Exhibit 99.2
Report of Independent Auditors
To the Board of Directors and Stockholders of SDI Holding, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of SDI Holding, Inc and its subsidiaries as of June 30, 2005, December 31, 2004 and 2003, and the results of their operations and their cash flows for the six month period ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five month period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP |
|
Dallas, Texas
September 27, 2005
F-35
SDI Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2005, December 31, 2004 and 2003
|
| June 30, |
| December 31, |
| |||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Assets |
|
|
|
|
|
|
| |||
Current assets |
|
|
|
|
|
|
| |||
Cash |
| $ | 3,754,978 |
| $ | 2,183,957 |
| $ | 2,017,710 |
|
Accounts receivable, net of allowances of $3,675,587, $3,765,742 and $4,698,111 |
| 51,757,163 |
| 37,883,403 |
| 28,865,902 |
| |||
Inventories |
| 59,956,563 |
| 37,858,983 |
| 27,599,774 |
| |||
Rebates receivable |
| 5,314,064 |
| 4,937,544 |
| 3,562,281 |
| |||
Refundable income taxes |
| — |
| — |
| 755,383 |
| |||
Prepaid expenses and other |
| 2,813,631 |
| 2,001,395 |
| 2,784,760 |
| |||
Deferred income taxes |
| 3,652,420 |
| 3,803,289 |
| 867,144 |
| |||
Total current assets |
| 127,248,819 |
| 88,668,571 |
| 66,452,954 |
| |||
Property and equipment, net |
| 11,001,294 |
| 9,682,449 |
| 8,586,616 |
| |||
Other assets, net |
|
|
|
|
|
|
| |||
Other intangible assets |
| 19,866,216 |
| 21,576,004 |
| 19,903,375 |
| |||
Deferred loan costs |
| 545,312 |
| 552,900 |
| 921,504 |
| |||
Goodwill |
| 37,618,550 |
| 37,492,232 |
| 33,089,508 |
| |||
Total other assets |
| 58,030,078 |
| 59,621,136 |
| 53,914,387 |
| |||
Total assets |
| $ | 196,280,191 |
| $ | 157,972,156 |
| $ | 128,953,957 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
|
| |||
Revolving credit facility |
| $ | 53,438,037 |
| $ | 41,770,975 |
| $ | 30,224,563 |
|
Current portion of long-term debt |
| 5,625,000 |
| 5,625,000 |
| 3,375,000 |
| |||
Capital lease obligations |
| 13,347 |
| 19,178 |
| 27,142 |
| |||
Book overdraft |
| 7,160,330 |
| 3,496,350 |
| 1,706,807 |
| |||
Accounts payable |
| 55,661,598 |
| 33,992,247 |
| 29,199,999 |
| |||
Income tax payable |
| 1,662,623 |
| 1,528,701 |
| — |
| |||
Accrued expenses and other |
| 8,832,087 |
| 6,622,381 |
| 5,554,714 |
| |||
Total current liabilities |
| 132,393,022 |
| 93,054,832 |
| 70,088,225 |
| |||
Long-term debt, less current portion |
| 16,399,054 |
| 18,027,067 |
| 17,033,092 |
| |||
Capital lease obligations, less current portions |
| 33,676 |
| 35,387 |
| 55,205 |
| |||
Deferred income taxes |
| 5,389,499 |
| 5,496,497 |
| 6,146,996 |
| |||
Total liabilities |
| 154,215,251 |
| 116,613,783 |
| 93,323,518 |
| |||
Commitments and contingencies |
|
|
|
|
|
|
| |||
Stockholders’ equity |
|
|
|
|
|
|
| |||
Common stock, $.01 par value; 45,000,000 shares authorized; 39,816,306, 39,729,906 and 34,606,906 shares issued and outstanding |
| 398,163 |
| 397,299 |
| 346,069 |
| |||
Additional paid-in capital |
| 39,418,143 |
| 39,332,607 |
| 34,260,837 |
| |||
Warrants outstanding |
| 2,148,152 |
| 2,148,152 |
| 2,148,152 |
| |||
Accumulated other comprehensive income |
| 178,694 |
| 139,715 |
| — |
| |||
Accumulated deficit |
| (78,212 | ) | (659,400 | ) | (1,124,619 | ) | |||
Total stockholders’ equity |
| 42,064,940 |
| 41,358,373 |
| 35,630,439 |
| |||
Total liabilities and stockholders’ equity |
| $ | 196,280,191 |
| $ | 157,972,156 |
| $ | 128,953,957 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-36
SDI Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended June 30, 2005,
the Years Ended December 31, 2004 and 2003
and the Five Months Ended December 31, 2002
|
| Six Months |
| Year Ended December 31, |
| Five Months |
| ||||||
|
| June 30, 2005 |
| 2004 |
| 2003 |
| December 30, 2002 |
| ||||
Sales, net |
| $ | 153,254,453 |
| $ | 248,337,784 |
| $ | 227,727,079 |
| $ | 71,239,406 |
|
Cost of goods sold |
| 114,904,286 |
| 185,988,385 |
| 171,373,452 |
| 55,596,020 |
| ||||
Gross margin |
| 38,350,167 |
| 62,349,399 |
| 56,353,627 |
| 15,643,386 |
| ||||
Selling, general and administrative expenses |
| 34,069,921 |
| 56,261,795 |
| 51,488,959 |
| 14,404,088 |
| ||||
Investor’s management fees |
| 345,653 |
| 657,627 |
| 598,175 |
| 269,833 |
| ||||
Income from operations |
| 3,934,593 |
| 5,429,977 |
| 4,266,493 |
| 969,465 |
| ||||
Other income (expense) |
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| (2,749,019 | ) | (4,318,176 | ) | (4,085,635 | ) | (1,253,519 | ) | ||||
Gain (loss) on sale of property and equipment |
| (12,365 | ) | 5,599 |
| 39,208 |
| 35,612 |
| ||||
Income (loss) before provision for income taxes |
| 1,173,209 |
| 1,117,400 |
| 220,066 |
| (248,442 | ) | ||||
Provision for income taxes |
| 496,369 |
| 524,967 |
| 269,361 |
| (26,515 | ) | ||||
Income (loss) from continuing operations |
| 676,840 |
| 592,433 |
| (49,295 | ) | (221,927 | ) | ||||
Loss from discontinued operations, net of tax |
| (95,652 | ) | (127,214 | ) | (714,455 | ) | (138,942 | ) | ||||
Net income (loss) |
| $ | 581,188 |
| $ | 465,219 |
| $ | (763,750 | ) | $ | (360,869 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
F-37
SDI Holding, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income
For the Six Months Ended June 30, 2005, the Years Ended December 31,
2004 and 2003 and the Five Months Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
| Additional |
| Stock |
|
|
| Other |
|
|
|
|
|
|
| ||||||||
|
| Common Stock |
| Paid-in |
| Subscription |
| Warrants |
| Comprehensive |
| Retained |
|
|
| Comprehensive |
| ||||||||||
|
| Shares |
| Amount |
| Capital |
| Receivable |
| Outstanding |
| Income |
| Earnings |
| Total |
| Income |
| ||||||||
Balance at August 1, 2002 |
| 23,045,000 |
| $ | 230,450 |
| $ | 22,814,550 |
| $ | (45,000 | ) | $ | 1,425,503 |
| $ | — |
| $ | — |
| $ | 24,425,503 |
|
|
| |
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (360,869 | ) | (360,869 | ) | $ | (360,869 | ) | |||||||
Subscription payment |
| — |
| — |
| — |
| 45,000 |
| — |
| — |
| — |
| 45,000 |
|
|
| ||||||||
Balance at December 31, 2002 |
| 23,045,000 |
| $ | 230,450 |
| $ | 22,814,550 |
| $ | — |
| $ | 1,425,503 |
| $ | — |
| $ | (360,869 | ) | $ | 24,109,634 |
|
|
| |
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (763,750 | ) | (763,750 | ) | $ | (763,750 | ) | |||||||
Issuance of common stock |
| 11,561,906 |
| 115,619 |
| 11,446,287 |
| — |
| — |
| — |
| — |
| 11,561,906 |
|
|
| ||||||||
Warrants issued |
| — |
| — |
| — |
| — |
| 722,649 |
| — |
| — |
| 722,649 |
|
|
| ||||||||
Balance at December 31, 2003 |
| 34,606,906 |
| $ | 346,069 |
| $ | 34,260,837 |
| $ | — |
| $ | 2,148,152 |
| $ | — |
| $ | (1,124,619 | ) | $ | 35,630,439 |
|
|
| |
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| 465,219 |
| 465,219 |
| $ | 465,219 |
| |||||||
Net change on hedging derivatives , net of tax of $97,090 |
| — |
| — |
| — |
| — |
| — |
| 139,715 |
| — |
| 139,715 |
| 139,715 |
| ||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 604,934 |
| |||||||
Issuance of common stock |
| 5,275,000 |
| 52,750 |
| 5,222,250 |
| — |
| — |
| — |
| — |
| 5,275,000 |
|
|
| ||||||||
Shares repurchased |
| (152,000 | ) | (1,520 | ) | (150,480 | ) | — |
| — |
| — |
| — |
| (152,000 | ) |
|
| ||||||||
Balance at December 31, 2004 |
| 39,729,906 |
| $ | 397,299 |
| $ | 39,332,607 |
| $ | — |
| $ | 2,148,152 |
| $ | 139,715 |
| $ | (659,400 | ) | $ | 41,358,373 |
|
|
| |
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| 581,188 |
| 581,188 |
| $ | 581,188 |
| |||||||
Net change on hedging derivatives, net of tax of $27,090 |
| — |
| — |
| — |
| — |
| — |
| 38,979 |
| — |
| 38,979 |
| 38,979 |
| ||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 620,167 |
| |||||||
Issuance of common stock |
| 86,400 |
| 864 |
| 85,536 |
| — |
| — |
| — |
| — |
| 86,400 |
|
|
| ||||||||
Balance at June 30, 2005 |
| 39,816,306 |
| $ | 398,163 |
| $ | 39,418,143 |
| — |
| $ | 2,148,152 |
| $ | 178,694 |
| $ | (78,212 | ) | $ | 42,064,940 |
|
|
|
The accompanying notes are an integral part of the consolidated financial statements
F-38
SDI Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2005,
the Years Ended December 31, 2004 and 2003
and the Five Months Ended December 31, 2002
|
| Six Months |
| Years Ended |
| Five Months |
| ||||||
|
| June 30, |
| December 31, |
| December 31, |
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 581,188 |
| $ | 465,219 |
| $ | (763,750 | ) | $ | (360,869 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 3,316,336 |
| 5,857,657 |
| 6,401,313 |
| 2,331,200 |
| ||||
Amortization of discount on subordinated notes |
| 184,487 |
| 368,975 |
| 363,500 |
| 98,994 |
| ||||
Provision for doubtful accounts |
| 815,845 |
| 1,279,501 |
| 389,955 |
| 371,582 |
| ||||
Gain on disposal of assets |
| 12,365 |
| (405,599 | ) | (39,038 | ) | (35,612 | ) | ||||
Deferred income taxes |
| 16,784 |
| (3,683,734 | ) | 396,140 |
| 1,001,387 |
| ||||
Changes in assets and liabilities, net of acquisitions |
|
|
|
|
|
|
|
|
| ||||
(Increase) decrease in— |
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
| (14,689,605 | ) | (8,287,220 | ) | (314,176 | ) | 8,579,381 |
| ||||
Inventories |
| (22,110,080 | ) | (4,591,155 | ) | (2,977,899 | ) | 7,915,641 |
| ||||
Rebates receivable |
| (376,520 | ) | (1,177,402 | ) | (940,687 | ) | (477,546 | ) | ||||
Refundable income taxes |
| — |
| 755,383 |
| 442,275 |
| (1,197,658 | ) | ||||
Prepaid expenses and other current assets |
| (758,667 | ) | 1,710,648 |
| 709,882 |
| (9,669 | ) | ||||
Increase (decrease) in— |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| 21,669,351 |
| 2,277,623 |
| 6,599,249 |
| (10,418,488 | ) | ||||
Accrued expenses and other |
| 2,343,625 |
| 1,182,317 |
| 995,222 |
| (1,986,011 | ) | ||||
Net cash provided by (used in) operating activities |
| (8,994,891 | ) | (4,247,787 | ) | 11,261,986 |
| 5,812,332 |
| ||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (2,827,170 | ) | (2,118,227 | ) | (2,845,907 | ) | (771,966 | ) | ||||
Proceeds from sale of property and equipment |
| 47,000 |
| 1,055,934 |
| 133,291 |
| 57,346 |
| ||||
Acquisitions, net of cash acquired |
| (101,318 | ) | (13,829,846 | ) | (32,005,444 | ) | — |
| ||||
Net cash used in investing activities |
| (2,881,488 | ) | (14,892,139 | ) | (34,718,060 | ) | (714,620 | ) | ||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| ||||
Net change in book overdraft |
| 3,663,980 |
| 1,789,543 |
| 760,070 |
| (1,244,373 | ) | ||||
Proceeds from sale of stock |
| 86,400 |
| 5,275,000 |
| 11,561,906 |
| 45,000 |
| ||||
Stock repurchases |
| — |
| (152,000 | ) | — |
| (3,204,855 | ) | ||||
Net borrowings on revolving credit facility |
| 11,667,062 |
| 11,546,412 |
| 4,802,097 |
| — |
| ||||
Borrowing on senior term loan |
| — |
| 3,250,000 |
| 3,000,000 |
| — |
| ||||
Borrowing on subordinated notes |
| — |
| — |
| 5,000,000 |
| — |
| ||||
Increase in deferred loan costs |
| (150,000 | ) | — |
| — |
| — |
| ||||
Borrowing on senior equipment notes |
| — |
| 1,000,000 |
| 1,500,000 |
| — |
| ||||
Principal payments on senior term loan |
| (1,500,000 | ) | (3,000,000 | ) | (2,750,000 | ) | (500,000 | ) | ||||
Payments on senior equipment notes |
| (312,500 | ) | (375,000 | ) | (156,250 | ) | — |
| ||||
Payments on capital lease obligations |
| (7,542 | ) | (27,782 | ) | — |
| (6,843 | ) | ||||
Net cash provided by (used in) financing activities |
| 13,447,400 |
| 19,306,173 |
| 23,717,823 |
| (4,911,071 | ) | ||||
Net increase in cash and cash equivalents |
| 1,571,021 |
| 166,247 |
| 261,749 |
| 186,641 |
| ||||
Cash and cash equivalents, beginning of period |
| 2,183,957 |
| 2,017,710 |
| 1,755,961 |
| 1,569,320 |
| ||||
Cash and cash equivalents, end of period |
| $ | 3,754,978 |
| $ | 2,183,957 |
| $ | 2,017,710 |
| $ | 1,755,961 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
| ||||
Cash paid for interest |
| $ | 2,628,349 |
| $ | 4,177,508 |
| $ | 3,783,844 |
| $ | 855,758 |
|
Cash paid for income taxes |
| $ | 249,286 |
| $ | 1,819,579 |
| $ | 310,644 |
| $ | 948,806 |
|
Issued seller financing |
| $ | — |
| $ | 2,000,000 |
| $ | — |
| $ | — |
|
The accompanying notes are an integral part of the consolidated financial statements
F-39
SDI Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Six Months Ended June 30, 2005,
the Years Ended December 31, 2004 and 2003
and the Five Months Ended December 31, 2002
1. Organization
Nature of Operations
SDI Holding, Inc. (“SDI Holding” or the “Company”), a Delaware Corporation, was incorporated July 24, 2002 for the purpose of developing a roofing and supply wholesale distribution business. SDI Holding intends to build its business by acquiring and consolidating building product distribution companies concentrating on commercial and residential roofing, residential siding and related products.
The accompanying consolidated financial statements include the accounts of SDI Holding, its wholly owned subsidiary Shelter Distribution, Inc. (“Shelter”), and Shelter’s subsidiaries West Roofing and Supply LP, West Roofing Partners, Inc., Complete Roofing Supply, Inc., Wimsatt Brothers, Inc., Wimsatt Tennessee Corporation, ABCo Wholesale Distributors, Inc. (“ABCo”) and U.S. Superior Building Products, Inc. (“USS”) (collectively the “Company”). Effective July 1, 2004, all of Shelter’s subsidiaries were merged with and into Shelter. All material intercompany accounts and transactions have been eliminated.
The Company is a wholesale distributor of roofing, siding and related building materials. The Company sells products for both commercial and residential applications. The Company’s major customers are predominantly construction companies and building products dealers. The Company operates branches in Arkansas, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee and Texas.
Acquisition of Shelter Distribution, Inc.
Effective August 1, 2002, the Company acquired the stock of Shelter Distribution, Inc. (“the SDI Acquisition”). The purchase price totaled $67,627,321, and was funded through $23,000,000 in equity, $6,000,000 in term loans, $10,000,000 in subordinated notes, and a $28,627,321 draw on the revolving credit facility. SDI Acquisition related costs and fees of $3,353,193 are included in the total purchase price.
In accordance with the underlying agreement, $5,808,822 of this purchase price was deposited into escrow. At December 31, 2003, prepaid expenses and other includes a receivable due from the Seller for $1,967,185. The December 31, 2003 balance was collected in March 2004.
The SDI Acquisition was accounted for as a purchase. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market values at the date of acquisition. The excess of the purchase price over the estimated fair market value of the net assets at the date of acquisition was $27,109,605 which was recorded as goodwill (Note 2).
F-40
The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition:
Cash |
| $ | 1,569,320 |
|
Accounts receivable |
| 29,439,569 |
| |
Inventories |
| 19,702,029 |
| |
Rebates receivable |
| 2,086,127 |
| |
Deferred income tax asset |
| 3,530,788 |
| |
Prepaid expenses |
| 3,244,534 |
| |
Property and equipment |
| 4,925,836 |
| |
Other intangible assets |
| 17,105,790 |
| |
Goodwill |
| 27,109,605 |
| |
Accounts payable |
| (29,222,662 | ) | |
Accrued expenses |
| (5,235,411 | ) | |
Capital lease obligations |
| (203,890 | ) | |
Deferred income taxes |
| (6,424,314 | ) | |
Net assets acquired |
| $ | 67,627,321 |
|
Acquisition of Guardian Building Products Distribution
Effective January 17, 2003, the Company acquired certain assets and liabilities of fourteen branches from Guardian Building Products Distribution for $24,574,847 (“the Guardian Acquisition”). The Guardian Acquisition was funded through $8,585,000 of new equity, the issuance of $3,000,000 in term loans, $5,000,000 in subordinated notes and a $7,994,847 draw on the revolving credit facility. Guardian Acquisition related costs and fees of $1,165,722 are included in the total purchase price.
The Guardian Acquisition was accounted for as a purchase. As a result of the acquisition, the Company gained additional market share in the Kentucky, Tennessee, Missouri and Illinois markets, and a presence in Nebraska, North Carolina and Louisiana. The results of the Guardian Acquisition’s operations have been included in the Company’s consolidated financial statements since the date of the acquisition.
F-41
The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition:
Cash |
| $ | 6,685 |
|
Accounts receivable |
| 6,565,167 |
| |
Inventories |
| 8,217,792 |
| |
Prepaid expenses and other |
| 87,375 |
| |
Property and equipment |
| 2,382,952 |
| |
Other intangible assets |
| 6,701,000 |
| |
Goodwill |
| 3,336,987 |
| |
Accounts payable |
| (2,249,741 | ) | |
Accrued expenses and other |
| (473,370 | ) | |
Net assets acquired |
| $ | 24,574,847 |
|
Acquisition of ABCo Wholesale Distributors, Inc.
Effective April 10, 2003, the Company acquired the stock of ABCo Wholesale Distributors, Inc. for $4,667,068 (“the ABCo Acquisition”). The ABCo Acquisition was funded through an increase in the Company’s revolving credit facility. ABCo Acquisition related costs and fees of $155,457 are included in the total purchase price.
The ABCo Acquisition was accounted for as a purchase and gives the Company a presence in Michigan. The results of the ABCo Acquisition’s operations have been included in the Company’s consolidated financial statements since the date of the acquisition.
The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition.
Cash |
| $ | 272,510 |
|
Accounts receivable |
| 715,274 |
| |
Inventories |
| 2,324,990 |
| |
Prepaid expenses and other |
| 8,884 |
| |
Property and equipment |
| 206,819 |
| |
Other intangible assets |
| 2,061,000 |
| |
Goodwill |
| 684,913 |
| |
Accounts payable |
| (544,272 | ) | |
Accrued expenses and other |
| (247,978 | ) | |
Deferred tax liability |
| (815,072 | ) | |
Net assets acquired |
| $ | 4,667,068 |
|
F-42
Acquisition of U.S. Superior Building Products, Inc.
Effective September 30, 2003, the Company acquired the stock of U.S. Superior Building Products, Inc. for $2,854,872 (“the USS Acquisition”). The USS Acquisition was funded through an increase in the Company’s revolving credit facility. Acquisition related costs and fees of $181,830 are included in the total purchase price.
The USS Acquisition was accounted for as a purchase and gives the Company additional market share in Texas. The results of the USS operations have been included in the Company’s consolidated financial statements since the date of the acquisition. At December 31, 2003, prepaid expenses and other includes a receivable due from the seller for $83,950 resulting from the true-up of net assets acquired.
The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition.
Cash |
| $ | 108,476 |
|
Accounts receivable |
| 1,172,634 |
| |
Inventories |
| 2,292,705 |
| |
Rebates receivable |
| 57,921 |
| |
Prepaid expenses and other |
| 144,180 |
| |
Property and equipment |
| 611,886 |
| |
Other intangible assets |
| 428,000 |
| |
Goodwill |
| 1,958,003 |
| |
Accounts payable |
| (3,193,673 | ) | |
Accrued expenses and other |
| (469,146 | ) | |
Capital lease obligations |
| (82,346 | ) | |
Deferred tax liability |
| (173,768 | ) | |
Net assets acquired |
| $ | 2,854,872 |
|
Acquisition of Forest Siding Supply
On December 31, 2004, the Company acquired certain assets and assumed certain liabilities of Forest Siding Supply (the “Forest Acquisition”) for $15,833,815. Forest operated 14 siding distribution branches in Arkansas, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma and Texas. The Forest Acquisition was funded through the issuance of $5,100,000 of equity, an increase in term debt of $3,250,000 and the issuance of a $2,000,000 seller subordinated note payable, with the remaining purchase price drawn on the Company’s revolving line of credit. Acquisition related costs and fees of $607,300 are included in the purchase price.
F-43
The Forest Acquisition was accounted for as a purchase and gives the Company additional presence in the states noted above. As the transaction took place at the close of business on December 31, 2004, the Company’s results for the year ended December 31, 2004 do not include any amounts related to Forest. At December 31, 2004, prepaid expenses and other includes a receivable due from the seller for $662,967 resulting from the true-up of the purchase price subsequent to closing.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash |
| $ | 3,969 |
|
Accounts receivable |
| 2,257,486 |
| |
Inventories |
| 5,986,123 |
| |
Rebates receivable |
| 197,861 |
| |
Prepaid expenses and other |
| 697,076 |
| |
Property and equipment |
| 1,370,499 |
| |
Other intangible assets |
| 4,849,000 |
| |
Goodwill |
| 4,335,945 |
| |
Accounts payable |
| (2,516,868 | ) | |
Accrued restructuring costs |
| (739,986 | ) | |
Accrued expenses and other |
| (607,290 | ) | |
Net assets acquired |
| $ | 15,833,815 |
|
2. Summary of Significant Accounting Policies
Inventories
The majority of the Company’s inventories are valued at the lower of cost or market determined using weighted average cost.
The Company receives monthly, quarterly, semi-annual and annual rebates from certain of its vendors. The Company accounts for vendor rebates as a reduction to the inventory value based on the total anticipated rebates to be earned for the reporting period. As inventory is sold, the anticipated applicable rebate is booked as a reduction of cost of goods sold. At June 30, 2005, December 31, 2004 and 2003, the cost of inventory is net of vendor rebates and cash discounts earned applicable to ending inventory.
F-44
Financial Instruments
The carrying value of the Company’s financial instruments does not differ materially from their estimated fair value (primarily based on quoted market prices). At June 30, 2005, December 31, 2004 and 2003, the fair value of the Company’s long-term debt, including current maturities, was approximately $22,000,000, $23,650,000 and $20,400,000. The fair value estimate was based on pertinent information available to management.
The Company uses derivative financial instruments to manage the economic impact of fluctuations in interest rates. The Company enters into interest rate swaps to manage these economic risks. As of January 1, 2003, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statements No. 137 and No. 138. The Statements require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive gain (loss) until the hedged item is recognized in earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to that item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; when the derivative expires or is sold, terminated or exercised; when it is probable that the forecasted transaction will not occur; when a hedged firm commitment no longer meets the definition of a firm commitment; or when management determines that designation of the derivative as a hedge instrument is no longer appropriate.
Property and Equipment
The Company’s property and equipment additions are stated at cost and include the cost of replacements and additions of major assets and expenditures that substantially increase the useful lives of existing property and equipment. Repairs and costs of minor replacements are expensed as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss on disposition is recognized.
F-45
Depreciation is calculated on the straight-line method over the estimated useful lives, which range from 1 to 8 years, of the respective assets. Leasehold improvements are amortized over the lesser of the lease term or the life of the asset. Depreciation expense of $1,448,960, $2,312,683, $2,111,975 and $733,741 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 includes amortization of assets recorded under capital leases that was computed based on the term of each lease.
Property and equipment as of June 30, 2005, December 31, 2004 and 2003 consisted of the following:
|
| June 30, |
| December 31, |
| |||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Machinery and equipment |
| $ | 15,571,206 |
| $ | 13,223,870 |
| $ | 9,983,758 |
|
Leasehold improvements |
| 1,272,538 |
| 929,381 |
| 749,956 |
| |||
Furniture and fixtures |
| 722,560 |
| 665,902 |
| 573,549 |
| |||
Construction in progress |
| 12,274 |
| 32,190 |
| 183,237 |
| |||
|
| 17,578,578 |
| 14,851,343 |
| 11,490,500 |
| |||
Less accumulated depreciation |
| 6,577,284 |
| 5,168,894 |
| 2,903,884 |
| |||
Property and equipment, net |
| $ | 11,001,294 |
| $ | 9,682,449 |
| $ | 8,586,616 |
|
Goodwill, Deferred Loan Costs and Other Intangibles
Goodwill represents the purchase price in excess of the fair value of net assets acquired. The Company tests goodwill for impairment on an annual basis, relying on a number of factors including operating results, business plans and future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. No impairment in the value of goodwill was recognized during the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002.
F-46
The changes in the carrying amount of goodwill for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 are as follows:
|
| June 30, |
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Beginning balance |
| $ | 37,492,232 |
| $ | 33,089,508 |
| $ | 28,322,118 |
| $ | 28,322,118 |
|
Net adjustments to purchase price of prior acquisitions |
| 126,318 |
| 66,779 |
| (1,212,513 | ) | — |
| ||||
Acquisitions |
| — |
| 4,335,945 |
| 5,979,903 |
| — |
| ||||
Ending balance |
| $ | 37,618,550 |
| $ | 37,492,232 |
| $ | 33,089,508 |
| $ | 28,322,118 |
|
Deferred loan costs represent costs incurred in connection with placement of the Company’s revolving credit facility, term loan and subordinated notes. Deferred loan costs are being amortized over the terms of the related debt. Amortization expense for deferred loan costs was $157,588, $368,604, $361,068 and $114,679 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002. Based on the current carrying amount of deferred loan costs, the estimated amortization expense for each of the succeeding three years ending June 30 is as follows: 2006—$261,750; 2007—$261,750; 2008—$21,812.
Other intangible assets at June 30, 2005, December 31, 2004 and 2003 consisted of the following:
|
| June 30, |
| December 31, |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||||
|
| Gross |
| Accumulated |
| Gross |
| Accumulated |
|
|
| Accumulated |
| ||||||
|
| Cost |
| Amortization |
| Cost |
| Amortization |
| 2003 |
| Amortization |
| ||||||
Beneficial leases |
| $ | 2,403,868 |
| $ | 571,794 |
| $ | 2,403,868 |
| $ | 466,772 |
| $ | 2,403,868 |
| $ | 256,729 |
|
Noncompetition agreements |
| 5,610,000 |
| 3,841,544 |
| 5,610,000 |
| 3,309,258 |
| 5,401,000 |
| 2,044,304 |
| ||||||
Customer relationships |
| 19,535,000 |
| 5,664,314 |
| 19,535,000 |
| 4,591,834 |
| 14,895,000 |
| 2,894,627 |
| ||||||
Tradename |
| 2,395,000 |
| — |
| 2,395,000 |
| — |
| 2,395,000 |
| — |
| ||||||
Customer log |
| — |
| — |
| 100,000 |
| 100,000 |
| 100,000 |
| 95,833 |
| ||||||
|
| 29,943,868 |
| $ | 10,077,652 |
| 30,043,868 |
| $ | 8,467,864 |
| 25,194,868 |
| $ | 5,291,493 |
| |||
Less accumulated amortization |
| 10,077,652 |
|
|
| 8,467,864 |
|
|
| 5,291,493 |
|
|
| ||||||
Other intangibles, net |
| $ | 19,866,216 |
|
|
| $ | 21,576,004 |
|
|
| $ | 19,903,375 |
|
|
|
Beneficial leases represent the difference between the present value of market rate rents for the term of the leases and the present value of the stated rents in the leases for certain of the Company’s locations. The related asset for these leases is being amortized over the life of the lease. Amortization expense for the beneficial leases was $105,022, $210,043, $183,794 and $72,934 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002.
F-47
Employment agreements are in place for key employees of the Company. These employment agreements contain noncompetition agreements ranging from one to six years. The value of the noncompetition agreements are being amortized on an accelerated basis over a five year period. Amortization expense for the noncompetition agreements was $532,286, $1,264,954, $1,517,679 and $526,625 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002.
Amortization expense for the customer relationships was $1,072,478, $1,697,207, $2,046,521 and $848,105 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 and is being amortized on an accelerated basis over a range of eighteen to twenty years.
Based on the current carrying amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding five years ending June 30 is as follows: 2006—$3,150,010; 2007—$2,588,566; 2008—$1,991,338; 2009—$1,596,615; 2010—$1,432,739.
A trade name acquired in the Guardian Acquisition was valued at $2,395,000. The trade name has an indefinite life and no amortization is recognized.
Comprehensive Income
The Company reports comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes rules for the reporting and display of comprehensive income and its components. Accumulated other comprehensive income as of June 30, 2005 consists entirely of the benefit derived from interest rate swap agreements.
Revenue Recognition
Sales are recognized at the time product is delivered to customers. Service charges on past due accounts of approximately $331,133, $483,000, $372,000 and $129,000 are included in sales for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 and are recognized upon the receipt of cash due to the unpredictable pattern of collectibility.
Accounting for Shipping and Handling Fees and Costs
The Company adheres to Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees and Costs”. This EITF requires the classification of shipping and handling costs billed to customers in sales and shipping and handling costs incurred by the Company to be included in costs of goods sold, or if classified elsewhere, to be disclosed. The Company has reflected these amounts in sales and in selling, general and administrative expenses on the accompanying consolidated statements of income. For the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002
F-48
shipping and handling costs totaled approximately $5,200,000, $8,140,000, $8,340,000 and $2,690,000.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Deferred taxes are determined based on the differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted statutory tax rates.
Advertising Costs
Advertising costs are expensed as incurred and totaled $174,888, $255,377, $214,105 and $117,650 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002.
Stock Option Plan
The Company has a stock option plan. The Company accounts for this plan under the recognition and measurement principles of APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations. The Board of Directors may grant nonqualified stock options to employees. The options have an exercise price equal to the fair market value of the underlying stock at the date of grant and vest ratably over a five year period with the first 20 percent becoming exercisable one year after the date of grant. Options granted expire ten years from the date of grant. At June 30, 2005, December 31, 2004 and 2003, the stock option plan reserved a total of 4,800,000 shares, of which 692,500, 637,500 and 759,500 shares were available for grant.
F-49
The following table summarizes the activity in the stock option plan for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002:
|
|
|
| Exercise |
| |
|
| Options |
| Price |
| |
Options outstanding at August 1, 2002 |
| — |
| $ | — |
|
Options granted |
| 3,301,870 |
| 1.00 |
| |
Options exercised |
| — |
| — |
| |
Options canceled |
| — |
| — |
| |
Options outstanding at December 31, 2002 |
| 3,301,870 |
| $ | 1.00 |
|
Options granted |
| 1,578,450 |
| 1.00 |
| |
Options exercised |
| — |
| — |
| |
Options canceled |
| (839,820 | ) | 1.00 |
| |
Options outstanding at December 31, 2003 |
| 4,040,500 |
| $ | 1.00 |
|
Options granted |
| 369,000 |
| 1.00 |
| |
Options exercised |
| — |
| — |
| |
Options canceled |
| (247,000 | ) | 1.00 |
| |
Options outstanding at December 31, 2004 |
| 4,162,500 |
| $ | 1.00 |
|
Options granted |
| 188,000 |
| 1.00 |
| |
Options exercised |
| (86,400 | ) | — |
| |
Options canceled |
| (156,600 | ) | 1.00 |
| |
Options outstanding at June 30, 2005 |
| 4,107,500 |
| $ | 1.00 |
|
The Company adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation”, which considers stock options as compensation expense to the Company based on their fair value at the date of the grant. Had the compensation expense related to the stock option plan been determined based on the fair value at date of grant, the Company’s operating results would have been reduced to the pro forma amounts indicated below:
|
| June 30, |
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Net income (loss) |
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 581,188 |
| $ | 465,219 |
| $ | (763,750 | ) | $ | (360,869 | ) |
Pro forma |
| 477,113 |
| 255,941 |
| (952,044 | ) | (424,408 | ) | ||||
F-50
The fair value of the options granted is estimated on the date of grant using the Black-Scholes option pricing model utilizing the following assumptions:
|
| June 30, |
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
|
Risk-free interest rate |
| 4.23 | % | 4.47 | % | 4.15 | % | 5.00 | % |
Expected life (years) |
| 10 |
| 10 |
| 10 |
| 10 |
|
Dividend yield |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
Expected volatility |
| 30.00 | % | 30.00 | % | 30.00 | % | 30.00 | % |
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 periods. Actual results could differ from those estimates.
Concentration of Credit Risk
Substantially all of the Company’s accounts receivable are due from construction companies, building product dealers and contractors. Sales volumes for these customers tend to be seasonal in nature with significant declines during the winter months. As of June 30, 2005, December 31, 2004 and 2003, the Company’s accounts receivable included approximately $443,000, $856,000 and $893,000 of notes receivable, which are due within one year. The Company actively maintains its right to file mechanics liens and its right to pursue payment against performance bonds on many commercial or public projects.
Accounts receivable are recorded net of allowances for doubtful accounts. The Company provides an allowance for balances deemed uncollectible. The Company utilizes a systematic approach to setting the allowance which includes a customer by customer review of its accounts receivable and an analysis of historical bad debt. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e. pro forma disclosure is no longer an alternative to financial statement recognition). The provisions of SFAS No. 123(R) must be applied at the beginning of the first interim or annual period beginning after
F-51
June 15, 2005. The Company is in the process of evaluating the impact of this new pronouncement on its financial statements.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional Subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. However, in December 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements involving special purpose entities entered into prior to February 1, 2003. All other arrangements within the scope of FIN 46 are subject to its provisions beginning in 2004. The Company adopted FIN 46, as required, with no material impact to its consolidated financial position or results of operations.
3. Income Taxes
The Company files a consolidated U.S. Federal income tax return and certain consolidated state income returns.
The provision (benefit) from income taxes for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 includes the following:
|
| June 30, |
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Current tax benefit |
|
|
|
|
|
|
|
|
| ||||
Federal |
| $ | 366,936 |
| $ | 3,105,762 |
| $ | (155,263 | ) | $ | (823,236 | ) |
State |
| 112,649 |
| 1,102,939 |
| 28,484 |
| (204,666 | ) | ||||
|
| 479,585 |
| 4,208,701 |
| (126,779 | ) | (1,027,902 | ) | ||||
Deferred tax provision |
|
|
|
|
|
|
|
|
| ||||
Federal |
| 12,649 |
| (2,976,149 | ) | 331,743 |
| 838,600 |
| ||||
State |
| 4,135 |
| (707,585 | ) | 64,397 |
| 162,787 |
| ||||
|
| 16,784 |
| (3,683,734 | ) | 396,140 |
| 1,001,387 |
| ||||
|
| $ | 496,369 |
| $ | 524,967 |
| $ | 269,361 |
| $ | (26,515 | ) |
F-52
A reconciliation of the income tax provision (benefit) to income taxes computed using the U.S. statutory income tax rate is summarized below:
|
| June 30, |
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Income from continuing operations before income taxes |
| $ | 1,173,208 |
| $ | 1,117,400 |
| $ | 220,066 |
| $ | (248,442 | ) |
U.S. statutory rate |
| 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||
Tax at U.S. statutory rate |
| 398,891 |
| 379,916 |
| 74,822 |
| (84,470 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Federal tax effect of permanent items |
|
|
|
|
|
|
|
|
| ||||
Meals and entertainment |
| 10,810 |
| 54,641 |
| 58,259 |
| 23,500 |
| ||||
Officers life insurance |
| 4,054 |
| 25,500 |
| 25,407 |
| 2,509 |
| ||||
Other |
| 4,594 |
| 39,576 |
| 30,733 |
| 17,902 |
| ||||
State, local and other income taxes net of federal benefit |
| 78,020 |
| 25,334 |
| 80,140 |
| 14,044 |
| ||||
Income tax provision |
| $ | 496,369 |
| $ | 524,967 |
| $ | 269,361 |
| $ | (26,515 | ) |
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
| June 30, |
| December 31, |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||||
|
| Current |
| Long-term |
| Current |
| Long-term |
| Current |
| Long-term |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Allowance for doubtful accounts |
| $ | 798,900 |
| $ | — |
| $ | 798,900 |
| $ | — |
| $ | 1,080,620 |
| $ | — |
|
Inventory |
| 2,361,044 |
| — |
| 2,493,537 |
| — |
| 493,934 |
| — |
| ||||||
Accrued expenses |
| 485,702 |
| — |
| 504,077 |
| — |
| 357,014 |
| — |
| ||||||
Other |
| 6,774 |
| 130,939 |
| 6,775 |
| 130,939 |
| 6,773 |
| 117,457 |
| ||||||
Total deferred tax assets |
| 3,652,420 |
| 130,939 |
| 3,803,289 |
| 130,939 |
| 1,938,341 |
| 117,457 |
| ||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intangible assets |
| — |
| (5,004,586 | ) | — |
| (5,138,672 | ) | — |
| (6,078,410 | ) | ||||||
Prepaid expenses |
| — |
| — |
| — |
| — |
| (798,677 | ) | — |
| ||||||
Property and equipment |
| — |
| (391,674 | ) | — |
| (391,674 | ) | — |
| (186,043 | ) | ||||||
LIFO reserve |
| — |
| — |
|
|
|
|
| (272,520 | ) |
|
| ||||||
Interest rate swap |
| — |
| (124,178 | ) | — |
| (97,090 | ) | — |
| — |
| ||||||
Total deferred tax liabilities |
| — |
| (5,520,438 | ) | — |
| (5,627,436 | ) | (1,071,197 | ) | (6,264,453 | ) | ||||||
Net deferred tax assets (liabilities) |
| $ | 3,652,420 |
| $ | (5,389,499 | ) | $ | 3,803,289 |
| $ | (5,496,497 | ) | $ | 867,144 |
| $ | (6,146,996 | ) |
F-53
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. Although realization is not assured, management believes they will generate sufficient taxable income in future years to realize these deferred tax assets. Based on management’s analysis of the realization of deferred tax assets at June 30, 2005, no valuation allowance was provided.
4. Capital Leases
The Company is party to capital lease agreements covering certain vehicles and equipment. The remaining terms as of June 30, 2005 are for periods ranging from approximately one to five years (expiring in August 2009) and generally provide for payment of insurance, maintenance and taxes by the Company. Certain of these leases have renewal and purchase options at varying dates. As of June 30, 2005, December 31, 2004 and 2003 amounts capitalized related to these leases and included in property and equipment, net in the accompanying consolidated balance sheets totaled approximately $50,700, $64,600 and $83,000.
Future minimum lease payments under capital leases as of June 30, 2005 are as follows:
Twelve months ending June 30, 2006 |
| $ | 17,387 |
|
Twelve months ending June 30, 2007 |
| 15,895 |
| |
Twelve months ending June 30, 2008 |
| 11,417 |
| |
Twelve months ending June 30, 2009 |
| 6,439 |
| |
Twelve months ending June 30, 2010 |
| 800 |
| |
Thereafter |
| — |
| |
Total minimum lease payments |
| 51,938 |
| |
Less amount representing interest |
| 4,915 |
| |
Present value of minimum lease payments |
| 47,023 |
| |
Less current portion |
| 13,347 |
| |
|
| $ | 33,676 |
|
F-54
5. Debt
Long-term debt as of June 30, 2005, December 31, 2004 and 2003 consists of the following:
|
| June 30, |
| December 31, |
| |||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Senior term loan, due October 1, 2006; principal due in quarterly installments through October 1, 2006, interest payable monthly at base rate or LIBOR plus applicable margin (interest rate of 7.25% as of June 30, 2005) collateralized by all assets of the company |
| $ | 4,500,000 |
| $ | 6,000,000 |
| $ | 5,750,000 |
|
Senior equipment notes, due July 31, 2007; principal due in quarterly installments through July 1, 2007, interest payable monthly at base rate or LIBOR plus applicable margin (interest rate of 7.25% as of June 30, 2005) collateralized by all assets of the Company |
| 1,656,250 |
| 1,968,750 |
| 1,343,750 |
| |||
8% uncollateralized seller subordinated note, due December 31, 2005 |
| 2,000,000 |
| 2,000,000 |
| — |
| |||
12.5% uncollateralized subordinated notes to stockholders, due July 15, 2008 |
| 15,000,000 |
| 15,000,000 |
| 15,000,000 |
| |||
|
| 23,156,250 |
| 24,968,750 |
| 22,093,750 |
| |||
Discount on subordinated notes to stockholders |
| (1,132,196 | ) | (1,316,683 | ) | (1,685,658 | ) | |||
|
| 22,024,054 |
| 23,652,067 |
| 20,408,092 |
| |||
Less current portion |
| 5,625,000 |
| 5,625,000 |
| 3,375,000 |
| |||
Long-term debt |
| $ | 16,399,054 |
| $ | 18,027,067 |
| $ | 17,033,092 |
|
In addition to the long-term debt detailed above, the Company has a senior revolving credit facility (the “Facility”) which expires July 31, 2007. All amounts collected by the Company are used to reduce the outstanding balance each day, and the Company borrows against the senior revolving credit facility each day to fund its payment obligations. Interest is payable monthly at base rate or LIBOR plus applicable margin (5.63 percent to 6.75 percent at June 30, 2005). This facility is collateralized by all assets of the Company.
F-55
The Company has a senior loan agreement covering the senior revolving credit facility, senior term loan and senior equipment notes. At June 30, 2005, the total facility aggregated $70,000,000. Borrowings under the revolving credit facility portion of the agreement are limited to a collateral base consisting of specified percentages of eligible accounts receivable and inventories. Available borrowings under the senior revolving facility were $7,808,663 at June 30, 2005 and the Company also had $3,754,978 in cash. Borrowings on the Company’s revolving line of credit are classified as current due to certain provisions of the Facility whereby the Company’s cash receipts are automatically applied against borrowings under the revolving line of credit. The Facility also includes a clause giving the lender the ability to recall the debt in the event of certain significant adverse changes in the business.
At June 30, 2005, the Company had outstanding letters of credit under its senior loan agreement aggregating $2,597,000. The beneficiaries of the letters of credit are the insurance companies which handle claims payments under the Company’s self insurance programs. The amount of outstanding letters of credit reduces the Company’s collateral base for purposes of determining the maximum borrowings that may be outstanding. The letters of credit are not considered outstanding debt and, therefore, are not included in the Company’s liabilities at June 30, 2005.
The senior loan agreement contains covenants which restrict the Company’s ability to incur additional debt, make distributions, and make capital expenditures in excess of certain limits or dispose of assets other than in the ordinary course of business. Further, the senior loan agreement requires the Company maintain certain ratios relative to the amount of fixed charges, senior debt levels and total debt levels. At June 30, 2005, the Company was in compliance with these ratios.
In March 2005, the Company and its banks amended the terms of the senior loan agreement to increase the maximum borrowings from $60,000,000 to $70,000,000, extend the termination date of the agreement by one year to July 31, 2007 and amend certain covenants. In July 2005, the Company and its banks amended the terms of the senior loan agreement to temporarily increase the maximum borrowings from $70,000,000 to $76,000,000, providing the company’s collateral base is sufficient to cover such additional borrowings. This temporary increase expires October 26, 2005.
In connection with the SDI Acquisition and the Guardian Acquisition, the Company sold $15,000,000 of 12.5 percent subordinated notes to Massachusetts Mutual Life Insurance Company, and affiliated entities (“MassMutual”). Interest is payable quarterly. The principal amount becomes due July 15, 2008. As of June 30, 2005, the Company had accrued $390,635 of interest payable to stockholders related to the subordinated notes. MassMutual is an equity investor in the Company.
The subordinated note agreement contains restrictive covenants which mirror those contained in the senior loan agreement. At June 30, 2005, the Company was in compliance with these ratios.
F-56
In connection with the acquisition of the net assets of Forest Siding Supply, the Company issued the seller a $2,000,000 subordinated note as a portion of the purchase consideration (the “Seller Note”). The Seller Note carries interest at 8% and is due in full on December 31, 2005. The Seller Note is subordinated to the senior loan agreement and is junior to the 12.5% uncollateralized subordinated notes due stockholders. A portion of the Seller Note is guaranteed by the Company’s Chief Executive Officer.
Future maturities of long-term debt as of June 30, 2005 are as follows:
Twelve month period ending June 30, 2006 |
| $ | 5,625,000 |
|
Twelve month period ending June 30, 2007 |
| 2,093,750 |
| |
Twelve month period ending June 30, 2008 |
| 437,500 |
| |
Twelve month period ending June 30, 2009 |
| 15,000,000 |
| |
Twelve month period ending June 30, 2010 |
| — |
| |
Thereafter |
| — |
| |
|
| $ | 23,156,250 |
|
6. Warrants
In conjunction with the issuance of the subordinated notes issued at its inception, the Company issued the holders of the notes 1,735,628 warrants to purchase its common stock. In conjunction with the subordinated notes issued to finance the Guardian acquisition, an additional 722,649 warrants were issued. The exercise price of the warrants is $.01 per share. The warrants are exercisable at any time before the expiration on July 15, 2009 and are considered automatically exercised on the last day of the agreement, unless otherwise notified. The Company has reserved 2,458,277 shares of authorized, unissued common stock for the conversion of outstanding stock warrants. The warrants are not transferable without prior approval of the Company. A risk free interest rate ranging from 4.15 percent to 5.00 percent was used in determining the value of the warrants. The fair value of these warrants of $2,148,152 was recorded as equity at date of acquisition and as subordinated notes discount. This discount is being amortized over six years. During the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002, the Company amortized $184,487, $368,975, $363,500 and $98,994 of the discount.
7. Benefit Plans
The Company has a 401(k) plan covering substantially all of its employees. The plan allows for employee contributions and Company matching contributions that are made at the discretion of the Company’s Board of Directors. The participants begin partial vesting after two years of service and become fully vested after six years of service.
F-57
The Company has a partially self-funded health insurance plan that is offered to all qualifying employees. The plan limits the liability to the Company by having both individual and aggregate stop loss insurance policies. Expense recognized related to the plan was $878,485, $1,831,612, $2,172,398 and $372,608 for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002.
8. Related Party Transactions
The Company’s majority shareholder is Brazos Private Equity Partners, LLC (“Brazos”), which provides management assistance and oversight to the Company. Brazos receives a quarterly fee based on a percentage of gross sales as well as fees on consummated acquisitions and capital infusions. Brazos earned approximately $343,653, $640,000, $1,350,000 and $270,000 for these services provided during the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002. Approximately $330,000 and $750,000 of the fees earned in 2004 and 2003 relate to assistance provided in conjunction with the Company’s acquisitions and were capitalized. Amounts due to Brazos at June 30, 2005, December 31, 2004 and 2003 were $156,855, $516,280 and $196,915.
9. Financial Instruments and Risk Management
During 2003, the Company entered into two interest rate swap agreements, each with a notional amount of $10 million that effectively convert a portion of its variable-rate borrowings to a fixed-rate basis through the maturity of the related debt on July 31, 2006, thus reducing the impact of changes in interest rates on future interest expense. Approximately 40% of the Company’s outstanding variable-rate borrowings as of June 30, 2005 have been hedged through the designation of interest rate swap agreements classified as cash flow hedges. Under the terms of the agreement, the Company pays a fixed rate of 2.44% and 2.47% and receives a LIBOR floating rate. The fair value of the Company’s interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. The change in accumulated other comprehensive income shown on the consolidated statement of changes in stockholders’ equity reflects the change in the fair value of these swap agreements during the six months ended June 30, 2005 and the years ended December 31, 2004 and 2003.
F-58
10. Commitments and Contingencies
The Company leases offices and certain warehouse facilities under various noncancelable agreements accounted for as operating leases. The leases are for periods ranging from one to twelve years. Certain of the leases contain renewal or purchase options and annual adjustments based on the consumer price index. Operating lease expense for current operating branches for the six months ended June 30, 2005, the years ended December 31, 2004 and 2003 and the five months ended December 31, 2002 was approximately $2,850,000, $4,300,000, $3,600,000 and $900,000. Future minimum lease payments under noncancelable operating leases as of June 30, 2005 are as follows:
Six months ending December 31, 2005 |
| $ | 3,128,582 |
|
Year ending December 31, 2006 |
| 5,846,792 |
| |
Year ending December 31, 2007 |
| 5,313,308 |
| |
Year ending December 31, 2008 |
| 4,004,202 |
| |
Year ending December 31, 2009 |
| 3,035,964 |
| |
Thereafter |
| 2,866,337 |
| |
|
| $ | 24,195,185 |
|
From time to time, the Company is a party to certain claims and litigation incidental to its business. Management is of the opinion that the ultimate resolution of any known claims, either individually or in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flow.
F-59
11. Discontinued Operations
During 2004, the Company closed branches located in Macon, GA and Corpus Christi, TX and sold a branch in Springfield, IL. In 2003, the Company closed branches in St. Louis, MO, Shreveport and Monroe, LA, Austin, TX and Toledo, OH. The financial results of the closed or sold branches have been accounted for as discontinued operations. The Company recognized additional expense of approximately $280,000 and $360,000 in 2004 and 2003 to account for estimated future lease costs and related expenditures. A summary of discontinued operations is shown below:
|
| June 30, |
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| ||||
Statements of Operations |
|
|
|
|
|
|
|
|
| ||||
Sales, net |
| $ | 28,507 |
| $ | 3,542,774 |
| $ | 10,337,506 |
| $ | 3,472,300 |
|
Cost of goods sold |
| (22,387 | ) | (2,778,077 | ) | (8,133,425 | ) | (2,733,654 | ) | ||||
Selling, general and administrative expenses |
| (167,150 | ) | (1,378,862 | ) | (3,386,954 | ) | (968,683 | ) | ||||
Gain on disposal of assets |
| — |
| 400,000 |
| — |
| — |
| ||||
Loss before income taxes |
| (161,030 | ) | (214,165 | ) | (1,182,873 | ) | (230,037 | ) | ||||
Income taxes benefit |
| 65,378 |
| 86,951 |
| 468,418 |
| 91,095 |
| ||||
Loss from discontinued operations |
| $ | (95,652 | ) | $ | (127,214 | ) | $ | (714,455 | ) | $ | (138,942 | ) |
12. Subsequent Event
On August 9, 2005, the Company and its stockholders and warrantholders entered into a Securities Purchase Agreement with Beacon Sales Acquisition, Inc. (Beacon) under which Beacon will acquire all of the Company’s issued and outstanding stock. The purchase price is $152,000,000 in cash, payable at closing, subject to an adjustment for working capital and other items. The Company’s outstanding debt at closing will be repaid and the difference between the exercise price and the calculated value of each share of common stock will be paid to each optionholder prior to the distribution of proceeds to the selling stockholders. Based on the Company’s performance for the remainder of calendar 2005, the Company’s stockholders could receive up to an additional $10,000,000 in additional purchase price. The transaction is expected to close in October 2005.
F-60