<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-21856
ABT BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3684348
- ------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE NEENAH CENTER, NEENAH, WISCONSIN 54956
-------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 751-8611
--------------
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 .
---- ----
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
As of the close of business on November 12, 1997, the registrant had outstanding
10,581,660 shares of Common Stock.
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL STATEMENTS PAGE NUMBER
- ----------------------------- -----------
<S> <C>
Unaudited Balance Sheets as of December 31, 1996
and September 30, 1997 3
Unaudited Statements of Income for the three
months and nine months ended September 30, 1996
and September 30, 1997 4
Unaudited Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1997 5
Condensed Notes to Unaudited Financial
Statements 6 - 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations 18 - 23
PART II: OTHER INFORMATION 24
- ---------------------------
Signature Page 25
</TABLE>
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- ------------------
(unaudited)
Assets
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 24 $ 1,949
Accounts receivable, less allowances of
$5,030 and $7,062, respectively 31,278 43,300
Inventories 47,237 53,395
Prepaid expenses 4,468 6,443
Deferred tax assets 765 1,674
--------- --------------
Total Current Assets 83,772 106,761
--------- --------------
PROPERTY, PLANT AND EQUIPMENT
Land 2,968 2,968
Buildings and improvements 28,700 39,812
Machinery and equipment 108,975 153,941
Furniture and fixtures 3,947 4,110
Construction in progress 45,525 32,688
--------- --------------
190,115 233,519
Less-Accumulated depreciation (25,646) (40,949)
--------- --------------
Net property, plant and equipment 164,469 192,570
OTHER ASSETS, Net 2,537 6,070
GOODWILL, Net 9,486 8,470
--------- --------------
Total Assets $ 260,264 $ 313,871
Liabilities & Stockholders' Equity
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 9,380 $ 12,501
Accounts Payable 15,432 17,681
Accrued Expenses 16,183 14,398
--------- --------------
Total Current Liabilities 40,995 44,580
LONG-TERM DEBT 90,691 123,939
OTHER LONG TERM LIABILITIES 6,957 7,215
DEFERRED INCOME TAXES 11,680 16,774
STOCKHOLDERS' EQUITY
Common stock 122 122
Additional paid-in capital 60,511 59,636
Cumulative translation adjustment (364) (1,246)
Retained earnings 76,637 89,195
Less: Treasury Shares (26,965) (26,344)
--------- --------------
Total Stockholders' Equity 109,941 121,363
--------- --------------
Total Liabilities and Stockholders' Equity $ 260,264 $ 313,871
========= ===============
</TABLE>
See accompanying notes to the financial statements
<PAGE>
ABT Building Products Corporation and Subsidiaries
Statements of Income (unaudited)
(in thossands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 88,435 $ 87,516 $ 245,346 $ 252,935
COST OF SALES 61,979 63,135 173,359 176,718
--------- --------- --------- ---------
Gross profit 26,456 24,381 71,987 76,217
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,247 13,372 35,321 39,650
RESTRUCTURING CHARGE - - - 10,397
--------- --------- --------- ---------
Operating income 13,209 11,009 36,666 26,170
OTHER INCOME (EXPENSE) (1,894) (2,544) (5,618) (5,811)
--------- --------- --------- ---------
Income before income taxes 11,315 8,465 31,048 20,359
--------- --------- --------- ---------
PROVISION FOR INCOME TAXES 4,421 3,210 12,121 7,801
--------- --------- --------- ---------
Net Income $ 6,894 $ 5,255 $ 18,927 $ 12,558
========= ========= ========= =========
INCOME PER COMMON SHARE $ 0.60 $ 0.46 $ 1.65 $ 1.08
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUUSTANDING 11,571 11,472 11,486 11,628
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 18,927 $ 12,558
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Writedown of assets due to restructuring 0 7,131
Depreciation and amortization 9,547 11,521
deferred income taxes 3,881 4,185
cumulative translation adjustment (364) (882)
Changes in certain assets and liabilities-
Accounts receivable (19,386) (12,022)
Inventories 3,789 (6,158)
Other assets (3,702) (3,028)
Accounts payable and accrued expenses 9,641 722
-------- --------
Net cash provided by (used in) operating activities 22,333 14,027
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (28,423) (48,217)
-------- --------
Net cash used in investing activities (28,423) (48,217)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 14,148 36,369
Exercise of stock options (70) (254)
Payments for the purchase of treasury shares (1,701) 0
-------- --------
Net cash provided by financing activities 12,377 36,115
-------- --------
Net increase (decrease) in cash 6,287 1,925
Cash and Cash equivalents, beginning of period 2,317 24
-------- --------
Cash and Cash equivalents, end of period $ 8,604 $ 1,949
======== ========
</TABLE>
See accompanying notes to the financial statements
5
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(1) GENERAL
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. In the opinion of management, these statements contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position of the Company (as defined below). Results
on the interim basis are not necessarily indicative of results which may be
expected for the full year.
(2) BASIS OF PRESENTATION
The consolidated balance sheets at December 31, 1996, and September 30,
1997, and the consolidated statements of operations for the three month and nine
month periods ended September 30, 1996 and 1997, and cash flows for the nine
months ended September 30, 1996 and 1997, include the accounts of ABT BUILDING
PRODUCTS CORPORATION, a Delaware corporation ("ABT"), and its wholly owned
subsidiaries ABTCO, INC. ("ABTCO"), KENTECH PLASTICS, INC. ("KENTECH") and ABT
CANADA, LIMITED ("ABT CANADA") (collectively referred to as the "Company").
(3) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost method. Inventory costs include
material, labor, and manufacturing overhead (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------------------- -----------------------
<S> <C> <C>
Finished products and work in process $ 30,330 $ 35,776
Raw materials 8,954 9,340
Operating parts and supplies 7,953 8,279
====================== ======================
$ 47,237 $ 53,395
====================== ======================
</TABLE>
6
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(4) LONG-TERM DEBT
Long-term debt as of December 31, 1996, and September 30, 1997,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------------------- ----------------------
<S> <C> <C>
Total debt---
Revolving line of credit $ 50,065 $ 83,465
Term loan 50,000 43,750
MISSISSIPPI BUSINESS FINANCE CORP. BONDS:
Series 1997A - 1,000
Series 1997B - 8,222
Capital lease obligations 6 3
--------------------- ---------------------
100,071 136,440
Less---current maturities (9,380) (12,501)
===================== =====================
TOTAL LONG-TERM DEBT $ 90,691 $ 123,939
===================== =====================
</TABLE>
On April 1, 1997 the Company entered into a loan agreement with the
Mississippi Business Finance Corporation for the issuance of $1 million Variable
Rate Demand Revenue Bonds (Series 1997A) and $16.5 million Taxable Variable Rate
Demand Revenue Bonds (Series 1997B) to finance the acquisition and construction
of a vinyl siding manufacturing facility in Holly Springs, Mississippi. The
bonds bear interest rates determined weekly by the remarketing agent. The
interest rates at September 30, 1997 were 4.20% and 5.60%, respectively. The
bonds are backed by Irrevocable Letters of Credit issued under the Company's
Revolving Credit Agreement. The Series 1997A and Series 1997B bonds have a
maturity date of April 1, 2022. The amounts included in total debt reflect
drawings against the proceeds of the issued amount of the bonds.
(5) STOCKHOLDERS' EQUITY
Stockholders' Equity as of December 31, 1996, and September 30, 1997,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED TREASURY
STOCK CAPITAL ADJUSTMENT EARNINGS SHARES
----------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 $ 122 $ 60,511 $ (364) $ 76,637 $ (26,965)
Cumulative translation adjustment (882)
Exercise of stock options (875) 621
Net income through September 30, 1997 12,558
----------- ------------- -------------- ------------- ---------------
September 30, 1997 $ 122 $ 59,636 $ (1,246) $ 89,195 $ (26,344)
========== ============ ============= ============ ===============
</TABLE>
7
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(5) STOCKHOLDERS' EQUITY (CONTINUED)
Commencing in the third quarter of 1994, the Board of Directors
authorized the repurchase of up to 2,200,000 shares of the Company's Common
Stock in open market transactions. At September 30, 1997, the Company had
repurchased 1,647,000 shares for a total cost of $26,344,480 (net of shares
reissued). The cost to repurchase the treasury shares has been recorded as a
reduction of stockholders' equity.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, and is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. SFAS No. 129, Disclosure of Information about Capital
Structure, has been issued and is effective for financial statements for annual
periods ending after December 15, 1997. The expected impact of the adoption of
these standards will not be material.
(6) COMMITMENTS AND CONTINGENCIES
Under the terms of the asset purchase agreements between the Company
and the predecessor owners of the operations conducted by ABTCO and ABT CANADA,
such entities agreed to indemnify the Company for certain liabilities or
obligations arising on or prior to the change in ownership, including
liabilities related to environmental, product liability and litigation matters.
In connection with such transactions, as well as the acquisition of KenTech, the
Company assumed various liabilities and obligations, including obligations under
product warranties with respect to products manufactured prior to the change in
ownership.
Litigation
On August 30, 1995, the Company completed negotiations with Michigan
environmental authorities regarding a consent judgment providing for an odor
emissions abatement program at its Alpena, Michigan facility. The program
provides for phased installation of controls to effect a staged reduction of the
facility's emissions of odors into the air. It is estimated that capital
expenditures of approximately $6 million to $12 million will be required in
order to attain compliance with the program. It is the Company's position that
costs incurred in complying with the consent judgment will be borne in whole or
in part by Abitibi-Price Corporation ("APC"), as the prior owner of the Alpena
facility, and APC's corporate parent Abitibi-Price, Inc. ("API"). Accordingly,
on November 27, 1995, the Company and ABTco commenced an action against APC and
API in the Circuit
8
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Court for the County of Oakland, Michigan, (ABT Building Products Corporation
---------------------------------
and ABTco, Inc. v. Abitibi-Price Corporation and Abitibi-Price, Inc., Case No.
- ------------------------------------------------------------------------------
95-508819-CK), seeking to recover damages incurred in connection with the
- -------------
remediation, correction and control of odor emissions at the Alpena facility.
The complaint initially asserted claims for breach of contract, fraudulent
non-disclosure and fraudulent misrepresentation. The Company and ABTco
determined not to pursue the claims for fraudulent non-disclosure and fraudulent
misrepresentation, and a stipulated order to that effect was filed on May 9,
1996. The Company and ABTco proceeded with their claims for breach of contract.
Discovery was completed. The Company and ABTco moved for summary judgment on
liability only; APC and API moved for summary judgment dismissing the remaining
claims in the complaint. By opinion and order dated March 28, 1997 (the
"Order"), the Circuit Court for the County of Oakland, Michigan, granted
defendants' motion for summary judgment, and denied plaintiffs' motion for
summary judgment, on plaintiffs' claim for breach of contract, thereby
dismissing the case. On April 15, 1997, the Company and ABTco filed a claim of
appeal from the Order in the Court of Appeals for the State of Michigan. On May
5, 1997, defendants APC and API filed a cross-appeal from the Order in the Court
of Appeals for the State of Michigan. On August 4, 1997, the Company and ABTco
filed their opening brief in their appeal, and APC and API filed their opening
brief in their cross-appeal.
The Company and ABTco have been named as defendants in a class action and
four separate putative class actions arising from hardboard siding manufactured,
distributed, or sold by them or by APC, API or Abitibi-Consolidated, Inc.
("ACI").
(1) Fyola et al. v. ABT Building Products Corporation, ABTco, Inc. and
------------------------------------------------------------------
Abitibi-Price Corporation, Docket No. 95-12854, Court of Common Pleas of
- --------------------------
Allegheny County, Pennsylvania (the "Fyola Action").
-----
On August 8, 1995, plaintiffs Glenn Fyola, Patricia Fyola, Joyce D'Antonio,
and Kenneth Hyre filed this action in the Court of Common Pleas of Allegheny
County, Pennsylvania against the Company. Plaintiffs alleged that they were
suing on behalf of themselves and a putative class composed of residential
homeowners who reside in Pennsylvania and whose homes have or had for their
exterior siding a hardboard product which was allegedly manufactured,
distributed, or sold by the Company. The original complaint alleged that the
exterior siding on plaintiffs' homes had prematurely rotted, warped, buckled,
and deteriorated. Plaintiffs
9
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
asserted purported claims for breach of implied warranty of merchantability,
breach of implied warranty of fitness, breach of express warranty, violation of
the Pennsylvania Unfair Trade Practice and Consumer Protection Law, and deceit
by concealment. Plaintiffs, on behalf of themselves and the putative class,
sought compensatory and punitive damages in unspecified amounts, including
economic damages, treble damages under the Pennsylvania Unfair Trade Practice
and Consumer Protection Law, and an award of attorneys' fees.
The Company filed an "Answer and New Matter" on October 31, 1995, that
denied all material allegations of the complaint and asserted affirmative
defenses.
On February 5, 1996, plaintiffs filed an amended complaint adding ABTco and
APC as defendants. The amended complaint was otherwise substantially similar to
the original complaint.
The action was removed to the United States District Court for the Western
District of Pennsylvania. By order dated November 25, 1996, that Court remanded
the action to the Court of Common Pleas for Allegheny County.
In response to the amended complaint, defendants filed an "Answer and New
Matter" dated December 27, 1996, that denies all material allegations of the
amended complaint and asserts affirmative defenses. On March 25, 1997,
defendants filed a motion seeking a stay of the action or, in the alternative,
an order limiting discovery to certification-related issues until the court
rules upon plaintiffs' motion for class certification. On May 30, 1997, the
Court of Common Pleas of Allegheny County entered an order staying this action
pending a decision by the United States District Court for the Southern District
of Alabama as to whether the conditional order of certification already entered
in the Foster Action (which is discussed below) should be upheld, or whether the
classes and subclasses already conditionally certified in that action should be
decertified. The Fyola Action has not been certified as a class action.
The Company and ABTco intend to defend the action vigorously.
(2) Foster et al. v. ABTco, Inc., ABT Building Products Corporation,
---------------------------------------------------------------
Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. 96-0069-AH-M,
- -------------------------------------------------
United States District Court for the Southern District of Alabama (the "Foster
Action").
On December 21, 1995, plaintiffs Thomas and Linda Foster brought this
action in the Circuit Court of Choctaw County, Alabama, on behalf of themselves
and a class generally composed of all individuals and entities (i) that own or
owned
10
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
property in the United States on which hardboard siding manufactured,
distributed, or sold by the Company, ABTco, API, or APC has been installed and
(ii) that have already suffered (or will suffer within the warranty period)
alleged damage because, according to plaintiffs, such siding prematurely rots,
buckles, swells, cracks or otherwise deteriorates. Plaintiffs filed an amended
complaint on July 10, 1996. Plaintiffs and the putative class are seeking
compensatory damages and an award of attorneys' fees. The complaint alleges that
the "amount in controversy is in the millions of dollars classwide and is
typically several thousand dollars for each plaintiff and individual class
member."
On December 22, 1995, this action was conditionally certified as a class
action by ex parte order.
-- -----
On January 23, 1996, defendants removed the action to the United States
District Court for the Southern District of Alabama. By order dated September
10, 1996, that court denied plaintiffs' motion to remand the action to the
Circuit Court of Choctaw County, Alabama. On October 31, 1996, defendants filed
an answer that denies all material allegations of the amended complaint and
asserts affirmative defenses.
On March 19, 1997, the court entered an order establishing a schedule for
discovery concerning issues that are relevant to class certification. After
certification-related discovery is completed, the conditional order of
certification already entered in the action may be challenged.
On May 29, 1997, API and APC filed cross-claims against the Company and
ABTco for breach of contract and common-law indemnification. Those claims allege
in substance, among other things that to the extent API and APC may be found
liable on certain claims arising from alleged defects in exterior hardboard
siding products manufactured by them or by the Company or ABTco, API and APC are
entitled to reimbursement of some or all of their losses from the Company and
ABTco. The claims also seek attorneys' fees, costs and other expenses. The
Company intends to defend these claims vigorously.
On May 29, 1997, the Company and ABTco filed cross-claims against API and
APC for indemnification and contribution. On June 18, 1997, the Company and
ABTco filed amended cross-claims against API and APC for indemnification and
contribution. Those claims allege in substance, among other things, that to the
11
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
extent the Company and ABTco may be found liable on certain claims arising from
alleged defects in exterior hardboard siding products manufactured by API or
APC, the Company and ABTco are entitled to reimbursement of some or all of their
losses from API and APC. The claims also seek attorneys' fees, costs and other
expenses.
On September 3, 1997, plaintiffs filed a renewed motion to remand the
action to the Circuit Court of Choctaw County, Alabama, based on a recent panel
decision by the United States Court of Appeals for the Eleventh Circuit in
Ericsson GE Mobile Communications, Inc. v. Motorola Communications & Elecs.,
- --------------------------------------- --------------------------------
Inc., et al., No. 95-6766. That motion has not yet been decided.
- ------------
The Company and ABTco intend to defend the action vigorously.
(3) Dunn et al. v. ABTco, Inc., ABT Building Products Corporation,
-------------------------------------------------------------
Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. 96-CVS7690,
- -------------------------------------------------
Superior Court of Forsyth County, North Carolina.
On December 27, 1996, plaintiffs William Dunn and Paul and Teresa Sullivan
brought this action on behalf of themselves and a putative class generally
composed of all individuals and entities (i) that own or owned property in the
United States on which hardboard siding manufactured, distributed, or sold by
the Company, ABTco, API or APC has been installed and (ii) that have already
suffered (or will suffer within the warranty period) alleged damage because,
according to plaintiffs, such siding prematurely rots, buckles, swells, cracks
or otherwise deteriorates. Plaintiffs and the putative class are seeking
compensatory damages and an award of attorneys' fees. The complaint alleges that
the "aggregate amount in controversy is in the millions of dollars classwide."
This action has not been certified as a class action. On January 28, 1997, all
defendants moved to abate or stay the action. That motion was argued on February
14, 1997. By order signed on February 18, 1997, the court denied the motion to
abate but granted the motion to stay.
The Company and ABTco intend to defend the action vigorously.
(4) Ezzell et al. v. ABTco, Inc., ABT Building Products Corporation,
---------------------------------------------------------------
Abitibi-Price, Inc. and Abitibi-Price Corporation, No. 97-CVS-167, Superior
- -------------------------------------------------
Court of Onslow County, North Carolina.
12
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 21, 1997, plaintiffs John and Rosemary Ezzell filed this action
on behalf of themselves and a putative class generally composed of all
individuals and entities (i) that own or owned property in the United States on
which hardboard siding manufactured, distributed, or sold by the Company, ABTco,
API, or APC has been installed and (ii) that have already suffered (or will
suffer within the warranty period) alleged damage because, according to
plaintiffs, such siding prematurely rots, buckles, discolors, deteriorates, and
otherwise does not perform as expressly represented or warranted, and/or would
not perform in accordance with the reasonable expectations of class members and
other consumers that such siding is durable, suitable and proper to be used on
personal residences or other properties. The complaint alleges that "the
aggregate amount in controversy is typically several thousand dollars for each
plaintiff and individual class member." On March 27, 1997, the Company and ABTco
served an answer that denies all material allegations of the complaint and
asserts affirmative defenses. The action has not been certified as a class
action.
On May 23, 1997, all defendants moved to abate or stay the action. By order
signed on October 2, 1997, the court denied the motion to abate but granted the
motion to stay.
The Company and ABTco intend to defend the action vigorously.
(5) Fiedler et al. v. ABT Building Products Corporation, ABTco, Inc.,
----------------------------------------------------------------
Abitibi-Price Corp., and Abitibi-Consolidated, Inc., Civil Action No. 97-CP-08-
- ---------------------------------------------------
1545, Court of Common Pleas of Berkeley County, South Carolina.
On September 25, 1997, plaintiffs Nancy Fiedler and Daniel Gaines brought
this action on behalf of themselves and a putative class composed of all past
and present owners of mobile homes who reside or resided in South Carolina and
whose mobile homes had compressed wood fiber exterior siding designed, marketed,
or manufactured by the Company, ABTco, APC or ACI. Plaintiffs' complaint alleges
that defendants' siding is defective and fails to perform as warranted by
prematurely deteriorating, rotting, swelling, cracking, splitting, delaminating,
absorbing water, warping, bulging and/or buckling under normal conditions and
exposure. Plaintiffs' complaint asserts purported claims for breach of express
warranty, breach of implied warranty of merchantability, negligence/ negligence
per se/gross negligence and strict liability in tort. Plaintiffs, on behalf of
themselves and the putative class, seek actual, consequential and punitive
damages "not to exceed $74,999.00 per class member," and the costs and expenses
of the lawsuit. The action has not been certified as a class action.
13
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On October 29, 1997, defendants removed the action to the United States
District Court for the District of South Carolina. On November 5, 1997,
defendants served an answer that denies all material allegations of the
complaint and asserts affirmative defenses.
The Company and ABTco intend to defend the action vigorously.
(6) Abitibi-Price Corporation and Abitibi-Price Sales Corporation v. ABT
------------------------------------------------------------- ---
Building Products Corporation and ABTco, Inc., Index No. 97-09771, Supreme Court
- ---------------------------------------------
of the State of New York, Westchester County.
On June 16, 1997, APC and Abitibi-Price Sales Corporation ("APS") brought
an action against the Company and ABTco in the Supreme Court of the State of New
York for the County of Westchester.
The complaint states that by agreement dated September 25, 1992 (the
"Agreement"), the Company and APC provided for the sale, assignment, and
transfer by APC to the Company of the assets of a business engaged in the
manufacture, sale, and distribution of various building products, including
exterior hardboard siding (the "Business"). In their complaint, APC and APS
allege, among other things, that "ABTco executed an Assumption Agreement, dated
as of October 20, 1992, whereby, among other things, ABTco assumed and agreed to
pay certain liabilities and obligations of APC, including, without limitation,
certain warranty liabilities and obligations on products manufactured or sold by
APC." The complaint also alleges that under the Agreement, the Company is
responsible for the following "Assumed Liability":
"liabilities and obligations under warranties with respect to products
of the Business manufactured or sold prior to the Closing Date to the
extent such liabilities and obligations do not constitute an Excluded
Liability."
The complaint alleges that "Excluded Liabilities" under the Agreement
include:
"one-half of the dollar amount paid pursuant to documented claims for
warranty service under warranties for the repair or replacement of
products of the Business (exclusive of credits or price adjustments
granted without Seller's consent) sold prior to the Closing Date or
held as finished goods inventory on the Closing Date in excess of
$100,000 during any calendar year (or in excess of $25,000 for the
period from the Closing Date through
14
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
December 31, 1992); provided that (x) Seller shall retain full
liability for claims with respect to products produced by Seller's
former facility in Sturgeon Falls, Canada regardless of dollar amount,
any (y) Seller shall retain all liability in excess of $2,500 with
respect to each individual claim in excess of $5,000."
The complaint further alleges that in the Agreement, the Company
indemnified APC against losses arising from "Assumed Liabilities," including
allegedly assumed "warranty liabilities," as well as attorneys' fees, costs and
other expenses associated with defending or compromising "warranty claims."
According to the complaint, during the period from October 20, 1992, to
1996, the Company, ABTco, APC, and APS allocated "warranty liabilities" under
the Assumption Agreement in the following manner:
(a) All warranty claims pertaining to products of the Business
sold or manufactured prior to the Closing Date were analyzed,
evaluated, administered and resolved by [the Company and ABTco], and an
accounting to [APC and APS] was made on a quarterly basis;
(b) The total amount of settled warranty claims pertaining to
product -sold or manufactured prior to the Closing Date was offset by a
$100,000 per calendar year "deductible", for which [the Company and
ABTco] [were] solely responsible;
(c) The remaining liability for each settled warranty claim up to
$5,000 was allocated 50% to [APC and APS] and 50% to [the Company and
ABTco];
(d) With respect to each settled warranty claim over $5,000, for
the first $2,500 was allocated to [the Company and ABTco], and the
remainder was allocated to [APC and APS]; and
(e) [The Company and ABTco] paid all attorneys' fees, costs and
expenses related to the claims.
According to the complaint, during this period the Company and ABTco
"assumed responsibility for administering the foregoing warranty claims
program" with respect to, among other products, products of the Business sold
before October 20, 1992.
15
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The complaint alleges that in 1996, the Company and ABTco improperly
departed from the alleged course of dealing that had previously been
operative. According to the complaint, as a result the Company and ABTco
refused, upon specific request, to pay the share that they were allegedly
required by contract to pay of settlements in at least three litigations "for
breach of warranty" involving hardboard siding products manufactured by the
Business before October 20, 1992. According to the complaint, the Company and
ABTco also improperly refused to defend two of those actions.
Based on these allegations, APC and APS assert claims against the
Company and ABTco for breach of the Agreement and unjust enrichment. APC and
APS seek to recover damages in an amount to be determined by the Court, which
amount is stated to be not less than $150,000. The damages sought include,
among other things, settlement amounts and attorneys' fees, costs and expenses
arising from the three litigations referred to in the preceding paragraph,
together with interest and attorneys' fees, costs and expenses in the action
brought by APC and APS.
On July 28, 1997, the Company and ABTco moved to dismiss or stay this
action based on their contentions that the cross-claims in the Foster Action
------
constitute another action pending between the same parties for the same cause of
action; that, in any event, this action and the Foster Action involve
------
overlapping issues; and that Westchester County is not a convenient forum. That
motion has not yet been fully briefed or decided.
In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of business, none of which, in management's
opinion, are expected to have a material adverse effect on the Company's
operating results or financial condition.
16
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Unaudited Financial Statements
(7) SUPPLEMENTAL CASH FLOW DISCLOSURE
In addition to the information provided in the statements of cash
flows, the following is a supplemental disclosure of cash flow information (in
thousands):
<TABLE>
<CAPTION>
FOR NINE FOR NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
---- ----
<S> <C> <C>
Cash paid during period for --
Interest....................................... $ 5,144 $ 6,644
Income taxes................................... 6,701 6,502
</TABLE>
(8) RESTRUCTURING CHARGE
On July 7, 1997 the Company announced that it was restructuring its
Plastic Products Group. The restructuring program was implemented to phase out
the Company's Plastics industrial business and to allow the Company to focus on
specialty building products. Accordingly, the Company recognized a $10.4 million
charge during the period ended June 30, 1997. $8.0 million of the restructuring
charge consisted of a write-down of certain machinery and equipment, inventory
and goodwill to net realizable values, the remaining $2.4 million consisted of
severance payments and outstanding lease obligations related to the closing of
certain leased facilities. The impact on earnings per share for the nine month
period ended September 30, 1997 amounted to $0.55.
The remaining $2.1 million of restructuring charge is included in the
accrued expenses of the accompanying consolidated balance sheet.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------
NET SALES
- ---------
Net sales decreased by $0.9 million (1.0%) from $88.4 million for the
quarter ended September 30,1996 to $87.5 million in the 1997 quarter. This
decrease is attributable to decreased sales in Exterior Hardboard Siding and
Plastic products, offset by the introduction of a new product line, Fiber Cement
Siding. Interior Hardboard sales were relatively flat when compared to the same
period last year.
The increase in Interior Hardboard sales of $0.1 million was primarily
the result of new product introductions and strong demand for the Company's
doorskin products. Sales of $23.6 million for the three months ended September
30,1997 were 0.4% greater than the same period last year. Unit volume shipments
were 1% below the same period last year and the average selling price increased
6% when compared with the same period last year. The higher selling price was
primarily due to product mix.
Exterior Hardboard Siding sales of $27.3 million for the three months
ended September 30,1997 were 11% lower than the same period last year. Shipments
of Exterior Hardboard Siding decreased 13% for the three months ended September
30,1997 while the average selling price remained flat when compared to the same
period last year. The sales volume decline was principally due to competition
from a major fiber cement siding producer. (See "Significant Business Trends.")
The decrease in Plastic products sales of $0.5 million was primarily due
to lower industrial sales (as a result of the restructuring of the Plastics
operations announced in the second quarter) partially offset by increased vinyl
siding, plastic moulding, shutters and accessories sales. Sales of $33.7 million
for the three months ended September 30,1997 were 1.5% less than the same period
last year. The average selling prices for all product lines were lower than the
same period last year primarily due to sales mix and increasing competition in
the vinyl siding market. Unit volume shipments for plastic moulding, shutters
and vinyl siding were up 8%, 12% and 14% respectively, when compared to the same
period last year; however, shipments were below expectations.
The Company introduced a new product line, Fiber Cement Siding, late in
the second quarter. During the three months ended September 30,1997, $2.9
million of fiber cement siding was sold.
GROSS PROFIT
- ------------
Gross profit decreased by $2.1 million (7.8%) from $26.5 million for the
three months ended September 30,1996 to $24.4 million in the 1997 quarter. Lower
volume and recent price reductions implemented on Exterior Hardboard Siding, as
well as, lower selling prices in Plastics products were the principal
contributors to the decrease in gross profit. Gross profit as a percentage of
net sales decreased from 29.9% for the three months ended September 30,1996 to
27.9% for the 1997 quarter primarily due to lower pricing in the Exterior
Hardboard Siding and Plastics products as well as lower volumes in Exterior
Hardboard Siding.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses increased by $0.1 million
(0.9%) from $13.2 million for the three months ended September 30,1996 to $13.4
million in the 1997 quarter. Selling, general and administrative expenses
increased $0.2 million due to increased legal fees incurred as a result of
certain litigation (see Certain Litigation below). Selling, general and
administrative costs as a percentage of net sales increased from 15.0% for the
three months ended September 30,1996 to 15.3% for the 1997 quarter. The higher
cost as a percentage of net sales is due to lower sales in Exterior Hardboard
Siding, lower than expected sales in the Plastics product lines and the increase
in legal fees as discussed above.
OPERATING INCOME
- ----------------
Operating Income decreased by $2.2 million (16.7%) from $13.2 million
for the three months ended September 30,1996 to $11.0 million for the 1997
quarter. The decrease is primarily due to the impact of lower volumes and recent
price decreases in Exterior Hardboard Siding as well as lower pricing in Plastic
products.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------
(CONTINUED)
- -----------
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense increased $0.7 million from $1.8 million for the three
months ended September 30, 1996 to $2.5 million (net of $0.1 million of
capitalized interest) for the 1997 quarter. Higher outstanding indebtedness was
partially offset by a slight decline in the Company's weighted average interest
rate on outstanding borrowings during the three months ended September 30,1997
as compared to the 1996 quarter.
NET INCOME
- ----------
Net Income decreased by $1.6 million (23.8%) from $6.9 million for the
three months ended September 30,1996 to $5.3 million for the 1997 quarter. The
decrease is attributable to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30,1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------
1996
- ----
NET SALES
- ---------
Net sales increased by $7.6 million (3.1%) from $245.3 million for the
nine months ended September 30,1996, to $252.9 million for the same period in
1997. This increase is attributable to increased sales in Interior Hardboard and
Plastic Products as well as the introduction of a new product line, Fiber Cement
Siding. Exterior Hardboard Siding sales were relatively flat when compared to
the same period last year.
The increase in Interior Hardboard sales of $3.4 million was primarily
the result of new product introductions and strong demand for the Company's
doorskin products. Sales of $72.7 million for the nine months ended September
30,1997, were 5% greater than the same period last year. Unit volume shipments
were 3% ahead of the same period last year and the average selling price
increased 2% when compared with the same period last year.
The increase in Plastic sales of $1.3 million was primarily due to
increased vinyl siding, shutter and accessories sales offset by lower plastic
moulding and industrial sales. Sales of $88.7 million for the nine months ended
September 30, 1997, were 2% greater than the same period last year. The average
selling prices for all product lines were lower than the same period last year
primarily due to sales mix and increasing competition in the siding market. Unit
volume shipments for plastic shutters and vinyl siding were up 9% and 33%,
respectively, when compared to the same period last year; however, shipments
were below expectations. Plastic moulding shipments were flat when compared to
the same period last year.
The decrease in Exterior Hardboard Siding sales of $0.5 million was
primarily the result of lower volumes and price decreases implemented during the
latter part of 1997. Sales of $88.2 million for the nine months ended September
30,1997, were 0.6% lower than the same period last year. The average selling
price increased 8% over the same period last year. Shipments of Exterior
Hardboard Siding decreased 9% for the nine months ended September 30,1997 when
compared to the same period last year. The sales volume decline was principally
due to competition from a major fiber cement siding producer. (See "Significant
Business Trends.")
GROSS PROFIT
- ------------
Gross profit increased by $4.2 million (5.9%) from $72.0 million for the
nine months ended September 30,1996 to $76.2 million for the same period in
1997. The impact of selling price increases implemented on Exterior Hardboard
Siding during 1996, strong demand for the Interior Hardboard doorskin product
line and volume increase in the vinyl siding product line were the principal
contributors to the increase in gross profit. These increases were partially
offset by higher thermoplastic resin costs and recent price reductions in
Exterior Hardboard Siding. Gross profit as a percentage of net sales increased
from 29.3% for the period ended September 30,1996 to 30.1% for the 1997 period
primarily due to price
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1996 (CONTINUED)
- ---------------
GROSS PROFIT (CONTINUED)
- ------------------------
increases implemented during 1996, strong demand for the doorskin product line
and volume increases in the vinyl siding product line partially offset by start
up costs related to the introduction of fiber cement siding and lower selling
prices for vinyl siding.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses increased by $4.4 million
(12.3%) from $35.3 million for the nine months ended September 30,1996 to $39.7
million for the 1997 period. These expenses increased as a result of an increase
in advertising and promotional expenditures, legal fees incurred as a result of
certain litigation (see Certain Litigation below), with the balance of the
increase primarily due to increases in salaries and facility expense related to
the development of the Company's distribution center in Action, Ontario.
Selling, general and administrative costs as a percentage of net sales increased
from 14.4% for the nine months ended September 30, 1996 to 15.7% for the 1997
period. The higher cost as a percentage of net sales is due to lower than
expected sales in the Plastics and Exterior Hardboard Siding product lines as
well as higher legal fees and advertising and promotional expenditures as
discussed above.
RESTRUCTURING CHARGE
- --------------------
On July 7,1997 the Company announced that it was restructuring its
Plastic Products Group. The restructuring program was implemented to phase out
the Company's Plastics industrial business and to allow the Company to focus on
specialty building products. Accordingly, the Company recorded a $10.4 million
charge during the period ended June 30,1997. The restructuring charge consisted
of the write-down of certain machinery and equipment, $5.9 million; inventory
and goodwill to net realizable values, $2.1 million; severance payments and
outstanding lease obligations related to the closing of certain leased
facilities, $2.2 million; and other miscellaneous restructuring costs, $0.2
million. The impact on earnings per share for the nine month period ended
September 30,1997 amounted to $0.55.
OPERATING INCOME
- ----------------
Operating income decreased by $10.5 million (28.6%) from $36.7 million
for the nine months ended September 30,1996 to $26.2 million for the 1997
period. The decrease is primarily due to the costs involved in the start up of
the fiber cement facility, the cost of eliminating the plastic industrial
business and higher selling, general and administrative expenses partially
offset by stronger doorskin sales and the impact of Exterior Hardboard Siding
price increases implemented during 1996. Excluding the restructuring charge
(discussed previously) operating income decreased by $0.1 million (0.3%) over
the same period last year.
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense increased $0.2 million from $5.5 million for the nine
months ended September 30,1996 to $5.7 million (net of $1.7 million of
capitalized interest) for the 1997 period. Higher outstanding indebtedness was
partially offset by a slight decline in the Company's weighted average interest
rate on outstanding borrowings during the nine months ended September 30,1997 as
compared to the 1996 period.
NET INCOME
- ----------
Net income decreased by $6.4 million (33.7%) from $18.9 million for the
nine months ended September 30,1996 to $12.6 million for the 1997 period. Net
income (excluding the restructuring charge) for the nine months ended September
30,1997 was relatively equal to the same period last year due to factors
discussed above.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
NINE MONTHS ENDED SEPTEMBER 30,1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------
1996 (CONTINUED)
- ----------------
SIGNIFICANT BUSINESS TRENDS
- ---------------------------
Management believes that the level of housing starts and expenditures
for home improvements have a significant influence on the Company's ability to
generate sales, particularly in relation to demand for its siding products. The
level of housing starts in the United States increased from 1.01 million in 1991
to 1.45 million as of September, 1997. The level of housing starts in Canada
decreased from 0.156 million in 1991 to 0.148 million in September, 1997.
Although management is unable to predict future levels of housing starts,
management believes that introduction of new products and acquisitions of
product lines will allow the Company to maintain levels of production and sales
should housing starts decline.
The cost of thermoplastic resins (polystyrene, polypropylene,
polyethylene and polyvinyl chloride) used in the Company's Plastics operations
increased substantially during 1995 before declining somewhat during the fourth
quarter of 1995 and remaining at that level during 1996. Thermoplastic resin
costs have increased during the first nine months of 1997. Management believes
that product price increases, continuing cost reduction programs and increased
production efficiencies will counteract, to some extent, the impact of raw
material price increases.
The recent consolidation in the vinyl siding industry has resulted in
increased competitive pricing of the Company's vinyl siding and accessories.
The Company has recently introduced Fiber Cement Siding. A major
competitor in the fiber cement siding market is aggressively pricing the product
in an attempt to increase share in the siding market. As a result, the Company
has lowered its pricing on both the Exterior Hardboard Siding and Fiber Cement
Siding products to maintain market share. The lower prices have impacted
earnings. The Company cannot predict the actions of this or other competitors,
however, management believes it will continue to protect market share in all
exterior siding markets in which it competes.
Management also believes that continued penetration into the mass
merchandiser market will have a significant influence on the Company's level of
business activity. Management believes that this market will continue to grow in
importance to the Company.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30,1997, the Company had working capital of $62.2 million
with a current ratio of 2.4 to 1.0 as compared with working capital of $42.8
million and a current ratio of 2.0 to 1.0 at December 31,1996. The increase in
working capital and the change in the current ratio were primarily due to the
increase in accounts receivable and inventories, partially offset by an increase
in accounts payable. The increase in accounts receivable and accounts payable
were a result of the increase in business activity in the third quarter of 1997
versus the last quarter of 1996.
Long-term debt increased from $90.7 million at December 31,1996 to
$123.9 million as of September 30,1997. The increase in debt was primarily due
to the increases in working capital and capital expenditures offset, in part, by
cash generated from operations.
In March 1997, the Company and its bank group executed a Third Amended
and Restated Credit Agreement ("Credit Agreement") which replaced all prior
credit agreements. The Credit Agreement provides a line of credit to the Company
totaling $250 million consisting of a $175 million continuing revolving credit
facility, a $25 million 364-day line of credit and a term loan facility under
which the Company borrowed $50 million on April 3,1995. The Credit Agreement
matures on March 10, 2002, subject to extension for additional one-year periods.
The term loan requires 16 equal quarterly principal payments of $3.125 million
commencing on June 30,1997, and continuing through March 31, 2001. As of
September 30,1997, the interest rate on the $43.8 million term loan was 7.99%
and the weighted average interest rate on the outstanding revolving loans of
$83.5 million was 6.2%.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
NINE MONTHS ENDED SEPTEMBER 30,1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------
1996 (CONTINUED)
- ----------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
On April 1,1997 the Company entered into a loan agreement with the
Mississippi Business Finance Corporation for the issuance of $1 million Variable
Rate Demand Revenue Bonds (Series 1997A) and $16.5 million Taxable Variable
Rate Demand Revenue Bonds (Series 1997B) to finance the acquisition and
construction of a vinyl siding manufacturing facility in Holly Springs,
Mississippi. The bonds bear interest rates determined weekly by the remarketing
agent. The bonds mature on April 1, 2022 and are backed by Irrevocable Letters
of Credit issued under the Company's Credit Agreement. The amounts included in
total debt reflect drawings against proceeds of the issued amount of the bonds.
Capital expenditures during the nine months ended September 30, 1997
amounted to approximately $48.2 million, and were incurred primarily for
improvements of the Company's manufacturing facilities, including $22.9 million
related to the construction of the fiber cement facility and $10.3 million
related to the construction of the vinyl siding manufacturing facility in Holly
Springs.
Management believes that the Company's cash on hand, anticipated funds
from operations and available borrowings under the revolving credit facility
will be sufficient to cover both its short-term and long-term working capital,
capital expenditure and debt service requirements.
ENVIRONMENTAL COMPLIANCE
- ------------------------
The Company's operations are subject to federal and state government
regulations pertaining to air emissions, waste water discharge and solid waste
disposal. While environmental compliance costs in the future will depend on
regulatory developments that cannot be predicted, the Company believes that
compliance will be achieved with a combination of capital expenditures and
modifications to its production processes. As discussed more fully in Note 6 of
the Notes to the Financial Statements, the Company entered into a consent decree
with respect to odor emissions at its Alpena, Michigan, facility requiring
estimated expenditures of $6 million to $12 million. The Company instituted
litigation to recover such costs from the former owner of the facility, but the
trial court dismissed the litigation. The Company has filed a claim of appeal
from the trial court's decision to dismiss the litigation. The Company does not
anticipate that costs relating to environmental activities will have a material
adverse impact on its financial condition or operating results.
CERTAIN LITIGATION
- ------------------
In recent years, a number of lawsuits have been brought against
manufacturers of OSB and exterior hardboard siding products alleging various
design and production defects and breach of express or implied warranties. Such
litigation has resulted in substantial settlements by certain competitors of the
Company. The Company has recently been named as a defendant in similar
litigation (see Note 6 of the Notes to the Financial Statements). The Company
believes that its exterior hardboard siding products are free of defects and,
when properly installed and maintained, are suitable for their intended purposes
and meet all applicable quality standards. Nevertheless, no assurance can be
given that the Company will not be required to expend significant resources to
defend against claims of this nature.
SEASONALITY
- -----------
The Company's quarterly results of operations are moderately seasonal
due to increases in construction activity that typically occur in the second and
third quarters and, to a lesser extent, the first quarter, thereby increasing
sales and gross profits in such periods as compared to the fourth quarter.
INFLATION
- ---------
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
ACCOUNTING CHANGES
- ------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No.128, Earnings per Share, and is
effective for financial statements for both interim and annual periods ending
after December 15,1997. SFAS No.129, Disclosure of Information about Capital
Structure, has been issued and is effective for financial statements for annual
periods ending after December 15,1997. The expected impact of the adoption of
these standards will not be material.
PRIVATE SECURITIES LITIGATION REFORM ACT DISCLOSURE
- ---------------------------------------------------
This report contains various forward looking statements, including
financial, operating and other projections. There are many factors that could
cause actual results to differ materially, including adoption of new
environmental laws and regulations and changes in how they are interpreted and
enforced; general business conditions, such as level of competition, changes in
demand for the Company's products and strength of the economy in general. These
and other factors are discussed in this report, the Company's Annual Report on
Form 10-K and other documents the Company has filed with the Securities and
Exchange Commission.
23
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal proceedings
See Note 6 to the Company's Consolidated Financial
Statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: November 11, 1997
ABT BUILDING PRODUCTS CORPORATION
/s/ Joseph P. O'Neill
----------------------------------
Joseph P. O'Neill
(Vice President Finance- Controller)
25
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,949
<SECURITIES> 0
<RECEIVABLES> 43,300
<ALLOWANCES> 7,062
<INVENTORY> 53,395
<CURRENT-ASSETS> 106,761
<PP&E> 233,519
<DEPRECIATION> 40,949
<TOTAL-ASSETS> 313,871
<CURRENT-LIABILITIES> 44,580
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 121,242
<TOTAL-LIABILITY-AND-EQUITY> 313,871
<SALES> 252,935
<TOTAL-REVENUES> 252,935
<CGS> 176,718
<TOTAL-COSTS> 39,650
<OTHER-EXPENSES> 10,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5811
<INCOME-PRETAX> 20,359
<INCOME-TAX> 7,801
<INCOME-CONTINUING> 12,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 12,588
<EPS-PRIMARY> 1.08
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</TABLE>
