Exhibit 99.1
Report of Independent Auditors
The Boards of Directors
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
We have audited the accompanying combined balance sheet of Newmark
International, Inc. and Pfleiderer Leasing USA, Inc. (collectively referred to
as the "Company") as of December 31, 2003, and the related combined statements
of income, stockholder's equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Company at
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Birmingham, Alabama
March 12, 2004,
except for Note 16, as to which the date is
April 1, 2004
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Combined Balance Sheet
December 31, 2003
Assets
Current assets:
Cash $ 1,563,039
Trade accounts receivable, net of allowance for doubtful
accounts of $46,000 14,060,824
Inventories 11,003,841
Deferred income taxes 481,000
Prepaid expenses 408,274
Other current assets 525,381
-----------------
Total current assets 28,042,359
Property, plant and equipment, net 31,262,702
Goodwill 2,769,107
-----------------
Total assets $ 62,074,168
=================
Liabilities and stockholder's equity
Current liabilities:
Revolving credit agreements $ 8,000,000
Trade accounts payable 4,901,299
Income taxes payable 936,396
Accrued insurance 511,445
Taxes payable other than income 446,800
Other accrued liabilities 1,104,166
Current portion of note payable to parent 103,982
Current portion of capital lease obligations 4,607
-----------------
Total current liabilities 16,008,695
Note payable to parent 2,826,662
Dividend payable to parent 12,000,000
Deferred income taxes 3,516,000
Stockholder's equity:
Common stock 1,500
Additional paid-in capital 17,451,167
Retained earnings 10,270,144
----------------
Total stockholder's equity 27,722,811
----------------
Total liabilities and stockholder's equity $ 62,074,168
==================
See accompanying notes.
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Combined Statement of Income
Year ended December 31, 2003
Net sales $ 86,364,896
Cost of sales 57,878,815
-----------------
Gross profit 28,486,081
Selling, general and administrative expenses 18,486,576
------------------
Operating income 9,999,505
Other expenses (income):
Interest, net 1,130,352
Other, net (17,622)
------------------
1,112,730
------------------
Income before income taxes 8,886,775
Income taxes 3,608,000
-------------------
Net income $ 5,278,775
====================
See accompanying notes.
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Combined Statement of Stockholder's Equity
Additional Total
Common Paid-in Retained Stockholder's
Stock Capital Earnings Equity
----------------- ---------------- ----------------- ----------------
Balance at December 31, 2002 $ 1,500 $ 17,451,167 $ 4,991,369 $ 22,444,036
Net income - - 5,278,775 5,278,775
----------------- ---------------- ----------------- ----------------
Balance at December 31, 2003 $ 1,500 $ 17,451,167 $10,270,144 $ 27,722,811
================= ================ ================= ================
See accompanying notes.
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Combined Statement of Cash Flows
Year ended December 31, 2003
Operating activities
Net income $ 5,278,775
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization:
Property, plant and equipment 3,767,740
Deferred income taxes 1,076,000
Loss on asset dispositions 19,216
Changes in operating assets and liabilities:
Trade accounts receivable (1,640,874)
Inventories (1,409,767)
Prepaid and other current assets (421,545)
Trade accounts payable 1,182,757
Income taxes payable 37,043
Other accrued liabilities (1,144,518)
Due to parent (147,368)
--------------
Net cash provided by operating activities 6,597,459
Investing activities
Purchases of property, plant and equipment (1,685,035)
--------------
Net cash used in investing activities (1,685,035)
Financing activities
Net proceeds on revolving credit
agreements $ 4,208,363
Principal payments on long-term debt (350,000)
Principal payments under capital lease obligations (16,351)
Principal payments on note payable to parent (581,189)
Dividend payments (13,000,000)
---------------
Net cash used in financing activities (9,739,177)
---------------
Net (decrease) in cash (4,826,753)
Cash at beginning of year 6,389,792
---------------
Cash at end of year $ 1,563,039
===============
Supplemental disclosures of cash flow information
Interest paid $ 1,139,582
Income taxes paid 2,492,657
See accompanying notes.
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Notes to Combined Financial Statements
December 31, 2003
1. Significant Accounting Policies
Principles of Combination
The combined financial statements include the accounts of Newmark International,
Inc. (Newmark) and its affiliate, Pfleiderer Leasing USA, Inc. (PLUSA),
collectively referred to as the "Company." All intercompany account balances and
transactions primarily consisting of rental payments, deferred gain on
sale-leaseback, and related tax effect, have been eliminated in combination.
Description of Business
Newmark designs, manufactures and sells concrete, steel and fiberglass pole
structures for the utility, telecommunications and lighting markets, operating
primarily in the southern half of the United States. PLUSA is the legal owner of
land, buildings and machinery and equipment located in Florida whose operations
consist solely of leasing such assets to Newmark. Both Newmark and PLUSA are
wholly-owned subsidiaries of Pfleiderer AG, a public corporation headquartered
in Germany (parent).
Revenue Recognition
Sales are generally recognized upon shipment of products. In certain
transactions, products are manufactured and stored for future delivery in
accordance with the sales contract. Sales in these transactions are recognized
at the earlier of the shipment date or the contract delivery date, when actual
delivery has been delayed by the customer. Sales of steel pole structures are
recognized on a percentage of completion basis in the ratio that costs incurred
bears to total estimated costs. Provision is made for any anticipated losses in
the period that such losses are determined.
Shipping and Handling Costs
Shipping and handling costs are included in selling, general and administrative
expenses. Such costs amounted to approximately $7,200,000 for the year ended
December 31, 2003.
Newmark International, Inc. and Pfleiderer Leasing USA, Inc.
Notes to Combined Financial Statements (continued)
Stock-Based Compensation
The Company accounts for stock options granted by the parent, for the purchase
of shares of the parent's stock by employees of the Company, using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25). Under this method,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the parent's stock at the date of the grant over the
amount an employee must pay to acquire the parent's stock.
Had compensation for the Company employees' participation in the parent's stock
option plan been accounted for using the fair value method prescribed in
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, pro-forma net
income would have been as follows for the year ended December 31, 2003:
Net income, as reported $ 5,278,775
Add: Stock-based compensation cost, net of tax,
included in the determination of net income as
reported -
Deduct: Stock-based compensation cost, net of tax,
that would have been included in the determination
of net income had the fair value method been used (66,800)
----------------
Pro-forma net income $ 5,211,975
=================
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, Accounting for Income Taxes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements and notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers highly liquid investments with maturities of three months
or less when purchased to be cash equivalents including bank time deposits,
money market securities and commercial paper. At December 31, 2003 the Company
had no cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are stated at cost less the allowance for doubtful
accounts. The allowance for doubtful accounts is established through charges to
the provision for bad debts. Trade accounts receivable are charged to the
allowance for doubtful accounts after collection efforts are exhausted and the
account is deemed uncollectible. The Company evaluates the adequacy of the
allowance for doubtful accounts on a periodic basis. The evaluation includes
historical loss experience, the nature and volume of the Company's receivables,
adverse situations that may affect a customer's ability to repay and the
prevailing economic conditions. If the evaluation of the allowance requirements
differs from the actual allowance, adjustments are made to the allowance.
Inventories
Inventories are valued at the lower of cost, as determined by the first-in,
first-out (FIFO) method, or market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. Depreciation and
amortization of property, plant and equipment are calculated using the
straight-line method over the estimated useful lives of the assets. Useful lives
are as follows: land improvements - ten to thirty years, buildings and
improvements - ten to forty years, machinery and equipment - eight to twelve
years, and office equipment and furnishings - three to ten years.
Expenditures for maintenance and repairs are expensed when incurred. Major
renewals and betterments that extend the life of the asset are capitalized.
Interest expense is capitalized in connection with the construction of major
facilities. Capitalized interest is recorded as part of the asset to which it
relates and is amortized over the asset's estimated useful life.
Goodwill
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142, which was effective for the Company January 1, 2002, provides that
goodwill is no longer amortized. Instead of amortization, SFAS No. 142 requires
a test for impairment to be performed on unamortized goodwill at least annually,
or immediately if conditions indicate that impairment could exist. No
unamortized goodwill was determined to be impaired in 2003 based on the results
of the impairment testing.
2. Inventories
Inventories at December 31, 2003 consist of the following:
Finished goods $ 5,595,714
Work-in-process 1,611,816
Raw materials and supplies 3,796,311
------------
$ 11,003,841
=============
3. Property, Plant and Equipment
Property, plant and equipment at December 31, 2003 consists of the following:
Land and improvements 3,208,614
Buildings and improvements 15,082,102
Machinery and equipment 45,699,865
Office equipment and furnishings 2,690,188
Construction-in-progress 162,450
--------------
66,843,219
Accumulated depreciation and amortization (35,580,517)
--------------
$ 31,262,702
==============
Depreciation expense for the year ended December 31, 2003 amounted to
$3,767,740. Amortization of assets held under capital leases is included in
depreciation expense.
4. Credit Agreements and Letters of Credit
At December 31, 2003, the Company had borrowed $8,000,000 under an unsecured
revolving credit agreement with a European bank. The agreement, which extends
through April 9, 2004, provides for maximum borrowings up to $8,000,000.
Borrowings bear interest at the 90-day LIBO rate plus 0.85% (2.01% at December
31, 2003).
At December 31, 2003, the Company had an unsecured overdraft credit agreement
with the New York branch of a European bank that provides for maximum borrowings
of up to $5,000,000. Borrowings bear interest at the bank's base rate minus
1.25% (2.75% at December 31, 2003) and are due on demand. There were no
outstanding borrowings under this credit agreement at December 31, 2003.
On February 11, 2003, the Company entered into an unsecured revolving credit
agreement with a U.S. commercial bank that provides for maximum borrowings up to
$1,200,000. Borrowings bear interest at the 30-day LIBOR plus 2%, but in no
event less than 4% (4% at December 31, 2003). The agreement extends through
February 15, 2004. There were no borrowings under this credit agreement at
December 31, 2003.
At December 31, 2003, the Company had outstanding letters of credit of
$1,950,000. These letters of credit serve as collateral for certain of the
Company's insurance policies. As a result of the issuances of the letters of
credit, available borrowings were reduced at December 31, 2003 by $550,000 under
the overdraft credit agreement and by $1,200,000 under the revolving credit
agreement with a U.S. commercial bank.
The Company's revolving credit agreements contain covenants regarding, among
other things, changes in ownership, indebtedness and the maintenance of specific
financial ratios. The Company was in compliance with such covenants at December
31, 2003 and for the year then ended.
5. Long-Term Debt
Long-term debt at December 31, 2003 consists of a promissory note payable to
parent with a principal balance of $2,930,644. This promissory note is payable
in monthly installments of $23,083 including interest at 6%. Future maturities
of this promissory note at December 31, 2003 are as follows:
Years ending December 31:
2004 $ 103,982
2005 110,396
2006 117,205
2007 124,434
2008 132,108
Thereafter 2,342,519
----------
$ 2,930,644
============
Interest cost incurred for the year ended December 31, 2003, including long-term
debt and revolving credit interest, was approximately $1,154,000. Of this
amount, none was capitalized in 2003.
6. Dividends Payable to Parent
On December 19, 2001, the Company entered into a dividend agreement with its
parent whereby any dividends declared subsequent to December 31, 2001 and prior
to January 1, 2005 shall not be paid before January 1, 2005. At any time on or
after January 1, 2005, the Company will pay such dividends within 30 days of
receiving notice of demand for payment.
On December 20, 2001, the Company declared a $17,000,000 dividend payable to its
parent of record as of December 28, 2001. Interest is payable quarterly at the
rate of 5.25% per annum on the unpaid balance.
The Company and its parent amended the dividend agreement on December 31, 2002.
The amendment provides that, upon written request from the parent, the Board of
Directors of the Company shall determine whether to pay the requested dividend
payment. If the Board of Directors of the Company determines that it has
sufficient funds on hand or readily available to make the requested payment
without compromising its ability to fund working capital requirements and
planned capital investments, the Board of Directors may authorize the payment.
On December 31, 2002, the Company declared an $8,000,000 dividend payable to its
parent of record as of December 31, 2002. In accordance with the provisions of
the dividend agreement amendment, the Company paid this dividend on February 17,
2003.
On June 27, 2003, in accordance with the provisions of the dividend agreement
amendment, the Company paid $5,000,000 of the $17,000,000 dividend declared on
December 20, 2001, leaving $12,000,000 outstanding as of December 31, 2003.
7. Common Stock
Common stock as of December 31, 2003 consists of 500 shares of Newmark common
stock ($1.00 pare value; 1,000 shares authorized, 500 shares issued and
outstanding) and 1,000 shares of PLUSA common stock ($1.00 par value; 2,000
shares authorized, 1,000 shares issued and outstanding).
8. Income Taxes
The components of income tax expense for the year ended December 31, 2003 are as
follows:
Current:
Federal $ 2,163,000
State 369,000
---------------
Total current 2,532,000
Deferred:
Federal 926,000
State 150,000
---------------
Total deferred 1,076,000
---------------
$ 3,608,000
================
The reconciliation of income tax expense computed at the U.S. federal statutory
tax rate to income tax expense for the year ended December 31 2003 is as
follows:
Federal income tax at statutory rate (34%) $ 3,022,000
State income taxes, net of federal income tax benefit 343,000
Adjustment to estimated income tax accruals 162,000
Nondeductible items 62,000
Other, net 19,000
----------------
$ 3,608,000
=================
The components of net deferred tax amounts recognized in the balance sheet at
December 31, 2003 are as follows:
Deferred tax assets:
Allowance for doubtful accounts $ 18,000
Inventories 463,000
------------------
Total deferred tax assets 481,000
Deferred tax liabilities:
Property, plant and equipment 3,229,000
Goodwill 287,000
-------------------
Total deferred tax liability 3,516,000
--------------------
Net deferred tax liability $ 3,035,000
====================
9. Leases
The Company leases certain land, buildings, machinery and equipment and office
facilities under capital and operating leases. The gross amount of assets and
related accumulated amortization recorded under capital leases at December 31,
2003 is as follows:
Machinery and equipment $ 244,531
Office equipment and furnishings 227,219
----------------
471,750
Accumulated amortization (467,899)
----------------
$ 3,851
================
Future minimum lease payments under capital leases at December 31, 2003 consist
of the following:
2004 $ 4,691
----------------
Minimum lease payments 4,691
Less amount representing imputed interest (84)
----------------
Present value of minimum lease payments 4,607
Less current portion (4,607)
----------------
$ -
================
Future minimum lease payments for non-cancelable operating leases at December
31, 2003 are as follows:
2004 $ 1,120,199
2005 892,751
2006 548,151
2007 482,679
2008 389,792
Thereafter 135,574
----------------
$ 3,569,146
================
Rental expense for operating leases totaled $1,614,394 for the year ended
December 31, 2003.
10. Employee Savings Plan
The Company has a 401(k) savings plan covering substantially all full time
employees. Generally, employees may participate in the plan after completing
service requirements. The plan allows participants to make pre-tax
contributions, and the Company matches 50% of employee contributions up to 6% of
eligible compensation. Additional annual contributions may be made at the
discretion of the Company's Board of Directors. Company contributions were
approximately $196,000 for the year ended December 31, 2003.
11. Stock Option Plans
The parent has two stock options plans (the 2001 and 2002 plans) that provide
for the issuance of options of certain key employees of the parent and its
subsidiaries for the purchase of shares of the parent's stock. Each plan
requires that participants make a personal financial investment by purchasing
shares of the parent. The number of options granted is determined by dividing
the amount of the personal financial investment by the average daily closing
price of the parent's stock for the three months prior to the grant date (the
"Base Price") and multiplying the result by 12. The options vest three years
after the grant date. Vested options may be exercised, subject to employment and
other conditions, at any time within three years after the vesting date. The
options are exercisable one quarter each at 110%, 115%, 120% and 125% of the
Base Price.
Stock option activity for the year ended December 31, 2003 is summarized as
follows:
Weighted
Average
Options Exercise Price
------------------------------------------
January 1, 2003 Balance 96,384 7.08
2003 Activity:
Granted - -
Exercised - -
Forfeited - -
----------------------------
December 31, 2003 Balance 96,384 7.08
============================
Information with regard to options outstanding and exercisable at December 31,
2003 is as follows:
Options Exercisable
-----------------------------------
Weighted
Average
Weighted Remaining Weighted
Range of Exercise Average Life at Average
Prices Exercise Price Options 12/31/03 Exercise Price
Outstanding (Years) Shares
- --------------------- ----------------- ------------------- --------------- ----------------- -----------------
$ 5.11 - 5.81 $ 5.46 32,124 4.92 - $ -
7.39 - 8.39 7.89 64,260 3.92 - -
------------------- -----------------
5.11 - 8.39 7.08 96,384 4.25 - -
=================== =================
12. Related Party Transactions
From time to time, in the ordinary course of business, the Company purchases
certain machinery and equipment, supplies and services from its parent. These
purchases totaled approximately $726,000 for the year ended December 31, 2003.
The Company recognized approximately $780,000 in interest expense on the
dividend payable to parent for the year ended December 31, 2003.
The Company recognized approximately $195,000 in interest expense on the note
payable to parent for the year ended December 31, 2003.
The Company recognized interest income of approximately $7,000 for the year
ended December 31, 2003 on a short-term investment with parent.
13. Customer and Credit Risk Concentrations
The Company's largest customers accounted for the following percentages of total
sales in 2003:
Customer
The Southern Company and its subsidiaries 12%
American Electric Power Company, Inc. 11%
TXU Corporation and its subsidiaries 11%
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of accounts receivable for sales to certain
customers. The Company writes off accounts receivable when factors surrounding
the credit risk of a customer indicate an impairment of value. The maximum
potential accounting loss related to accounts receivable is limited to the net
balance outstanding at December 31, 2003.
14. Contingency
In March 2002, an individual employed by a contractor of a customer of the
Company filed a complaint against the Company. The complaint, for unspecified
damages, alleges that the individual suffered injuries to his lower legs, ankles
and feet as a result of the failure of a pole during installation that was
designed and manufactured by the Company.
The Company disputes the claim, believes that it has substantial meritorious
defenses and is vigorously contesting the claim. No suit has yet gone to trial.
Although it is not possible to predict the outcome of this matter, the Company
believes that it has adequate insurance coverage and that the outcome will not
have a material adverse impact on the Company's financial statements.
15. Subsequent Event
On February 23, 2004, the parent entered into an agreement to sell 100% of the
outstanding stock of both Newmark and PLUSA to Valmont Industries, Inc
(Valmont). The sale, which is subject to regulatory approval, is expected to
close by the end of March 2004.
Under the terms of the agreement, the Company and its parent will execute a
dividend termination agreement at closing that provides for termination of the
dividend agreement discussed in Note 6 to the financial statements and
cancellation of the Company's $12,000,000 dividend payable obligation that
exists at December 31, 2003. The agreement also provides for Valmont to pay in
full at closing the $8,000,000 revolving credit agreement with a European bank
discussed in Note 4 and the promissory note to parent discussed in Note 5.
The Company intends to rely on Valmont for working capital, capital expenditure
and financing requirements after the closing.
16. Subsequent Event - Sale of Fiberglass Pole Business
Effective April 1, 2004, Newmark sold its fiberglass pole business and assets to
FRP Poles, Inc., another wholly-owned subsidiary of the parent. The sales price
consisted of cash proceeds of $1,040,000 plus assumption of all liabilities
totaling approximately $1,800,000. The sale resulted in a pre-tax loss of
approximately $3,200,000 ($1,920,000 after-tax).