------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 466 466
---------- ----------- ------------ ------------
Net increase (decrease) in cash (475) (333) 72 (736)
CASH, beginning of period 1,605 (687) 1,486 2,404
---------- ----------- ------------ ------------
CASH, end of period $ 1,130 $ (1,020) $ 1,558 $ 1,668
========== =========== ============ ============
18
(5) STOCK OPTION PLANS
The Company's 2000 Stock Option Plan permits the grant of stock options to
purchase common shares. Options that are cancelled may be reissued. The Stock
Option Plan constitutes the amendment and merger into one plan of four previous
option plans and governs options that remained outstanding following our
recapitalization in 2000, as well as new option grants. The terms of the option
grants are ten years from the date of grant.
Generally, between 10% and 25% of the options have a fixed vesting period of
fewer than three years. The remaining options are eligible to become exercisable
in installments over one to five years from the date of grant based on the
Company's performance, but, in any case, become exercisable no later than nine
years after the grant date.
These options may be subject to accelerated vesting upon certain change in
control events based on Odyssey Investment Partners, LLC return on investment.
Under the Stock Option Plan, the option exercise price equals the stock's market
price on date of grant.
A summary of the status of the Company's stock option plans at October 1, 2004,
as well as changes during the fiscal nine months then ended is presented in the
table below:
Weighted Average
Number of Exercise Price Per
Shares Share
--------- ------------------
Outstanding at December 31, 2003 643,839 $ 25.03
Granted 79,400 25.85
Exercised (31,044) 1.96
Cancelled (9,217) 27.39
-------
Outstanding at October 1, 2004 682,978 $ 26.13
=======
(6) RETIREMENT PLANS
The Company's pension plans cover virtually all hourly employees not covered by
multi-employer pension plans and provide benefits of stated amounts for each
year of credited service. The Company funds such plans at a rate that meets or
exceeds the minimum amounts required by applicable regulations. The plans'
assets are primarily invested in mutual funds comprised primarily of common
stocks and corporate and U.S. government obligations.
The Company provides postretirement health care benefits on a contributory basis
and life insurance benefits for Symons salaried and hourly employees who retired
prior to May 1, 1995.
The following are the components of Net Periodic Benefit Cost for the nine
months ended October 1, 2004 and September 26, 2003:
Symons Symons
Pension Pension Postretirement Postretirement
Benefits 2004 Benefits 2003 Benefits 2004 Benefits 2003
------------- ------------- ------------- -------------
Service cost $ 448 $ 363 $ - $ -
Interest cost 447 422 27 35
Expected return on plan assets (449) (402) - -
Amortization of prior service cost 4 4 18 18
Amortization of net loss 57 41 - -
---------- ---------- -------- --------
Net periodic benefit cost $ 507 $ 428 $ 45 $ 53
========== ========== ======== ========
As of October 1, 2004, $794 of contributions has been made. The Company
presently anticipates contributing an additional $204 to fund its pension plan
in 2004 for a total of $998.
19
(7) SEGMENT REPORTING
Effective January 1, 2004, the Company changed its financial reporting to three
segments to monitor gross profit by sales type: product sales, rental revenue,
and used rental equipment sales. These types of sales are differentiated by
their source and gross margin percentage of sales.
Product sales represent sales of new products carried in inventories on the
balance sheet. Cost of goods sold for product sales include material, labor,
overhead, and freight.
Rental revenues are derived from leasing the rental equipment, and are
recognized ratably over the term of the lease. Cost of goods sold for rental
revenues include depreciation of the rental equipment, maintenance of the rental
equipment, and freight.
Sales of used rental equipment are sales of rental equipment after a period of
generating rental revenue. Cost of goods sold for sales of used rental equipment
is the net book value of the equipment.
All other expenses, as well as assets and liabilities, are not tracked by sales
type. Export sales and sales by non-U.S. affiliates is not significant.
Information about the gross profit of each sales type and the reconciliations to
the consolidated amounts for the three and nine fiscal months ended October 1,
2004 and September 26, 2003 follows. The 2003 amounts have been reclassified to
conform to the 2004 classification.
Three Fiscal Months Ended Nine Fiscal Months Ended
---------------------------- ----------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
----------- ------------- ---------- -------------
Product sales $ 96,640 $ 85,695 $ 273,101 $ 229,247
Rental revenue 11,449 10,391 30,792 24,021
Used rental equipment sales 6,459 5,202 14,978 26,190
---------- ---------- ---------- ----------
Net sales 114,548 101,288 318,871 279,458
---------- ---------- ---------- ----------
Product cost of sales 71,266 67,854 204,948 177,417
Rental cost of sales 8,480 7,717 23,852 19,153
Used rental equipment cost of sales 2,743 2,079 5,956 7,797
---------- ---------- ---------- ----------
Cost of sales 82,489 77,650 234,756 204,367
---------- ---------- ---------- ----------
Product gross profit 25,374 17,841 68,153 51,830
Rental gross profit 2,969 2,674 6,940 4,868
Used rental equipment gross profit 3,716 3,123 9,022 18,393
---------- ---------- ---------- ----------
Gross profit $ 32,059 $ 23,638 $ 84,115 $ 75,091
========== ========== ========== ==========
Depreciation Expense:
Product sales (Property, plant, and equipment) $ 1,343 $ 1,482 $ 4,276 $ 4,572
Rental Revenue (rental equipment) 4,746 4,514 14,146 11,360
Corporate 790 778 1,947 2,178
---------- ---------- ---------- ----------
Total depreciation $ 6,879 $ 6,774 $ 20,369 $ 18,110
========== ========== ========== ==========
20
(8) FACILITY CLOSING AND SEVERANCE EXPENSES
During 2001, we approved and began implementing a plan to exit certain of
our manufacturing and distribution facilities and to reduce overall headcount in
order to keep our cost structure in alignment with net sales. Activity for this
plan for the year ended December 31, 2003, and for the nine months ended October
1, 2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Balance, January 1, 2003 $ - $ 210 $ - $ 311 $ 521
Facility closing and severance expenses - 379 - - 379
Items charged against reserve - (175) - (311) (486)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 - 414 - - 414
Facility closing and severance expenses - - - - -
Items charged against reserve - (414) - - (414)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
During 2002, we approved and began implementing a plan to exit certain of
our distribution facilities and to reduce overall headcount in order to keep our
cost structure in alignment with net sales. Activity for this plan for the year
ended December 31, 2003, and for the nine months ended October 1, 2004 was as
follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Balance, January 1, 2003 $ 2,412 $ 84 $ - $ - $ 2,496
Facility closing and severance expenses 202 (11) - - 191
Items charged against reserve (2,414) (73) - - (2,487)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 200 - - - 200
Facility closing and severance expenses - - - - -
Items charged against reserve (200) - - - (200)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
During 2003, we approved and began implementing a plan to exit certain of
our manufacturing and distribution facilities and to reduce overall headcount in
order to keep our cost structure in alignment with net sales. Activity for this
plan for the year ended December 31, 2003 and the nine months ended October 1,
2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Facility closing and severance expenses $ 988 $ 27 $ - $ 921 $ 1,936
Items charged against reserve (988) (27) - (921) (1,936)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 - - - - -
Facility closing and severance expenses 63 1 - 61 125
Items charged against reserve (63) (1) - (61) (125)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
21
During 2004, we continued to execute our plan to exit additional
distribution facilities. Activity for this plan for the nine months ended
October 1, 2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Facility closing and severance expenses $ 427 $ 76 $ 412 $ 353 $ 1,268
Items charged against reserve (401) (76) (412) (353) (1,242)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ 26 $ - $ - $ - $ 26
======= ======== ========== ============ ========
The total expected future expense for commitments under this plan is
approximately $500,000 and will be expensed in accordance with SFAS No. 146.
(9) BENEFIT FOR INCOME TAXES
In 2003, we carried back all available federal income tax losses and are now
carrying losses forward. Accordingly, tax benefits from operating losses are
offset by valuation allowances, resulting in no net tax benefit being recorded
until realization is reasonably assured.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We believe we are the largest North American manufacturer and distributor of
metal accessories and forms used in concrete construction, and a leading
manufacturer of metal accessories used in masonry construction in terms of
revenues. We operate in two sectors of the construction industry: infrastructure
construction, such as highways, bridges, utilities, water and waste treatment
facilities and airport runways, and non-residential building, such as schools,
stadiums, prisons, retail sites, commercial offices, hotels and manufacturing
facilities. We have expanded our business through acquisitions. On July 29, 2003
we completed the acquisition of substantially all of the fixed assets and rental
fleet assets of Safway Formwork Systems, L.L.C. ("Safway Formwork") for $20.9
million.
Effective January 1, 2004, the Company changed its financial reporting to three
segments to monitor gross profit by sales type: product sales, rental revenue,
and used rental equipment sales. These types of sales are differentiated by
their source and gross margin percents of sales.
- PRODUCT SALES CONSIST OF:
- CONCRETE ACCESSORIES, which are used for connecting forms for
poured-in-place concrete walls, anchoring or bracing for walls
and floors, supporting bridge framework and positioning steel
reinforcing bars, and include products which remain in place
at the convenience of the contractors.
- MASONRY PRODUCTS, which are placed between layers of brick and
concrete blocks and covered with mortar to provide additional
strength to walls.
- PAVING PRODUCTS, which are used in the construction and
rehabilitation of concrete roads, highways and airport runways
to extend the life of the pavement, and include products which
remain in place at the convenience of the contractors. Welded
dowel assemblies are a paving product used to transfer dynamic
loads between two adjacent slabs of concrete roadway. Metal
dowels are part of a dowel basket design that is imbedded in
two adjacent slabs to transfer the weight of vehicles as they
move over a road.
- CHEMICALS, which include a broad spectrum of chemicals for use
in concrete construction, including form release agents, bond
breakers, curing compounds, liquid hardeners, sealers, water
repellents, bonding agents, grouts and epoxies, and other
chemicals used in the pouring, placement, and stamping of
concrete as well as curing compounds used in concrete road
construction.
- RENTAL EQUIPMENT CONSISTS PRIMARILY OF:
- FORMING SYSTEMS, which are reusable engineered modular forms;
hold liquid concrete in place on concrete construction jobs
while it hardens. Standard forming systems are made of steel
and plywood and are used in the creation of concrete walls and
columns. Specialty forming systems consist primarily of steel
forms that are designed to meet architects' specific needs for
concrete placements. Both standard and specialty forming
systems and related accessories are sold as used rental
equipment and rented.
23
SAFWAY FORMWORK ACQUISITION
On July 29, 2003 we acquired substantially all of the fixed assets and rental
fleet assets of Safway Formwork Systems, L.L.C. ("Safway") for $20.9 million,
including acquisition costs of $1.1 million. The initial purchase price was
comprised of $13.0 million in cash and a $12.0 million non-interest bearing
(other than in the case of default) senior unsecured note with an initial
present value of $7.0 million payable to the seller. The note was issued at a
discount, which is being accreted to the face value using the effective interest
method and is reflected as interest expense. The net present value at October 1,
2004 was $6.1 million. The first $250,000 installment payment on the note was
paid on September 30, 2003, and an additional $750,000 installment payment was
due on December 31, 2003. The settlement of normal purchase price adjustments
resulted in a $417,000 reduction in the payment made in December to $333,000. A
subsequent purchase price adjustment of $240,000 was paid in March 2004. A $1.0
million payment was made at September 30, 2004 and annual payments of $1.0
million are due on September 30 of each year from 2005 through 2008, with a
final balloon payment of $6.0 million due on December 31, 2008.
The Company exercised its option to acquire additional rental equipment from
Safway. The Company issued a non-interest bearing note, which is being accreted
to its face value using the effective interest method with an interest rate of
6% and is reflected as interest expense. The net present value of the note at
October 1, 2004 was $1.5 million. Minimum payments of the note are $50,000 for
the remainder of 2004, $282,000 in 2005, $398,000 in 2006, $563,000 in 2007, and
$464,000 in 2008. Payments may be accelerated if certain revenue targets are
met.
Safway sold and rented concrete forming and shoring systems, principally
European style products designed and manufactured by its affiliated European
concrete forming and shoring business, to a national customer base. For the
period from October 1, 2002 through July 25, 2003, Safway Formwork had revenues
of $17.0 million. By acquiring the Safway Formwork rental fleet assets, which
had a gross book value at July 25, 2003 of approximately $41.8 million, we
expect to increase our presence in the concrete forming and shoring systems
business and expand our product offerings by advancing our plan to continue
augmenting Symons' existing rental fleet with European clamping systems. As part
of the asset acquisition we entered into an exclusive manufacturing and
distribution agreement with certain of Safway's affiliates under which we were
granted the exclusive right to manufacture, design, market, offer, sell and
distribute certain European formwork products within the United States, Mexico
and Canada. The acquisition has been accounted for as a purchase, and the
results of Safway Formwork have been included in our consolidated financial
statements from the date of acquisition. The purchase price has been allocated
based on the fair value of the assets acquired and liabilities assumed.
24
FACILITY CLOSING AND SEVERANCE EXPENSES
During 2001, we approved and began implementing a plan to exit certain of
our manufacturing and distribution facilities and to reduce overall headcount in
order to keep our cost structure in alignment with net sales. Activity for this
plan for the year ended December 31, 2003, and for the nine months ended October
1, 2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Balance, January 1, 2003 $ - $ 210 $ - $ 311 $ 521
Facility closing and severance expenses - 379 - - 379
Items charged against reserve - (175) - (311) (486)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 - 414 - - 414
Facility closing and severance expenses - - - - -
Items charged against reserve - (414) - - (414)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
During 2002, we approved and began implementing a plan to exit certain of
our distribution facilities and to reduce overall headcount in order to keep our
cost structure in alignment with net sales. Activity for this plan for the year
ended December 31, 2003, and for the nine months ended October 1, 2004 was as
follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Balance, January 1, 2003 $ 2,412 $ 84 $ - $ - $ 2,496
Facility closing and severance expenses 202 (11) - - 191
Items charged against reserve (2,414) (73) - - (2,487)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 200 - - - 200
Facility closing and severance expenses - - - - -
Items charged against reserve (200) - - - (200)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
During 2003, we approved and began implementing a plan to exit certain of
our manufacturing and distribution facilities and to reduce overall headcount in
order to keep our cost structure in alignment with net sales. Activity for this
plan for the year ended December 31, 2003 and the nine months ended October 1,
2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Facility closing and severance expenses $ 988 $ 27 $ - $ 921 $ 1,936
Items charged against reserve (988) (27) - (921) (1,936)
------- -------- ---------- ------------ --------
Balance, December 31, 2003 - - - - -
Facility closing and severance expenses 63 1 - 61 125
Items charged against reserve (63) (1) - (61) (125)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ - $ - $ - $ - $ -
======= ======== ========== ============ ========
25
During 2004, we continued to execute our plan to exit additional
distribution facilities. Activity for this plan for the nine months ended
October 1, 2004 was as follows:
Involuntary Lease Relocation Other Post-
Termination Termination of Closing
Benefits Costs Operations Costs Total
----------- ----------- ---------- ------------ --------
Facility closing and severance expenses $ 427 $ 76 $ 412 $ 353 $ 1,268
Items charged against reserve (401) (76) (412) (353) (1,242)
------- -------- ---------- ------------ --------
Balance, October 1, 2004 $ 26 $ - $ - $ - $ 26
======= ======== ========== ============ ========
The total expected future expense for commitments under this plan is
approximately $500,000 and will be expensed in accordance with SFAS No. 146.
26
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a percentage of net
sales for the periods indicated.
Three Fiscal Months Ended Nine Fiscal Months Ended
--------------------------- ---------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
---------- ------------- ---------- -------------
Product sales 84.4% 84.6% 85.6% 82.0%
Rental revenue 10.0 10.3 9.7 8.6
Used rental equipment sales 5.6 5.1 4.7 9.4
----- ----- ----- -----
Net sales 100.0 100.0 100.0 100.0
----- ----- ----- -----
Product cost of sales 73.7 79.2 75.0 77.4
Rental cost of sales 74.1 74.3 77.5 79.7
Used rental equipment cost of sales 42.5 40.0 39.8 29.8
----- ----- ----- -----
Cost of sales 72.0 76.7 73.6 73.1
----- ----- ----- -----
Product gross profit 26.3 20.8 25.0 22.6
Rental gross profit 25.9 25.7 22.5 20.3
Used rental equipment gross profit 57.5 60.0 60.2 70.2
----- ----- ----- -----
Gross profit 28.0 23.3 26.4 26.9
Selling, general and administrative expenses 19.0 21.7 20.8 21.8
Facility closing and severance expenses 0.4 0.5 0.4 0.4
(Gain) loss on disposals of property, plant, and
equipment (0.4) - (0.1) 0.1
Amortization of intangibles 0.3 0.2 0.3 0.2
----- ----- ----- -----
Income from operations 8.8 0.9 5.0 4.4
Interest expense 10.4 11.0 11.1 10.1
Loss on early extinguishment of long-term debt - - 0.3 0.9
Other expense (income) - - - -
----- ----- ----- -----
Loss before benefit for income taxes (1.6) (10.1) (6.4) (6.6)
Benefit for income taxes - (3.8) - (2.2)
----- ----- ----- -----
Net loss (1.6)% (6.3)% (6.4)% (4.4)%
===== ===== ===== =====
27
COMPARISON OF THREE FISCAL MONTHS ENDED OCTOBER 1, 2004 AND SEPTEMBER 26, 2003
NET SALES
Net sales increased $13.3 million, or 13.1%, to $114.6 million in the third
quarter of 2004 from $101.3 million in the third quarter of 2003. The following
table summarizes our net sales by product type:
Three fiscal months ended
------------------------------------------------
October 1, 2004 September 26, 2003
---------------------- ---------------------
(In thousands)
Net Sales % Net Sales % % Change
--------- ----- --------- ----- --------
Product sales $ 96,640 84.4% $ 85,695 84.6% 12.8%
Rental revenue 11,449 10.0 10,391 10.3 10.2
Used rental equipment sales 6,459 5.6 5,202 5.1 24.2
-------- ----- -------- -----
Net sales $114,548 100.0% $101,288 100.0% 13.1%
======== ===== ======== =====
Product sales increased $10.9 million, or 12.8%, to $96.6 million in the third
quarter of 2004 from $85.7 million in the third quarter of 2003. The increase in
sales was due to price increases over the last twelve months. This was partially
offset by a decrease in volume that was due to customers buying ahead of
anticipated sales price increases in the first six months of 2004.
Rental revenue increased $1.1 million, or 10.2%, to $11.5 million for the third
quarter of 2004, compared to $10.4 million in the third quarter of 2003. We
estimate that Safway added approximately $1.0 million in rental revenue while
the remaining increase was due to volume from existing product lines.
Used rental equipment sales increased to $6.5 million in the third quarter of
2004 from $5.2 million in the third quarter of 2003. The increase is due to the
timing of customer projects.
GROSS PROFIT
Gross profit on product sales for the third quarter of 2004 was $25.4 million,
or 26.3% of sales, an increase of $7.5 million from $17.8 million, or 20.8% of
sales, in the third quarter of 2003. The increase in gross profit dollars was
primarily due to the increased net sales as discussed above, partially offset by
increasing costs, primarily steel and freight. As a percent of revenue, gross
profit also increased due to productivity gains. We will continue to see higher
impacts of steel costs in future quarters, as the third quarter steel costs were
approximately 10% higher than the second quarter but still largely remain in
inventory.
Gross profit on rental revenue for the third quarter of 2004 was $3.0 million,
an increase of $0.3 million from the third quarter of 2003, which was $2.7
million. The increase in gross profit dollars was primarily due to the increased
net sales as discussed above, which was partially offset by the increase in
depreciation expense on rental equipment as a result of the acquisition of
Safway and higher freight costs.
Gross profit on sales of used rental equipment for the third quarter of 2004 was
$3.7 million, or 57.5% of sales, compared to $3.1 million, or 60.0% of sales, in
the third quarter of 2003. The increase in gross profit dollars was due to the
increased sales discussed previously. Gross profit as a percentage of sales
fluctuates based on the age and type of the specific equipment sold.
OPERATING EXPENSES
Selling, general and administrative expenses decreased $0.2 million to $21.8
million in the third quarter of 2004 from $22.0 million in the third quarter of
2003, despite adding approximately $0.7 million for Safway in the third quarter.
The third quarter of 2003 included some non-recurring expenses related to the
severance, hiring, and relocation costs from certain management changes.
28
Facility closing and severance expense during the third quarter of 2004 was $0.4
million compared to $0.5 million in the third quarter of 2003.
Amortization of intangibles was $0.3 million in the third quarter of 2004,
compared to $0.2 million in the third quarter of 2003.
OTHER EXPENSES
Interest expense increased to $11.9 million in the third quarter of 2004 from
$11.2 million in the third quarter of 2003. This was primarily due to higher
average borrowings.
INCOME (LOSS) BEFORE INCOME TAXES
Loss before income taxes in the third quarter of 2004 was $(1.8) million
compared to a loss of $(10.3) million in the third quarter of 2003, due to the
factors described above.
BENEFIT FOR INCOME TAXES
In 2003, we carried back all available federal income tax losses and are now
carrying such losses forward. Accordingly, in 2004, tax benefits from operating
losses are offset by valuation allowances, resulting in no net tax benefit being
recorded until realization is reasonably assured.
NET INCOME (LOSS)
Net loss in the third quarter of 2004 was $(1.8) million compared to $(6.4)
million in the third quarter of 2003, due to the factors described above.
COMPARISON OF NINE FISCAL MONTHS ENDED OCTOBER 1, 2004 AND SEPTEMBER 26, 2003
NET SALES
Net sales increased $39.4 million, or 14.1%, to $318.9 million in the first
three quarters of 2004 from $279.5 million in the first three quarters of 2003.
The following table summarizes our net sales by product type:
Nine fiscal months ended
--------------------------------------
October 1, 2004 September 26, 2003
------------------ ------------------
(In thousands)
Net Sales % Net Sales % % Change
--------- ----- --------- ----- --------
Product sales $273,101 85.6% $ 229,247 82.0% 19.1%
Rental revenue 30,792 9.7 24,021 8.6 28.2
Used rental equipment sales 14,978 4.7 26,190 9.4 (42.8)
-------- ----- --------- -----
Net sales $318,871 100.0% $ 279,458 100.0% 14.1%
======== ===== ========= =====
Product sales increased $43.8 million, or 19.1%, to $273.1 million in the first
three quarters of 2004 from $229.3 million in the first three quarters of 2003.
The majority of the increase in sales was due to price increases over the last
twelve months, while the remaining increase was due to volume.
Rental revenue increased $6.8 million, or 28.2%, to $30.8 million first three
quarters of 2004, compared to $24.0 million in the first three quarters of 2003.
We estimate that Safway added approximately $6.3 million in rental revenue,
while the remaining increase was due to volume from existing product lines.
Used rental equipment sales decreased to $15.0 million in the first three
quarters of 2004 from $26.2 million in the first three quarters of 2003. The
decrease is due to two large transactions in the first nine months of 2003 that
did not recur in the first nine months of 2004.
29
GROSS PROFIT
Gross profit on product sales for the first three quarters of 2004 was $68.2
million, or 25.0% of sales, an increase of $16.4 million from $51.8 million, or
22.6% of sales, in the first three quarters of 2003. The increase in gross
profit dollars was primarily due to the increased net sales as discussed above,
partially offset by an increase in material costs, primarily steel. As a percent
of revenue, gross profit also increased due to productivity gains. We will
continue to see higher impacts of steel costs in future quarters, as the third
quarter steel costs were approximately 10% higher than the second quarter but
still largely remain in inventory.
Gross profit on rental revenue for the first three quarters of 2004 was $6.9
million, a $2.0 million an increase over the first three quarters 2003, which
was $4.9 million. The increase in gross profit dollars was primarily due to the
increased net sales as discussed above. The increase was partially offset by
higher cost of sales, primarily depreciation expense due to the acquisition of
Safway and higher freight costs.
Gross profit on sales of used rental equipment for the first three quarters of
2004 was $9.0 million, or 60.2% of sales, compared to $18.4 million, or 70.2% of
sales, in the first three quarters of 2003. The decrease in gross profit dollars
was primarily due to the decreased sales discussed previously. Gross profit as a
percentage of sales, fluctuates based on the age and type of the specific
equipment sold.
OPERATING EXPENSES
Selling, general and administrative expenses increased $5.3 million to $66.3
million in the first three quarters of 2004 from $61.0 million in the first
three quarters of 2003. The increase was due to the acquisition of Safway, which
was partially offset by cost controls.
Facility closing and severance expense during the first three quarters of 2004
was $1.4 million compared to $1.2 million in first three quarters of 2003.
Amortization of intangibles was $0.9 million in the first three quarters of
2004, compared to $0.4 million in the first three quarters of 2003.
OTHER EXPENSES
Interest expense increased to $35.5 million in the first three quarters of 2004
from $28.3 million in the first three quarters of 2003. This was primarily due
to the higher interest rate from the new senior second secured notes and higher
average borrowings. The Company incurred a loss on the early extinguishment of
long-term debt of $0.8 million in the first nine months of 2004 and $2.6 million
in the first nine months of 2003. The 2004 loss was due to the expensing of
deferred financing costs on the Company's previous revolving line of credit. The
2003 loss was due to the expensing of deferred financing costs related to the
issuance of the $165.0 million senior second secured notes.
INCOME (LOSS) BEFORE INCOME TAXES
Loss before income taxes for the first three quarters of 2004 was $(20.4)
million compared to a loss of $(18.6) million in the first three quarters of
2003, due to the factors described above.
BENEFIT FOR INCOME TAXES
In 2003, we carried back all available federal income tax loses and are now
carrying such losses forward. Accordingly, in 2004, tax benefits from operating
losses are offset by valuation allowances, resulting in no net tax benefit being
recorded until realization is reasonably assured.
NET INCOME (LOSS)
Net loss for the first three quarters of 2004 was $(20.4) million compared to
$(12.2) million in the first three quarters of 2003, due to the factors
described above.
30
LIQUIDITY AND CAPITAL RESOURCES
Our key statistics for measuring liquidity and capital resources are net cash
provided by operating activities, capital expenditures, and amounts available
under our revolving credit facility.
Our capital requirements relate primarily to capital expenditures, debt service
and the cost of acquisitions. Historically, our primary sources of financing
have been cash generated from operations, borrowings under our revolving credit
facility and the issuance of long-term debt and equity.
Net cash used in operating activities in the first nine months of 2004 was
$(33.9) million, compared to $(28.1) million in the first nine months of 2003.
This activity is comprised of the following:
2004 2003
-------- --------
(in millions)
Net loss $(20,392) $(12,243)
Non-cash adjustments 16,471 4,206
-------- --------
Net loss after non-cash adjustments (3,921) (8,037)
Changes in assets and liabilities (29,959) (20,026)
-------- --------
Net cash used in operating activities $(33,880) $(28,063)
======== ========
Net loss after non-cash adjustments was $(3.9) million for the first nine months
of 2004, compared to $(8.0) million in the first nine months of 2003. This
improvement was due to the unfavorable net loss being more than offset by
non-cash items such as gains on sales of rental equipment and depreciation and
amortization.
Changes in assets and liabilities resulted in a $(30.0) million use of cash in
the first nine months of 2004, as compared to $(20.0) million use of cash in the
first nine months of 2003. This was primarily due to an increase in inventory
which was a $(14.0) million use of cash in the first nine months of 2004 as
compared to a $(2.8) million use of cash in the first nine months of 2003. The
2004 growth in inventories was due to steel price increases, and an opportunity
to buy steel raw material at favorable prices.
Cash used for prepaid expense and other assets was a $(5.9) million use of cash
in the first nine months of 2004, compared to $(1.3) million in the first nine
months of 2003. This use of cash in 2004 was primarily due to prepayments for
steel raw material at favorable prices.
This use of cash was offset by accounts payable, which was a $3.0 million source
of cash in the first nine months of 2004 as compared to a $(1.5) million use of
cash in the first nine months of 2003. This was primarily due to raw material
cost increases. Accrued liabilities and other long-term liabilities was a $(0.3)
million use of cash in first nine months of 2004 as compared to $(3.6) in the
first nine months of 2003. This decrease was due to higher 2003 payments for
facility closing and severance accruals, a retirement plan contribution in 2003
that was suspended in 2004, and an increase in accrued liabilities, such as
freight, due to increased sales.
Net cash used in investing activities was $(5.1) million in the first nine
months of 2004, compared to $(14.7) million in the first nine months of 2003.
Property, plant, and equipment additions declined as management continues to
monitor capital spending. The proceeds from sales of property, plant, and
equipment were primarily due to the sale of real estate that became redundant as
a result of the acquisition of Safway. Rental equipment additions decreased to
$16.7 million in the first nine months of 2004 from $21.5 million in the first
nine months of 2003, which is due to the lower sales of rental equipment.
Proceeds from sales of rental equipment decreased to $15.0 million in the first
nine months of 2004 from $26.2 million in the first nine months of 2003. The
decrease is due to two large transactions in the first half of 2003 that did not
recur in 2004.
31
As of October 1, 2004, our long-term debt consisted of the following:
October 1,
2004
-----------
Revolving credit facility, weighted average interest rate of 4.35% $ 66,050
Senior Second Secured Notes, interest rate of 10.75% 165,000
Debt discount on Senior Second Secured Notes (6,526)
Senior Subordinated Notes, interest rate of 13.0% 154,729
Debt discount on Senior Subordinated Notes (7,688)
Notes payable to seller of Safway, non-interest bearing, accreted at 6.0% to 14.5% 7,602
Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand 1,102
Capital lease obligations 4,047
City of Parsons, Kansas Economic Development Loan, interest rate of 7.0% 24
---------
Total long-term debt 384,340
Less current maturities (2,527)
---------
Long-term portion $ 381,813
=========
The Company has a $95,000 senior secured revolving credit facility that matures
on January 30, 2007. The credit facility has no financial covenants.
Availability of borrowings is limited to 85% of eligible accounts receivable and
60% of eligible inventories and rental equipment, less $10,000. At October 1,
2004, all $95,000 was available under the calculation. The credit facility is
secured by substantially all assets of the Company and its domestic
subsidiaries.
At October 1, 2004, $66.1 million of borrowings were outstanding, along with
$7.3 million of letters of credit, with the remaining $21.6 million available
for borrowing.
Our long-term debt borrowings, net of repayments for the quarters ended October
1, 2004, was $39.5 million. We incurred $2.5 million of financing costs
primarily related to the refinancing of the line of credit in January of 2004.
The Company may, from time to time, seek to retire its outstanding debt through
cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, the Company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
At October 1, 2004, working capital was $100.3 million, compared to $71.6
million at December 31, 2003. The $28.7 million increase was comprised of the
following:
- $12.8 million increase in accounts receivable due to the normal
seasonal increase in net sales from December to September,
- $14.0 million increase in inventories due to higher raw material
costs and an opportunity to buy steel raw materials at favorable
prices,
- $5.8 million increase in prepaid expenses due to prepayments of
steel raw materials,
- $3.0 million increase in accounts payable due to higher inventories;
and
- $0.9 million of changes in other items.
32
We intend to pursue additional acquisitions that present opportunities to
realize significant synergies, operating expense economies or overhead cost
savings or to increase our market position. We regularly engage in discussions
with respect to potential acquisitions and investments. There are no definitive
agreements with respect to any material acquisitions at this time, and we cannot
assure you that we will be able to reach an agreement with respect to any future
acquisition. Our acquisition strategy may require substantial capital, and no
assurance can be given that we will be able to raise any necessary funds on
terms acceptable to us or at all. We intend to fund acquisitions with cash,
securities or a combination of cash and securities.
To the extent we use cash for all or part of any future acquisitions, we expect
to raise the cash from our business operations, from borrowings under our
revolving credit facility or, if feasible and attractive, by issuing long-term
debt or additional common shares. If we incur additional debt to finance
acquisitions, our total interest expense will increase.
On July 29, 2003 we acquired substantially all of the fixed assets and rental
fleet assets of Safway Formwork Systems, L.L.C. for $20.9 million, including
acquisition costs of $1.1 million. The initial purchase price was comprised of
$13.0 million in cash and a $12.0 million, non-interest bearing (other than in
the case of default) senior unsecured note, with an initial present value of
$7.0 million payable to the seller. The note was issued at a discount, which is
being accreted to the face value using the effective interest method and is
reflected as interest expense. The net present value at October 1, 2004 was $6.1
million. The first $250,000 installment payment on the note was paid on
September 30, 2003, and an additional $750,000 installment payment was due on
December 31, 2003. The settlement of normal purchase price adjustments resulted
in a $417,000 reduction in the payment made in December to $333,000. A
subsequent purchase price adjustment of $240,000 was paid in March 2004. A $1.0
million payment was made at September 30, 2004 and annual payments of $1.0
million are due on September 30 of each year from 2005 through 2008, with a
final balloon payment of $6.0 million due on December 31, 2008.
The Company exercised its option to acquire additional rental equipment from
Safway. The Company issued a non-interest bearing note, which is being accreted
to its face value using the effective interest method with an interest rate of
6% and is reflected as interest expense. The net present value of the note at
October 1, 2004 was $1.5 million. Minimum payments of the note are $50,000 for
the remainder of 2004, $282,000 in 2005, $398,000 in 2006, $563,000 in 2007, and
$464,000 in 2008. Payments may be accelerated if certain revenue targets are
met.
We believe our liquidity, capital resources, and cash flows from operations are
sufficient, in the absence of additional acquisitions, to fund the capital
expenditures we have planned and our working capital and debt service
requirements.
Our ability to make scheduled payments of principal of, or to pay the interest
on, or to refinance, our indebtedness, or to fund planned capital expenditures
and research and development will depend on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. Based on
our current level of operations and anticipated operating improvements,
management believes that cash flow from operations and available borrowings
under our revolving credit facility will be adequate to meet our future
liquidity for the foreseeable future. We cannot assure you, however, that our
business will generate sufficient cash flow from operations, that operating
improvements will be realized on schedule or that future borrowings will be
available to us under our revolving credit facility in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs. We may
from time to time seek to retire our outstanding debt through cash purchases
and/or exchanges for equity securities, in open market purchases, in privately
negotiated transactions or otherwise. Any such repurchases or exchanges will
depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material. We may
need to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness,
including our revolving credit facility, the senior subordinated notes and the
senior second secured notes, on commercially reasonable terms or at all.
33
COMMITMENTS
There were no material changes to minimum future payments from December 31,
2003.
SEASONALITY
Our operations are seasonal in nature with approximately 55% of sales
historically occurring in the second and third quarters. Working capital and
borrowings fluctuate with the volume of our sales.
INFLATION
We may not be able to pass on the cost of commodity price increases to our
customers. Steel, in its various forms, is our principal raw material,
constituting approximately 20% of our cost of sales in 2003. Historically, steel
prices have fluctuated and we are currently facing rising steel prices and a
potential impending steel shortage. Any decrease in our volume of steel
purchases could affect our ability to secure volume purchase discounts that we
have obtained in the past. Additionally, the overall increase in energy costs,
including natural gas and petroleum products, has adversely impacted our overall
operating costs in the form of higher raw material, utilities, and freight
costs. We cannot assure you we will be able to pass these cost increases on to
our customers.
STOCK COLLATERAL VALUATION - SENIOR SECOND SECURED NOTES
Rule 3-16 of the SEC's Regulation S-X requires the presentation of a
subsidiary's stand-alone, audited financial statements if the subsidiary's
capital stock secures an issuer's notes and the par value, book value or market
value ("Applicable Value") of the stock equals or exceeds 20% of the aggregate
principal amount of the secured class of securities the ("Collateral
Threshold.") The indenture governing our Senior Second Secured Notes and the
security documents for the notes provide that the collateral will never include
the capital stock of any subsidiary to the extent the Applicable Value of the
stock is equal to or greater than the Collateral Threshold. As a result, we will
not be required to present separate financial statements of any of our
subsidiaries under Rule 3-16. In addition, in the event that Rule 3-16 or Rule
3-10 of Regulation S-X is amended, modified or interpreted by the SEC to require
(or is replaced with another rule or regulation, or any other law, rule or
regulation is adopted, which would require) the filing with the SEC (or any
other governmental agency) of separate financial statements of any of our
subsidiaries due to the fact that such subsidiary's capital stock or other
securities secure our Senior Second Secured Notes, then the capital stock or
other securities of such subsidiary automatically will be deemed not to be part
of the collateral for the notes but only to the extent necessary to not be
subject to such requirement. In such event, the security documents for the
Senior Second Secured Notes may be amended or modified, without the consent of
any holder of notes, to the extent necessary to release the liens of the Senior
Second Secured Notes on the shares of capital stock or other securities that are
so deemed to no longer constitute part of the collateral; however, the excluded
collateral will continue to secure our first priority lien obligations such as
our senior secured revolving credit facility. As a result of the provisions in
the indenture and security documents relating to subsidiary capital stock,
holders of our Senior Second Secured Notes may at any time in the future lose
all or a portion of their security interest in the capital stock of any of our
other subsidiaries if the Applicable Value of that stock were to become equal to
or greater than the Collateral Threshold.
As of October 1, 2004, all of the capital stock of our subsidiaries Dur-O-Wal,
Inc., Southern Construction Products, Inc., Dayton Superior Specialty Chemical
Corp., and 65% of the voting capital stock and 100% of the non-voting capital
stock of our subsidiary Dayton Superior Canada Ltd. constituted collateral for
the notes. The capital stock of our subsidiaries Symons Corporation, Aztec
Concrete Accessories, Inc. and Trevecca Holdings Inc. did not constitute
collateral for the notes, since the Applicable Value of the capital stock
equaled or exceeded the Collateral Threshold. This is a change from the second
quarter of 2004, as the capital stock of Dayton Superior Specialty Chemical
Corp. did not constitute collateral for the notes as of July 2, 2004.
We have based our determination of which subsidiary's capital stock currently
constitutes collateral upon the book value, par value and estimated market value
of the capital stock of each of our subsidiaries as of October 1, 2004. The
Applicable Value for the capital stock of each of our subsidiaries is the
greater of the book value
34
and estimated market value, as the par value of each subsidiary's capital stock
is nominal and therefore has not impacted our calculation of Applicable Value.
Set forth in the table below is the Applicable Value of each subsidiary's
capital stock as of October 1, 2004:
Subsidiary Applicable Value
---------- ----------------
Symons Corporation $ 63,953
Aztec Concrete Accessories, Inc. 41,791
Dur-O-Wal, Inc. 22,530
Trevecca Holdings, Inc. (1) 41,791
Dayton Superior Specialty Chemical Corp. 32,707
Southern Construction Products, Inc. (2) -
Dayton Superior Canada Ltd. 14,997
(1) Trevecca Holdings, Inc. is a holding company, the sole asset of which has
remained the capital stock of Aztec Concrete Accessories, Inc. since we acquired
Trevecca Holdings and Aztec Concrete Accessories in January 2001.
(2) Southern Construction Products, Inc. is currently an inactive corporation
with no assets.
In respect of Symons Corporation and Dayton Superior Specialty Chemical Corp.,
the Applicable Value of their common stock was based upon book value. Book value
of a subsidiary's capital stock is calculated as of each preceding period end
and represents the original purchase price of the subsidiary's capital stock
plus any income earned and less any losses and any transfers of assets.
In respect of Aztec Concrete Accessories, Inc., Dur-O-Wal, Inc., Dayton Superior
Canada Ltd, and Trevecca Holdings, Inc., the Applicable Value of their common
stock was based upon estimated market value. We have calculated the estimated
market value of our subsidiaries' capital stock by determining the earnings
before interest, taxes, depreciation, and amortization, or EBITDA, of each
subsidiary for the twelve months ended October 1, 2004, adjusted in each case to
add back facility closing and severance expenses, loss on sale of fixed assets
and other expense, and multiplied this adjusted EBITDA by 5.5 times. We retain
an independent appraisal firm for purposes of calculating the market value of
our common stock on a going concern basis, as required under our Management
Stockholders' Agreement and in connection with determining equity-based
compensation. The appraisal firm has informed us that a range of 5 to 6 times
adjusted EBITDA is reasonable for determining the fair value of the capital
stock of smaller, basic manufacturing companies. We determined that using a
multiple of 5.5 times, which is the mid-point of the range described above is a
reasonable and appropriate means for determining fair value of our subsidiaries'
capital stock.
Set forth below is the adjusted EBITDA of each of our subsidiaries other than
Southern Construction Products, Inc. (which has no adjusted EBITDA) for the
twelve months ended October 1, 2004, together with a reconciliation to the net
income (loss) of each of these subsidiaries:
Trevecca Dayton Superior Dayton
Symons Aztec Concrete Dur-O-Wal, Holdings, Inc. Specialty Superior
Corporation Accessories, Inc. Inc. (1) Chemical Corp. Canada Ltd.
----------- ----------------- --------- ------------- -------------- -----------
Net Income (Loss) $(11,964) $ 6,387 $ 3,304 $ 6,387 $ 2,585 $ 2,545
Provision (Benefit) for Income
Taxes (799) 610 242 610 (50) 20
Other (Income) Expense (6) 2 - 2 305 101
Interest Expense 394 - - - - -
Income from Operations (12,375) 6,999 3,546 6,999 2,840 2,666
Facility Closing and
Severance Expenses 339 - - - 56 -
Depreciation Expense 21,034 599 550 599 547 61
Amortization of Intangibles 1,190 - - - - -
-------- -------- -------- -------- -------- --------
Adjusted valuation EBITDA 10,188 7,598 4,096 7,598 3,443 2,727
Multiple 5.5 5.5 5.5 5.5 5.5 5.5
-------- -------- -------- -------- -------- --------
Estimated Fair Value $ 56,034 $ 41,789 $ 22,528 $ 41,789 $ 18,937 $ 14,999
======== ======== ======== ======== ======== ========
35
(1) Trevecca Holdings, Inc. is a holding company, the sole asset of which has
remained the capital stock of Aztec Concrete Accessories, Inc. since we acquired
Trevecca Holdings and Aztec Concrete Accessories in January 2001.
As described above, we have used EBITDA and adjusted EBITDA of each of our
subsidiaries solely for purposes of determining the estimated market value of
their capital stock to determine whether that capital stock is included in the
collateral. EBITDA and adjusted EBITDA are not recognized financial measures
under generally accepted accounting principles and do not purport to be
alternatives to operating income as indicators of operating performance or to
cash flows from operating activities as measures of liquidity. Additionally,
EBITDA has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our consolidated results as
reported under generally accepted accounting principles. Because not all
companies use identical calculations, the presentation of adjusted EBITDA also
may not be comparable to other similarly titled measures of other companies. You
are encouraged to evaluate the adjustments taken and the reasons we consider
them appropriate for analysis for determining estimated market value of our
subsidiaries' capital stock.
A change in the Applicable Value of the capital stock of any of our subsidiaries
could result in a subsidiary's capital stock that was previously excluded from
collateral becoming part of the collateral or a subsidiary's capital stock that
was previously included in collateral to become excluded. The following table
reflects the amounts by which the Applicable Value of each subsidiary's capital
stock as of October 1, 2004 and the adjusted EBITDA of each subsidiary for the
twelve months ended October 1, 2004, in the case of Dur-O-Wal, Inc., Dayton
Superior Canada Ltd., and, Dayton Superior Specialty Chemical Corp. would have
to increase in order for that subsidiary's capital stock to no longer constitute
collateral or, in the case of Symons Corporation, Aztec Concrete Accessories,
Inc. and Trevecca Holdings Inc., would have to decrease in order for their
capital stock to become collateral:
Change in Applicable Change in Adjusted
Subsidiary Value EBITDA
---------- -------------------- ------------------
Symons Corporation $(30,953) $ (4,188)
Aztec Concrete Accessories, Inc. (8,791) (1,598)
Dur-O-Wal, Inc. 10,470 1,904
Trevecca Holdings, Inc. (1) (8,791) (1,598)
Dayton Superior Specialty Chemical Corp. 293 2,557
Southern Construction Products, Inc. - -
Dayton Superior Canada Ltd. 18,003 3,273
(1) Trevecca Holdings, Inc. is a holding company, the sole asset of which has
remained the capital stock of Aztec Concrete Accessories, Inc. since we acquired
Trevecca Holdings and Aztec Concrete Accessories in January 2001.
36
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting
principles generally accepted in the United States. These principles require us
to make certain estimates and apply judgments that affect our financial position
and results of operations. We continually review our accounting policies and
financial information disclosures. On an on-going basis, we evaluate our
estimates, including those related to allowance for doubtful accounts,
inventories, investments, long-lived assets, income taxes, insurance reserves,
restructuring liabilities, environmental contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. There have been no
material changes in our policies or estimates since December 31, 2003.
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes, and future filings by us on Form 10-K, Form 10-Q, and
Form 8-K, and future oral and written statements by us and our management may
include certain forward-looking statements, including (without limitation)
statements with respect to anticipated future operating and financial
performance, growth opportunities and growth rates, acquisition and divestitive
opportunities and other similar forecasts and statements of expectation. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and "should," and variations of these words and similar expressions,
are intended to identify these forward-looking statements. Forward-looking
statements by our management and us are based on estimates, projections, beliefs
and assumptions of management and are not guarantees of future performance. We
disclaim any obligation to update or revise any forward-looking statement based
on the occurrence of future events, the receipt of new information, or
otherwise.
Actual future performance, outcomes and results may differ materially from those
expressed in forward-looking statements made by us, and our management, as the
result of a number of important factors. Representative examples of these
factors include (without limitation) the cyclical nature of nonresidential
building and infrastructure construction activity, which can be affected by
factors outside our control such as weakness in the general economy, a decrease
in governmental spending, interest rate increases, and changes in banking and
tax laws; the amount of debt we must service; the effects of weather and the
seasonality of the construction industry; our ability to implement cost savings
programs successfully and on a timely basis; our ability to successfully
identify, finance, complete and integrate acquisitions; increases in the price
of steel (our principal raw material), availability of steel, and our ability to
pass along such price increases to our customers; the effects of weather and
seasonality on the construction industry; increasing consolidation of our
customers; the mix of products we sell; the competitive nature of our industry;
and the amount of debt we must service. This list is not intended to be
exhaustive, and additional information can be found under "Risks Related to Our
Business" in Part I of our most recent Annual Report on Form 10-K. In addition
to these factors, actual future performance, outcomes and results may differ
materially because of other, more general, factors including (without
limitation) general industry and market conditions and growth rates, domestic
economic conditions, governmental and public policy changes and the continued
availability of financing in the amounts, at the terms and on the conditions
necessary to support our future business.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of October 1, 2004, we had financial instruments, which were sensitive to
changes in interest rates. These financial instruments consist of:
- $95.0 million revolving credit facility, $66.1 million of which was
outstanding at October 1, 2004;
- $165.0 million of Senior Second Secured Notes, with a net book value
of $158.5 million;
- $154.7 million of Senior Subordinated Notes, with a net book value
of $147.0 million;
- $7.6 million of notes payable to the seller of Safway;
- $4.0 million in capital lease obligations;
- $1.1 million in other fixed-rate, long-term debt.
Our $95.0 million senior secured revolving credit facility matures on
January 30, 2007. The credit facility has no financial covenants. Availability
of borrowings is limited to 85% of eligible accounts receivable and 60% of
eligible inventories and rental equipment, less $10.0 million. At October 1,
2004, the Company had outstanding letters of credit of $7.3 million and
available borrowings of $21.6 million under this revolving credit facility. The
credit facility is secured by substantially all assets of the Company and its
domestic subsidiaries.
Our $165.0 million of senior second secured notes mature in June 2008. The
notes were issued at a discount, which is being accreted to the face value using
the effective interest method and is reflected as interest expense. The proceeds
of the offering of the Senior Notes were $156.9 million and were used to repay
the Company's acquisition credit facility, certain of the Company's then current
debt, and a portion of the revolving credit facility. The estimated fair value
of the notes is $176.6 million as of October 1, 2004. The senior second secured
notes are secured by substantially all assets of the Company and its domestic
subsidiaries.
Our $154.7 million of senior subordinated notes mature in June 2009. The
notes were issued at a discount, which is being accreted to the face value using
the effective interest method and is reflected as interest expense. The notes
were issued with warrants that allow the holder to purchase 117,276 of the
Company's Class A Common Shares for $0.01 per share. The senior subordinated
notes have an interest rate of 13.0%. The estimated fair value of the notes is
$151.6 million as of October 1, 2004.
Our $12.0 million non-interest bearing note to the seller of Safway has a
remaining balance of $10.0 million and is being accreted to the face value at
14.5% using the effective interest method. Annual payments of $1.0 million are
due on September 30 of each year from 2005 through 2008, with a final balloon
payment of $6.0 million due on December 31, 2008. The book value of the note at
October 1, 2004 was $6.1 million.
Our $2.0 million non-interest bearing note payable to the seller of Safway
has a remaining balance of $1.8 million and is being accreted to the face value
at 6.0% using the effective interest method. Minimum payments on the note are
$50,000 for the remainder of 2004, $282,000 in 2005, $398,000 in 2006, $563,000
in 2007, and $464,000 in 2008. Payments may be accelerated if certain revenue
targets are met. The book value of the note at October 1, 2004 was $1.5 million.
Our other long-term debt at October 1, 2004 consisted of $1.1 million of
9.1% junior subordinated debentures previously held by the Dayton Superior
Capital Trust with an estimated fair value of $1.9 million, and a 7% loan due in
annual installments of $31,500 per year.
In the ordinary course of our business, we also are exposed to price
changes in raw materials, particularly steel. The prices of these items can
change significantly due to changes in the markets in which our suppliers
operate. We generally do not, however, use financial instruments to manage our
exposure to changes in commodity prices.
38
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the quarter covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting
during the most recent quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
39
PART II. - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no unregistered sales of equity securities and no repurchases of
securities during this reporting period.
ITEM 6. EXHIBITS
(a) Exhibits. See Index to Exhibits following the signature page to this
report for a list of Exhibits.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAYTON SUPERIOR CORPORATION
DATE: November 12, 2004 BY: /s/ Edward J. Puisis
----------------------------
Edward J. Puisis
Vice President and Chief Financial Officer
41
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(31) Rule 13a-14(a)/15d-14(a) Certifications
31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief Financial Officer
(32) Section 1350 Certifications
32.1 Section 1350 Certification of President and Chief Executive Officer
32.2 Section 1350 Certification of Vice President and Chief Financial Officer
42