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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1910453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 South Cameron Street, Winchester, 22601
Virginia (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (540) 678-4070
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class: on which registered:
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendments to this Form 10-K [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant at March 16, 2001, based on the closing price of
such stock on the New York Stock Exchange on such date, was approximately $211
million.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 16, 2001 was 14,137,586.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the proxy statement for the 2001 annual meeting of
stockholders of the registrant is incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 13
Item 3. Legal Proceedings................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 15
Item 6. Selected Financial Data......................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 23
Item 8. Financial Statements and Supplementary Data...................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 23
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 24
Item 11. Executive Compensation.......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 26
Item 13. Certain Relationships and Related Transactions.................. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................................................... 27
i
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and "plan" as they relate to Trex
Company, Inc. or our management are intended to identify these forward-looking
statements. All statements by Trex Company, Inc. regarding our expected future
financial position and operating results, our business strategy, our financing
plans, forecasted trends relating to the markets in which we operate and
similar matters are forward-looking statements. We cannot assure you that our
expectations expressed or implied in these forward-looking statements will turn
out to be correct. Our actual results could be materially different from our
expectations as a result of, among other factors, the factors discussed under
the caption "Business--Risk Factors" in this report.
Some of the information contained in this report concerning the markets and
industry in which we operate is derived from publicly available information and
from industry sources. Although we believe that this publicly available
information and the information provided by these industry sources are
reliable, we have not independently verified the accuracy of any of this
information.
ii
PART I
Item 1. Business
General
Trex Company, Inc., which we sometimes refer to as the "company" in this
report, is the nation's largest manufacturer of non-wood decking alternative
products, which are marketed under the brand name Trex. Trex Wood-Polymer(TM)
lumber is a wood/plastic composite that offers an attractive appearance and the
workability of wood without wood's on-going maintenance requirements and
functional disadvantages. Trex is manufactured in a proprietary process that
combines waste wood fibers and reclaimed polyethylene and is used primarily for
residential and commercial decking. We promote Trex among consumers and
contractors as a premium decking product. Net sales of Trex increased from $0.6
million in 1992 to $117.6 million in 2000. Our income from operations increased
from a loss of $5.6 million in 1992 to a profit of $31.9 million in 2000.
We seek to achieve sales growth in the decking market by converting demand
for wood decking products into demand for Trex. We intend to continue to
develop and promote the Trex brand name as a premium decking product and to
focus on the contractor-installed market segment. This segment represents
approximately 70% of the decking market, as measured by board feet of lumber,
and contractors generally build larger, more elaborate residential decks than
decks built by homeowners in the "do-it-yourself" market segment. We sell our
products through approximately 75 wholesale distribution locations, which in
turn sell Trex to approximately 2,600 dealer outlets across the United States.
Trex Company, Inc., which is a Delaware corporation, was incorporated on
September 4, 1998 for the purpose of acquiring 100% of the membership interests
and operating the business of TREX Company, LLC, a Delaware limited liability
company, in connection with the company's initial public offering of its common
stock. Trex Company, Inc. had no operations or activity until it completed a
reorganization on April 7, 1999 in which TREX Company, LLC became the company's
wholly owned subsidiary. The company completed its initial public offering on
April 13, 1999. See note 1 to the company's consolidated financial statements
appearing elsewhere in this report for information concerning the
reorganization and the company's initial public offering.
TREX Company, LLC initiated commercial activity on August 29, 1996. On that
date, TREX Company, LLC acquired substantially all of the assets and assumed
some of the liabilities of the Composite Products Division of Mobil Oil
Corporation for a cash purchase price of approximately $29.5 million. The
buyout was led by four senior Mobil executives who currently serve as members
of our senior management.
Decking Market Overview
The decking market is part of the substantial home improvement market.
Expenditures for residential improvements and repairs totaled approximately
$143 billion in 1999, according to the U.S. Census Bureau, and the home
improvement market grew at a compound annual growth rate of 4.0% for the five-
year period ended December 31, 1999. The primary market for Trex is residential
decking and, to a lesser extent, commercial decking. Annual factory sales in
1999 of residential decking totaled approximately $1.9 billion, or
approximately 2.3 billion board feet of lumber. This market includes all
decking products other than posts, beams and columns used for a deck's
substructure. For the four-year period ended December 31, 1999, factory sales
of all residential decking increased at a compound annual growth rate of
approximately 7%. In recent years, factory sales of non-wood alternative
decking products to the residential market have increased at a compound annual
growth rate of over 30%.
The growth in demand for residential decking reflects the increasing
popularity of decks as a means of extending living areas and providing outdoor
recreation and entertainment spaces. Residential decking purchases include the
installation of new and replacement decks for existing homes, construction of
decks for new homes and repair of existing decks. An industry study estimates
that more than three million decks are built each year. We expect that deck
repair, modernization and replacement will increase as existing decks age.
1
The majority of decks are built for existing homes as new additions or to
replace other decks. During periods of economic uncertainty, when spending on
discretionary items is reduced, many homeowners forego the purchase of new
homes and choose to improve their existing residences. Adding a deck has become
one of the most popular home improvement projects. Construction of decking is a
relatively low-cost means of adding livable space, and industry studies
indicate that decking improvements generally return a significant percentage of
their cost at the time of resale. We estimate that the installation cost of a
majority of decks ranges from $3,000 to $6,000. More than half of all decks are
constructed one to five years after a home is purchased. Accordingly, there is
typically an increased demand for decking in the five-year period following a
peak in home sales. We believe that, because residential deck construction is
not primarily tied to new home activity, the residential decking market
historically has not experienced the high level of cyclicality common to
businesses in the new home construction and building materials industries.
The following table shows, in board feet of lumber, our estimate of the
percentage of 1999 factory sales to the decking market generated by each
product category listed:
Percentage of
Product 1999 Factory Sales
------- ------------------
Wood...................................................... 95%
100% plastic.............................................. 1
Wood/plastic composites................................... 4
---
100%
===
More than 75% of the lumber used in wooden decks is southern yellow pine,
which is pressure-treated with pesticides and other chemicals to create
resistance to insect infestation and decay. The balance of the wood decking
segment is primarily divided between redwood and cedar products. The 100%
plastic decking products utilize polyethylene, fiberglass and polyvinyl
chloride, or PVC, as raw materials. Wood/plastic composites are produced from a
combination of wood fiber and polyethylene or other commonly used polymers.
Growing consumer awareness of the product attributes of non-wood decking
alternatives and the decline in lumber quality and quantity have contributed to
increased sales of 100% plastic lumber and wood/plastic composites for decking.
Distributors of wood decking materials typically supply lumber to lumber
yards and home center outlets, which in turn supply the materials to home
builders, contractors and homeowners. Manufacturers of non-wood decking
alternatives also generally use these distribution channels because many of
these alternative products can be stacked, stored and installed like wood
products. Some non-wood decking alternatives, however, are sold to specialty
dealers who provide the special selling support needed to build consumer
awareness of new products.
Wood decking products generally are not associated with brand
identification. The primary softwoods used for decking, which consist of
treated southern yellow pine, redwood and cedar, are sold as commodities graded
according to classifications established by the U.S. Department of Commerce.
Pricing is based on species, grade, size and level of chemical treatment, if
any. There generally is no pricing differentiation based on brand, although
some wood preservers have attempted to brand their treated wood products. We
believe that these companies, which we estimate represent less than 5% of the
treated wood market, have not established meaningful brand name recognition.
Growth Strategies
Our goals are to continue to be the leading producer of a superior non-wood
decking alternative product, to increase our market share of the decking market
and to expand into new products and geographic markets. To attain these goals,
we employ the following strategies:
. we plan to increase our investment in, and the resources devoted to,
development of the Trex brand;
. we intend to establish comprehensive national coverage for Trex by
increasing the number of dealer outlets selling Trex over the next year
from 2,600 to approximately 3,000;
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. we plan to increase our output of Trex by increasing productivity and
adding production capacity in our existing facilities in Winchester,
Virginia and Fernley, Nevada and by constructing and operating a third
manufacturing facility near Knoxville, Tennessee;
. we will continue to make substantial investments in process and product
development to support new products and improve product consistency,
reduce manufacturing costs and increase operating efficiencies; and
. as part of our long-term growth strategy, we will continue to develop
opportunities for Trex in new products and product applications and in
geographic markets beyond our U.S. base.
We have signed an agreement to purchase approximately 100 acres of land near
Knoxville, Tennessee on which we intend to establish our third manufacturing
facility. We expect to purchase this site and begin engineering work in the
first half of 2001 and begin construction of the facility in 2002. We have
budgeted approximately $2.0 million in capital expenditures for this facility
in 2001. We will apply these expenditures primarily for site acquisition and
engineering work.
Products
We manufacture Trex Wood-Polymer lumber in a proprietary process that
combines waste wood fibers and reclaimed polyethylene. Trex is produced in
popular lumber sizes and is currently sold in four colors: Natural, Winchester
Grey, Madeira and Woodland Brown.
Trex offers a number of significant advantages over wood decking products.
Trex eliminates many of wood's major functional disadvantages, which include
warping, splitting and other damage from moisture. Trex requires no sealing to
protect against moisture damage, provides a splinter-free surface and needs no
chemical treatment against insect infestation. These features of Trex eliminate
the on-going maintenance requirements for a wood deck and make Trex less costly
than wood over the life of the deck. Like wood, Trex is slip-resistant, even
when wet, can be painted or stained and is not vulnerable to damage from
ultraviolet rays. The special characteristics of Trex, including resistance to
splitting, flexibility, and ease and consistency of machining and finishing,
facilitate deck installation, reduce contractor call-back and afford customers
a wide range of design options. Trex does not have the tensile strength of wood
and, as a result, is not used as a primary structural member in posts, beams or
columns used in a deck's substructure.
Trex has received product building code listings from the major U.S.
building code listing agencies. Our listings facilitate the acquisition of
building permits by residential consumers of Trex. We believe that our listings
promote customer and industry acceptance of Trex as a substitute for wood in
decking.
We derived approximately 98% of our 2000 net sales from sales of Trex to the
residential and commercial decking market. We also have a number of non-decking
product applications, which generated the remaining 2% of our 2000 net sales.
These applications currently include blocks to cover and protect concrete sub-
floors in heavy industrial plants; applications for parks and recreational
areas, including playground structures, picnic tables and benches, fencing and
theme park applications; floating and fixed docks and other marine
applications; and landscape edging.
Sales and Marketing
We have invested approximately $20 million during the last three years to
develop Trex as a recognized brand name in the residential and commercial
decking market. Our sales growth in the decking market will largely depend on
converting demand for wood products into demand for Trex. Accordingly, our
branding strategy will continue to emphasize the advantages of Trex over wood
decking products. We have implemented a two-pronged marketing program directed
at consumers and contractors. We seek to develop consumer brand awareness and
contractor preference to generate demand for Trex among dealers and
distributors, who then
3
recommend Trex to other contractors and consumers. We believe that our branding
strategy promotes product differentiation of Trex in a market which is not
generally characterized by brand identification and enables us both to command
premium prices and to maintain price stability for Trex.
The following are the key elements of our marketing program:
Consumer Advertising. We engage in extensive television advertising in which
we target cable channels such as HG-TV, the Discovery Channel, the Food
Network, and The Learning Channel which feature programs on home improvement
and remodeling. In a ten-week period during the spring of 2000, we ran an
intensive campaign of over 670 advertisements. Our investment in broadcast
advertising for 2000 increased more than 100% over 1999.
We also advertise Trex decking in popular home and garden consumer
publications, including Martha Stewart Living, Southern Living, House & Garden,
and Sunset. Several of these publications feature "idea" homes each year that
incorporate leading building materials. Trex decking was featured in five of
these idea homes in 2000.
Public Relations. We employ a public relations firm to stimulate interest in
Trex decking by the print and broadcast media. During 2000, print and broadcast
stories featuring Trex decking generated a total of 185 million "impressions,"
which represent potential viewings, compared to 182 million impressions in
1999. The increase in impressions was largely attributable to the inclusion of
Trex in several episodes of a well-known home improvement program on The
Learning Channel. The marketing of Trex also benefited from coverage by
consumer reporters on local television stations.
Trade Advertising and Promotion. To build a brand name for Trex with decking
contractors, we reach a professional building audience through advertisements
in leading building and remodeling magazines, including Builder, Building
Products, Fine Homebuilding, Journal of Light Construction, and other well-
known publications. In 1999, we initiated an incentive program for deck
builders which rewards contractors for their purchases of Trex decking. In
2000, over 3,800 new members enrolled in this program.
Model Home Program. We operate a program which is designed to provide
promotional allowances and display materials to homebuilders who use Trex for
their model home decks and agree to promote Trex. More than 180 builders have
participated in this program.
Homebuilder Focus. In 2000, we expanded our marketing program to target
major homebuilder groups in different regions of the country. A number of these
homebuilder groups, including David Weekley Homes, Pulte Homes, Royce Homes,
Ryan Homes and Toll Brothers, have agreed to offer Trex decking as their
standard decking material on major home developments.
Trade and Home Shows. We annually exhibit Trex decking at five major trade
shows for homebuilders, contractors, and specifiers that have a total
attendance of approximately 200,000. We also exhibit our product line at major
regional home and garden shows. Distributors, dealers and contractors
experienced in Trex decking provide additional support by exhibiting Trex
decking at smaller local home shows.
Showcase Projects. We also obtain brand name recognition through our
association with highly publicized showcase projects. Trex decking was used in
a number of new projects in 2000, including the Hammonasset Beach State Park in
Madison, Connecticut, the Gulf Islands National Seashore in Ocean Springs,
Mississippi, the 14th Street Pier in Hoboken, New Jersey and the Big Morongo
Canyon Preserve in Morongo Valley, California. Other showcase projects include
the Presidential Trail at Mount Rushmore, the Toronto Boardwalk on Lake Ontario
Shores, the Florida Everglades Walkways and the Grand Canyon Education Center.
Consumer Research. From time to time, we commission consumer research
studies to gain a better understanding of the needs of the decking market, our
ability to meet those needs relative to competitive products, and consumer
acceptance of Trex as a decking material.
4
Distribution
In 2000, we made approximately 99% of our net sales through our wholesale
distribution network. At December 31, 2000, we sold our Trex product line to 25
wholesale companies operating from approximately 75 distribution locations. At
the same date, our distributors marketed Trex to approximately 2,600 dealer
outlets across the United States. Although our dealers sell to both homeowners
and contractors, they primarily direct their sales at professional contractors,
remodelers and homebuilders. In 2000, we made the remaining 1% of our net sales
directly to industrial floor fabricators, playground material distributors and
other accounts.
Wholesale Distributors. We believe that attracting wholesale distributors
that are committed to Trex and the Trex marketing approach and that can
effectively sell Trex to contractor-oriented lumber yards is important to our
future growth. We believe our distributors are able to provide value-added
service in marketing Trex because they sell premium wood decking products and
other building supplies, which typically require product training and personal
selling efforts.
Under our agreement with each wholesale distributor, we appoint the
distributor on a non-exclusive basis to distribute Trex within a specified
area. The distributor generally purchases Trex at our prices in effect at the
time we ship the product to the distributor. The distributor is required to
maintain specified minimum inventories of Trex during designated portions of
each year. Upon the expiration of the initial one-year term, the agreement is
automatically renewed for additional one-year terms unless either party
provides notice of termination at least 60 days before the expiration of any
renewal term. The distributor may terminate the agreement at any time upon 60
or 90 days' notice, while we may terminate the agreement upon 60 or 90 days'
notice or immediately upon the happening of specified events, including a
failure by the distributor to maintain the required minimum inventories of
Trex.
We require our wholesale distributors to contribute significant resources to
support Trex. All wholesale distributors have appointed a Trex specialist,
regularly conduct dealer training sessions, fund demonstration projects and
participate in local advertising campaigns and home shows. We sponsor intensive
two-day training seminars to help train Trex specialists.
In 1998, 1999 and 2000, we generated in excess of 10% of our net sales to
each of five wholesale distribution companies: Capital Lumber Company, Boise
Cascade Corporation, Oregon Pacific Corporation, Parksite Inc. and Snavely
Forest Products. Distributors that individually accounted for more than 10% of
our annual net sales collectively accounted for approximately 74% of our net
sales in 1998, approximately 75% of our net sales in 1999, and approximately
75% of our net sales in 2000. None of such distributors individually accounted
for more than 20% of our net sales in any of these years.
To augment our dealer outlets, we plan to add new distributors and increase
the number of our wholesale distribution locations by December 31, 2001 to
approximately 85.
Retail Lumber Dealers. Of the approximately 25,000 retail outlets in the
United States that sell lumber, approximately 5,000 are independent lumber
yards that emphasize sales to contractors and are the primary market for Trex.
Although there is demand for Trex from both the "do-it-yourself" homeowner and
contractor, our sales efforts emphasize the contractor-installed market to
achieve premium product positioning for Trex and to ensure that the
installations will have professional craftsmanship. Our retail dealers
generally provide sales personnel trained in Trex, contractor training,
inventory commitment and point-of-sale display support. To establish
comprehensive national coverage for Trex, we plan to increase the number of our
dealer outlets over the next year from approximately 2,600 at December 31, 2000
to approximately 3,000 by December 31, 2001.
Contractor Training. We have provided training about Trex to over 32,000
contractors since 1995. Contractors receive a Trex Contractor Kit containing a
product handbook, sales literature and product samples as part of their
training. We have established a "Builders Club" to strengthen our relationship
with premium decking contractors.
5
Dealer Locator Service and Web Site. We maintain a toll-free telephone
service (1-800-BUY-TREX) for use by consumers and building professionals to
locate the closest dealer offering Trex and to obtain product information. We
use these calls to generate sales leads for contractors, dealers, distributors
and Trex sales representatives. We also analyze caller information to assess
the effectiveness of our promotional and advertising activities.
As an additional source of information to consumers, dealers and
distributors, we operate a web site (www.trex.com) which provides product
installation information, handling instructions, a dealer locator service,
photographs of showcase installations, technical reports and other information.
The contents of our web site are not part of this report.
Shipment. We ship Trex to distributors by truck and rail. Distributors pay
all shipping and delivery charges.
Manufacturing Process
Trex is manufactured at our 115,000-square foot facility in Winchester,
Virginia, which had eight production lines in operation at December 31, 2000,
and our 150,000-square foot facility in Fernley, Nevada, which had five
production lines in operation at the same date. Each production line is highly
automated and, on average, requires fewer than five employees to operate per
shift.
In 2000, our Winchester facility produced approximately $86.3 million sales
value of finished product and our Fernley facility produced approximately $52.6
million sales value of finished product. To support sales growth and improve
customer service, during 2000 we added three new production lines in our
Fernely facility.
Trex is manufactured from waste wood fiber and reclaimed polyethylene, or
"poly." The composition of Trex Wood-Polymer lumber is approximately 50% wood
fiber and 50% reclaimed poly material. We use wood fiber purchased from
woodworking factories, mills and pallet recyclers. Poly material used in the
production of Trex consists primarily of reclaimed grocery sacks and stretch
film.
The Trex manufacturing process involves mixing wood particles with plastic,
heating and finally extruding, or forcing, the highly viscous and abrasive
material through a profile die. We cool the extruded product in a water bath
and cut the product to its finished length. We recycle into the production
process the waste created during manufacturing. The finished boards are placed
on a cooling conveyor and proceed to finished goods inspection, packaging and
storage.
Production of a non-wood decking alternative like Trex requires significant
capital investment, special process know-how and time to develop. We have
invested approximately $123 million and nine years in expansion of our
manufacturing capacity, manufacturing process improvements, new product
development and product enhancements. As a result of these investments,
production line rates have increased over 200% since 1992. We also have
broadened the range of raw materials that can be used to produce Trex by
developing hardware capable of utilizing different forms of poly material to
produce a consistent final product. We have obtained a patent for a process of
preparing the raw materials for the manufacturing phase of production and a
second patent for another manufacturing process improvement. The patent
protection for both processes will extend until 2015. In the third quarter of
1998, we centralized our research and development operations in the Trex
technical center, a 30,000-square foot building adjacent to our Winchester
manufacturing facility.
In conjunction with our building code listings, we maintain a quality
control testing program that is monitored by an independent inspection agency.
Under this program, we test one board from every other production bundle to
determine whether it meets the detailed, published criteria for code listing.
Representatives of the inspection agency conduct unannounced monthly on-site
audits of these program records to assure conformity to testing and to check
test results. We believe that currently a minimum of 18 months would be
required for a manufacturer of a competitive product which has not yet started
the listing approval process to complete all phases of the process for its
product.
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Suppliers
The production of Trex requires the supply of wood fiber and polyethylene
from reclaimed grocery sacks and stretch film. We are party to several short-
term and long-term supply contracts that require us to take or pay for raw
materials for periods of up to ten years. The quantities of raw materials to be
purchased under these contracts are not fixed or determinable.
Wood Fiber. In 2000, we consumed approximately $6.7 million of wood fiber.
Woodworking plants or mills are our preferred suppliers of wood fiber because
the waste wood fiber produced by these operations contains little contamination
and is low in moisture. These facilities generate wood fiber as a byproduct of
their manufacturing operations. To minimize our purchase costs, we seek to
provide the manufacturing facilities with prompt and reliable removal service
using equipment we provide.
Four suppliers accounted individually for more than 10% and collectively for
approximately 57% of our 2000 wood fiber purchases. We obtain our wood fiber
supplies for a fixed annual price under multi-year contracts that are
terminable by either party upon 30 days' notice. Based on our discussions with
wood fiber suppliers and our analysis of industry data, we believe that, if our
contracts with one or more of our current suppliers were terminated, we would
be able to obtain adequate supplies of wood fiber at an acceptable cost from
our other current suppliers or from new suppliers.
Poly. In 2000, we consumed approximately $27.5 million of poly material,
which was primarily composed of reclaimed grocery sacks and stretch film.
Approximately two billion pounds of poly film are used in the manufacture of
grocery sacks and stretch film in the United States each year. We will seek to
meet our future needs for poly material from expansion of our existing supply
sources and the development of new sources, including post-industrial waste and
plastic paper laminates.
We purchase plastic sacks primarily from large grocery supermarket chains,
which have recycling programs that facilitate and encourage plastic sack
returns. Approximately 5% of all grocery sacks nationwide are returned. The
existing industry practice is for reclaimed sack purchasers, such as the
company, to absorb freight and handling costs after the sacks are picked up
from the chains' distribution centers. We pick up the plastic grocery sacks at
the distribution centers and store the sacks in warehouses until we use them in
our production process.
Stretch film is used to stabilize pallet loads to avoid damage during
shipping and handling. We collect stretch film from distribution centers that
service the grocery and other industries, including the furniture, machinery,
parts and soft goods industries. Suppliers of stretch film save on waste
disposal costs by selling the bundled film to us.
No supplier sold 10% or more of the poly material we purchased in 2000. We
generally acquire poly material by purchase order at prices which are fixed
annually.
Competition
The residential and commercial decking market in which we principally
operate is highly competitive. As a wood/plastic composite product, Trex
competes with wood, other wood/plastic composites and 100% plastic lumber for
use as decking. The primary competition for Trex is wood decking, which
accounted for approximately 96% of 1999 decking sales, as measured by board
feet of lumber. The conventional lumber suppliers with which we compete in many
cases have established ties to the building and construction industry and have
well-accepted products. Many of our competitors in the decking market that sell
wood products have significantly greater financial, technical and marketing
resources than we do. We estimate that Trex currently represents over 60% of
the non-wood decking segment. We compete with other wood/plastic composites as
well as with 100% plastic products that utilize polyethylene, fiberglass and
PVC as raw materials. Our principal competitors in the non-wood decking
alternative market include Advanced Environmental Recycling Technologies, Inc.,
Crane Plastics, Louisiana-Pacific Corporation, CertainTeed Corporation and U.S.
Plastic Lumber Corporation.
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Our ability to compete depends, in part, upon a number of factors outside
our control, including the ability of our competitors to develop new non-wood
decking alternatives which are competitive with Trex. We believe that the
principal competitive factors in the decking market include product quality,
price, maintenance cost and consumer awareness of product alternatives. We
believe we compete favorably with respect to these factors based on the low
maintenance requirements and other attributes of Trex compared to wood and 100%
plastic products, the Trex brand name and our extensive distribution network.
Of the wood lumber which we estimate constituted approximately 95% of the
total decking market in 1999, over 75% is pressure-treated southern yellow
pine. Southern yellow pine is used for decking because its porosity allows it
readily to accept the chemicals used in the treating process that creates
resistance to rotting and insect infestation. The chemical compound used to
treat wood is typically chromated copper arsenate, or CCA, an EPA-registered
pesticide. The same porosity makes southern yellow pine susceptible to taking
on moisture, which causes the lumber to warp, crack, splinter and expel
fasteners. The balance of the wood decking segment is primarily divided between
redwood and cedar, with some amounts of treated fir and exotic hardwoods.
Because old, slow-growth timber has been depleted, new, fast-growth varieties
predominate. These varieties do not have the natural decay resistance or close
rings of old, slow-growth timber, causing them to be more susceptible to rot,
insect infestation, splintering and warping.
Trex also competes with decks made from 100% plastic lumber. Although there
are several companies in the United States that manufacture 100% plastic
lumber, total factory sales to the decking market in 1999 are estimated at $15
million, or 20 million board feet. A number of factors have limited the success
of 100% plastic lumber manufacturers, including a less efficient manufacturing
process, inconsistent product quality, and physical properties not considered
suitable for decking, such as higher thermal expansion and contraction, poor
slip resistance and an appearance viewed by some homeowners as unattractive.
There are several manufacturers of wood/plastic composite lumber in addition
to the company. Some of these manufacturers participate in the decking market
only on a limited basis. We estimate that Trex accounted for approximately two
out of every three plastic/composite decks installed in the United States in
1999.
The following chart compares particular attributes of Trex to the
characteristics of treated wood and 100% plastic products:
Treated 100%
Characteristics Trex Wood Plastic
--------------- ---- ------- -------
Low thermal expansion/contraction....................... x x
Low thermal conductivity................................ x x
Good paint adhesion..................................... x x
Resistance to ultraviolet damage........................ x x
Easy to work with....................................... x x
Low moisture absorption................................. x x
Splinter-free........................................... x x
Resistant to insect damage.............................. x x x
No chemical preservatives............................... x x
No splitting............................................ x x
No rotting.............................................. x x x
No warping.............................................. x x
No sealant required..................................... x x
Slip resistant.......................................... x x
We believe that Trex offers cost advantages when compared with some of the
other types of decking materials. Although a contractor-installed Trex deck
built in 2000 using a pressure-treated wood substructure generally cost 15% to
20% more than a deck made entirely from pressure-treated wood, Trex eliminates
the on-going maintenance required for a pressure-treated deck and is,
therefore, less costly over the life of the deck. We believe that our
manufacturing process and utilization of relatively low-cost raw material
sources also provide Trex with a competitive cost advantage relative to other
wood/plastic composite products.
8
Government Regulation
We are subject to federal, state and local environmental regulation. The
emissions of particulates and other substances from our manufacturing
facilities must meet federal and state air quality standards implemented
through air permits issued to us by the Department of Environmental Quality of
the Commonwealth of Virginia and the Division of Environmental Protection of
Nevada's Department of Conservation and Natural Resources. Our facilities are
regulated by federal and state laws governing the disposal of solid waste and
by state and local permits and requirements with respect to waste water and
storm water discharge. Compliance with environmental laws and regulations has
not had a material adverse effect on our business, operating results or
financial condition.
Our operations also are subject to work place safety regulation by the U.S.
Occupational Safety and Health Administration, the Commonwealth of Virginia and
the State of Nevada. Our compliance efforts include safety awareness and
training programs for our production and maintenance employees.
Intellectual Property
Our success depends, in part, upon our intellectual property rights relating
to our production process and other operations. We rely upon a combination of
trade secret, nondisclosure and other contractual arrangements, and patent,
copyright and trademark laws, to protect our proprietary rights. We have made
substantial investments in manufacturing process improvements which have
enabled us to increase manufacturing line production rates, facilitated our
development of new products and produced improvements in the dimensional
consistency, surface texture and color uniformity of Trex. We have obtained a
patent for a process of preparing the raw materials for the manufacturing phase
of production and a second patent for another manufacturing process
improvement. The patent protection for both processes will extend until 2015.
We have been granted federal registrations for the Trex, Easy Care Decking and
No Sealing No Splinters No Hassles trademarks by the U.S. Patent and Trademark
Office and have filed an application for the federal registration of our Wood-
Polymer trademark. Federal registration of trademarks is effective for as long
as we continue to use the trademarks. We consider our trademarks to be of
material importance to our business plans. We have not registered any of our
copyrights with the U.S. Copyright Office, but rely on the protection afforded
to such copyrights by the U.S. Copyright Act. That law provides protection to
authors of original works, whether published or unpublished, and whether
registered or unregistered. We enter into confidentiality agreements with our
senior employees and limit access to and distribution of our proprietary
information.
In 1992, before our buyout of Mobil's Composite Products Division, Mobil
brought an action in the U.S. District Court for the District of Delaware
seeking a declaratory judgment that four patents issued to Advanced
Environmental Recycling Technologies, Inc., or AERT, a manufacturer of
wood/plastic composite products, were invalid, were not infringed by Mobil in
connection with its wood/plastic composite, now known as "Trex," and were
unenforceable. Mobil brought this action in response to statements by AERT that
Mobil infringed AERT's patents. AERT counterclaimed against Mobil for alleged
infringement of two of the AERT patents and for alleged violations of antitrust
and trade regulation laws.
Following a trial in early 1994, the district court held that Mobil did not
infringe either of the two AERT patents that were the subject of the
counterclaim and rendered a verdict for Mobil that each of the four AERT
patents was invalid and unenforceable. On an appeal of this judgment by AERT,
the U.S. Court of Appeals for the Federal Circuit affirmed the district court's
judgment that Mobil did not infringe the two AERT patents and that two of the
four AERT patents were invalid and unenforceable. The Federal Circuit vacated
the district court's judgment on the remaining two AERT patents on the grounds
that there was no case or controversy between the parties regarding
infringement of those patents. The district court also still has pending before
it AERT's non-patent counterclaims against Mobil. No proceedings on those
claims are currently scheduled.
Employees
At December 31, 2000, we had 403 full-time employees, of whom 324 were
employed in our manufacturing operations. Our employees are not covered by
collective bargaining agreements. We believe that our relationships with our
employees are good.
9
Risk Factors
Our business is subject to a number of risks, including the following:
We will have to increase market acceptance of Trex to grow.
Our ability to grow will depend largely on our success in converting demand
for wood decking products, which we estimate accounted for approximately 95% of
the 1999 decking market when measured by board feet of lumber, into demand for
Trex. Failure to achieve increased market acceptance of Trex could have a
material adverse effect on our business, operating results and financial
condition. To increase our market share, we must overcome:
. the low consumer awareness of non-wood decking alternatives;
. the preference of many consumers for well-accepted wood products;
. the somewhat different appearance of Trex;
. the greater initial expense of installing a Trex deck; and
. the established relationships existing between suppliers of wood
decking products and contractors and homebuilders.
All of our sales result from one product.
All of our net sales are derived from sales of Trex. Although we have
developed new Trex products and new applications for Trex since 1992, and we
intend to continue this development, our product line is based exclusively on
the composite formula and manufacturing process for Trex Wood-Polymer lumber.
If we should experience any problems, real or perceived, with product quality
or acceptance of Trex, our lack of product diversification could have a
material adverse effect on our business, operating results and financial
condition.
We currently depend on two manufacturing facilities to meet the demand for
Trex.
We currently produce Trex in our manufacturing facilities in Winchester,
Virginia and Fernley, Nevada. Any interruption in the operations or decrease in
the production capacity of these facilities, whether because of equipment
failure, natural disaster or otherwise, would limit our ability to meet
existing and future customer demand for Trex and could have a material adverse
effect on our business, operating results and financial condition.
Our business is subject to risks in obtaining the raw materials we use to
produce Trex.
The production of Trex requires substantial amounts of wood fiber and
polyethylene. Our business is subject to the risks that we may be unable to
purchase sufficient quantities of these raw materials to meet our production
requirements or that we may have to pay higher prices for our supplies. In
2000, four suppliers accounted individually for more than 10% and collectively
for approximately 57% of our wood fiber purchases. No supplier sold 10% or more
of the poly material purchased in 2000. Our ability to obtain adequate supplies
of poly material depends on our success in developing new sources, entering
into long-term arrangements with suppliers and managing the collection of
supplies from geographically dispersed distribution centers. We generally
obtain our raw materials from existing suppliers at fixed prices that are
established annually. We cannot be sure that we will be successful in
maintaining such pricing policies to protect against fluctuations in raw
materials prices. The termination of significant sources of raw materials, the
payment of higher prices for raw materials or the failure to obtain sufficient
additional raw materials to meet planned increases in capacity could have a
material adverse effect on our business, operating results and financial
condition.
10
The demand for decking products is sensitive to general economic conditions
and could be adversely affected by economic downturns.
The demand for decking products is sensitive to changes in the level of
activity in home improvements and, to a lesser extent, new home construction.
These activity levels, in turn, are affected by such factors as consumer
spending habits, employment, interest rates and inflation. An economic downturn
could reduce consumer income available for spending on discretionary items such
as decking, which could have a material adverse effect on our business,
operating results and financial condition.
We face risks in implementing our plan to increase our manufacturing
capacity to meet customer demand for Trex.
To support sales growth and improve customer service, we plan to add one new
production line in 2001 in our Winchester, Virginia facility and to commence
engineering for a third manufacturing facility on land near Knoxville,
Tennessee subject to a purchase agreement. In augmenting the capacity of our
existing facilities and establishing a new facility, we will face risks:
. recruiting and training additions to our workforce;
. installing and operating new production equipment;
. purchasing raw materials for increased production requirements; and
. maintaining product quality.
These risks could result in substantial unanticipated delays or expense,
which could have a material adverse effect on our business, operating results
and financial condition.
The expansion and future profitability of our business could be adversely
affected if we do not manage our growth effectively.
Our recent growth has placed significant demands on our management and other
resources. If we are unable to manage our future growth effectively, our
inability to do so could have a material adverse effect on the quality of our
products and on our business, operating results and financial condition. Our
net sales increased to $117.6 million in 2000 from $77.6 million in 1999 and
$49.2 million in 1998. The number of dealer outlets selling Trex has increased
from approximately 1,200 at December 31, 1996 to approximately 2,600 at
December 31, 2000, and we expect further significant increases in the future.
We plan to support our geographic expansion by adding one new production line
in our Winchester, Virginia facility in 2001 and acquiring and commencing
engineering for a third manufacturing facility near Knoxville, Tennessee. To
manage our growth effectively, we will need to continue to develop and improve
our operational, financial, accounting and other internal systems. In addition,
our future success will depend in large part on our ability to recruit, train,
motivate and retain senior managers and other employees and to maintain product
quality.
We experience seasonal fluctuations in our sales and quarterly operating
results.
Our net sales and income from operations historically have varied from
quarter to quarter. These variations are principally attributable to seasonal
trends in the demand for Trex. We experience lower net sales levels during the
fourth quarter, in which holidays and adverse weather conditions in some
regions usually reduce the level of home improvement and new construction
activity. During the third quarter of 2000, our increased production capacity
enabled us to eliminate the allocation of product supply to our network of
wholesale distributors and retail dealers. Because customer stockpiling of
inventories resulting from this allocation policy affected seasonality during
1998 and 1999, our historical seasonality may not be a reliable indicator of
future seasonality. Income from operations and net income tend to be lower in
quarters with lower sales due to a lower gross margin which is not offset by a
corresponding reduction in selling, general and administrative expenses, in
part because we continue to make advertising expenditures throughout the year.
As a result of these factors, we believe period-to-period comparisons of our
operating results are not reliable indicators of future performance, and the
operating results for any quarterly period may not be indicative of operating
results to be expected for a full year.
11
We will have to make significant capital expenditures to increase our
manufacturing capacity.
We estimate that our capital requirements in 2001 will total approximately
$33 million. Our failure to generate sufficient funds to meet our capital
requirements could have a material adverse effect on our business, operating
results and financial condition. We will use capital expenditures primarily to
increase capacity at our two existing manufacturing facilities, to make process
and productivity improvements, to complete a plastic processing facility at our
Winchester, Virginia plant and to complete the site acquisition and begin
engineering work for a planned third manufacturing facility near Knoxville,
Tennessee. The actual amount and timing of our future capital requirements may
differ materially from our estimates, depending on the demand for Trex and as a
result of new market developments and opportunities. We may determine that it
is necessary or desirable to obtain financing for our capital requirements
through bank borrowings or the issuance of debt or equity securities. Debt
financing would increase our level of indebtedness, while equity financing may
dilute the ownership of our stockholders. We cannot be sure as to whether, or
as to the terms on which, we will be able to obtain this financing.
Our sales depend on a small number of significant distributors.
Our total net sales to our five largest wholesale distributors accounted for
approximately 75% of our net sales in 2000. Our contracts with these
distributors are terminable by the distributors upon notice at any time during
the contract term. A contract termination or significant decrease or
interruption in business from any of our five largest distributors or any other
significant distributor could cause a short-term disruption of our operations.
Such a disruption could have a material adverse effect on our business,
operating results and financial condition.
We face highly competitive conditions in the decking market.
The residential and commercial decking market in which we principally
operate is highly competitive. Our failure to compete successfully in this
market could have a material adverse effect on our business, operating results
and financial condition. As a wood/plastic composite product, Trex competes
with wood, other wood/plastic composites and 100% plastic lumber for use as
decking. The primary competition for Trex is wood decking, which we estimate
accounted for approximately 95% of 1999 decking sales when measured by board
feet of lumber. The conventional lumber suppliers with which we compete have
established ties, in many cases, to the building and construction industry and
have well-accepted products. Many of our competitors in the decking market that
sell wood products have significantly greater financial, technical and
marketing resources than we do. Our ability to compete depends, in part, upon a
number of factors outside our control, including the ability of our competitors
to develop new non-wood decking alternatives which are competitive with Trex.
We are subject to government regulation.
We are subject to federal, state and local environmental, occupational
health and safety, and other laws and regulations. The environmental laws and
regulations applicable to our operations establish air quality standards for
emissions from our manufacturing operations, govern the disposal of solid
waste, and regulate waste water and storm water discharge. As is the case with
manufacturers in general, we may be held liable for response costs and damages
to natural resources if a release or threat of release of hazardous materials
occurs on or from our properties or any associated offsite disposal location,
or if contamination from prior activities is discovered at any properties we
own or operate. A liability of this kind could have a material adverse effect
on our business, operating results and financial condition.
We cannot be sure we have adequately protected our intellectual property.
Our success depends, in part, on our intellectual property rights. Our
failure to protect adequately those rights could have a material adverse effect
on our business, operating results and financial condition. We rely
12
on a combination of trade secret, nondisclosure and other contractual
arrangements, and copyright and trademark laws to protect our proprietary
rights. We have also obtained patent protection for some of our production
processes. We enter into confidentiality agreements with our employees and
limit access to and distribution of our proprietary information. We cannot be
sure that the steps we have taken in this respect will be adequate to deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights.
Our principal stockholders have a controlling influence over our business.
Our four principal stockholders beneficially own approximately 56% of our
outstanding common stock. As a result, these stockholders will collectively be
able to exercise control over our business and affairs by virtue of their
voting power with respect to the election of directors and other actions
requiring stockholder approval.
Item 2. Properties
We lease our corporate headquarters in Winchester, Virginia, which consists
of approximately 10,200 square feet of office space, on a month-to-month basis.
We have entered into a long-term lease for approximately 40,000 square feet of
office space in Winchester which will serve as our new headquarters. We expect
to occupy this facility in the third quarter of 2001.
We own approximately 74 contiguous acres of land in Winchester, Virginia and
the buildings on this land. These buildings include our first manufacturing
facility, which contains approximately 115,000 square feet of space, our
research and development technical facility, which contains approximately
30,000 square feet of space, a mixed-use building, which contains approximately
173,000 square feet of space, and an additional manufacturing facility, which
will contain approximately 150,000 square feet of space upon its expected
completion in the second quarter of 2001. We own the site and plant of our
manufacturing facility in Fernley, Nevada, which contains approximately 250,000
square feet of manufacturing space, including an 100,000 square foot addition
completed in 2000, and approximately 30 acres of outside open storage.
We lease a total of approximately 658,000 square feet of storage warehouse
space under leases with expiration dates from 2001 to 2015.
The equipment and machinery we use in our operations consist principally of
plastic and wood conveying and processing equipment. We own all of our
manufacturing equipment. At December 31, 2000, we operated approximately 100
wood trailers and approximately 50 forklift trucks under operating leases.
We regularly evaluate the capacity of our various facilities and equipment
and make capital investments to expand capacity where necessary. In 2000, we
spent a total of $60.1 million on capital expenditures, including $39.3 million
for process improvements, equipment and machinery to increase our production
capacity. We estimate that our capital expenditures in 2001 will total
approximately $33 million, most of which will be used to increase capacity at
our two existing manufacturing facilities, to make process and productivity
improvements, to complete a plastic processing facility at our Winchester,
Virginia plant and to complete the site acquisition and begin engineering work
for a planned third manufacturing facility near Knoxville, Tennessee.
Item 3. Legal Proceedings
Our operating subsidiary, TREX Company, LLC, filed a lawsuit on March 2,
1999 against a former distributor to collect unpaid invoices. The defendant
filed its response on July 30, 1999 and, in a counterclaim, alleged that TREX
Company, LLC had made various misrepresentations which resulted in, among other
items, loss of business and loss of reputation. On November 16, 2000, the
Circuit Court of Frederick County, Virginia, dismissed the entire case with
prejudice after TREX Company, LLC recovered all amounts of its outstanding
invoices from the former distributor.
13
From time to time, we are involved in litigation and proceedings arising out
of the ordinary course of our business. As of the date of this report, there
are no pending material legal proceedings to which we are a party or to which
our property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to our security holders in the fourth
quarter of 2000.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been listed on the New York Stock Exchange under the
symbol "TWP" since April 8, 1999. The table below shows the reported high and
low quarterly sale prices of our common stock on the NYSE composite tape since
that date:
2000 High Low
---- ----- ----
First Quarter........................................... $ 42 $24 1/4
Second Quarter.......................................... 53 5/8 32 1/4
Third Quarter........................................... 58 15/16 27 1/16
Fourth Quarter.......................................... 46 1/4 20 5/16
1999 High Low
---- ----- ----
$ 26
Second Quarter (from April 8)........................... 5/8 $ 10
Third Quarter........................................... 29 3/8 19 1/4
Fourth Quarter.......................................... 32 1/2 22 15/16
As of December 31, 2000, there were approximately 180 holders of record of
our common stock.
We have never paid cash dividends on our common stock. We intend to retain
future earnings, if any, to finance the development and expansion of our
business and, therefore, do not anticipate paying any cash dividends on the
common stock in the foreseeable future. Under the terms of our credit facility,
we may pay cash dividends only if, after payment of such dividends, the ratio
of our total consolidated debt to our total consolidated capitalization does
not exceed 50%.
15
Item 6. Selected Financial Data
The following table presents selected financial data as of December 31,
1996, 1997, 1998, 1999 and 2000, for the periods from January 1, 1996 to August
28, 1996 and from August 29, 1996 to December 31, 1996, and for the four years
ended December 31, 2000.
. The selected financial data as of December 31, 1999 and 2000 and for
each of the years in the three-year period ended December 31, 2000 are
derived from our audited consolidated financial statements appearing
elsewhere in this report.
. The selected financial data as of December 31, 1996, 1997 and 1998 and
for the period from August 29, 1996 to December 31, 1996 and the year
ended December 31, 1997 are derived from our financial statements,
which have been audited by Ernst & Young LLP, independent auditors.
. The selected financial data for the period from January 1, 1996 to
August 28, 1996 are derived from the financial statements of the
Composite Products Division of Mobil Oil Corporation, the company's
predecessor, which have been audited by Ernst & Young LLP, independent
auditors.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes thereto appearing
elsewhere in this report.
16
The
Predecessor(1) The Company(2)
-------------- --------------------------------------------------------------
Aug. 29,
Jan. 1, 1996 1996 to Year Ended Dec. 31,
to Aug. 28, Dec. 31, ----------------------------------------------
1996 1996 1997 1998 1999 2000
-------------- --------- ---------- ---------- ---------- ----------
(In thousands, except per share and unit data)
Statement of Operations
Data:
Net sales(3)............ $18,071 $ 5,708 $ 34,137 $ 49,167 $ 77,570 $ 117,568
Cost of sales(3)........ 9,188 3,481 16,774 25,305 37,707 61,852
------- --------- ---------- ---------- ---------- ----------
Gross profit............ 8,883 2,227 17,363 23,862 39,863 55,716
Selling, general and
administrative
expenses............... 5,508 2,558 8,992 12,878 18,370 23,830
------- --------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 3,375 (331) 8,371 10,984 21,493 31,886
Interest expense, net... -- 934 2,777 2,526 1,476 902
------- --------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary item..... 3,375 (1,265) 5,594 8,458 20,017 30,984
Income taxes............ -- -- -- -- 7,281 11,682
------- --------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item..... 3,375 (1,265) 5,594 8,458 12,736 19,302
Extraordinary loss on
the early
extinguishment of debt,
net.................... -- -- -- -- (1,056) --
------- --------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 3,375 $ (1,265) $ 5,594 $ 8,458 $ 11,680 $ 19,302
======= ========= ========== ========== ========== ==========
Basic (loss) earnings
per share.............. $ (0.15) $ 0.55 $ 0.85 $ 0.90 $ 1.37
========= ========== ========== ========== ==========
Weighted average basic
shares outstanding..... 9,500,000 9,500,000 9,500,000 12,848,571 14,129,652
========= ========== ========== ========== ==========
Historical income before
income tax expense(4).. $ 5,594 $ 8,458 $ 20,017
Pro forma income tax
expense(4)
(unaudited)............ 2,126 3,214 7,606
---------- ---------- ----------
Pro forma net income(4)
(unaudited)............ $ 3,468 $ 5,244 $ 12,411
---------- ---------- ----------
Pro forma net income per
share, basic(4)
(unaudited)............ $ 0.32 $ 0.55 $ 0.97
========== ========== ==========
Historical income from
operations(5).......... $ 8,371 $ 10,984 $ 21,493
Supplemental pro forma
interest income
(expense), net(5)...... 150 249 (691)
Supplemental pro forma
income tax expense(5).. 3,238 4,269 7,905
---------- ---------- ----------
Supplemental pro forma
net income(5).......... $ 5,283 $ 6,964 $ 12,897
========== ========== ==========
Supplemental pro forma
weighted average basic
shares outstanding(5).. 14,115,450 14,115,450 14,117,297
========== ========== ==========
Supplemental pro forma
basic earnings per
share(5)............... $ 0.37 $ 0.49 $ 0.91
========== ========== ==========
Cash Flow Data:
Cash flow (used in) from
operating activities... $ 2,848 $ (222) $ 6,521 $ 12,228 $ 21,405 $ 15,407
Cash flow (used in)
investing activities... (3,708) (30,253) (3,252) (17,140) (29,369) (60,114)
Cash flow (used in) from
financing activities... 860 34,216 (5,010) 4,112 6,764 44,707
Other Data (unaudited):
EBITDA(6)............... $ 4,492 $ 527 $ 11,013 $ 14,098 $ 25,937 $ 38,755
The Company(2)
------------------------------------------
As of December 31,
------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents.......... $ 3,741 $ 2,000 $ 1,200 $ -- $ --
Working capital.................... 3,974 4,156 (3,193) (4,181) 13,696
Total assets....................... 36,561 37,229 51,611 79,303 156,595
Total debt......................... 29,250 26,250 33,063 16,937 61,399
Total members'/stockholders'
equity............................ 3,950 7,534 13,291 49,401 69,041
17
- --------
(1) Through August 28, 1996, the company was a business unit of a subsidiary of
Mobil, which is referred to as the "predecessor." For the periods shown,
the predecessor was included in the consolidated tax return of its parent
and, accordingly, no tax provision was provided. Historical, pro forma and
supplemental basic earnings per share have been omitted for the predecessor
periods, since the operations for these periods were a component of Mobil.
(2) On August 29, 1996, TREX Company, LLC acquired substantially all of the
assets and assumed some of the liabilities of the predecessor for a
purchase price of approximately $29.5 million. TREX Company, LLC had no
operations before this date. On April 7, 1999, Trex Company, Inc. acquired
all of the membership interests of TREX Company, LLC in a series of
transactions referred to as the "reorganization." On April 13, 1999, Trex
Company, Inc. completed an initial public offering of its common stock. The
"company" refers to TREX Company, LLC through April 7, 1999 and to Trex
Company, Inc. thereafter. Before the reorganization, the company was taxed
as a partnership and accordingly did not record a provision for income
taxes. After the reorganization, the company is taxed as a corporation and
has provided for federal and state taxes at a combined effective rate of
38%. Weighted average shares outstanding assumes that the 9,500,000 shares
of common stock outstanding immediately after the reorganization were
outstanding for all periods through April 7, 1999, that 13,500,000 shares
were outstanding through May 2, 1999, that 14,115,450 shares were
outstanding through July 14, 1999, that 14,118,435 shares were outstanding
through October 14, 1999 and that 14,120,572 shares were outstanding
through December 31, 1999.
(3) The company implemented the consensus of the Emerging Issues Task Force
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," or EITF
00-10, in the fourth quarter of 2000. This consensus requires that all
shipping and handling fees be recorded in net sales and that the related
costs be included in cost of sales. Previously, the company had classified
shipping and handling fees, net of shipping and handling costs, as cost of
sales. Sales and costs of sales for 1998, 1999 and 2000 have been
reclassified to conform to this new rule. The information required to
reclassify shipping and handling in sales and cost of sales for the period
from January 1, 1996 to August 28, 1996, the period from August 29, 1996 to
December 31, 1996 and for the year ended December 31, 1997 is not readily
available and, accordingly, these amounts have not been reclassified to
conform with this consensus. See Note 2 to the consolidated financial
statements included elsewhere in this report for more information.
(4) Pro forma income taxes and net income assume the company was taxed as a
corporation for all periods presented at a combined effective rate of 38%
and exclude one-time charges relating to the reorganization and initial
public offering, including (a) a net deferred tax liability of
approximately $2.6 million and (b) a $1.1 million extraordinary charge for
the extinguishment of debt repaid from the net proceeds of the initial
public offering. Pro forma earnings per share assume the same number of
shares outstanding as indicated in note (2) above.
(5) Supplemental pro forma interest income (expense), income taxes and net
income (a) exclude interest expense of $2.9 million, $2.8 million and $.8
million in 1997, 1998 and 1999, respectively, related to debt that was
repaid with a portion of the net proceeds of the initial public offering,
(b) assume the company was taxed as a corporation for all periods presented
at a combined effective rate of 38% and (c) exclude one-time charges
relating to the reorganization and initial public offering, including a net
deferred tax liability of approximately $2.6 million and a $1.1 million
extraordinary charge for the extinguishment of debt repaid from the net
proceeds of the initial public offering. Supplemental pro forma shares
outstanding assumes that the 14,115,450 shares outstanding after the
initial public offering were outstanding for all periods through July 14,
1999, that 14,118,435 shares were outstanding through October 14, 1999 and
that 14,120,572 shares were outstanding through December 31, 1999.
(6) Consists of income (loss) from operations plus depreciation and
amortization. EBITDA is presented because it is a commonly used measure of
performance by the financial community. Although management believes EBITDA
is a useful measure of the company's performance, EBITDA should not be
considered an alternative to net income (loss) as a measure of operating
performance or to cash provided by (used for) operating activities as a
measure of liquidity. In addition, this measure of EBITDA may not be
comparable to similarly titled measures reported by other companies.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Net sales consists of sales and freight, net of returns and discounts. The
company has experienced net sales growth each year since it began operations in
1992. The increase in net sales is primarily attributable to the growth in
sales volume. The company's branding and product differentiation strategy
enables the company both to command premium prices and to maintain price
stability for Trex. Prices for Trex over the last three years have increased at
a compound annual growth rate of approximately 5.6%.
From time to time since 1992, customer demand for Trex has exceeded the
company's manufacturing capacity. The constraints on the company's capacity in
these periods have limited the rate of the company's net sales growth. Such
constraints substantially ended during the third quarter of 2000.
The company's cost of sales consists of raw material costs, direct labor
costs, manufacturing costs, including depreciation, and freight. In the last
three years, the cost of raw materials has increased an average of
approximately 7.6% annually. Almost all of the increases were attributable to
higher costs of polyethylene and waste wood fiber, including shipping costs.
The positive effect on cost of sales in 2000 of productivity gains from the
company's investment in manufacturing process improvements and the addition of
production lines was offset by increases in raw material and direct labor
costs. Production line rates have increased over 200% since 1992 and the number
of production lines has increased from one line in 1992 to 13 lines in 2000.
The principal component of selling, general and administrative expenses is
branding and other sales and marketing costs, which have increased
significantly as the company has sought to build brand awareness of Trex in the
decking market. Sales and marketing costs consist primarily of salaries,
commissions and benefits paid to sales and marketing personnel, advertising
expenses and other promotional costs. General and administrative expenses
include salaries and benefits of personnel engaged in research and development,
procurement, accounting and other business functions and office occupancy costs
attributable to these functions, as well as amortization expense. As a
percentage of net sales, selling, general and administrative expenses have
varied from quarter to quarter, especially when the company has determined to
build inventory selectively and to continue expenditures for advertising.
In connection with its acquisition of Mobil's Composite Products Division in
August 1996, the company incurred indebtedness of $29.3 million, of which $26.3
million was outstanding at December 31, 1998, and recorded $10.6 million for
goodwill, substantially increasing its interest and amortization expense. In
April 1999, the company repaid its acquisition-related indebtedness with a
portion of the net proceeds of its initial public offering and recognized an
extraordinary cash charge against income of $1.5 million, on a pre-tax basis,
for early extinguishment of debt and an extraordinary $0.2 million non-cash
charge against income for the write-off of unamortized debt discount. The
company is amortizing its goodwill over a 15-year period in an amount of
approximately $0.7 million per year.
The company did not record an income tax provision for any period through
April 7, 1999, which was the date on which it completed the reorganization.
Before its acquisition of Mobil's Composite Products Division, the company was
included in the consolidated tax return of its parent company. In the period
between the acquisition and the reorganization, the company elected to be
treated as a partnership for federal and state income tax purposes, and the
company's income during that period was taxed directly to the company's
members, rather than to the company. As a result of the reorganization, the
company is subject to income tax as a corporation taxed in accordance with
Subchapter C of the Internal Revenue Code. In April 1999, as a result of its
conversion to C corporation status, the company recognized a $2.6 million non-
cash charge against income for income tax expense. The effect of this charge
was to increase substantially the company's effective tax rate for that quarter
and for the year ended December 31, 1999. The increased effective tax rate was
recognized only in such quarter and, accordingly, the company believes that its
effective tax rate for subsequent periods should not exceed approximately 38%.
19
Results of Operations
The following table shows, for the last three years, selected statement of
operations data as a percentage of net sales:
Year Ended
December 31,
-------------------
1998 1999 2000
----- ----- -----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 51.5 48.6 52.6
----- ----- -----
Gross profit............................................ 48.5 51.4 47.4
Selling, general and administrative expenses............ 26.2 23.7 20.3
----- ----- -----
Income from operations.................................. 22.3 27.7 27.1
Interest expense, net................................... 5.1 1.9 0.8
----- ----- -----
Income before taxes and extraordinary item.............. 17.2 25.8 26.4
Income taxes(1)......................................... -- 9.4 9.9
----- ----- -----
Income before extraordinary item........................ 17.2 16.4 16.4
Extraordinary loss, net of taxes........................ -- 1.4 --
----- ----- -----
Net income.............................................. 17.2% 15.1% 16.4%
===== ===== =====
- --------
(1) The company did not record an income tax provision for any period through
April 7, 1999, the date on which it completed the reorganization. The
company elected to be treated as a partnership for federal and state income
tax purposes for all periods from its inception through April 7, 1999. As a
result, during these periods, the company's income was taxed for such
purposes directly to the company's members, rather than to the company.
2000 Compared to 1999
Net Sales. Net sales increased 51.6% to $117.6 million in 2000 from $77.6
million in 1999. The increase in net sales was primarily attributable to a
growth in sales volume and, to a lesser extent, a price increase of
approximately 7.3%. Production line rate increases and the addition of two
production lines during 2000 significantly increased the company's production
capacity. To stimulate demand for Trex and continue its brand name development,
the company increased expenditures on cable television advertising and
emphasized incentive sales programs instituted in 2000. The number of dealer
outlets increased from approximately 2,000 at December 31, 1999 to
approximately 2,600 at December 31, 2000.
Cost of Sales. Cost of sales increased 64.0% to $61.9 million in 2000 from
$37.7 million in 1999. All components of cost of sales increased to support the
higher level of sales activity. Cost of sales as a percentage of net sales
increased to 52.6% in 2000 from 48.6% in 1999. The increase principally
reflected higher raw material costs, which were partially offset by operating
efficiencies from improved production line rates.
Gross Profit. Gross profit increased 39.8% to $55.7 million in 2000 from
$39.9 million in 1999, reflecting the higher sales volume in 2000. Gross profit
as a percentage of net sales decreased to 47.4% in 2000 from 51.4% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 29.7% to $23.8 million in 2000 from $18.4
million in 1999. The increase was primarily attributable to higher branding
costs, including expenses of promotion, advertising, public relations, sales
literature, trade shows and cooperative advertising, which increased 17.0% to
$8.1 million in 2000 from $6.9 million in 1999. The increase in corporate
personnel, the upgrading of accounting and other systems to support growth, and
management bonuses contributed to a 40.1% increase in general and
administrative expenses. Selling, general and administrative expenses as a
percentage of net sales decreased to 20.3% in 2000 from 23.7% in 1999.
20
Interest Expense. Net interest expense decreased 38.9% to $0.9 million in
2000 from $1.5 million in 1999. The decrease resulted from the capitalization
of $1.1 million of interest during 2000 that was incurred in connection with
financing the company's production capacity expansion activities.
Provision for Income Taxes. For all periods through April 7, 1999, the
company was taxed as a partnership for federal and state income tax purposes
and, accordingly, did not record an income tax provision. In connection with
the reorganization, and its conversion to a corporation taxed in accordance
with Subchapter C of the Internal Revenue Code, the company recorded a one-time
deferred tax charge of $2.6 million. For all periods subsequent to April 7,
1999, the company has provided for federal and state taxes at a combined
effective rate of approximately 38%.
Extraordinary Loss on the Early Prepayment of Debt. In April 1999, the
company used a portion of the net proceeds of its initial public offering to
repay approximately $21.3 million principal amount of senior notes and
approximately $5.0 million principal amount of subordinated notes. In
connection with the repayment, the company incurred a prepayment penalty of
$1.5 million and wrote off unamortized debt discount of $0.2 million. The
company recorded an extraordinary charge of $1.1 million, net of taxes, to
reflect these two items.
1999 Compared to 1998
Net Sales. Net sales increased 57.8% to $77.6 million in 1999 from $49.2
million in 1998. The increase in net sales was primarily attributable to a
growth in sales volume and, to a lesser extent, a price increase of
approximately 5.7%. Production line rate increases and the addition of four
production lines during 1999 significantly increased the company's production
capacity. To stimulate demand for Trex and continue its brand name development,
the company increased expenditures on cable television advertising and
instituted incentive sales programs in 1999. The number of dealer outlets
remained at approximately 2,000 at both December 31, 1998 and December 31,
1999.
Cost of Sales. Cost of sales increased 49.0% to $37.7 million in 1999 from
$25.3 million in 1998. All components of cost of sales increased to support the
higher level of sales activity. Cost of sales as a percentage of net sales
decreased to 48.6% in 1999 from 51.5% in 1998. The decline principally
reflected operating efficiencies from improved production line rates.
Gross Profit. Gross profit increased 67.1% to $39.9 million in 1999 from
$23.9 million in 1998, reflecting the higher sales volume in 1999. Gross profit
as a percentage of net sales increased to 51.4% in 1999 from 48.5% in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 42.6% to $18.4 million in 1999 from $12.9
million in 1998. The increase was primarily attributable to higher branding
costs, including expenses of promotion, advertising, public relations, sales
literature, trade shows and cooperative advertising, which increased 44.8% to
$6.9 million in 1999 from $4.8 million in 1998. The increase in corporate
personnel, the upgrading of accounting and other systems to support growth, and
the expenses associated with being a publicly traded company contributed to a
62.0% increase in general and administrative expenses. Selling, general and
administrative expenses as a percentage of net sales decreased to 23.7% in 1999
from 26.2% in 1998.
Interest Expense. Net interest expense decreased 41.5% to $1.5 million in
1999 from $2.5 million in 1998. The decrease primarily resulted from lower
average borrowings attributable to the company's repayment of $26.3 million
principal amount of senior and subordinated notes in April 1999 with the net
proceeds of the company's initial public offering.
Provision for Income Taxes. For all periods through April 7, 1999, the
company was taxed as a partnership for federal and state income tax purposes
and, accordingly, did not record an income tax provision. In
21
connection with the reorganization, and its conversion to a corporation taxed
in accordance with Subchapter C of the Internal Revenue Code, the company
recorded a one-time deferred tax charge of $2.6 million. For all periods
subsequent to April 7, 1999, the company has provided for federal and state
taxes at a combined effective rate of 38%.
Extraordinary Loss on the Early Prepayment of Debt. In April 1999, the
company used a portion of the net proceeds of its initial public offering to
repay approximately $21.3 million principal amount of senior notes and
approximately $5.0 million principal amount of subordinated notes. In
connection with the repayment, the company incurred a prepayment penalty of
$1.5 million and wrote off unamortized debt discount of $0.2 million. The
company recorded an extraordinary charge of $1.1 million, net of taxes, to
reflect these two items.
Liquidity and Capital Resources
The company historically has financed its operations and growth primarily
with cash flow from operations, operating leases, normal trade credit terms,
mortgages for its real estate holdings and borrowings under its credit
facility.
The company's cash flow from operating activities was $12.2 million in 1998,
$21.4 million in 1999 and $15.4 million in 2000. Higher sales volume accounted
for the significant increases in cash flows in 1998 and 1999. The effect of a
higher sales volume in 2000 was more than offset by increases in receivables,
as the company offered some distributors extended payment terms in the fourth
quarter of 2000 to facilitate the addition of new distributors and the
introduction on a national basis of the newest Trex color, Madeira. In
addition, the company increased inventories in anticipation of continued sales
growth in 2001. An increase in trade accounts payable, resulting from the
company's increased operating activities and capital expenditures, had a
positive effect on cash flow from operating activities in 2000.
The company's total assets increased from $79.3 million at December 31, 1999
to $156.6 million at December 31, 2000. Most of this increase was attributable
to an increase of $54.1 million in property, plant and equipment, net. During
2000, the company purchased additional land and a mixed-use building adjacent
to its existing Winchester, Virginia facility and began construction of a
second manufacturing facility on the additional land. The company also
completed the expansion of its existing manufacturing plant in its Fernley,
Nevada facility and added three production lines, of which two were operating
at year-end.
The company currently maintains two revolving credit facilities which
together provide for borrowings of up to $90.0 million for working capital and
other general corporate purposes. Amounts drawn under the two facilities bear
interest at an annual rate equal to LIBOR plus 1.00%. Of borrowings under the
first facility, $25.0 million will be payable on September 30, 2001 and all
remaining outstanding amounts will be payable on June 30, 2003. The $15.0
million second facility, which became effective on January 31, 2001, will
mature on April 30, 2001. At December 31, 2000, borrowings of $44.7 million
were outstanding under the first facility and no borrowings were outstanding
under the second facility. The Company intends to use borrowings under the two
facilities primarily to finance the company's expansion activities.
The company financed its purchase of its Winchester, Virginia facility in
June 1998 with a ten-year term loan of $3.8 million. Under an interest rate
swap agreement, the company pays interest on this loan at an annual rate of
7.12%.
The company financed its purchase of the Trex technical center in November
1998 in part with the proceeds of a ten-year term loan of $1.0 million. Under
an interest rate swap agreement, the company pays interest on this loan at an
annual rate of 6.80%.
The company financed its acquisition of the site for its Fernley, Nevada
facility in December 1998 in part with a $2.1 million loan which was payable in
September 1999. The company partially financed construction of
22
the facility with proceeds of $4.6 million under a construction loan which was
payable in November 1999. The site acquisition and construction loans accrued
interest at an annual rate of 7.50%. The company refinanced both loans on
September 30, 1999 with a 15-year term loan in the original principal amount of
$6.7 million. Under an interest rate swap agreement, interest on this loan is
payable at an annual rate of 7.90%.
In May 2000, the company financed its purchase of a site adjacent to its
existing Winchester, Virginia manufacturing facility through borrowings under
its revolving credit facility. On August 14, 2000, the company refinanced the
borrowings with a 15-year term loan in the original principal amount of $5.9
million. An interest rate swap agreement effectively fixes the interest rate on
this loan at an annual rate of 8.10%.
On October 3, 2000, the company purchased an additional 11.83 acres of land
adjacent to its existing Winchester, Virginia manufacturing facility. The
company financed the purchase through borrowings under its revolving credit
facility.
As of December 31, 2000, the company's long-term indebtedness, excluding the
revolving credit facility, was $16.7 million, with an overall weighted average
interest rate of 7.75%.
Expansion of the company's production capacity will require significant
capital expenditures. The company currently estimates that its aggregate
capital requirements in 2001 will total approximately $33 million. Of this
amount, we will use approximately $13 million to increase capacity at our two
existing manufacturing facilities, approximately $5 million to make process and
productivity improvements, approximately $5 million to complete a plastic
processing facility at the company's existing Winchester, Virginia facility,
and $2.0 million to complete the site acquisition and begin engineering work
for the company's planned third manufacturing facility near Knoxville,
Tennessee. The company believes that cash flow from operations and borrowings
expected to be available under the company's credit agreements will provide
sufficient funds to enable the company to fund its capital expenditures and
expand its business as currently planned for at least the next 12 months. The
actual amount and timing of the company's future capital requirements may
differ materially from the company's estimate depending on the demand for Trex
and new market developments and opportunities. The company may determine that
it is necessary or desirable to obtain financing for such requirements through
bank borrowings or the issuance of debt or equity securities. Debt financing
would increase the company's level of indebtedness, while equity financing may
dilute the ownership of the company's stockholders. There can be no assurance
as to whether, or as to the terms on which, the company will be able to obtain
such financing.
Inflation
Inflation did not have a material impact on the company's operating results
in 1998, 1999 or 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The company's major market risk exposure is to changing interest rates. The
company's policy is to manage interest rates through the use of a combination
of fixed and floating-rate debt. The company uses interest rate swap contracts
to manage its exposure to fluctuations in interest rates on its floating-rate
debt, substantially all of which is based on LIBOR. At December 31, 2000, the
company had effectively capped its interest rate exposure at approximately 7.7%
on approximately $16.7 million of its floating-rate debt through 2015. For
additional information, see note 6 to the company's consolidated financial
statements appearing elsewhere in this report.
Item 8. Financial Statements and Supplementary Data
The financial statements listed in Item 14 are filed as part of this report
and appear on pages F-2 through F-19.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
The table below sets forth information concerning our directors and
executive officers:
Name Age Positions with Company
---- --- ----------------------
Robert G. Matheny....... 55 President, Director
Anthony J. Cavanna...... 61 Executive Vice President and Chief Financial Officer, Director
Andrew U. Ferrari....... 54 Executive Vice President of Sales and Marketing, Director
Roger A. Wittenberg..... 52 Executive Vice President of Technical Operations and
Materials Sourcing, Director
Harold F. Monahan....... 55 Senior Vice President of Manufacturing and Distribution
William H. Martin, III.. 70 Director
William F. Andrews...... 69 Director
Patricia B. Robinson.... 48 Director
Robert G. Matheny has served as the President of TREX Company, LLC since
August 1996 and as the President and a director of the company since September
1998. From July 1992 to August 1996, he was the General Manager of the
Composite Products Division of Mobil Chemical Company, referred to below as
"Mobil Chemical," which was a division of Mobil Oil Corporation, referred to
below as "Mobil." From August 1987 to July 1992, he served as the General
Manager of the Chemical Specialties Group of Mobil Chemical and as a Vice
President of Mobil Chemical Products International. From 1970 to August 1987,
Mr. Matheny held various positions in sales, marketing and manufacturing at
Mobil. Mr. Matheny received a B.S. degree in Industrial Engineering and
Operations Research from Virginia Polytechnic Institute.
Anthony J. Cavanna has served as the Chief Financial Officer of TREX
Company, LLC since August 1996 and as Executive Vice President and Chief
Financial Officer and a director of the company since September 1998. From July
1994 to August 1996, he was a Group Vice President of Mobil Chemical. From July
1992 to July 1994, he was the Vice President-Planning and Finance for Mobil
Chemical. From November 1986 to July 1992, Mr. Cavanna served as a Vice
President of Mobil Chemical and the General Manager of its Films Division
Worldwide. From November 1981 to November 1986, he was the President and
General Manager of Mobil Plastics Europe. From January 1981 to November 1981,
he was the Vice President-Planning and Supply of the Films Division of Mobil
Chemical. Between 1962 and 1981, Mr. Cavanna held a variety of positions within
Mobil, including engineering, manufacturing and project/group leader positions.
Mr. Cavanna received a B.S. degree in Chemical Engineering from Villanova
University and an M.S. degree in Chemical Engineering from the Polytechnic
Institute of Brooklyn.
Andrew U. Ferrari has served as the Vice President of Sales and Marketing of
TREX Company, LLC since August 1996 and as Executive Vice President of Sales
and Marketing and a director of the company since September 1998. From April
1992 to August 1996, he was the Director of Sales and Marketing of the
Composite Products Division of Mobil Chemical. From February 1990 to April
1992, Mr. Ferrari served as the New Business Manager for Mobil Chemical. From
January 1984 to February 1990, he served as Marketing Director of the Consumer
Products Division of Mobil Chemical. Mr. Ferrari received a B.A. degree in
Economics from Whitman College and an M.B.A. degree from Columbia University.
Roger A. Wittenberg has served as the Vice President of Technical Operations
and Materials Sourcing of TREX Company, LLC since August 1996 and as Executive
Vice President of Technical Operations and Materials Sourcing and a director of
the company since September 1998. Mr. Wittenberg also serves as a director of
Elite Textiles Ltd., a textile manufacturer. From May 1992 to August 1996, he
was the Technical Manager of the Composite Products Division of Mobil Chemical.
Mr. Wittenberg founded Rivenite Corporation in 1987 and was its Chief Executive
Officer until April 1992, when Mobil Chemical acquired the assets of Rivenite
Corporation. Before 1987, Mr. Wittenberg founded and operated three companies
in the textile, food and animal feed supplements industries. Mr. Wittenberg
received a B.S. degree in Chemistry from High Point College.
24
Harold F. Monahan has served as the Senior Vice President for Manufacturing
and Distribution of TREX Company, LLC and the company since October 2000. From
1999 to 2000, he served as Operations Manager for North American Operations of
Exxon Mobil Corporation, an energy company. Prior to the merger of Exxon
Corporation and Mobil in 1999, Mr. Monahan served as Logistics Manager for
North American Operations of Mobil from 1997 to 1999, where he was responsible
for the distribution of Mobil's petroleum products throughout North America.
From 1971 to 1997, Mr. Monahan served in a variety of other positions with
Mobil, including Manager of U.S. Domestic Plant Operations, Asset Manager of
Domestic U.S. Operations, and Surface Transportations Manager for Domestic U.S.
Operations, Mr. Monahan received a B.S. degree in Economics from St. Norbert
College.
William H. Martin, III has served as a director of the company since April
1999. Mr. Martin has served as Chairman of the Board of Martin Industries,
Inc., a manufacturer and producer of gas grills, gas space heaters, gas logs
and pre-engineered fireplaces, since April 1994 and as a director of Martin
Industries since 1974. From 1971 to 1987, he served as President and Chief
Executive Officer of Martin Industries. From 1987 to 1993, Mr. Martin served as
Executive Assistant to the Rector of Trinity Church in New York City. Since
1993, Mr. Martin has been managing private investments and serving as a
director of Aluma Form, Inc., a manufacturing company. Mr. Martin is a graduate
of Vanderbilt University.
William F. Andrews has served as a director of the company since April 1999.
Mr. Andrews has served as Chairman of the Board of Directors of Scovill
Fasteners, Inc., a designer, manufacturer and distributor of apparel fasteners
and specialty industrial fasteners, since 1996. Mr. Andrews has been a director
and Chairman of Northwestern Steel and Wire Co. since 1998 and a director and
Chairman of Corrections Corporation of America since 2000. Mr. Andrews has been
a Principal of Kohlberg & Company, a venture capital firm, since 1994. From
1981 to 1986, Mr. Andrews served as the Chairman, President and Chief Executive
Officer of Scovill Manufacturing Co., where he worked for over 28 years. From
1995 to 1998, he served as the Chairman of Schrader-Bridgeport International,
Inc., a manufacturer of tire valves and pressure control devices. From 1993 to
1995, Mr. Andrews served as Chairman and Chief Executive Officer of Amdura
Corporation, a manufacturer of hardware and industrial equipment. From 1992 to
1994, he served as Chairman of Utica Corporation, a manufacturer of fan blades
for aerospace and land-based gas turbine engines. From 1986 to 1989, Mr.
Andrews served as President, Chairman and Chief Executive Officer of Singer
Sewing Company. Mr. Andrews also serves as a director of Black Box Corporation,
Johnson Controls, Inc., Katy Industries, Inc. and Navistar, Inc.
Patricia B. Robinson has served as a director of the company since November
2000. Ms. Robinson is an independent consultant and in 2000 served as Interim
Operating Officer of TruckBay.com, an Internet distributor of heavy duty truck
parts. From 1994 to 1998, she served as President of Mead School and Office
Products, the consumer products division of Mead Corporation. From 1977 to
1994, Ms. Robinson served in a variety of other positions with Mead
Corporation, including Vice President of Corporate Strategy and Planning,
President of Gilbert Paper, which makes premium correspondence papers, Plant
Manager of a specialty machinery facility and Product Manager for new packaging
product introductions. Ms. Robinson received a B.A. degree in economics from
Duke University and an M.B.A. degree from the Darden School at the University
of Virginia.
Other information responsive to this Item 10 is incorporated herein by
reference to the company's definitive proxy statement for its 2001 annual
meeting of stockholders.
Item 11. Executive Compensation
Information responsive to this Item 11 is incorporated herein by reference
to the company's definitive proxy statement for its 2001 annual meeting of
stockholders.
25
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information responsive to this Item 12 is incorporated herein by reference
to the company's definitive proxy statement for its 2001 annual meeting of
stockholders.
Item 13. Certain Relationships and Related Transactions
Information responsive to this Item 13 is incorporated herein by reference
to the company's definitive proxy statement for its 2001 annual meeting of
stockholders.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of the company appear on pages F-2
through F-19 of this report and are incorporated by reference in Part II, Item
8:
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets-December 31, 1999 and 2000
Consolidated Statements of Operations for the three years ended
December 31, 2000
Consolidated Statements of Changes in Members'/Stockholders' Equity
for the three years ended
December 31, 2000
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
2. Exhibits
3.1 Restated Certificate of Incorporation of Trex Company, Inc. (the
"Company"). Filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (No. 333-63287) and incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Company. Filed herewith.
4.1 Specimen certificate representing the Company's common stock. Filed as
Exhibit 4.1 of the Company's Registration Statement on Form S-1 (No.
333-63287) and incorporated herein by reference.
10.1 Registration Rights Agreement, dated as of April 7, 1999, among the
Company and each of the persons named on the schedule thereto. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated herein by
reference.
10.2 Trex Company, Inc. 1999 Stock Option and Incentive Plan. Filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No.
333-76847) and incorporated herein by reference.
10.3 Trex Company, Inc. 1999 Incentive Plan for Outside Directors, as
amended. Filed herewith.
10.4 Form of Distributor Agreement of TREX Company, LLC. Filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1 (No. 333-63287)
and incorporated herein by reference.
10.5 $3,780,000 Promissory Note, dated June 15, 1998, made by TREX Company,
LLC payable to First Union National Bank of Virginia. Filed as Exhibit
10.7 to the Company's Registration Statement on Form S-1 (No. 333-63287)
and incorporated herein by reference.
10.6 $1,035,000 Promissory Note, dated November 20, 1998, made by TREX
Company, LLC payable to First Union National Bank of Virginia. Filed as
Exhibit 10.8 to the Company's Registration Statement on Form S-1 (No.
333-63287) and incorporated herein by reference.
10.7 Amended and Restated Credit Agreement, dated as of August 3, 1999, among
the Company,
TREX Company, LLC and First Union National Bank of Virginia. Filed as
Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended
September 30, 1999 and incorporated herein by reference.
27
10.8 Standing Loan Agreement, dated as of September 28, 1999, between TREX
Company, LLC and Bank of America, N.A. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.
10.9 Promissory Note, dated September 28, 1999, made by TREX Company, LLC
payable to Bank of America, N.A. Filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1999 and incorporated herein by reference.
10.10 Payment Guaranty, dated as of September 28, 1999, made by the Company in
favor of Bank of America, N.A. Filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1999 and incorporated herein by reference.
10.11 Second Amendment to Amended and Restated Credit Agreement, dated April
27, 2000, made by TREX Company, LLC and Trex Company, Inc. in favor of
First Union National Bank. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2000 and incorporated herein by reference.
10.12 Third Amendment to Amended and Restated Credit Agreement, dated June 30,
2000, made by TREX Company, LLC and Trex Company, Inc. in favor of First
Union National Bank. Filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000 and
incorporated herein by reference.
10.13 Fourth Amendment to Amended and Restated Credit Agreement, dated October
27, 2000, made by TREX Company, LLC and Trex Company, Inc. in favor of
First Union National Bank. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000 and incorporated herein by reference.
10.14 Financing Agreement, dated January 31, 2001, between TREX Company, LLC
and Bank of America, N.A. Filed herewith.
10.15 Guaranty of Payment Agreement, dated January 31, 2001, between the
Company and Bank of America, N.A. Filed herewith.
10.16 Deed of Lease, dated June 15, 2000, between TREX Company, LLC and Space,
LLC. Filed herewith.
21 Subsidiaries of the Company. Filed herewith.
23 Consent of Ernst & Young LLP, Independent Auditors. Filed herewith.
28
TREX COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements
Consolidated Balance Sheets-December 31, 1999 and 2000................... F-3
Consolidated Statements of Operations for the three years ended December
31, 2000................................................................ F-4
Consolidated Statements of Changes in Members'/Stockholders' Equity for
the three years ended December 31, 2000................................. F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 2000................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Trex Company, Inc.
We have audited the accompanying consolidated balance sheets of Trex
Company, Inc. (the "Company") as of December 31, 1999 and 2000, and the related
consolidated statements of operations, members'/ stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Trex Company, Inc. at December 31, 1999 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia,
February 7, 2001
F-2
TREX COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1999 2000
ASSETS ----------- ------------
Current Assets:
Cash and cash equivalents........................... $ -- $ --
Trade accounts receivable........................... 1,266,000 10,582,000
Inventories......................................... 8,668,000 23,017,000
Prepaid expenses and other assets................... 1,057,000 689,000
Deferred income taxes............................... 360,000 478,000
----------- ------------
Total current assets.............................. 11,351,000 34,766,000
----------- ------------
Property, plant and equipment, net.................... 59,489,000 113,635,000
Intangible assets, net................................ 8,252,000 7,544,000
Other................................................. 211,000 650,000
----------- ------------
Total Assets...................................... $79,303,000 $156,595,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.............................. $ 6,416,000 $ 17,082,000
Accrued expenses.................................... 1,737,000 2,053,000
Income taxes payable................................ 117,000 574,000
Other current liabilities........................... 1,163,000 664,000
Line of credit...................................... 5,714,000 --
Current portion of long-term debt................... 385,000 697,000
----------- ------------
Total current liabilities......................... 15,532,000 21,070,000
Deferred income taxes................................. 3,532,000 5,782,000
Line of credit........................................ -- 44,748,000
Long-term debt........................................ 10,838,000 15,954,000
----------- ------------
Total Liabilities................................. 29,902,000 87,554,000
----------- ------------
Stockholders' Equity:
Preferred stock, $0.01 par value, 3,000,000 shares
authorized; none issued and outstanding............ -- --
Common stock, $0.01 par value, 40,000,000 shares
authorized; 14,120,572 and 14,135,060 shares issued
and outstanding at December 31, 1999 and 2000,
respectively....................................... 141,000 141,000
Additional capital.................................. 40,992,000 41,330,000
Retained earnings................................... 8,268,000 27,570,000
----------- ------------
Total stockholders' equity........................ 49,401,000 69,041,000
----------- ------------
Total Liabilities and Stockholders' Equity........ $79,303,000 $156,595,000
=========== ============
See accompanying notes to financial statements.
F-3
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------
1998 1999 2000
----------- ----------- ------------
Net sales.............................. $49,167,000 $77,570,000 $117,568,000
Cost of sales.......................... 25,305,000 37,707,000 61,852,000
----------- ----------- ------------
Gross profit........................... 23,862,000 39,863,000 55,716,000
Selling, general, and administrative
expenses.............................. 12,878,000 18,370,000 23,830,000
----------- ----------- ------------
Income from operations................. 10,984,000 21,493,000 31,886,000
Interest income........................ 411,000 83,000 5,000
Interest (expense)..................... (2,937,000) (1,559,000) (907,000)
----------- ----------- ------------
Income before income taxes and
extraordinary item.................... 8,458,000 20,017,000 30,984,000
Income taxes........................... -- 7,281,000 11,682,000
----------- ----------- ------------
Income before extraordinary item....... 8,458,000 12,736,000 19,302,000
Extraordinary loss on the early
extinguishment of debt, net of
$704,000 of income tax benefit........ -- (1,056,000) --
----------- ----------- ------------
Net income............................. $ 8,458,000 $11,680,000 $ 19,302,000
=========== =========== ============
Basic earnings per common share:
Income before extraordinary item..... $ 0.85 $ 0.98 $ 1.37
Extraordinary item................... -- (0.08) --
----------- ----------- ------------
Net income........................... $ 0.85 $ 0.90 $ 1.37
=========== =========== ============
Weighted average basic shares
outstanding........................... 9,500,000 12,848,571 14,129,652
=========== =========== ============
Diluted earnings per common share:
Income before extraordinary item..... $ 0.85 $ 0.98 $ 1.36
Extraordinary item................... -- (0.08) --
----------- ----------- ------------
Net income........................... $ 0.85 $ 0.90 $ 1.36
=========== =========== ============
Weighted average diluted shares
outstanding........................... 9,500,000 12,892,784 14,179,475
=========== =========== ============
Pro Forma Data (unaudited, see Note
12):
Historical income before taxes and
extraordinary item.................. $ 8,458,000 $20,017,000
Pro forma income taxes............... (3,214,000) (7,606,000)
----------- -----------
Pro forma net income................. $ 5,244,000 $12,411,000
=========== ===========
Pro forma basic earnings per share... $ 0.55 $ 0.97
=========== ===========
Pro forma weighted average basic
common shares outstanding........... 9,500,000 12,848,571
=========== ===========
Pro forma diluted earnings per
share............................... $ 0.55 $ 0.96
=========== ===========
Pro forma weighted average diluted
common shares outstanding........... 9,500,000 12,892,784
=========== ===========
See accompanying notes to financial statements.
F-4
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/ STOCKHOLDERS' EQUITY
For The Three Years Ended December 31, 2000
Undistributed
Income/
Preferred Junior Preferred Common Additional Retained
Units Units Stock Stock Capital Earnings Total
---------- ----------- --------- -------- ----------- ------------- ------------
Balance, December 31, 1997.. $3,000,000 $ 2,350,000 $ -- $ -- $ -- $ 2,184,000 $ 7,534,000
Net income.................. -- -- -- -- -- 8,458,000 8,458,000
Distributions declared...... -- -- -- -- -- (405,000) (405,000)
Tax distributions........... -- -- -- -- -- (2,296,000) (2,296,000)
---------- ----------- ------- -------- ----------- ------------ ------------
Balance, December 31, 1998.. 3,000,000 2,350,000 -- -- -- 7,941,000 13,291,000
Net income.................. -- -- -- -- -- 11,680,000 11,680,000
Preferred redemption........ (3,000,000) -- -- -- -- (115,000) (3,115,000)
Common distributions........ -- (2,350,000) -- -- -- (11,238,000) (13,588,000)
Reorganization.............. -- -- -- 95,000 (95,000) -- --
Initial public offering..... -- -- -- 46,000 41,009,000 -- 41,055,000
Employee stock purchase
plan....................... -- -- -- -- 78,000 -- 78,000
---------- ----------- ------- -------- ----------- ------------ ------------
Balance, December 31, 1999.. -- -- -- 141,000 40,992,000 8,268,000 49,401,000
Net income.................. -- -- -- -- -- 19,302,000 19,302,000
Employee stock purchase and
options plans.............. -- -- -- -- 245,000 -- 245,000
Tax benefit of stock
options.................... -- -- -- -- 93,000 -- 93,000
---------- ----------- ------- -------- ----------- ------------ ------------
Balance, December 31, 2000.. $ -- $ -- $ -- $141,000 $41,330,000 $ 27,570,000 $ 69,041,000
========== =========== ======= ======== =========== ============ ============
See accompanying notes to financial statements.
F-5
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
Operating Activities
Net income.......................... $ 8,458,000 $ 11,680,000 $ 19,302,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary loss on early
prepayment of debt............... -- 1,760,000 --
Deferred income taxes............. -- 3,172,000 2,132,000
Tax benefit of stock options...... -- -- 93,000
Depreciation and amortization..... 3,164,000 4,457,000 6,869,000
Loss on disposal of property,
plant and equipment.............. 187,000 157,000 18,000
Changes in operating assets and
liabilities:
Trade accounts receivable....... 977,000 (1,232,000) (9,316,000)
Inventories..................... (1,532,000) (2,661,000) (14,349,000)
Prepaid expenses and other
assets......................... (558,000) (384,000) (282,000)
Trade accounts payable.......... 1,096,000 3,839,000 10,666,000
Accrued expenses................ 287,000 651,000 316,000
Income taxes payable............ -- 117,000 457,000
Other........................... 149,000 (151,000) (499,000)
------------ ------------ ------------
Net cash provided by operating
activities......................... 12,228,000 21,405,000 15,407,000
------------ ------------ ------------
Investing Activities
Expenditures for property, plant and
equipment.......................... (17,140,000) (29,369,000) (60,114,000)
------------ ------------ ------------
Net cash used in investing
activities......................... (17,140,000) (29,369,000) (60,114,000)
------------ ------------ ------------
Financing Activities
Borrowings under mortgages and
notes.............................. 6,886,000 11,298,000 5,940,000
Principal payments under mortgages
and notes.......................... (73,000) (34,678,000) (512,000)
Borrowings under line of credit..... 162,000 10,793,000 57,249,000
Principal payments under line of
credit............................. (162,000) (5,079,000) (18,215,000)
Proceeds from initial public
offering........................... -- 41,055,000 --
Proceeds from employee stock
purchase and option plans.......... -- 78,000 245,000
Preferred distributions paid........ (405,000) (3,115,000) --
Common distributions paid........... (2,296,000) (13,588,000) --
------------ ------------ ------------
Net cash provided by financing
activities......................... 4,112,000 6,764,000 44,707,000
------------ ------------ ------------
Net decrease in cash and cash
equivalents........................ (800,000) (1,200,000) --
Cash and cash equivalents at
beginning of year.................. 2,000,000 1,200,000 --
------------ ------------ ------------
Cash and cash equivalents at end of
year............................... $ 1,200,000 $ -- $ --
============ ============ ============
See accompanying notes to financial statements.
F-6
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Trex Company, Inc. (the "Company"), a Delaware corporation, was incorporated
on September 4, 1998 for the purpose of acquiring 100% of the membership
interests and operating the business of TREX Company, LLC, a Delaware limited
liability company, in connection with an initial public offering ("IPO") of the
Company's common stock. The Company had no operations or activity from
inception on September 4, 1998 through April 7, 1999, immediately prior to the
Reorganization described below. The IPO was consummated on April 13, 1999. On
March 22, 1999, the Company amended its certificate of incorporation to
increase its authorized capital to 40,000,000 shares of $0.01 par value common
stock (the "Common Stock") and 3,000,000 shares of preferred stock. All
references in the accompanying consolidated balance sheets have been restated
to reflect the increase in the Company's authorized capital.
Through its subsidiary, TREX Company, LLC, the Company manufactures and
distributes wood/plastic composite products primarily for residential and
commercial decking applications. Trex Wood-Polymer(TM) lumber ("Trex") is
manufactured in a proprietary process that combines waste wood fibers and
reclaimed polyethylene. TREX Company, LLC is a limited liability company formed
under the laws of the State of Delaware on July 1, 1996 (inception). It
initiated commercial activity on August 29, 1996. On August 29, 1996, TREX
Company, LLC acquired substantially all of the assets and assumed certain
liabilities of the Composite Products Division of Mobil Corporation (the "Mobil
Composite Products Division") for a cash purchase price of approximately $29.5
million. The acquisition was accounted for using the purchase accounting
method.
Reorganization
Trex Company, Inc., TREX Company, LLC and the holders of membership
interests in TREX Company, LLC completed certain transactions (the
"Reorganization") on April 7, 1999, prior to the consummation of the IPO. In
the Reorganization, the junior members of TREX Company, LLC contributed their
membership interests to Trex Company, Inc. in exchange for 9,500,000 shares of
Common Stock of Trex Company, Inc. Concurrently with such exchange, the
preferred member of TREX Company, LLC exchanged its preferred membership
interest for a $3.1 million note of Trex Company, Inc. As a result of such
exchanges, TREX Company, LLC became a wholly owned subsidiary of Trex Company,
Inc. The Company has accounted for the Reorganization as an exchange of shares
between entities under common control at historical cost in a manner similar to
a pooling of interests. After the Reorganization, the ownership percentage of
each Trex Company, Inc. common stockholder was the same as its ownership
percentage in the junior membership interests of TREX Company, LLC.
As part of the Reorganization, the Company made a special cash distribution
(the "LLC Distribution") to its junior members in the amount of $12.6 million,
of which $6.7 million was paid prior to the consummation of the IPO. The
Company finalized its determination of amounts due to the junior members as
part of the LLC Distribution in July 1999 and distributed an additional
$822,000 in the third quarter of 1999. A deferred income tax liability of $2.6
million was recognized as a result of the conversion of TREX Company, LLC in
the Reorganization from a partnership for federal income tax purposes to a
corporation taxed in accordance with Subchapter C of the Internal Revenue Code
(a "C corporation").
Immediately prior to the Reorganization, TREX Company, LLC exercised an
option to repurchase 667 units of junior membership interest from certain
members at a price of $0.01 per unit.
Initial Public Offering
In the IPO, the Company sold 4,615,450 shares of Common Stock at a public
offering price of $10.00 per share. Of such shares, the Company sold 4,000,000
shares on April 13, 1999 and 615,450 shares on May 6,
F-7
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 pursuant to the underwriters' exercise in full of their over-allotment
option. The net proceeds from the IPO, after deducting underwriting discounts
and commissions and offering expenses payable by the Company, totaled
approximately $41.1 million. The net proceeds of approximately $35.5 million
from the sale of shares on April 13, 1999 were used as follows: approximately
$28.1 million was used to repay approximately $26.3 million principal amount of
senior and subordinated notes, accrued interest thereon and a related
prepayment premium of approximately $1.5 million; approximately $3.1 million
was used to repay the note issued to the preferred member of TREX Company, LLC
in the Reorganization; and approximately $4.3 million was used to fund a
portion of the LLC Distribution. The net proceeds of approximately $5.6 million
from the over-allotment exercise were used as follows: approximately $4.4
million was used to repay borrowings under the Company's revolving credit
facility and approximately $1.2 million was used for working capital and
general corporate purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its wholly-owned subsidiary, TREX
Company, LLC. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (last-in, first-out) or market
value.
Long Lived Assets
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost. The costs of
additions and improvements are capitalized, while maintenance and repairs are
expensed as incurred. Depreciation is provided using the straight line method
over the following estimated useful lives:
Machinery and equipment.......................................... 11 years
Furniture and equipment.......................................... 10 years
Forklifts and tractors........................................... 5 years
Data processing equipment........................................ 5 years
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the asset.
Intangible Assets
Intangible assets consist of goodwill representing the excess of cost over
net assets acquired resulting from the purchase of the Mobil Composite Products
Division. Goodwill is amortized using the straight line method over a period of
15 years.
F-8
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company assesses long-lived assets including intangible assets for
impairment in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to
be recognized for long-lived assets when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the assets'
carrying amounts. Intangibles are also evaluated for recoverability by
estimating the projected undiscounted cash flows, excluding interest, of the
related business activities. The impairment loss of these assets, including
goodwill, is measured by comparing the carrying amount of the asset to its fair
value less disposal costs, with any excess of carrying value over fair value
written off. Fair value is based on market prices where available, an estimate
of market value, or various valuation techniques including discounted cash
flow.
Revenue Recognition
The Company recognizes revenue at the point of sale, which is at the time of
shipment to the customer from the Company's manufacturing facilities.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation under the provisions of SFAS No. 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), but
requires pro forma disclosures in the footnotes to the financial statements as
if the measurement provisions of SFAS No. 123 had been adopted. The Company
accounts for its stock-based compensation in accordance with APB No. 25.
Income Taxes
For all periods prior to the Reorganization, the Company was a partnership
for income tax purposes. Accordingly, during these periods, no provision for
income taxes has been included in these financial statements, as taxable income
or loss passed through to, and was reported by, members individually. The
Company accounts for income taxes and the related accounts under the liability
method. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted rates expected to be in effect during the year in
which the differences reverse. In connection with the Reorganization, and its
conversion for income tax purposes from a partnership to a C corporation, the
Company recorded a one-time deferred tax charge of $2.6 million. Subsequent to
the Reorganization, the Company has provided for federal and state income taxes
at a combined effective rate of 38%.
Research and Development Costs
Research and development costs are expensed as incurred. For the years ended
December 31, 1998, 1999 and 2000, research and development costs were
approximately $946,000, $1,238,000 and $1,440,000, respectively.
Advertising Costs
Branding costs including advertising are expensed as incurred. For the years
ended December 31, 1998, 1999 and 2000, branding costs were approximately
$4,775,000, $6,915,000 and $8,092,000, respectively.
F-9
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the accompanying notes. Actual results could differ
from those estimates.
Fair Value of Financial Statements
The Company considers the recorded value of its financial assets and
liabilities, consisting primarily of cash and cash equivalents, accounts
receivable, inventory, accounts payable, accrued liabilities and other current
liabilities, and long term debt to approximate the fair value of the respective
assets and liabilities at December 31, 1999 and 2000.
Recent Pronouncements
The Company implemented the consensus of the Emerging Issues Task Force
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," or EITF 00-
10, in the fourth quarter of 2000. This rule requires that all shipping and
handling fees be recorded in net sales and that the related costs be included
in cost of sales. Previously, the Company had classified shipping and handling
fees, net of shipping and handling costs, as cost of sales. The effect of this
reclassification was to increase net sales and cost of sales by approximately
$2.3 million in 1998, $3.2 million in 1999, and $3.0 million in 2000. This
reclassification had no effect on net income in any period.
Effective January 1, 2001, the Company will adopt Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities," as amended by Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The Company's use of derivatives is currently limited to interest rate swaps on
its floating rate mortgage debt. The Company estimates that the transition
adjustment to implement this new standard will increase liabilities by
approximately $800,000 with a corresponding reduction in stockholders' equity
through other comprehensive income (approximately $500,000, net of tax).
3. INVENTORIES
Inventories consist of the following as of December 31:
1999 2000
---------- -----------
Finished goods........................................ $7,599,000 $19,523,000
Raw materials......................................... 1,069,000 3,494,000
---------- -----------
$8,668,000 $23,017,000
========== ===========
F-10
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31:
1999 2000
----------- ------------
Building and improvements......................... $12,505,000 $ 18,893,000
Machinery and equipment........................... 46,054,000 61,848,000
Furniture and equipment........................... 417,000 753,000
Forklifts and tractors............................ 149,000 159,000
Data processing equipment......................... 867,000 1,171,000
Construction in process........................... 4,268,000 39,985,000
Land.............................................. 3,437,000 4,934,000
----------- ------------
67,697,000 127,743,000
Accumulated depreciation.......................... (8,208,000) (14,108,000)
----------- ------------
$59,489,000 $113,635,000
=========== ============
Depreciation expense for the years ended December 31, 1998, 1999 and 2000
totaled $2,280,000, $3,610,000, and $5,950,000, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
1999 2000
----------- -----------
Goodwill........................................... $10,609,000 $10,609,000
Accumulated amortization........................... (2,357,000) (3,065,000)
----------- -----------
$ 8,252,000 $ 7,544,000
=========== ===========
Amortization expense was $707,000 for each of the years ended December 31,
1998, 1999 and 2000.
6. DEBT
The Company maintains a revolving credit facility with a bank that provides
for borrowings of up to $75.0 million on an unsecured basis for working capital
and general corporate purposes through September 30, 2001 and $50.0 million
thereafter. Amounts drawn under the revolving credit facility bear interest at
an annual rate equal to LIBOR plus 1.00%. The facility will mature on June 30,
2003. The facility agreement contains restrictive and financial covenants and
is subject to a commitment fee on the unused balance. As of December 31, 1999
and 2000, $5,714,000 and $44,748,000, respectively, were outstanding under the
revolving credit facility.
In April 1999, with a portion of the proceeds of the IPO, the Company repaid
$21,250,000 of its 10.00% Senior Notes and $5,000,000 of its 12.00%
Subordinated Notes. In connection with the repayment, the Company recorded an
extraordinary loss on the early prepayment of debt in the amount of $1,056,000,
net of taxes, consisting of a prepayment premium and the related unamortized
debt discount at the time of repayment.
In May 2000, the Company financed its purchase of a site adjacent to its
existing Winchester, Virginia manufacturing facility through borrowings under
its revolving credit facility. In August 2000, the Company refinanced the
borrowings with a 15-year term loan in the original principal amount of $5.9
million. Pursuant to an interest rate swap, interest on this loan is payable at
an annual rate of 8.10%.
F-11
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company refinanced two loans incurred in connection
with the site acquisition and construction of the Company's second
manufacturing facility with a 15-year term loan in the original principal
amount of approximately $6.7 million. Pursuant to an interest rate swap
agreement, interest on this loan is payable at an effective annual rate of
7.90%.
During the year ended December 31, 1998, the Company borrowed $4,815,000
under two mortgages to fund, in part, the acquisition of the site of its second
manufacturing facility and the site of its research and development facility.
The mortgages provide for monthly amortization of principal and interest over a
15-year amortization schedule, with all remaining principal due on the tenth
anniversary of the mortgage dates. The mortgages bear interest at an annual
rate equal to LIBOR plus 1.00%. The Company has entered into interest rate swap
agreements, as discussed below, at the notional amounts of the amortizing
principal balances, that effectively fix the interest rates paid by the Company
at 7.12% and 6.80%, respectively.
Long-term debt consists of the following as of December 31:
1999 2000
----------- -----------
Mortgage, due June 16, 2008, 7.12%................. $ 3,563,000 $ 3,404,000
Mortgage, due November 28, 2008, 6.80%............. 991,000 948,000
Mortgage, due September 30, 2014, 7.90%............ 6,669,000 6,426,000
Mortgage, due August 31, 2015, 8.10%............... -- 5,873,000
----------- -----------
11,223,000 16,651,000
Less current portion............................... (385,000) (697,000)
----------- -----------
Long-term debt..................................... $10,838,000 $15,954,000
=========== ===========
Maturities of long-term debt are as follows:
Years ending December 31,
-------------------------
2001.......................................................... $ 697,000
2002.......................................................... 752,000
2003.......................................................... 813,000
2004.......................................................... 879,000
2005.......................................................... 950,000
Thereafter.................................................... 12,560,000
-----------
$16,651,000
===========
The mortgages are secured by the Company's various real estate holdings and
are held by various financial institutions.
The Company made interest payments in the aggregate amounts of approximately
$2,875,000, $1,532,000 and $1,779,000 for the years ended December 31, 1998,
1999 and 2000, respectively. During 2000, the company capitalized approximately
$1,143,000 of interest.
During 1998, 1999 and 2000, the Company entered into interest-rate swap
agreements to eliminate the impact of increases and decreases in interest rates
on its floating-rate mortgages. At December 31, 2000, the Company had four
interest-rate swap agreements outstanding. The agreements effectively entitle
the Company to receive from (pay to) the bank the amount, if any, by which the
Company's interest payments on its $3,780,000, $1,035,000, $6,728,000 and
$5,940,000 floating-rate mortgages due in June 2008, November 2008, September
2014 and August 2015 exceed (fall below) 7.12%, 6.80%, 7.90% and 8.10%,
respectively. The Company has not incurred a premium or other fee for these
interest-rate swap agreements. Payments received
F-12
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(made) as a result of the agreements are accrued as a reduction of (increase
to) interest expense on the floating-rate mortgage debt. The notional amounts
of these agreements correspond to the outstanding balances of the mortgage
debt.
The Company is exposed to credit loss in the event of nonperformance by the
counter-party on interest-rate swap agreements, but the Company does not
anticipate nonperformance by the counter-party. The amount of such exposure is
generally the unrealized gains, if any, in such agreements.
7. STOCKHOLDERS' EQUITY
The predecessor of Trex Company, Inc., TREX Company, LLC, was initially
capitalized by the sale of 3,000 Class A units for $2,000,000 and 1,000 Class B
units for $350,000. The Class A and Class B units are collectively known as
junior units. In connection with the acquisition of substantially all of the
assets and assumption of certain liabilities of the Mobil Composite Products
Division, the Company issued Mobil Oil Corporation 1,000 preferred units in
exchange for $3,000,000.
In the Reorganization, the Company issued 9,500,000 shares of its Common
Stock in exchange for the outstanding junior units and a note in the principal
amount of $3,100,000 in exchange for the preferred units. In the IPO, the
Company sold 4,615,450 previously unissued shares of its Common Stock for net
proceeds of $41,055,000. In connection with the Reorganization and IPO, the
Company repaid the note it exchanged for the preferred units, and made payments
totaling $13,588,000 to the original Class A and Class B unitholders,
representing a distribution of previously undistributed earnings and a return
of capital. See Note 1 herein for a discussion of the Reorganization and IPO
transactions.
Through the Company's employee stock purchase and option plans, 5,122 and
14,488 previously unissued shares of Common Stock were issued to employees
and/or non-employee directors for a total of $78,000 and $245,000 during 1999
and 2000, respectively.
F-13
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted earnings
per share:
Year Ended December 31,
------------------------------------
1998 1999 2000
---------- ----------- -----------
Numerator:
Income before extraordinary item.... $8,458,000 $12,736,000 $19,302,000
Preferred dividends................. (405,000) (115,000) --
---------- ----------- -----------
8,053,000 12,621,000 19,302,000
Extraordinary item.................. -- (1,056,000) --
---------- ----------- -----------
Net income available to common
shareholders....................... $8,053,000 $11,565,000 $19,302,000
========== =========== ===========
Denominator:
Denominator for basic earnings per
share--weighted average shares
outstanding........................ 9,500,000 12,848,571 14,129,652
========== =========== ===========
Basic earnings per share:
Income before extraordinary item.... $ 0.85 $ 0.98 $ 1.37
Extraordinary item.................. -- (0.08) --
---------- ----------- -----------
Net income.......................... $ 0.85 $ 0.90 $ 1.37
========== =========== ===========
Denominator:
Denominator for diluted earnings per
share--weighted average shares
outstanding........................ 9,500,000 12,892,784 14,179,475
========== =========== ===========
Diluted earnings per share:
Income before extraordinary item.... $ 0.85 $ 0.98 $ 1.36
Extraordinary item.................. -- (0.08) --
---------- ----------- -----------
Net income.......................... $ 0.85 $ 0.90 $ 1.36
========== =========== ===========
The earnings per share amounts shown above for 1998 and 1999 have been
adjusted to reflect the Reorganization and the issuance of 9,500,000 shares of
Trex Company, Inc. Common Stock in exchange for the junior units in TREX
Company, LLC. The diluted weighted average shares outstanding for 1999 and 2000
reflect the dilutive effect of the exercise of stock options outstanding.
On March 12, 1999, the Company adopted the 1999 Stock Option and Incentive
Plan (the "Plan"). The Plan authorizes the granting of options to purchase up
to 1,400,000 shares of Common Stock. The exercise price per share under each
option granted under the Plan may not be less than 100% of the fair market
value of the Common Stock on the option grant date. Vesting of the options is
determined by the Compensation Committee of the Board of Directors, with a
maximum vesting period of 10 years.
F-14
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity from inception of the Plan through December 31, 2000
is as follows:
Weighted Average
Exercise Price
Options Per Share
------- ----------------
Outstanding March 12, 1999 (inception)............. -- --
1999
Granted.......................................... 111,160 $10.53
Exercised........................................ (7,160) $10.00
Canceled......................................... -- --
-------
Outstanding at December 31, 1999................... 104,000 $10.53
2000
Granted.......................................... 141,358 $28.20
Exercised........................................ (8,018) $10.00
Canceled......................................... (14,309) $15.04
-------
Outstanding at December 31, 2000................... 223,031 $21.27
=======
Exercisable at December 31, 2000................... 29,494 $18.77
=======
At December 31, 2000, the price range of options outstanding was as follows:
Average
Weighted Remaining Weighted
Average Contractual Average
Options Exercise Life Options Exercise
Outstanding Price (Years) Exercisable Price
----------- -------- ----------- ----------- --------
$10.00-19.99.......... 85,029 $10.13 8.1 16,329 $10.17
20.00-29.99.......... 108,219 27.15 9.2 13,165 29.43
30.00-39.99.......... 28,138 30.63 9.7 -- --
40.00 and over....... 1,645 50.00 9.5 -- --
------- ------
223,031 21.27 8.9 29,494 18.77
The grant date weighted average fair value of options granted in 1999 and
2000 was $7.14 and $19.35, respectively. Options generally vest with respect to
25% of the shares subject to the option on each of the first, second, third and
fourth anniversaries of the grant date. The options are forfeitable upon
termination of an option holder's service as an employee or director under
certain circumstances.
At December 31, 2000, 1,384,822 shares of Common Stock are reserved for
issuance under the Plan.
In accordance with SFAS 123, the fair value was estimated at the grant date
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 2000: risk-free interest rate of 6%; no dividends; and
a weighted-average expected life of the options of approximately five years. A
volatility factor of the expected market price of the Company's Common Stock of
.551 and .810 was used for 1999 and 2000, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-15
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying SFAS 123 for the years ended December 31, 1999 and 2000
would have reduced income by approximately $111,000 and $384,000, respectively,
and resulted in basic earnings per share of $0.89 and $1.34, respectively.
8. LEASES
The Company leases office space, storage warehouses and certain office and
plant equipment under various operating leases. Minimum annual payments under
these non-cancelable leases as of December 31, 2000 were as follows :
Year ending December 31,
------------------------
2001........................................................... $ 3,397,000
2002........................................................... 2,640,000
2003........................................................... 2,360,000
2004........................................................... 1,832,000
2005........................................................... 1,582,000
Thereafter..................................................... 9,971,000
-----------
$21,782,000
===========
For the years ended December 31, 1998, 1999 and 2000, the Company recognized
rental expenses of approximately $1,024,000, $1,516,000 and $2,650,000,
respectively.
9. FRINGE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan and a Money Purchase Pension
Plan for the benefit of all employees who meet certain eligibility
requirements. These plans cover substantially all of the Company's full time
employees. The plan documents provide for the Company to make defined
contributions as well as matching and other discretionary contributions, as
determined by the Board of Directors. The Company recognized contribution
expense totaling $639,000, $1,142,000 and $677,000 to the 401(k) Profit Sharing
Plan and $256,000, $303,000 and $326,000 to the Money Purchase Pension Plan
during the years ended December 31, 1998, 1999 and 2000, respectively. As of
December 31, 1999 and 2000, the Company's accrued expenses included
approximately $1,425,000 and $760,000, respectively, for contributions due in
respect of the 401(k) Profit Sharing Plan and Money Purchase Pension Plan.
The Company has a long-term incentive plan for the benefit of certain
employees. The plan provides up to one year's annual base compensation to
participants who have completed four years of continuous service to the
Company.
10. INCOME TAXES
The Company's provision for income taxes is as follows:
Year ended December 31,
-------------------------------
1998 1999 2000
-------- ---------- -----------
Current provisions:
Federal................................... $ -- $3,465,000 $ 8,616,000
State..................................... -- 644,000 1,019,000
Federal deferred tax expense.............. -- 2,866,000 1,854,000
State deferred tax expense................ -- 306,000 193,000
-------- ---------- -----------
$ -- $7,281,000 $11,682,000
======== ========== ===========
F-16
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes resulted in effective tax rates that varied
from the combined federal and state statutory income tax rates as follows:
Year ended December 31,
-------------------------------------
1998 1999 2000
----------- ----------- -----------
Expected federal income tax
provision.......................... $ 2,876,000 $ 6,806,000 $10,854,000
Permanent........................... -- 30,000 (58,000)
State income taxes, net of federal
benefit............................ 338,000 797,000 793,000
Non-deductible charge for stock
option compensation................ -- -- 93,000
Effect of income taxed directly to
LLC members........................ (3,214,000) (2,961,000) --
Deferred taxes arising from
Reorganization..................... -- 2,609,000 --
----------- ----------- -----------
$ -- $ 7,281,000 $11,682,000
=========== =========== ===========
The significant items constituting the Company's deferred tax assets and
liabilities as of December 31, 1999 and 2000 were as follows:
As of December 31,
------------------------
1999 2000
----------- -----------
Deferred tax assets-current:
Reserves........................................ $ 360,000 $ 478,000
----------- -----------
Deferred tax asset-current........................ $ 360,000 $ 478,000
=========== ===========
Deferred tax liabilities-non-current:
Book versus tax depreciation.................... $(3,532,000) $(5,782,000)
----------- -----------
Deferred tax liability-non-current................ $(3,532,000) $(5,782,000)
=========== ===========
Cash paid for income taxes during the years ended December 31, 1998, 1999
and 2000 was $0, $3,287,000 and $9,088,000 respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company from time to time is party to litigation arising in the ordinary
course of its business. The Company believes that such litigation will not have
a material impact on the Company's financial position or results of operations.
The Company is a party to several short-term and long-term supply contracts
that require the Company to take or pay for raw materials for periods of up to
ten years. The quantities of raw materials to be purchased under these
contracts are not fixed or determinable.
Approximately 74%, 75% and 75% of the Company's sales for the years ended
December 31, 1998, 1999 and 2000, respectively, were from its five largest
customers, each of which exceeded 10% of sales. Approximately 22%, 24% and 20%
of the Company's raw materials for the years ended December 31, 1998, 1999 and
2000, respectively, were purchased from its four largest suppliers.
F-17
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. PRO FORMA DATA (Unaudited)
The pro forma statement of operations data give effect to the Reorganization
as if the Reorganization had occurred on January 1, 1998. The pro forma net
income taxes and pro forma net income reflect federal and state income taxes
(assuming a 38% combined effective tax rate) as if the Company had been taxed
as a C corporation for each of the two years ended December 31, 1999. The pro
forma consolidated statements of operations data exclude one-time charges
relating to the Reorganization and IPO, including (i) a net deferred tax
liability of approximately $2.6 million and (ii) a $1.1 million extraordinary
charge for the extinguishment of debt repaid from the net proceeds of the IPO.
Pro forma weighted average shares outstanding reflect 9,500,000 shares of Trex
Company, Inc. Common Stock outstanding through April 7, 1999, 13,500,000 shares
outstanding from April 8, 1999 through May 2, 1999, 14,115,450 shares
outstanding from May 3 through July 14, 1999, 14,118,435 shares outstanding
from July 15 through October 14, 1999 and 14,120,572 shares outstanding through
December 31, 1999.
The following table sets forth the computation of basic earnings per common
share on a supplemental pro forma basis:
Year ended December 31,
------------------------
1998 1999
----------- -----------
Numerator:
Historical income from operations.................. $10,984,000 $21,493,000
Supplemental pro forma interest income (expense),
net............................................... 249,000 (691,000)
Pro forma income tax provision..................... (4,269,000) (7,905,000)
----------- -----------
Supplemental pro forma net income available to
common shareholders............................... $ 6,964,000 $12,897,000
=========== ===========
Denominator:
Denominator for supplemental pro forma basic
earnings per common share--weighted average shares
outstanding....................................... 14,115,450 14,117,297
=========== ===========
Supplemental pro forma basic earnings per common
share............................................. $ 0.49 $ 0.91
=========== ===========
The foregoing supplemental pro forma basic earnings per common share amounts
have been adjusted to reflect the Reorganization (see Note 1) as if the
Reorganization had occurred on January 1, 1998. The supplemental pro forma
interest expense gives effect to the repayment of the Senior and Subordinated
Notes, and related debt issuance and discount amortization, from the net
proceeds of the IPO as if such repayment had been made as of January 1, 1998.
The supplemental pro forma income tax provision reflects federal and state
income taxes (assuming a 38% combined effective tax rate) as if the Company had
been taxed as a C corporation as of January 1, 1998. Supplemental pro forma net
income available to common shareholders assumes the preferred units were
exchanged as of January 1, 1998. Supplemental pro forma weighted average shares
outstanding assumes that the shares resulting from the Reorganization and the
consummation of the IPO were outstanding for the entire period. Supplemental
pro forma fully diluted earnings per share is the same as supplemental pro
forma basic earnings per share and, therefore, is not separately presented.
F-18
TREX COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. INTERIM FINANCIAL DATA (Unaudited)
Three Months Ended
-------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 2000 2000 2000 2000
----------- ----------- ------------- ------------ ----------- ------------ ------------- ------------
Net sales........ $23,448,000 $20,684,000 $20,780,000 $12,658,000 $39,053,000 $36,449, 000 $25,806,000 $16,260,000
Gross profit..... 12,423,000 11,521,000 10,597,000 5,322,000 18,162,000 18,013,000 13,103,000 6,438,000
Income before
extraordinary
item............ 7,559,000 50,000 4,137,000 990,000 7,057,000 6,081,000 5,196,000 968,000
Net income
(loss).......... 7,559,000 (1,006,000) 4,137,000 990,000 7,057,000 6,081,000 5,196,000 968,000
Basic income
before
extraordinary
item per share.. $ 0.78 $ -- $ 0.29 $ 0.07 $ 0.50 $ 0.43 $ 0.37 $ 0.07
Basic net income
(loss) per
share........... $ 0.78 $ (0.07) $ 0.29 $ 0.07 $ 0.50 $ 0.43 $ 0.37 $ 0.07
Diluted income
before
extraordinary
item per share.. $ 0.78 $ -- $ 0.29 $ 0.07 $ 0.50 $ 0.43 $ 0.37 $ 0.07
Diluted net
income (loss)
per share....... $ 0.78 $ (0.07) $ 0.29 $ 0.07 $ 0.50 $ 0.43 $ 0.37 $ 0.07
The Company implemented the consensus of the Emerging Issues Task Force
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," or EITF 00-
10, in the fourth quarter of 2000. This rule requires that all shipping and
handling fees be recorded in net sales and that the related costs be included
in cost of sales. Previously, the Company had classified shipping and handling
fees, net of shipping and handling costs, as cost of goods sold. The effect of
this reclassification was to increase net sales and cost of goods sold
previously reported by approximately $1,083,000, $909,000, $825,000 and
$408,000 for the first, second, third and fourth quarters of 1999, respectively
and $989,000, $893,000 and $728,000 for the first, second and third quarters of
2000, respectively.
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TREX COMPANY, INC.
/s/ Anthony J. Cavanna
By: _________________________________
Anthony J. Cavanna
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
Date: March 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed as of March 26, 2001 by the following persons on behalf
of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Robert G. Matheny President and Director
________________________________________ (Principal Executive
Robert G. Matheny Officer)
/s/ Anthony J. Cavanna Executive Vice President
________________________________________ and Chief Financial
Anthony J. Cavanna Officer and Director
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ Andrew U. Ferrari Director
________________________________________
Andrew U. Ferrari
/s/ Roger A. Wittenberg Director
________________________________________
Roger A. Wittenberg
/s/ William H. Martin, III Director
________________________________________
William H. Martin, III
/s/ William F. Andrews Director
________________________________________
William F. Andrews
/s/ Patricia B. Robinson Director
________________________________________
Patricia B. Robinson