DAYTON SUPERIOR FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTER ENDED September 30, 2005		COMMISSION FILE NUMBER 1-11781

DAYTON SUPERIOR CORPORATION

(Exact name of registrant as specified in its charter)


OHIO		31-0676346

(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

7777 Washington Village Dr., Suite 130
Dayton, Ohio		45459

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 937-428-6360

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed from last report)

Indicate by mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

4,575,885 Common Shares were outstanding as of November 14, 2005

TABLE OF CONTENTS


Part I. — Financial Information
	Item 1 — Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. — Other Information
	Item 6. Exhibits
SIGNATURES
INDEX TO EXHIBITS
EX-31.1 Rule 13A-14(A)/15D-14(A) Certification of CEO
EX-31.2 Rule 13A-14(A)/15D-14(A) Certification of CFO
EX-32.1 Section 1350 Certification of President & CEO
EX-32.2 Section 1350 Certification of Vice President & CFO

Part I. — Financial Information

Item 1 — Financial Statements

Dayton Superior Corporation and Subsidiary
Condensed Consolidated Balance Sheets
As of September 30, 2005 and December 31, 2004
(Amounts in thousands)
(Unaudited)


	September 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash	$	1,352		$	4,504
Accounts receivable, net of allowances for doubtful accounts and sales returns and allowances of $4,506 and $5,379		73,188			68,031
Inventories		64,435			59,389
Prepaid expenses and other current assets		3,636			8,392
Prepaid income taxes		426			365
Deferred income taxes		5,467			5,465

Total current assets		148,504			146,146


Rental equipment, net of accumulated depreciation of $48,991 and $38,756		69,959			69,662


Property, plant and equipment		112,228			118,385
Less accumulated depreciation		(60,799	)		(58,927	)

Net property, plant and equipment		51,429			59,458


Goodwill		107,643			107,643
Intangible assets, net of accumulated amortization		5,569			7,185
Other assets		2,259			4,044

Total assets	$	385,363		$	394,138


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt	$	2,403		$	2,455
Accounts payable		21,003			21,086
Accrued compensation and benefits		10,748			12,700
Accrued interest		8,316			6,746
Accrued freight		4,340			3,722
Current portion of deferred gain on sale-leaseback		3,336			—
Other accrued liabilities		5,222			4,154

Total current liabilities		55,368			50,863

Revolving credit facility		69,725			58,800
Other long-term debt, net of current portion		317,148			316,389
Deferred gain on sale-leaseback, net of current portion		1,796			—
Deferred tax liability		17,025			17,473
Other long-term liabilities		6,371			6,143

Total liabilities		467,433			449,668


Shareholders’ deficit:
Common shares		116,037			116,024
Loans to shareholders		(2,432	)		(2,767	)
Treasury shares, at cost, 51,293 and 36,747 shares		(1,509	)		(1,184	)
Cumulative other comprehensive loss		(758	)		(1,137	)
Accumulated deficit		(193,408	)		(166,466	)

Total shareholders’ deficit		(82,070	)		(55,530	)

Total liabilities and shareholders’ deficit	$	385,363		$	394,138

The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.

Dayton Superior Corporation and Subsidiary
Consolidated Statements of Operations
For The Three and Nine Fiscal Months Ended September 30, 2005 and October 1, 2004
(Amounts in thousands)
(Unaudited)


	Three Fiscal Months Ended						Nine Fiscal Months Ended
	September 30,			October 1,			September 30,			October 1,
	2005			2004			2005			2004
Product sales	$	96,557		$	96,640		$	269,643		$	273,101
Rental revenue		13,816			11,449			35,961			30,792
Used rental equipment sales		3,698			6,459			11,953			14,978

Net sales		114,071			114,548			317,557			318,871


Product cost of sales		75,018			71,442			208,030			204,948
Rental cost of sales		9,594			8,304			27,389			23,852
Used rental equipment cost of sales		1,270			2,743			4,188			5,956

Cost of sales		85,882			82,489			239,607			234,756


Product gross profit		21,539			25,198			61,613			68,153
Rental gross profit		4,222			3,145			8,572			6,940
Used rental equipment gross profit		2,428			3,716			7,765			9,022

Gross profit		28,189			32,059			77,950			84,115

Selling, general and administrative expenses		22,736			21,757			68,993			66,294
Facility closing and severance expenses		211			429			542			1,393
(Gain) loss on disposals of property, plant, and equipment		(543	)		(464	)		(1,629	)		(386	)
Amortization of intangible assets		180			302			486			857


Income from operations		5,605			10,035			9,558			15,957

Other expenses
Interest income		(24	)		(14	)		(146	)		(42	)
Interest expense		12,207			11,937			36,563			35,549
Loss on early extinguishment of long-term debt		—			—			—			842
Other expense (income)		79			(45	)		84			—


Loss before benefit for income taxes		(6,657	)		(1,843	)		(26,943	)		(20,392	)

Benefit for income taxes		—			—			—			—


Net loss	$	(6,657	)	$	(1,843	)	$	(26,943	)	$	(20,392	)

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.

Dayton Superior Corporation and Subsidiary
Consolidated Statements of Cash Flows
For The Nine Fiscal Months Ended September 30, 2005 and October 1, 2004
(Amounts in thousands)
(Unaudited)


	Nine Fiscal Months Ended
	September 30,			October 1,
	2005			2004
Cash Flows From Operating Activities:
Net loss	$	(26,943	)	$	(20,392	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		22,750			20,369
Amortization of intangible assets		486			857
Loss on early extinguishment of long-term debt		—			842
Deferred income taxes		(448	)		(103	)
Amortization of deferred financing costs and debt discount		3,942			3,914
Amortization of deferred gain from sale-leaseback		(1,483	)		—
Gain on sales of rental equipment		(7,765	)		(9,022	)
(Gain) loss on sales of property, plant and equipment		(456	)		(386	)
Changes in assets and liabilities:
Accounts receivable		(5,157	)		(12,832	)
Inventories		(5,046	)		(13,979	)
Accounts payable		(83	)		3,024
Accrued liabilities and other long-term liabilities		1,456			(259	)
Prepaid expenses and other assets		6,375			(5,913	)

Net cash used in operating activities		(12,372	)		(33,880	)


Cash Flows From Investing Activities:
Property, plant and equipment additions		(4,187	)		(3,819	)
Proceeds from sales of property, plant and equipment		1,287			689
Rental equipment additions		(20,814	)		(16,671	)
Proceeds from sales of rental equipment		11,953			14,978
Acquisition		—			(245	)

Net cash used in investing activities		(11,761	)		(5,068	)


Cash Flows From Financing Activities:
Repayments of long-term debt including the revolving credit facility		(99,179	)		(80,314	)
Borrowings under revolving credit facility		108,125			119,804
Financing costs incurred		(3	)		(2,554	)
Proceeds from sale-leaseback		11,636			—
Purchase of treasury shares		(325	)		—
Changes in loans to shareholders		335			(27	)
Issuance of common shares		13			73

Net cash provided by financing activities		20,602			36,982


Effect of Exchange Rate Changes on Cash		379			(29	)


Net decrease in cash		(3,152	)		(1,995	)

Cash, beginning of period		4,504			1,995

Cash, end of period	$	1,352		$	—

Supplemental Disclosures:
Cash paid for income taxes	$	435		$	573
Cash paid for interest		31,051			30,578
Purchases of equipment on capital leases		—			389

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.

Dayton Superior Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(Unaudited)

(1)		Consolidated Financial Statements

		The interim consolidated financial statements included herein have been prepared by the Company, without audit, and include, in the opinion of management, all adjustments necessary to state fairly the information set forth therein. Any such adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s annual financial statements for the year ended December 31, 2004. The interim results may not be indicative of future periods.

(2)		Accounting Policies

		The interim consolidated financial statements have been prepared in accordance with the accounting policies described in the notes to the Company’s consolidated financial statements for the year ended December 31, 2004. While management believes that the procedures followed in the preparation of interim financial information are reasonable, the accuracy of some estimated amounts is dependent upon facts that will exist or calculations that will be made at year end. Examples of such estimates include changes in the deferred tax accounts and management bonuses, among others. Any adjustments pursuant to such estimates during the fiscal quarter were of a normal recurring nature.

	(a)		Fiscal Quarter — The Company’s fiscal year end is December 31. The Company’s fiscal quarters are defined as the 13-week periods ending on a Friday near the end of March, June and September.

	(b)		Inventories — The Company values all inventories at the lower of first-in, first-out (“FIFO”) cost or market. The Company provides net realizable value reserves which reflect the Company’s best estimate of the excess of the cost of potential obsolete and slow moving inventory over the expected net realizable value.

			Following is a summary of the components of inventories as of September 30, 2005 and December 31, 2004:


	September 30, 2005		December 31, 2004
Raw materials	$	15,153	$	21,663
Work in progress		3,287		2,588
Finished goods		45,995		35,138

Total Inventory	$	64,435	$	59,389

	(c)		New Accounting Pronouncements — In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and waste material (spoilage). This statement requires those items to be recognized as current period charges. The Company will be required to comply with the provision of SFAS No. 151 as of the first fiscal year beginning after June 15, 2005. The Company has not determined the impact that SFAS No. 151 will have on its financial statements.

			In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This statement requires that the cost resulting from all share-based payment transactions are recognized in the financial statements. That cost will be measured based on the fair value of the equity of liability

			instruments issued. SFAS 123 (R) is effective as of the beginning of the first fiscal year beginning after June 15, 2005. The Company is currently evaluating this pronouncement and does not anticipate a material impact on the Company’s results of operations.

			In June 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections.” The statement applies to all voluntary changes in accounting principle, and changes the requirement for accounting for and reporting a change in accounting principle. This statement is a replacement for Accounting Principles Board Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after May 31, 2005. The company does not anticipate a material impact on the results of operations from the adoption of this pronouncement.

	(d)		Stock Options — The Company measures compensation cost for stock options issued using the intrinsic value-based method of accounting in accordance with Accounting Principles Board Opinion (APB) No. 25. If compensation cost for the Company’s stock options had been determined based on the fair value method of SFAS No. 123, ''Accounting for Stock-Based Compensation,’’ the Company’s net loss and net loss per share would have been increased to the pro forma amounts as follows:


		Three fiscal months ended						Nine fiscal months ended
		September			October 1,			September 30,			October 1,
		30, 2005			2004			2005			2004
Net income (loss)	As Reported	$	(6,657	)	$	(1,843	)	$	(26,943	)	$	(20,392	)
	Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect		(72	)		(61	)		(216	)		(186	)

	Pro Forma	$	(6,729	)	$	(1,904	)	$	(27,159	)	$	(20,578	)

(e)

Reclassifications — Certain reclassifications have been made to the 2004 amounts to conform to their 2005 classifications.

(3)

Credit Arrangements

On January 30, 2004, the Company established an $80,000 senior secured revolving credit facility, which was used to refinance the previous $50,000 facility. The Company recorded a loss on the early extinguishment of long-term debt of $842 due to the expensing of deferred financing costs on the previous facility. The facility was subsequently increased to $95,000 and matures on January 30, 2007. The credit facility has no financial covenants. Availability of borrowings is limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment, less $10,000. At September 30, 2005, the entire $95,000 was available and the Company had an outstanding balance of $69,725 at a weighted average interest rate of 6.5% as compared with $58,800 outstanding at December 31, 2004. Outstanding letters of credit were $7,201 and available borrowings were $18,074 under this revolving credit facility at September 30, 2005. The credit facility is secured by substantially all assets of the Company.

The average borrowings, maximum borrowings and weighted average interest rates on the revolving credit facility and its predecessor for the periods indicated were as follows:


	Three fiscal months ended						Nine fiscal months ended
	September			October 1,			September			October 1,
	30, 2005			2004			30, 2005			2004
Revolving Credit Facility:
Average borrowings	$	66,774		$	63,198		$	65,841		$	51,763
Maximum borrowing		71,900			71,900			77,500			71,900
Weighted average interest rate		6.4	%		4.4	%		6.0	%		4.4	%

Following is a summary of the Company’s other long-term debt as of September 30, 2005 and December 31, 2004:


	September 30,			December 31,
	2005			2004
Senior Second Secured Notes, interest rate of 10.75%	$	165,000		$	165,000
Debt discount on Senior Second Secured Notes		(5,164	)		(6,194	)
Senior Subordinated Notes, interest rate of 13.0%		154,729			154,729
Debt discount on Senior Subordinated Notes		(6,459	)		(7,397	)
Notes payable to seller of Safway, non-interest bearing, accreted at 6.0% to 14.5%		7,351			7,794
Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand		1,068			1,102
Capital lease obligations		3,026			3,794
City of Parsons, Kansas Economic Development Loan, interest rate of 7.0%		—			16

Total long-term debt		319,551			318,844
Less current maturities		(2,403	)		(2,455	)

Long-term portion	$	317,148		$	316,389

As of September 30, 2005, the senior second secured notes (the “Senior Notes”) have a principal amount of $165,000 and 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 estimated fair value of the notes, based on most recent trade, was $166,650 as of September 30, 2005. The senior second secured notes are secured by substantially all assets of the Company.

As of September 30, 2005, the Senior Subordinated Notes (the “Notes”) have a principal amount of $154,729 and mature in June 2009. The Notes were issued at a discount, which is being accreted to the face value using the effective interest method and is reflected as interest expense. The Notes were issued with warrants that allow the holders to purchase 117,276 of the Company’s Common Shares for $0.01 per share. The estimated fair value of the notes, based on most recent trade, was $123,783 as of September 30, 2005.

(4)

Stock Option Plans

The Company’s 2000 Stock Option Plan permits the grant of stock options to purchase common shares. Options that are cancelled may be reissued. The Stock Option Plan constitutes the amendment and merger into one plan of four previous option plans and governs options that remained outstanding following our recapitalization in 2000, as well as new option grants. The terms of the option grants are ten years from the date of grant.

Generally, between 10% and 25% of the options have a fixed vesting period of fewer than three years. The remaining options are eligible to become exercisable in installments over one to five years from the date of

grant based on the Company’s performance, but, in any case, become exercisable no later than nine years after the grant date.

These options may be subject to accelerated vesting upon certain change in control events based on Odyssey Investment Partners, LLC return on investment. Under the Stock Option Plan, the option exercise price equals the stock’s market price on date of grant.

A summary of the status of the Company’s stock option plans at September 30, 2005, as well as changes during the fiscal nine months then ended is presented in the table below:


				Weighted Average
	Number of			Exercise Price Per
	Shares			Share
Outstanding at December 31, 2004		682,978		$	26.13
Cancelled / expired		(100,000	)		27.50

Outstanding at September 30, 2005		582,978		$	24.27

(5)

Retirement Plans

The Company’s pension plans cover virtually all hourly employees not covered by multi-employer pension plans and provide benefits of stated amounts for each year of credited service. The Company funds such plans at a rate that meets or exceeds the minimum amounts required by applicable regulations. The plans’ assets are primarily invested in mutual funds comprised primarily of common stocks and corporate and U.S. government obligations.

The Company provides postretirement health care benefits on a contributory basis and life insurance benefits for salaried and hourly employees who retired from the Company’s Symons subsidiary prior to May 1, 1995. As of January 1, 2005, there were 51 people receiving postretirement health care benefits and 88 people receiving life insurance benefits.

The following are the components of Net Periodic Benefit Cost for the nine months ended September 30, 2005 and October 1, 2004:


							Symons			Symons
	Pension			Pension			Postretirement			Postretirement
	Benefits 2005			Benefits 2004			Benefits 2005			Benefits 2004
Service cost	$	519		$	448		$	0		$	0
Interest cost		491			447			20			27
Expected return on plan assets		(555	)		(449	)		0			0
Amortization of prior service cost		11			4			18			18
Amortization of net loss		68			58			(8	)		0

Net periodic benefit cost	$	534		$	508		$	30		$	45

As of September 30, 2005, $710 of contributions have been made in 2005. The Company presently anticipates contributing an additional $221 to fund its pension plan in 2005 for a total of $931.

(6)

Segment Reporting

The Company has three reporting segments to monitor gross profit by sales type: product sales, rental revenue, and used rental equipment sales. These types of sales are differentiated by their source and gross margin percentage of sales.

Product sales represent sales of new products carried in inventories on the balance sheet. Cost of goods sold for product sales include material, labor, overhead, and freight.

Rental revenues are derived from leasing the rental equipment, and are recognized ratably over the term of the lease. Cost of goods sold for rental revenues include depreciation of the rental equipment, maintenance of the rental equipment, and freight.

Sales of used rental equipment are sales of rental equipment after a period of generating rental revenue. Cost of goods sold for sales of used rental equipment is the net book value of the equipment.

All other expenses, as well as assets and liabilities, are not tracked by sales type. Export sales and sales by non-U.S. affiliates is not significant.

Information about the gross profit of each sales type and the reconciliations to the consolidated amounts for the three and nine fiscal months ended September 30, 2005 and October 1, 2004 follows. The 2004 amounts have been reclassified to conform to the 2005 classification.


	Three Fiscal Months Ended				Nine Fiscal Months Ended
	September 30,				September 30,		October 1,
	2005		October 1, 2004		2005		2004
Product sales	$	96,557	$	96,640	$	269,643	$	273,101
Rental revenue		13,816		11,449		35,961		30,792
Used rental equipment sales		3,698		6,459		11,953		14,978

Net sales		114,071		114,548		317,557		318,871


Product cost of sales		75,018		71,442		208,030		204,948
Rental cost of sales		9,594		8,304		27,389		23,852
Used rental equipment cost of sales		1,270		2,743		4,188		5,956

Cost of sales		85,882		82,489		239,607		234,756


Product gross profit		21,539		25,198		61,613		68,153
Rental gross profit		4,222		3,145		8,572		6,940
Used rental equipment gross profit		2,428		3,716		7,765		9,022

Gross profit	$	28,189	$	32,059	$	77,950	$	84,115


Depreciation Expense:
Product sales (property, plant, and equipment)	$	1,466	$	1,343	$	4,383	$	4,276
Rental Revenue (rental equipment)		5,668		4,746		16,329		14,146
Corporate		626		790		2,038		1,947

Total depreciation	$	7,760	$	6,879	$	22,750	$	20,369

(7)

Facility Closing and Severance Expenses

During 2003, the Company approved and began implementing a plan to exit certain of its manufacturing and distribution facilities and to reduce overall headcount by approximately 120 in order to keep its cost structure in alignment with net sales. There has been no activity under this plan during 2005. Activity for this plan for the year ended December 31, 2004 was as follows:


	Involuntary			Lease			Relocation		Other Post-
	Termination			Termination			of		Closing
	Benefits			Costs			Operations		Costs			Total
Balance, January 1, 2004	$	—		$	—		$	—	$	—		$	—
Facility closing and severance expenses		63			1			—		61			125
Items charged against reserve		(63	)		(1	)		—		(61	)		(125	)

Balance, December 31, 2004	$	—		$	—		$	—	$	—		$	—

There is no expected future expense for commitments under this plan.

During 2004, the Company continued to execute its plan to exit additional distribution facilities and to reduce overall headcount by approximately 75 in order to keep its cost structure in alignment with net sales. Activity for this plan for the nine months ended September 30, 2005 was as follows:


	Involuntary			Lease			Relocation			Other Post-
	Termination			Termination			of			Closing
	Benefits			Costs			Operations			Costs			Total
Balance, January 1, 2004	$	—		$	—		$	—		$	—		$	—
Facility closing and severance expenses		611			307			595			398			1,911
Items charged against reserve		(611	)		(187	)		(595	)		(398	)		(1,791	)

Balance, December 31, 2004		—			120			—			—			120
Facility closing and severance expenses		82			154			4			134			374
Items charged against reserve		(82	)		(208	)		(4	)		(134	)		(428	)

Balance, September 30, 2005	$	—		$	66		$	—		$	—		$	66

The total expected future expense for commitments under this plan is approximately $100 and will be expensed in accordance with SFAS No. 146.

During 2005, the Company approved and implemented a plan to change its management structure, which resulted in a headcount reduction of two. Activity for this plan for the nine months ended September 30, 2005 was as follows:


	Involuntary		Lease		Relocation		Other Post-
	Termination		Termination		of		Closing
	Benefits		Costs		Operations		Costs		Total
Balance, January 1, 2005	$	—	$	—	$	—	$	—	$	—
Facility closing and severance expenses		168		—		—		—		168
Items charged against reserve		—		—		—		—		—

Balance, September 30, 2005	$	168	$	—	$	—	$	—	$	168

There is no expected future expense for commitments under this plan.

(8)

Benefit for Income Taxes

The Company has recorded a non-cash valuation allowance to reduce its deferred tax asset related to net operating loss carryforwards to zero, as estimated levels of future taxable income are less than the amount needed to realize this asset. If such estimates change in the future, the valuation allowance will be decreased or increased appropriately, resulting in a non-cash increase or decrease to net income.

(9)

Sale-Leaseback Transaction

In April 2005, the Company sold its manufacturing facility in Des Plaines, Illinois to an unrelated party and immediately leased it back from the purchaser. The net proceeds after commissions and other normal closing costs were $11,636. The lease has an initial term of 24 months, with an optional renewal for an additional 12 months and the Company is obligated to pay rent totaling approximately $1,400 over the initial lease term and approximately $725 over the renewal term. In addition, the Company is responsible for all property taxes, operating expenses and insurance on the leased property. The Company realized a gain of $6,673 on the sale of the facility, which was initially deferred and is being recognized ratably over the initial term of the lease.

(10)

Subsequent Event

On October 12, 2005, the Company completed the transactions contemplated by a Real Estate Purchase and Sale Agreement dated August 2, 2005, as amended (the “Purchase Agreement”), with STAG Capital Partners, LLC, an unrelated party. Pursuant to the Purchase Agreement, the Company sold its manufacturing facilities in Aurora, Illinois; Kansas City, Kansas; and Parsons, Kansas and its distribution center in Miamisburg, Ohio to four different affiliates of STAG Capital Partners, LLC. At the same time, the Company also entered into four separate Leases, each dated October 12, 2005, with those affiliates (the “Leases”) under which the Company immediately leased the four facilities back. The aggregate sale price of the facilities under the Purchase Agreement was $12,000, which was paid at the closing. The net proceeds after commissions and other normal closing costs were approximately $11,500. The principal terms of the Leases are as follows:

The terms are 10 years (Kansas City, Kansas), 11 years (Aurora, Illinois), 12 years (Miamisburg, Ohio) and 13 years (Parsons, Kansas), respectively. Each Lease also permits the Company to renew the Lease for up to two five-year renewal terms.

The rent the Company pays under the Leases increases annually during the initial term. The annual rent payable during the initial year of each Lease and during the last year of the initial term of each the Leases is as follows: Kansas City, Kansas ($226; $270); Aurora, Illinois ($364; $444); Miamisburg, Ohio ($431; $535); and Parsons, Kansas ($240; $304). In addition, the Company is responsible for all property taxes, operating expenses (including maintenance expenses) and insurance on the leased property. The annual rent the Company will pay during the renewal terms will be the higher of the rent in the last year of the initial term or the fair market rent, determined as provided in the Lease.

The Company expects to realize an aggregate gain of approximately $1,100 on the sale of these facilities, comprised of a.) gains of approximately $4,500, which the Company initially will defer and recognize ratably over the term of the applicable Leases, and b.) a loss of approximately $3,400, which will be recognized immediately.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We believe we are the largest North American manufacturer and distributor of metal accessories and forms used in concrete construction, and a leading manufacturer of metal accessories used in masonry construction in terms of revenues. We operate in two sectors of the construction industry: infrastructure construction, such as highways, bridges, utilities, water and waste treatment facilities and airport runways, and non-residential building, such as schools, stadiums, prisons, retail sites, commercial offices, hotels and manufacturing facilities. We have expanded our business units through acquisitions.

Effective December 31, 2004, all of Dayton Superior’s wholly-owned domestic subsidiaries (consisting of Symons Corporation; Aztec Concrete Accessories, Inc.; Dur-O-Wal, Inc.; Trevecca Holdings, Inc.; Dayton Superior Specialty Chemical Corp.; and Southern Construction Products, Inc.) were merged into Dayton Superior Corporation. Dayton Superior Corporation is the surviving corporation in the merger and now directly operates the businesses that were being operated by the domestic subsidiaries immediately prior to the merger.

As a result of the merger, the guarantees by the merged subsidiaries of our Senior Second Secured Notes and the Senior Subordinated Notes and the pledge of the capital stock of certain of the merged subsidiaries that secured the Credit Agreement and the Senior Second Secured Notes immediately prior to the merger ceased to exist, effective December 31, 2004. As the surviving corporation in the merger, however, Dayton Superior, which is the issuer of the Senior Second Secured Notes, the Senior Subordinated Notes and the borrower under the Credit Agreement, succeeded to all of the assets and liabilities of each of the merged subsidiaries that had been guarantors of the notes and Credit Agreement.

The Company has three segments to monitor gross profit by sales type: product sales, rental revenue, and used rental equipment sales. These types of sales are differentiated by their source and gross margin percents of sales.

•

Product sales consist primarily of:

	•		Concrete accessories, which are used for connecting forms for poured-in-place concrete walls, anchoring or bracing for walls and floors, supporting bridge framework and positioning steel reinforcing bars, and include products which remain in place at the convenience of the contractors.

	•		Masonry products, which are placed between layers of brick and concrete blocks and covered with mortar to provide additional strength to walls.

	•		Paving products, which are used in the construction and rehabilitation of concrete roads, highways and airport runways to extend the life of the pavement, and include products which remain in place at the convenience of the contractors. Welded dowel assemblies are a paving product used to transfer dynamic loads between two adjacent slabs of concrete roadway. Metal dowels are part of a dowel basket design that is imbedded in two adjacent slabs to transfer the weight of vehicles as they move over a road.

	•		Chemicals, which include a broad spectrum of chemicals for use in concrete construction, including form release agents, bond breakers, curing compounds, liquid hardeners, sealers, water repellents, bonding agents, grouts and epoxies, and other chemicals used in the pouring, placement, and stamping of concrete as well as curing compounds used in concrete road construction.

•

Rental equipment consists primarily of:

	•		Forming Systems, which are reusable engineered modular forms; hold liquid concrete in place on concrete construction jobs while it hardens. Standard forming systems are made of steel and plywood and are used in the creation of concrete walls and columns. Specialty forming systems consist primarily of steel forms that are designed to meet architects’ specific needs for concrete placements. Both standard and specialty forming systems and related accessories are sold as used rental equipment and rented.

	•		Shoring Systems, including aluminum beams and joists, are reusable post shores and shoring frames which are used to support deck and other raised forms while concrete is being poured.

Facility Closing and Severance Expenses

During 2003, we approved and began implementing a plan to exit certain of our manufacturing and distribution facilities and to reduce overall headcount by approximately 120 in order to keep our cost structure in alignment with net sales. There has been no activity for this plan during 2005. Activity for this plan for the year ended December 31, 2004 was as follows:


	In 000’s
	Involuntary			Lease			Relocation		Other Post-
	Termination			Termination			of		Closing
	Benefits			Costs			Operations		Costs			Total
Balance, January 1, 2004	$	—		$	—		$	—	$	—		$	—
Facility closing and severance expenses		63			1			—		61			125
Items charged against reserve		(63	)		(1	)		—		(61	)		(125	)

Balance, December 31, 2004	$	—		$	—		$	—	$	—		$	—

There is no expected future expense for commitments under this plan.

During 2004, we continued to execute our plan to exit additional distribution facilities and reduce headcount by approximately 75 in order to keep our cost structure in alignment with net sales. Activity for this plan for the nine months ended September 30, 2005 was as follows:


	In 000’s
	Involuntary			Lease			Relocation			Other Post-
	Termination			Termination			of			Closing
	Benefits			Costs			Operations			Costs			Total
Balance, January 1, 2004	$	—		$	—		$	—		$	—		$	—
Facility closing and severance expenses		611			307			595			398			1,911
Items charged against reserve		(611	)		(187	)		(595	)		(398	)		(1,791	)

Balance, December 31, 2004		—			120			—			—			120
Facility closing and severance expenses		82			154			4			134			374
Items charged against reserve		(82	)		(208	)		(4	)		(134	)		(428	)

Balance, September 30, 2005	$	—		$	66		$	—		$	—		$	66

The total expected future expense for commitments under this plan is approximately $100,000 and will be expensed in accordance with SFAS No. 146.

During 2005, we approved and implemented a plan to change our management structure, which resulted in a headcount reduction of two. Activity for this plan for the nine months ended September 30, 2005 was as follows:


	In 000’s
	Involuntary		Lease		Relocation		Other Post-
	Termination		Termination		of		Closing
	Benefits		Costs		Operations		Costs		Total
Balance, January 1, 2005	$	—	$	—	$	—	$	—	$	—
Facility closing and severance expenses		168		—		—		—		168
Items charged against reserve		—		—		—		—		—

Balance, September 30, 2005	$	168	$	—	$	—	$	—	$	168

There is no expected future expense for commitments under this plan.

Results of Operations

The following table summarizes our results of operations as a percentage of net sales for the periods indicated.


	Three Fiscal Months Ended						NIne Fiscal Months Ended
	September 30,			October 1,			September 30,			October 1,
	2005			2004			2005			2004
Product sales		84.7	%		84.4	%		84.9	%		85.6	%
Rental revenue		12.1			10.0			11.3			9.7
Used rental equipment sales		3.2			5.6			3.8			4.7

Net sales		100.0			100.0			100.0			100.0


Product cost of sales		77.7			73.9			77.2			75.0
Rental cost of sales		69.4			72.5			76.2			77.5
Used rental equipment cost of sales		34.3			42.5			35.0			39.8

Cost of sales		75.3			72.0			75.5			73.6


Product gross profit		22.3			26.1			22.8			25.0
Rental gross profit		30.6			27.5			23.8			22.5
Used rental equipment gross profit		65.7			57.5			65.0			60.2

Gross profit		24.7			28.0			24.5			26.4

Selling, general and administrative expenses		19.9			19.0			21.7			20.8
Facility closing and severance expenses		0.2			0.3			0.2			0.4
(Gain) loss on disposals of property, plant, and equipment		(0.5	)		(0.4	)		(0.5	)		(0.1	)
Amortization of intangible assets		0.2			0.3			0.1			0.3

Income from operations		4.9			8.8			3.0			5.0
Interest income		—			—			—			—
Interest expense		10.7			10.4			11.5			11.1
Loss on early extinguishment of long-term debt		—			—			—			0.3
Other expense (income)		—			—			—			—

Loss before benefit for income taxes		(5.8	)		(1.6	)		(8.5	)		(6.4	)
Benefit for income taxes		—			—			—			—

Net loss		(5.8	%)		(1.6	%)		(8.5	%)		(6.4	%)

Comparison of Three Fiscal Months Ended September 30, 2005 and October 1, 2004

Net Sales

Net sales decreased $0.5 million, or 0.4%, to $114.1 million in the third quarter of 2005 from $114.5 million in the third quarter of 2004. The following table summarizes our net sales by product type:


	Three fiscal months ended
	September 30, 2005					October 1, 2004
	(In thousands)
	Net Sales		%			Net Sales		%			% Change
Product sales	$	96,557		84.7	%	$	96,640		84.4	%		(0.1	)%
Rental revenue		13,816		12.1			11,449		10.0			20.7
Used rental equipment sales		3,698		3.2			6,459		5.6			(42.7	)


Net sales	$	114,071		100.0	%	$	114,548		100.0	%		0.4	%

Product sales in the third quarter of 2005 were flat with the third quarter of 2004 at $96.6 million. The decrease in sales was due to lower unit volume compared to the third quarter of 2004 as volume suffered from hurricanes Katrina and Rita. The volume shortfall was almost entirely offset by price increases.

Rental revenue increased $2.4 million, or 20.7%, to $13.8 million for the third quarter of 2005, compared to $11.4 million in the third quarter of 2004. The increase in rental revenue was due to better positioning of the fleet we acquired from Safway, particularly in the southeastern and western United States, and to an overall stronger rental market in several product families.

Used rental equipment sales decreased to $3.7 million in the third quarter of 2005 from $6.5 million in the third quarter of 2004 as we emphasize renting equipment rather than selling it.

Gross Profit

Gross profit on product sales for the third quarter of 2005 was $21.5 million, or 22.3% of sales, a decrease of $3.7 million from $25.2 million, or 26.1% of sales, in the third quarter of 2004. The decrease in gross profit was primarily due to increasing costs of steel and freight and the effect of lower production volume, partially offset by higher sales prices.

Gross profit on rental revenue for the third quarter of 2005 was $4.2 million, or 30.6% of revenue, an increase of $1.1 million from $3.1 million, or 27.5% of revenue in the third quarter of 2004. Depreciation on rental equipment for the third quarter of 2005 was $5.7 million, an increase of $0.9 million from $4.8 million in the third quarter of 2004. The increase in depreciation expense was primarily due to having a higher mix of rental fleet that is depreciated more quickly as compared with the third quarter of 2004. Gross profit on rental revenue before depreciation was $9.9 million, or 71.6% of revenue, an increase of $2.0 million from $7.9 million, or 69.0% of revenue in 2004. The increase in gross profit dollars was due to the increased net revenue discussed above. The increase in gross profit as a percent of sales was due to the favorable leverage of higher revenues on fixed costs.

Gross profit on sales of used rental equipment for the third quarter of 2005 was $2.4 million, or 65.7% of sales, compared to $3.7 million, or 57.5% of sales, in the third quarter of 2004. The decrease in gross profit dollars was primarily due to the decreased sales discussed previously. Gross profit as a percentage of sales fluctuates based on the age and type of the specific equipment sold.

Operating Expenses

Selling, general and administrative expenses increased $0.9 million to $22.7 million in the third quarter of 2005 from $21.8 million in the third quarter of 2004. The increase was primarily due to moving two distribution centers to larger facilities and increased rental center costs due to higher rental activity.

We gained $0.5 million on the sale of property, plant and equipment during the third quarters of both 2005 and 2004.

Other Expenses

Interest expense increased to $12.2 million in the third quarter of 2005 from $11.9 million in the third quarter of 2004. This was primarily due to higher interest rates on the revolving credit facility compared to the third quarter of 2004.

Loss Before Income Taxes

The loss before income taxes in the third quarter of 2005 was $(6.7) million compared to a loss of $(1.8) million in the third quarter of 2004, due to the factors described above.

Benefit for Income Taxes

Net Loss

The net loss for the third quarter of 2005 was $(6.7) million, compared to $(1.8) million in the third quarter of 2004 due to the factors described above.

Comparison of Nine Fiscal Months Ended September 30, 2005 and October 1, 2004

Net Sales

Net sales decreased $1.3 million, or 0.4%, to $317.6 million in the first three quarters of 2005 from $318.9 million in the first three quarters of 2004. The following table summarizes our net sales by product type:


	Nine fiscal months ended
	September 30, 2005					October 1, 2004
			(In thousands)
	Net Sales		%			Net Sales		%			% Change
Product sales	$	269,643		84.9	%	$	273,101		85.6	%		(1.3	)%
Rental revenue		35,961		11.3			30,792		9.7			16.8
Used rental equipment sales		11,953		3.8			14,978		4.7			(20.2	)


Net sales	$	317,557		100.0	%	$	318,871		100.0	%		(0.4	)%

Product sales decreased $3.5 million, or 1.3%, to $269.6 million in the first three quarters of 2005 from $273.1 million in the first three quarters of 2004. The decrease in product sales was due to a decrease in unit volume due to unusually strong demand in the first half of 2004 due to customers buying ahead of our sales price increases and concerns over availability of steel-based products. Sales in the first nine months of 2005 also suffered lower demand in our markets from adverse winter weather in the first half and hurricanes Katrina and Rita in the third quarter. We also believe certain of our customers curtailed purchases in the first nine months of 2005 in expectation of lower steel prices later in the year. Price increases implemented throughout 2004 helped to offset most of the volume decline.

Rental revenue increased $5.2 million, or 16.8%, to $36.0 million in the first three quarters of 2005, compared to $30.8 million in the first three quarters of 2004. The increase in rental revenue is due to better positioning of the fleet we acquired from Safway, particularly in the southeastern and western United States and to an improving rental market in the second and third quarters in several product families.

Used rental equipment sales decreased to $12.0 million in the first three quarters of 2005 from $15.0 million in the first three quarters of 2004 as we emphasize renting equipment rather than selling it.

Gross Profit

Gross profit on product sales for the first three quarters of 2005 was $61.6 million, or 22.8% of sales, a decrease of $6.6 million from $68.2 million, or 25.0% of sales, in the first three quarters of 2004. The decrease in gross profit was primarily due to decreased net sales, as discussed above, and higher costs of steel and freight. As a percent of sales, gross profit declined due to higher costs of steel and freight and the effect of lower production volume.

Gross profit on rental revenue for the first three quarters of 2005 was $8.6 million, or 23.8% of revenue, an increase of $1.7 million from $6.9 million, or 22.5% of revenue in the first three quarters of 2004. Depreciation on rental equipment for the first three quarters of 2005 was $16.3 million, an increase of $2.0 million from $14.3 million in the first three quarters of 2004. The increase in depreciation expense was primarily due to having a higher mix of rental fleet that is depreciated more quickly as compared to the first nine months of 2004. Gross profit before depreciation was $24.9 million, or 69.2% of revenue, an increase of $3.7 million from $21.2 million, or 68.8% of revenue. This increase was primarily due to the increased net revenue discussed above.

Gross profit on sales of used rental equipment for the first three quarters of 2005 was $7.8 million, or 65.0% of sales, compared to $9.0 million, or 60.2% of sales, in the first three quarters of 2004. The decline in gross profit dollars is mainly due to the decline in sales as discussed above. Gross profit as a percentage of sales fluctuates based on the age and type of the specific equipment sold.

Operating Expenses

Selling, general and administrative expenses increased $2.7 million to $69.0 million in the first three quarters of 2005 from $66.3 million in the first three quarters of 2004. The increase was due to severance expenses of $1.0 million related to the termination of employment of our former President and Chief Executive Officer, moving two distribution centers to larger facilities, increased rental center costs due to higher rental activity, and, to a lesser degree, non-recurring recruiter fees paid in the search for a new Chief Executive Officer.

Facility closing and severance expense during the first three quarters of 2005 was $0.5 million compared to $1.4 million in the first three quarters of 2004 due to fewer facilities being closed.

Gain on the sale of property plant and equipment during the first three quarters of 2005 was $1.6 million compared to $0.4 million during the first three quarters of 2004. The increase was due to the gains the sales of our Des Plaines, IL and Folcroft, PA facilities.

Other Expenses

Interest expense increased to $36.6 million in the first three quarters of 2005 from $35.5 million in the first three quarters of 2004. This was primarily due to higher interest rates on the revolving credit facility and higher average borrowings compared to the first three quarters of 2004. We incurred a loss on the early extinguishment of long-term debt of $0.8 million in the first nine months of 2004 due to the expensing of deferred financing costs related to our new $95.0 million senior secured revolving credit facility.

Loss Before Income Taxes

The loss before income taxes for the first three quarters of 2005 was $(26.9) million compared to a loss of $(20.4) million in the first three quarters of 2004, due to the factors described above.

Benefit for Income Taxes

Net Loss

Loss before income taxes for the first three quarters of 2005 was $(26.9) million compared to a loss of $(20.4) million in the first three quarters of 2004, 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 borrowings under our revolving credit facility, the issuance of long-term debt and equity, and sale-leaseback transactions.

Net cash used in operating activities in the first nine months of 2005 was $(12.4) million, compared to $(33.9) million in the first nine months of 2004. This activity is comprised of the following:


	2005			2004
	(in millions)
Net loss	$	(26.9	)	$	(20.4	)
Non-cash adjustments		17.0			16.5

Net loss after non-cash adjustments		(9.9	)		(3.9	)
Changes in assets and liabilities		(2.5	)		(30.0	)

Net cash used in operating activities	$	(12.4	)	$	(33.9	)

Net loss after non-cash adjustments was $(9.9) million for the first nine months of 2005, compared to the net loss of $(3.9) million in the first nine months of 2004 due primarily to:

	§		A higher net loss in the first nine months of 2005 of $(26.9) million compared to a $(20.4) million net loss in the first nine months of 2004.

	§		No loss on the early extinguishment of long-term debt in 2005, while there was a loss of $0.8 million in the first nine months of 2004.

	§		Gains on the sale of property, plant and equipment and on the sale-leaseback of $1.9 million in the first nine months of 2005 compared with gains of $0.4 million in the first nine months of 2004.

	§		Changes in other items of $0.4 million.

These items were partially offset by:

	§		Higher depreciation and amortization of intangible assets of $23.2 million in the first nine months of 2005 compared to $21.2 million in the first nine months of 2004.

	§		Lower gain on sale of rental equipment of $(7.8) million in the first nine months of 2005 compared to $(9.0) million in the first nine months of 2004.

Changes in assets and liabilities resulted in an $(2.5) million use of cash in the first nine months of 2005, as compared to $(30.0) million use of cash in the first nine months of 2004. This was due to:

	§		A lower use of cash in accounts receivable, which was a $(5.2) million use of cash in the first nine months of 2005 as compared to a $(12.8) million use of cash in the first nine months of 2004. This decrease was primarily due to better collections in 2005.

	§		A lower use of cash in inventory of $(5.0) million in the first nine months of 2005 as compared to an $(14.0) million use of cash in the first nine months of 2004. The 2005 decline in cash used was due to a less dramatic rise in inventory quantities as a result of having more inventory on-hand at year-end and greater cost increases in the first nine months of 2004.

	§		Cash provided by prepaid expense and other assets increasing to a $6.4 million source of cash in the first nine months of 2005, compared to a $(5.9) million use of cash in the first nine months of 2004. This source of cash in 2005 was primarily due to payments on notes receivable from customers, while the use in 2004 was due to prepayments for steel.

	§		Cash provided by accrued liabilities was $1.5 million in the first nine months of 2005, compared to a $(0.3) million use in the first nine months of 2004. This increase was due to higher accrued interest in 2005 and higher payments for facility closing, severance and rebates in 2004

These items were partially offset by a use of cash from accounts payable, which was $(0.1) million in the first nine months of 2005 as compared to a $3.0 million source of cash in the first nine months of 2004. This decrease was due to a decline in our purchasing activity in the first three quarters of 2005 as compared to the first three quarters of 2004 as a result of having more inventory on-hand at year-end.

Net cash used in investing activities was $(11.8) million in the first nine months of 2005, compared to a use of $(5.1) million in the first nine months of 2004. Rental equipment additions increased to $20.8 million in the first nine months of 2005 from $16.7 million in the first nine months of 2004, which was due to strategically investing in the rental fleet to achieve a more advantageous mix. Property, plant and equipment additions increased to $4.2 million in the first nine months of 2005 from $3.8 million in the first nine months of 2004, primarily as a result of the implementation of our new ERP system and the opening of two distribution centers. Proceeds from the sale of property, plant and equipment were $1.3 million from the sale of our Folcroft, PA

facility in 2005, compared to proceeds of $0.7 million in the first nine months of 2004. Proceeds from the sale of rental equipment were down to $12.0 million in the first three quarters of 2005 from $15.0 million in the first three quarters of 2004 due to the focus on renting equipment rather than selling it.

On April 21, 2005 we sold our manufacturing facility in Des Plaines, Illinois to an unrelated party and immediately leased it back from the purchaser. The net proceeds after commissions and other normal closing costs were $11.6 million. We realized a gain of $6.7 million on the sale of the facility, which was initially deferred and is being recognized ratably over the initial term of the lease.

On January 30, 2004, we established a senior secured revolving credit facility, which was used to refinance the previous $50.0 million facility. We recorded a loss on the early extinguishment of long-term debt of $0.8 million due to the expensing of deferred financing costs on the previous facility. The facility was subsequently increased to $95.0 million and matures on January 30, 2007. The credit facility has no financial covenants. Availability of borrowings is limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment, less $10.0 million. At September 30, 2005, the entire $95.0 million was available and the Company had an outstanding balance of $69.7 million at a weighted average interest rate of 6.5% as compared to $58.8 million outstanding at December 31, 2004. Outstanding letters of credit were $7.2 million and available borrowings were $18.1 million under this revolving credit facility at September 30, 2005. The credit facility is secured by substantially all assets of the Company.

As of September 30, 2005, our other long-term debt consisted of the following:


	September 30,
	2005
	(in $000’s)
Senior Second Secured Notes, interest rate of 10.75%	$	165,000
Debt discount on Senior Second Secured Notes		(5,164	)
Senior Subordinated Notes, interest rate of 13.0%		154,729
Debt discount on Senior Subordinated Notes		(6,459	)
Notes payable to seller of Safway, non-interest bearing, accreted at 6.0% to 14.5%		7,351
Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand		1,068
Capital lease obligations		3,026

Total long-term debt		319,551
Less current maturities		(2,403	)

Long-term portion	$	317,148

Our long-term debt repayments for the nine months ended September 30, 2005 were $2.0 million.

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 September 30, 2005, working capital was $93.1 million, compared to $95.3 million at December 31, 2004. The $2.2 million decrease was comprised of the following:

	•		$3.1 million decrease in cash due to the timing of cash receipts and disbursements at December and September,

	•		$4.8 million decrease in prepaid expenses and other current assets due to collections on notes receivable,

	•		$3.3 million increase in deferred gain on the sale of the Des Plaines facility,

	•		$1.2 million of changes in other items,

These were partially offset by:

	•		$5.2 million increase in accounts receivable due to the normal seasonal increase in net sales from December to September; and

	•		$5.0 million increase in inventories due to lower than anticipated sales in the third quarter and to higher raw material costs.

We intend to pursue 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 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.

We believe our liquidity and capital resources 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.

Commitments

During the nine months ended September 30, 2005, we entered into a lease for a facility with an initial term of 24 months, with an optional renewal for an additional 12 months. We are obligated to pay rent totaling approximately $0.7 million per year over the initial lease term and the renewal term.

In October 2005, we entered into leases on four facilities with terms from 11 to 13 years. We are obligated to pay rent totaling approximately $1.3 million per year in years one through four and $11.0 million in total for year five through the end of the leases.

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 22.5% of our cost of sales in 2004. Historically, steel prices have fluctuated and we are currently facing a steel supply market which has an unusual pricing set of trends depending on the form and type of steel. Some forms of steel are trending up and some have a temporary trend down. 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 our subsidiary 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 subsidiary 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 subsidiaries if the Applicable Value of that stock were to become equal to or greater than the Collateral Threshold. As of September 30, 2005, 65% of the voting capital stock and 100% of the non-voting capital stock of our subsidiary Dayton Superior Canada Ltd. constitutes collateral for the notes. We have based our determination of whether 65% of the voting capital stock and 100% of the non-voting capital stock of our subsidiary Dayton Superior Canada Ltd. constitutes collateral upon the book value, par value and estimated market value of the capital as of September 30, 2005. The Applicable Value for the capital stock is the greater of the book value and estimated market value, as the par value of each subsidiary’s capital stock is nominal and therefore has not impacted our calculation of Applicable Value.

The Applicable Value of Dayton Superior Canada Ltd. was $9.4 million as of September 30, 2005. Based upon the foregoing, as of September 30, 2005, the Applicable Value of the capital stock of Dayton Superior Canada Ltd. did not exceed the Collateral Threshold. The Applicable Value of the common stock of Dayton Superior Canada Ltd was based upon the estimated market value. We have calculated the estimated market value of our Dayton Superior Canada Ltd. capital stock by determining the earnings before interest, taxes, depreciation, and amortization, or EBITDA, for the twelve months ended September 30, 2005, adjusted 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 subsidiary’s capital stock.

Set forth below is the adjusted EBITDA of Dayton Superior Canada Ltd. for the twelve fiscal months ended September 30, 2005, together with a reconciliation to the net income:


	Dayton
	Superior
	Canada Ltd.
Net Income	$	1,537
Provision for Income Taxes		105

Income from Operations		1,642
Depreciation Expense		62

Adjusted valuation EBITDA		1,704
Multiple		5.5

Estimated Fair Value	$	9,372

As described above, we have used EBITDA and adjusted valuation EBITDA of Dayton Superior Canada Ltd. solely for purposes of determining the estimated market value of the capital stock to determine whether that capital stock is included in the collateral. EBITDA and adjusted valuation 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 Dayton Superior Canada Ltd. could result in the capital stock being excluded from collateral (or becoming part of the collateral if it was previously excluded). The following table reflects the amounts by which the Applicable Value of Dayton Superior Canada Ltd. as of September 30, 2005 and the adjusted EBITDA for the twelve months ended September 30, 2005 would have to increase in order for Dayton Superior Canada Ltd. capital stock to no longer constitute collateral:


	Change in Applicable		Change in Adjusted
Subsidiary	Value		Valuation EBITDA
Dayton Superior Canada Ltd.	$	23,628	$	4,296

Critical Accounting Policies

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. On an on-going basis, we evaluate our estimates, including those related to allowance for doubtful accounts, inventories, investments, long-lived assets, income taxes, insurance reserves, restructuring liabilities, environmental contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our policies or estimates since December 31, 2004.

Forward-Looking Statements

This Form 10-Q includes, and future filings by us on Form 10-K, Form 10-Q, and Form 8-K, and future oral and written statements by us and our management may include certain forward-looking statements, including (without limitation) statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestitive opportunities and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and “should,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements by our management and us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by us, and our management, as the result of a number of important factors. Representative examples of these factors include (without limitation) the cyclicality of the construction industry; the Company’s substantial leverage; net losses; price increases and availability of raw materials; rising energy costs; weather-related risks; chemical products competition; potential exposure to environmental liabilities; consolidation of our customers; increased dependence on foreign operations; product mix profit margins; risks associated with acquisitions; competition; control by Odyssey; risks associated with our workforce; dependence on key personnel; and restrictive covenants. This list is not intended to be exhaustive, and additional information can be found under ”Risks Related to Our Business” in Part I of our most recent Annual Report on Form 10-K. In addition to these factors, actual future performance, outcomes and results may differ materially because of other, more general, factors including (without limitation) general industry and market conditions and growth rates, domestic economic conditions, governmental and public policy changes and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support our future business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2005, we had financial instruments, which were sensitive to changes in interest rates. These financial instruments consist of:

	•		$95.0 million revolving credit facility, $69.7 million of which was outstanding at September 30, 2005;

	•		$165.0 million of Senior Second Secured Notes, with a net book value of $159.8 million;

	•		$154.7 million of Senior Subordinated Notes, with a net book value of $148.3 million;

	•		$10.5 million of non-interest bearing notes payable to the seller of Safway with a net book value of $7.3 million;

	•		$3.0 million in capital lease obligations;

	•		$1.1 million in other fixed-rate, long-term debt.

Our $95.0 million senior secured revolving credit facility matures on January 30, 2007. The credit facility has no financial covenants. Availability of borrowings is limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment, less $10.0 million. The entire $95.0 million was available for borrowing as of September 30, 2005. At September 30, 2005, the Company had outstanding letters of credit of $7.2 million and available borrowings of $18.1 million under this revolving credit facility. The credit facility is secured by substantially all assets of the Company.

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 estimated fair value of the notes is $166.7 million as of September 30, 2005. The senior second secured notes are 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 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 $123.8 million as of September 30, 2005.

Our $12.0 million non-interest bearing note was issued to the seller of Safway in 2003 and is being accreted to the face value at 14.5% using the effective interest method. As of September 30, 2005, remaining payments are $9.0 million and are payable in annual payments of $1.0 million due on September 30 of each year from 2006 through 2008, and a final balloon payment of $6.0 million due on December 31, 2008. The book value of the note at September 30, 2005 was $6.0 million.

Our $2.0 million non-interest bearing note payable was issued to the seller of Safway in 2003 and is being accreted to the face value at 6.0% using the effective interest method. As of September 30, 2005, remaining payments are $1.5 million and are payable in minimum payments of $42,000 for the remainder of 2005, $398,000 in 2006, $563,000 in 2007, and $464,000 in 2008. Payments may be accelerated if certain revenue targets are met. The book value of the note at September 30, 2005 was $1.3 million.

Our other long-term debt at September 30, 2005 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 $1.4 million.

In the ordinary course of our business, we also are exposed to price changes in raw materials, particularly steel. The prices of these items can change significantly due to changes in the markets in which our suppliers operate. We generally do not, however, use financial instruments to manage our exposure to changes in commodity prices.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

The Company is currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which currently is required as of December 31, 2006. This effort includes documenting, evaluating the design and testing the effectiveness of our internal controls. During this process, we expect to make improvements in the design of and operation of our internal controls including further formalization of policies and procedures and improving segregation of duties. Although we believe that our efforts will enable us to provide the required management report on internal controls and our independent auditors to provide the required attestation as of fiscal year end 2006, we can give no assurance that these efforts will be successfully completed in a timely manner.


	DAYTON SUPERIOR CORPORATION

DATE: November 14, 2005		BY: /s/ Edward J. Puisis

		Edward J. Puisis
		Vice President and Chief Financial Officer


Exhibit No.		Description

(31)		Rule 13a-14(a)/15d-14(a) Certifications

		31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer

		31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief Financial Officer

(32)		Section 1350 Certifications

		32.1 Section 1350 Certification of President and Chief Executive Officer

		32.2 Section 1350 Certification of Vice President and Chief Financial Officer



November 14, 2005	/s/ Eric R. Zimmerman
	Eric R. Zimmerman
	President, Chief Executive Officer



November 14, 2005	/s/ Edward J. Puisis
	Edward J. Puisis
	Vice President and Chief Financial Officer

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	1.		I have reviewed this Quarterly Report on Form 10-Q of Dayton Superior Corporation;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.