1
Exhibit 99.1
(LOGO)
NARRAGANSETT/DSI ACQUISITION
CO., INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1994 and 1993
(With Independent Auditors' Report Thereon)
2
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Table of Contents
Page
----
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Stockholder's Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-16
3
(LOGO) PEAT MARWICK LLP
500 Fleet Center
50 Kennedy Plaza
Providence, RI 02903-9605
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Narragansett/DSI Acquisition Co., Inc.:
We have audited the accompanying consolidated balance sheets of
Narragansett/DSI Acquisition Co., Inc. and subsidiaries as of December 31, 1994
and 1993, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Narragansett/DSI
Acquisition Co., Inc. and subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in note 11 to the financial statements, Narragansett/DSI
Acquisition Co., Inc.'s wholly owned subsidiary, Dryvit Systems, Inc., has
experienced rust related warranty expense arising from prior years sales.
Dryvit Systems, Inc. has made provision for reported claims. However, future
levels of rust related warranty expense for unreported claims, if any, cannot
be reasonably estimated at this time. Accordingly, no additional provision for
any liability that may result has been recognized in the accompanying financial
statements.
/s/ KPMG PEAT MARWICK LLP
Providence, Rhode Island KPMG Peat Marwick LLP
February 28, 1995
4
2
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
Assets 1994 1993
------ ---- ----
Current assets:
Cash (note 7) $ 2,094,501 744,645
Trade accounts receivable, less allowance for doubtful receivables
of $851,213 in 1994 and $1,600,550 in 1993 5,332,990 6,568,948
Other receivables, less allowance for doubtful receivables of $171,406
in 1994 and $155,492 in 1993 206,875 337,046
Inventories (note 2) 2,380,712 2,417,537
Prepaid expenses (note 3) 301,191 671,414
Deferred income taxes (note 8) 733,162 896,708
----------- ----------
Total current assets 11,049,431 11,636,298
----------- ----------
Property, plant and equipment (notes 4 and 10) 12,915,205 12,049,790
Less accumulated depreciation (3,992,454) (3,205,577)
----------- ----------
Net property, plant and equipment 8,922,751 8,844,213
----------- ----------
Goodwill, less accumulated amortization 20,654,371 21,241,676
Non-compete agreement, less accumulated amortization 256,833 1,797,833
Other assets, less accumulated amortization (notes 5 and 6) 1,267,069 2,346,350
----------- ----------
$42,150,455 45,866,370
=========== ==========
See accompanying notes to consolidated financial statements.
5
Liabilities and Stockholder's Equity 1994 1993
------------------------------------ ---- ----
Current liabilities:
Current installments of long-term debt (note 7) $ 758,704 --
Current installments of obligations under capital leases (note 7) 32,150 29,526
Accounts payable - trade 2,378,120 2,083,009
Accrued expenses 5,365,253 5,183,217
Income taxes payable 812,146 163,073
----------- ----------
Total current liabilities 9,346,373 7,458,825
Long-term debt, excluding current installments (notes 7 and 9) 14,430,406 24,146,737
Deferred income taxes (note 8) 1,071,403 1,062,410
----------- ----------
Total liabilities 24,848,182 32,667,972
----------- ----------
Stockholder's equity (note 12):
Voting, Class A common stock, $.01 par value. Authorized 100,000 shares;
issued and outstanding 46,200 shares 462 462
Nonvoting, Class A preferred stock, $.01 par value. Authorized 4,130
shares; issued and outstanding 3,500 shares 35 35
Voting Class B convertible participating preferred stock, $.01 par value.
Authorized 39,800 shares; issued and outstanding 30,800 shares 308 308
Additional paid in capital 10,499,195 10,499,195
Retained earnings 6,775,920 2,661,270
Equity adjustment from foreign currency translation 26,353 37,128
----------- ----------
Total stockholder's equity 17,302,273 13,198,398
----------- ----------
Commitments and contingencies (note 10).
$42,150,455 45,866,370
=========== ==========
6
3
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1994 and 1993
1994 1993
---- ----
Net sales $65,653,838 57,966,042
Cost of sales 36,913,569 31,313,829
----------- ----------
Gross profit 28,740,269 26,652,213
Selling, general and administrative expenses (notes 13, 14 and 15) 18,907,844 19,467,446
----------- ----------
Operating income 9,832,425 7,184,767
----------- ----------
Other income (expense):
Interest income 18,512 16,641
Interest expense (2,553,597) (3,393,669)
Miscellaneous, net (note 5) 157,705 114,451
----------- ----------
(2,377,380) (3,262,577)
----------- ----------
Income before income taxes 7,455,045 3,922,190
Income tax expense (note 8) 3,340,395 583,421
----------- ----------
Net income $ 4,114,650 3,338,769
=========== ==========
See accompanying notes to consolidated financial statements.
7
Liabilities and Stockholder's Equity 1994 1993
------------------------------------ ---- ----
Current liabilities:
Current installments of long-term debt (note 7) $ 758,704 --
Current installments of obligations under capital leases (note 7) 32,150 29,526
Accounts payable - trade 2,378,120 2,083,009
Accrued expenses 5,365,253 5,183,217
Income taxes payable 812,146 163,073
----------- ----------
Total current liabilities 9,346,373 7,458,825
Long-term debt, excluding current installments (notes 7 and 9) 14,430,406 24,146,737
Deferred income taxes (note 8) 1,071,403 1,062,410
----------- ----------
Total liabilities 24,848,182 32,667,972
----------- ----------
Stockholder's equity (note 12):
Voting, Class A common stock, $.01 par value. Authorized 100,000 shares;
issued and outstanding 46,200 shares 462 462
Nonvoting, Class A preferred stock, $.01 par value. Authorized 4,130
shares; issued and outstanding 3,500 shares 35 35
Voting Class B convertible participating preferred stock, $.01 par value.
Authorized 39,800 shares; issued and outstanding 30,800 shares 308 308
Additional paid in capital 10,499,195 10,499,195
Retained earnings 6,775,920 2,661,270
Equity adjustment from foreign currency translation 26,353 37,128
----------- ----------
Total stockholder's equity 17,302,273 13,198,398
----------- ----------
Commitments and contingencies (note 10).
$42,150,455 45,866,370
=========== ==========
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4
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1994 and 1993
$.01 par
convertible
$.01 par $.01 par participating
common preferred preferred Additional
stock stock stock paid-in
Class A Class A Class B Capital
------- ------- ------- -------
Balances at December 31, 1992 $ 462 35 308 10,499,195
Net income -- -- -- --
Equity adjustment from foreign
currency translation -- -- -- --
--- --- --- ----------
Balances at December 31, 1993 462 35 308 10,499,195
Net income -- -- -- --
Equity adjustment from foreign
currency transaction -- -- -- --
--- --- --- ----------
Balances at December 31, 1994 $ 462 35 308 10,499,195
===== == === ==========
Retained
earnings Total
(accumulated) Equity stockholder's
deficit adjustment equity
------- ---------- ------
Balances at December 31, 1992 (677,499) 57,856 9,880,357
Net income 3,338,769 -- 3,338,769
Equity adjustment from foreign
currency translation -- (20,728) (20,728)
---------- ------- ----------
Balances at December 31, 1993 2,661,270 37,128 13,198,398
Net income 4,114,650 -- 4,114,650
Equity adjustment from foreign
currency transaction -- (10,775) (10,775)
---------- ------ -------
Balances at December 31, 1994 6,775,920 26,353 17,302,273
========== ====== ==========
See accompanying notes to consolidated financial statements.
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994 and 1993
Cash flows from operating activities:
Net income $ 4,114,650 3,338,769
----------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,443,058 3,415,674
Loss on sale of fixed assets 1,037 72,106
Loss on disposal of interest in joint ventures 38,328 --
Provision for losses on accounts receivable 220,164 1,317,010
Provision for warranty expenses 2,407,343 2,183,817
Equity in income of joint ventures -- (58,024)
Gain on discontinuation of employee benefit plan (203,221) --
Deferred tax expense 179,638 8,757
----------- ---------
Adjustments related to income statement activity 6,086,347 6,939,340
Changes in assets and liabilities
Decrease (increase) inaaccounts receivable 1,097,652 (601,158)
Decrease (increase) in inventories 14,053 (422,311)
Decrease in goodwill due to allocation of tax benefits -- 176,000
Decrease (increase) in prepaid expenses (120,728) 91,852
Decrease in prepaid employee benefit plan due
to discontinuation 694,172 --
Decrease in accounts payable and accrued expenses (1,880,271) (1,082,930)
Increase in income tax payable 653,359 141,343
Decrease in refundable income taxes -- 55,453
Decrease in other assets 2,039 54,536
----------- ---------
Total adjustments 6,546,623 5,352,125
----------- ---------
Net cash provided by operating activities 10,661,273 8,690,894
----------- ---------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment (1,216,404) (428,113)
Capital expenditures for intangible assets (64,102) (43,901)
Proceeds from sale of fixed assets 93,299 18,154
Proceeds from sale of interest in joint ventures 716,480 --
----------- ---------
Net cash used in investing activities (470,727) (453,860)
----------- ---------
(Continued)
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6
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1994 and 1993
1994 1993
---- ----
Cash flows from financing activities:
Payments on long-term debt and revolving line of credit $(8,835,016) (8,079,519)
----------- ---------
Net cash used in financing activities (8,835,016) (8,079,519)
----------- ---------
Effect of exchange rate changes on cash (5,674) 5,229
----------- ---------
Net increase in cash and cash equivalents 1,349,856 162,744
Cash and cash equivalents at beginning of year 744,645 581,901
----------- ---------
Cash and cash equivalents at end of year $ 2,094,501 744,645
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 2,553,597 3,393,669
Income taxes $ 2,507,398 249,717
=========== =========
A capital lease obligation of $144,030 was incurred in the year ended
December 31, 1993 when the Company entered into leases for new
equipment (note 9).
See accompanying notes to consolidated financial statements.
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Narragansett/DSI Acquisition Co., Inc. (the "Holding Company"), its
wholly-owned subsidiary, Dryvit Systems, Inc. (the "Company") and its
wholly-owned subsidiaries: Dryvit Systems Canada, Ltd. ("DSCL"), Dryvit
Systems Australia, Ltd. ("Australia"), Dryvit Systems New Zealand, Ltd.
("NZ"), Dryvit Systems FSC, Inc. and Tech-21 Panel Systems, Inc.
("Tech-21"). All significant intercompany transactions and balances have
been eliminated.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by using the last-in, first-out (LIFO) method for manufacturing
inventories and by using the first-in, first-out (FIFO) method for resale
inventories and inventories owned by DSCL.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Buildings, machinery,
and equipment are depreciated using the straight-line method over the
estimated useful lives of the respective assets.
(d) Income Taxes
The Holding Company prepares a consolidated tax return. The Company is
included in this consolidated tax return and accounts for substantially
all of the Holding Company's consolidated taxable income.
Income tax expense is provided for and reported in the accompanying
statements of income regardless of when such tax is payable. Deferred
income taxes result from the recognition of certain income and expense
items in different time periods for financial statement and tax return
purposes.
Deferred income taxes have not been provided on the undistributed earnings
of foreign subsidiaries and joint ventures, as such earnings are intended
to be indefinitely reinvested by the Company.
(e) Profit Sharing Plan
The Company has a voluntary, contributory 401(k) profit sharing plan
covering all eligible employees. All contributions to the plan by Dryvit
Systems, Inc. are discretionary. Under the plan, eligible employees can
contribute up to 10% of their annual compensation.
(f) Warranty
The Company accrues for reported warranty claims based on the estimated
costs to repair. Estimated costs are based on either actual bids received
for repairs or a calculation of square footage of affected areas times the
applicable per square foot rate to repair. The Company has established the
rates to repair based on agreements with independent repair companies and
historical calculations for each method of repair.
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(g) Intangible Assets
Intangible assets are stated at cost and are shown net of amortization.
Intangibles are amortized using the straight-line method over 40 years
for goodwill, 5 years for the non-compete agreement and the term of the
related debt for deferred financing costs. Other intangibles are
amortized utilizing the straight-line method over various estimated
lives, not exceeding 40 years.
(h) Consolidated Statements of Cash Flows
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers cash held in banks and the negative revolver balance (note 7)
as cash and cash equivalents.
(i) Foreign Currency Translation
Foreign currency financial statements are translated into dollars at
current rates, except that revenues, costs and expenses are translated at
average rates during each reporting period. Adjustments resulting from
translation of financial statements are reflected as a separate component
of stockholder's equity.
(j) Presentation
Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) Inventories
At December 31, 1994 and 1993, inventories are classified and valued as
follows:
1994 1993
---- ----
Manufacturing inventories (LIFO) $1,538,488 1,493,661
Resale inventories (FIFO) 448,797 529,099
Manufacturing and resale inventory DSCL (FIFO) 393,427 394,777
---------- ---------
Total inventories 2,380,712 2,417,537
========== =========
The components of inventories (e.g., raw materials and finished goods) have
not been disclosed as the computation would require a percentage allocation
of the LIFO dollar base for manufacturing inventories which is only
coincidentally related to the components of inventories.
If the first-in, first-out (FIFO) method of inventory valuation had been
used, manufacturing inventories would have been $76,821 and $165,820 higher
than that reported at December 31, 1994 and 1993, respectively.
(3) Employee Benefit Plan
At December 31, 1993 the Company had a Voluntary Employee Benefit Plan which
covered substantially all employees. Provisions of the Plan, among other
things, provided for payment of certain employee benefits into the Plan for
later disbursement to parties providing the benefits. The Plan was
discontinued during the year ended December 31, 1994, and all employee
benefits previously provided through the Plan were paid directly by the
Company.
(Continued)
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9
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The estimated obligations under the Plan were $490,951 at December 31, 1993.
For financial statement purposes, the estimated obligation was considered a
prepaid asset until the benefit payment obligation was incurred and was
included in prepaid expenses at December 31, 1993. Proceeds received upon
dissolution of the Plan were $694,172.
(4) Property, Plant and Equipment
A summary of property, plant and equipment follows:
1994 1993
---- ----
Land $ 1,324,425 1,344,655
Buildings 4,462,060 4,274,165
Building improvements 1,843,178 1,842,787
Machinery and equipment 4,778,958 4,124,713
Furniture and fixtures 273,986 256,495
Automobiles 70,734 45,111
Capital leases (see note 9) 161,864 161,864
----------- ----------
12,915,205 12,049,790
Less accumulated depreciation (3,992,454) (3,205,577)
----------- ----------
$ 8,922,751 8,844,213
=========== ==========
Depreciation expense amounted to $924,886 and $899,145 for the years ended
December 31, 1994 and 1993.
(5) Investments in Joint Ventures
The Company accounts for certain investments in joint ventures using the
equity method of accounting. The following is a listing of such
investments in joint ventures and their related carrying values at December
31, 1994 and 1993, and the equity in income of the investments for the
years ended December 31, 1994 and 1993. The carrying values of the
investments are included in other assets and the equity in income of the
investments is included in miscellaneous income.
1994 1993
-------------------------------------- -----------------------------------
Carrying Equity in Percent Carrying Equity in Percent
Investment Value Income Ownership Value Income Ownership
---------- ----- ------ --------- ----- ------ ---------
Hyosung-Dryvit Co., Ltd. $ -- -- 0% 739,808 58,024 40.0%
Browne-Dryvit Limited -- -- 0% 15,000 -- 50.0%
------- ------ ------- ------
$ -- -- 754,808 58,024
======= ====== ======= ======
Dryvit sold all of its shares in Hyosung-Dryvit Co., Ltd., in 1994 to the
majority shareholder. The Company received $696,500 from the majority
shareholder on May 11, 1994. The difference between the December 31, 1993
carrying value and the amount received is included in miscellaneous, net.
The investment in Browne-Dryvit Limited was written down in 1993 to its
expected net realizable value of $15,000. During 1994 the Company received
$19,980 and the joint venture was terminated.
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Other Assets
Included in other assets are $816,588 and $1,121,339 of deferred financing
costs at December 31, 1994 and 1993, respectively, net of applicable
amortization, which are being amortized over the remaining term of the
related debt which does not exceed 10 years. Amortization expense amounted
to $302,051 and $293,207 for the years ended December 31, 1994 and 1993.
Also included in other assets is $34,970 and $50,789 of computer software
costs at December 31, 1994 and 1993, respectively, net of applicable
amortization. Amortization expense amounted to $21,648 and $25,563 for the
years ended December 31, 1994 and 1993.
(7) Long-Term Debt
Long-term debt consists of the following:
1994 1993
---- ----
Revolving credit note payable under a line of credit agreement that
permits the Company to borrow up to the "Additonal Borrowing Base"
plus the lesser of (1) eligible receivables or (2) $6,500,000. The
"Additional Borrowing Base" at December 31, 1994 was $8,200,000 and
is subject to mandatory quarterly reductions of $1,025,000 per quarter
from March 1, 1995 through December 1, 1996. Interest is payable monthly
at a rate equal to prime plus 1.5% $ -- 7,424,364
Fixed rate note payable in quarterly amounts commencing in March
1997 through December 1998. Principal payments are payable in different
amounts quarterly in 1997 and 1998. Interest payable monthly throughout
the term of the loan at a rate equal to 14.5%. 13,589,348 15,000,000
Note payable in quarterly amounts commencing in March 1995 through
December 1996. Interest is payable monthly throughout the term of the
loan at the Canadian prime rate plus 2.0%. 1,517,408 1,607,869
Obligations under capital leases (see note 9) 114,504 144,030
----------- ----------
Total 15,221,260 24,176,263
Less: current installment of long-term debt and obligations under
under capital leases (790,854) (29,526)
----------- ----------
Long-term debt $14,430,406 24,146,737
=========== ==========
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The loan agreement dated March 1, 1990 as amended on July 29, 1992 and
February 17, 1995 covers the fixed rate note payable and the revolving
credit note payable. The availability under the terms of the revolving
credit note payable terminates on March 1, 1997 at which time full payment
of the outstanding balance is due. The amended loan agreement contains
restrictive covenants which establish minimums for consolidated cash flows
and consolidated interest coverage ratios and maximums for funded debt to
cash flow ratios, extraordinary warranty expenditures and capital
expenditures. At December 31, 1994, the Company was in compliance with
these covenants except for the covenant relating to the limitation on
extraordinary warranty expenditures. In an agreement dated February 17,
1995, the lender agreed to waive the violation for the year ended December
31, 1994 and amended the covenant's limitations for future years.
Under the terms of a lock-box arrangement included in the loan agreement, it
is possible for the Company to achieve a negative revolver balance due to
deposits to the lockbox in excess of borrowings under the revolving credit
note payable. As of December 31, 1994, the negative revolver balance
amounted to $1,878,750 and is classified as cash.
The aggregate maturities of long-term debt, (excluding the mandatory
reductions as described above under the revolving credit note payable and
maturities of obligations under capital lease which are disclosed in note
9), for each of the five years ending December 31, 1999 are as follows:
1995 - $758,704; 1996 - $758,704; 1997 - $7,000,000, 1998 - $6,589,348; and
1999 - $0.
Mandatory reductions of the Additional Borrowing Base are expected to be
offset at any point in time by the credit availability provided for by the
eligible receivables borrowing base.
(8) Income Taxes
Income tax expense (benefit) consists of:
Charge in
Current Deferred Lieu of Tax Total
------- --------- ----------- -----
1994:
Federal $2,482,686 120,204 -- 2,602,890
State 575,577 44,792 -- 620,369
Foreign 109,593 7,543 -- 117,136
---------- ------- ------- ---------
Total income tax expense $3,167,856 172,539 -- 3,340,395
========== ======= ======= =========
1993:
Federal $ 262,729 53,908 165,440 482,077
State 33,543 (37,394) 10,560 6,709
Foreign 107,414 (12,779) -- 94,635
---------- ------- ------- -------
Total income tax expense $ 403,686 3,735 176,000 583,421
========== ======= ======= =======
(Continued)
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NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Income tax (benefit) expense amounted to $3,340,395 for 1994 and $583,421 for
1993. The actual tax expense for both 1994 and 1993 differs from the
"expected" tax expense (computed by applying the U.S. Federal corporate tax
rate of 34% to earnings before income taxes) as follows:
1994 1993
---- ----
Computed "expected" tax expense $2,534,715 1,333,545
Expense of foreign subsidiary tax on income at greater than 34% 40,916 --
State tax net of Federal tax benefit 409,444 161,700
Non-taxable net loss (profit) of unconsolidated subsidiary
and joint ventures 17,230 (19,727)
Meals and entertainment 24,575 11,206
Nondeductible amortization of intangibles 232,498 242,760
Other 84,025 (11,916)
Charge in lieu of taxes resulting from recognition of tax benefits
charged to goodwill -- 176,000
Change in valuation allowance (3,008) (1,310,147)
---------- ---------
Total income tax expense $3,340,395 583,421
========== =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below:
Deferred Tax Asset 1994 1993
------------------ ---- ----
Net operating loss carryforward $ 7,270 --
Reserve for bad debts 293,282 551,355
Reserve for product warranties 402,420 591,663
Reserve for compensated absences and other benefits 84,247 76,128
---------- ---------
Total gross deferred tax assets 787,219 1,219,146
Less: Valuation allowance (26,341) (29,349)
---------- ---------
Gross deferred tax assets net of valuation allowance 760,878 1,189,797
---------- ---------
Depreciation and amortization 1,062,587 1,062,410
Employee benefits -- 252,008
Other 36,532 41,081
---------- ---------
Total gross deferred tax liability 1,099,119 1,355,499
---------- ---------
Net deferred tax liability $ 338,241 165,702
========== =========
(Continued)
17
13
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred Tax Liability 1994 1993
---------------------- ---- ----
The net deferred tax liability is comprised as follows:
Net current deferred tax asset $ 733,162 896,708
Net long-term deferred tax liability 1,071,403 1,062,410
---------- ---------
$ 338,241 165,702
========== =========
The cumulative amounts of undistributed earnings of the Company's foreign
subsidiaries and joint ventures amounted to approximately $579,869 and
$609,636 at December 31, 1994 and 1993, respectively, all of which are
considered to be indefinitely reinvested.
It is management's assertion that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize
gross deferred tax assets net of valuation allowance.
The Holding Company has been assessed by the Internal Revenue Service per an
examination of certain prior years tax returns. Deductions principally
related to costs incurred in connection with the Company's acquisition by
the parent have been disallowed by the IRS. The Company believes that the
assessment is without merit and is vigorously defending its position on
these matters. If the Company is unsuccessful in its negotiations with the
IRS, any portion of the tax deductions lost would not have a material
impact on financial position or results of operations.
(9) Capital leases
The Company has eight capital leases expiring in various years through 1998.
The assets and liabilities under capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair value of the
asset. The assets are depreciated over the lesser of the related lease
terms or their estimated productive lives. Depreciation of the assets
under capital leases is included in depreciation expense.
Following is a summary of property held under capital leases:
1994 1993
---- ----
Forklifts $ 161,864 161,864
Less: Accumulated depreciation (53,177) (20,804)
--------- -------
$ 108,687 141,060
========= =======
(Continued)
18
14
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments at December 31, 1994 under capital leases are
as follows:
Amount
------
1995 $ 39,515
1996 39,515
1997 36,104
1998 13,914
Subsequent to 1998
--------
Total minimum lease payments 129,048
Less: Amount representing interest (14,544)
--------
Present value of minimum lease payments $114,504
========
The interest rate of 7.5% on capitalized leases is based on the Company's
incremental borrowing rate at the inception of each lease.
All capital leases contain purchase options, which provide for pricing at the
expected fair value of the equipment at the expiration of the lease term.
(10) Commitments and Contingencies
As of December 31, 1994, the Company had under operating leases certain office
equipment and automobiles.
The following is a schedule by years of future minimum rental payments
required under operating leases as of December 31, 1994 (all current leases
expire by December 31, 1997):
Year ending December 31:
1995 $ 45,150
1996 27,415
1997 11,582
Total rental expense under operating leases amounted to $116,785 and $164,406
for the years ended December 31, 1994 and 1993.
The Company is party to various claims and lawsuits, all of which are being
contested. In the opinion of management, the ultimate liability with
respect to these actions and claims will not have a material adverse effect
on either the Company's financial position or its results of operations.
(Continued)
19
15
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company periodically receives claims from customers relating to product
or application failure. After investigation by the Company and
determination of the cause of the failure, Dryvit may decide to repair the
failure or participate in an appropriate remedy. This decision is based on
factors relating to the extent of actual material failure and customer
goodwill. Warranty expense, including the amounts relating to rust (note
11), amounted to $2,407,343 (net of the reversal of an overaccrual from
1993) and $2,183,817 for the years ended December 31, 1994 and 1993 and is
included in selling, general and administrative expenses.
(11) Rust Warranty Claims
The Company periodically receives warranty claims relating to rust spotting
and staining that appears on a customerGs exterior finished wall. These
rust claims arise from the presence of impurities in the sand component of
product manufactured by the Company prior to April 1991. The impurities
consisted of ferrous and pyrite particles which developed into rust spots
when exposed to seasonal weathering conditions. The rust spots affect only
the aesthetic appearance of the building and have no impact on its
structural integrity.
The Company has implemented comprehensive quality control procedures
specifically aimed at ensuring the elimination of impurities from the
manufacturing process. The quality control procedures include independent
inspection and analysis of sand sources prior to selecting suppliers,
analysis of sand shipments before shipping and again upon arrival at the
production facilities, and the inclusion of high powered magnets in the
sand handling process at all facilities. These quality control steps were
completed and in place by April 1991. The Company has not received any
rust warranty claims relating to product produced after April 1991.
Based on their experience with reported claims, management believes that an
estimate of future claims cannot be reasonably determined, since not all
product produced prior to April 1991 contained impurities and not all
projects having rust spots will result in a claim.
Rust warranty expense amounted to $2,416,983 in 1994 and $1,904,302 in 1993.
(12) Stockholders Equity
In addition to the common stock, preferred stock and convertible
participating preferred stock, the Holding Company is authorized to issue
25,000 shares of $.01 par nonvoting Class B common stock, and 75,000 shares
of preferred stock with a par value of $.01 per share, none of which are
outstanding.
The Class B convertible participating preferred stock has a liquidation value
of $146.10 per share plus any declared but unpaid dividends thereon. It is
convertible upon the occurrence of specific events relating to change in
control of the Holding Company into Class A common stock at a formula
specified in the stock issuance certificates. The convertible
participating preferred stock has a liquidation priority over common stock
and preferred stock but not over Class A preferred stock.
The Class A preferred stock has a liquidation value of $1,000 plus all
accrued and unpaid dividends to date, whether or not declared by the Board
of Directors and has preference over all other classes of stock in
liquidation.
(Continued)
20
16
NARRAGANSETT/DSI ACQUISITION CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1991, the Holding Company issued stock options under a non-qualified
plan (which was amended in 1993) to certain key employees of Dryvit. These
options are for Class B Nonvoting Common Stock, $0.01 par value, of
Narragansett/DSI Acquisition Co. At December 31, 1994 and 1993, the total
number of shares under option were 2,800 and 3,000 shares, of which 1,922
and 1,411 shares were exercisable, respectively. At December 31, 1994 and
1993, no options had been exercised. The options expire on the tenth
anniversary of the option date, or when an employee is no longer employed
by Dryvit. The option price for each share is $105.52 per share, which was
the estimated fair market value at the date of grant.
On March 1, 1990, the Holding Company issued three warrants to GE Capital
with each having an expiration date of March 1, 2000. The first warrant
issued was for the purchases of 9,000 shares of Class A Voting Common Stock
of Narragansett/DSI Acquisition Co., Inc., at a purchase price of $32.4675
per share. The second warrant issued was for the purchase of Class B
Convertible Participating Preferred Stock of Narragansett/DSI Acquisition
Co., Inc., at a purchase price of $178.5714 per share. The third warrant
issued was for the purchase of 630 shares of Class A Accreting Preferred
Stock of Narragansett/DSI Acquisition Co., Inc., at a purchase price of
$1.00 per share. As of December 31, 1994, none of the warrants, nor any
part of the warrants, had been exercised.
(13) Amortization Expense
For the years ended December 31, 1994 and 1993, total amortization expense on
goodwill, non-compete agreements and other assets amounted to $2,518,172
and $2,516,529, respectively.
(14) Profit Sharing Plan
For the years ended December 31, 1994 and 1993, profit sharing expense
amounted to $943,893 and $1,019,759, respectively.
(15) Research and Development
Expenditures for research and development are charged to earnings in the year
incurred. Total Research and Development expense was $452,757 and $473,687
for the years ended December 31, 1994 and 1993, respectively.