Document/Exhibit Description Pages Size
1: 10-K Annual Report 59 358K
2: EX-4.2 Letter From the Company to the S.E.C. 1 8K
3: EX-10.24 3rd Amended & Restated Credit Agree. Dtd. 03/11/97 36 39K
4: EX-10.25 1st Amended to 3rd Amended & Restated Cr Agree. 116 401K
2/2/98
5: EX-10.26 Consulting Agreement Dated 12/03/97 3 16K
6: EX-10.27 Consulting Agreement Dated 06/30/97 4 15K
7: EX-10.28 Consulting Agreement Dated 10/01/97 2 12K
8: EX-10.29 Labor Agree Between Abt's Canexel Hardboard 76 190K
9: EX-10.30 Labor Agree. Between Abt's Acton Plant 39 105K
10: EX-10.31 Labor Agreement Between Abt's Alpina Plant 31 116K
11: EX-11.1 Statement Re Computation of Per Share Earnings 1 7K
12: EX-21.1 List of Subsidiaries of the Company 1 6K
13: EX-27.1 Financial Data Schedule 2 9K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
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 0-21856
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ABT BUILDING PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3684348
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
ONE NEENAH CENTER, NEENAH, WISCONSIN 54956
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's telephone number, including area code: (920) 751-8611
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH
None REGISTERED:
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
Common Stock, par value $.01 per share
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 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 the 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. [_]
On March 18, 1998 the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, using the closing
price of the Registrant's Common Stock on such date, was $89,216,735.
The number of shares of the Registrant's common stock outstanding as of March
18, 1998 was 10,659,160.
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DOCUMENTS INCORPORATED BY REFERENCE
IDENTIFICATION OF DOCUMENTS PART INTO WHICH INCORPORATED
Proxy Statement for Annual Meeting of Part III--Items 10, 11, 12 and 13
Shareholder to be held on May 5, 1998
ABT BUILDING PRODUCTS CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
[Download Table]
ITEM NO. DESCRIPTION PAGE
-------- ----------- ----
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 12
Item 3. Legal Proceedings............................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder 18
Matters......................................................
Item 6. Selected Financial Data...................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition 20
and Results of Operation ....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 25
Item 8. Financial Statements and Supplementary Data.................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting 48
and Financial Disclosure ....................................
PART III
Item 10. Directors and Executive Officers of the Registrant........... 48
Item 11. Executive Compensation....................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and 48
Management ..................................................
Item 13. Certain Relationships and Related Transactions............... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 49
8-K..........................................................
PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest manufacturer of exterior hardboard siding in the
United States and a leading manufacturer of plastic resin and fiber cement
specialty building products. The Company believes its products, marketed under
the "ABTco," "ABT Canada Limited" and "Canexel" trade names, provide
distinctive design, performance or cost advantages, as compared to products
made from solid wood, brick, stucco and other natural materials. The Company's
product offering is extensive and is targeted for use in most segments of the
building materials market, including new residential construction, repair and
remodeling and a variety of industrial applications. The Company's products
are sold in North America and certain international markets through four
distribution channels: wholesale distributors, home center retailers,
manufactured housing builders and industrial fabricators.
In implementing its production and distribution strategy, the Company has
targeted certain markets, including the vinyl and fiber cement siding markets
that have historically exhibited relatively higher rates of growth, and
focused on certain higher growth distribution channels, such as the home
center retailers, that desire broad product lines and "one-stop" benefits
provided by suppliers such as the Company. In order to remain responsive to
the changing needs of its target markets and improve overall production
performance, the Company has invested approximately $132 million in its
manufacturing facilities from January 1, 1995 to December 31, 1997. Recent
investments have included the completion of a new $61 million fiber cement
siding manufacturing facility in Roaring River, North Carolina, and
approximately $12 million for the retrofitting of a vinyl siding manufacturing
facility in Holly Springs, Mississippi. As a result of its investments, the
Company's manufacturing processes and facilities incorporate state-of-the-art
technology that provide it with the flexibility to produce a variety of
products, enhance the introduction of new products and adjust its product mix
in response to changing market conditions.
The Company has two principal product groups, Exterior Products and
Specialty Products:
[Enlarge/Download Table]
EXTERIOR PRODUCTS SPECIALTY PRODUCTS
. Exterior hardboard siding, utility panels . Interior hardboard products, including
and trimboard (collectively, "Exterior tileboard, prefinished paneling,
Hardboard Siding") doorskins and hardboard substrate
(collectively, "Interior Hardboard")
. Exterior vinyl siding and trim . Decorative prefinished mouldings and
accessories, decorative plastic shutters, other plastic products (collectively,
vents and building product accessories "Interior Plastics")
(collectively, "Exterior Plastics")
. Fiber cement siding products ("Fiber
Cement Siding")
The Company was formed in 1992 by Kohlberg & Co. and George T. Brophy, the
Company's Chairman, President and Chief Executive Officer, in order to acquire
a substantial portion of its current domestic operations from Abitibi-Price
Corporation ("APC") relating to APC's Building Products Division (the
"Acquisition"). In July 1993, the Company consummated an initial public
offering of its shares of common stock. During 1994 and 1995, the Company
completed three acquisitions to improve its market presence and product
diversity. In 1994, the Company acquired a division of Avenor, Inc, a
manufacturer of Exterior Hardboard Siding and Interior Hardboard and in 1995,
the Company acquired the assets of KenTech Plastics Inc., a manufacturer of
shutters and related products, and the vinyl siding operations of EMCO Ltd. In
1995, the Company approved the construction of a $61 million fiber cement
siding manufacturing facility with production commencing in late June 1997. In
1997, the Company invested approximately $12 million in the retrofitting of a
vinyl siding manufacturing facility in Holly Springs, Mississippi.
The Company is a Delaware corporation with principal executive offices
located at One Neenah Center, Suite 600, Neenah, Wisconsin 54956, telephone
number (920) 751-8611.
1
INDUSTRY OVERVIEW
The residential building products industry depends primarily on the level of
new home construction and the repair and remodeling of existing homes. The
level of activity is generally a function of interest rates, inflation,
unemployment, demographic trends, gross domestic product growth and consumer
confidence. Demand for the Company's products is affected by residential
housing starts and existing home sales, the age and size of the housing stock,
and overall home improvement expenditures. According to the National
Association of Home Builders, domestic housing starts declined from
approximately 1.8 million in 1986 to approximately 1.0 million in 1991,
improving to approximately 1.5 million in 1997. Domestic housing starts have
fluctuated between 1.3 million and 1.5 million from 1993 to 1997. Also
according to the National Association of Home Builders, residential remodeling
expenditures have increased over the same period, from $91 billion in 1986 to
a high of approximately $114 billion in 1996 and decreased to $110 billion in
1997.
Residential building products are distributed through both wholesale and
retail channels. The wholesale channel of distribution includes a variety of
specialized and broad-line wholesale distributors and dealers focused
primarily on the supply of products for use by professional builders and
contractors. Within the retail distribution channel, one of the most recent
developments is the continuing growth and consolidation among the large, well-
positioned retailers catering to the do-it-yourself and repair and remodeling
markets. Such retailers typically seek to develop and maintain relationships
with building product manufacturers that provide a broad line of products,
high levels of service and the ability to grow with their needs.
BUSINESS STRENGTHS AND STRATEGY
By capitalizing upon senior management's expertise in manufacturing, sales,
marketing and customer service in the specialty building products industry,
the Company has developed a business strategy designed to improve its
competitive position while increasing net sales and operating income. The
Company's business strategy emphasizes the following competitive strengths:
Broad and Diversified Line of Exterior Products.
The Company plans to continue its emphasis on product line breadth and
diversity to take advantage of new sales opportunities, to maximize
flexibility in dealing with shifts in market demand and to expand its ability
to provide "one-stop" service to its customers. The Company's extensive
product offering and development capabilities provide it with what it believes
are competitive advantages, including (i) an ability to access new markets,
such as the fiber cement and vinyl siding product markets, (ii) an ability to
modify existing product lines to respond to changing market conditions such as
its recent emphasis on the utility panels and TrimBoard products within its
traditional Exterior Hardboard Siding products category, and (iii) enhanced
selling opportunities in growing channels of distribution, including home
center retailers.
Leading Market Shares in Selected Specialty Product Categories.
The Company intends to maintain a leading market share position in the
various Specialty Product categories in which it competes in the United
States. The Company believes that it is currently a leading manufacturer in
tileboard, plastic moulding and lightly embossed doorskins in the United
States. The Company believes that Specialty Products represent a niche market
with margins that are relatively higher than those for its Exterior Products.
The Company believes that its flexible manufacturing facilities and its broad
product lines provide it with competitive advantages in this market.
Established, National Distribution Through Multiple Channels.
The Company seeks to maintain a balanced approach to national distribution
through both wholesale and retail channels. The Company's broad network of
wholesale distributors and dealers primarily serves professional customers
while its relationship with well-positioned home center retailers, such as The
Home Depot, Inc.,
2
Lowe's Companies, Inc. and Menard, Inc., provides primary distribution to the
professional do-it-yourself repair and remodeling markets. The Company
believes that the expected continuing growth and consolidation of the home
improvement retail distribution channel, combined with the Company's product
and marketing strategies, provide the Company with an opportunity to increase
sales. The Company's sales to domestic home center retailers increased from
$78 million in 1996 to $111 million in 1997, a 42% increase. In addition, the
Company believes that it can leverage its relationship with this established
distribution network to support its new product development and marketing
strategy.
Flexible State-of-the-Art Manufacturing Facilities.
The Company plans to continue to invest in its manufacturing facilities,
incorporating state-of-the-art technology, to provide it with the flexibility
to produce a wide range of products for various applications. This flexibility
enhances the Company's new product development efforts, improves capacity
utilization and allows the Company to adjust its product mix to meet customer
needs and respond to market opportunities. For example, the Company's coating
capabilities allow it to use a variety of substrate materials to produce
specialty products, such as tileboard, which generally command higher prices
than less differentiated products. Similarly, the Company's new fiber cement
production facility was specifically designed to enable the Company to
manufacture a variety of exterior and specialty products in addition to
siding.
New Product Development and Differentiation.
The Company's ongoing product development efforts and focus on product
differentiation emphasize continuous enhancements in quality, performance and
style, all while focusing on pricing products competitively. Through extensive
market research, customer interviews and ongoing product research and
development, the Company has successfully introduced numerous new products
during the last five years. These products have spanned the Company's existing
product categories and include new entries in the Company's (i) Interior
Plastics category, including UltraOak, Affinity and Prime Mould, which
accounted for 28% of sales in this category in 1997, (ii) Exterior Hardboard
Siding category, including TrimBoard, which accounted for 10% of sales in this
category in 1997, (iii) Fiber Cement Siding category, (iv) Exterior Plastics
category, with the introduction of the line of vinyl siding "Northern Star,"
and varieties of color through polypropylene shutters, and (v) Interior
Hardboard category, including a number of newly designed tileboard products.
From time to time, the Company has made, and evaluates acquisitions that
complement its building product lines. The Company will continue to review
acquisition opportunities consistent with its core competencies and business
strategy in specialty building products.
PRODUCTS
Management believes that its products provide distinctive design,
performance or cost advantages as compared to products made from solid wood,
brick, stucco or other natural products. Management also believes that the
market for its principal products is favorably affected by factors which
adversely affect the availability, quality or cost of competing products. Such
factors include the declining availability of old-growth timber, growing
environmental pressures to preserve wildlife habitats and increasing
restrictions on clear cutting of timber.
The Company implements its product development strategy through teams which
focus on different segments of each market including: manufacturing,
marketing, sales forces and the end customer. The teams observe color and
design trends in the marketplace and discuss preferences of the consumer
through direct and continued interaction with home center retailers, wholesale
distributors and other customers. The Company's research and development
departments and product managers review the research and develop products
prototypes in connection with the Company's manufacturing and sales forces.
Such products are subsequently subject to a variety of tests, including
strength and durability, before being fully distributed. Coating, embossing
and other existing manufacturing techniques are among the techniques used by
the Company to develop new
3
products. The Company has also developed new technology using paper overlays
and laminates, as well as new coatings in its new product development process.
Management believes that its expertise in new product development and sales
and marketing provides the Company with a competitive advantage.
The Company's Exterior Hardboard Siding products are sold under warranties
which are standard in the industry. Such warranties typically provide 25 years
of limited warranty against defects in material, delamination, checking,
splitting, cracking and chipping. The Company's vinyl siding products are also
sold under warranties which are standard in the vinyl siding industry. Such
warranties typically provide for up to a lifetime warranty against defects in
manufacturing, materials and color fade. Pursuant to the Acquisition of the
Building Products Division of APC, the Company assumed responsibility for a
portion of the liability for warranty claims based on products manufactured by
APC prior to the Acquisition.
Exterior Products
Exterior Products consists of exterior hardboard siding and trimboard,
utility panels, exterior vinyl siding and trim accessories, decorative plastic
shutters, vents and building product accessories and fiber cement siding
products. Sales of Exterior Products accounted for 61% of the Company's net
sales for the year ended December 31, 1997.
Exterior Hardboard Siding. Sales of Exterior Hardboard Siding accounted for
35% of the Company's net sales for the year ended December 31, 1997. The
Company manufactures approximately 100 different Exterior Hardboard Siding
products which fall into two broad categories, lap siding and panel siding.
Lap siding is installed with the bottom edge overlapping the top edge of
adjacent segments, while panel siding is installed flush to adjacent edges.
These products are either primed or prefinished in a wide variety of surfaces,
including stucco, fir, cedar and other simulated woodgrains.
During the past five years, primarily in response to continued demand for
Exterior Hardboard Siding products, the Company increased the annual
production capacity at its Roaring River siding facility from approximately
200 million surface feet to approximately 270 million surface feet as of
December 31, 1997. The increase in capacity was attained through a combination
of improvements in the manufacturing process and a capital investment of
approximately $4.0 million during 1993 and 1994. This increased Exterior
Hardboard Siding production capacity has enabled the Company to broaden its
product distribution and arrange with certain customers to distribute its
Exterior Hardboard Siding products on a national basis. In addition, increased
production capacity has allowed the Company the flexibility to adjust its
strategy in response to increasing price pressures on Exterior Hardboard
Siding products and Fiber Cement Siding products by shifting its Exterior
Hardboard Siding product mix from the 7/16p siding product into trimboard and
utility panels. The introduction in 1995 of the Company's trimboard products,
an alternative to solid wood trim used on the exterior of homes which
accounted for 10% of Exterior Hardboard sales in 1997, is expected to enhance
the Company's long-term utilization of production capacity.
The Company's Exterior Hardboard Siding products are sold under warranties
which are standard in the industry. Such warranties typically provide 25 years
of limited warranty against defects in material, delamination, checking,
splitting, cracking and chipping. Pursuant to the Acquisition, the Company
assumed responsibility for a portion of the liability for warranty claims
based on products manufactured by APC prior to the Acquisition.
Exterior Plastics. Vinyl siding sales represented 19% of the Company's net
sales for the year ended December 31, 1997. The Company manufactures its
woodgrain vinyl (polyvinyl chloride) siding in four different thicknesses
ranging from 37 to 44 millimeters. These products are offered in up to 13
different colors and 9
4
different profiles. In addition to vinyl siding the Company produces a
complete line of soffit, fascia and vinyl siding accessories necessary for the
installation of the vinyl siding. The Company's vinyl siding products are also
sold under warranties which are standard in the vinyl siding industry. Such
warranties typically provide for up to a lifetime warranty against defects in
manufacturing, materials and color fade.
Prior to 1995, the Company was a reseller of injection molded shutters
manufactured by outside sources. In April 1995, the Company purchased a
manufacturer of injection molded and thermoformed plastic shutters and other
plastic molded products. Shutter product sales represented 7% of the Company's
net sales for the year ended December 31, 1997. Shutter products are
manufactured from various thermoplastic resins, primarily utilizing an
injection molded process and to a lesser extent a thermoforming process. The
Company's product line consists of raised panel and louvered shutters, which
have a woodgrain texture and are available in a wide variety of colors and
sizes. The product line also includes gable and dryer vents, flush mounted
blocks for use with electrical outlets and lighting and other building
products. These products complement the Company's other exterior siding
product lines and are sold through the same distribution channels.
Fiber Cement Siding. In response to the relatively rapid growth in demand
for fiber cement building products, the Company began construction of a new
Fiber Cement Siding facility in Roaring River, NC during 1995. Production
began in late June 1997, with sales for the six months ended December 31, 1997
totaling $4.8 million. The Company believes that the growth in demand for
fiber cement products has been due to the various properties of the product
that make it superior from an appearance, durability, maintenance, and safety
standpoint, as compared to alternative building products. These properties
include superior resistance to the damaging effects of weather, ultra violet
rays and wood boring insects. The cement substrate used in the manufacture of
this product allows a more durable bond between layers of the product's
construction, resulting in greater surface fidelity, and superior wood grain
and stucco patterns. These products also have a Class 1 fire rating which
means they do not burn, produce virtually no smoke and are thus inherently
safer than building products constructed entirely of wood. The Company's fiber
cement products, as do its exterior hardboard products generally, fall into
two categories, lap siding and panel siding. These products are either primed
or unprimed in a variety of surfaces, including stucco, fir, cedar and other
simulated woodgrains. The Company's fiber cement siding products are sold
under warranties which are standard in the industry. Such warranties typically
provide 50 years of limited warranty against defects in manufacturing and
materials.
Specialty Products
Specialty Products consists of interior hardboard products, including
tileboard, prefinished paneling, doorskins and hardboard substrate, decorative
prefinished mouldings and other plastic products. Sales of Specialty Products
accounted for 39% of the Company's net sales for the year ended December 31,
1997.
Interior Hardboard. Sales of Interior Hardboard accounted for 29% of the
Company's net sales for the year ended December 31, 1997. The Company's
Interior Hardboard product group has three general categories, prefinished
products, doorskins and industrial hardboard.
Prefinished products consists of two basic types: (i) tileboard, including
both embossed and flat melamine surfaces which substitute for ceramic tile in
kitchens, bathrooms and other high-moisture areas; and (ii) paneling,
including embossed woodgrain and stone designs, wet print designs and vinyl
and paper overlays. The Company believes that the main advantages of its
prefinished products as compared to ceramic tile, natural wood panels and
wallpaper are lower installed cost, superior design capabilities and ease of
application.
Doorskin products are manufactured from engineered hardwood fiber and are
50% denser than natural wood. The Company's product line consists of two
brands: Beauport door panels, which are embossed with the texture of oak and
prefinished in numerous natural wood colors, and Newport door panels, which
are embossed to replicate the look and design of a traditional 6-panel
colonial door.
The Company's industrial hardboard is a high quality substrate that has a
smooth surface on both sides. The Company sells industrial hardboard in an
unfinished state to various fabricators who use hardboard for a variety of
applications, such as the production of furniture components, displays and
store fixtures. The Company also sells unfinished hardboard to other companies
who apply finishing techniques to produce interior building products similar
to those of the Company.
5
Interior Plastics. Sales of Interior Plastics products represented 10% of
the Company's net sales for the year ended December 31, 1997. The Company's
plastic moulding products consist primarily of prefinished polystyrene
mouldings and trim which are produced in a wide variety of profiles and
lengths and finished in a variety of colors, woodgrain prints and paper
overlays. The Company also produces a line of rigid polyvinyl chloride ("PVC")
mouldings for use with decorative plastic and designer paneling.
The Company's prefinished mouldings and trim are designed in various
patterns and finishes which match or complement the Company's prefinished
Interior Hardboard products, as well as a wide variety of other patterns and
finishes. Plastic moulding products compete against both finished and
unfinished wood mouldings, and are considered to have the advantages of
uniform appearance, consistent quality and ease of installation.
MARKETS AND DISTRIBUTION
The Company's products are sold throughout the United States, Canada and
internationally in the repair and remodeling, new residential construction and
industrial markets. The Company services these markets through four
distribution channels: distributors, home center retailers, manufactured
housing builders and industrial fabricators. The Company's largest customer is
Menard, Inc. with net sales aggregating approximately 11% of the Company's
consolidated revenues. The Company's products are generally sold under the
"ABTco," "ABT Canada Limited" and "Canexel" tradenames.
The Company maintains two separate sales and marketing organizations. The
Exterior Products Division and the Specialty Products Division sales and
marketing organization consists of four functional areas: sales, customer
service, product management and product support. These areas work in close
cooperation with one another in an effort to maximize the Company's net sales
and offer superior customer service. The Company's general sales and marketing
strategy is to distinguish itself from the competition by offering superior
customer service. The major components of the strategy are to offer the
customer superior support through the sales force and customer service forces
as well as providing the customer with innovative products through continued
market research and new product development.
Sales Force
Both the Exterior and Specialty Products divisions maintain a dedicated
sales force to service the Company's channels of distribution. Home center
retailers and wholesale distributors and dealers are serviced by a combination
of regional sales representatives and national account managers who are
responsible for maintaining existing customer relationships and developing new
business. The Company's manufactured housing, industrial and international
customers are covered by specialty sales forces also dedicated to the Exterior
Products and Specialty Products divisions. All of these sales representatives
work closely with customers to develop sales programs, point of sale displays
and new product ideas.
Customer Service
The customer service department is responsible for providing support to the
sales force as well as working directly with the customer. The customer
service department accepts customer orders, advises customers of order status,
handles order changes, returns and promotional programs and provides other
administrative support functions. Each customer service representative works
with a regional sales representative, visits customers, attends trade shows
and maintains relationships with the customers. The Company maintains a
Specialty Products customer service department in Troy, Michigan and an
Exterior Products customer service department in Charlotte, North Carolina.
Product Management
Product managers work closely with each division's sales force and the
manufacturing locations. The product manager is responsible for the
development of new products, the establishment of promotional programs and the
constant review of division product offerings.
6
Product Support
The Company's product support includes quality assurance departments at each
manufacturing facility and two research and development departments. Each
manufacturing facility maintains an engineering and quality control staff
responsible for performing a variety of tests including strength and
durability tests in order to ensure the continued quality of the product. The
Company has a dedicated research and development department at each division
which focuses on new product development and continued manufacturing process
improvements.
Exterior Products Market
Exterior Hardboard Siding. The new construction market has accounted for
approximately 70% of the Company's Exterior Hardboard Siding sales with the
repair and remodeling market representing the balance in 1997. Exterior
Hardboard Siding has less appeal to the repair and remodeling market where it
must compete with aluminum, vinyl and other products that can be placed on top
of existing exterior cladding and thus are easier to install. The Company's
primary marketing emphasis remains on the southeastern and central states, the
regions where demand for Exterior Hardboard Siding is the highest and where
new residential construction has exceeded national averages in recent years.
The largest end users of hardboard siding are builders and contractors. To
service these markets, the Company primarily uses three channels of
distribution: (i) wholesale distributors selling to retailers and contractors,
(ii) direct sales to manufactured housing builders, and (iii) home center
retailers specializing in direct sales to builders and contractors. These
channels provide the Company with a broad customer base for its Exterior
Hardboard Siding products, with no single customer accounting for more than
10% of 1997 Exterior Hardboard Siding sales. The top ten customers represented
67% of the Company's 1997 Exterior Hardboard Siding sales.
Exterior Plastics. Vinyl siding sales in the United States are primarily for
use in the repair and remodeling markets. The Company intends to continue to
develop the United States market utilizing its existing distribution channels
which include (i) distributors selling to retailers and contractors, (ii) home
center retailers specializing in direct sales to builders and contractors, and
(iii) direct sales to manufactured housing builders. In Canada, the Company's
primary marketing emphasis will be on maintaining its market share in the new
residential construction market with opportunities to expand the use of vinyl
siding products in the repair and remodeling market. To service these markets,
the Company primarily uses two channels of distribution: (i) wholesale
distributors selling to retailers and contractors and (ii) home center
retailers specializing in direct sales to builders and contractors.
No single customer accounted for more than 36% of 1997 vinyl siding sales
while the top 10 customers represented 68% of the Company's 1997 vinyl siding
sales.
Fiber Cement Siding. The Company recently completed construction of its
Fiber Cement Siding facility. Production began in late June 1997 with sales
for the six months ended December 31, 1997 totaling $4.8 million.
Historically, the new construction market has accounted for a significant
percentage of Fiber Cement Siding sales with the repair and remodeling market
representing the balance. Fiber Cement Siding has less appeal to the repair
and remodeling market where it must compete with aluminum, vinyl and other
products that can be placed on top of existing exterior cladding and thus are
easier to install.
The largest end users of Fiber Cement Siding are builders and contractors.
To service these markets, the Company leverages its existing relationship with
the broad and established network for the distribution of its Exterior
Hardboard Siding products: (i) wholesale distributors selling to retailers and
contractors, (ii) direct sales to manufactured housing builders and (iii) home
center retailers specializing in direct sales to builders and contractors.
This distribution strategy provides the Company with a broad customer base for
its Fiber Cement Siding products.
Specialty Products
Interior Hardboard. Prefinished products are used primarily in the repair
and remodeling market. To a lesser extent, prefinished products are also sold
for various applications in new residential and commercial
7
construction. The primary point of sale to the end user of prefinished
paneling products is the home center retailer or retail lumber dealer. The
Company distributes its prefinished products through distributors and directly
to home center retailers. The Company sells its door panel products to
interior door manufacturers in North America and internationally. No single
customer accounted for more than 16% of 1997 Interior Hardboard sales while
the top ten customers represented 54% of the Company's 1997 Interior Hardboard
sales.
Interior Plastics. The major market for the Company's prefinished mouldings
is the repair and remodeling market, where mouldings are used to complement
prefinished interior panels, wallpaper and painted walls. Certain of the
Company's new plastic moulding products are designed to appeal more directly
to the new residential construction market. The Company markets its plastic
moulding products through wholesale distributors for resale to retail lumber
dealers and other outlets, with the balance of sales made directly to home
center retailers. No single customer accounted for more than 21% of 1997
plastic moulding sales while the top ten customers represented 65% of the
Company's 1997 plastic moulding sales.
MANUFACTURING PROCESSES AND OPERATIONS
The Company's manufacturing processes and facilities use state-of-the art
technology which provides the Company with the flexibility to produce a wide
range of products for various applications and adjust its product mix
continuously to meet customer needs and respond to market changes.
Exterior Hardboard Siding. The Company utilizes the smooth one side ("S1S")
wet manufacturing process in the production of Exterior Hardboard Siding at
its Roaring River, North Carolina, and East River, Nova Scotia facilities. The
S1S process begins with wood waste or small logs that are converted to chips
and then reduced to wood fiber through a mechanical pulping process. After
these wood fibers are formed into mats on a continuous forming machine, the
wet fiber mats are loaded into a press and are simultaneously dried and
pressed into hardboard panels through a combination of high pressure and
temperatures ranging from approximately 400 to 415 degrees Fahrenheit. The
hardboard produced through this process is free of knots and other
imperfections of natural wood, has higher density and is less moisture
permeable than many natural woods. The S1S process utilizes embossed press
plates to impart simulated woodgrains and other decorative patterns to the
panels. At the Roaring River facility, the Company's unique "Fusion Finish"
process incorporates a thin paper overlay on the surface of the fiber mats,
and the pressed panels are baked in an oven to increase strength properties
and then rehumidified to a stable moisture condition. The unfinished hardboard
is cut to final dimensions for lap or panel siding products and the surfaces
are either factory primed or prefinished. After the finishing process, the
products are inspected and packaged for shipment to customers.
Exterior Plastics. The Company utilizes a modified extrusion process, known
as co-extrusion, to produce its vinyl siding products at its Acton, Ontario
facility. In the co-extrusion process, two different thermoplastic resin
compound formulations or mixtures are extruded through separate extrusion
machines and then joined as a viscous melt in a co-extrusion die. The die
forms the melt into a continuous profile and is then embossed, cooled and
sized using water and vacuum tools. Further processing equipment notches,
perforates and shears the finished product. The primary ingredient used in the
production of vinyl siding is PVC. The finished products are inspected and
packaged for shipment to customers.
The Company manufactures a majority of its shutter products using an
injection moulding process at its Hopkinsville, Kentucky facility. This
process transforms thermoplastic resin pellets (primarily polystyrene,
polypropylene or polyethylene) through the application of heat into a flowable
state. This melt is then injected under pressure into a steel mold, allowed to
cool and subsequently removed from the mold. This phase or cycle of the
process can last from a few seconds to several minutes to produce a single
part. The desired color of these
8
products is achieved by adding a colorant directly into the thermoplastic
resin or by subsequently painting the molded part on a state-of-the-art
paintline. The finished product is inspected and packaged for shipment to
customers.
Fiber Cement Siding. The Company utilizes the Hatschek process which blends
cement, silica sand, clay and cellulose fiber and deposits a thin film of the
mixture onto a moving felt. Upon reaching the desired thickness it is cut into
sheets and transferred to the piling station. The piling station intersperses
the sheets of fiber cement with molds. The product is then transferred to a
press which serves multiple purposes. The pressure on the molds embosses the
decorative wood grain on the surface of the fiber cement and the press
improves bonding between the cement and wood fibers. The pressed substrate is
then sent through a pre-cure process where heat improves the physical strength
and steam aides in curing. The final stage of the manufacturing process is the
autoclave where the sheets are cured under pressure at 350 degrees Fahrenheit.
This process results in a product that offers added durability with less
maintenance, while replicating the sharp detail of natural materials, such as
wood and slate. This combination has particular appeal where siding must
withstand extreme temperatures, wood-eating insects or high humidity.
Interior Hardboard. The Company utilizes the smooth two sides ("S2S")
manufacturing process in the production of Interior Hardboard products at its
Alpena, Michigan facility and the S1S process to produce Interior Hardboard at
its Nova Scotia facility. The S2S process is similar to the S1S process
through the mat forming stage. While the S1S process directly links the
forming step and the pressing operation, the S2S process has an intermediate
step in which the fiber mats are dried prior to pressing. The intermediate
step is required due to the additional production complexities of
manufacturing a panel which is smooth on two sides. The pressing operations
are similar to S1S, as both processes use embossed press plates to impart
simulated woodgrains (including the traditional colonial 6-panel and flat-door
panel designs) and other decorative patterns to the hardboard panel. Finishing
the hardboard panels into decorative tileboard, woodgrain paneling and
doorskin products is accomplished in a coating operation where multiple coats
of paint or decorative printing inks are applied to the panel and cured in
infrared ovens. Following the coating operation, the products are inspected
and packaged for shipment to customers.
Interior Plastics. The Company employs a specialized continuous extrusion
process to produce a substantial portion of its plastic moulding products.
This process involves the blending and melting of polystyrene resin with
various other ingredients under high temperatures. Next, a physical blowing or
foaming agent is introduced into the mixture as it is put through a tandem
extruder and drawn out and forced through various dies which produce the
moulding shapes and profiles. These profiles are then finished using a variety
of woodgrain laminates, paints or prints to achieve the desired colors and
wood-like appearance. Following the finishing operation, the products are
inspected and packaged for shipment to customers. The Company's Interior
Plastics products have the advantages of uniform appearance, consistent
quality and ease of installation.
COMPETITION
The building products industry is highly competitive and the Company
competes against other manufacturers of similar wood substitute products, as
well as numerous producers of natural wood, ceramic tile and other building
products. Some of the Company's competitors are substantially larger and have
greater resources than the Company. The Company believes that it is the
largest manufacturer of exterior hardboard siding and that it is a leading
manufacturer of tileboard, plastic moulding and trimboard in the United
States.
The demand for the Company's Exterior Hardboard Siding products is affected
by the level of new residential construction which is, in turn, affected by
general economic conditions. Although new construction has remained at below
mid-1980s levels, the Company has generally maintained its sales volume as a
result of the continuing reduced availability and increased costs of certain
natural wood products and levels of new construction activity in the Company's
principal geographic markets which exceeded the national average. In the
9
exterior siding industry, the Company competes in the new residential
construction market with manufacturers of natural wood siding and other wood
substitute siding products, such as brick, stucco, fiber cement and other non-
wood exterior products. In the home improvement, repair and remodeling market,
the principal competition for exterior siding is provided by manufacturers of
aluminum and other vinyl siding.
In the exterior siding industry, the Company competes in the new residential
construction market with manufacturers of natural wood siding and other wood
substitute siding products, such as brick, stucco, fiber cement and other non-
wood exterior products. In the home improvement, repair and remodeling market,
the principal competition for exterior siding is provided by manufacturers of
aluminum and other vinyl siding.
The Company's principal competitors in the Interior Hardboard market include
large forest products companies and other producers or importers of plywood
and natural wood paneling, as well as other manufacturers of prefinished
hardboard paneling. In the paneling market, the Company competes against
manufacturers of ceramic tile, plastic and other products. The Company's
industrial hardboard operations are subject to competition from other domestic
S2S hardboard manufacturers, as well as a large number of producers and
importers of various substitute materials.
The plastic moldings market has two principal domestic manufacturers, one of
which is the Company, and several smaller producers. Decorative plastic
moulding products are substitutes for and compete against a wide range of
natural wood products produced by numerous manufacturers, including
prefinished and unfinished products. The exterior residential shutter market
is highly fragmented and includes many smaller manufacturers.
The Fiber Cement Siding market is dominated by James Hardie Industries
Limited who currently is aggressively marketing and pricing its product. In
response, among other actions, the Company has lowered its pricing on both the
Exterior Hardboard Siding products and Fiber Cement Siding products to protect
its market share against competition from Fiber Cement Siding products. The
lower prices have impacted earnings to date and could continue to negatively
impact earnings. In addition, other competitors have announced that they are
planning to add new fiber cement lines to expand their product offerings.
ENVIRONMENTAL REGULATION
The Company's operations and properties are subject to extensive federal,
state and local laws, regulations and ordinances which govern activities and
operations that may have adverse environmental effects, such as discharges to
air, soil and water, and establish standards for the handling of hazardous and
toxic substances and the handling and disposal of solid and hazardous wastes
("Environmental Laws"). These Environmental Laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act and the Clean Air Amendments
of 1990, the Occupational Safety and Health Act, the Emergency Planning and
Community Right to Know Act, the Clean Water Act and analogous state statutes.
Pursuant to certain Environmental Laws, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of environmental contamination on, under or in such property. In
addition, persons who arrange, or are deemed to have arranged, for the
disposal or treatment of hazardous substances may also be liable for the costs
of removal or remediation of environmental contamination at the disposal or
treatment site, regardless of whether the affected site is owned or operated
by such person. Environmental Laws often impose liability whether or not the
owner or operator or arranger, knew of, or was responsible for, the presence
of such environmental contamination. Also, third parties may make claims
against owners or operators of properties for personal injuries and property
damage associated with releases of hazardous or toxic substances pursuant to
Environmental Laws as well as common law tort theories, including strict
liability. While environmental compliance costs in the future will depend on
regulatory developments that cannot be predicted, the Company believes that
compliance will be achieved with a combination of capital expenditures and
modifications to its production processes. The Company does not anticipate
that costs relating to environmental activities will have a material adverse
impact on its financial condition or results of operations.
On August 30, 1995, the Company completed negotiations with Michigan
environmental authorities regarding a consent judgment providing for an odor
emissions abatement program at its Alpena, Michigan
10
facility. The program provides for phased installation of controls to effect a
staged reduction of the facility's emissions of odors into the air. To date,
the Company has expended approximately $8 million in connection with this
program. Additional capital expenditures of up to $4 million may be required
over the next several years in order to attain compliance with the program. In
connection with the Acquisition, the seller has agreed to indemnify the
Company with respect to certain pre-Acquisition environmental matters and has
placed $5.0 million into escrow to fund any required remediation of such
conditions. In connection with the purchase of Canexel, Canadian Pacific
Forest Products Limited is obligated to indemnify the Company against certain
environmental liabilities associated with Canexel's Nova Scotia production
facility.
RAW MATERIALS
The principal raw materials used by the Company in the production of
Exterior Hardboard Siding and Interior Hardboard are pulpwood, sawmill by-
products and other wood waste. The principal raw materials for the Company's
thermoplastic resin products are polystyrene, PVC, polypropylene and
polyethylene. The Company also uses a wide variety of coatings in the Interior
Hardboard and thermoplastics finishing processes. The principal raw materials
used by the Company in the production of Fiber Cement Siding are sand, clay,
cement and cellulose fiber. All of the raw materials required for the
manufacture of the Company's specialized building products are available from
numerous sources and the Company has not experienced any shortages which have
materially affected its operations. However, certain of these commodity raw
materials are subject to fluctuations in price. Each of the Company's Exterior
Hardboard Siding and Interior Hardboard substrate manufacturing facilities is
located within a 100 mile radius of its source of wood supply. In general, the
availability and cost of pulpwood and wood waste required for hardboard
production have not been significantly affected by the continuing shortages of
natural wood building products.
BACKLOG
In general, the Company does not produce against a backlog of firm orders.
Production is geared primarily to the level of incoming orders and to
projections of future demand. Inventories of finished goods, work-in-process
and raw materials are maintained to meet delivery requirements of customers.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,700 full time
employees. The Company's hourly production employees at its Alpena, Michigan,
East River, Nova Scotia, and Acton, Ontario plants are covered by collective
bargaining agreements with expiration dates of December 15, 2000, December 17,
2002, and October 31, 2001, respectively. As these union contracts expire, the
Company may be required to renegotiate them in an environment of increasing
wage rates. Although the Company has not experienced any work stoppage since
its incorporation, there can be no assurance that the Company will be able to
renegotiate union contracts on terms favorable to the Company without
experiencing a work stoppage. In addition, although the Company believes that
its relations with its employees are satisfactory, there can be no assurance
that the Company's non-union facilities will not become subject to labor union
organizational efforts or that labor costs will not materially increase.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report, including information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Certain, but not necessarily all,
of such forward-looking statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategies that involve risks and
uncertainties. Such forward-looking statements involve known and unknown
11
risks, uncertainties and other factors which may cause the actual results,
performance or 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. Such factors include,
among others, the following: the outcome of certain pending litigation;
general economic and business conditions, including the level of new housing
starts and activity in the home improvement, repair and remodeling market,
which will, among other things, impact demand for the Company's products and
services; adoption of new environmental laws and regulations and changes in
how they are interpreted and enforced; the ability of the Company to implement
its business strategy; changes in consumer preference; competition; quality of
management; availability of qualified personnel; and other factors referenced
in this report. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As a result of the foregoing and other
factors, no assurance can be given as to future results, levels of activity
and achievement and neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
ITEM 2. PROPERTIES
The table below sets forth as of December 31, 1997 the location, products
manufactured, facility size, estimated annual capacity and capacity
utilization of each of the Company's eight production facilities, all of which
are owned by the Company. The Company's production facilities are generally in
good to excellent condition and are considered adequate for their current
uses. The Company's executive offices are located in a 3,300 square foot
leased office facility in Neenah, Wisconsin. The Company's divisional offices
are located in leased office space in Troy, Michigan; Charlotte, North
Carolina; and Neenah, Wisconsin.
[Enlarge/Download Table]
ESTIMATED
PRODUCTS ESTIMATED CAPACITY
LOCATION MANUFACTURED FACILITY SIZE ANNUAL CAPACITY UTILIZATION(1)
-------- ------------ --------------- ------------------------ --------------
Roaring River, NC... Exterior Hardboard Siding; Trimboard 450,000 sq. ft. 270 million surface feet 99%
Fiber Cement Siding 200,000 sq. ft. 72 million surface feet x%(2)
Alpena, MI.......... Interior Hardboard Substrates 473,000 sq. ft. 284 million surface feet 87%
Toledo, OH.......... Tileboard and Prefinished Paneling 230,000 sq. ft. 350 million surface feet 48%
Middlebury, IN...... Plastic Mouldings 233,000 sq. ft. 250 million linear feet 47%
East River, Nova Exterior Hardboard Siding and Interior Hardboard 230,000 sq. ft. 265 million surface feet 79%
Scotia.............
Acton, Ontario...... Vinyl Siding and Trim Accessories 150,000 sq. ft. 2.0 million units 74%
Hopkinsville, KY.... Shutters and Accessories 110,000 sq. ft. 131,000 press hours 54%
Holly Springs, MS... Vinyl Siding and Trim Accessories 250,000 sq. ft. 2.0 million units x%(3)
--------
(1) Full capacity utilization denotes the operation of a facility seven days
per week, three shifts per day at budgeted product mix for 1997.
(2) Information with respect to its capacity is not meaningful because the
construction of this facility was only completed in late June 1997.
(3) This facility is currently being retrofitted.
The Company manufactures Exterior Hardboard Siding on two S1S production
lines at its Roaring River, North Carolina facility, the largest single
hardboard-based siding facility in the U.S. The plant was constructed in 1970
with expansions in 1981 and 1984, and is located on 506 acres. The plant is
located near an abundant supply of wood raw materials, and process water is
drawn from the Yadkin River adjacent to the property. Steam for the
manufacturing process is provided by a 180 million BTU per hour boiler fueled
by wood waste, with two standby boilers available. Since all steam is provided
by the wood-fired boiler, the facility does not depend on conventional fossil
fuels as its primary source of energy. The Company manufactures Fiber Cement
Siding products at its Roaring River, North Carolina facility. The Company
completed construction of this facility in June 1997 for an aggregate cost of
$61 million.
The Company manufactures hardboard substrate on a S2S production line at its
Alpena, Michigan facility. The plant, located on 61 acres, was built in 1957
and expanded in 1970 and 1985. Hardboard substrate is finished into tileboard
and paneling at the Company's Toledo, Ohio facility situated on 57 acres. The
Toledo plant uses state-of-the-art printing capabilities to maintain the
quality of its finished products. The principal assets
12
of the Toledo facility include one primary coating line and one vinyl
laminating line. The primary coating line is a high quality four-stage print
line with computer-aided capability for precision printing and painting of a
broad range of panels, including embossed tileboard. The Company's Toledo
plant is currently operating at less than full capacity. With the continued
expansion into home center retailers and ongoing new product development and
introduction, the Company expects to increase capacity utilization at this
facility, thereby reducing average overhead cost per unit.
The Company manufactures plastic mouldings at its Middlebury, Indiana
facility situated on 35 acres. The facility was originally built in 1955, with
major expansions in 1978 and 1980. The extrusion operation includes eleven
polystyrene tandem extruders with a combined annual capacity of 212 million
linear feet. In addition, five extruders with an annual capacity of 38 million
linear feet are used for lower volume PVC mouldings. Other equipment used to
finish the mouldings includes five woodgrain printlines, a five deck
paint/topcoat oven, two hot glue paper laminators and five packaging lines.
The plant has a modern machine tool capability for the production of its own
die requirements. The Company's plastic mouldings production facility is
currently operating at less than full capacity. With the continued expansion
into home center retailers and ongoing product development, the Company
expects to further increase capacity utilization at this facility, thereby
reducing average overhead cost per unit.
The Company manufactures Exterior Hardboard Siding and industrial and
prefinished hardboard on two S1S production lines at its East River, Nova
Scotia facility, the largest hardboard manufacturing facility in Canada. The
Canexel plant, located on 1,060 acres, was constructed in 1967 and was
expanded in 1969 to add a second S1S line. The plant is located near an
abundant supply of wood raw materials and process water is drawn from the
Little East River which is located nearby. Other principal assets of the
facility are one interior products finishing line and one exterior siding
prefinishing line.
The Company manufactures vinyl siding and trim accessories at its Acton,
Ontario facility situated on 14 acres. The facility was originally constructed
in 1959 with major expansions completed in 1972, 1983 and 1986. The extrusion
operation includes ten co-extrusion processing lines and one mono-extrusion
line. In 1994, the Company completed the installation of a state-of-the-art,
four-story compounding tower. The computer-controlled compounding and
extrusion process allows the resin formulations to proceed from raw material
to finished goods without touching human hands until the product is packaged.
The Company is currently retrofitting a vinyl siding facility with an
estimated annual capacity of 2 million units in Holly Springs, Mississippi.
The Company expects to complete the retrofitting of the facility in early
1998.
The Company manufactures injection molded shutters at its Hopkinsville,
Kentucky facility located on 14 acres. Originally constructed in 1967, the
facility was expanded several times by previous owners. In 1994, the Company
completed the expansion of the manufacturing facility, which included the
installation of three additional presses. Molded products are manufactured on
one of twenty-seven presses, which range in size from 125 tons to 2,000 tons.
This facility has a state-of-the-art finishing line to paint shutters.
The Company owns a 220,000 square foot warehouse facility located in Milton,
Ontario. In addition, the Company leases a 113,000 square feet warehouse in
Hopkinsville, Kentucky.
ITEM 3. LEGAL PROCEEDINGS
Hardboard Siding Actions
Class Actions and Putative Class Actions. The Company and ABTco, Inc., a
subsidiary of the Company ("ABTco"), have been named as defendants in a
conditionally certified class action and four separate putative class actions
arising from hardboard siding manufactured, distributed, or sold by them or by
Abitibi-Price, Inc. ("API"), APC or Abitibi Consolidated Inc. ("ACI"). APC,
API and ACI have also been named as defendants in these actions and APC has
been named a defendant in another putative class action, which may result in
13
liability for the Company as described below. These actions--Fyola et al. v.
ABT Building Products Corporation, ABTco, Inc. and Abitibi-Price Corporation,
Docket No. 95-12854, Court of Common Pleas of Allegheny County, Pennsylvania
(the "Fyola Action"), Foster et al. v. ABTco, Inc., ABT Building Products
Corporation, Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. CV-
95-151M, Circuit Court of Choctaw County, Alabama (the "Foster Action"), Dunn
et al. v. ABTco, Inc., ABT Building Products Corporation, Abitibi-Price, Inc.
and Abitibi-Price Corporation, Docket No. 96-CVS7690, Superior Court of
Forsyth County, North Carolina (the "Dunn Action"), Ezzell et al. v. ABTco,
Inc., ABT Building Products Corporation, Abitibi-Price, Inc. and Abitibi-Price
Corporation, No. 97-CVS-167, Superior Court of Onslow County, North Carolina
(the "Ezzell Action"), Fiedler et al. v. ABT Building Products Corporation,
ABTco, Inc., Abitibi-Price Corporation and Abitibi Consolidated, Inc., Case
No. 97-CP-08-1545, Court of Common Pleas of Berkeley County, South Carolina
(the "Fiedler Action"), and Lillis et al. v. Abitibi-Price Corporation and
Sunstate Manufactured Homes of Georgia, Inc. d/b/a Peach State Homes, Inc.,
Case No. 97-1814 CA21, Circuit Court of Dade County, Florida (the "Lillis
Action")--are collectively referred to herein as the "Hardboard Siding Class
Actions."
The representative plaintiffs in the Hardboard Siding Class Actions claim
that the exterior siding on their homes, and on homes owned by members of the
class or putative class, prematurely rotted, warped, buckled, swelled,
cracked, split, absorbed water, bulged, discolored, delaminated or
deteriorated. The representative plaintiffs seek recovery on a variety of
legal theories, including breach of implied warranty of merchantability,
breach of implied warranty of fitness, breach of express warranty, unfair
trade practices, deceit by concealment, fraud, negligence and strict
liability. Each of the Hardboard Siding Class Actions has been brought on
behalf of an unknown number of claimants, but the potential number of class
members is believed to include multiple thousands of claimants.
The Hardboard Siding Class Actions include, as members of the conditionally
certified and putative classes, certain owners of exterior hardboard siding
products manufactured by APC or ABTco that are still within the period of any
applicable express warranty made by API, APC, ACI, the Company or ABTco. To
the best of the Company's knowledge, such warranties covered periods of up to
twenty-five years. The Company is not able to definitively determine how many
persons may be members of the conditionally certified class or the putative
classes in the Hardboard Siding Class Actions.
The Company, ABTco, API, APC and ACI have received to date in excess of
12,000 claims or inquiries respecting alleged problems with exterior hardboard
siding products that, according to the person filing the complaint or inquiry,
were believed to have been manufactured by API, APC, ACI, the Company or
ABTco. Substantially more claims or inquiries may be forthcoming. In
particular, it is possible that in the event of determinations concerning
liability that are adverse to defendants in any of the Hardboard Siding Class
Actions, or in the event of further developments in or publicity concerning
the litigation, materially more than 12,000 homeowners might file claims
asserting that they are members of the relevant plaintiff class and are
entitled to damages. The Company is unable to estimate the number of such
potential claimants.
The representative plaintiffs in the Hardboard Siding Class Actions, on
behalf of themselves and the class or putative class, seek compensatory
damages, attorneys' fees, costs and other expenses. In certain cases, the
damages claimed include economic damages, consequential damages and double or
treble damages under state unfair trade practice and consumer protection laws.
In the Fiedler Action, the damages claimed include punitive damages. In
certain other cases, the representative plaintiffs might seek, or might
attempt to amend their complaints in an effort to seek, punitive damages. The
damages claimed in each of the Hardboard Siding Class Actions is either for
(i) an unspecified amount, or (ii) several thousands of dollars for each class
member, which would allegedly amount to millions of dollars classwide.
Other Hardboard Siding Cases. APC has also been named as defendant in two
consolidated actions, Adams, et al. v. Masonite Corporation, Abitibi-Price
Corporation, MG Building Materials, Inc. and Nu-Air Manufacturing Co., Inc.,
Cause No. 16707, District Court of Duval County, Texas, (the "Adams Action"),
filed in the District Court of Duval County, Texas, and the Arredondo, et al.
v. Masonite Corporation, Abitibi-Price
14
Corporation, MG Building Materials, Inc., and Nu-Air Manufacturing Co., Inc.,
Cause No. 4571, District Court of Jim Hogg County, Texas (the "Arredondo
Action"), filed in the District Court of Jim Hogg County, Texas. In the Adams
Action, the owners of approximately 140 homes, and in the Arredondo Action,
the owners of approximately 30 homes, alleged that they had suffered damages
as a result of APC hardboard siding installed on their homes. The complaint in
the Adams Action and the complaint in the Arredondo Action are virtually
identical and were filed by the same attorney. The plaintiffs in these actions
allege that hardboard siding manufactured by APC is defective and failed to
perform to a level reasonably expected for a product of its nature. The
plaintiffs in these actions assert purported claims for negligence and gross
negligence, breach of implied warranty of fitness, breach of implied warranty
of merchantability, breach of express warranty, negligent misrepresentation,
and violation of the Texas deceptive trade practices act. The plaintiffs in
these actions seek actual and exemplary damages, including damages for
economic loss and mental anguish, treble damages, costs and interest.
Following pre-trial motions and rulings, venue has been transferred for a
majority of the plaintiffs to their home county. As a result, there are
currently three actions pending, the Arredondo Action, the Adams Action and an
action in Jim Wells County, Texas.
Indemnity Settlement. On June 16, 1997, APC and Abitibi-Price Sales
Corporation brought suit against the Company and ABTco in the Supreme Court of
New York for the County of Westchester alleging violation of the indemnity and
warranty provisions in the asset sale agreement relating to the Acquisition
(the "Abitibi Action"). Pursuant to a settlement agreement dated as of October
1, 1997 (the "Indemnity Settlement"), the Company and APC agreed to an
allocation of liability with respect to claims relating to ABT Board and APC
Board (each, as defined below).
Under the terms of the Indemnity Settlement, all amounts paid in settlement
or judgment (other than punitive, multiple or exemplary damages) following the
completion of any claims process resolving any claim in a litigation certified
as a class action (or involving claims for more than 125 homes owned by named
plaintiffs) ("Class Action Claims") are defined as "Class Action Damage
Amounts." Class Action Damage Amounts that relate to siding sold by APC prior
to October 22, 1992 or held as finished goods inventory by APC on October 22,
1992 ("APC Board") shall be paid 65% by APC and 35% by the Company. Class
Action Damage Amounts relating to siding sold by the Company after October 22,
1992 ("ABT Board") will be paid 100% by the Company. Total amounts paid for
joint local counsel and other joint expenses, and for plaintiffs' attorneys'
fees and expenses relating to Class Action Claims are to be divided equally
between APC and the Company initially, and are to be adjusted according to the
Company's and APC's proportional share of the ultimate liability if either
party's proportional share exceeds 60%. Any punitive, multiple, or exemplary
damages awarded with respect to any Class Action Claim shall be paid 100% by
the party against which such damages are assessed, or if such damages are
joint or unable to be allocated to a particular party, will be apportioned
according to the Company and APC's proportional share of the ultimate
liability.
Under the terms of the Indemnity Settlement, with respect to Non-Class
Action Claims (all claims other than Class Action Claims) relating to APC
Board, the Company is responsible for the first $100,000 in each calendar year
of all amounts paid for settlements, judgments and associated fees and
expenses of local outside counsel representing the parties in the
jurisdictions where litigation or arbitration involving such claims is pending
(the "APC Board Settlement Amount"). APC and the Company shall each pay 50% of
the APC Board Settlement Amount in excess of $100,000 per year up to $5,000
with respect to each individual claim. APC shall pay 100% of the amount of any
APC Board Settlement Amount in excess of $5,000 with respect to each
individual claim. With respect to Non-Class Action Claims relating to ABT
Board, the Company shall pay 100% of any amounts paid for settlements,
judgments and associated fees and expenses of local outside counsel
representing the parties in the jurisdictions where litigation or arbitration
involving such claims is pending. The Adams Action and the Arredondo Action
are treated as Non- Class Action Claims under the Indemnity Settlement for
which the Company may have potential liability.
The Company believes that its exterior hardboard siding products are free of
defects and, when properly installed and maintained, are suitable for their
intended purposes and meet all applicable legal standards. The
15
Company believes that it has substantial defenses to the claims asserted by
the representative plaintiffs on behalf of themselves and the conditionally
certified class and the putative classes in the Hardboard Siding Class
Actions. The Company and ABTco intend to defend vigorously those actions in
which they are named as defendants. Nevertheless, the litigations are in
preliminary stages. Given the uncertainties inherent in litigation, it is
possible that some or all of the Hardboard Siding Class Actions, the Adams
Action or the Arredondo Action could be decided against the Company, ABTco,
APC, API or ACI in whole or in part. It is also possible that additional
actions or class actions could be brought against the Company, ABTco, API, APC
or ACI in connection with hardboard siding manufactured, distributed or sold
by them. Should the Company, ABTco, API, APC or ACI ultimately be found liable
in these actions to individual plaintiffs, members of the conditionally
certified class or the putative classes, or to any future plaintiff, the
damages could materially and adversely affect the Company's business,
financial condition and results of operations. The Company is not able to
estimate or predict the amount of such ultimate liability, if any. Even if the
Company and ABTco are not ultimately found to be liable in any of these
actions, the financial and business burdens of defending prolonged and
expensive litigation or of any settlement could materially and adversely
affect the Company's business, financial condition and results of operation.
Because it is not possible at this time to reasonably estimate the amount of
the potential damages in the Hardboard Siding Class Actions, the Adams Action
and the Arredondo Action, the Company is not required under generally accepted
accounting principles ("GAAP") to make reserve provisions with respect to such
litigation (and has made no such provisions) in its consolidated financial
statements (other than standard warranty accruals). In addition, if the
Company or ABTco, or API, APC or ACI is ultimately found to be liable in any
of these actions, there can be no assurance that any of the Company's ultimate
liability would be covered by insurance, or that the Company's ultimate
liability would not exceed any available insurance. In either case, the
amounts not covered by insurance could be material to the Company's business,
financial condition and results of operation. One of the Company's primary
insurance carriers, Employers Insurance of Wausau, A Mutual Company
("Wausau"), filed a complaint dated February 16, 1998, against the Company and
ABTco in the Circuit Court of Marathon County, Wisconsin. In that action,
which is entitled Employers Insurance of Wausau, A Mutual Company v. ABT
Building Products Corporation and ABTco, Inc., Case No. 98-CV-86, Wausau seeks
a declaratory judgment that it has no obligation to defend or indemnify the
Company or ABTco with respect to certain of the Hardboard Siding Class
Actions. The Company and ABTco have not yet responded to the complaint. In
addition, no assurance can be given that APC will perform its obligations
under the Indemnity Settlement.
In recent years, a number of similar lawsuits have been brought against
other manufacturers of exterior hardboard siding products or engineered
exterior hardboard siding products. Although there may be distinctions between
these other lawsuits and the Hardboard Siding Class Actions, the Adams Action
and the Arredondo Action, such other lawsuits have resulted in at least three
settlements by other manufacturers. One of those settlements was publicly
reported to require a manufacturer of oriented strand board ("OSB") products
to contribute a minimum of $275 million to a settlement fund payable over a
number of years. Another such settlement was publicly reported to require a
manufacturer of hardboard siding products to pay $47.5 million in plaintiff
attorneys' fees and the manufacturer reportedly set aside $150 million in
legal reserves to cover the cost of future individual damages payments under
the settlement. Determinations of liability or adverse rulings against other
manufacturers of exterior hardboard siding products that are defendants in
similar actions, even if the determinations or rulings are not final, or
additional large settlements by other manufacturers, could adversely affect
the litigations against the Company and ABTco and could increase the number of
such claims and litigations against the Company, ABTco, or both.
For additional information concerning the Hardboard Siding Class Actions,
the Adams Action and the Arredondo Action, see Note 11 to the Company's
Consolidated Financial Statements included elsewhere in this Form 10K.
Other Litigation
In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of business, none of which, in management's
opinion, are expected to have a material adverse effect on the Company's
operating results or financial condition.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the holders of Common Stock
during the fourth quarter of the Registrant's 1997 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company:
[Download Table]
NAME AGE POSITION
---- --- --------
George T. Brophy.. 63 Chairman, President and Chief Executive Officer
William J. Adams.. 56 Executive Vice President--Exterior Products Group
Richard E. Park-
er............... 56 Executive Vice President--Specialty Products Group
Donald B. Grimm... 47 Vice President--General Manager of Industrial Products
North America, Chief Environmental Compliance Officer
Joseph P.
O'Neill.......... 39 Vice President and Chief Financial Officer
Dale H. Von
Behren........... 41 Vice President--Corporate Administration and Secretary
--------
GEORGE T. BROPHY has been Chairman, President and Chief Executive Officer of
the Company since October 1992. From 1983 to 1988, Mr. Brophy was President,
Chief Executive Officer and a director of Morgan Products Ltd., a building
products company ("Morgan"), and was a private business consultant from 1988
to 1992. From 1966 to 1980, Mr. Brophy served in various positions at Masonite
Corporation ("Masonite"), including Executive Vice President and Chief
Operating Officer. Mr. Brophy is also a director of Banta Corporation, a
printing company. Mr. Brophy has served as a Director since October 1992.
WILLIAM J. ADAMS has been Executive Vice President of the Company's Exterior
Products Group since December 1995. From September 1994 to December 1995, Mr.
Adams was the Executive Vice President of the Siding Division. Mr. Adams was
the Hardboard/Plastics Division's Vice President of Marketing and Sales since
October of 1992. From 1990 to 1992, Mr. Adams was President and Chief
Executive Officer of Vanderpool Electric Company. From 1987 to 1990, Mr. Adams
was President and Chief Executive Officer of Harris-Tarkett, Inc., a
manufacturer of hardwood flooring.
RICHARD E. PARKER has been the Company's Executive Vice President of the
Interior Products Group since December 1995. From October 1992 through
December 1995, Mr. Parker was the Executive Vice President of the
Hardboard/Plastics Division. From 1990 to October 1992, Mr. Parker served as
Vice President and General Manager of the Bend Door & Millwork Company. From
1986 to 1990, Mr. Parker was Executive Vice President of the Manufacturing
Division of Morgan. Earlier in his career, Mr. Parker held sales,
distribution, marketing and general management positions at Masonite for a
period of 13 years.
DONALD B. GRIMM has been the Vice President and General Manager of
Industrial Products North America and the Chief Environmental Compliance
Officer of the Company since October 1997. From October of 1992 through
October 1997, Mr. Grimm was Vice President of Manufacturing.
JOSEPH P. O'NEILL has been Vice President and Chief Financial Officer of the
Company since January of 1998. From 1996 to 1997, Mr. O'Neill was Vice
President Finance-Controller. From 1992, Mr. O'Neill was the Controller.
DALE H. VON BEHREN has been the Vice President of Administration of the
Company since January of 1998. From 1996 to 1997 Mr. Von Behren was Vice
President Finance-Treasurer. From May 1994 to 1996 Mr. Von Behren was
Treasurer. From 1990 to 1994, Mr. Von Behren was Controller and Treasurer of
Morgan.
There are no family relationships among any of the directors or executive
officers of the Company.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ National Market under the
symbol "ABTC." The following table sets forth, for the periods indicated, the
high and low sale prices of the Common Stock as reported by NASDAQ.
[Download Table]
1997 1996
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
Fourth Quarter................................. 20.625 16.500 26.750 19.750
Third Quarter.................................. 26.500 16.750 22.500 19.500
Second Quarter................................. 26.750 21.250 23.000 18.500
First Quarter.................................. 27.250 21.000 19.500 14.250
ON DECEMBER 31, 1997, THE LAST REPORTED SALE PRICE FOR THE COMPANY'S COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $18.00 PER SHARE. AS OF MARCH 13,
1998, THE COMPANY HAD APPROXIMATELY 5,400 SHAREHOLDERS OF RECORD (INCLUDING
BROKERAGE FIRMS AND OTHER NOMINEES).
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain earnings and does not anticipate paying
dividends on its Common Stock in the foreseeable future. Any future payment of
dividends on the Common Stock is within the discretion of the Board of
Directors and will depend upon various factors, including the then-current
capital requirements, operating results and financial condition of the
Company.
18
ITEM 6. SELECTED FINANCIAL DATA
The operating data set forth below is derived from the consolidated
financial statements audited by Arthur Andersen LLP, independent public
accountants, and should be read in conjunction with those financial statements
and notes thereto included elsewhere in this Form 10-K. The data set forth in
the following table should be read in conjunction with, and is qualified in
its entirety by, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto appearing elsewhere herein.
[Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Operating Data:
Net sales............... $161,011 $203,264 $240,107 $320,402 $321,813
Cost of sales........... 106,572 139,848 176,119 227,351 225,074
-------- -------- -------- -------- --------
Gross profit............ 54,439 63,416 63,988 93,051 96,739
Selling, general and
administrative
expenses............... 21,253 25,684 30,961 48,609 53,250
Restructuring charge.... -- -- -- -- 10,397(3)
-------- -------- -------- -------- --------
Operating income........ 33,186 37,732 33,027 44,442 33,092
Interest expense........ 3,929 2,063 5,929 6,511 8,344
Other income (expense),
net.................... (201) (80) (4) (269) (263)
-------- -------- -------- -------- --------
Income before income
taxes and extraordinary
item................... 29,056 35,589 27,094 37,662 25,011
Provision for income
taxes.................. 11,572 13,843 10,607 14,510 9,521
-------- -------- -------- -------- --------
Net income before
extraordinary item..... 17,484 21,746 16,487 23,152 15,490
Extraordinary item (net
of tax)................ (1,070)(1) -- -- -- --
-------- -------- -------- -------- --------
Net income ............. $ 16,414 $ 21,746 $ 16,487 $ 23,152 $ 15,490
======== ======== ======== ======== ========
Income per common share:
Before extraordinary
item:
Basic.................. $ 1.65 $ 1.85 $ 1.54 $ 2.22 $ 1.47
-------- -------- -------- -------- --------
Diluted................ $ 1.50 $ 1.70 $ 1.42 $ 2.01 $ 1.34
-------- -------- -------- -------- --------
After extraordinary
item:
Basic.................. $ 1.55 $ 1.85 $ 1.54 $ 2.22 $ 1.47
-------- -------- -------- -------- --------
Diluted................ $ 1.41 $ 1.70 $ 1.42 $ 2.01 $ 1.34
-------- -------- -------- -------- --------
Weighted average common
shares outstanding(2):
Basic.................. 10,617 11,728 10,707 10,433 10,547
Diluted................ 11,667 12,825 11,647 11,519 11,578
Balance Sheet Data (at
end of period):
Working capital......... $ 27,363 $ 42,006 $ 55,762 $ 42,777 $ 55,683
Total assets............ 109,628 143,545 210,767 260,264 309,232
Total debt.............. 12,438 33,278 84,629 100,071 132,911
Stockholders' equity.... 77,210 80,483 88,120 109,941 124,841
--------
(1) Represents write-off of deferred financing costs in connection with the
repayment of long-term debt with the proceeds of the Company's initial
public offering.
(2) Includes the effect to the Company's stock split effected in June 1993 in
connection with the Company's initial public offering.
(3) The Company recorded a $10.4 million charge (consisting of a $1.5 million
cash charge and a $8.9 million non-cash charge) during the second quarter
of 1997 in connection with the restructuring of its Exterior Plastics
products group. The restructuring charge consisted of: the write-down of
certain machinery and equipment, $5.8 million; the write-down of inventory
and goodwill to net realizable values, $3.1 million; and severance
payments and lease obligations related to the closing of certain leased
facilities, $1.5 million.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Over the last three years, the Company has increased sales and gross profit
margins through: (i) new product introductions, in the Exterior Products
division and the Specialty Products division such as UltraOak, Diamond Tile
and TrimBoard; (ii) acquisitions of new product lines such as vinyl siding and
exterior plastic accessories (1995); (iii) the construction of new facilities
to produce fiber cement siding (1997) and vinyl siding and accessories (1997);
and (iv) expansion in the retail home center distribution channel. In
addition, the Company has implemented cost reduction programs and selectively
increased selling prices which have further increased the Company's sales and
gross profit margins during such period. The Company's broad product line
allows it to serve many of its customers as a "one-stop" source of products.
Recent vinyl siding industry consolidation and aggressive marketing and
pricing by a major fiber cement siding competitor have resulted in lower sales
volumes and prices for the Company's siding products. The lower prices have
impacted earnings to date and could continue to further negatively impact
earnings. In addition, other competitors have announced that they are planning
to add new fiber cement lines to their product offerings. In an effort to
reduce the impact of the pricing pressures on siding products, the Company has
also implemented a strategy to shift product mix in its Exterior Hardboard
Siding products from the 7/16p siding products into trimboard and utility
panels. See "Significant Business Trends."
RESULTS OF OPERATIONS
The following table sets forth the dollar amount (in thousands) and
percentages of the Company's net sales attributable to each of its principal
product group categories during the last three years:
[Download Table]
1995 1996 1997
-------------- -------------- --------------
Exterior Products............... $123,129 51.3% $197,261 61.6% $195,987 60.9%
Specialty Products.............. 116,978 48.7% 123,141 38.4% 125,826 39.1%
-------- ----- -------- ----- -------- -----
$240,107 100.0% $320,402 100.0% $321,813 100.0%
======== ===== ======== ===== ======== =====
The following table presents, for the periods indicated, the percentage of
net sales of the Company's two principal product groups and the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations:
[Download Table]
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
Net sales
Exterior Products sales............................. 51.3% 61.6% 60.9%
Specialty Products sales............................ 48.7 38.4 39.1
----- ----- -----
Total net sales................................... 100.0% 100.0% 100.0%
Cost of sales......................................... 73.4 71.0 70.0
----- ----- -----
Gross profit.......................................... 26.6 29.0 30.0
Selling, general and administrative expenses ......... 12.8 15.2 16.5
Restructuring charge.................................. -- -- 3.2
----- ----- -----
Operating income...................................... 13.8 13.8 10.3
Net income............................................ 6.9 7.2 4.8
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased $1.4 million (0.4%) from $320.4 million in
1996 to $321.8 million in 1997. The increase reflects a $2.7 million (2.2%)
increase in Specialty Products sales, partially offset by a $1.3 million
(0.7%) decrease in Exterior Products sales.
20
The increase in Specialty Products sales of $2.7 million was attributable to
a $3.1 million increase in Interior Hardboard offset by a $0.4 million
decrease in Interior Plastics. A decrease in volume shipments (0.4%) of
Interior Hardboard products was more than offset by an increase in average
selling price of 3.4%. Strong demand for doorskins and industrial products
offset lower prefinished interior hardboard product sales. Interior Plastics
moulding unit volume shipments were 1.3% greater in 1997 than the prior year.
The average selling price of mouldings decreased by 4.2%. New product
introductions and increased penetration into the home center retailers were
the primary reasons for the increased volume.
The decrease in Exterior Products sales consisted of a $3.2 million increase
in sales of Exterior Plastics and a $4.8 million increase in sales of Fiber
Cement Siding, a product introduced in June 1997, more than offset by a $9.3
million decrease in Exterior Hardboard Siding. The increase in Exterior
Plastics of $3.2 million consists of a $10.6 million increase in vinyl siding
and accessories partially offset by the discontinuation of industrial plastic
product sales as part of the restructuring of the Company's Exterior Plastics
group (see discussion below). Exterior Hardboard Siding was impacted by
aggressive pricing by competition in both hardboard and fiber cement siding
markets, resulting in lower volumes and selling prices.
Gross Profit. Gross profit increased $3.6 million (4.0%) from $93.1 million
in 1996 to $96.7 million in 1997. The increase in gross profit is attributable
to increased demand for Specialty Products and increased sales volume in vinyl
siding, partially offset by lower volume and pricing on Exterior Hardboard
Siding and additional costs incurred during the start up of the fiber cement
facility. Gross profit as a percentage of net sales increased from 29.0% to
30.0% over the period. Exterior Hardboard Siding decline in volume and pricing
was principally due to aggressive pricing by competitors in the fiber cement
and hardboard siding markets. See "Significant Business Trends."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.7 million (9.5%) from $48.6 million in
1996 to $53.3 million in 1997. The increase is primarily attributable to an
increase in Exterior Plastics expenses of $3.7 million over 1996. The Exterior
Plastics increase is due to increases in salaries and facility expenses
related to the development of the Company's Exterior Plastics distribution
center in Milton, Ontario, and additional promotional expenses incurred as a
result of new product introductions. In addition, the Company incurred legal
fee increases over 1996 of $0.5 million as a result of certain litigation (see
"Certain Litigation" below). As a percentage of net sales, selling, general
and administrative expenses increased from 15.2% in 1996 to 16.5% in 1997. The
increase is due to factors discussed above.
Restructuring Charge. On July 7, 1997, the Company announced that it was
restructuring its Plastics products group. The restructuring program was
implemented to phase out the manufacturing facility's plastic industrial
business and to allow the Company to focus on specialty building products.
Accordingly, the Company recorded a $10.4 million charge during the quarter
ended June 30, 1997 (consisting of a $1.5 million cash charge and an $8.9
million non-cash charge). The restructuring charge consisted of the write-down
of certain machinery and equipment, $5.8 million; the write-off of inventory
and goodwill to net realizable values, $3.1 million; and severance payments
and outstanding lease obligations related to the closing of certain leased
facilities, $1.5 million. The impact on earnings per share for 1997 amounted
to $0.61 and $0.56 on a basic and dilutive basis, respectively.
At December 31, 1997, a remaining balance of $1.1 million related to the
restructuring is included in the accrued expenses in the Company's
consolidated balance sheet.
Operating Income. Operating income decreased by $11.3 million (25.5%) from
$44.4 million in 1996 to $33.1 million in 1997. The decrease is primarily the
result of costs incurred due to the restructuring of the Exterior Plastics
products group, additional costs related to the start up of the fiber cement
facility, higher selling, general and administrative expenses, partially
offset by increased demand for the Company's Specialty Products.
Interest Expense. Interest expense increased $1.8 million (28.2%) from $6.5
million (net of $1.0 million of capitalized interest) in 1996 to $8.3 million
(net of $1.9 million) in 1997. The increase is attributable to higher
outstanding indebtedness partially offset by a slight decline in the Company's
weighted average interest rate on outstanding borrowings during 1997 as
compared to 1996.
21
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $80.3 million (33.4%) from $240.1 million in
1995 to $320.4 million in 1996. This increase reflects of $74.3 million
(60.2%) increase in Exterior Products sales and a $6.2 million (5.3%) increase
in Specialty Products sales.
The increase in Exterior Products sales of $68.7 million in 1996 was
primarily attributable to the impact of two acquisitions in 1995 and strong
demand for Exterior Hardboard Siding. KenTech Plastics, Inc., a manufacturer
of plastic shutters, exterior accessories and industrial products, was
acquired in April of 1995. In June 1995, the Company acquired the Vinyl
Division of EMCO, Ltd., a manufacturer of vinyl siding and accessories. These
two acquisitions accounted for $39.5 million of the increase in net sales for
1996. Unit volume shipments for vinyl siding and shutters in 1996 were
substantially greater than 1995. The increase in Exterior Hardboard Siding
sales of $28.8 million in 1996 was primarily the result of an increase in
demand for the product line (see "Significant Business Trends" below),
continued expansion into the home center retailer market and price increases
implemented during the first quarter of 1996. As a result of these factors,
Exterior Hardboard Siding unit sales volume increased 12.4% for 1996 compared
to 1995 and average selling price increased 10.5%.
The increase in Specialty Products sales of $11.6 million in fiscal 1996 was
primarily attributable to new product introductions and increased export
sales. Sales of Interior Hardboard products increased $7.3 million in 1996.
The increase was primarily due to new product introductions and increases in
sales outside of North America. These factors resulted in an increase of unit
volume shipments of 8.7% compared to 1995. Plastic mouldings sales were
favorably impacted by new product introductions and increased penetration into
the home center retailer market, as sales increased $4.3 million over the same
period last year. Unit volume shipments for mouldings in 1996 was 11.7%
greater than 1995.
Gross Profit. Gross profit increased $29.1 million (45.4%) from $64.0
million in 1995 to $93.1 million in 1996. Exterior Hardboard Siding pricing
and volume increases, as well as volume increases in the Interior Hardboard
and Plastics moulding products contributed to the increase in gross profit. In
addition, the 1995 acquisitions favorably impacted gross profit by $14.4
million. Gross profit as a percentage of net sales increased from 26.6% for
1995 to 29.0% in 1996. The increase is primarily the result of price increases
implemented during 1996, as well as volume increases in Exterior Hardboard
Siding, Interior Hardboard, vinyl siding and plastics moulding product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $17.6 million (57.0%) from $31.0 million in
1995 to $48.6 million in 1996. Selling, general and administrative expenses
increased $10.3 million as a result of the 1995 acquisitions, $1.5 million of
the increase represents legal fees incurred as a result of certain litigation
(see "Certain Litigation" below) with the balance of the increase primarily
due to increases in promotional expenses, allowances and management bonuses,
directly related to the increase in sales over 1995. As a percentage of net
sales, selling, general and administrative expenses increased from 12.8% in
1995 to 15.2% in 1996. The increase is due to higher selling, general and
administrative expenses (as a percentage of net sales for the 1995
acquisitions) as well as, increases in legal fees, management bonuses and
promotional expenses related to new product introductions.
Operating Income. Operating income increased $11.4 million (34.6%) from
$33.0 million in 1995 to $44.4 million in 1996. The improvement is the result
of operating income generated by the 1995 acquisitions, selling price
increases, new product introductions and volume increases in substantially all
product lines.
Interest Expense. Interest expense increased $0.6 million (9.8%) from $5.9
million in 1995 to $6.5 million (net of $1.0 million of capitalized interest)
in 1996. The increase is attributed to higher outstanding indebtedness,
partially offset by a slight decline in the Company's weighted average
interest rate on outstanding borrowings during 1996 as compared to 1995.
SIGNIFICANT BUSINESS TRENDS
Management believes that the level of housing starts has a significant
influence on the Company's ability to generate sales, particularly in relation
to demand for its siding products. The level of housing starts in the United
22
States increased from 1.3 million in 1995 to 1.5 million in 1997. The level of
housing starts in Canada increased from 0.111 million in 1995 to 0.152 million
in 1997.
The cost of thermoplastic resins (polystyrene and PVC) used in the Company's
Specialty Products and Exterior Products operations increased substantially
during 1995 before declining somewhat during the fourth quarter of 1995 and
remaining at that level during 1997. Management believes that product price
increases, continuing cost reduction programs and increased production
efficiencies will counteract, to some extent, the impact of these raw material
price increases.
The recent consolidation in the vinyl siding industry has resulted in
increased competitive pricing of the Company's Exterior Plastics products. The
Company cannot predict the actions of its competitors, which could further
negatively impact earnings in the future.
The Company has recently introduced Fiber Cement Siding. A major competitor
in the fiber cement siding market is aggressively marketing and pricing its
product. In response, among other actions, the Company has lowered its pricing
on both the Exterior Hardboard Siding and Fiber Cement Siding products to
protect its market share against competition from fiber cement siding
products. The Company has also implemented a strategy to shift product mix in
its Exterior Hardboard Siding products from the 7/16p siding products into
trimboard and utility panels, in an effort to reduce the impact of the pricing
pressures. The lower prices have impacted earnings to date and could continue
to further negatively impact earnings. The Company cannot predict the actions
of this or other competitors, however, there have been recent announcements by
competitors that they are planning to add new fiber cement lines to expand
their product offerings, which could further negatively impact earnings in the
future.
Management also believes that continued penetration into the home center
retailer market will have a significant beneficial influence on the Company's
level of business activity. Sales to these customers have increased
approximately 42% over the prior year. In addition, sales to the Company's top
three home center retailer customers increased 58% over the past year.
Management believes that this market will continue to grow in importance to
the Company.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company derived its cash from funds generated by
operations and from third-party financings, including the Credit Facility. The
Company believes that its operating cash flow, together with borrowings under
the Credit Facility, will be sufficient to meet its operating expenses,
capital requirements and debt service requirements.
Cash Flow From Operating Activities. Net cash provided by the Company's
operating activities was $24.6 million for 1997. Principal working capital
changes included increases of $10.4 million and $4.2 million in inventory and
other assets, respectively, and a decrease of $5.8 million in accounts
payable. Net cash provided by the Company's operating activities was $41.2
million for 1996. Principal working capital changes included an increase in
accounts receivable of $5.3 million and an increase of $8.8 million in
accounts payable. At December 31, 1997, the Company had working capital of
$55.7 million with a current ratio of 2.4 to 1.0 as compared with working
capital of $42.8 million and a current ratio of 2.0 to 1.0 at December 31,
1996. The increase in working capital and the change in the current ratio were
primarily due to the increase in inventory, as a result of the recent
introduction of fiber cement siding, and lower accrued expenses.
Cash Flow From Investing Activities. The Company's cash used in investing
activities for 1997 and 1996 was related principally to capital expenditures.
Capital expenditures during 1997 amounted to approximately $57.7 million and
were incurred primarily for improvements to the Company's manufacturing
facilities and development of new products, including $24.3 million for the
completion of the fiber cement facility and $11.6 million for the retrofitting
of a vinyl siding manufacturing facility and for environmental compliance
projects (See "Environmental Compliance"). Capital expenditures during 1996
amounted to approximately $57.9 million
23
and were incurred primarily for improvements to the Company's manufacturing
facilities and development of new products, including $36.8 million for the
construction, the fiber cement facility and environmental compliance projects
(See "Environmental Compliance").
Cash Flow From Financing Activities. Net cash provided by financing
activities for 1997 and 1996 was principally from borrowings under the Credit
facility. Debt increased from $100.1 million at December 31, 1996 to $132.9
million (including $12.5 million of current maturities) as of December 31,
1997.
Sources of Liquidity. On April 1, 1997 the Company entered into a loan
agreement with the Mississippi Business Finance Corporation for the issuance
of $1.0 million Variable Rate Demand Revenue Bonds (Series 1997A) and $16.5
million Taxable Variable Rate Demand Revenue Bonds (Series 1997B) (together,
the "Industrial Revenue Bonds") to finance the acquisition and retrofitting of
a vinyl siding manufacturing facility in Holly Springs, Mississippi. The
Industrial Revenue Bonds bear interest rates determined weekly by the
remarketing agent. The Industrial Revenue Bonds mature on April 1, 2022 and
are backed by irrevocable letters of credit issued under the Company's Credit
Facility. The amounts included in total debt reflect only drawings against
proceeds of the issued amounts of the Industrial Revenue Bonds and do not
reflect amounts held in a segregated escrow account pending disbursement.
In March 1997, the Company and its bank group entered into a Third Amended
and Restated Credit Facility, as amended on February 2, 1998 (as amended, the
"Credit Facility") which superseded all prior credit agreements. The Credit
Facility provides a line of credit to the Company totaling $225.0 million
consisting of a $175.0 million continuing revolving credit facility (the
"Revolving Credit Facility") and a term loan facility (the "Term Loan") under
which the Company borrowed $50.0 million on April 3, 1995. The Credit Facility
matures on March 10, 2002, subject to extensions for additional one-year
periods. The Term Loan requires 16 equal quarterly principal payments of
$3.125 million commencing on June 30, 1997 and continuing through March 31,
2001. As of December 31, 1997, approximately $40.6 million was outstanding
under the Term Loan and the interest rate on the Term Loan was 7.99% and
approximately $80.7 million was outstanding under the Revolving Credit
Facility and the weighted average interest rate on the outstanding Revolving
Credit Facility was 6.55%.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to federal and state government
regulations pertaining to air emissions, waste water discharge and solid waste
disposal. While environmental compliance costs in the future will depend on
regulatory developments that cannot be predicted, the Company believes that
compliance will be achieved with a combination of capital expenditures and
modifications to its production processes. As discussed more fully in
"Business--Environmental Regulation," the Company entered into a consent
decree with Michigan environmental authorities providing for an odor emissions
abatement program at its Alpena, Michigan, facility. To date, the Company has
expended approximately $8.0 million in connection with this program.
Additional capital expenditures of up to $4.0 million may be required over the
next several years in order to attain compliance with the program. Although no
assurances can be given as to any ultimate recoveries, the prior owners of
certain of the Company's businesses have agreed to indemnify the Company
against certain environmental liabilities. The Company does not anticipate
that costs relating to environmental activities will have a material adverse
impact on its financial condition or operating results. In connection with the
Acquisition, the seller has agreed to indemnify the Company with respect to
certain pre-Acquisition environmental matters and has placed $5.0 million into
escrow to fund any required remediation of such conditions. In connection with
the purchase of Canexel, Canadian Pacific Forest Products Limited is obligated
to indemnify the Company against certain environmental liabilities associated
with Canexel's Nova Scotia production facility.
CERTAIN LITIGATION
In recent years, a number of lawsuits have been brought against
manufacturers of OSB and exterior hardboard siding products alleging various
design and production defects and breach of express or implied warranties.
Such litigation has resulted in substantial settlements by certain competitors
of the Company. The
24
Company has been named as a defendant in similar litigation (see "Legal
Proceedings"). The Company believes that its exterior hardboard siding
products are free of defects and, when properly installed and maintained, are
suitable for their intended purposes and meet all applicable quality
standards. Nevertheless, no assurance can be given that the Company will not
be required to pay substantial amounts with respect to such litigation or to
expend significant resources to defend against claims of this nature.
SEASONALITY
The Company's quarterly results of operations are moderately seasonal due to
the higher levels of construction activity that typically occur in the second
and third quarters and, to a lesser extent, the first quarter, thereby
increasing sales and gross profits in such periods as compared to the fourth
quarter.
INFLATION
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
YEAR 2000 COMPLIANCE
The Company is currently implementing an upgrade to its existing financial,
sales, production and distribution software that is Year 2000 compliant. It is
also conducting a comprehensive review of the balance of its computer systems
to identify those processes that could be adversely affected by the Year 2000
issue and is developing an implementation plan to resolve any issue that might
arise. In conducting its review, the Company is actively soliciting its
suppliers and customers to assess any Year 2000 issue that might arise from
the interaction of its computer systems with those of its suppliers and
customers. The Year 2000 issue refers to the inability of many computer
programs and systems to process accurately dates later than December 31, 1999.
Unless these programs are modified to handle the century change, they will
likely interpret the Year 2000 as the year 1900. Although final cost estimates
have yet to be determined, it is anticipated that these Year 2000 costs will
result in an increase to the Company's expenses during 1998 and 1999 but are
not expected to have a material impact on its ongoing results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
----
The Company and Subsidiaries:
Report of Independent Public Accountants................................ 27
Consolidated Balance Sheets as of December 31, 1996 and 1997............ 28
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997.................................................... 29
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995, 1996 and 1997................................. 30
Consolidated Statements of Cash Flow for the Years Ended December 31,
1995, 1996 and 1997.................................................... 31
Notes to Consolidated Financial Statements.............................. 32
Report of Independent Public Accountants.................................. 54
Schedule II--Valuation and Qualifying Accounts............................ 55
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of ABT Building Products
Corporation:
We have audited the accompanying consolidated balance sheets of ABT BUILDING
PRODUCTS CORPORATION (a Delaware corporation) AND SUBSIDIARIES (the "Company")
as of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 consolidated financial position of ABT Building
Products Corporation and Subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois,
January 20, 1998
27
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Download Table]
AS OF DECEMBER
31,
------------------
1996 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 24 $ 329
Accounts receivable, less allowances of $5,030 and
$6,303, respectively.................................... 31,278 29,395
Inventories.............................................. 47,237 57,682
Prepaid expenses......................................... 4,468 5,305
Deferred tax assets...................................... 765 1,313
-------- --------
Total current assets................................... 83,772 94,024
PROPERTY, PLANT AND EQUIPMENT:
Land..................................................... 2,968 4,063
Buildings and improvements............................... 28,700 44,153
Machinery and equipment.................................. 108,975 168,071
Furniture and fixtures................................... 3,947 5,227
Construction-in-progress................................. 45,525 18,140
-------- --------
190,115 239,654
Less--accumulated depreciation........................... (25,646) (42,660)
-------- --------
Net property, plant and equipment...................... 164,469 196,994
GOODWILL, Net.............................................. 9,486 8,297
OTHER ASSETS, Net.......................................... 2,537 9,917
-------- --------
Total assets........................................... $260,264 $309,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 15,432 $ 14,467
Current maturities of long-term debt..................... 9,380 12,501
Accrued liabilities...................................... 16,183 11,373
-------- --------
Total current liabilities.............................. 40,995 38,341
LONG-TERM DEBT, less current maturities.................... 90,691 120,410
OTHER LONG-TERM LIABILITIES................................ 6,957 7,279
DEFERRED INCOME TAXES...................................... 11,680 18,361
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 40,000,000 shares
authorized; 10,526,160 and 10,599,160 shares outstanding
at December 31, 1996 and 1997, respectively............. 122 122
Additional paid-in capital............................... 60,511 59,926
Cumulative translation adjustment........................ (364) (1,556)
Retained earnings........................................ 76,637 92,127
Less: 1,685,000 and 1,612,000 common shares in treasury,
at cost, at December 31, 1996 and 1997, respectively.... (26,965) (25,778)
-------- --------
Total stockholders' equity............................. 109,941 124,841
-------- --------
Total liabilities and stockholders' equity............. $260,264 $309,232
======== ========
The accompanying notes to financial statements
are an integral part of these statements.
28
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Download Table]
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
NET SALES........................................ $240,107 $320,402 $321,813
COST OF SALES.................................... 176,119 227,351 225,074
-------- -------- --------
Gross profit................................. 63,988 93,051 96,739
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 30,961 48,609 53,250
RESTRUCTURING CHARGE............................. -- -- 10,397
-------- -------- --------
Operating income............................. 33,027 44,442 33,092
OTHER (EXPENSE):
Interest expense............................... (5,929) (6,511) (8,344)
Other, net..................................... (4) (269) 263
-------- -------- --------
Total other expense.......................... (5,933) (6,780) (8,081)
-------- -------- --------
Income before income taxes................... 27,094 37,662 25,011
PROVISION FOR INCOME TAXES....................... 10,607 14,510 9,521
-------- -------- --------
Net income................................... $ 16,487 $ 23,152 $ 15,490
======== ======== ========
INCOME PER COMMON SHARE
Basic........................................ $ 1.54 $ 2.22 $ 1.47
======== ======== ========
Diluted...................................... $ 1.42 $ 2.01 $ 1.34
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic........................................ 10,707 10,433 10,547
======== ======== ========
Diluted...................................... 11,647 11,519 11,578
======== ======== ========
The accompanying notes to financial statements
are an integral part of these statements.
29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
[Download Table]
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED TREASURY
STOCK CAPITAL ADJUSTMENT EARNINGS SHARES
------ ---------- ----------- -------- --------
BALANCE, December 31, 1994.... $122 $62,296 $ (345) $36,998 $(18,588)
Exercise of stock options.... -- (466) -- -- 674
Cumulative translation ad-
justment.................... -- -- 274 -- --
Purchase of treasury shares.. -- -- -- -- (9,332)
Net income................... -- -- -- 16,487 --
---- ------- ------- ------- --------
BALANCE, December 31, 1995.... 122 61,830 (71) 53,485 (27,246)
Exercise of stock options.... -- (1,319) -- -- 1,983
Cumulative translation ad-
justment.................... -- -- (293) -- --
Purchase of treasury shares.. -- -- -- -- (1,702)
Net income................... -- -- -- 23,152 --
---- ------- ------- ------- --------
BALANCE, December 31, 1996.... 122 60,511 (364) 76,637 (26,965)
Exercise of stock options.... -- (585) -- -- 1,187
Cumulative translation ad-
justment.................... -- -- (1,192) -- --
Net income................... -- -- -- 15,490 --
---- ------- ------- ------- --------
BALANCE, December 31, 1997.... $122 $59,926 $(1,556) $92,127 $(25,778)
==== ======= ======= ======= ========
The accompanying notes to financial statements are an integral part of these
statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 16,487 $ 23,152 $ 15,490
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities--
Writedown of assets due to restructuring..... -- -- 8,894
Depreciation and amortization................ 8,628 11,964 15,190
Deferred income taxes........................ 3,017 3,324 6,133
Cumulative translation adjustment............ 274 (293) (1,192)
Changes in certain assets and liabilities--
Accounts receivable......................... 2,875 (5,317) 1,883
Inventories................................. 968 1,480 (12,208)
Other assets................................ 479 (1,875) (4,156)
Accounts payable and accrued liabilities.... (8,966) 8,790 (5,453)
--------- -------- ---------
Net cash provided by operating activities.. 23,762 41,225 24,581
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of net assets..................... (47,083) -- --
Capital expenditures.......................... (16,813) (57,922) (57,718)
--------- -------- ---------
Net cash (used in) investing activities.... (63,896) (57,922) (57,718)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt.................... 158,000 112,990 237,504
Payments of long-term debt.................... (106,649) (97,548) (204,664)
Payments for the purchase of treasury shares.. (9,332) (1,702) --
Exercise of stock options..................... 208 664 602
--------- -------- ---------
Net cash provided by financing activities..... 42,227 14,404 33,442
--------- -------- ---------
Net increase (decrease) in cash............... 2,093 (2,293) 305
CASH, beginning of period...................... 224 2,317 24
--------- -------- ---------
CASH, end of period............................ $ 2,317 $ 24 $ 329
========= ======== =========
The accompanying notes to financial statements
are an integral part of these statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND NATURE OF BUSINESS
The consolidated balance sheets as of December 31, 1996 and 1997, and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995, 1996 and 1997 include the accounts of ABT
Building Products Corporation ("ABT") (a Delaware corporation) and its wholly-
owned subsidiaries ABTco, Inc. ("ABTco"), and ABT Canada, Limited ("ABT
Canada") (collectively referred to as the "Company"). The Company was formed
to acquire substantially all of the net assets of the Building Products
Division ("Predecessor") of Abitibi-Price Corporation ("APC"). On October 20,
1992 ("Inception Date"), the Predecessor was acquired by the Company (the
"Acquisition") pursuant to a purchase agreement dated September 25, 1992 (the
"Purchase Agreement"), for $92 million. The Company was organized by Kohlberg
& Co. and an officer of the Company for the purpose of acquiring the
Predecessor. This transaction was accounted for using the purchase method of
accounting.
In February of 1994, the company acquired Canexel Hardboard, a former
division of Canadian Pacific Forest Products Limited ("CPFP") (now Avenor,
Inc.) located in Nova Scotia, Canada. In addition, during the second quarter
of 1995, the Company acquired KenTech Plastics, Inc. ("KenTech") and the Vinyl
Siding Division of EMCO Limited ("Vinyl Division"). The Company's 1995 results
include the results of KenTech and the Vinyl Division from the date of
acquisition. These transactions were accounted for using the purchase method
of accounting (Note 3).
The Company is a manufacturer or finisher of various building products
including exterior hardboard siding, fiber cement siding, interior hardboard,
including textured paneling, finished tileboard, hardboard substrate and
doorskins and plastics such as siding, prefinished mouldings, trim accessories
and shutters. The Company's products are sold internationally to building
products distributors, home center retailers, manufactured housing builders
and industrial fabricators. The Company's quarterly results of operations are
moderately seasonal due to increases in construction activity that typically
occur in the second and third quarters and, to a lesser extent, the first
quarter, thereby increasing sales and gross profits in such periods as
compared to the fourth quarter.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Significant transactions and balances between ABT and its subsidiaries have
been eliminated in consolidation.
Cash
Cash includes cash equivalents which consist of highly liquid investments
having maturities of three months or less when acquired.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Inventory costs include material,
labor and manufacturing overhead.
Inventories at December 31, 1996 and 1997 consisted of the following (in
thousands):
[Download Table]
1996 1997
------- -------
Finished products and work-in-process....................... $30,330 $38,935
Raw materials............................................... 8,954 9,560
Operating parts and supplies................................ 7,953 9,187
------- -------
$47,237 $57,682
======= =======
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on
a straight-line basis over the estimated useful lives of the assets. The
following useful lives are used for recognizing depreciation expense for
financial reporting purposes:
[Download Table]
Buildings and improvements........................................ 31.5 years
Machinery and equipment........................................... 5-16 years
Furniture and fixtures............................................ 10 years
Major renewals and betterments which extend the useful life of an asset are
capitalized; routine maintenance and repairs are expensed as incurred. Total
maintenance and repair expense charged to operations was approximately
$14,754,000, $17,793,000 and $18,493,000 for the years ended December 31,
1995, 1996 and 1997, respectively. Upon sale or retirement of assets, the
asset cost and related accumulated depreciation are removed from the accounts
and any related gain or loss is reflected in results of operations.
Other Assets
Other Assets are stated net of accumulated amortization of $3,893,000 and
$5,843,000 as of December 31, 1996 and 1997, respectively, and consist of
deferred charges related to caul plates and resin molds, deferred financing
costs and other intangible assets. Amortization of these costs is computed
using the straight-line method over the estimated useful lives ranging from 2
to 5 years.
Costs incurred for software are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired at the acquisition date. Goodwill is being amortized
on a straight-line basis over a period of 20 years. Accumulated amortization
at December 31, 1996 and 1997 was $857,000 and $1,384,000, respectively. In
July 1997 the Company announced a restructuring of its plastics products group
(See Note 10). Accordingly, the Company took a write-down of goodwill in the
amount of $1,246,000 originally recorded at the time of the KenTech
acquisition. The Company utilizes the undiscounted operating cash flow method
to continuously review the realization of goodwill associated with the
acquisitions.
Warranty Reserve
The Company and the Predecessor warrant certain of their products against
defective workmanship for up to 25 years. The estimated cost of warranty
obligations is recognized at the time the related products are sold. The
Purchase Agreement required APC to retain responsibility for a portion of this
liability for products sold prior to the acquisition date as follows:
1. One half of the dollar amount paid pursuant to documented claims for
warranty service in excess of $100,000 during any calendar year, and
2. All liability in excess of $2,500 with respect to each individual claim
in excess of $5,000.
For the years ended December 31, 1995, 1996 and 1997, the Company incurred
warranty expense related to its exterior hardboard siding products amounting
to $679,000, $705,000 and $715,000, respectively. Warranty expense incurred
for the remainder of the Company's product categories is immaterial.
Recognition of Revenue
Revenue is recorded on the date goods are shipped to the customer. Sales
returns and allowances are recorded as a charge against revenue in the period
in which the related sales are recognized.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Deferred tax assets and liabilities are recorded for all temporary
differences between financial and tax reporting and are the result of
differences in the timing of recognition of certain income and expense items
for financial and tax reporting.
Foreign Currency Transactions
The Canadian dollar is considered the functional currency of ABT Canada. For
reporting purposes, assets and liabilities have been translated to U.S.
dollars at the rate in effect at the end of the year and income and expense
accounts have been translated at average rates in effect during the year.
Foreign currency transaction gains and losses are included in income in the
periods in which they occur.
Research and Development
Costs incurred in connection with the development of new products and
manufacturing methods are charged to operations as incurred. Such costs
amounted to $850,000, $1,127,000 and $1,053,000 for the years ended December
31, 1995, 1996 and 1997, respectively.
Estimates and Assumptions
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 and
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.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121 on Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of in fiscal year 1996. The Company also adopted SFAS
No. 123 on Accounting for Stock-Based Compensation as described more fully in
Note 9 to the Consolidated Financial Statements. The adoption of SFAS No. 121
and SFAS No. 123 did not have a material impact on the financial position or
the results of operations of the Company.
(3) ACQUISITIONS
On April 3, 1995, the Company acquired KenTech, located in Hopkinsville,
Kentucky. The purchase price of KenTech was $14.1 million, which was funded
from drawings on the Company's revolving line of credit. The transaction was
accounted for under the purchase method of accounting and, accordingly, the
Company's consolidated financial statements reflect the results of operations
of KenTech from the date of acquisition. The allocation of the purchase price
was based on the fair value of the net assets acquired.
On May 31, 1995, the Company acquired through its wholly-owned subsidiary,
ABT Canada, the Vinyl Division of EMCO Limited, located in Acton, Ontario. The
purchase price of the Vinyl Division was $33.0 million, which was funded from
drawings on the Company's revolving line of credit. The transaction was
accounted for under the purchase method of accounting and, accordingly, the
Company's consolidated financial statements reflect the results of operations
of the Vinyl Division from the date of acquisition. The allocation of the
purchase price was based on the fair value of the net assets acquired.
Presented below is the unaudited summarized pro forma statement of
operations for the year ended December 31, 1995. The statement gives effect to
the purchase of KenTech and the Vinyl Division as if such transactions had
taken place on January 1, 1995. These results include certain adjustments,
primarily for
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
depreciation, interest and other expenses related to the acquisitions and are
not necessarily indicative of what the results would have been had the
transactions actually occurred on such dates (in thousands, except per share
data).
[Download Table]
YEAR ENDED
DECEMBER 31,
1995
------------
Net sales....................................................... $263,652
Net income...................................................... 15,844
Earnings per common share
Basic......................................................... $ 1.48
--------
Diluted....................................................... $ 1.36
--------
Average common shares outstanding
Basic......................................................... 10,707
--------
Diluted....................................................... 11,647
--------
(4) ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996 and 1997 consisted of the
following (in thousands):
[Download Table]
1996 1997
------- -------
Accrued payroll and benefits................................ $ 9,145 $ 7,445
Other....................................................... 7,038 3,928
------- -------
$16,183 $11,373
======= =======
(5) LONG-TERM DEBT
On March 11, 1997 the Company and its bank group executed a Third Amended
and Restated Credit Agreement ("Credit Agreement") which amended and modified
all prior credit agreements. The Credit Agreement provides for a line of
credit to the Company totaling $225 million consisting of (i) a $175 million
continuing revolving credit facility, and (ii) a term loan facility under
which the Company borrowed a term loan in the principal amount of $50 million
on April 3, 1995. Up to $50 million of the total line of credit may be used
for letters of credit. Included in the revolving credit facility is $10
million availability under a Swing Line (the "Swing Line"). The Swing Line
provides an administratively less complex procedure for temporary borrowings.
The Credit Agreement matures on March 10, 2002. However, annually at the
request of the Company and at the discretion of the bank group, the maturity
may be extended for additional one-year periods. The Credit Agreement allows
the Company to choose among interest rate options, which include the agent
bank's base rate of interest in effect from time to time (prime rate) or the
prevailing Eurodollar rate, each plus a specific maximum margin. The maximum
margin is based on the Company's leverage ratio (the "Ratio"). As of December
31, 1996 and 1997, the interest rate on outstanding revolving loans was 6.40%
and 6.55%, respectively. The interest rate on the $50 million term loan
borrowed on April 3, 1995 was 7.99%. In addition, the Credit Agreement
requires the payment of a quarterly commitment fee, based on the Ratio,
ranging from 0.10% to 0.25% per annum of the revolving credit facility.
The Credit Agreement is unsecured (except for a pledge of 65% of the capital
stock of ABT Canada and a pledge of an intercompany note payable by ABT Canada
to the Company) and requires that the Company meet certain covenants which,
among other things, require the maintenance of ratios related to leverage and
net worth. In addition, the Company is permitted to effect acquisitions so
long as, on a pro-forma basis, the Company remains in compliance with the
financial covenants specified in the agreement. As of December 31, 1997, the
Company is in compliance with all loan covenants.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1997 the Company entered into a loan agreement with the
Mississippi Business Finance Corporation for the issuance of $1 million
Variable Rate Demand Bonds (Series 1997A) and $16.5 million Taxable Variable
Rate Demand Revenue Bonds (Series 1997B) to finance the acquisition and
retrofitting of a vinyl siding manufacturing facility in Holly Springs,
Mississippi. The bonds bear interest rates determined weekly by the
remarketing agent. The interest rates at December 31, 1997 were 4.30% and
6.10%, respectively. The bonds mature on April 1, 2022 and are backed by
Irrevocable Letters of Credit issued under the Company's Credit Agreement. The
Credit Agreement requires the payment of quarterly letter of credit fees,
based on the Ratio, ranging from 0.285% to 0.75% per annum of the letter of
credit amount. The amounts included in total debt reflect drawings against
proceeds of the issued amount of the bonds.
[Download Table]
DECEMBER 31,
-----------------
1996 1997
------- --------
(IN THOUSANDS)
Revolving line of credit.................................. $50,065 $ 80,675
Term loans................................................ 50,000 40,625
Mississippi Business Finance Corporation Bonds
Series 1997A........................................... -- 1,000
Series 1997B............................................ -- 10,610
Capital lease obligations................................. 6 1
------- --------
100,071 132,911
Less-current maturities................................... (9,380) (12,501)
------- --------
Total long-term debt.................................... $90,691 $120,410
======= ========
The Company has entered into agreements to lease certain property under
terms which qualify as capital leases. Capital leases consist primarily of
data processing equipment. As of December 31, 1996 and 1997, assets recorded
under capital leases were approximately $373,000, net of accumulated
amortization of approximately $306,000 and $369,000, respectively.
Under existing agreements, maturities of long-term debt as of December 31,
1997, including capital lease obligations, are as follows (in thousands):
[Download Table]
1998............................................................. $ 12,501
1999............................................................. 12,500
2000............................................................. 12,500
2001............................................................. 3,125
2002............................................................. --
Thereafter....................................................... 92,285
--------
$132,911
========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
The provision for income taxes in the consolidated statements of operations
for the years ended December 31, 1995, 1996 and 1997 consists of the following
(in thousands):
[Download Table]
1995 1996 1997
------- ------- ------
Current
Federal........................................ $ 7,543 $ 9,510 $2,437
State and local................................ 1,333 2,132 193
Foreign........................................ (1,286) 215 249
------- ------- ------
Total Current................................ 7,590 11,857 2,879
------- ------- ------
Deferred
Federal........................................ 1,649 2,324 5,640
State and local................................ 544 426 1,006
Foreign........................................ 824 (97) (4)
------- ------- ------
Total Deferred................................... 3,017 2,653 6,642
------- ------- ------
Total provision for income taxes............. $10,607 $14,510 $9,521
======= ======= ======
The difference between the United States federal statutory income tax rate
and the consolidated effective income tax rate is summarized as follows (in
thousands):
1995 1996 1997
------- ------- ------
Income before income taxes multiplied by statu-
tory rate....................................... $ 9,483 $13,182 $8,754
State income tax (net of federal tax benefit).... 1,220 1,663 779
Foreign income tax (benefit)..................... (462) 118 245
Foreign sales corporation benefit................ (92) (60) (453)
Research and experimental tax credit............. -- -- (493)
Other............................................ 458 (393) 689
------- ------- ------
Total provision for income taxes................. $10,607 $14,510 $9,521
======= ======= ======
Deferred taxes are determined based on the estimated future tax effects of
temporary differences between the financial reporting and tax basis of assets
and liabilities, given the provisions of the enacted tax laws. Deferred tax
consequences of significant temporary differences existing as of December 31,
1996 and 1997 are as follows (in thousands):
[Download Table]
1996 1997
--------- --------
Accrued vacation....................................... $ 563 $ 395
Inventory burden....................................... 151 584
Warranty............................................... (36) 985
Prepaid pension expense................................ 469 888
Restructuring reserve.................................. -- 2,761
Canadian net operating loss and investment tax credit
carryover, net of valuation allowance of $0 and $1,552
at December 31, 1996 and 1997, respectively........... 3,170 2,755
--------- --------
Net deferred tax asset............................... 4,317 8,368
--------- --------
Depreciation........................................... (15,186) (19,236)
Asset capitalization................................... -- (4,487)
Other.................................................. (46) (1,693)
--------- --------
Deferred tax liability............................... (15,232) (25,416)
--------- --------
$(10,915) $(17,048)
========= ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Tax benefits arising from the exercise of stock options in the amount of
$176,000, $815,000 and $739,000 are not reflected in the current tax
provisions for the years ended Decmber 31, 1995, 1996 and 1997, respectively.
These amounts were credited directly to additional paid-in capital.
At December 31, 1997, the Company's Canadian operation had available tax net
operating losses and investment tax credits of $6,244,000 and $1,809,000,
respectively, which will begin to expire in 2001 and 2004, resepctively. In
1997, the Company recorded a valuation allowance of $1,552,000 for unrealized
net operating loss carryforwards and investment tax credits that may expire
before the Company is able to utilize such tax assets.
(7) EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory, defined benefit pension plan
covering substantially all U.S. employees. Pension plan costs are funded in
compliance with the Employee Retirement Income Security Act of 1974 "ERISA"
requirements. The following table sets forth the funded status of the plan at
January 1, 1997 and 1998 (in thousands):
[Download Table]
1997 1998
------- -------
Actuarial present value of benefit obligation--
Vested benefits........................................ $41,318 $44,412
Nonvested benefits..................................... 370 832
------- -------
Accumulated benefit obligation........................... 41,688 45,244
Effect of projected future compensation levels........... 7,012 7,323
------- -------
Projected benefit obligation............................. 48,700 52,567
Plan assets at fair value................................ 46,902 52,884
------- -------
Projected benefit obligation (in excess of) less than
plan assets............................................. (1,798) 317
Unrecognized prior service cost.......................... 770 1,372
Unrecognized net loss (gain)............................. 955 (2,484)
------- -------
Pension asset (liability) recorded in balance sheets..... $ (73) $ 795
======= =======
The assumptions used to measure the projected benefit obligation and to
compute the expected long-term return on assets for the plan are as follows:
[Download Table]
1995 1996 1997
---- ---- ----
Discount rate.............................................. 7.5% 7.5% 7.5%
Average increase in compensation levels.................... 4.5 4.5 4.5
Expected long-term return on assets........................ 9.0 9.0 10.0
The plan's assets consist primarily of common stocks, bonds and cash
equivalents.
Net periodic pension cost for the defined benefit pension plan for the years
ended December 31, 1995, 1996 and 1997 include the following components (in
thousands):
[Download Table]
1995 1996 1997
------ ------ ------
Service cost on benefits
earned during the peri-
od..................... $1,029 $1,432 $1,577
Interest cost on pro-
jected benefit obliga-
tion................... 3,353 3,696 3,626
Expected return on plan
assets................. (3,602) (4,361) (4,584)
Amortization cost....... (70) 54 103
------ ------ ------
Net periodic pension
cost................... $ 710 $ 821 $ 722
====== ====== ======
Certain employees, whose benefits under the plan have been reduced as the
result of recent formula changes or who are otherwise designated by the
compensation committee, may accrue additional benefits under
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
supplemental nonqualified plans which the Company has established. The cost of
these plans was approximately $220,000, $390,000 and $532,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. The accumulated benefit
obligation of these plans was $1,056,000 and $1,825,000 as of December 31,
1996 and 1997, respectively. The projected benefit obligation of the plans was
$1,453,000 and $2,143,000 as of December 31, 1996 and 1997, respectively. The
plans are not funded, thus plan assets at December 31, 1996 and 1997 were $0.
The pension liability recorded in the consolidated balance sheets is $862,399
and $1,393,072 at December 31, 1996 and 1997, respectively. The actuarial
assumptions used for these plans are the same as those used to measure the
defined benefit plan funded in compliance with ERISA requirements.
The Company maintains no post-retirement benefits other than pensions.
The Company is in the process of finalizing the pension asset and liability
transfer with CPFP and EMCO Limited, as it relates to the acquisitions of
Canexel and the Vinyl Division (Note 3). CPFP and EMCO Limited retained the
obligation for all participants retired prior to the acquisition date. These
plans do not have a material effect on the Company's financial condition or
results of operations.
(8) LEASES
The Company is party to numerous leases, principally for vehicles,
administrative and sales offices and warehouses. Rent expense under operating
leases was approximately $2,219,000 $2,967,000 and $3,947,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1997, future minimum annual rental commitments were as
follows (in thousands):
[Download Table]
OPERATING
LEASES
---------
1998............................................................... $2,487
1999............................................................... 1,613
2000............................................................... 1,264
2001............................................................... 565
2002 and thereafter................................................ 144
------
Total minimum lease payments..................................... $6,073
======
(9) STOCKHOLDERS' EQUITY
On February 16, 1994, the major shareholders of the Company completed a
secondary offering of 3,415,000 shares. The costs incurred were charged to
additional paid-in capital and amounted to approximately $600,000.
Commencing the third quarter of 1994, the Board of Directors authorized the
repurchase of up to 2,200,000 shares of the Company's common stock in the open
market. Treasury shares repurchased amounted to 591,000 in 1995 and 115,000 in
1996 and 0 in 1997. At December 31, 1997, the Company had 1,612,000 treasury
shares. Accordingly, the cost to repurchase the treasury shares has been
recorded in stockholders' equity.
The Board of Directors and stockholders of the Company adopted a Stock
Option Plan pursuant to which members of management and other employees of the
Company may be granted options to purchase up to an aggregate of 3,100,000
shares of common stock. At the Inception Date, certain officers of the Company
were granted options to purchase 1,120,000 shares of common stock at an
exercise price of $2.50 per share, the fair market value as of the date of
grant. Options generally become exercisable ratably over a four-year period
and expire ten years after the date of grant. The Company accounts for this
plan under APB Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost for these plans been determined
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts for the
years ended December 31, 1995, 1996 and 1997 (in thousands, except for per
share data):
[Download Table]
1995 1996 1997
------- ------- -------
Net Income: As Reported $16,487 $23,152 $15,490
Pro Forma 15,539 21,905 14,109
Earnings per Share:
Basic As Reported $1.54 $2.22 $1.47
Pro Forma 1.45 2.10 1.34
Diluted As Reported $1.42 $2.01 $1.34
Pro Forma 1.33 1.90 1.22
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The following table provides summary information regarding stock options
granted under the Stock Option Plan:
[Download Table]
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. EX. AVG. EX. AVG. EX.
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding at January
1...................... 1,910,750 $ 9 2,376,360 $11 2,185,657 $12
Granted................. 529,860 19 24,400 20 318,775 18
Exercised............... (31,800) 3 (172,393) 7 (156,857) 12
Cancelled............... (32,450) 17 (42,710) 17 (40,250) 19
--------- --- --------- --- --------- ---
Outstanding at December
31..................... 2,376,360 12 2,185,657 12 2,307,325 13
--------- --- --------- --- --------- ---
Exercisable at December
31..................... 1,022,960 6 1,299,532 7 1,605,975 10
========= === ========= === ========= ===
The weighted average fair value of options granted for 1995, 1996 and 1997
was $12.44, $12.28 and $12.28, respectively. 902,000 of the 2,307,325 options
outstanding at December 31, 1997 have exercise prices of $2.50 with a weighted
average remaining contractual life of 5 years. All of these options are
exercisable. 1,140,125 options outstanding have exercise prices between $11.80
and $20.65 with a weighted average exercise price of $17.51 and a weighted
average remaining contractual life of 7 years. The remaining 265,200 options
have exercise prices between $20.66 and $29.50 with a weighted average
exercise price of $25.96 and a weighted average remaining contractual life of
6 years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1995, 1996 and 1997, respectively:
risk-free interest rates of 7.13%, 6.35% and 5.99%; expected dividend yield of
0%; expected lives of 10 years; expected volatility of 42.00%, 38.04% and
38.76%.
(10) RESTRUCTURING CHARGE
On July 7, 1997, the Company announced that it was restructuring its Plastic
Products Group. The restructuring program was implemented to phase out the
Company's plastics industrial business and to allow the Company to focus on
specialty building products. Accordingly, the Company recognized a $10.4
million charge during the period ended June 30, 1997. $8.9 million of the
restructuring charge consisted of a write-down of certain machinery and
equipment, inventory and goodwill to net realizable values. The remaining $1.5
million
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consisted of severance payments and outstanding lease obligations related to
the closing of certain leased facilities. The impact on earnings per share for
the year ended December 31, 1997, amounted to $0.56.
As of December 31, 1997, the remaining balance of $1.1 million related to
the restructuring charge is included in the accrued expenses in the Company's
consolidated balance sheet.
(11) COMMITMENTS AND CONTINGENCIES
Under the terms of the asset purchase agreements between the Company and
APC, CPFP and EMCO Limited, such entities agreed to indemnify the Company for
certain liabilities or obligations of the Predecessor, Canexel and the Vinyl
Division respectively, arising on or prior to the change in ownership
including liabilities related to environmental, product liability and
litigation matters. In connection with such transactions, as well as the
acquisition of KenTech, the Company assumed various liabilities and
obligations under product warranties with respect to products manufactured
prior to the change in ownership.
Environmental Compliance
On August 30, 1995, the Company completed negotiations with Michigan
environmental authorities regarding a consent judgment providing for an odor
emissions abatement program at its Alpena, Michigan facility. The program
provides for phased installation of controls to effect a staged reduction of
the facility's emissions of odors into the air. It is estimated that capital
expenditures of approximately $8 million to $12 million will be required in
order to attain compliance with the program. On November 27, 1995, the Company
and ABTco commenced an action against Abitibi-Price Corporation ("APC"), as
the prior owner of the Alpena facility, and APC's corporate parent Abitibi-
Price, Inc. ("API") in the Circuit Court for the County of Oakland, Michigan
(ABT Building Products Corporation and ABTco, Inc. v. Abitibi-Price
Corporation and Abitibi-Price, Inc., Case No. 95-508819-CK), seeking to
recover damages incurred in connection with the remediation, correction and
control of odor emissions at the Alpena facility. Although not yet dismissed,
under the Indemnity Settlement (as defined below), the parties have agreed to
dismiss this action with prejudice.
Litigation
The Company and ABTco have been named as defendants in a class action and
four separate putative class actions arising from hardboard siding
manufactured, distributed, or sold by them or by Abitibi-Price Corporation
("APC"), Abitibi-Price, Inc. ("API") or Abitibi-Consolidated, Inc. ("ACI").
APC, API, and ACI have also been named as defendants in these actions, and APC
has been named a defendant in certain other actions, which may result in
liability for the Company under the terms of the Indemnity Settlement as
described below:
(1) Fyola et al. v. ABT Building Products Corporation, ABTco, Inc. and
Abitibi-Price Corporation, Docket No. 95-12854, Court of Common Pleas of
Allegheny County, Pennsylvania (the "Fyola Action").
August 8, 1995, plaintiffs Glenn Fyola, Patricia Fyola, Joyce D'Antonio,
and Kenneth Hyre filed this action in the Court of Common Pleas of
Allegheny County, Pennsylvania against the Company. Plaintiffs alleged that
they were suing on behalf of themselves and a putative class composed of
residential homeowners who reside in Pennsylvania and whose homes have or
had for their exterior siding a hardboard product which was allegedly
manufactured, distributed, or sold by the Company. The original complaint
alleged that the exterior siding on plaintiffs' homes had prematurely
rotted, warped, buckled, and deteriorated. Plaintiffs asserted purported
claims for breach of implied warranty of merchantability, breach of implied
warranty of fitness, breach of express warranty, violation of the
Pennsylvania Unfair Trade Practice and Consumer Protection Law, and deceit
by concealment. Plaintiffs, on behalf of themselves and
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the putative class, sought compensatory and punitive damages in unspecified
amounts, including economic damages, treble damages under the Pennsylvania
Unfair Trade Practice and Consumer Protection Law, and an award of
attorneys' fees.
The Company filed an "Answer and New Matter" on October 31, 1995, that
denied all material allegations of the complaint and asserted affirmative
defenses.
On February 5, 1996, plaintiffs filed an amended complaint adding ABTco
and APC as defendants. The amended complaint was otherwise substantially
similar to the original complaint.
The action was removed to the United States District Court for the
Western District of Pennsylvania. By order dated November 25, 1996, that
Court remanded the action to the Court of Common Pleas for Allegheny
County.
In response to the amended complaint, defendants filed an "Answer and New
Matter" dated December 27, 1996, that denies all material allegations of
the amended complaint and asserts affirmative defenses. On March 25, 1997,
defendants filed a motion seeking a stay of the action or, in the
alternative, an order limiting discovery to certification-related issues
until the court rules upon plaintiffs' motion for class certification. On
May 30, 1997, the Court of Common Pleas of Allegheny County entered an
order staying this action pending a decision by the United States District
Court for the Southern District of Alabama as to whether the conditional
order of certification already entered in the Foster Action (which is
discussed below) should be upheld, or whether the classes and subclasses
already conditionally certified in that action should be decertified. The
Fyola action has not been certified as a class action.
The Company and ABTco intend to defend the action vigorously.
(2) Foster et al. v. ABTco, Inc., ABT Building Products Corporation,
Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. CV95-151M,
Circuit Court of Choctaw County of Alabama (the "Foster Action").
On December 21, 1995, plaintiffs Thomas and Linda Foster brought this
action in the Circuit Court of Choctaw County, Alabama, on behalf of
themselves and a class generally composed of all individuals and entities
(i) that own or owned property in the United States on which hardboard
siding manufactured, distributed, or sold by the Company, ABTco, API, or
APC has been installed and (ii) that have already suffered (or will suffer
within the warranty period) alleged damage because, according to
plaintiffs, such siding prematurely rots, buckles, swells, cracks or
otherwise deteriorates. Plaintiffs filed an amended complaint on July 10,
1996. Plaintiffs and the putative class are seeking compensatory damages
and an award of attorneys' fees. The complaint alleges that the "amount in
controversy is in the millions of dollars classwide and is typically
several thousand dollars for each plaintiff and individual class member."
On December 22, 1995, this action was conditionally certified as a class
action by ex parte order.
On January 23, 1996, defendants removed the action to the United States
District Court for the Southern District of Alabama. On October 31, 1996,
defendants filed an answer that denies all material allegations of the
amended complaint and asserts affirmative defenses.
On May 29, 1997, API and APC filed cross-claims against the Company and
ABTco for breach of contract and common-law indemnification.
On May 29, 1997, the Company and ABTco filed cross-claims against API and
APC for indemnification and contribution. On June 18, 1997, the Company and
ABTco filed amended cross-claims against API and APC for indemnification
and contribution. By agreement dated as of October 1, 1997 (the
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Indemnity Settlement"), the Company and APC agreed to voluntarily dismiss,
with prejudice, these cross-claims. See the description of the Indemnity
Settlement below.
On September 3, 1997, plaintiffs filed a renewed motion they had
previously brought seeking remand of the action to the Circuit Court of
Choctaw County, Alabama. The Court granted this motion and remanded the
action by order dated on November 21, 1997.
The parties are currently conducting certification discovery.
The Company and ABTco intend to defend the action vigorously.
(3) Dunn et al. v. ABTco, Inc., ABT Building Products Corporation,
Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. 96-CVS7690,
Superior Court of Forsyth County, North Carolina.
On December 27, 1996, plaintiffs William Dunn and Paul and Teresa
Sullivan brought this action on behalf of themselves and a putative class
generally composed of all individuals and entities (i) that own or owned
property in the United States on which hardboard siding manufactured,
distributed, or sold by the Company, ABTco, API or APC has been installed
and (ii) that have already suffered (or will suffer within the warranty
period) alleged damage because, according to plaintiffs, such siding
prematurely rots, buckles, swells, cracks or otherwise deteriorates.
Plaintiffs and the putative class are seeking compensatory damages and an
award of attorneys' fees. The complaint alleges that the "aggregate amount
in controversy is in the millions of dollars classwide." This action has
not been certified as a class action. On January 28, 1997, all defendants
moved to abate or stay the action. That motion was argued on February 14,
1997. By order signed on February 18, 1997, the court denied the motion to
abate but granted the motion to stay, without prejudice for either party to
move to reconsider upon the loss of jurisdiction over the Foster Action by
the federal and state courts.
The Company and ABTco intend to defend the action vigorously.
(4) Ezzell et al. v. ABTco, Inc., ABT Building Products Corporation,
Abitibi-Price, Inc. and Abitibi-Price Corporation, No. 97-CVS-167, Superior
Court of Onslow County, North Carolina.
On January 21, 1997, plaintiffs John and Rosemary Ezzell filed this
action on behalf of themselves and a putative class generally composed of
all individuals and entities (i) that own or owned property in the United
States on which hardboard siding manufactured, distributed, or sold by the
Company, ABTco, API, or APC has been installed and (ii) that have already
suffered (or will suffer within the warranty period) alleged damage
because, according to plaintiffs, such siding prematurely rots, buckles,
discolors, deteriorates, and otherwise does not perform as expressly
represented or warranted, and/or would not perform in accordance with the
reasonable expectations of class members and other consumers that such
siding is durable, suitable and proper to be used on personal residences or
other properties. The complaint alleges that "the aggregate amount in
controversy is typically several thousand dollars for each plaintiff and
individual class member." On March 27, 1997, the Company and ABTco served
an answer that denies all material allegations of the complaint and asserts
affirmative defenses. The action has not been certified as a class action.
On May 23, 1997, all defendants moved to abate or stay the action. By
order signed on October 2, 1997, the court denied the motion to abate but
granted the motion to stay, provided that in the event the court in the
Foster Action shall enter an order decertifying, in whole or in part, the
classes and subclasses conditionally certified in that action in such a way
that the representative plaintiffs in this action are not represented in
that action, the plaintiffs in this action may move for reconsideration of
the stay.
The Company and ABTco intend to defend the action vigorously.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) Fiedler et al. v. ABT Building Products Corporation, ABTco, Inc.,
Abitibi-Price, Corp. and Abitibi-Consolidated, Inc., Civil Action No. 97-
CP-08-1545, Court of Common Pleas of Berkeley County, South Carolina.
On September 25, 1997, plaintiffs Nancy Fiedler and Daniel Gaines brought
this action on behalf of themselves and a putative class composed of all
past and present owners of mobile homes who reside or resided in South
Carolina and whose mobile homes had compressed wood fiber exterior siding
designed, marketed, or manufactured by the Company, ABTco, APC or ACI.
Plaintiffs' complaint alleges that defendants' siding is defective and
fails to perform as warranted by prematurely deteriorating, rotting,
swelling, cracking, splitting, delaminating, absorbing water, warping,
bulging and/or buckling under normal conditions and exposure. Plaintiffs'
complaint asserts purported claims for breach of express warranty, breach
of implied warranty of merchantability, negligence/negligence per se/gross
negligence and strict liability in tort. Plaintiffs, on behalf of
themselves and the putative class, seek actual, consequential and punitive
damages "not to exceed $74,999.00 per class member," and the costs and
expenses of the lawsuit. The action has not been certified as a class
action.
On October 29, 1997, defendants removed the action to the United States
District Court for the District of South Carolina. On November 5, 1997,
defendants served an answer that denies all material allegations of the
complaint and asserts affirmative defenses. With consent of defendants, the
District Court remanded the case back to the Court of Common Pleas of
Berkeley County by order dated December 10, 1997. On February 11, 1998,
defendants moved to stay the action and for a stay of discovery. This
motion has not yet been fully briefed or decided.
The Company and ABTco intend to defend the action vigorously.
(6) Lillis et al. v. Abitibi-Price Corporation and Sunstate Manufactured
Homes of Georgia, Inc. d/b/a Peach State Homes, Inc., Case No. 97-18136
CA21, Circuit Court of Dade County, Florida (the "Lillis Action").
On August 13, 1997, plaintiff Gloria Lillis filed this action in the
Circuit Court of the Eleventh Judicial Circuit in and for Dade County,
Florida against APC and Sunstate Manufactured Homes of Georgia, Inc. The
plaintiff alleged that she was suing APC on behalf of herself and a
putative class composed of all persons who purchased in the State of
Florida a new manufactured home with APC hardboard siding. Plaintiff's
complaint alleges that APC's hardboard siding is defective because under
normal maintenance it deteriorates, delaminates, disintegrates and has
virtually no resistance to moisture. Plaintiff's complaint against APC
asserts purported claims for breach of express warranty and a Florida
statutory claim for failure satisfactorily to resolve a warranty claim.
Plaintiff, on behalf of herself and the putative class, seeks compensatory
damages, attorneys' fees, costs and interest.
On September 17, 1997, defendants removed the action to the United States
District Court for the Southern District of Florida. On September 26, 1997,
defendant APC filed a motion to dismiss the plaintiff's statutory claim. On
October 17, 1997, plaintiff filed a motion to remand the action to the
Circuit Court for Dade County, Florida. These motions have not yet been
decided. This action is not certified as a class action.
The Company may have potential liability for this litigation under the
terms of the Indemnity Settlement described below.
(7) Arredondo, et al. v. Masonite Corporation, Abitibi-Price Corporation,
MG Building Materials, Inc., and Nu-Air Manufacturing Co., Inc., Cause No.
4571, District Court of Jim Hogg County, Texas (the "Arredondo Action");
and Adams, et al. v. Masonite Corporation, Abitibi-Price Corporation, MG
Building Materials, Inc. and Nu-Air Manufacturing Co., Inc., Cause No.
16707, District Court of Duval County, Texas, (the "Adams Action").
On August 30, 1996, two consolidated actions, the Adams Action, filed in
the District Court of Duval County, Texas, and the Arredondo Action, filed
in the District Court of Jim Hogg County, Texas, were
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
brought naming APC as a defendant. In the Adams Action, the owners of
approximately 140 homes, and in the Arredondo Action, the owners of
approximately 30 homes, alleged that they had suffered damages as a result
of APC hardboard siding installed on their homes. The complaint in the
Adams Action and the complaint in the Arredondo Action are virtually
identical and were filed by the same attorney. The plaintiffs in the these
actions allege that hardboard siding manufactured by APC is defective and
failed to perform to a level reasonably expected for a product of its
nature. The plaintiffs in the these actions assert purported claims for
negligence and gross negligence, breach of implied warranty of fitness,
breach of implied warranty of merchantability, breach of express warranty,
negligent misrepresentation, and violation of the Texas deceptive trade
practices act. The plaintiffs in the these actions seek actual and
exemplary damages, including damages for economic loss and mental anguish,
treble damages, costs and interest.
In both actions, APC filed a motion to transfer venue with respect to the
majority of the plaintiffs. The trial court granted APC's motion to
transfer, but rather than transfer those plaintiffs to the venue requested
by APC, transferred those plaintiffs to the county of their residence. APC
sought mandamus and review by the Texas Supreme Court on this issue, and
the issue is currently pending before the Texas Supreme Court.
As a result of the trial court's decision, there are currently three
actions pending: the original Arredondo Action, in which the owners of
approximately 15 homes have remaining claims against APC; the original
Adams Action, in which the owners of approximately 40 homes have remaining
claims against APC; and an action in Jim Wells County, Texas, in which it
is currently unclear how many plaintiffs have claims against APC. Discovery
is proceeding in the Arredondo Action and in the Adams Action.
The Adams Action and the Arredondo Action are treated as non-class action
claims under the Indemnity Settlement as described below for which the
Company may have potential liability.
(8) Indemnity Settlement.
On June 16, 1997, APC and Abitibi-Price Sales Corporation brought suit
against the Company and ABTco in the Supreme Court of the State of New York
for the County of Westchester alleging violation of the indemnity and
warranty provisions in the asset sale agreement relating to the Acquisition
(the "Abitibi Action"). On October 1, 1997, the Company and APC agreed to
settle their claims under the Abitibi Action and to dismiss the Abitibi
Action with prejudice. Pursuant to the Indemnity Settlement, the Company
and APC agreed to an allocation of liability with respect to claims
relating to ABT Board (as defined below) and APC Board (as defined below).
The following description of the terms of the Indemnity Settlement is
general, and is subject to restrictions, qualifications, and additional
terms stated in the Indemnity Settlement itself. In general, under the
terms of the Indemnity Settlement all amounts paid in settlement or
judgment (other than punitive damages if they are assessed against either
the Company or APC individually) following the completion of any claims
process resolving any class action claim (including consolidated cases
involving more than 125 homes owned by named plaintiffs) ("Class Action
Damage Amounts") that relate to siding sold by APC prior to October 22,
1992 or held as finished goods inventory by APC on October 22, 1992 ("APC
Board") shall be paid 65% by Abitibi and 35% by the Company. Class Action
Damage Amounts relating to siding sold by the Company after October 22,
1992 ("ABT Board") shall be paid 100% by the Company. Class Action Damage
Amounts that cannot be attributed to either the Company or APC
("Indeterminate Amounts") shall be paid 50% by the Company and 50% by APC.
Total amounts paid for joint local counsel and other joint expenses, for
Class Action Damage Amounts, and for plaintiffs' attorneys' fees and
expenses (collectively "Final Class Action Costs") are to be apportioned
according to the Company's and APC's proportional share of the Class Action
Damage Amounts, including the Indeterminate Amounts (the "Proportional
Share").
All joint costs of defending and disposing of class action claims
incurred prior to the final determination of what portion of claims relate
to APC Board and what portion relate to ABT Board ("Preliminary Class
Action Costs") are to be paid 50% by the Company and 50% by APC, with
provisions for adjustment if either the Company's or APC's Proportional
Share exceeds 60% of the Final Class Action
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs. In the event any class action claim involves only ABT Board, the
Company shall pay 100% of the Preliminary Class Action Costs. In the event
any class action claim involves only APC Board, APC shall pay 65% and the
Company shall pay 35% of the Preliminary Class Action Costs.
Under the terms of the Indemnity Settlement, with respect to non-class
action claims relating to APC Board, the Company is responsible for the
first $100,000 in each calendar year of all amounts paid for settlements,
judgments and associated fees and expenses of local outside counsel. APC
and the Company are each responsible for 50% of such amounts in excess of
$100,000 per year up to $5,000 with respect to individual claims. APC is
responsible for 100% of amounts in excess of $5,000 with respect to
individual claims. The Adams Action and the Arredondo Action are treated as
Non-Class Action Claims under the Indemnity Settlement. With respect to
Non-Class Action Claims relating to ABT Board, the Company shall pay 100%
of any amounts paid for settlements, judgments and associated fees and
expenses of local outside counsel representing the parties in the
jurisdictions where litigation or arbitration involving such claims is
pending.
The Company believes that its exterior hardboard siding products are free
of defects and, when properly installed and maintained, are suitable for
their intended purposes and meet all applicable legal standards. The
Company believes that it has substantial defenses to the claims asserted by
the representative plaintiffs on behalf of themselves and the conditionally
certified class and the putative classes in the Hardboard Siding Class
Actions. The Company and ABTco intend to defend vigorously those actions in
which they are named as defendants. Nevertheless, the litigations are in
preliminary stages. Given the uncertainties inherent in litigation, it is
possible that some or all of the Hardboard Siding Class Actions, the Adams
Action or the Arredondo Action could be decided against the Company, ABTco,
APC, API or ACI in whole or in part. It is also possible that additional
actions or class actions could be brought against the Company, ABTco, API,
APC or ACI in connection with hardboard siding manufactured, distributed or
sold by them. Should the Company, ABTco, API, APC or ACI ultimately be
found liable in these actions to individual plaintiffs, members of the
conditionally certified class or the putative classes, or to any future
plaintiff, the damages could materially and adversely affect the Company's
business, financial condition and results of operations. The Company is not
able to estimate or predict the amount of such ultimate liability, if any,
and accordingly, the Company has made no reserve provisions in its
consolidated financial statements (other than standard warranty accruals).
Even if the Company and ABTco are not ultimately found to be liable in any
of these actions, the financial and business burdens of defending prolonged
and expensive litigation or of any settlement could materially and
adversely affect the Company's business, financial condition and results of
operation.
In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of business, none of which, in management's
opinion, are expected to have a material adverse effect on the Company's
operating results or financial condition.
(12) RELATED-PARTY TRANSACTIONS
The Company entered into an agreement with Kohlberg & Co. to provide
management services for an annual fee of $95,000, plus out-of-pocket expenses.
Payments under this agreement for the years ended December 31, 1995, 1996 and
1997 were approximately $114,000, $103,000 and $118,000, respectively.
(13) SUPPLEMENTAL CASH FLOW DISCLOSURE
In addition to the information provided in the Statements of Cash Flows, the
following is a supplemental disclosure of cash flow information for the years
ended December 31, 1995, 1996 and 1997 (in thousands):
[Download Table]
1995 1996 1997
------- ------ ------
Cash paid during year for--
Interest............................................ $ 4,834 $8,017 $9,303
Income taxes........................................ 10,833 7,124 7,483
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data.)
[Enlarge/Download Table]
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------- --------------- --------------- ---------------
1996 1997 1996 1997 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- ------- -------
Net sales............... $74,362 $77,023 $82,549 $88,396 $88,435 $87,516 $75,056 $68,879
Gross profit............ 21,062 24,449 24,469 27,387 26,456 24,381 21,064 20,522
Operating income........ 10,880 11,356 12,577 3,805 13,209 11,009 7,776 6,922
Net income.............. 5,481 6,154 6,552 1,149 6,894 5,255 4,225 2,932
Net income per common share
Basic................. .53 .58 .63 .11 .66 .50 .40 .28
Diluted............... .48 .53 .57 .10 .60 .46 .36 .26
(15) CONCENTRATION OF BUSINESS/GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment; the design,
manufacture, sale and support of building products. One customer accounts for
11% of net sales for the year ended December 31, 1997.
The following table provides summary information for the years ended
December 31, 1995, 1996 and 1997
(in millions):
[Download Table]
1995 1996 1997
------ ------ ------
Revenues
U.S. Operations...................................... $192.6 $233.6 $221.6
Canadian Operations.................................. 47.5 86.8 100.2
------ ------ ------
Total Revenues..................................... 240.1 320.4 321.8
====== ====== ======
Operating Income
U.S. Operations...................................... 31.6 38.1 28.0
Canadian Operations.................................. 1.4 6.3 5.1
------ ------ ------
Total Operating Income............................. 33.0 44.4 33.1
====== ====== ======
Assets
U.S. Operations...................................... 156.5 193.4 237.3
Canadian Operations.................................. 54.3 66.9 71.9
------ ------ ------
Total Assets....................................... $210.8 $260.3 $309.2
====== ====== ======
(16) EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted
earnings per share were calculated by including the effect of all dilutive
securities. For the years ended December 31, 1995, 1996 and 1997, the effect
of potentially dilutive stock options was 940,000, 1,086,000 and 1,031,000,
respectively. The Company had additional outstanding stock options of
1,322,160, 250,604 and 917,823 as of December 31, 1995, 1996 and 1997,
respectively, which were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company adopted SFAS No. 128, "Earnings per Share", effective
December 15, 1997. As a result, the Company's reported earnings per share for
1995 and 1996 were restated. The effect of this accounting change on
previously reported earnings per share (EPS) data was as follows:
[Download Table]
1995 1996
----- -----
Per Share amounts:
Primary EPS as reported......................................... $1.42 $2.01
Effect of SFAS No. 128.......................................... .12 .21
----- -----
Basic EPS as restated........................................... $1.54 $2.22
===== =====
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual
Meeting of Shareholders to be held on May 5, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual
Meeting of Shareholders to be held on May 5, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual
Meeting of Shareholders to be held on May 5, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement prepared with respect to the Annual
Meeting of Shareholders to be held on May 5, 1998.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statement, Financial Statement Schedules and Exhibits
1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995, 1996 and 1997
Consolidated Statements of Cash Flow for the Years Ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
[Download Table]
Schedule II--Valuation and Qualifying Accounts
3. Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other documents
previously filed with the Securities and Exchange Commission.
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of ABT Building
Products Corporation, as amended to date (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
No. 33-61676)).
3.2 Amended and Restated By-Laws of ABT Building Products Corporation
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
4.1 Form of certificate representing shares of the Common Stock of the
Company (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
4.2 Letter from the Company to the Securities and Exchange Commission
agreeing to file certain debt instruments.
10.1 Asset Purchase Agreement, dated September 25, 1992, by and between
Abitibi-Price Corporation ("APC") and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 33-61676)).
10.2 First Amendment to Asset Purchase Agreement, dated as of October 16,
1992, by and between APC and the Company (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File
No. 33-61676)).
10.3 Amended and Restated Escrow Agreement, dated December 15, 1993, among
APC, the Company and NBD Bank, N.A. (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
No. 33-73732)).
10.4 IWA Labor Contract Assumption Agreement, dated as of October 20, 1992,
by and between Local III-260, International Woodworkers of America,
AFL-CIO-CLC and ABT (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.5 USW Labor Contract Assumption Agreement, dated as of October 20, 1992,
by and between Local 7923 of the United Steelworkers of America, AFL-
CIO and ABT (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
50
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
10.6 Trademark License Agreement, dated as of October 20, 1992, by and
between APC and ABT (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.7 Stockholders Agreement, among the Company, KABT Acquisition Company,
L.P. and KABT II Acquisition Company, L.P., George T. Brophy, Richard
E. Parker, William J. Adams, and others dated as of October 20, 1992
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
10.8 ABT Building Products Corporation Amended and Restated Stock Option
Plan (adopted April 22, 1993 (incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 (File No. 33-
61676)).
10.9 ABT Building Products Corporation--1994 Director Stock Option Plan
(incorporated by reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 (File No. 33-82606)).
10.10 Employment Agreement between the Company and George T. Brophy, dated
as of October 20, 1992 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.11 ABT Building Products Corporation--1994 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 (File No. 33-82606)).
10.13 Amended and Restated Revolving and Term Credit Agreement, dated as of
July 13, 1995, between the Company and Coamerica Bank, as agent
(incorporated by reference to Exhibit 10.13 to the Company's Annual
Report Form 10-K for the year ended December 31, 1995 (File No. 0-
21856)).
10.14 Summary of ABT Building Products Corporation Bonus Plan (adopted April
22, 1993) (incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
10.15 Labor Agreement between ABTco Inc., Alpena Plant and Local III-
26010.15 International Woodworkers of America AFL-CIO-CLC, 1992-1996
Contract (incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
10.16 Labor Agreement between Abitibi-Price Corporation Building Products
Group, Alpena Plant and United Steelworkers of America Local 7923 AFL-
CIO, 1992-1996 Contract (incorporated by reference to Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.17 Settlement Agreement between ABT Building Products Corporation and APC
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1(File No. 33-61676)).
10.18 Asset Purchase Agreement, dated as of January 26, 1994, between
Canadian Pacific Forest Products Limited and ABT Building Products
Canada, Limited (incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File No. 33-73732)).
10.19 Asset Purchase Agreement, dated as of May 5, 1995, between EMCO
Limited and ABT Building Products Canada, Limited (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
dated June 14, 1995 (File No. 0-21856)).
10.20 Consent Judgement between the Company and the Michigan Department of
Natural Resources (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report for the Quarter Ended September 30, 1995
(File No. 0-21856)).
10.21 Equipment Purchase Contract between the Company and J.M. Voith
Aktiengesselschaft. (incorporated by reference to Exhibit 10.21 to the
Company's Annual Report Form 10-K for the year ended December 31, 1995
(File No. 0-21856)).
10.22 Form of Indemnification Agreement Between the Company and its
Directors and Officers. (incorporated by reference to Exhibit 10.22 to
the Company's Annual Report Form 10-K for the year ended December 31,
1995 (File No. 0-21856)).
51
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
10.23 ABT Building Products Corporation Executive Severance Policy
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report Form 10-K for the year ended December 31, 1995 (File No.
0-21856)).
10.24 Third Amended and Restated Credit Agreement, dated as of March 11,
1997, among the Company, ABTco, Inc., ABT Canada, Ltd., Kentech
Plastics, Inc., Coamerica Bank as agent, First Union National Bank of
North Carolina as documentation agent, Harris Trust and Savings Bank
as syndication agent and other banks named therein.
10.25 First Amendment to Third Amended and Restated Credit Agreement, dated
as of February 2, 1998, among the Company, ABTco, Inc., ABT Canada,
Ltd., Coamerica Bank as agent, Creditanstalt A.G., First Union
National Bank of North Carolina, Harris Trust and Savings Bank,
National City Bank, Bank One Wisconsin, Firstar Bank Milwaukee, N.A.,
Lasalle National Bank, and U.S. Bank National Association.
10.26 Consulting Agreement, dated December 3, 1997, between the Company and
Michael A. Lupo.
10.27 Consulting Agreement, dated June 30, 1997, between the Company and
George T. Brophy.
10.28 Consulting Agreement, dated October 1, 1997, between the Company and
J. Phillipe Latreille.
10.29 Labor Agreement between ABT's Canexel Hardboard Division and
Communications, Energy and Papermakers Union of Canada, dated December
17, 1997.
10.30 Labor Agreement between ABT's Acton plant and United Steelworkers of
America, dated February 28, 1997.
10.31 Labor Agreement between ABT's Alpen plant and Woodworkers Lodge W260
IAM, dated August
30, 1996.
11.1 Statement re computation of per share earnings.
21.1 List of subsidiaries of the Company.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the last
quarter of the fiscal year ended December 31, 1997.
As of the date of the filing of this Annual Report on Form 10-K no proxy
materials have been furnished to security holders. Copies of all proxy
materials will be sent to the Commission in compliance with its rules.
52
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN NEENAH,
WISCONSIN, ON THIS 20TH DAY OF MARCH, 1998.
ABT Building Products Corporation
By:
----------------------------------
GEORGE T. BROPHY
(CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER)
WE, THE UNDERSIGNED OFFICERS AND DIRECTORS OF ABT BUILDING PRODUCTS
CORPORATION, HEREBY SEVERALLY CONSTITUTE GEORGE T. BROPHY, AND JOSEPH P.
O'NEILL, AND EACH OF THEM SINGLY, OUR TRUE AND LAWFUL ATTORNEYS WITH FULL
POWER TO THEM, AND EACH OF THEM SINGLY, TO SIGN FOR US AND IN OUR NAMES IN THE
CAPACITIES INDICATED BELOW, ANY AND ALL REPORTS, WITH ALL EXHIBITS THERETO AND
ANY AND ALL DOCUMENTS IN CONNECTION THEREWITH, AND GENERALLY DO ALL SUCH
THINGS IN OUR NAME AND ON OUR BEHALF IN SUCH CAPACITIES TO ENABLE ABT BUILDING
PRODUCTS CORPORATION TO COMPLY WITH THE APPLICABLE PROVISIONS OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND ALL REQUIREMENTS OF THE
SECURITIES EXCHANGE COMMISSION, AND WE HEREBY RATIFY AND CONFIRM OUR
SIGNATURES AS THEY MAY BE SIGNED BY OUR SAID ATTORNEYS, OR EITHER OF THEM, TO
ANY AND ALL SUCH AMENDMENTS.
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ George T. Brophy Chairman of the March 20, 1998
------------------------------------- Board and Chief
GEORGE T. BROPHY Executive Officer
(Principal
Executive Officer)
/s/ Joseph P. O'Neill Vice President and
------------------------------------- Chief
JOSEPH P. O'NEILL Financial Officer (Principal
Financial Officer)
March 20, 1998
/s/ Samuel P. Frieder Director March 20, 1998
-------------------------------------
SAMUEL P. FRIEDER
/s/ James A. Kohlberg Director March 20, 1998
-------------------------------------
JAMES A. KOHLBERG
/s/ George W. Peck IV Director March 20, 1998
-------------------------------------
GEORGE W. PECK IV
/s/ Warner C. Frazier Director March 20, 1998
-------------------------------------
WARNER C. FRAZIER
/s/ Nelson J. Rohrbach Director March 20, 1998
-------------------------------------
NELSON J. ROHRBACH
/s/ W. Dexter Paine, III Director March 20, 1998
-------------------------------------
W. DEXTER PAINE, III
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ABT Building Products Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of ABT Building Products Corporation and
Subsidiaries (the "Company") included in this Form 10-K and have issued our
report thereon dated January 20, 1998. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed on the index on page 26 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated 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 consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois, January 20, 1998
54
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
(IN THOUSANDS)
[Download Table]
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
Balance, beginning of period.............. $ 1,433 $ 2,452 $ 5,030
Provision for discounts and allowances.... 7,948 12,014 16,282
Discounts and allowances taken............ (6,929) (9,436) (15,009)
---------- ---------- -----------
Balance, end of period.................... $ 2,452 $ 5,030 $ 6,303
========== ========== ===========
55
EXHIBIT INDEX
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of ABT Building
Products Corporation, as amended to date (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
No. 33-61676)).
3.2 Amended and Restated By-Laws of ABT Building Products Corporation
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
4.1 Form of certificate representing shares of the Common Stock of the
Company (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
4.2 Letter from the Company to the Securities and Exchange Commission
agreeing to file certain debt instruments.
10.1 Asset Purchase Agreement, dated September 25, 1992, by and between
Abitibi-Price Corporation ("APC") and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 33-61676)).
10.2 First Amendment to Asset Purchase Agreement, dated as of October 16,
1992, by and between APC and the Company (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File
No. 33-61676)).
10.3 Amended and Restated Escrow Agreement, dated December 15, 1993, among
APC, the Company and NBD Bank, N.A. (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
No. 33-73732)).
10.4 IWA Labor Contract Assumption Agreement, dated as of October 20, 1992,
by and between Local III-260, International Woodworkers of America,
AFL-CIO-CLC and ABT (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.5 USW Labor Contract Assumption Agreement, dated as of October 20, 1992,
by and between Local 7923 of the United Steelworkers of America, AFL-
CIO and ABT (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.6 Trademark License Agreement, dated as of October 20, 1992, by and
between APC and ABT (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.7 Stockholders Agreement, among the Company, KABT Acquisition Company,
L.P. and KABT II Acquisition Company, L.P., George T. Brophy, Richard
E. Parker, William J. Adams, and others dated as of October 20, 1992
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
10.8 ABT Building Products Corporation--Amended and Restated Stock Option
Plan (adopted April 22, 1993 (incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 (File No. 33-
61676)).
10.9 ABT Building Products Corporation--1994 Director Stock Option Plan
(incorporated by reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 (File No. 33-82606)).
10.10 Employment Agreement between the Company and George T. Brophy, dated
as of October 20, 1992 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.11 ABT Building Products Corporation--1994 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 (File No. 33-82606)).
10.13 Amended and Restated Revolving and Term Credit Agreement, dated as of
July 13, 1995, between the Company and Coamerica Bank, as agent
(incorporated by reference to Exhibit 10.13 to the Company's Annual
Report Form 10-K for the year ended December 31, 1995 (File No. 0-
21856)).
10.14 Summary of ABT Building Products Corporation Bonus Plan (adopted April
22, 1993) (incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
EXHIBIT INDEX--CONTINUED
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
10.15 Labor Agreement between ABTco Inc., Alpena Plant and Local III-
26010.15 International Woodworkers of America AFL-CIO-CLC, 1992-1996
Contract (incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 33-61676)).
10.16 Labor Agreement between Abitibi-Price Corporation Building Products
Group, Alpena Plant and United Steelworkers of America Local 7923 AFL-
CIO, 1992-1996 Contract (incorporated by reference to Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-61676)).
10.17 Settlement Agreement between ABT Building Products Corporation and APC
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1(File No. 33-61676)).
10.18 Asset Purchase Agreement, dated as of January 26, 1994, between
Canadian Pacific Forest Products Limited and ABT Building Products
Canada, Limited (incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File No. 33-73732)).
10.19 Asset Purchase Agreement, dated as of May 5, 1995, between EMCO
Limited and ABT Building Products Canada, Limited (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
dated June 14, 1995 (File No. 0-21856)).
10.20 Consent Judgement between the Company and the Michigan Department of
Natural Resources (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report for the Quarter Ended September 30, 1995
(File No. 0-21856)).
10.21 Equipment Purchase Contract between the Company and J.M. Voith
Aktiengesselschaft. (incorporated by reference to Exhibit 10.21 to the
Company's Annual Report Form 10-K for the year ended December 31, 1995
(File No. 0-21856)).
10.22 Form of Indemnification Agreement Between the Company and its
Directors and Officers. (incorporated by reference to Exhibit 10.22 to
the Company's Annual Report Form 10-K for the year ended December 31,
1995 (File No. 0-21856)).
10.23 ABT Building Products Corporation Executive Severance Policy
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report Form 10-K for the year ended December 31, 1995 (File No.
0-21856)).
10.24 Third Amended and Restated Credit Agreement, dated as of March 11,
1997, among the Company, ABTco, Inc., ABT Canada, Ltd., Kentech
Plastics, Inc., Coamerica Bank as agent, First Union National Bank of
North Carolina as documentation agent, Harris Trust and Savings Bank
as syndication agent and other banks named therein.
10.25 First Amendment to Third Amended and Restated Credit Agreement, dated
as of February 2, 1998, among the Company, ABTco, Inc., ABT Canada,
Ltd., Coamerica Bank as agent, Creditanstalt A.G., First Union
National Bank of North Carolina, Harris Trust and Savings Bank,
National City Bank, Bank One Wisconsin, Firstar Bank Milwaukee, N.A.,
Lasalle National Bank, and U.S. Bank National Association.
10.26 Consulting Agreement, dated December 3, 1997, between the Company and
Michael A. Lupo.
10.27 Consulting Agreement, dated June 30, 1997, between the Company and
George T. Brophy.
10.28 Consulting Agreement, dated October 1, 1997, between the Company and
J. Phillipe Latreille.
10.29 Labor Agreement between ABT's Canexel Hardboard Division and
Communications, Energy and Paperworkers Union of Canada, dated
December 17, 1997.
10.30 Labor Agreement between ABT's Acton plant and United Steelworkers of
America, dated February 28, 1997.
10.31 Labor Agreement between ABT's Alpina plant and Woodworkers Lodge W260
IAM, dated August 30, 1996.
11.1 Statement re computation of per share earnings.
21.1 List of subsidiaries of the Company.
23.1 Report of Independent Public Accountants.
24.1 Power of Attorney (contained on page 53 of the 10-K).
27.1 Financial Data Schedule.
Dates Referenced Herein and Documents Incorporated by Reference
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