<PAGE> 1
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule
424(b)(3) of the Rules and
(To Prospectus dated October 15, 1998) Regulations Under the
Securities Act of 1933
Registration Statement No.
333-56817
BRAND SCAFFOLD SERVICES, INC.
10 1/4% Senior Notes Due 2008
---------------------------
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is the Form 10-K
Annual Report of Brand Scaffold Services, Inc. for the annual period ended
December 31, 1998 and the Form 10-Q Quarterly Report of Brand Scaffold Services,
Inc. for the quarterly period ended September 30, 1999.
---------------------------
This Prospectus Supplement, together with the Prospectus, is to be used
by Donaldson Lufkin & Jenrette Securities Corporation in connection with offers
and sales of the above-referenced securities in market-making transactions at
negotiated prices related to prevailing market prices at the time of the sale.
Donaldson Lufkin & Jenrette Securities Corporation may act as principal or agent
in such transactions.
November 19, 1999
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED
December 31, 1998
BRAND SCAFFOLD SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 735915 133909681
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation or Organization) Identification Number)
15450 SOUTH OUTER HIGHWAY 40, #270
CHESTERFIELD, MISSOURI 63017
(314) 519-1000
(Address, including zip code, and Telephone Number, including area code,
of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
No market exists for the Common Stock of Brand Scaffold Services, Inc. All of
the outstanding shares of Common Stock are held by DLJ Brand Holdings, Inc.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS MARCH 15 , 1999
----- ---------------
<S> <C>
BRAND SCAFFOLD SERVICES, INC.
COMMON STOCK, $0.01 PAR VALUE 100 SHARES
</TABLE>
1
<PAGE> 3
ITEM 1. BUSINESS
General
Company History and Structure
Brand Scaffold Services, Inc. and its subsidiaries ("Brand") are 100% owned by
DLJ Brand Holdings, Inc. ("Holdings"). As of December 31, 1998, Holdings is
owned 65.5% by Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), 9.3% by Carlisle
Enterprises, L.P. ("Carlisle"), 18.6% by Rust International Inc. ("Rust
International") through its wholly owned subsidiary Rust Industrial Services,
Inc. ("RIS") and 6.5% by the directors, officers and employees of the Company.
Rust International is a subsidiary of Waste Management, Inc. ("WMI"). All
references to "the Company," "we," "us" or "our" mean Brand Scaffold Services,
Inc. and its subsidiaries.
On September 30, 1996, Brand, a newly formed entity created by the merchant
banking group of DLJ, purchased the assets of Rust Scaffold Services, Inc. and
its subsidiaries, which were direct and indirect subsidiaries of Rust
International ("the Acquisition"). The Acquisition was financed by $190.0
million in debt and accounted for under the purchase method of accounting.
Financial Information About Industry Segments
We operate in one segment and provide scaffolding services primarily to
refining, chemical, petrochemical, pulp and paper and utility industries, and to
a lesser extent, nuclear facilities and general commercial clients. Our
revenues, operating income and total assets as of and for the years ended
December 31, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue $205,304 $160,660
Operating income 18,063 9,684
Total assets 211,060 197,543
</TABLE>
Description of Business
We are the largest North American provider of industrial scaffolding services.
Our services facilitate access to tall structures for on-going maintenance,
turnarounds (major maintenance projects which require the complete or partial
shutdown of a facility) and capital projects, principally in the refining,
petrochemical, chemical, utility and pulp and paper industries. Our turnkey
services include equipment rental, labor for the erection and dismantlement of
scaffolding and scaffolding design services. We deliver our services through an
extensive field service organization of approximately 3,200 employees in 27
field offices located throughout the United States and two in Canada. We also
provide scaffolding services to the commercial market (primarily nonresidential
construction) and sell a small amount of scaffolding.
Approximately 83%, 80% and 86% of our 1998, 1997 and 1996, respective, revenues
were attributable to ongoing maintenance, turnarounds and capital projects of
industrial facilities. We typically provide on-going maintenance services under
long-term contracts; the duration of these contracts ranges between one and 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. We believe that the necessity for on-going
maintenance and turnarounds provides us with a stable, recurring revenue base.
Our main customers include major integrated oil companies, independent refiners,
large chemical companies, utilities and large engineering and construction
firms. The largest customer, Exxon Corporation, accounted for approximately 15%
and 17% of our revenues in the years ended December 31, 1998 and 1997,
respectively. The loss of this customer could have a material adverse effect on
us. It is unclear what effect the recently announced mergers and consolidations
in the oil industry (such as the merger between Exxon Corporation and Mobil
Corporation and between British Petroleum P.L.C. and Amoco Corporation) and the
paper industry will have on us.
2
<PAGE> 4
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 trucking fleet and to provide a
design department that specializes in the custom design of industrial
scaffolding, which we use 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 turnarounds during
the spring and fall. Similar patterns are evidenced for utilities.
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 an inability to 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 turnarounds. It does not appear that any areas of our business
exhibit a significant degree of counter-cyclicality that would offset these
effects. This cyclicality could have a material adverse effect on us.
The Industry and Competition
The Company is the largest North American provider of industrial scaffolding
services. We currently face competition from other existing scaffolding services
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 services industry consists of 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 not as versatile as
systems scaffolding and requires a lower level of expertise.
3
<PAGE> 5
Industrial Market
The North American industrial scaffolding market is approximately $575 million
and is serviced predominantly by scaffolding specialists such as Brand. We
estimate that the top six scaffolding specialists service almost one half of the
total industrial market.
Industrial customers use scaffolding for on-going maintenance, turnarounds and
capital projects. Among industrial applications, maintenance represents
approximately 50% and turnarounds represent approximately 35% of the market.
Since turnarounds may require the complete shutdown of a facility (which may
lose up to $1 million of revenues per day during a turnaround), 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
The North American commercial scaffolding is used primarily in nonresidential
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.
These factors combine to make the commercial market highly fragmented with low
barriers to entry. We have longstanding customer relationships, extensive
equipment resources, significant labor capacity and an industry-leading safety
record. We believe these strengths have enabled us to gain current market share.
Competition is based primarily on the basis of quality, price, speed,
reliability, reputation and customer service. The Company plans to focus on
reducing operating costs, pursue complementary acquisitions and expand our
commercial scaffolding operations.
Employees and Dependence on Labor
As of December 31, 1998, we employed approximately 4,900 full-time employees, of
which 31% were represented by a labor union. 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 employees.
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. In recent years, unemployment rates have reached unusually low levels
leading to lower availability of labor and to wage inflation. In particular, the
supply of labor has been low relative to demand in the Gulf Coast Region, in
which we have significant operations. While we have been successful in hiring
workers for our projects and we do not believe that the reduced 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. PROPERTIES
We operate facilities in 30 locations (29 field offices and 1 headquarters
location). We maintain a substantial inventory of scaffolding at its 29 field
offices as well as at customer sites throughout the United States and Canada.
Our facilities are concentrated near its 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 23 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
four acres. Our headquarters are located in a 9,500 square foot facility in
Chesterfield, Missouri.
4
<PAGE> 6
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of our outstanding common stock is held by Holdings 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 its indebtedness.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents (i) selected historical financial data of Rust
Scaffold Services, Inc. and subsidiaries ("Rust") as of and for each of the
years ended December 31, 1994 and 1995, and for the nine months ended September
30, 1996, and (ii) selected historical financial data of Brand, for the three
months ended December 31, 1996, and the years ended December 31, 1997 and 1998.
The selected historical financial data as of and for the years ended December
31, 1994 and 1995, and for the nine months ended September 30, 1996, has been
derived from the audited financial statements of Rust. The selected historical
financial data as of and for the three months ended December 31, 1996, and the
years ended December 31, 1997 and 1998, has been derived from the audited
financial statements of Brand. 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.
5
<PAGE> 7
<TABLE>
<CAPTION>
Rust Brand
------------------------------------------- ------------------------------------------
Nine Months Three Months
Year Ended Year Ended Ended Ended Year Ended Year Ended
December 31, December 31, September 30, December 31, December 31, December 31,
1994 1995 1996 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Revenue ..................... $ 182,372 $ 193,829 $ 124,769 $ 44,412 $ 160,660 $ 205,304
Operating expenses .......... 129,045 138,968 89,073 34,170 122,638 157,673
--------- --------- --------- --------- --------- ---------
Gross profit ............. 53,327 54,861 35,696 10,242 38,022 47,631
Selling and
administrative
expenses ................. 27,111 25,807 15,825 4,743 25,840 29,568
Nonrecurring start-up
expenses ................. -- -- -- -- 2,498 --
--------- --------- --------- --------- --------- ---------
Operating income ...... 26,216 29,054 19,871 5,499 9,684 18,063
Interest expense ............ 9,655 9,444 7,872 4,504 15,422 17,728
Interest income ............. (707) (1,012) (482) (195) (397) (249)
Other expense, net (2) ...... 813 853 708 -- -- --
--------- --------- --------- --------- --------- ---------
Pretax income
(loss) .............. 16,455 19,769 11,773 1,190 (5,341) 584
Provision for income tax .... 7,200 8,300 4,813 525 -- --
Extraordinary loss .......... -- -- -- -- -- 4,329
--------- --------- --------- --------- --------- ---------
Net income (loss) ..... $ 9,255 $ 11,469 $ 6,960 $ 665 $ (5,341) $ (3,745)
========= ========= ========= ========= ========= =========
EBITDA (3) .................. $ 33,956 $ 36,803 $ 25,832 $ 8,398 $ 22,009 $ 34,572
Cash flow from
operations ............... 22,234 35,587 28,478 4,966 11,983 26,753
Depreciation and
amortization ............. 8,553 8,602 6,669 3,567 13,294 17,234
Cash interest expense(4) .... 9,655 9,444 7,872 3,836 14,453 17,003
Capital expenditures ........ 11,059 8,602 1,810 208 9,720 14,831
Ratio of earnings to
fixed charges and
preferred stock
dividends (5) ............ 2.6x 3.0x 2.4x 1.2x .7x 1.0x
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
Rust Brand
----------------------- --------------------------------------
December 31
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (1)
Working capital $ 34,155 $ 30,227 $ 12,656 $ 4,207 $ 12,080
Total assets 180,107 178,201 204,266 197,543 211,060
Long-term debt (including current portion and revolving
loan) -- -- 158,000 154,250 158,500
Notes payable and capital lease obligation (including
current portion) -- -- -- -- 5,007
14.5% senior exchangeable preferred stock -- -- 25,906 31,140 35,907
Stockholder's equity (deficit) 150,005 141,374 4,247 (5,176) (14,483)
</TABLE>
(1) The Acquisition had a significant impact on our financial position and
results of operations. Consequently, the financial data for and as of dates
prior to the Acquisition may not be directly comparable to corresponding
information for and as of dates after the Acquisition.
(2) Since the Acquisition, we have not separately classified other income and
expense and have included it in selling and administrative expenses because
such amounts have been immaterial.
(3) EBITDA is defined as earnings before interest income, cash interest
expense, income taxes, depreciation and amortization. EBITDA is commonly
used to analyze companies on the basis of operating performance, leverage
and liquidity. 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 prepared in
accordance with generally accepted accounting principles.
(4) Cash interest expense represents total interest expense less amortization
of deferred financing fees of $668,000 for the three months ended December
31, 1996, $969,000 and $725,000 for the years ended December 31, 1997 and
1998, respectively.
(5) For the purposes of calculating the ratio of earnings to combined 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.
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 herewith. Financial data and
discussions relating to the year ended December 31, 1996, reflect the combined
results of operations of Rust, prior to the Acquisition and Brand after the
Acquisition.
Overview
The Company is the largest North American provider of industrial scaffolding
services which facilitate access to tall structures for maintenance, turnarounds
and capital projects, principally in the refining, petrochemical, chemical,
utility and pulp and paper industries. The Company provides turnkey services
which include equipment rental, labor for the erection and dismantlement of the
scaffolding and scaffolding design services. The Company also provides
scaffolding services to the commercial market (primarily nonresidential
construction) and sells a small amount of scaffolding.
In September 1998, Brand acquired the operating assets of Scaffold Rental and
Erection ("SRE") for a purchase price net of cash acquired, of $4.2 million
($400,000 of cash and $3.8 million in notes payable and capital lease
obligations). The excess cost of assets acquired over the amounts assigned to
net tangible assets at the date of acquisition was $100,000. SRE is an Atlanta
based company that provides scaffolding services to industrial customers
primarily in the southeastern states. In October 1998, Brand acquired the
operating assets of The Brook Company, Ltd. ("Brook") for a
7
<PAGE> 9
purchase price net of cash acquired of $3.1 million ($1.7 million of cash and
$1.4 million in notes payable). There was no excess cost of assets acquired over
the amounts assigned to net tangible assets at the date of the acquisition.
Brook is a New Orleans based specialty provider of temporary structures and
enclosures for the special events market.
Approximately 83%, 80% and 86% of the Company's 1998, 1997 and 1996, 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, which represented approximately 18% and 14% of
1998 and 1997 revenues, respectively, result 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 14% and 15% of
1998 and 1997 revenues, are related to the level of nonresidential construction
and renovation. Demand for commercial scaffolding services has recently been
high due to the recent strength in the commercial construction industry. In
1997, the Company increased its penetration of the commercial market, by opening
four new offices, expanding its sales force and investing $7.3 million in frame
and brace scaffolding inventory.
In November 1997, the Company implemented a cost reduction program which has
reduced its annual operating overhead and selling, general and administrative
expenses by approximately $5.3 million. The major initiatives included (i)
eliminating 63 administrative and support positions and consolidating certain
administrative functions, (ii) restructuring and renegotiating benefits
programs, (iii) renegotiating the Company's insurance premiums to reflect
continued improvements in its safety record, (iv) negotiating company-wide
procurement contracts in order to take advantage of volume pricing and (v)
implementing a new management information system to improve inventory
utilization and reduce equipment transportation expenses. The Company recorded a
one-time expense in the fourth quarter of 1997 of $437,000 to reflect severance
and other expenses of the cost reduction program.
In connection with the Acquisition, WMI agreed to pay the Company a quarterly
fee of $725,000 for transition services for three years beginning on December
31, 1996. Such payments will continue through September 30, 1999. In addition,
WMI agreed to pay for all historical accident-related claims in which the
accident occurred prior to the Acquisition. Because cash expenditures related to
accidents are paid out over time but accident-related expenses are accrued in
the period in which the accident occurs, the Company has a significant non-cash
claims expense ($2.9 million in 1997 and $2.6 million in 1998) which it
anticipates will decline over time.
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 fiscal
years ended December 31, 1996, 1997 and 1998.
On September 30, 1996, the Company was formed and acquired the net assets of
Rust Scaffold Services, Inc. The acquisition was accounted for as a purchase.
Also on September 30, 1996, the Company entered into a credit agreement pursuant
to which $160.0 million was borrowed. As a result of the acquisition and the
borrowings, the periods prior to September 30, 1996, are not comparable to the
periods after September 30, 1996. For purposes of the table and discussion that
follows, combined 1996 financial data represents the summation of the results
for Rust for the nine months ended September 30, 1996, and for Brand for the
three months ended December 31, 1996. This 1996 data does not include pro forma
adjustments to reflect the acquisition or the borrowings, which had the effect
of increasing amortization and depreciation expense and interest expense. The
combined 1996 revenues, operating expenses and selling and administrative
expenses are presented for comparative purposes. Other combined 1996 income and
expense items are not presented as the information was not considered
meaningful.
8
<PAGE> 10
Results of Operations
Summary of Historical Financial Results
(In thousands)
<TABLE>
<CAPTION>
Combined Brand
------------ ---------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996(1) 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income Statement Data:
Revenue $ 169,181 $ 160,660 $ 205,304
Operating expenses 123,243 122,638 157,673
--------- --------- ---------
Gross profit 45,938 38,022 47,631
Selling and administrative expenses 20,568 25,840 29,568
Nonrecurring start-up expenses -- 2,498 --
--------- --------- ---------
Operating income 25,370 9,684 18,063
Interest expense 15,422 17,728
Interest income (397) (249)
--------- ---------
Pretax income (loss) (5,341) 584
Provision for income taxes -- --
Extraordinary items -- 4,329
--------- ---------
Net loss $ (5,341) $ (3,745)
========= =========
Other Data:
EBITDA $ 22,009 $ 34,572
========= =========
</TABLE>
(1) Combined 1996 financial data represents the summation of the results for
Brand for the three months ended December 31, 1996, and Rust for the nine
months ended September 30, 1996, and is not indicative of the results the
Company would have achieved for the full year had the Acquisition occurred
on January 1, 1996.
Year Ended December 31, 1998, as Compared to Year Ended December 31, 1997
Revenue
Revenue for the year ended December 31, 1998, increased 27.8% to $205.3 million
from $160.7 million for the same period in 1997. Labor revenue increased 33.2%
to $149.4 million for the year ended December 31, 1998, as compared to the same
period in 1997. Rental revenue increased 22.7% to $50.0 million for the year
ended December 31, 1998, as compared to the same period in 1997. The increase in
revenues was primarily attributable to increased activity in the industrial
scaffolding market, and to a lesser extent, attributable to the acquisitions
made in 1998. Increased turnaround and capital maintenance activity and
unplanned utility outages in the U.S. Gulf Coast as well as utility plant
renovation, maintenance work and an increase in refinery turnarounds in the
northern part of the country, resulted in a positive variance for the year.
9
<PAGE> 11
Gross Profit
Gross profit for the year ended December 31, 1998, increased 25.3% to $47.6
million from $38.0 million for the same period in 1997. Labor gross profit
(labor revenue less labor cost) increased 40.2% to $24.8 million for the year
ended December 31, 1998, as compared to the same period in 1997. Gross profit as
a percentage of revenue for the year ended December 31, 1998, decreased to 23.2%
from 23.7% for the same period in 1997. This decrease was primarily due to a
higher mix of labor revenue to total revenue for the period. Labor profit
margins are lower than rental and sale profit margins. Much of the increased
revenue was from industrial projects requiring a high percentage of labor, thus
causing overall profit margins to be lower.
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 1998,
increased 14.7% to $29.6 million from $25.8 million for the same period in 1997.
Selling and administrative expenses as a percentage of revenue for the year
ended December 31, 1998, decreased to 14.4% from 16.1% for the same period in
1997. For the year ended December 31, 1998, the savings realized from a cost
reduction program implemented in 1997 were offset by a $4.0 million increase in
payroll expense.
Operating Income
As a result of the above, operating income for the period ended December 31,
1998, increased to $18.1 million from $9.7 million for the same period in 1997.
The operating income results from 1997 were affected by certain nonrecurring
start-up expenses incurred by the Company as a result of the Company's efforts
to establish itself as a stand-alone entity.
Interest Expense
Interest expense for the year ended December 31, 1998, increased 15.0% to $17.7
million from $15.4 million for the same period in 1997. The increase was mainly
due to a higher weighted average interest rate on all outstanding debt. For 1998
and 1997, the weighted average interest rate was 8.9% and 9.8%, respectively.
Extraordinary Item
The extraordinary item for the year ended December 31, 1998, was $4.3 million
that represented the writeoff of the pro rata share of deferred financing costs
related to the portion of the debt repaid with proceeds from the issuance of the
10-1/4% Senior Notes in February 1998.
Net Loss
Net loss (before accretion of preferred stock dividends) improved to $3.7
million loss from $5.3 million loss for the same period in 1997.
Year Ended December 31, 1997, as Compared to Year Ended December 31, 1996
Revenue
Revenue for the year ended December 31, 1997, were $160.7 million as compared to
$169.2 million for the year ended December 31, 1996. The decline in revenues is
attributable to: (i) the loss of several contracts with a single customer in
1996 which accounted for an approximate loss of $3.4 million in revenues
compared to 1996 and (ii) the transfer, in connection with the Acquisition, of a
contract, which generated revenues in excess of $2.0 million in 1996, to a
former sister corporation of the Company. Also contributing to the decline was
lengthened turnaround schedules at refineries due to a strong operating
environment in 1997. These decreases were partially offset by several new
accounts obtained during 1997, including three large accounts which generated a
total of $2.8 million.
10
<PAGE> 12
Gross Profit
Gross profit for the year ended December 31, 1997, was $38.0 million as compared
to $45.9 million for the year ended December 31, 1996. The $7.9 million decline
was due to lower revenue levels and a $3.2 million increase in depreciation and
amortization expenses resulting from the Acquisition. An increase in gross
profit as a percentage of revenues for labor services and a decrease in
insurance claims partially offset the decrease in gross profit.
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 1997, were
$25.8 million as compared to $20.6 million for the year ended December 31, 1996.
The $5.2 million increase was due to the hiring of additional sales personnel
and the opening of four new commercial scaffolding offices. During 1997, selling
and administrative expenses were reduced by $700,000 as a result of payments by
WMI pursuant to the transition services agreement relating to the Acquisition.
Nonrecurring Start-up Expenses
In 1997, the Company incurred certain expenses to establish the Company as a
stand-alone entity. These expenses were comprised of costs related to
establishing benefit plans, a treasury department, strategic planning and cash
management.
Operating Income
Operating income for the year ended December 31, 1997, was $9.7 million as
compared to $25.4 million for the year ended December 31, 1996. The $15.7
million decrease was attributable primarily to a decrease in revenues, increased
depreciation and, to a lesser extent, to an increase in nonrecurring start-up
expenses and selling and administrative expenses.
Liquidity and Capital Resources
The Company has historically utilized internal cash flow from operations and
borrowings under the Bank Facility (see below) to fund its operations, capital
expenditures, and working capital requirements. As of December 31, 1998, the
Company had working capital of $12.1 million including cash and cash equivalents
of $3.1 million.
Historically, the principal uses of cash have been capital expenditures
(primarily scaffolding) and working capital. The Company has also used cash to
repay term loans for which payments amounted to $2.0 million in 1996 and $8.3
million in 1997. In February 1998, $119.8 million of the term loans were repaid
with proceeds from the offering of the 10-1/4% Senior Notes and $500,000 in
payments were made in June 1998. Additionally, the Company paid $6.3 million in
interest relating to the 10-1/4% Senior Notes in August 1998 and will pay
approximately $6.7 million in interest relating to the notes in February 1999.
For the year ended December 31, 1998, cash provided by operating activities was
$26.8 million, and for the three months ended December 31, 1996, and the year
ended December 31, 1997, cash provided by operating activities was $5.0 million
and $12.0 million, respectively.
The Company's capital expenditure requirements are comprised of maintenance and
expansion expenditures. Net capital expenditures for the Company were $9.7
million and $14.8 million for the years ended December 31, 1997 and 1998,
respectively.
Pursuant to a credit agreement dated as of September 30, 1996, the Company
entered into the Bank Facility. The Bank Facility consisted of three term loan
facilities, under which the Company borrowed a total of $160.0 million
immediately upon closing of the Bank Facility, and a $30.0 million revolving
loan facility. All but $30.0 million of the loans outstanding under the term
loan facilities was repaid in February 1998, with the proceeds of the 10-1/4%
Senior Note offering. Borrowings under the revolving loan facility are governed
by a borrowing base equal to 85% of eligible accounts receivable. A $15.0
million sub-facility is available for the issuance of letters of credit. As of
December 31, 1998, the Company had $16.2 million in unused senior secured
borrowing capacity under the Bank Facility. The interest rate on each loan
facility
11
<PAGE> 13
under the Bank Facility is variable. During the year ended December 31, 1998,
the interest rate on loans outstanding under the term loan facility was an
annual dollar-weighted rate of 9.8%. Total payments for interest and principal
by the Company under the Bank Facility in 1996 were $3.0 million and $2.0
million, respectively, and in 1997 were $14.1 million and $8.3 million,
respectively. During the year ended December 31, 1998, total payments for
interest were $11.5 million. During the year ended December 31, 1998, $121.3
million of the term loans were repaid of which $119.8 million was from the
proceeds of the 10-1/4% Senior Note offering.
The Bank Facility contains financial and operating covenants, including among
other things, that the Company maintain certain financial ratios and satisfy
certain financial tests, 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 the loan covenants at December 31, 1998.
In February 1998, the Company raised $125.6 million from the 10-1/4% Senior Note
offering. Substantially all of the net proceeds of the sale of the notes by the
Company were used to reduce outstanding indebtedness under the Bank Facility.
Two term loan facilities and the revolving loan facility, each included in the
Bank Facility, were repaid in full, and loans under a third term loan facility,
also a part of the Bank Facility, were paid down such that the aggregate
principal amount of loans outstanding under the remaining term loan facility
after such prepayment was $30.0 million. In addition, pursuant to the amendment
to the Bank Facility obtained by the Company, the Bank Facility was reduced to
$60.0 million. Certain provisions contained in the credit agreement governing
the Bank Facility were amended to eliminate a requirement that revolving loans
be periodically reduced. Also, certain of the covenants contained in the credit
agreement were amended to permit the Company to incur certain additional
indebtedness, engage in a broader range of business, make certain additional
investments and capital expenditures and reinvest asset disposition proceeds
within 180 days, rather than prepay the term loan facilities with such proceeds.
Net Operating Losses
As of December 31, 1998 and 1997, the Company had estimated net operating loss
carryforwards, resulting primarily from depreciation timing differences, of
approximately $86.0 million and $65.9 million, respectively, for U.S. income tax
purposes. As a result of such loss carryforwards, cash paid for income taxes in
1998 and 1997 was minimal. The Company does not expect to expend cash for taxes
in the next several years.
Effect of Inflation; Seasonality
Inflation has not generally been a material factor affecting the Company's
business. In recent years, the cost of scaffolding equipment has remained
relatively stable due to competitive pressures within the industry. 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.
Year 2000 Readiness Disclosure
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions.
The Company recognizes the importance of the Year 2000 problem and has completed
the first phase of identifying all mission critical information technology
("IT") and non-IT systems that are affected. These systems include all computer
workstations, telephone/PBX systems, computer operating systems and accounting,
data processing and other miscellaneous systems. Various systems, including the
core billing/rental systems, are Year 2000 compliant. The Company expects all
other systems, including key financial systems, to be Year 2000 compliant by
October 1999.
12
<PAGE> 14
The Company is not presently aware of any Year 2000 issues encountered by its
business partners that would materially impact the Company's operations. There
can be no assurance that the Company will not experience operational
difficulties as a result of Year 2000 issues either arising out of internal
systems or caused by its business partners which may have a material adverse
effect on its business operations.
The Company estimates that the total cost for executing the Year 2000 plan will
not exceed $50,000 and estimates that the Year 2000 plan for its financial
systems will be completed by June 1999. In planning for the most likely worst
case scenario, all major elements in the Company's comprehensive program have
been addressed. The Company's current contingency plan will be to replace only
those individual financial system applications that would not be Year 2000
compliant by mid 1999.
The Company's Year 2000 compliance program is divided into seven major projects
as shown in the table below.
<TABLE>
<CAPTION>
Percent
Complete
as of
December 31,
Year 2000 Project Time Frame 1998
----------------- ------------- ------------
<S> <C> <C>
Review IT system infrastructure 05/98 - 07/98 100
Review non-IT systems 06/98 - 08/98 100
Upgrade non-IT systems 07/98 - 10/99 20
Upgrade PBX/phone systems 11/98 - 09/99 20
PC workstation review and upgrade 07/98 - 08/99 60
Update core business distributed systems 04/98 - 07/98 100
Update core business centralized systems 07/98 - 06/99 80
</TABLE>
Accounting Standard Not Yet Implemented
In June 1998, the Financial Accounting Standards Board (FASB) adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates and
selectively uses derivative financial instruments to manage these risks. The
value of market risk sensitive derivatives and other finance 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Schedules" on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
None.
13
<PAGE> 15
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. Each director and officer holds office until
a successor is elected and qualified or until his earlier death, resignation or
removal.
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<S> <C> <C>
David L. Jaffe 40 Chairman of the Board
John M. Monter 51 Chief Executive Officer, President and Director
Ian R. Alexander 52 Chief Financial Officer, Vice President, Finance and Secretary
David R. Cichy 48 Vice President, Operations--Northern Region
Raymond L. Edwards 45 Vice President, Administration
Guy S. Huelat 37 Vice President, Resource Management
Otto K. Knoll 45 Vice President, Operations--Western Region
James "Marty" McGee 42 Vice President, Operations--Southeast Region
Scott M. Robinson 51 Vice President, Operations--Central Region
Robert Bonczek 53 Director
James S. Carlisle 56 Director
Vincent P. Langone 55 Director
D.P. "Pat" Payne 55 Director
Karl R. Wyss 58 Director
</TABLE>
David L. Jaffe, Chairman of the Board: Mr. Jaffe has been a Managing Director of
DLJ Merchant Banking, Inc. ("DLJMB, Inc.") since 1995 and has been Chairman of
the Board of the Company since the Acquisition. Prior to serving in his current
position with DLJMB, Inc., Mr. Jaffe was a Senior Vice President at DLJMB, Inc.
He serves on the boards of EZ Buy & EZ Sell Recycler Corporation, OSF Holdings,
Inc., Terra Nova Group, OHA Financial, Inc., Pharmaceutical Fine Chemicals S.A.
and Duane Reade Inc. Mr. Jaffe also serves as a director of the Creative Arts
Workshop for Kids, Inc. of New York.
John M. Monter, Chief Executive Officer, President and Director: Mr. Monter has
served as a director, Chief Executive Officer and President since the
Acquisition. Prior to joining the Company at the time of the Acquisition, Mr.
Monter held a variety of corporate and operating assignments at Cooper
Industries, Inc. ("Cooper") 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.
Ian R. Alexander, Chief Financial Officer, Vice President, Finance and
Secretary: Prior to joining the Company as Chief Financial Officer, Vice
President, Finance and Secretary in April 1998, Mr. Alexander had a variety of
assignments with BP Oil Company from 1973 until 1993 in Europe, Africa and the
U.S.A. He then became Chief Financial Officer and Executive Vice President of
Purina Mills, Inc. until it was sold to Koch Industries in March, 1998.
David R. Cichy, Vice President, Operations -- Northern Region: Mr. Cichy was
appointed Vice President, Operations - Northern Region in 1996. Beginning in
1978, Mr. Cichy served in various construction management functions with Rust
Industrial including Vice President, Resource Management from 1993 to 1996.
Raymond L. Edwards, Vice President, Administration: Mr. Edwards joined the
Company in his current role in November 1996. Prior to joining the Company, he
held a variety of management positions, most recently, with Cooper from 1984 to
1996, including Vice President, Human Resources from 1990 to 1996.
Guy S. Huelat, Vice President, Resource Management: Mr. Huelat joined the
Company in January 1997 in his current position. Prior to joining the Company,
Mr. Huelat was a Plant Manager from 1989 to 1994 and a Materials Manager from
1994 to 1996 at Cooper. From 1996 to 1997, he was Director of Logistics for
Planning and Customer Service for Kimble Glass, Inc.
14
<PAGE> 16
Otto K. Knoll, Vice President, Operations - Western Region: Mr. Knoll has held
his current position since the Acquisition. From 1994 until the Acquisition, Mr.
Knoll served as Western Region Vice President of Rust Industrial. From 1991 to
1994, Mr. Knoll was a Vice President, Operations - Western Region for Serv-Tech,
Inc.
James "Marty" McGee, Vice President, Operations - Southeast Region: Mr. McGee
has held his current position since the Acquisition. From 1993 until the
Acquisition, Mr. McGee held various Region Management positions with Rust
Industrial and WMI. Mr. McGee has been with the Company in various management
positions since 1981 including President, Southern Regional Scaffolding in 1993,
Southern Region Manager in 1994 and Vice President, Southern Operations from
1995 to 1996.
Scott M. Robinson, Vice President, Operations - Central Region: Mr. Robinson
joined the Company as Vice President, Marketing in March 1997 and assumed his
present position in November 1997. Prior to joining the Company, Mr. Robinson
held various positions at Cooper, including Vice President, Sales from 1993 to
1997 and Vice President, Marketing from 1987 to 1993.
Robert Bonczek, Director: Mr. Bonczek has been President and a director of
ApsenTree Capital, a private money management firm since 1991, and has been a
director of the Company since the Acquisition. He is a legal consultant to
Wilmer, Cutler and Pickering. Mr. Bonczek is a director of DCV, Inc.
James S. Carlisle, Director: Mr. Carlisle has been Chief Executive of Carlisle
Enterprises, LLC, a firm engaged in the acquisition and management of leveraged
buyout companies since 1989, and has been a director of the Company since the
Acquisition.
Vincent P. Langone, Director: Mr. Langone has been a director of the Company
since the Acquisition. Mr. Langone has been Chairman, President and Chief
Executive Officer of Formica Corporation since May 1998. From 1995 to 1997, Mr.
Langone served as President and Chief Operating Officer of Interbuild
International, Inc., which participates in and manages leveraged buyouts and
provides operational management and general consulting services. Mr. Langone is
a director of United Retail Group and Summit Bank. From 1989 to 1995, Mr.
Langone served as Chairman, President and Chief Executive Officer of Formica
Corporation.
D.P. "Pat" Payne, Director: Mr. Payne has been Senior Vice President for WMI
since 1995, and has been a director of the Company since February 1998. Prior to
serving in his current position with WMI, Mr. Payne served as President and
Chief Executive Officer of Chemical Waste Management, Inc. from 1991 to 1995.
Karl R. Wyss, Director: Mr. Wyss is a Managing Director of DLJMB, Inc. and has
been a director of the Company since the Acquisition. Prior to joining DLJMB,
Inc. in 1993, he was Chairman and Chief Executive Officer of Lear Siegler Inc.,
where he served as President and Chief Operating Officer from 1989 to 1993. He
serves on the boards of CommVault Systems, Inc., EZ Buy & EZ Sell Recycler
Corp., Localiza Rent A Car S.A., OSF, Inc., Mallory Limitada, Pharmaceutical
Fine Chemicals, S.A. and Von Hoffman Press, Inc.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Directors of the Company do not receive cash compensation for serving as
directors; however, in March 1997, pursuant to Holdings' Stock Option Plan for
Outside Directors, directors who were not employees of Holdings, the Company or
any of their institutional shareholders, were each awarded options (the
"Director Options") to purchase 40,000 shares of the common stock of Holdings,
which options will vest in March 1999.
15
<PAGE> 17
Compensation Committee and Insider Interlocks
Compensation of the Company's management is determined by a committee comprised
of Messrs. Jaffe, Monter and Wyss. Mr. Monter is the Chief Executive Officer and
President of the Company. In March 1997, Mr. Monter purchased 386,406
newly-issued shares of the common stock of Holdings and 17,500 newly-issued
shares of preferred stock for an aggregate purchase price of $823,905. In
connection with such purchase, Holdings extended Mr. Monter a recourse loan of
$167,000, which matures in March 2002 (subject to prepayment in the event any
shares are disposed of prior to such time) and bears interest at a rate of 7.03%
per annum. The loan is secured by a pledge of the shares purchased.
Messrs. Jaffe and Wyss are Managing Directors of DLJMB, Inc., the general
partner of DLJMB. Pursuant to a shareholders agreement dated as of September 30,
1996, between DLJMB, Carlisle, Rust, the Company, Holdings and certain other
individuals, Holdings' board consists of seven members, five of whom are
nominated by DLJMB. In addition, the shareholders agreement provides for certain
rights of first refusal in favor of DLJMB, certain rights and obligations on the
part of shareholders to participate in transfers of shares by DLJMB and
preemptive rights for DLJMB under certain circumstances. The shareholders
agreement further provides that DLJMB has the right, subject to certain
conditions, to request that Holdings register securities that they own under the
Securities Act of 1933, as amended (the "Securities Act"), and to participate in
other registrations of Holdings' and the Company's securities, in each case at
Holdings' expense.
In addition, the shareholders agreement provides for certain advisory
relationships and the payment of management advisory fees. For five years after
the date of the agreement, Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"), an affiliate of DLJMB, Inc., is engaged as the exclusive financial
and investment banking advisor for Holdings, on customary terms. Pursuant to the
shareholders agreement, DLJMB, Inc. receives an annual advisory fee of $250,000
from Holdings. DLJSC received customary fees in connection with the
underwriting, purchase and placement of the 10-1/4% Senior Notes.
DLJ Capital, the Syndication Agent and a lender under the Bank Facility is an
affiliate of DLJMB. For a description of the Bank Facility, see "Description of
Bank Facility." The proceeds from the sale of the 10-1/4% Senior Notes were used
to repay indebtedness under the Bank Facility, $1.6 million of which was owed to
DLJ Capital on the date of the 10-1/4% Senior Note offering. In connection with
an amendment to the existing Bank Facility, the Company will pay customary fees
to DLJ Capital, as the Syndication Agent and as a lender under the Bank
Facility.
Executive Compensation
The following table sets forth the compensation earned by the Chief Executive
Officer and the six other most highly paid executive officers for services
rendered in 1998.
16
<PAGE> 18
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------------------- -------------------------------
Securities
Name and Principal Position Other Underlying All Other
--------------------------- Salary Bonus Compensation Options/SARS Compensation
($) ($) ($) (#) ($)
------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
John M. Monter,
Chief Executive Officer 350,000 365,000 8,723 1,800(1)
James "Marty" McGee
Vice President, Operations-Southeast Region 129,816 168,641
- 1,000 1,800(1)
Otto K. Knoll
Vice President, Operations-Western Region 145,389 166,718 6,542 2,000 1,800(1)
Raymond L. Edwards
Vice President, Administration 140,208 155,250 - 2,000 1,491(1)
Scott Robinson
Vice President, Operations - Central Region 145,368 160,792 23,233 - 1,292(1)
Guy Huelat
Vice President, Resource Management 124,617 138,000 2,469 2,000 1,186(1)
Gerald B. Curran (2) 86,544 63,085 115,392 - 1,800(1)
</TABLE>
(1) Represents the Company's matching 401(k) contributions.
(2) Mr. Curran resigned from his position as Chief Financial Officer, Vice
President, Finance and Secretary on May 1, 1998. Mr. Curran's severance
agreement includes additional 1998 bonus payments of $32,946, one year at
continued base salary of $150,000 and one year's continued coverage under
the Company's medical and dental plan.
Stock Option Grants in Last Fiscal Year.
The following table sets forth certain information concerning grants of stock
options made to the persons named in the Summary Compensation Table during the
year ended December 31, 1998. Such grants are exercisable for shares of the
common stock of Holdings. No stock appreciation rights were granted.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value at
-------------------------------------------------------------- Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise or Option Term (2)
Options Employees in Base Price Expiration ------------------
Name Granted (#)(1) Fiscal Year ($/sh) Date 5% ($) 10% ($)
---- -------------- - ------------- ------------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
John M. Monter 0 0 1.00 12/31/06 -- --
James "Marty" McGee 2,000 4.1 1.00 12/31/06 320 480
Otto K. Knoll 2,000 8.2 1.00 12/31/06 320 480
Raymond L. Edwards 2,000 8.2 1.00 12/31/06 320 480
Guy Huelat 2,000 8.2 1.00 12/31/06 320 480
</TABLE>
(1) Options vest in five equal annual installments beginning January 1, 1999,
provided certain performance criteria are met. Unvested options are subject
to forfeiture, and any shares acquired upon exercise are subject to
repurchase rights of the Company, upon termination of employment. Upon a
change of control all unvested options will vest.
17
<PAGE> 19
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation for the underlying
stock of 5% and 10% compounded annually from the date that the respective
options were granted through their expiration date. This table does not
take into account any appreciation in the price of the underlying stock to
date. Actual gains, if any, on stock option exercises will depend on the
future performance of the underlying stock and the date at which the
options are exercised.
The following table summarizes option exercises during the last fiscal year and
the amount and value of options for persons named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31,
1998 (#) 1998 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---- ---------------- ------------ ------------- -------------
<S> <C> <C>
John M. Monter -- -- 0/437,500 0/0
James "Marty" McGee -- -- 0/42,000 0/0
Otto K. Knoll -- -- 0/42,000 0/0
Raymond L. Edwards -- -- 0/42,000 0/0
Scott Robinson -- -- 0/40,000 0/0
Guy Huelat -- -- 0/42,000 0/0
</TABLE>
Employment Agreement
Mr. Monter entered into an employment agreement with the Company on October 1,
1996, pursuant to which he serves as President and Chief Executive Officer. The
employment agreement terminates on March 31, 1999, and provides for an annual
salary of not less than $350,000. Mr. Monter is also eligible for a bonus of up
to 100% of his base salary and an additional bonus of up to $50,000. The Company
undertakes to pay up to $1,500 of premiums annually under Mr. Monter's life
insurance policy. In the event the Company terminates Mr. Monter's employment
without cause or he becomes disabled, he is entitled to his (i) base salary
until the later to occur of the one year anniversary or March 31, 1999 (the
"Severance Period"), (ii) continued coverage under the Company's welfare
benefits for up to the end of the Severance Period, and (iii) in the case of
termination without cause, a bonus equal to $12,500 multiplied by the number of
months remaining in the Severance Period. Any unvested stock options held by Mr.
Monter shall vest upon a change in control of the Company. As a part of the
employment agreement, Mr. Monter has entered into covenants prohibiting him from
competing with the Company, working for any of the Company's competitors or
using proprietary information for a twelve month period following his departure
from the Company.
18
<PAGE> 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Principal Stockholders
All of the issued and outstanding common stock of the Company is held by
Holdings (and pledged to secure the Bank Facility). The following table sets
forth certain information with respect to the beneficial ownership of the common
stock of Holdings as of December 31, 1998, by (i) each person or group known to
the Company who beneficially owns more than five percent of the common stock of
Holdings and (ii) all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
Number of
Shares of Percentage
Name and Address of Beneficial Owner Common stock of Class
------------------------------------ ------------ --------
<S> <C> <C> <C>
DLJ Merchant Banking Partners, L.P. and related investors (1) 8,762,500 65.5%
Rust Industrial Services, Inc.(2)
3003 Butterfield Road
Oakbrook, IL 60521 2,487,500 18.6%
Carlisle-Brand Investors, L.P.(3)
7777 Fay Avenue
La Jolla, California 92037 1,250,000(4) 9.3%
David L. Jaffe(5)
DLJ Merchant Banking Partners, Inc.
277 Park Avenue
New York, New York 10172 - -
Karl R. Wyss(5)
DLJ Merchant Banking Partners, Inc.
277 Park Avenue
New York, New York 10172 - -
James S. Carlisle(6)
Carlisle Enterprises
7777 Fay Avenue
La Jolla, California 92037 - -
All directors and officers as a group(5)(6) 788,876(7) 5.9%
</TABLE>
(1) Consists of shares held by DLJMB, DLJ Offshore Partners, C.V. ("Offshore"),
DLJ Merchant Banking Funding, Inc. ("Funding") and DLJ International
Partners, C.V. ("International"), each of which is affiliated with DLJSC.
See "Certain Relationships and Related Transactions." The address of each
of DLJMB and Funding is 277 Park Avenue, New York, New York 10172. The
address of each of Offshore and International is John B. Gorsivaweg 6,
Willemstad, Curacao, Netherlands Antilles. As a general partner of DLJMB,
Offshore and International, DLJMB, Inc. may be deemed to beneficially own
indirectly all of the shares held by DLJMB, Offshore and International, and
as the parent of each of DLJ Merchant Banking, Inc. and Funding, Donaldson,
Lufkin & Jenrette, Inc. may be deemed to beneficially own indirectly all of
the shares held by DLJMB, Offshore, International and Funding. Donaldson,
Lufkin & Jenrette, Inc. is a majority owned subsidiary of The Equitable
Companies Incorporated. The address of DLJ Merchant Banking, Inc. and
Donaldson, Lufkin & Jenrette, Inc. is 277 Park Avenue, New York, New York
10172.
(2) Rust Industrial is a wholly owned subsidiary of Rust International, Inc.
("RII") which is majority owned by WMI. As a result, WMI and RII may be
deemed to beneficially own all of the shares held by Rust Industrial. The
address for each of WMI and RII is 3003 Butterfield Road, Oakbrook,
Illinois 60521.
(3) As the general partner of Carlisle, Carlisle Group, L.P. ("Carlisle Group")
may be deemed to beneficially own indirectly all of the shares held by
Carlisle. As the general partner of Carlisle Group, Carlisle Enterprises,
LLC may be deemed to beneficially own indirectly all of the shares held by
Carlisle. The address of Carlisle Group and Carlisle Enterprises, LLC is
7777 Fay Avenue, La Jolla, California 92037.
(4) Does not include (i) 47,500 shares issuable upon the exercise of currently
exercisable options held by Carlisle Group and (ii) up to 871,250 shares
issuable upon exercise of options held by Carlisle Group, which options are
not currently exercisable and will not be exercisable within 60 days of the
date of this prospectus.
19
<PAGE> 21
(5) Messrs. Jaffe and Wyss are officers of DLJ Merchant Banking, Inc., an
affiliate of DLJMB and DLJSC. Share data shown for such individuals
excludes shares shown as held by DLJMB and related investors, as to which
such individuals disclaim beneficial ownership.
(6) Mr. Carlisle is a managing partner of Carlisle Enterprises, LLC, the sole
general partner of the sole general partner of Carlisle. Share data shown
for Mr. Carlisle excludes shares shown as held by Carlisle, as to which Mr.
Carlisle disclaims beneficial ownership.
(7) Does not include shares which may be purchased upon exercise of Director
Options or options awarded pursuant to the Company's employee benefit
plans, none of which are vested or will be exercisable within 60 days of
the date of the prospectus.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the shareholders agreement dated as of September 30, 1996, between
DLJMB, Carlisle, Rust, the Company, Holdings and certain other individuals,
Holdings' board consists of seven members: five nominated by DLJMB, one
nominated by Carlisle and one nominated by Rust Industrial. The shareholders
agreement also provides for certain restrictions on transfers of Holdings'
common stock. In addition, the shareholders agreement provides for certain
rights of first refusal in favor of DLJMB, certain rights and obligations on the
part of shareholders to participate in transfers of shares by DLJMB and
preemptive rights for DLJMB, Carlisle and Rust Industrial under certain
circumstances. The shareholders agreement further provides that DLJMB, Carlisle
and Rust Industrial each have the right, subject to certain conditions, to
request that Holdings register securities that they own under the Securities Act
and to participate in other registrations of Holdings' and the Company's
securities, in each case at Holdings' expense.
The shareholders agreement provides for certain advisory relationships and the
payment of management advisory fees. For five years after the date of the
agreement, DLJSC is engaged as the exclusive financial and investment banking
advisor for Holdings, on customary terms. Pursuant to the shareholders
agreement, DLJMB, Inc., the sole general partner of DLJMB, and Carlisle Group,
the sole general partner of Carlisle, each receive an annual advisory fee of
$250,000 from Holdings. DLJSC received customary fees in connection with the
underwriting, purchase and placement of the 10-1/4% Senior Notes.
Holdings has entered into a stock option agreement with Carlisle Group. The
stock option agreement gives Carlisle Group the right to acquire up to 918,750
shares of the common stock of Holdings for $1 per share. The exact number of
shares that may be acquired pursuant to the stock option agreement depends upon
Holdings' financial performance, equity financings by Holdings and other
factors. Carlisle Group's rights under the stock option agreement vest
progressively throughout the term of the agreement. The stock option agreement
will terminate on or, under certain circumstances, before September 30, 2006.
DLJ Capital, the Syndication Agent and a lender under the Bank Facility, is an
affiliate of DLJMB and DLJSC. For a description of the Bank Facility, see
"Description of Bank Facility." The proceeds from the sale of the 10-1/4% Senior
Notes were used to repay indebtedness under the Bank Facility, $1.6 million of
which was owed to DLJ Capital. In connection with an amendment to the existing
Bank Facility, the Company paid customary fees to DLJ Capital, as the
Syndication Agent and as a lender under the Bank Facility.
In connection with the Acquisition, WMI and the Company entered into a
transition services agreement. Pursuant to such agreement, WMI pays the Company
a fee for transition services of $725,000 quarterly. The first such payment was
made on December 31, 1996, and such payments will continue through September 30,
1999. In addition, the Company provides computer support to WMI Industrial
Cleaning Services, Inc., a subsidiary of WMI and receives a payment of $62,500
per month for such service.
In March 1997, certain officers and employees of the Company purchased a total
of 878,364 newly-issued shares of Holdings' common stock for $1 per share and
42,832 shares of preferred stock for $25 per share. In connection with such
purchases, Holdings extended recourse loans to executive officers in the
aggregate amount of $341,000. Each of the loans matures in March 2002 (subject
to prepayment in the event any shares are disposed of prior to such time), with
interest payable at the rate of 7.03% per annum. The loans are secured by a
pledge of the shares purchased.
WMI provides trash hauling services to the Company for which the Company paid
WMI approximately $90,000 in 1998 and 1997.
20
<PAGE> 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report
(1) and (2) Financial Statement and Financial Statement Schedules
See Index to Financial Statements and Financial Schedules on Page F-1 of this
report.
(3) Exhibits.
See Index on Page E-1 of this report.
21
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Rust Scaffold Services, Inc. and Subsidiaries:
Report of Independent Public Accountants F-2
Consolidated Statement of Income for the nine months ended September 30, 1996 F-3
Consolidated Statement of Cash Flows for the nine months ended September 30, 1996 F-4
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996 F-5
Notes to Consolidated Financial Statements F-6
Brand Scaffold Services, Inc. and Subsidiaries:
Report of Independent Public Accountants F-11
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997, and
the three months ended December 31, 1996 F-12
Consolidated Balance Sheets as of December 31, 1998 and 1997, and the three months ended
December 31, 1996 F-13
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997, and
the three months ended December 31, 1996 F-15
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31,
1998 and 1997, and the three months ended December 31, 1996 F-17
Notes to Consolidated Financial Statements F-18
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
</TABLE>
F-1
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rust Scaffold Services, Inc.:
We have audited the accompanying consolidated statements of income,
stockholder's equity and cash flows of Rust Scaffold Services, Inc. (a Delaware
corporation) and subsidiaries for the nine months ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Rust Scaffold
Services, Inc. and subsidiaries for the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 19, 1997
F-2
<PAGE> 25
RUST SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
---------
<S> <C>
Revenue $ 124,769
Operating expenses 89,073
---------
Gross profit 35,696
Selling and administrative expenses 15,825
---------
Operating income 19,871
Interest expense 7,872
Interest income (482)
Other expense, net 708
---------
Pretax income 11,773
Provision for income taxes 4,813
---------
Net income $ 6,960
=========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-3
<PAGE> 26
RUST SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
--------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,960
Adjustments to reconcile net income to net cash
provided by operating activities-
Deferred tax provision 2,427
Depreciation and amortization 6,669
Changes in operating assets and liabilities-
Trade accounts receivable, net 4,416
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,701
Notes receivable 4,797
Scaffolding 2,846
Accounts payable (727)
Accrued expenses 2,173
Billings in excess of costs and estimated earnings
on uncompleted contracts (504)
Other (2,280)
--------
Net cash provided by operating activities 28,478
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,770)
Proceeds from sales of property and equipment other than scaffolding 64
--------
Net cash used for investing activities (5,706)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to Rust Industrial Services Inc., net (26,962)
--------
Net cash used for financing activities (26,962)
--------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,190)
CASH AND CASH EQUIVALENTS, beginning of year 4,316
--------
CASH AND CASH EQUIVALENTS, end of year $ 126
========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-4
<PAGE> 27
RUST SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
---------
<S> <C>
STOCKHOLDER'S EQUITY - NET INVESTMENT BY RUST
INDUSTRIAL SERVICES, INC.,
beginning balance $ 141,374
---------
Comprehensive Income-
Net income 6,960
Translation adjustment 26
---------
Comprehensive income 6,986
Payments to Rust Industrial Services Inc., net (26,962)
---------
STOCKHOLDER'S EQUITY--NET INVESTMENT BY RUST
INDUSTRIAL SERVICES. INC.,
ending balance $ 121,398
=========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-5
<PAGE> 28
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Rust Scaffold Services, Inc. and its subsidiaries ("Rust" or the "Company") was
a Delaware Corporation and was 100% owned by Rust Industrial Services, Inc.
("RIS") which is 100% owned by Rust International Inc. ("RII"). RII is a 60%
owned subsidiary of Waste Management Inc. ("WMI") and a 40% owned subsidiary of
Wheelabrator Technologies Inc. ("WTI"). On September 30, 1996, a company (the
"Newco") formed by DLJ Merchant Banking Partners, L.P. ("DLJMB") and on behalf
of DLJMB one or more of its affiliates or other related entities and Carlisle
Brand Investors, L.P. (the "Investors") acquired the outstanding securities of
the Company. The purchase price of the business was approximately $190 million,
which RIS was paid through a combination of cash, notes payable, preferred stock
and a 19.9% interest in Newco. Newco operates under the name DLJ Brand Holdings,
Inc. ("Holdings").
The Company provided scaffolding services primarily to refining, chemical,
petrochemical and utility industries, and to a lesser extent, pulp and paper
plants, nuclear facilities and general commercial clients. In most cases, the
Company's scaffolding services were provided in connection with periodic,
routine cleaning and maintenance of refineries, chemical plants and utilities,
and such services were also performed in connection with new construction
projects, plants, nuclear facilities and general commercial clients. The Company
provided personnel to erect, modify, move and dismantle scaffolding structures,
transport scaffolding to project sites and supervised and managed such
activities. In addition, the Company rents, and in some cases, sold scaffolding.
The Company maintained a substantial inventory of scaffolding at several
locations in various cities in the United States and Canada.
The Company's services were not rendered to or dependent on any single customer
within the industrial or commercial markets and, therefore, the Company did not
believe that a material concentration of credit risk existed, except that one
customer accounted for 21% of revenue for the nine months ended September 30,
1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
As a result of the Company's relationship with WMI and RII, the financial
position and results of operations are not necessarily indicative of what they
would have been had these relationships not existed. Additionally, these
financial statements are not necessarily indicative of the future operations or
future financial position of the Company.
F-6
<PAGE> 29
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 consolidated statements of income reflect
substantially all of the Company's costs associated with the normal cost of
business. These costs include direct expenses and certain overhead and other
expenses incurred by WMI and RII on the Company's behalf. The expenses allocated
to the Company and the method of allocation are further discussed in Note 3,
"Transactions with Affiliates."
Revenue Recognition
The Company recognizes contract revenue on the percentage-of-completion basis
with losses recognized in full when identified. Changes in project performance
and conditions, estimated profitability and final contract settlements may
result in future revisions to costs and income. Substantially all of the
Company's contracts are completed in less than six months. Other revenues are
recognized when the services are performed.
Foreign Currency
The assets and liabilities of the Company's foreign subsidiaries, Rust Scaffold
Services of Canada, LTD. and JLG Scaffolding, Inc., 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 directly to the Net
Investment by Rust Industrial Services, Inc. account, as settlement of such
intercompany balance is not planned or anticipated in the foreseeable future.
Cash and Cash Equivalents
The Company considers all short-term deposits purchased with original maturities
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment (including major repairs and improvements) are
capitalized and stated at cost. Items of an ordinary maintenance or repair
nature are charged directly to operations. The cost of property and equipment is
depreciated over the estimated useful lives on the straight-line method as
follows:
<TABLE>
<S> <C>
Buildings 10 to 40 years
Scaffolding equipment 7 to 25 years
Vehicles and other equipment 3 to 20 years
Leasehold improvements Life of the applicable lease or life of
the improvement, whichever is shorter
</TABLE>
Depreciation expense for the nine months ended September 30, 1996, was $5,958.
Intangible Assets
Intangible assets relating to acquired businesses consist primarily of the cost
of purchased businesses in excess of the market value of net assets acquired
("goodwill") and other covenants. Goodwill is amortized on a straight-line basis
over a period not exceeding 40 years. Amortization expense related to
intangibles for the nine months ended September 30, 1996, was $711.
F-7
<PAGE> 30
Impairment of Long-Lived Assets
During 1995, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("FAS 121"). When such events or
circumstances indicate the carrying value of an asset may be impaired, the
Company recognizes an impairment loss.
Additionally, the Company measures the realizability of goodwill by the ability
of the acquired business to generate current and expected future operating
income in excess of annual amortization. If such realizability is in doubt, an
adjustment is made to reduce the carrying value of the goodwill.
Management has not recognized and does not believe any material impairment
losses exist for the nine months ended September 30, 1996.
Income Taxes
The Company is included in the federal income tax return of RII. The deferred
tax liabilities in the accompanying balance sheets are calculated as if the
Company filed a separate tax return. Income taxes are paid by RII on behalf of
the Company, and charges for taxes currently payable are allocated to the
Company.
Operating Leases
The Company leases various operating and office facilities for various terms.
Rent charged to costs and expenses in the statement of income was $927 for the
nine months ended September 30, 1996.
3. TRANSACTIONS WITH AFFILIATES:
WMI, RII and RIS have furnished the services of financial, administrative, legal
and certain other corporate staff personnel to the Company. Additionally, RII
provides certain retirement and post-retirement benefits to eligible employees
of the Company. The costs of such services and benefits are allocated to the
Company ratably on the basis of its revenues. The Company believes that the
charges for such services and benefits have been calculated on a reasonable
basis and that the total amount of costs recognized in the statement of income
approximate what its actual costs would have been as a stand alone entity.
During the nine months ended September 30, 1996, certain RSS employees
participated in a 401(k) Plan and a stock option plan administered by WMI. Such
charges for these services and benefits were $1,057 for the nine months ended
September 30, 1996, and are included in selling and administrative expenses in
the statement of income.
RIS allocates a portion of its interest expense to the Company based on the
ratio which cumulative net cash advances to the Company bears to RIS's
cumulative net cash advances to all of its subsidiaries and the value of net
tangible assets. Management believes that the allocation of interest expense is
representative of financing costs attributable to the Company and that the
methodology used to allocate interest expense is reasonable. Intercompany
interest expense of $7,872 was allocated to the Company in the nine months ended
September 30, 1996, respectively.
RIS also provides worker's compensation and medical insurance coverage to the
Company. The Company is allocated charges, which management deems reasonable,
for such coverage and at any point in time is fully insured by RIS. The Company
paid and provided expense in the amount of $5,897 for such coverage for the nine
months ended September 30, 1996.
F-8
<PAGE> 31
4. INCOME TAXES:
The domestic operations of the Company were included in the consolidated federal
income tax return of RII. The Canadian operations of the Company are included in
the tax returns of Rust Scaffold Services of Canada, LTD. and JLG Scaffolding,
Inc. Income taxes relating to the Company were paid by RII. No tax sharing
agreement existed between the Company and RII. Income taxes have been provided
in accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("FAS 109"). In accordance with FAS 109, deferred
income taxes are provided when tax laws and financial accounting standards
differ with respect to the amount of income calculated in a given year and the
bases of assets and liabilities. Deferred income taxes are not provided on
undistributed earnings of foreign affiliates 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.
Following is a summary of the Company's income tax provision:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
------------
<S> <C>
Currently payable:
Federal $1,615
State 243
------
1,858
Deferred: --
Federal 2,110
State 317
------
2,427
------
Foreign 528
------
Total provision $4,813
======
</TABLE>
The reconciliation of the statutory federal income tax rate to the effective
income tax rate for the nine months ended September 30, 1996, is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
------------
<S> <C>
Statutory federal income tax rate 35.0%
State and local taxes, net of federal benefit 3.1
Amortization of intangible assets relating to acquired businesses 1.1
Other 1.7
------
Effective tax rate 40.9%
======
</TABLE>
F-9
<PAGE> 32
5. STOCKHOLDER'S EQUITY -- NET INVESTMENT BY RIS:
The Company participates in a centralized cash management program administered
by RIS. Cash collected from U.S. operations is remitted to RIS and advances are
made by RIS, as needed, to cover the Company's operating expenses and capital
requirements. Cash remittances and advances have been recorded to the
"Stockholder's Equity -- Net Investment by Rust Industrial Services, Inc."
account in the accompanying consolidated statements of stockholder's equity.
6. 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, but 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.
F-10
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brand Scaffold Services, Inc.:
We have audited the accompanying consolidated balance sheets of Brand Scaffold
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholder's
equity (deficit) and cash flows for the years ended December 31, 1998 and 1997,
and for the three months ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Brand Scaffold Services, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
and for the three months ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 19, 1999
F-11
<PAGE> 34
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenue $ 205,304 $ 160,660 $ 44,412
Operating expenses 157,673 122,638 34,170
--------- --------- ---------
Gross profit 47,631 38,022 10,242
Selling and administrative expenses 29,568 25,840 4,743
Nonrecurring start-up expenses -- 2,498 --
--------- --------- ---------
Operating income 18,063 9,684 5,499
Interest expense 17,728 15,422 4,504
Interest income (249) (397) (195)
--------- --------- ---------
Income (loss) before provision for income tax 584 (5,341) 1,190
Provision for income tax -- -- 525
--------- --------- ---------
Income (loss) before extraordinary loss 584 (5,341) 665
Extraordinary loss on debt extinguishment 4,329 -- --
--------- --------- ---------
Net income (loss) (3,745) (5,341) 665
Less- Accretion of preferred stock dividends (4,767) (4,172) (906)
--------- --------- ---------
Net loss applicable to common stock $ (8,512) $ (9,513) $ (241)
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-12
<PAGE> 35
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,125 $ 2,217
Trade accounts receivable, net of allowance for doubtful accounts of $812 in 1998
and $1,000 in 1997 31,485 23,672
Costs and estimated earnings in excess of billings on uncompleted contracts 2,056 2,145
Note receivable from WMI, current portion 2,175 2,700
Notes receivable, current portion 132 388
Other current assets 3,192 2,374
-------- --------
Total current assets 42,165 33,496
-------- --------
PROPERTY AND EQUIPMENT:
Land 1,633 1,633
Buildings 2,284 2,097
Vehicles and other equipment 11,281 5,383
Scaffolding equipment 172,970 160,576
Leasehold improvements 853 790
-------- --------
Total property and equipment, at cost 189,021 170,479
Less- Accumulated depreciation and amortization 27,421 14,938
-------- --------
Total property and equipment, net 161,600 155,541
-------- --------
OTHER ASSETS:
Deferred financing costs, net 5,350 5,575
Note receivable from WMI, net of current portion -- 2,175
Notes receivable, net of current portion 759 756
Other assets 1,186 --
-------- --------
Total other assets 7,295 8,506
-------- --------
Total assets $211,060 $197,543
======== ========
</TABLE>
(Continued on following page)
F-13
<PAGE> 36
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving loan $ -- $ 4,500
Current maturities of long-term debt 5,000 9,500
Current portion notes payable and capital lease obligation 831 --
Accounts payable and accrued expenses 23,454 14,544
Billings in excess of costs and estimated earnings on uncompleted contracts 800 745
--------- ---------
Total current liabilities 30,085 29,289
--------- ---------
LONG-TERM DEBT 153,500 140,250
--------- ---------
NOTES PAYABLE AND CAPITAL LEASE OBLIGATION 4,176 --
--------- ---------
DEFERRED INCOME TAXES 1,875 2,040
--------- ---------
14.5% SENIOR EXCHANGEABLE PREFERRED STOCK, $0.01 par value, 1,250,000 shares
authorized, 1,042,460 issued and outstanding 35,907 31,140
--------- ---------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $0.01 par value, 100 shares authorized, issued and outstanding -- --
Paid-in capital 18,525 18,477
Receivable from sale of Holdings' common stock (336) (336)
Predecessor basis adjustment (13,038) (13,038)
Cumulative translation adjustment (1,368) (525)
Accumulated deficit (18,266) (9,754)
--------- ---------
Total stockholder's equity (deficit) (14,483) (5,176)
--------- ---------
Total liabilities and stockholder's equity (deficit) $ 211,060 $ 197,543
========= =========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-14
<PAGE> 37
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,745) $ (5,341) $ 665
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Deferred income tax provision (42) (167) 420
Depreciation and amortization 17,234 13,294 3,567
Extraordinary loss on debt extinguishment 4,329 -- --
Changes in operating assets and liabilities-
Trade accounts receivable, net (7,813) (1,513) 1,960
Costs and estimated earnings in excess of billings on
uncompleted contracts 89 109 (1,643)
Notes receivable 253 1,973 176
Scaffolding equipment 4,264 4,540 868
Accounts payable and accrued expenses 7,940 15 (445)
Billings in excess of costs and estimated earnings on
uncompleted contracts 54 109 (562)
Other 4,190 (1,036) (40)
--------- --------- ---------
Net cash provided by operating activities 26,753 11,983 4,966
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,519) (14,733) (1,642)
Receipts on note receivable from WMI 2,700 2,200 363
Proceeds from sales of property and equipment other than
scaffolding 43 37 (17)
Payments for acquisitions (2,100) -- --
--------- --------- ---------
Net cash used for investing activities (24,876) (12,496) (1,296)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 130,000 -- --
Payments of long-term debt (121,250) (8,250) (2,000)
Borrowings (payments) of revolving loans (4,500) 4,500 --
Payments on notes payable and capital lease obligation (438) -- --
Debt issuance financing costs (4,829) -- --
Issuance of preferred stock -- 1,062 --
Capital contribution from Holdings 48 537 --
--------- --------- ---------
Net cash used for financing activities (969) (2,151) (2,000)
--------- --------- ---------
</TABLE>
(Continued on following page)
F-15
<PAGE> 38
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 908 $ (2,664) $ 1,670
CASH AND CASH EQUIVALENTS, beginning of period 2,217 4,881 3,211
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,125 $ 2,217 $ 4,881
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 11,469 $ 14,138 $ 3,016
Income taxes paid -- 113 --
NONCASH TRANSACTIONS:
Paid in-kind accretion of preferred stock dividends $ 4,767 $ 4,172 $ 906
Receipt of scaffolding as payment in lieu of cash on accounts
receivable -- 422 --
Purchase of equipment with capital lease 3,800 -- --
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-16
<PAGE> 39
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Receivable
from Sale of
Holding's Predecessor Cumulative
Paid In Common Basis Accumulated Translation Comprehensive
Shares Dollars Capital Stock Adjustment Deficit Adjustment Total Income (Loss)
------ -------- -------- ------------ ----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 1,
1996 100 $ -- $ 17,604 $ -- $(13,038) $ -- $ -- $ 4,566
Comprehensive
income (loss):
Net income -- -- -- -- -- 665 -- 665 $ 665
Translation
Adjustment -- -- -- -- -- -- (78) (78) (78)
--------
Comprehensive
income (loss) $ 587
========
Paid-in-kind
accretion of
preferred
dividends -- -- -- -- -- (906) -- (906)
--- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31,
1996 100 -- 17,604 -- (13,038) (241) (78) 4,247
Comprehensive
income (loss):
Net income
(loss) -- -- -- -- -- (5,341) -- (5,341) $ (5,341)
Translation
adjustment -- -- -- -- -- -- (447) (447) (447)
--------
Comprehensive
(loss) $ (5,788)
========
Paid-in-kind
accretion of
preferred
dividends -- -- -- -- -- (4,172) (4,172)
Capital
contribution
from DLJ
Brand
Holdings, Inc. -- -- 873 -- -- -- -- 873
Issuance of
promissory
notes from
officers and
employees -- -- -- (336) -- -- -- (336)
--- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31,
1997 100 -- 18,477 (336) (13,038) (9,754) (525) (5,176)
--- -------- -------- -------- -------- -------- -------- --------
</TABLE>
(Continued on following page)
F-17
<PAGE> 40
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (Continued)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Receivable
from Sale of
Holding's Predecessor Cumulative
Paid In Common Basis Accumulated Translation Comprehensive
Shares Dollars Capital Stock Adjustment Deficit Adjustment Total Income (Loss)
------ -------- -------- ------------ ----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1997 100 $ -- $ 18,477 $ (336) $(13,038) $ (9,754) $ (525) $ (5,176)
Comprehensive
income (loss):
Net income
(loss) -- -- -- -- -- (3,745) -- (3,745) $ (3,745)
Translation
adjustment -- -- -- -- -- -- (843) (843) 843)
--------
Comprehensive
(loss) $ (4,588)
========
Capital
contribution
from DLJ
Brand
Holdings, Inc. -- -- 48 -- -- -- -- 48
Paid-in-kind
accretion of
preferred
dividends -- -- -- -- -- (4,767) -- (4,767)
--- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31,
1998 100 $ -- $ 18,525 $ (336) $(13,038) $(18,266) $ (1,368) $(14,483)
=== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an
integral part of this statement.
F-18
<PAGE> 41
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Brand Scaffold Services, Inc. (a Delaware corporation) and its subsidiaries (the
"Company") are 100% owned by DLJ Brand Holdings, Inc. ("Holdings"). Holdings is
owned 65.5% by Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), 9.3% by Carlisle
Enterprises, L.P. ("Carlisle"), 18.6% by Rust International Inc. ("Rust
International") through its wholly owned subsidiary, Rust Industrial Services
Inc. ("RIS") and 6.5% by the directors, officers and employees of the Company.
Rust International is a subsidiary of Waste Management, Inc. ("WMI").
The Company believes it operates in one segment. The Company provides
scaffolding services primarily to refining, chemical, petrochemical, pulp and
paper, and utility industries, and to a lesser extent, nuclear facilities and
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 15% and 17% of revenue for the years ended December 31,
1998 and 1997, respectively.
2. PURCHASE TRANSACTION:
On September 30, 1996, the Company, a newly formed entity created by the
merchant banking group of DLJ, purchased the net assets of Rust Scaffold
Services, Inc. and its subsidiaries, which were direct and indirect subsidiaries
of Rust International (the "Acquisition"). The purchase price approximated the
fair values of the net tangible assets acquired. The Company paid Rust
International the following, at fair values (in thousands):
<TABLE>
<S> <C>
Cash $ 178,038
199,000 shares of senior exchangeable preferred stock 4,975
2,487,500 shares of common stock of Holdings 2,487
Subordinated note 4,800
---------
$ 190,300
=========
</TABLE>
To fund the Acquisition, on September 30, 1996, the Company entered into a $190
million credit agreement (the "Credit Agreement") with a bank and DLJ Capital
Funding pursuant to which the Company borrowed $160 million. On November 21,
1996, in accordance with the Credit Agreement, such borrowings were placed with
various financial institutions. The Acquisition was accounted for using the
purchase method. As a result, the assets and liabilities of the Company were
recorded at their approximate fair values as of October 1, 1996. As part of the
Acquisition, Rust International retained liability for certain tax, legal,
environmental and other contingencies related to periods prior to October 1,
1996.
F-19
<PAGE> 42
The Company recorded a liability of approximately $1,200,000 on October 1, 1996,
as part of the acquisition cost in connection with management's decision to exit
and relocate certain offices and to involuntarily terminate or relocate certain
employees. The Company substantially completed its restructuring activities in
1997. Charges to the liability were $900,000 for the year ended December 31,
1997. As of December 31, 1998 and 1997, the balance of the liability was $0 and
$100,000, respectively.
On the date of the purchase, Rust International retained a 19.9% interest in the
Company. Accordingly, a "Predecessor Basis Adjustment" of $13,038,000 was
recorded to the acquired assets and stockholder's equity reflecting the
historical carrying value of the retained ownership interest in the sold assets.
The following table presents pro forma information for the Company for the year
ended December 31, 1996, assuming the acquisition had taken place on January 1,
1996 (in thousands).
<TABLE>
<CAPTION>
Unaudited
---------
<S> <C>
Revenue $169,181
Net income 3,352
</TABLE>
The pro forma amounts have been derived from the results for Rust Scaffold
Services, Inc. and subsidiary for the nine months ended September 30, 1996, and
for the Company for the three months ended December 31, 1996, plus certain
adjustments: an increase of interest expense of $3,470,000 and an increase in
depreciation and amortization of $4,218,000, as well as the related tax impact.
These amounts are not necessarily indicative of the results the Company would
have achieved for the full year had the Acquisition occurred on January 1, 1996.
3. 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 generally accepted
accounting principles 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
The Company recognizes contract revenue on the percentage-of-completion basis
with losses recognized in full when identified. Changes in project performance
and conditions, estimated profitability and final contract settlements may
result in future revisions to costs and income. Substantially all of the
Company's contracts are completed in less than six months. Other revenues are
recognized when the services are performed.
Rental and Sales of Scaffolding
For the years ended December 31, 1998 and 1997, and the three months ended
December 31, 1996, revenues from the rental of scaffolding were $50,137,000,
$40,847,000 and $11,230,000, respectively.
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. Revenues and gross profit
from sales of scaffolding were $5,757,000 and $1,493,000, respectively, for the
year ended December 31, 1998, $7,714,000 and $3,174,000, respectively for the
year ended December 31, 1997, $1,395,000 and $567,000 respectively for the three
months ended December 31, 1996.
F-20
<PAGE> 43
Cash and Cash Equivalents
The Company considers all short-term deposits purchased with original maturities
of three months or less to be cash equivalents.
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 the estimated useful lives on the
straight-line method as follows:
<TABLE>
<S> <C>
Buildings 10 to 30 years
Vehicles and other equipment 3 to 8 years
Scaffolding equipment 2 to 20 years
Leasehold improvements Life of the applicable lease or life of the
improvement, whichever is shorter
</TABLE>
For the years ended December 31, 1998 and 1997, and the three months ended
December 31, 1996, depreciation expense was $16,509,000, $12,325,000 and
$2,899,000, respectively.
Deferred Financing Costs
In connection with the Acquisition, the Company deferred financing costs
totaling $7,212,000. Of this amount, $588,000 was allocated to borrowings for
the period October 1, 1996, to November 21, 1996, and was charged to expense
during that period. The remaining $6,624,000 was allocated to the term loans and
is being amortized over the life of the Credit Agreement. In 1998, the Company
recorded an extraordinary loss of $4.3 million to write off deferred financing
costs related to the early extinguishment of debt. For the three months ended
December 31, 1996, and the year ended December 31, 1997, amortization of
deferred financing costs, included in interest expense, was $668,000 and
$969,000, respectively. For the year ended December 31, 1998, amortization
expense was $725,000. Accumulated amortization was $924,000, $1,637,000 and
$969,000 as of December 31, 1998, 1997 and 1996, respectively. In connection
with the February 1998 issuance of senior notes, the Company incurred financing
fees and expenses of $4.8 million, which were deferred and are being amortized
over 10 years. Of these fees, $3.9 million related to commissions.
Derivative Financial Instruments
The Company uses an interest rate collar to hedge its exposure to interest rate
fluctuations. The collar has the effect of establishing a maximum and a minimum
interest rate on a portion of the Company's underlying variable rate debt
obligations. The maximum and minimum interest rates associated with the interest
rate collar are 8.50% and 5.69%, respectively, and the notional amount at
December 31, 1997, was $75 million. In 1998, the Company reduced the interest
rate collar's notional amount to $30 million resulting in an expense of $599,000
related to this transaction. In 1997, the existence of this hedge had no impact
on the financial position, results of operations or cash flows of the Company.
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.
Foreign Operations
The assets and liabilities of the Company's wholly owned foreign subsidiary,
Brand Scaffold Services of Canada, Inc. 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.
F-21
<PAGE> 44
4. NOTES RECEIVABLE:
Notes receivable result from scaffolding sales. As of December 31, 1998 and
1997, approximately $891,000 and $1,144,000 of such notes maturing in 3 to 5
years were outstanding with interest rates ranging from 9.75% to 11.00% and 8%
to 10.25%, respectively.
5. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. 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, 1998 and 1997, such provision consisted of a
deferred domestic tax benefit of $238,000 and $287,000, current foreign tax
expense of $42,000 and $167,000, and deferred foreign tax expense of $196,000
and $120,000, respectively. For the three months ended December 31, 1996, the
Company's income tax provision consisted of deferred domestic taxes of $420,000
and current foreign taxes of $105,000.
The reconciliation of the statutory federal income tax (benefit) expense on the
Company's pretax income (loss) to the actual provision for income taxes for the
years ended December 31, 1998 and 1997, and for the three months ended December
31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal income taxes $(1,333) $(1,869) $ 417
State and local taxes, net of federal (251) (174) 45
Foreign taxes 54 287 35
Valuation allowance 1,240 1,918 --
Other 290 (162) 28
------- ------- -------
Provision for income taxes $ -- $ -- $ 525
======= ======= =======
</TABLE>
The components of the net deferred income tax liability as of December 31, 1998
and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 4,274 $ 3,152
Property and equipment 1,670 --
Net operating loss carryforward 34,401 26,371
Valuation allowance (8,336) (7,096)
-------- --------
Deferred tax assets $ 32,009 $ 22,427
-------- --------
</TABLE>
F-22
<PAGE> 45
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Note receivable from WMI $ (870) $ (1,950)
Property and equipment (33,014) (22,517)
---------- ----------
Deferred tax liabilities (33,884) (24,467)
---------- ----------
Deferred income tax liability, net $ (1,875) $ (2,040)
========== ==========
</TABLE>
The Company is required to record 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. As of December 31, 1998, a valuation allowance of $8,336,000 was
recorded, which increased $1,240,000 for the year ended December 31, 1998. As of
December 31, 1997, a valuation allowance of $7,096,000 was recorded, which
increased $1,918,000 for the year ended December 31, 1997.
At December 31, 1998 and 1997, the Company had net operating loss carryforwards
for federal income tax purposes of $86,001,000 and $65,928,000 which expire in
various years between 2011 and 2018.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The major components of accounts payable and accrued expenses as of December 31,
1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $ 4,024 $ 4,186
Payroll and related accruals 6,419 3,945
Workers compensation and health benefit liabilities 6,304 3,717
Accrued interest 5,128 785
Other 1,579 1,911
---------- ----------
$ 23,454 $ 14,544
========== ==========
</TABLE>
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION:
Notes payable and capital lease obligation as of December 31, 1998, are as
follows (in thousands):
<TABLE>
<S> <C>
Notes payable $ 1,375
Capital lease obligation 3,632
----------
5,007
Less- Current portion 831
----------
$ 4,176
==========
</TABLE>
Notes payable consist of several promissory notes with interest rates of 8.5%.
Future principal payments total $283,000 for 1999, $283,000 for 2000, $283,000
for 2001, $283,000 for 2002 and $193,000 for 2003.
F-23
<PAGE> 46
8. DEBT AND BORROWING ARRANGEMENTS:
At December 31, 1998 and 1997, long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Term loans $ 28,500 $ 149,750
10-1/4% Senior Notes 130,000 --
---------- ----------
158,500 149,750
Less- Current portion 5,000 9,500
---------- ----------
Long-term debt $ 153,500 $ 140,250
========== ==========
</TABLE>
In 1996, in connection with the Acquisition, the Company entered into a Credit
Agreement which provides for Term Loan Commitments under Senior Secured Credit
facilities totaling $160 million, and a Revolving Loan Commitment totaling $30
million. In February 1998, the Company issued $130 million of 10-1/4% Senior
Notes due February 2008. The offering was underwritten by DLJ. The proceeds of
this offering were used to repay $120 million of the Term Loans outstanding
under the Credit Agreement. In addition, in February 1998, the Company amended
the Credit Agreement to reduce the total facility to $60 million. This amendment
included revisions to certain covenant requirements. In connection with the
Credit Agreement, the Company incurred administrative and commitment fees,
included in interest expense, of $208,000, $216,000 and $60,000, for the years
ended December 31, 1998 and 1997, and for the three months ended December 31,
1996, respectively.
Maturities of long-term debt as of December 31, 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
Year
-------------
<S> <C>
1999 $ 5,000
2000 6,000
2001 8,500
2002 9,000
2003 --
Thereafter 130,000
-----------
$ 158,500
===========
</TABLE>
Interest rates are determinable under the Credit Agreement based upon certain
market "Base Rates" or LIBOR, plus an "Applicable Margin" of between 1.75% to
3.5%. The Applicable Margins for Tranche B and Tranche C loans are fixed while
those for Tranche A loans ($28,500,000, $51,000,000 and $58,250,000 as of
December 31, 1998, 1997 and 1996, respectively), vary based, generally, on
earnings performance. The average interest rate under Term Loans in effect
during the years ended December 31, 1998 and 1997, and the three months ended
December 31, 1996, was 8.78%, 8.90% and 9.59%, respectively. Interest expense on
the Term Loans and the Senior Notes for the years ended December 31, 1998 and
1997, and for the three months ended December 31, 1996, was $17,060,000,
$13,984,000 and $3,836,000, respectively.
Revolving loan commitments equal an amount based upon an eligible borrowing
base, as defined, with a maximum available limit of $30 million. The loan
expires September 30, 2002, and interest rates are based on certain market "Base
Rate" or LIBOR plus a margin of between 1.75% and 3.5% (generally based on
earnings performance). At December 31, 1998 and 1997, the available borrowing
base (which is net of outstanding borrowings) was $16,244,000 and $13,136,000,
respectively. As of December 31, 1998 and 1997, amounts borrowed under the
revolving loan were $-0- and $4,500,000, respectively. Any borrowings under the
revolving loan commitment in excess of $10 million must be repaid once per year,
in accordance with the Credit Agreement. Interest expense on the revolving loan
for the years ended December 31, 1998 and 1997, and for the three months ended
December 31, 1996, was $100,000, $119,000 and $-0-, respectively.
F-24
<PAGE> 47
Substantially all assets of the Company are pledged as collateral for the Credit
Agreement described above. In addition, the Company is required to comply with
various affirmative and negative covenants in the Credit Agreement, including
financial covenants requiring certain levels of net worth to be maintained and
the achievement of certain financial ratios. The Company was in compliance with
the various affirmative and negative covenants at December 31, 1998.
As part of the Acquisition, the Company issued a Subordinated Note (the
Subordinated Note) to Rust International totaling $14.5 million due 2008. The
Subordinated Note was recorded at its fair value of $4.8 million, assuming an
effective interest rate of 18% per annum. On September 30, 1996, Holdings
assumed all obligations under the Subordinated Note by making a capital
contribution to the Company of $4.8 million, which is included in paid-in
capital of the Company. Because Holdings has no revenue generating activities,
other than its ownership of the Company, it is likely that the Company's cash
flows will service all or part of Holding's obligation under the Subordinated
Note. Subject to certain conditions, Holdings has the option of paying interest,
calculated annually, through the issuance of additional Subordinated Notes in
lieu of cash. Additionally, based on Holdings' financial performance, the
Subordinated Note's interest and principal payments may be delayed or
accelerated. As a result of interest accretion, Holding's carrying amount of the
Subordinated Note is approximately $7,039,000 and $5,965,000 as of December 31,
1998 and 1997, respectively. No principal or interest cash payments were made
during 1998, 1997 or 1996.
9. LEASE OBLIGATIONS:
The Company leases a portion of its operating and office facilities under
operating leases. For the years ended December 31, 1998 and 1997, and the three
months ended December 31, 1996, rent expense was $1,538,000, $1,334,000 and
$271,000, respectively.
The Company leases certain scaffolding equipment under capital leases. The net
book value of the scaffolding equipment under capital lease was $3,768,000 as of
December 31, 1998. The future minimum lease payments under noncancelable leases
as of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
----------- --------- ---------
<S> <C> <C>
1999 $ 940 $ 1,753
2000 940 1,319
2001 940 1,177
2002 940 962
2003 610 650
Thereafter -- 638
--------- ---------
Total minimum lease payments 4,370 $ 6,499
=========
Less- Imputed interest component 738
---------
Present value of net minimum lease payments $ 3,632
=========
</TABLE>
10. 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.
The Company has available Letter of Credit Commitments in an amount not to
exceed $15 million, of which $8,000,000 and $6,751,000 was outstanding with a
bank at December 31, 1998 and 1997, respectively. For the years ended December
31, 1998 and 1997, and the three months ended December 31,1996, the Company paid
fees related to such commitments (included in interest expense) of $216,000,
$134,000 and $20,000, respectively.
F-25
<PAGE> 48
11. SENIOR EXCHANGEABLE PREFERRED STOCK:
The Company has authorized 1,250,000 shares and has issued and outstanding
1,042,460 of Senior Exchangeable Preferred Stock (the "Senior Preferred Stock").
The Senior Preferred Stock is mandatorily redeemable on March 31, 2008, at a
redemption price equal to aggregate liquidation value plus unpaid dividends. The
liquidation value of each share of Senior Preferred Stock is $25 at issuance.
Dividends are calculated quarterly on the liquidation value of such shares at
14.5% annually. For the five-year period ended September 30, 2001, such
dividends accrete on a compounded basis and increase the liquidation value.
Dividends are payable in cash subsequent to this date. For the years ended
December 31, 1998 and 1997, and the three months ended December 31, 1996,
dividends of $4,767,000, $4,172,000 and $906,000, were accreted. As a result,
the loss attributable to common stockholders for the years ended December 31,
1998 and 1997, and for the three months ended December 31, 1996, was $8,512,000,
$9,513,000 and $241,000, respectively.
The Senior Preferred Stock carries no voting rights, but its holders have
certain defined rights upon certain events occurring. In the event of a change
in control of the Company, each holder of Senior Preferred Stock will have the
right to require the Company to repurchase its shares at 101% of the liquidation
value. The Company may redeem the Senior Preferred Stock at certain premiums to
the liquidation value at any time after September 30, 2001 or upon the
occurrence of an initial public offering of the Company's common stock prior to
September 30, 1999. Additionally, at the option of the Company, the Senior
Preferred Stock is exchangeable into 14.5% Subordinated Exchange Debentures due
2008, under certain conditions.
12. STOCKHOLDER'S EQUITY (DEFICIT):
The Company has authorized, issued and outstanding 100 shares of $.01 par common
stock. All of the common stock of the Company is owned by Holdings.
13. PARENT COMPANY TRANSACTIONS:
Holdings has authorized 15,000,000 shares and issued and outstanding 13,373,356
shares of $.01 par common stock.
As part of the Acquisition, on September 30, 1996, Holdings and Carlisle agreed
upon a grant of options to Carlisle (the "Carlisle Options") to acquire 918,750
shares of Holdings' common stock. The Carlisle Options fall into three
categories, each with different vesting terms: time based, performance based,
and path dependent (for which vesting is contingent upon certain measurements of
the value of the Company). Substantially all of the value of the Carlisle
Options was considered a cost of the Acquisition and pushed down to the
Company's financial statements.
In 1998 and 1997, Holdings made a capital contribution to the Company of $48,000
and $873,000, respectively, representing cash and notes received by the Company
from the sale of Holdings' common stock to certain directors, officers and
employees of the Company. At December 31, 1998 and 1997, certain officers and
employees of the Company have outstanding promissory notes in the aggregate
amount of $336,000 and $336,000, which were issued to the Company as
consideration for a portion of the above Holdings' common stock. The notes earn
interest at 7.03% and mature on 2002. These notes are secured by shares owned by
such officers and employees.
In 1997, the Board of Directors of Holdings approved a stock option plan for key
employees of the Company. During 1998 and 1997, Holdings granted certain
employees options to acquire 23,000 and 889,000 shares of Holding's common
stock, respectively. The options were granted with an exercise price of $1.00
per share which management believes approximated the fair value of Holdings'
common stock at the date of grant. The options vest over a maximum of ten years
and a minimum of five years provided certain performance criteria are met.
Unvested options are subject to forfeiture, upon employee termination, as
defined. Additionally, any shares acquired upon exercise are subject to
repurchase rights of the Company upon termination of employment, as defined.
Upon a change of control, as defined, all unvested options will vest. In 1998
and 1997, no options were canceled or exercised. As of December 31, 1998 and
1997, there were 889,000 and 912,000 options outstanding and 88,900 and 177,800,
options exercisable, respectively. The weighted average exercise price for the
options outstanding in 1998 and 1997 is $1.00.
F-26
<PAGE> 49
The Company adopted the disclosure-only provisions under SFAS 123 "Accounting
for Stock Based Compensation" ("SFAS 123"). The Company accounts for employee
stock options under APB Opinion 25, as permitted under generally accepted
accounting principles. Accordingly, no compensation cost has been recognized in
the accompanying financial statements related to these options. Had compensation
cost for these options been determined consistent with SFAS 123, the Company's
net loss would reflect the following for the year ended December 31 (in
thousands):
<TABLE>
<CAPTION>
Net Loss 1998 1997
----------- -------- --------
<S> <C> <C>
As reported $ (3,745) $ (5,341)
Pro forma (3,786) (5,384)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1997; dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 6.5% and an expected life of seven years. The fair
value of the options granted in 1998 and 1997 was $.44 and $.45 per option,
respectively.
In accordance with the Shareholder's Agreement of Holdings, in the event any
shareholder desires to transfer any shares of Holdings to a third party prior to
September 30, 2001, such shareholders must first offer such shares to the other
shareholders. Also, certain shareholders engaged in a transfer of shares to a
third party have the right to compel the other shareholders to sell a
proportionate share of their holdings to the third party, as defined.
14. RELATED-PARTY TRANSACTIONS:
Certain shareholders of Holdings receive a quarterly Management Advisory Fee in
return for management, advisory and other services rendered. Such fees totaled
$500,000, $500,000, $125,000, for the years ended December 31, 1998 and 1997,
and for the three months ended December 31, 1996, respectively.
In connection with the Acquisition, the Company entered into a Transitional
Services Agreement with WMI and Rust International. In consideration of certain
services to be rendered by the Company and the licenses and preferred customer
status granted by the Company, WMI shall pay to the Company $725,000 per quarter
through September 30, 1999 ($8.7 million in total). The Company recorded
$7,437,500 as a note receivable from WMI in purchase accounting. The balance of
$1,262,500 is being accounted for as a reduction to the Company's operating
expenses in the period the aforementioned services are provided. For the years
ended December 31, 1998 and 1997, the Company received $2,900,000 and
$2,900,000, respectively, in cash and reduced its note receivable by $2,700,000
and $2,200,000, respectively. For the years ended December 31, 1998 and 1997,
and for the three months ended December 31, 1996, operating expenses were
reduced by $200,000, $700,000 and $362,000, respectively.
15. EMPLOYEE BENEFIT PLAN:
In 1997, the Company established the Brandshare 401(k) Savings Plan and Profit
Sharing Plan. Substantially all employees are eligible to participate in the
Plan. Participants may elect to defer 2% to 15% of their salary. The Company, at
its sole discretion, may make matching contributions to the Plan. For the years
ended December 31, 1998 and 1997, the Company expensed $345,000 and $318,000,
respectively, for contributions to the Plan.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents--The carrying amounts approximate fair value.
Notes Receivable--The fair value of notes receivable are based on discounted
future cash flows at current interest rates.
Revolving Loan--The carrying amounts of the borrowings under the Credit
Agreement approximate their fair value because such borrowings carry variable
interest rates.
F-27
<PAGE> 50
Term Loans--The carrying amounts of the term loans approximate their fair value
because such loans carry variable interest rates.
Senior Notes--The fair value of the senior notes is based on market rates
obtained from dealers.
Interest Rate Hedge--The fair values of interest rate collars are the amounts at
which they could be settled, based on estimates obtained from dealers.
14.5% Senior Exchangeable Preferred Stock--The liquidation amounts plus accreted
dividends approximate fair value.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,125 $ 3,125 $ 2,217 $ 2,217
Notes receivable 891 891 1,144 1,192
Revolving loan -- -- 4,500 4,500
Term loans 28,500 28,500 149,750 149,750
Senior notes 130,000 123,500 -- --
Notes payable and capital lease obligation 5,007 5,007 -- --
Interest rate hedge -- (259) -- (298)
14.5% Senior exchangeable preferred stock 35,907 35,902 31,140 31,140
</TABLE>
17. ACQUISITIONS:
In September 1998, Brand acquired the operating assets of Scaffold Rental and
Erection ("SRE") for a purchase price net of cash acquired, of $4.2 million
($400,000 of cash and $3.8 million in notes payable and capital lease
obligations). The excess cost of assets acquired over the amounts assigned to
net tangible assets at the date of acquisition was $100,000. SRE is an Atlanta
based company that provides scaffolding services to industrial customers
primarily in the southeastern states.
In October 1998, Brand acquired the operating assets of The Brook Company, Ltd.
("Brook") for a purchase price net of cash acquired of $3.1 million ($1.7
million of cash and $1.4 million in notes payable). There was no excess cost of
assets acquired over the amounts assigned to net tangible assets at the date of
the acquisition. Brook is a New Orleans based specialty provider of temporary
structures and enclosures for the special events market.
18. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board (FASB) adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
F-28
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 - Certificate of Incorporation of the Registrant(1)
3.2 - Certificate of Amendment of Certificate of Incorporation of the Registrant(1)
3.3 - Amended and Restated By-Laws of Brand Scaffold Services, Inc.(1)
4.1 - Amended and Restated Certificate of Designations, Preferences and Rights of 14.5% Senior Exchangeable
Preferred Stock due 2008 (the "Preferred Stock")(1)
4.2 - Amended and Restated Shareholders Agreement dated as of September 30, 1996, among DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., Carlisle-Brand Investors, L.P., Rust Industrial Services Inc., DLJ Brand
Holdings, Inc. ("Holdings"), Brand Scaffold Services, Inc. and Certain Individuals(1)
4.3 - Stock Option Agreement dated as of March 4, 1997, between Holdings and Carlisle Group, L.P.(1)
4.4 - Indenture dated as of February 25, 1998, between the Company, and U.S. Trust Company of Texas, N.A.,
as Trustee, relating to the Company's 10-1/4% Senior Notes due
2008 (the "Notes")(1) 4.5 - Registration Rights Agreement, dated as of
February 25, 1998, between the Company and Donaldson
Lufkin & Jenrette Securities Corporation ("DLJSC"), as initial
purchaser, relating to the Notes(1) 4.6 - Registration Rights Agreement
dated as of March 2, 1998, by and between the Company and DLJSC,
relating to the Preferred Stock(1)
4.7 - Form of Indenture relating to the Company's 14.5% Junior Subordinated
Exchange Debentures due 2008 (2) 5 - Opinion of Davis Polk & Wardwell,
Counsel of the Registrant, regarding the validity of the securities
being registered(2)
10.1 - Credit Agreement dated as of September 30, 1996, among Brand
Scaffold Services, Inc., the Banks party thereto, DLJ Capital,
as Syndication Agent, and Bank of America, as Administrative
Agent(1)
10.2 - Purchase Agreement dated as of February 25, 1998, by and between the Company and DLJSC, as initial
purchaser, relating to the Notes(1)
10.3 - The Amended and Restated Transaction Agreement dated as of September 18, 1996 among DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., Carlisle Enterprises, L.P., Holdings, the Company, Brand Scaffold Builders,
Inc., Brand Scaffold Rental & Erection, Inc. 702569 Alberta Ltd., Rust International Inc., Rust
Industrial Services Inc., Rust Scaffold Services Inc., Rust Scaffold Builders Inc., and Rust
Scaffold & Erection Inc.(1)
10.4 - Employment Agreement dated as of October 1, 1996, between the Company and John M. Monter(1)
10.5 - Employment Agreement dated as of July 29, 1996, between the Company and James "Marty" McGee(1)
10.6 - Employment Agreement dated as of July 29, 1996, between the Company and Ronald W. Moore(1)
10.7 - Employment Agreement dated as of July 29, 1996, between the Company and Otto K. Knoll(1)
10.8 - Offer Letter dated as of March 30, 1998, between the Company and Ian R. Alexander(1)
12 - Statement of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends(3)
21 - Subsidiaries of the Registrant(1)
23.2 - Consent of Davis Polk & Wardwell, counsel to the Registrant
24 - Powers of Attorney
27 - Financial Data Schedule
</TABLE>
(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) Previously filed with the SEC
(3) Filed herewith
E-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brand Scaffold Services, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Brand Scaffold Services, Inc. included in this Form
10-K, and have issued our report thereon dated February 19, 1999. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. Schedule II included in this Form 10-K is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 19, 1999
<PAGE> 53
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997,
AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Additions
and
Balance at Charges to Balance at
Beginning Costs and End of
Description of Period Expenses Writeoffs Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998:
Allowance for doubtful accounts $ 1,000 $ 423 $ (611) $ 812
December 31, 1997:
Allowance for doubtful accounts 925 1,140 (1,065) 1,000
December 31, 1996:
Allowance for doubtful accounts 906 102 (83) 925
</TABLE>
<PAGE> 54
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 333-56813
BRAND SCAFFOLD SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3909681
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification no.)
15450 South Outer 40, #270, Chesterfield, MO 63017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 519-1000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: [X] No: [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at October 31, 1999
$.01 Par Value 100 shares
<PAGE> 55
Page 1
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 2
Consolidated Balance Sheets at September 30, 1999 and December 31,
1998 3-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 5-6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-14
PART II - OTHER INFORMATION
Item 6. (a) Exhibits 15
(b) Reports on Form 8-K
SIGNATURES 15
</TABLE>
<PAGE> 56
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(unaudited) (unaudited)
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue........................................ $44,509 $ 47,127 $157,572 $ 147,782
Operating expenses............................. 34,538 36,384 122,305 113,038
---------------------------------------------------------
Gross profit.................................. 9,971 10,743 35,267 34,744
Selling and administrative expenses............ 7,544 7,599 23,560 19,868
---------------------------------------------------------
Operating income.............................. 2,427 3,144 11,707 14,876
Interest expense............................... 4,419 4,353 13,472 12,712
Interest income................................ (13) (67) (53) (171)
---------------------------------------------------------
Pretax income (loss).......................... (1,979) (1,142) (1,712) 2,335
Provision for income tax....................... - - - -
---------------------------------------------------------
Income (loss) before extraordinary loss....... (1,979) (1,142) (1,712) 2,335
Extraordinary loss on debt extinguishment, net
of tax of $0.................................. - - - 4,329
---------------------------------------------------------
Net income (loss)............................. (1,979) (1,142) (1,712) (1,994)
Less accretion of preferred stock dividends ... (1,398) (1,212) (4,048) (3,511)
=========================================================
Net income (loss) applicable to common stock . $(3,377) $ (2,354) $ (5,760) $ (5,505)
=========================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 57
Page 3
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998
--------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 1,180 $ 3,125
Trade accounts receivable, net of allowance for
doubtful accounts: 1999, $730; 1998, $812........... 27,673 31,485
Costs and estimated earnings in excess of billings
on uncompleted contracts............................ 2,349 2,056
Notes receivable, current portion.................... 214 132
Note receivable from WMI, current portion............ - 2,175
Other current assets................................. 2,878 3,192
--------------------------------
Total current assets............................. 34,294 42,165
PROPERTY AND EQUIPMENT:
Land................................................. 1,647 1,633
Buildings............................................ 2,814 2,284
Vehicles and other equipment........................ 16,938 11,281
Scaffolding equipment................................ 185,264 172,970
Leasehold improvements............................... 654 853
--------------------------------
Total property and equipment, at cost............ 207,317 189,021
Less-Accumulated depreciation and amortization 41,636 27,421
--------------------------------
Total property and equipment, net................ 165,681 161,600
--------------------------------
OTHER ASSETS:
Intangible assets, net............................... 1,032 1,186
Deferred financing costs, net........................ 4,963 5,350
Notes receivable, net of current portion............. 528 759
--------------------------------
Total other assets............................... 6,523 7,295
================================
TOTAL ASSETS.......................................... $206,498 $ 211,060
================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 58
Page 4
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998
--------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving loan........................................ $ 3,235 $ -
Current maturities of capital lease obligation........ 887 831
Current maturities of long-term debt.................. 5,750 5,000
Accounts payable...................................... 3,637 4,026
Accrued expenses -
Payroll and related accruals........................ 5,200 6,419
Workers compensation and health benefits............ 8,874 6,304
Other............................................... 3,195 6,705
Billings in excess of costs and estimated earnings
on uncompleted contracts............................ 869 800
-----------------------------
Total current liabilities......................... 31,647 30,085
-----------------------------
LONG-TERM DEBT.......................................... 149,000 153,500
-----------------------------
NOTES PAYABLE AND CAPITAL LEASE
OBLIGATION.............................................. 3,703 4,176
-----------------------------
DEFERRED INCOME TAXES................................... 2,128 1,875
-----------------------------
COMMITMENTS AND CONTINGENCIES
14.5% SENIOR EXCHANGEABLE
PREFERRED STOCK...................................... 39,955 35,907
-----------------------------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $0.01 par value, 100 shares
authorized, issued and outstanding.................. - -
Paid-in capital....................................... 18,520 18,525
Receivable from sale of Holding's Common Stock (336) (336)
Predecessor basis adjustment.......................... (13,038) (13,038)
Cumulative translation adjustment..................... (1,055) (1,368)
Accumulated deficit................................... (24,026) (18,266)
-----------------------------
Total stockholder's equity (deficit)................ (19,935) (14,483)
=============================
Total liabilities and stockholder's equity (deficit) $206,498 $ 211,060
=============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 59
Page 5
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30 (unaudited)
------------------------------
1999 1998
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (1,712) $ (1,994)
Adjustments to reconcile net income (loss) to net
Cash provided by operating activities -
Depreciation and amortization........................ 15,482 10,541
Extraordinary loss................................... - 4,329
Gain on sale of property and equipment other than
scaffolding........................................ (71) -
Changes in operating assets and liabilities -
Trade accounts receivable, net....................... 3,780 (3,552)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... (283) 551
Notes receivable..................................... 150 206
Scaffolding equipment................................ 2,109 3,122
Accounts payable..................................... (392) (1,631)
Accrued expenses..................................... (2,293) 3,920
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 68 (84)
Other................................................ 318 326
----------------------------
Net cash provided by operating activities........ 17,156 15,734
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (18,326) (14,333)
Payments for acquisitions.............................. (2,071) (400)
Receipts on note receivable from WMI................... 2,175 2,025
Redemption of Parent Company Stock..................... (5) -
Proceeds from sale of property and equipment
other than scaffolding............................... 58 17
----------------------------
Net cash used for investing activities........... (18,169) (12,691)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................... - 130,000
Payments of long-term debt............................. (3,750) (120,750)
Borrowings/(payments) of revolving loan................ 3,235 (4,500)
Debt issuance financing costs.......................... - (4,893)
Payments on capital lease obligation................... (417) -
----------------------------
Net cash (used for) provided by financing
activities......................................... (932) (143)
----------------------------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS............................................ (1,945) 2,900
CASH AND CASH EQUIVALENTS, beginning of
Period................................................... 3,125 2,217
============================
CASH AND CASH EQUIVALENTS, end of period $ 1,180 $ 5,117
============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 60
Page 6
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30 (unaudited)
------------------------------
1999 1998
------------------------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $15,731 $ 10,721
==============================
NONCASH TRANSACTIONS:
Paid in-kind accretion of preferred stock dividends . $ 4,048 $ 3,511
Purchase of scaffolding equipment via capital lease - $ 3,800
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 61
Page 7
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The financial statements included herein for the periods ended September 30,
1999 and 1998 have been prepared by the Company without audit. In the opinion of
management, all adjustments have been made which are of a normal recurring
nature necessary to present fairly the Company's financial position as of
September 30, 1999 and the results of operations and cash flows for the three
and nine month periods ended September 30, 1999 and 1998. Certain information
and footnote disclosures have been condensed or omitted for these periods. The
results for interim periods are not necessarily indicative of results for the
entire year.
1. Organization and Business
Brand Scaffold Services, Inc. (a Delaware corporation) and its subsidiaries (the
"Company") are 100% owned by DLJ Brand Holdings, Inc. ("Holdings"). Holdings is
owned 64.4% by Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), 9.2% by Carlisle
Enterprises, L.P. ("Carlisle"), 18.3% by Waste Management Industrial Inc.
("WIS") and 8.1% by the directors, officers and employees of the Company. WIS is
a subsidiary of Waste Management, Inc. ("WMI").
The Company believes it operates in one segment. The Company provides
scaffolding services primarily to refining, chemical, petrochemical and utility
industries, and to a lesser extent, pulp and paper plants, nuclear facilities
and 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 sheet. The
Company maintains a substantial inventory of scaffolding in the United States
and Canada.
2. Summary of Significant Accounting Policies
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 generally accepted
accounting principles 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.
<PAGE> 62
Page 8
3. Debt and Borrowing Arrangements
At September 30, 1999 and December 31, 1998 long term-debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998
--------------------------------
<S> <C> <C>
Revolving Loans................................ $ 3,235 -
Term Loans..................................... 24,750 28,500
10 1/4% Senior Notes........................... 130,000 130,000
Less Current Portion.......................... 8,985 5,000
================================
Long-Term Debt................................. $149,000 $ 153,500
================================
</TABLE>
In 1996, the Company entered into a Credit Agreement, which provided for Term
Loan Commitments under Senior Secured Credit facilities totaling $160 million,
and a Revolving Loan Commitment totaling $30 million. In February 1998, the
Company issued $130 million of 10 1/4% Senior Notes due February 2008. The
offering was underwritten by DLJ. The proceeds of this offering were used to
repay $120 million of the Term Loans outstanding under the Credit Agreement. In
February 1998, the Company amended the Credit Agreement to reduce the total
facility to $60 million. This amendment included revisions to certain covenant
requirements. In addition, in March 1999, the Company amended the Credit
Agreement to allow additional borrowings of $10 million to enable the Company to
make further acquisitions.
4. 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.
5. Comprehensive Income
For the three months ended September 30, 1999 and 1998, comprehensive income
(loss) was $(2.3) million and $(1.9) million, respectively and for the nine
months ended September 30, 1999 and 1998, comprehensive income (loss) was $(1.4)
million and $(2.6) million, respectively.
6. Accounting Standard Not Yet Implemented
In June 1998, the Financial Accounting Standards Board ("FASB") adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
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accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its consolidated financial statements nor has it determined the timing or method
of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
7. Acquisition
In August 1999, the Company acquired 100% of the stock of Scaffold Jax
Corporation ("Scaffold Jax"). Scaffold Jax is a Jacksonville, FL based company
that provides scaffolding services to industrial customers primarily in the
southeastern region of the U.S.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The matters discussed in this Form 10-Q of Brand Scaffold Services, Inc. (the
"Company") contain forward looking statements that involve a number of risks and
uncertainties. A number of factors could cause actual results, performance,
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These factors include, but are not limited to,
the competitive environment in the industrial and commercial scaffolding
industry in general and in the Company's specific market areas; changes in
prevailing interest rates and the availability of and terms of financing to fund
the anticipated growth of the Company's business; inflation; changes in costs of
goods and services; economic conditions in general and in the Company's specific
market areas; demographic changes; changes in or failure to comply with federal,
state and/or local government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant indebtedness
of the Company; labor disturbances; changes in the Company's acquisition and
capital expenditure plans; risks associated with the Year 2000 issue; and other
factors referenced herein. The forward looking statements contained herein
reflect the Company's current beliefs and specific assumptions with respect to
future business decisions and are based on information currently available.
Accordingly, the statements are subject to significant risks, uncertainties and
contingencies, which could cause the Company's actual operating results,
performance or business prospects to differ from those expressed in, or implied
by, these statements.
The following discussion and analysis should be read in conjunction with the
attached condensed financial statements and notes thereto.
Overview
The Company is the largest North American provider of industrial scaffolding
rental, erection, dismantlement and design services. The Company provides
industrial turnkey scaffolding services which facilitate access to tall
structures for maintenance, turnarounds and capital projects, principally in the
refining, petrochemical, chemical, utility and pulp and paper industries. The
Company provides turnkey services, which include equipment rental, labor for the
erection and dismantlement of the scaffolding and scaffolding design services.
The Company also provides scaffolding services to the commercial market
(primarily nonresidential construction) and sells a small amount of scaffolding.
The Company typically provides on-going maintenance services under long-term
contracts; the duration of these contracts is usually three 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
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such facilities. The Company believes the necessity for on-going maintenance and
turnarounds provide a stable, recurring revenue base.
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.
Results of Operations
Revenues - Revenues for the three months ended September 30, 1999 decreased 5.6%
to $44.5 million from $47.1 million for the same period in 1998. Revenues for
the nine month period ended September 30, 1999 increased 6.6% to $157.6 million
from $147.8 million for the same period in 1998. Labor revenue decreased 11.3%
to $30.3 million for the three months ended September 30, 1999 as compared to
the same period in 1998 and increased 6.6% to $114.0 million for the nine month
period ended September 30, 1999 as compared to the same period in 1998. Rental
revenue increased 9.4% to $12.9 million for the third quarter of 1999 compared
to the same period in 1998 and 8.7% to $39.5 million for the nine month period
ended September 30, 1999 as compared to the same period in 1998. The increase in
revenues through the first three quarters of 1999 was primarily attributable to
the acquisitions made in 1998 and 1999.
Gross Profit - Gross profit for the three months ended September 30, 1999
decreased 7.2% to $10.0 million from $10.7 million for the same period in 1998.
Gross profit for the nine month period ended September 30, 1999 increased 1.5%
to $35.3 million from $34.7 million for the same period in 1998. Labor gross
profit (labor revenue less labor cost) decreased 1.9% to $5.4 million for the
three months ended September 30, 1999 as compared to the same period in 1998 and
increased 22.3% to $19.9 million for the nine month period ended September 30,
1999 as compared to the same period in 1998. Gross profit as a percentage of
revenue decreased for the three month period ended September 30, 1999 as
compared to the same period in 1998, decreasing to 22.4% from 22.8%. Gross
profit as a percentage of revenue for the nine month period ended September 30,
1999 decreased to 22.4% from 23.5% for the same period in 1998. This decrease is
being caused by the increase in depreciation expense of operating assets, for
the nine month period ending September 30, 1999, depreciation expense for
operating assets increased $4.9 million as compared to the same period in 1998.
The increased expense is due primarily to the change in the estimated useful
life of scaffolding planks from 7 to 2 years in July of 1998.
Selling and Administrative Expenses - Selling and administrative expenses for
the three months ended September 30, 1999 decreased .7% to $7.5 million from
$7.6 million for the same period in 1998. Selling and administrative expenses
for the nine month period ended September 30, 1999 increased 18.6% to $23.6
million from $19.9 million for the same period in 1998. Selling and
administrative expenses as a percentage of revenue for the three month period
ended September 30, 1999 increased to 16.9% from 16.1% for the same period in
1998. Selling and administrative expenses as a percentage of revenue for the
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nine month period ended September 30, 1999 increased to 15.0% from 13.4% for the
same period in 1998. This increase in expense was primarily attributable to
increased salaries, related payroll taxes and benefit costs and an increase in
telecommunications expense. Additionally, companies acquired in late 1998 and
early 1999 have a higher selling and administrative cost structure than existing
divisions, causing the expense to increase as a percent of revenue.
Operating Income - As a result of the above, operating income for the three
months ended September 30, 1999 decreased 22.8% to $2.4 million from $3.1
million for the same period in 1998 and decreased 21.3% for the nine months
ended September 30, 1999 to $11.7 million from $14.9 million for the same period
in 1998.
Interest Expense - Interest expense for the three months ended September 30,
1999 increased 1.5% to $4.4 million from $4.3 million for the same period in
1998. Interest expense for the nine month period ended September 30, 1999
increased 6.0% to $13.5 million from $12.7 million for the same period in 1998.
The increase is due to a higher weighted average interest rate on all
outstanding debt for the nine month period and a higher average outstanding debt
balance. For the quarter ended September 30, 1999 and 1998, the weighted average
interest rate was 9.88% and 9.92%, respectively and for the first nine months of
1999 and 1998, the weighted average interest rate was 9.84% and 9.77%,
respectively.
Extraordinary Items (net of tax) - Extraordinary items for the nine month period
ended September 30, 1999 and 1998 were $0 and $4.3 million respectively. This
extraordinary charge represents the write off of the pro rata share of deferred
financing costs related to the portion of the Term Loans repaid with the
proceeds from the issuance of the 10 1/4% Senior notes in February, 1998.
Net Income (Loss) - Net (loss) for the three months ended September 30, 1999 and
1998 was $(2.0) million and $(1.1) million respectively, and increased to $(1.7)
million from $(2.0) million for the nine month period ended September 30, 1999
and 1998. The net loss in 1998 is attributable to the extraordinary charge
discussed above. The net loss in 1999 is attributable to the increase in
depreciation expense as discussed earlier.
Liquidity and Capital Resources
The Company has historically utilized internal cash flow from operations and
borrowings under the Bank Facility to fund its operations, capital expenditures,
and working capital requirements. As of September 30, 1999 and 1998, the Company
had working capital of $2.6 million and $13.2 million, respectively and cash of
$1.2 million and $5.1 million, respectively. For the nine months ended September
30, 1999 and 1998 the Company provided cash of $17.2 million and $15.7 million
from operating activities.
One of the Company's major uses of cash is capital expenditures. The Company's
capital expenditure requirements are comprised of maintenance and expansion
expenditures. The Company's maintenance capital expenditure requirements are
generally for scaffolding planks and other items used in the business, such as
trucks. Expansion capital expenditures are for new
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scaffolding, are discretionary and vary annually based on the Company's level of
scaffolding rental activity and management's growth expectations. During the
nine months ended September 30, 1999, total capital expenditures were $18.3
million of which expansion capital expenditures accounted for $10.4 million.
The other major uses of cash were the payment of interest on long term debt and
principal on term loans. For the nine months ended September 30, 1999 interest
payments were $15.7 million and principal payments were $3.8 million.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions.
The Company recognizes the importance of the Year 2000 problem and has completed
the first phase of identifying all mission critical information technology
("IT") and non-IT systems that are affected. These systems include all computer
workstations, telephone/PBX systems, computer operating systems and accounting,
data processing and other miscellaneous systems. Various systems, including the
core billing/rental systems, are Year 2000 compliant. The Company expects all
other systems, including key financial systems, to be Year 2000 compliant by
October 1999.
The Company is not presently aware of any Year 2000 issues encountered by its
business partners that would materially impact the Company's operations. There
can be no assurance that the Company will not experience operational
difficulties as a result of Year 2000 issues either arising out of internal
systems or caused by its business partners which may have a material adverse
effect on its business operations.
The Company estimates that the total cost for executing the Year 2000 plan will
not exceed $50,000 and estimates that the Year 2000 plan for its financial
systems will be completed by October 1999. In planning for the most likely worst
case scenario, all major elements in the Company's comprehensive program have
been addressed. The Company's current contingency plan will be to replace only
those individual financial system applications that would not be Year 2000
compliant by October 1999. No known event, trend or uncertainty is likely to
have a material adverse impact on the Company's results of operations, liquidity
or financial condition.
The Company's Year 2000 compliance program is divided into seven major projects
as shown in the table below:
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<TABLE>
<CAPTION>
Percent
Complete
as of
September
Year 2000 Project Time Frame 30, 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Review IT system infrastructure 05/98 - 07/98 100
Review non-IT systems 06/98 - 08/98 100
Upgrade non-IT systems 07/98 - 10/99 40
Upgrade PBX/phone systems 11/98 - 10/99 75
PC workstation review and upgrade 07/98 - 10/99 75
Update core business distributed systems 04/98 - 07/98 100
Update core business centralized systems 07/98 - 10/99 90
</TABLE>
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PART II - OTHER INFORMATION
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
27. Financial Data Schedule
(b) No reports were filed on Form 8-K during the period for which this report
is filed.
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 SCAFFOLD SERVICES, INC.
Date: November 4, 1999 /s/ John M. Monter
------------------------------------
John M. Monter
Chief Executive Officer, President
Date: November 4, 1999 /s/ Ian Alexander
------------------------------------
Ian Alexander
Chief Financial Officer,
Vice President, Finance
