SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1998
Commission File Number 0-14798
AMERICAN WOODMARK CORPORATION
(Exact name of the registrant as specified in its charter)
VIRGINIA 54-1138147
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
3102 Shawnee Drive, Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 6659100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock (no par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, no par value,
held by non-affiliates of the registrant at June 23, 1998 was $125,909,639 based
on the closing price on that date on the NASDAQ Exchange.
As of June 23, 1998, 7,811,080 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
April 30, 1998 (1998 Annual Report) are incorporated by reference into Parts I
and II of this Form 10-K.
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on August 21, 1998 (Proxy Statement) are incorporated by
reference into Part III of this Form 10-K.
<PAGE>
PART I
Item 1. BUSINESS
American Woodmark Corporation manufactures and
distributes kitchen cabinets and vanities for the
remodeling and new home construction markets. The
Company was formed in 1980 by the four principal managers
of the Boise Cascade Cabinet Division through a leveraged
buyout of that division. The Company was operated
privately until 1986 when it became a public company
through a Common Stock offering.
The Company currently offers framed stock cabinets in
approximately 120 different cabinet lines, ranging in
price from relatively inexpensive to medium priced
styles. Styles vary by design and color from natural wood
finishes to low-pressure laminate surfaces. The entire
product offering includes forty door designs and seven
colors. Stock cabinets consist of a common box with
standard interior components and an oak, cherry, maple or
hickory front frame.
The Company's products are sold under the brand names of
American Woodmark(R), Crestwood(R), Timberlake(R), Scots
Pride(R), and Coventry and Case(R) cabinets.
American Woodmark's products are sold on a national basis
via three market channels: independent dealer/distributors,
home centers, and major builders. It is estimated that 70%
of sales during the fiscal year ended April 30, 1998 were
to the remodeling market and 30% to the new home market.
Products are distributed to each market channel directly
from the Company's three assembly plants and through a
logistics network consisting of four service centers located
in key areas throughout the United States.
The primary raw materials used by the Company include the
lumber species oak, maple, cherry and hickory. Additional
raw materials include paint, particleboard, manufactured
components, and hardware. The Company currently purchases
paint from one supplier; however, other sources are
available. Oak, maple, cherry and hickory lumber,
particleboard, manufactured components, and hardware are
purchased from more than one source and are readily
available.
The Company operates in a highly fragmented industry which is
composed of several thousand local, regional and national
manufacturers. The Company believes that no other company in
the industry has more than a 15% share of the market.
The Company also believes that American Woodmark is one of
the five largest manufacturers of kitchen cabinets in the
United States.
2
<PAGE>
The Company's business has historically been subjected to
seasonal influences, with higher sales typically realized
in the second and fourth fiscal quarters. General
economic forces and changes in the Company's customer mix
have reduced seasonal fluctuations in the Company's
revenue over the past few years.
In the fiscal year ended April 30, 1998, the Company had
two customers, The Home Depot and Lowe's Companies, Inc.,
who each accounted for in excess of 10% of the Company's sales.
At April 30, 1998, the Company had 2,245 employees. Approximately
31% of its employees are represented by labor unions. Management
believes its employee relations are excellent.
Item 2. PROPERTIES
The Company leases its Corporate Office which is located
in Winchester, Virginia. In addition, the Company leases
one and owns six manufacturing facilities located
primarily in the eastern United States. The Company
also leases six office centers located throughout the United
States which support the distribution of products to each market
channel.
Item 3. LEGAL PROCEEDINGS
"Legal Matters" under Note I to the Financial Statements
in the 1998 Annual Report is incorporated herein by
reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
"Market Information" in the 1998 Annual Report is incorporated
herein by reference.
3
<PAGE>
Item 6. SELECTED FINANCIAL DATA
"Five Year Selected Financial Information" in the 1998Annual
Report is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" in the 1998 Annual
Report is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements, Notes to Financial Statements,
"Quarterly Results of Operations," and the Report of
Ernst & Young LLP, Independent Auditors, in the 1998
Annual Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors and nominees for
directorships, see the information under the caption
"Election of Directors" in the Proxy Statement, which
information is incorporated herein by reference.
The executive officers of the Registrant as of April 30, 1998 are
as follows:
Name Age Position Held During Past Five Years
---- --- ------------------------------------
William F. Brandt, Jr. 52 Chairman of the Board from August
1996 to present Chairman and
Chief Executive Officer from
1995 to 1996
Chairman and President
from 1980 to 1995
4
<PAGE>
James J. Gosa 50 President and Chief Executive
Officer from August, 1996 to
present President
and Chief Operating Officer
from 1995 to 1996 Executive
Vice President from 1993 to
1995
David L. Blount 50 Vice President, Manufacturing from
May, 1995 to present Vice
President, Component
Manufacturing from 1994 to
1995 Vice President,
Manufacturing from 1983 to 1994
Kent B. Guichard 42 Vice President,Finance and Chief
Financial Officer from
November 1995 to present Vice
President, Finance from 1993
to 1995
Philip S. Walter 47 Vice President and General Manager,
New Business Development from
August, 1997 to present
President, Professional Turf
Products, Inc.; Managing
Director, National Support
Network, Inc. (Subsidiaries
of The Toro Company) from
January 1996 to December 1996
Director, Marketing and
Sales, The Toro Company,
Irrigation Division, from
1990 to 1996
Ian J. Sole 42 Vice President, Sales and Marketing
from October, 1997 to present
Vice President,
International, Hamilton Beach
Proctor-Silex from 1996 to 1997
Vice President, Marketing,
Hamilton Beach ProctorSilex
from 1991 to 1995
For information concerning Item 405, disclosure of delinquent
filers, see the information under the caption, Section 16(a)
"Beneficial Ownership Reporting Compliance" in the Proxy Statement,
which information is incorporated herein by reference.
5
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The "Compensation of Executive Officers" segment in
the Proxy Statement is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Principal Shareholders of the Company" segment in
the Proxy Statement is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain
Transactions" in the Proxy Statement is incorporated
herein by reference.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements of American
Woodmark Corporation are incorporated by reference
in Item 8:
Balance Sheet - April 30, 1998 and 1997
Statement of Income and Retained Earnings -
for each year of the threeyear period ended
April 30, 1998
Statement of Cash Flows - for each year of the
three-year period ended April 30, 1998
(a) 2. Financial Statement Schedules
Reference is made to Financial Statement schedules
and supplementary data under Item 8 in Part II hereof,
where these documents are listed.
The following Financial Statement schedule is
included in a separate section of this report:
Schedule Page
-------- ----
II. Valuation and qualifying accounts 11
All other schedules for which provisions are made
in the applicable accounting regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable, and therefore have been omitted.
6
<PAGE>
(a) 3. Exhibits
Exhibit No. Description
- ----------- -----------
3.1 - Articles of Incorporation as amended effective August
12, 1987 (3)
3.2 (a) - Bylaws (1)
3.2 (b) - Amendment to Bylaws on June 22, 1994 (7)
4 - Amended and Restated Stockholders'Agreement (1)
10.1 (a) - Amended and Restated Loan Agreement between the Company and
NationsBank of North Carolina as of March 23, 1992 (5)
10.1 (b) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of September 8, 1992 (6)
10.1 (c) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of June 25, 1993 (6)
10.1 (d) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of March 15, 1993 (6)
10.1 (e) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of August 31, 1993 (7)
10.1 (f) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of March 15, 1994 (7)
10.1 (g) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of July 27, 1994 (8)
10.1 (h) - Amendment to Amended and Restated Loan Agreement and to
Reimbursement Agreements as of July 8, 1996
10.1 (i) - Amendment to Amended and Restated Loan Agreement as of
August 31, 1996
10.2 (a) - Security Agreement between the Company and NationsBank of
North Carolina as of March 23, 1992 (5)
10.2 (b) - Amendment to Security Agreement as of August 31, 1993 (7)
10.2 (c) - Second Amendment to Security Agreement as of August 31, 1996
7
<PAGE>
10.3 (a) - Bond Purchase Agreement Sale - Orange, Virginia (1)
10.3 (b) - Bond Purchase Agreement and Agreement of Sale - Orange,
Virginia (1)
10.3 (c) - Bond Purchase Agreement and Agreement of Sale - The
Industrial Development Authority of the County of Mohave,
Arizona (2)
10.3 (d) - Bond Purchase Agreement and Agreement of Sales - Stephens
County Development Authority (3)
10.3 (e) - Amendment of Bond Purchase Agreement and Agreement of Sale -
Orange, Virginia (4)
10.3 (f) - Loan Agreement between the Company and the County Commission
of Hardy County, West Virginia as of December 1, 1991,
relating to bond financing (5)
10.3 (g) - Promissory Note between the Company and County Commission of
Hardy County, West Virginia as of December 18, 1991 (5)
10.3 (h) - Reimbursement Agreement between the Company and NationsBank
as of December 1, 1991 (5)
10.3 (i) - Amendment to Reimbursement Agreements as of June 15, 1992 (5)
10.4 (a) - Credit Line Deed of Trust and Security Agreement Orange -
and Clarke Counties, Virginia, as amended (1)
10.4 (b) - Deed of Trust and Security Agreement - Hardy County,
West Virginia, as amended (1)
10.5 (a) - Loan Agreement between the Company and the West Virginia
Economic Development Authority and the Hardy County
Rural Development Authority (1)
10.5 (b) - Security Agreement between the Company and the West Virginia
Economic Development Authority (1)
10.5 (c) - Deed of Trust - Hardy County, West Virginia (1)
10.6 (a) - Lease between the Company and Amwood Associates (1)
10.6 (b) - Lease between the Company and the West Virginia Industrial
and Trade Jobs Development Corporation (3)
8
<PAGE>
10.6 (c) - Lease between the Company and the West Virginia Industrial
and Trade Jobs Development Corporation (3)
10.6 (d) - Amendment to Deed of Lease between the Company and West
Virginia Economic Development Authority as of March
30, 1992 (5)
10.7 (a) - 1986 Employee Stock Option Plan (1)
10.7 (b) - Form of Option Agreement and Stock Purchase Agreement (1)
10.7 (c) - 1990 Non-Employee Directors Stock Option Plan (7)
10.7 (d) - 1995 Non-Employee Directors Stock Option Plan (9)
10.7 (e) - 1996 Stock Option Plan (10)
10.8 (a) - 1998 Annual Incentive Plan for Chairman and President/CEO
10.8 (b) - 1998 Annual Incentive Plan for Vice Presidents
10.9 - ISDA Master Agreement between NationsBank, N.A. and American
Woodmark Corporation as of May 29, 1998
11 - Computation of Earnings Per Share
13 - 1998 Annual Report to Shareholders
23 - Consent of Ernst & Young LLP, Independent Auditors
27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
- ----------------------------------------------------------------------------
(1) - Incorporated by reference to exhibits filed with Form S-1,
No. 33-6245.
(2) - Incorporated by reference to exhibits filed with the 1987
Form 10-K.
(3) - Incorporated by reference to exhibits filed with the 1988
Form 10-K.
(4) - Incorporated by reference to exhibits filed with the 1989
Form 10-K.
9
<PAGE>
(5) - Incorporated by reference to exhibits filed with the 1992
Form 10-K.
(6) - Incorporated by reference to exhibits filed with the 1993
Form 10-K.
(7) - Incorporated by reference to exhibits filed with the 1994
Form 10-K.
(8) - Incorporated by reference to exhibits filed with the 1995
Form 10-K.
(9) - Incorporated by reference to exhibits filed with Form S-8,
No. 333-12631.
(10) - Incorporated by reference to exhibits filed with Form S-8,
No. 333-12623.
10
<PAGE>
Schedule II - Valuation and Qualifying Accounts
AMERICAN WOODMARK CORPORATION
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Cost and Deduc- at End
Description(a) of Period Expenses tions of Period
-------------- --------- -------- ----- ---------
Year ended April 30, 1998:
Allowance for doubtful
accounts $ 210 $ -- $(87)(b) $ 123
------- ------ -------- ------
Reserve for cash discounts $ 303 $3,883(c) $(3,821)(d) $ 365
------- ------ -------- ------
Reserve for sales returns
and allowances $ 868 $5,051(c) $(4,650) $1,269
------- ------ -------- ------
Year ended April 30, 1997:
Allowance for doubtful
accounts $ 629 $ 830 $(1,249)(b) $ 210
------- ------ -------- ------
Reserve for cash discounts $ 250 $3,236(c) $(3,183)(d) $ 303
------- ------ -------- ------
Reserve for sales returns
and allowances $ 627 $4,492(c) $(4,251) $ 868
------- ------ ------- ------
Year ended April 30, 1996:
Allowance for doubtful
accounts $ 243 $ 620 $ (234)(b) $ 629
------- ------ -------- ------
Reserve for cash discounts $ 240 $2,977(c) $(2,967)(d) $ 250
------- ------ -------- ------
Reserve for sales returns
and allowances $ 698 $3,489(c) $(3,560) $ 627
------- ------ -------- ------
(a) All reserves relate to accounts receivable.
(b) Principally write-offs, net of collections.
(c) Reduction of gross sales.
(d) Cash discounts granted.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
American Woodmark Corporation
-----------------------------
(Registrant)
/s/ JAMES J. GOSA
-----------------------------
James J. Gosa
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ KENT B. GUICHARD /s/MARTHA M. DALLY
- ------------------------------ -------------------------
Kent B. Guichard Martha M. Dally
Vice President, Finance and Director
Chief Financial Officer
/s/ WILLIAM A. ARMSTRONG /s/FRED S. GRUNEWALD
- ------------------------------ --------------------------
William A. Armstrong Fred S. Grunewald
Corporate Controller Director
/s/ WILLIAM F. BRANDT, JR. /s/C. ANTHONY WAINWRIGHT
- ------------------------------ --------------------------
William F. Brandt, Jr. C. Anthony Wainwright
Chairman of the Board Director
/s/ DANIEL T. CARROLL
- ------------------------------
Daniel T. Carroll
Director
12
<PAGE>
In accordance with Securities and Exchange Commission requirements,
the Company will furnish copies of all exhibits to its Form 10-K not
contained herein upon receipt of a written request and payment of $.10
(10 cents) per page to:
Mr. Kent Guichard
Vice President, Finance and
Chief Financial Officer
American Woodmark Corporation
P.O. Box 1980
Winchester, Virginia 22604-8090
13
<PAGE>
Exhibit 10.8 (a)
Fiscal Year 1998
Annual Incentive Plan for the Chairman of the Board
and the President/CEO
I. The objectives of the Annual Incentive Plan are threefold:
A. Provide an incentive which will encourage and reward
outstanding individual performance;
B. Help align the personal goals of the individual with
the overall goals of and objectives of American Woodmark
and the stockholders of American Woodmark; and
C. Together with base pay and long term incentive
programs, provide a compensation package, in both form
and total value, which is equal to or better than
opportunities offered in the competitive marketplace for
similar performance in similar positions.
II. Eligibility for Participation in the Annual Incentive Program
A. The Chairman and President/CEO of the Company. Eligible
participants must be employed by the Company on
April 30, 1998. All calculations will be reduced on a
prorated basis for eligible participants not employed as
of May 1, 1997.
III. Determination of Annual Incentive Payout
A. Determination of the payout will be based on one
component:
1. Zero to 110% of base salary on April 30, 1998 as
determined by the attached schedule for net income.
No payment will be made on net income below $5.0 million.
Net income will be the audited amount as listed in the
Company's annual report for Fiscal 1998.
<PAGE>
Exhibit 10.8 (b)
American Woodmark Corporation
Fiscal Year 1998
Annual Incentive Plan for Vice Presidents
I. The objectives of the Annual Incentive Plan are threefold:
A. Provide an incentive which will encourage and reward outstanding
individual performance;
B. Help align the personal goals of the individual with the
overall goals of and objectives of American Woodmark and
the stockholders of American Woodmark; and
C. Together with base pay and long term incentive programs,
provide a compensation package, in both form and total
value, which is equal to or better than opportunities
offered in the competitive marketplace for similar performance
in similar positions.
II. Eligibility for Participation in the Annual Incentive Program
A. All Vice Presidents of the Company. Eligible participants
must be employed by the Company on April 30, 1998. All
calculations will be reduced on a pro-rated basis for
eligible participants not employed as of May 1, 1997.
III. Determination of Annual Incentive Payout
A. Determination of the payout will be based two components:
1. Zero to 70% of base salary on April 30, 1998 as determined
by the attached schedule for net income. No payment
will be made on net income below $5.0 million. Net
income will be the audited amount as listed in the
Company's annual report for Fiscal 1998.
2. Zero to 30% of base salary on April 30, 1998 based on the
individual evaluation of the employee through the
Company's performance review process.
B. No payments will be made on the annual incentive plan unless
the Company reports a net profit for the fiscal year.
<PAGE>
Exhibit 10.9
(Multicurrency-Cross Border)
ISDA(R)
International Swap Dealers Association. Inc.
MASTER AGREEMENT
dated as of May 29, 1998
NationsBank, N.A. and American Wood mark Corporation
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master
Agreement, which includes the schedule (the "Schedule"), and the
documents and other confirming evidence (each a "Confirmation")
exchanged between the parties confirming those Transactions.
Accordingly, the parties agree as follows:--
1. Interpretation
(a) Definitions. The terms defined in Section 14 and in the
Schedule will have the meanings therein specified for the purpose
of this Master Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions
of the Schedule and the other provisions of this Master Agreement, the
Schedule will prevail. In the event of any inconsistency between the
provisions of any Confirmation and this Master Agreement (including the
Schedule), such Confirmation will prevail for the purpose of the relevant
Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the
fact that this Master Agreement and all Confirmations form a single agreement
between the parties (collectively referred to as this "Agreement"), and the
parties would not otherwise enter into any Transactions.
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified
in each Confirmation to be made by it, subject to the other provisions
of this Agreement.
(ii) Payments under this Agreement will be made on the due date for
value on that date in the place of the account specified in the
relevant Confirmation or otherwise pursuant to this Agreement, in
freely transferable funds and in the manner customary for payments
in the required currency. Where settlement is by delivery (that is,
other than by payment), such delivery will be made for receipt on the
due date in the manner customary for the relevant obligation unless
otherwise specified in the relevant Confirmation or elsewhere in this
Agreement.
<PAGE>
(iii) Each obligation of each party under Section 2(a)(i) is subject
to (1) the condition precedent that no Event of Default or Potential
Event of Default with respect to the other party has occurred and is
continuing, (2) the condition precedent that no Early Termination Date
in respect of the relevant Transaction has occurred or been effectively
designated and (3) each other applicable condition precedent specified
in this Agreement.
Copyright (C)1992 by International Swap Dealers Association, Inc.
(b) Change of Account. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to
which such change applies unless such other party gives timely notice of a
reasonable objection to such change.
(c) Netting. If on any date amounts would otherwise be payable:--
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to
make payment of any such amount will be automatically satisfied and
discharged and, if the aggregate amount that would otherwise have been
payable by one party exceeds the aggregate amount that would otherwise have
been payable by the other party, replaced by an obligation upon the party by
whom the larger aggregate amount would have been payable to pay to the other
party the excess of the larger aggregate amount over the smaller aggregate
amount.
The parties may elect in respect of two or more Transactions that a net
amount will be determined in respect of all amounts payable on the same date
in the same currency in respect of such Transactions, regardless of whether
such amounts are payable in respect of the same Transaction. The election
may be made in the Schedule or a Confirmation by specifying that subparagraph
(ii) above will not apply to the Transactions identified as being subject
to the election, together with the starting date (in which case subparagraph
(ii) above will not, or will cease to, apply to such Transactions from such
date). This election may be made separately for different groups of
Transactions and will apply separately to each pairing of Offices through
which the parties make and receive payments or deliveries.
(d) Deduction or Withholding for Tax.
(i) Gross-Up. All payments under this Agreement will be made without
any deduction or withholding for or on account of any Tax unless such
deduction or withholding is required by any applicable law, as modified
by the practice of any relevant governmental revenue authority, then in
effect. If a party is so required to deduct or withhold, then that party
("X") will:-
(1) promptly notify the other party ("Y") of such requirement;
(2) pay to the relevant authorities the full amount required to be
deducted or withheld (including the full amount required to be
deducted or withheld from any additional amount paid by X to Y
under this Section 2(d)) promptly upon the earlier of
<PAGE>
determining that such deduction or withholding is required or
receiving notice that such amount has been assessed against Y;
(3) promptly forward to Y an official receipt (or a certified copy),
or other documentation reasonably acceptable to Y, evidencing such
payment to such authorities; and
(4) if such Tax is to Indemnifiable Tax, pay to Y, in addition to
the payment to which Y is otherwise entitled under this Agreement,
such additional amount as is necessary to ensure that the net amount
actually received by Y (free and clear of Indemnifiable Taxes,
whether assessed against X or Y) will equal the full amount Y
would have received had no such deduction or withholding been
required. However, X will not be required to pay any additional
amount to Y to the extent that it would not be required to be paid
but for:
(A) the failure by Y to comply with or perform any agreement
contained in Section 4(a)(i), 4(a)(iii) or 4(d); or
(B) the failure of a representation made by Y pursuant to
Section 3(f) to be accurate and true unless such failure would
not have occurred but for (I) any action taken by a taxing
authority, or brought in a court of competent jurisdiction,
on or after the date on which a Transaction is entered into
(regardless of whether such action is taken or brought with
respect to a party to this Agreement) or (II) a Change in Tax
Law.
(ii) Liability. If:-
(1) X is required by any applicable law, as modified by the practice
of any relevant governmental revenue authority, to make any deduction
or withholding in respect of which X would not be required to pay an
additional amount to Y under Section 2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly against
X,
then, except to the extent Y has satisfied or then satisfies the
liability resulting from such Tax, Y will promptly pay to X the amount
of such liability (including any related liability for interest, but
including any related liability for penalties only if Y has failed to
comply with or perform any agreement contained in Section 4(a)(i),
4(a)(iii) or 4(d)).
(e) Default Interest; Other Amounts. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant
Transaction, a party that defaults in the performance of any payment
obligation will, to the extent permitted by law and subject to Section 6(c),
be required to pay interest (before as well as after judgment) on the overdue
amount to the other party on demand in the same currency as such overdue
amount, for the period from (and including) the original due date for
payment to (but excluding) the date of actual payment, at the Default Rate.
Such interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. If, prior to the occurrence or effective
designation of an Early TerminationDate in respect of the relevant.
<PAGE>
Transaction, a party defaults in the performance of any obligation required
to be settled by delivery, it will compensate the other party on demand if
and to the extent provided for in the relevant Confirmation or elsewhere in
this Agreement.
3. Representations
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is
entered into and, in the case of the representations in Section 3(f), at all
times until the termination of this Agreement) that:--
(a) Basic Representations.
(i) Status. It is duly organized and validly existing under the laws of
the jurisdiction of its organization or incorporation and, if relevant
under such laws, in good standing;
(ii) Powers. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to
deliver this Agreement and any other documentation relating to this
Agreement that it is required by this Agreement to deliver and to
perform its obligations under this Agreement and any obligations it has
under any Credit Support Document to which it is a party and has taken
all necessary action to authorize such execution, delivery and
performance;
(iii) No Violation or Conflict. Such execution, delivery and
performance do not violate or conflict with any law applicable
to it, any provision of its constitutional documents, any
order or judgment of any court or other agency of government
applicable to it or any of its assets or any contractual
restriction binding on or affecting it or
any of its assets;
(iv) Consents. All governmental and other consents that are
required to have been obtained by it with respect to this
Agreement or any Credit Support Document to which it is a
party have been obtained and are in full force and effect and
all conditions of any such consents have been complied with; and
(v) Obligations Binding. Its obligations under this Agreement
and any Credit Support Document to which it is a party
constitute its legal, valid and binding obligations,
enforceable in accordance with their respective terms (subject
to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable
principles of general application (regardless of whether
enforcement is sought in a proceeding in equity or at law)).
(b) Absence of Certain Events. No Event of Default or Potential Event of
Default or, to its knowledge, Termination Event with respect to it has
occurred and is continuing and no such event or circumstance would occur as
a result of its entering into or performing its obligations under this
Agreement or any Credit Support Document to which it is a party.
<PAGE>
(c) Absence of Litigation. There is not pending or, to its knowledge,
threatened against it or any of its Affiliates any action, suit or proceeding
at law or in equity or before any court, tribunal, governmental body, agency
or official or any arbitrator that is likely to affect the legality,
validity or enforceability against it of this Agreement or any Credit Support
Document to which it is a party or its ability to perform its obligations
under this Agreement or such Credit Support Document.
(d) Accuracy of Specified Information. All applicable information that is
furnished in writing by or on behalf of it to the other party and is
identified for the purpose of this Section 3(d) in the Schedule is, as of the
date of the information, true, accurate and complete in every material respect.
(e) Payer Tax Representation. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(e) is accurate and true.
(f) Payee Tax Representations. Each representation specified in the Schedule
as being made by it for the purpose of this Section 3(f) is accurate and true.
4. Agreements
Each party agrees with the other that, so long as either party has or may
have any obligation under this Agreement or under any Credit Support Document
to which it is a party:--
(a) Furnish Specified Information. It will deliver to the other party or,
in certain cases under subparagraph (iii) below, to such government or taxing
authority as the other party reasonably directs:--
(i) any forms, documents or certificates relating to taxation specified
in the Schedule or any Confirmation;
(ii) any other documents specified in the Schedule or any Confirmation;
and
(iii) upon reasonable demand by such other party, any form or document
that may be required or reasonably requested in writing in order to
allow such other party or its Credit Support Provider to make a payment
under this Agreement or any applicable Credit Support Document
without any deduction or withholding for or on account of any Tax or
with such deduction or withholding at a reduced rate (so long as the
completion, execution or submission of such form or document would not
materially prejudice the legal or commercial position of the party in
receipt of such demand), with any such form or document to be accurate
and completed in a manner reasonably satisfactory to such other party
and to be executed and to be delivered with any reasonably required
certification,
in each case by the date specified in the Schedule or such Confirmation or,
if none is specified, as soon as reasonably practicable.
<PAGE>
(b) Maintain Authorizations. It will use all reasonable efforts to maintain
in full force and effect all consents of any governmental or other authority
that are required to be obtained by it with respect to this Agreement or any
Credit Support Document to which it is a party and will use all reasonable
efforts to obtain any that may become necessary in the future.
(c) Comply with Laws. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to
comply would materially impair its ability to perform its obligations
under this Agreement or any Credit Support Document to which ii is a party.
(d) Tax Agreement. Ii will give notice of any failure of a representation
made by it under Section 3(0 to be accurate and true promptly upon learning
of such failure.
(e) Payment of Stamp Tax. Subject to Section II, it will pay any Stamp Tax
levied or imposed upon it or in respect of its execution or performance of
this Agreement by a jurisdiction in which it is incorporated, organized,
managed and controlled, or considered to have its seat, or in which a branch
or office through which it is acting for the purpose of this Agreement
is located ("Stamp Tax Jurisdiction") and will indemnify the other party
against any Stamp Tax levied or imposed upon the other party or in respect
of the other party's execution or performance of this Agreement by any such
Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with
respect to the other party.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any of the following events constitutes an event of
default (an "Event of Default") with respect to such party:-
(i) Failure to Pay or Deliver. Failure by the party to make, when
due, any payment under this Agreement or delivery under Section 2(a)(i)
or 2(e) required to be made by it if such failure is not remedied on or
before the third Local Business Day after notice of such failure is given
to the party;
(ii) Breach of Agreement. Failure by the party to comply with or perform
any agreement or obligation (other than an obligation to make any
payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or
to give notice of a Termination Event or any agreement or obligation under
Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by
the party in accordance with this Agreement if such failure is not
remedied on or before the thirtieth day after notice of such failure is
given to the party;
(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such party
to comply with or perform any agreement or obligation to be complied
with or performed by it in accordance with any Credit Support Document
if such failure is continuing after any applicable grace period has
elapsed;
<PAGE>
(2) the expiration or termination of such Credit Support Document
or the failing or ceasing of such Credit Support Document to be in
full force and effect for the purpose of this Agreement (in either
case other than in accordance with its terms) prior to the satisfaction
of all obligations of such party under each Transaction to which such
Credit Support Document relates without the written consent of the
other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims,
repudiates or rejects, in whole or in part or challenges the validity
of, sucb Credit Support Document;
(iv) Misrepresentation. A representation (other than a representation
under Section 3(e) or (f)) made or repeated or deemed to have been made or
repeated by the party or any Credit Support Provider of such party in this
Agreement or any Credit Support Document proves to have been incorrect
or misleading in any material respect when made or repeated or deemed
to have been made or repeated;
(v) Default under Specified Transaction. The party, any Credit Support
Provider of such party or any applicable Specified Entity of such party
(1) defaults under a Specified Transaction and, after giving effect to
any applicable notice requirement or grace period, there occurs a
liquidation of, an acceleration of obligations under, or an early
termination of, that Specified Transaction, (2) defaults, after giving
effect to any applicable notice requirement or grace period, in making
any payment or delivery due on the last payment, delivery or exchange
date of, or any payment on early termination of, a Specified Transaction
(or such default continues for at least three Local Business Days if
there is no applicable notice requirement or grace period) or (3)
disaffirms, disclaims, repudiates or rejects, in whole or in part, a
Specified Transaction(or such action is taken by any person or entity
appointed or empowered to operate it or act on its behalf);
(vi) Cross Default. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of (1) a default,
event of default or other similar condition or event (however described)
in respect of such party, any Credit Support Provider of such party or
any applicable Specified Entity of such party under one or more
agreements or instruments relating to Specified Indebtedness of any of
them (individually or collectively) in an aggregate amount of not less
than the applicable Threshold Amount (as specified in the Schedule)
which has resulted in such Specified Indebtedness becoming, or becoming
capable at such time of being declared, due and payable under such
agreements or instruments, before it would otherwise have been due and
payable or (2) a default by such party, sucb Credit Support Provider or
such Specified Entity (individuadly or collectively) in making one or
more payments on the due date thereof in an aggregate amount of not less
than the applicable Threshold Amount under such agreements or instruments
(after giving effect to any applicable notice requirement or grace period);
(vii) Bankruptcy. The party, any Credit Support Provider of such party or
any applicable Specified Entity of such party:-
<PAGE>
(1) is dissolved (other than pursuant to a consolidation, amalgamation
or merger); (2) becomes insolvent or is unable to pay its debts or
fails or admits in writing its inability generally to pay its debts as
they become due; (3) makes a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) institutes
or has instituted against it a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or a
petition is presented for its winding-up or liquidation, and, in the
case of any such proceeding or petition instituted or presented against
it, such proceeding or petition (A) results in a judgment of insolvency
or bankruptcy or the entry of an order for relief or the making
of an order for its winding-up or liquidation or (B) is not dismissed,
discharged, stayed or restrained in each case within 30 days of the
institution or presentation thereof; (5) has a resolution passed for
its winding-up, official management or liquidation (other than
pursuant to a consolidation, amalgamation or merger); (6) seeks or
becomes subject to the appointment of an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or other
similar official for it or for all or substantially all its
assets; (7) has a secured party take possession of all or
substantially all its assets or has a distress, execution,
attachment, sequestration or other legal process levied, enforced
or sued on or against all or substantially all its assets and such
secured party maintains possession, or any such process is not
dismissed, discharged, stayed or restrained, in each case within 30
days thereafter; (8) causes or is subject to any event with respect
to it which, under the applicable laws of any jurisdiction, has an
analogous effect to any of the events specified in clauses (1) to (7)
(inclusive); or (9) takes any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of
the foregoing acts; or
(viii) Merger Without Assumption. The party or any Credit Support
Provider of such party consolidates or amalgamates with, or merges with
or into, or transfers all or substantially all its assets to, another
entity and, at the time of such consolidation, amalgamation, merger or
transfer;
(1) the resulting, surviving or transferee entity fails to assume
all the obligations of such party or such Credit Support Provider
under this Agreement or any Credit Support Document to which it or
its predecessor was a party by operation of law or pursuant to an
agreement reasonably satisfactory to the other party to this Agreement;
or
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by such
resulting, surviving or transferee entity of its obligations under this
Agreement.
(b) Termination Events. The occurrence at any time with respect to a party
or, if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any event specified below constitutes an Illegality
if the event is specified in (i) below, a Tax Event if the event is specified
in (ii) below or a Tax Event Upon Merger if the event is specified in (iii)
below, and, if specified to be applicable, a Credit Event Upon Merger if the
event is specified pursuant to (iv) below or an Additional Termination Event
if the event is specified pursuant to (v) below:-
<PAGE>
(i) Illegality. Due to the adoption of, or any change in, any applicable
law after the date on which a Transaction is entered into, or due to the
promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any
applicable law after such date, it becomes unlawful (other than as a result
of a breach by the party of Section 4(b)) for such party (which will be
the Affected Party):-
(1) to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of such
Transaction or to comply with any other material provision of this
Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such party to
perform, any contingent or other obligation which the party (or such
Credit Support Provider) has under any Credit Support Document relating
to such Transaction:
(ii) Tax Event Due to (x) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date on
which a Transaction is entered into (regardless of whether such action
is taken or brought with respect to a party to this Agreement) or (y) a
Change in Tax Law, the party (which will be the Affected Party) will,
or there is a substantial likelihood that it will, on the next succeeding
Scheduled Payment Date (1) be required to pay to the other party an
additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4)(except in respect of interest under Section 2(e), 6(d)(ii) or
6(e)) or (2) receive a payment from which an amount is required to be
deducted or withheld for or on account of a Tax (except in respect of
interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount
is required to be paid in respect of such Tax under Section 2(d)(i)(4)
(other than by reason of Section 2(d)(i)(4)(A) or (B));
(iii) Tax Event Upon Merger. The party (the "Burdened Party") on the
next succeeding Scheduled Payment Date will either (1) be required to
pay an additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii)
or 6(e)) or (2) receive a payment from which an amount has been deducted
or withheld for or on account of any Indemnifiable Tax in respect of
which the other party is not required to pay an additional amount
(other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as
a result of a party consolidating or amalgamating with, or merging
with or into, or transferring all or substantially all its assets to,
another entity (which will be the Affected Party) where such action does
not constitute an event described in Section 5(a)(viii);
(iv) Credit Even: Upon Merger. If "Credit Event Upon Merger" is
specified in the Schedule as applying to the party, such party
("X"), any Credit Support Provider of X or any applicable Specified
Entity of X consolidates or amalgamates with, or merges with or into,
or transfers all or substantially all its assets to, another entity and
such action does not constitute an event described in Section 5(a)(viii)
but the creditworthiness of the resulting, surviving or transferee entity
is materially weaker than that of X, such Credit Support Provider or such
Specified Entity, as the case may he, immediately prior to such action
(and, in such event, X or its successor or transferee, as appropriate,
will be the Affected Party); or
<PAGE>
(v) Additional Termination Event. If any "Additional Termination Event"
is specified in the Schedule or any Confirmation as applying, the
occurrence of such event (and, in such event, the Affected Party or
Affected Parties shall be as specified for such Additional Termination
Event in the Schedule or such Confirmation).
(c) Event of Default and Illegality. If an event or circumstance which would
otherwise constitute or give rise to an Event of Default also constitutes an
Illegality, it will be treated as an Illegality and will not constitute an
Event of Default
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event
of Default with respect to a party (the "Defaulting Party") has occurred and
is then continuing, the other party (the "Non-defaulting Party") may, by not
more than 20 days notice to the Defaulting Party specifying the relevant Event
of Default, designate a day not earlier than the day such notice is effective
as an Early Termination Date in respect of all outstanding Transactions. If,
however, "Automatic Early Termination" is specified in the Schedule as applying
to a party, then an Early Termination Date in respect of all outstanding
Transactions will occur immediately upon the occurrence with respect to such
party of an Event of Default specified in Section 5(a)(vii)(l), (3), (5),
(6) or, to the extent analogous thereto, (8), and as of the time immediately
preceding the institution of the relevant proceeding or the presentation of
the relevant petition upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(4) or, to the extent
analogous thereto, (8).
(b) Right to Terminate' Following Termination Event.
(i) Notice. If a Termination Event occurs, an Affected Party will,
promptly upon becoming aware of it, notify the other party,
specifying the nature of that Termination Event and each Affected
Transaction and will also give such other information about that
Termination Event as the other party may reasonably require.
(ii) Transfer to Avoid Termination Event. If either an Illegality
under Section 5Cb)(i)(l) or a Tax Event occurs and there is only
one Affected Party, or if a Tax Event Upon Merger occurs and the
Burdened Party is the Affected Party, the Affected Party will, as
a condition to its right to designate an Early Termination Date under
Section 6(b)(iv), use all reasonable efforts (which will not require
such party to incur a loss, excluding immaterial, incidental expenses) to
transfer within 20 days after it gives notice under Section 6(b)(i)
all its rights and obligations under this Agreement in respect of the
Affected Transactions to another of its Offices or Affiliates so that
such Termination Event ceases to exist.
If the Affected Party is not able to make such a transfer it will give
notice to the other party to that effect within such 20 day period,
whereupon the other party may effect such a transfer within 30 days after
the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject
to and conditional upon the prior written consent of the other party,
which consent will not be withheld if such other party's policies in
effect at such time would permit it to enter into transactions with the
transferee on the terms proposed.
<PAGE>
(iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1) or
a Tax Event occurs and there are two Affected Parties, each party will
use all reasonable efforts to reach agreement within 30 days after
notice thereof is given under Section 6(b)(i) on action to avoid that
Termination Event.
(iv) Right to Terminate. If:-
(1) a transfer under Section 6(b)(ii) or an agreement under
Section 6(b)(iii), as the case may be, has not been effected with
respect to all Affected Transactions within 30 days after an
Affected Party gives notice under Section 6(b)(i); or
(2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon
Merger or an Additional Termination Event occurs, or a Tax Event
Upon Merger occurs and the Burdened Party is not the Affected Party,
either party in the case of an Illegality, the Burdened Party in the case
of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event
or an Additional Termination Event if there is more than one Affected
Party, or the party which is not the Affected Party in the case of a
Credit Event Upon Merger or an Additional Termination Event if there
is only one Affected Party may, by not more than 20 days notice to the
other party and provided that the relevant Termination Event is then
continuing, designate a day not earlier than the day such notice is
effective as an Early Termination Date in respect of all Affected
Transactions.
(c) Effect of Designation.
(i) If notice designating an Early Termination Date is given under
Section 6(a) or (b), the Early Termination Date will occur on the date
so designated, whether or not the relevant Event of Default or
Termination Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early
Termination Date, no further payments or deliveries under Section 2(a)(i)
or 2(e) in respect of the Terminated Transactions will be required to be
made, but without prejudice to the other provisions of this Agreement.
The amount, if any. payable in respect of an Early Termination Date
shall be determined pursuant to Section 6(e).
(d) Calculations.
(i) Statement. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party with make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable detail,
such calculations (including all relevant quotations and specifying
any amount payable under Section 6(e)) and (2) giving details of the
relevant account to which any amount payable to it is to be paid. In
the absence of written confirmation from the source of a quotation
obtained in determining a Market Quotation, the records of the party
obtaining such quotation will be conclusive evidence of the existence
and accuracy of such quotation.
<PAGE>
(ii) Payment Date. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day
that notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event
of Default) and on the day which is two Local Business Days after the
day on which notice of the amount payable is effective (in the case of
an Early Termination Date which is designated as a result of a
Termination Event). Such amount will be paid together with (to the
extent permitted under applicable law) interest thereon (before as
well as after judgment)in the Termination Currency, from (and including)
the relevant Early Termination Date to (but excluding) the date such
amount is paid, at the Applicable Rate. Such interest will be
calculated on the basis of daily compounding and the actual number of
days elapsed.
(e) Payments on Early Termination. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the
Schedule of a payment measure, either "Market Quotation" or "Loss", and a
payment method, either the "First Method" or the "Second Method". If the
parties fail to designate a payment measure or payment method in the Schedule,
it will be deemed that "Market Quotation" or the "Second Method", as the case
may be, shall apply. The amount, if any, payable in respect of an Early
Termination Date and determined pursuant to this Section will be subject to
any Set-off.
(i) Events of Default. If the Early Termination Date results from an
Event of Default:-
(1) First Method and Market Quotation. If the First Method and
Market Quotation apply, the Defaulting Party will pay to the
Non-defaulting Party the excess, if a positive number, of (A) the
sum of the Settlement Amount (determined by the Non-defaulting
Party) in respect of the Terminated Transactions and the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Non-defaulting Party over (B) the Termination Currency Equivalent
of the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If die First Method and Loss apply,
the Defaulting Party will pay to the Non defaulting Party, if a
positive number, the Non-defaulting Party's Loss in respect of this
Agreement.
(3) Second Method and Market Quotation. If the Second Method
and Market Quotation apply, an amount will be payable equal to
(A) the sum of the Settlement Amount (determined by the Non-
defaulting Party) in respect of the Terminated Transactions and
the Termination Currency Equivalent of the Unpaid Amounts owing to
the Non-defaulting Party less (B) the Termination Currency
Equivalent of the Unpaid Amounts owing to the Defaulting Party. If
that amount is a positive number, the Defaulting Party will pay it
to the Non-defaulting Party; if it is a negative number, the
Non-defaulting Party will pay the absolute value of that amount to
the Defaulting Party.
<PAGE>
(4) Second Method and Loss. If the Second Method and Loss apply,
an amount will be payable equal to the Non-defaulting Party's Loss
in respect of this Agreement. If that amount is a positive number,
the Defaulting Party will pay it to the Non-defaulting Party; if it
is a negative number, the Non-defaulting Party will pay the absolute
value of that amount to the Defaulting Party.
(ii) Termination Events. If the Early Termination Date results from a
Termination Event:-
(1) One Affected Party. If there is one Affected Party, the amount
payable will be determined in accordance with Section 6(e)(i)(3),
if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies,
except that, in either case, references to the Defaulting Party and
to the Non-defaulting Party will be deemed to be references to the
Affected Party and the party which is not the Affected Party,
respectively, and, if Loss applies and fewer than all the
Transactions are being terminated, Loss shall be calculated in
respect of all Terminated Transactions.
(2) Two Affected Parties. If there are two Affected Parties:-
(A) if Market Quotation applies, each party will determine
a Settlement Amount in respect of the Terminated Transactions,
and an amount will be payable equal to (I) the sum of (a) one-
half of the difference between the Settlement Amount of the
party with the higher Settlement Amount ("X") and the Settlement
Amount of the party with the lower Settlement Amount ("Y") and
(b) the Termination Currency Equivalent of the Unpaid Amounts
owing to X less (II) the Termination Currency Equivalent of
the Unpaid Amounts owing to Y; and
(B) if Loss applies, each party will determine its Loss in
respect of this Agreement (or, if fewer than all the
Transactions are being terminated, in respect of all Terminated
Transactions) and an amount will be payable equal to one-half
of the difference between the Loss of the party with the
higher Loss ("X") and the Loss of the party with the lower Loss
("Y").
If the amount payable is a positive number, Y will pay it to X; if
it is a negative number, X will pay the absolute value of that amount
to Y.
(iii) Adjustment for Bankruptcy. In circumstances where an Early
Termination Date occurs because "Automatic Early Termination" applies
in respect of a party, the amount determined under this Section 6(e)
will be subject to such adjustments as are appropriate and permitted by
law to reflect any payments or deliveries made by one party to the other
under this Agreement (and retained by such other party) during the period
from the relevant Early Termination Date to the date for payment
determined under Section 6(d)(ii).
<PAGE>
(iv) Pre-Estimate. The parties agree that if Market Quotation applies
an amount recoverable under this Section 6(e) is a reasonable
pre-estimate of loss and not a penalty. Such amount is payable for the
loss of bargain and the loss of protection against future risks and
except as otherwise provided in this Agreement neither party will be
entitled to recover any additional damages as a consequence of such
losses.
7. Transfer
Subject to Section 6~)(ii), neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by
way of security or otherwise) by either party without the prior written
consent of the other party, except that:-
(a) a party may make such a transfer of this Agreement pursuant to
a consolidation or amalgamation with, or merger with or into, or
transfer of all or substantially all its assets to, another entity (but
without prejudice to any other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest
in any amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section
will be void.
8. Contractual Currency
(a) Payment in the Contractual Currency. Each payment under this
Agreement will he made in the relevant currency specified in this
Agreement for that payment (the Contractual Currency"). To the extent
permitted by applicable law, any obligation to make payments under this
Agreement in the Contractual Currency will not be discharged or satisfied by
any tender in any currency other than the Contractual Currency, except to the
extent such tender results in the actual receipt by the party to which
payment is owed, acting in a reasonable manner and in good faith in converting
the currency so tendered into the Contractual Currency, of the full amount
in the Contractual Currency of all amounts payable in respect of this
Agreement. If for any reason the amount in the Contractual Currency so
received falls short of the amount in the Contractual Currency payable in
respect of this Agreement, the party required to make the payment will,
to the extent permitted by applicable law, immediately pay such additional
amount in the Contractual Currency as may be necessary to compensate for
the shortfall. If for any reason the amount in the Contractual Currency so
received exceeds the amount in the Contractual Currency payable in respect
of this Agreement, the party receiving the payment will refund promptly the
amount of such excess.
<PAGE>
(b) Judgments. To the extent permitted by applicable law, if any
judgment or order expressed in a currency other than the Contractual
Currency is rendered (i) for the payment of any amount owing in respect
of this Agreement. (ii) for the payment of any amount relating to any
early termination in respect of this Agreement or (iii) in respect of a
judgment or order of another court for the payment of any amount described
in (i) or (ii) above, the party seeking recovery, after recovery in full of
the aggregate amount to which such party is entitled pursuant to the
judgment or order, will be entitled to receive immediately from the other
party the amount of any shortfall of the Contractual Currency received by
such party as a consequence of sums paid in such other currency and willt
refund promptly to the other party any excess of the Contractual Currency
received by such party as a consequence of sums paid in such other currency
if such shortfall or such excess arises or results from any variation
between the rate of exchange at which the Contractual Currency is converted
into the currency of the judgment or order for the purposes of such
judgment or order and the rate of exchange at which such party is able,
acting in a reasonable manner and in good faith in converting the currency
received into the Contractual Currency, to purchase the Contractual
Currency with the amount of the currency of the judgment or order
actually received by such party. The term "rate of exchange" includes,
without limitation, any premiums and costs of exchange payable in
connection with the purchase of or conversion into the Contractual Currency.
(c) Separate Indemnities. To the extent permitted by applicable law, these
indemnities constitute separate and independent obligations from the other
obligations in this Agreement, will be enforceable as separate and independent
causes of action, will apply notwithstanding any indulgence granted by the
party to which any payment is owed and will not be affected by judgment being
obtained or claim or proof being made for any other sums payable in respect
of this Agreement.
(d) Evidence of Loss. For the purpose of this Section 8, it will be
sufficient for a party to demonstrate that it would have suffered a loss
had an actual exchange or purchase been made.
9. Miscellaneous
(a) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of 'he parties with respect to its subject matter and
supersedes all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced
by a facsimile transmission) and executed by each of the parties or confirmed
by an exchange of telexes or electronic messages on an electronic messaging
system.
(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive
the termination of any Transaction.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative
and not exclusive of any rights, powers, remedies and privileges provided
by law.
<PAGE>
(e) Counterparts and Confirmations.
(i) This Agreement (and each amendment, modification and waiver in
respect of it) may be executed and delivered in counterparts (including
by facsimile transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of
each Transaction from the moment they agree to those terms (whether
orally or otherwise). A Confirmation shall be entered into as soon as
practicable and may be executed and delivered in counterparts
(including by facsimile transmission) or be created by an exchange
of telexes or by an exchange of electronic messages on an electronic
messaging system, which in each case will be sufficient for all
purposes to evidence a binding supplement to this Agreement. The
parties will specify therein or through another effective means that
any such counterpart, telex or electronic message constitutes a
Confirmation.
(f) No Waiver of Rights. A failure or delay in exercising any right, power
or privilege in respect of this Agreement will not be presumed to operate
as a waiver, and a single or partial exercise of any right, power or
privilege will not be presumed to preclude any subsequent or further exercise,
of that right, power or privilege or the exercise of any other right, power
or privilege.
(g) Headings. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
10. Offices; Multibranch Parties
(a) If Section 10(a) is specified in the Schedule as applying, each party
that enters into a Transaction through an Office other than its head or
home office represents to the other party that, notwithstanding the place
of boolting office or jurisdiction of incorporation or organization of such
party, the obligations of such party are the same as if it had entered into
the Transaction through its head or home office. This representation will be
deemed to be repeated by such party on each date on which a Transaction is
entered into.
(b) Neither party may change the Office through which it makes and receives
payments or deliveries for the purpose of a Transaction without the prior
written consent of the other party.
(c) If a party is specified as a Multibranch Party in the Schedule, such
Multibranch Party may make and receive payments or deliveries under any
Transaction through any Office listed in the Schedule, and the Office through
which it makes and receives payments or deliveries with respect to a
Transaction will be specified in the relevant Confirmation.
11. Expenses
A Defaulting Party will, on demand, indemnify and hold harmless the other
party for and against all reasonable out-of-pocket expenses, including legal
fees and Stamp Tax, incurred by such other party by reason of the
enforcement and protection of its rights under this Agreement or any Credit
Support Document to which the Defaulting Party is a party or by reason of
the early termination of any Transaction, including, but not limited to,
costs of collection.
<PAGE>
12. Notices
(a) Effectiveness. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice
or other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:--
(i) if in writing and delivered in person or by courier, on the date
it is delivered;
(ii) if sent by telex, on the date the recipient's answerback is
received;
(iii) if sent by facsimile transmission, on the date that
transmission is received by a responsible employee of the recipient
in legible form (it being agreed that the burden of proving receipt
will be on the sender and will not be met by a transmission report
generated by the sender's facsimile machine);
(iv) if sent by certified or registered mail (airmail, if
overseas) or the equivalent (return receipt requested), on the
date that mail is delivered o(its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that
electronic message is received,
unless the date of that delivery (or attempted delivery) or that receipt,
as applicable, is not a Local Business Day or that communication is
delivered (or attempted) or received, as applicable, after the close of
business on a Local Business Day, in which case that communication shall be
deemed given and effective on the first following day that is a Local
Business Day.
(b) Change of Addresses. Either party may by notice to the other change
the address, telex or facsimile number or electronic messaging system
details at which notices or other communications are to be given to it.
13. Governing Law and Jurisdiction
(a) Governing Jaw. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) Jurisdiction. With respect to any suit' action or proceedings
relating to this Agreement ("Proceedings"), each party irrevocably:-
(i) submits to the jurisdiction of the English courts, if
this Agreement is expressed to be governed by English law, or
to the non-exclusive jurisdiction of the courts of the State
of New York and the United States District Court located in the
Borough of Manhattan in New York City, if this Agreement is expressed
to be governed by the laws of the State of New York; and
<PAGE>
(ii) waives any objection which it may have at any time to the
laying of venue of any Proceedings brought in any such court, waives
any claim that such Proceedings have been brought in an inconvenient
forum and further waives the right to object, with respect to such
Proceedings, that such court does not have any jurisdiction over such
party.
Nothing in this Agreement precludes either party from bringing Proceedings
in any other jurisdiction (outside, if this Agreement is expressed to be
governed by English law, the Contracting States, as defined in Section 1(3)
of the Civil Jurisdiction and Judgments Act 1982 or any modification,
extension or re-enactment thereof for the time being in force) nor will the
bringing of Proceedings in any one or more jurisdictions preclude the
bringing of Proceedings in any other jurisdiction.
(c) Service of Process. Each party irrevocably appoints the Process Agent
(if any) specified opposite its name in the Schedule to receive, for it and
on its behalf, service of process in any Proceedings. If for any reason any
party's Process Agent is unable to act as such, such party will promptly
notify the other party and within 30 days appoint a substitute process agent
acceptable to the other party. The parties irrevocably consent to service of
process given in the manner provided for notices in Section 12. Nothing in
this Agreement will affect the right of either party to serve process in
any other manner permitted by law.
(d) Waiver of Immunities. Each party irrevocably waives, to the fullest
extent permitted by applicable law, with respect to itself and its revenues
and assets (irrespective of their use or intended use), all immunity on the
grounds of sovereignty or other similar grounds from (i) suit,
(ii) jurisdiction of any court, (iii) relief by way of injunction, order
for specific performance or for recovery of property, (iv) attachment of its
assets (whether before or after judgment) and (v) execution or enforcement
of any judgment to which it or its revenues or assets might otherwise be
entitled in any Proceedings in the courts of any jurisdiction and irrevocably
agrees, to the extent permitted by applicable law, that it will not claim
any such immunity in any Proceedings.
14. Definitions
As used in this Agreement:-
"Additional Termination Event" has the meaning specified in Section 5(b).
"Affected Party" has the meaning specified in Section 5(b).
"Affected Transactions" means (a) with respect to any Termination Event
consisting of an Illegality, Tax Event or Tax Event Upon Merger, all
Transactions affected by the occurrence of such Termination Event and
(b) with respect to any other Termination Event, all Transactions.
"Affiliate" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control"
of any entity or person means ownership of a majority of the voting power
of the entity or person.
<PAGE>
"Applicable Rate" means:-
(a) in respect of obligations payable or deliverable (or which would have
been but for Section~(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of
either party from and after the date (determined in accordance with
Section 6(d)(ii)) on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which
would have been but for Section 2(a)(iii)) by a Nondefaulting Party, the
Non-default Rate; and
(d) in all other cases, the Termination Rate.
"Burdened Party" has the meaning specified in Section 5(b).
"Change in Tax law" means the enactment, promulgation, execution or
ratification of, or any change in or amendment to, any law (or in
the application or official interpretation of any law) that occurs
on or after the date on which the relevant Transaction is entered into.
"consent" includes a consent, approval, action. authorization, exemption,
notice, filing, registration or exchange control consent.
"Credit Event Upon Merger" has the meaning specified in Section 5(b).
"Credit Support Document" means any agreement or instrument that is
specified as such in this Agreement.
"Credit Support Provider" has the meaning specified in the Schedule.
"Default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it)
if it were to fund or of funding the relevant amount plus 1% per annum.
"Defaulting Party" has the meaning specified in Section 6(a).
"Early Termination Date" means the date determined in accordance
with Section 6(a) or 6(b)(iv).
"Event of Default" has the meaning specified in Section 5(a) and,
if applicable, in the Schedule.
"Illegality" has the meaning specified in Section 5b).
"Indemnifiable Tax" means any Tax other than a Tax that would not
be imposed in respect of a payment under this Agreement but for a
present or former connection between the jurisdiction of the government
or taxation authority imposing such Tax and the recipient of such payment
or a person related to such recipient (including, without limitation, a
connection arising from such recipient or related person being or
having been a citizen or resident of such jurisdiction, or being or
having been organized, present or engaged in a trade or business in
such jurisdiction, or having or having had a permanent establishment or
fixed place of business in such jurisdiction, but excluding a connection
arising solely from such recipient or related person having executed,
delivered, performed its obligations or received a payment under, or
enforced, this Agreement or a Credit Support Document).
<PAGE>
"law" includes any treaty, law, rule or regulation (as modified, in the
case of tax matters, by the practice of any relevant governmental revenue
authority) and "lawful" and "unlawful" will be construed accordingly.
"Local Business Day" means, subject to the Schedule, a day on which
commercial banks are open for business (including dealings in foreign
exchange and foreign currency deposits) (a) in relation to any obligation
under Section 2(a)(i), in the place(s) specified in the relevant Confirmation
or, if not so specified, as otherwise agreed by the parties in writing or
determined pursuant to provisions contained, or incorporated by reference,
in this Agreement, (b) in relation to any other payment, in the place where
the relevant account is located and, if different, in the principal
financial centre, if any, of the currency of such payment, (c) in relation
to any notice or other communication, including notice contemplated under
Section 5(a)(i), in the city specified in the address for notice provided by
the recipient and, in the case of a notice contemplated by Section 2(b), in
the place where the relevant new account is to be located and (d) in
relation to Section 5(a)(v)(2), in the relevant locations for performance
with respect to such Specified Transaction.
"Loss" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, the Termination Currency
Equivalent of an amount that party reasonably determines in good faith to
be its total losses and costs (or gain, in which case expressed as a
negative number) in connection with this Agreement or that Terminated
Transaction or group of Terminated Transactions, as the case may be,
including any loss of bargain, cost of funding or, at the election of such
party but without duplication, loss or cost incurred as a result of its
terminating, liquidating, obtaining or reestablishing any hedge or
related trading position (or any gain resulting from any of them).
Loss includes losses and costs (or gains) in respect of any payment or
delivery required to have been made (assuming satisfaction of each applicable
condition precedent) on or before the relevant Early Termination Date and
not made, except, so as to avoid duplication, if Section 6(e)(i)(l) or
(3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees
and outofpocket expenses referred to under Section II. A party will
determine its Loss as of the relevant Early Termination Date, or, if that is
not reasonably practicable, as of the earliest date thereafter as is
reasonably practicable. A party may (but need not) determine its Loss by
reference to quotations of relevant rates or prices from one or more leading
dealers in the relevant markets.
"Market Quotation" means, with respect to one or more Terminated
Transactions and a party making the determination, an amount determined on
the basis of quotations from Reference Marketmakers. Each quotation will be
for an amount, if any, that would be paid to such party (expressed as a
negative number) or by such party (expressed as a positive number) in
consideration of an agreement between such party (taking into account any
existing Credit Support Document with respect to the obligations of such
party) and the quoting Reference Marketmaker to enter into a transaction
(the "Replacement Transaction") that would have the effect of preserving
for such party the economic equivalent of any payment or delivery (whether
the underlying obligation was absolute or contingent and assuming the
satisfaction of each applicable condition precedent) by the parties under
Section 2(a)(i) in respect of such Terminated Transaction or group of
Terminated Transactions that would, but for the occurrence of the relevant
Early Termination Date, have been required after that date. For this
purpose, Unpaid Amounts in respect of the Terminated Transaction or
<PAGE>
group of Terminated Transactions are to be excluded but, without Limitation,
any payment or delivery that would, but for the relevant Early Termination
Date, have been required (assuming satisfaction of each applicable condition
precedent) after that Early Termination Date is to be included. The
Replacement Transaction would be subject to such documentation as such party
and the Reference Marketmaker may, in good faith, agree. The party making
the determination (or its agent) will request each Reference Market-maker to
provide its quotation to the extent reasonably practicable as of the same
day and time (without regard to different time zones) on or as soon as
reasonably practicable after the relevant Early Termination Date. The day
and time as of which those quotations are to be obtained will be selected
in good faith by the party obliged to make a determination under Section
6(e), and, if each party is so obliged, after consultation with the
other. If more than three quotations are provided, the Market Quotation
will be the arithmetic mean of the quotations, without regard to the
quotations having the highest and lowest values. If exactly three such
quotations are provided, the Market Quotation will be the quotation remaining
after disregarding the highest and lowest quotations. For this purpose, if
more than one quotation has the same highest value or lowest value, then one
of such quotations shall be disregarded. If fewer than three quotations are
provided, it will be deemed that the Market Quotation in respect of such
Terminated Transaction or group of Terminated Transactions cannot be
determined.
"Non-default Rate" means a rate per annum equal to the cost (without proof
or evidence of any actual cost) to the Nondefaulting Party (as certified by
it) if it were to fund the relevant amount.
"Non-defaulting Party" has the meaning specified in Section 6(a).
"Office" means a branch or office of a party, which may be such party's head
or home office.
"Potential Event of Default" means any event which, with the giving of notice
or the lapse of time or both, would constitute an Event of Default.
"Reference Market-makers" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith
(a) from among dealers of the highest credit standing which satisfy all the
criteria that such party applies generally at the time in deciding whether
to offer or to make an extension of credit and (b) to the extent practicable,
from among such dealers having an office in the same city.
"Relevant Jurisdiction" means, with respect to a party, the jurisdictions
(a) in which the party is incorporated, organized, managed and controlled or
considered to have its seat,
(b) where an Office through which the party is acting for purposes of this
Agreement is located, (c) in which the party executes this Agreement and
(d) in relation to any payment, from or through which such payment is made.
"Scheduled Payment Date" means a date on which a payment or delivery is to
be made under Section 2(a)(i) with respect to a Transaction.
<PAGE>
"Set-off" means set-off, offset, combination of accounts, right of retention
or withholding or similar right or requirement to which the payer of an
amount under Section 6 is entitled or subject (whether arising under this
Agreement, another contract, applicable law or otherwise) that is exercised
by, or imposed on, such payer.
"Settlement Amount" means, with respect to a party and any Early Termination
Date, the sum of:-
(a) the Termination Currency Equivalent of the Market Quotations (whether
positive or negative) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation is determined; and
(b) such party's Loss (whether positive or negative and without
reference to any Unpaid Amounts) for each Terminated Transaction or
group of Terminated Transactions for which a Market Quotation cannot be
determined or would not (in the reasonable belief of the party making the
determination) produce a commercially reasonable result.
"Specified Entity" has the meaning specified in the Schedule.
"Specified Indebtedness" means, subject to the Schedule, any obligation
(whether present or future, contingent or otherwise, as principal or surety
or otherwise) in respect of borrowed money.
"Specified Transaction" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter
entered into between one party to this Agreement (or any Credit Support
Provider of such party or any applicable Specified Entity of such party) and
the other party to this Agreement (or any Credit Support Provider of such
other party or any applicable Specified Entity of such other party) which is
a rate swap transaction, basis swap, forward rate transaction, commodity
swap, commodity option, equity or equity index swap, equity or equity index
option, bond option, interest rate option, foreign exchange transaction,
cap transaction, floor transaction, collar transaction, currency swap
transaction, cross currency rate swap transaction, currency option or any
other similar transaction (including any option with respect to any of these
transactions), (b) any combination of these transactions and (c) any other
transaction identified as a Specified Transaction in this Agreement or the
relevant confirmation.
"Stamp Tax" means any stamp, registration, documentation or similar tax.
"Tax" means any present or future tax, levy, impost, duty, charge,
assessment or fee of any nature (including interest, penalties and
additions thereto) that is imposed by any government or other taxing
authority in respect of any payment under this Agreement other than a
stamp, registration, documentation or similar tax.
"Tax Event" has the meaning specified in Section 5(b).
"Tax Event Upon Merger" has the meaning specified in Section 5(b).
<PAGE>
"Terminated Transactions" means with respect to any Early Termination Date
(a) if resulting from a Termination Event, all Affected Transactions and
(b) if resulting from an Event of Default, all Transactions (in either case)
in effect immediately before the effectiveness of the notice designating
that Early Termination Date (or, if "Automatic Early Termination" applies,
immediately before that Early Termination Date).
"Termination Currency" has the meaning specified in the Schedule.
"Termination Currency Equivalent" means, in respect of any amount
denominated in the Termination Currency, such Termination Currency amount
and, in respect of any amount denominated in a currency other than the
Termination Currency (the "Other Currency"), the amount in the Termination
Currency determined by the party making the relevant determination as being
required to purchase such amount of such Other Currency as at the relevant
Early Termination Date, or, if the relevant Market Quotation or Loss (as
the case may be), is determined as of a later date, that later date, with
the Termination Currency at the rate equal to the spot exchange rate of
the foreign exchange agent (selected as provided below) for the purchase of
such Other Currency with the Termination Currency at or about 11:00 a.m.
(in the city in which such foreign exchange agent is located) on such date
as would be customary for the determination of such a rate for the purchase
of such Other Currency for value on the relevant Early Termination Date or
that later date. The foreign exchange agent will, if only one party is
obliged to make a determination under Section 6(e), be selected in good faith
by that party and otherwise will be agreed by the parties.
"Termination Event" means an Illegality, a Tax Event or a Tax Event Upon
Merger or, if specified to be applicable, a Credit Event Upon Merger or an
Additional Termination Event.
"Termination Rate" means a rate per annum equal to the arithmetic mean of
the cost (without proof or evidence of any actual cost) to each party (as
certified by such party) if it were to fund or of funding such amounts.
"Unpaid Amounts" owing to any party means, with respect to an Early
Termination Date, the aggregate of (a) in respect of all Terminated
Transactions, the amounts that became payable (or that would have become
payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on
or prior to such Early Termination Date and which remain unpaid as at such
Early Termination Date and (b) in respect of each Terminated Transaction,
for each obligation under Section 2(a)(i) which was (or would have been but
for Section 2(a)(iii)) required to be settled by delivery to such party on or
prior to such Early Termination Date and which has not been so settled as
at such Early Termination Date, an amount equal to the fair market value of
that which was (or would have been) required to be delivered as of the
originally scheduled date for delivery, in each case together with (to the
extent permitted under applicable law) interest, in the currency of such
amounts, from (and including) the date such amounts or obligations were or
would have been required to have been paid or performed to (but excluding)
such Early Termination Date, at the Applicable Rate. Such amounts of
interest will be calculated on the basis of daily compounding and the actual
number of days elapsed. The fair market value of any obligation referred to
in clause (b) above shall be reasonably determined by the party obliged to
make the determination under Section 6(e) or, if each party is so obliged,
it shall be the average of the Termination Currency Equivalents of the fair
market values reasonably determined by both parties.
<PAGE>
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page
of this document.
NationsBank, N.A. American Woodmark Corporation
- ----------------------------- -----------------------------
(Name of Party) (Name of Party)
BY: /S/ R. VAUGHAN DODD BY: /S/ GLENN EANES
------------------------- -----------------------------
Name: R. Vaughan Dodd Name: Glenn Eanes
Title: Senior Vice President Title: Treasurer
Date: Jun 30 1998 Date: 6/24/98
<PAGE>
Exhibit 10.9
SCHEDULE to the MASTER AGREEMENT
dated as of May 29, 1998 between
NATIONSBANK, N.A. ("Party A") and
AMERICAN WOODMARK CORPORATION ("Party B")
PART 1: Termination Provisions
(a) "Specified Entity" means in relation to Party A for the purpose of:-
Section 5(a)(v), none;
Section 5(a)(vi), none;
Section 5(a)(vii), none;and
Section 5(b)(iv), none;
in relation to Party B for the purpose of:-
Section 5(a)(v), any Affiliate of Party B;
Section 5(a)(vi), any Affiliate of Party B;
Section 5(a) (vii), any Affiliate of Party B; and
Section 5(b)(iv), any Affiliate of Party B.
(b)) "Specified Transaction" will have the meaning specified in Section 14.
(c) The "Cross-Default" provisions of Section 5(a)(vi)(as amended in Part
5(g)) will apply to Party A and Party B and each Specified
Entity of Party B. In connection therewith, "Specified
Indebtedness" will not have the meaning specified in Section
14, and such definition shall be replaced by the following:
"any obligation in respect of the payment of moneys (whether
present or future, contingent or otherwise, as principal or surety or
otherwise), except that such term shall not include obligations in
respect of deposits received in the ordinary course of a party's
banking business." and "Threshold Amount" means, with respect to
Party A, an amount equal to three percent of Party A's shareholders'
equity, determined in accordance with generally accepted accounting
principles in such party's jurisdiction of incorporation or
organization, consistently applied, as at the end of such party's most
recently completed fiscal year, and
with respect to Party B, any amount.
(d) The "Credit Event Upon Merger" provisions of Section 5(b)(iv) will
apply to Party A and Party B and each Specified Entity of Party B.
(e) The "Automatic Early Termination" provision of Section 6(a) will not
apply to Party A and will not apply to Party B.
<PAGE>
(f) Payments on Early Termination. For the purpose of Section 6(e):-
(i) Market Quotation will apply.
(ii) The Second Method will apply.
(g) "Termination Currency" means United States Dollars.
(h) "Additional Termination Event." Additional Termination Event
will not apply.
PART 2: Tax Representations
Not Applicable.
PART 3: Agreement to Deliver Documents
For the purpose of Section 4(a)(i) and (ii) of this Agreement, each
party agrees to deliver the following documents:
(a) Tax forms, documents or certificates to be delivered are: none
(b) Other documents to be delivered are:-
Party Form/ Date by Covered by
required Document/ which to be Section 3(d)
to deliver Certificate delivered Representation
document
_______________________________________________________________________________
Party A and Certified copies of all Upon execution Yes
Party B corporate authorizations and and delivery of
any other documents with this Agreement
respect to the execution,
delivery and performance of
this Agreement and any
Credit Support Document
Party A and Certified of authority and Upon execution Yes
Party B specimen signatures of and delivery of
individuals executing this this Agreement
Agreement any Credit and thereafter
Support Document and upon request of
Confirmations. the other party
PART 4: Miscellaneous
-------------
(a) Address for Notices. For the purpose of Section 12(a) of this
Agreement:-
<PAGE>
Address for notice or communications to Party A:
NationsBank, N.A.
100 N. Tryon St., NC 1-007-13-01
Charlotte, North Carolina 28255
Attention: DerivativesDocumentation Unit
(Telex: 669959; Answerback: NATIONSBK CHA)
Facsimile: 704-386-4113
Address for notice or communications to Party B:
American Woodmark Corporation Attention:
Mr. Glenn Eanes, Treasurer
3102 Shawnee Drive
Winchester, Virginia 22601
Telephone: 540-665-9112
Facsimile: 540-665-9176
(b) Process Agent. For the purpose of Section 13(c):
Party A appoints as its Process Agent: Not applicable.
Party B appoints as its Process Agent: Not applicable.
(c) Offices. The provisions of Section 10(a) will apply to this Agreement.
(d) Multibranch Party. For the purpose of Section 10 of this Agreement:
Party A is not a Multibranch Party.
Party B is not a Multibranch Party.
(e) Calculation Agent. The Calculation Agent is Party A, unless
otherwise specified in a Confirmation in relation to the
relevant Transaction.
(f) Credit Support Document. Details of any Credit Support Document:-
Not applicable.
(g) Credit Support Provider. Credit Support Provider means in relation to
Party A,
Not applicable.
Credit Support Provider means in relation to Party B,
Not applicable.
(h) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York (without reference
to its conflict of laws doctrine).
(i) Netting of Payments. Subparagraph (ii) of Section 2(c) will
not apply to any Transaction unless specified in the relevant
Confirmation.
<PAGE>
(j) "Affiliate" will have the meaning specified in Section 14 of
this Agreement.
PART 5: Other Provisions
----------------
(a) Set-ff. Any amount (the "Early Termination Amount") payable to
one party (the Payee) by the other party (the Payer) under
Section 6(e), in circumstances where there is a Defaulting
Party or one Affected Party in the case where a Termination Event
under Section 5(b)(iv) or (v) has occurred, will, at the option of
the party ("X") other than the Defaulting Party or the Affected Party
(and without prior notice to the Defaulting Party or the Affected
Party), be reduced by its setoff against any amount(s) (the "Other
Agreement Amount") payable (whether at such time or in the future or
upon the occurrence of a contingency) by the Payee to the Payer
(irrespective of the currency, place of payment or booking office of
the obligation) under any other agreement(s) between the Payee and
the Payer or instrument(s) or undertaking(s) issued or executed by
one party to, or in favor of, the other party (and the Other Agreement
Amount will be discharged promptly and in all respects to the extent
it is so set-off). X will give notice to the other party of any set-off
effected under this Part 5(a).
For this purpose, either the Early Termination Amount or the
Other Agreement Amount (or the relevant portion of such
amounts) may be converted by X into the currency in which the
other is denominated at the rate of exchange at which such party would
be able, acting in a reasonable manner and in good faith, to purchase
the relevant amount of such currency.
If an obligation is unascertained, X may in good faith estimate that
obligation and set-off in respect of the estimate, subject to the
relevant party accounting to the other when the obligation is
ascertained.
Nothing in this Part 5(a) shall be effective to create a
charge or other security interest. This Part 5(a) shall be
without prejudice and in addition to any right of set-off,
combination of accounts, lien or other right to which any
party is at any time otherwise entitled (whether by operation
of law, contract or otherwise).
(b) Exchange of Confirmations. For each Transaction entered into
hereunder, Party A shall promptly send to Party B a Confirmation via
telex or facsimile transmission. Party B agrees to respond to such
Confirmation within three (3) Business Days, either confirming
agreement thereto or requesting a correction of any error(s) contained
therein. Failure by Party A to send a Confirmation or of Party B to
respond within such period shall not affect the validity or
enforceability of such Transaction. Absent manifest error, there shall
be a presumption that the terms contained in such Confirmation are the
terms of the Transaction. The parties agree that any such exchange of
telexes or facsimile transmissions shall constitute a Confirmation for
all purposes hereunder.
<PAGE>
(c) Furnishing Specified Information. Section 4(a)(iii) is hereby
amended by inserting "promptly upon the earlier of (i)" in
lieu of the word "upon" at the beginning thereof and inserting
"or (ii) such party learning that the form or document is
required" before the word "any" on the first line thereof.
(d) Notice by Facsimile Transmission. Section 12(a) is hereby amended by
inserting the words "2(b)," between the word "Section" and the
number "5" and inserting the words "or 13(c)" between the number "6"
and the word "may" in the second line thereof.
(e) Recording of Conversations. Each party to this Agreement
acknowledges and agrees to the tape recording of conversations
between the parties to this Agreement whether by one or other
or both of the parties or their agents, and that any such tape
recordings may be submitted in evidence in any Proceedings
relating to the Agreement.
(f) Eligible Swap Participant. Each party represents to the other
that it is an "eligible swap participant" as defined under the
regulations of the Commodity Futures Trading Commission,
currently at 17 C.F.R. 35.1(b)(2).
(g) Cross Default. Section 5(a)(vi) of this Agreement is hereby
amended adding the following after the semicolon at the end
thereof:
provided, however, that notwithstanding the foregoing
(but subject to any provision to the contrary contained
in any such agreement or instrument), an Event of Default
shall not occur under either (1) or (2) above if the default,
event of default or other similar condition or event referred
to in (1) or the failure to pay referred to in (2) is caused
not (even in part) by the unavailability of funds but is
caused solely due to a technical or administrative error
which has been remedied within three Business Days after
notice of such failure is given to the party."
(h) Relationship Between Parties. Each party represents to the
other party and will be deemed to represent to the other party
on the date on which it enters into a Transaction that (absent
a written agreement between the parties that expressly imposes
affirmative obligations to the contrary for that Transaction):-
(1) Non-Reliance. It is acting for its own account, and it
has made its own independent decisions to enter into that
Transaction and as to whether that Transaction is appropriate
or proper for it based upon its own judgment and upon advice
from such advisors as it has deemed necessary. It is not
relying on any communication (written or oral) of the other
party as investment advice or as a recommendation to enter
into that Transaction; it being understood that information
and explanations related to the terms and conditions of a
Transaction shall not be considered investment advice or a
recommendation to enter into that Transaction. Further, such
party has not received from the other party any assurance or
guarantee as to the expected results of that Transaction.
<PAGE>
(2) Evaluation and Understanding. It is capable of
evaluating and understanding (on its own behalf or through
independent professional advice), and understands and accepts,
the terms, conditions and risks of that Transaction. It is
also capable of assuming, and assumes, the financial and other
risks of that Transaction.
(3) Status of Parties. The other party is not acting as an agent,
fiduciary or advisor for it in respect of that Transaction.
(i) Waiver of Right to Trial by Jury. Each party hereby irrevocably waives
any and all rights to trial by jury with respect to any legal
proceeding arising out of or relating to this Agreement or any
Transaction contemplated hereby.
(j) Restatement and Amendment of Prior Agreement. This Master
Agreement restates and amends in its entirety the Master
Agreement dated as of April 13, 1987, between NCNB National
Bank of North Carolina ~redecessor to Party A) and Party B
(the "First Prior Agreement"). Each confirmation to the First
Prior Agreement shall be deemed a Confirmation subject to this
Agreement, and each transaction subject to such a confirmation
shall be governed hereby.
(k) Restatement and Amendment of Prior Agreement. This Master
Agreement restates and amends in its entirety the ISDA
Interest Rate Swap Agreement dated as of July 24, 1989,
between NCNB National Bank of North Carolina and Party B (the
"Second Prior Agreement"). Each confirmation to the Second Prior
Agreement shall be deemed a Confirmation subject to this Agreement,
and each transaction subject to such a confirmation shall be
governed hereby.
Accepted and agreed:
NATIONSBANK, N.A. AMERICAN WOODMARK CORPORATION
/s/ R. VAUGHAN DODD /S/ GLENN EANES
- ------------------------- -------------------
Name: R. Vaughan Dodd Name: Glenn Eanes
Title: Senior Vice President Title: Treasurer
<PAGE>
Exhibit 10.9
SECRETARY'S CERTIFICATION
OF
AUTHORIZATION AND INCUMBENCY
I, JACQUELINE MacRORIE, Assistant Secretary of NationsBank,
National Association (formerly NationsBank, National Association (Carolinas),
(the "Association"), do hereby certify:
1. That Exhibit A attached hereto is a true copy of resolutions
adopted by the Board of Directors of the Association on July
28, 1993, which resolutions remain in full force and effect on
this date.
2. That the following named person has been properly elected
and now holds the office in the Association as indicated
below, and that person has been duly designated a key officer
with the authority and powers to engage in activities relating
to derivative products as set out in sections "(A)", "(B)",
"(D)" and "(E)" on Exhibit A.
Name Title Signature
- ---- ----- ---------
R. Vaughan Dodd Senior Vice President /S/ R. VAUGHAN DODD
-------------------
IN WITNESS WHEREOF, I have hereupon set my hand and
affixed the seal of said Association this 18th day of June, 1998.
/S/ JACQUELINE MAC RORIE
------------------------
Jacqueine MacRorie
(SEAL)
<PAGE>
Exhibit 10.9
EXHIBIT A
---------
Securities and Related Trading Authority
----------------------------------------
NOW, THEREFORE, BE IT RESOLVED, that within the scope of their
respective authorities, any Executive Vice President (or other
officer of equivalent or higher rank or grade) within or
responsible for the Investment Banking, Global Trading and
Distribution, Balance Sheet and Funds Management, or Corporate
Investments group (and their respective successor(s) in such
capacities) is hereby empowered to be responsible and to designate
key officers to be responsible for the overall supervision, coordination,
execution and delivery, including the maintenance of appropriate books and
records, of all transactions, contracts, agreements, arrangements and
commitments by which the business and activities of the functional area,
group, unit,department or division of the Bank under his control
are conducted on behalf of the Bank, including, to the extent
permitted by federal law or regulation, purchasing, investing in,
or otherwise acquiring (including purchasing on margin and
borrowing funds through or from approved third parties and securing
payment thereof with property of the Bank to the extent permitted
by law), possessing, selling (including short sales), placing as
agent, effecting transactions pursuant to repurchase and reverse
repurchase agreements, transferring, lending, borrowing, exchanging
or otherwise disposing of, and generally underwriting, dealing and
trading in (A) securities, mortgages, and instruments whether on a
current, mandatory forward or optional commitment basis, including:
(1) United States government securities and federal agency securities,
on a when-issued or current settlement basis; (2) mortgage-backed
pass-through securities, guaranteed as to payment of principal and
interest by the Government National Mortgage Association, Federal
Home Loan Mortgage Corporation or the Federal National Mortgage
Association; (3) asset-backed securities and mortgage related
securities, including collateralized mortgage obligations, mortgage-
backed debt securities and mortgage-backed pass-through securities
not enumerated in clause A(2) above; (1) whole mortgage loans
whether residential, commercial or project related, and instruments
and participation certificates evidencing an interest in any such
loans; (5) money market instruments, including federal funds,
deposits, redeposits, bankers acceptances, certificates of deposit,
deposit notes, bank notes and commercial paper (both foreign and domestic);
(6) municipal securities, including general obligation and revenue bonds
and variable rate demand notes; (7) equity securities and corporate
debt obligations, whether secured, unsecured or convertible,
including bonds, debentures and notes; (B) foreign currencies and
foreign currencydenominated securities, deposits and money market
instruments including currency swaps, crosscurrency interest rate
swaps. Eurocurrency deposits and redeposits, certificates of
deposit, notes and floating rate notes (FRN's) and bonds; (C)
foreign government and government agency securities; (D) derivative
products, including interest rate swaps, caps, collars, floors,
swap options, forward rate agreements, commodity derivatives,
equity derivatives and the like; and (E) futures and options
(exchange listed or over-the counter) on securities, securities
indices. financial instruments and foreign currencies.
<PAGE>
AND BE IT FURTHER RESOLVED, that such authority
with respect to such transactions. contracts, agreements,
arrangements or commitments or with respect to any transactions
deemed by such key officers to be proper in connection therewith
includes the authority to give written (including telecopied,
telexed, telegraphic and electronic) or oral instructions, to pay
in cash or by check and/or draft drawn upon the funds of the Bank
such sums as may be necessary, and to bind and obligate the Bank to
and for the carrying out of any such transaction, contract,
agreement, arrangement or commitment which shall be entered into by
any such officers for and on behalf of the Bank; to deliver
securities or other documents; to authorize or order the transfer
or delivery of securities or other documents; to enter into and
bind the Bank to the terms of any and all agreements with
appropriate clearing organizations; to affix the seal of the Bank
to any documents, instruments or agreements or otherwise; to
endorse in the name of the Bank or otherwise any securities in
order to pass title thereto; to direct the sale or exercise of all
rights with respect to any securities; to sign for the Bank all
releases, powers of attorney and/or other documents in connection
with any such transaction, contract, agreement, arrangement or
commitment and to agree to any terms or conditions in connection
therewith; to accept delivery of any securities, documents or other
items; to appoint any other person or persons to do any and all things
which any of such officers is empowered to do; and generally to do and
take any and all action necessary or considered desirable in connection
with any such transaction, contract. agreement, arrangement or commitment.
AND BE IT FURTHER RESOLVED, that all such lawful transactions,
contracts, agreements, arrangements and commitments which shall
have been entered into by or under the authority of the respective
officers specified above for and on behalf of the Bank on or after
January 1, 1992 be and hereby are ratified, confirmed, approved and
adopted in all respects.
<PAGE>
Exhibit 11
AMERICAN WOODMARK CORPORATION
Computation of Earnings Per Share
(in thousands, except per share amounts
Fiscal Year Ended April 30
--------------------------
1998 1997 1996
---- ---- ----
Net income $13,031 $10,548 $3,846
Divided by weighted average
common shares outstanding
Basic 7,753 7,673 7,595
Diluted 7,908 7,797 7,645
Earnings per share
Basic $1.68 $1.37 $0.51
Diluted $1.65 $1.35 $0.50
<PAGE>
TABLE OF CONTENTS
Company Profile 2
Market Information 2
Financial Highlights 2
Letter from the President 3
Five Year Selected Financial Information 5
Driving Growth 6
Management's Discussion and Analysis 9
Financial Statements 16
Notes to Financial Statements 19
Management's Report 27
Report of Independent Auditors 28
Board of Directors and Executive Officers 29
Corporate Information 30
<PAGE>
Exhibit 13
M I S S I O N S T A T E M E N T
CREATING VALUE THROUGH PEOPLE
WHO WE ARE
American Woodmark is an organization of employees and shareholders
who have combined their resources to pursue a common goal.
WHAT WE DO
Our common goal is to create value by providing kitchens and baths
"of pride" for the American family.
WHY WE DO IT
We pursue this goal to earn a profit, which allows us to reward our
shareholders and employees and to make a contribution to our
society.
HOW WE DO IT
Four principles guide our actions:
Customer Satisfaction - Providing the best possible quality,
service and value to the greatest number of people. Doing
whatever is reasonable, and sometimes unreasonable, to make
certain that each customer's needs are met each and every day.
Integrity - Doing what is right. Caring about the dignity and
rights of each individual. Acting fairly and responsibly with all
parties. Being a good citizen in the communities in which we operate.
Teamwork - Understanding that we must all work together if we are to be
successful. Realizing that each individual must contribute to the team
to remain a member of the team.
Excellence - Striving to perform every job or action in a superior way.
Being innovative, seeking new and better ways to get things done.
Helping all individuals to become the best that they can be in their jobs
and careers.
ONCE WE'VE DONE IT
When we achieve our goal good things happen: sales increase, profits are
made, shareholders and employees are rewarded, jobs are created, our
communities benefit, we have fun, and our customers are happy and proud-with
a new kitchen or bath from American Woodmark.
1
<PAGE>
COMPANY PROFILE
American Woodmark Corporation manufactures and distributes kitchen cabinets
and vanities for the remodeling and new home construction markets. The Company
operates seven manufacturing facilities located in Arizona, Georgia, Virginia,
and West Virginia, and four service centers across the country.
American Woodmark Corporation was formed in 1980 and became a public
company through a Common Stock offering in July, 1986.
The Company offers approximately 120 cabinet lines in a wide variety of
designs, materials and finishes. Its products are sold on a national basis
through a network of independent distributors and directly to home centers,
major builders and home manufacturers. Approximately 70% of its sales during
fiscal year 1998 were to the remodeling market and 30% to the new home market.
The Company is one of the five largest manufacturers of kitchen cabinets
in the United States.
MARKET INFORMATION
American Woodmark Corporation no par value Common Stock is traded on the
NASDAQ Over-the-Counter market under the AMWD symbol. Common Stock per share
market prices and cash dividends declared during the last two fiscal years
were as follows:
Market Price
------------ Dividends
(in dollars) High Low Declared
---- --- --------
FISCAL 1998
First quarter $16.88 $11.88 $ .02
Second quarter 22.38 12.88 .03
Third quarter 23.00 18.00 .03
Fourth quarter 30.75 20.50 .03
FISCAL 1997
First quarter 6.13 4.75 --
Second quarter 9.75 5.13 .02
Third quarter 19.00 8.13 .02
Fourth quarter 22.38 10.75 .02
As of April 30, 1998, there were approximately 5,500 stockholders of the
Company's Common Stock. Included are approximately 86% of the Company's
employees who are stockholders through the American Woodmark Stock Ownership
Plan.
FINANCIAL HIGHLIGHTS
(in thousands, except share data) Years Ended April 30
---------------------------
1998 1997 1996
---- ---- ----
OPERATIONS
Net sales $241,677 $219,402 $196,237
Operating income 21,328 17,606 7,281
Income before income taxes 21,288 17,114 6,238
Net income 13,031 10,548 3,846
Earnings per share
Basic $ 1.68 $ 1.37 $ .51
Diluted 1.65 1.35 .50
Average shares outstanding -- Note A
Basic 7,753 7,673 7,595
Diluted 7,908 7,797 7,645
FINANCIAL POSITION
Working capital $ 31,367 $ 23,442 $ 15,409
Total assets 106,481 87,157 76,336
Long-term debt 8,717 10,637 12,866
Stockholders' equity 59,137 46,298 35,845
Long-term debt to equity ratio 15% 23% 36%
2
<PAGE>
TO OUR SHAREHOLDERS:
Fiscal 1998 was another outstanding year for American Woodmark. We achieved
record sales and reported record net income of $13,031,000 or $1.65 per share.
Net income performance set a new record in each of the four fiscal quarters.
Net income improved from the previous records by 25% in the first quarter,
17% in the second, 24% in the third and 31% in the fourth. American Woodmark
has now established a record of earnings growth, setting a new level of
earnings performance in nine consecutive quarters. Net income for fiscal
1998 was 24% above the previous high set last year.
Our current performance and future prospects are being recognized by the
investment community. Over this past fiscal year, the value of a share of
American Woodmark stock increased 140% from under $13.00 to over $30.00. This
latest increase, combined with the improvement in our stock price during
fiscal 1997, means that $100 invested in American Woodmark in April 1996 was
worth $630 in April 1998. Over this same period, the market capitalization
of the Company has increased from $40 million to almost $240 million.
Net sales in fiscal 1998 increased 10% to $241.7 million from $219.4 million
the previous year. We continue to gain market share, especially in the home
center channel, based on our strong market position, our key customer
relationships, our innovative new products and our superior service programs.
Year-over-year sales increased with both The Home Depot and Lowe's. These two
customers alone are now operating a combined total of almost 1,000 big-box
stores throughout the United States. By the beginning of the next century,
The Home Depot and Lowe's will be operating almost 2,000 stores. American
Woodmark is committed to supporting the tremendous growth of these two
customers with new products and innovative service programs. Sales to
Hechingers, which completed a purchase of Builders Square in September 1997,
were relatively flat for the year due to the time and energy these companies
invested in the combination of their two operations. We look forward to
renewing our growth trend with the new Hechingers in fiscal 1999 as they are
again able to focus exclusively on their customers and markets.
We continue to be very aggressive and gain market share through our
Timberlake(R) brand program designed for the new construction industry.
This program has been highly successful and has provided significant growth,
especially in the competitive business of serving both national and regional
builders. The Company continues to use this platform to expand into new and
under-served markets.
The Company continues to develop new products and services to generate top
line sales growth. During fiscal 1998, we expanded our line to include several
3
<PAGE>
new styles and colors that had an immediate impact on our business. In the
spring of 1997, the Company introduced a new, high end, white thermo foil door
that was enthusiastically received by consumers and during fiscal 1998
provided significant growth. At the same time, we introduced a new cherry
line that resulted in substantial growth of our cherry business during the
year. In the fall of 1997, the Company introduced a new line of hickory
cabinets. This line represents the first introduction of a new wood
species in over a decade. In just six months, hickory sales have become a
significant product line and are exceeding volume projections.
In addition to our traditional special order cabinet business, new products
and services introduced during fiscal 1997 continue to support overall sales
growth. The in-stock cabinet program is now offered in selected regions of
all our home center customers. Our Flat Pack(TM) ready-to-assemble cabinet
line was widely tested by target customers during the year. By the end of
the year, these successful tests had resulted in commitments from several
customers to convert to our Flat Pack system. We are looking forward to
significant growth from this line in fiscal 1999.
The growth experienced by our Company over the past two years has begun to
strain our manufacturing capacity in certain operations. During fiscal 1998
we invested over $7.3 million in capital projects, our largest annual total
since 1988. As we begin to plan for even more growth in the next few years,
our capital spending program will increase accordingly. We anticipate
expenditures of $10 million to $12 million in each of the next two years.
Since the end of fiscal 1996, the Company has built and maintained
significant cash reserves and borrowing capacity precisely for this reason.
The investment of our resources in additional capacity will continue to
provide opportunities to drive even more sales growth and profitability.
Our accomplishments are a credit to the many dedicated men and women who
work at American Woodmark. I would like to thank all of our employees for
another excellent year. We would especially like to recognize John Gerlach
who retired from the Board of Directors at the annual meeting in August of
last year. John was present at the founding of American Woodmark as both an
investor and financial advisor. He served on our Board for the past eighteen
years, providing much appreciated counsel to the management team. We wish John
well in his retirement. We have added Fred Grunewald and Kent Guichard to
our Board. With a career as a line manager at General Electric, Black & Decker
and Rubbermaid, Fred brings a wealth of experience in business operations.
Kent joined American Woodmark in 1993 as the Chief Financial Officer. Over the
past five years, Kent has been an integral part of the management team as we
continually refined and implemented our strategy. I look forward to
contributions from both Fred and Kent as new members of the Board.
As American Woodmark begins the second half of our 2001 Vision, we have many
challenges ahead. As we approach our goal of $500 million in annual sales by
2001, we will need to make the transition from a big, little company into a
little, big company. We will need to learn new skills and create significantly
different processes in order to sustain our aggressive growth. I remain
confident that our team will successfully complete this journey in the same
manner as we achieved our past goals. We will continue to follow the
guidelines outlined in our Mission Statement as we build our Company and
seek to provide a superior return to those shareholders investing for the
long term.
I look forward to another exciting year ahead. Thank you for your
continuing support of American Woodmark.
/s/ JAMES J. GOSA
James J. Gosa
President and Chief Executive Officer
4
<PAGE>
FIVE YEAR SELECTED FINANCIAL INFORMATION
Years Ended April 30
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
FINANCIAL STATEMENT DATA
(in millions, except share data)
Net sales $241.7 $219.4 $196.2 $197.4 $171.3
Income before income taxes 21.3 17.1 6.2 8.8 3.5
Net income 13.0 10.5 3.8 5.4 2.2
Earnings per share (1)
Basic 1.68 1.37 .51 .71 .29
Diluted 1.65 1.35 .50 .70 .29
Depreciation and amortization
expense 7.8 7.8 7.8 7.8 7.2
Restructuring costs -- -- -- 0.5 1.0
Total assets 106.5 87.2 76.3 74.4 72.3
Long-term debt 8.7 10.6 12.9 15.5 18.3
Stockholders' equity 59.1 46.3 35.8 31.8 26.4
Cash dividends declared per share .11 .06 -- -- --
Average shares outstanding (1)
Basic 7.8 7.7 7.6 7.5 7.5
Diluted 7.9 7.8 7.6 7.6 7.6
------------------------------------------
PERCENT OF SALES
Gross profit 30.3% 27.8% 21.5% 23.5% 21.4%
Sales, general and administrative
expenses 21.5 19.8 17.8 18.1 17.6
Income before income taxes 8.8 7.8 3.2 4.5 2.1
Net income 5.4 4.8 2.0 2.7 1.3
-------------------------------------------
RATIO ANALYSIS
Current ratio 1.9 1.9 1.7 1.6 1.4
Inventory turnover (2) 15.1 15.3 11.9 11.0 8.5
Percentage of capital:
(LTD & equity)
Debt 12.8% 18.7% 26.4% 32.8% 41.0%
Equity 87.2 81.3 73.6 67.2 59.0
Return on equity (average %) 24.7 25.7 11.4 18.4 8.6
Collection period--days (3) 37.2 36.1 36.9 34.7 37.2
(1) The weighted average of common shares has been restated to conform to
SFAS No. 128.
(2) Based on average of beginning and ending inventory.
(3) Based on ratio of monthly average customer receivables to average sales
per day.
5
<PAGE>
DRIVING GROWTH
The close of fiscal 1998 marks the halfway point in the 2001 Vision,
our six year blueprint for creating a growth company. We are creating
sustainable growth by capitalizing on our four primary competitive advantages:
* Our market position and customer relationships with the
leading home center retailers in the United States.
* Our full product line and service programs specifically
designed to meet the unique needs of professional home builders.
* Our expertise in wood processing and wood finishing technologies.
* Our sophisticated distribution system.
We use these competitive advantages to create value through
our product for both the channel of trade and the ultimate end
consumer. Our product is the total experience of the end consumer's
construction or remodeling project, from design to order to delivery to
installation. We continue to be the pioneer in creating new ways to provide
better products with more choices, with greater design flexibility, with
higher service and at a lower cost. We are defining true value in our
industry.
New Styles and Colors
We have successfully driven growth through the introduction of new
styles and colors. Almost one-third of our total revenue during fiscal 1998
was generated from styles and colors that were not offered in our product line
just three years ago. Some of the new products are:
* A family of cabinets in a new wood species for American
Woodmark, hickory. The introduction of our Nashville(TM),
Hickory Grove(TM), Yellowstone(TM), Teton(TM) and Leesburg(TM)
lines has placed American Woodmark in a position to compete in a
growth area of the market.
* A full line of shaker design cabinets has captured a significant
share of the upgrade market, especially in home remodeling. Our
popular shaker style cabinets are offered in a variety of wood
species and styles, including maple, oak and white, and in several
finishes, including natural, frost and traditional wood stains.
* A redesigned series offered in both classic Bordeaux and
contemporary Spice finishes that has substantially increased
revenues in the upscale, sophisticated look of cherry.
6
<PAGE>
* A high-end white line using thermo foil technology to create
a custom look and feel at a reasonable price.
* A natural, character oak line with the timeless look of
traditional oak.
* A value white line, providing style of an all white cabinet
at an entry level price point.
New Features and Options
In addition to new styles and colors, we have aggressively expanded
product features, available options and service support programs. The
flexibility and value offered through these selections has helped move
American Woodmark towards becoming the designer's first choice. Some of
the new features include:
* Expanded SKUs, providing the designer with the opportunity
to creatively meet the expectations of the end consumer.
Using our full line, the designer can create the look of a
custom kitchen or bath at a cost up to 20% less than even a
semi-custom kitchen. Additional SKUs also provide designers with
an opportunity to expand into other areas of the home with utility
7
<PAGE>
room designs, built-in studies and entertainment centers.
* A broad range of custom accessories including appliance
garages, wine racks, stem glass holders, spice drawers and
spice racks, cookbook racks, shelf organizers, range hoods,
cutting boards and knife trays, curved end panels, lazy susans,
tilt-out trays, bread boxes, slide-out shelves, upgraded hardware,
hardwood drawers, plywood sides and an expansive line of mouldings.
* An extensive sales service program with sophisticated
point-of-purchase support. Elements of our program include the
new home center selling center, in-store promotion campaigns
and project literature. Virtually all of our sales support
programs can be customized for the retailer or builder,
providing a competitive advantage in their individual markets.
* A manufacturer's training program in which we provide detailed
training for our customers both on general kitchen and bath
design and on American Woodmark products. Specific programs that
"train the trainer" effectively increase the leverage of the
in-house training efforts of our direct customer, the retailer and
builder.
* Several delivery options which offer each customer a choice,
tailored to fit their needs. American Woodmark was a pioneer
in offering home delivery to the home center industry and site
delivery by individual kitchen to the new home construction
industry. Replacement parts can be shipped to any mailing
address in the United States within 48 hours.
Product Development
In order to take advantage of opportunities and to keep pace with
the ever changing demands of the marketplace, American Woodmark has
created a product development process that can take a new product from
concept to market in less than 120 days. This product development process,
when combined with our just-in-time manufacturing system, allows us to
respond to customer requirements quickly and at a minimal cost. This entire
system is designed to deliver value to the end consumer through our channels
of distribution. For example, we recently developed and introduced two new
growth products using this process.
* Our Flat Pack product was designed to meet specific customer
requirements for a high quality, framed cabinet in a ready-
to-assemble design. Professional builders and original
equipment manufacturers wanted a traditional cabinet look
with the flexibility of inventory management in an unassembled
configuration and the cost savings opportunities associated with
a ready-to-assemble product. American Woodmark was able to
develop a line that met those specific needs. In addition, our
Flat Pack line utilizes the same styles and components that we
8
<PAGE>
use in some of our standard lines. This allows our customers to
enhance their business by offering special cabinets that are not
in the Flat Pack line through our normal special order program.
This product was successfully developed to meet the needs of
certain customers and is providing significant growth
opportunities for American Woodmark.
* Our in-stock program was designed to help our home center
customers serve the "cash and carry" consumer that needs to
install a kitchen that day, but still wants the quality, look and
convenience of an assembled, framed cabinet. American Woodmark
quickly designed an in-stock program which provided our home
center customers with a program that offers effective
point-of purchase support, high service levels and superior
inventory turns. Our in-stock program is now offered in the
three largest home center chains in the United States and is
providing additional opportunities for growth.
As we begin the second half of the 2001 Vision, American Woodmark is
creating even more opportunities for growth. Our products simply offer
superior value. Our new styles and colors and our features and options
offer an opportunity to create unique, custom environments at a stock price.
We have created a product development process that constantly monitors
customer needs and quickly responds by providing the right product,
at the right time, in the right place.
Just watch us grow.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth certain income and expense items as a
percentage of net sales.
Percentage of Net Sales
Years Ended April 30
------------------------
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales and distribution 69.7 72.2 78.5
Gross profit 30.3 27.8 21.5
Selling and marketing expenses 15.4 14.0 12.6
General and administrative expenses 6.1 5.8 5.2
Operating income 8.8 8.0 3.7
Interest expense 0.3 0.4 0.6
Income before income taxes 8.8 7.8 3.2
Provision for income taxes 3.4 3.0 1.2
Net income 5.4 4.8 2.0
FISCAL YEAR 1998 COMPARED to FISCAL YEAR 1997
Fiscal 1998 net sales of $241.7 million increased 10.2% from
fiscal 1997 net sales of $219.4 million. Improved sales were the
result of continued growth with the leading national home center
chains and increased shipments to national and regional builders.
In fiscal year 1998, the average price per unit increased 3.8%
over fiscal year 1997. The average unit price increased primarily
as a result of a richer product mix and general price increases
implemented in the third quarter of both fiscal 1997 and 1998.
Overall unit volume increased approximately 6% from the prior
year as the Company gained overall market share, especially in
the home center channel, due largely to the impact of new product
styles introduced during the last year. Unit shipments to home
centers increased to record levels based on strong overall remodeling
activity and the Company's relationships with the leading home center
chains. Unit shipments direct to builders improved through both increased
volume in existing sales regions and expansion into new markets. Unit
volumes to distributors decreased during a year in which the Company
refocused its strategy within this channel.
Gross profit for fiscal year 1998 improved to 30.3%, up 2.5%
from 27.8% in fiscal year 1997. The increase in gross profit was
attributable to the shift towards higher end products, favorable
channel mix and increased productivity.
Material cost per unit increased from prior year. A significant
increase in demand for hardwood lumber and the shift towards more material
intensive, higher end products led to increases in material cost that were
only partially offset by reduced prices for particleboard and other
miscellaneous purchased components.
Labor costs per unit decreased, as improvements in productivity and
lower health care expenses more than offset normal labor rate increases.
Per unit freight costs increased over prior year due to the cost of
maintaining the Company's competitive advantage in the market through
development and maintenance of a specialized delivery system. The impact
of higher freight cost was offset by the increased leverage effect of
higher volume on fixed and semi-fixed components of expense.
Sales and marketing expenses increased as a percentage of net
sales from 14.0% in fiscal 1997 to 15.4% in fiscal 1998. The increase in
sales and marketing costs was the result of the Company's advertising and
promotional initiatives, which were designed to increase market share
through the introduction of several new products and to gain entrance into
new markets of distribution. The Company also hired additional sales and
10
<PAGE>
marketing personnel to support revenue growth.
General and administrative expenses as a percent of sales increased
from 5.8% in fiscal 1997 to 6.1% in fiscal 1998. Increased expense was
attributed to the costs associated with pay-for-performance incentive plans
and payroll expense associated with additions to executive and senior level
management.
Interest expense for fiscal 1998 declined $120,000 to $795,000 from
the prior year. The decrease resulted from the continued reduction of
outstanding debt. Total debt decreased $2.2 million during fiscal 1998.
As of April 30, 1998, long-term debt to total capital was reduced to 12.8%.
Other income increased $332,000 for fiscal 1998 compared to the prior
year due to a combination of increased interest income from short-term
investments and lower net cost for disposal of obsolete equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $16.3 million in
net cash during fiscal 1998 as compared to $17.4 million in the prior
year. The year-over-year decrease in cash generated from operations was
primarily due to an increase in customer receivables associated with a
strong surge in sales during the fourth fiscal quarter. Favorable impact
on cash flow was generated from increased accounts payable, timing
differences in the payment of performance incentives and related compensation,
and timing differences in the payment of promotional rebates. Increased
inventory and an increase in deferred charges also reduced cash provided by
operating activities. Inventory increased due to a higher purchase value
per unit and increased levels associated with the fourth quarter spike in
demand. Deferred charge additions resulted from shipments of new displays
exceeding amortization, as the Company increased market share within the
home center channel.
Capital spending increased $2.8 million from prior year to $7.3
million as the Company increased manufacturing capacity to meet higher
demand. During fiscal 1998 the Company completed an expansion of the
assembly facility in Jackson, Georgia and initiated an expansion of the
dimension and finishing facility in Hardy County, West Virginia. In addition,
the Company invested in new lumber processing and dimension equipment to
increase capacity and efficiency in manufacturing facilities located in
Orange, Virginia; Moorefield, West Virginia; and Toccoa, Georgia. Ground
breaking for the Company's new wood processing facility was delayed until
the beginning of fiscal 1999 due to unforeseen complications with an
intended site. An alternative site has been selected and site work is
scheduled to begin in June 1998. To support continued sales growth, the
Company expects that it will be necessary to make significant investments in
plant, property and equipment. Therefore, capital spending in fiscal 1999
is expected to exceed the level of spending in fiscal 1998.
The Company reduced overall debt by $2.2 million during fiscal 1998.
Total debt on April 30, 1998, was $10.7 million and did not include any
short-term borrowings under the Company's revolving credit facility.
Long-term debt to total equity declined from 23.0% at April 30, 1997, to
14.7% at April 30, 1998.
Cash dividends of $853,000 were paid on Common Stock during
fiscal 1998.
Cash flow from operations combined with accumulated cash on hand and
available borrowing capacity is expected to be sufficient to meet
forecasted working capital requirements, service existing debt obligations
and fund capital expenditures for fiscal 1999.
OUTLOOK FOR FISCAL 1999
The Company anticipates continued underlying strength in the domestic
economy through fiscal 1999. This strength should result in the continued
growth and expansion of the relevant markets for the Company. In addition,
the Company expects to continue to gain market share based on its position
11
<PAGE>
with major customers, its broad stock product offering and its ability to
deliver quality products with superior service. Under these conditions, the
Company expects to continue to generate higher sales.
The Company expects to maintain or increase recent profitability
performance while investing resources in future products, facilities and
markets. Additional volume and improved efficiencies should be sufficient
to offset the anticipated rise in other costs.
The Company maintains sufficient overall capacity to meet current
demand. Projected growth will require capital projects designed to increase
both component and assembly manufacturing capacities. Additional capital
spending will include projects planned to improve productivity, support cost
saving initiatives and the replacement of aging equipment. The Company is
also considering investment opportunities to increase the Company's
business base, to acquire new products, and to gain access to new markets.
The Company establishes debt to equity targets in order to maintain
the financial health of the Company and is prepared to trim investment
plans to maintain financial strength. While the Company is not currently
aware of any events that would result in a material decline in earnings
from fiscal 1998, the Company participates in an industry that is subject
to rapidly changing conditions. The preceding forward looking statements
are based on current expectations, but there are numerous factors that could
cause the Company to experience a decline in sales and/or earnings including:
(1) overall industry demand at reduced levels, (2) economic weakness in a
specific channel of distribution, especially the home center industry,
(3) the loss of sales from specific customers due to their loss of market
share, bankruptcy or switching to a competitor, (4) a sudden and significant
rise in basic raw material costs, (5) the need to respond to price or
product initiatives launched by a competitor, and (6) the impact of a
significant investment or acquisition which provides a substantial
opportunity to increase long-term performance. While the Company believes
that these risks are manageable and will not adversely impact the long-term
performance of the Company, these risks could, under certain circumstances,
have a materially adverse impact on short-term operating results.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Fiscal 1997 net sales of $219.4 million increased 12% from fiscal 1996
net sales of $196.2 million. Average unit prices increased approximately
4% over the prior year due to the general price increase implemented during
the third quarter of the prior fiscal year, favorable changes in the sales
mix by market channel, and a shift towards the higher end of the Company's
broad stock product offering.
Overall unit volume increased approximately 8% from the prior year as
the Company benefited from a stronger economy and increased market share.
Unit shipments to home centers increased to record levels based on strong
overall remodeling activity and the Company's relationships with the leading
domestic home center chains. Unit volumes to distributors increased due to
good overall market demand and the Company's access to key markets through
both new and established customers. Unit shipments to direct builders
remained flat, but at historically high levels, as aggressive pricing
initiatives by certain competitors offset the addition of several new
customers.
Gross profit improved to 27.8% of net sales from 21.5% the prior year.
The increase in gross profit was attributable to higher average unit prices,
decreased per unit material and labor costs, and the favorable impact of
leverage with higher volume on fixed and semi-fixed costs.
Material cost per unit declined from the prior year. Continued
improvements in lumber yield, more efficient material utilization and price
12
<PAGE>
decreases on specific raw materials more than offset increased hardwood
lumber prices and costs associated with a more material intensive product mix.
Labor costs per unit decreased, as productivity resulting from the use
of new equipment and manufacturing techniques more than offset normal labor
rate increases and increased incentive pay expenses.
Per unit freight and overhead costs declined due to the leverage impact
of higher volume on fixed and semi-fixed components of expenses.
Selling and marketing expenses increased as a percentage of net sales
from 12.6% in fiscal 1996 to 14.0% in fiscal 1997. The increase in sales
and marketing costs was the result of a one-time national sales event,
higher incentive pay expenses associated with higher sales levels, and
advertising and promotional costs designed to increase market share and
launch several new product and market initiatives.
General and administrative expenses increased from 5.2% of net sales
in fiscal 1996 to 5.8% in fiscal 1997 primarily due to employee compensation
costs associated with the Company's performance incentive programs.
Interest expense for fiscal 1997 declined $295,000 to $915,000 from
the prior year. The decrease resulted from the continued reduction of
outstanding debt. Total debt decreased $2.7 million during fiscal 1997.
As of April 30, 1997, long-term debt to total capital was reduced to 18.7%.
Other income increased $256,000 for fiscal 1997 compared to the prior
year due to a combination of increased interest income from short-term
investments of cash and less expenses pertaining to the disposal of
property, plant and equipment. The effect of this increase over prior year
was lessened by a property tax refund received by the Company in the third
quarter of the prior fiscal year.
YEAR 2000
The Company recognizes that the year 2000 presents many challenges for
information systems, specifically the issue of a two-digit determination of
the year. The Company has performed a self-assessment and has identified
all known software and hardware issues associated with two-character versus
four-character year codes. Business plans have been developed and are
being initiated which will bring about four-digit year compliance for all
software and hardware systems during 1999. The cost of updating systems to
comply with four-digit dating is believed to be incrementally immaterial as
the Company's strategic business plan had already called for upgrading
information systems technology. The Company has determined it has no
exposure to contingencies related to the year 2000 issue for the products it
has sold.
The Company further recognizes a risk from the year 2000 impact on its
suppliers and customers. In response, the Company has initiated formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failures to remediate their own year 2000 issues.
There can be no guarantee that the systems of suppliers and customers
will be converted by the end of calendar 1999. In response, the Company is
developing contingency plans to address critical system interfaces with
these third parties in the event that these third parties are unable to
resolve their year 2000 compliance issues by the end of calendar 1999.
Based on presently available information, the Company does not believe
that the incremental cost to the Company associated with year 2000
compliance activities of third parties is material to the Company.
OTHER COMMENTS
The Company's business has historically been subjected to seasonal
influences, with higher sales typically realized in the second and fourth
13
<PAGE>
fiscal quarters. General economic forces and changes in the Company's
customer mix have reduced seasonal fluctuations in the Company's performance
over the past few years.
The costs of the Company's products are subject to inflationary
pressures and commodity price fluctuations. Inflationary pressure and
commodity price increases have been relatively modest over the past five
years, except for lumber prices, which rose significantly during fiscal 1997.
The Company has generally been able over time to recover the effects of
inflation and commodity price fluctuations through selling price increases.
Mr. John Gerlach did not stand for re-election and retired from the
Board effective August 27, 1997.
Mr. Fred S. Grunewald was elected at the 1997 Annual Shareholders
Meeting held on August 27, 1997, for an initial term to the Board of
Directors.
In addition, the Board named Vice President of Finance and Chief
Financial Officer, Mr. Kent Guichard, Corporate Secretary, on August 27, 1997.
On November 12, 1997, the Board elected Mr. Guichard to the Board of Directors.
During the third quarter of fiscal 1998 the Company adopted SFAS No. 128,
"Earnings per Share." The earnings per share amounts prior to fiscal year
1998 have been restated to comply with the new Statement. The implementation
of this Statement did not have material impact on the determination of
earnings per share. (See Note A to the Financial Statements.)
On June 1, 1998, the Board of Directors approved a $.03 per share cash
dividend on its Common Stock. The cash dividend was paid on June 29, 1998,
to shareholders of record on June 15, 1998.
The Company is involved in various suits and claims in the normal
course of business. Included therein are claims against the Company
pending before the Equal Employment Opportunity Commission. Although
management believes that such claims are without merit and intends to
vigorously contest them, the ultimate outcome of these matters cannot be
determined at this time. In the opinion of management, after consultation
with counsel, the ultimate liabilities and losses, if any, that may result
from suits and claims involving the Company, will not have any material
adverse effect on the Company's operating results or financial position.
The Company is voluntarily participating with a group of companies,
which is cleaning up a waste facility site at the direction of a state
environmental authority.
The Company records liabilities for all probable and reasonably
estimable loss contingencies on an undiscounted basis. For loss
contingencies related to environmental matters, liabilities are based on
the Company's proportional contamination of a site since management believes
it "probable" that the other parties, which are financially solvent, will
fulfill their proportional share of the contamination obligation of a site.
There are no probable insurance or other indemnification receivables
recorded. The Company has accrued for all known environmental remediation
costs, which are probable and can be reasonably estimated, and such amounts
are not material. (See Note I to the Financial Statements.)
14
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended April 30, 1998
---------------------------------------
(in thousands, except share amounts) 1st 2nd 3rd 4th
------- ------- ------- -------
Net sales $55,970 $62,738 $55,545 $67,424
Gross profit 16,331 19,362 16,202 21,330
Income before income taxes 4,255 6,601 4,152 6,280
Net income 2,621 4,066 2,549 3,795
Earnings per share
Basic .34 .53 .33 .49
Diluted .33 .52 .32 .48
Year Ended April 30, 1997
---------------------------------------
1st(a) 2nd 3rd 4th(b)
------- ------- ------- -------
Net sales $53,362 $56,976 $51,643 $57,421
Gross profit 13,552 16,493 14,454 16,547
Income before income taxes 3,347 5,529 3,589 4,649
Net income 2,100 3,462 2,063 2,923
Earnings per share
Basic .28 .45 .27 .38
Diluted .27 .45 .26 .37
(a) Income before income taxes for the first quarter of fiscal 1997
includes $830,000 in unfavorable adjustments for an additional bad
debt provision.
(b) Income before income taxes for the fourth quarter of fiscal 1997
includes $193,000 for increased inventory obsolescence costs.
15
<PAGE>
BALANCE SHEET
(in thousands, except share data) April 30
----------------
1998 1997
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 23,925 $17,339
Customer receivables 27,365 20,488
Inventories 11,884 10,356
Prepaid expenses and other 1,403 940
Deferred income taxes 997 720
-------- -------
TOTAL CURRENT ASSETS 65,574 49,843
Property, Plant and Equipment 34,522 32,252
Deferred Costs and Other Assets 5,604 4,335
Intangible Pension Assets 781 727
-------- -------
$106,481 $87,157
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,414 $ 9,312
Accrued compensation and related expenses 13,211 11,180
Current maturities of long-term debt 2,001 2,229
Accrued marketing expenses 3,549 1,395
Other accrued expenses 3,032 2,285
-------- -------
TOTAL CURRENT LIABILITIES 34,207 26,401
Long-Term Debt, less current maturities 8,717 10,637
Deferred Income Taxes 2,397 2,328
Long-Term Pension Liabilities 2,023 1,493
Commitments and Contingencies -- --
Stockholders' Equity
Preferred Stock, $1.00 par value; 2,000,000
shares authorized, none issued
Common Stock, no par value; 20,000,000 shares
authorized; issued and outstanding shares:
7,800,886 -- 1998; 7,722,656 -- 1997 18,704 18,043
------- -------
Retained earnings 40,433 28,255
TOTAL STOCKHOLDERS' EQUITY 59,137 46,298
------- -------
$106,481 $87,157
-------- -------
See notes to financial statements
16
<PAGE>
STATEMENT OF INCOME AND RETAINED EARNINGS
Years Ended April 30
--------------------------------
(in thousands, except share data) 1998 1997 1996
---- ---- ----
Net sales $ 241,677 $ 219,402 $ 196,237
Cost of sales and distribution 168,452 158,356 153,982
--------- --------- ---------
GROSS PROFIT 73,225 61,046 42,255
Selling and marketing expenses 37,189 30,678 24,775
General and administrative expenses 14,708 12,762 10,199
--------- --------- ---------
OPERATING INCOME 21,328 17,606 7,281
Interest expense 795 915 1,209
Other income (755) (423) (166)
--------- --------- ---------
INCOME BEFORE INCOME TAXES 21,288 17,114 6,238
Provision for income taxes 8,257 6,566 2,392
--------- --------- ---------
NET INCOME 13,031 10,548 3,846
RETAINED EARNINGS, BEGINNING OF YEAR 28,255 18,168 14,322
Cash dividends (853) (461) --
--------- --------- ---------
RETAINED EARNINGS, END OF YEAR $ 40,433 $ 28,255 $ 18,168
--------- --------- ---------
SHARE INFORMATION
Earnings per share
Basic $ 1.68 $ 1.37 $ .51
Diluted $ 1.65 $ 1.35 $ .50
Cash dividends per share $ .11 $ .06 $ --
--------- --------- ---------
See notes to financial statements
17
<PAGE>
STATEMENT OF CASH FLOWS
(in thousands) Years Ended April 30
----------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net income $ 13,031 $ 10,548 $ 3,846
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and
amortization 7,759 7,810 7,839
Net loss on disposal of property,
plant and equipment 122 220 126
Deferred income taxes (208) (645) (342)
Other non-cash items 568 1,432 831
Changes in operating assets and
liabilities:
Customer receivables (7,340) (1,891) (631)
Inventories (1,653) (384) 177
Refundable deposits -- -- 1,708
Other assets (4,183) (2,995) (2,828)
Accounts payable 3,102 1,661 (1,231)
Accrued compensation and related
expenses 2,031 2,706 1,338
Other 3,115 (1,058) 908
NET CASH PROVIDED BY OPERATING ------ ------ ------
ACTIVITIES 16,344 17,404 11,741
INVESTING ACTIVITIES
Payments to acquire property, plant
and equipment (7,304) (4,537) (5,030)
Proceeds from sales of property, plant
and equipment 67 85 221
------ ------ ------
NET CASH USED BY INVESTING
ACTIVITIES (7,237) (4,452) (4,809)
FINANCING ACTIVITIES
Payments of long-term debt (2,230) (2,719) (2,805)
Common Stock issued through stock
option plans 562 366 198
Dividends paid (853) (461) --
------ ------ ------
NET CASH USED BY FINANCING
ACTIVITIES (2,521) (2,814) (2,607)
------ ------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 6,586 10,138 4,325
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 17,339 7,201 2,876
------ ------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $23,925 $17,339 $ 7,201
------- ------- -------
See notes to financial statements
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company manufactures and distributes kitchen cabinets and
vanities for the remodeling and new home construction markets.
The Company's products are sold on a national basis through a
network of independent distributors and directly to home centers,
major builders and home manufacturers.
The following is a description of the more significant
accounting policies of the Company.
Revenue Recognition: Revenue is recognized as shipments are
made to the customer. Revenue is based on invoice price less
allowances for sales returns and cash discounts.
Advertising Costs: Advertising costs are expensed in the
fiscal year incurred.
Cash and Cash Equivalents: Cash in excess of operating
requirements is invested in short-term instruments which are
carried at fair value (approximates cost). The Company considers
all highly liquid short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at lower of cost,
determined by the last-in, first-out method (LIFO), or market.
The LIFO cost reserve is determined in the aggregate for
inventory and is applied as a reduction to inventories determined
on the first-in, first-out method (FIFO). FIFO inventory cost
approximates replacement cost.
Promotional Displays: The Company's investment in promotional
displays is carried at cost less applicable amortization.
Amortization is provided by the straight-line method on an
individual display basis over the estimated period of benefit
(approximately 30 months).
Property, Plant and Equipment: Property, plant and equipment is
stated on the basis of cost less an allowance for depreciation.
Depreciation is provided by the straight-line method over the
estimated useful lives of the related assets, which range from
fifteen to thirty years for buildings and improvements and three
to ten years for furniture and equipment. Assets under capital
lease, buildings and leasehold improvements are amortized over
the shorter of their estimated useful lives or term of the
related lease.
Fair Value of Financial Instruments: The carrying amounts of the
Company's cash and cash equivalents, customer receivables, accounts
payable and long-term debt approximate fair value.
Per Share Information: In 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards, (SFAS) No. 128,
"Earnings Per Share". SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Previously, the dilutive effect of stock options on earnings per share
was not significant and, therefore, was excluded. All earning per share
amounts for all periods have been presented and, where appropriate, restated
to the SFAS No. 128 requirements.
Stock-Based Compensation: As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to continue using the
intrinsic value method of accounting for stock options and has provided the
additional required disclosures. (See Note F to the Financial Statements.)
New Accounting Rules: In June 1997 FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which the Company will be required to adopt for the
fiscal quarter ending July 31, 1998. SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial
19
<PAGE>
statements. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments by or
distributions to stockholders. The Company currently has no components of
comprehensive income as required by SFAS No. 130 and therefore does not
expect the adoption of SFAS No. 130 to have a materialimpact on the financial
statements.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications: Certain prior years' amounts have been
reclassified to conform to the current year's presentation.
NOTE B -- CUSTOMER RECEIVABLES
The components of customer receivables were:
April 30
--------------------
(in thousands) 1998 1997
---- ----
Gross customer receivables $29,122 $21,869
Less:
Allowance for bad debt (123) (210)
Allowance for returns and discounts (1,634) (1,171)
------- -------
Net customer receivables $27,365 $20,488
------- -------
NOTE C -- INVENTORIES
The components of inventories were:
April 30
-------------------
(in thousands) 1998 1997
---- ----
Raw materials $ 7,052 $ 6,270
Work-in-process 10,678 9,684
Finished goods 1,138 1,115
------- -------
Total FIFO inventories 18,868 17,069
Reserve to adjust inventories to
LIFO value (6,984) (6,713)
------- -------
Total LIFO inventories $11,884 $10,356
------- -------
NOTE D -- PROPERTY, PLANT and EQUIPMENT
The components of property, plant and equipment were:
April 30
------------------
(in thousands) 1998 1997
---- ----
Land $ 876 $ 876
Buildings and improvements 18,766 17,416
Buildings and improvements -
capital leases 6,550 6,550
Machinery and equipment 51,394 48,697
Machinery and equipment -
capital leases 136 1,836
Construction in progress 2,984 1,250
------- -------
80,706 76,625
Less allowance for depreciation (46,184) (44,373)
------- -------
Total $34,522 $32,252
------- -------
Depreciation expense amounted to $4,845,000, $5,168,000, and
$5,128,000 in fiscal 1998, 1997, and 1996, respectively.
20
<PAGE>
NOTE E -- LOANS PAYABLE AND LONG-TERM DEBT
Maturities of long-term debt are as follows:
Years Ending April 30
2004 and Total
There- Out-
(in thousands) 1999 2000 2001 2002 2003 after standing
--------------------------------------------------------------
Notes payable $ 500 $ 125 $ -- $ -- $ -- $ -- $ 625
Industrial
revenue
bonds 1,120 750 750 925 2,500 -- 6,045
Capital lease
obligations 381 401 422 434 436 1,974 4,048
------ ------ ------ ------ ------ ------ -------
Total $2,001 $1,276 $1,172 $1,359 $2,936 $1,974 $10,718
------ ------ ------ ------ ------ ------ -------
Less current
maturities (2,001)
-------
Total long-term debt $ 8,717
-------
The Company's primary loan agreement provides for term loans and a
$12 million revolving credit facility. This agreement includes various
variable interest rate options which lower and raise the interest rate based
on Company performance. The maximum interest rate under the agreement is
the prime rate.
The revolving credit facility is used by the Company as a working
capital account. As such, borrowings and repayments may routinely occur on
a daily basis. There was no activity through the revolving credit facility
during fiscal 1998 and 1997.
The Company employs straight-forward interest rate swap agreements to
assist in maintaining a balance between fixed and variable interest rates
on outstanding debt. Any deferred gain or loss associated with the swap
agreements is accounted for over the life of the swaps at the fixed rate
stipulated in the executed agreements. On April 30, 1998, these amounts
were immaterial. The Company does not invest, trade, or otherwise
speculate in any derivatives or similar type instruments.
At April 30, 1998, term loans of $625,000 were outstanding. The term
loans bore a variable interest rate of 6.9% on April 30, 1998.
On April 30, 1998, the Company had $6.0 million outstanding in
industrial revenue bonds, maturing at various dates through 2003. Due to
an interest rate swap agreement, a fixed rate of 6.2% applies to $4.8 million
through June 1, 1999. The variable rate that would have applied if the
rate swap had not occurred was 4.3% on April 30, 1998. On $1.2 million of
outstanding bonds, the variable interest rate was 4.3% on April 30, 1998.
Subsequent to year end the Company amended its swap agreement, effective
June 1, 1998, on $4.5 million of industrial revenue bonds, extending the
term to December 1, 2002 and reducing the fixed rate to approximately 5.0%.
Substantially all of the industrial revenue bonds are redeemable at the
option of the bondholder. The Company has irrevocable arrangements to
refinance these bonds on a long-term basis in the event they are redeemed.
Interest rates on the Company's capital lease obligations were approxi-
mately 5.0% on April 30, 1998, with these obligations maturing through 2007.
The Company's primary loan agreement limits the amount and type of
indebtedness the Company can incur and requires the Company to maintain a
21
<PAGE>
specific minimum net worth and specified financial ratios measured on a
quarterly basis. The primary loan agreement was amended during the first
quarter of fiscal 1997, allowing the Company to pay cash dividends on
Common Stock. Substantially all assets of the Company are pledged as
collateral under the primary loan agreement, industrial revenue bond
agreements and capital lease arrangements. The Company was in compliance
with all covenants contained in its loan agreements at April 30, 1998.
Interest paid was $810,000, $989,000, and $1,178,000 during fiscal 1998,
1997, and 1996, respectively. Net amounts to be received or paid under
interest rate swap agreements are accrued as an adjustment to interest
expense.
NOTE F -- STOCKHOLDERS' EQUITY
Common Stock
Transactions affecting Common Stock were as follows:
Shares Amount
Outstanding (in thousands)
----------- --------------
Balance at April 30, 1996 7,608,761 $ 17,677
Stock options exercised 113,895 366
--------- ----------
Balance at April 30, 1997 7,722,656 $ 18,043
Stock options exercised 65,908 408
Stock issued to AWSOP 12,322 253
--------- ----------
Balance at April 30, 1998 7,800,886 $ 18,704
--------- ----------
Employee Stock Ownership Plan
In fiscal 1990, the Company instituted the American Woodmark
Stock Ownership Plan (AWSOP). Under this plan, all employees over the
age of 18 who have been employed by the Company for a minimum of one year
are eligible to receive Company stock through a profit sharing contribution
and a 401(k) matching contribution based upon the employee's contribution
to the plan.
Profit sharing contributions are 3% of after tax earnings,
calculated on a quarterly basis and distributed equally to all employees
eligible to participate in the plan. The Company recognized expenses for
profit sharing contributions of $392,000, $317,000, and $115,000 in fiscal
1998, 1997, and 1996, respectively.
The Company matches 401(k) contributions in the amount of 50% of an
employee's contribution to the plan up to 3% of base salary for an
effective maximum Company contribution of 1.5%. The expense for 401(k)
matching contributions for this plan was $594,000, $619,000, and $502,000
in fiscal 1998, 1997, and 1996, respectively.
Stock Options
The 1986 stock option plan for key employees of the Company expired
in April 1996. Outstanding options under this plan are exercisable in
annual cumulative increments of 33.33% beginning one year after the date
of grant and must be exercised within twelve months after cumulative
increments equal 100%, at which time options expire.
In August 1996 stockholders approved a new stock option plan for key
employees of the Company. Under the plan, up to 750,000 shares of Common
Stock may be granted as options, with the term of options granted not
exceeding ten years. Options granted are subject to vesting conditions and
other requirements prescribed by a participant's stock option agreement.
22
<PAGE>
In August 1995 stockholders approved a stock option plan for
non-employee directors, which replaced the 1990 plan that had expired.
<PAGE>
Under the new 1995 plan, up to 30,000 shares of Common Stock may be granted
as options, with each non-employee director receiving an option to purchase
1,000 shares on the anniversary date of the plan. Outstanding options
under both plans are exercisable in annual cumulative increments of 33.33%
beginning one year after the date of grant and must be exercised within
twelve months after cumulative increments equal 100%, at which time options
expire.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plans.
For the years ended April 30, 1998, 1997 and 1996, pro forma net income
and earnings per share information required by SFAS No. 123 has been
determined as if the Company had accounted for its stock options using the
fair value method. The fair value of these options was estimated at the
date of grant using a Black-Scholes option pricing model.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows:
1998 1997 1996
---- ---- ----
Pro forma net income $12,499,514 $10,435,671 $3,831,639
Pro forma earnings
per share:
Basic $1.61 $1.36 $ .50
Diluted 1.59 1.35 .50
The following table summarizes stock option activity and related
information under the stock option plans for the fiscal years
ended April 30:
1998 1997 1996
---- ---- ----
Outstanding at beginning
of year 312,000 252,919 319,442
Granted 238,650 206,600 66,600
Exercised (66,998) (113,895) (57,652)
Expired or cancelled (3,301) (33,624) (75,471)
------- ------- -------
Outstanding at April 30 480,351 312,000 252,919
------- ------- -------
Exercisable at April 30 88,235 64,867 142,686
------- ------- -------
Available for future
issuance at April 30 335,875 570,734 24,000
------- ------- -------
Weighted average exercise
prices (in dollars):
Outstanding at beginning
of year $ 6.62 $4.01 $3.84
Granted 16.46 7.70 4.47
Exercised 4.97 3.22 3.41
Expired or cancelled 10.36 5.19 4.15
Outstanding at April 30 11.71 6.62 4.01
Exercisable at April 30 6.67 4.61 3.57
The following table summarizes information about stock options
outstanding at April 30, 1998 [remaining lives (in years) and
exercise prices are weighted-averages]:
Options Outstanding Options Exercisable
------------------------------------------------
Option Price Remaining Exercise Exercise
per Share Options Life Price Options Price
- ------------- ------- ---- ------ ------- --------
$ 4.38-$ 5.50 85,700 4.2 $ 4.78 42,435 $ 4.70
$ 5.63-$ 7.50 104,501 8.2 $ 6.52 28,900 $ 6.47
$ 9.25-$14.44 72,700 8.9 $12.55 16,900 $11.93
$15.56-$18.94 217,450 9.1 $16.65 -- --
- ------------- ------- ---- ------ ------ ------
$ 4.38-$18.94 480,351 8.0 $11.71 88,235 $ 6.67
- ------------- ------- ---- ------ ------ ------
23
<PAGE>
The following table summarizes the computations of basic and
diluted earnings per share:
Years ended April 30,
- --------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------
Numerator used in basic
and diluted earnings
per common share:
Net income $13,030,977 $10,548,145 $ 3,845,677
- --------------------------------------------------------------------
Denominator:
Denominator for basic
earnings per common
share--weighted
average shares 7,752,873 7,672,873 7,594,977
Effect of dilutive
securities:
Stock options 154,743 124,499 50,435
- --------------------------------------------------------------------
Denominator for diluted
earnings per common
share--weighted average
shares and assumed
conversions 7,907,616 7,797,372 7,645,412
- --------------------------------------------------------------------
Earnings per
common share, basic $1.68 $1.37 $ .51
Earnings per
common share, diluted $1.65 $1.35 $ .50
NOTE G -- EMPLOYEE BENEFITS
The Company has two defined benefit pension plans covering
substantially all employees. The plan covering salaried employees provides
pension benefits based upon a formula which considers salary levels and
length of service. The hourly pension plan provides benefits based upon an
hourly rate formula. Contributions to the plans meet or exceed the minimum
funding standards set forth in the Employee Retirement Income Security
Act of 1974. Pension plan assets are invested in equity mutual funds and
fixed income security funds.
Net periodic pension costs were comprised of the following:
(in thousands) Years Ended April 30
-------------------------
1998 1997 1996
---- ---- ----
Service cost-benefits
earned during the year $ 868 $ 767 $ 763
Interest cost on projected
benefit obligation 1,309 1,142 1,031
Actual return on plan
assets (3,440) (1,272) (1,846)
Net amortization and
deferrals 2,344 280 1,045
------ ------ ------
Net periodic pension cost $1,081 $ 917 $ 993
------ ------ ------
The funded status of the Company's pension plans was as follows
for the fiscal years ended April 30:
1998 1997
--------------------------------------------------------
Plan assets Accumulated Plan assets Accumulated
exceed benefit exceed benefit
accumulated obligation accumulated obligation
benefit exceeds benefit exceeds
(in thousands) obligation plan assets obligation plan assets
---------------------------------------------------------
Actuarial present
value of pension
benefit obligation:
Vested $ 9,625 $ 6,901 $ 7,444 $ 5,572
Non-vested 641 624 424 512
------- ------- ------- -------
Accumulated 10,266 7,525 7,868 6,084
Effect of
anticipated future
salary increases 3,715 -- 2,589 --
------- ------- ------- -------
Projected 13,981 7,525 10,457 6,084
Less fair value of
plan assets (12,437) (7,345) (9,808) (5,259)
------- ------- ------- -------
Projected benefit
obligation in excess
of the fair value of
plan assets 1,544 180 649 825
Unrecognized prior
service cost (39) (541) (46) (475)
Unrecognized net
gain (loss) 614 (155) 1,515 (136)
Unrecognized net
transition obligation (162) (85) (212) (116)
Additional minimum
liability -- 781 -- 727
------- ------- ------- -------
Net pension obligation $ 1,957 $ 180 $ 1,906 $ 825
------- ------- ------- -------
24
<PAGE>
Primary assumptions utilized in accounting for the Company's pension
plans were as follows:
Years Ended April 30
----------------------------
1998 1997 1996
---- ---- ----
Weighted average assumed
discount rate 7.25% 8.0% 8.0%
Estimate of salary increases
(salaried plan only) 4.0% 4.0% 4.0%
Expected long-term rate of
return on assets 8.0% 8.0% 8.0%
NOTE H -- INCOME TAXES
The provision for income taxes was comprised of the following:
(in thousands) Years Ended April 30
------------------------------
1998 1997 1996
---- ---- ----
Current
Federal $ 7,076 $ 6,307 $ 2,429
State 1,389 904 305
------- ------- -------
Total current 8,465 7,211 2,734
------- ------- -------
Deferred (Benefit)
Federal (178) (546) (283)
State (30) (99) (59)
------- ------- -------
Total deferred (208) (645) (342)
------- ------- -------
Total provision $ 8,257 $ 6,566 $ 2,392
------- ------- -------
The Company's effective income tax rate varied from the federal
statutory rate as follows:
Years Ended April 30
--------------------
1998 1997 1996
---- ---- ----
Federal statutory rate 35% 35% 34%
State income taxes,
net of federal tax effect 4 3 3
Other -- -- 1
---- ---- ----
Effective income tax rate 39% 38% 38%
---- ---- ----
Income taxes paid were $7,619,000, $8,199,000, and $1,809,000 for fiscal
years 1998, 1997, and 1996, respectively.
The significant components of deferred tax assets and liabilities were
as follows:
(in thousands) April 30
-------------
1998 1997
---- ----
Deferred tax assets
Employee benefits $ 696 $ 757
Product liability 375 276
Other 667 582
------ ------
Total 1,738 1,615
Deferred tax liabilities
Depreciation 2,330 2,518
Inventory 607 511
Other 201 194
----- ------
Total 3,138 3,223
Net deferred tax liability $1,400 $1,608
------ ------
NOTE I -- COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved in various suits and claims in the normal
course of business. Included therein are claims against the Company
pending before the Equal Employment Opportunity Commission. Although
management believes that such claims are without merit and intends to
vigorously contest them, the ultimate outcome of these matters cannot be
determined at this time. In the opinion of management, after consultation
with counsel, the ultimate liabilities and losses, if any, that may
result from suits and claims involving the Company will not have a material
adverse effect on the Company's results of operations or financial position.
The Company is voluntarily participating with a group of companies
which is cleaning up a waste facility site at the direction of a state
environmental authority.
The Company records liabilities for all probable and reasonably
estimable loss contingencies on an undiscounted basis. For loss
contingencies related to environmental matters, liabilities are based on
the Company's proportional share of the contamination obligation of a site
since management believes it "probable" that the other parties, which are
25
<PAGE>
financially solvent, will fulfill their proportional contamination
obligations. There are no probable insurance or other indemnification
receivables recorded. The Company has accrued for all known environmental
remediation costs which are probable and can be reasonably estimated, and
such amounts are not material. Due to factors such as the continuing
evolution of environmental laws and regulatory requirements, technological
changes, and the allocation of costs among potentially responsible parties,
estimation of future remediation costs is necessarily imprecise. It is
possible that the ultimate cost, which cannot be determined at this time,
could exceed the Company's recorded liability. As a result, charges to
income for environmental liabilities could have a material effect on results
of operations in a particular quarter or year as assessments and remediation
efforts proceed. However, management is not aware of any matters which
would be expected to have a material adverse effect on the Company's
results of operations or financial position.
Lease Agreements
The Company leases six office buildings, a manufacturing building,
four service centers and certain equipment. Total rental expenses amounted
to approximately $3,835,000, $3,428,000, and $3,378,000 in fiscal 1998,
1997, and 1996, respectively.
Minimum rental commitments as of April 30, 1998, under noncancelable
leases are as follows:
(in thousands)
Fiscal Year Operating Capital
- ----------- --------- -------
1999 $2,303 $ 582
2000 1,800 581
2001 1,103 581
2002 457 571
2003 140 551
2004 (and thereafter) 1 2,203
------ -------
$5,804 $ 5,069
------ -------
Less amounts representing interest (1,021)
-------
Total obligation under capital leases $ 4,048
-------
Related Parties
During fiscal 1985, prior to becoming a publicly held
corporation, the Company entered into an agreement with a
partnership formed by certain executive officers of the Company to lease
an office building constructed and owned by the partnership. The initial
lease term has three remaining years with two five-year renewal periods
available at the Company's option. Under this agreement, rental expense
was $383,000, $377,000, and $370,000 in fiscal 1998, 1997, and 1996,
respectively. Rent during the remaining base term of approximately
$386,000 annually (included in the above table) is subject to adjustment
based upon changes in the Consumer Price Index.
NOTE J -- OTHER INFORMATION
Credit is extended based on an evaluation of the customer's
financial condition and generally collateral is not required. The
Company's customers operate in the construction and remodeling markets.
At April 30, 1998, the Company's three largest customers, Customers A,
B and C, represented 9.1%, 21.8% and 10.3% of the Company's customer
receivables, respectively.
The following table summarizes the percentage of sales to the
Company's three largest customers for the last three fiscal years:
Percent of Annual Sales
-----------------------
1998 1997 1996
---- ---- ----
Customer A 8.5 9.9 10.7
Customer B 30.4 25.7 17.5
Customer C 13.0 11.9 9.7
The Company maintains an allowance for bad debt based upon
management's evaluation and judgement of potential net loss. The
allowance is estimated based upon historical experience, the effects of
current developments and economic conditions, and anticipation of
customers' financial condition. Estimates and assumptions are periodically
reviewed and updated with any resulting adjustments to the allowance
reflected in current operating results.
26
<PAGE>
MANAGEMENT'S REPORT
The accompanying financial statements are the responsibility of and
have been prepared by the management of American Woodmark. The
financial statements have been prepared in accordance with generally
accepted accounting principles and necessarily include some amounts
that are based on management's best estimates and judgements.
Financial information throughout this annual report is consistent with
the financial statements.
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that transactions are
properly recorded, that policies and procedures are adhered to and
that assets are adequately safeguarded. The system of internal
controls is supported by written policies and guidelines, an
organizational structure designed to ensure appropriate segregation of
responsibilities and selection and training of qualified personnel.
To ensure that the system of internal controls operates
effectively, management and the internal audit staff review and
monitor internal controls on an ongoing basis. In addition, as part of
the audit of the financial statements, the Company's independent
auditors evaluate selected internal accounting controls to establish a
basis for reliance thereon in determining the nature, timing and
extent of audit tests to be performed. The Company believes its system
of internal controls is adequate to accomplish the intended
objectives, and continues its efforts to further improve those
controls.
The Audit Committee of the Board of Directors, which is composed
entirely of non-management Directors, oversees the financial reporting
and internal control functions. The Audit Committee meets periodically
and separately with Company management, the internal audit staff, and
the independent auditors to ensure these individuals are fulfilling
their obligations and to discuss auditing, internal control and
financial reporting matters. The Audit Committee reports its findings
to the Board of Directors. The independent auditors and the internal
audit staff have unrestricted access to the Audit Committee.
/s/JAMES J. GOSA
James J. Gosa
President and Chief Executive Officer
/s/KENT B. GUICHARD
Kent B. Guichard
Vice President, Finance and
Chief Financial Officer
27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
American Woodmark Corporation
We have audited the accompanying balance sheets of American Woodmark
Corporation as of April 30, 1998 and 1997, and the related statements of
income and retained earnings, and cash flows for each of the three years
in the period ended April 30, 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 American
Woodmark Corporation at April 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
Baltimore, Maryland
June 4, 1998
28
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
James J. Gosa
Director; President and Chief Executive Officer
David L. Blount
Vice President, Manufacturing
Kent B. Guichard
Director; Vice President, Finance and
Chief Financial Officer; Corporate Secretary
Philip S. Walter
Vice President and General Manager,
New Business Development
Ian J. Sole
Vice President, Sales and Marketing
William F. Brandt, Jr.
Chairman of the Board
Daniel T. Carroll
Director; Chairman
The Carroll Group
A Management Consulting Firm
Martha M. Dally
Director; Executive Vice President-Personal Products
Sara Lee Corporation
Fred S. Grunewald
Director
C. Anthony Wainwright
Director; Vice Chairman
McKinney & Silver
CORPORATE INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of American Woodmark
Corporation will be held on August 21, 1998, at 9:00 a.m. at
Piper's at Creekside in Winchester, Virginia.
Form 10-K Report
A copy of the Form 10-K for the year ended April 30, 1998, may be
obtained by writing:
Kent Guichard
Vice President, Finance and
Chief Financial Officer
American Woodmark Corporation
PO Box 1980
Winchester, VA 22604-8090
Corporate Headquarters
American Woodmark Corporation
3102 Shawnee Drive
Winchester, VA 22601-4208
(540) 665-9100
Mailing Address
PO Box 1980
Winchester, VA 22604-8090
Transfer Agent
American Stock Transfer & Trust Company
(800) 937-5449
American Woodmark(R)
Coventry & Case(R)
Crestwood(R)
Scots Pride(R)
Timberlake(R)
Flat Pack(TM)
Hickory Grove(Tm)
Leesburg(TM)
Nashville(TM)
Teton(TM)
Yellowstone(TM)
are trademarks of American Woodmark Corporation.
(C)1998 American Woodmark Corporationr
Printed in U.S.A.
<PAGE>
Appendix to Exhibit 13
Front cover Corporate Logo, Picture
Picture shows three cabinet doors
Caption: Oak Maple Thermo Foil Hickory Cherry Melamine Laminate
1998 Annual Shareholders Report
Page 1 Corporate Logo
Page 3 Picture
Shows James J. Gosa (President and Chief Executive Officer)
Page 6 Picture, Logo
Picture shows employee at workstation
American Woodmark Brand logo with caption: "American Woodmark
brand cabinetry is sold through the nation's leading home center
outlets, including The Home Depot and Lowe's."
Page 7 Picture, Logo
Picture shows employee in plant and two cabinet doors
Coventry & Case logo with caption: "The Coventry & Case brand is
the exclusive cabinetry brand for The Great Indoors, Sears' new
home interiors store."
Page 8 Picture, Logo
Picture shows modern equipment
Timberlake logo with caption: Introduced in 1990, Timberlake
brand cabinetry is sold throughout the company's builder direct
service centers and through a network of distributors and dealers
throughout the United States and Canada."
Page 9 Two Pictures, Two Logos
First picture shows a kitchen
Second picture shows a packaged cabinet
Crestwood and Scots Pride brand logos with caption: "Scots Pride
and Crestwood brand cabinetry are offered in Hechingers and
Builders Square stores throughout the United States."
Back cover Logo, Address, Phone Number, Fax Number
Corporate logo
American Woodmark Vcorporation
3102 Shawnee Drive
Winchester, VA 22601-4208
(540) 665-9100
(540) 665-9176 Fax
<PAGE>
Exhibit 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of American Woodmark Corporation of our report
dated June 4, 1998, included in the April 30, 1998 Annual Report
to Shareholders of American Woodmark Corporation.
Our audits also included the financial statement schedule of
American Woodmark Corporation listed in Item 14(a). This
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the
Registration Statement (Form S-8 No. 333-12631) pertaining to the
American Woodmark Corporation 1995 Non-Employee Directors Stock
Option Plan and the Registration Statement (Form S-8 No. 333-
12623) pertaining to the American Woodmark Corporation 1996 Stock
Option Plan for Employees of our reports dated June 4, 1998 and
included herein, with respect to the consolidated financial
statements and schedule of American Woodmark Corporation
incorporated by reference and included in the annual report (Form
10-K) for the year ended April 30, 1998.
/s/ERNST & YOUNG LLP
Baltimore, Maryland
July 16, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 23,925
<SECURITIES> 0
<RECEIVABLES> 29,122
<ALLOWANCES> 1,757
<INVENTORY> 11,844
<CURRENT-ASSETS> 65,574
<PP&E> 80,706
<DEPRECIATION> 46,184
<TOTAL-ASSETS> 106,481
<CURRENT-LIABILITIES> 34,207
<BONDS> 8,717
0
0
<COMMON> 18,704
<OTHER-SE> 40,433
<TOTAL-LIABILITY-AND-EQUITY> 106,481
<SALES> 241,677
<TOTAL-REVENUES> 241,677
<CGS> 168,452
<TOTAL-COSTS> 168,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 795
<INCOME-PRETAX> 21,288
<INCOME-TAX> 8,257
<INCOME-CONTINUING> 13,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,031
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.65
</TABLE>
