EXHIBIT 7.2
James H. Drew Corporation and Subsidiary
Consolidated Financial Statements
Four Months Ended April 29, 2004 and 2003
TABLE OF CONTENTS
Consolidated Financial Statements
Balance Sheets......................................................... 1
Statements of Operations and Retained Earnings......................... 2
Statements of Cash Flows............................................... 3
Notes to Financial Statements.......................................... 4
JAMES H. DREW CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
April 29, 2004 and 2003
2004 2003
------------ ------------
Assets
Current Assets
Cash $ -- $ 156,274
Contracts receivable, net 8,276,881 9,370,060
Cost and estimated earnings in excess of billings 6,842,290 4,470,395
Inventory, net 1,776,836 2,073,074
Prepaid expenses 22,738 29,301
Deferred tax asset 438,635 46,633
------------ ------------
Total Current Assets 17,357,380 16,145,737
------------ ------------
Property and Equipment
Land 384,318 384,318
Buildings 1,300,352 1,289,327
Machinery and equipment 9,502,778 9,589,714
Accumulated depreciation (7,545,973) (6,720,811)
------------ ------------
Total Property and Equipment 3,641,475 4,542,548
------------ ------------
Goodwill 243,110 243,110
------------ ------------
Total Assets $ 21,241,965 $ 20,931,395
============ ============
2004 2003
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 2,627,786 $ 2,275,928
Accrued expenses and other current liabilities 712,223 756,534
Billings in excess of costs and estimated earnings 1,660,649 873,140
Amount due to parent company -- 3,219,206
------------ ------------
Total Current Liabilities 5,000,658 7,124,808
------------ ------------
Other Long-term Liabilities
Postretirement health care obligation -- 563,196
Deferred tax liability 406,128 165,247
------------ ------------
Total Liabilities 5,406,786 7,853,251
------------ ------------
Shareholders' Equity
Common stock 50,000 50,000
Additional paid-in capital 2,575,501 --
Retained earnings 13,209,678 13,028,144
------------ ------------
Total Shareholders' Equity 15,835,179 13,078,144
------------ ------------
Total Liabilities and Shareholders' Equity $ 21,241,965 $ 20,931,395
============ ============
See accompanying summary of accounting policies and notes to unaudited interim
consolidated financial statements.
1
JAMES H. DREW CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations and Retained Earnings
For the Four Months Ended April 29, 2004 and 2003
2004 2003
------------ ------------
Construction Revenue $ 10,476,263 $ 11,249,177
------------ ------------
Operating Costs and Expenses
Direct costs of construction 11,157,835 10,413,223
Administrative expenses 1,612,723 1,064,463
------------ ------------
Total Operating Costs and Expenses 12,770,558 11,477,686
------------ ------------
Loss from Operations (2,294,295) (228,509)
------------ ------------
Other Income and Expense, Net 4,478 4,004
------------ ------------
Loss before Income Taxes (2,289,817) (224,505)
Income Tax Benefit 891,099 87,557
------------ ------------
Net Loss (1,398,718) (136,948)
Retained Earnings, Beginning of Year 14,608,396 13,165,092
------------ ------------
Retained Earnings, End of Year $ 13,209,678 $ 13,028,144
============ ============
See accompanying summary of accounting policies and notes to unaudited interim
consolidated financial statements.
2
JAMES H. DREW CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Four Months Ended April 29, 2004 and 2003
2004 2003
----------- -----------
Cash Flows from Operating Activities
Net loss $(1,398,718) $ (136,948)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 333,263 350,546
Deferred income taxes (143,597) --
Gain on sale of assets (4,000) (1,500)
(Increase) decrease in certain operating assets:
Contracts receivable 1,647,487 (150,530)
Cost and estimated earnings in excess of billings (2,877,885) (1,624,602)
Inventory (385,511) (290,770)
Prepaid expenses 31,334 1,043
Increase (decrease) in certain operating liabilities:
Accounts payable 340,572 448,485
Accrued expenses and other current liabilities (55,367) 13,834
Billings in excess of costs and estimated earnings 542,048 (348,162)
Amount due to parent company 752,079 1,108,312
Postretirement health care obligation (518,144) --
----------- -----------
Total Adjustments (337,721) (493,344)
----------- -----------
Net cash used in operating activities (1,736,439) (630,292)
----------- -----------
Cash Flows from Investing Activities
Proceeds from the sale of equipment 4,000 1,500
Capital expenditures (47,569) --
----------- -----------
Net cash provided by (used in) investing activities (43,569) 1,500
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,780,008) (628,792)
Cash and Cash Equivalents, Beginning of Year 1,780,008 785,066
----------- -----------
Cash and Cash Equivalents, End of Year $ -- $ 156,274
=========== ===========
See accompanying summary of accounting policies and notes to unaudited interim
consolidated financial statements.
3
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(1) Nature of Operations and Summary of Significant Accounting Policies
(a) Description of Business
James H. Drew Corporation (the Company) was incorporated in 1947 in
Indianapolis and maintains its principal offices at 8701 Zionsville
Road, Indianapolis, Indiana. The Company is engaged primarily as a
subcontractor to paving and bridge contractors to install highway
safety systems such as traffic signals, signs, lighting, and guard
rails in Midwestern states. The Company is a wholly owned subsidiary
of Cemex Corporation (the Parent) through April 29, 2004. Effective
April 30, 2004, the Company was acquired by Fortune Diversified
Industries, Inc. as further disclosed in Note 12.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of James H. Drew Corporation and its wholly owned subsidiary Tennessee
Guardrail, Inc. (the Subsidiary). All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Revenue and Cost Recognition
Revenues from construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost
incurred to date to estimated total cost for each contract. That
method is used because management considers total cost to be the best
available measure of progress on the contracts.
Project costs include all direct labor, subcontract, and material
costs and those indirect costs related to contract performance.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job
performances, job conditions, and estimated profitability may result
in revisions to costs and income, which are recognized in the period
in which the revisions are determined.
The Company also performs service work under time-and-material
contracts. Revenues from these contracts are recognized as labor and
material costs are incurred.
The asset, "Costs and estimated earnings in excess of billings",
represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings",
represents billings in excess of revenues recognized.
(d) Contracts Receivable
The Company carries its contracts receivable at invoiced amounts less
an allowance for doubtful accounts. On a periodic basis, the Company
evaluates its contracts receivable and establishes an allowance for
doubtful accounts, based on history of past write-offs and collections
and current credit conditions. Management has established an allowance
for doubtful accounts of $700,000 and $15,000 as of April 29, 2004 and
2003. The Company's policy is not to accrue interest on past due
contract receivables.
4
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(1) Nature of Operations and Summary of Significant Accounting Policies
(Continued)
(e) Inventories
Inventories are stated at the lower of cost or market. Costs are
determined under the first-in, first-out method (FIFO) method of
accounting.
(f) Shipping and Handling
Costs incurred for shipping and handling are included in the Company's
consolidated financial statements as a component of costs of goods
sold.
(g) Property, Equipment, and Depreciation
Property and equipment are carried at cost and includes expenditures
for new additions and those, which substantially increase the useful
lives of existing assets. Depreciation is computed by use of the
straight-line method. Depreciable lives are generally as follows:
Building 10 to 33 years
Equipment 3 to 7 years
Expenditures for normal repairs and maintenance are charged to
operations as incurred. The cost of property or equipment retired or
otherwise disposed of and the related accumulated depreciation are
removed from the accounts in the year of disposal with the resulting
gain or loss reflected in earnings or in the cost of the replacement
asset.
The provision for depreciation amounted to $333,263 and $350,546 for
the four months ended April 29, 2004 and 2003, respectively.
(h) Goodwill
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets". With the
adoption of SFAS No. 142, goodwill and other intangibles with
indeterminate lives are no longer amortized but instead are assessed
for impairment at least annually and more frequently as triggering
events may occur. In making this assessment, management relies on a
number of factors including operating results, business plans,
economic projections, anticipated future cash flows, and transactions
and market place data. Any impairment losses determined to exist are
recorded in the period the determination is made. There are inherent
uncertainties related to these factors and management's judgment in
applying them to the analysis of any impairment. Since management's
judgment is involved in performing goodwill and other intangible
assets valuation analyses, there is risk that the carrying value of
our goodwill and other intangible assets may be overstated or
understated.
5
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(1) Nature of Operations and Summary of Significant Accounting Policies
(Continued)
(i) Income Taxes
Through April 29, 2004, the Company is included in the Parent's
consolidated federal income tax return. Income taxes are provided for
the tax effects of transactions reported in the consolidated financial
statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for the differences between the basis of
assets and liabilities for financial statement and income tax
purposes. Those differences relate primarily to fixed assets (use of
different depreciation methods and lives for financial statement and
income tax purposes) and certain accrued expenses (use of accrual
method for financial statement purposes and cash method for income tax
purposes). The deferred tax assets and liabilities represent the
future tax consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for any operating loss
carryforwards, charitable contribution carryforwards, and tax credit
carryforwards that are available to offset future income taxes.
(j) Cash Flows
For purposes of the Statements of Cash Flows, the Company considers
all highly liquid instruments that are purchased within three months
or less of an instruments maturity date to be cash equivalents.
Certain noncash transactions were entered into during the four month
period ended April 29, 2004, which are summarized as follows:
o As described in Note 12, the Parent contributed capital of
$2,575,501 to the Company in lieu of accepting payment on
the Company's "amount due to parent company" liability
related to tax payments, retirement plan contributions, and
other expenses.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles of 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 consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when
it is probable that a liability has been incurred, and the amount of
the assessment and/or remediation can be reasonably estimated.
6
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(2) Contracts Receivable
Information with respect to contracts receivable is summarized as follows:
2004 2003
----------- -----------
Completed contracts $ 4,438,771 $ 3,657,317
Contracts in process
Progress billings 3,893,878 5,310,723
Retainages 617,177 391,420
----------- -----------
8,949,826 9,359,460
Other receivables 27,055 25,600
Less allowance for uncollectible accounts (700,000) (15,000)
----------- -----------
$ 8,276,881 $ 9,370,060
=========== ===========
(3) Contracts in Process
Information with respect to contracts in process is summarized as follows:
2004 2003
------------ ------------
Costs incurred $ 23,842,268 $ 17,340,807
Estimated earnings thereon 3,692,163 3,286,386
------------ ------------
27,534,431 20,627,193
Less applicable billings (22,352,790) (17,029,938)
------------ ------------
$ 5,181,641 $ 3,597,255
============ ============
Included in the accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess of billings $ 6,842,290 $ 4,470,395
Billings in excess of costs and estimated earnings (1,660,649) (873,140)
------------ ------------
$ 5,181,641 $ 3,597,255
============ ============
(4) Change in Accounting Estimate
Revisions in estimated contract profits are made in the year in which
circumstances requiring the revision become known. The effect of changes
in estimates of contract profits was to decrease net earnings for the four
months ended April 29, 2004 by approximately $415,000 from that which
would have been reported had the revised estimate been used as a basis of
recognition of contract profits in the preceding year.
7
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(5) Amount Due From Parent Company
The amount due to Parent of $3,219,206 at April 29, 2003, was due on
demand, unsecured, and non-interest bearing. As disclosed in Note 12, the
amount due to Parent is $0 at April 29, 2004.
(6) Pension and Other Postretirement Benefits
Prior to the acquisition as disclosed in Note 12, substantially all of the
Company's employees were covered under defined benefit and defined
contribution benefit plans. For employees covered by collective bargaining
agreements, the Company made contributions directly to the Union which
sponsors a plan for the employees' benefit. The Company participated with
its Parent in a defined benefit pension plan covering substantially all of
its full-time, salaried employees. The cost of the pension benefit was
assumed by the Parent. Details of other obligation, fair value of plan
assets and funded status at April 29, 2003 attributable to James H. Drew
Corporation is not readily available because it is a multi-employer plan.
In addition to the Company's defined benefit pension plan, the Company
sponsored a defined benefit health care and life insurance plan that
provided postretirement medical and life insurance benefits to salaried
employees who met minimum age and service requirements. This plan is
administered by the Parent. Details of the benefit obligation, fair value
of plan assets and funded status at April 29, 2003 attributable to James H.
Drew Corporation was not readily available because it is a multi-employer
plan. The Company also sponsored a defined benefit health care plan for
substantially all retirees and employees. The Company measured the costs of
its obligation based on its best estimate. The net periodic costs were
recognized as employees render the services necessary to earn the
postretirement benefits.
The Company also sponsored a savings plan for its salaried employees, which
is qualified under Section 401(k) of the Internal Revenue Code (the Code).
Under the provisions of the plan, employees elect to defer a portion of
their compensation subject to a maximum limit determined by the Code. The
Company, in accordance with the plan, makes contributions to the plan based
upon employee contributions. Company contributions to the plan were $22,888
and $27,720 for the four months ended April 29, 2004 and 2003,
respectively.
(7) Common Stock
The Company has voting stock with equal voting rights. All of the stock is
no par value.
The following summarizes the Company's shares of common stock as of April
29, 2004 and 2003:
Authorized 1,000
Issued 660
Outstanding 660
As disclosed in Note 12, 100% of the Company's common stock was acquired by
Fortune Diversified Industries, effective April 30, 2004.
8
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(8) Income Taxes
The Company is included in the Parent's consolidated federal income tax
return. Under the tax allocation method used by the Parent, the Company is
charged an amount substantially equal to the income tax it would pay if it
filed a separate return.
Income tax (expense) benefit consists of:
Current Deferred Total
-------- -------- --------
Four months ended April 29, 2004:
U.S federal benefit $651,669 $125,187 $776,856
State and local benefit 95,833 18,410 114,243
-------- -------- --------
$747,502 $143,597 $891,099
======== ======== ========
Current Deferred Total
-------- -------- --------
Four months ended April 29, 2003:
U.S federal benefit $ 58,774 $ 0 $ 58,774
State and local benefit 28,783 0 28,783
-------- -------- --------
$ 87,557 $ 0 $ 87,557
======== ======== ========
Income tax benefit attributable to income from continuing operations was
$891,099 and $87,557 for the four months ended April 29, 2004 and 2003,
respectively, and differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% to pretax income from continuing operations
as a result of the following:
2004 2003
-------- --------
Computed "expected" tax benefit -34.0% -34.0%
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit -5.0% -5.0%
Other, net 0.1% --
-------- --------
-38.9% -39.0%
======== ========
9
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(8) Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at April 29, 2004 and 2003 are
presented below.
2004 2003
--------- ---------
Deferred tax assets:
Nondeductible accruals $ 438,635 $ 46,633
Postretirement health care obligation -- 219,646
Other 29,069 --
--------- ---------
Deferred tax assets 467,704 266,279
--------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation 429,962 384,893
Other 5,235 --
--------- ---------
Deferred tax liabilities 435,197 384,893
--------- ---------
Net deferred tax liability $ 32,507 (118,614)
========= =========
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences at
April 29, 2004. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
10
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(9) Operating Lease Commitments
The Company leases various machinery and equipment under agreements, which
expire on dates ranging from November 2004 through May 2008.
Future minimum commitments under these agreements are as follows at April
29, 2004:
For the Years Ended:
2005 $ 96,000
2006 60,000
2007 6,000
2008 6,000
Later years --
--------
$168,000
========
Various types of construction equipment are leased during the year for use
on specific contracts, along with office space at the Company's Missouri
facility. These leases generally have terms of 30 days or less and may be
canceled at any time. Rental charges amounted to approximately $270,000 and
$250,000 for the four months ended April 29, 2004 and 2003, respectively.
(10) Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and contracts
receivables. The Company places its cash and cash equivalents with high
credit quality institutions. At times, such amounts may be in excess of the
FDIC insured limit. The Company routinely assesses the financial strength
of its customers and, as a consequence, believes that its contracts
receivable credit risk exposure is limited.
(11) Business Concentration
The Company's revenues are substantially derived from installing highway
safety systems such as traffic signals, signs, lighting, and guard rails.
The Company has receivables from customers, substantially all of whom are
located in Midwestern states.
11
JAMES H. DREW CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 29, 2004 and 2003
(12) Subsequent Event - Business Combination
Effective April 30, 2004, Fortune Diversified Industries, Inc. (FDVI)
acquired all of the outstanding shares of common stock of the Company
pursuant to a Stock Purchase Agreement (the Agreement). Terms of the
Agreement include, among other things, the exchange of all the Company's
outstanding shares for $11,500,000 cash paid by FDVI in return for the
Company's assets and liabilities, excluding items noted below, as well as
land and buildings as discussed in the following paragraph. The cash price
is subject to certain adjustments, of which are currently under negotiation
between the buyer and seller as of the date of this filing. Pursuant to the
Agreement, amounts due to Parent, the Company's postretirement health care
obligation, and cash are $0 as of the purchase date. This net amount of
$2,575,501 is reflected on the Company's April 29, 2004 consolidated
balance sheet as additional paid in capital.
Effective April 30, 2004, a related party of FDVI acquired the Company's
real property for $1,375,000 cash.
12