ITEM 1. BUSINESS (DOLLARS IN THOUSANDS)
General
Company History and Structure
Brand Intermediate Holdings, Inc. and its subsidiaries ("Brand" or "Brand Intermediate") are 100% owned by Brand Holdings LLC ("the "LLC"). As of December 31, 2002, the voting equity interests of the LLC are owned 76.7% by J. P. Morgan Partners and its affiliates ("JPMP"), and 23.3% by other equity investors, on a fully diluted basis. Brand Services, Inc. is a wholly owned subsidiary of Brand Intermediate Holdings, Inc. All references to "the Company", "we", "us", or "our" mean Brand Intermediate Holdings, Inc. and its subsidiaries.
Prior to October 16, 2002, Brand Services, Inc. was a wholly owned subsidiary of DLJ Brand Holdings, Inc. ("DLJ Brand"). DLJ Brand is also referred to as the "Predecessor" company.
On October 16, 2002, DLJ Brand merged with Brand Acquisition Corp., a wholly-owned subsidiary of the LLC. The merged entity was renamed Brand Intermediate Holdings, Inc. The total amount of consideration paid in the merger, including payment of transaction costs incurred by the buyer, was approximately $524.4 million. The following events occurred in connection with the Acquisition:
o an investment in the LLC made by affiliates of JPMP and other equity investors, totaling $220.0 million.
o our borrowing of $130.0 million in term loans under a new Credit Facility (the "Credit Facility"). The Credit Facility also includes a $50.0 million revolving credit facility, and a $20.0 million letter of credit facility;
o an issuance to JPMP and certain selling stockholders of DLJ Brand by Brand Intermediate of $35.0 million aggregate principal amount of 13% senior subordinated pay-in-kind notes due 2013 and by the LLC of warrants to purchase its common equity interests; and
o our issuance of the $150.0 million of 12% Senior Subordinated Notes due 2012 ("Senior Notes").
o The payoff and redemption of our Old Credit Facility (the "Old Credit Agreement"), our old 10-1/4 % Senior Notes due 2008 (the "Old Senior Notes"), our old 7.03% Subordinated Note (the "Old Subordinated Note"), and our old 14.5% Senior Exchangeable Preferred Stock (the "Old Preferred Stock").
All of the above events are referred to as the "Transaction."
In connection with the Transaction, all of our assets and liabilities were recorded at their fair values. Accordingly, the accounting for certain operating expenses was affected by the Transaction. In the following discussion, certain items, such as revenues, for 2002 are discussed on a year-to-date basis because the accounting for these items was not impacted by the Transaction. However, the discussion of operating expenses is divided between the period from January 1, 2002 through October 16, 2002, and the period from October 17, 2002 through December 31, 2002, as some of these items were impacted by the Transaction.
Financial Information About Industry Segments
We operate in one segment and provide scaffolding services primarily to refining, petrochemical, chemical, utility and pulp and paper industries, and to a lesser extent general commercial clients. Our revenues, operating income and total assets as of and for the periods indicated below, were as follows (in thousands):
Description of Business
We are the largest North American provider of scaffolding services. Our services in the industrial scaffolding market facilitate access to tall structures that require on-going maintenance, periodic overhauls, or turnarounds, and capital projects, principally in the refining, petrochemical, chemical, utility and pulp and paper industries. Our scaffolding services in the commercial market primarily serve the non-residential building construction and renovation markets. Our turnkey services include equipment rental, labor for the erection and dismantlement of scaffolding, scaffolding design services and the sale of scaffolding equipment. We deliver our services through an extensive field service organization of between 3,900 and 4,900 team members in 45 field offices located throughout the United States and two in Canada.
Approximately 76%, 78%, and 82%, of our 2000, 2001, and 2002, respective revenues were attributable to ongoing maintenance, overhauls and capital projects of industrial facilities. We typically provide on-going maintenance services under long-term contracts with a duration ranging from two to five years. Overhauls, which are necessary to maintain the safety and efficiency of most industrial facilities, occur every one to four years depending on the industry and the type of overhaul being performed. We believe that the necessity for on-going maintenance and periodic overhauls provides us with a stable, recurring revenue base.
Our customers include major integrated oil companies, independent refiners, large chemical and petrochemical companies, utilities, pulp and paper producers, and large engineering and construction firms. One customer accounted for $40.3 million, or 11%, of our revenues for the year (combined twelve months) ended December 31, 2002. Another customer accounted for $34.0 million, or 13%, and $32.5 million, or 11%, or our revenues for the years ended December 31, 2000 and 2001, respectively. The loss of these customers could have a material adverse effect on the Company's revenues and results of operations.
We believe our position as the largest supplier of industrial scaffolding services provides us with a number of competitive advantages including:
o the ability to offer national coverage to large customers;
o the ability to provide required personnel and scaffolding to process major turnarounds and unanticipated plant outages;
o higher asset use through the shifting of assets across regions and across our large customer base;
o purchasing leverage with scaffolding manufacturers; and
o comprehensive safety training programs which have resulted in an accident incident rate which is well below the industry average and have enabled us to reduce insurance costs and accident-related expenses.
Our size also enables us to maintain our own design department that specializes in the custom design of industrial scaffolding. We use our design department to assure a safe structure that complies with national, state, and local codes to minimize the amount of scaffolding used and to maximize labor efficiency, thereby providing us with a competitive advantage.
Effects of Seasonality and Cyclicality
The market for industrial scaffolding services experiences seasonal fluctuations in demand. In particular, because of high demand for gasoline for automobiles during the summer, most refineries prefer to close down for overhauls during the spring and fall. Similar seasonal patterns are evidenced for utilities. Conversely, non-residential building construction, particularly in the renovation business, occurs throughout the year, but is heaviest in the second and third quarters.
We may be able to take advantage of differing seasonal patterns in other markets we service, such as the commercial scaffolding market, but seasonality may still lead to:
o low inventory use during periods of low demand;
o a lesser ability to adequately service all of our customers during periods of high demand;
o price fluctuations; and
o periods of low cash flow.
Historically, the market for industrial scaffolding services has experienced a degree of cyclicality. In particular, demand for nonresidential construction and capital projects is highly cyclical. In addition, when refining products are in high demand or the price of pulp is high, refineries and pulp and paper mills often delay overhauls. It does not appear that any areas of our business exhibit a significant degree of counter-cyclicality that would offset these effects. Any sustained downturn in our end-markets could have a material adverse effect on our Company because it will negatively impact our sales and lower our asset utilization.
The Industry and Competition
The Company is the largest North American provider of scaffolding services. We currently face competition from other existing scaffolding service providers, including entities providing substantially similar services, some of which have significantly greater resources than us. We also compete with larger engineering and construction firms. While we believe that we currently have a strong position in the industrial scaffolding market, we cannot assure that we will be able to increase or maintain our market share.
The scaffolding industry provides services to the industrial market and the commercial market, each of which requires different types of scaffolding equipment and levels of expertise. Industrial applications generally require systems scaffolding, which is highly versatile, can be quickly erected and dismantled, is capable of conforming to irregularly shaped structures and requires a higher level of skill to erect and dismantle. Commercial applications generally require frame and brace scaffolding, which is less versatile and requires a lower level of expertise.
Industrial Market
The North American industrial scaffolding market is approximately $1 billion and is serviced predominantly by scaffolding specialists such as Brand. We estimate that in 2002, the top five scaffolding specialists service almost 46% of the total industrial scaffolding market.
Industrial customers use scaffolding for on-going maintenance, periodic overhauls and capital projects. Among industrial applications, maintenance represents approximately 74% and turnarounds represent approximately 26% of the market. Since overhauls and capital projects may require the complete shutdown of a facility, which results in the loss of substantial revenue per day, speed and reliability are key customer considerations. Safety is another important consideration for industrial customers as scaffolding contractor accident incidents are counted against a facility's safety record and may cause increases in both insurance premiums and attention by the Occupational Safety and Health Administration ("OSHA").
Commercial Market
In North America, commercial scaffolding is used primarily in nonresidential building construction and renovation projects. Commercial applications are generally characterized by regularly shaped structures with few contoured or angled surfaces. Due to the simple shapes required, commercial jobs generally utilize frame and brace scaffolding, a less versatile type of equipment which is not suited to industrial applications. Commercial scaffolding requires a less skilled work force and has historically been less focused on safety issues. As a result, many contractors have in the past chosen to utilize in-house scaffolding services, and the balance of the market has historically been highly fragmented with low barriers to entry. During the last five years, however, contractors have increasingly outsourced their scaffolding needs, primarily due to greater scrutiny by OSHA on commercial job sites, labor shortages and an increase in relatively more complex renovation activity. While scaffolding providers have historically only provided scaffolding equipment, as outsourcing has increased, contractors
have increasingly sought scaffold providers who provide both equipment and labor. In determining to outsource their scaffolding needs, contractors generally choose a scaffold provider based on reputation, customer service, safety, price, speed and reliability.
Employees and Dependence on Labor
Brand typically employs between 3,900 to 4,900 team members, of which approximately 32% are represented by a labor union. While we have excellent relations with these unions and while we have experienced no material work stoppages during the past six years, we cannot assure that strikes or other types of conflicts with unions or personnel will not arise or that we will not become a target for further union organizing activity. Since our business has a high labor content, any such activity could have a material adverse effect on the Company. We believe that we have a good relationship with our team members.
Our business has a high labor content and, as a result, our financial performance is affected by the availability of qualified personnel and the cost of labor. The availability of labor can vary depending on market conditions. While we have been successful in hiring workers for our projects and we do not believe that the availability of labor has had a material adverse effect on our financial performance, we cannot assure that sufficient labor will be available in the future or that the cost of labor will not rise, either of which could have an adverse effect on the Company.
ITEM 2.
ITEM 2. PROPERTIES
We operate facilities in 46 locations (45 field offices and 1 headquarters location). We maintain a substantial inventory of scaffolding at our field offices as well as at customer sites throughout the United States and Canada. Our facilities are concentrated near our customers to minimize transportation costs, to shorten lead times and to strengthen oversight and project management abilities. Brand owns two locations in Canada, two in Texas, one in Alabama and one in Louisiana. We lease the remaining 39 facilities as well as one site used for our corporate headquarters located in Chesterfield, Missouri. Our facilities typically include a small office, warehouse and yard and range in size from 2,000 to 40,000 square feet under roof with yards from half an acre to more than nine acres. Our headquarters are located in a 9,500 square foot facility in Chesterfield, Missouri.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal proceedings and administrative actions, all of which are of an ordinary or routine nature incidental to the operations of the Company. In the opinion of the Company's management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of 2002.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of our outstanding common stock is held by the LLC and, accordingly, there is no established public trading market for our common stock. We have paid no dividends since inception and our ability to pay dividends is limited by the terms of certain agreements related to our indebtedness.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for DLJ Brand (the Predecessor company) for the years ended December 31, 1998, 1999, 2000, and 2001, and for the period from January 1, 2002 through October 16, 2002 and for Brand Intermediate Holdings, Inc. for the period from October 17, 2002 through December 31, 2002, and has been derived from the audited financial statements. The information as of December 31, 2002 and for the period from October 17, 2002 through December 31, 2002 may not be directly comparable to the information provided related to the Predecessor company as a result of the effect of the revaluation of assets and liabilities to their estimated fair market values in accordance with the application of purchase accounting pursuant to Statement of Financial Accounting Standards No. 141, "Business Combinations." The financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes thereto included elsewhere herein.
(1) Adjusted EBITDA is EBITDA, which we define for this purpose, as net income (loss) before interest, income taxes, depreciation and amortization, accretion of preferred stock dividends of subsidiary, adjusted for the period from January 1, 2002 through October 16, 2002 to exclude $2.5 million of non-cash compensation expense related to the issuance of stock options, $5.3 million of transaction expenses, and $0.2 million of the write-down of the cash surrender value of a split dollar life insurance policy of one of our officers. We present EBITDA because management believes it provides useful information regarding a company's ability to service and/or incur debt and is used by some investors, analysts and others to make informed investment decisions. Our management uses EBITDA to evaluate our operating performance, to allocate resources and capital to our business operations and as a measure of performance for incentive compensation purposes. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance, profitability or liquidity prepared in accordance with accounting principles generally accepted in the United States. Our method for calculating EBITDA may not be comparable to methods used by other companies. A reconciliation of pretax income under generally accepted accounting principles to EBITDA and adjusted EBITDA follows:
(2) Cash interest expense represents total interest expense less amortization of deferred financing fees, amortization of the discounts on long-term debt, accretion of the $35.0 million, 13% Senior Subordinated Pay-in-Kind Notes due 2013 (the "Holdings Notes") and accretion of the Old Subordinated Note. Amortization of deferred financing fees were $724, $722, $545, $546, $433, and $380 for the years ended December 31, 1998, 1999, 2000 and 2001, and for the periods from January 1, 2002 through October 16, 2002, and from October 17, 2002, through December 31, 2002, respectively. Amortization of the discount of long-term debt was $84 for the period from October 17, 2002
through December 31, 2002. Accretion of the Holdings Notes was $963 for the period from October 17, 2002 through December 31, 2002. Accretion of the Old Subordinated Note was $1,151, $1,374, $1,638, $1,953, and $1,812 for the years ended December 31, 1998, 1999, 2000 and 2001 and the period from January 1, 2002 through October 16, 2002.
(3) For the purposes of calculating the ratio of earnings to fixed charges and preferred stock dividends, earnings represent income (loss) before income taxes plus fixed charges. Fixed charges consist of interest expense on all indebtedness plus the interest portion of rental expense on noncancelable leases, amortization of debt issuance costs and accretion of preferred stock dividends. The deficiency of earnings to cover fixed charges for the years ended December 31, 1998, 1999, and 2000 and for the period from October 17, 2002 through December 31, 2002, were $5,347, $8,745, $7,172 and $2,961, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report.
Overview
The Company is the largest North American provider of scaffolding services and operates in the industrial and commercial scaffolding markets. The Company provides turnkey services that include equipment rental, labor for the erection and dismantlement of the scaffolding and scaffolding design services. The Company also sells a small amount of scaffolding.
Our services in the industrial scaffolding segment facilitate access to tall, often irregular-shaped structures that require ongoing maintenance, periodic overhauls and capital projects related to capacity additions and regulatory compliance, principally in the refining, petrochemical, chemical, electric utility and pulp and paper industries. Our services in the commercial scaffolding segment primarily serve the non-residential building construction market. Each job type derives revenue from one or more of the following sources: (1) the provision of labor for the design, erection and dismantlement of scaffolding, (2) rental of scaffolding equipment and (3) sales of new and used scaffolding equipment.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements. Certain of our accounting policies as discussed below require the application of significant judgment by management in selecting the appropriate assumptions for calculating amounts to record in our financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty.
We recognize deferred income tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred income taxes also include net operating loss carryforwards primarily due to the accelerated depreciation of our scaffolding equipment over book depreciation. We regularly review our deferred income tax assets for recoverability and establish a valuation allowance when it is more likely than not such assets will not be recovered, taking into consideration historical net income (losses), projected future income (losses) and the expected timing of the reversals of existing temporary differences. As of December 31, 2000, we had a valuation allowance of $10.9 million. During the year ended December 31, 2001, the valuation allowance was reduced by $3.3 million, reducing our effective tax rate and total income tax expense to zero. As of December 31, 2001, we had a valuation allowance of $7.6 million. During the period from January 1, 2002 through October 16, 2002, the valuation allowance on deferred tax assets was reduced to $0 as we determined that it is more likely than not that all deferred tax assets would be realized based upon year-to-date operating results and anticipated operating results of future periods.
As part of our ongoing business, we make payments for workers' compensation and health benefit claims. We have purchased insurance coverage for large claims. Our workers' compensation and health benefit liabilities are developed using actuarial methods based upon historical data for payment patterns, cost trends, utilization of healthcare services and other relevant factors. While we believe our liabilities for workers' compensation and health benefit claims of $13.6 million as of December 31, 2002, are adequate and that the judgment applied is appropriate, such estimated liabilities could differ materially from what will actually transpire in the future.
Prior to the Transaction we used the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock issued to Employees," to account for stock compensation plans. Non-cash compensation expense of $2.5 million for the period from January 1, 2002 through October 16, 2002 was recorded in the consolidated statement of operations since the
exercise prices of certain stock compensation awards were less than the estimated fair values of the underlying stock on the date of the grant. Estimated fair values were determined by using the valuation inherent in our sale to JPMP as this transaction provided independent third-party evidence of the fair value of the underlying stock. For periods prior to 2002, the fair value of the underlying stock was determined by our board of directors based upon a multiple of EBITDA, as this provided the best available evidence at that time.
Acquisitions
In December 2001, the Company purchased the scaffolding business of United Rentals, Inc. for an aggregate purchase price of $3.8 million in cash and $0.5 million in note payable that was entirely allocated to property and equipment. The purchase price approximated the fair market value of the assets purchased. The acquisition was accounted for using the purchase method of accounting, and accordingly has been included in the financial statements from the date of acquisition.
During 2000, the Company acquired four companies in four separate transactions for an aggregate purchase price of $11.0 million in cash, $3.3 million in notes payable, and $3.0 million of possible future payments conditioned upon the operating results of two of the acquired companies. The purchase prices, allocated to assets and liabilities assumed, were based on relative fair values. In connection with the acquisitions, the Company recorded goodwill in the amount of $6.0 million based upon the allocation of the purchase prices of the acquisitions. Each of the above acquisitions was accounted for using the purchase method of accounting, and accordingly have been included in the financial statements from the respective date of acquisition.
Revenues
Approximately 76%, 78%, and 82% of the Company's 2000, 2001, and 2002, respective revenues were attributable to on-going maintenance, turnarounds and capital projects of industrial facilities.
The Company typically provides on-going maintenance services under long-term contracts; the duration of these contracts is usually one to five years. Turnarounds occur every one to four years depending on the industry and the type of turnaround being performed. Although some turnarounds may be postponed for a period of time, they are a necessary component of maintaining industrial facilities and are required to ensure the safe and efficient operation of such facilities. While the postponement of scheduled turnarounds causes fluctuations in the Company's quarterly and annual results, the Company believes the necessity for on-going maintenance and turnarounds provides a stable, recurring revenue base.
Revenues from capital projects involving the industrial scaffold market, which represented approximately 6%, 14%, and 26% of our 2000, 2001, and 2002 revenues, respectively, resulted from new plant construction, plant expansions and modifications. Capital projects can and have had material impacts on the Company's results of operations.
Commercial scaffolding revenues, which represented approximately 24%, 22%, and 18% of 2000, 2001, and 2002 revenues, respectively, are related to the level of nonresidential construction and renovation.
The Company's business is seasonal. End-use industries such as the refining and utility industries experience increased demand for their products during the summer months. Consequently, turnarounds are generally scheduled during the first and fourth quarters of the year.
The following discussion of results of operations is presented for the years ended December 31, 2000, and 2001, and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002.
Results of Operations
Summary of Historical Financial Results (In thousands)
(1) Adjusted EBITDA is EBITDA, which we define for this purpose, as net income (loss) before interest, income taxes, depreciation and amortization, accretion of preferred stock dividends of subsidiary adjusted for the period from January 1, 2002 through October 16, 2002 to exclude $2.5 million of non-cash compensation expense related to the
issuance of stock options, $5.3 million of transaction expenses, and $0.2 million of the write-down of the cash surrender value of a split dollar life insurance policy of one of our officers. We present EBITDA because management believes it provides useful information regarding a company's ability to service and/or incur debt and is used by some investors, analysts and others to make informed investment decisions. Our management uses EBITDA to evaluate our operating performance, to allocate resources and capital to our business operations and as a measure of performance for incentive compensation purposes. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance, profitability or liquidity prepared in accordance with accounting principles generally accepted in the United States. Our method for calculating EBITDA may not be comparable to methods used by other companies. A reconciliation of pretax income under generally accepted accounting principles to EBITDA and adjusted EBITDA follows:
Year Ended December 31, 2002, as Compared to Year Ended December 31, 2001
Revenue
Total revenue rose from $305.1 million for the year ended December 31, 2001 to $369.8 million for the year (combined twelve months) ended December 31, 2002, which represented an increase of $64.7 million, or 21.2%. Labor revenue was the biggest factor in the increase in overall revenues. Labor revenue increased $59.0 million, or 26.1%, for the combined twelve months ended December 31, 2002 as compared to the year ended December 31, 2001. Rental revenue increased by $6.7 million, or 9.8%, from $68.1 million for the year ended December 31, 2001 to $74.8 million for the combined twelve months ended December 31, 2002. The majority of the revenue growth was driven by the industrial segment of our business, as we were awarded new refinery contracts and new power plant construction contracts. The nature of these work opportunities caused labor revenue to grow at a faster rate than rental revenue, as this type of work is more labor intensive than commercial work. Equipment sales declined by $1.1 million, or 9.8%, during the combined twelve months ended December 31, 2002 as compared to the year ended December 31, 2001.
Gross Profit
Gross profit is comparable year-over-year except for the depreciation expense on our property and equipment, which increased during the period from October 17, 2002 through December 31, 2002, due to the write-up of our property and equipment to its fair value in connection with the Transaction. During the period from October 17, 2002 through December 31, 2002, as compared to the period from January 1, 2002 through October 16, 2002, monthly depreciation increased approximately $1.2 million. Depreciation expense on our scaffolding equipment is included in equipment rental operating expenses.
Overall gross profit increased from $72.8 million for the year ended December 31, 2001 to $86.0 million for the combined twelve months ended December 31, 2002, which was an increase of $13.2 million, or 18.1%. Labor gross profit (labor revenue less labor cost) increased by 22.0%, or $9.6 million, from 2001 to 2002, while labor gross profit
percentage (labor gross profit as a percentage of labor revenue) decreased from 19.2% for the year ended December 31, 2001 to 18.6% for the combined twelve months ended December 31, 2002. The decrease in labor gross profit percentage is a result of the mix of jobs completed and increased claims costs during 2002 as compared to 2001. Rental gross profit increased $4.1 million, or 9.7%, from the year ended December 31, 2001 to the combined twelve months ended December 31, 2002. As a result of lower sales revenue, sales gross profit declined from $4.0 million for the year ended December 31, 2001 to $3.3 million for the year ended December 31, 2002.
Selling and Administrative Expenses
Selling and administrative expenses are not comparable year-over-year due to the change in the basis of accounting as a result of the Transaction on October 16, 2002, mostly due to the amortization expense relating to our customer relationships intangible asset, which is being amortized over a twelve year period and will amount to an annual amortization of $4.5 million.
Non-Cash Compensation
Non-cash compensation expense of $2.5 million for the period from January 1, 2002 through October 16, 2002 was recorded in the consolidated statement of operations since the exercise prices of certain stock compensation awards were less than the estimated fair values on the date of the grant. Estimated fair values were determined by using the stock price used in the Transaction, as this provided independent third-party evidence of the fair value of the underlying stock.
Transaction Expenses
Transaction expenses represent those costs associated with the Transaction which were not capitalizable under generally accepted accounting principles. Of the $5.3 million of transaction expenses in the period from January 1, 2002 through October 16, 2002, $5.0 million represents completion bonuses paid to members of management upon the consummation of the Transaction.
Operating Income
Operating income increased by $5.7 million, or 18.9%, from $30.0 million for the year ended December 31, 2001 to $35.7 million for the combined twelve months ended December 31, 2002.
Interest Expense
Interest expense is not comparable from 2001 to 2002 due to the new financing obtained and the repayment of all of the prior debt in connection with the Transaction.
Accretion of Preferred Stock Dividends of Subsidiary
Accretion of preferred stock dividends of subsidiary represents dividends accreted on the Old Preferred Stock. Such dividends accreted on a compounded basis and increased the liquidation value of the Old Preferred Stock. The preferred stockholders were paid in full in connection with the Transaction.
Provision for Income Tax
For the period from January 1, 2002 through October 16, 2002, the Company recorded an income tax provision of $1.3 million, net of a reduction in the valuation allowance on deferred tax assets by $7.6 million. During the period from January 1,2002 through October 16, 2002, the valuation allowance on deferred tax assets was reduced to $0 as the Company determined that it was more likely than not that all deferred tax assets would be realized based upon current operating results and anticipated operating results of future periods.
Net Income
Net income is not comparable from 2001 to 2002 due to the changes in the basis of accounting as a result of the Transaction on October 16, 2002.
Year Ended December 31, 2001, as Compared to Year Ended December 31, 2000
Revenue
Revenue increased by $41.0 million, or 15.5%, from $264.1 million in 2000 to $305.1 million in 2001. Labor revenue increased by $36.3 million, or 19.1%, from $189.8 million in 2000 to $226.1 million in 2001. Equipment rental revenue increased by $1.1 million, or 1.6%, from $67.0 million in 2000 to $68.1 million in 2001. Equipment sales revenue increased by $3.8 million, or 52.6%, from $7.1 million in 2000 to $10.9 million in 2001. Revenue from all sources (labor, rental and sales) increased from 2000 to 2001; however, the industrial business was particularly strong with additional work in the refining and utility sectors. Commercial work remained flat from 2000 to 2001. The revenue growth from 2000 to 2001 can be attributed 89% to increases in industrial work and 11% from a full year contribution of acquisitions made in 2000.
Gross Profit
Gross profit increased by $12.4 million, or 20.6%, from $60.4 million in 2000 to $72.8 million in 2001. Labor gross profit (labor revenue less labor cost) increased by $8.6 million, or 24.8%, from $34.8 million in 2000 to $43.4 million in 2001. Equipment rental gross profit increased by $2.5 million, or 6.2%, from $39.6 million in 2000 to $42.1 million in 2001. Equipment sales gross profit increased by $1.7 million, or 75.1%, from $2.3 million in 2000 to $4.0 million in 2001. Labor gross profit as a percent of labor revenue increased from 18.3% to 19.2%, increasing gross profit over revenue growth. Additionally, sales of both new and used equipment generated higher gross profit margins in 2001 than in 2000.
Selling and Administrative Expenses
Selling and administrative expenses increased by $3.6 million, or 9%, from $39.3 million in 2000 to $42.8 million in 2001. Selling and administrative expenses as a percentage of revenue decreased from 14.9% in 2000 to 14.0% in 2001. During 2001, we recorded a $1.4 million impairment charge relating to goodwill for an acquisition made in 2000. During 2001, we successfully integrated companies acquired in prior years into our existing business, reducing administrative expenses as a percentage of revenue. We also continued to actively manage spending relating to selling and administrative expenses.
Accretion of preferred stock dividends of subsidiary
Accretion of preferred stock dividends of subsidiary represents dividends accreted on our subsidiary's 14.5% Senior Exchangeable Preferred Stock. Such dividends accrete on a compounded basis and increase the liquidation value until such time that our subsidiary is permitted to pay cash dividends.
Operating Income
Operating income increased by $8.9 million, or 42.1%, from $21.1 million in 2000 to $30.0 million in 2001. This increase in operating income is directly related to increases in gross profit exceeding increases in selling and administrative expenses.
Interest Expense
Interest expense increased by $0.7 million, or 3.2%, from $22.1 million in 2000 to $22.8 million in 2001. In April 2001, we borrowed $10.0 million under the Term B loan portion of our existing credit facility, and in May 2001, we borrowed an additional $5.0 million under the Term B Loan facility. The proceeds of these loans were used to repay the revolving loans and for working capital needs.
Net Income (Loss)
Net income (loss) increased by $7.8 million from a loss of $7.2 million in 2000 to income of $0.6 million in 2001.
Liquidity and Capital Resources
The Company has historically utilized internal cash flow from operations and borrowings under the old credit facility to fund its operations, capital expenditures and working capital requirements. In the future, the Company expects to use the Credit Facility for these items. As of December 31, 2002, the Company had working capital of $35.9 million, including cash and cash equivalents of $4.8 million.
For the years ended December 31, 2000 and 2001 and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, cash provided by operating activities was $19.5 million, $29.4 million, $36.2 million and $8.4 million, respectively.
The Company's capital expenditure requirements are comprised of maintenance and expansion expenditures. Capital expenditures were $32.2 million, $19.6 million, $12.8 million, and $3.7 million, for the years ended December 31, 2000 and 2001, and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, respectively.
Our Credit Facility provides for $130.0 million of term loans, a $50.0 million revolving loan facility and a $20.0 million letter of credit facility. Up to $20.0 million of the $50.0 million revolving loan facility may be used for letters of credit. As of December 31, 2002, the Company had no borrowings outstanding under the revolving credit facility and had total outstanding letters of credit of $30.6 million.
The interest rate on the $130.0 million of term loans under the Credit Facility is variable. For the period from October 17, 2002 through December 31, 2002, the weighted average interest rate on the term loans was 5.6%. The interest rate on the term loans under the Old Credit Agreement was variable, and the weighted average interest rate on the loans outstanding under the old term loan facility for the period from January 1, 2002 through October 16, 2002 was 5.7%.
Our estimated interest payment obligation for 2003 is $27.0 million. We are required to make semi-annual interest payments on the Senior Notes in the amount of $9.0 million in April and October of every year until the Senior Notes mature in October 2012. We are also required to make quarterly interest payments on loans under our Credit Facility, which bears interest at a floating rate based upon either the base rate (as defined in our credit agreement, for base rate loans) or the LIBOR rate (for LIBOR loans) plus a spread of 2.5% to 4.0%, depending on the ratio of our consolidated debt to EBITDA. As of December 31, 2002, the interest rate on our term loans was 5.41%. We are not required to make interest payments on the Intermediate Notes, as these notes are pay-in-kind notes.
The Credit Facility requires financial and operating covenants, including among other things, that the Company maintain certain financial ratios, and imposes limitations on the Company's ability to make capital expenditures, to incur indebtedness, and to pay dividends. The Company was in compliance with all loan covenants at December 31, 2002.
Contractual Obligations
The following is a summary of contractual cash obligations as of December 31, 2002 (dollars in thousands):
Effect of Inflation; Seasonality
Inflation has not generally been a material factor affecting the Company's business. The Company's general operating expenses, such as salaries, employee benefits and facilities costs are subject to normal inflationary pressures.
The operations of the Company are generally subject to seasonal fluctuations coinciding with the spring and fall turnaround schedules of its major customers.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company adopted SFAS No. 141 for its December 2001 acquisition.
SFAS No. 142 was implemented by the Company on January 1, 2002. Under SFAS No. 142, goodwill is no longer subject to amortization over its useful life; rather, it is subject to at least annual assessments of impairment. Goodwill amortization for the years ended December 31, 2000 and 2001 was $0.5 million and $2.8 million, respectively. Goodwill expense for the year ended December 31, 2001 included an impairment charge of $1.4 million.
Under SFAS No. 143, "Accounting for Asset Retirement Obligations", the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was implemented by the Company on January 1, 2002 with no material impact on the Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by the Company on January 1, 2002 with no material impact on the Company's financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be adopted by us beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be adopted for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 did not have a material impact on our condensed financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity. SFAS No. 146 also established that fair value be the objective for initial measurement of the liability. SFAS No. 146 will be adopted by us for exit or disposal activities that are initiated after December 31, 2002. Adoption will not have a material impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The disclosure
requirements in the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. FASB Interpretation 45 was implemented in the fourth quarter 2002. The adoption of this FASB Interpretation did not have a material impact on the consolidated financial statements of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Implementation of SFAS No. 148 will not have a material impact on the results of operations of the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk related to changes in interest rates on its variable rate debt. The value of market risk sensitive instruments is subject to change as a result of movements in market rates and prices. Sensitivity analysis is one technique used to evaluate these impacts. Based upon a hypothetical ten percent change in interest rates, the potential losses in future earnings, fair value and cash flows are not material. The Company did not have any derivative financial instruments in place at December 31, 2002.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Financial Statement Schedules" on Page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On January 7, 2003, the Board of Directors authorized the engagement of Ernst & Young LLP ("E&Y") to serve as independent public accountants for the fiscal year ending December 31, 2002. KPMG LLP ("KPMG") had been engaged as independent public accountants for the predecessor company for the most recent fiscal year until their resignation on December 18, 2002.
None of KPMG's reports on DLJ Brand's consolidated financial statements for the fiscal years ended December 31, 2001 and December 31, 2000 contained an adverse opinion or disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2001 and December 31, 2000, there were no disagreements between Brand and KPMG on any matters of accounting principles or practices, financial statement disclosures, or auditing scope or procedure, which disagreements, if not resolved to KPMG's satisfaction, would have caused KPMG to make reference to the subject matter of the disagreement in connection with its reports. None of the reportable events described under Item 304(a)(1)(iv) of Regulation S-K occurred within the fiscal years ended December 31, 2001 and December 31, 2000.
During the most recent fiscal years and the subsequent interim period, the Company did not consult E&Y with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, or any other matters or reportable events listed in Item 304(a)(1)(iv) of Regulation S-K.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth certain information with respect to directors and executive officers of the Company as of March 31, 2002. Each director and officer holds office until a successor is elected and qualified or until his earlier death, resignation or removal.
John M. Monter has served as our Chief Executive Officer, President and one of our directors since 1996. Mr. Monter has served as our Chairman of the Board since April 2001. Prior to joining our company, he held a variety of corporate and operating assignments at Cooper Industries, Inc., an electrical products and tools and hardware manufacturer, where he began his career in 1977. Mr. Monter was President of the Bussmann Division of Cooper, which manufactures electrical overcurrent fuses, from 1992 to 1996. Mr. Monter has been a director of Belden, Inc. since May 2000. Mr. Monter holds a B.S. from Kent State University and an M.B.A. from the University of Chicago.
Jeffrey W. Peterson has served as our Chief Financial Officer and Vice President, Finance since April 2001. From 1992 to April 2001, he was our Corporate Controller and Region Controller. Mr. Peterson held the position of Division Controller over various divisions of Waste Management, Inc., a waste services provider, from 1987 to 1992. He began his career in public accounting with the firms of Coopers and Lybrand and Peat Marwick, Mitchell and Company. Mr. Peterson earned a B.S. from Brigham Young University and is a Certified Public Accountant.
Raymond L. Edwards has served as our Vice President, Operations Support Services and Secretary since October, 2002. Prior to that, he was our Vice President, Administration from November 1996 to October 2002. Prior to joining us, he held a variety of management positions, most recently, with Cooper Industries, Inc., from 1984 to 1996, including Vice President, Human Resources from 1990 to 1996. Mr. Edwards received a B.S. and an M.P.A. from the University of Colorado.
Guy S. Huelat has been our Vice President, Operations-Southwest Region, since October 2002. Prior to that, he was Vice President, Resource Management since January 1997. Prior to joining us, Mr. Huelat was a Plant Manager from 1989 to 1994 and a Materials Manager from 1994 to 1996 at Cooper Industries, Inc. From 1996 to 1997, he was Director of Logistics for Planning and Customer Service for Kimble Glass, Inc., a designer and producer of glass tubing and fabricated glass products. Mr. Huelat holds a B.S. from Gannon University.
Scott M. Robinson has served as our Vice President, Business Development, since October 2002. He served as our Vice President, Operations--Southwest Region, from January 1998 to October 2002. Mr. Robinson joined us as Vice President, Marketing in March 1997. Prior to joining us, he held various positions at Cooper Industries, Inc., including Vice President, Sales from 1993 to 1997 and Vice President, Marketing from 1987 to 1993. Mr. Robinson received a B.S. and an MS from Virginia Polytechnic Institute.
David R. Cichy has been our Vice President, Operations--Northern Region since 1996. Beginning in 1978, Mr. Cichy served in various construction management functions with Rust Industrial Services ("RIS") including Vice President, Resource Management from 1993 to 1996. Mr. Cichy attended Chicago Technical College.
James "Marty" McGee has served as our Vice President, Operations--Southeast Region since 1996. From 1993 until 1996, Mr. McGee held various region management positions with RIS and Waste Management Technologies. He has been with us in various management positions since 1981, including President, Southern Regional Scaffolding in 1993, Southern Region Manager in 1994 and Vice President, Southern Operations for WMX Services group (29 locations, five different Rust companies), from 1995 to 1996. Mr. McGee attended Louisiana State University.
Arnold L. Chavkin is an Executive Partner of JPMP. Prior to joining JPMP, Mr. Chavkin was a member of Chemical Bank's merchant banking group and a generalist in its corporate finance group specializing in mergers and acquisitions and private placements for the energy industry. His experience prior to Chemical Bank included corporate development for Freeport McMoRan as well as positions with Gulf and Western Industries and Arthur Young & Company. Mr. Chavkin is a Certified Public Accountant. He received his B.A. and M.B.A. degrees from Columbia University. Mr. Chavkin is a director of American Tower Corporation, Better Minerals & Aggregates, Crown Media Holdings, Inc., Encore Acquisition Partners, HDFC Bank, and Triton PCS, Inc. He serves on the Advisory Investment Boards of Richina Group, the India Private Equity Fund, and the Asia Development Partners Fund.
Christopher C. Behrens is a Partner of JPMP. Mr. Behrens holds a B.A. from the University of California, Berkeley and an M.A. from Columbia University. Mr. Behrens is a director of Berry Plastics, Carrizo Oil and Gas, Chromalox Corp., Domino's Pizza, Erickson Air Crane, Haddington Energy Partners, InterLine Brands, and Portola Packaging. Mr. Behrens is also on the Investment Committee of the Chase Private Equity Partners Select, a private equity fund of funds. Prior to joining JPMP, Mr. Behrens was a Vice President in Chase's Merchant Banking Group.
Sean E. Epps is a Principal of JPMP. Prior to joining JPMP, Mr. Epps was an Associate at Paribas Principal Partners. Mr. Epps also held positions at Donaldson, Lufkin & Jenrette Securities Corp. and The Chase Manhattan Bank. He holds a B.A. from Hamilton College and an M.B.A. from The Wharton School, University of Pennsylvania. He is a director of Chromalox Corp.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in Item 11 is not presented in thousands of dollars.
Compensation Committee
Compensation of the Company's management is determined by a committee comprised of Messrs. Behrens and Epps.
Executive Compensation
The following table sets forth the compensation earned by the Chief Executive Officer and the most highly paid executive officers for services rendered in 2000, 2001, and 2002:
Summary Compensation Table
The individuals named in the foregoing table are collectively referred to as the Brand Advisory Team.
Equity Incentive and Stock Options
In addition to compensation reflected in the foregoing table, the LLC has provided members of the Brand Advisory Team an opportunity to participate in both a time-based equity incentive program and a performance-based equity incentive program. The following table reflects the number of Class C units of the LLC issued to members of the Brand Advisory Team under these equity incentive programs:
Prior to the merger, DLJ Brand had adopted equity incentive plans pursuant to which members of the Brand Advisory Team and other team members of the Company had been permitted to purchase shares (or had been granted options to acquire shares) of DLJ Brand's common stock at prices equal to the fair market value of such stock as of the date of grant.
During 2001, members of the Brand Advisory Team were granted purchase rights at $2.55 per share of DLJ Brand's common stock as set forth in the following table. The table also reflects the number of shares subject to options, if any, held by the Brand Advisory Team as of December 31, 2001. All of the following shares were redeemed on October 16, 2002 in connection with the Transaction:
(1) None of such shares were exercisable at December 31, 2001.
(2) All shares were exercisable at December 31, 2001.
In connection with the exercise, in 1999, of options originally granted during 1997 and 1998, certain members of the Brand Advisory Team entered into restricted stock agreements ("RSAs") with DLJ Brand, pursuant to which a portion of the shares acquired upon exercise of the options would be subject to forfeiture in the event of a termination of employment prior to full vesting under the terms of the RSAs. Annual vesting of the shares subject to the RSAs was dependent upon the achievement of annual operating budgets or other targets established by the board of directors. As of December 31, 2001, vesting under the RSAs was complete and the forfeiture restrictions applicable to the remaining 20% of the shares originally subject to the RSAs expired. The total number of shares of DLJ Brand common stock originally covered by the RSAs held by members of the Brand Advisory Team is as follows: John M. Monter, 437,500; Raymond L. Edwards, 42,000; Guy S. Huelat, 42,000; Scott M. Robinson, 40,000; David R. Cichy, 40,000; and James "Marty" McGee, 42,000.
As shareholders of DLJ Brand prior to the merger of DLJ Brand and Brand Acquisition Corp., members of the Brand Advisory Team and other team members of the Company were entitled to receive the per share cash purchase price payable in connection with the merger in exchange for each share of DLJ Brand common stock they owned. However, members of the Brand Advisory Team and other team members used some of the proceeds from the redemption of the
DLJ Brand stock they owned to purchase equity interest in the LLC. The amount of equity interests of the LLC purchased in this manner was $6.7 million.
During 2001, in connection with the purchase of certain shares pursuant to the foregoing equity incentives and stock option programs, DLJ Brand extended loans to members of the Brand Advisory Team as follows: John M. Monter, $160,650; Jeffrey W. Peterson, $95,040; Raymond L. Edwards, $50,490; and Guy S. Huelat, $50,490. Such loans were represented by recourse notes and were secured by the respective shares of common stock purchased with the proceeds. Also during 2001, members of the Brand Advisory Team executed new, consolidated notes in respect of prior loans made by DLJ Brand relating to the purchase of shares, and exercise of options, relating to DLJ Brand's common stock. Such consolidated notes were also on a recourse basis and secured by the respective shares of common stock purchased with the proceeds. These loans were repaid in connection with the Transaction.
Employment Agreements
Mr. Monter has entered into an amended and restated employment agreement with us which became effective with the closing of the Transactions pursuant to which he will serve as the Chief Executive Officer. The amended and restated employment agreement terminates on December 31, 2007, and provides for an annual salary of not less than $425,000. Mr. Monter is also eligible for a bonus of up to 150% of his base salary. We are, under certain circumstances (including that such remittance is permitted by law), obligated to remit the remaining two annual scheduled payments of premiums in the amount of $200,000 each, on an insurance policy pursuant to a split-dollar agreement entered into between us and Mr. Monter. We are obligated to establish a nonqualified deferred compensation plan pursuant to which we shall make an annual contribution during each year of Mr. Monter's employment term in an amount equal to 25% of Mr. Monter's base salary. As a part of the amended and restated employment agreement, Mr. Monter has entered into covenants prohibiting him from competing with us, working for any of our competitors or using proprietary information for a 24-month period following the termination of his employment with us. Mr. Monter's receipt of post-termination severance benefits are conditioned upon his releasing us from certain potential claims and upon his compliance with confidentiality and non-competition provisions included in the amended and restated employment agreement.
Each of Raymond L. Edwards, Jeffrey W. Peterson, Guy S. Huelat, James McGee, Scott M. Robinson and David R. Cichy (the "Executives") has entered into an amended and restated employment agreement with us, each of which became effective with the closing of the Transactions, for terms effective through the second anniversary of the closing of the Transactions. The employment agreements will automatically extend thereafter for one-year terms unless a written notice to terminate is provided by us not less than 30 days nor more than 60 days prior to the end of the then-current term. We are obligated to establish a nonqualified deferred compensation plan for each such Executive pursuant to which we shall make an annual contribution during each year of such Executive's employment term in an amount equal to 15% of such Executive's base salary. As a part of each amended and restated employment agreement, each Executive has entered into covenants prohibiting such Executive from competing with us, working for any of our competitors or using proprietary information for a 24-month period following his departure from us. Each Executive's receipt of post-termination severance benefits is conditioned upon such Executive releasing us from certain potential claims and upon such Executive's compliance with confidentiality and non-competition provisions included in the amended and restated employment agreement.
Equity Programs
In connection with the Transaction, our executive officers and certain of our other team members have been or will be offered the opportunity to invest in equity securities of the LLC pursuant to the following equity participation programs.
The Management Equity Incentive Program. As a portion of the employment compensation packages offered by us to our management, the LLC will provide certain members of our management an opportunity to participate in both a time-based equity incentive program and a performance-based equity incentive program. A portion of this time- and performance-based equity was issued to management as of the closing of the Transaction. The remainder was reserved by the LLC for issuance to new hires or existing managers following the closing of the Transaction.
Under the time-based equity incentive program, certain members of our management will have an opportunity to earn, as a group, up to two percent of the fully-diluted equity of the LLC (as calculated at the time of the closing of the merger). Such time-based equity units shall vest over a five-year period, with various restrictions and accelerators.
Under the performance-based equity incentive program, certain members of our management will have an opportunity to earn, as a group, up to 12% of the fully-diluted equity of the LLC (as calculated at the time of the closing of the Transaction). The percentage of the outstanding performance-vesting incentive units that shall vest will be determined by the net equity valuation of the LLC at a liquidity event or at the seventh anniversary of the closing of the Transaction.
The Leveraged Employee Co-Investment Program. Subject to the satisfaction of certain requirements, certain of our managers, including our executive officers, will have the opportunity to participate in a leveraged employee co-investment program. Under this program, the LLC will provide these managers with eight-year term loans, bearing interest at a cumulative rate per annum equal to the federal funds rate in effect at the time the loan is made, for the purpose of financing such managers' purchase of additional equity interests in the LLC. It is anticipated that the executive officers and team members will borrow approximately $4 million to purchase equity interests in the LLC under this plan. Each loan made to a manager will be secured, at a minimum, by a pledge of all of the equity interests in the LLC purchased by such manager with the proceeds of the loan.
The Direct Investment Program. In addition to the foregoing equity programs, the LLC will provide certain of our managers with the opportunity to purchase additional equity interests in the LLC for the same per unit cash purchase price paid by JPMP and certain other equity investors in connection with the closing of the Transaction. No loans will be provided to the team members under the Direct Investment Program.
Performance Bonuses
As approved by the shareholders of DLJ Brand, the boards of directors of DLJ Brand and Brand Services authorized the payment of performance bonuses of $1.97 million to Mr. Monter, $0.26 million to Mr. Peterson and approximately $2.77 million to other members of management. These bonuses were expensed in the period from January 1, 2002 through October 16, 2002.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
All of the issued and outstanding common stock of Brand Services, Inc. is owned by Brand Intermediate Holdings, Inc. and all of the issued and outstanding common stock of Brand Intermediate Holdings, Inc. is owned by the LLC. The following table sets forth certain information with respect to the beneficial ownership of the voting equity interests of the LLC as of December 31, 2002, by (i) each person or group known to the Company who beneficially owns more than five percent of the common stock of the LLC and (ii) all directors and executive officers of the Company as a group:
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(1) Consists of equity interests held by J.P. Morgan Partners (BHCA), L.P. ("BHCA"), J.P. Morgan Partners Global Investors, L.P., J.P. Morgan Partners Global Investors (Cayman), L.P., J.P. Morgan Partners Global Investors A, L.P., and J.P. Morgan Partners Global Investors (Cayman) II, L.P., each of which is affiliated with BHCA.
(2) The address for officers and directors is c/o Brand Services, Inc., 15450 South Outer Highway 40, #270, Chesterfield, MO 63017.
(3) Includes 13,467,277 shares held by BHCA and its affiliates. Messrs. Chavkin, Behrens and Epps are partners and/or principals of J.P. Morgan Partners, LLC, an affiliate of BHCA and therefore may be considered to share the beneficial ownership of the shares held by BHCA and its affiliates. Messrs. Chavkin, Behrens and Epps disclaim beneficial ownership of these shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JPMorgan Chase Bank is the syndication agent, and its affiliate, J.P. Morgan Chase & Co., is a lender under the Credit Facility. JPMorgan Chase Bank and J.P. Morgan Chase & Co. received fees of approximately $1.25 million for acting in such capacities. J.P. Morgan Chase & Co. will receive interest and other payments as a lender under the Credit Facility as provided in our credit agreement governing the Credit Facility.
J.P. Morgan Securities Inc. was one of the initial purchasers in our October 2002 offering of the Senior Notes due 2012 and was also a dealer manager for the debt tender offer and consent solicitation relating to our Old Senior Notes and received fees of approximately $1.9 million for acting in such capacities. J.P. Morgan Securities also received a commitment fee of approximately $0.8 million for providing a bridge loan commitment.
Each of JPMorgan Chase Bank, J.P. Morgan Chase & Co. and J.P. Morgan Securities Inc. are affiliates of J.P. Morgan Partners (BHCA), L.P., J.P. Morgan Partners Global Investors, L.P., J.P. Morgan Partners Global Investors (Cayman), L.P., J.P. Morgan Partners Global Investors A, L.P., and J.P. Morgan Partners Global Investors (Cayman) II, L.P., who collectively own 65.1% of the equity interests (76.7% of the voting equity interests) in our parent company, Brand Holdings, LLC. Arnold L. Chavkin and Christopher C. Behrens, who serve as our directors, are executive officers of J.P. Morgan Partners, LLC, which serves as investment advisor to J.P. Morgan Partners (BHCA), L.P., and JPMP Capital Corp., a subsidiary of J.P. Morgan Chase & Co., which is the general partner of the general partner of each of J.P. Morgan Partners (BHCA), L.P., J.P. Morgan Partners Global Investors, L.P., J.P. Morgan Partners Global Investors (Cayman), L.P., J.P. Morgan Partners Global Investors A, L.P., and J.P. Morgan Partners Global Investors (Cayman) II, L.P.
In connection with the consummation of the Transaction, JPMP received a financial advisory fee of $5.0 million.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14(c) and 15d-14(c)) as of a date within 90 days prior to the filing date of this annual report on Form 10-K (the "Evaluation Date"). Based on such evaluation, each such officer has concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's reports filed or submitted under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the Company's internal controls, or in the other factors that could significantly affect such controls.
ITEM 15.
ITEM 15. EXHIBITS, INDEX TO FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report
(1) and (2) Financial Statements.
See Index to Financial Statements on Page of this report.
(1) Exhibits
See Index on Page E-1 of this report.
Reports filed with Form 8-K
On August 9, 2002, Brand Services, Inc. filed a report on Form 8-K to announce that DLJ Brand Holdings, Inc. was being acquired by J.P. Morgan Partners LLC.
On July 8, 2002, Brand Services, Inc. filed a report on Form 8-K to announce the engagement of KPMG LLP as its independent public accountant.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REPORTS OF INDEPENDENT AUDITORS
Board of Directors Brand Intermediate Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Brand Intermediate Holdings, Inc. and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, stockholder's equity, and cash flows for the period from October 17, 2002 through December 31, 2002. We have also audited the consolidated statements of operations, stockholder's equity (deficit), and cash flows of DLJ Brand Holdings, Inc. and subsidiaries (Predecessor company) for the period from January 1, 2002 through October 16, 2002. 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 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 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 consolidated financial position of Brand Intermediate Holdings, Inc. and subsidiaries at December 31, 2002 and the consolidated results of their operations and their cash flows for the period from October 17, 2002 through December 31, 2002 and the consolidated results of operations and cash flows of DLJ Brand Holdings, Inc. (Predecessor company) for the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 4 to the consolidated financial statements, DLJ Brand Holdings, Inc. and subsidiaries (Predecessor company) adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets", in 2002.
ERNST & YOUNG LLP
St. Louis, Missouri March 14, 2003
INDEPENDENT AUDITORS' REPORT
To DLJ Brand Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of DLJ Brand Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2001. 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 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. 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 DLJ Brand Holdings, Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
St. Louis, Missouri September 6, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands except per share amounts)
(Continued on following page)
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued) (In thousands except per share amounts)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated balance sheets.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
(Continued on following page)
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (In thousands except share amounts)
(Continued on following page)
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (Continued) (In thousands except share amounts)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (Continued) (In thousands except share amounts)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (Continued) (In thousands except share amounts)
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
1. ORGANIZATION AND BUSINESS:
Brand Intermediate Holdings, Inc. and its subsidiaries ("Brand") are 100% owned by Brand Holdings LLC (the "LLC"). As of December 31, 2002, the voting equity interests of the LLC are owned 76.7% by J.P. Morgan Partners and its affiliates ("JPMP"), and 23.3% by other equity investors, on a fully diluted basis. Brand Services, Inc. is a wholly owned subsidiary of Brand Intermediate Holdings, Inc. All references to "the Company", "we", "us", or "our" mean Brand Intermediate Holdings, Inc. and its subsidiaries.
Prior to October 16, 2002, Brand Services, Inc. was a wholly owned subsidiary of DLJ Brand Holdings, Inc. ("DLJ Brand" or the "Predecessor" company). On October 16, 2002, DLJ Brand merged with Brand Acquisition Corp., which was a wholly-owned subsidiary of the LLC, and was renamed Brand Intermediate Holdings, Inc. The preceding events are referred to as the "Transaction", as discussed further in Note 15.
The information as of December 31, 2002 and for the period from October 17, 2002 through December 31, 2002 may not be directly comparable to the information provided related to the Predecessor company as a result of the effect of the revaluation of assets and liabilities to their estimated fair market values in accordance with the application of purchase accounting pursuant to Statement of Financial Accounting Standards No. 141, "Business Combinations."
The Company operates in one segment and provides scaffolding services primarily to refining, petrochemical, chemical, utility and pulp and paper industries, and to a lesser extent general commercial clients. Scaffolding services are typically provided in connection with periodic, routine cleaning and maintenance of refineries, chemical plants and utilities, as well as for new construction projects. The Company provides personnel to erect and dismantle scaffolding structures, transport scaffolding to project sites and supervise and manage such activities. In addition, the Company rents and occasionally sells scaffolding that is classified as property and equipment on the consolidated balance sheets. The Company maintains a substantial inventory of scaffolding in the United States and Canada.
The Company's services are not rendered to or dependent on any single customer within the industrial or commercial markets and, therefore, the Company does not believe that a material concentration of credit risk exists, except that one customer accounted for $34.0 million (13%) and $32.5 million (11%), of revenue for the years ended December 31, 2000, and 2001, respectively, and another customer accounted for $40.3 million (11%) of our revenues for the combined twelve months ended December 31, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements are prepared on a consolidated basis and include those assets, liabilities, revenues and expenses directly attributable to the operations of the Company. All significant intercompany balances and transactions have been eliminated.
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 reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Labor revenues are recognized when the services are performed. Equipment rental revenue is recognized based on the number of days the equipment is rented beginning with the first day the equipment is under rental.
Sales of Scaffolding
The Company periodically sells new scaffolding directly to third parties. The Company recognizes revenue upon shipment and records as operating expense, the average cost of the scaffolding sold. The Company periodically sells scaffolding to third parties, primarily to its rental customers. The Company recognizes revenue for the proceeds of such sales and records as operating expense, the net book value of the scaffolding. Net book value is determined assuming the oldest scaffolding is sold first, as the Company maintains inventory records on a group basis.
Cash and Cash Equivalents
The Company considers all short-term deposits purchased with original maturities of three months or less to be cash equivalents.
Accrued Revenue
Accrued revenue represents work performed which either due to contract stipulations or lacking contractual documentation requirements, could not be billed. Substantially all unbilled amounts are expected to be billed and collected within one year.
Property and Equipment
Property and equipment (including major repairs and improvements that extend the useful life of the asset) are capitalized and stated at cost. Ordinary maintenance and repairs of equipment are charged to expense. The cost of property and equipment is depreciated over its estimated useful life on the straight-line method as follows:
For the years ended December 31, 2000 and 2001, and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, depreciation expense was $24,502, $23,488, $17,906, and $7,964, respectively.
Deferred Financing Costs
In connection with borrowings under the old Credit Facility ("Old Credit Facility") and the February 1998 issuance of 10-1/4% Senior Notes, ("Old Senior Notes") the Company incurred financing fees and expenses that were deferred and were being amortized generally over 10 years. For the years ended December 31, 2000 and 2001, and for the period from January 1, 2002 through October 16, 2002, amortization expense related to deferred financing costs was $739, $737, and $586, respectively.
In connection with the issuance of the new Credit Facility ("Credit Facility"), the $150.0 million, 12% Senior Subordinated Notes ("Senior Notes"), and the $35.0 million, 13%, pay-in-kind notes ("Intermediate Notes"), the Company incurred financing fees and expenses that were deferred and are being amortized over the lives of the individual debt instruments. For the period from October 17, 2002 through December 31, 2002, amortization expense relating to these deferred financing costs was $380.
Asset Impairment
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.
Deferred Revenue
Deferred revenue represents amounts collected from customers at a faster rate than the work was performed on these contracts. Substantially all of the costs related to these amounts will be incurred within one year.
Stock Based Employee Compensation
Prior to the Transaction, to account for the Company's stock option plan, (the "Plan"), the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation." The Company accounted for employee stock options under the Plan under APB Opinion 25, as permitted under generally accepted accounting principles. Accordingly, no compensation cost was recognized in the financial statements for the years ended December 31, 2000 and 2001. During the period from January 1, 2002 through October 16, 2002, non-cash compensation expense of $2.5 million was recorded in the consolidated statement of operations since the exercise prices of certain stock compensation awards were less than the estimated fair values of the underlying stock on the date of grant. Estimated fair values were determined by using the stock price inherent in the Transaction. Had compensation cost been determined consistent with SFAS 123, the Company's net income (loss) would reflect the following:
Workers' Compensation and Health Benefit Liabilities
The estimates of workers' compensation and health benefit liabilities are developed using actuarial methods based upon historical data for payment patterns, cost trends, utilization of health care services and other relevant factors. These estimates are continually reviewed and adjustments, if necessary, are reflected in the period known.
Foreign Operations
The assets and liabilities of the Company's wholly owned foreign subsidiary, Brand Scaffold Services of Canada, Inc., which uses the Canadian dollar as its functional currency, are translated at the rates of exchange in effect on the balance sheet date while income statement accounts are translated at the average exchange rate in effect during the period. The resulting translation adjustments are charged or credited to the cumulative translation adjustment account included in stockholder's equity (deficit). Revenue from the Canadian operation and scaffolding equipment in Canada are less than 10% of the consolidated totals for the Company.
3. NOTES RECEIVABLE:
Notes receivable primarily result from scaffolding sales. As of December 31, 2001 and 2002, $327 and $679, respectively, of such notes were outstanding with interest rates ranging from 8.5% to 9.0%.
4. GOODWILL:
As of December 31, 2002, goodwill represents the amount paid in connection with the Transaction in excess of the fair value of the identifiable net assets acquired. Prior to December 31, 2001, goodwill was amortized using the straight-line method over five years. Amortization expense related to goodwill was $542 and $2,756 for the years ended December 31, 2000 and 2001, respectively. Goodwill amortization for the year ended December 31, 2001 included an impairment charge of $1.4 million. During 2001, goodwill associated with one of the acquired businesses in 2000 was written down
to $0 because management no longer believed the carrying value of that goodwill was recoverable.
Under SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer subject to amortization over its useful life; rather, it is subject to at least annual assessments of impairment. Accordingly, amortization of goodwill ceased effective January 1, 2002. The Company completed the required transitional impairment test as of January 1, 2002, and in doing so determined that goodwill was not impaired. The following table shows a reconciliation between reported net income and adjusted net income had SFAS No. 142 been implemented by the Company as of January 1, 2000:
5. OTHER ASSETS AND INTANGIBLES:
Other assets and intangibles consists of the following at December 31:
The customer relationships and trade names were recorded at their fair values as a result of the Transaction. The fair value assigned to customer relationships of $53,900 was based on the future discounted cash flows that are expected to result from the customer relationships existing at October 16, 2002. The customer relationships are amortized over twelve years. Amortization expense relating to customer relationships for the period from October 17, 2002 through December 31, 2002 was $1,123. The value assigned to trade names was $13,514. The trade names will not be amortized as this intangible asset has an indefinite life. Amortization expense related to the non-compete agreement was $182, $181, $198, and $43 for the years ended December 31, 2000, and 2001, and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, respectively.
The following summarizes the balances of intangibles as of December 31, 2002:
Aggregate amortization expense for the period from October 17, 2002 through December 31, 2002 was $1,166. Estimated amortization expense for the years ended December 31, is as follows:
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts consists of the following:
7. INCOME TAXES:
Deferred income taxes reflect the 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. Deferred income taxes are not provided on undistributed earnings of the Company's foreign subsidiary because those earnings are considered to be permanently invested. If the reinvested earnings were to be remitted, the U. S. income taxes under current law would be immaterial.
For the years ended December 31, 2000 and 2001 and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, the provision (benefit) for income taxes consisted of the following:
The reconciliation of the statutory federal income tax expense (benefit) on the Company's pretax income (loss) to the actual provision (benefit) for income taxes for the years ended December 31, 2000 and 2001 and the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002 follows:
The components of the net deferred income tax liability as of December 31, 2001 and 2002 are as follows:
The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. For the years ended December 31, 2000 and 2001, the valuation allowance increased (decreased) $0.1 million, and $(3.3) million, respectively. During the period from January 1, 2002 through October 16, 2002, the Company reduced the valuation allowance on deferred tax assets by $7.6 million. The valuation allowance on deferred tax assets was reduced to $0 because the Company determined that it was more likely than not that all deferred tax assets would be realized based upon current operating results and anticipated operating results for future periods. At December 31, 2002, the Company had net operating loss carryforwards, for federal income tax purposes, of $119.3 million which expire in various years between 2011 and 2022. A majority of the net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code Section 382.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The major components of accounts payable and accrued expenses as of December 31, 2001 and 2002, are as follows:
9. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
Notes payable and capital lease obligations as of December 31, 2001 and 2002, are as follows:
Notes payable consist of several promissory notes with interest rates of 8.5% to 9.0%. Future principal payments total $1,038 for 2003, $660 for 2004, and $165 for 2005. See Note 11 for the amortization table of the capital lease obligations.
10. LONG-TERM DEBT:
At December 31, 2001 and 2002, the long-term debt consisted of the following:
In connection with the Transaction, Brand issued $150.0 million of 12%, Senior Subordinated Notes (the "Senior Notes") due in 2012. The Senior Notes were issued at a discount of $4,216 and are subordinated to the Credit Facility (the "Credit Facility"). Amortization expense related to the discount on the Senior Notes for the period from October 17, 2002 through December 31, 2002 was $50. Brand also entered into the Credit Facility which provides for $130.0 million
in term loans, a $50.0 million revolving credit facility and a $20.0 million letter of credit facility. As of December 31, 2002, no borrowings were outstanding under the revolving credit facility. Brand also issued $35.0 million of 13%, pay-in-kind notes (the "Intermediate Notes"). The Intermediate Notes were issued at a discount of $4,098. Amortization expense related to the discount on the Intermediate Notes for the period from October 17, 2002 through December 31, 2002 was $35. The Intermediate Notes are "pay-in-kind" notes due to restrictions on interest payments in the Credit Facility. Accretion of interest on the Intermediate Notes for the period from October 17, 2002 through December 31, 2002 was $962.
Interest rates under the Credit Facility are based upon the LIBOR rate (for LIBOR loans under the term borrowing) or the base rate (for base rate loans under the term borrowing) plus a margin of 2.5% to 4.0%. As of December 31, 2002, our term borrowings were LIBOR loans at a rate of 5.41%. The average interest rate under term loans for the period from October 17, 2002 through December 31, 2002 was 5.6%. Interest expense on the term loans and the Senior Notes for the period from October 17, 2002 through December 31, 2002 was $5,357. In connection with the Credit Facility, the Company incurred administrative fees and commitment fees of 0.5% on the unused portion of the revolving credit facility. The fees are included in interest expense and totaled $52 for the period from October 17, 2002 through December 31, 2002.
Maturities of debt as of December 31, 2002, are as follows:
As a result of the Transaction, the loans outstanding under the old $190.0 million Credit Agreement (the "Old Credit Agreement"), the old 10 1/4%, $130.0 million Senior Notes (the "Old Senior Notes"), and the old $14.5 million Subordinated Note (the "Old Subordinated Note") were all repaid in full. The average interest rate under the Old Credit Agreement and the Old Senior Note was 10.20%, 9.63%, and 9.21%, for the years ended December 31, 2000 and 2001 and for the period from January 1, 2002 through October 16, 2002, respectively. Interest expense under the Old Credit Agreement and the Old Senior Notes for the years ended December 31, 2000 and 2001 and for the period from January 1, 2002 through October 16, 2002 was $16,691, $17,901, and $12,433, respectively. Under the Old Credit Agreement, the Company incurred administrative and commitment fees, included in interest expense, of $154, $173, and $158 for the years ended December 31, 2000 and 2001, and for the period from January 1, 2002 through October 16, 2002, respectively.
As of December 31, 2001 and 2002, the Company had outstanding letters of credit of $15.0 million and $30.6 million, respectively. For the years ended December 31, 2000 and 2001 and for the periods from January 1, 2002 through October 16, 2002, and from October 17, 2002 through December 31, 2002, the Company paid fees related to such commitments (included in interest expense) of $315, $414, $399 and $254, respectively.
Substantially all of the assets of the Company are pledged as collateral for the Credit Facility. In addition, the Company was required under the Old Credit Agreement and is required under the Credit Facility to comply with various covenants. These covenants include, among other restrictions, the achievement of certain financial ratios. The Company was in compliance with the various covenants at December 31, 2002.
11. LEASE OBLIGATIONS:
The Company leases a portion of its operating and office facilities under operating leases. For the years ended December 31, 2000 and 2001 and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002, rent expense was $2,564, $2,970, $2,368, and $791, respectively. The Company leases certain scaffolding equipment under capital leases. The net book value of the scaffolding equipment under capital lease was $2,559 and $1,489 as of December 31, 2001 and 2002, respectively.
The future minimum lease payments under noncancelable leases as of December 31, 2002, are as follows:
12. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of conducting its business, the Company becomes involved in various pending claims and lawsuits. These primarily relate to employee matters. The outcome of these matters is not presently determinable; however, in the opinion of management, based on the advice of legal counsel, the resolution of these matters is not anticipated to have a material adverse effect on the financial position or results of operations of the Company.
13. SENIOR EXCHANGEABLE PREFERRED STOCK OF SUBSIDIARY:
Prior to the Transaction, the Company had authorized 1,250,000 shares and at December 31, 2001, had issued and outstanding 1,042,460 of Senior Exchangeable Preferred Stock (the "Old Senior Preferred Stock"). The liquidation value of each share of Old Senior Preferred Stock was $25.00 at issuance. Dividends were calculated quarterly on the liquidation value of such shares (including accreted dividends) at 14.5% annually. For the years ended December 31, 2000, and 2001, and for the period from January 1, 2002 through October 16, 2002, dividends of $6,338, $7,308, and $6,576, respectively, were accreted. All of the Old Senior Preferred Stock was redeemed and paid in full in connection with the Transaction.
14. STOCKHOLDERS' EQUITY (DEFICIT):
Subsequent to the Transaction, the Company adopted a Management Equity Incentive Program (the "Management Equity Incentive Program"). Under this program, employees of Brand are eligible to participate in both a time-based equity incentive program and a performance-based equity incentive program to purchase Class C units of the LLC. Under the time-based equity incentive program, for so long as a member of management remains employed by Brand, and subject to an accelerated vesting in the event of certain liquidity events, the time-based incentive units issued to each employee vest over a five-year period. Under the performance-based equity incentive program, the number of outstanding performance-based units that will vest upon the occurrence of a liquidity event will be determined by comparing the net equity valuation of Brand to certain net equity valuation targets agreed to between management and the LLC. In the event that no liquidity event occurs prior to October 16, 2009, the number of the outstanding performance-based units that vest on that date will be determined by the fair market value of the LLC on that date. As of December 31, 2002, 195,142 and 1,170,854 time-based and performance-based Class C units were issued and outstanding, respectively.
The value of the Class C units under the Management Equity Incentive Program is based upon a formula which calculates the net equity of the LLC. As such, the Company will record compensation expense utilizing variable plan accounting to account for the Management Equity Incentive Program. A liability will be recorded for the amount that would be payable to Class C unit holders at each balance sheet date. As of December 31,2002, the redemption value of the Class C units is $0 and, accordingly, no liability has been recorded.
In 1997, the Board of Directors of DLJ Brand adopted the Plan for key employees of the Company. In connection with the Transaction, all stock options were exercised and all shares of stock were redeemed on October 16, 2002. The following table summarizes stock option transactions under the Plan for 2000, 2001, and 2002:
The weighted-average exercise price of the outstanding options as of December 31, 2000 and 2001 was $1.03 and $1.53, respectively. Prior to the Transaction, certain members of management were extended loans with full recourse for the purchase of stock of the Predecessor company. In connection with the Transaction, all loans were repaid in full.
15. THE TRANSACTION
On October 16, 2002, the LLC acquired 100% of DLJ Brand in a stock transaction accounted for as a business combination using the purchase method of accounting. The total amount of consideration paid in the Transaction, including the payment of transaction costs incurred by the buyer, was approximately $524.4 million. The financial statements of Brand Intermediate Holdings, Inc. have been prepared utilizing push-down accounting reflecting the LLC's cost of the acquisition. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed on the date of the Transaction:
In connection with the Transaction, the LLC made a capital contribution to Brand Intermediate Holdings, Inc. in the amount of $223,498. The following unaudited pro forma results of operations assume that the Transaction occurred as of the beginning of each year presented:
16. RELATED-PARTY TRANSACTIONS:
Prior to the Transaction, certain shareholders of DLJ Brand received a quarterly Management Advisory Fee in return for management, advisory and other services rendered. For the years ended December 31, 2000 and 2001, and for the period from January 1, 2002 through October 16, 2002, such fees totaled $500, $500, and $375, respectively.
In connection with the consummation of the Transaction, JPMP received a financial advisory fee of $5.0 million. Also, JPMP holds $15.0 million of the $35.0 million Intermediate Notes and holds 221,484 warrants to purchase certain voting equity interests of the LLC.
17. EMPLOYEE BENEFIT PLAN:
In 1997, the Company established the Brandshare 401(k) Savings Plan and Profit Sharing Plan ("401(k) Plan"). Substantially all employees are eligible to participate in the Plan, after one year of service. Participants may elect to defer 1% to 25% of their salary, up to the Internal Revenue Service limitation. The Company, at its sole discretion, may make matching contributions to the 401(k) Plan. For the years ended December 31, 2000 and 2001, and for the periods from January 1, 2002 through October 16, 2002 and from October 17, 2002 through December 31, 2002 the Company expensed $383, $411, $402, and $119, respectively, for contributions to the 401(k) Plan.
18. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Notes Receivable - Recorded amounts of notes receivable approximate their fair value.
Term Loans - The carrying amounts of the term loans approximate their fair value because such loans carry variable interest rates.
Old Senior Notes - The fair value of the Old Senior Notes is based on market rates obtained from dealers.
Notes Payable and Capital Lease Obligations - Recorded amounts of the notes payable and capital lease obligations approximate their fair value.
Old 14.5% Senior Exchangeable Preferred Stock - The fair value of the Old 14.5% Senior Exchangeable Preferred Stock is based on market rates obtained from dealers.
12% Senior Subordinated Notes - The fair value of the Senior Notes is based upon market rates obtained from dealers.
13% Intermediate Notes - The carrying value of the Intermediate Notes approximates fair value.
The carrying amounts and fair values of the Company's financial instruments at December 31, 2001 and 2002, are as follows:
(a) Excludes discount.
19. ACQUISITIONS:
In December 2001, the Company purchased the scaffolding business of United Rentals, Inc. for an aggregate purchase price of $3.8 million in cash and $0.5 million in a note payable, which was entirely allocated to property and equipment. The purchase price approximated the fair market value of the assets purchased. The acquisition was accounted for using the purchase method of accounting, and accordingly has been included in the financial statements from the date of acquisition. The pro forma effects of this acquisition are not material to the financial position or results of operation of the company.
During 2000, the Company acquired four companies in four separate transactions for an aggregate purchase price of $11.0 million in cash, $3.3 million in notes payable, and $3.0 million of possible future payments conditioned upon the operating results of two of the acquired companies. The purchase prices, allocated to assets and liabilities assumed, were based on relative fair values. In connection with the acquisitions, the Company recorded goodwill in the amount of $6.0 million based upon the allocation of the purchase prices of the acquisitions. Each of the above acquisitions was accounted for using the purchase method of accounting, and accordingly has been included in the financial statements from the respective date of acquisition.
20. NEW ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company adopted SFAS No. 141 for its December 2001 acquisition. See Note 4 for the disclosures required by SFAS No. 142.
Under SFAS No. 143, "Accounting for Asset Retirement Obligations", the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was implemented by the Company on January 1, 2002 with no material impact on the Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by the Company on January 1, 2002 with no material impact on the Company's financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be adopted by the Company beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be adopted for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the financial statements of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity. SFAS No. 146 also establishes that fair value be the objective for initial measurement of the liability. SFAS No. 146 will be adopted by the Company for exit or disposal activities that are initiated after December 31, 2002. Adoption will not have a material impact on the consolidated financial statements of the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The disclosure requirements in the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. FASB Interpretation 45 was implemented in the fourth quarter 2002. The adoption of this FASB Interpretation did not have a material impact on the consolidated financial statements of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Implementation of SFAS No. 148 will not have a material impact on the results of operations of the Company.
21. SUPPLEMENTAL CONSOLIDATING INFORMATION:
The 12% Senior Notes, which are an obligation of Brand Services, Inc. are fully and unconditionally guaranteed on a senior subordinated, joint, and several basis by the other domestic subsidiaries of Brand Intermediate Holdings (which are all 100% owned by Brand Intermediate Holdings) and by Brand Intermediate Holdings, Inc. Supplemental consolidating information of Brand Intermediate Holdings, Inc., Brand Services, Inc., the guarantor subsidiaries, and its foreign non-guarantor subsidiaries is presented below. Investments in subsidiaries are presented on the equity method of accounting. Separate financial statements are not provided because management has concluded that the summarized financial information below provides sufficient information to allow investors to separately determine the nature of the asset held by and the operations of the guarantor and non-guarantor subsidiaries.
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brand Intermediate Holdings, Inc. Condensed Consolidating Balance Sheet December 31, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Brand Intermediate Holdings, Inc. Condensed Consolidating Balance Sheet December 31, 2002 (continued)
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Balance Sheet December 31, 2001
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Balance Sheet December 31, 2001 (continued)
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Brand Intermediate Holdings, Inc. Condensed Consolidating Statement of Operations For the Period from October 17, 2002 through December 31, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Operations For the Period from January 1, 2002 through October 16, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Operations For the Year Ended December 31, 2001
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Operations For the Year Ended December 31, 2000
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Brand Intermediate Holdings, Inc. Condensed Consolidating Statement of Cash Flows For the Period from October 17, 2002 through December 31, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Cash Flows For the Period from January 1, 2002 through October 16, 2002
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2001
BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DLJ Brand Holdings, Inc. (Predecessor) Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2000
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BRAND INTERMEDIATE HOLDINGS, INC.
Date: March 31, 2003 By: -------------------------------------- John M. Monter Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2003.
By: -------------------------------------- John M. Monter Chief Executive Officer and President (Principal Executive Officer)
By: -------------------------------------- Jeffrey W. Peterson Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer)
-------------------------------------- Christopher C. Behrens Director
-------------------------------------- Sean E. Epps Director
-------------------------------------- Arnold L. Chavkin Director
INDEX TO EXHIBITS
(1) Incorporated herein by reference to exhibit of the same number in the Registrant's Registration Statement on Form S-1, Registration Number 333-56817.
(2) Incorporated herein by reference for exhibit of the same number in the Registrant's Registration Statement on Form S-4, Registration Number 333-102511.
(3) Filed herewith.
Chief Executive Officer Certification
I, John M. Monter, certify that:
1. I have reviewed this annual report on Form 10-K of Brand Intermediate Holdings, Inc. (the "Registrant").
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report.
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ John M. Monter ----------------------------------------- John M. Monter Chairman, Chief Executive Officer, President and Director
Chief Financial Officer Certification
I, Jeffrey W. Peterson, certify that:
1. I have reviewed this annual report on Form 10-K of Brand Intermediate Holdings, Inc. (the "Registrant").
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report.
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
d) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
e) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
c) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
d) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Jeffrey W. Peterson ----------------------------------------- Jeffrey W. Peterson Chief Financial Officer and Vice President, Finance