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Exhibit 99.1

 

Krestmark Industries, L.P. and Affiliates

 

Independent Auditor’s Report and Combined Financial Statements

 

December 31, 2015

 



 

GRAPHIC

 



 

Krestmark Industries, L.P. and Affiliates

December 31, 2015

 

Contents

 

Independent Auditor’s Report

1

 

 

Combined Financial Statements

 

Balance Sheets

3

Statements of Income

4

Statements of Changes in Partners’ Capital

5

Statements of Cash Flows

6

Notes to Financial Statements

7

 



 

Independent Auditor’s Report

 

Partners

Krestmark Industries, L.P.

Dallas, Texas

 

We have audited the accompanying combined financial statements of Krestmark Industries, L.P. and affiliates, which comprise the combined balance sheets as of December 31, 2015 and 2014, and the related combined statements of income, changes in partners’ capital and cash flows for each of the three years in the period ended December 31, 2015, and the related notes to the combined financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these combined financial statements based on our audits.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 



 

Opinion

 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Krestmark Industries, L.P. and affiliates as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in accordance with accounting principles generally accepted in the United States of America.

 

 

/s/ BKD, LLP

Dallas, Texas

June 7, 2016

 

2



 

Krestmark Industries, L.P. and Affiliates

Combined Balance Sheets

December 31, 2015 and 2014

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

10,147,543

 

$

8,066,436

 

Accounts receivable, net of allowance, 2015 – $122,743 and 2014 – $71,365

 

9,477,253

 

7,393,089

 

Inventories

 

6,905,101

 

6,362,769

 

Prepaid expenses and other current assets

 

2,618,762

 

719,624

 

 

 

 

 

 

 

Total current assets

 

29,148,659

 

22,541,918

 

 

 

 

 

 

 

Property and Equipment, At Cost

 

 

 

 

 

Machinery and equipment

 

9,545,691

 

8,865,653

 

Leasehold improvements

 

847,445

 

653,359

 

Computer equipment and software

 

635,478

 

567,836

 

Furniture and fixtures

 

83,756

 

83,756

 

 

 

11,112,370

 

10,170,604

 

Less accumulated depreciation and amortization

 

7,236,235

 

6,231,648

 

 

 

 

 

 

 

 

 

3,876,135

 

3,938,956

 

 

 

 

 

 

 

Other Assets

 

30,932

 

136,486

 

 

 

 

 

 

 

Total assets

 

$

33,055,726

 

$

26,617,360

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

 

$

714,276

 

Accounts payable

 

2,134,314

 

2,324,008

 

Accrued employee wages and benefits

 

315,038

 

447,295

 

State income taxes payable

 

316,979

 

352,979

 

Other accrued liabilities

 

1,374,593

 

984,326

 

 

 

 

 

 

 

Total current liabilities

 

4,140,924

 

4,822,884

 

 

 

 

 

 

 

Long-term Debt, Less Current Maturities

 

 

1,439,424

 

 

 

 

 

 

 

Deferred Rent

 

351,361

 

326,108

 

 

 

 

 

 

 

Partners’ Capital

 

28,563,441

 

20,028,944

 

 

 

 

 

 

 

Total liabilities and partners’ capital

 

$

33,055,726

 

$

26,617,360

 

 

See Notes to Combined Financial Statements

 

3



 

Krestmark Industries, L.P. and Affiliates

Combined Statements of Income

Years Ended December 31, 2015, 2014 and 2013

 

 

 

2015

 

2014

 

2013

 

Net Sales

 

$

99,451,991

 

$

85,881,651

 

$

61,682,823

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

65,451,159

 

56,562,892

 

43,558,187

 

 

 

 

 

 

 

 

 

Gross Profit

 

34,000,832

 

29,318,759

 

18,124,636

 

 

 

 

 

 

 

 

 

Selling, General and Administrative Expenses

 

9,811,539

 

9,325,226

 

7,182,256

 

 

 

 

 

 

 

 

 

Operating Income

 

24,189,293

 

19,993,533

 

10,942,380

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Interest income

 

24,696

 

18,369

 

12,875

 

Interest expense

 

(5,261

)

(149,377

)

(110,769

)

 

 

 

 

 

 

 

 

 

 

19,435

 

(131,008

)

(97,894

)

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

24,208,728

 

19,862,525

 

10,844,486

 

 

 

 

 

 

 

 

 

Provision for State Income Taxes

 

316,587

 

353,377

 

234,850

 

 

 

 

 

 

 

 

 

Net Income

 

$

23,892,141

 

$

19,509,148

 

$

10,609,636

 

 

See Notes to Combined Financial Statements

 

4



 

Krestmark Industries, L.P. and Affiliates

Combined Statements of Changes in Partners’ Capital

Years Ended December 31, 2015, 2014 and 2013

 

Balance, January 1, 2013

 

$

7,694,642

 

 

 

 

 

Net income

 

10,609,636

 

 

 

 

 

Partner distributions

 

(9,473,682

)

 

 

 

 

Balance, December 31, 2013

 

8,830,596

 

 

 

 

 

Net income

 

19,509,148

 

 

 

 

 

Partner distributions

 

(8,310,800

)

 

 

 

 

Balance, December  31, 2014

 

20,028,944

 

 

 

 

 

Net income

 

23,892,141

 

 

 

 

 

Partner distributions

 

(15,357,644

)

 

 

 

 

Balance, December 31, 2015

 

$

28,563,441

 

 

See Notes to Combined Financial Statements

 

5



 

Krestmark Industries, L.P. and Affiliates

Combined Statements of Cash Flows

Years Ended December 31, 2015, 2014 and 2013

 

 

 

2015

 

2014

 

2013

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

23,892,141

 

$

19,509,148

 

$

10,609,636

 

Items not requiring (providing) cash

 

 

 

 

 

 

 

Depreciation and amortization

 

1,050,730

 

795,804

 

807,363

 

Changes in

 

 

 

 

 

 

 

Accounts receivable

 

(2,084,164

)

(3,469,077

)

(194,143

)

Inventories

 

(542,332

)

(2,076,272

)

(1,401,804

)

Prepaid expenses and other assets

 

(1,793,584

)

6,389

 

149,605

 

Accounts payable and accrued liabilities

 

93,569

 

1,017,788

 

(23,558

)

State income taxes payable

 

(36,000

)

123,859

 

69,120

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

20,580,360

 

15,907,639

 

10,016,219

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

(987,909

)

(1,764,738

)

(1,377,876

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(987,909

)

(1,764,738

)

(1,377,876

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 

6,327,965

 

Principal payments on long-term debt

 

(2,153,700

)

(2,787,663

)

(4,447,813

)

Partner distributions

 

(15,357,644

)

(8,310,800

)

(9,473,682

)

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(17,511,344

)

(11,098,463

)

(7,593,530

)

 

 

 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

2,081,107

 

3,044,438

 

1,044,813

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Year

 

8,066,436

 

5,021,998

 

3,977,185

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Year

 

$

10,147,543

 

$

8,066,436

 

$

5,021,998

 

 

 

 

 

 

 

 

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

Interest paid

 

$

5,261

 

$

149,377

 

$

110,769

 

Income taxes paid

 

$

352,587

 

$

227,437

 

$

165,730

 

 

See Notes to Combined Financial Statements

 

6



 

Krestmark Industries, L.P. and Affiliates

Notes to Combined Financial Statements

December 31, 2015

 

Note 1:                                     Nature of Operations and Summary of Significant Accounting Policies

 

Nature of Operations

 

Krestmark Industries, L.P. (Krestmark) was formed in the state of Texas as a limited partnership on April 1, 2004.  Krestmark earns revenues predominately from the manufacturing of aluminum and vinyl windows and doors.  Products are sold primarily to builders and distributors in the central and southern United States.  The combined affiliates are Crest Vinyl Extrusions, L.L.C. (Crest) and Legacy Vinyl Windows, LP (Legacy).  Crest was formed in the state of Texas as a limited liability company on July 18, 2013.  Crest earns revenues predominately from the manufacturing of vinyl window components.  To date the majority of Crest revenues have been generated through the sale of products to Krestmark.  Legacy was formed in the state of Texas as a limited partnership on September 10, 2014.  Legacy, which began operations in 2015, manufactures windows.  Krestmark, Crest and Legacy (collectively, the Company) have common management and ownership and therefore management has elected to present combined financial statements.

 

Principles of Combination

 

All significant intercompany accounts and transactions of the Company have been eliminated in the combined financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.  At December 31, 2015 and 2014, cash equivalents consisted primarily of money market accounts.

 

At December 31, 2015, the Company’s cash accounts exceeded federally insured limits by approximately $10,514,000.

 

7



 

Krestmark Industries, L.P. and Affiliates

Notes to Combined Financial Statements

December 31, 2015

 

Accounts Receivable

 

Accounts receivable are stated at the amount the Company expects to collect.  The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions.  Accounts receivable are ordinarily due 30 days after the issuance of the invoice.  Accounts past due more than 120 days are considered delinquent.  Interest is generally not charged on overdue receivables.  Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

 

If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

 

Inventory Pricing

 

Inventories consist of raw materials, work-in-process and finished goods.  Inventories include costs of materials, labor and overhead.  Inventories are stated at the lower of cost or market.  If needed, the Company records a reserve for obsolete and slow-moving inventory based on current inventory levels and historical and expected future sales levels.

 

Property and Equipment

 

Property and equipment acquisitions are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization is charged to expense on the straight-line basis over the estimated useful life of each asset.  Leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.

 

The estimated useful lives for each major depreciable classification of property and equipment are as follows:

 

Leasehold improvements

 

5 – 10 years

 

Machinery and equipment

 

5 – 7 years

 

Computer equipment and software

 

3 – 5 years

 

Furniture and fixtures

 

3 – 5 years

 

 

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.  Expenditures for maintenance and repairs are charged to expenses as incurred.

 

8



 

Krestmark Industries, L.P. and Affiliates

Notes to Combined Financial Statements

December 31, 2015

 

Long-lived Asset Impairment

 

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable.  If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.  No asset impairment was recognized during the years ended December 31, 2015, 2014 and 2013.

 

Income Taxes

 

The Company is not a tax paying entity for federal or state (except Texas) income tax purposes.  Therefore, taxable income or loss is reported to the individual partners and members for inclusion in their respective tax returns and no provision for federal income is included in these statements.

 

The Company is subject to a franchise tax in the state of Texas.  Although the subject legislation states that the franchise tax is not an income tax, it has the characteristics of an income tax as it is determined by applying a tax rate to a base that considers both revenues and expenses.  Therefore, the Company accounts for the Texas franchise tax as an income tax.

 

With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2011.

 

Revenue Recognition

 

Revenues are generally recorded at the time products are delivered and are reported net of returns and allowances.

 

Taxes Collected from Customers and Remitted to Governmental Authorities

 

Taxes collected from customers and remitted to governmental authorities are presented in the accompanying combined statements of income on a net basis.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold.

 

Deferred Rent

 

The Company’s operating leases for its warehouses and office space contain free rent periods and escalating payments during the lease terms.  For these leases, the Company recognizes rent expense on a straight-line basis over the minimum lease terms and records the difference between the amounts charged to expense and the rent paid as deferred rent.

 

9



 

Krestmark Industries, L.P. and Affiliates

Notes to Combined Financial Statements

December 31, 2015

 

Note 2:                                     Inventories

 

Inventories consist of the following at December 31, 2015 and 2014:

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Raw materials

 

$

5,066,877

 

$

4,836,733

 

Work-in-process

 

303,808

 

229,732

 

Finished goods

 

1,534,416

 

1,296,304

 

 

 

 

 

 

 

 

 

$

6,905,101

 

$

6,362,769

 

 

Note 3:                                     Long-term Debt

 

In November 2013, Krestmark entered into a promissory note agreement with a financial institution for $5,000,000.  The outstanding balance on the note payable was $2,153,700 at December 31, 2014, and was repaid in full during 2015.

 

The Company has a $195,000 letter of credit with a financial institution related to its workers’ compensation insurance policy.

 

Note 4:                                     Operating Leases

 

The Company leases warehouses and office space under operating lease agreements.  The lease agreements require the Company to pay all executory costs (property taxes, maintenance and insurance).  Total rental expense was approximately $1,713,000, $1,354,000 and $1,264,000 for the years ended December 31, 2015, 2014 and 2013, respectively.  The following is a schedule of future minimum lease payments at December 31, 2015:

 

2016

 

$

1,296,594

 

2017

 

1,345,049

 

2018

 

1,109,120

 

2019

 

1,012,249

 

2020

 

875,710

 

Thereafter

 

3,672,331

 

 

 

 

 

 

 

$

9,311,053

 

 

The Company has a $228,000 letter of credit with a bank related to these leases.

 

Note 5:                                     Subsequent Events

 

Subsequent events have been evaluated through June 7, 2016, which is the date the combined financial statements were available to be issued.

 

10