10-K 1 l05622ae10vk.txt DAYTON SUPERIOR CORPORATION 10-K/FYE 12-31-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-11781 DAYTON SUPERIOR CORPORATION (Exact name of registrant as specified in its charter) Ohio 31-0676346 (State of incorporation) (I.R.S. Employer Identification No.) 7777 Washington Village Dr. Suite 130 Dayton, Ohio 45459 (Address of principal executive office) Registrant's telephone number, including area code: (937) 428-6360 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Junior Subordinated Debentures Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of March 29, 2003, there were 4,554,827 common shares outstanding, all of which were privately held and not traded on a public market. As of June 30, 2003, none of the outstanding shares were held by non-affiliates. 1 In this Annual Report on Form 10-K, unless otherwise noted, the terms "Dayton Superior," "we," "us" and "our" refer to Dayton Superior Corporation and its subsidiaries. PART I ITEM 1. BUSINESS. AVAILABLE INFORMATION The Company files annual, quarterly, and current reports, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. GENERAL 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. In many of our product lines, we believe we are the market leader in terms of revenues competing primarily in two segments 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 derive our revenue from a mix of sales of consumable products (accessories, chemicals, etc.) and the sale and rental of engineered concrete forming equipment. Through our network of 26 service/distribution centers, we serve over 5,000 customers, comprised of independent distributors and a broad array of pre-cast concrete manufacturers, general contractors, subcontractors and metal fabricators. We sell most of our 21,000 products under well established, industry-recognized brand names, and manufacture the vast majority of these products "in-house." We believe that the breadth of our product offerings and national distribution network allow us to service the largest customer base in the industry by providing a "one-stop" alternative to our customers. We believe that none of our competitors can match our combination of product breadth and national reach. In addition, our nationwide customer base enables us to efficiently cross-sell our products and provides us with a platform from which we can broadly distribute newly developed and acquired product lines. Finally, our national customer base provides us with geographically dispersed sales, which can mitigate the effects of regional economic downturns. In an effort to reduce costs and enhance customer responsiveness, effective January 1, 2003, we reorganized our company from six autonomous manufacturing and sales divisions into two sales units ("CPG" and Symons) and a new product fulfillment unit (Supply Chain). CPG and Symons are primarily responsible for sales, customer service and new product development. As part of this effort, we reorganized most of our manufacturing and distribution operations into our Supply Chain unit, which manufactures and distributes our products in support of CPG and Symons. 2 CONSTRUCTION PRODUCTS GROUP In terms of revenues, we believe that CPG is the leading North American supplier 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 - WELDED DOWEL ASSEMBLIES, which are paving products used in the construction and rehabilitation of concrete roads, highways and airport runways to extend the life of the pavement. In addition, CPG supplies: - MASONRY PRODUCTS, which are placed between layers of brick and concrete blocks and covered with mortar to provide additional strength to walls; and - CHEMICALS, which can be used in conjunction with our construction products for various purposes including form release, bond breakers, curing compounds, liquid hardeners, sealers, water repellents, bonding agents, grouts and other uses related to the pouring and placement of concrete. SYMONS We believe we are the leading North American manufacturer, in terms of revenues, of concrete forming systems, which are reusable, engineered forms and related accessories used in the construction of concrete walls, columns and bridge supports to hold concrete in place while it hardens. Symons both rents and sells its forms through a network of 16 company-operated distribution centers and through numerous third party distributors, some of whom also purchase accessories and chemicals from CPG. PRODUCTS Although almost all of our products are used in concrete or masonry construction, the function and nature of the products differ widely. Most of our products are consumable, providing us with a source of recurring revenue. In addition, while our products represent a relatively small portion of a construction project's total cost, our products assist in ensuring the on-time, quality completion of those projects. We continually attempt to increase the number of products we offer by using engineers and product development teams to introduce new products and refine existing products. CPG. CPG manufactures and sells concrete accessories primarily under the Dayton/Richmond(R), Aztec(R) and BarLock(R) brand names, masonry products primarily under the Dur-O-Wal(R) brand name and paving products primarily under the American Highway Technology(R) name, but we also offer some paving products under the Dayton/Richmond(R) name. CPG PRODUCTS INCLUDE: - WALL-FORMING PRODUCTS. Wall-forming products include shaped metal ties and accessories that are used with modular forms to hold concrete in place when walls are poured at a construction site or are prefabricated off site. These products, which generally are not reusable, are made of wire or plastic or a combination of both materials. - BRIDGE DECK PRODUCTS. Bridge deck products are metal assemblies of varying designs used to support the formwork used by contractors in the construction and rehabilitation of bridges. - BAR SUPPORTS. Bar supports are non-structural steel, plastic, or cementitious supports used to position rebar within a horizontal slab or form to be filled with concrete. Metal bar 3 supports are often plastic or epoxy coated, galvanized or equipped with plastic tips to prevent creating a conduit for corrosion of the embedded rebar. - SPLICING PRODUCTS. Splicing products are used to join two pieces of rebar together while at a construction site without the need for extensive preparation of the rebar ends. - PRECAST AND PRESTRESSED CONCRETE CONSTRUCTION PRODUCTS. Precast and prestressed concrete construction products are metal assemblies of varying designs used in the manufacture of precast concrete panels and prestressed concrete beams and structural members. Precast concrete panels and prestressed concrete beams are fabricated away from the construction site and transported to the site. Precast concrete panels are used in the construction of prisons, freeway sound barrier walls, external building facades and other similar applications. Prestressed concrete beams use multiple strands of steel cable under tension embedded in concrete beams to provide rigidity and bearing strength, and often are used in the construction of bridges, parking garages and other applications where long, unsupported spans are required. - TILT-UP CONSTRUCTION PRODUCTS. Tilt-up construction products include a complete line of inserts, lifting hardware and adjustable beams used in the tilt-up method of construction, in which the concrete floor slab is used as part of a form for casting the walls of a building. After the cast walls have hardened on the floor slab, a crane is used to "tilt-up" the walls, which then are braced in place until they are secured to the rest of the structure. Tilt-up construction generally is considered to be a faster method of constructing low-rise buildings than conventional poured-in-place concrete construction. Some of our tilt-up construction products can be rented as well as sold. - FORMLINER PRODUCTS. Formliner products include plastic and elastomeric products that adhere to the inside face of forms to provide shape to the surface of the concrete. - CHEMICAL PRODUCTS. Chemical products sold by CPG 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 and placement of concrete and curing compounds used in concrete road construction. - MASONRY PRODUCTS. Masonry products are wire products sold under the Dur-O-Wal(R) name that improve the performance and longevity of masonry walls by providing crack control, greater elasticity and higher strength to withstand seismic shocks and better resistance to rain penetration. - WELDED DOWEL ASSEMBLIES. Welded dowel assemblies are 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. - CORROSIVE-PREVENTING EPOXY COATINGS. Corrosive-preventing epoxy coatings are used for infrastructure construction products and a wide range of industrial and construction uses. SYMONS. Symons manufactures, sells and rents reusable modular concrete forming systems primarily under the Symons(R) name. SYMONS PRODUCTS INCLUDE: - CONCRETE FORMING SYSTEMS. Concrete forming systems are reusable, engineered modular forms which 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 and rented for use. 4 - SHORING SYSTEMS. Shoring systems, including aluminum beams and joists, post shores and shoring frames are used to support deck and other raised forms while concrete is being poured. - ARCHITECTURAL PAVING PRODUCTS. Architectural paving products are used to apply decorative texture and coloration to concrete surfaces while concrete is being poured. - CONSTRUCTION CHEMICALS. Construction chemicals sold by the Symons business unit include form release agents, sealers, water repellents, grouts and epoxies and other chemicals used in the pouring, stamping and placement of concrete. MANUFACTURING We manufacture a substantial majority of the products we sell. As part of our reorganization effective January 1, 2003, we reorganized most of our manufacturing and distribution operations into Supply Chain, our new product fulfillment unit, which manufactures and distributes our products in support of CPG and Symons. CPG obtains the majority of the products it sells from the Supply Chain group and manufactures its chemicals product line. Symons obtains Steel-Ply(R) forms from the Supply Chain unit and manufactures and assembles or outsources some of the manufacturing involved in some of the other all-steel forms. Most of our CPG products are manufactured in 17 facilities throughout the United States. Our production volumes enable us to design and build or custom modify much of the equipment we use to manufacture these products, using a team of experienced manufacturing engineers and tool and die makers. By developing our own automatic high-speed manufacturing equipment, we believe we generally have achieved significantly greater productivity, lower capital equipment costs, lower scrap rates, higher product quality, faster changeover times, and lower inventory levels than most of our competitors. In addition, our ability to "hot-dip" galvanize masonry products provides us with an advantage over many competitors' manufacturing masonry wall reinforcement products, which lack this internal capability. We also have a flexible manufacturing setup and can make the same products at several locations using short and discrete manufacturing lines. We manufacture our Symons concrete forming systems at two facilities in the United States. These facilities incorporate semi-automated and automated production lines, heavy metal presses, forging equipment, stamping equipment, robotic welding machines, drills, punches, and other heavy machinery typical for this type of manufacturing operation. We are currently moving a significant percentage of our annual production requirements to Reynosa, Mexico. We believe that by relocating a portion of our manufacturing to Mexico, we will realize approximately $5 million in savings annually. We also intend to outsource some of our production requirements to lower cost foreign producers, which we believe will generate significant additional savings. DISTRIBUTION We distribute our products through over 1,100 independent distributors, and our own network of 26 service/distribution centers located in the United States and Canada. We have 10 distribution centers dedicated to our CPG business unit and 16 distribution centers dedicated to our Symons business unit. Some locations carry more than one of our product lines. We ship most of our products to our service/distribution centers from our manufacturing plants; however, a majority of our centers also are able to produce smaller batches of some products on an as-needed basis to fill rush orders. We have an on-line inventory tracking system for CPG, which enables our customer service representatives to identify, reserve and ship inventory quickly from any of our locations in response to telephone orders. 5 SALES AND MARKETING We employed approximately 280 sales and marketing personnel at December 31, 2003, of whom approximately two-thirds were field sales people and one-third were customer service representatives. Sales and marketing personnel are located in all of our service/distribution centers. We produce product catalogs and promotional materials that illustrate certain construction techniques in which our products can be used to solve typical construction problems. We promote our products through seminars and other customer education efforts and work directly with architects and engineers to secure the use of our products whenever possible. We consider our engineers to be an integral part of the sales and marketing effort. Our engineers have developed proprietary software applications to conduct extensive pre-testing on both new products and construction projects. CUSTOMERS We have over 5,000 customers, of which approximately 50% purchase our products for resale. Our customer base is geographically diverse, with no customer accounting for more than 3% of net sales in 2003. CPG. CPG has approximately 2,600 customers, consisting of distributors, rebar fabricators, precast and prestressed concrete manufacturers, brick and concrete block manufacturers, general contractors and sub-contractors. We estimate that approximately 85% of the customers of this business unit purchase our products for resale. The largest customer of the business unit accounted for approximately 5% of the business unit's 2003 net sales. CPG has instituted a certified dealer program for those dealers who handle our tilt-up construction products. This program was established to educate dealers in the proper use of our tilt-up products and to assist them in providing engineering assistance to their customers. Certified dealers are not permitted to carry other manufacturers' tilt-up products, which we believe are incompatible with ours and, for that reason, could be unsafe if used with our products. The business unit currently has 98 certified tilt-up construction product dealers. SYMONS. Symons has approximately 2,500 customers, consisting of distributors, precast and prestressed concrete manufacturers, general contractors and subcontractors. We estimate that approximately 90% of the customers of this business unit are the end-users of its products, while approximately 10% of those customers purchase its products for resale or re-rent. This business unit's largest customer accounted for 7% of the business unit's 2003 net sales. RAW MATERIALS Our principal raw materials are steel wire rod, steel hot rolled bar, metal stampings and flat steel, aluminum sheets and extrusions, plywood, cement and cementitious ingredients, liquid chemicals, zinc, plastic resins and injection-molded plastic parts. We currently purchase materials from over 600 vendors and are not dependent on any single vendor or small group of vendors for any significant portion of our raw material purchases. Steel, in its various forms, constitutes approximately 20% of our cost of sales. We are currently facing rising steel prices and a potential impending steel shortage. We have responded by increasing our sales prices in October 2003, January 2004, and March 2004 and will continue to announce pricing increases in response to rising steel costs. COMPETITION Our industry is highly competitive in most product categories and geographic regions. We compete with a limited number of full-line national manufacturers of concrete accessories, concrete forming systems and paving products, and a much larger number of regional manufacturers and manufacturers with limited product lines. We believe competition in our industry is largely based on, among other things, price, quality, breadth of product lines, distribution capabilities (including quick delivery times), and customer service. Due primarily to factors such as freight rates, quick delivery times 6 and customer preference for local suppliers, some local or regional manufacturers and suppliers may have a competitive advantage over us in a given region. We believe the size, breadth, and quality of our product lines provide us with advantages of scale in both distribution and production relative to our competitors. TRADEMARKS AND PATENTS We sell most products under the registered trade names Dayton Superior(R), Dayton/Richmond(R), Symons(R), Aztec(R), BarLock(R), Conspec(R), Edoco(R), Dur-O-Wal(R) and American Highway Technology(R), which we believe are widely recognized in the construction industry and, therefore, are important to our business. Although some of our products (and components of some products) are protected by patents, we do not believe these patents are material to our business. At December 31, 2003, we had approximately 200 trademarks and 140 patents. EMPLOYEES As of December 31, 2003, we employed approximately 700 salaried and 1,200 hourly personnel, of whom approximately 800 of the hourly personnel and 7 of the salaried personnel are represented by labor unions. Employees at our Miamisburg, Ohio; Parsons, Kansas; Des Plaines, Illinois; New Braunfels, Texas; Tremont, Pennsylvania; Long Beach, California; Santa Fe Springs, California; City of Industry, California, and Aurora, Illinois manufacturing/distribution plants and our service/distribution center in Atlanta, Georgia are covered by collective bargaining agreements. We believe we have good employee and labor relations. SEASONALITY Our operations are seasonal in nature, with approximately 55% of our sales historically occurring in the second and third quarters. Working capital and borrowings fluctuate with sales volume. BACKLOG We typically ship most of our products, other than paving products and most specialty forming systems, within one week and often within 24 hours after we receive the order. Other product lines, including paving products and specialty forming systems, may be shipped up to six months after we receive the order, depending on our customer's needs. Accordingly, we do not maintain significant backlog, and backlog as of any particular date has not been representative of our actual sales for any succeeding period. RISKS RELATED TO OUR BUSINESS CYCLICALITY OF CONSTRUCTION INDUSTRY--The construction industry is cyclical, and a continued significant downturn in the construction industry could further decrease our revenues and profits and adversely affect our financial condition. Because our products primarily are used in infrastructure construction and non-residential building, our sales and earnings are strongly influenced by construction activity, which historically has been cyclical. Construction activity can decline because of many factors we cannot control, such as: - weakness in the general economy; - a decrease in government spending at the federal and state levels; - interest rate increases; and - changes in banking and tax laws. 7 SUBSTANTIAL LEVERAGE--Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the exchange notes. We have a significant amount of indebtedness and debt service requirements. The following chart shows certain important credit statistics as of December 31, 2003: Total long-term indebtedness, including current maturities .... $341.8 million Shareholders' deficit ......................................... $ 7.3 million
Our substantial indebtedness could have important consequences. For example, it could: - make it more difficult for us to satisfy our obligations under outstanding indebtedness; - increase our vulnerability to general adverse economic and industry conditions; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - place us at a disadvantage to our competitors that have less debt; and - limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds. In addition, failing to comply with those covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In addition, we and our subsidiaries may be able to incur substantial additional indebtedness in the future under the terms of the indenture that will govern the notes, the senior subordinated notes, the senior credit facility and other indebtedness. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we, and they, now face could increase. NET LOSSES--Our business has experienced net losses over the past several periods. We reported net losses of approximately $20.3 million in 2002 and $17.1 million in 2003. Our results of operations will continue to be affected by events and conditions both within and beyond our control, including competition, economic, financial, business and other conditions. Therefore, we cannot assure you that we will not continue to incur net losses in the future. PRICE INCREASES AND AVAILABILITY--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. WEATHER-RELATED RISKS--Weather causes our operating results to fluctuate and could adversely affect the demand for our products and decrease our revenues. Our operating results tend to fluctuate from quarter to quarter because, due to weather, the construction industry is seasonal in most of North America, which is where almost all of our sales are made. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales typically are the lowest of the year and we experience a net loss. Our net sales and operating income in the fourth quarter also generally are less than in the second and third quarters. In addition, severe weather could adversely affect our business, financial condition and results of operation. Adverse weather, such as unusually prolonged periods of cold or rain, blizzards, hurricanes and other severe weather patterns, 8 could delay or halt construction activity over wide regions of the country. For example, an unusually severe winter, such as the 2002-2003 winter, leads to reduced construction activity and magnifies the seasonal decline in our revenues and earnings during the winter months. Although weather conditions have not historically had a material long-term effect on our results of operations, sustained extreme adverse weather conditions could have a material adverse effect on our business, financial condition and results of operations. CHEMICAL PRODUCTS COMPETITION--We are significantly smaller than some of our construction chemical competitors. In the sale of some construction chemicals, we must compete with a number of national and international companies that are many times larger than we are in terms of total assets and annual revenues. Because our resources are more limited, we may not be able to compete effectively and profitably on a sustained basis in the markets in which those competitors are actively present. POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES--We may be liable for costs under certain environmental laws, even if we did not cause any environmental problems. Changes in environmental laws or unexpected investigations could adversely affect our business. Our business and our facilities are subject to a number of federal, state and local environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. Pursuant to certain environmental laws, a current or previous owner or operator of land may be liable for the costs of investigation and remediation of hazardous materials at the property. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who arrange (as defined under these statutes) for the disposal or treatment of hazardous materials also may be liable for the costs of investigation and remediation of these substances at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. We believe we are in material compliance with applicable environmental laws. However, because we own and operate a number of facilities where industrial activities have been historically conducted and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation and remediation, as well as capital costs associated with compliance with these laws. These environmental costs have not been material in the past and are not expected to be material in the future. Nevertheless, more stringent environmental laws as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation could impose material costs and liabilities on us, which could have a material adverse effect on our business, financial condition and results of operations. CONSOLIDATION OF OUR DISTRIBUTORS--Increasing consolidation of our distributors may negatively affect our earnings. We believe that there is an increasing trend among our distributors to consolidate into larger entities. As our distributors increase in size and market power, they may be able to exert pressure on us to reduce prices or create price competition by dealing more readily with our competitors. If the consolidation of our distributors does result in increased price competition, our sales and profit margins may be adversely affected. UNREALIZED COST SAVINGS--We may not realize or continue to realize the cost savings that we have achieved or anticipate achieving from our manufacturing cost improvement programs and company reorganization. Beginning in 2001, we implemented strategic initiatives designed to reduce our manufacturing costs, and beginning in the second half of 2002, we began to consolidate our operating divisions and eliminate redundant overhead expense. Our future cost savings expectations with respect to these initiatives are necessarily based upon a number underlying estimates and assumptions, which may or may not prove to be accurate. In addition, these underlying estimates and assumptions are subject to significant economic, competitive and other uncertainties that are beyond our control. INCREASED DEPENDENCE ON FOREIGN OPERATIONS--Political and economic conditions in Mexico could adversely affect us. Our manufacturing cost improvement programs have resulted in our moving a significant percentage of our annual production requirements to Reynosa, Mexico. The success of our operations in Mexico will depend on numerous factors, many of which will be beyond our control, including our inexperience with operating in Mexico or abroad, generally, general economic conditions, currency fluctuations, restrictions on the repatriation of assets, compliance with Mexican laws and standards and political risks. 9 PRODUCT MIX PROFIT MARGINS--A change in the mix of products we sell could negatively affect our earnings. Some of our products historically have had narrow profit margins. If the mix of products we sell shifts to include a larger percentage of products with narrow profit margins, our earnings may be negatively affected. RISKS ASSOCIATED WITH ACQUISITIONS--We may complete acquisitions that disrupt our business. If we make acquisitions, we could do any of the following, which could adversely affect our business, financial condition and results of operations: - incur substantial additional debt, which may reduce funds available for operations and future opportunities and increase our vulnerability to adverse general economic and industry conditions and competition; - assume contingent liabilities; or - take substantial charges to write off goodwill and other intangible assets. In addition, acquisitions can involve other risks, such as: - difficulty in integrating the acquired operations, products and personnel into our existing business; - costs, which are greater than anticipated or cost savings, which are less than anticipated; - diversion of management time and attention; and - adverse effects on existing business relationships with our suppliers and customers and the suppliers and customers of the acquired business. COMPETITION--The markets in which we sell our products are highly competitive. We compete against some national and many regional rivals. The uniformity of products among competitors results in substantial pressure on pricing and profit margins. As a result of these pricing pressures, we may in the future experience reductions in the profit margins on our sales, or we may be unable to pass any cost increases on to our customers. We believe that our purchasing power, nationwide distribution network, marketing capabilities and manufacturing efficiency allow us to competitively price our products. We cannot assure you that we will be able to maintain or increase our current market share of our products or compete successfully in the future. CONTROL BY ODYSSEY--We are controlled by Odyssey Investment Partners, LLC. Odyssey and its co-investors indirectly own 92% of our outstanding common shares and, therefore, have the power, subject to certain exceptions, to control our affairs and policies. They also control the election of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors have authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions about our capital stock. The interests of Odyssey and its affiliates could conflict with the interest of our note holders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Odyssey investors, as holders of our equity, might conflict with the interests of our note holder. Affiliates of Odyssey may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though these transactions might involve risks to holders of our notes. RISKS ASSOCIATED WITH OUR WORKFORCE--We depend on our highly trained employees, and any work stoppage or difficulty hiring similar employees would adversely affect our business. We could be adversely affected by a shortage of skilled employees. As of December 31, 2003, approximately 40% of our employees were unionized. We are subject to several collective bargaining agreements with these employees. There are six collective bargaining agreement expiring in 2004, covering hourly employees at the Parsons, Kansas; Miamisburg, Ohio; Aurora, Illinois; Atlanta, Georgia; City of Industry, California, and Santa Fe Springs, California facilities. Although we believe that our relations with our employees are good, we cannot assure you that we will be able to negotiate a satisfactory renewal of 10 these collective bargaining agreements or that our employee relations will remain stable. Because we maintain a relatively small inventory of finished goods and operate on relatively short lead times for our products, any shortage of labor could have a material adverse effect on our business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL--If we lose our senior management, our business may be adversely affected. The success of our business is largely dependent on our senior managers, as well as on our ability to attract and retain other qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain "key person" life insurance on any of our key employees. RESTRICTIVE COVENANTS--Our senior credit facility and our note indentures contain various covenants which limit the discretion of our management in the operation of our business including, among other things, our ability to: - incur additional debt; - pay dividends or distributions on our capital stock or repurchase our capital stock; - enter into guarantees; - issue preferred stock of subsidiaries; - restrict the rights of our subsidiaries to make distributions to us; - make certain investments; - create liens to secure debt; - enter into transactions with affiliates; - merge or consolidate with another company; - transfer and sell assets; - change the terms of certain of our debt; and - create new subsidiaries. In addition, if we fail to comply with our senior credit facility, our note indentures, or any other subsequent financing agreements, a default could occur. Such a default could allow the lenders, if the agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the lenders could terminate any commitments they had made to supply us with further funds. 11 ITEM 2. PROPERTIES. Our corporate headquarters are located in leased facilities in Dayton, Ohio. We believe our facilities provide adequate manufacturing and distribution capacity for our needs. We also believe all of the leases were entered into on market terms. Our other principal facilities are located throughout North America, as follows:
Leased/ Size Lease Location Use Principal Business Unit Owned (Sq. Ft.) Expiration Date --------------------- -------------------------- -------------------------- ------ ------- --------------- Birmingham, Alabama Manufacturing/Distribution Construction Products Group Leased 287,000 12/12/ 2021 Des Plaines, Illinois Manufacturing/Distribution Symons Owned 171,650 Miamisburg, Ohio Manufacturing/Distribution Construction Products Group Owned 126,000 Parsons, Kansas Manufacturing/Distribution Construction Products Group Owned 98,250 Aurora, Illinois Manufacturing/Distribution Construction Products Group Owned 109,000 Kankakee, Illinois Manufacturing/Distribution Construction Products Group Leased 107,900 12/31/2007 Tremont, Pennsylvania Manufacturing/Distribution Construction Products Group Owned 86,000 New Braunfels, Texas Manufacturing/Distribution Symons Owned 89,600 Fontana, California Manufacturing/Distribution Construction Products Group Leased 114,275 12/31/2007 Parker, Arizona Manufacturing/Distribution Construction Products Group Leased 60,000 Month to Month Modesto, California Manufacturing/Distribution Construction Products Group Leased 54,100 12/31/2007 Reynosa, Mexico Manufacturing/Distribution Construction Products Group Leased 110,000 07/16/2006 Atlanta, Georgia Service/Distribution Construction Products Group Leased 49,392 08/31/2006 Grand Prairie, Texas Service/Distribution Construction Products Group Leased 45,000 12/31/2004 Seattle, Washington Service/Distribution Construction Products Group Leased 40,640 06/30/2006 Toronto, Ontario Manufacturing/Distribution Construction Products Group Leased 45,661 01/31/2005 Oregon, Illinois Service/Distribution Construction Products Group Owned 39,000 Kansas City, Kansas Manufacturing/Distribution Construction Products Group Owned 33,000 Folcroft, Pennsylvania Service/Distribution Construction Products Group Owned 32,000
ITEM 3. LEGAL PROCEEDINGS. During the ordinary course of our business, we are from time to time threatened with, or may become a party to, legal actions and other proceedings. While we are currently involved in various legal proceedings, we believe the results of these proceedings will not have a material effect on our business, financial condition or results of operations. We believe that our potential exposure to these legal actions is adequately covered by product and general liability insurance, and, in some instances, by indemnification arrangements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. There is no established public trading market for our common shares. As of December 31, 2003, there were 35 holders of our common shares. On October 22, 2003, we sold 400 Common Shares to Peter J. Astrauskas at an aggregate price of $9,600 ($24.00 per share) in connection with the employment of Mr. Astrauskas as our Vice President, Engineering. The shares were issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. 12 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical consolidated financial information as of and for each of the years in the five-year period ended December 31, 2003. The selected historical financial information as of and for the years ended December 31, 1999 and 2000 has been derived from our consolidated financial statements, which were audited by Arthur Andersen LLP, our former independent public accountants. The selected historical financial information as of and for the years ended December 31, 2001, 2002, and 2003 have been derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP. Our audited consolidated financial statements for the three years ended December 31, 2003 are included elsewhere herein. You should read the following table together with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section below and our restated consolidated financial statements and their related notes included elsewhere herein.
Year Ended December 31, ------------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (dollars in thousands) STATEMENT OF OPERATIONS DATA: Net sales $ 377,854 $ 398,737 $ 415,491 $ 387,068 $ 322,170 Cost of sales 273,598 269,861 276,221 248,746 201,445 --------- --------- --------- --------- --------- Gross profit 104,256 128,876 139,270 138,322 120,725 Selling, general and administrative expenses 87,020 91,221 97,532 92,941 79,819 Facility closing and severance expenses (1) 2,294 5,399 7,360 2,517 - Amortization of goodwill and intangibles 944 603 3,912 2,508 2,369 --------- --------- --------- --------- --------- Income from operations 13,998 31,653 30,466 40,356 38,537 Interest expense 39,955 33,967 35,024 22,574 11,661 Lawsuit judgment - - - 15,341(2) - Loss on early extinguishment of long-term debt 2,480(4) - - 7,761(3) - Loss (gain) on disposals of property, plant and equipment (636) 1,115 (7) - - Other expense 20 80 102 293 230 --------- --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (27,821) (3,509) (4,653) (5,613) 26,646 Provision (benefit) for income taxes (10,713) (386) (1,179) (1,478) 11,991 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (17,108) (3,123) (3,474) (4,135) 14,655 Cumulative effect of change in accounting principle, net of income tax benefit - (17,140)(5) - - - --------- --------- --------- --------- --------- Net income (loss) (17,108) (20,263) (3,474) (4,135) 14,655 Dividends on Company-obligated mandatorily redeemable convertible trust preferred securities, net of income tax benefit - - - 583 320 --------- --------- --------- --------- --------- Net income (loss) available to common shareholders $ (17,108) $ (20,263) $ (3,474) $ (4,718) $ 14,335 ========= ========= ========= ========= =========
13
Year Ended December 31, ----------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (dollars in thousands) Other Financial Data: Depreciation and amortization $ 26,878 $ 21,453 $ 22,202 $ 15,121 $ 14,086 Property, plant and equipment additions, net 6,935 9,267 9,755 11,483 7,469 Rental equipment additions, net (12,152) (17,230) 3,191 801 4,052 Balance Sheet Data (at period end): Working Capital $ 71,594 $ 65,751 $ 56,943 $ 60,868 $ 50,469 Goodwill and Intangibles 119,932 115,733 136,626 97,044 75,522 Total Assets 393,384 373,971 396,843 335,418 278,679 Long-term debt (including current portion) 341,890 299,536 291,946 245,925 105,173 Convertible trust preferred securities - - - - 19,556 Shareholders' equity (deficit) (7,267) (4,241) 16,721 13,196 88,772
(1) From 2000 through 2003, we approved and implemented several plans to exit additional manufacturing and distribution facilities and reduce overall headcount to keep our cost structure aligned with our net sales. We describe the facility closing and severance expenses relating to these consolidation efforts in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Facility Closing and Severance Expenses." (2) Symons was a defendant in a civil suit brought by EFCO Corp., a competitor of Symons in one portion of their business. In October 2000, Symons satisfied a judgment of $14.1 million, post-judgment interest of $1.1 million, and defense costs of $0.1 million, by payment to EFCO from our cash on hand and from our revolving credit facility. (3) During June 2000, in connection with the recapitalization, we refinanced our then-existing bank indebtedness. Additionally, the Dayton Superior Capital Trust, which held solely debentures, was dissolved. The company-obligated mandatorily redeemable convertible trust preferred securities converted to debentures having the right to receive cash in the amount of $22.00, plus accrued dividends, per preferred security. As a result we recorded a loss in 2000 of $7.8 million, comprised of the following: Expense deferred financing costs on previous long-term debt $ 2.7 Prepayment premium on extinguishments of long-term debt and interest rate swap agreements 0.5 Expense issuance costs on company-obligated mandatorily redeemable convertible trust Preferred securities 1.7 Prepayment premium on conversion of company-obligated mandatorily redeemable convertible trust preferred securities into debentures 2.1 Financing cost for unused long-term debt commitment 0.8 ----- $ 7.8 =====
This loss was recorded as an extraordinary loss in 2000 and subsequently was reclassified as an ordinary loss as a result of our adoption in 2003 of SFAS No. 145, "Rescission of FASB Statement Nos. 4,44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." 14 (4) On June 9, 2003, we completed an offering of $165 million of senior second secured notes (the "Senior Notes") in a private placement. The notes mature in June 2008 and 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 $157 million and were used to repay our acquisition credit facility, term loan tranche A, term loan tranche B, and a portion of the revolving credit facility, which was subsequently increased by $24.4 million. As a result of the transactions, we incurred a loss on the early extinguishment of long-term debt of $2.5 million, due to the expensing of deferred financing costs. The Senior Notes are secured by substantially all assets of the Company. (5) We adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, we recorded a non-cash charge in 2002 of $17.1 million ($19.9 million of goodwill, less an income tax benefit of $2.8 million), which is reflected as a cumulative effect of change in accounting principle. This amount does not affect our ongoing operations. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Founded in 1924, 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. Although almost all of our products are used in concrete or masonry construction, the function and nature of the products differ widely. In 2001, we acquired Aztec Concrete Accessories, Inc., a manufacturer of plastic products for the construction industry, primarily in the Western United States. We also have expanded our business units through additional smaller 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 $20.0 million. Safway Formwork is a subsidiary of Safway Services, Inc., whose ultimate parent is ThyssenKrupp AG, or TK, a publicly traded company in Germany. In an effort to reduce costs and enhance customer responsiveness, effective January 1, 2003, we reorganized our company from six autonomous manufacturing and sales divisions into two sales units (CPG and Symons) and a new product fulfillment unit (Supply Chain). CPG and Symons are primarily responsible for sales, customer service and new product development. As part of this effort, we reorganized most of our manufacturing and distribution operations into our Supply Chain unit, which manufactures and distributes our products in support of CPG and Symons. CPG. CPG derives its revenues from the sale of products primarily to independent distributors and contractors. CPG also provides some equipment on a rental basis. CPG obtains the majority of the products it sells from the Supply Chain product fulfillment group and manufactures its chemicals product line. Cost of sales for CPG consists primarily of purchased steel and other raw materials, as well as the costs associated with manufacturing, assembly, testing, and associated overhead. Orders from customers for our paving products are affected by state and local governmental infrastructure expenditures and their related bid processes. Due to the project-oriented nature of paving jobs, these products generally are made to order. SYMONS. Symons derives its revenues from the sale and rental of engineered, reusable modular forming systems and related accessories to independent distributors and contractors. Sales of both new and used concrete forming systems and specific consumables generally represent approximately two-thirds of the revenues of this business unit, and rentals represent the remaining one-third. This business unit's products include systems with steel frames and a plywood face, also known as Steel-Ply(R), and systems that use steel in both the frame and face. Symons obtains Steel-Ply(R) forms from the Supply Chain product fulfillment group and manufactures and assembles or outsources some of the manufacturing involved in some of the other all-steel forms. This outsourcing strategy allows us to fulfill larger orders without increased overhead. Cost of sales for Symons consists primarily of purchased steel and specialty plywood, and other raw materials, depreciation and maintenance of rental equipment, and the costs associated with manufacturing, assembly and overhead. SUPPLY CHAIN. As part of our reorganization, effective January 1, 2003, we reorganized most of our manufacturing and distribution operations into Supply Chain, our new product fulfillment unit, which manufactures and distributes our products in support of CPG and Symons. In addition to manufacturing Steel-Ply(R) forms for Symons, we design and manufacture or customize most of the machines we use to produce concrete accessories, and these proprietary designs allow for quick changeover of machine set-ups. This flexibility, together with our extensive distribution system, enables CPG to deliver many of its concrete accessories within 24 hours of a customer order. We are currently moving a significant percentage of our annual production requirements to Reynosa, Mexico. We believe that by relocating a portion of our manufacturing to Mexico, we will realize approximately $5 million in savings annually. We also intend to outsource some of our production requirements to lower cost foreign producers, which we believe will generate significant additional savings. For segment reporting purposes, we include Supply Chain within CPG. 16 SAFWAY FORMWORK ACQUISITION 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. for $20.0 million. Safway Formwork is a subsidiary of Safway Services, Inc., whose ultimate parent is ThyssenKrupp AG, or TK, a publicly traded company in Germany. The purchase price was comprised of $13.0 million in cash and a non-interest bearing (other than in the case of default) senior unsecured note with a 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 book value of the note at December 31, 2003 was $6.4 million. The face value of the note is $12.0 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 December payment to $333,000. A subsequent purchase price adjustment of $240,000 was paid in March 2004. Annual payments of $1.0 million are due on September 30 of each year from 2004 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 with a present value of $1.6 million. The note is being accreted to the face value of $2.0 million using the effective interest method and is reflected as interest expense. Minimum payments on the note are $199,000 in 2004 and 2005, $397,000 in 2006 and 2007, and $795,000 in 2008. Payments may be accelerated if certain revenue targets are met. Safway Formwork sold and rented concrete forming and shoring systems, principally European style products designed and manufactured by TK's 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 TK'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. 17 FACILITY CLOSING AND SEVERANCE EXPENSES During 2000, as a result of the acquisition of Conspec, we approved and began implementing a plan to consolidate certain of our existing operations. Activity for this plan for the years ended December 31, 2001, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- --------- -------- (AMOUNTS IN THOUSANDS) Balance, January 1, 2001 .................... $ 738 $ 540 $ - $ 575 $ 1,853 Facility closing and severance expenses ..... - - - - - Items charged against reserve ............... (738) (50) - (398) (1,186) -------- -------- -------- -------- -------- Balance, December 31, 2001 .................. - 490 - 177 667 Facility closing and severance expenses ..... - - - - - Items charged against reserve ............... - (221) - (84) (305) -------- -------- -------- -------- -------- Balance, December 31, 2002 .................. - 269 - 93 362 Facility closing and severance expenses ..... - (212) - - (212) Items charged against reserve ............... - (57) - (93) (150) -------- -------- -------- -------- -------- Balance, December 31, 2003 .................. $ - $ - $ - $ - $ - ======== ======== ======== ======== ========
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 years ended December 31, 2001, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- --------- -------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses ..... $ 3,287 $ 685 $ - $ 786 $ 4,758 Items charged against reserve ............... (2,356) (161) - - (2,517) ------- ------- -------- ------- ------- Balance, December 31, 2001 .................. 931 524 - 786 2,241 Facility closing and severance expenses ..... - - 108 - 108 Items charged against reserve ............... (931) (314) (108) (475) (1,828) ------- ------- -------- ------- ------- Balance, December 31, 2002 .................. - 210 - 311 521 Facility closing and severance expenses ..... - 379 - - 379 Items charged against reserve ............... - (175) - (311) (486) ------- ------- -------- ------- ------- Balance, December 31, 2003 .................. $ - $ 414 $ - $ - $ 414 ======= ======= ======== ======= =======
The remaining lease termination costs are expected to be paid in 2004. 18 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, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- --------- -------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses ..... $ 4,441 $ 650 $ - $ 200 $ 5,291 Items charged against reserve ............... (2,029) (566) - (200) (2,795) -------- -------- -------- -------- -------- Balance, December 31, 2002 .................. 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 ======== ======== ======== ======== ========
The remaining involuntary termination benefits are expected to be paid in 2004. During 2003, 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 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- --------- -------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses .... $ 988 $ 27 $ - $ 921 $ 1,936 Items charged against reserve .............. (988) (27) - (921) (1,936) ------- ------- ------ ------- ------- Balance, December 31, 2003 ................. $ - $ - $ - $ - $ - ======= ======= ====== ======= =======
19 RESULTS OF OPERATIONS The following table summarizes our results of operations as a percentage of net sales for the periods indicated:
YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Product sales 79.9% 79.8% 80.8% Rental revenue 9.6 11.3 13.8 Used rental equipment sales 10.5 8.9 5.5 ----- ----- ----- Net sales 100.0 100.0 100.0 ----- ----- ----- Product cost of sales 78.5 74.5 74.3 Rental cost of sales 65.5 43.0 31.9 Used rental equipment cost of sales 32.2 38.4 37.7 ----- ----- ----- Cost of sales 72.4 67.7 66.5 ----- ----- ----- Product gross profit 21.5 25.5 25.7 Rental gross profit 34.5 57.0 68.1 Used rental equipment gross profit 67.8 61.6 62.3 ----- ----- ----- Gross profit 27.6 32.3 33.5 Selling, general and administrative expenses 23.0 22.9 23.5 Facility closing and severance expenses 0.6 1.4 1.8 Amortization of goodwill and intangibles 0.2 0.1 0.9 ----- ----- ----- Income from operations 3.7 7.9 7.3 Interest expense 10.6 8.5 8.4 Loss on early extinguishment of long-term debt 0.7 - - Loss (gain) on disposals of property, plant, and equipment (0.2) 0.3 - Other expense - - - ----- ----- ----- Income (loss) before provision (benefit) for income taxes (7.4) (0.9) (1.1) Provision (benefit) for income taxes (2.8) (0.1) (0.3) ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle (4.5) (0.8) (0.8) Cumulative effect of change in accounting principle, net of income tax benefit - (4.3) - ----- ----- ----- Net income (loss) (4.5)% (5.1)% (0.8)% ===== ===== =====
20 COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2003 NET SALES. Our 2003 net sales were $377.9 million, a 5.2% decrease from $398.7 million in 2002. The following table summarizes our net sales by segment for the periods indicated:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2003 2002 ---------------------- ---------------------- (IN THOUSANDS) % SALES % SALES % CHANGE --------- ----- --------- ----- ------ Construction Products Group: Product sales $ 262,753 69.5% $ 278,473 69.8% (5.6)% Rental revenue 3,194 0.8 4,694 1.2 (32.0) Used rental equipment sales 4,403 1.2 4,085 1.0 7.8 --------- ---- --------- ---- Total Construction Products Group 270,350 71.5 287,252 72.0 (5.9) Symons: Product sales 60,936 16.1 60,773 15.2 0.3 Rental revenue 33,100 8.8 40,386 10.1 (18.0) Used rental equipment cost of sales 35,320 9.3 31,556 7.9 11.9 --------- ---- --------- ---- Total Symons 129,356 34.2 132,715 33.2 (2.5) Intersegment eliminations (21,852) (5.8) (21,230) (5.3) 2.9 --------- ---- --------- ---- Net sales $ 377,854 100.0% $ 398,737 100.0% (5.2)% ========= ===== ========= =====
CPG's sales decreased by 5.9% to $270.4 million in 2003 from $287.3 million in 2002. This decrease was due to unfavorable volume, as the construction products markets were weaker in 2003 compared to 2002. Symons' sales decreased by 2.5% to $129.4 million in 2003 from $132.7 million in 2002. Product sales increased 0.3% to $60.9 million from $60.8 million. Rental revenues decreased 18.0% to $33.1 million in 2003 from $40.4 million in 2002. The acquisition of Safway contributed $5.2 million of rental revenues in the five months after acquisition. This was offset by lower revenues in existing product lines, due to lower rental rates and, to a lesser extent, volume, both due to weaker markets. We estimate that approximately 80% of the decrease in rental revenues in existing product lines is due to rates. Symons' sales of used rental equipment increased 11.9% to $35.3 million from $31.6 million. Safway contributed $4.4 million with the remaining increase due to customers desiring to increase their own fleet of rental equipment. GROSS PROFIT. Gross profit for 2003 was $104.3 million, a $24.6 million decrease from the $128.9 million reported for 2002. Gross profit was 27.6% of sales in 2003, decreasing from 32.3% in 2002. Product gross profit was $64.8 million, or 21.5% of product sales, in 2003, compared to $81.2 million, or 25.5% of product sales in 2002. The decrease in percent of product sales was due to higher costs of steel of approximately $1.8 million, insurance and health care benefits of approximately $2.5 million, consistent with general market trends, and the impact of fixed costs on lower product sales. Rental gross profit decreased by $13.2 million to $12.5 million, or 34.5% of rental revenue, in 2003 from $25.7 million, or 57.0 % of rental revenue in 2002. Lower rental revenues of $8.8 million and higher depreciation expense of $4.5 million were the causes for the decline. Approximately $2.9 million of the higher depreciation expense was due to the acquisition of Safway. Gross profit on used rental equipment sales was $26.9 million, or 67.8% of used rental equipment sales, compared to $22.0 million, or 61.6% of used rental equipment sales, in 2002. The increase in percent of used rental equipment sales was due to older equipment with less net book value being sold. 21 OPERATING EXPENSES. Our selling, general, and administrative expenses decreased $4.2 million to $87.0 million in 2003 from $91.2 million in 2002, as a result of the cost reduction initiatives we implemented in 2003 and 2002, which more than offset the $3.3 million added by the acquisition of Safway. Facility closing and severance expenses in 2003 were approximately $2.3 million and approximately $5.4 million in 2002. Amortization of intangibles increased $0.3 million to $0.9 million in 2003 from $0.6 million in 2002, due to the amortization of intangibles acquired with Safway. OTHER EXPENSES. Interest expense increased to $40.0 million in 2003 from $34.0 million in 2002, due to higher interest rates on the new Senior Secured Notes and higher outstanding long-term debt balances in 2003. The gain on disposals of property, plant and equipment was $0.6 million in 2003, as compared to a loss of $1.1 million in 2002. The 2003 amount related to real estate disposed due to being redundant with an acquired Safway leased facility. The 2002 amount related to the write-off of certain assets that were disposed of in conjunction with our facility closing plans. LOSS BEFORE BENEFIT FOR INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The loss before income taxes and cumulative effect of change in accounting principle in 2003 was $27.8 million, as compared to $3.5 million in 2002, and was comprised of the following:
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 ---------- ---------- (IN THOUSANDS) Construction Products Group $ 18,057 $ 28,265 Symons 20,733 27,076 Intersegment eliminations (11,695) (11,032) Corporate, including interest expense (54,916) (47,818) ---------- ---------- Loss before benefit for income taxes, and cumulative effect of change in accounting principle $ (27,821) $ (3,509) ========== ==========
CPG's income before provision for income taxes of $18.1 million in 2003 decreased from $28.3 million in 2002. Gross profit decreased by $13.0 million due to the unfavorable sales volume, and higher steel, insurance, and benefit costs discussed above. These were partially offset by the benefit of $2.4 million of selling, general, and administrative expenses from the cost reductions we implemented. All other items netted to a decrease in income of $0.3 million. Symons' income before income taxes was $20.7 million in 2003, compared to $27.1 million in 2002. This was due to lower gross profit of $9.2 million, primarily due to lower rental revenues from weaker markets in 2003 compared to 2002. These were partially offset by the benefit of lower selling, general, and administrative expenses of $3.0 million from the cost reduction initiatives we implemented. All other items netted to a decrease in income of $0.2 million. Corporate expenses increased to $54.9 million in 2003 from $47.8 million in 2002 primarily due to higher interest expense, which increased by $6.0 million. Elimination of gross profit on intersegment sales increased to $11.7 million in 2003 from $11.0 million in 2002 due to higher intersegment sales from more cross selling of products. LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The effective tax rate in 2003 was 38.5%, which is different from the statutory rate, primarily due to the state income taxes. The net loss before cumulative effect of change in accounting principle for 2003 was $17.1 million, compared to a loss of $3.1 million in 2002 due to the factors described above. 22 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. We adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, we recorded a non-cash charge in 2002 of $17.1 million ($19.9 million of goodwill, less an income tax benefit of $2.8 million), which is reflected as a cumulative effect of change in accounting principle. This amount does not affect our ongoing operations or our cash flow. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. The following is a reconciliation from reported net loss to net loss adjusted for the amortization of goodwill: NET LOSS. The net loss for 2003 was $17.1 million, compared to a loss of $20.3 million in 2002 due to the factors described above. COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2002 NET SALES. Our 2002 net sales were $398.7 million, a 4.0% decrease from $415.5 million in 2001. The following table summarizes our net sales by segment for the periods indicated:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 ---------------------- ---------------------- (AS RESTATED) (IN THOUSANDS) % NET SALES % NET SALES % CHANGE --------- ----- --------- ----- ------ Construction Products Group $ 287,252 72.0% $ 296,365 71.3% (3.1)% Symons 132,715 33.3 140,168 33.7 (5.3) Intersegment eliminations (21,230) (5.3) (21,042) (5.0) 0.9 --------- ---- --------- ---- Net sales $ 398,737 100.0% $ 415,491 100.0% (4.0)% ========= ===== ========= =====
CPG's sales decreased by 3.1% to $287.3 million in 2002 from $296.4 million in 2001. This decrease was primarily due to unfavorable volume and pricing, as the construction products markets were weaker in 2002 compared to 2001. Symons' sales decreased by 5.3% to $132.7 million in 2002 from $140.2 million in 2001 due to unfavorable rental revenues and pricing, as the concrete forming systems markets were weaker in 2002 compared to 2001. GROSS PROFIT. Gross profit for 2002 was $128.9 million, a $10.4 million decrease from the $139.3 million reported for 2001. This was primarily due to the unfavorable volume and pricing discussed previously. In addition, a change in accounting estimate relating to the depreciable lives of a portion of the rental fleet reduced 2002 gross profit by $2.0 million. These were partially offset by the cost savings realized from the implementation of the 2001 and 2002 facility closing and headcount reduction plans. Gross profit was 32.3% of sales in 2002, decreasing from 33.5% in 2001. The decrease from 2001 was due to the unfavorable sales volume and pricing, a higher mix of lower gross profit paving products, a lower mix of higher gross profit Symons and concrete accessories products, a lower mix of higher gross profit rental revenues and higher medical and insurance costs. These were partially offset by a higher mix of sales of higher gross profit used rental fleet in the Symons segment, and the cost savings realized from the implementation of the 2001 and 2002 facility closing and headcount reduction plans. OPERATING EXPENSES. Our selling, general, and administrative expenses decreased $6.3 million to $91.2 million in 2002 from $97.5 million in 2001, as a result of the cost reduction initiatives we implemented in 2001 and 2002. Facility closing and severance expenses in 2002 were approximately $5.4 million and approximately $7.4 million in 2001. Amortization of goodwill and intangibles decreased $3.3 million to $0.6 million in 2002 from $3.9 million in 2001, due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets." This statement 23 precludes amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. OTHER EXPENSES. Interest expense decreased to $34.0 million in 2002 from $35.0 million in 2001 primarily due to lower interest rates in 2002. The loss on disposals of property, plant and equipment was $1.1 million in 2002, which related to the write-off of certain assets that were disposed of in conjunction with our facility closing plans. LOSS BEFORE BENEFIT FOR INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The loss before income taxes and cumulative effect of change in accounting principle in 2002 was $3.5 million, as compared to $4.7 million in 2001, and was comprised of the following:
YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 ---------- --------- (IN THOUSANDS) Construction Products Group $ 28,265 $ 29,315 Symons 27,076 31,324 Intersegment eliminations (11,032) (11,187) Corporate, including interest expense (47,818) (54,105) ---------- --------- Loss before benefit for income taxes, and cumulative effect of change in accounting principle $ (3,509) $ (4,653) ========== =========
CPG's income before provision for income taxes of $28.3 million in 2002 decreased from $29.3 million in 2001, due to the unfavorable sales volume and pricing. These were partially offset by the benefit of the cost reductions we implemented, lower amortization expense with the adoption of SFAS No. 142, and lower facility closing and severance expenses in 2002 compared to 2001. Symons' income before income taxes was $27.1 million in 2002, compared to $31.3 million in 2001. This was due to the decreased sales volume, unfavorable pricing and unfavorable mix of lower rental revenues due to weaker markets in 2002 compared to 2001. These were partially offset by the benefit of the cost reduction initiatives we implemented, and the increased sales of higher gross profit used rental fleet. Corporate expenses decreased to $47.8 million, including interest expense of $34.0 million, in 2002 from $54.1 million, including interest expense of $35.0 million, in 2001 due to lower facility closing and severance expenses, lower interest expense as a result of lower interest rates, and the benefit of the cost reduction initiatives we implemented. Elimination of gross profit on intersegment sales decreased to $11.0 million in 2002 from $11.1 million in 2001 due to the mix of intersegment sales. LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The effective tax rate in 2002 was 11.0%, which is different from the statutory rate, primarily due to the unfavorable impact of permanent book/tax differences. The net loss before cumulative effect of change in accounting principle for 2002 was $3.1 million, compared to a loss of $3.5 million in 2001 due to the factors described above. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. We adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, we recorded a non-cash charge in 2002 of $17.1 million ($19.9 million of goodwill, less an income tax benefit of $2.8 million), which is reflected as a cumulative effect of change in accounting principle. This amount does not affect our ongoing operations or our cash flow. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. 24 The following is a reconciliation from reported net loss to net loss adjusted for the amortization of goodwill:
Years Ended December 31, 2002 2001 -------- -------- (In thousands) Net loss before cumulative effect of change in accounting principle, as reported $ (3,123) $ (3,474) Amortization of goodwill, net of tax benefit - 3,375 -------- -------- Net loss before cumulative effect of change in accounting principle, as adjusted $ (3,123) $ (99) ======== ========
NET LOSS. The net loss for 2002 was $20.3 million, compared to a loss of $3.5 million in 2001 due to the factors described above. 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 for 2003 and 2002 was $32.5 million and $17.3 million, respectively. Net loss after non-cash adjustments for 2003 was $22.4 million compared to net income of $3.0 million in 2002. This was due to the higher loss before cumulative effect of change in accounting principle in 2003 and the benefit for income taxes in 2003 being primarily non-cash deferred. Changes in assets and liabilities resulted in a use of cash of $10.1 million in 2003 compared to $20.3 million in 2002. This was attributed to smaller growth in accounts receivable in 2003 and the timing of income tax refunds received. Net cash used in investing activities for 2003 was $8.1 million. Our investing activities consisted of net proceeds from the sale of fixed assets and rental equipment of $5.2 million in 2003, compared $8.0 million in 2002. In addition, our investing activities in 2003 consisted of the acquisition of Safway Formwork Systems LLC, which resulted in a use of cash in the amount of $13.7 million. Our capital expenditures in 2003 included additions to the rental fleet of $27.6 million and net property, plant, and equipment additions of $6.9 million, offset by $39.7 million of proceeds from sales of rental equipment. As of December 31, 2003, our long-term debt consisted of the following: Revolving credit facility, weighted average interest rate of 5.2% $ 24,375 Senior Subordinated Notes, interest rate of 13.0% 154,729 Debt discount on Senior Subordinated Notes (8,514) Senior Second Secured Notes, interest rate of 10.75% 165,000 Debt discount on Senior Second Secured Notes (7,454) Senior Unsecured Note payable to seller of Safway, non-interest bearing, accreted at 14.5% 7,999 Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand 1,110 Capital lease obligations 4,590 City of Parsons, Kansas Economic Development Loan, interest rate of 7.0% 55 --------- Total long-term debt 341,890 Less current maturities (3,067) --------- Long-term portion $ 338,823 =========
25 At December 31, 2003, of the $50.0 million revolving credit facility that was available to us, $24.4 million of borrowings were outstanding, along with $7.0 million of letters of credit, with the remaining $18.6 million available for borrowing. Our long-term debt borrowings, net of repayments for the year ended December 31, 2003 were $28.6 million. We incurred $1.9 million of financing costs primarily related to the issuance of the Senior Secured Notes. 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 December 31, 2003, working capital was $71.6 million, compared to $65.8 million at December 31, 2002. Accounts receivable increased by $3.7 million due to higher fourth quarter net sales. Inventories increased $1.5 million from 2002 to 2003. Raw materials declined $6.4 million due to the timing of receipts and work in process and finished goods increased $7.9 million due to support of the implementation of our manufacturing rationalization plan. Prepaid expenses and other current assets decreased $2.4 million from 2002 to 2003 due to the timing of insurance payments. Prepaid income taxes and future income tax benefits combined decreased $3.9 million due to the cash refunds from the carryback of our 2002 tax losses. Accounts payable decreased from 2002 due to lower raw material purchases in the fourth quarter of 2003, and by decreasing the payment time on steel purchases in exchange for discounts. Accrued liabilities in total increased $1.7 million from 2002 to 2003. Accrued interest increased $4.1 million due to the timing of required interest payments on the $165.0 million Senior Second Secured Notes. This was partially offset by the lower accrual for retirement contributions as the Company suspended contributions for service rendered in 2003. In addition, required accruals have decreased in conjunction with the lower net sales volumes and the reductions in number of facilities and headcount as a result of our facility closing and severance plans. On June 9, 2003 we completed an offering of $165.0 million of 10.75% Senior Second Secured Notes due 2008. The proceeds of the offering, $159.0 million, net of discounts, were used to repay acquisition credit facility, term loan tranche A, term loan tranche B and a portion of the revolving credit facility. Also in June 2003, we repurchased $15.3 million in principal amount of our senior subordinated notes for $14.3 million with borrowings under our revolving credit facility. The Senior Second Secured Notes are secured by substantially all assets of the Company. On January 30, 2004, we established an $80 million senior secured revolving credit facility, which was used to refinance our previous $50 million revolving credit facility. The new credit facility has no financial covenants and is subject to availability under a borrowing base calculation. Availability of borrowings is limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment, less $10 million. As of January 30, 2004, all $80 million was available under the facility. The credit facility is secured by substantially all assets of the Company. 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. 26 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. for $20.0 million. Safway Formwork is a subsidiary of Safway Services, Inc., whose ultimate parent is ThyssenKrupp AG, or TK, a publicly traded company in Germany. The purchase price was comprised of $13.0 million in cash and a non-interest bearing (other than in the case of default) senior unsecured note with a 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 book value of the note at December 31, 2003 was $6.4 million. The face value of the note is $12.0 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 December payment to $333,000. A subsequent purchase price adjustment of $240,000 was paid in March 2004. Annual payments of $1.0 million are due on September 30 of each year from 2004 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 with a present value of $1.6 million. The note is being accreted to the face value of $2.0 million using the effective interest method and is reflected as interest expense. Minimum payments on the note are $199,000 in 2004 and 2005, $397,000 in 2006 and 2007, and $795,000 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. 27 COMMITMENTS Certain purchase commitments contain guaranteed purchase levels with vendors. The maximum potential future payout is reflected in the purchase obligations column and there are no guaranteed purchase levels in excess of what the Company intends to purchase in the normal course of business. Our Management Stockholders' Agreement states that, upon termination of the employment of a management stockholder, the management stockholder has certain put rights, and the Company has certain call rights, with respect to the stockholder's common stock. See discussion of Management Stockholders' Agreement in Item 11. Scheduled payments of long-term debt, future minimum lease payments under capital leases, future lease payments under non-cancelable operating leases, purchase obligations, and other long-term liabilities at December 31, 2003 were as follows:
Other Long- Long-term Capital Operating Purchase Term Year Debt Leases Leases Obligations Liabilities Total ---------- -------- -------- --------- ----------- ----------- -------- 2004 $ 1,523 $ 1,514 $ 5,749 $ 798 $ 5,407 $ 14,991 2005 196 1,392 5,016 792 50 7,446 2006 24,763 965 3,588 792 50 30,158 2007 418 772 2,460 792 - 4,442 2008 171,639 664 1,353 - 173,656 Thereafter 154,729 127 7,300 - 162,156 -------- -------- -------- -------- -------- -------- $353,268 $ 5,434 $ 25,466 $ 3,174 $ 5,507 $392,849 ======== ======== ======== ======== ======== ========
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 28 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 December 31, 2003, all of the capital stock of our subsidiaries Dur-O-Wal, Inc., Trevecca Holdings, Inc., Dayton Superior Specialty Chemical Corp., Aztec Concrete Accessories, Inc. and Southern Construction Products, Inc. and 65% of the voting capital stock and 100% of the non-voting capital stock of our subsidiary Dayton Superior Canada Ltd. constitute collateral for the notes. The capital stock of our subsidiary, Symons Corporation, does not currently constitute collateral for the notes, since the Applicable Value of the capital stock of Symons Corporation equals or exceeds the Collateral Threshold. The Applicable Value of the capital stock of each of Dayton Superior Specialty Chemical Corp., Aztec Concrete Accessories, Inc. and Trevecca Holdings, Inc. (the direct, holding company parent of Aztec Concrete Accessories, Inc.) is currently near the Collateral Threshold. 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 December 31, 2003. The Applicable Value for the capital stock of each of our subsidiaries is the greater of the book value and estimated market value, as the 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 December 31, 2003:
Subsidiary Applicable Value as of 12/31/2003 --------------------------------------- --------------------------------- Symons Corporation $ 112,682 Aztec Concrete Accessories, Inc. 30,756 Dur-O-Wal, Inc. 6,908 Trevecca Holdings, Inc. (1) 30,756 Dayton Superior Specialty Chemical Corp. 29,150 Southern Construction Products, Inc. (2) - Dayton Superior Canada Ltd. 5,223
(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. Based upon the foregoing, as of December 31, 2003, the Applicable Value of the capital stock of Symons Corporation exceeded the Collateral Threshold. As a result, the capital stock of Symons Corporation is not currently included in the Collateral. The Applicable Value of the capital stock of our other subsidiaries did not exceed the Collateral Threshold as of December 31, 2003. In respect of Aztec Concrete Accessories, Inc., Trevecca Holdings, Inc., 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 Symons Corporation, Dur-O-Wal, Inc., and Dayton Superior Canada Ltd, the Applicable Value of their common stock was based upon estimated market value. We have calculated the 29 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 December 31, 2003, 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 December 31, 2003, together with a reconciliation to the net income (loss) of each of these subsidiaries:
DAYTON SUPERIOR DAYTON SYMONS AZTEC CONCRETE DUR-O-WAL, TREVECCA SPECIALTY SUPERIOR CORPORATION ACCESSORIES, INC. INC. HOLDINGS, INC. CHEMICAL CORP. CANADA LTD. ----------- ----------------- --------- -------------- --------------- ----------- Net Income $ 150 $ 2,970 $ 396 $ 2,970 $ 1,623 $ 357 Provision for Income Taxes 94 1,859 248 1,859 1,016 224 Other (Income) Expense (84) - - - 110 316 Interest Expense 323 - - - - - Income from Operations 483 4,830 644 4,830 2,748 896 Facility Closing and Severance Expenses 569 - - - 96 - Depreciation Expense 18,785 591 612 591 799 53 Amortization of Intangibles 651 - - - - - --------- --------- --------- --------- --------- --------- Adjusted valuation EBITDA 20,488 5,421 1,256 5,421 3,644 950 Multiple 5.5 5.5 5.5 5.5 5.5 5.5 --------- --------- --------- --------- --------- --------- Estimated Fair Value $ 112,682 $ 29,814 $ 6,908 $ 29,814 $ 20,042 $ 5,223 ========= ========= ========= ========= ========= =========
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 December 31, 2003 and the adjusted EBITDA of each subsidiary for the twelve months ended December 31, 2003 would have to increase in order for that subsidiary's capital stock to no longer constitute collateral or, in the case of Symons Corporation, would have to decrease in order for the capital stock of Symons Corporation to become collateral: 30
Change in Applicable Change in Adjusted Subsidiary Value EBITDA --------------------------------------- -------------------- ------------------ Symons Corporation $(79,681) $(14,488) Aztec Concrete Accessories, Inc. 2,245 580 Dur-O-Wal, Inc. 26,093 4,744 Trevecca Holdings, Inc. 2,245 580 Dayton Superior Specialty Chemical Corp. 3,851 2,356 Southern Construction Products, Inc. - - Dayton Superior Canada Ltd. 27,778 5,050
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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. INVENTORIES We value all inventories at the lower of first-in, first-out, or FIFO, cost or market and includes all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. We provide net realizable value reserves, which reflect our best estimate of the excess of the cost of potential obsolete and slow moving inventory over the expected net realizable value. RENTAL EQUIPMENT We manufacture rental equipment for resale and for rent to others on a short-term basis. We record rental equipment at the lower of FIFO cost or market and it is depreciated over the estimated useful life of the equipment, three to fifteen years, on a straight-line method. Rental equipment that is sold is also treated on a FIFO basis. INCOME TAXES We have generated deferred tax assets or liabilities due to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance against deferred tax assets at the balance sheet date is not considered necessary because it is more likely than not the deferred tax assets will be fully realized. We record liabilities relating to income taxes utilizing known obligations and estimates of potential obligations. REVENUE RECOGNITION Revenue is recognized from product sales when the product is shipped from our facilities and risk of loss and title have passed to the customer. Additionally, revenue is recognized at the customer's written request and when the customer has made a fixed commitment to purchase goods on a fixed schedule consistent with the customer's business, where risk of ownership has passed to the buyer, the goods are set-aside in storage and the Company does not retain any specific performance obligations such that the earning process is not complete. For transactions where such conditions are not satisfied, revenue is deferred until the terms of acceptance are satisfied. On rental equipment sales, revenue is recognized and recorded on the date of shipment. Rental revenues are recognized ratably over the terms of the rental agreements. 31 INSURANCE RESERVES We are self-insured for certain of our group medical, workers' compensation and product and general liability claims. We have stop loss insurance coverage at various per occurrence and per annum levels depending on type of claim. We consult with third party administrators to estimate the reserves required for these claims. Actual claims experience can impact these calculations and, to the extent that subsequent claim costs vary from estimates, future earnings could be impacted and the impact could be material. We made no material revisions to the estimates for the years ended December 31, 2003, 2002 and 2001. PENSION LIABILITIES Pension and other retirement benefits, including all relevant assumptions required by accounting principles generally accepted in the United States of America, are evaluated each year. Due to the technical nature of retirement accounting, outside actuaries are used to provide assistance in calculating the estimated future obligations. Since there are many assumptions used to estimate future retirement benefits, differences between actual future events and prior estimates and assumptions could result in adjustments to pension expense and obligations. Certain actuarial assumptions, such as the discount rate and expected long-term rate of return, have a significant effect on the amounts reported for net periodic pension cost and the related benefit obligations. ACCOUNTS RECEIVABLE ALLOWANCE We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required. OTHER LOSS RESERVES We have other loss exposures, such as facility closing and severance liabilities and litigation. Establishing loss reserves for these matters requires us to estimate and make judgments in regards to risk exposure and ultimate liability. We establish accruals for these exposures; however, if our exposure exceeds our estimates we could be required to record additional charges. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The adoption of this pronouncement in 2003 resulted in the classification in 2003 of the loss on the early extinguishment of long-term debt as other expense. In July 2002, the FASB issued Statement of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. 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 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 32 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 shall be effective for periods beginning after December 15, 2003. The Company does not believe this pronouncement will have a material impact on its consolidated financial position, results of operations, or cash flows. In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements in this interpretation are required for financial statements of periods ending after December 15, 2002. The initial measurement provisions of the interpretation are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. 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. In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition, corrected copy". This bulletin revises or rescinds portions of the previous interpretive guidance included in Topic 13 in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance related to revenue recognition. The adoption of SAB No. 104 did not have a material impact on the Company's consolidated financial statements. 33 FORWARD-LOOKING STATEMENTS This Form 10-K 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; and Dayton Superior's ability to successfully integrate acquisitions on a timely basis, our ability to successfully identify, finance, complete and integrate acquisitions; increases in the price of steel (our principal raw material) 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 this 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. 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of December 31, 2003, we had financial instruments, which were sensitive to changes in interest rates. These financial instruments consist of: - $50 million revolving credit facility, $24.4 million of which was outstanding at December 31, 2003; - $154.7 million of Senior Subordinated Notes; - $165.0 million of Senior Second Secured Notes; - $8.0 million Senior Unsecured Note payable to seller of Safway - $4.6 million in capital lease obligations - $1.2 million in other fixed-rate, long-term debt. Our $50,000 revolving credit facility was due to mature in June 2006. The credit facility has several interest rate options that reprice on a short-term basis. At December 31, 2003, the Company had outstanding letters of credit of $7,000 and available borrowings of $18,625 under its $50,000 revolving credit facility. The weighted average interest rate as of December 31, 2003 was 5.2%. The credit facility was secured by substantially all assets of the Company. 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 net book value of the notes at December 31, 2003 was $146.2 million. 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 $134.6 million as of December 31, 2003. 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 $156,895 and were used to repay the Company's acquisition credit facility, term loan tranche A, term loan tranche B, and a portion of the revolving credit facility which was subsequently increased by $24,375. As a result of the transactions, the Company incurred a loss on the early extinguishment of long-term debt of $2,550, due to the expensing of deferred financing costs. The net book value of the notes at December 31, 2003 was $157.6 million. The senior second secured notes have an interest rate of 10.75%. The estimated fair value of the notes is $169.1 million as of December 31, 2003. 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. for $20.0 million Safway Formwork is a subsidiary of Safway Services, Inc., whose ultimate parent is ThyssenKrupp AG, or TK, a publicly traded company in Germany. The purchase price was comprised of $13.0 million in cash and a non-interest bearing (other than in the case of default) senior unsecured note with a 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 face value of the note is $12.0 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 December payment to $333,000. A subsequent purchase price adjustment of $240,000 was paid in March 2004. Annual payments of $1.0 million are due on September 30 of each year from 2004 through 2008, with a final balloon payment of $6.0 million due on December 31, 2008. The book value of the note at December 31, 2003 was $6.4 million. 35 The Company exercised its option to acquire additional rental equipment from Safway. The Company issued a non-interest bearing note with a present value of $1.6 million. The note is being accreted to the face value of $2.0 million using the effective interest method and is reflected as interest expense. Minimum payments on the note are $199,000 in 2004 and 2005, $397,000 in 2006 and 2007, and $795,000 in 2008. Payments may be accelerated if certain revenue targets are met. Our other long-term debt at December 31, 2003 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 $1.7 million, and a $0.1 million, 7% loan due in annual installments of $31,500 per year with an estimated fair value as of December 31, 2003 of $0.1 million. In the ordinary course of our business, we also are exposed to price changes in raw materials (particularly steel rod and steel bar) and products purchased for resale. 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. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Dayton Superior Corporation We have audited the accompanying consolidated balance sheets of Dayton Superior Corporation (an Ohio corporation) and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related statements of operations, shareholders' deficit, cash flows, and comprehensive loss for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed at item 15(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to adopt Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." DELOITTE & TOUCHE LLP Dayton, Ohio March 26, 2004 37 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2003 2002 ---------- ---------- ASSETS Current assets: Cash $ 1,995 $ 2,404 Accounts receivable, net of allowances for doubtful accounts and sales returns and allowances of $4,939 and $4,861 64,849 61,165 Inventories (Note 3) 49,437 47,911 Prepaid expenses and other current assets 4,610 7,054 Prepaid income taxes 956 4,009 Deferred income taxes (Note 7) 5,368 6,194 ---------- ---------- Total current assets 127,215 128,737 ---------- ---------- Rental equipment, net of accumulated depreciation of $27,794 and $24,181 78,042 63,160 ---------- ---------- Property, plant and equipment (Note 3) Land and improvements 5,457 5,536 Building and improvements 30,621 26,268 Machinery and equipment 77,288 72,042 ---------- ---------- 113,366 103,846 Less accumulated depreciation (51,128) (42,600) ---------- ---------- Net property, plant and equipment 62,238 61,246 ---------- ---------- Goodwill 110,308 107,328 Intangible assets, net of accumulated amortization (Note 3) 10,532 8,405 Other assets 5,049 5,095 ---------- ---------- Total assets $ 393,384 $ 373,971 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt (Note 4) $ 3,067 $ 6,991 Accounts payable 20,526 25,667 Accrued compensation and benefits 19,704 20,948 Other accrued liabilities 12,324 9,380 ---------- ---------- Total current liabilities 55,621 62,986 Long-term debt (Note 4) 338,823 292,545 Deferred income taxes (Note 7) - 11,919 Other long-term liabilities 6,207 10,762 ---------- ---------- Total liabilities 400,651 378,212 ---------- ---------- Commitments and contingencies (Note 9) Shareholders' equity (deficit) Class A common shares; no par value; 5,000,000 shares authorized; 4,591,016 and 4,046,907 shares issued and 4,554,269 and 4,010,160 shares outstanding 115,951 102,525 Loans to shareholders (2,729) (2,878) Class A treasury shares, at cost, 36,747 shares (1,184) (1,184) Other comprehensive loss (1,209) (1,716) Accumulated deficit (118,096) (100,988) ---------- ---------- Total shareholders' equity (deficit) (7,267) (4,241) ---------- ---------- Total liabilities and shareholders' deficit $ 393,384 $ 373,971 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 38 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31 (AMOUNTS IN THOUSANDS)
2003 2002 2001 ---------- ---------- ---------- Product sales $ 301,837 $ 318,016 $ 335,550 Rental revenue 36,294 45,080 57,199 Used rental equipment sales 39,723 35,641 22,742 ---------- ---------- ---------- Net sales 377,854 398,737 415,491 ---------- ---------- ---------- Product cost of sales 237,032 236,782 249,391 Rental cost of sales 23,775 19,404 18,265 Used rental equipment cost of sales 12,791 13,675 8,565 ---------- ---------- ---------- Cost of sales 273,598 269,861 276,221 ---------- ---------- ---------- Product gross profit 64,805 81,234 86,158 Rental gross profit 12,519 25,676 38,935 Used rental equipment gross profit 26,932 21,966 14,177 ---------- ---------- ---------- Gross profit 104,256 128,876 139,270 Selling, general and administrative expenses 87,020 91,221 97,532 Facility closing and severance expenses (Note 10) 2,294 5,399 7,360 Amortization of goodwill and intangibles 944 603 3,912 ---------- ---------- ---------- Income from operations 13,998 31,653 30,466 Other expenses Interest expense 39,955 33,967 35,024 Loss on early extinguishment of long-term debt (Note 4) 2,480 - - Loss (gain) on disposals of property, plant and equipment (636) 1,115 (7) Other expense 20 80 102 ---------- ---------- ---------- Loss before benefit for income taxes, and cumulative effect of change in accounting principle (27,821) (3,509) (4,653) Benefit for income taxes (Note 7) (10,713) (386) (1,179) ---------- ---------- ---------- Loss before cumulative effect of change in accounting principle (17,108) (3,123) (3,474) Cumulative effect of change in accounting principle, net of income tax benefit of $2,754 (Note 3d) - (17,140) - ---------- ---------- ---------- Net loss $ (17,108) $ (20,263) $ (3,474) ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 39 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Class A Class A Retained Common Shares Treasury Shares Other Earnings --------------------- Loans to ----------------- Comprehensive (Accumulated Shares Amount Shareholders Shares Amount Loss Deficit) Total --------- --------- ------------ ------ -------- ------------- ------------ -------- Balances at January 1, 2001 3,693,990 $ 92,826 $ (2,039) - $ - $ (340) $ (77,251) $ 13,196 Net loss (3,474) (3,474) Foreign currency translation adjustment (249) (249) Issuance of Class A common shares 323,278 8,986 (909) 8,077 Purchase of Class A treasury shares 51 29,288 (979) (928) Exercise of stock options, net 9,134 232 (133) 99 --------- --------- --------- ------ -------- --------- --------- -------- Balances at December 31, 2001 4,026,402 102,044 (3,030) 29,288 (979) (589) (80,725) 16,721 Net loss (20,263) (20,263) Foreign currency translation adjustment 92 92 Change in minimum pension liability (net of income tax benefit of $151) (1,219) (1,219) Issuance of Class A common shares 20,505 481 (350) 131 Purchase of Class A common shares 7,459 (205) (205) Repayments of loans to shareholders 502 502 --------- --------- --------- ------ -------- --------- --------- -------- Balance at December 31, 2002 4,046,907 102,525 (2,878) 36,747 (1,184) (1,716) (100,988) (4,241) Net loss (17,108) (17,108) Foreign currency translation adjustment 613 613 Change in minimum pension liability (net of income tax benefit of $657) (106) (106) Issuance of Class A common shares 544,109 13,059 13,059 Repayments of loans to shareholders 149 149 Additional tax benefit from 2000 recapitalization 367 367 --------- --------- --------- ------ -------- --------- --------- -------- Balances at December 31, 2003 4,591,016 $ 115,951 $ (2,729) 36,747 $ (1,184) $ (1,209) $(118,096) $ (7,267) ========= ========= ========= ====== ======== ========= ========= ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 40 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 (AMOUNTS IN THOUSANDS)
2003 2002 2001 ---------- ---------- ---------- Cash Flows From Operating Activities: Net loss $ (17,108) $ (20,263) $ (3,474) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle (Note 3d) - 17,140 - Loss on the early extinguishment of long-term debt 2,480 Depreciation 25,934 20,850 18,290 Amortization of goodwill and intangibles 944 603 3,912 Deferred income taxes (10,436) 3,228 (2,972) Amortization of deferred financing costs, debt discount, and issuance costs on Company-obligated mandatorily redeemable convertible trust preferred securities 3,371 2,335 2,251 Net gain on sale of rental equipment (26,932) (21,966) (14,177) Net (gain) loss on sale of property, plant, and equipment (636) 1,115 (7) Change in assets and liabilities, net of effects of acquisitions: Accounts receivable (3,684) (9,537) 7,348 Inventories (1,526) (11) (1,410) Prepaid expenses and other assets 2,013 2,119 (8,533) Prepaid income taxes 3,420 (2,784) 2,710 Accounts payable (5,140) (1,673) 671 Accrued liabilities and other long-term liabilities (5,188) (8,406) 3,614 ---------- ---------- ---------- Net cash provided by (used in) operating activities (32,488) (17,250) 8,223 ---------- ---------- ---------- Cash Flows From Investing Activities: Property, plant and equipment additions (7,829) (11,277) (9,924) Proceeds from sale of property, plant, and equipment 894 2,010 169 Rental equipment additions (27,571) (18,411) (25,933) Proceeds from sales of rental equipment 39,723 35,641 22,742 Acquisitions (Note 2) (13,668) - (40,850) Refund of purchase price on acquisitions - - 143 ---------- ---------- ---------- Net cash provided by (used in) investing activities (8,451) 7,963 (53,653) ---------- ---------- ---------- Cash Flows From Financing Activities: Repayments of long-term debt (177,873) (4,141) (48,532) Issuance of long-term debt 206,442 8,050 93,751 Proceeds from sale/leaseback transaction - 2,258 - Issuance of common shares, net of issuance costs 13,059 131 5,334 Purchase of treasury shares - (205) (928) Repayments of loans to shareholders, net 149 502 - Financing costs incurred (1,860) - (791) ---------- ---------- ---------- Net cash provided by financing activities 39,917 6,595 48,834 ---------- ---------- ---------- Effect of Exchange Rate Changes on Cash 613 107 (197) ---------- ---------- ---------- Net increase (decrease) in cash (409) (2,585) 3,207 Cash, beginning of year 2,404 4,989 1,782 ---------- ---------- ---------- Cash, end of year $ 1,995 $ 2,404 $ 4,989 ========== ========== ========== Supplemental Disclosures: Cash refunded for income taxes $ (3,909) $ (1,149) $ (1,532) Cash paid for interest 32,690 31,862 32,348 Purchase of equipment on capital lease 3,183 2,758 - Issuance of Class A common shares and loans to shareholders - 350 909 Issuance of Class A common shares in conjunction with acquisition - - 2,842 Issuance of long-term debt in conjunction with acquisition 8,572 - -
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 41 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31 (AMOUNTS IN THOUSANDS)
2003 2002 2001 -------- -------- -------- Net loss $(17,108) $(20,263) $ (3,474) Other comprehensive income Foreign currency translation adjustment 613 92 (249) Change in minimum pension liability (net of income tax benefit of $657 and $151) (106) (1,219) - -------- -------- -------- Comprehensive loss $(16,601) $(21,390) $ (3,723) ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (1) THE COMPANY The accompanying consolidated financial statements include the accounts of Dayton Superior Corporation and its wholly-owned subsidiaries (collectively referred to as the "Company"). All intercompany transactions have been eliminated. The Company believes it is the largest North American manufacturer and distributor of metal accessories and forms used in concrete construction and of metal accessories used in masonry construction. The Company has a distribution network consisting of 18 manufacturing/distribution plants and 26 service/distribution centers in the United States and Canada. The Company employs approximately 700 salaried and 1,200 hourly personnel, of whom approximately 800 of the hourly personnel and 7 of the salaried personnel are represented by labor unions. There are five collective bargaining agreement expiring in 2004, covering hourly employees at the Parsons, Kansas; Miamisburg, Ohio; Aurora, Illinois; Atlanta, Georgia; and Santa Fe Springs, California facilities. (2) ACQUISITIONS (a) SAFWAY FORMWORK SYSTEMS, L.L.C. -- 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. for $20,000. Safway Formwork is a subsidiary of Safway Services, Inc., whose ultimate parent is ThyssenKrupp AG, or TK, a publicly traded company in Germany. The purchase price was comprised of $13,000 in cash and a non-interest bearing (other than in the case of default) senior unsecured note with a 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 book value of the note at December 31, 2003 was $6,392. The face value of the note is $12,000. 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 December payment to $333. A subsequent purchase price adjustment of $240 was paid in March 2004. Annual payments of $1,000 are due on September 30 of each year from 2004 through 2008, with a final balloon payment of $6,000 due on December 31, 2008. 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 541,667 common shares valued at $13,000 to the Company's majority shareholder. The common shares were valued at $24.00 per share in an independent third party appraisal completed in December 2002. The Company exercised its option to acquire additional rental equipment from Safway. The Company issued a non-interest bearing note with a present value of $1,607. The note is being accreted to the face value of $2.0 using the effective interest method and is reflected as interest expense. Minimum payments on the note are $199 in 2004 and 2005, $397 in 2006 and 2007, and $795 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 purchase price has been allocated based on the preliminary estimated fair value of the assets acquired, as follows: Rental equipment $ 13,994 Property, plant and equipment 798 Goodwill 2,537 Intangible assets 5,115 Accrued liabilities (1,571) -------- Purchase price, including acquisition costs of $1,085 $ 20,873 ========
43 The allocation of the purchase price may change on receipt of the final appraisals. 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 -------- Total purchase price $ 20,873 ========
The following pro forma information sets forth the consolidated results of operations for the twelve months ended December 31, 2003 and December 31, 2002 as though the acquisition had been completed as of the beginning of each period presented:
Pro Forma Twelve fiscal months ended -------------------------------------- December 31, 2003 December 31, 2002 ----------------- ----------------- Net Sales $ 390,449 $ 425,955 Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (6,961) (30,830) Income (loss) before cumulative effect of change in accounting principle $ (19,094) $ (5,263)
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. (b) ANCONCCL INC.-- On June 19, 2001, the Company acquired the stock of AnconCCL Inc., dba BarLock ("BarLock") for approximately $9,900 in cash, including acquisition costs. The payment was funded through the Company's credit facility. The business is being operated as part of the Company's concrete accessories business. The acquisition has been accounted for as a purchase, and the results of BarLock have been included in the accompanying financial statements since the date of acquisition. The purchase price has been allocated based on the fair values of the assets acquired (approximately $10,800, including goodwill of $7,100) and liabilities assumed (approximately $900). Pro forma financial information is not required as this was not a significant acquisition. (c) AZTEC CONCRETE ACCESSORIES, INC.-- On January 4, 2001, the Company acquired the stock of Aztec Concrete Accessories, Inc. ("Aztec") for approximately $32,800, including acquisition costs. The payment of the purchase price consisted of cash of approximately $29,900 and 105,263 common shares valued at approximately $2,900. The cash portion was funded through the issuance of 189,629 common shares valued at approximately $5,100 to Odyssey Investment Partners Fund, LP and an increase of approximately $24,800 to the credit facility. The business is being operated as part of the Company's concrete accessories business. The acquisition has been accounted for as a purchase, and the results of Aztec have been included in the accompanying consolidated financial statements since the date of acquisition. The purchase price has been allocated based on the fair values of the assets acquired (approximately $44,000, including goodwill of $35,400) and liabilities assumed (approximately $11,200, including a deferred compensation liability of approximately $7,700). Pro forma financial information is not required as this was not a significant acquisition. 44 (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) 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 December 31, 2003 and 2002:
December 31, December 31, 2003 2002 ----------- ----------- Raw materials $ 9,588 $ 15,984 Work in progress 2,742 3,069 Finished goods 37,107 28,858 --------- -------- Total Inventory $ 49,437 $ 47,911 ========= ========
(b) RENTAL EQUIPMENT-- Rental equipment is manufactured by the Company for resale and for rent to others on a short-term basis. Rental equipment is recorded at the lower of FIFO cost or market and is depreciated over the estimated useful life of the equipment, three to fifteen years, on a straight-line method. Effective January 1, 2002, the Company changed its accounting estimates relating to the depreciable life of a portion of its rental fleet. The change was based upon a study performed by the Company that showed that the useful life of certain items within the rental fleet was shorter than the fifteen-year life previously assigned. The study showed that a three-year life was more appropriate based upon the nature of these products. These products include smaller hardware and accessories that accompany steel forms and the recently introduced European forming systems. As a result of the change, the Company recorded incremental depreciation of approximately $4,000 in 2002, which is reflected in cost of goods sold in the accompanying December 31, 2002 consolidated statement of operations. Effective January 1, 2001, the Company changed its accounting estimates relating to the depreciable life of a portion of its rental fleet. As a result of the change, the Company recorded incremental depreciation of approximately $2,300 in 2001, which is reflected in cost of goods sold in the accompanying December 31, 2001 consolidated statement of operations. (c) PROPERTY, PLANT AND EQUIPMENT-- Property, plant and equipment are valued at cost and depreciated using straight-line methods over their estimated useful lives of 10-30 years for buildings and improvements and 3-10 years for machinery and equipment. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful life of the improvement. Improvements and replacements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Included in the cost of property, plant and equipment are assets obtained through capital leases, all included in machinery and equipment. As of December 31, 2003 the cost of assets under capital lease is $5,941, net of accumulated amortization of $904. Amortization expense related to machinery and equipment under capital lease was $648 for the period ended December 31, 2003. As of December 31, 2002 the cost of assets under capital lease is $2,758, net of accumulated depreciation of $256. Depreciation expense related to machinery and equipment under capital lease was $256 for the period ended December 31, 2002. 45 (d) GOODWILL AND INTANGIBLE ASSETS-- Amortization is provided over the term of the loan (3 to 9 years) for deferred financing costs, the term of the agreement (17 months-5 years) for non-compete agreements, over the estimated useful life (1-15 years) for intellectual property, customer lists, and dealer network. Amortization of non-compete agreements, intellectual property, customer lists, and dealer network is reflected as "Amortization of goodwill and intangibles" in the accompanying consolidated statements of operations. The estimated aggregate amortization expense for each of the next five years is as follows: $1,383 in 2004, $713 in 2005, $626 in 2006, $255 in 2007, and $255 in 2008. Amortization of deferred financing costs is reflected as "Interest expense" in the accompanying consolidated statements of operations. The estimated aggregate interest expense for each of the next five years related to the amortization of deferred financing costs is as follows: $1,114 in 2004, $1,113 in 2005, $1,013 in 2006, $911 in 2007, and $810 in 2008. Intangible assets consist of the following at December 31:
2003 2002 -------------------------------- -------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net -------- ------------ -------- -------- ------------ -------- Deferred financing costs $ 8,429 $ (3,175) $ 5,254 $ 10,550 $ (3,479) $ 7,071 Non-compete agreements 2,325 (367) 1,958 1,595 (722) 873 Customer list 2,255 (63) 2,192 - - - Intellectual property 1,590 (481) 1,109 690 (229) 461 Dealer Network 33 (14) 19 - - - -------- -------- -------- -------- -------- -------- $ 14,632 $ (4,100) $ 10,532 $ 12,835 $ (4,430) $ 8,405 ======== ======== ======== ======== ======== ========
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 revises the accounting for future business combinations to only allow the purchase method of accounting. In addition, the two statements preclude amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. The Company adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, the Company recorded a non-cash charge in 2002 of $17,140 ($19,894 of goodwill, less an income tax benefit of $2,754), which is reflected as a cumulative effect of change in accounting principle in the accompanying December 31, 2002 consolidated statement of operations. This amount does not affect the Company's ongoing operations. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. The following is a reconciliation from reported net loss to net loss adjusted for the amortization of goodwill:
Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- Net loss before cumulative effect of change in accounting principle, as reported $(17,108) $ (3,123) $ (3,474) Amortization of goodwill, net of tax benefit - - 3,375 -------- -------- -------- Net loss before cumulative effect of change in accounting principle, as adjusted $(17,108) $ (3,123) $ (99) ======== ======== ========
46 The following is a reconciliation of goodwill:
Symons CPG Corporate Total ---------- ---------- ---------- ---------- Balance at January 1, 2002 $ 587 $ 33,605 $ 92,618 $ 126,810 Impairment - - (19,894) (19,894) Other - - 412 412 ---------- ---------- ---------- ---------- Balance at December 31, 2002 587 33,605 73,136 107,328 Safway Acquisition 1,629 - 908 2,537 Other - - 443 443 ---------- ---------- ---------- ---------- Balance at December 31, 2003 $ 2,216 $ 33,605 $ 74,487 $ 110,308 ========== ========== ========== ==========
(e) INCOME TAXES-- Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the enacted tax rates in effect for the years the differences are expected to reverse. The Company evaluates the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that it will realize its deferred tax assets in the future and records liabilities for uncertain tax matters based on its assessment of the likelihood of sustaining certain tax positions. (f) ENVIRONMENTAL REMEDIATION LIABILITIES-- The Company accounts for environmental remediation liabilities in accordance with the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities," ("SOP 96-1"). The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. (g) FOREIGN CURRENCY TRANSLATION ADJUSTMENT-- The financial statements of foreign subsidiaries and branches are maintained in their functional currency (Canadian dollars) and are then translated into U.S. dollars. The balance sheets are translated at end of year rates while revenues, expenses and cash flows are translated at weighted average rates throughout the year. Translation adjustments, which result from changes in exchange rates from period to period, are accumulated in a separate component of shareholders' deficit. Transactions in foreign currencies are translated into U.S. dollars at the rate in effect on the date of the transaction. Changes in foreign exchange rates from the date of the transaction to the date of the settlement of the asset or liability are recorded as income or expense. (h) REVENUE RECOGNITION-- Revenue is recognized from product sales when the product is shipped from our facilities and risk of loss and title have passed to the customer. Additionally, revenue is recognized at the customer's written request and when the customer has made a fixed commitment to purchase goods on a fixed schedule consistent with the customer's business, where risk of ownership has passed to the buyer, the goods are set-aside in storage and the Company does not retain any specific performance obligations such that the earning process is not complete. For transactions where such conditions are not satisfied, revenue is deferred until the terms of acceptance are satisfied. On rental equipment sales, revenue is recognized and recorded on the date of shipment. Rental revenues are recognized ratably over the terms of the rental agreements. 47 (i) CUSTOMER REBATES-- The Company offers rebates to certain customers, which are redeemable only if the customer meets certain specified thresholds relating to a cumulative level of sales transactions. The Company records such rebates as a reduction of revenue in the period the related revenues are recognized. (j) ACCOUNTS RECEIVABLE ALLOWANCE-- We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required. (k) USE OF ESTIMATES-- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Examples of accounts in which estimates are used include the reserve for excess and obsolete inventory, the allowance for doubtful accounts and sales returns and allowances, the accrual for self-insured employee medical claims, the self-insured product and general liability accrual, the self-insured workers' compensation accrual, accruals for litigation losses, the valuation allowance for deferred tax assets, actuarial assumptions used in determining pension benefits, and actuarial assumptions used in determining other post-retirement benefits. (l) NEW ACCOUNTING PRONOUNCEMENTS-- In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The adoption of this pronouncement in 2003 resulted in the classification in 2003 of the loss on the early extinguishment of long-term debt as other expense. In July 2002, the FASB issued Statement of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. 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 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 shall be effective for periods beginning after December 15, 2003. The Company does not believe this pronouncement will have a material impact on its consolidated financial position, results of operations, or cash flows. In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements in this interpretation are required for financial statements of periods ending after December 15, 48 2002. The initial measurement provisions of the interpretation are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. 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. In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition, corrected copy". This bulletin revises or rescinds portions of the previous interpretive guidance included in Topic 13 in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance related to revenue recognition. The adoption of SAB No. 104 did not have a material impact on the Company's consolidated financial statements. (m) 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:
2003 2002 2001 -------- -------- -------- Net loss: As Reported $(17,108) $(20,263) $ (3,474) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect (261) (284) (633) -------- -------- -------- Pro Forma $(17,369) $(20,547) (4,107) ======== ======== ========
49 (4) CREDIT ARRANGEMENTS Following is a summary of the Company's long-term debt as of December 31, 2003 and December 31, 2002:
December 31, December 31, 2003 2002 ------------ ------------ Revolving credit facility, weighted average interest rate of 5.2% $ 24,375 $ 10,050 Acquisition credit facility - 9,250 Term Loan Tranche A - 19,391 Term Loan Tranche B - 97,516 Senior Subordinated Notes, interest rate of 13.0% 154,729 170,000 Debt discount on Senior Subordinated Notes (8,514) (10,374) Senior Second Secured Notes, interest rate of 10.75% 165,000 - Debt discount on Senior Second Secured Notes (7,454) - Senior Unsecured Notes payable to seller of Safway, non-interest bearing, accreted at 14.5% 7,999 - Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand 1,110 1,110 Capital lease obligations 4,590 2,507 City of Parsons, Kansas Economic Development Loan, interest rate of 7.0% 55 86 ---------- ---------- Total long-term debt 341,890 299,536 Less current maturities (3,067) (6,991) ---------- ---------- Long-term portion $ 338,823 $ 292,545 ========== ==========
Scheduled maturities of long-term debt and future minimum lease payments under capital leases are:
Long-term Capital Year Debt Leases Total ----------------------------------- --------- --------- --------- 2004 $ 1,523 $ 1,514 $ 3,037 2005 196 1,392 1,588 2006 24,763 965 25,728 2007 418 772 1,190 2008 171,639 664 172,303 Thereafter 154,729 127 154,856 --------- --------- --------- Long-Term Debt and Lease Payments 353,268 5,434 358,702 Less: Debt Discount (15,968) - (15,968) Less: Amounts Representing Interest - (844) (844) --------- --------- --------- $ 337,300 $ 4,590 $ 341,890 ========= ========= =========
On June 9, 2003, the Company completed an offering of $165,000 of senior second secured notes (the "Senior Notes") in a private placement. The notes mature in June 2008 and 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 $156,895 and were used to repay the Company's acquisition credit facility, term loan tranche A, term loan tranche B, and a portion of the revolving credit facility which was subsequently increased by $24,375. As a result of the transactions, the Company incurred a loss on the early extinguishment of long-term debt of $2,550, due to the expensing of deferred financing costs. The senior second secured notes are secured by substantially all assets of the Company. As of December 31, 2003, 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 50 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. As of December 31, 2003 the Company had a $50,000 revolving credit facility that was due to mature in June 2006. The credit facility is secured by substantially all assets of the company and has several interest rate options that reprice on a short-term basis. At December 31, 2003, the Company had outstanding letters of credit of $7,000 and available borrowings of $18,625 under its $50,000 revolving credit facility. The $50,000 credit facility was amended during the second quarter to remove certain of the restrictive financial covenants. As of December 31, 2003, the only remaining financial covenant requires that the Company not exceed a certain leverage ratio, as defined. The Company was in compliance with this covenant as of December 31, 2003. The amendment also limits the Company's borrowings to 75% of eligible accounts receivable and 50% of eligible inventories. The credit facility was secured by substantially all assets of the Company. The average borrowings, maximum borrowings and weighted average interest rates on the revolving credit facility for the periods indicated were as follows:
For the Year Ended ----------------------------------------------------------------- December 31, December 31, December 31, 2003 2002 2001 ---- ---- ---- Revolving Credit Facility: Average borrowing $ 22,578 $ 15,156 $ 8,980 Maximum borrowing 35,225 29,275 26,425 Weighted average interest rate 5.5% 6.4% 10.4%
On January 30, 2004, we established an $80 million senior secured revolving credit facility, which was used to refinance our previous $50 million revolving credit facility. The new credit facility is secured by the same assets that secured the previous credit facility. The new credit facility has no financial covenants and is subject to availability under a borrowing base calculation. Availability of borrowings is limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment, less $10,000. As of January 30, 2004, all $80 million was available under the calculation. The credit facility is secured by substantially all assets of the Company. 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 subsidiaries of the Company are not guarantors of the Notes or the Senior Notes and do not have any credit arrangements senior to the Notes or the Senior Notes. The following supplemental consolidating condensed balance sheets as of December 31, 2003 and 2002 and the supplemental consolidating condensed statements of operations and cash flows for the years ended December 31, 2003, 2002, and 2001 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. 51 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 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 ========= ============ ============ ============ ============
52 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2002
Dayton Non Superior Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------ ------------ ------------ ASSETS Cash $ 1,605 $ (687) $ 1,486 $ - $ 2,404 Accounts receivable, net 30,223 30,487 455 - 61,165 Inventories 23,408 23,180 1,323 - 47,911 Intercompany 56,498 (56,414) (84) - - Other current assets 8,555 8,539 163 - 17,257 ---------- ---------- ---------- ---------- ---------- TOTAL CURRENT ASSETS 120,289 5,105 3,343 - 128,737 Rental equipment, net 4,268 58,846 46 - 63,160 Property, plant and equipment, net 25,690 35,378 178 - 61,246 Investment in subsidiaries 123,041 - - (123,041) - Other assets 53,497 67,331 - - 120,828 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS $ 326,785 $ 166,660 $ 3,567 $ (123,041) $ 373,971 ========== ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current maturities of long-term debt $ 6,991 $ - $ - $ - $ 6,991 Accounts payable 13,983 11,407 277 - 25,667 Accrued liabilities 18,022 12,152 154 - 30,328 ---------- ---------- ---------- ---------- ---------- TOTAL CURRENT LIABILITIES 38,996 23,559 431 - 62,986 Long-term debt 292,545 - - - 292,545 Other long-term liabilities 5,730 16,763 188 - 22,681 Total shareholders' equity (deficit) (10,486) 126,338 2,948 (123,041) (4,241) ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 326,785 $ 166,660 $ 3,567 $ (123,041) $ 373,971 ========== ========== ========== ========== ==========
53 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ Net sales $ 175,338 $ 193,064 $ 9,452 $ 377,854 Cost of sales 126,355 140,203 7,040 273,598 ---------- ---------- ---------- ---------- Gross profit 48,983 52,861 2,412 104,256 Selling, general and administrative expenses 35,092 50,413 1,515 87,020 Facility closing and severance expenses 1,629 665 - 2,294 Management Fees (400) - 400 Amortization of goodwill and intangibles 293 651 - 944 ---------- ---------- ---------- ---------- Income from operations 12,369 1,132 497 13,998 Other expenses Interest expense 39,633 322 - 39,955 Loss on early extinguishment of long-term debt 2,480 - - 2,480 Loss (Gain) on disposals of property, plant and equipment 3 (639) - (636) Other expense (income), net 104 - (84) 20 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes (29,851) 1,449 581 (27,821) Provision (benefit) for income taxes (11,495) 558 224 (10,713) ---------- ---------- ---------- ---------- Net income (loss) $ (18,356) $ 891 $ 357 $ (17,108) ========== ========== ========== ==========
54 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ Net sales $ 192,271 $ 197,368 $ 9,098 $ 398,737 Cost of sales 132,946 130,894 6,021 269,861 --------- --------- --------- --------- Gross profit 59,325 66,474 3,077 128,876 Selling, general and administrative expenses 40,422 49,188 1,611 91,221 Facility closing and severance expenses 3,827 1,572 - 5,399 Amortization of goodwill and intangibles 373 230 - 603 Management fees (300) - 300 - --------- --------- --------- --------- Income from operations 15,003 15,484 1,166 31,653 Other expenses Interest expense 33,101 866 - 33,967 Loss on disposals of property, plant and equipment 728 387 - 1,115 Other expense (income), net (35) 44 71 80 --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (18,791) 14,187 1,095 (3,509) Provision (benefit) for income taxes (2,067) 1,561 120 (386) --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (16,724) 12,626 975 (3,123) Cumulative effect of change in accounting principle, net of income tax benefit of $2,754 - (17,140) - (17,140) --------- --------- --------- --------- Net income (loss) $ (16,724) $ (4,514) $ 975 $ (20,263) ========= ========= ========= =========
55 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ Net sales $ 194,163 $ 211,918 $ 9,410 $ 415,491 Cost of sales 132,837 137,459 5,925 276,221 ----------- ----------- ----------- ----------- Gross profit 61,326 74,459 3,485 139,270 Selling, general and administrative expenses 38,006 57,983 1,543 97,532 Facility closing and severance expenses 442 6,918 - 7,360 Amortization of goodwill and intangibles 1,980 1,932 - 3,912 Management fees (300) - 300 - ----------- ----------- ----------- ----------- Income from operations 21,198 7,626 1,642 30,466 Other expenses Interest expense 34,463 561 - 35,024 Other expense (income), net - 95 - 95 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes (13,265) 6,970 1,642 (4,653) Provision (benefit) for income taxes (3,361) 1,766 416 (1,179) ----------- ----------- ----------- ----------- Net income (loss) $ (9,904) $ 5,204 $ 1,226 $ (3,474) =========== =========== =========== ===========
56 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2003
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (18,356) $ 891 $ 357 $ (17,108) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,697 19,499 53 30,249 Deferred income taxes (10,436) - - (10,436) Gain on sales of rental equipment and fixed assets (3,408) (24,160) - (27,568) Loss on the early extinguishment of long-term debt 2,480 - - 2,480 Change in assets and liabilities, net of the effects of acquisitions (15,141) 5,214 (178) (10,105) ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities (34,164) 1,444 232 (32,488) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (3,631) (4,191) (7) (7,829) Proceeds from sales of fixed assets 131 763 - 894 Rental equipment additions (2,472) (25,094) (5) (27,571) Proceeds from sale of rental equipment 4,352 35,320 51 39,723 Acquisitions - (13,668) - (13,668) ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities (1,620) (6,870) 39 (8,451) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (177,611) (262) - (177,873) Issuance of long-term debt 206,442 - - 206,442 Proceeds from sale/leaseback transaction - - - - Issuance of common shares, net of issuance costs 13,059 - - 13,059 Repayment of loans to shareholders, net 149 - - 149 Financing Costs incurred (1,860) - - (1,860) Intercompany (5,140) 5,135 5 - ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 35,039 4,873 5 39,917 ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 613 613 ---------- ---------- ---------- ---------- Net increase (decrease) in cash (745) (553) 889 (409) CASH, beginning of year 1,605 (687) 1,486 2,404 ---------- ---------- ---------- ---------- CASH, end of year $ 860 $ (1,240) $ 2,375 $ 1,995 ========== ========== ========== ==========
57 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (9,514) $ (11,724) $ 975 $ (20,263) Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle - 17,140 - 17,140 Depreciation and amortization 7,712 16,026 50 23,788 Deferred income taxes 3,228 - - 3,228 Gain on sales of rental equipment and fixed assets (572) (20,247) (32) (20,851) Change in assets and liabilities, net of the effects of acquisitions (5,834) (13,460) (998) (20,292) ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities (4,980) (12,265) (5) (17,250) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (6,658) (4,489) (130) (11,277) Proceeds from sales of fixed assets 1,105 877 28 2,010 Rental equipment additions (758) (17,619) (34) (18,411) Proceeds from sale of rental equipment 3,018 32,550 73 35,641 ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities (3,293) 11,319 (63) 7,963 ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (4,141) - - (4,141) Issuance of long-term debt 8,050 - - 8,050 Proceeds from sale/leaseback transaction 633 1,597 28 2,258 Issuance of common shares, net of issuance costs 131 - - 131 Redemption of common shares and purchase of treasury shares (205) - - (205) Repayment of loans to shareholders, net 502 - - 502 Intercompany 2,194 (2,170) (24) - ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 7,164 (573) 4 6,595 ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 107 107 ---------- ---------- ---------- ---------- Net increase (decrease) in cash (1,109) (1,519) 43 (2,585) CASH, beginning of year 2,714 832 1,443 4,989 ---------- ---------- ---------- ---------- CASH, end of year $ 1,605 $ (687) $ 1,486 $ 2,404 ========== ========== ========== ==========
58 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ----------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (9,904) $ 5,204 $ 1,226 $ (3,474) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,483 15,928 42 24,453 Deferred income taxes (2,972) - - (2,972) Gain on sales of rental equipment and fixed assets (1,062) (13,039) (83) (14,184) Change in assets and liabilities, net of the effects of acquisitions (9,109) 15,049 (1,540) 4,400 ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities (14,564) 23,142 (355) 8,223 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (4,065) (5,679) (180) (9,924) Proceeds from sales of fixed assets 34 132 3 169 Rental equipment additions (1,565) (24,317) (51) (25,933) Proceeds from sale of rental equipment 2,193 20,390 159 22,742 Acquisitions (40,707) - - (40,707) ---------- ---------- ---------- ---------- Net cash used in investing activities (44,110) (9,474) (69) (53,653) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (48,532) - - (48,532) Issuance of long-term debt 93,751 - - 93,751 Issuance of Class A common shares 5,334 - - 5,334 Financing costs incurred (791) - - (791) Purchase of treasury shares (928) - - (928) Intercompany 10,951 (12,011) 1,060 - ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 59,785 (12,011) 1,060 48,834 ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (197) (197) ---------- ---------- ---------- ---------- Net increase in cash 1,111 1,657 439 3,207 CASH, beginning of year 1,603 (825) 1,004 1,782 ---------- ---------- ---------- ---------- CASH, end of year $ 2,714 $ 832 $ 1,443 $ 4,989 ========== ========== ========== ==========
59 (5) COMMON SHARES (a) STOCK OPTION PLAN-- Upon consummation of the recapitalization in 2000, the Company adopted the 2000 Stock Option Plan of Dayton Superior Corporation ("Stock Option Plan"). The Stock Option Plan permits the grant of stock options to purchase 719,254 common shares. Options to purchase 92,859, 147,225, and 5,506 common shares were granted during 2003, 2002, and 2001, respectively. 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 remain outstanding following the recapitalization, 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 less 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's 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 December 31, 2003, 2002, and 2001, and changes during the years then ended is presented in the table and narrative below:
Weighted Average Number of Exercise Price Per Shares Share ------ ----- Outstanding at January 1, 2001 570,946 $ 24.22 Granted at a weighted average fair value of $7.65 5,506 27.50 Exercised (9,134) 21.20 Cancelled (26,060) 27.00 ------- Outstanding at December 31, 2001 541,258 24.17 Granted at a weighted average fair value of $5.43 147,225 27.50 Exercised (3,050) 2.29 Cancelled (13,749) 25.21 ------- Outstanding at December 31, 2002 671,684 25.00 Granted at a weighted average fair value of $4.78 92,859 25.42 Cancelled (120,704) 25.26 ------- Outstanding at December 31, 2003 643,839 $ 25.03 =======
Price ranges and other information for stock options outstanding at December 31, 2003 are as follows:
Outstanding Exercisable ----------- ----------- Weighted Weighted Weighted Average Average Average Exercise Remaining Exercise Range of Exercise Prices Shares Price Life Shares Price ------------------------ ------ ----- ---- ------ ----- $ 1.96 - $ 4.00 40,887 $ 2.45 0.7 years 40,887 $ 2.45 $ 16.81 - $ 19.91 22,164 17.95 4.6 22,164 17.95 $ 24.00 - $ 27.50 580,788 26.87 7.5 97,999 27.02 ------- ------- --------- ------- ------- 643,839 $ 25.03 6.9 years 161,050 $ 19.54 ======= ======= ========= ======= =======
Shares exercisable were 188,092 and 163,573 as of December 31, 2002 and 2001, respectively. 60 The fair value of each option grant is estimated on the date of grant using the Black Scholes options pricing model with the following weighted average assumptions used for grants in 2003, 2002, and 2001, respectively:
2003 2002 2001 ---- ---- ---- Risk-free interest rates 2.98%-3.26% 3.70% 5.55% Expected dividend yield 0% 0% 0% Expected lives 6 years 6 years 6 years Expected volatility 8.44% 0.00% 0.00%
(b) TREASURY SHARES-- During 2002 and 2001, the Company repurchased common shares from former employees in conjunction with the facility closing and severance plans discussed in Note 10. There were 7,459 shares repurchased in 2002 for $205, and 29,288 shares repurchased in 2001 for $979. 61 (6) RETIREMENT PLANS (a) COMPANY-SPONSORED PENSION 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.
PENSION PENSION SYMONS SYMONS BENEFITS BENEFITS POSTRETIREMENT POSTRETIREMENT 2003 2002 BENEFITS 2003 BENEFITS 2002 ---- ---- ------------- ------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 8,227 $ 7,059 $ 720 $ 820 Service cost 483 428 - - Interest cost 563 502 46 57 Amendments - 120 - - Actuarial loss 1,424 479 44 27 Benefits paid (499) (361) (164) (183) ---------- ---------- ---------- ---------- Benefit obligation at end of year $ 10,198 $ 8,227 $ 648 $ 721 ========== ========== ========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 6,812 $ 6,716 $ - $ - Actual return (loss) on plan assets 1,136 (457) - - Employee contribution 109 57 Employer contribution 199 914 55 126 Benefits paid (499) (361) (164) (183) ---------- ---------- ---------- ---------- Fair value of plan assets at end of year $ 7,648 $ 6,812 $ - $ - ========== ========== ========== ========== Funded status $ (2,550) $ (1,415) $ (648) $ (720) Unrecognized prior service cost (37) (32) 168 192 Unrecognized net loss (gain) 2,170 1,402 7 (39) ---------- ---------- ---------- ---------- Net amount recognized $ (417) $ (45) $ (473) $ (567) ========== ========== ========== ========== AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Accrued benefit liability $ (2,550) $ (1,415) $ (473) $ (567) Accumulated other comprehensive income 2,133 1,370 - - ---------- ---------- ---------- ---------- Net amount recognized $ (417) $ (45) $ (473) $ (567) ========== ========== ========== ========== COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 483 $ 428 $ - $ - Interest cost 563 502 46 57 Expected return on plan assets (536) (560) - - Amortization of actuarial loss 55 - - - Amortization of prior service cost 5 (5) 24 24 ---------- ---------- ---------- ---------- Net periodic pension cost $ 570 $ 365 $ 70 $ 81 ========== ========== ========== ========== ADDITIONAL INFORMATION Increase in minimum liability included in other comprehensive income (106) (1,219) - -
62 The weighted average assumptions used in the actuarial computation that derived the above funded status amounts were as follows:
Pension Pension Symons Symons Benefits Benefits Postretirement Postretirement 2003 2002 Benefits 2003 Benefits 2002 ---- ---- ------------- ------------- Discount rate 6.00% 6.75% 6.00% 6.75% Expected return on plan assets 8.00% 8.00% N/A N/A Rate of compensation increase N/A N/A N/A N/A
The weighted average assumptions used in the actuarial computation that derived net periodic benefit income (expense) were as follows:
Pension Pension Pension Symons Symons Symons Benefits Benefits Benefits Postretirement Postretirement Postretirement 2003 2002 2001 Benefits 2003 Benefits 2002 Benefits 2001 ---- ---- ---- ------------- ------------- ------------- Discount rate 6.75% 7.25% 6.75% 6.75% 7.5% 7.0% Expected return on plan assets 8.00% 8.00% 8.00% N/A N/A N/A Rate of compensation increase N/A N/A N/A N/A N/A N/A
One of the principal components of the net periodic pension cost calculation is the expected long-term rate of return on assets. The required use of an expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. Our defined benefit pension plan's assets are invested primarily in equity and fixed income mutual funds. We use long-term historical actual return experience and estimates of future long-term investment return with consideration to the expected investment mix of the plan's assets to develop our expected rate of return assumption used in the net periodic pension cost calculation. Our postretirement healthcare benefit plan is unfunded and has no plan assets. Therefore, the expected long-term rate of return on plan assets is not a factor in accounting for this benefit plan. As of December 31, 2003 and 2002, the plan had accumulated benefit obligations equal to the projected benefit obligation of $10,198 and $8,227, respectively. Assumed health care cost trend rates:
DECEMBER 31, ---------------------- 2004 2003 ---- ---- Health care cost trend rate assumed for next year 8.0% 8.5% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0% 5.0% Year that the rate reaches the ultimate trend rate 2010 2010
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:
1 Percentage Point 1 Percentage Increase Point Decrease -------- -------------- Effect on total of service and interest cost components $ 6 $ (6) Effect on the postretirement benefit obligation 105 (93)
63 Plan Assets The pension plan asset allocations at December 31, 2003 and 2002, by asset category were as follows:
PLAN ASSETS AT DECEMBER 31, --------------------------- ASSET CATEGORY 2003 2002 -------------- ---- ---- Equity Securities 55 % 66 % Fixed Income Securities 36 18 Insurance Contract 9 16 Total 100 % 100 % --- ---
The Company's pension plan asset investment strategy is to invest in a combination of equities and fixed-income investments while maintaining a moderate risk posture. The targeted asset allocation within the investment portfolio is 55% equities and 45% fixed income. The Company evaluates the performance of the pension investment program in the context of a three to five-year horizon. CASH FLOW Contributions: We expect to contribute $100 to the pension plan in 2004. Estimated Future Benefit Payments: The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
PENSION BENEFITS OTHER BENEFITS ---------------- -------------- 2004 $ 324 $ 81 2005 354 84 2006 368 86 2007 404 87 2008 445 88 Years 2009-2013 2,984 393
(b) MULTI-EMPLOYER PENSION PLAN-- Approximately 12% of the Company's employees are currently covered by collectively bargained, multi-employer pension plans. Contributions are determined in accordance with the provisions of negotiated union contracts and generally are based on the number of hours worked. The Company does not have the information available to determine its share of the accumulated plan benefits or net assets available for benefits under the multi-employer pension plans. The aggregate amount charged to expense under these plans was $321, $347, and $380, for the years ended December 31, 2003, 2002, and 2001, respectively. (c) 401(k) SAVINGS PLAN-- Most employees are eligible to participate in Company sponsored 401(k) savings plans. Company matching contributions vary from 0% to 50% according to terms of the individual plans and collective bargaining agreements. The aggregate amount charged to expense under these plans was $767, $993, and $1,000, for the years ended December 31, 2003, 2002, and 2001, respectively. (d) RETIREMENT CONTRIBUTION ACCOUNT-- The Company has a defined contribution plan for substantially all salaried employees. Employees are not permitted to contribute to the plan. The Company suspended contributions to this account for service rendered in 2003. Previously, participants earned 1.5% to 6.0% of eligible compensation, depending on the age of the employee. The amount charged to expense for the years ended December 31, 2002 and 2001 was $1,791 and $1,905, respectively. 64 (7) INCOME TAXES The following is a summary of the components of the Company's income tax provision for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001 -------- -------- -------- Currently receivable: Federal $ (98) $ (4,000) $ (671) State and local 154 (354) 555 Foreign 459 603 413 Deferred (future tax benefit) (11,228) 3,365 (1,476) -------- -------- -------- Total benefit $(10,713) $ (386) $ (1,179) ======== ======== ========
The effective income tax rate differs from the statutory federal income tax rate for the years ended December 31, 2003, 2002, and 2001 for the following reasons:
2003 2002 2001 -------- -------- -------- Statutory income tax rate 34.0% 34.0% 34.0% State income taxes (net of federal tax benefit) 4.9 (4.1) 4.0 Nondeductible goodwill amortization and other permanent differences (0.4) (8.6) (12.7) Foreign income taxes - (10.3) - -------- -------- -------- Effective income tax rate 38.5% 11.0% 25.3% ======== ======== ========
The components of the Company's deferred taxes as of December 31, 2003 and 2002 are as follows:
2003 2002 -------- -------- Current deferred taxes: Inventory reserves $ 1,100 $ 668 Accounts receivable reserves 1,123 876 Accrued liabilities 2,975 4,628 Other 170 22 -------- -------- Total 5,368 6,194 -------- -------- Long-term deferred taxes: Accelerated depreciation (19,340) (19,302) Net operating loss carryforwards 15,179 2,678 Deferred compensation 2,001 3,046 Other long-term liabilities 1,522 947 Amortization of intangibles 878 798 Other (240) (86) -------- -------- Total - (11,919) -------- -------- Net deferred taxes $ 5,368 $ (5,725) ======== ========
For federal income tax purposes, the Company has federal net operating tax loss carryforwards of approximately $39,300, which expire over a five year period beginning in 2019. The Company also has state net operating tax loss carryforwards of $49,400, which expire over a period of five to twenty years beginning in 2006. 65 (8) SEGMENT REPORTING In an effort to reduce cost and enhance customer responsiveness, the Company consolidated its overhead structure from five marketing arms down to two effective January 1, 2003. Accordingly, the Company changed it's reporting as a result of this consolidation such that it now reports under two segments: Construction Products Group and Symons. Construction Products Group and Symons sell primarily to external customers and are differentiated by their products and services, both of which serve the construction industry. Construction Products Group sells concrete accessories, which are used in connecting forms for poured-in-place concrete walls, anchoring or bracing for walls and floors, supporting bridge framework and positioning steel reinforcing bars; masonry accessories, 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 construction chemicals which are used in conjunction with its other products. Symons sells and rents reusable engineered forms and related accessories used in the construction of concrete walls, columns and bridge supports to hold concrete in place while it hardens and construction chemicals which are used in conjunction with its other products. Corporate loss before income tax includes interest expense. Sales between Construction Products Group and Symons are recorded at normal selling price by the selling segment and at cost for the buying segment, with the profit recorded as an intersegment elimination. Segment assets include accounts receivable; inventories; property, plant, and equipment; rental equipment; and an allocation of goodwill. Corporate and unallocated assets include cash, prepaid income taxes, future tax benefits, and financing costs. Export sales and sales by non-U.S. affiliates are not significant. Information about the income (loss) of each segment and the reconciliations to the consolidated amounts for the years ended December 31, 2003, 2002, and 2001 is as follows:
2003 2002 2001 --------- --------- --------- Sales: Construction Products Group $ 258,051 $ 274,129 $ 282,375 Symons 119,803 124,608 133,116 --------- --------- --------- Net sales to external customers $ 377,854 $ 398,737 $ 415,491 ========= ========= ========= Construction Products Group $ 12,299 $ 13,123 $ 13,990 Symons 9,553 8,107 7,052 --------- --------- --------- Net sales to other segments $ 21,852 $ 21,230 $ 21,042 ========= ========= ========= Income (loss) before income tax: Construction Products Group $ 18,057 $ 28,265 $ 29,315 Symons 20,733 27,076 31,324 Intersegment Eliminations (11,695) (11,032) (11,187) Corporate (54,916) (47,818) (54,105) --------- --------- --------- Loss before income taxes $ (27,821) $ (3,509) $ (4,653) ========= ========= ========= Depreciation: Construction Products Group $ 6,708 $ 6,665 $ 6,455 Symons 17,457 12,417 9,936 Corporate 1,769 1,768 1,899 --------- --------- --------- Depreciation $ 25,934 $ 20,850 $ 18,290 ========= ========= ========= Amortization of goodwill and intangibles: Construction Products Group $ 185 $ 258 $ 375 Symons 651 229 16 Corporate 108 116 3,521 --------- --------- --------- Amortization of goodwill and intangibles $ 944 $ 603 $ 3,912 ========= ========= =========
66 Information regarding each segment's assets and the reconciliation to the consolidated amounts as of December 31, 2003 and 2002 are as follows:
2003 2002 --------- --------- Construction Products Group $ 154,514 $ 159,955 Symons 138,973 115,071 Corporate and Unallocated 99,897 98,945 --------- --------- Total Assets $ 393,384 $ 373,971 ========= =========
Information regarding capital expenditures by segment and the reconciliation to the consolidated amounts for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001 --------- --------- --------- Construction Products Group $ 6,313 $ 7,968 $ 6,629 Symons 521 2,520 2,320 Corporate 995 789 975 --------- --------- --------- Property, Plant, and Equipment Additions $ 7,829 $ 11,277 $ 9,924 ========= ========= ========= Construction Products Group $ 870 $ 864 $ 1,664 Symons 26,701 17,547 24,269 --------- --------- --------- Rental Equipment Additions $ 27,571 $ 18,411 $ 25,933 ========= ========= =========
(9) COMMITMENTS AND CONTINGENCIES (a) OPERATING LEASES-- Rental expense for property, plant and equipment (principally manufacturing, service/distribution, and office facilities, forklifts, and office equipment) was $6,301, $6,318, and $6,599, for the years ended December 31, 2003, 2002 and 2001, respectively. Lease terms range from one to 20 years and some contain renewal options. Aggregate minimum annual rental commitments under non-cancelable operating leases are as follows:
Operating Leases ---------------- 2004 $ 5,749 2005 5,016 2006 3,588 2007 2,460 2008 1,353 Thereafter 7,300 ----------- Total $ 25,466 ===========
(b) LITIGATION-- From time to time, the Company is involved in various legal proceedings arising out of the ordinary course of business. None of the matters in which the Company is currently involved, either individually, or in the aggregate, is expected to have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. (c) SELF-INSURANCE-- The Company is self-insured for certain of its group medical, workers' compensation and product and general liability claims. The Company has stop loss insurance coverage at various per occurrence and per annum levels depending on the type of claim. The Company consults with third party administrators to estimate the reserves required for these claims. No material revisions were made to the estimates for the years ended December 31, 2003, 2002 and 2001. The Company has reserved $5,116 and $6,890 as of December 31, 2003 and 2002, respectively. 67 (d) SEVERANCE OBLIGATIONS-- The Company has employment agreements with its executive management and severance agreements with certain of its key management-level personnel, with annual base compensation ranging in value from $170 to $390. The agreements generally provide for salary continuation in the event of termination without cause for periods of one to three years. The agreements also contain certain non-competition clauses. As of December 31, 2003, the remaining aggregate commitment under these severance agreements if all individuals were terminated without cause was approximately $2,800. (10) FACILITY CLOSING AND SEVERANCE EXPENSES During 2000, as a result of the acquisition of Conspec, we approved and began implementing a plan to consolidate certain of our existing operations. Activity for this plan for the years ended December 31, 2001, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- ------------ ------- (AMOUNTS IN THOUSANDS) Balance, January 1, 2001 .................... $ 738 $ 540 $ - $ 575 $ 1,853 Facility closing and severance expenses ..... - - - - - Items charged against reserve ............... (738) (50) - (398) (1,186) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2001 .................. - 490 - 177 667 Facility closing and severance expenses ..... - - - - - Items charged against reserve ............... - (221) - (84) (305) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2002 .................. - 269 - 93 362 Facility closing and severance expenses ..... - (212) - - (212) Items charged against reserve ............... - (57) - (93) (150) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2003 .................. $ - $ - $ - $ - $ - =========== =========== ========== ============ =======
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 years ended December 31, 2001, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- ------------ ------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses ..... $ 3,287 $ 685 $ - $ 786 $ 4,758 Items charged against reserve ............... (2,356) (161) - - (2,517) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2001 .................. 931 524 - 786 2,241 Facility closing and severance expenses ..... - - 108 - 108 Items charged against reserve ............... (931) (314) (108) (475) (1,828) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2002 .................. - 210 - 311 521 Facility closing and severance expenses ..... - 379 - - 379 Items charged against reserve ............... - (175) - (311) (486) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2003 .................. $ - $ 414 $ - $ - $ 414 =========== =========== ========== ============ =======
The remaining lease termination costs are expected to be paid in 2004. 68 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, 2002, and 2003 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- ------------ ------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses ..... $ 4,441 $ 650 $ - $ 200 $ 5,291 Items charged against reserve ............... (2,029) (566) - (200) (2,795) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2002 .................. 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 =========== =========== ========== ============ =======
The remaining involuntary termination benefits are expected to be paid in 2004. During 2003, 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 was as follows:
OTHER INVOLUNTARY LEASE RELOCATION POST- TERMINATION TERMINATION OF CLOSING BENEFITS COSTS OPERATIONS COSTS TOTAL ----------- ----------- ---------- ------------ ------- (AMOUNTS IN THOUSANDS) Facility closing and severance expenses ..... $ 988 $ 27 $ - $ 921 $ 1,936 Items charged against reserve ............... (988) (27) - (921) (1,936) ----------- ----------- ---------- ------------ ------- Balance, December 31, 2003 .................. $ - $ - $ - $ - $ - =========== =========== ========== ============ =======
(11) RELATED PARTY TRANSACTIONS For the years ended December 31, 2003, 2002, and 2001, the Company reimbursed Odyssey Investment Partners, LLC, the majority shareholder, for travel, lodging, and meals of $315, $228, and $107 respectively. In conjunction with the acquisition of Aztec Concrete Accessories, Inc. ("Aztec"), the Company paid Odyssey a $350 fee. 69 (12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2003 --------------------------------------------------------------------- First Second Third Fourth Full Quarterly Operating Data Quarter Quarter Quarter Quarter Year ----------------------------------------- --------- --------- --------- --------- --------- Net sales $ 71,994 $ 105,514 $ 100,988 $ 99,358 $ 377,854 Gross profit 21,000 31,012 24,729 27,515 104,256 Income (loss) before cumulative effect of change in accounting principle (5,390) (460) (6,393) (4,865) (17,108)
2002 --------------------------------------------------------------------- First Second Third Fourth Full Quarterly Operating Data Quarter Quarter Quarter Quarter Year ----------------------------------------- --------- --------- --------- --------- --------- Net sales $ 82,772 $ 112,214 $ 110,526 $ 93,225 $ 398,737 Gross profit 26,517 36,587 36,623 29,149 128,876 Income (loss) before cumulative effect of change in accounting principle (3,010) 2,890 2,587 (5,590) (3,123)
70 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS)
Additions Deductions ---------------------------------- ----------------------- Charges Charged for Which Balance at to Costs Reserves Balance at Beginning of and Were End of Year Expenses Other Created Year ------------ --------- ----- --------- ---------- Allowances for Doubtful Accounts and Sales Returns and Allowances For the year ended December 31, 2003 $ 4,861 $ 6,521 $ - $ (6,443) $ 4,939 For the year ended December 31, 2002 7,423 1,848 - (4,410) 4,861 For the year ended December 31, 2001 $ 5,331 $ 2,156 $ 102 (1) $ (166) $ 7,423
(1) Acquisition of BarLock and Aztec Concrete Accessories, Inc. 71 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. 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 period 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. 72 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position of our executive officers and directors as of December 31, 2003.
Name Age Position ----------------------- --- ----------------------------------------------- John A. Ciccarelli 64 Chairman of the Board of Directors Stephen R. Morrey 49 President, Chief Executive Officer and Director Peter J. Astrauskas 53 Vice President, Engineering Raymond E. Bartholomae 57 Vice President, Sales and Marketing Dennis P. Haggerty 52 Vice President, Supply Chain Management Steven C. Huston 49 Vice President, General Counsel and Secretary Mark K. Kaler 46 Vice President, Strategic Planning Edward J. Puisis 43 Vice President and Chief Financial Officer Thomas W. Roehrig 38 Vice President of Corporate Accounting Stephen Berger 64 Director William F. Hopkins 40 Director Douglas W. Rotatori 43 Director
John A. Ciccarelli has been a Director since 1994 and Chairman of our Board of Directors since 2000. Mr. Ciccarelli was President and Chief Executive Officer from 1989 until 2002. Stephen R. Morrey has been President, Chief Executive Officer and a Director since July 2002. From June 2001 to July 2002, Mr. Morrey was President of Alcoa Automotive Castings. From 1999 to June 2001, he was Vice President of Operations for the Occupant Safety Systems Division of TRW. From 1995 to 1999, Mr. Morrey served as Vice President of Operations for the Airbags Worldwide, Steering Wheels North America Division of TRW. Peter J. Astrauskas has been Vice President, Engineering since September 2003. From 2001 to 2003, he was Vice President, Engineering for Alcoa Automotive. From 1994 to 2001, he was the Director, Global Manufacturing Engineering for TRW Safety Systems. Raymond E. Bartholomae has been Vice President, Sales and Marketing since August 2003. He has been employed by Symons since January 1970 and had been Vice President and General Manager, Symons, from February 1998 to August 2003. Dennis P. Haggerty has been Vice President, Supply Chain Management since October 2002. From October 2001 to October 2002, he was Director of Business Development/Quality for Alcoa Automotive Castings. From February 2000 to October 2001, he was Executive Vice President for Ventra Plastics. From May 1999 to February 2000, Mr. Haggerty was Vice President for Ventra Plastics Europe. From 1997 to May 1999, he served as Director of Operations for TRW. Steven C. Huston has been Vice President, General Counsel and Secretary since January 2003. From January 2002 to January 2003, he was Deputy General Counsel and Assistant Secretary. Mr. Huston was in private practice from February 2001 through December 2001, and prior to that, served as Counsel--North America for Wm. Wrigley Jr. Company from March 1997 to February 2001. Mark K. Kaler has been Vice President, Strategic Planning since August 2003. He served as Vice President and General Manager, Construction Products Group from October 2002 to August 2003. From April 1996 to October 2002, Mr. Kaler was Vice President and General Manager, American Highway Technology. 73 Edward J. Puisis has been Vice President and Chief Financial Officer since August 2003. From March 1998 to August 2003 Mr. Puisis was General Manager of Finance and Administration and Chief Financial Officer of Gallatin Steel Company, a partnership owned by Dafasco and Gerdau Ameristeel. Thomas W. Roehrig has been Vice President of Corporate Accounting since February 2003 and was Treasurer from August 2003 to December 2003. From April 1998 to February 2003, Mr. Roehrig served as Corporate Controller. Stephen Berger has been chairman of Odyssey Investment Partners, LLC since 1997. Mr. Berger also served as a director of Transdigm, Inc., a supplier of highly engineered commercial and military aircraft parts from 1998 to July 2003. William F. Hopkins has been a member and Managing Principal of Odyssey Investment Partners, LLC since 1997. Mr. Hopkins also served as a director of Transdigm, Inc. from 1998 to July 2003, a supplier of highly engineered commercial and military aircraft parts. Douglas W. Rotatori has been a principal of Odyssey Investment Partners, LLC since 1998. We have five directors. Each director is elected to serve until the next annual meeting of shareholders or until a successor is elected. Our executive officers are elected by the directors to serve at the pleasure of the directors. There are no family relationships between any of our directors or executive officers. Except for Mr. Ciccarelli, our directors, all of whom are employed by us, or Odyssey, do not receive any compensation for their service as directors. The AUDIT COMMITTEE of our Board of Directors consists of Messrs. Berger, Hopkins, and Rotatori, none of who is considered independent under the rules of the national securities exchanges. The Board of Directors has determined that Mr. Rotatori is an Audit Committee financial expert, as defined in the rules of the Securities and Exchange Commission. We have adopted a CODE OF ETHICS that specifically applies to our senior financial officers, including our President and Chief Executive Officer, Chief Financial Officer, Vice President of Corporate Accounting, and Treasurer. Our Code of Ethics is filed with this annual report on Form 10-K as Exhibit 14. 74 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the 2003, 2002, and 2001 compensation for our chief executive officer and each of the other four most highly compensated executive officers who were serving as executive officers at December 31, 2003 or who had served as an executive officer during 2003.
LONG-TERM COMPENSATION ----------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------- -------------- ----------- OTHER ANNUAL SHARES LONG TERM NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING INCENTIVE ALL OTHER POSITION YEAR ($) ($) ($) OPTIONS (#)(1) PAYOUTS ($) COMPENSATION($)(2) ---------------------- ---- --------- --------- ------------ -------------- ----------- ------------------ Stephen R. Morrey 2003 $ 375,000 $ 135,000 $ 195,709(3) - $ - $ 4,000 President and Chief 2002 173,077 235,000 77,102(3) 100,000 - - Executive Officer Dennis Haggerty 2003 $ 225,000 $ 100,000 $ 43,122(4) - $ - $ 3,500 Vice President, 2002 55,385 32,653 - 35,000 - - Supply Chain Management Raymond E. Bartholomae 2003 $ 243,942 $ 140,000 $ - 12,000 $ - $ 4,000 Vice President, 2002 210,000 120,000 - - - 16,000 Sales and Marketing 2001 206,750 90,000 - - - 13,600 Mark K. Kaler 2003 $ 227,000 $ 70,000 $ - 12,000 $ - $ 4,000 Vice President, 2002 184,077 110,000 - - - 13,000 Strategic Planning 2001 149,231 160,214 - - - 7,650 Alan F. Mcliroy(5) 2003 $ 147,692 $ 27,123 $ 24,110(6) - $ - $ 314,846 Vice President and 2002 240,000 45,000 - - - 13,000 Chief Financial 2001 236,539 96,406 - - - 11,050 Officer Edward J. Puisis 2003 $ 96,154 $ 325,000(7) $ - 55,000 $ - $ - Vice President and Chief Financial Officer
(1) Options to purchase common shares were granted under our stock option plans at an exercise price of $27.50 per share, except for Mr. Puisis' options, which have an exercise price of $24.00 per share. The options become exercisable based on a combination of service and performance factors. (2) Consists of:
Matching 401(k) Contributions Contributions to 401(k) Savings Plan Severance 2003 2002 2001 2003 2002 2001 2003 ----------------------------------------------------------------------------- Mr. Morrey $4,000 $ - $ - $ - $ - $ - $ - Mr. Haggerty 3,500 - - - - - - Mr. Bartholomae 4,000 4,000 3,400 - 12,000 10,200 - Mr. Kaler 4,000 4,000 3,400 - 9,000 4,250 - Mr. Mcliroy 4,000 4,000 3,400 - 9,000 7,650 310,846 Mr. Puisis - - - - - - -
75 (3)The amounts included in this column which represent more than 25% of the total perquisites and personal benefits received by Mr. Morrey were relocation expense paid by us of $70,402 in 2002 and $176,119 in 2003. (4)The amounts included in this column which represent more than 25% of the total perquisites and personal benefits received by Mr. Haggerty were temporary living and mileage expenses paid by us of $29,322 and a car allowance of $13,800. (5) Mr. McIlroy, the former chief financial officer, resigned effective August 8, 2003. In connection with Mr. McIlroy's severance, Mr. McIlroy received a severance payment of $207,000, 24 months of salary continuation (of which $103,846 was paid in 2003), and a prorated bonus of $27,123 for 2003. All of his unexercised options were cancelled. (6) The amounts included in this column which represent more than 25% of the total perquisites and personal benefits received by Mr. Mcliroy were imputed interest of $10,310 on an interest free loan and a car allowance of $13,800. (7) The bonus amount for Mr. Puisis reflects a signing bonus of $175,000 he received upon his employment with Dayton Superior and a $150,000 bonus under the Company's annual bonus plan. EMPLOYMENT AGREEMENTS We have entered into employment agreements with each of Messrs. Morrey, Bartholomae, Puisis, and Kaler. We do not currently have an employment agreement with Mr. Haggerty. Generally, each employment agreement provides: - Each executive officer is an "employee at will." - Each executive officer is entitled to participate in our executive annual bonus plan and in our various other employee benefit plans and arrangements which are applicable to senior officers. - If an executive officer is terminated without cause during the term of his employment agreement, he will be entitled to receive a pro rata share of his bonus for the year of termination, to continue to receive his annual base salary for a period of 12 to 36 months and to continue coverage under our medical and dental programs for from one to three years on the same basis as he was entitled to participate prior to his termination. - Each executive officer is prohibited from competing with us during the term of his employment under the employment agreement and, under certain conditions, from one to three years following termination of his employment or expiration of the term of his employment agreement. Mr. Morrey's employment agreement differs from the other agreements described above in the following respects: - His annual base salary is $375,000, which may be increased by our Board of Directors at its discretion. - He serves as a director as well as President and Chief Executive Officer. - The term of his employment is four years, beginning July 15, 2002. His agreement will automatically be extended for additional one-year periods unless either of us notifies the other of termination not later than 120 days before the end of a term. - He received in 2002 a one-time signing bonus of $100,000 and reimbursement for certain expenses he incurred in connection with his move to the Dayton, Ohio area. He also received in 2002 a loan in the amount of $350,000 (which is fully recourse to him only with respect to $175,000), which he applied toward the purchase of 14,545 of our common shares at a price of $27.50 per share. 76 - He receives an annual car allowance, payment of the annual membership fee in a country, alumni or social club of his choice and hanger fees for his personal aircraft (up to a specified maximum amount), payment for reasonable expenses incurred by him for professional assistance with taxes and financial management consistent with our current practices and reimbursement for reasonable travel and business expenses incurred by him in the use of his personal aircraft for performance of his duties, in accordance with our procedures. Pursuant to an agreement with Dayton Superior, Mr. Puisis' employment agreement differs from the other agreements described above in the following respects: - His annual base salary is $250,000, which may be increased by our Board of Directors at its discretion. - The term of his employment is two years, beginning August 11, 2003. His employment agreement will be automatically extended for additional one-year periods unless either of us notifies the other not later than 120 days before the end of a term. - He received in 2003 a one-time signing bonus of $175,000 and reimbursement for expenses he incurred in connection with his move to the Dayton, Ohio area. - He receives an annual car allowance, payment of the annual membership fee in a country, alumni or social club of his choice (up to a specified maximum amount) as well as payment of the initiation fee in that country, alumni or social club (up to a specified amount). MANAGEMENT STOCKHOLDERS' AGREEMENT We along with Odyssey and our employee stockholders, including the officers named in the Summary Compensation Table (the "Management Stockholders"), are partners to a Management Stockholders' Agreement (the "Management Stockholders' Agreement") which governs our common shares, options to purchase our common shares and shares acquired upon exercise of options. The Management Stockholders' Agreement provides that except for certain transfers to family members and family trusts, no Management Stockholder may transfer common stock except in accordance with the Management Stockholders' Agreement. The Management Stockholders' Agreement also provides that, upon termination of the employment of a Management Stockholder, the Management Stockholder has certain put rights and we have certain call rights regarding his or her common stock. If the provisions of any law, the terms of credit and financing arrangements or our financial circumstances would prevent us from making a repurchase of shares pursuant to the Management Stockholders' Agreement, we will not make the purchase until all such prohibitions lapse, and will then also pay the Management Stockholder a specified rate of interest on the repurchase price. The Management Stockholders' Agreement further provides that in the event of certain transfers of common shares by Odyssey, the Management Stockholders may participate in such transfers and/or Odyssey may require the Management Stockholders to transfer their shares in such transactions, in each case on a pro rata basis. Certain Management Stockholders are entitled to participate on a pro rata basis with, and on the same terms as, Odyssey in any future offering of common shares. 77 FISCAL 2003 STOCK OPTION GRANTS The stock options granted in 2003 to Messers. Kaler, Bartholomae and Puisis in the Summary Compensation Table are shown in the following table. The table also shows the hypothetical gains that would exist for the options at the end of their ten year terms, assuming compound rates of stock appreciation of 5% and 10%, respectively. The actual future value of the options will depend on the market or appraised value of the common shares.
Option Grants in Last Fiscal Year ------------------------------------------------------ Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Individual Grants Term ------------------------------------------------------ ----------------------------- Number of % of Total Shares Options Underlying Granted to Exercise Options Employees Price Expiration Name Granted (#) in 2003 ($/Sh) Date 5%($) 10%($) ----------------------- ----------- ---------- -------- ---------- --------- ---------- Mark K. Kaler 12,000(1) 12.9% $ 27.50 1/1/13 $ 207,535 $ 525,935 Raymond E. Bartholomae 12,000(1) 12.9% $ 27.50 1/1/13 $ 207,535 $ 525,935 Edward J. Puisis 55,000(1) 59.2% $ 24.00 8/11/13 $ 830,141 $2,103,740
(1) Options were granted under the 2000 Stock Option Plan with an exercise price that represents the fair market value of a Common Share on the date the options were granted. The options are divided into two different parts, both of which have a different vesting schedule. All unvested options will become fully exercisable upon a change in control (as defined in the 2000 Stock Option Plan), if Odyssey receives at least a targeted return on its investment. FISCAL YEAR-END OPTION VALUES The number and value of options exercised and the number and value of all unexercised options held by each of the executive officers named in the Summary Compensation Table at December 31, 2003 are shown in the following table.
Number of Shares Value of Unexercised Underlying Unexercised In-the-Money Options at Shares Options at 12/31/03 (#) 12/31/03 ($)(1) Acquired on Value ------------------------- ------------------------- Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable ----------------- ------------ ------------ ------------------------- ------------------------- Stephen R. Morrey - - 25,000/75,000 $ 0/$0 Dennis Haggerty - - 3,500/31,500 0/0 Raymond E. Bartholomae - - 12,552/49,341 15,039/0 Mark K. Kaler - - 20,775/47,417 233,063/0 Alan F. Mcliroy - - 0/0 0/0 Edward J. Puisis - - 4,582/50,418 0/0
(1) Represents the excess of $22.41, the fair market value as of December 31, 2003 based on an independent appraisal, over the aggregate option exercise price. 78 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS. The following table sets forth information with respect to the beneficial ownership of our common shares as of December 31, 2003 by: - each person known by us to beneficially own more than 5% of our common shares; - directors; - executive officers listed in the compensation table; and - directors and executive officers as a group. We have determined beneficial ownership as reported below in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Beneficial ownership generally includes sole or shared voting or investment power with respect to the shares and includes the number of common shares subject to all outstanding options. The percentages of our outstanding common shares are based on 4,554,269 shares outstanding, except for certain parties who hold options that are exercisable into common shares within 60 days. The percentages for those parties who hold options that are exercisable within 60 days are based on the sum of 4,554,269 shares outstanding plus the number of common shares subject to options exercisable within 60 days held by them and no other person, as indicated in the notes following the table. The number of common shares beneficially owned has been determined by assuming the exercise of options exercisable into common shares within 60 days. Unless otherwise indicated, voting and investment power are exercised solely by each individual and/or a member of his household.
Number of Common Shares Beneficially % of Common Name of Beneficial Owner: Owned Shares ---------------------------- ------------------- ----------- Odyssey (1) 4,208,317 92.4 Raymond E. Bartholomae (2) 33,629 * Stephen Berger (3) 4,208,317 92.4 John A. Ciccarelli (4) 76,312 1.7 Dennis P. Haggerty (5) 5,500 * William F. Hopkins (3) 4,208,317 92.4 Mark K. Kaler (6) 48,686 1.1 Edward J. Puisis (7) 5,624 * Alan F. McIlroy 18,227 * Stephen R. Morrey (8) 39,546 * Douglas Rotatori (3) 4,208,317 92.4 Executive officers and directors as a group (9 persons) (9) 4,435,841 95.2
* Signifies less than 1%. (1) Consists of 4,208,317 common shares owned in the aggregate by Odyssey Investment Partners Fund, LP (the "Fund"), certain of its affiliates and certain co-investors (together with the Fund, "Odyssey"). Odyssey Capital Partners, LLC is the general partner of the Fund. Odyssey Investment Partners, LLC is the manager of the Fund. The principal business address for Odyssey is 280 Park Avenue, West Tower, 38th Floor, New York, New York. (2) Includes 12,552 common shares issuable upon exercise of options exercisable within 60 days. (3) Consists of 4,208,317 common shares owned in the aggregate by Odyssey. Messrs. Berger and Hopkins are managing members of the Odyssey Capital Partners, LLC and Odyssey Investment Partners, LLC and, therefore, may each be deemed to share voting and investment power with respect to the shares deemed to be beneficially owned by Odyssey. Mr. Rotatori is a member of Odyssey Investment Partners, LLC. Each of Messrs. Berger, Hopkins and Rotatori disclaim beneficial ownership of these shares. (4) Includes 37,051 common shares issuable upon exercise of options exercisable within 60 days. 79 (5) Includes 3,500 common shares issuable upon exercise of options exercisable within 60 days. (6) Includes 20,775 common shares issuable upon exercise of options exercisable within 60 days. (7) Includes 4,582 common shares issuable upon exercise of options exercisable within 60 days. (8) Includes 25,000 common shares issuable upon exercise of options exercisable within 60 days. (9) As described in note 3, Messrs. Berger and Hopkins may each be deemed to share voting and investment power with respect to the shares beneficially owned by Odyssey and Messrs. Berger, Hopkins and Rotatori disclaim beneficial ownership of the shares beneficially owned by Odyssey. Excluding the shares deemed to be owned by Odyssey, all executive officers and directors as a group beneficially own 215,841 common shares. EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining Number of securities to be available for future issuance issued upon exercise of Weighted-average exercise under equity compensation outstanding options, price of outstanding plans (excluding securities warrants and rights options, warrants and rights reflected in column (a)) Plan Category (a) (b) (c) --------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 643,839 $ 25.03 75,415 --------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders - - - --------------------------------------------------------------------------------------------------------------------- Total 643,839 $ 25.03 75,415 ---------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. EMPLOYMENT AND ROLLOVER AGREEMENTS In connection with the 2000 recapitalization, we entered into employment and other "rollover" agreements with John A. Ciccarelli, Raymond E. Bartholomae and Mark K. Kaler, each of whom is or was an executive officer, and with Alan F. Mcliroy, our former chief financial officer. Generally, the "rollover" agreements required each executive officer to retain common shares and, in most cases, stock options, with a specified aggregate value following the recapitalization. In some cases, the executive officer has agreed to exercise stock options in order to obtain some of the common shares, which he has agreed to retain, following the recapitalization. These agreements provided that if the executive officer exercised stock options in order to obtain some of the common shares he is required to retain and he so requested, we made a non-interest bearing, recourse loan to him in an amount equal to the exercise price of the options plus the estimated federal and state income tax liability he incurred in connection with the exercise. If the executive officer purchased some of the common shares he is required to retain and he so requested, we made a 6.39% interest deferred recourse loan to him. These loans are secured by a pledge of the shares issued. As of December 31, 2003, the amounts outstanding were $69,852 for Mr. Ciccarelli, $374,697 for Mr. Morrey, $556,455 for Mr. Bartholomae, $288,487 for Mr. Kaler, and $177,379 for Mr. Mcliroy. These amounts were also the largest amounts outstanding for these loans during the period January 1, 2000 through December 31, 2003, except for Mr. Mcliroy, for whom the largest amount was $289,159. 80 ODYSSEY FINANCIAL SERVICES During 2003, we reimbursed Odyssey for $315,000 of out-of-pocket expenses for travel, lodging and meals. MANAGEMENT STOCKHOLDERS' AGREEMENT We, along with Odyssey and our employee stockholders, including our executive officers, are parties to a Management Stockholders' Agreement, which is described in more detail under Item 11 above. 81 PART IV ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The services performed by Deloitte & Touche LLP in 2003 and 2002 were pre-approved by the Audit Committee. The Audit Committee requires any requests for audit, audit-related, tax, or any other services to be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval. In addition, although not required by the rules and regulations of the SEC, the Audit Committee requests a range of fees associated with each proposed service. Providing a range of fees for a service permits appropriate oversight and control of the independent auditor relationship, while permitting us to receive immediate assistance from the independent auditor when time is of the essence. We retained Deloitte & Touche LLP to audit our consolidated financial statements for the years ended 2003 and 2002. To minimize relationships that could appear to impair the objectivity of Deloitte & Touche, our audit committee has restricted the non-audit services that Deloitte & Touche may provide to us primarily to audit services and tax services. In considering the nature of the services provided by the independent auditor, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and our management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002. The aggregate fees billed for professional services by Deloitte & Touche LLP, the Company's independent accountants, in 2003 and 2002 for these various services were:
TYPE OF FEES 2003 2002 ------------------ --------- -------- Audit fees (1) $ 645.9 $ 196.7 Audit-related fees 197.8 42.4 Tax fees 855.2 213.8 --------- -------- Total fees $ 1,698.9 $ 452.9 ========= ========
(1) Audit fees for 2003 include $345.7 of costs related to the 2000, 2001, and 2002 restatements as disclosed in the 2002 10-K/A. The aggregate fees billed for professional services by Arthur Andersen LLP, the Company's independent accountants for a portion of 2002, for these various services were:
TYPE OF FEES 2002 ------------------ --------- Audit fees $ - Audit-related fees 46.5 Tax fees 356.5 --------- Total fees $ 403.0 =========
In the above tables, in accordance with new SEC definitions and rules, "audit fees" are fees we paid Deloitte & Touche and Arthur Anderson for professional services for the audit of our consolidated financial statements included in Form 10-K and review of financial statements included in Form 10-Qs, or for comfort letters, statutory and regulatory audits, consents and other services related to SEC matters; "audit-related fees" are fees billed by Deloitte & Touche and Arthur Andersen for assurance 82 and related services that are reasonably related to the performance of the audit or review of our financial statements, due diligence associated with mergers/acquisitions, financial accounting and reporting consultations, and information systems reviews; "tax fees" are fees for tax compliance, tax advice, and tax planning. Tax compliance services are services rendered based upon facts already in existence or transactions that have already occurred to document, compute, and obtain government approval for amounts to be included in tax filings. Tax planning and advice are services rendered with respect to proposed transactions or that alter a transaction to obtain a particular tax result. 83 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements of the Company and subsidiaries are incorporated by reference as part of this Report under Item 8. Independent Auditors Report. Consolidated Balance Sheets as of December 31, 2003 and 2002. Consolidated Statements of Operations for the years ended December 31, 2003, 2002, and 2001. Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001. Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002, and 2001. Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts (at Item 8 of this Report) All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (a)(3) Exhibits. See Index to Exhibits following the signature pages to this Report for a list of exhibits. (b) Reports on Form 8-K. During the quarter ended December 31, 2003, we filed the following Current Reports on Form 8-K: Amendment No. 1 to Current Report on Form 8-K dated October 14, 2003 (amending our Current Report on Form 8-K dated August 13, 2003) reporting under Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits) the historical financial information with respect to Safway Formwork Systems, L.L.C. required under Item 7(a), which was not included in the initial filing. Current Report on Form 8-K dated October 15, 2003 reporting under Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition) that we had issued a press release announcing our release of historical audited financial information of Safway Formwork Systems, L.L.C. Current Report on Form 8-K dated November 11, 2003 reporting under Item 12 (Results of Operations and Financial Condition) that we had issued a press release announcing our summary financial results for the third quarter and first nine months of 2003. Amendment No. 2 to Current Report on Form 8-K dated December 10, 2003 (amending our Current Report on Form 8-K dated August 13, 2003) reporting under Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits) the pro forma financial information required under Item 7(b), which was not included in the initial filing. 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Dayton Superior Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAYTON SUPERIOR CORPORATION March 30, 2004 By /s/ Stephen R. Morrey ----------------------------------- Stephen R. Morrey President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Dayton Superior Corporation and in the capacities and on the dates indicated.
NAME TITLE DATE /s/John A. Ciccarelli Chairman of the Board of Directors March 30, 2004 --------------------- John A. Ciccarelli /s/Stephen R. Morrey President, Chief Executive Officer and Director March 30, 2004 --------------------- Stephen R. Morrey /s/Edward J. Puisis Vice President and Chief Financial Officer March 30, 2004 --------------------- (Principal Financial Officer) Edward J. Puisis /s/Thomas W. Roehrig Vice President of Corporate Accounting March 30, 2004 --------------------- (Principal Accounting Officer) Thomas W. Roehrig /s/Stephen Berger Director March 30, 2004 --------------------- Stephen Berger /s/William F. Hopkins Director March 30, 2004 --------------------- William F. Hopkins /s/Douglas Rotatori Director March 30, 2004 --------------------- Douglas Rotatori
85 INDEX OF EXHIBITS
Exhibit No. Description (2) ACQUISITION AGREEMENTS 2.1 Asset Purchase Agreement, dated as of June 30, 2003, by and among the Company and Symons Corporation, and Safway Formworks Systems L.L.C. and Safway Services, Inc. [Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on August 13, 2003] + 2.1.1 Amendment One, dated as of July 15, 2003, to the Asset Purchase Agreement among the Company and Symons Corporation, and Safway Formworks Systems L.L.C. and Safway Services, Inc. [Incorporated by reference to Exhibit 2.2 to the Company's Form 8-K filed on August 13, 2003] + 2.1.2 Amendment Two, dated as of July 29, 2003, to the Asset Purchase Agreement among the Company and Symons Corporation, and Safway Formworks Systems L.L.C. and Safway Services, Inc. [Incorporated by reference to Exhibit 2.3 to the Company's Form 8-K filed on August 13, 2003] + (3) ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Amended Articles of Incorporation of the Company [Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-41392)] + 3.2 Code of Regulations of the Company (as amended) [Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-41392)] + (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Form of Junior Convertible Subordinated Indenture between Dayton Superior Corporation and Firstar Bank, N.A., as Indenture Trustee [Incorporated by reference to Exhibit 4.2.3 to the Company's Registration Statement on Form S-3 (Reg. 333-84613)] + 4.1.1 First Supplemental Indenture dated January 17, 2000, between Dayton Superior Corporation and Firstar Bank, N.A., as Trustee [Incorporated by reference to Exhibit 4.6.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999] + 4.1.2 Form of Junior Convertible Subordinated Debenture [Incorporated by reference to Exhibit 4.2.3 to the Company's Registration Statement on Form S-3 (Reg. 333-84613)] +
86 4.2 Indenture dated June 16, 2000 among the Company, the Guarantors named therein, as guarantors, and United States Trust Company of New York, as trustee, relating to $170,000,000 in aggregate principal amount of 13% Senior Subordinated Notes due 2009 and registered 13% Senior Subordinated Notes due 2009 [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (Reg. 333-41392)] + 4.2.1 First Supplemental Indenture dated as of August 3, 2000. [Incorporated by reference to Exhibit 4.5.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001] + 4.2.2 Second Supplemental Indenture dated as of January 4, 2001. [Incorporated by reference to Exhibit 4.5.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001] + 4.2.3 Third Supplemental Indenture dated as of June 19, 2001. [Incorporated by reference to Exhibit 4.5.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001] + 4.2.4 Fourth Supplemental Indenture dated as of September 30, 2003. ** 4.3 Specimen Certificate of 13% Senior Subordinated Notes due 2009 [Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Reg. 333-41392)] + 4.4 Specimen Certificate of the registered 13% Senior Subordinated Notes due 2009 [Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Reg. 333-41392)] + 4.5 Warrant Agreement dated as of June 16, 2000 between the Company and United States Trust Company of New York, as Warrant Agent ** 4.6 Warrant Shares Registration Rights Agreement dated as of June 16, 2000 among the Company and the Initial Purchasers ** 4.7 Tag-Along Sales Agreement dated as of June 16, 2000 among the Company, Odyssey Investment Partners Fund, LP and the Initial Purchasers ** 4.8 Senior Second Secured Notes Indenture with respect to the 10 3/4% Senior Second Secured Notes due 2008, among the Company, the Guarantors named therein and The Bank of New York, as Trustee, dated June 9, 2003 [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] + 4.9 Form of 10 3/4% Senior Second Secured Note due 2008 (included in Exhibit 4.5) + 4.10 Second Amended and Restated Security Agreement, among the Company, certain subsidiaries of the Company and The Bank of New York, as Collateral Agent and as Trustee, dated January 30, 2004 [Incorporated by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] +
87 4.11 Second Amended and Restated Pledge Agreement, among the Company, Trevecca Holdings, Inc. and The Bank of New York, as Collateral Agent and as Trustee, dated January 30, 2004 [Incorporated by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] + 4.12 Credit Agreement among the Company, the other persons designated as Credit Parties, General Electric Capital Corporation, as Agent, L/C Issuer and a Lender, the other Lenders and GECC Capital Markets Group, Inc., as Lead Arranger, dated January 30, 2004 [Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] + 4.13 Security Agreement among the Company, certain subsidiaries of the Company and General Electric Capital Corporation, as Agent, dated January 30, 2004 [Incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] + 4.14 Pledge Agreement among the Company, Trevecca Holdings, Inc. and General Electric Capital Corporation, as Agent, dated January 30, 2004 [Incorporated by reference to Exhibit 4.9 to the Company's Registration Statement on Form S-4 (Reg. 333-107071)] + (10) MATERIAL CONTRACTS 10.1 Management Incentive Plan [Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998] +* 10.2 Amended and Restated Employment Agreement dated as of July 15, 2002 by and between Dayton Superior Corporation and John A. Ciccarelli [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2002] +* 10.3 Employment Agreement dated as of January 19, 2000 between the Company and Mark K. Kaler, as amended effective June 16, 2000 [Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-4 (Reg. 333-41392)] +* 10.3.1 Letter Agreement dated May 13, 2002 between Dayton Superior Corporation and Mark K. Kaler [Incorporated by reference to Exhibit 10.7.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002] +* 10.4 Employment Agreement dated effective June 12, 2002 by and between Dayton Superior Corporation and Stephen R. Morrey [Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2002] +* 10.4.1 Secured Promissory Note dated July 22, 2002 between Dayton Superior Corporation and Stephen R. Morrey. [Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2002] +*
88 10.4.2 Secured Promissory Note dated July 22, 2002 between Dayton Superior Corporation and Stephen R. Morrey. [Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2002] +* 10.4.3 Repayment and Stock Pledge Agreement dated as of July 22, 2002 between Dayton Superior Corporation and Stephen R. Morrey. [Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2002] +* 10.5 Employment Agreement between the Company and Edward J. Puisis [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated November 10, 2003] +* 10.6 Letter Agreement dated August 13, 2003 between Raymond Bartholomae and the Company [Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated November 10, 2003] +* 10.7 Letter Agreement dated August 13, 2003 between Peter Astrauskas and the Company [Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated November 10, 2003] +* 10.8 Amendment dated October 3, 2003 to Letter Agreement dated August 13, 2003 between Peter Astrauskas and the Company [Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated November 10, 2003] +* 10.9 Management Stockholder's Agreement dated June 16, 2000 by and among the Company, Odyssey Investment Partners Fund, LP and the Management Stockholders named therein [Incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-4 (Reg. 333-41392)] +* 10.10 Dayton Superior Corporation 2000 Stock Option Plan [Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001] +* 10.10.1 First Amendment to 2000 Stock Option Plan of Dayton Superior Corporation [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001] +* 10.10.2 Second Amendment to 2000 Stock Option Plan of Dayton Superior Corporation dated July 15, 2002 [Incorporated by reference to Exhibit 10.13.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002] +* 10.10.3 Third Amendment to 2000 Stock Option Plan of Dayton Superior Corporation dated October 23, 2002[Incorporated by reference to Exhibit 10.13.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002] +* 10.10.4 Fourth Amendment to 2000 Stock Option Plan of Dayton Superior Corporation dated February 10, 2004. * **
89 10.10.5 Form of Amended and Restated Stock Option Agreement entered into between Dayton Superior Corporation and certain of its executive officers [Incorporated by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002] +* (14) CODE OF ETHICS 14 Code of Ethics for Senior Financial Officers ** (21) SUBSIDIARIES OF THE REGISTRANT 21.1 Subsidiaries of the Company ** (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 Sarbanes-Oxley Section 1350 Certification of President and Chief Executive Officer ** 32.2 Sarbanes-Oxley Section 1350 Certification of Vice President and Chief Financial Officer **
---------------------------- * Compensatory plan, contract or arrangement in which one or more directors or named executive officers participate. ** Filed herewith + Previously filed 90