<PAGE>
As filed with the Securities and Exchange Commission on March 9, 1999
Registration No. 333-63287
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TREX COMPANY, INC.
(exact name of registrant as specified in its charter)
Delaware 3089 54-1910453
(State or other (Primary Standard (I.R.S. Employer
jurisdictionof Industrial Identification Number)
incorporation or Classification Code
organization) Number)
20 South Cameron Street
Winchester, VA 22601
(540) 678-4070
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
Anthony J. Cavanna
Executive Vice President and
Chief Financial Officer
Trex Company, Inc.
20 South Cameron Street
Winchester, VA 22601
(540) 678-4070
(Name, address, including zip code and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Richard J. Parrino, Esq. Brian Hoffmann, Esq. Dov Schwell, Esq.
Hogan & Hartson L.L.P. Cadwalader, Wickersham & Taft McDermott, Will & Emery
555 13th Street, N.W. 100 Maiden Lane 50 Rockefeller Plaza, 11th floor
Washington, DC 20004-1190 New York, NY 10038 New York, NY 10020-1605
(202) 637-5600 (212) 504-6000 (212) 547-5400
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Dated March 9, 1999
3,353,000 Shares
Trex Company, Inc.
Common Stock
Of the 3,353,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of Trex Company, Inc. (the "Company") being offered hereby
(the "Shares"), 3,250,000 Shares are being sold by the Company and 103,000
Shares are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of Shares by the Selling Stockholders.
Prior to the offering of the Shares (the "Offering"), there has been no
public market for the Common Stock and there can be no assurance that any
active trading market will develop. It is anticipated that the initial public
offering price will be between $13.00 and $15.00 per Share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price.
The Common Stock has been approved for listing on the New York Stock Exchange
(the "NYSE") under the symbol "TWP" subject to notice of issuance.
See "Risk Factors" beginning on page 11 for a discussion of certain factors
which should be considered by prospective purchasers in connection with an
investment in the Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to the Proceeds to Selling
Public Commissions(1) Company(2) Stockholders(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- --------------------------------------------------------------------------------------------------
Total (4).............. $ $ $ $
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering estimated at $1,550,000.
(3) The Selling Stockholders will pay a portion of the underwriting discounts
and commissions applicable to the sale of their Shares, equal to an
aggregate of $ .
(4) The Company has granted to the Underwriters an option (the "Over-Allotment
Option") exercisable for a 30-day period from the closing of the Offering
to purchase up to an additional 502,950 shares of Common Stock on the same
terms set forth above to cover over-allotments, if any. If the Over-
Allotment Option is exercised in full, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to the Company will be $ and the
total Proceeds to Selling Stockholders will be $ .
-----------
The Shares are being offered by the several Underwriters named herein,
subject to prior sale and acceptance by the Underwriters and subject to their
right to reject any order in whole or in part. It is expected that the Shares
will be available for delivery on or about , 1999 at the offices of
Schroder & Co. Inc., New York, New York.
Schroder & Co. Inc. J.C. Bradford & Co.
, 1999
<PAGE>
[The graphics on the inside front cover page are displayed on a three-page
color fold-out and consist of the following: (i) on the first page, color
photographs of three different product installations identified by location,
accompanied by the registered product logo and text consisting of six bullet
points summarizing product characteristics; and (ii) on a gatefold consisting
of the second and third pages, color photographs of six different product
installations identified by location and superimposed on a color photograph of
a seventh product installation, accompanied by the registered product logo]
[Text accompanying graphics on the first page:]
. Splinter-free, wood-polymer(TM) decking lumber that requires no
protective sealants.
. Manufactured primarily from recycled grocery bags, reclaimed stretch
wrap, and hardwood waste.
. Resists moisture, insects, and UV rays.
. Will not rot, crack, split, warp, or splinter.
. Meets ADA standards for split resistant walking surfaces.
. The only wood-plastic lumber to be code listed by the nation's three
major building code agencies: BOCA, ICBO, and SBCCI.
----------------
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus. Except as otherwise indicated, the information in this Prospectus
assumes (i) consummation of the Reorganization (as defined below), (ii)
consummation of the Offering at an initial public offering price of $14.00 per
Share (the midpoint of the range set forth on the cover page of this
Prospectus) and (iii) no exercise of the Over-Allotment Option. Unless
otherwise indicated, references in this Prospectus to the "Company" mean, at
all times prior to the consummation of the Reorganization, TREX Company, LLC
or, prior to August 29, 1996, its predecessor, the Composite Products Division
of Mobil Oil Corporation, and, at all times thereafter, Trex Company, Inc. and
its wholly-owned subsidiary. The information on the decking market presented in
this Prospectus is for the U.S. market. Trex(R) is a registered trademark of
the Company.
THE COMPANY
General
The Company is the nation's largest manufacturer of non-wood decking
alternative products, which are marketed under the brand name Trex(R). Trex
Wood-Polymer(TM) lumber is a wood/plastic composite that offers an attractive
appearance and the workability of wood without wood's on-going maintenance
requirements and functional disadvantages. Trex is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene
and is used primarily for residential and commercial decking. The Company
promotes Trex among consumers and contractors as a premium decking product. Net
sales of Trex increased from $0.6 million in 1992 to $46.8 million in 1998.
Income from operations increased from a loss of $5.6 million in 1992 to a
profit of $11.0 million in 1998.
Annual factory sales of residential and commercial decking in 1997 totaled
approximately $1.7 billion and approximately $200 million, respectively. This
market includes all decking products other than posts, beams and columns used
for a deck's substructure. For the seven-year period ended December 31, 1997,
factory sales of all residential decking increased at a compound annual growth
rate of approximately 8%. In recent years, factory sales of non-wood
alternative decking products to the residential market have increased at a
compound annual growth rate of over 25%. Although wood decking accounted for
approximately 97% of 1997 decking sales (measured by board feet of lumber),
developing consumer awareness of non-wood decking alternatives, the trend to
low-maintenance products and the decline in lumber quality and quantity have
contributed to increased sales of wood/plastic composites used for decking.
Residential decking purchases include the installation of new or replacement
decks for existing homes, construction of decks for new homes and repair of
existing decks. The Company believes that, because residential deck
construction is not primarily tied to new home activity, residential decking
sales generally have not experienced the high level of cyclicality common to
businesses in the new home construction and building materials industries.
The Company seeks to achieve sales growth in the decking market by converting
demand for wood decking products into demand for Trex. The Company intends to
continue to develop and promote the Trex brand name as a premium decking
product and to focus on the contractor-installed market segment. This segment
represents approximately 70% of the decking market (measured by board feet of
lumber) and contractors generally build larger, more elaborate residential
decks than decks built by homeowners in the "do-it-yourself" market segment.
The Company sells its products through approximately 55 wholesale distribution
locations, which in turn sell Trex to approximately 2,000 independent
contractor-oriented retailer lumber yards ("dealer outlets") across the United
States.
3
<PAGE>
The Company was formed in August 1996 in a buyout (the "Acquisition") of the
assets of the Composite Products Division of Mobil Oil Corporation ("Mobil").
Mobil established the Composite Products Division in April 1992 after
purchasing the technology and related assets used to create Trex. The buyout
was led by four senior Mobil executives with over 75 years of combined
management experience.
Competitive Strengths
The Company believes that its primary competitive strengths are the
following:
Superior Product. Trex offers a number of significant advantages over wood
decking products. Trex eliminates many of wood's major functional
disadvantages, which include warping, splitting and other damage from moisture.
Trex requires no sealing to protect against moisture damage, provides a
splinter-free surface and needs no chemical treatment against insect
infestation. These features of Trex eliminate the on-going maintenance
requirements for a wood deck and make Trex less costly than wood over the life
of the deck. Like wood, Trex is slip-resistant, even when wet, can be painted
or stained and is not vulnerable to damage from ultraviolet rays. The special
characteristics of Trex, including resistance to splitting, flexibility, and
ease and consistency of machining and finishing, facilitate deck installation,
reduce contractor call-back and afford customers a wide range of design
options.
Brand Name Development. The Company has invested over $10 million during the
last three years to develop Trex as a recognized brand name in the residential
and commercial decking market. The Company's marketing strategy has been to
promote Trex among consumers and contractors as a premium decking product. The
Company uses extensive print and television advertising to build brand
awareness among homeowners and commercial users and targets decking contractors
with advertisements in leading building and remodeling magazines. Brand name
recognition helps to generate demand for Trex directly among consumers and also
among distributors and dealers, who recommend Trex to contractors and other
consumers. The Company believes that its branding strategy promotes product
differentiation of Trex in a market which is not generally characterized by
brand identification and enables the Company both to command premium prices and
to maintain price stability for Trex.
Extensive Distribution Network. The Company has developed an extensive
distribution network which complements its branding strategy and focus on the
contractor-installed market segment. At December 31, 1998, the Company sold
Trex through approximately 55 wholesale distribution locations. At the same
date, the Company's distributors marketed Trex to approximately 2,000 dealer
outlets, which directly service contractors and consumers. The Company selects
distributors based upon their anticipated commitment to Trex, and the Company's
distribution network devotes significant resources to promoting and selling
Trex. All distributors have appointed a Trex specialist, regularly conduct
dealer training sessions, fund demonstration projects and participate in local
advertising campaigns and home shows. These distributors generally sell Trex as
their only non-wood decking alternative and agree in their distribution
agreements with the Company not to market other wood/plastic composites with
the same applications as Trex.
Investment in Manufacturing Process and Product Development. Production of a
non-wood decking alternative like Trex requires significant capital investment,
special process know-how and time to develop. The Company has invested
approximately $34 million and six years in expansion of its manufacturing
capacity, manufacturing process improvements, new product development and
product enhancements. The Company's investment of time and capital has enabled
it to increase the number of production lines from one to eight and its
manufacturing line production rates by more than 200% since 1992, has
facilitated the Company's development of new products and has produced
improvements in the dimensional consistency, surface texture and color
uniformity of Trex.
4
<PAGE>
Building Code Listing. Trex is the only non-wood decking alternative to
receive a product building code listing either from the National Evaluation
Service (the "NES") or from any of the three NES regional members that
establish construction standards in the United States. Since receiving its NES
listing in 1995, Trex has been the only non-wood alternative decking product
published in all major code books throughout the country. The Company's listing
facilitates the acquisition of building permits by residential consumers of
Trex. The Company believes that its listing promotes customer and industry
acceptance of Trex as a substitute for wood in decking.
Experienced Management Team. The Company is managed by four experienced
senior executives who led the buyout of Mobil's Composite Products Division in
1996. The Company's executives have managed billion-dollar operations as well
as smaller, high-growth divisions and product rollouts within and outside of
Mobil. They have approximately 75 years of combined management experience at
Mobil across a wide range of management functions.
Growth Strategies
The Company's goals are to continue to be the leading producer of a superior
non-wood decking alternative product, to increase its market share of the
decking market and to expand new products and geographic markets. To attain
these goals, the Company employs the following strategies:
Continue Brand Name Development. The Company plans to increase its investment
in, and the resources devoted to, development of the Trex brand. The Company's
branding efforts will focus on implementation of enhanced integrated
advertising, public relations and trade programs. The Company's sales growth in
the decking market will largely depend on converting demand for wood products
into demand for Trex. Accordingly, the Company's branding strategy will
continue to emphasize the advantages of Trex over wood decking products. The
Company's brand building programs also are designed to support the positioning
of Trex as a premium product in the decking market.
Expand Distribution Coverage. The Company intends to establish comprehensive
national coverage for Trex. To achieve this objective, the Company expects to
increase the number of dealer outlets selling Trex over the next three years by
50% to approximately 3,000 outlets. The Company will seek to expand its dealer
network by adding new distributors and increasing the number of its wholesale
distribution locations to approximately 75 distribution locations from its base
of approximately 55 at December 31, 1998.
Increase Production Capacity. Currently, customer demand for Trex exceeds the
Company's manufacturing capacity. To support sales growth and improve customer
service, the Company plans to increase output by increasing productivity in its
existing facility in Winchester, Virginia and by beginning production in an
additional manufacturing facility near Reno, Nevada in the fourth quarter of
1999. The Company recently augmented the production capacity of its Winchester
facility by adding one new production line in December 1998 and a second new
production line in January 1999. The addition of these two production lines
will enable the Company to increase its manufacturing capacity by approximately
40% by mid-1999. With the second manufacturing facility in operation, the
Company expects by the end of 1999 to double its production capacity from the
level sustained in December 1998.
Invest in Process and Product Development. The Company will continue to make
substantial investments in process and product development to support new
products and improve product consistency, reduce manufacturing costs and
increase operating efficiencies. In the third quarter of 1998, the Company
centralized its research and development operations in the Trex Technical
Center, a 30,000-square foot building adjacent to its Winchester manufacturing
facility.
5
<PAGE>
Increase New Product Development and Export Markets. As part of its long-term
growth strategy, the Company will continue to develop opportunities for Trex in
new products and product applications and in geographic markets beyond the
Company's U.S. base. In 1998, the Company derived approximately 15% of its net
sales from sales of Trex for non-decking applications, including industrial
block flooring, applications for parks and recreational areas, floating and
fixed docks and other marine applications, and landscape edging. The Company
believes that the product characteristics of Trex are well suited to satisfy
the diverse appearance, performance and safety requirements of these and other
potential product applications. In expanding its geographic scope of
operations, the Company plans to increase exports to Canada, where it currently
has limited sales, and to explore export opportunities in the Caribbean, Latin
America and selected parts of Europe.
Reorganization
In connection with the Offering, the Company and TREX Company, LLC will take
certain actions described below which are collectively referred to in this
Prospectus as the "Reorganization."
Trex Company, Inc. is currently a wholly-owned subsidiary of TREX Company,
LLC, a Delaware limited liability company. Prior to the consummation of the
Offering, the members of TREX Company, LLC other than Mobil will contribute
their junior membership interests in TREX Company, LLC to Trex Company, Inc. in
exchange for Common Stock of Trex Company, Inc. (the "Exchange Transaction").
Concurrently with such exchange, Mobil will exchange its preferred membership
interest in TREX Company, LLC for a $3.1 million note of Trex Company, Inc.
payable upon the consummation of the Offering. As a result of such exchanges,
TREX Company, LLC will become a wholly-owned subsidiary of Trex Company, Inc.
In connection with the Exchange Transaction, TREX Company, LLC will make a
special cash distribution of approximately $11.3 million to certain of its
members (the "LLC Distribution"). Of the LLC Distribution, approximately $8.9
million represents the amount of the previously recognized and undistributed
taxable income of TREX Company, LLC through the expected payment date on which
the members have paid, or will pay, income tax and approximately $2.4 million
represents a return of capital. The estimated $8.9 million amount and the total
amount of the LLC Distribution are subject to adjustment based on the actual
taxable income of TREX Company, LLC from January 1, 1999 through the date of
the LLC Distribution. See "Certain Transactions--Reorganization."
The Company's principal executive offices are located at 20 South Cameron
Street, Winchester, Virginia 22601, and the Company's telephone number at that
address is (540) 678-4070.
6
<PAGE>
THE OFFERING
Common Stock offered by the
Company......................
3,250,000 shares
Common Stock offered by the
Selling Stockholders.........
103,000 shares
Common Stock to be
outstanding after the
Offering.....................
13,500,000 shares (1)
Use of Proceeds...............
The Company will use its net proceeds of the
Offering to repay indebtedness, to fund a
portion of the LLC Distribution and to provide
funds for equipping the Company's second
manufacturing facility, working capital and
other general corporate purposes. See "Use of
Proposed NYSE symbol.......... Proceeds."
TWP
- --------
(1) Does not include (i) 125,000 shares subject to stock options the Company
intends to grant to certain of its employees under its 1999 Stock Option
and Incentive Plan (the "Stock Incentive Plan") upon the consummation of
the Offering or (ii) up to 10,000 shares subject to stock options the
Company intends to grant to its non-employee directors under its 1999
Incentive Plan for Outside Directors (the "Outside Director Plan") upon the
consummation of the Offering. See "Management--1999 Stock Option and
Incentive Plan" and "--1999 Incentive Plan for Outside Directors."
RISK FACTORS
Potential investors should carefully consider the risk factors relating to
the Company, its business and an investment in the Shares set forth under "Risk
Factors." Such risk factors include, but are not limited to, the following:
. Ability to Increase Market Acceptance
. Lack of Product Diversification
. Dependence on Single Manufacturing Facility
. Reliance on Supply of Raw Materials
. Sensitivity to Economic Conditions
. Ability to Increase Manufacturing Capacity
. Ability to Manage Growth
. Seasonality and Fluctuations in Quarterly Operating Results
. Significant Capital Requirements
. Dependence on Significant Distributors
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data presented below as of
December 31, 1998, for the period from August 29, 1996 to December 31, 1996,
and for the years ended December 31, 1997 and 1998 are derived from the
Company's Financial Statements and related Notes thereto appearing elsewhere in
this Prospectus, which have been audited by Ernst & Young LLP, independent
auditors. The summary historical statement of operations data and cash flow
data presented below for the period from January 1, 1996 to August 28, 1996 are
derived from the Financial Statements of the Composite Products Division of
Mobil Oil Corporation (the "Predecessor") and related Notes thereto appearing
elsewhere in this Prospectus, which have been audited by Ernst & Young LLP,
independent auditors. The unaudited supplemental pro forma statement of
operations data, cash flow data and other data give effect to the
Reorganization and the Offering as if such transactions had been consummated on
January 1, 1998. The unaudited pro forma balance sheet data give effect to the
Reorganization as if the Reorganization had been consummated on December 31,
1998. The unaudited supplemental pro forma balance sheet data give effect to
the Reorganization and the Offering as if such transactions had been
consummated on December 31, 1998. The unaudited pro forma balance sheet data
and unaudited supplemental pro forma financial data are based on assumptions
that management believes are reasonable, are presented for comparative and
informational purposes only and do not purport to represent what the Company's
actual results of operations or financial condition would have been if the
Reorganization and the Offering in fact had occurred on such dates or to
project the Company's results of operations for any future period or financial
condition at any future date. The summary historical and unaudited pro forma
balance sheet data and unaudited supplemental pro forma financial data
presented below also include certain unaudited other data. The summary
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the Predecessor and related Notes thereto
appearing elsewhere in this Prospectus.
8
<PAGE>
<TABLE>
<CAPTION>
The Predecessor(1) The Company(1)
------------------ --------------------------------------------
Supplemental
Jan. 1, August 29, Pro Forma
1996 to 1996 to Year Ended Dec. 31, Year Ended
Aug. 28, Dec. 31, ------------------- Dec. 31,
1996 1996 1997 1998 1998(2)
------------------ ---------- --------- --------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales............... $18,071 $ 5,708 $ 34,137 $ 46,818 $ 46,818
Gross profit............ 8,883 2,227 17,363 23,862 23,862
Income (loss) from
operations............. 3,375 (331) 8,371 10,984 10,984
Interest expense, net... - 934 2,777 2,526 175
------- -------- --------- --------- --------
Income (loss) before
income tax expense..... $ 3,375 $ (1,265) $ 5,594 $ 8,458 10,809
======= ======== ========= =========
Basic (loss) earnings
per junior unit (3).... $(350.00) $1,297.25 $2,013.25
======== ========= =========
Weighted average junior
units outstanding...... 4,000 4,000 4,000
======== ========= =========
Pro forma income tax
expense (4)(5)(6)
(unaudited)............ 3,383 4,324
--------- --------
Pro forma net income
(5)(6) (unaudited)..... $ 5,075 $ 6,485
========= ========
Pro forma net income
per share, basic
(5)(6)(7) (unaudited).. $ 0.50 $ 0.48
========= ========
Cash Flow Data:
Cash flow from (used in)
operating activities... $ 2,848 $ (222) $ 6,521 $ 12,228 $11,870
Cash flow (used in)
investing activities... (3,708) (30,253) (3,252) (17,140) (17,140)
Cash flow from (used in)
financing activities... 860 34,216 (5,010) 4,112 8,342
Other Data (unaudited):
EBITDA (8).............. $ 4,492 $ 527 $ 11,013 $ 14,098 $ 14,098
Pounds of Trex sold..... 61,483 19,924 113,948 151,555 151,555
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------------
Supplemental
Actual Pro Forma(9) Pro Forma(9)(10)
------- ------------ ----------------
<S> <C> <C> <C>
Balance Sheet Data (in thousands):
Cash and cash equivalents............... $ 1,200 $ 200 $5,072
Working capital (deficit)............... (3,172) (11,816) 5,718
Total assets............................ 51,331 50,331 54,420
Total debt.............................. 33,063 33,063 6,813
Total members'/stockholders' equity..... 13,291 4,647 41,991
</TABLE>
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(1) On August 29, 1996, the Company acquired substantially all of the assets
and assumed certain of the liabilities of the Predecessor for a purchase
price of approximately $29.5 million. See "Certain Transactions--
Acquisition Transactions."
(2) The supplemental pro forma statement of operations data have been computed
by eliminating net interest expense of $2.4 million related to debt that
will be repaid with a portion of the net proceeds of the Offering. The
supplemental pro forma statement of operations data do not include
adjustments to (i) record an extraordinary loss, net of taxes, of $1.1
million for the year ended December 31, 1998 related to the extinguishment
of such debt or (ii) reflect recognition of a one-time non-cash tax charge
of approximately $1.4 million for the year ended December 31, 1998 with
respect to a net deferred tax liability related to the Company's conversion
in the Reorganization to a C corporation. Such data give effect to the
conversion as if it had occurred on January 1, 1998. The supplemental pro
forma income tax provision is calculated at a combined federal and state
income tax rate of 40%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and "Certain
Transactions--Reorganization."
(3) Historical basic earnings per junior unit has been omitted for the
Predecessor period, since the operations for such period were a component
of Mobil.
9
<PAGE>
(4) For the period shown, the Predecessor was included in the consolidated tax
return of its parent and, accordingly, no tax provision was provided. For
all periods since inception, the Company elected to be treated as a
partnership for federal and state income tax purposes. As a result, the
Company's income has been taxed directly to the Company's members, rather
than to the Company.
(5) Pro forma and supplemental pro forma net income and basic net income per
share reflect current federal and state income taxes (assuming a 40%
combined effective tax rate) as if the Company had been taxed as a C
corporation for the periods presented.
(6) Pro forma and supplemental pro forma net income and basic net income per
share for the year ended December 31, 1998 do not include adjustments to
record deferred income tax expense of $1.4 million as a result of the
Company's conversion in the Reorganization to a C corporation. Such data
give effect to the conversion as if it had occurred on January 1, 1998.
(7) Assumes 10,250,000 and 13,500,000 weighted average shares outstanding
during the year ended December 31, 1998 on a pro forma and supplemental pro
forma basis, respectively. Diluted income per share is the same as basic
income per share and, therefore, is not separately presented.
(8) Consists of income (loss) from operations plus depreciation and
amortization. EBITDA is presented because it is a commonly used measure of
performance by the financial community. Although management believes EBITDA
is a useful measure of the Company's performance, EBITDA should not be
considered an alternative to net income (loss) as a measure of operating
performance or to cash provided by (used for) operating activities as a
measure of liquidity. In addition, this measure of EBITDA may not be
comparable to similarly titled measures reported by other companies.
(9) Reflects (i) the LLC Distribution of $5.6 million at December 31, 1998 and
(ii) the repayment of a $3.1 million note issued in exchange for the
preferred membership interest in the Company. Does not reflect a net
deferred tax liability of $2.4 million that would have been recorded by the
Company if it had converted to C corporation status on December 31, 1998.
The $5.6 million LLC Distribution adjustment is calculated as if the LLC
Distribution had been made on December 31, 1998 and is based in part on the
estimated amount of previously recognized and undistributed income of the
Company through such date, while the $11.3 million LLC Distribution amount
appearing elsewhere in this Prospectus also reflects the then estimated
additional results of operations of the Company from January 1, 1999
through the estimated date of the LLC Distribution. The $5.6 million amount
as of December 31, 1998 will be increased by the amount of any taxable
income realized by the Company from January 1, 1999 through the date of the
LLC Distribution. See "Certain Transactions--Reorganization."
(10) Reflects (i) the LLC Distribution of $5.6 million at December 31, 1998,
(ii) the repayment of a $3.1 million note issued in exchange for the
preferred membership interest in the Company, (iii) a net deferred tax
liability of $2.4 million that would have been recorded by the Company if
it had converted to C corporation status on December 31, 1998, (iv) an
extraordinary $1.1 million charge for the early extinguishment of debt to
be repaid from the net proceeds of the Offering and (v) the sale by the
Company of the Shares in the Offering and the application of the net
proceeds therefrom. See "Use of Proceeds," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Certain Transactions--Reorganization."
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RISK FACTORS
In addition to the other information in this Prospectus, investors should
carefully consider the following risk factors before deciding whether to
purchase the Shares offered hereby. Certain statements in this Prospectus
concerning the Company's future financial condition and performance are
forward-looking statements. The Company's actual results may differ materially
from those expressed in or implied by such forward-looking statements. Factors
that may cause such a difference include, but are not limited to, those
discussed below and in the sections of this Prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
Ability to Increase Market Acceptance
The Company's ability to grow will largely depend on its success in
converting demand for wood decking products, which accounted for approximately
97% of the 1997 decking market (measured by board feet of lumber), into demand
for Trex. The Company's strategy to increase market acceptance of Trex is to
develop and promote the Trex brand name as a premium decking product and to
emphasize the advantages of Trex over wood decking products. To increase its
market share, the Company must overcome the low consumer awareness of non-wood
decking alternatives, the preference of many consumers for well-accepted wood
products, the somewhat different appearance of Trex, the greater initial
expense of installing a Trex deck and the established relationships existing
between suppliers of wood decking products and contractors and homebuilders.
The Company's failure to achieve increased market acceptance of Trex would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Lack of Product Diversification
All of the Company's net sales are derived from Trex. Although the Company
has developed new Trex products and new applications for Trex since 1992, and
intends to continue such development, the Company's product line is based
exclusively on the composite formula and manufacturing process for Trex Wood-
Polymer lumber. If the Company should experience any problems, real or
perceived, with product quality or acceptance of Trex, the Company's lack of
product diversification would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Single Manufacturing Facility
Trex is currently produced solely in the Company's manufacturing facility in
Winchester, Virginia. Any interruption in the operations or decrease in the
production capacity of this facility, whether because of equipment failure,
natural disaster or otherwise, would limit the Company's ability to meet
existing and future customer demand for Trex and would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company has acquired the site for, and in January 1999 began
construction of, a second manufacturing facility, which will be located near
Reno, Nevada. The new facility is expected to begin production in the fourth
quarter of 1999, but construction and equipping of the facility is subject to
risks that could delay commencement of operations beyond that date. See "--
Ability to Increase Manufacturing Capacity."
Reliance on Supply of Raw Materials
Production of Trex requires substantial amounts of wood fiber and
polyethylene. The Company purchases wood fiber under contracts with a
relatively small number of suppliers primarily located within a 200-mile
radius of the Company's existing manufacturing facility in Winchester,
Virginia, and obtains polyethylene under purchase order arrangements with
suppliers of reclaimed grocery sacks
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and stretch film throughout the United States. Four suppliers collectively
accounted for approximately 80% of the Company's 1998 wood fiber purchases.
For a description of the Company's supply agreements with such suppliers, see
"Business--Suppliers--Wood Fiber." The Company's ability to obtain adequate
polyethylene supplies depends on its success in developing new sources,
entering into long-term arrangements with suppliers and managing the
collection of supplies from geographically dispersed distribution centers. The
termination of the Company's relationships with suppliers of a significant
portion of its wood fiber or polyethylene requirements could subject the
Company to the risks that it would be unable to purchase sufficient quantities
of raw materials to meet its production requirements or would have to pay
higher prices for replacement supplies. Further, the Company generally obtains
its raw materials from existing suppliers at fixed prices that are established
annually. There can be no assurance that the Company will be successful in
maintaining such pricing policies to protect against fluctuations in raw
materials prices. The Company believes it will be able to obtain sufficient
additional wood and polyethylene supplies from its existing suppliers and new
supply sources to meet the increased requirements resulting from its recent
addition of two new production lines to its Winchester facility and its
establishment of a second manufacturing facility near Reno, Nevada, which the
Company expects to begin production in the fourth quarter of 1999. The Company
has not yet entered into supply agreements for the new facility. The
termination of significant sources of raw materials, the payment of higher
prices for raw materials or the failure to obtain sufficient additional raw
materials to meet planned increases in capacity could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "--Ability to Increase Manufacturing Capacity" and "Business--
Suppliers."
Sensitivity to Economic Conditions
The demand for decking products is sensitive to changes in the level of
activity in home improvements and, to a lesser extent, new home construction,
which are affected by such factors as consumer spending habits, employment,
interest rates and inflation. An economic downturn could reduce consumer
income available for spending on discretionary items such as decking, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Decking Market Overview."
Ability to Increase Manufacturing Capacity
Currently, customer demand for Trex exceeds the Company's manufacturing
capacity. As part of its strategy to increase capacity, the Company recently
augmented the production capacity of its manufacturing facility in Winchester,
Virginia by adding one new production line in December 1998 and a second new
production line in January 1999. In addition, the Company has acquired the
site for, and in January 1999 began construction of, a second manufacturing
facility, which will be located near Reno, Nevada. The Company expects that
the new facility will begin production in the fourth quarter of 1999. See
"Business--Growth Strategies." In constructing and equipping the new facility,
the Company will be subject to the risks normally associated with the
development of manufacturing facilities, including risks relating to the
timely receipt of environmental and other regulatory approvals, the cost and
timely completion of construction (which may be affected by causes beyond the
Company's control, such as weather, labor conditions or material shortages),
the costs associated with financing equipment purchases and the availability
of long-term borrowings to refinance on acceptable terms short-term site
acquisition and construction loans obtained by the Company. Further, in the
start-up and operation of the new facility and the two additional production
lines, the Company will be subject to the risks involved in recruiting and
training a factory workforce, installing and operating new production
equipment, purchasing raw materials, commencing manufacturing operations and
maintaining product quality. These risks could result in substantial
unanticipated delays or expense, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See "--
Dependence on Single Manufacturing Facility," "--Reliance on Supply of Raw
Materials" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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Ability to Manage Growth
The Company's recent growth has placed significant demands on its management
and other resources. The Company's net sales increased to $46.8 million in
1998 from $34.1 million in 1997 and $23.8 million in 1996. The number of
dealer outlets selling Trex has increased from approximately 1,200 at December
31, 1996 to approximately 2,000 at December 31, 1998, and further significant
increases are expected in the future. The Company also plans to support its
geographic expansion by opening a second manufacturing facility, which will be
located near Reno, Nevada. To manage its growth effectively, the Company will
need to continue to develop and improve its operational, financial, accounting
and other internal systems. In addition, the Company's future success will
depend in large part upon its ability to recruit, train, motivate and retain
senior managers and other employees and to maintain product quality. If the
Company is unable to manage its growth effectively, such inability could have
a material adverse effect on the quality of the Company's products and its
business, financial condition and results of operations.
Seasonality and Fluctuations in Quarterly Operating Results
The Company's net sales and income from operations historically have varied
from quarter to quarter. Such variations are principally attributable to
seasonal trends in the demand for Trex. The Company experiences lower net
sales levels during the fourth quarter, in which holidays and adverse weather
conditions in certain regions usually reduce the level of home improvement and
new construction activity. Income from operations and net income tend to be
lower in quarters with lower sales due to a lower gross margin which is not
offset by a corresponding reduction in selling, general and administrative
expenses, in part because the Company continues to make advertising
expenditures throughout the year. As a result of these factors, the Company
believes period-to-period comparisons of its net sales and other operating
results should not be relied upon as indicators of future performance, and the
results of any quarterly period may not be indicative of results to be
expected for a full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
Significant Capital Requirements
Expansion of the Company's production capacity will require significant
capital expenditures. The Company currently estimates that its aggregate
capital requirements in 1999 and 2000 will total approximately $23.8 million,
of which approximately $20.3 million is expected to be incurred in 1999 and
approximately $3.5 million in 2000. Capital expenditures will be used
primarily for the construction and equipping of the Company's new
manufacturing facility, which will be located near Reno, Nevada and which the
Company expects to begin production in the fourth quarter of 1999. The Company
believes that the net proceeds of the Offering, together with cash on hand,
cash flow from operations and borrowings expected to be available under the
Company's credit agreements and construction loan for the new facility, will
provide sufficient funds to enable the Company to expand its business as
currently planned for at least the next 12 months. The actual amount and
timing of the Company's future capital requirements may differ materially from
the Company's estimates depending on the demand for Trex and as a result of
new market developments and opportunities. The Company may determine that it
is necessary or desirable to obtain financing for such requirements through
bank borrowings or the issuance of debt or equity securities. Debt financing
would increase the leverage of the Company, while equity financing may dilute
the ownership of the Company's stockholders. There can be no assurance as to
whether, or as to the terms on which, the Company will be able to obtain such
financing. Any failure by the Company to generate sufficient funds from
operations or equity or debt financings to meet its capital requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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Dependence on Significant Distributors
The Company's aggregate net sales to its five largest distributors accounted
for approximately 74% of the Company's net sales in 1998. The Company's
contracts with these distributors are terminable by the distributors upon
notice at any time during the contract term. Although the Company believes it
would be able to replace any current distributor, a contract termination or
significant decrease or interruption in business from any of its five largest
distributors or any other significant distributor could cause a short-term
disruption of the Company's operations. Such a disruption could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Distribution."
Dependence on Key Personnel
The Company's success will depend in large part upon the continued services
of a small number of key management employees, including Anthony J. Cavanna,
Andrew U. Ferrari, Robert G. Matheny and Roger A. Wittenberg. Upon the
consummation of the Offering, none of such employees will be a party to an
employment agreement with the Company. The loss of the services of one or more
of the Company's key employees could have a material adverse effect on the
Company. In addition, if one or more of the Company's key employees resigns
from the Company to join a competitor or to form a competing company, the loss
of such employees and any resulting loss of existing or potential customers to
such competitor could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event of the
loss of any such personnel, there can be no assurance that the Company would
be able to prevent the unauthorized disclosure or use of its technical
knowledge, practices or procedures by such personnel. Although the Company's
key employees are parties to agreements containing confidentiality covenants,
there can be no assurance that courts will enforce such covenants as written
or that the agreements will deter conduct prohibited by such covenants. See
"Management."
Competition
The residential and commercial decking market in which the Company
principally operates is highly competitive. As a wood/plastic composite
product, Trex competes with wood, other wood/plastic composites and 100%
plastic lumber for use as decking. The primary competition for Trex is wood
decking, which accounted for approximately 97% of 1997 decking sales (measured
by board feet of lumber). The conventional lumber suppliers with which the
Company competes in many cases have established ties to the building and
construction industry and have well-accepted products. Many of the Company's
competitors in the decking market that sell wood products have significantly
greater financial, technical and marketing resources than the Company. The
Company's ability to compete depends, in part, upon a number of factors
outside its control, including the ability of its competitors to develop new
non-wood decking alternatives which are competitive with Trex. Trex is the
only non-wood decking alternative to receive a product building code listing
from the NES or any of its three regional members. A product building code
listing covers all uses of a product meeting the specified design criteria.
The Company is aware of one manufacturer of wood/plastic composite products
that has publicly announced it has applied for a regional application listing
for its products and of at least four manufacturers that have received
regional application listings of their 100% plastic lumber products. An
application listing covers specific uses of the listed products. There can be
no assurance that one or more of the Company's competitors will not receive a
listing for their non-wood decking alternative products in the immediate
future. Any product receiving such a listing could be more competitive with
Trex. The Company's failure to compete successfully with its competitors would
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Competition."
Impact of Government Regulation
The Company is subject to federal, state and local environmental,
occupational health and safety, and other laws and regulations. The
environmental laws and regulations applicable to the Company's
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operations establish air quality standards for emissions from the Company's
manufacturing operations, govern the disposal of solid waste, and regulate
waste water and storm water discharge. The Company believes that it currently
complies in all material respects with such environmental laws and
regulations. As is the case with manufacturers in general, the Company may be
held liable for response costs and damages to natural resources if a release
or threat of release of hazardous materials occurs on or from the Company's
properties or any associated offsite disposal location, or if contamination
from prior activities is discovered at any properties owned or operated by the
Company. Such a liability could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Government Regulation."
Year 2000 Compliance
The Company and third parties with which the Company does business rely on
numerous computer programs in their day-to-day operations. The Company has
undertaken a program to address the Year 2000 problem as it relates to the
Company's internal computer systems and the third-party computer systems with
which the Company interacts, including the systems of its major suppliers and
customers. The Company expects to continue to incur internal staff costs and
other expenses, which may be significant and will be expensed as incurred, to
address these issues. In addition, the appropriate course of action may
include replacement or an upgrade of certain systems or equipment at a
substantial cost to the Company. There can be no assurance that the Year 2000
issues will be resolved in 1999. If not resolved, such issues could have a
material adverse impact on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Influence by Principal Stockholders
Upon completion of the Offering, the Company's four management stockholders
will beneficially own approximately 68.4% of the Common Stock (65.9% if the
Over-Allotment Option is exercised in full). As a result, such stockholders
collectively will be able to exercise control over the Company's business and
affairs by virtue of their voting power with respect to the election of
directors and actions requiring stockholder approval. See "Management,"
"Principal and Selling Stockholders" and "Description of Capital Stock."
Intellectual Property
The Company's success depends, in part, upon its intellectual property
rights. The Company relies upon a combination of trade secret, nondisclosure
and other contractual arrangements, and copyright and trademark laws to
protect its proprietary rights. The Company also has obtained patent
protection for certain of its production processes. The Company enters into
confidentiality agreements with its employees and limits access to and
distribution of its proprietary information. There can be no assurance that
the steps taken by the Company in this respect will be adequate to deter
misappropriation of its proprietary information or that the Company will be
able to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights. See "Business--Intellectual Property."
Certain Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation (the
"Certificate of Incorporation") and Bylaws (the "Bylaws") and the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law") could have anti-takeover effects even if a change of control of the
Company would be beneficial to the interests of the Company's stockholders.
These provisions include a requirement that the Board of Directors be divided
into three classes, with approximately one-third of the directors to be
elected each year. This classification of directors makes it more difficult
for an acquiror or for other stockholders to change the composition of the
Board of Directors. In addition, the Certificate of Incorporation authorizes
the Board of Directors to provide for the issuance of up to 3,000,000 shares
of preferred stock of the Company,
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in one or more series, which the Board of Directors could issue without
stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine.
The ability to issue preferred stock could have the effect of discouraging
unsolicited acquisition proposals or making it more difficult for a third
party to gain control of the Company, or otherwise could adversely affect the
market price of the Common Stock. Further, the Company is subject to Section
203 of the Delaware General Corporation Law, which prohibits it from engaging
in certain business combinations with stockholders that beneficially own 15%
or more of the Company's voting stock, or with the affiliates of such
stockholders, unless the Company's directors or stockholders approve the
business combination in the prescribed manner. See "Description of Capital
Stock--Anti-Takeover Effect of Certain Charter and Bylaw Provisions" and "--
Section 203 of the Delaware General Corporation Law."
No Prior Public Market; Possible Volatility of Share Price
Prior to the Offering, there has been no market for the Common Stock.
Although the Common Stock has been approved for listing on the New York Stock
Exchange subject to notice of issuance, there is no assurance that an active
trading market for the Shares will develop or be sustained after the Offering.
There can be no assurance that the market price of the Shares will not
decline below the initial public offering price. The initial public offering
price will be determined by negotiations among the Company, the Selling
Stockholders and the representative of the Underwriters and may not be
indicative of future market prices. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. In recent years, stock markets have experienced extreme price
and volume fluctuations. The trading price of the Shares could be subject to
wide fluctuations in response to quarterly variations in operating results,
changes in earnings estimates by analysts, announcements of new contracts or
product offerings by the Company or its competitors, general economic or stock
market conditions and other events or factors.
Dilution to New Investors
The initial public offering price per Share is substantially higher than the
Company's pro forma net tangible book value per share of Common Stock.
Purchasers of Shares in the Offering will experience immediate dilution of
$11.58 in the supplemental pro forma net tangible book value per Share and may
experience further dilution upon the exercise of future options to purchase
shares of Common Stock. See "Dilution."
No Dividends
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company's revolving credit facility
contains provisions restricting the Company's ability to pay cash dividends on
the Common Stock. See "Dividend Policy."
Benefits of Offering to Selling Stockholders and Other Current Investors
Approximately $28.0 million of the net proceeds of the Offering will be used
to repay indebtedness of the Company to Connecticut General Life Insurance
Company, Connecticut General Life Insurance Company on behalf of one or more
separate accounts, Life Insurance Company of North America and The Lincoln
National Life Insurance Company, all of which own equity interests in the
Company and one or more of which may be deemed affiliates of the Company prior
to the Offering (collectively the "Institutional Investors"). The Company
incurred such indebtedness in connection with the Acquisition. In addition,
the Company will use approximately $3.1 million of the net proceeds of the
Offering to repay a note it will issue to Mobil in the Reorganization in
exchange for Mobil's preferred equity interest in TREX Company, LLC. Mobil
obtained this equity interest in connection with the Acquisition.
The Selling Stockholders, all of which are Institutional Investors, will
receive substantial proceeds from the Offering and certain other benefits. The
Offering will establish a public market for the
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Common Stock and provide increased liquidity to the Selling Stockholders for
the shares of Common Stock they will own after the Offering. After deduction
of estimated underwriting discounts and commissions, the aggregate net
proceeds of the Offering to be received by the Selling Stockholders will total
approximately $1.3 million. See "Use of Proceeds," "Principal and Selling
Stockholders" and "Certain Transactions."
As part of the Reorganization, the Company will make the LLC Distribution of
approximately $11.3 million to its four management members and to the
Institutional Investors. A portion of the net proceeds of the Offering will be
used to pay approximately $6.9 million of the LLC Distribution. The amount of
the LLC Distribution and the amount of the net proceeds of the Offering to be
applied in respect thereof are subject to adjustment based on the Company's
actual taxable income from January 1, 1999 through the date of the LLC
Distribution. See "Use of Proceeds," "Principal and Selling Stockholders" and
"Certain Transactions."
Shares Eligible for Future Sale; Registration Rights
Future sales of a substantial number of shares of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Common Stock and could make it more
difficult for the Company to raise funds through a public offering of its
equity securities. Upon completion of the Offering, there will be 13,500,000
shares of Common Stock outstanding, including the 3,353,000 Shares sold in the
Offering. The 3,353,000 Shares offered hereby, other than up to 162,500 shares
reserved for issuance to directors and employees of the Company and certain
other persons (the "Reserved Shares"), will be freely tradable upon completion
of the Offering without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), by persons other than "affiliates" of the
Company as defined in Rule 144 under the Securities Act. The remaining
10,147,000 shares of Common Stock will be deemed "Restricted Securities"
within the meaning of Rule 144 and, as such, may not be sold in the absence of
registration under the Securities Act or an exemption therefrom, including the
exemption afforded by Rule 144.
In connection with the Offering, the Company, all stockholders of the
Company prior to the Offering and the holders of Reserved Shares have entered
into "lock-up" agreements with the Underwriters. The Company and such
stockholders have agreed that they will not offer, sell, contract to sell,
issue or otherwise dispose of any shares of Common Stock or any securities of
the Company which are substantially similar to the Common Stock or which are
convertible into or exchangeable or exercisable for Common Stock or securities
substantially similar to the Common Stock for a period of 180 days after the
closing of the Offering without the prior written consent of Schroder & Co.
Inc., which it may grant in whole or in part without a public announcement.
The stockholders subject to the foregoing restrictions have advised the
Company that they do not intend to request Schroder & Co. Inc. to waive such
restrictions during the 180-day lock-up period. The foregoing restrictions
will not apply to the following transactions by the Company: (i) the issuance
of options or other awards under the Stock Incentive Plan and options under
the Outside Director Plan, as such plans are in effect on the date of this
Prospectus; (ii) the issuance of shares of Common Stock under the Company's
1999 Employee Stock Purchase Plan as in effect on the date of this Prospectus;
(iii) the issuance of up to 135,000 shares of Common Stock upon exercise of
options to be granted by the Company upon the consummation of the Offering
pursuant to the Stock Incentive Plan and the Outside Director Plan; and (iv)
the filing of one or more registration statements on Form S-8 registering the
offer and sale of Common Stock under the Stock Incentive Plan, the Outside
Director Plan and the 1999 Employee Stock Purchase Plan. In addition, the
lock-up restrictions will not apply to transfers of Common Stock to the
Company or to certain transfers of Common Stock to family trusts or by gift,
will or intestate succession. As a condition to any such transfer to a family
trust or
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transfer by gift, will or intestate succession, the transferee (or trustee or
legal guardian on the transferee's behalf) will be required to execute and
deliver a lock-up agreement containing the terms described in this paragraph.
Upon expiration of the lock-up period, the Reserved Shares will be freely
tradable by persons other than affiliates of the Company and up to 10,147,000
shares of Common Stock will be eligible for sale under Rule 144. See "Shares
Eligible for Future Sale."
The Company has granted "demand" and "piggyback" registration rights with
respect to the Common Stock held by the Institutional Investors. The
Institutional Investors are entitled to require the Company to register the
sale of their shares under the Securities Act on up to two occasions. In
addition, if the Company proposes to register the Common Stock under the
Securities Act (other than pursuant to a registration statement on Form S-4 or
Form S-8), whether or not for its own account, the Institutional Investors are
entitled to require the Company, subject to certain conditions, to include all
or a portion of their shares in such registration. The Company has registered
the shares offered hereby by the Selling Stockholders pursuant to their
exercise of such piggyback registration rights. The foregoing registration
rights are subject to certain notice requirements, timing restrictions and
volume limitations which may be imposed by the underwriters of an offering.
The Company is required to bear the expenses of all such registrations except
for underwriting discounts and commissions. Following the consummation of the
Offering, 922,000 shares of Common Stock, or 6.8% of total number of
outstanding shares of Common Stock, will be entitled to the benefits of such
registration rights. See "Certain Transactions--Acquisition Transactions."
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USE OF PROCEEDS
The net proceeds to the Company from the Offering after deducting
underwriting discounts and commissions and after expenses of the Offering are
expected to be $40.8 million ($47.2 million if the Over-Allotment Option is
exercised in full). The Company will not receive any of the net proceeds from
the sale of Shares by the Selling Stockholders.
The Company will use approximately $28.0 million of the net proceeds of the
Offering to repay $26.3 million principal amount of indebtedness, $0.2 million
of accrued and unpaid interest thereon and a related prepayment premium of
approximately $1.5 million. Such indebtedness, which was incurred in
connection with the Acquisition, consists of (i) $21.3 million principal
amount of senior notes, which accrue interest at an annual rate of 10% and
mature on August 30, 2003 (the "Senior Notes"), and (ii) $5.0 million
principal amount of subordinated notes, which accrue interest at an annual
rate of 12% and mature on August 30, 2004 (the "Subordinated Notes"). The
Senior Notes and the Subordinated Notes are held by the Institutional
Investors, one or more of which may be deemed affiliates of the Company prior
to the Offering. The Company also will use approximately $3.1 million to repay
a note it will issue in the Reorganization in exchange for Mobil's preferred
equity interest in TREX Company, LLC, including $0.1 million of accrued and
unpaid dividends on such equity interest. See "Certain Transactions--
Acquisition Transactions." The Company will pay approximately $6.9 million of
the net proceeds of the Offering to fund a portion of the LLC Distribution to
its four management members and to the Institutional Investors. The estimated
LLC Distribution as of December 31, 1998 is $5.6 million. Such amount will be
increased by the amount of any taxable income realized by the Company from
January 1, 1999 through the date of the LLC Distribution. The amount of the
net proceeds of the Offering to be applied in respect of the LLC Distribution,
which is estimated to be approximately $11.3 million as of the expected
payment date, is subject to adjustment based on the actual amount of the LLC
Distribution. See "Certain Transactions--Reorganization."
The Company intends to use up to all of the remaining net proceeds of the
Offering of approximately $2.8 million to equip the Company's second
manufacturing facility. Any proceeds not used for this purpose will be applied
to working capital and other general corporate purposes. The Company estimates
that the total cost of the site acquisition, construction and equipping of its
second manufacturing facility will be approximately $19.6 million.
Pending the foregoing uses, the net proceeds of the Offering will be
invested in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future. The
payment of dividends is within the discretion of the Board of Directors and
will be dependent upon, among other factors, the Company's results of
operations, financial condition and capital requirements, restrictions imposed
by the Company's financing agreements and legal requirements. Under the terms
of its revolving credit facility, the Company may pay cash dividends only if,
after payment of such dividends, the ratio of its total consolidated debt to
its total consolidated capitalization does not exceed 50%.
Prior to the Reorganization, the Company has been treated as a partnership
for federal and state income tax purposes. The Company made distributions to
its members of $1.6 million in 1997 and $2.3 million in 1998 to satisfy their
allocated portion of the Company's taxable income. As part of the
Reorganization, the Company will make the LLC Distribution of approximately
$11.3 million to certain of its members. The amount of the LLC Distribution is
subject to adjustment based on the Company's actual taxable income from
January 1, 1999 through the date of the LLC Distribution. See "Certain
Transactions--Reorganization."
19
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Reorganization and (iii) the supplemental
pro forma capitalization of the Company after giving effect to the
Reorganization and as adjusted for the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------
Supplemental
Actual Pro Forma Pro Forma
------- --------- ------------
(In thousands, except share
and unit data)
<S> <C> <C> <C>
Long-term debt (including current portion of
$6,109 for Actual and Pro Forma and $2,259 for
Supplemental Pro Forma):
Senior Notes.................................. $21,250 $21,250 $ --
Subordinated Notes............................ 5,000 5,000 --
Other......................................... 6,813 6,813
6,813
------- ------- -------
Total long-term debt......................... 33,063 33,063 6,813
Members' equity:
Preferred units, 1,000 units
authorized, issued and
outstanding.................................. 3,000
Junior units, 4,000 units
authorized, issued and
outstanding.................................. 2,350
Undistributed income.......................... 7,941
-------
Total members' equity.......................... 13,291
Stockholders' equity:
Preferred Stock, $0.01 par value,
3,000,000 shares authorized;
none issued and outstanding.................. -- --
Common Stock, $0.01 par value,
40,000,000 shares authorized;
10,250,000 and 13,500,000 shares issued and
outstanding for Pro Forma and Supplemental
Pro Forma, respectively (1).................. 103 135
Additional capital............................ -- 40,630
Retained earnings............................. 4,544 1,226
------- -------
Total stockholders' equity................... 4,647 41,991
------- ------- -------
Total capitalization........................ $46,354 $37,710 $48,804
======= ======= =======
</TABLE>
- --------
(1) Does not include (i) 125,000 shares subject to stock options the Company
intends to grant to certain of its employees under the Stock Incentive
Plan upon the consummation of the Offering or (ii) up to 10,000 shares
subject to stock options the Company intends to grant to its non-employee
directors under the Outside Director Plan upon the consummation of the
Offering. See "Management--1999 Stock Option and Incentive Plan" and "--
1999 Incentive Plan for Outside Directors."
20
<PAGE>
DILUTION
At December 31, 1998, the deficit in pro forma net tangible book value of
the Common Stock, after giving effect to the Reorganization, was $(4.9)
million, or approximately $(0.48) per share outstanding. As of December 31,
1998, the supplemental pro forma net tangible book value of the Common Stock,
after giving effect to the Reorganization and the consummation of the Offering
and the application of the net proceeds therefrom, was $32.7 million, or
approximately $2.42 per share outstanding. This represents an immediate
increase in pro forma net tangible book value of $2.90 per share to existing
stockholders and an immediate dilution in net tangible book value of $11.58
per share to new investors purchasing Shares in the Offering. The net tangible
book value per share of Common Stock represents the amount of the Company's
tangible assets less its liabilities divided by the number of shares of Common
Stock outstanding. The following table illustrates this dilution in net
tangible book value per share to new investors at December 31, 1998:
<TABLE>
<CAPTION>
Initial public offering price per Share......................... $14.00
<S> <C> <C>
Deficit in pro forma net tangible book value per share at
December 31, 1998 after giving effect to the Reorganization.... $(0.48)
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 2.90
------
Supplemental pro forma net tangible book value per share at
December 31, 1998 after giving effect to the Offering.......... 2.42
------
Dilution per share to new investors............................. $11.58
======
</TABLE>
The following table sets forth, at December 31, 1998 on a pro forma basis,
after giving effect to the Reorganization, the difference between the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share paid by the existing holders of the
Common Stock and by the new investors, before deducting underwriting discounts
and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Paid
--------------------- ------------------------- ----------
<S> <C> <C> <C> <C> <C>
Number Percentage Amount Percentage Per Share
---------- ---------- ----------- ---------- ---------
Existing stockholders
(1).................... 10,250,000 75.9% $ 2,350,000(2) 4.9% $ 0.23(2)
New investors (1).......
3,250,000 24.1 45,500,000 95.1 $ 14.00
---------- ---------- ----------- ----------
Total.................. 13,500,000 100.0% $47,850,000 100.0 $ 3.54
========== ========== =========== ==========
</TABLE>
- --------
(1) Does not reflect the sale of 103,000 shares by Selling Stockholders in
the Offering. Sales by Selling Stockholders in the Offering will reduce
the number of shares held by existing stockholders of the Company to
10,147,000 or approximately 75.2% of the total shares of Common Stock
outstanding after the Offering (or 72.5% of the total shares of Common
Stock outstanding if the Over-Allotment Option is exercised in full).
(2) Reflects the amount paid by the members of TREX Company, LLC other than
Mobil for their membership interests, which will be exchanged for Common
Stock in the Reorganization. See "Certain Transactions--Reorganization"
and "--Acquisition Transactions."
21
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data presented below as of December 31,
1996, 1997 and 1998, for the period from August 29, 1996 to December 31, 1996,
and for the years ended December 31, 1997 and 1998 are derived from the
Company's Financial Statements and related Notes thereto, appearing elsewhere
in this Prospectus, which have been audited by Ernst & Young LLP, independent
auditors. The selected historical statement of operations data and cash flow
data presented below as of December 31, 1995 and for the year ended December
31, 1995 and the period from January 1, 1996 to August 28, 1996 are derived
from the Financial Statements of the Predecessor and related Notes thereto
appearing elsewhere in this Prospectus, which have been audited by Ernst &
Young LLP, independent auditors. The selected historical financial data
presented below as of December 31, 1994 and for the year ended December 31,
1994 are derived from the Predecessor's unaudited financial statements. The
unaudited supplemental pro forma statement of operations data, cash flow data
and other data give effect to the Reorganization and the Offering as if such
transactions had been consummated on January 1, 1998. The unaudited pro forma
balance sheet data give effect to the Reorganization as if the Reorganization
had been consummated on December 31, 1998. The unaudited supplemental pro
forma balance sheet data give effect to the Reorganization and the Offering as
if such transactions had been consummated on December 31, 1998. The unaudited
pro forma balance sheet data and unaudited supplemental pro forma financial
data are based on assumptions that management believes are reasonable, are
presented for comparative and informational purposes only and do not purport
to represent what the Company's actual results of operations or financial
condition would have been if the Reorganization and the Offering in fact had
occurred on such dates or to project the Company's results of operations for
any future period or financial condition at any future date. The selected
historical and unaudited pro forma balance sheet data and unaudited
supplemental pro forma financial data presented below also include certain
unaudited other data. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and the
Predecessor and related Notes thereto appearing elsewhere in this Prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
The Predecessor(1) The Company(1)
--------------------------- ------------------------------------------------
Supplemental
Year Ended Jan. 1, Aug. 29, Pro Forma
Dec. 31, 1996 to 1996 to Year Ended Dec. 31, Year Ended
----------------- Aug. 28, Dec. 31, -------------------- Dec. 31,
1994 1995 1996 1996 1997 1998 1998(2)
-------- ------- -------- -------- --------- --------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 7,376 $19,635 $18,071 $ 5,708 $ 34,137 $ 46,818 $ 46,818
Cost of sales........... 6,203 10,269 9,188 3,481 16,774 22,956 22,956
-------- ------- ------- -------- --------- --------- --------
Gross (loss) profit..... 1,173 9,366 8,883 2,227 17,363 23,862 23,862
Selling, general and
administrative
expenses............... 13,875 6,943 5,508 2,558 8,992 12,878 12,878
-------- ------- ------- -------- --------- --------- --------
(Loss) income from
operations............. (12,702) 2,423 3,375 (331) 8,371 10,984 10,984
Interest expense, net... -- -- -- 934 2,777 2,526 175
-------- ------- ------- -------- --------- --------- --------
(Loss) income before
income tax expense..... $(12,702) $ 2,423 $ 3,375 $ (1,265) $ 5,594 $ 8,458 10,809
======== ======= ======= ======== ========= =========
Basic (loss) earnings
per junior unit (3).... $(350.00) $1,297.25 $2,013.25
======== ========= =========
Weighted average junior
units outstanding ..... 4,000 4,000 4,000
======== ========= =========
Pro forma income tax
expense (4)(5)(6)
(unaudited)............ 3,383 4,324
--------- --------
Pro forma net income
(5)(6) (unaudited)..... $ 5,075 $ 6,485
========= ========
Pro forma net income per
share, basic
(5)(6)(7)(unaudited)... $ 0.50 $ 0.48
========= ========
Cash Flow Data:
Cash flow (used in) from
operating activities... $ (4,404) $ 4,841 $ 2,848 $ (222) $ 6,521 $ 12,228 $ 11,870
Cash flow (used in)
investing activities... (4,427) (3,842) (3,708) (30,253) (3,252) (17,140) (17,140)
Cash flow from (used in)
financing activities... 8,778 (1,009) 860 34,216 (5,010) 4,112 8,342
Other Data (unaudited):
EBITDA (8).............. $ (4,080) $ 3,751 $ 4,492 $ 527 $ 11,013 $ 14,098 $ 14,098
Pounds of Trex sold..... 30,081 71,822 61,483 19,924 113,948 151,555 151,555
</TABLE>
<TABLE>
<CAPTION>
The Predecessor(1) The Company(1)
-------------------- -----------------------------------------------------
As of December 31, As of December 31, 1998
------------------------------------- -------------------------------------
Supplemental
1994 1995 1996 1997 Actual Pro Forma(9) Pro Forma(9)(10)
--------- --------- ------- ------- ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
(in thousands)
Cash and cash
equivalents............ $ 10 $ -- $ 3,741 $ 2,000 $1,200 $200 $5,072
Working capital......... (403) (1,150) 3,974 4,156 (3,172) (11,816) 5,718
Total assets............ 11,958 13,047 36,561 37,229 51,331 50,331 54,420
Total debt.............. 38,059 37,050 29,250 26,250 33,063 33,063 6,813
Total
members'/stockholders'
(deficit) equity....... (29,121) (26,698) 3,950 7,534 13,291 4,647 41,991
</TABLE>
- --------
(1) On August 29, 1996, the Company acquired substantially all of the assets
and assumed certain of the liabilities of the Predecessor for a purchase
price of approximately $29.5 million. See "Certain Transactions--
Acquisition Transactions."
(2) The supplemental pro forma statement of operations data have been computed
by eliminating net interest expense of $2.4 million related to debt that
will be repaid with a portion of the net proceeds of the Offering. The
supplemental pro forma statement of operations data do not include
adjustments to (i) record an extraordinary loss, net of taxes, of $1.1
million for the year ended December 31, 1998 related to the extinguishment
of such debt or (ii) reflect recognition of a one-time non-cash tax charge
of approximately $1.4 million for the year ended December 31, 1998 with
respect to a net deferred tax liability related to the Company's
conversion in the Reorganization to a C corporation. Such data give effect
to the conversion as if it had occurred on January 1, 1998. The
supplemental pro forma income tax provision is calculated at a combined
federal and state income tax rate of 40%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Certain Transactions--Reorganization."
(3) Historical basic earnings per junior unit has been omitted for the
Predecessor periods, since the operations for such periods were a
component of Mobil.
(4) For the periods shown, the Predecessor was included in the consolidated
tax return of its parent and, accordingly, no tax provision was provided.
For all periods since inception, the Company elected to be treated as a
partnership for federal and state income tax purposes. As a result, the
Company's income has been taxed directly to the Company's members, rather
than to the Company.
23
<PAGE>
(5) Pro forma and supplemental pro forma net income and basic net income per
share reflect current federal and state income taxes (assuming a 40%
combined effective tax rate) as if the Company had been taxed as a C
corporation for the periods presented.
(6) Pro forma and supplemental pro forma net income and basic net income per
share for the year ended December 31, 1998 do not include adjustments to
record deferred income tax expense of $1.4 million as a result of the
Company's conversion in the Reorganization to a C corporation. Such data
give effect to the conversion as if it had occurred on January 1, 1998.
(7) Assumes 10,250,000 and 13,500,000 weighted average shares outstanding
during the year ended December 31, 1998 on a pro forma and supplemental
pro forma basis, respectively. Diluted income per share is the same as
basic income per share and, therefore, is not separately presented.
(8) Consists of income (loss) from operations plus depreciation and
amortization. EBITDA is presented because it is a commonly used measure of
performance by the financial community. Although management believes
EBITDA is a useful measure of the Company's performance, EBITDA should not
be considered an alternative to net income (loss) as a measure of
operating performance or to cash provided by (used for) operating
activities as a measure of liquidity. In addition, this measure of EBITDA
may not be comparable to similarly titled measures reported by other
companies.
(9) Reflects (i) the LLC Distribution of $5.6 million at December 31, 1998 and
(ii) the repayment of a $3.1 million note issued in exchange for the
preferred membership interest in the Company. Does not reflect a net
deferred tax liability of $2.4 million that would have been recorded by
the Company if it had converted to C corporation status on December 31,
1998. The $5.6 million LLC Distribution adjustment is calculated as if the
LLC Distribution had been made on December 31, 1998 and is based in part
on the estimated amount of previously recognized and undistributed income
of the Company through such date, while the $11.3 million LLC Distribution
amount appearing elsewhere in this Prospectus also reflects the then
estimated additional results of operations of the Company from January 1,
1999 through the estimated date of the LLC Distribution. The $5.6 million
amount as of December 31, 1998 will be increased by the amount of any
taxable income realized by the Company from January 1, 1999 through the
date of the LLC Distribution. See "Certain Transactions--Reorganization."
(10) Reflects (i) the LLC Distribution of $5.6 million at December 31, 1998,
(ii) the repayment of a $3.1 million note issued in exchange for the
preferred membership interest in the Company, (iii) a net deferred tax
liability of $2.4 million that would have been recorded by the Company if
it had converted to C corporation status on December 31, 1998, (iv) an
extraordinary $1.1 million charge for the early extinguishment of debt to
be repaid from the net proceeds of the Offering and (v) the sale by the
Company of the Shares in the Offering and the application of the net
proceeds therefrom. See "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview" and "Certain Transactions--Reorganization."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is the nation's largest manufacturer of non-wood decking
alternative products, which are marketed under the brand name Trex. Trex Wood-
Polymer lumber is a wood/plastic composite that offers an attractive
appearance and the workability of wood without wood's on-going maintenance
requirements and functional disadvantages. Trex is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene
and is used primarily for decking. Trex also has non-decking product
applications, including industrial block flooring, applications for parks and
recreational areas, floating and fixed docks and other marine applications,
and landscape edging.
The primary market for Trex is residential and commercial decking, which
accounted for approximately 85% of the Company's 1998 net sales. The Company
seeks to achieve sales growth in the decking market by converting demand for
wood decking products into demand for Trex. Wood decking accounted for
approximately 97% of 1997 decking sales (measured by board feet of lumber).
The Company's strategy to increase market acceptance of Trex is to develop and
promote the Trex brand name as a premium decking product and to emphasize the
advantages of Trex over wood decking products. The Company has invested over
$10 million during the last three years to develop Trex as a recognized brand
name. The Company focuses on the contractor-installed market segment, since
this segment represents 70% of the decking market (measured by board feet of
lumber) and since contractors generally build larger and more elaborate
residential decks than decks built by homeowners in the "do-it-yourself"
market segment.
The Company has developed an extensive distribution network which
complements its branding strategy and its focus on the contractor-installed
market segment. At December 31, 1998, the Company sold Trex through
approximately 55 wholesale distribution locations. At the same date, the
Company's distributors marketed Trex to approximately 2,000 dealer outlets,
which directly service contractors and consumers.
Net sales consists of sales net of returns and discounts. The Company has
experienced net sales growth each year since it began operations in 1992. The
increase in net sales is primarily attributable to the growth in sales volume,
which increased from 16.2 million pounds of finished product in 1993, the
first full year of operations, to 151.6 million pounds in 1998. The Company's
branding and product differentiation strategy enables the Company both to
command premium prices and to maintain price stability for Trex. Prices for
Trex over the last three years have increased at a compound annual growth rate
of approximately 4%.
From time to time since 1992, customer demand for Trex has exceeded the
Company's manufacturing capacity. The constraints on the Company's capacity in
these periods have limited the rate of the Company's net sales growth.
The Company's cost of sales consists of raw material costs, direct labor
costs and manufacturing costs, including depreciation. In the last three
years, the cost of raw materials increased an average of approximately 5.0%
annually. Almost all of the increases were attributable to higher costs of
polyethylene. Although cost of sales has increased with the growth in net
sales, cost of sales as a percentage of net sales decreased in 1998 from the
level in 1997. During this period, productivity gains from the Company's
investment in manufacturing process improvements and the addition of
production lines outweighed increases in raw material and direct labor costs.
Production line rates, which are measured in pounds of finished product per
production hour, have increased over 200%
25
<PAGE>
since 1992, and the number of production lines has increased from one line in
1992 to seven lines in 1998. The Company expects that cost of sales as a
percentage of net sales will decrease in the first half of 1999 because the
Company has augmented its manufacturing capacity through the addition of one
new production line to its Winchester facility in December 1998 and a second
new production line in January 1999.
The principal component of selling, general and administrative expenses is
sales and marketing costs, which have increased significantly as the Company
has sought to build brand awareness of Trex in the decking market. Sales and
marketing costs consist primarily of salaries, commissions and benefits paid
to sales and marketing personnel, advertising expenses and other promotional
costs. General and administrative expenses include salaries and benefits of
personnel engaged in research and development, procurement, accounting and
other business functions and office occupancy costs attributable to such
functions, as well as amortization expense. As a percentage of net sales,
selling, general and administrative expenses have varied from quarter to
quarter, especially when the Company has determined to build inventory
selectively and to continue expenditures for advertising.
In connection with the Acquisition, the Company incurred indebtedness of
$29.3 million, of which $26.3 million was outstanding at December 31, 1998,
and recorded $11.3 million for goodwill and organizational cost, substantially
increasing its interest and amortization expense. The Company will repay its
Acquisition-related indebtedness with a portion of the net proceeds of the
Offering. See "Use of Proceeds." In the quarter in which the Offering is
consummated, as a result of repayment of such indebtedness, the Company will
recognize an extraordinary cash charge against income of $1.5 million on a
pre-tax basis for early extinguishment of debt and an extraordinary $0.2
million non-cash charge against income for the write-off of unamortized debt
discount. The Company is amortizing its goodwill over a 15-year period in an
amount of approximately $0.7 million per year and organizational cost over a
five-year period in an amount of approximately $0.1 million per year.
The Company did not record an income tax provision for any period through
the date of the Offering. Prior to the Acquisition, the Company was included
in the consolidated tax return of its parent company. Since the Acquisition,
the Company has elected to be treated as a partnership for federal and state
income tax purposes, and the Company's income has been taxed directly to the
Company's members, rather than to the Company. Upon consummation of the
Reorganization, the Company will become subject to income tax as a corporation
taxed in accordance with Subchapter C of the Internal Revenue Code. In the
quarter in which the Offering is consummated, as a result of the Company's
conversion to C corporation status, the Company will recognize a $2.4 million
non-cash charge against income for income tax expense. The effect of this
charge will be to increase substantially the Company's effective tax rate for
the quarter in which the Reorganization is consummated. The increased
effective tax rate will be recognized only in such quarter and, accordingly,
the Company believes that its effective tax rate for subsequent periods should
not exceed approximately 40%.
26
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of net sales:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1996(1) 1997 1998
------ ------ -----
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 53.3 49.1 49.0
------ ------ -----
Gross profit............................................ 46.7 50.9 51.0
Selling, general and administrative expenses............ 33.9 26.3 27.5
------ ------ -----
Income (loss) from operations........................... 12.8 24.5 23.5
Interest expense........................................ 3.9 8.1 5.4
------ ------ -----
Net income(2)........................................... 8.9% 16.4% 18.1%
====== ====== =====
</TABLE>
- --------
(1) Reflects the sum of the selected statement of operations data for the
Predecessor during the period January 1, 1996 to August 28, 1996 and for
the Company during the period August 29, 1996 to December 31, 1996.
(2) The Company did not record an income tax provision for any period through
the date of the Offering. The Predecessor was included in the
consolidated tax return of its parent company and, accordingly, no tax
provision was provided. The Company has elected to be treated as a
partnership for federal and state income tax purposes for all periods
since inception. As a result, the income of the Company has been taxed
for such purposes directly to the Company's members, rather than to the
Company.
1998 Compared to 1997
Net Sales. Net sales increased 37.2% to $46.8 million in 1998 from $34.1
million in 1997. The increase in net sales was attributable to the growth in
sales volume, which increased to 151.6 million pounds of finished product in
1998 from 113.9 million pounds in 1997, and, to a lesser extent, to a price
increase of approximately 3.1%. Production line rate increases and the
addition of a sixth production line in the second quarter of 1998
significantly increased the Company's production capacity in 1998. To
stimulate demand for Trex, the Company increased expenditures on network and
cable television advertising and instituted incentive sales programs in 1998.
Increased sales of a railing product and a Trex color introduced in 1997 also
contributed to the higher sales volume. The Company substantially increased
the number of dealer outlets, from approximately 1,500 at December 31, 1997 to
approximately 2,000 at December 31, 1998.
Cost of Sales. Cost of sales increased 36.9% to $23.0 million in 1998 from
$16.8 million in 1997. All components of cost of sales increased to support
the higher level of sales activity. Cost of sales as a percentage of net sales
decreased to 49.0% in 1998 from 49.1% in 1997. The decline principally
reflected operating efficiencies from improved production line rates.
Gross Profit. Gross profit increased 37.4% to $23.9 million in 1998 from
$17.4 million in 1997, reflecting the higher sales volume in 1998. Gross
profit as a percentage of net sales increased to 51.0% in 1998 from 50.9% in
1997. The contribution to gross profit of greater operating efficiencies more
than offset the effects of discounts offered by the Company to distributors in
1998 as part of its sales incentive programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 43.3% to $12.9 million in 1998 from $9.0
million in 1997. The increase was primarily attributable to higher sales and
marketing expenses, which increased 47.1% to $7.5 million in 1998
27
<PAGE>
from $5.1 million in 1997. The largest component of the increase was
advertising and promotion costs, which increased 50.6% as the Company expanded
promotion of the Trex brand on network and cable television. The Company also
incurred higher personnel costs through additions to its sales and marketing
staff. The increase in corporate personnel and the upgrading of accounting and
other systems to support growth contributed to a 61.0% increase in general and
administrative expenses. Selling, general and administrative expenses as a
percentage of net sales increased to 27.5% in 1998 from 26.3% in 1997.
Interest Expense. Net interest expense decreased 10.7% to $2.5 million in
1998 from $2.8 million in 1997. The decrease primarily resulted from lower
average borrowings attributable to the Company's prepayment of $3.0 million
principal amount of Senior Notes in the second quarter of 1997.
1997 Compared to 1996
Net Sales. Net sales increased 43.3% to $34.1 million in 1997 from $23.8
million in the period January 1, 1996 to August 28, 1996 and the period August
29, 1996 to December 31, 1996 (such periods together, "1996"). The increase in
net sales was attributable to the growth in sales volume, which increased to
113.9 million pounds of finished product in 1997 from 81.4 million pounds in
1996, and, to a lesser extent, to a price increase of approximately 2.9%. The
Company's production capacity in 1997 was significantly augmented by a fifth
production line added in the third quarter of 1996. The Company used the
additional capacity to build up inventories in late 1996 for sale in 1997. The
introduction of a new railing product and a new Trex color also contributed to
the higher sales volume in 1997. The Company significantly expanded its
distribution network by increasing the number of dealer outlets from
approximately 1,200 at December 31, 1996 to approximately 1,500 at December
31, 1997.
Cost of Sales. Cost of sales increased 32.3% to $16.8 million in 1997 from
$12.7 million in 1996. Raw materials purchases, direct labor costs and
manufacturing costs all increased to support the higher sales volume in 1997.
Cost of sales as a percentage of net sales declined to 49.1% in 1997 from
53.3% in 1996. The decline was primarily attributable to improved production
line rates resulting from the efforts of an engineering team assigned in 1996
to focus on productivity improvements.
Gross Profit. Gross profit increased 55.9% to $17.3 million in 1997 from
$11.1 million in 1996, reflecting the higher sales volume in 1997. Gross
profit as a percentage of net sales increased to 50.9% in 1997 from 46.7% in
1996. The increase was primarily attributable to operating efficiencies
resulting from improved production line rates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11.1% to $9.0 million in 1997 from $8.1
million in 1996. The increase resulted principally from higher sales and
marketing expenses, which increased 21.4% to $5.1 million in 1997 from
$4.2 million in 1996. An increase of 14.8% in advertising costs over 1997 and
the addition of new sales and marketing personnel contributed to the higher
sales and marketing expenses. The increased general and administrative
expenses in 1997 reflected an expense of $0.8 million from amortization of
goodwill and organizational costs incurred in connection with the Acquisition.
Selling, general and administrative expenses as a percentage of net sales
decreased to 26.3% in 1997 from 33.9% in 1996.
Interest Expense. Net interest expense increased to $2.8 million in 1997
from $0.9 million in 1996. The increase reflected a full year of interest
expense on indebtedness incurred in connection with the Acquisition. See
"Certain Transactions--Acquisition Transactions."
Seasonality
The Company's net sales and income from operations historically have varied
from quarter to quarter. Such variations are principally attributable to
seasonal trends in the demand for Trex. The
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Company experiences lower net sales levels during the fourth quarter, in which
holidays and adverse weather conditions in certain regions usually reduce the
level of home improvement and new construction activity. Income from
operations and net income tend to be lower in quarters with lower sales due to
a lower gross margin which is not offset by a corresponding reduction in
selling, general and administrative expenses, in part because the Company
continues to make advertising expenditures throughout the year. The Company
utilizes a variety of sales incentive programs with customers to reduce the
effects of seasonality.
Liquidity and Capital Resources
The Company historically has financed its operations and growth primarily
with cash flow from operations, operating leases, normal trade credit terms
and borrowings under its revolving credit facility.
The Company's cash flow from operating activities was $12.2 million in 1998,
$6.5 million in 1997 and $2.6 million in 1996. Higher sales volume accounted
for the significant increase in cash flows in 1998.
The Company's working capital generally averages between 12% and 18% of
annual net sales. The Company's working capital needs correlate closely with
the level of the Company's net sales. Consequently, the Company's short-term
borrowing requirements are affected by the seasonality of its business. The
Company currently maintains a $6.0 million revolving credit facility, which
accrues interest at a rate equal to LIBOR plus 200 basis points. As of
December 31, 1998, no borrowings were outstanding under the facility. The
Company expects to replace its current facility in March 1999 with a $10.0
million revolving credit facility containing substantially the same terms. The
Company also anticipates that it will obtain an additional $7.5 million line
of credit in March 1999 to finance equipment purchases for its new
manufacturing facility.
The Company financed its purchase of its Winchester, Virginia facility in
June 1998 with a ten-year term loan of $3.8 million. Pursuant to an interest
rate swap agreement, the Company pays interest on this loan at an annual rate
of 7.12%.
The Company financed its purchase of the Trex Technical Center in November
1998 in part with the proceeds of a ten-year term loan of $1.0 million.
Pursuant to an interest rate swap agreement, the Company pays interest on this
loan at an annual rate of 6.8%.
The Company financed its acquisition of the site for its second
manufacturing facility in December 1998 in part with a $2.1 million loan which
is payable in September 1999. The Company will finance construction of the
facility in part with proceeds of up to $4.6 million under a construction loan
which is payable in November 1999. The site acquisition and construction loans
accrue interest at an annual rate of 7.5%. The Company intends to refinance
both loans with long-term borrowings. The Company will use cash flow from
operations and borrowings under its current and expected credit facilities to
fund a portion of the costs of constructing and equipping its new
manufacturing facility. It also intends to use a portion of the net proceeds
of the Offering to equip the new facility. See "Use of Proceeds" and
"Business--Manufacturing Process."
As of December 31, 1998, the Company's long-term indebtedness, including
current portion, was $33.1 million, with an overall weighted average interest
rate of 9.7%. Of such indebtedness, $26.3 million principal amount of the
Senior Notes and the Subordinated Notes will be repaid from the net proceeds
of the Offering. See "Use of Proceeds."
The Company's major market risk exposure is to changing interest rates. The
Company's policy is to manage interest rates through the use of a combination
of fixed and floating rate debt. The Company uses interest rate swap contracts
to manage its exposure to fluctuations in interest rates on its floating-rate
debt, substantially all of which is based on LIBOR. At December 31, 1998, the
Company had effectively capped its interest rate exposure at approximately 7%
on approximately $4.7 million of its floating rate debt through 2008. See Note
6 to the Financial Statements of TREX Company, LLC appearing elsewhere in this
Prospectus.
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As part of the Reorganization, the Company will make the LLC Distribution of
approximately $11.3 million to certain of its members. A portion of the net
proceeds of the Offering will be used to pay approximately $6.9 million of the
LLC Distribution. The Company will fund the balance of the LLC Distribution of
approximately $4.4 million from drawings under its revolving credit facility.
The amount of the LLC Distribution and the amount of the net proceeds of the
Offering to be applied in respect thereof are subject to adjustment based on
the Company's actual taxable income from January 1, 1999 through the date of
the LLC Distribution. See "Certain Transactions--Reorganization."
Expansion of the Company's production capacity will require significant
capital expenditures. The Company currently estimates that its aggregate
capital requirements in 1999 and 2000 will total approximately $23.8 million,
of which approximately $20.3 million is expected to be incurred in 1999 and
approximately $3.5 million in 2000. Capital expenditures will be used
primarily for the construction and equipping of the Company's new
manufacturing facility, which will be located near Reno, Nevada and which the
Company expects to begin production in the fourth quarter of 1999. The Company
believes that the net proceeds of the Offering, together with cash on hand,
cash flow from operations and borrowings expected to be available under the
Company's credit agreements and construction loan for the new facility, will
provide sufficient funds to enable the Company to expand its business as
currently planned for at least the next 12 months. The actual amount and
timing of the Company's future capital requirements may differ materially from
the Company's estimate depending on the demand for Trex and new market
developments and opportunities. The Company may determine that it is necessary
or desirable to obtain financing for such requirements through bank borrowings
or the issuance of debt or equity securities. Debt financing would increase
the leverage of the Company, while equity financing may dilute the ownership
of the Company's stockholders. There can be no assurance as to whether, or as
to the terms on which, the Company will be able to obtain such financing.
Year 2000 Compliance
The Company's Program. The Company has undertaken a program to address the
Year 2000 issue with respect to the following: (i) the Company's information
technology and operating systems (including its billing, accounting and
financial reporting systems); (ii) the Company's non-information technology
systems (such as buildings, plant, equipment and other infrastructure systems
that may contain embedded microcontroller technology); (iii) certain systems
of the Company's major suppliers and material service providers (insofar as
such systems relate to the Company's business activities with such parties);
and (iv) the Company's major distributors (insofar as the Year 2000 issue
relates to the ability of such distributors to distribute Trex to the
Company's dealer outlets). As described below, the Company's Year 2000 program
involves (i) an assessment of the Year 2000 problems that may affect the
Company, (ii) the development of remedies to address the problems discovered
in the assessment phase, (iii) the testing of such remedies and (iv) the
preparation of contingency plans to deal with worst case scenarios.
Assessment Phase. As part of the assessment phase of its program, the
Company will attempt to identify substantially all of the major components of
the systems described above. To determine the extent to which such systems are
vulnerable to the Year 2000 issue, the Company has completed an evaluation of
its software applications and began remediation and testing activities for
such applications in the first quarter of 1999. In addition, in the fourth
quarter of 1998, the Company completed its distribution of letters to certain
of its major suppliers and other material service providers and to the
Company's major distributors, requesting them to provide the Company with
detailed, written information concerning existing or anticipated Year 2000
compliance by their systems insofar as the systems relate to such parties'
business activities with the Company. The Company is currently processing the
responses to those inquiries and re-soliciting responses from those entities
that have not yet responded.
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Remediation and Testing Phase. Based upon the results of its assessment
efforts, the Company will undertake remediation and testing activities. The
Company intends to complete this phase by June 30, 1999. The activities
conducted during the remediation and testing phase are intended to address
potential Year 2000 problems in computer software used by the Company in its
information technology and non-information technology systems in an attempt to
demonstrate that this software will be made substantially Year 2000 compliant
on a timely basis. In this phase, the Company will first evaluate a program
application and, if a potential Year 2000 problem is identified, will take
steps to attempt to remediate the problem and individually test the
application to confirm that the remediating changes are effective and have not
adversely affected the functionality of that application. After the individual
applications and system components have undergone remediation and testing
phases, the Company will conduct integrated testing for the purpose of
demonstrating functional integrated systems operation.
Contingency Plans. The Company intends to develop contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios, which it has
not yet identified fully. The Company intends to complete its determination of
such worst case scenarios after it has received and analyzed responses to
substantially all of the inquiries it has made of third parties and completed
its remediation and testing activities. The Company expects to complete
development of its contingency plans by August 31, 1999.
Costs Related to the Year 2000 Issue. To date, the Company has incurred
approximately $5,000 in costs for its Year 2000 program. Such costs do not
include internal staff costs, consisting principally of payroll costs,
incurred on Year 2000 matters, because the Company does not separately track
such costs. The Company currently estimates that it will incur additional
costs (excluding internal staff costs), which are not expected to exceed
approximately $50,000, to complete its Year 2000 compliance work. Such costs
will constitute approximately 40% of the Company's budgeted expenditures for
information technology. Actual costs may vary from the foregoing estimates
based on the Company's evaluation of responses to its third-party inquiries
and on the results of its remediation and testing activities. The Company
expects to fund its Year 2000 remediation costs out of the cash flows
generated by its operations. The Company has not deferred any of its
information technology projects to date as a result of the Year 2000 issue.
Risks Related to the Year 2000 Issue. Although the Company's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company and its major suppliers, other
material service providers and major distributors to address adequately their
respective Year 2000 issues in a timely manner (insofar as such issues relate
to the Company's business) could have a material adverse effect on the
Company's business, results of operations and financial condition.
Inflation
Inflation did not have a material impact on the Company's operating results
in 1998, 1997 or 1996.
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BUSINESS
General
The Company is the nation's largest manufacturer of non-wood decking
alternative products, which are marketed under the brand name Trex(R). Trex
Wood-Polymer(TM) lumber is a wood/plastic composite that offers an attractive
appearance and the workability of wood without wood's on-going maintenance
requirements and functional disadvantages. Trex is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene
and is used primarily for residential and commercial decking. The Company
promotes Trex among consumers and contractors as a premium decking product.
Net sales of Trex increased from $0.6 million in 1992 to $46.8 million in
1998. Income from operations increased from a loss of $5.6 million in 1992 to
a profit of $11.0 million in 1998.
The Company seeks to achieve sales growth in the decking market by
converting demand for wood decking products into demand for Trex. The Company
intends to continue to develop and promote the Trex brand name as a premium
decking product and to focus on the contractor-installed market segment. This
segment represents approximately 70% of the decking market (measured by board
feet of lumber) and contractors generally build larger, more elaborate
residential decks than decks built by homeowners in the "do-it-yourself"
market segment. The Company sells its products through approximately 55
wholesale distribution locations, which in turn sell Trex to approximately
2,000 dealer outlets across the United States.
The Company was formed in August 1996 in a buyout of the assets of Mobil's
Composite Products Division. Mobil established the Composite Products Division
in April 1992 after purchasing the technology and related assets used to
create Trex. The buyout was led by four senior Mobil executives with over 75
years of combined management experience.
Decking Market Overview
The decking market is part of the substantial home improvement market.
Expenditures for residential improvements and repairs totaled approximately
$118 billion in 1997, according to the U.S. Department of Commerce, and the
home improvement market grew at a compound annual growth rate of 3.7% for the
seven-year period ended December 31, 1997. The primary market for Trex is
residential decking and, to a lesser extent, commercial decking. Annual
factory sales in 1997 of residential decking and commercial decking totaled
approximately $1.7 billion (approximately 2.0 billion board feet of lumber)
and approximately $200 million (approximately 225 million board feet of
lumber), respectively. This market includes all decking products other than
posts, beams and columns used for a deck's substructure. For the seven-year
period ended December 31, 1997, factory sales of all residential decking
increased at a compound annual growth rate of approximately 8%. In recent
years, factory sales of non-wood alternative decking products to the
residential market have increased at a compound annual growth rate of over
25%.
The growth in demand for residential decking reflects the increasing
popularity of decks as a means of extending living areas and providing outdoor
recreation and entertainment spaces. Residential decking purchases include the
installation of new and replacement decks for existing homes, construction of
decks for new homes and repair of existing decks. An industry study estimates
that more than three million decks are built each year. Deck repair,
modernization and replacement are expected to increase as existing decks age.
The majority of decks are built for existing homes as new additions or to
replace other decks. During periods of economic uncertainty, when spending on
discretionary items is reduced, many homeowners forego the purchase of new
homes and choose to improve their existing residences. Adding a deck has
become one of the most popular home improvement projects. Construction of
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decking is a relatively low-cost means of adding livable space, and industry
studies indicate that decking improvements generally return a significant
percentage of their cost at the time of resale. The Company estimates that the
installation cost of a majority of decks ranges from $2,000 to $5,000. More
than half of all decks are constructed one to five years after a home is
purchased. Accordingly, there is typically an increased demand for decking in
the five-year period following a peak in home sales. The Company believes
that, because residential deck construction is not primarily tied to new home
activity, the residential decking market historically has not experienced the
high level of cyclicality common to businesses in the new home construction
and building materials industries.
The Company estimates that contractors, including homebuilders, install
approximately 60% of all residential decks, accounting for approximately 70%
of the board feet used. The balance of residential decks are installed by "do-
it-yourself" homeowners. Contractors generally either specialize in deck
installation or build decks in connection with new home construction or home
improvement and remodeling projects. Contractor-installed decks on average are
larger and more elaborate than decks installed by homeowners.
Commercial decks are constructed for restaurants, hotels, nature walks and
boardwalks. These decking applications typically have more demanding design
and installation requirements than those for residential decking. Product
liability and maintenance costs are major issues for commercial installations.
As a result, safety and maintenance features of decking products particularly
influence buying decisions in this market segment.
The following table sets forth, in board feet of lumber, the percentage of
1997 factory sales to the decking market generated by each product category
indicated:
<TABLE>
<CAPTION>
Percentage of
Product 1997 Factory Sales
- ------- ------------------
<S> <C>
Wood......................................................... 97%
100% plastic................................................. 1
Wood/plastic composites...................................... 2
---
100%
===
</TABLE>
More than 75% of wooden decks are fabricated from southern yellow pine,
which is pressure-treated with insecticides and other chemicals to create
resistance to insect infestation and decay. The balance of the wood decking
segment is primarily divided between redwood and cedar products. The 100%
plastic decking products utilize polyethylene, fiberglass and polyvinyl
chloride ("PVC") as raw materials. Wood/plastic composites are produced from a
combination of wood fiber and polyethylene or other commonly used polymers.
Growing consumer awareness of the product attributes of non-wood decking
alternatives and the decline in lumber quality and quantity have contributed
to increased sales of 100% plastic lumber and wood/plastic composites for
decking.
Production and distribution operations in the decking market are highly
fragmented. Treated southern yellow pine is produced by wood preservers that
operate approximately 550 treatment plants in the United States. These
treated-wood suppliers are predominantly small companies with a regional
distribution focus. An estimated six to eight companies supply redwood to the
decking market, while cedar supplies are produced by a few large suppliers and
approximately 20 to 30 small, regional suppliers that market varieties of
cedar grown in their areas. In 1997, according to an industry study, non-wood
decking materials were manufactured by approximately 20 companies, of which
less than half had annual revenues of over $5 million.
Distributors of wood decking materials typically supply lumber to lumber
yards and home center outlets, who in turn supply the materials to home
builders, contractors and homeowners. Manufacturers of non-wood decking
alternatives also generally use these distribution channels, since
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many such alternative products can be stacked, stored and installed like wood
products. Certain non-wood decking alternatives, however, are sold to
specialty dealers who provide the special selling support needed to build
consumer awareness of new products.
Wood decking products generally are not associated with brand
identification. The primary softwoods used for decking (treated southern
yellow pine, redwood and cedar) are sold as commodities graded according to
classifications established by the U.S. Department of Commerce. Pricing is
based on species, grade, size and level of chemical treatment, if any. There
generally is no pricing differentiation based on brand, although certain wood
preservers have attempted to brand their treated wood products. The Company
believes that these companies, which it estimates represent less than 5% of
the treated wood market, have not established meaningful brand name
recognition.
Competitive Strengths
The Company believes that its primary competitive strengths are the
following:
Superior Product. Trex offers a number of significant advantages over wood
decking products. Trex eliminates many of wood's major functional
disadvantages, which include warping, splitting and other damage from
moisture. Trex requires no sealing to protect against moisture damage,
provides a splinter-free surface and needs no chemical treatment against
insect infestation. These features of Trex eliminate the on-going maintenance
requirements for a wood deck and make Trex less costly than wood over the life
of the deck. Like wood, Trex is slip-resistant, even when wet, can be painted
or stained and is not vulnerable to damage from ultraviolet rays. The special
characteristics of Trex, including resistance to splitting, flexibility, and
ease and consistency of machining and finishing, facilitate deck installation,
reduce contractor call-back and afford customers a wide range of design
options.
Brand Name Development. The Company has invested over $10 million during the
last three years to develop Trex as a recognized brand name in the residential
and commercial decking market. The Company's marketing strategy has been to
promote Trex among consumers and contractors as a premium decking product. The
Company uses extensive print and television advertising to build brand
awareness among homeowners and commercial users and targets decking
contractors with advertisements in leading building and remodeling magazines.
Brand name recognition helps to generate demand for Trex directly among
consumers and also among distributors and dealers, who recommend Trex to
contractors and other consumers. The Company believes that its branding
strategy promotes product differentiation of Trex in a market which is not
generally characterized by brand identification and enables the Company both
to command premium prices and to maintain price stability for Trex.
Extensive Distribution Network. The Company has developed an extensive
distribution network which complements its branding strategy and focus on the
contractor-installed market segment. At December 31, 1998, the Company sold
Trex through approximately 55 wholesale distribution locations. At the same
date, the Company's distributors marketed Trex to approximately 2,000 dealer
outlets, which directly service contractors and consumers. The Company selects
distributors based upon their anticipated commitment to Trex, and the
Company's distribution network devotes significant resources to promoting and
selling Trex. All distributors have appointed a Trex specialist, regularly
conduct dealer training sessions, fund demonstration projects and participate
in local advertising campaigns and home shows. These distributors generally
sell Trex as their only non-wood decking alternative and agree in their
distribution agreements with the Company not to market other wood/plastic
composites with the same applications as Trex.
Investment in Manufacturing Process and Product Development. Production of a
non-wood decking alternative like Trex requires significant capital
investment, special process know-how and
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time to develop. The Company has invested approximately $34 million and six
years in expansion of its manufacturing capacity, manufacturing process
improvements, new product development and product enhancements. The Company's
investment of time and capital has enabled it to increase the number of
production lines from one to eight and its manufacturing line production rates
by more than 200% since 1992, has facilitated the Company's development of new
products and has produced improvements in the dimensional consistency, surface
texture and color uniformity of the Trex product line.
Building Code Listing. Trex is the only non-wood decking alternative to
receive a product building code listing either from the NES or from any of the
three NES regional members that establish construction standards in the United
States. Since receiving its NES listing in 1995, Trex has been the only non-
wood alternative decking product published in all major code books throughout
the country. The Company's listing facilitates the acquisition of building
permits by residential consumers of Trex. The Company believes that its
listing promotes customer and industry acceptance of Trex as a substitute for
wood in decking.
Experienced Management Team. The Company is managed by four experienced
senior executives who led the buyout of Mobil's Composite Products Division in
1996. The Company's executives have managed billion-dollar operations as well
as smaller, high-growth divisions and product rollouts within and outside of
Mobil. They have approximately 75 years of combined management experience at
Mobil across a wide range of management functions.
Growth Strategies
The Company's goals are to continue to be the leading producer of a superior
non-wood decking alternative product, to increase its market share of the
decking market and to expand new products and geographic markets. To attain
these goals, the Company employs the following strategies:
Continue Brand Name Development. The Company plans to increase its
investment in, and the resources devoted to, development of the Trex brand.
The Company's branding efforts will focus on implementation of enhanced
integrated advertising, public relations and trade programs. The Company's
sales growth in the decking market will largely depend on converting demand
for wood products into demand for Trex. Accordingly, the Company's branding
strategy will continue to emphasize the advantages of Trex over wood decking
products. The Company's brand building programs also are designed to support
the positioning of Trex as a premium product in the decking market.
Expand Distribution Coverage. The Company intends to establish comprehensive
national coverage for Trex. To achieve this objective, the Company expects to
increase the number of dealer outlets selling Trex over the next three years
by 50% to approximately 3,000 outlets. The Company will seek to expand its
dealer network by adding new distributors and increasing the number of its
wholesale distribution locations to approximately 75 distribution locations
from its base of approximately 55 at December 31, 1998.
Increase Production Capacity. Currently, customer demand for Trex exceeds
the Company's manufacturing capacity. To support sales growth and improve
customer service, the Company plans to increase output by increasing
productivity in its existing facility in Winchester, Virginia and by beginning
production in an additional manufacturing facility near Reno, Nevada in the
fourth quarter of 1999. The Company recently augmented its production capacity
at the Winchester facility by adding one new production line in December 1998
and a second new production line in January 1999. The addition of these two
production lines will enable the Company to increase its current manufacturing
capacity by approximately a 40% by mid-1999. With the second manufacturing
facility in operation, the Company expects by the end of 1999 to double its
production capacity from the level sustained in December 1998.
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Invest in Process and Product Development. The Company will continue to make
substantial investments in process and product development to support new
products and improve product consistency, reduce manufacturing costs and
increase operating efficiencies. In the third quarter of 1998, the Company
centralized its research and development operations in the Trex Technical
Center, a 30,000 square foot building adjacent to its Winchester manufacturing
facility.
Increase New Product Development and Export Markets. As part of its long-
term growth strategy, the Company will continue to develop opportunities for
Trex in new products and product applications and in geographic markets beyond
the Company's U.S. base. In 1998, the Company derived approximately 15% of its
net sales from sales of Trex for non-decking applications, including
industrial block flooring, applications for parks and recreational areas,
floating and fixed docks and other marine applications, and landscape edging.
The Company believes that the product characteristics of Trex are well suited
to satisfy the diverse appearance, performance and safety requirements of
these and other potential product applications. In expanding its geographic
scope of operations, the Company plans to increase exports to Canada, where it
currently has limited sales, and explore export opportunities in the
Caribbean, Latin America and selected parts of Europe.
Products
The Company manufactures Trex Wood-Polymer lumber, a composite product that
offers an attractive appearance and the workability of wood without wood's on-
going maintenance requirements and functional disadvantages. Trex is
manufactured in a proprietary process that combines waste wood fibers and
reclaimed polyethylene. Trex is produced in popular lumber sizes and is
currently sold in three colors: Natural, Winchester Grey and Woodland Brown.
Approximately 85% of the Company's 1998 net sales were derived from sales of
Trex to the residential and commercial decking market. Trex also has a number
of non-decking product applications, which generated the remaining 15% of the
Company's 1998 net sales. These applications currently include blocks to cover
and protect concrete sub-floors in heavy industrial plants; applications for
parks and recreational areas, including playground structures, picnic tables
and benches, fencing and theme park applications; floating and fixed docks and
other marine applications; and landscape edging. Trex does not have the
tensile strength of wood and, as a result, is not used as a primary structural
member in posts, beams or columns used in a deck's substructure.
Sales and Marketing
The Company's marketing activities at December 31, 1998 were conducted by 17
employees, of whom 12 were field sales representatives providing nationwide
sales coverage. The sales representatives, who are assigned to particular
geographic markets, are primarily responsible for servicing the Company's
wholesale distributors, assisting in dealer and contractor training, meeting
with architects and specifiers and providing support at regional home shows
and other consumer events. The Company maintains a commission program for its
sales force which is designed to reward achievement of sales goals and to
promote sales growth.
The Company's sales growth in the decking market will largely depend on
converting demand for wood products into demand for Trex. Accordingly, the
Company's branding strategy will continue to emphasize the advantages of Trex
over wood decking products. The Company's marketing efforts are focused on the
residential and commercial decking market. The Company has implemented a two-
pronged marketing program directed at consumers and contractors. The Company
seeks to develop consumer brand awareness and contractor preference to
generate demand for Trex among dealers and distributors, who then recommend
Trex to other contractors and consumers. The following are the key elements of
the Company's marketing program:
Consumer Advertising. The Company engages in extensive television
advertising. In 1998, the Company ran network and cable television
advertisements over an 18-week period during
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the first half of the year featuring 30-second spots on shows such as ABC's
Good Morning America and NBC's Today.
The Company also advertises Trex extensively in popular magazines, including
Better Homes & Gardens, Sunset and Martha Stewart Living. The 1998 print
advertising campaign includes full-page color magazine advertisements
featuring the Company's new spokesman, Willard Scott, of NBC's Today.
Public Relations. The Company employs a public relations firm to stimulate
interest in Trex by the print and broadcast media. During 1998, print and
broadcast stories featuring Trex generated a total of 125 million
"impressions," which represent potential viewings.
Trade Advertising and Promotion. To build a brand name for Trex with decking
contractors, the Company reaches a professional building audience through
advertisements in leading building and remodeling magazines, including
Builder, Building Products, Fine Homebuilding, Journal of Light Construction
and other well-known publications.
Homebuilder Program. In 1998, the Company inaugurated a program to provide
promotional allowances and display materials to homebuilders who use Trex for
their model home decks and agree to promote Trex. Over 60 homebuilders
currently participate in the program.
Trade and Home Shows. The Company annually exhibits Trex at five major trade
shows for homebuilders, contractors and specifiers that have a total
attendance of approximately 200,000. The Company also exhibits its product
line at major regional home and garden shows. Distributors, dealers and
contractors experienced in Trex provide additional support by exhibiting Trex
at smaller local home shows.
Showcase Projects. Trex obtains further brand name recognition through its
association with highly publicized showcase projects. Trex has been used in a
number of such projects, including the Presidential Trail at Mount Rushmore,
the Toronto Boardwalk on Lake Ontario Shores, the Florida Everglades Walkways
and the Grand Canyon Education Center.
Consumer Research. From time to time, the Company commissions consumer
research studies to gain a better understanding of the needs of the decking
market, the ability of Trex to meet those needs relative to competitive
products and consumer acceptance of Trex as a decking material.
Distribution
Approximately 95% of Trex net sales are made through the Company's wholesale
distribution network. At December 31, 1998, the Company sold its Trex product
line to 22 wholesale companies operating from approximately 55 distribution
locations. At the same date, the Company's distributors marketed Trex to
approximately 2,000 dealer outlets across the United States. Although the
Company's dealers sell to both homeowners and contractors, their sales efforts
are primarily directed at professional contractors, remodelers and
homebuilders. The remaining 5% of the Company's net sales are made directly to
industrial floor fabricators, playground material distributors and other
accounts.
Wholesale Distributors. The Company believes attracting wholesale
distributors who are committed to Trex and the Trex marketing approach and who
can effectively sell Trex to contractor-oriented lumber yards is important to
its future growth. The Company believes its distributors are able to provide
value-added service in marketing Trex because they sell premium wood decking
products and other building supplies, which typically require product training
and personal selling efforts.
Pursuant to its agreement with each wholesale distributor, the Company
appoints the distributor on a non-exclusive basis to distribute Trex within a
specified area. The distributor generally purchases Trex at
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the Company's prices in effect at the time the Company ships the product to
the distributor. The distributor is required to maintain specified minimum
inventories of Trex during certain portions of each year. Upon the expiration
of the initial one-year term, the agreement is automatically renewed for
additional one-year terms unless either party provides notice of termination
at least 60 days before the expiration of any renewal term. The distributor
may terminate the agreement at any time upon 60 or 90 days' notice, while the
Company may terminate the agreement upon 60 or 90 days' notice or immediately
upon the happening of certain events, including a failure by the distributor
to maintain the required minimum inventories of Trex.
The Company requires its wholesale distributors to contribute significant
resources to support Trex. All wholesale distributors have appointed a Trex
specialist, regularly conduct dealer training sessions, fund demonstration
projects and participate in local advertising campaigns and home shows. The
Company sponsors intensive two-day training seminars to help train Trex
specialists.
In 1997 and 1998, the Company generated in excess of 10% of its net sales to
each of five wholesale distribution companies: Capital Lumber Company, Furman
Lumber, Inc., OrePac Building Products, Inc., Plunkett-Webster Inc. and
Snavely Forest Products, Inc. These distributors collectively accounted for
approximately 68% and 74% of the Company's net sales in 1997 and 1998,
respectively. Other than Plunkett-Webster, Inc., which accounted for between
15% and 20% of the Company's net sales in both years, each of such
distributors accounted for less than 15% of the Company's net sales. In 1996,
the Company generated in excess of 10% of its net sales to each of three
wholesale distribution companies: Capital Lumber Company, Plunkett-Webster,
Inc. and Snavely Forest Products, Inc. These distributors collectively
accounted for approximately 52% of the Company's net sales in 1996. Capital
Lumber Company and Plunkett-Webster, Inc. each accounted for between 15% and
20% of the Company's 1996 net sales, while Snavely Forest Products, Inc.
accounted for less than 15% of such net sales.
To augment its dealer outlets, the Company plans to add new distributors and
increase the number of its wholesale distribution locations over the next
three years to approximately 75.
Retail Lumber Dealers. Of the approximately 25,000 retail outlets in the
United States that sell lumber, approximately 5,000 are independent lumber
yards that emphasize sales to contractors and are the primary market for Trex.
Although there is demand for Trex from both the "do-it-yourself" homeowner and
contractor, the Company's sales efforts emphasize the contractor-installed
market to achieve premium product positioning for Trex and to ensure that the
installations will have professional craftsmanship. The Company's retail
dealers generally provide sales personnel trained in Trex, contractor
training, inventory commitment and point-of-sale display support. To establish
comprehensive national coverage for Trex, the Company plans to increase the
number of its dealer outlets over the next three years from approximately
2,000 at December 31, 1998 to approximately 3,000.
Contractor Training. The Company has provided training about Trex to over
20,000 contractors since 1995. Contractors receive a Trex Contractor Kit
containing a product handbook, sales literature and product samples as part of
their training. The Company has established a "Builders Club" to strengthen
its relationship with premium decking contractors.
Dealer Locator Service and Web Site. The Company maintains a toll-free
telephone service for use by consumers and building professionals to locate
the closest dealer offering Trex and to obtain product information. The
Company uses these calls to generate sales leads for contractors, dealers,
distributors and Trex sales representatives. The Company also analyzes caller
information to assess the effectiveness of its promotional and advertising
activities.
As an additional source of information to consumers, dealers and
distributors, the Company operates a Web site, which provides product
installation information, handling instructions, a dealer locator service,
photographs of showcase installations, technical reports and other
information.
Shipment. The Company ships Trex to distributors by truck and rail. Western
distributors principally receive shipments by rail. Distributors pay all
shipping and delivery charges.
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<PAGE>
Manufacturing Process
Trex is manufactured at the Company's 100,000 square foot facility in
Winchester, Virginia. The facility currently has eight production lines, each
of which is highly automated and on average requires fewer than five employees
to operate per shift.
In 1998, the Company's Winchester facility had a total capacity of 155
million pounds per year of finished product and was operating at its full
capacity. To support sales growth and improve customer service, the Company
added one new production line to the facility in December 1998 and a second
new production line in January 1999. The Company expects that, after the two
new lines achieve their full operating capacity in mid-1999, the addition of
these lines will increase the facility's total capacity to 215 million pounds
of finished product per year, or approximately 40% over the December 1998
level.
In December 1998, the Company acquired the site for an additional
manufacturing facility in Fernley, Nevada, which is located approximately 30
miles east of Reno. The Company estimates that the total cost of the site
acquisition, construction and equipping of the new facility will be
approximately $19.6 million. The Company expects to fund this cost with
approximately $6.7 million of borrowings under site acquisition and
construction loans, approximately $2.8 million from the net proceeds of the
Offering and approximately $10.1 million from its operating cash flow and
borrowings under its current and expected credit facilities. Construction of
the facility began in January 1999. The Company anticipates that the new
facility will begin production in the fourth quarter of 1999. The facility
will occupy 150,000 square feet and will initially have two production lines.
With its second manufacturing facility in operation, the Company expects by
the end of 1999 to double its production capacity from the level sustained in
December 1998. See "Risk Factors--Ability to Increase Manufacturing Capacity"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Trex is manufactured from waste wood fiber and reclaimed polyethylene
("poly"). The composition of Trex Wood-Polymer lumber is approximately 50%
wood fiber and 50% reclaimed poly material. The Company uses wood fiber
purchased from wood working factories, mills and pallet recyclers, most of
which are located within a 200-mile radius of the Company's Winchester
facility. Poly material used in the production of Trex consists primarily of
reclaimed grocery sacks and stretch film, which the Company purchases from
suppliers throughout the United States. See "--Suppliers."
The Trex manufacturing process involves mixing wood particles with plastic,
heating and finally extruding (or forcing) the highly viscous and abrasive
material through a profile die. The extruded product is cooled in a water bath
and cut to its finished length. Waste created during manufacturing is recycled
into the production process. The finished boards are placed on a cooling
conveyor and proceed to finished goods inspection, packaging and storage.
The Company has made substantial investments in manufacturing process
improvements. As a result of these investments, production line rates, which
are measured in pounds of finished product per production hour, have increased
over 200% since 1992. The Company also has broadened the range of raw
materials that can be used to produce Trex by developing hardware capable of
utilizing different forms of poly material to produce a consistent final
product. The Company has obtained a patent for a process of preparing the raw
materials for the manufacturing phase of production and a second patent for
another manufacturing process improvement. The patent protection for both
processes will extend until 2015.
Trex is the only wood/plastic composite product to receive a building code
listing either from the NES or from any of its three regional members that
establish construction standards in the United States (Building Officials &
Code Administrators International, Inc., International Conference on Building
Officials and Southern Building Code Congress International, Inc.). In
conjunction with its NES listing, the Company
39
<PAGE>
maintains a quality control testing program that is monitored by an NES-
approved independent inspection agency. Under this program, the Company tests
one board from every other production bundle to determine whether it meets the
detailed, published criteria for code listing. Representatives of the
inspection agency conduct unannounced monthly on-site audits of these program
records to assure conformity to testing and to check test results. The Company
believes that currently a minimum of 18 months would be required for a
manufacturer of a competitive product which has not yet started the listing
approval process to complete all phases of the process for its product. See
"Risk Factors--Competition."
Suppliers
The production of Trex requires the supply of wood fiber and polyethylene
from reclaimed grocery sacks and stretch film. The Company satisfies virtually
all of its current wood fiber requirements from six regional suppliers. The
Company purchases its supplies of poly material from multiple locations
throughout the country, including supermarkets and distribution centers.
Wood Fiber. In 1998, the Company consumed 101 million pounds of wood fiber.
Suppliers accounting for over 90% of the Company's wood fiber purchases are
located within a 200-mile radius of the Company's Winchester, Virginia
facility. Convenient access to available wood fiber supplies was one of the
Company's principal site selection criteria for its second manufacturing
facility, which will be located near Reno, Nevada. Although it has not yet
entered into supply agreements for the new facility, the Company believes that
it will be able to satisfy substantially all of the facility's wood fiber
requirements from suppliers located within a 500-mile radius of the facility.
Woodworking plants or mills are the Company's preferred suppliers of wood
fiber because the waste wood fiber produced by these operations contains
little contamination and is low in moisture. These facilities generate wood
fiber as a byproduct of their manufacturing operations. To minimize its
purchase costs, the Company seeks to provide the manufacturing facilities with
prompt and reliable removal service using Company-provided equipment.
Four suppliers accounted individually for more than 10% and collectively for
approximately 80% of the Company's 1998 wood fiber purchases: American
Woodmark, American Wood Fiber, Plumly Lumber and Coastal Lumber. The Company
obtains its wood fiber supplies for a fixed annual price under multi-year
contracts that are terminable by either party upon 30 days' notice. Based on
its discussions with wood fiber suppliers and its analysis of industry data,
the Company believes that, if its contracts with one or more of its current
suppliers were terminated, the Company would be able to obtain adequate
supplies of wood fiber at an acceptable cost from its other current suppliers
or from new suppliers.
Poly Material. In 1998, the Company consumed 87 million pounds of poly
material, which was primarily composed of reclaimed grocery sacks and stretch
film. Approximately two billion pounds of poly film are used in the
manufacture of grocery sacks and stretch film in the United States each year.
The Company will seek to meet its future needs for poly material from
expansion of its existing supply sources and the development of new sources,
including post-industrial waste and plastic paper laminates.
The Company purchases plastic sacks primarily from large grocery supermarket
chains, which have recycling programs that facilitate and encourage plastic
sack returns. Approximately 5% of all grocery sacks nationwide are returned.
The existing industry practice is for reclaimed sack purchasers, such as the
Company, to absorb freight and handling costs after the sacks are picked up
from the chains' distribution centers. The Company picks up the plastic
grocery sacks at the distribution centers and stores the sacks in warehouses
until it uses them in its production process.
Stretch film is used to stabilize pallet loads to avoid damage during
shipping and handling. The Company collects stretch film from distribution
centers that service the grocery and other industries,
40
<PAGE>
including furniture, machinery, parts and soft goods businesses. Suppliers of
stretch film save on waste disposal costs by selling the bundled film to the
Company.
No supplier sold 10% or more of the poly material purchased by the Company
in 1998. The Company generally acquires poly material by purchase order at
prices which are fixed annually.
The Company has entered into a six-year contract with a potential supplier
of poly material derived from a source not previously accessed by the Company.
The contract obligates the Company to purchase up to $3.3 million of poly
material annually at a specified price per pound during the contract term. The
Company is unable to determine the amount of poly material it will obtain
under the contract because the supplier has not yet commenced operations and
will utilize a new production process. The Company is scheduled to receive its
first delivery under the contract in mid-1999. The Company has the option to
renew the contract for an additional six years on the same terms and
conditions.
Competition
The residential and commercial decking market in which the Company
principally operates is highly competitive. As a wood/plastic composite
product, Trex competes with wood, other wood/plastic composites and 100%
plastic lumber for use as decking. The primary competition for Trex is wood
decking, which accounted for approximately 97% of 1997 decking sales (measured
by board feet of lumber). The conventional lumber suppliers with which the
Company competes in many cases have established ties to the building and
construction industry and have well-accepted products. Many of the Company's
competitors in the decking market that sell wood products have significantly
greater financial, technical and marketing resources than the Company. Trex
currently represents over half of the non-wood segment and competes with other
wood/plastic composites as well as with 100% plastic products that utilize
polyethylene, fiberglass and PVC as raw materials.
The Company's principal competitors in the non-wood decking alternative
market include Advanced Environmental Recycling Technologies, Inc., Crane
Plastics, Eaglebrook Plastics, Inc., Royal Crown Limited and U.S. Plastic
Lumber Corporation. Trex is the only non-wood decking alternative to receive a
product building code listing from the NES or any its three regional members.
A product building code listing covers all uses of a product meeting the
specified design criteria. The Company is aware of one manufacturer of
wood/plastic composites, Advanced Environmental Recycling Technologies, Inc.,
that has publicly announced it has applied for a regional application listing
for its products and of at least four manufacturers that have received
regional application listings for their 100% plastic lumber products. The four
manufacturers are Outdoor Technologies, Inc., ZCL Composites, Thermal
Industries Inc. and Teck-Rail Vinyl Guardrail System. An application listing
covers specific uses of the listed products. Any non-wood decking alternative
product receiving a listing could be more competitive with Trex. The Company's
ability to compete depends, in part, upon a number of factors outside its
control, including the ability of its competitors to develop new non-wood
decking alternatives which are competitive with Trex.
The Company believes that the principal competitive factors in the decking
market include product quality, price, maintenance cost and consumer awareness
of product alternatives. The Company believes it competes favorably with
respect to these factors based on the low maintenance requirements and other
attributes of Trex compared to wood and 100% plastic products, the Trex brand
name, the Company's extensive distribution network and the Trex NES building
code listing.
Of the wood lumber which constituted approximately 97% of the total decking
market in 1997, over 75% is pressure-treated southern yellow pine. Southern
yellow pine is used for decking because its porosity allows it readily to
accept the chemicals used in the treating process that creates resistance to
rotting and insect infestation. The chemical compound used to treat wood is
typically chromated copper arsenate ("CCA"), an EPA-registered pesticide. The
same porosity makes southern yellow pine susceptible to taking on moisture,
which causes the lumber to warp, crack, splinter and expel fasteners. The
balance
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<PAGE>
of the wood decking segment is primarily divided between redwood and cedar,
with some amounts of treated fir and exotic hardwoods. Because old, slow-
growth timber has been depleted, new, fast-growth varieties predominate. These
varieties do not have the natural decay resistance or close rings of old,
slow-growth timber, causing them to be more susceptible to rot, insect
infestation, splintering and warping.
Trex also competes with decks made from 100% plastic lumber. Although there
are several companies in the United States that manufacture 100% plastic
lumber, total factory sales to the decking market in 1997 are estimated at
only $20 million (18 million board feet). A number of factors have limited the
success of 100% plastic lumber manufacturers, including a less efficient
manufacturing process, inconsistent product quality, and physical properties
not considered suitable for decking, such as higher thermal expansion and
contraction, poor slip resistance and an appearance viewed by some homeowners
as unattractive.
There are approximately five manufacturers of wood/plastic composite lumber
in addition to the Company. Some of these manufacturers participate in the
decking market only on a limited basis. The Company estimates that Trex
accounted for more than 80% of 1998 total factory sales of wood/plastic
composites to the decking market.
The following chart compares certain attributes of Trex to the
characteristics of treated wood and 100% plastic products:
<TABLE>
<CAPTION>
Treated 100%
Characteristics Trex Wood Plastic
- --------------------------------------------------------------------
<S> <C> <C> <C>
Low thermal expansion/contraction x x
- --------------------------------------------------------------------
Low thermal conductivity x x
- --------------------------------------------------------------------
Good paint adhesion x x
- --------------------------------------------------------------------
Resistance to ultraviolet damage x x
- --------------------------------------------------------------------
Easy to work with x x
- --------------------------------------------------------------------
Low moisture absorption x x
- --------------------------------------------------------------------
Splinter-free x x
- --------------------------------------------------------------------
Resistant to insect damage x x x
- --------------------------------------------------------------------
No chemical preservatives x x
- --------------------------------------------------------------------
No splitting x x
- --------------------------------------------------------------------
No rotting x x x
- --------------------------------------------------------------------
No warping x x
- --------------------------------------------------------------------
No sealant required x x
- --------------------------------------------------------------------
Slip resistant x x
- --------------------------------------------------------------------
Product building code listing or acceptance x x
</TABLE>
The Company believes that Trex offers cost advantages when compared with
certain other types of decking materials. Although a contractor-installed Trex
deck built in 1998 using a pressure-treated wood substructure generally cost
10% to 15% more than a deck made entirely from pressure-treated wood, Trex
eliminates the on-going maintenance required for a pressure-treated deck and
is, therefore, less costly over the life of the deck. The Company believes
that its manufacturing process and utilization of relatively low cost raw
material sources also provide Trex with a competitive cost advantage relative
to other wood/plastic composite products.
42
<PAGE>
Government Regulation
The Company is subject to federal, state and local environmental regulation.
The emissions of particulates and other substances from the Company's
manufacturing facility must meet federal and state air quality standards
implemented through air permits issued to the Company by the Department of
Environmental Quality of the Commonwealth of Virginia. The Company's facility
is regulated by federal and state laws governing the disposal of solid waste
and by state and local permits and requirements with respect to waste water
and storm water discharge. Compliance with environmental laws and regulations
has not had a material adverse effect on the Company's business, financial
condition or results of operations.
The Company's operations also are subject to work place safety regulation by
the U.S. Occupational Safety and Health Administration and the Commonwealth of
Virginia. The Company's compliance efforts include safety awareness and
training programs for its production and maintenance employees.
The Company will be subject to similar state and local regulation in Nevada
in connection with the operation of its new facility.
Intellectual Property
The Company's success depends, in part, upon its intellectual property
rights relating to its production process and other operations. The Company
relies upon a combination of trade secret, nondisclosure and other contractual
arrangements, and patent, copyright and trademark laws, to protect its
proprietary rights. The Company has made substantial investments in
manufacturing process improvements which have enabled it to increase
manufacturing line production rates, facilitated the Company's development of
new products and produced improvements in the dimensional consistency, surface
texture and color uniformity of Trex. The Company has obtained a patent for a
process of preparing the raw materials for the manufacturing phase of
production and a second patent for another manufacturing process improvement.
The patent protection for both processes will extend until 2015. The Company
has been granted a federal registration for the Trex trademark by the U.S.
Patent and Trademark Office and has filed applications for the federal
registration of its Easy Care Decking and Wood-Polymer trademarks. Federal
registration of trademarks is effective for an initial period of 20 years and
is renewable for as long as the Company continues to use the trademarks. The
Company considers its trademarks to be of material importance to its business
plans. The Company has not registered any of its copyrights with the U.S.
Copyright Office, but relies on the protection afforded to such copyrights by
the U.S. Copyright Act. That law provides protection to authors of original
works, whether published or unpublished, and whether registered or
unregistered. The Company enters into confidentiality agreements with its
senior employees and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and
take appropriate steps to enforce its intellectual property rights. See "Risk
Factors--Intellectual Property."
In 1992, before the Company's buyout of Mobil's Composite Products Division,
Mobil brought an action in the U.S. District Court for the District of
Delaware seeking a declaratory judgment that four patents issued to Advanced
Environmental Recycling Technologies, Inc. ("AERT"), a manufacturer of
wood/plastic composite products, were invalid, were not infringed by Mobil in
connection with its wood/plastic composite (now known as Trex) and were
unenforceable. Mobil brought this action in response to statements by AERT
that Mobil infringed AERT's patents. AERT counterclaimed against Mobil for
alleged infringement of two of the AERT patents and for alleged violations of
antitrust and trade regulation laws.
Following a trial in early 1994, the district court held that Mobil did not
infringe either of the two AERT patents that were the subject of the
counterclaim and rendered a verdict for Mobil that each of the four AERT
patents was invalid and unenforceable. On an appeal of this judgment by AERT,
the U.S. Court of Appeals for the Federal Circuit affirmed the district
court's judgment that Mobil did not infringe the two AERT patents and that two
of the four AERT patents were invalid and unenforceable. The Federal Circuit
vacated the district court's judgment on the remaining two AERT patents on the
grounds that there was no case or controversy between the parties regarding
infringement of those patents. AERT has filed a motion for a new
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<PAGE>
trial, which is pending before the district court. The district court also
still has pending before it AERT's non-patent counterclaims against Mobil. No
proceedings on those claims are currently scheduled.
In June 1998, the U.S. Patent and Trademark Office issued to AERT a patent
which is a continuation in part of one of the two patent applications that
resulted in the two patents held to be invalid and unenforceable in the
district court action. The Company believes, based in part on advice of its
legal counsel, that the Company does not infringe this patent.
Facilities and Equipment
The Company leases its corporate headquarters in Winchester, Virginia, which
consists of approximately 4,500 feet of office space, on a month-to-month
basis.
The Company owns its manufacturing facility in Winchester, Virginia, which
contains approximately 100,000 square feet of manufacturing space, and
approximately 7.5 acres of outside open storage in a lot located across from
the manufacturing facility.
The Company leases storage warehouse space, which totals 75,000 square feet,
pursuant to leases with expiration dates from December 1999 to July 2000. The
Company currently occupies approximately 30,000 square feet in the Trex
Technical Center, which it purchased in the fourth quarter of 1998.
Equipment and machinery used by the Company in its operations consist
principally of plastic and wood conveying and process equipment. The Company
owns all of its manufacturing equipment. The Company also operates
approximately 30 wood trailers pursuant to operating leases with expiration
dates from 1999 to 2003 and approximately 20 forklift trucks pursuant to
operating leases with expiration dates from 2000 to 2001.
The Company regularly evaluates the capacity of its various facilities and
equipment and makes capital investments to expand capacity where necessary. In
1998, the Company spent a total of $17.1 million on capital expenditures,
including $7.4 million for additional production equipment in its Winchester
facility. The Company has acquired the site for, and in January 1999 began
construction of, a second manufacturing facility, which will be located near
Reno, Nevada and which the Company expects to begin production in the fourth
quarter of 1999. See "--Manufacturing Process." The Company currently
estimates that its aggregate capital expenditures in 1999 will total
approximately $20.3 million, most of which will be used to construct and equip
the new facility.
Employees
At December 31, 1998, the Company had 217 full-time employees, of whom 23
were employed in corporate management and administration, 17 were employed in
sales and marketing, six were employed in research and development and 171
were employed in manufacturing operations. Of such employees, 142 were hourly
employees engaged in manufacturing activities in the Company's Winchester
facility. The Company's employees are not covered by collective bargaining
agreements. The Company believes that its relationships with its employees are
good.
Legal Proceedings
The Company has been named as a co-defendant in a suit filed on December 7,
1997 in the U.S. District Court for the Eastern District of Pennsylvania. The
plaintiff, the owner of a ship moored in Philadelphia, alleges that design
defects in a Trex decking product caused buckling of decking installed on the
ship as part of a renovation project. The plaintiff seeks damages in an
unspecified amount against the Company based on claims of strict liability,
misrepresentation, breach of warranties, gross negligence, indemnification and
violation of the New Jersey Consumer Fraud Act. Trex has denied liability on
the grounds, among others, that the alleged damage to the decking resulted
from poor design and improper installation. The parties have conducted certain
discovery proceedings. A trial date for the suit is scheduled for June 1999.
From time to time, the Company is involved in litigation and proceedings
arising out of the ordinary course of its business. Except as set forth above,
there are no pending material legal proceedings to which the Company is a
party or to which the property of the Company is subject.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
The table below sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Positions with Company
- ------------------------ --- --------------------------------------------------------------
<S> <C> <C>
Robert G. Matheny....... 53 President, Director
Anthony J. Cavanna...... 59 Executive Vice President and Chief Financial Officer, Director
Andrew U. Ferrari....... 52 Executive Vice President of Sales and Marketing, Director
Roger A. Wittenberg..... 50 Executive Vice President of Technical Operations, Director
William H. Martin, III.. 68 Director Nominee
William F. Andrews...... 67 Director Nominee
</TABLE>
Robert G. Matheny has served as the President of the Company since August
1996 and as a director of Trex Company, Inc. since its formation in September
1998. From July 1992 to August 1996, he was the General Manager of the
Composite Products Division of Mobil Chemical Company, a division of Mobil
("Mobil Chemical"). From August 1987 to July 1992, he served as the General
Manager of the Chemical Specialties Group of Mobil Chemical and as a Vice
President of Mobil Chemical Products International. From 1970 to August 1987,
Mr. Matheny held various positions in sales, marketing and manufacturing at
Mobil. Mr. Matheny received a B.S. degree in Industrial Engineering and
Operations Research from Virginia Polytechnic Institute.
Anthony J. Cavanna has served as the Chief Financial Officer of the Company
since August 1996, as Executive Vice President since September 1998 and as a
director of Trex Company, Inc. since its formation in September 1998. From
July 1994 to August 1996, he was a Group Vice President of Mobil Chemical.
From July 1992 to July 1994, he was the Vice President-Planning and Finance
for Mobil Chemical. From November 1986 to July 1992, Mr. Cavanna served as a
Vice President of Mobil Chemical and the General Manager of its Films Division
Worldwide. From November 1981 to November 1986, he was the Vice President and
General Manager-European Operations of Mobil Plastics Europe. From January
1981 to November 1981, he was the Vice President-Planning and Supply of the
Films Division of Mobil Chemical. Between 1962 and 1981, Mr. Cavanna held a
variety of positions within Mobil, including engineering, manufacturing and
project/group leader positions. Mr. Cavanna received a B.S. degree in Chemical
Engineering from Villanova University and an M.S. degree in Chemical
Engineering from the Polytechnic Institute of Brooklyn.
Andrew U. Ferrari has served as the Vice President of Sales and Marketing of
the Company since August 1996, as Executive Vice President of Sales and
Marketing since September 1998 and as a director of Trex Company, Inc. since
its formation in September 1998. From April 1992 to August 1996, he was the
Director of Sales and Marketing of the Composite Products Division of Mobil
Chemical. From February 1990 to April 1992, Mr. Ferrari served as the New
Business Manager for Mobil Chemical. From January 1984 to February 1990, he
served as Marketing Director of the Consumer Products Division of Mobil
Chemical. Mr. Ferrari received a B.A. degree in Economics from Whitman College
and an M.B.A. degree from Columbia University.
Roger A. Wittenberg has served as the Vice President of Technical Operations
of the Company since August 1996, as Executive Vice President of Technical
Operations since September 1998 and as a director of Trex Company, Inc. since
its formation in September 1998. Mr. Wittenberg also serves as a director of
Elite Textiles Ltd., a textile manufacturer. From May 1992 to August 1996, he
was the Technical Manager of the Composite Products Division of Mobil
Chemical. Mr. Wittenberg founded Rivenite Corporation in 1987 and was its
Chief Executive Officer until April 1992, when Mobil Chemical acquired the
assets of Rivenite Corporation. Prior to 1987, Mr. Wittenberg founded and
operated three companies in the textile, food and animal feed supplements
industries. Mr. Wittenberg received a B.S. degree in Chemistry from High Point
College.
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<PAGE>
William H. Martin, III has acted as Interim Chief Executive Officer of
Martin Industries, Inc., a manufacturer and producer of gas space heaters, gas
logs and pre-engineered fireplaces, since March 1998. Mr. Martin has also
served as Chairman of the Board of Martin Industries since April 1994 and as a
director of Martin Industries since 1974. From 1971 to 1987, he served as
President and Chief Executive Officer of Martin Industries. From 1987 to 1993,
Mr. Martin served as Executive Assistant to the Rector of Trinity Church in
New York City. From 1993 to March 1998, Mr. Martin was a private investor.
William F. Andrews has served as Chairman of the Board of Directors of
Scovill Fasteners, Inc., a designer, manufacturer and distributor of apparel
fasteners and specialty industrial fasteners, since 1996. From 1981 to 1986,
Mr. Andrews served as the Chairman, President and Chief Executive Officer of
Scovill Manufacturing Co., where he worked for over 20 years. From 1995 to
1998, he served as the Chairman of Schrader-Bridgeport International, Inc., a
manufacturer of tire valves and pressure control devices. From January 1993 to
January 1995, Mr. Andrews served as Chairman and Chief Executive Officer of
Amdura Corporation, a manufacturer of hardware and industrial equipment. From
February 1992 to February 1994, he served as Chairman of Utica Corporation, a
manufacturer of fan blades for aerospace and land-based gas turbine engines,
and as an adviser and consultant to Investor International (U.S.), Inc., a
financial adviser. Mr. Andrews is also a director of Black Box Corporation,
Corrections Corporation of America, Johnson Controls, Inc., Katy Industries,
Navistar, Inc., Northwestern Steel and Wire Co., and Dayton Superior
Corporation.
The Board of Directors currently consists of four directors. William H.
Martin, III and William F. Andrews have been nominated and have agreed to
serve as directors of the Company effective upon the consummation of the
Offering. Directors and executive officers of the Company are elected to serve
until they resign or are removed, or are otherwise disqualified to serve, or
until their successors are elected and qualified. Directors of the Company are
elected at the annual meeting of stockholders. Prior to the consummation of
the Offering, the Board of Directors will be divided into three classes
serving staggered three-year terms. The initial term of Anthony J. Cavanna and
Roger A. Wittenberg will expire at the annual meeting of stockholders in the
year 2000, the initial term of Andrew U. Ferrari and William F. Andrew will
expire at the annual meeting of stockholders in the year 2001 and the initial
term of Robert G. Matheny and William H. Martin, III will expire at the annual
meeting of stockholders in the year 2002. Upon the expiration of the initial
term of each such class, the nominees for such class will be elected for a
term of three years to succeed the directors whose terms of office expire.
Executive officers of the Company generally are appointed at the Board's
first meeting after each annual meeting of stockholders.
Committees of the Board of Directors
Effective upon the consummation of the Offering, the Board of Directors has
established an Audit Committee, a Compensation Committee and an Executive
Committee.
The Audit Committee, among other things, will be responsible for
recommending to the full Board of Directors the selection of the Company's
independent auditors, reviewing the scope of the audit plan and the results of
each audit with management and the independent auditors, reviewing the
adequacy of the Company's system of internal accounting controls in
consultation with the independent auditors, reviewing generally the activities
and recommendations of the independent auditors, and exercising oversight with
respect to the Company's code of conduct and other policies and procedures
regarding adherence with legal requirements. The members of the Audit
Committee will be non-employee directors. William H. Martin, III and William
F. Andrews will be the initial members of the Audit Committee.
The Compensation Committee will be responsible for establishing the
compensation and benefits of the executive officers of the Company, monitoring
compensation arrangements for management employees for consistency with
corporate objectives and stockholders' interests, and administering
46
<PAGE>
the Stock Incentive Plan, the Company's 1999 Employee Stock Purchase Plan and
other management compensation plans. The members of the Compensation Committee
will be non-employee directors. William H. Martin, III and William F. Andrews
will be the initial members of the Compensation Committee.
The Executive Committee will be empowered to exercise powers of the Board of
Directors between regular meetings of the Board of Directors. The initial
members of the Executive Committee will be Robert G. Matheny, Anthony J.
Cavanna, Andrew U. Ferrari and Roger A. Wittenberg.
Director Compensation
Directors of the Company who are also officers or employees of the Company
do not receive any additional compensation for serving on the Board of
Directors or any of its committees. Following the consummation of the
Offering, each non-employee director will receive an option to purchase 1,500
shares of Common Stock upon such director's initial election or appointment to
the Board of Directors. Each non-employee director will receive an annual fee
of $25,000 for service on the Board of Directors and its committees. The non-
employee director may elect to receive up to one-half of this fee in cash and
up to all of the fee in the form of options to purchase Common Stock issued
under the Stock Incentive Plan. Directors are reimbursed for their reasonable
out-of-pocket expenses in attending meetings. See "--1999 Stock Option and
Incentive Plan" and "--1999 Incentive Plan for Outside Directors."
Executive Compensation
The following table sets forth the compensation paid to each of the
Company's executive officers during the fiscal year ended December 31, 1998
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation(1) All Other
Name and Principal Positions Salary ($) Compensation ($)(2)
- ---------------------------- --------------- -------------------
<S> <C> <C>
Robert G. Matheny
President................................. 263,591 52,995
Anthony J. Cavanna
Chief Financial Officer................... 248,144 52,281
Andrew U. Ferrari
Vice President of Sales and Marketing..... 232,698 52,310
Roger A. Wittenberg
Vice President of Technical Operations.... 232,698 52,925
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus for each Named Executive Officer in 1998.
(2) The amounts shown in the "All Other Compensation" column consists of the
following: (i) for Mr. Matheny, $3,025 in matching contributions to the
Company's 401(k) Plan (as defined below), $1,600 in employer
discretionary contributions to the 401(k) Plan, $6,400 in employer
contributions to the Company's Money Purchase Plan (as defined below) and
$41,970 in reimbursement of self-employment taxes payable by Mr. Matheny;
(ii) for Mr. Cavanna, $2,613 in matching contributions to the 401(k)
Plan, $1,600 in employer discretionary contributions to the 401(k) Plan,
$6,400 in employer contributions to the Money Purchase Plan and $41,668
in reimbursement of self-employment taxes payable by Mr. Cavanna; (iii)
for Mr. Ferrari, $2,944 in matching contributions to the 401(k) Plan,
$1,600 in employer discretionary contributions to the 401(k) Plan, $6,400
in employer contributions to the Money Purchase Plan and $41,366 in
reimbursement of self-employment taxes payable by Mr. Ferrari; and (iv)
for Mr. Wittenberg, $3,559 in matching contributions to the 401(k) Plan,
$1,600 in employer discretionary contributions to the 401(k) Plan, $6,400
in employer contributions to the Money Purchase Plan and $41,366 in
reimbursement of self-employment taxes payable by Mr. Wittenberg.
47
<PAGE>
1999 Stock Option and Incentive Plan
The Company's 1999 Stock Option and Incentive Plan provides for the grant of
options that are intended to qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees of the Company and any future subsidiaries, as well as for the grant
of non-qualified options, restricted Common Stock, restricted units of Common
Stock, unrestricted Common Stock and stock appreciation rights (collectively,
"Awards") to employees, non-employee directors and other individuals whose
participation in the Stock Incentive Plan is determined to be in the Company's
best interests. The Stock Incentive Plan authorizes the issuance of 1,400,000
shares of Common Stock (subject to adjustment in the event of a stock split,
stock dividend, merger, reorganization or similar transaction). The maximum
number of shares of Common Stock subject to options that may be granted to any
individual under the Stock Incentive Plan is 500,000 shares (subject to such
adjustment). The Stock Incentive Plan will be administered by the Compensation
Committee of the Board of Directors, which has the authority, subject to the
provisions of the Stock Incentive Plan, to determine the terms of any Awards.
The Stock Incentive Plan will be adopted by the Board of Directors and
stockholder of the Company prior to the consummation of the Offering.
Upon the consummation of the Offering, the Company intends to grant to
certain employees non-qualified options under the Stock Incentive Plan to
purchase up to an aggregate of 125,000 shares of Common Stock. No such options
will be granted to executive officers of the Company. All such options will be
exercisable at a price equal to the initial public offering price of the
Shares. Each option will vest with respect to one-fourth of the shares subject
to the option on each of the first, second, third and fourth anniversaries of
the date of grant.
The Board of Directors may authorize amendment of the Stock Incentive Plan
without stockholder approval except in circumstances prescribed by applicable
law or regulation. The Stock Incentive Plan does not have a termination date,
but no incentive stock options may be granted after the tenth anniversary of
the effective date of the plan.
Options. An option granted under the Stock Incentive Plan is exercisable
only to the extent that it is vested on the date of exercise. No option may be
exercisable more than ten years from the option grant date, or five years in
the case of an incentive stock option granted to a person who owns more than
10% of the total combined voting power of all classes of stock of the Company
or any subsidiary thereof (a "ten percent stockholder").
Each option will become vested and exercisable at such times and under such
conditions as the Compensation Committee may approve. The Compensation
Committee may accelerate the vesting of any option in its discretion. The
exercise price per share under each option granted under the Stock Incentive
Plan may not be less than 100% (110% in the case of an incentive stock option
granted to a ten percent stockholder) of the fair market value of the Common
Stock on the option grant date. In the case of incentive stock options, the
aggregate fair market value of the Common Stock (determined on the option
grant date) with respect to which such options are exercisable for the first
time during any calendar year may not exceed $100,000.
Incentive stock options are non-transferable during the optionee's lifetime,
but non-qualified stock options may be transferred to the spouse, children,
grandchildren, parents and siblings of the optionee, to the extent permitted
by the Compensation Committee.
Unless otherwise provided by the Compensation Committee, the following
provisions of the Stock Incentive Plan will govern termination of options in
the circumstances described below. Upon termination of a participant's
employment or other relationship with the Company, other than by reason of
death, permanent and total disability or retirement, all unvested options held
by such participant will terminate immediately and all vested options not
exercised will terminate 90 days following the employment termination date. If
a participant dies while employed or providing services to the Company,
terminates his employment or other relationship with the Company by reason of
permanent and total disability or retires, all options held by such
participant which have not previously
48
<PAGE>
terminated will fully vest and will be exercisable for one year thereafter, in
the case of death or disability, or for three years thereafter, in the case of
retirement.
Restricted Stock and Restricted Stock Units. Restricted shares of Common
Stock are awards of shares of Common Stock upon which are imposed restricted
periods and restrictions which subject the shares to a substantial risk of
forfeiture as defined in Section 83 of the Code. Restricted Common Stock units
are awards which represent a conditional right to receive shares of Common
Stock in the future and which are subject to the same types of restrictions
and risk of forfeiture as restricted shares of Common Stock. Restricted shares
of Common Stock and restricted Common Stock units will be subject to such
restrictions as the Compensation Committee may impose, including, without
limitation, continuous employment with the Company or any of its future
subsidiaries or the attainment of specific corporate or individual performance
objectives. The restrictions and the restricted period, which generally will
be a minimum of three years, may differ with respect to each recipient of an
Award. An Award of restricted shares of Common Stock or restricted Common
Stock units will be subject to forfeiture if certain events specified by the
Board of Directors occur prior to the lapse of the restrictions. Subject to
the provisions of the Stock Incentive Plan, the Compensation Committee will
determine the terms and conditions of the agreement evidencing each Award of
restricted shares of Common Stock and restricted Common Stock units.
Unrestricted Stock. Unrestricted shares of Common Stock are shares that are
free of restrictions other than those imposed pursuant to federal or state
securities laws.
Stock Appreciation Rights. A stock appreciation right ("SAR") is a right to
receive, in the form of Common Stock, cash or a combination of Common Stock
and cash, the spread or difference between the fair market value of the Common
Stock subject to an option and the option exercise price. SARs may be granted
in conjunction with all or a portion of any option granted under the Stock
Incentive Plan, either at the time of the grant of such option or at any
subsequent time prior to the expiration of such option. The Compensation
Committee will determine at the SAR grant date or thereafter the time or times
at which and the circumstances under which an SAR may be exercised in whole or
in part, the time or times at which and the circumstances under which an SAR
will cease to be exercisable, the method of exercise, the method of
settlement, the form of consideration payable in settlement, whether or not an
SAR will be in tandem or in combination with any other grant, and any other
terms and conditions of any SAR. Exercisability of SARs may be subject to
achievement of one or more of the same performance objectives that apply to
awards of restricted shares of Common Stock or restricted Common Stock units.
SARs issued in connection with incentive stock options are required to meet
additional conditions. SARs are transferable only to the same extent as the
related options.
1999 Incentive Plan for Outside Directors
The Company's 1999 Incentive Plan for Outside Directors sets forth the terms
of compensation payable to the Company's non-employee directors ("Outside
Directors") for their service on the Board of Directors. Upon his initial
election or appointment of the Board of Directors, each Outside Director will
receive an option to purchase 1,500 shares of Common Stock. Each Outside
Director will receive an annual fee of $25,000 for service on the Board of
Directors and its committees. The director may elect to receive up to one-half
of this annual fee in cash and up to all of the fee in the form of options to
purchase Common Stock. The value of the options issued in payment of any
portion of an Outside Director's annual fee will be determined pursuant to the
Black-Scholes valuation model.
The shares of Common Stock issuable upon the exercise of options under the
Outside Director Plan will be issued under the Stock Incentive Plan. The
exercise price per share under each option will be the fair market value of
the Common Stock on the option grant date. The options that will be granted to
the newly appointed Outside Directors upon the consummation of the Offering
will be
49
<PAGE>
exercisable at a price equal to the initial public offering price of the
Shares. Each option will vest with respect to one-fourth of the shares subject
to the option on each of the first, second, third and fourth anniversaries of
the date of grant. No option may be exercisable more than ten years from the
option grant date. Options will terminate after the expiration of specified
periods following the termination of the option holder's service as a
director, whether by reason of death, disability, retirement or otherwise. The
Outside Director Plan will be administered by a committee of the Board of
Directors. The Outside Director Plan will be adopted by the Board of Directors
and stockholder of the Company prior to the consummation of the Offering.
Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"),
which will be implemented upon the consummation of the Offering, is intended
to qualify under Section 423 of the Code. The Company has reserved an
aggregate of 300,000 shares of Common Stock for issuance under the Employee
Stock Purchase Plan. The Employee Stock Purchase Plan will permit full-time
employees of the Company and any future subsidiaries who have satisfied
minimum service requirements to purchase Common Stock through payroll
deductions, provided that no employee may purchase more than $25,000 worth of
Common Stock in any calendar year. The purchase price of the Common Stock
under the Employee Stock Purchase Plan will be no less than 85% of the fair
market value of the Common Stock on the first day or the last day of each
fiscal quarter, whichever is lower.
Employee Benefit Plans
The Company sponsors a tax-qualified defined contribution employee profit
sharing and 401(k) plan (the "401(k) Plan"). The 401(k) Plan consists of
employee pre-tax contributions, Company matching contributions and Company
discretionary contributions, and contains provisions which are intended to
satisfy the tax qualification requirement of Section 401(a) of the Code. Each
employee may elect to defer up to 15% of such employee's compensation, subject
to a maximum of $10,000 in 1999. The Company makes matching contributions
equal to a specified percentage of each employee's contribution and may also
make discretionary contributions for any plan year. Employee, matching and
discretionary contributions and earnings are fully vested and nonforfeitable
at all times and are invested according to the direction of the employee.
The Company also sponsors a tax-qualified defined contribution employee
money purchase pension plan (the "Money Purchase Plan"). The Money Purchase
Plan contains provisions which are intended to satisfy the tax qualification
requirement of Section 401(a) of the Code. The Company makes an annual
contribution equal to 4% of employee compensation. Plan contributions and
earnings are fully vested and nonforfeitable after five full years of service
and are invested according to the direction of the employee.
Annual Bonus Plan
Following the Offering, the Company intends to establish an annual bonus
plan pursuant to which all full-time management personnel, including executive
officers, will be eligible to receive a bonus for exceptional individual or
team performance. The Company will reserve the right not to award bonuses in
any year.
50
<PAGE>
CERTAIN TRANSACTIONS
Reorganization
Trex Company, Inc. is currently a wholly-owned subsidiary of TREX Company,
LLC, a Delaware limited liability company. Prior to the consummation of the
Offering, the members of TREX Company, LLC other than Mobil will contribute
their junior membership interests in TREX Company, LLC to Trex Company, Inc.
in exchange for Common Stock of Trex Company, Inc. Concurrently with such
exchange, Mobil will exchange its preferred membership interest in TREX
Company, LLC for a $3.1 million note of Trex Company, Inc. payable upon the
consummation of the Offering. As a result of such exchanges, TREX Company, LLC
will become a wholly-owned subsidiary of Trex Company, Inc. In connection with
the Exchange Transaction, the Certificate of Incorporation and Bylaws will be
restated in their entirety. See "Description of Capital Stock" for a
description of the Certificate of Incorporation and Bylaws that will be in
effect at the time of the consummation of the Offering.
In the Exchange Transaction, the junior membership interests in TREX
Company, LLC will be exchanged for shares of Common Stock of Trex Company,
Inc. as follows: (i) the membership interests of the Management Holders (as
defined below) will be exchanged for a total of 9,225,000 shares of Common
Stock; and (ii) the membership interests of the Institutional Investors will
be exchanged for a total of 1,025,000 shares of Common Stock. The Company will
receive no additional consideration in connection with the exchange of
membership interests for shares of Common Stock. Immediately following the
Exchange Transaction, the Management Holders and the Institutional Investors
will beneficially own 90% and 10%, respectively, of the outstanding Common
Stock, which is the same proportion in which they held membership interests in
TREX Company, LLC immediately before the Exchange Transaction.
Before the Exchange Transaction, TREX Company, LLC will exercise an option
to repurchase from the Institutional Investors approximately 667 junior
membership interests designated as Class A Units. As a result of exercise of
this option, the beneficial ownership of outstanding junior membership
interests by the Institutional Investors will decrease to 10% from 25%, while
the beneficial ownership of outstanding junior membership interests by the
Management Holders will increase to 90% from 75%. The terms of this option are
set forth in an agreement which TREX Company, LLC, the Management Holders and
the Institutional Investors entered into in connection with the Acquisition.
The option exercise price will be $.01 for each junior membership interest
repurchased. The number of junior membership interests TREX Company, LLC may
repurchase pursuant to the option is based on the internal rate of return
earned since the Acquisition by the Institutional Investors on their
investment in TREX Company, LLC, which consists of the Senior Notes, the
Subordinated Notes and their junior membership interests. The initial public
offering price of the Shares is one component of the internal rate of return
calculation. The number of junior membership interests TREX Company, LLC will
repurchase will be the same at each of the initial public offering prices of
the Shares within the range set forth on the cover page of this Prospectus.
In connection with the Exchange Transaction, TREX Company, LLC will make the
LLC Distribution to the Management Holders and the Institutional Investors.
The estimated amount of the LLC Distribution as of December 31, 1998 is $5.6
million. Such amount will be increased by the amount of any taxable income
realized by TREX Company, LLC from January 1, 1999 through the date of the LLC
Distribution. Of the LLC Distribution, which is estimated to be approximately
$11.3 million as of the expected payment date, approximately $8.9 million
represents the amount of the previously recognized and undistributed income of
TREX Company, LLC through the expected payment date on which the members have
paid, or will pay, income tax and approximately $2.4 million represents a
return of capital.
Trex Company, Inc. was organized in September 1998 under the laws of the
State of Delaware for the purpose of acquiring all of the membership interests
and operating the business of
51
<PAGE>
TREX Company, LLC. Trex Company, Inc. has not conducted, and prior to the
Exchange Transaction will not conduct, any business other than in connection
with the Offering and the other transactions described herein.
Acquisition Transactions
Acquisition. In the Acquisition, the Company purchased the assets of Mobil's
Composite Products Division in a management-led buyout for a cash purchase
price of approximately $29.5 million. The Acquisition and the Company's
initial operations were financed by a combination of the following: (i)
proceeds of $29.3 million from the sale by the Company of $24.3 million
principal amount of Senior Notes, $5.0 million principal amount of
Subordinated Notes and a total of 1,000 Class B Units to Connecticut General
Life Insurance Company, Connecticut General Life Insurance Company on behalf
of one or more separate accounts and Life Insurance Company of North America;
(ii) proceeds of $3.0 million from the sale by the Company of 1,000 Preferred
Units (the "Preferred Units") to Mobil; and (iii) proceeds of $2.0 million
from the sale by the Company of 750 Class A Units to each of Robert G.
Matheny, Anthony J. Cavanna, Andrew U. Ferrari and Roger A. Wittenberg
(collectively, the "Management Holders"). The Institutional Investors will
convert their Class B Units into the same number of Class A Units prior to the
Reorganization.
On June 25, 1997, the Company prepaid $3.0 million principal amount of
Senior Notes.
In January 1998, Connecticut General Life Insurance Company transferred 333
Class B Units to The Lincoln National Life Insurance Company in connection
with the sale of certain assets.
As a result of the indebtedness incurred to finance the Acquisition, the
Company has been highly leveraged. The terms of the Company's financing
agreements have required substantial debt service payments. Such financing
agreements also have required the Company to comply with various restrictive
covenants, financial ratios and other financial and operating tests.
Acquisition-Related Agreements. The Company and its members entered into
certain agreements in connection with the Acquisition relating to the members'
interests in the Company or any successor entity.
Pursuant to the Members' Agreement dated as of August 29, 1996 among the
Company, the Management Holders and the Institutional Investors (the "Members'
Agreement"), the Company has granted certain "demand" and "piggyback"
registration rights with respect to Common Stock issuable to the Institutional
Investors upon consummation of the Reorganization. The Institutional Investors
are entitled to require the Company to register the sale of their shares under
the Securities Act on up to two occasions. In addition, if the Company
proposes to register the Common Stock under the Securities Act (other than
pursuant to a registration statement on Form S-4 or Form S-8), whether or not
for its own account, the Institutional Investors are entitled to require the
Company, subject to certain conditions, to include all or a portion of their
shares in such registration. The Company has registered the shares offered
hereby by the Selling Stockholders pursuant to their exercise of such
piggyback registration rights. The foregoing registration rights are subject
to certain notice requirements, timing restrictions and volume limitations
which may be imposed by the underwriters of an offering. The Company is
required to bear the expenses of all such registrations, including expenses of
the Selling Stockholders in connection with the Offering, except for
underwriting discounts and commissions. The Members' Agreement will be
terminated following consummation of the Offering, and the foregoing
registration rights will be contained in a new agreement among the Company,
the Management Holders and the Institutional Investors.
Pursuant to the Limited Liability Company Agreement dated as of August 29,
1996 among the Management Holders, the Institutional Investors and Mobil, the
Institutional Investors were granted the right to approve certain actions by
the Company outside the ordinary course of its business,
52
<PAGE>
including the sale of all or a substantial part of the Company's assets and
the incurrence or payment of specified types of indebtedness. This agreement
will be terminated following the consummation of the Reorganization.
Pursuant to the Class A Members' Agreement dated as of August 29, 1996, the
Management Holders agreed to certain restrictions on the sale, transfer or
other disposition of their membership interests in the Company. This agreement
will be terminated following the consummation of the Reorganization.
In connection with the Acquisition, each Management Holder entered into an
employment agreement with the Company. The employment agreements will be
terminated following the consummation of the Offering.
Other Transactions
The Company paid the Institutional Investors interest on the Senior Notes
and Subordinated Notes of $1.0 million for 1996, $3.0 million for 1997 and
$2.7 million for 1998.
The Company paid Mobil dividends on the Preferred Units of $0.1 million for
1996, $0.4 million for 1997 and $0.4 million for 1998.
The Company will use a portion of the net proceeds of the Offering to repay
the Senior Notes and the Subordinated Notes and to repay a $3.1 million note
it will issue to Mobil in the Reorganization in exchange for Mobil's preferred
equity interest in TREX Company, LLC. See "Use of Proceeds."
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of December 31, 1998,
on a pro forma basis after giving effect to the Reorganization, regarding the
beneficial ownership of Common Stock by: (i) each person or entity known by
the Company to own beneficially more than 5% of the Common Stock; (ii) each
director of the Company; (iii) each Named Executive Officer; (iv) all
directors and executive officers of the Company as a group; and (v) the
Selling Stockholders both before and after giving effect to their sale of
103,000 Shares. Each director and executive officer has an address in care of
the Company's principal executive offices at 20 South Cameron Street,
Winchester, Virginia 22601.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Shares Beneficially
Prior to Offering Number Owned After Offering
-------------------- of Shares --------------------
Name of Beneficial Owner Number of Offered Number
(1) Shares % Hereby of Shares %
- ------------------------ -------------------- --------- --------------------
<S> <C> <C> <C> <C> <C>
Anthony J. Cavanna ....... 2,306,250 22.5 -- 2,306,250 17.1
Andrew U. Ferrari ........ 2,306,250 22.5 -- 2,306,250 17.1
Robert G. Matheny ........ 2,306,250 22.5 -- 2,306,250 17.1
Roger A. Wittenberg ...... 2,306,250 22.5 -- 2,306,250 17.1
Connecticut General Life
Insurance Company (2).... 567,850 5.5 57,062 510,788 3.8
Life Insurance Company of
North America (2)........ 115,825 1.1 11,639 104,186 *
The Lincoln National Life
Insurance Company (3).... 341,325 3.3 34,299 307,026 2.3
All directors and
executive officers
as a group (4 persons) .. 9,225,000 90.0 -- 9,225,000 68.4
</TABLE>
- --------
* Less than 1%.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, for purposes of this table, a person is deemed to be the
beneficial owner of any shares of Common Stock if such person has or
shares voting power or investment power with respect to such security, or
has the right to acquire beneficial ownership at any time within 60 days
of the date of the table. As used herein, "voting power" is the power to
vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares.
(2) Shares are held of record by a nominee of such stockholder. Such
stockholder is an indirect, wholly owned subsidiary of CIGNA Corporation,
which may be deemed to be the beneficial owner of such shares. The address
of the record holder is c/o CIGNA Investments, Inc., 900 Cottage Grove
Road, Hartford, Connecticut 06152.
(3) Shares are held of record by such stockholder. CIGNA Investments, Inc., an
indirect, wholly owned subsidiary of CIGNA Corporation, exercises voting
and dispositive power with respect to such shares. CIGNA Corporation may
be deemed to be the beneficial owner of such shares. The address of the
record holder is 200 East Berry Street, Renaissance Square, Fort Wayne,
Indiana 46802.
The Company has registered the shares offered by the Selling Stockholders
pursuant to their exercise of registration rights with respect to such shares.
See "Certain Transactions" for a description of such registration rights and
material relationships during the past three years between the Selling
Stockholders and the Company.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Certificate
of Incorporation and Bylaws, which will be in effect at the time of the
consummation of the Offering, and to the provisions of the applicable law. The
Certificate of Incorporation and the Bylaws are included as exhibits to the
Registration Statement of which this Prospectus forms a part.
Authorized and Outstanding Capital Stock
Upon consummation of the Reorganization, the Company will have authority to
issue 43,000,000 shares of capital stock, consisting of 40,000,000 shares of
Common Stock, par value $.01 per share, and 3,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). As of December 31,
1998, after giving effect to the Reorganization and the Offering, 13,500,000
shares of Common Stock (or 14,002,950 shares of Common Stock if the Over-
Allotment Option is exercised in full) will be issued and outstanding and no
shares of Preferred Stock will be issued and outstanding.
Common Stock
Holders of Common Stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. Holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors on the Common Stock out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
affairs of the Company, holders of Common Stock are entitled to share ratably
in the assets available for distribution after payments to the creditors and
to the holders of any Preferred Stock that may be outstanding at such time.
Holders of Common Stock have no preemptive rights, cumulative voting rights or
rights to convert shares of Common Stock into any other securities, and are
not subject to future calls or assessments by the Company. All outstanding
shares of Common Stock of the Company are, and the Shares issued in the
Offering will be, fully paid and nonassessable.
Preferred Stock
The Board of Directors is authorized without further stockholder action to
provide for the issuance from time to time of up to 3,000,000 shares of
Preferred Stock in one or more series with such powers, designations,
preferences and relative, participating, optional or other rights,
qualifications, limitations or restrictions as will be set forth in the
resolutions providing for the issuance of such series adopted by the Board of
Directors. The holders of Preferred Stock will have no preemptive rights
(unless otherwise provided in the applicable certificate of designation) and
will not be subject to future assessments by the Company. Such Preferred Stock
may have voting or other rights which could adversely affect the rights of
holders of the Common Stock. In addition, the issuance of Preferred Stock,
while providing the Company with financial flexibility in connection with
possible acquisitions and other corporate purposes, could, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. The Company currently
has no intention to issue any Preferred Stock.
Anti-Takeover Effect of Certain Charter and Bylaw Provisions
The Certificate of Incorporation and the Bylaws contain certain provisions
that could make it more difficult to consummate an acquisition of the Company
by means of a tender offer, a proxy contest or otherwise.
Classified Board of Directors. The Certificate of Incorporation and the
Bylaws provide that the Board of Directors will be divided into three classes
of directors, with the classes as nearly equal in
55
<PAGE>
number as possible. As a result, approximately one-third of the Board of
Directors will be elected each year. The classification of the Board of
Directors will make it more difficult for an acquiror or for other
stockholders to change the composition of the Board of Directors. The
Certificate of Incorporation provides that, subject to any rights of holders
of Preferred Stock to elect additional directors under specified
circumstances, the total number of directors constituting the entire Board of
Directors will be not fewer than five directors nor more than 20 directors,
with the authorized number of directors being fixed from time to time by the
Board of Directors. In addition, the Certificate of Incorporation provides
that, subject to any rights of holders of Preferred Stock, and unless the
Board of Directors otherwise determines, any vacancies will be filled only by
the affirmative vote of a majority of the remaining directors, though less
than a quorum.
No Stockholder Action by Written Consent. The Certificate of Incorporation
and Bylaws provide that, subject to the rights of any holders of Preferred
Stock to act by written consent in lieu of a meeting, stockholder action may
be taken only at an annual meeting or special meeting of stockholders and may
not be taken by written consent in lieu of a meeting, unless the action to be
effected by written consent of stockholders and the taking of such action by
such written consent have expressly been approved in advance by the Board of
Directors. Failure to satisfy any of the requirements for a stockholder
meeting could delay, prevent or invalidate stockholder action.
Stockholder Advance Notice Procedure. The Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual or special meeting of
stockholders of the Company (the "Stockholder Notice Procedure"). The
Stockholder Notice Procedure provides that only persons that are named in the
Company's notice of meeting or that are nominated by the Board of Directors or
by a stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. Any such notice is required
to set forth, among other things, specified information about the stockholder,
the beneficial owner (if any) on whose behalf the nomination is made and each
proposed director nominee, such other information regarding each proposed
nominee as would be required to be included in a proxy statement filed
pursuant to the rules and regulations of the Securities and Exchange
Commission, the written consent of each proposed nominee to serve as a
director of the Company if elected, and a representation whether the
stockholder or the beneficial owner, if any, intends or is part of a group
which intends to solicit proxies in support of such nomination. The
Stockholder Notice Procedure also provides that only such business may be
conducted at an annual or special meeting as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a stockholder
who has given timely written notice to the Secretary of the Company. Any such
notice is required to set forth, among other things, a brief description of
the business desired to be brought before the meeting, any material interest
of the stockholder in such business, and specified information about such
stockholder and such stockholder's ownership of capital stock of the Company.
Section 203 of the Delaware General Corporation Law
The Company is subject to Section 203 ("Section 203") of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the time that
such stockholder became an interested stockholder unless: (i) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) at or subsequent to such
56
<PAGE>
time, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following: (i) any
merger or consolidation of the corporation with the interested stockholder;
(ii) any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder; (iii) subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) any receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Director Liability and Indemnification of Directors and Officers
The Delaware General Corporation Law provides that a corporation may limit
the liability of each director to the corporation or its stockholders for
monetary damages except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases and (iv) for any transaction from
which the director derives an improper personal benefit. The Certificate of
Incorporation provides for the elimination and limitation of the personal
liability of directors of the Company for monetary damages to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Certificate of Incorporation provides that if the Delaware General Corporation
Law is amended to authorize the further elimination or limitation of the
liability of a director, then the liability of the directors will be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. The effect of this provision is to eliminate
the rights of the Company and its stockholders (through stockholder derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in situations
described in clauses (i) through (iv) above. The provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of
director's duty of care. This provision is consistent with Section 102(b)(7)
of the Delaware General Corporation Law, which is designed, among other
things, to encourage qualified individuals to serve as directors of Delaware
corporations. The Company believes this provision will assist it in securing
and maintaining the services of qualified individuals who are not employees of
the Company.
The Bylaws provide that the Company will, to the full extent permitted by
the Delaware General Corporation Law, as amended from time to time, indemnify,
and advance expenses to, each of its currently acting and former directors and
officers.
Listing
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TWP" subject to notice of issuance.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. will serve as transfer agent and
registrar for the Common Stock.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, after giving effect to the Reorganization,
there will be 13,500,000 shares of Common Stock outstanding. The 3,353,000
Shares offered hereby, other than up to 162,500 Reserved Shares, will be
freely tradable upon completion of the Offering without restriction under the
Securities Act by persons other than "affiliates" of the Company as defined in
Rule 144 under the Securities Act. The remaining shares of Common Stock will
be deemed "restricted securities" within the meaning of Rule 144 and, as such,
will not be eligible for future sale to the public unless they are sold in
transactions under the Securities Act or pursuant to an exemption from
registration, including the exemption afforded by Rule 144.
The Company, all current stockholders of the Company and the holders of
Reserved Shares, have entered into "lock-up" agreements with the Underwriters
pursuant to which they have agreed that they will not, for a period of 180
days after the closing of the Offering, offer, sell, contract to sell, issue
or otherwise dispose of any shares of Common Stock or any securities of the
Company which are substantially similar to the Common Stock, or which are
convertible into or exchangeable or exercisable for Common Stock or securities
substantially similar to the Common Stock without the prior written consent of
Schroder & Co. Inc. Such consent may be granted in whole or in part without a
public announcement. Such agreements have been expressly agreed to preclude
such parties from engaging in any hedging or other transaction which is
designed to or reasonably could be expected to lead to or result in a sale or
disposition of securities during the applicable period, even if such
securities would be disposed of by someone other than such party. Such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any such securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from such securities. The stockholders subject
to the foregoing restrictions have advised the Company that they do not intend
to request Schroder & Co. Inc. to waive such restrictions during the 180-day
lock-up period. The foregoing restrictions will not apply to the following
transactions by the Company, which are the only transactions during such 180-
day period currently contemplated by the Company: (i) the issuance of options
or other awards under the Stock Incentive Plan and options under the Outside
Director Plan, as such plans are in effect on the date of this Prospectus;
(ii) the issuance of shares of Common Stock under the 1999 Employee Stock
Purchase Plan as in effect on the date of this Prospectus; (iii) the issuance
of up to 135,000 shares of Common Stock upon exercise of options to be granted
by the Company upon the consummation of the Offering pursuant to the Stock
Incentive Plan and the Outside Director Plan; and (iv) the filing of one or
more registration statements on Form S-8 registering the offer and sale of
Common Stock under the Stock Incentive Plan, the Outside Director Plan and the
1999 Employee Stock Purchase Plan. In addition, the lock-up restrictions will
not apply to transfers of Common Stock to the Company or to certain transfers
of Common Stock to family trusts or by gift, will or intestate succession. As
a condition to any such transfer to a family trust or transfer by gift, will
or intestate succession, the transferee (or trustee or legal guardian on the
transferee's behalf) will be required to execute and deliver a lock-up
agreement containing the terms described in this paragraph. Upon expiration of
the lock-up period, the Reserved Shares will be freely tradable by persons
other than affiliates of the Company and up to 10,147,000 shares of Common
Stock will be eligible for sale under Rule 144.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated), including an affiliate of the
Company, who has beneficially owned "restricted securities" for at least one
year is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 135,000 shares of Common Stock
immediately after the Offering) or (ii) the average weekly trading volume of
the Common Stock on the New York Stock Exchange during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale with
the Securities and Exchange Commission. Sales under Rule 144 also are subject
to certain other requirements regarding the manner of sale, notice and
availability of current public information about the Company. Under Rule
144(k), if a
58
<PAGE>
period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company and the date they were
acquired from an affiliate of the Company, a stockholder who is not an
affiliate of the Company at the time of sale and has not been an affiliate at
any time during the 90 days prior to the sale would be entitled to sell shares
of Common Stock immediately without compliance with the requirements under
Rule 144. Following the Reorganization, the Management Holders may be deemed
to be affiliates of the Company for purposes of Rule 144. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.
The Company has granted "demand" and "piggyback" registration rights with
respect to the Common Stock held by the Institutional Investors. The
Institutional Investors are entitled to require the Company to register the
sale of their shares under the Securities Act on up to two occasions. In
addition, if the Company proposes to register the Common Stock under the
Securities Act (other than pursuant to a registration statement on Form S-4 or
Form S-8), whether or not for its own account, the Institutional Investors are
entitled to require the Company, subject to certain conditions, to include all
or a portion of their shares in such registration. The Company has registered
the shares offered hereby by the Selling Stockholders pursuant to their
exercise of such piggyback registration rights. The foregoing registration
rights are subject to certain notice requirements, timing restrictions and
volume limitations which may be imposed by the underwriters of an offering.
The Company is required to bear the expenses of all such registrations except
for underwriting discounts and commissions. Following the consummation of the
Offering, 922,000 shares of Common Stock, or 6.8% of the total number of
outstanding shares of Common Stock, will be entitled to the benefits of such
registration rights. See "Certain Transactions--Acquisition Transactions."
Prior to the Offering, there has been no public market for the Common Stock.
Future sales of a substantial number of shares of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Common Stock and could make it more
difficult for the Company to raise funds through a public offering of its
equity securities.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an underwriting
agreement, dated , 1999 (the "Underwriting Agreement"), the Company
and the Selling Stockholders have agreed to sell to each of the underwriters
named below (collectively, the "Underwriters"), and each of the Underwriters
has severally agreed to purchase from the Company and the Selling
Stockholders, the respective number of shares of Common Stock set forth
opposite its name below for aggregate gross proceeds to the Company of
$45,500,000 and to the Selling Stockholders of $1,442,000, payable in cash
against delivery of a certificate or certificates representing each share of
Common Stock:
<TABLE>
<CAPTION>
Number of Shares
Underwriter of Common Stock
----------- ----------------
<S> <C>
Schroder & Co. Inc. ...................................
J.C. Bradford & Co. ...................................
Total .................................................
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligation to pay
for and accept delivery of the Shares is subject to certain conditions
precedent and that the Underwriters will be obligated to purchase all such
Shares if any are purchased. Schroder & Co. Inc., as representative of the
Underwriters (the "Representative"), has informed the Company that no sales of
Shares will be confirmed to discretionary accounts.
The closing of the purchase and sale of the Shares is intended to occur on
or about , 1999, or such other dates as may be agreed upon by the
Company and the Representative.
The Underwriters propose to offer the Shares in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at a price that
represents a concession not in excess of $ per Share under the initial
public offering price. The Underwriters may allow, and such dealers may re-
allow, a concession not in excess of $ per Share on sales to certain
brokers and dealers. After the Shares are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company has granted to the Underwriters the Over-Allotment Option,
exercisable for 30 days from the closing of the Offering, to purchase up to an
aggregate of 502,950 additional shares of Common Stock on the same terms and
conditions as apply to purchases of the Shares. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set out next to each such Underwriter's name in the table
above bears to the total number of shares of Common Stock offered by the
Underwriters hereunder. If the Over-Allotment Option is exercised in full, the
total price to public of the Shares will be $ , the total underwriting
discounts and commissions will be $ and the total net proceeds to the
Company will be $ , after deducting the Underwriters' discounts and
commissions but before estimated Offering expenses.
The obligations of the Underwriters under the Underwriting Agreement may be
terminated at the discretion of the respective Underwriters upon the
occurrence of certain events.
The Company, all stockholders of the Company prior to the Offering and the
holders of Reserved Shares have entered into "lock-up" agreements with the
Underwriters pursuant to which they have agreed that, for a period of 180 days
after the closing of the Offering, subject to certain limited exceptions, they
will not offer, sell, contract to sell, issue or otherwise dispose of any
shares of Common Stock or any securities of the Company which are
substantially similar to the Common Stock, or which are convertible into or
exchangeable or exercisable for Common Stock or securities
60
<PAGE>
substantially similar to the Common Stock without the prior written consent of
Schroder & Co. Inc. Such consent may be granted in whole or in part without a
public announcement. Such agreements have been expressly agreed to preclude
such parties from engaging in any hedging or other transaction which is
designed to or reasonably could be expected to lead to or result in a sale or
disposition of such securities during the applicable period, even if such
securities would be disposed of by someone other than such party. Such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any such securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from such securities. See "Shares Eligible for
Future Sale."
At the request of the Company, up to 162,500 Shares have been reserved for
sale in the Offering to certain individuals, including directors and employees
of the Company, members of their families or friends, and other persons having
business relationships with the Company. The sale of the Reserved Shares to
such persons will be at the initial public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and
commissions. The number of Shares available for sale to the general public
will be reduced to the extent these persons purchase the Reserved Shares. Any
Reserved Shares not purchased will be offered by the Underwriters to the
general public on the same basis as the other Shares offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that the Underwriters may incur in
connection with the sale of the Shares, including liabilities arising under
the Securities Act, and to contribute to payments that the Underwriters may be
required to make with respect thereto.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Shares will be determined by
negotiations among the Company, the Selling Stockholders and the
Representative. Among the factors to be considered in determining the initial
public offering price of the Shares, in addition to prevailing market
conditions, are the Company's historical performance, the Underwriters'
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the foregoing
factors in relation to market valuation of companies in related businesses.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TWP" subject to notice of issuance.
In connection with the Offering, the Underwriters and their affiliates may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Shares. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase Shares for the purpose of stabilizing their
market price. The Underwriters also may create a short position for their
accounts by selling more shares of Common Stock in connection with the
Offering than they are committed to purchase from the Company and the Selling
Stockholders, and in such case may purchase shares of Common Stock in the open
market following completion of the Offering to cover all or a portion of such
short position. In addition, the Representative, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from a dealer participating in the
Offering, for the account of the Underwriters, the selling concession with
respect to Shares that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Shares at a level above that which might otherwise prevail in the
open market. None of the transactions described in this paragraph is required,
and, if such transactions are undertaken, they may be discontinued at any
time.
61
<PAGE>
The Company has agreed to pay to TriCapital Corporation, a member of the
National Association of Securities Dealers, Inc. ("TriCapital"), in exchange
for certain financial advisory services provided to the Company in connection
with the Offering, a fee of $250,000 upon the consummation of the Offering as
well as a cash bonus equal to a percentage of the amount by which the
valuation of the Company for purposes of the Offering exceeds $150 million.
TriCapital will receive a total fee of approximately $550,000 if the Offering
is consummated at an initial public offering price of $14.00 per Share (the
midpoint of the range set forth on the cover page of this Prospectus). To the
date of this Prospectus, the Company has paid TriCapital an aggregate of
$72,000, which will be offset against the amounts payable by the Company upon
the consummation of the Offering. The Company also has agreed to reimburse
TriCapital for all its out-of-pocket expenses incurred in connection with its
performance of such services.
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<PAGE>
LEGAL MATTERS
The validity of the Shares will be passed upon for the Company by Hogan &
Hartson L.L.P., Washington, D.C. Certain matters in connection with the
Offering will be passed upon for the Underwriters by McDermott, Will & Emery,
New York, New York.
EXPERTS
The balance sheet of Trex Company, Inc. as of December 31, 1998, appearing
in this Prospectus and Registration Statement has been audited by Ernst &
Young LLP, independent public accountants, as set forth in their report
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of TREX Company, LLC as of December 31, 1997 and
1998, for the period from August 29, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
public accountants, as set forth in their reports appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The financial statements of the Composite Products Division of Mobil Oil
Corporation (the Predecessor) for the year ended December 31, 1995 and the
period from January 1, 1996 to August 28, 1996, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
public accountants, as set forth in their reports appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act with respect to the Shares. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain items
of which are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is made to the
copy of the document filed as an exhibit to the Registration Statement, each
statement made in this Prospectus relating to such document being qualified in
all respects by such reference. For further information with respect to the
Company and the Shares, reference is hereby made to such Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. The Registration Statement and the
exhibits thereto filed by the Company with the Commission may be inspected and
copied by the public at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and are also available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 at prescribed rates and, in certain cases,
by accessing the Commission's World Wide Web site at http://www.sec.gov.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Trex Company, Inc.
Report of Independent Auditors............................................ F-2
<S> <C>
Balance Sheet as of December 31, 1998..................................... F-3
Notes to Balance Sheet.................................................... F-4
TREX Company, LLC
Report of Independent Auditors............................................ F-5
Balance Sheets as of December 31, 1997 and 1998........................... F-6
Statements of Operations for the period from July 1, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998..... F-7
Statements of Members' Equity for the period from July 1, 1996 (inception)
to December 31, 1996 and for the years ended December 31, 1997 and
1998..................................................................... F-8
Statements of Cash Flows for the period from July 1, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998..... F-9
Notes to Financial Statements............................................. F-10
<CAPTION>
Mobil Composite Products Division of Mobil Oil Corporation
(The Predecessor)
Report of Independent Auditors............................................ F-19
<S> <C>
Statements of Divisional Operations and Divisional Operating Equity
Deficit for the year ended December 31, 1995 and the period from January
1, 1996 to August 28, 1996............................................... F-20
Statements of Cash Flows for the year ended December 31, 1995 and the
period from January 1, 1996 to August 28, 1996........................... F-21
Notes to Financial Statements............................................. F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Trex Company, Inc.
We have audited the accompanying balance sheet of Trex Company, Inc. (the
"Company") as of December 31, 1998. The balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Trex Company, Inc. at December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia,
January 27, 1999
F-2
<PAGE>
TREX COMPANY, INC.
Balance Sheet
December 31, 1998
Assets
<TABLE>
<S> <C>
Cash.................................................................... $1,000
------
Total assets............................................................. $1,000
======
</TABLE>
Stockholder's Equity
<TABLE>
<CAPTION>
Common stock, $.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding............................................... $ 1
<S> <C>
Additional paid-in capital............................................. 999
Retained earnings...................................................... --
------
Total stockholder's equity.............................................. $1,000
======
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
TREX COMPANY, INC
Notes to Balance Sheet
December 31, 1998
1. BUSINESS AND ORGANIZATION
Trex Company, Inc. (the "Company"), a Delaware corporation, was incorporated
on September 4, 1998, for the purpose of acquiring 100% of the membership
interests and operating the business of TREX Company LLC, in conjunction with
a proposed initial public offering ("IPO") of the Company's Common Stock. The
Company is a wholly owned subsidiary of TREX Company, LLC. Prior to the
proposed IPO, the Company will amend its certificate of incorporation to
increase its authorized capital to 40,000,000 shares of Common Stock and
3,000,000 shares of Preferred Stock.
Prior to the Company's proposed IPO, the junior membership interests in TREX
Company, LLC will be exchanged for shares of Common Stock of the Company and
the preferred membership interest in TREX Company, LLC will be exchanged for a
note of the Company (the "Reorganization"). Subsequent to such transactions,
TREX Company, LLC will be a wholly owned subsidiary of the Company. In
conjunction with the Reorganization, TREX Company, LLC will (1) pay a cash
distribution to its members representing undistributed TREX Company, LLC
taxable earnings and a return of capital and (2) recognize a deferred income
tax liability resulting from the conversion of TREX Company, LLC to a C
corporation.
The net proceeds from the proposed IPO are planned to be used primarily to
reduce outstanding indebtedness, fund a portion of the cash distribution to
its members and provide funds for expansion of operations, working capital
needs and other general corporate purposes.
The Company has had no operations or activity since inception on September
4, 1998 through December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash And Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less.
Income Taxes
Income taxes are accounted for using the liability method required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Fair Value Of Financial Statements
The Company considers the recorded value of its financial assets consisting
of cash and cash equivalents to approximate the fair value of the respective
assets at December 31, 1998.
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers
TREX Company, LLC
We have audited the accompanying balance sheets of TREX Company, LLC (the
"Company") as of December 31, 1997 and 1998, and the related statements of
operations, members' equity, and cash flows for the period from July 1, 1996
(Inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TREX Company, LLC at December
31, 1997 and 1998, and the results of its operations and its cash flows for
the period from July 1, 1996 (Inception) to December 31, 1996 and for the
years ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia,
January 21, 1999 (except Notes 11 and 12, as to
which the date is February 8, 1999)
F-5
<PAGE>
TREX COMPANY, LLC
Balance Sheets
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31,
1997 1998 1998 (Note 11)
----------- ----------- --------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 2,000,000 $ 1,200,000 $ 200,000
Trade accounts receivable............. 1,011,000 34,000 34,000
Inventories........................... 4,475,000 6,007,000 6,007,000
Prepaid expenses and other assets..... 115,000 673,000 673,000
----------- ----------- -----------
Total current assets.................... 7,601,000 7,914,000 6,914,000
----------- ----------- -----------
Property, plant and equipment, net...... 19,213,000 33,886,000 33,886,000
Intangible assets, net.................. 10,132,000 9,298,000 9,298,000
Deferred financing charges, net......... 283,000 233,000 233,000
----------- ----------- -----------
Total Assets............................ $37,229,000 $51,331,000 $50,331,000
=========== =========== ===========
LIABILITIES AND MEMBERS'/STOCKHOLDERS'
EQUITY
Current Liabilities:
Trade accounts payable................ $ 1,481,000 $ 2,577,000 $ 2,577,000
Accrued expenses...................... 799,000 1,086,000 1,086,000
Other current liabilities............. 1,165,000 1,314,000 1,314,000
Distributions payable................. -- -- 7,644,000
Current portion of long-term debt .... -- 6,109,000 6,109,000
----------- ----------- -----------
Total current liabilities............... 3,445,000 11,086,000 18,730,000
Long term debt.......................... 26,250,000 26,954,000 26,954,000
----------- ----------- -----------
Total liabilities....................... 29,695,000 38,040,000 45,684,000
----------- ----------- -----------
Members'/Stockholders' Equity:
Preferred units, 1,000 units
authorized, issued and outstanding... 3,000,000 3,000,000
Junior units, 4,000 units authorized,
issued and outstanding............... 2,350,000 2,350,000
Preferred Stock, $0.01 par value,
3,000,000 shares authorized;
none issued and outstanding, pro
forma................................
Common Stock, $0.01 par value,
40,000,000 shares authorized;
10,250,000 shares issued and
outstanding, pro forma............... 103,000
Undistributed income/retained
earnings, pro forma ................. 2,184,000 7,941,000 4,544,000
----------- ----------- -----------
Total members'/stockholders' equity .... 7,534,000 13,291,000 4,647,000
----------- ----------- -----------
Total Liabilities and
Members'/Stockholders' Equity.......... $37,229,000 $51,331,000 $50,331,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
TREX COMPANY, LLC
Statements of Operations
<TABLE>
<CAPTION>
Period from
July 1, 1996
(Inception) to Year Ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Net sales............................. $ 5,708,000 $34,137,000 $46,818,000
Cost of sales......................... 3,481,000 16,774,000 22,956,000
----------- ----------- -----------
Gross profit.......................... 2,227,000 17,363,000 23,862,000
Selling, general, and administrative
expenses............................. 2,558,000 8,992,000 12,878,000
----------- ----------- -----------
(Loss) income from operations......... (331,000) 8,371,000 10,984,000
Interest income....................... 91,000 150,000 411,000
Interest (expense).................... (1,025,000) (2,927,000) (2,937,000)
----------- ----------- -----------
Net (loss) income..................... $(1,265,000) $ 5,594,000 $ 8,458,000
=========== =========== ===========
Basic earnings per junior unit ....... $ (350.00) $ 1,297.25 $ 2,013.25
=========== =========== ===========
Weighted average junior units
outstanding.......................... 4,000 4,000 4,000
=========== =========== ===========
Pro Forma Data (unaudited, see Note
11):
Historical net income............... $ 8,458,000
Pro forma income taxes.............. (3,383,000)
-----------
Pro forma net income................ $ 5,075,000
===========
Pro forma income per share, basic... $ 0.50
===========
Pro forma weighted average shares
outstanding........................ 10,250,000
===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
TREX COMPANY, LLC
Statements of Members' Equity
For the period from July 1, 1996 (Inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Preferred Junior Undistributed
Units Units Income (Loss) Total
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, July 1, 1996
(Inception)................. $ -- $ -- $ -- $ --
Proceeds from issuance of
units....................... 3,000,000 2,350,000 -- 5,350,000
Net loss..................... -- -- (1,265,000) (1,265,000)
Distributions declared....... -- -- (135,000) (135,000)
---------- ---------- ----------- -----------
Balance, December 31, 1996... 3,000,000 2,350,000 (1,400,000) 3,950,000
Net income................... -- -- 5,594,000 5,594,000
Distributions declared....... -- -- (405,000) (405,000)
Tax distributions............ -- -- (1,605,000) (1,605,000)
---------- ---------- ----------- -----------
Balance, December 31, 1997... 3,000,000 2,350,000 2,184,000 7,534,000
Net income................... -- -- 8,458,000 8,458,000
Distributions declared....... -- -- (405,000) (405,000)
Tax distributions............ -- -- (2,296,000) (2,296,000)
---------- ---------- ----------- -----------
Balance, December 31, 1998... $3,000,000 $2,350,000 $ 7,941,000 $13,291,000
========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
TREX COMPANY, LLC
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
July 1, 1996
(Inception)
to
December 31, Year ended December 31,
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................... $ (1,265,000) $ 5,594,000 $ 8,458,000
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Depreciation and amortization...... 858,000 2,642,000 3,114,000
Amortization of deferred financing
charges........................... 17,000 50,000 50,000
Loss on disposal of property, plant
and equipment..................... 148,000 161,000 187,000
Changes in operating assets and
liabilities
Trade accounts receivable........ 646,000 (485,000) 977,000
Inventories...................... (2,332,000) (1,569,000) (1,532,000)
Prepaid expenses and other
assets.......................... (115,000) 44,000 (558,000)
Trade accounts payable........... 280,000 (62,000) 1,096,000
Accrued expenses................. 426,000 197,000 287,000
Other current liabilities........ 1,014,000 (51,000) 149,000
Distributions payable............ 101,000 -- --
------------ ----------- ------------
Net cash (used in) provided by
operating activities................ (222,000) 6,521,000 12,228,000
------------ ----------- ------------
INVESTING ACTIVITIES
Purchase of net assets............... (29,191,000) -- --
Expenditures for property, plant and
equipment........................... (1,062,000) (3,252,000) (17,140,000)
------------ ----------- ------------
Net cash used in investing
activities.......................... (30,253,000) (3,252,000) (17,140,000)
------------ ----------- ------------
FINANCING ACTIVITIES
Borrowings under mortgages and
notes............................... 28,900,000 -- 6,886,000
Proceeds from issuance of preferred
units............................... 3,000,000 -- --
Proceeds from issuance of junior
units............................... 2,350,000 -- --
Principal payments under mortgages
and notes........................... -- (3,000,000) (73,000)
Preferred distributions paid......... (34,000) (405,000) (405,000)
Tax distributions paid............... -- (1,605,000) (2,296,000)
------------ ----------- ------------
Net cash provided by (used in)
financing activities................ 34,216,000 (5,010,000) 4,112,000
------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................... 3,741,000 (1,741,000) (800,000)
Cash and cash equivalents at
beginning of period................. -- 3,741,000 2,000,000
------------ ----------- ------------
Cash and cash equivalents at end of
period.............................. $ 3,741,000 $ 2,000,000 $ 1,200,000
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements
For the period from July 1, 1996 (Inception) to December 31, 1996 and for the
years ended December 31, 1997 and 1998
1. BUSINESS AND ORGANIZATION
TREX Company, LLC ("Trex" or the "Company") manufactures and distributes wood
polymer (thermo-plastic) composite products primarily for consumer and
commercial decking applications. Trex lumber is manufactured primarily from
reclaimed plastic (mainly shopping bags and stretch film) and hardwood waste.
Organization
Trex is a limited liability company formed under the laws of the State of
Delaware on July 1, 1996 (Inception). The Company initiated commercial
activity on August 29, 1996.
On August 29, 1996, Trex acquired substantially all of the assets and assumed
certain liabilities of Mobil Oil Corporation's Composite Products Division
("CPD"). The Company acquired these net assets for cash of approximately $29
million. The acquisition was accounted for using the purchase accounting
method.
Reorganization
On September 4, 1998 the Company formed a wholly owned subsidiary, Trex
Company, Inc., for the purpose of acquiring 100% of the membership interests
and operating the business of the Company in conjunction with the subsidiary's
proposed initial public offering of common stock (the "IPO"). The Company will
account for the reorganization as an exchange of shares between entities under
common control at historical cost in a manner similar to a pooling of
interests. As of December 31, 1998, the Company had capitalized its subsidiary
with an initial capital contribution of $1,000 and the subsidiary had no other
assets or operations as of that date or for the inception period then ended.
The Company has reflected its investment in its subsidiary as a component of
other assets as of December 31, 1998.
In connection with the anticipated IPO, which is expected to be consummated in
the first quarter of 1999, the Company will complete certain transactions
related thereto prior to the consummation of the IPO. See Note 12 for details
of these transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (last-in, first-out) or market
value.
F- 10
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long Lived Assets
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost. The costs of
additions and improvements are capitalized, while maintenance and repairs
are expensed as incurred. Depreciation is provided using the straight line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment.......................................... 11 years
Furniture and equipment.......................................... 10 years
Forklifts and tractors........................................... 5 years
Data processing equipment........................................ 5 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the asset.
Intangible Assets
Intangible assets consist of goodwill representing the excess of cost over
net assets acquired and organizational costs resulting from the purchase of
CPD. Goodwill and organizational costs are amortized using the straight
line method over periods of 15 and 5 years, respectively.
The Company assesses the impairment of long-lived assets including intangible
assets in accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. Intangibles are also evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities. The impairment loss of these assets, including goodwill, is
measured by comparing the carrying amount of the asset to its fair value with
any excess of carrying value over fair value written off. Fair value is based
on market prices where available, an estimate of market value, or various
valuation techniques including discounted cash flow.
Revenue Recognition
The Company recognizes revenue at the point of sale, which is at the time of
shipment to the customer from the warehouse.
Deferred Financing Charges
Deferred financing charges represent the unamortized portion of the discount
upon the issuance of the subordinated and senior notes (See Note 5). These are
amortized as interest expense using the effective interest method.
F-11
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company is a partnership for income tax purposes. Accordingly, no
provision for income taxes has been included in these financial statements, as
taxable income or loss passes through to, and is reported by, members
individually.
Research and Development Costs
Research and development costs are expensed as incurred. For the period from
July 1, 1996 (Inception) to December 31, 1996 and for the years ended December
31, 1997 and 1998, research and development costs were approximately $357,000,
$909,000 and $946,000, respectively.
Advertising Costs
Advertising costs are expensed as incurred. For the period from July 1, 1996
(Inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998, advertising costs were approximately $461,000, $2,103,000 and
$3,168,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Statements
The Company considers the recorded value of its financial assets and
liabilities, consisting primarily of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and other current
liabilities, and long term debt to approximate the fair value of the
respective assets and liabilities at December 31, 1997 and 1998.
Recent Pronouncements
The Company has determined that no recent FASB accounting pronouncements will
have a material impact on the Company's financial position or results of
operations.
3. INVENTORIES
Inventories consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Finished Goods...................................... $4,026,000 $4,847,000
Raw Materials....................................... 449,000 1,160,000
---------- ----------
$4,475,000 $6,007,000
========== ==========
</TABLE>
F-12
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Building and improvements.......................... $ 1,659,000 $ 5,436,000
Machinery and equipment............................ 19,040,000 27,222,000
Furniture and equipment............................ 36,000 95,000
Forklifts and tractors............................. 131,000 131,000
Data processing equipment.......................... 187,000 355,000
Construction in process............................ 521,000 1,851,000
Land............................................... -- 3,437,000
----------- -----------
21,574,000 38,527,000
Accumulated depreciation........................... (2,361,000) (4,641,000)
----------- -----------
$19,213,000 $33,886,000
=========== ===========
</TABLE>
Depreciation expense for the period from July 1, 1996 (Inception) to December
31, 1996 and for the years ended December 31, 1997 and 1998 totaled $579,000,
$1,808,000 and $2,280,000, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Goodwill........................................... $10,609,000 $10,609,000
Organization costs................................. 636,000 636,000
----------- -----------
11,245,000 11,245,000
Accumulated amortization........................... (1,113,000) (1,947,000)
----------- -----------
$10,132,000 $ 9,298,000
=========== ===========
</TABLE>
Amortization expense for the period from July 1, 1996 (Inception) to December
31, 1996 and for the years ended December 31, 1997 and 1998 totaled $279,000,
$834,000 and $834,000, respectively.
6. DEBT
The Company maintains an agreement with a bank to provide a $6,000,000 line of
credit for working capital purposes, secured by substantially all of the
Company's accounts receivable and inventories. The line of credit accrues
interest at LIBOR plus 200 basis points and matures on April 10, 1999. There
were no amounts outstanding at December 31, 1997 or 1998.
During the year ended December 31, 1998, the Company borrowed $4,815,000 under
two mortgages to fund, in part, the acquisition of a new manufacturing
facility and research development facility. The mortgages provide for monthly
amortization of principal and interest over a 15-year amortization schedule,
with all remaining principal due ten years from the mortgage dates. The
mortgages have floating rates of LIBOR plus 100 basis points, and the Company
entered into interest rate swap agreements, as discussed below, at the
notional amounts of the amortizing principal balances, that effectively fix
the interest rates paid by the Company at 7.12% and 6.80%, respectively.
During the year ended December 31, 1998, the Company borrowed $2,071,000 under
a promissory note. The note bears interest at 7.5%, payable monthly, with the
entire principal amount due September 5, 1999.
F-13
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
6. DEBT (continued)
Debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Senior Notes, due August 30, 2003, 10%.............. $21,250,000 $21,250,000
Subordinated Notes, due August 30, 2004, 12%........ 5,000,000 5,000,000
Mortgage, due September 16, 2008, 7.12%............. -- 3,710,000
Mortgage, due November 28, 2008, 6.8%............... -- 1,032,000
Promissory Note, due September 5, 1999, 7.5%........ -- 2,071,000
----------- -----------
26,250,000 33,063,000
Less current portion................................ -- (6,109,000)
----------- -----------
Long-term debt...................................... $26,250,000 $26,954,000
=========== ===========
</TABLE>
Maturities of debt are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999....................................................... $ 6,109,000
2000....................................................... 4,052,000
2001....................................................... 5,317,000
2002....................................................... 5,333,000
2003....................................................... 7,350,000
Thereafter................................................. 4,902,000
-----------
$33,063,000
===========
</TABLE>
The Senior and Subordinated Notes are secured by substantially all of the
assets of the Company, with the Senior Notes holding liquidation preferences,
and are held by the Company's Class B Members. The mortgages and promissory
notes are secured by the Company's various real estate holdings and are held
by various financial institutions.
The Company made interest payments in the amount of approximately $1,025,000,
$2,975,000 and $2,875,000 for the period from July 1, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998,
respectively.
During 1998, the Company entered into interest-rate swap agreements to
eliminate the impact of increases and decreases in interest rates on its
floating-rate mortgages. At December 31, 1998, the Company had two interest-
rate swap agreements outstanding. The agreements effectively entitle the
Company to receive from (pay to) the bank the amount, if any, by which the
Company's interest payments on its $3,780,000 and $1,035,000 floating-rate
mortgages due in June 2008 and November 2008 exceed (fall below) 7.12 and 6.80
percent, respectively. The Company has not incurred a premium or other fee for
these interest-rate swap agreements. Payments received (made) as a result of
the agreements are accrued as a reduction of (increase to) interest expense on
the floating-rate mortgage debt. The notional amounts of these agreements
correspond to the outstanding balances of the mortgage debt.
The Company is exposed to credit loss in the event of nonperformance by the
counter-party on interest-rate swap agreements but the Company does not
anticipate nonperformance by the counter-party. The amount of such exposure is
generally the unrealized gains in such agreements.
F-14
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
7. MEMBERS' EQUITY
Trex was initially capitalized by the sale of 3,000 Class A units for
$2,000,000 and 1,000 Class B units for $350,000. The Class A and Class B units
are collectively known as junior units. In conjunction with the acquisition of
substantially all of the assets and assumption of certain liabilities of CPD,
the Company issued Mobil Oil Corporation 1,000 preferred units in exchange for
$3,000,000.
Class A members have the right to elect the members of the Company's Board of
Managers, which carries on the day-to-day business of the Company. Major
decisions of the Company, such as those outside the ordinary course of
business, require the approval of both Class A and Class B members. Class B
units are convertible pro-rata into Class A units.
The preferred units are non-transferable and have limited voting rights as
defined in the Limited Liability Company Agreement. Preferred units are
entitled to a preferred annual return, which is cumulative and payable under
the terms of the Limited Liability Company Agreement. The Company has the
right to redeem the preferred units upon 30 days prior notice at the original
issuance costs plus any accumulated preferred returns at the time of
redemption.
Cash distributions to members shall be distributed upon approval of the Board
of Managers and are limited under the terms of the Limited Liability Company
Agreement. Members' liabilities are limited to their respective capital
contributions.
The Company is party to a unitholders agreement that provides for certain
additional rights such as registration, approval of certain transactions and
other rights as defined in the agreement.
The following table sets forth the computation of basic earnings per junior
unit:
<TABLE>
<CAPTION>
Period from
July 1, 1996
(Inception) to Year Ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net (loss) income.................... $(1,265,000) $ 5,594,000 $ 8,458,000
Preferred dividends.................. (135,000) (405,000) (405,000)
----------- ----------- -----------
Net (loss) income available to junior
unitholders......................... $(1,400,000) $ 5,189,000 $ 8,053,000
=========== =========== ===========
Denominator:
Denominator for basic earnings per
junior unit-weighted average units
outstanding......................... 4,000 4,000 4,000
=========== =========== ===========
Basic earnings per junior unit ....... $ (350.00) $ 1,297.25 $ 2,013.25
=========== =========== ===========
</TABLE>
The basic earnings per junior unit amounts shown above have not been adjusted
to reflect (i) the reorganization (see Notes 1 and 12), (ii) the issuance of
10,250,000 shares of Trex Company, Inc. common stock in exchange for the
junior units in the Company or (iii) the effect of federal and state income
taxes, since the Company was not subject to income taxes for the periods
presented. Fully diluted earnings per junior unit is the same as basic
earnings per junior unit, and, therefore, is not separately presented.
F-15
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
8. LEASES
The Company leases office space, storage warehouses and certain office and
plant equipment under various operating leases. Minimum annual payments under
these non-cancelable leases as of December 31, 1998 were as follows :
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999........................................................... $378,000
2000........................................................... 221,000
2001........................................................... 119,000
2002........................................................... 65,000
2003........................................................... 47,000
--------
Thereafter..................................................... $830,000
========
</TABLE>
For the period from July 1, 1996 (Inception) to December 31, 1996 and for the
years ended December 31, 1997 and 1998, the Company had rental expenses of
approximately $257,000, $1,020,000 and $1,024,000, respectively, including the
rental of the Company's plant which was purchased during 1998.
9. FRINGE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan and a Money Purchase Pension Plan
for the benefit of all employees who meet certain eligibility requirements.
The plan documents provide for the Company to make defined contributions as
well as matching and other discretionary contributions, as determined by the
Board of Managers. The Company contributed $15,000, $85,000 and $120,000 to
the 401(k) Profit Sharing Plan and $0, $50,000 and $192,000 to the Money
Purchase Pension Plan during the period from July 1, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998,
respectively.
10. OTHER INFORMATION
The Company is from time to time party to litigation arising in the ordinary
course of its business. The Company believes that such litigation will not
have a material impact on the Company's financial position or results from
operations.
During 1998, the Company entered into a take-or-pay contract to secure an
ongoing source of raw materials at competitive, market prices. The contract
requires the Company to take or pay for raw materials in the amount of
$3,300,000 annually for a period of nine years, commencing upon the counter-
party's completion of its production facility. No raw materials have been
supplied under this agreement.
Approximately 66%, 68% and 74% of the Company's sales for the period from July
1, 1996 (Inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998, respectively, were from its five largest customers.
Approximately 25%, 24% and 22% of the Company's raw materials for the period
from July 1, 1996 (Inception) to December 31, 1996 and for the years ended
December 31, 1997 and 1998, respectively, were purchased from four suppliers.
F-16
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
11. PRO FORMA DATA (Unaudited)
The unaudited pro forma balance sheet gives effect to the reorganization (see
Notes 1 and 12) as if the reorganization had occurred on December 31, 1998 and
reflects (i) the repayment of a $3.1 million note issued by Trex Company, Inc.
in exchange for the preferred units in the Company, (ii) the distribution of
previously taxed earnings of the Company of approximately $3,294,000 and a
return of capital totaling $2,350,000 and (iii) the issuance of 10,250,000
shares of Trex Company, Inc. common stock in exchange for the junior units in
the Company. The unaudited pro forma balance sheet excludes the effects of (i)
the recognition of a net deferred tax liability totaling approximately
$2,400,000 that would have been recognized if the conversion from a limited
liability company to a corporation taxed in accordance with Subchapter C of
the Internal Revenue Code (a "C corporation") had occurred on December 31,
1998, and (ii) certain transactions which will occur upon consummation of the
IPO (see Note 12).
The pro forma statement of operations data give effect to the reorganization
as if the reorganization had occurred on January 1, 1998. The pro forma net
income taxes and pro forma net income reflect federal and state income taxes
(assuming a 40% combined effective tax rate) as if the Company had been taxed
as a C corporation for the year ended December 31, 1998. Pro forma weighted
average shares outstanding reflect 10,250,000 shares outstanding, which
assumes that the shares resulting from the reorganization were outstanding for
the year ended December 31, 1998 (See Note 12). Fully diluted income per share
is the same as basic income per share, and, therefore, is not separately
presented.
The following table sets forth the computation of basic earnings per common
share on a supplemental pro forma basis:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Numerator:
Net income...................................................... $8,458,000
Reduction in interest expense, net ............................. 2,351,000
Pro forma income tax provision.................................. (4,324,000)
==========
Supplemental pro forma net income available to common
shareholders................................................... $6,485,000
==========
Denominator:
Denominator for pro forma basic earnings per common share-
weighted average shares outstanding............................ 13,500,000
==========
Supplemental pro forma basic earnings per common share ......... $ 0.48
==========
</TABLE>
The above supplemental pro forma basic earnings per common share amounts have
been adjusted to reflect the reorganization (see Notes 1 and 12) as if the
reorganization had occurred on January 1, 1998. The supplemental pro forma
reduction in interest expense gives effect to the repayment of the Senior and
Subordinated Notes, and related debt issuance and discount amortization, from
the net proceeds of the IPO (see Note 12) as if such repayment had been made
as of January 1, 1998. The supplemental pro forma income tax provision
reflects federal and state income taxes (assuming a 40% combined effective tax
rate) as if the Company had been taxed as a C corporation as of January 1,
1998. Supplemental pro forma net income available to common shareholders
assumes the preferred units were exchanged as of January 1, 1998. Supplemental
pro forma weighted average shares outstanding assumes that the shares
resulting from the reorganization and the consummation of the IPO were
outstanding for the entire period. Supplemental pro forma fully diluted
earnings per share is the same as supplemental pro forma basic earnings per
share, and therefore, is not separately presented.
F-17
<PAGE>
TREX COMPANY, LLC
Notes to Financial Statements--(continued)
12. SUBSEQUENT EVENTS
The Company will complete certain transactions prior to the consummation of
the IPO by its wholly owned subsidiary at December 31, 1998, Trex Company,
Inc. Prior to the IPO, the junior unitholders of the Company will contribute
their membership interests in the Company to Trex Company, Inc. in exchange
for common stock of Trex Company, Inc. (the "Exchange Transaction").
Concurrently with such exchange, the preferred unitholder will exchange its
preferred interest in the Company for a $3.1 million note of Trex Company,
Inc. payable upon the consummation of the Offering. As a result of such
exchanges, the Company will become a wholly owned subsidiary of Trex Company,
Inc. The Company will account for the reorganization as an exchange of shares
between entities under common control at historical cost in a manner similar
to a pooling of interests. After the reorganization, the ownership percentage
of each Trex Company, Inc. common stockholder will be the same as its
ownership percentage in the junior units of the Company.
In connection with the Exchange Transaction, the Company will make a special
cash distribution to its junior unitholders. If it had been made as of
December 31, 1998, the distribution would have totaled approximately
$5,644,000 and consisted of approximately $3,294,000 attributable to
previously recognized and undistributed income of the Company and
approximately $2,350,000 attributable to a return of capital at December 31,
1998. The actual distribution is subject to change based on the actual taxable
income of the Company during 1999 through the date of the Exchange
Transaction. In addition, a deferred income tax liability, estimated to be
approximately $2,357,000 at December 31, 1998, will be recognized as a result
of the conversion from a limited liability company to a C corporation.
Immediately prior to the Exchange Transaction, the Company will exercise an
option to repurchase approximately 667 junior units from certain unitholders
at a price of $.01 per unit. The terms of this option are set forth in an
agreement which the Company and the junior unitholders entered into in
connection with the CPD acquisition. The Company's equity has not been
retroactively restated for the proposed reorganization.
The net proceeds from the proposed IPO are planned to be used primarily to
reduce outstanding indebtedness, fund a portion of the LLC distributions and
provide funds for expansion of operations, working capital needs, and other
general corporate purposes.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers
TREX Company, LLC
We have audited the related statements of divisional operations and divisional
operating equity deficit and cash flows of Mobil Composite Products Division
of Mobil Oil Corporation for the year ended December 31, 1995 and the period
from January 1, 1996 to August 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our 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 results of operations and cash flows of Mobil
Composite Products Division for the year ended December 31, 1995 and the
period from January 1, 1996 to August 28, 1996 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
June 24, 1998
F-19
<PAGE>
MOBIL COMPOSITE PRODUCTS DIVISION OF
MOBIL OIL CORPORATION (THE PREDECESSOR)
Statements of Divisional Operations and
Divisional Operating Equity Deficit
<TABLE>
<CAPTION>
Period from
Year ended January 1, 1996
December 31, to August 28,
1995 1996
------------ ---------------
<S> <C> <C>
Net sales........................................ $ 19,635,000 $ 18,071,000
Cost of sales.................................... 10,269,000 9,188,000
------------ ------------
Gross profit..................................... 9,366,000 8,883,000
Selling, general, and administrative expenses.... 6,943,000 5,508,000
------------ ------------
Net income....................................... $ 2,423,000 $ 3,375,000
Divisional operating equity deficit--beginning... $(29,121,000) $(26,698,000)
------------ ------------
Divisional operating equity deficit--ending...... $(26,698,000) $(23,323,000)
============ ============
Pro forma net income (Note 6):
Net income (historical)....................... $ 2,423,000 $ 3,375,000
Pro forma tax provision (unaudited)........... 969,000 1,350,000
------------ ------------
Pro forma net income (unaudited).............. $ 1,454,000 $ 2,025,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
MOBIL COMPOSITE PRODUCTS DIVISION OF
MOBIL OIL CORPORATION (THE PREDECESSOR)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1996 to
December 31, August 28,
1995 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $2,423,000 $3,375,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization....................... 1,328,000 1,117,000
Loss on disposal of property, plant and equipment... 209,000 --
Changes in operating assets and liabilities
Trade accounts receivable.......................... (101,000) (582,000)
Inventories........................................ 1,306,000 (170,000)
Prepaid expenses and other assets.................. -- (44,000)
Trade accounts payable............................. (225,000) 12,000
Accrued expenses................................... (17,000) (107,000)
Other liabilities.................................. (82,000) (753,000)
---------- ----------
Net cash provided by operating activities............ 4,841,000 2,848,000
---------- ----------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment....... (3,842,000) (3,708,000)
---------- ----------
Net cash used in investing activities................ (3,842,000) (3,708,000)
---------- ----------
FINANCING ACTIVITIES
Intercompany financing, net.......................... (1,009,000) 860,000
---------- ----------
Net cash provided by (used in) financing activities.. (1,009,000) 860,000
---------- ----------
Net decrease in cash and cash equivalents............ (10,000) --
Cash and cash equivalents at beginning of year....... 10,000 --
---------- ----------
Cash and cash equivalents at end of year............. $ -- $ --
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
MOBIL COMPOSITE PRODUCTS DIVISION OF
MOBIL OIL CORPORATION (THE PREDECESSOR)
Notes to Financial Statements
For the year ended December 31, 1995 and the period from
January 1, 1996 to August 28, 1996
1. BUSINESS AND ORGANIZATION
Mobil Composite Products Division, (the "Predecessor" or the "Division")
manufactures and distributes wood polymer (thermo-plastic) composite products
primarily for consumer and commercial decking applications. The Division is
operated by Mobil Chemical Company, a subsidiary of Mobil Oil Corporation (the
"Parent"). The Division markets its products throughout North America.
On August 29, 1996, TREX Company, LLC ("Trex") acquired substantially all of
the assets and assumed certain of the liabilities of the Division. Trex
acquired these net assets for cash of approximately $29 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (last-in, first-out) or market
value.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost. The costs of
additions and improvements are capitalized, while maintenance and repairs are
charged to expense as incurred.
Depreciation is provided using the straight line method over the following
estimated useful lives:
Machinery and equipment............................... 11 years
Furniture and equipment............................... 10 years
Forklifts and tractors................................. 5 years
Data processing equipment.............................. 5 years
Leasehold improvements are amortized over the shorter of the lease term or the
estimated life of the asset.
Depreciation expense for the year ended December 31, 1995 and the period from
January 1, 1996 to August 28, 1996 totaled $1,141,000 and $992,000,
respectively.
Intangible Asset
The intangible asset consists of a non-compete agreement which is amortized
using the straight line method over a period of 7 years.
F-22
<PAGE>
MOBIL COMPOSITE PRODUCTS DIVISION OF
MOBIL OIL CORPORATION (THE PREDECESSOR)
Notes to Financial Statements--(continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Division recognizes revenue at the point of sale, which is at time of
shipment to the customer from the warehouse.
Research and Development Costs
Research and development costs are expensed as incurred. For the year ended
December 31, 1995 and the period from January 1, 1996 to August 28, 1996,
research and development costs were approximately $830,000 and $710,000,
respectively. Approximately $204,000 of these costs were allocated from
another division of the Parent for the year ended December 31, 1995, while
substantially all research and development costs were incurred directly by the
Division for the period from January 1, 1996 to August 28, 1996.
Advertising Costs
Advertising costs are expensed as incurred. For the year ended December 31,
1995 and the period from January 1, 1996 to August 28, 1996, advertising costs
were approximately $1,240,000 and $1,542,000, respectively.
Income Taxes
Income taxes have been excluded from the accompanying financial statements as
the Division was included in the consolidated tax returns of it Parent. There
were no tax allocations to the division during the year ended December 31,
1995 and the period from January 1, 1996 to August 28, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
3. LEASES
For the year ended December 31, 1995 and the period from January 1, 1996 to
August 28, 1996, the Division had rental expense of approximately $684,000 and
$451,000, respectively.
4. ALLOCATION OF EXPENSES
The Parent and certain of its subsidiaries provide the Division with various
administrative and financial services. These services include treasury,
insurance and tax administration, legal, certain payroll and employee benefit
administration, health and safety and environmental compliance. Mobil's policy
is to allocate centrally incurred costs primarily on the basis of usage or on
estimated time spent. Management believes these allocations and charges have
been made on a reasonable basis; however, they are not necessarily indicative
of the level of expenses which might have been incurred had the division been
operated as a stand-alone entity.
F-23
<PAGE>
MOBIL COMPOSITE PRODUCTS DIVISION OF
MOBIL OIL CORPORATION (THE PREDECESSOR)
Notes to Financial Statements--(continued)
5. LITIGATION
During 1995 the Division incurred approximately $600,000 in legal expenses in
connection with a patent dispute. The dispute has been resolved in favor of
the Division. In addition, the Division is from time to time party to
litigation arising in the ordinary course of its business. The Division is not
subject to any material pending litigation.
6. PRO FORMA TAX PROVISION (UNAUDITED)
The pro forma unaudited condensed information is based upon the historical
financial information of the Division adjusted to reflect estimated income tax
provisions (assuming a 40% effective rate) on historical income before taxes
which would have occurred had the Division been taxed as a stand-alone entity.
F-24
<PAGE>
[The graphics on the inside back cover page are displayed on a three-page
color fold-out and consist of the following: (i) on the first page, eleven
color photographs of Company operations superimposed on a photograph of an
employee holding waste wood fiber and reclaimed polyethylene used in the
manufacture of the Company's product, accompanied by the registered product
logo; and (ii) on a gatefold consisting of the second and third pages, color
photographs showing television and print advertising, public relations in
print media, corporate recognition of the Company, the Company's official
spokesperson, product support materials and the Company's Web site,
superimposed on a photograph of a retail outlet advertising sale of the
Company's product]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company, the Selling Stockholders or the Underwriters. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any security other than the Common Stock, nor does it constitute an
offer or solicitation in any jurisdiction where, or to any person to whom, it
is unlawful to make such offer or solicitation, or an offer or solicitation by
anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Historical and Pro Forma Financial Data......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 32
Management............................................................... 45
Certain Transactions..................................................... 51
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,353,000 Shares
Trex Company, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Schroder & Co. Inc.
J.C. Bradford & Co.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses expected to be
incurred in connection with the sale and distribution of the securities being
registered hereby. All amounts except the SEC Registration Fee, the NASD
Filing Fee and the NYSE Listing Fee are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $16,959.06
NASD Filing Fee................................................. 6,284.00
NYSE Listing Fee................................................ *
Blue Sky Fees and Expenses...................................... *
Accounting Fees and Expenses.................................... *
Legal Fees and Expenses......................................... *
TriCapital Corporation Fee...................................... *
Printing and Engraving Expenses................................. *
Transfer Agent Fees and Expenses................................ *
Miscellaneous................................................... *
----------
Total......................................................... $ *
----------
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Delaware General Corporation Law. Section 145(a) of the Delaware General
Corporation Law provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law states that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by reason
of the fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person acted in
good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which the person
II-1
<PAGE>
shall have been adjudged to be liable to the corporation unless and only to
the extent that the Delaware Court of Chancery or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
Section 145(c) of the Delaware General Corporation Law provides that to the
extent that a present or former director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in
defense of any claim, issue or matter therein, the person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by the person in connection therewith.
Section 145(d) of the Delaware General Corporation Law states that any
indemnification under subsections (a) and (b) of Section 145 (unless ordered
by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145. Such determination shall be made with
respect to a person who is a director or officer at the time of such
determination (i) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, (ii) by a
committee of such directors designated by majority vote of such directors,
even though less than a quorum, or (iii) if there are no such directors, or if
such directors so direct, by independent legal counsel in a written opinion,
or (iv) by the stockholders.
Section 145(f) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, the other subsections of Section 145 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against such person and incurred by such person in any such capacity or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under the
provisions of Section 145.
Section 145(j) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Certificate of Incorporation. Article XI of the Certificate of Incorporation
provides that, to the fullest extent permitted by the Delaware General
Corporation Law, the Company's directors will not be personally liable to the
registrant or its stockholders for monetary damages resulting from a breach of
their fiduciary duties as directors. However, nothing contained in such
Article XII will eliminate or limit the liability of directors (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.
II-2
<PAGE>
Bylaws. The Bylaws provide for the indemnification of the officers and
directors of the Company to the fullest extent permitted by the Delaware
General Corporation Law. Article XII of the Bylaws provides that each person
who was or is made a party to (or is threatened to be made a party to) any
civil or criminal action, suit or proceeding by reason of the fact that such
person is or was a director or officer of the Company shall be indemnified and
held harmless by the Company to the fullest extent authorized by the Delaware
General Corporation Law against all expenses, liability and loss (including,
without limitation, attorneys' fees) incurred by such person in connection
therewith, if such person acted in good faith and in a manner such person
reasonably believed to be or not opposed to the best interests of the Company
and had no reason to believe that such person's conduct was illegal.
Insurance. The directors and officers of the Company are covered by
insurance policies indemnifying against certain liabilities, including certain
liabilities arising under the Securities Act, which might be incurred by them
in such capacities and against which they cannot be indemnified by the
Company.
Underwriting Agreement. The Underwriting Agreement will provide for the
indemnification against certain liabilities of the directors and officers of
the Company and certain controlling persons under certain circumstances,
including certain liabilities under the Securities Act.
Registration Rights Agreement. In the registration rights agreement with the
Company pursuant to which the shares offered by the Selling Stockholders are
being registered, the Selling Stockholders have agreed to indemnify the
Company, its directors, officers and agents and each person, if any, who
controls the Company against certain liabilities, including certain
liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
On September 10, 1998, in connection with the incorporation and organization
of Trex Company, Inc., Trex Company, Inc. issued 100 shares of Common Stock to
TREX Company, LLC for cash consideration of $1,000. Such issuance was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
**1.1 Form of Underwriting Agreement.
* 3.1 Form of Restated Certificate of Incorporation of the Company to be
effective upon consummation of the Offering.
* 3.2 Form of Amended and Restated Bylaws of the Company to be effective
upon consummation of the Offering.
* 4.1 Form of Stock Certificate for the Common Stock.
**5.1 Opinion by Hogan & Hartson L.L.P. regarding the validity of the
Common Stock.
*10.1 Credit Agreement, dated as of December 10, 1996, between the Company
and First Union National Bank of Virginia, as amended.
*10.2 Form of 1999 Stock Option and Incentive Plan.
*10.3 Form of 1999 Incentive Plan for Outside Directors.
*10.4 Members' Agreement, dated as of August 29, 1996, among TREX Company,
LLC and each of the persons named on the schedules thereto, as
amended.
**10.5 Contribution and Exchange Agreement, dated as of ,
1999, among Trex Company, Inc., TREX Company, LLC and certain members
of TREX Company, LLC.
*10.6 Form of Distributor Agreement of the Company.
*10.7 $3,780,000 Promissory Note, dated June 15, 1998, made by TREX
Company, LLC payable to First Union National Bank of Virginia.
II-3
<PAGE>
*10.8 $1,035,000 Promissory Note, dated November 20, 1998, made by TREX
Company, LLC payable to First Union National Bank of Virginia.
*10.9 Business Loan Agreement, dated December 2, 1998, between TREX
Company, LLC and Pioneer Citizens Bank of Nevada.
*10.10 Construction Loan Agreement, dated February 5, 1999, between TREX
Company, LLC and Pioneer Citizens Bank of Nevada.
**10.11 Preferred Units Exchange Agreement, dated as of , 1999, among
Trex Company, Inc., TREX Company, LLC and Mobil Oil Corporation.
**10.12 Form of Registration Rights Agreement among Trex Company, Inc. and
each of the persons named on the schedules thereto, to be effective
upon consummation of the Offering.
**21 Subsidiary of the Company.
***23.1 Consent of Ernst & Young LLP, independent accountants.
**23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
***23.3 Consent of William H. Martin, III.
***23.4 Consent of William F. Andrews.
*24.1 Power of Attorney (included in signature page).
*27.1 Financial Data Schedule.
- --------
*Previously filed.
**To be filed by amendment.
***Filed herewith.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Winchester, Commonwealth of Virginia, on this 9th day of March 1999.
Trex Company, Inc.
/s/ Robert G. Matheny
By: _________________________
Robert G. Matheny
President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Robert G. Matheny President and Director March 9, 1999
______________________________________ (Principal Executive
Robert G. Matheny Officer)
/s/ Anthony J. Cavanna Executive Vice President and March 9, 1999
______________________________________ Chief Financial Officer and
Anthony J. Cavanna Director (Principal
Financial and Accounting
Officer)
/s/ Andrew U. Ferrari Director March 9, 1999
______________________________________
Andrew U. Ferrari
/s/ Roger A. Wittenberg Director March 9, 1999
______________________________________
Roger A. Wittenberg
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
** 1.1 Form of Underwriting Agreement.
* 3.1 Form of Restated Certificate of Incorporation of the Company to be
effective upon consummation of the Offering.
* 3.2 Form of Amended and Restated Bylaws of the Company to be effective
upon consummation of the Offering.
* 4.1 Form of Stock Certificate for the Common Stock.
** 5.1 Opinion by Hogan & Hartson L.L.P. regarding the validity of the
Common Stock.
*10.1 Credit Agreement, dated as of December 10, 1996, between the Company
and First Union National Bank of Virginia, as amended.
*10.2 Form of 1999 Stock Option and Incentive Plan.
*10.3 Form of 1999 Incentive Plan for Outside Directors.
*10.4 Members' Agreement, dated as of August 29, 1996, among TREX Company,
LLC and each of the persons named on the schedules thereto, as
amended.
**10.5 Contribution and Exchange Agreement, dated as of ,
1999, among Trex Company, Inc., TREX Company, LLC and certain members
of TREX Company, LLC.
*10.6 Form of Distributor Agreement of the Company.
*10.7 $3,780,000 Promissory Note, dated June 15, 1998, made by TREX
Company, LLC payable to First Union National Bank of Virginia.
*10.8 $1,035,000 Promissory Note, dated November 20, 1998, made by TREX
Company, LLC payable to First Union National Bank of Virginia.
*10.9 Business Loan Agreement, dated December 2, 1998, between TREX
Company, LLC and Pioneer Citizens Bank of Nevada.
*10.10 Construction Loan Agreement, dated February 5, 1999, between TREX
Company, LLC and Pioneer Citizens Bank of Nevada.
**10.11 Preferred Units Exchange Agreement, dated as of , 1999, among
Trex Company, Inc., TREX Company, LLC and Mobil Oil Corporation.
**10.12 Form of Registration Rights Agreement among Trex Company, Inc. and
each of the persons named on the schedules thereto, to be effective
upon consummation of the Offering.
**21 Subsidiary of the Company.
***23.1 Consent of Ernst & Young LLP, independent accountants.
**23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
***23.3 Consent of William H. Martin, III.
***23.4 Consent of William F. Andrews.
*24.1 Power of Attorney (included in signature page).
*27.1 Financial Data Schedule.
- --------
*Previously filed.
**To be filed by amendment.
***Filed herewith.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports with respect to the financial statements of: Trex Company,
Inc. dated January 27, 1999; TREX Company, LLC dated January 21, 1999 (except
Notes 11 and 12, as to which the date is February 8, 1999); and the Mobil
Composite Products Division of Mobil Oil Corporation dated June 24, 1998, in
Amendment No. 3 to the Registration Statement (Form S-1 No. 333-63287) and
related Prospectus of Trex Company, Inc. for the registration of 3,855,950
shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
March 8, 1999
<PAGE>
Exhibit 23.3
CONSENT OF WILLIAM H. MARTIN, III
The undersigned, William H. Martin, III, hereby consents to being named
as having been nominated and agreed to serve as a director of Trex Company, Inc.
in the Registration Statement on Form S-1 (Registration Statement No. 333-63287)
of Trex Company, Inc. The undersigned also consents to the references to the
undersigned under the caption "Management" in the Prospectus included in such
Registration Statement.
Dated: February 24, 1999 /s/ William H. Martin, III
--------------------------
(signature)
<PAGE>
Exhibit 23.4
CONSENT OF WILLIAM F. ANDREWS
The undersigned, William F. Andrews, hereby consents to being named
as having been nominated and agreed to serve as a director of Trex Company, Inc.
in the Registration Statement on Form S-1 (Registration Statement No. 333-63287)
of Trex Company, Inc. The undersigned also consents to the references to the
undersigned under the caption "Management" in the Prospectus included in such
Registration Statement.
Dated: February 23, 1999 /s/ William F. Andrews
--------------------------
(signature)
