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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.
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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.
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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
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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.
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- 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.
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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
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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.
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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,
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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.
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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