<PAGE>
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, 1998
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 ________.
-------
As of the close of business on November 13,1998, the registrant had
outstanding 10,674,160 shares of Common Stock.
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL STATEMENTS PAGE NUMBER
- ----------------------------- -----------
Unaudited Balance Sheets as of December 31, 1997
and September 30, 1998 3
Unaudited Statements of Income for the three
months and nine months ended September 30, 1997
and September 30, 1998 4
Unaudited Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1998 5
Condensed Notes to Unaudited Financial
Statements 6 - 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations 21 - 27
PART II: OTHER INFORMATION 28
- ---------------------------
Signature Page 29
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 September 3O, 1998
------------------ --------------------
(unaudited)
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 329 $ 3,234
Accounts receivable, less allowances of
$6,303 and $6,778, respectively 29,395 44,730
Inventories 57,682 56,961
Prepald expenses 5,305 4,498
Deferred tax assets 1,313 2,241
-------- --------
Total Current Assets 94,024 111,664
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land 4,063 4,137
Buildings and improvements 44,153 47,860
Machinery and equipment 168,071 180,183
Furniture and fixtures 5,227 5,477
Construction in progress 18,140 8,816
-------- --------
239,654 246,473
Less accumulated depreciation (42,660) (54,121)
-------- --------
Net property, plant and equipment 196,994 192,352
OTHER ASSETS, Net 9,917 11,110
GOODWILL, Net 8,297 7,916
-------- --------
Total Assets $309,232 $323,042
======== ========
Liabilities & Stockholders' Equity
CURRENT LIABILITIES
Current maturities of long-term debt $ 12,501 $ 12,500
Accounts payable 14,467 15,528
Accrued expenses 11,373 16,914
-------- --------
Total Current Liabilities 38,341 44,942
LONG-TERM DEBT 120,410 109,716
OTHER LONG TERM LiABILITIES 7,279 7,446
DEFERRED INCOME TAXES 18,361 23,411
STOCKHOLDERS' EQUITY
Common stock 122 122
Additional paid-In capItal 59,926 59,521
Cumulative translation adjustment (1,556) (2,918)
Retained earnings 92,127 105,325
Less treasury shares (25,778) (24,523)
-------- --------
Total Stockholders' Equity 124,841 137,527
-------- --------
Total Liabilities and Stockholders' Equity $309,232 $323,042
======== ========
</TABLE>
See accompanying notes to the financial statements
3
<PAGE>
ABT Building Products Corporation and Subsidiaries
Statements of Income (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 87,516 $ 90,709 $ 252,935 $ 258,545
COST OF SALES 63,135 66,047 176,718 189,863
---------- ---------- ---------- -----------
Gross profit 24,381 24,662 76,217 68,682
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,372 13,440 39,650 39,911
RESTRUCTURING CHARGE - - 10,397 -
---------- ---------- ---------- -----------
Operating income 11,009 11,222 26,170 28,771
OTHER INCOME (EXPENSE) (2,544) (2,459) (5,811) (7,482)
---------- ---------- ---------- -----------
Income before income taxes 8,465 8,763 20,359 21,289
PROVISION FOR INCOME TAXES 3,210 3,331 7,801 8,091
---------- ---------- ---------- -----------
Net Income $ 5,255 $ 5,432 $ 12,558 $ 13,198
========== ========== ========== ===========
INCOME PER COMMON SHARE
BASIC $ 0.50 $ 0.51 $ 1.19 $ 1.24
========== ========== ========== ===========
DILUTED $ 0.46 $ 0.48 $ 1.08 $ 1.16
========== ========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 10,549 10,674 10,542 10,656
========== ========== ========== ===========
DILUTED 11,472 11,367 11,628 11,387
========== ========== ========== ===========
</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,
1997 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $12,558 $13,198
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Writedown of assets due to restructuring 7,131 -
Depreciation and amortization 11,521 14,858
Deferred income taxes 4,185 4,122
Cumulative translation adjustment (882) (1,362)
Changes in certain assets and liabilities-
Accounts receivable (12,022) (15,335)
Inventories (6,158) 721
Other assets (3,028) (769)
Accounts payable and accrued expenses 722 6,769
------------------- ------------------
Net cash provided by (used in) operating activities 14,027 22,202
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (48,217) (9,452)
------------------- ------------------
Net cash used in investing activities (48,217) (9,452)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 36,369 (10,695)
Exercise of stock options (254) 850
------------------- ------------------
Net cash provided by financing activities 36,115 (9,845)
------------------- ------------------
Net increase (decrease) in cash 1,925 2,905
Cash and Cash equivalents, beginning of period 24 329
------------------- ------------------
Cash and Cash equivalents, end of period $ 1,949 $ 3,234
=================== ==================
</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, 1997. 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, 1997, and September 30,
1998, and the consolidated statements of operations and cash flows for the nine
months ended September 30, 1997 and 1998, include the accounts of ABT BUILDING
PRODUCTS CORPORATION, a Delaware corporation ("ABT"), and its wholly owned
subsidiaries ABTCO, INC. ("ABTCO") and ABT CANADA, LIMITED ("ABT CANADA")
(collectively referred to as the "Company").
In April 1998, the AICPA issued Statement of Position 98-5 " Reporting on
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires non-government
entities to expense start-up costs, including organization costs, as incurred.
SOP 98-5 is effective for financial statements for periods beginning after
December 15, 1998 (the Company's fiscal year beginning January 1, 1999). When
adopted, all capitalized start-up costs must be expensed and recorded as a
change in accounting principle. The Company has approximately $3.0 million of
capitalized start-up costs recorded on its balance sheet as of September 30,
1998. The Company is studying the potential impact of SOP 98-5 and has not
decided when it will adopt the new standard.
6
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(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,
1997 1998
---------------------- ----------------------
<S> <C> <C>
Finished products and work in $ 38,935 $ 38,710
process
Raw materials 9,560 9,427
Operating parts and supplies 9,187 8,824
---------------------- ----------------------
$ 57,682 $ 56,961
====================== ======================
</TABLE>
(4) LONG-TERM DEBT
Long-term debt as of December 31, 1997, and September 30, 1998, consisted
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
---------------------- ----------------------
<S> <C> <C>
Total debt---
Revolving line of credit $ 80,675 $ 76,000
Term loans 40,625 31,250
MISSISSIPPI BUSINESS FINANCE CORP. BONDS:
Series 1997A 1,000 1,000
Series 1997B 10,610 13,966
Capital lease obligations 1 -
---------------------- ----------------------
132,911 122,216
Less---current maturities (12,501) (12,500)
---------------------- ----------------------
TOTAL LONG-TERM DEBT $ 120,410 $ 109,716
====================== ======================
</TABLE>
On April 1, 1997 the Company entered into a loan agreement with the
Mississippi Business Finance Corporation for the issuance of $1.0 million
Variable Rate Demand Revenue Bonds (Series 1997A) and $16.5 million Taxable
Variable Rate Demand Revenue Bonds (Series 1997B) to finance the acquisition and
retrofitting of a vinyl siding manufacturing facility in Holly Springs,
Mississippi. The bonds bear interest rates determined weekly by the remarketing
agent. The interest rates at September 30, 1998 were 4.25% and 5.60%,
respectively. The bonds mature on April 1, 2022 and are backed by Irrevocable
Letters of Credit issued under the Company's Revolving Credit Agreement. The
amounts included in total debt reflect drawings against the proceeds of the
issued amount of the bonds.
7
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(5) STOCKHOLDERS' EQUITY
In 1998 the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires companies to report
all changes in equity during a period, except those resulting from investment by
owners and distribution to owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose Comprehensive
Income, which encompasses net income and foreign currency translation
adjustments, in the notes to the condensed consolidated financial statements for
interim reporting purposes.
Total Comprehensive Income for the three months and the nine months ended
September 30, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
1997 1998 1997 1998
---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Income $5,255 $5,432 $12,558 $13,198
Cumulative Translation Adjustment (121) (666) (882) (1,362)
------ ------ ------- -------
Total Comprehensive Income $5,134 $4,766 $11,676 $11,836
====== ====== ======= =======
</TABLE>
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, 1998, the Company had repurchased
1,537,000 shares for a total cost of $24,522,990 (net of shares reissued). The
cost to repurchase the treasury shares has been recorded as a reduction of
stockholders' equity.
(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.
8
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
The Company and ABTco have been named as defendants in a class action and
six separate putative class actions (the "Hardboard Siding Actions") arising
from hardboard siding manufactured, distributed, or sold by them or by Abitibi-
Price Corporation ("APC"), Abitibi-Price, Inc. ("API") or Abitibi-Consolidated,
Inc. ("ACI"). APC, API, and ACI have also been named as defendants in these
actions, and APC has been named a defendant in certain other actions, which may
result in liability for the Company under the terms of the Indemnity Settlement
as described below:
(1) Fyola et al. v. ABT Building Products Corporation, ABTco, Inc. and
------------ --------------------------------------------------
Abitibi-Price Corporation, Docket No. 95-12854, Court of Common Pleas of
- -------------------------
Allegheny County, Pennsylvania (the "Fyola Action").
-----
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 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.
9
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. CV-95-151
- --------------------------------------------------
M, Circuit Court for Choctaw County, Alabama (the "Foster Action").
------
On December 21, 1995, plaintiffs Thomas and Linda Foster brought this
action in the Circuit Court of Choctaw County, Alabama, on behalf of themselves
and a class generally composed of all individuals and entities (i) that own or
owned property in the United States on which hardboard siding manufactured,
distributed, or sold by the Company, ABTco, API, or APC has been installed and
(ii) that have already suffered (or will suffer within the warranty period)
alleged damage because, according to plaintiffs, such siding prematurely rots,
buckles, swells, cracks or otherwise deteriorates. Plaintiffs filed an amended
complaint on July 10, 1996. Plaintiffs and the putative class are seeking
compensatory damages and an award of attorneys' fees. The complaint alleges that
the "amount in controversy is in the millions of dollars classwide and is
typically several thousand dollars for each plaintiff and individual class
member."
On December 22, 1995, this action was conditionally certified as a class
action by ex parte order.
-- -----
On January 23, 1996, defendants removed the action to the United States
District Court for the Southern District of Alabama. By order dated November
21, 1997, that Court remanded the action to the Circuit Court of Choctaw County,
Alabama, where it is currently pending. On October 31, 1996, defendants filed
an answer that denies all material allegations of the amended complaint and
asserts affirmative defenses.
10
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The parties are currently conducting certification discovery.
The Company and ABTco intend to defend the action vigorously.
(3) Dunn et al. v. ABTco, Inc., ABT Building Products Corporation,
---------- -----------------------------------------------
Abitibi-Price, Inc. and Abitibi-Price Corporation, Docket No. 96-CVS7690,
- --------------------------------------------------
Superior Court of Forsyth County, North Carolina.
On December 27, 1996, plaintiffs William Dunn and Paul and Teresa Sullivan
brought this action on behalf of themselves and a putative class generally
composed of all individuals and entities (i) that own or owned property in the
United States on which hardboard siding manufactured, distributed, or sold by
the Company, ABTco, API or APC has been installed and (ii) that have already
suffered (or will suffer within the warranty period) alleged damage because,
according to plaintiffs, such siding prematurely rots, buckles, swells, cracks
or otherwise deteriorates. Plaintiffs and the putative class are seeking
compensatory damages and an award of attorneys' fees. The complaint alleges that
the "aggregate amount in controversy is in the millions of dollars classwide."
This action has not been certified as a class action. By order signed on
February 18, 1997, the court granted defendants' motion to stay the action,
without prejudice to a motion by either party for reconsideration of the stay
upon loss of jurisdiction over the Foster Action by the federal and state
------
courts.
The Company and ABTco intend to defend the action vigorously.
(4) Ezzell et al. v. ABTco, Inc., ABT Building Products Corporation,
------------ -----------------------------------------------
Abitibi-Price, Inc. and Abitibi-Price Corporation, No. 97-CVS-167,
- --------------------------------------------------
Superior Court of Onslow County, North Carolina.
On January 21, 1997, plaintiffs John and Rosemary Ezzell filed this action
on behalf of themselves and a putative class generally composed of all
individuals and entities (i) that own or owned property in the United States on
which hardboard siding manufactured, distributed, or sold by the Company, ABTco,
API, or APC has been installed and (ii) that have already suffered (or will
suffer within the warranty period) alleged damage because, according to
plaintiffs, such siding prematurely rots, buckles, discolors, deteriorates, and
otherwise does not perform as expressly represented or warranted, and/or would
not perform in accordance with the reasonable expectations of class members and
other consumers that such siding is durable, suitable and proper to be used on
personal residences or other properties.
11
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
By order signed on October 2, 1997, the court granted defendants' motion
to stay the action, provided that in the event the court in the Foster Action
------
shall enter an order decertifying, in whole or in part, the classes and
subclasses conditionally certified in that action in such a way that the
representative plaintiffs in this action are not represented in that action, the
plaintiffs in this action may move for reconsideration of the stay.
The Company and ABTco intend to defend the action vigorously.
(5) Fiedler et al. v. ABT Building Products Corporation, ABTco, Inc.,
-------------- -----------------------------------------------
Abitibi-Price, Corp. and Abitibi-Consolidated, Inc., Civil Action No. 97-CP-08-
- ----------------------------------------------------
1545, Court of Common Pleas of Berkeley County, South Carolina.
On September 25, 1997, plaintiffs Nancy Fiedler and Daniel Gaines brought
this action on behalf of themselves and a putative class composed of all past
and present owners of mobile homes who reside or resided in South Carolina and
whose mobile homes had compressed wood fiber exterior siding designed, marketed,
or manufactured by the Company, ABTco, APC or ACI. Plaintiffs' complaint alleges
that defendants' siding is defective and fails to perform as warranted by
prematurely deteriorating, rotting, swelling, cracking, splitting, delaminating,
absorbing water, warping, bulging and/or buckling under normal conditions and
exposure. Plaintiffs' complaint asserts purported claims for breach of express
warranty, breach of implied warranty of merchantability, negligence/ negligence
per se/gross negligence and strict liability in tort. Plaintiffs, on behalf of
themselves and the putative class, seek actual, consequential and punitive
damages "not to exceed $74,999.00 per class member," and the costs and expenses
of the lawsuit. The action has not been certified as a class action.
On October 29, 1997, defendants removed the action to the United States
District Court for the District of South Carolina. On November 5, 1997,
defendants served an answer that denies all material allegations of the
complaint and asserts affirmative defenses. With consent of defendants, the
District Court remanded the case to the Court of Common Pleas of Berkeley County
by order dated Decem-ber 10, 1997. On February 11, 1998, defendants moved to
stay the action. On April 9, 1998, the Court denied that motion. The action is
currently in discovery.
The Company and ABTco intend to defend the action vigorously.
12
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(6) Jackson et al. v. ABTco, Inc., Abitibi-Price Corporation, Abitibi-
--------------- -----------------------------------------------
Consolidated, Inc., Stone Container Corporation, Stone Consolidated Corporation,
- --------------------------------------------------------------------------------
Destiny Industries, Inc., Oakwood Homes Corporation, Case No. 98-CV115-RH,
- ----------------------------------------------------
United States District Court for the Northern District of Florida (the "Jackson
-------
Action").
On March 11, 1998, plaintiffs Tom Jackson and Lloyd and Gladys Decker brought
this action in the Circuit Court of Bay County, Fourteenth Judicial Circuit,
Florida, on behalf of themselves and a putative class composed of residents of
the United States who have purchased hardboard siding from defendants (including
ABTco, Inc., APC and ACI) from January 1, 1980, until the date of the filing of
the complaint. Plaintiffs' complaint alleges that defendants knowingly
manufactured, distributed and falsely advertised a defective hardboard siding
product that discolors, deteriorates, causes damage to other structures and
otherwise does not perform as represented and warranted and/or perform with the
reasonable expectations of plaintiffs. Plaintiffs' complaint asserts purported
claims for fraud, intentional suppression, willful representation, reckless
representation, fraud-reasonable expectations, post-sale fraud, post-sale
suppression, post-sale reckless misrepresentation, negligence, wanton
misconduct, nuisance, breach of express warranty, breach of implied warranty of
merchantability, breach of implied warranty of fitness, and violation of the
Magnusson-Moss Act. Plaintiffs, on behalf of themselves and the putative class,
seek compensatory damages, attorneys' fees, and declaratory and injunctive
relief. The action has not been certified as a class action.
On May 1, 1998, all defendants removed the action to the United States
District Court for the Northern District of Florida. On May 12, 1998, ABTco and
APC 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.
(7) Roach et al. v. ABTco, Inc., ABT Building Products Corporation, Abitibi-
------------- -------------------------------------------------------
Price Corporation, Abitibi-Consolidated, Inc. and Destiny Industries, Inc.,
- ---------------------------------------------------------------------------
Civil Action No. 98-9794-3, Superior Court of DeKalb County, Georgia.
On September 25, 1998, plaintiff Tracy Roach filed the complaint in this
action on behalf of herself and a putative class composed of all past and
present owners of mobile homes who reside or resided in Georgia and whose mobile
homes had compressed wood fiber exterior siding designed, marketed, or
manufactured by the Company, ABTco, APC or ACI. Plaintiff's complaint alleges
that defendants' siding is defective and fails to perform as warranted by
prematurely deteriorating, rotting,
13
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, and negligence/negligence per se/gross negligence.
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. ABTco was served with a copy of the
summons and complaint on or about November 2, 1998. The action has not been
certified as a class action.
The Company and ABTco intend to defend the action vigorously.
(8) Lillis et al. v. Abitibi-Price Corporation and Sunstate Manufactured
------------- ---------------------------------------------------
Homes of Georgia, Inc. d/b/a Peach State Homes, Inc., Case No. 97-18136 CA21,
- ----------------------------------------------------
Circuit Court of Dade County, Florida (the "Lillis Action").
------
On August 13, 1997, plaintiff Gloria Lillis filed this action in the Circuit
Court of the Eleventh Judicial Circuit in and for Dade County, Florida against
APC and Sunstate Manufactured Homes of Georgia, Inc. The plaintiff alleged that
she was suing APC on behalf of herself and a putative class composed of all
persons who purchased in the State of Florida a new manufactured home with APC
hardboard siding. Plaintiff's complaint alleges that APC's hardboard siding is
defective because under normal maintenance it deteriorates, delaminates,
disintegrates, and has virtually no resistance to moisture. Plaintiff's
complaint against APC asserts purported claims for breach of express warranty
and a Florida statutory claim for failure satisfactorily to resolve a warranty
claim. Plaintiff, on behalf of herself and the putative class, seeks
compensatory damages, attorneys' fees, costs and interest.
On September 17, 1997, defendants removed the action to the United States
District Court for the Southern District of Florida. On April 23, 1998, the
Court dismissed the action without prejudice by reason of the pendency of the
Foster Action. On May 26, 1998, plaintiff filed a notice of appeal of this
- ------
decision.
On October 6, 1998, the trial judge issued an order sua sponte that indicated,
if he were to regain jurisdiction, he intended to vacate the dismissal without
prejudice and reconsider the motion to remand. On October 16, 1998, plaintiff
filed a motion for interim remand with the United States Court of Appeals for
the Eleventh Circuit.
(8) Arredondo, et al. v. Masonite Corporation, Abitibi-Price Corporation, MG
----------------- ---------------------------------------------------
Building Materials, Inc., and Nu-Air Manufacturing Co., Inc., Cause No. 4571,
- ------------------------------------------------------------
14
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
District Court of Jim Hogg County, Texas (the "Arredondo Action"); and Adams,
--------- ------
et al. v. Masonite Corporation, Abitibi-Price Corporation, MG Building
- ------ ------------------------------------------------------------
Materials, Inc. and Nu-Air Manufacturing Co., Inc., Cause No. 16707, District
- --------------------------------------------------
Court of Duval County, Texas, (the "Adams Action").
-----
On August 30, 1996, two consolidated actions, the Adams Action, filed in the
-----
District Court of Duval County, Texas, and the Arredondo Action, filed in the
---------
District Court of Jim Hogg County, Texas, were brought naming APC as a
defendant. In the Adams Action, the owners of approximately 140 homes, and in
-----
the Arredondo Action, the owners of approximately 30 homes, alleged that they
---------
had suffered damages as a result of APC hardboard siding installed on their
homes. The complaint in the Adams Action and the complaint in the Arredondo
----- ---------
Action are virtually identical and were filed by the same attorney. The
plaintiffs in the these actions allege that hardboard siding manufactured by APC
is defective and failed to perform to a level reasonably expected for a product
of its nature. The plaintiffs in these actions assert purported claims for
negligence and gross negligence, breach of implied warranty of fitness, breach
of implied warranty of merchantability, breach of express warranty, negligent
misrepresentation, and violation of the Texas deceptive trade practices act.
The plaintiffs in the these actions seek actual and exemplary damages, including
damages for economic loss and mental anguish, treble damages, costs and
interest.
In both actions, APC filed a motion to transfer venue with respect to the
majority of the plaintiffs. The trial court granted APC's motion to transfer,
but rather than transfer those plaintiffs to the venue requested by APC,
transferred those plaintiffs to the county of their residence. APC sought
mandamus and review by the Texas Supreme Court on this issue, and the issue is
currently pending before the Texas Supreme Court.
As a result of the trial court's decision, there are currently three actions
pending: the original Arredondo Action, in which the owners of approximately 9
---------
homes have remaining claims against APC; the original Adams Action, in which the
-----
owners of approximately 40 homes have remaining claims against APC; and an
action in Jim Wells County, Texas, in which is currently unclear how many
plaintiffs have claims against APC. Discovery is proceeding in the Arredondo
---------
Action and in the Adams Action.
-----
The Adams Action and the Arredondo Action are treated as non-class action
----- ---------
claims under the Indemnity Settlement as described above for which the Company
may have potential liability.
15
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(9) Indemnity Settlement.
--------------------
On June 16, 1997, APC and Abitibi-Price Sales Corporation brought suit against
the Company and ABTco in the Supreme Court of the State of New York for the
County of Westchester alleging violation of the indemnity and warranty
provisions in the asset sale agreement relating to the [Acquisition] (the
"Abitibi Action"). On October 1, 1997, the Company and APC agreed to settle
- ---------
their claims under the Abitibi Action and to dismiss the Abitibi Action with
------- -------
prejudice. Pursuant to the Indemnity Settlement, the Company and APC agreed to
an allocation of liability with respect to claims relating to ABT Board (as
defined below) and APC Board (as defined below). The following description of
the terms of the Indemnity Settlement is general, and is subject to
restrictions, qualifications, and additional terms stated in the Indemnity
Settlement itself. In general, under the terms of the Indemnity Settlement all
amounts paid in settlement or judgment (other than punitive damages if they are
assessed against either the Company or APC individually) following the
completion of any claims process resolving any class action claim (including
consolidated cases involving more than 125 homes owned by named plaintiffs)
("Class Action Damage Amounts") that relate to siding sold by APC prior to
October 22, 1992, or held as finished goods inventory by APC on October 22, 1992
("APC Board") shall be paid 65% by Abitibi and 35% by the Company. Class Action
Damage Amounts relating to siding sold by the Company after October 22, 1992
("ABT Board") shall be paid 100% by the Company. Class Action Damage Amounts
that cannot be attributed to either the Company or APC ("Indeterminate Amounts")
shall be paid 50% by the Company and 50% by APC.
Total amounts paid for joint local counsel and other joint expenses, for Class
Action Damage Amounts, and for plaintiffs' attorneys' fees and expenses
(collectively "Final Class Action Costs") are to be apportioned according to the
Company's and APC's proportional share of the Class Action Damage Amounts,
including the Indeterminate Amounts (the "Proportional Share").
All joint costs of defending and disposing of class action claims incurred
prior to the final determination of what portion of claims relate to APC Board
and what portion relate to ABT Board ("Preliminary Class Action Costs") are to
be paid 50% by the Company and 50% by APC, with provisions for adjustment if
either the Company's or APC's Proportional Share exceeds 60% of the Final Class
Action Costs. In the event any class action claim involves only ABT Board, the
Company shall pay 100% of the Preliminary Class Action Costs. In the event any
class action claim involves only APC Board, APC shall pay 65% and the Company
shall pay 35% of the Preliminary Class Action Costs.
Under the terms of the Indemnity Settlement, with respect to non-class action
claims relating to APC Board, the Company is responsible for the first $100,000
in
16
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
each calendar year of all amounts paid for settlements, judgments and associated
fees and expenses of local outside counsel. APC and the Company are each
responsible for 50% of such amounts in excess of $100,000 per year up to $5,000
with respect to individual claims. APC is responsible for 100% of amounts in
excess of $5,000 with respect to individual claims. The Adams Action and the
------
Arredondo Action are treated as Non-Class Action Claims under the Indemnity
- ---------
Settlement. With respect to Non-Class Action Claims relating to ABT Board, the
Company shall pay 100% of any amounts paid for settlements, judgments and
associated fees and expenses of local outside counsel representing the parties
in the jurisdictions where litigation or arbitration involving such claims is
pending.
The Company believes that its exterior hardboard siding products are free of
defects and, when properly installed and maintained, are suitable for their
intended purposes and meet all applicable legal standards. The Company believes
that it has substantial defenses to the claims asserted by the representative
plaintiffs on behalf of themselves and the conditionally certified class and the
putative classes in the Hardboard Siding Class Actions. The Company and ABTco
intend to defend vigorously those actions in which they are named as defendants.
The Company is not able to estimate or predict the amount of such ultimate
liability, if any, and accordingly, the Company has made no reserve provisions
in its consolidated financial statements (other than standard warranty accruals)
for these claims.
The Company and ABTco are involved in two lawsuits with one of their insurance
carriers, Employers Insurance of Wausau, regarding the insurance coverage
available as relates to several of the Hardboard Siding Actions:
(1) Employers Insurance of Wausau, A Mutual Company v. ABT Building Products
------------------------------------------------ ---------------------
Corporation and ABTco, Inc., Case No. 98-CV-86, Circuit Court of Marathon
- ---------------------------
County, Wisconsin.
On February 16, 1998, plaintiff Employers Insurance Wausau, A Mutual Company
("Wausau") filed this action in the Circuit Court of Marathon County, Wisconsin,
against the Company and ABTco. Wausau's lawsuit denies that Plaintiff has an
obligation to defend or indemnify the Company or ABTco in connection with all or
part of the Foster Action, the Fiedler Action, the Dunn Action, the Ezzell
------ ------- ---- ------
Action and the Fyola Action (the "Underlying Lawsuits"). Wausau alleges that it
-----
has not been provided adequate and complete information regarding these actions
and the Company and ABTco's additional insurance coverages. Wausau's complaint
seeks declaratory relief and reimbursement for any amounts paid by Wausau in
connection with the Company and ABTco's defense of the Underlying Lawsuits to
the extent those amounts exceed Wausau's obligation as determined by the Court.
17
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On March 30, 1998, the Company and ABTco filed a motion to dismiss or stay the
action. On that same day, the Company and ABTco filed a motion to change venue
from Marathon County, Wisconsin to Winnebago County, Wisconsin. On June 2,
1998, the Circuit Court of Marathon County granted the motion to change venue to
Winnebago County. At a hearing on June 30, 1998, the Circuit Court of Winnebago
County granted the motion to dismiss the action.
On September 3, 1998, Wausau filed a notice of appeal of the decision to
dismiss.
(2) ABT Building Products Corp. and ABTco, Inc. v. Employers Insurance of
-------------------------------------------- ----------------------
Wausau, A Mutual Company, and Thomas A. Foster and Linda E. Foster, Circuit
- ------------------------------------------------------------------
Court of Choctaw County, Alabama.
On March 30, 1998, the Company and ABTco filed this action in the Circuit
Court of Choctaw County, Alabama against Wausau and Thomas and Linda Foster. The
Company and ABTco's complaint denies any liability to the plaintiffs in the
Underlying Lawsuits and alleges that Wausau has wrongfully refused to assume any
liability for indemnification in connection with the Underlying Lawsuits and has
wrongfully refused to defend the Company and ABTco in those actions (except to a
limited extent in the Fiedler Action, pursuant to a full reservation of rights).
-------
The Company and ABTco's complaint asserts claims for declaratory judgment and
breach of contract. The Company and ABTco's complaint seeks declaratory relief,
compensatory damages, fees (including attorney's fees), and costs.
On June 10, 1998, Wausau filed a motion to dismiss or stay the action, based
upon the pendency of Wausau's duplicative action in Wisconsin, or in the
alternative for a transfer of venue to Jefferson County. Wausau subsequently
agreed to withdraw its motions to dismiss or stay, and consequently, on August
21, 1998, the court dismissed the motions as moot.
On September 9, 1998, Wausau filed an "Answer, Affirmative Defenses and
Counterclaims" that denied all material allegations of the complaint, asserted
affirmative defenses, and asserted counterclaims against the Company and ABTco
for allegedly making material misstatements and allegedly concealing material
facts during negotiation for the insurance policy at issue. The counterclaims
seek damages and rescission or reformation of the insurance policy at issue.
On October 13, 1998, ABT moved to dismiss Wausau's counterclaims.
The Company and ABTco intend to defend against the counterclaims vigorously.
18
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
(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,
1997 1998
----------------------- -----------------------
<S> <C> <C>
Cash paid during period for ---
Interest.......................... $6,644 $7,636
Income taxes...................... 6,502 2,657
</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. $8.9 million of the
restructuring charge consisted of a write-down of certain machinery and
equipment, inventory and goodwill to net realizable values, the remaining $1.5
million consisted of severance payments and outstanding lease obligations
related to the closing of certain leased facilities. The impact on diluted
earnings per share for the year ended December 31, 1997 amounted to $0.56. At
September 30, 1998 the remaining balance of $0.4 million related to the
restructuring is included in the accrued expenses in the Company's consolidated
balance sheet.
19
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
(9) EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares outstanding during the period. Diluted
earnings per share were calculated by including the effect of all dilutive
securities. For the three months ended September 30, 1997 and 1998, the effect
of potentially dilutive stock options was 922,758 and 692,439, respectively. For
the nine months ended September 30, 1997 and 1998, the effect of potentially
dilutive stock options was 1,086,552 and 731,260, respectively. The Company had
additional outstanding stock options of 213,489 and 1,309,267 as of September
30, 1997 and 1998, respectively, which were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of common shares.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
NET SALES
- ---------
Net sales increased by $3.2 million (3.6%) from $87.5 million for the
quarter ended September 30, 1997 to $90.7 million in the 1998 quarter. This
increase reflects a $1.2 million (3.9%) increase in Specialty Products sales and
a $2.0 million (3.5%) increase in Exterior Product sales.
The increase in Specialty Product sales of $1.2 million was
attributable to a $0.7 million increase in interior hardboard sales and a $0.5
million increase in plastic moulding sales. Interior hardboard sales were
impacted by strong demand for tileboard, doorskins and industrial hardboard
paneling products. Shipments of interior hardboard were 2.0% greater than the
same period last year. Shipments of mouldings were 7.7% greater than the same
period last year. Continued strong demand in the home center retailer market is
the primary reason for increased shipments of Specialty Products.
The increase in Exterior Products sales of $2.0 million was
attributable to an increase of $0.7 million in fiber cement siding, a product
introduced during the second half of 1997, an increase of $1.5 million in
exterior hardboard siding, offset by a $0.2 million decrease in exterior
plastics sales. Shipments of hardboard siding were 9.7% greater than the same
period last year. Exterior Plastics sales have been negatively impacted by the
discontinuation of industrial plastic product sales as part of a restructuring
in the second quarter of 1997 offset by an increase in vinyl siding sales. Vinyl
siding sales increased due to the continued growth in the wholesale distributor
and home center retailer distribution channels. Vinyl siding volumes were 18.7%
greater than the same period last year. Selling prices for vinyl siding were 5%
lower than the same period last year.
GROSS PROFIT
- ------------
Gross profit increased by $0.3 million (1.2%) from $24.4 million for
the three months ended September 30, 1997 to $24.7 million in the 1998 quarter.
Increased shipments, partially offset by lower pricing in the siding market, as
well as start-up costs related to both the vinyl siding facility in Mississippi
and the fiber cement facility located in North Carolina, were the principal
contributors to the increase in gross profit. Gross profit as a percentage of
net sales decreased from 27.9% for the three months ended September 30, 1997 to
27.2% for the 1998 quarter primarily due to lower pricing in the fiber cement
siding and vinyl siding products when compared to the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
Selling, general and administrative expenses increased by $0.1 million
(0.5%) from $13.4 million for the three months ended September 30, 1997 to $13.4
million in the 1998 quarter. Selling, general and administrative expenses
increased due to additional legal fees as a result of the class action lawsuits
(See Note 6 of the Condensed Notes to the Unaudited Financial Statements),
continuing costs related to the Year 2000 Compliance issue, partially offset by
various cost reduction programs implemented to reduce selling, general and
administrative expense. Selling, general and administrative costs as a
percentage of net sales decreased from 15.3% for the three months ended
September 30, 1997 to 14.8% for the 1998 quarter. The lower cost as a percentage
of net sales is due to the items discussed above.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
Quarter Ended September 30, 1998 compared to Quarter Ended September 30, 1997
- -----------------------------------------------------------------------------
(Continued)
- -----------
OPERATING INCOME
- ----------------
Operating Income increased by $0.2 million (1.9%) from $11.0 million
for the three months ended September 30, 1997 to $11.2 million for the 1998
quarter. The increase is primarily due to increased sales, partially offset by
the lower pricing in the siding market.
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense decreased $0.1 million from $2.5 million (net of $0.1
million of capitalized interest) for the three months ended September 30, 1997
to $2.4 million for the 1998 quarter. Slightly lower outstanding indebtedness
and a decline in the Company's weighted average interest rate on outstanding
borrowings during the three months ended September 30, 1998 as compared to the
1997 quarter, were the principal reasons for the decrease in interest expense.
NET INCOME
- -----------
Net Income increased by $0.2 million (3.4%) from $5.3 million for the
three months ended September 30, 1997 to $5.4 million for the 1998 quarter. The
increase is attributable to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1997
- ----
NET SALES
- ---------
Net sales increased by $5.6 million (2.2%) from $252.9 million for the
nine months ended September 30, 1997 to $258.5 million for the same period in
1998. This increase reflects a $4.1 million (4.3%) increase in Specialty
Products sales and a $1.5 million (1.0%) increase in Exterior Product sales.
The increase in Specialty Product sales of $4.1 million was
attributable to a $2.7 million increase in interior hardboard sales and a $1.4
million increase in plastic moulding sales. Plastic moulding sales increased due
to continued growth with the home center retailers. Shipments of moulding were
5.3% greater than the same period last year. Interior hardboard sales were
impacted by strong demand for tileboard, doorskins and designer series
hardboard paneling products as well as continued penetration into the home
center retailer market. Shipments of interior hardboard were 1.2% greater than
the same period last year.
The increase in Exterior Products sales of $1.5 million was
attributable to an increase of $6.7 million in fiber cement siding, a product
introduced during the second half of 1997, offset by a $2.9 million decrease in
exterior hardboard siding and a $2.3 million decrease in exterior plastics.
Exterior hardboard siding sales were impacted by aggressive pricing by
competitors in fiber cement and hardboard siding markets, resulting in lower
selling prices (3.7%) on a slight increase in volume (0.2%) when compared to
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1997 (Continued)
- ----------------
the same period last year. Exterior Plastics sales have been negatively impacted
by the discontinuation of industrial plastic product sales as part of a
restructuring in the second quarter of 1997 offset by an increase in vinyl
siding sales. Vinyl siding sales increased due to the continued growth in the
wholesale distributor and home center retailer distribution channels. Vinyl
siding volumes were 16.9% greater than the same period last year. Selling prices
for vinyl siding were 5.6% lower than the same period last year.
GROSS PROFIT
- ------------
Gross profit decreased by $7.5 million (9.9%) from $76.2 million for
the nine months ended September 30, 1997 to $68.7 million for the same period in
1998. Lower volume and price reductions implemented on exterior hardboard
siding, as well as lower selling prices in vinyl siding products were the
principal contributors to the decrease in gross profit. In addition, lower
realizations in fiber cement siding have negatively impacted gross profit for
the nine months ended September 30, 1998. Gross profit as a percentage of net
sales decreased from 30.1% for the nine months ended September 30, 1997 to 26.6%
for the 1998 period primarily due to lower pricing in all the Exterior Product
siding lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
Selling, general and administrative expenses increased by $0.3 million
(0.7%) from $39.7 million for the nine months ended September 30, 1997 to $39.9
million in the 1998 period. Selling, general and administrative expenses
increased due to additional legal fees as a result of the class action lawsuits
(See Note 6 of the Condensed Notes to the Unaudited Financial Statements),
continuing costs related to the Year 2000 Compliance issue, partially offset by
various cost reduction programs implemented to reduce selling, general and
administrative expense. Selling, general and administrative costs as a
percentage of net sales decreased from 15.7% for the nine months ended September
30, 1997 to 15.4% for the 1998 period. The lower cost as a percentage of net
sales is due to additional revenues generated by the new fiber cement siding
product line as well as a reduction in certain general and administrative
expenses for the nine months ended September 30, 1998 as compared to the nine
months ended September 30, 1997.
RESTRUCTURING CHARGE
- --------------------
On July 7, 1997 the Company announced that it was restructuring its
Plastic Products Group. The restructuring program was implemented to phase out
the Company's Plastics industrial business and to allow the Company to focus on
specialty building products. Accordingly, the Company recognized a $10.4
million charge during the period ended June 30, 1997. $8.9 million of the
restructuring charge consisted of a write-down of certain machinery and
equipment, inventory and goodwill to net realizable values, the remaining $1.5
million consisted of severance payments and outstanding lease obligations
related to the closing of certain leased facilities. The impact on diluted
earnings per share for the nine months ended June 30, 1997 amounted to $0.56.
At September 30, 1998 the remaining balance of $0.4 million related to the
restructuring is included in the accrued expenses in the Company's consolidated
balance sheet.
OPERATING INCOME
- ----------------
Operating Income increased by $2.6 million (9.9%) from $26.2 million
for the nine months ended September 30, 1997 to $28.8 million for the 1998
period. The increase is primarily due to the 1997 restructuring charge ($10.4
million) offset by the impact of pricing pressures on the exterior hardboard
siding, vinyl siding and fiber cement siding product lines during the nine
months ended September 30,1998.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1997 (CONTINUED)
- ----------------
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense increased $1.7 million from $5.7 million (net of $1.7
million of capitalized interest) for the nine months ended September 30, 1997 to
$7.5 million (net of $0.3 million of capitalized interest) for the 1998 period.
Higher average 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, 1998 as compared to the 1997 period.
NET INCOME
- -----------
Net Income increased by $0.6 million (5.1%) from $12.6 million for the nine
months ended September 30, 1997 to $13.2 million for the 1998 period. The
increase is attributable to the factors discussed above.
SIGNIFICANT BUSINESS TRENDS
- ---------------------------
Management believes that the level of housing starts has a significant
influence on the Company's ability to generate sales, particularly in relation
to demand for its siding products. The level of housing starts in the United
States increased from 1.3 million in 1995 to 1.57 million as of September, 1998.
The level of housing starts in Canada increased from 0.111 million in 1995 to
0.135 million in September, 1998.
The costs of thermoplastic resins (polystyrene, polypropylene, polyethylene
and polyvinyl chloride) used in the Company's Specialty Products and Exterior
Products are subject to price volatility. 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 exterior plastics products. The
Company cannot predict the actions of its competitors, which could further
negatively impact earnings in the future.
The Company has recently introduced Fiber Cement Siding. A major competitor
in the fiber cement siding market is aggressively marketing and pricing its
product. In response, among other actions, the Company has lowered its pricing
on both the Exterior Hardboard Siding and Fiber Cement Siding products to
protect its market share against competition from fiber cement siding products.
The Company has also implemented a strategy to shift product mix in its exterior
hardboard siding products from the 7/16" siding products into trimboard and
utility panels, in an effort to reduce the impact of the pricing pressures. The
lower prices have impacted earnings to date and could continue to further
negatively impact earnings. The Company cannot predict the actions of this or
other competitors, however, there have been recent announcements by competitors
that they are planning to add new fiber cement lines to expand their product
offerings, which could negatively impact earnings in the future.
Management also believes that continued penetration into the home center
retailer market will have a significant beneficial influence on the Company's
level of business activity. Sales to these customers have increased
approximately 13% for the nine months ended September 1998 when compared to the
same period last year. In addition, sales to the top three home center retailer
customers increased 28% for the nine months ended September 1998 as compared to
the same period last year. Management believes that this market will continue to
grow in importance to the Company.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Historically, the Company derived its cash from funds generated by
operations and from third-party financings, including the Credit Facility. The
Company believes that its operating cash flow, together with borrowings under
the Credit Facility, will be sufficient to meet its operating expenses, capital
requirements and debt service requirements.
At September 30, 1998, the Company had working capital of $66.7 million
with a current ratio of 2.5 to 1.0 as compared with working capital of $55.7
million and a current ratio of 2.5 to 1.0 at December 31, 1997. The increase in
working capital was primarily due to the increase in accounts receivable,
partially offset by an increase in accounts payable and accrued expenses. The
increase in accounts receivable and accounts payable were a result of the
increase in business activity in the third quarter of 1998 versus the last
quarter of 1997.
Capital expenditures during the nine months ended September 30, 1998
amounted to approximately $9.5 million, and were incurred primarily for
improvements to the Company's manufacturing facilities, including $2.8 million
related to the retrofitting of the vinyl siding manufacturing facility in Holly
Springs.
Debt decreased from $132.9 million at December 31, 1997 to $122.2 million
(including $12.5 million of current maturities) as of September 30, 1998. The
decrease in debt was primarily due to the cash generated from operations offset,
in part, to increases in working capital and capital expenditures .
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 retrofitting
of a vinyl siding manufacturing facility in Holly Springs, Mississippi. The
Industrial Revenue Bonds bear interest rates determined weekly by the
remarketing agent. The Industrial Revenue Bonds mature on April 1, 2022 and are
backed by irrevocable letters of credit issued under the Company's Credit
Facility. The amounts included in total debt reflect only drawings against
proceeds of the issued amounts of the Industrial Revenue Bonds and do not
reflect amounts held in a segregated escrow account pending disbursement.
On February 2, 1998 the Company and its bank group executed a First
Amendment to the Third Amended and Restated Credit Agreement (the "Credit
Facility") which superseded all prior credit agreements. The Credit Facility
provides a line of credit to the Company totaling $225.0 million consisting of a
$175.0 million continuing revolving credit facility (the "Revolving Credit
Facility") and a term loan facility (the "Term Loan") under which the Company
borrowed $50.0 million on April 3, 1995. The Credit Facility matures on March
10, 2002, subject to extensions for additional one-year periods. The Term Loan
requires 16 equal quarterly principal payments of $3.125 million commencing on
June 30, 1997, and continuing through March 31, 2001. As of September 30, 1998,
$31.3 million was outstanding under the Term Loan and the interest rate on the
Term Loan was 7.99% and $76.0 million was outstanding under the Revolving Credit
Facility and the weighted average interest rate on the outstanding Revolving
Credit Facility was 6.24%.
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
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
ENVIRONMENTAL COMPLIANCE (CONTINUED)
- ------------------------------------
compliance will be achieved with a combination of capital expenditures and
modifications to its production processes. The Company has entered into a
consent decree with respect to odor emissions at its Alpena, Michigan, facility.
To date, the Company has expended approximately $8.0 million in connection with
this program. Additional capital expenditures of up to $4.0 million may be
required over the next several years in order to attain compliance with the
program.
Although no assurances can be given as to any ultimate recoveries, the
prior owners of certain of the Company's businesses have agreed to indemnify the
Company against certain environmental liabilities. In connection with the
Acquisition, the seller has agreed to indemnify the Company with respect to
certain pre-Acquisition environmental matters and has placed $5.0 million in
escrow to fund any required remediation of such conditions. In connection with
the purchase of Canexel, Avenor is obligated to indemnify the Company against
certain environmental liabilities associated with Canexel's Nova Scotia
production facility. 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 been named as a defendant in similar litigation (see
Note 6 of the Condensed Notes to the Unaudited 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.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND
---
RESULTS OF OPERATIONS
---------------------
YEAR 2000 COMPLIANCE
- --------------------
The Company is currently implementing an upgrade to its existing financial,
sales, production and distribution software that is Year 2000 compliant. It is
also conducting a comprehensive review of the balance of its computer systems to
identify those processes that could be adversely affected by the Year 2000 issue
and is developing an implementation plan to resolve any issue that might arise.
In conducting its review, the Company is actively soliciting its suppliers and
customers to assess any Year 2000 issue that might arise from interaction of its
computer systems with those of its suppliers and customers. The Year 2000 issue
refers to the inability of many of its computer programs and systems to process
accurately dates later than December 31, 1999. Unless these programs are
modified to handle the century change, they will likely interpret the Year 2000
as the Year 1900. The Company has incurred approximately $0.6 million in
software programming and consulting expense through nine months ended September
30,1998 and management believes that an additional $1.5 million in expense will
be incurred through December 31, 1999, in order achieve Year 2000 compliance.
ACCOUNTING CHANGES
- ------------------
In 1998 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses net income and foreign currency
translation adjustments, in the notes to the condensed consolidated financial
statements for interim reporting purposes. In July 1997, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". This standard expands certain reporting and
disclosure requirements for segments from current standards. The Company is not
required to adopt SFAS No. 131 until December 1998. The expected impact of the
adoption of SFAS No. 131 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.
27
<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
28
<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 13, 1998
ABT BUILDING PRODUCTS CORPORATION
/s/ Joseph P. O'Neill
---------------------------------
Joseph P. O'Neill
(Vice President - CFO)
29
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