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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, 2001
[_]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
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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.)
160 Exeter Drive, Winchester, Virginia 22603-8605
(Address of Principal Executive Offices) (Zip Code)
(540) 542-6300
Registrant's telephone number, including area code:
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 7, 2002, based on the closing price
of such stock on the New York Stock Exchange on such date, was approximately
$140 million.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 7, 2002 was 14,157,912.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the proxy statement for the 2002 annual meeting of
stockholders of the registrant is incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
Page
PART I
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Item 1. Business ............................................................................... 1
Item 2. Properties ............................................................................. 17
Item 3. Legal Proceedings ...................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders .................................... 18
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 19
Item 6. Selected Financial Data ................................................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................. 32
Item 8. Financial Statements and Supplementary Data ............................................ 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ... 32
PART III
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Item 10. Directors and Executive Officers of the Registrant .................................... 33
Item 11. Executive Compensation ................................................................ 35
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................ 35
Item 13. Certain Relationships and Related Transactions ........................................ 35
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 36
Index to Consolidated Financial Statements....................................................... F-1
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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," "plan" and similar words as they
relate to Trex Company, Inc. or our management are intended to identify some of
these forward-looking statements. All statements by Trex Company, Inc. regarding
our expected financial position and operating results, our business strategy and
our financing plans 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.
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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(R). Trex
Wood-Polymer(R) 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, partially patented 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.
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, as
contractors generally build larger, more elaborate residential decks than decks
built by homeowners in the "do-it-yourself" market segment. As of December 31,
2001, we sold our products through approximately 90 wholesale distribution
locations, which in turn sold Trex to approximately 2,900 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 $153
billion in 2000, according to the U.S. Census Bureau, and the home improvement
market grew at a compound annual growth rate of 7.3% for the five-year period
ended December 31, 2000. The primary market for Trex is residential decking and,
to a lesser extent, commercial decking. Annual factory sales in 2000 of
residential decking totaled approximately $2.2 billion, or approximately 2.6
billion board feet of lumber. This market includes all decking products other
than those used for a deck's substructure, such as stringers, beams and columns.
For the three-year period ended December 31, 2000, factory sales of all
residential decking increased at a compound annual growth rate of approximately
7%. For the same three-year period, factory sales of non-wood alternative
decking products to the residential market increased at a compound annual growth
rate of over 50%.
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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.
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 installed cost of a majority of
decks ranges from $15 to $20 per square foot, which is significantly less than
the cost of a typical interior construction project. 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 2000 factory sales to the decking market generated by each product
category listed:
Percentage of
Product 2000 Factory Sales
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Wood ................................................ 95%
Wood/plastic composites ............................. 4
100% plastic ........................................ 1
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100%
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Approximately 85% of the lumber used in wooden decks is southern yellow
pine or fir, 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 PVC. 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 wood/plastic
composites and 100% plastic lumber for decking. In 2002, the Environmental
Protection Agency announced an agreement under which manufacturers will
voluntarily phase out by December 2003 the residential use of chromated copper
arsenate, or CCA, which is a preservative used in approximately 90% of all
pressure-treated lumber. We believe that the publicity relating to this
agreement will contribute to increases in sales of wood/plastic composites and
100% plastic lumber for decking by raising consumer awareness of active
chemicals in pressure-treated lumber.
Distributors of wood decking materials typically sell to lumber yards
and home centers, which in turn supply the materials to homebuilders,
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.
Wood decking products generally are not associated with brand
identification. The primary softwoods used for decking, which consist of treated
southern yellow pine, treated fir, 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
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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 long-term 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 will employ the following long-term strategies:
. we plan to increase our investment in, and the resources devoted
to, development of the Trex brand;
. we intend to expand comprehensive national coverage for Trex by
increasing the number of dealer outlets selling Trex;
. 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;
. we will seek to continue making investments in process and product
development to support new products and improve product
consistency, reduce manufacturing costs and increase operating
efficiencies; and
. we will seek to continue developing opportunities for Trex in new
products and product applications and in geographic markets beyond
our U.S. base.
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 five colors: Natural, Winchester
Grey, Madeira, Woodland Brown and Saddle.
We launched Saddle, our newest color, in 2001, as well as several new
profiles, including our code-listed Railpost(TM), which enables an all-Trex deck
and railing system, and 1x8, which is used primarily for deck trim. We
reintroduced landscape edging in 2001 after a hiatus due to capacity
constraints.
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 rot or insect infestation. These features of
Trex eliminate most of 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-backs 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 for both our decking and railing systems. Our
listings facilitate the acquisition of building
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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 2001 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 2001
net sales. These applications include blocks to cover and protect concrete
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 a dedicated sales force that works with all levels of our
distribution system. During 2001, we increased our sales force from 18 to 37
company employees to assist in the "pull through" of our products. We expect to
continue to expand our sales force as needed to further these efforts.
We have invested approximately $25 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, fencing and accessory 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 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 advertise Trex decking in popular home and
garden consumer publications, including This Old House, 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 four
of these idea homes in 2001.
Public Relations. We employ a public relations firm to stimulate
interest in Trex decking by the print and broadcast media. During 2001, print
and broadcast stories featuring Trex decking generated a total of 360 million
"impressions," which represent potential viewings, compared to 185 million
impressions in 2000. There were more than 2,000 articles in magazines and
newspapers featuring Trex in 2001 compared to 450 articles in 2000. Major
newspapers featuring articles on Trex included the Los Angeles Times, San
Francisco Chronicle, Newsday and The Christian Science Monitor. Home-oriented
magazines featuring articles on Trex articles included Home Magazine, Sunset
Magazine and Southern Living. Trex also received television coverage on the PBS
series "Garden's Gate" and on a number of network television affiliates across
the country.
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
2001, over 1,000 new members enrolled in this program.
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Model Home Program. We operate a program that 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 185 builders have
participated in this program.
Homebuilder Focus. Our marketing program targets 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,
Toll Brothers, D.R. Horton, Inc., Standard Pacific Homes, Richmond American
Homes, John Weiland Homes & Neighborhoods and Rottlund Homes, 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 national
trade shows for homebuilders, contractors and specifiers that have a total
attendance of approximately 300,000. 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 2001, including Misquamicut Beach Boardwalk in
Misquamicut, Rhode Island, Pajaro Dunes overwalks in Monterrey, California, and
Paradise Lighthouse Deck and Walkway in Paradise, Michigan. Other showcase
projects include the Presidential Trail at Mount Rushmore, the Toronto Boardwalk
on Lake Ontario, the Florida Everglades walkways and the Grand Canyon Education
Center.
Marketing Research. During 2001, Trex was featured in three marketing
research studies related to decking commissioned by leading trade publications.
Professional Builder Magazine surveyed homebuilders and found that Trex was the
"brand most preferred" by a 2-to-1 margin over any other decking brand.
Professional Remodeler Magazine surveyed remodeling contractors and found that
Trex was the "brand most preferred" by a 3-to-1 margin over any other decking
brand. Building Products Magazine recognized Trex as a "2001 Brand Leader" for
generating the most reorder inquiries in the decking products category.
Distribution
In 2001, we generated approximately 99% of our net sales through our
wholesale distribution network. At December 31, 2001, we sold our Trex product
line to 20 wholesale companies operating from approximately 90 distribution
locations. At the same date, our distributors marketed Trex to approximately
2,900 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 2001, 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. 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. Upon the expiration of the initial
one-year term, the agreement is
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automatically renewed for additional one-year terms unless either party provides
notice of termination at least 30 days before the expiration of any renewal
term. Either party may terminate the agreement at any time upon 30 days' notice,
while we may also terminate the agreement immediately upon the occurrence of
specified events.
We require our wholesale distributors to contribute significant
resources to support Trex. All wholesale distributors are required to appoint 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 1999, 2000 and 2001, 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 Plunkett-Webster and
Snavely Forest Products. Distributors that individually accounted for more than
10% of our annual net sales collectively accounted for approximately 75% of our
net sales in 1999 and 2000 and approximately 78% of our net sales in 2001. None
of such distributors individually accounted for more than 21% 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.
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 increase comprehensive national
coverage for Trex, we plan to increase the number of dealer outlets stocking
Trex products.
Contractor/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 contractors and dealers 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 contractor locator service, 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.
Contractor Training. We have provided training about Trex to more than
40,000 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 TrexPro association of top contractors who
receive comprehensive training and have the quality of their work audited by a
Trex representative. These contractors receive consumer lead referrals directly
from 1-800-BUY-TREX and are listed on our web site.
Shipment. We ship Trex to distributors by truck and rail. Distributors
pay all shipping and delivery charges.
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Manufacturing Process
Trex is manufactured at our two facilities in Winchester, Virginia,
which total approximately 265,000 square feet and had four of nine production
lines in operation at December 31, 2001, and our 250,000-square foot facility in
Fernley, Nevada, which had two of six 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 2001, our Winchester facilities produced approximately $82.1 million
sales value of finished product and our Fernley facility produced approximately
$49.2 million sales value of finished product. During the third and fourth
quarters of 2001, to reduce our finished product inventories and conserve
working capital, we temporarily suspended operation of five production lines in
our Winchester facilities and four production lines in our Fernley facility.
These lines remained idle at December 31, 2001. Including these lines, our total
annual capacity at December 31, 2001 was approximately $180 million sales value
of finished product. As of December 31, 2001, our construction in process
totaled approximately $42.4 million. The construction in process consisted
primarily of seven production lines in various stages of completion at our
Winchester and Fernley facilities and a plastic processing plant at our
Winchester facility. We currently expect that the production lines in process
will be completed and put into service in 2003 or 2004, that the plastic
processing plant in process will be completed and put into service in late 2002
or 2003, and that the idled production lines will be put back into service
during 2002 and 2003. At such time as the construction in process is completed,
we estimate our Winchester and Fernley facilities will be capable of producing a
total of approximately $260 million sales value of finished product annually.
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 $155 million and ten 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 more than 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 1998, we centralized
our research and development operations in the Trex Technical Center, a
30,000-square foot building adjacent to our Winchester manufacturing facilities.
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 Trex board from every other production bundle to
determine whether it meets the detailed, published criteria for code
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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.
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 2001, we consumed approximately $5.4 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 furnish.
Five suppliers accounted individually for more than 10% and
collectively for approximately 60% of our 2001 wood fiber purchases. We obtain
our wood fiber supplies at prices that are fixed annually at the then-current
market price under multi-year contracts with varying terms. 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 2001, we consumed approximately $26.3 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
increasingly 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 have developed a new source of poly material through our
participation in a joint venture that operates a new plant in El Ejido, Spain.
Our joint venture partners are a local Spanish company responsible for public
environmental programs in southern Spain and an Italian equipment manufacturer.
The plant is designed to recycle waste polyethylene generated primarily from
agricultural applications. The plant began operations during 2001 and delivered
approximately $1.3 million of plastic raw material to us during the year. Under
our joint venture agreement, we have the right to purchase up to 100% of the
plant's production.
To facilitate our poly processing operations, we are constructing our
own plastic processing plant on our manufacturing site in Winchester, Virginia.
We currently expect that this plant will be completed and put into service in
late 2002 or 2003.
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
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furniture, machinery, parts and soft goods industries. Suppliers of stretch film
save on waste disposal costs by selling us the bundled film.
No supplier sold 10% or more of the poly material we purchased in 2001.
We generally acquire poly material by purchase order at prices that are fixed
annually at the then-current market price.
Competition
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 95% of 2000 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.
Approximately 85% of the lumber used in wooden decks is pressure-
treated southern yellow pine or fir. 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
same porosity makes southern yellow pine susceptible to taking on moisture,
which causes the lumber to warp, crack, splinter and expel fasteners. The
chemical compound used to treat wood is typically chromated copper arsenate, or
CCA, an EPA-registered pesticide. In 2002, the Environmental Protection Agency
announced an agreement under which manufacturers will voluntarily phase out the
residential use of CCA by December 2003. Other chemical preservatives, which
could replace CCA, are more costly and have a limited history upon which to base
claims of efficiency and safety. 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 rotting, insect infestation, splintering and warping.
We estimate that wood/plastic composites accounted for approximately 4%
of 2000 decking sales, as measured by board feet of lumber. There are more than
25 manufacturers of wood/plastic composite lumber in addition to the company.
Many of these manufacturers participate in the decking market only on a limited
basis.
Trex also competes with decks made from 100% plastic lumber that
utilizes polyethylene, fiberglass and PVC as raw materials. Although there are
several companies in the United States that manufacture 100% plastic lumber, we
estimate this segment accounted for approximately 1% of 2000 decking sales as
measured by board feet of lumber. 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 and poor
slip resistance.
We estimate that Trex currently represents approximately 50% of the
non-wood segment of the decking market. Our principal competitors in that market
segment include Advanced Environmental Recycling Technologies, Inc., Crane
Plastics, Louisiana-Pacific Corporation, CertainTeed Corporation and U.S.
Plastic Lumber Corporation.
Our ability to compete depends, in part, on a number of factors outside
our control, including the ability of our competitors to develop new non-wood
decking alternatives that are competitive with Trex.
-9-
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.
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 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
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
We believe that Trex offers cost advantages when compared with other
types of decking materials. Although a contractor-installed Trex deck built in
2001 using a pressure-treated wood substructure generally cost 15% to 20% more
than a deck made entirely from pressure-treated wood, Trex eliminates most of
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 and
100% plastic decking products.
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 wastewater 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
-10-
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, Trex Wood Polymer, The Deck of a Lifetime, Easy Care Decking and No
Sealing No Splinters No Hassles trademarks by the U.S. Patent and Trademark
Office. 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 the buyout of Mobil's Composite Products Division by
TREX Company, LLC, 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 business (now known as Trex) and were
unenforceable. Mobil brought this action in response to statements by AERT that
Mobil infringed on AERT's patents. AERT counterclaimed against Mobil for alleged
infringement of two of 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 AERT's counterclaim and rendered a verdict for Mobil that each of the four
AERT patents was invalid and unenforceable. On an appeal of this judgment by
AERT, the U.S. Court of Appeals for the Federal Circuit affirmed the district
court's judgment that Mobil did not infringe the two AERT patents and that two
of the four AERT patents were invalid and unenforceable. The Federal Circuit
vacated the district court's judgment on the remaining two AERT patents on the
grounds that there was no case or controversy between the parties regarding
infringement of those patents. AERT filed a motion for a new trial, which was
denied. The Federal Circuit affirmed that decision in December 2000. AERT's
non-patent claims against Mobil were dismissed without prejudice in October
2001, concluding proceedings in the litigation.
In June 1998, the U.S. Patent and Trademark Office issued to AERT a
patent which is a continuation in part of one of the two patent applications
that resulted in the two patents held to be invalid and unenforceable in the
foregoing district court action.
See "Legal Proceedings" for information about a pending lawsuit
involving intellectual property to which the company is a party.
Employees
At December 31, 2001, we had 298 full-time employees, of whom 195 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.
Risk Factors
Our business is subject to a number of risks, including the following:
-11-
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 2000 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 in
general and Trex brand products in particular;
. the resistance of many consumers and contractors to change from
well-established wood products;
. the unique 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 material.
We derive all of our revenues from sales of Trex Wood-Polymer lumber.
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 currently
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 Wood-Polymer lumber, our lack of
product diversification could have a material adverse effect on our business,
operating results and financial condition.
We currently depend on three manufacturing facilities to meet the demand for
Trex.
We currently produce Trex in two manufacturing facilities in
Winchester, Virginia and a third manufacturing facility in 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 2001,
five suppliers accounted individually for more than 10% and collectively for
approximately 60% of our wood fiber purchases. 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 at the then-current market rates. 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
-12-
planned increases in capacity could have a material adverse effect on our
business, operating results and financial condition.
The demand for decking products is influenced by general economic conditions and
could be adversely affected by economic downturns.
The demand for decking products is correlated 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 production levels to meet
customer demand for Trex.
To support sales growth and improve customer service, we plan during
2002 to restart at least some of the idled production lines in our Winchester
and Fernley facilities. In increasing production capacity in our facilities, we
will face risks:
. recruiting and training additions to our workforce;
. restarting 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,
systems 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 $116.9 million in 2001 from $23.8 million
in 1996. The number of dealer outlets selling Trex has increased from
approximately 1,200 at December 31, 1996 to approximately 2,900 at December 31,
2001, and we expect further increases in the future. 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.
Past seasonal fluctuations in our sales and quarterly operating results may not
be a reliable indicator of future seasonal fluctuations.
Our historical seasonality may not be a reliable indicator of our
future seasonality. 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
-13-
reduce the level of home improvement and new construction activity. Income from
operations and net income tend to be lower in quarters with lower sales due to a
lower gross profit 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. For substantially all periods
through mid-2000, we allocated our product to our network of wholesale
distributors and retail dealers. We believe the allocation process caused our
distributors to stockpile inventories, which mitigated our inherent seasonality.
During the third quarter of 2000, our increased production capacity enabled us
to eliminate the allocation of product supply. Our customary lower net sales
levels in the fourth quarter were further depressed in 2000 and 2001 as our
customers reduced their stockpiled inventories before reordering from us.
We have significant capital invested in idle assets and construction in process.
As of December 31, 2001, our construction in process totaled
approximately $42.4 million, with an estimated cost to complete of approximately
$24.1 million. The construction in process consisted primarily of seven
production lines in various stages of completion at our Winchester and Fernley
manufacturing facilities and a plastic processing plant at our Winchester
facility. As of December 31, 2001, we had a total of nine production lines that
were temporarily idled during the third and fourth quarters of 2001 to conserve
working capital.
We will have to make significant capital expenditures after 2002 to increase our
manufacturing capacity.
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 made capital expenditures aggregating $121.5
million in 1999, 2000 and 2001, primarily to expand manufacturing capacity. We
estimate that our capital expenditures in 2002 will total approximately $5
million since we expect that increased utilization of our existing capacity will
be sufficient to meet the demand for Trex in 2002. We expect that our capital
requirements will be significantly higher in 2003 and subsequent years as we
complete our construction in process and then invest in additional production
lines and facilities to meet an anticipated increase in the demand for our
products. 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 expect that it will be
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.
We will have to generate substantial operating cash flow to meet our obligations
under our senior credit facility.
Our ability to make scheduled principal payments on our senior term
loan, borrow under our revolving credit facility and continue to comply with our
loan covenants will depend primarily on our success in generating substantial
operating cash flow. Our failure to comply with our loan covenants might cause
our lenders to accelerate our repayment obligations under the senior credit
facility and our other loans, which may be declared payable immediately based on
a credit facility default. We are required in 2002 to repay $25 million of $58
million of outstanding borrowings under our senior term loan. Our ability to
borrow under our $17 million revolving credit facility is tied to a borrowing
base that consists of specified receivables and inventory. To remain in
compliance with our senior credit facility covenants, we must maintain specified
financial ratios based on our levels of debt, capital and earnings
-14-
before interest, taxes, depreciation and amortization, or "EBITDA." The
following table summarizes these financial covenant ratios:
Company Ratio as of
Ratio Covenant December 31, 2001
----- -------- -----------------
Trailing twelve month EBITDA Minimum of $22.0 million during the period $25.7 million
from October 1, 2001 through December 31,
2001; minimum of $20.0 million during the
period from January 1, 2002 through March
31, 2002; minimum of $25.0 million thereafter
Debt to capital Maximum of 55.0% 51.2%
Debt to trailing twelve month Maximum of 4.0:1.0 through June 30, 2002; 3.3:1.0
EBITDA maximum of 3.0:1.0 thereafter
Covenants in our credit facility restrict our capacity to borrow and invest,
which could impair our ability to expand or finance our operations.
Our senior credit facility agreement imposes operating and financial
restrictions that limit our discretion on some business matters, which could
make it more difficult for us to expand, finance our operations or engage in
other business activities that may be in our interest. These restrictions limit
our ability to:
. incur additional debt;
. issue equity securities;
. pay dividends or make other distributions;
. make acquisitions, investments or other restricted payments;
. pledge or mortgage assets;
. sell assets; and
. consolidate, merge or sell all or substantially all of our
assets.
Our indebtedness may limit our flexibility in responding to important
business developments, which could place us at a competitive disadvantage. Our
indebtedness may:
. limit our ability to obtain necessary financing in the future;
. limit our ability to fund planned capital expenditures;
. require us to use a significant portion of our cash flow from
operations to pay our debt obligations rather than utilize our
cash flow for other purposes, such as funding working capital or
capital expenditures; and
. make us more vulnerable to a downturn in our business or in the
economy in general.
-15-
Our sales depend on a small number of significant distributors.
Our total net sales to our five largest wholesale distributors
accounted for approximately 78% of our net sales in 2001. 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.
We must compete with an increasing number of companies in the
wood-plastic composites segment of the decking market and with wood producers
that currently have more production capacity than is required to meet the demand
for decking products. Our failure to compete successfully in the decking market
could have a material adverse effect on our business, operating results and
financial condition. 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. 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 that 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 wastewater 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 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 owned approximately 55%
of our outstanding common stock as of December 31, 2001. These stockholders are
collectively 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.
-16-
Item 2. Properties
We lease our corporate headquarters in Winchester, Virginia, which
consists of approximately 36,000 square feet of office space, under a lease
which expires in July 2011.
We own approximately 74 contiguous acres of land in Winchester,
Virginia and the buildings on this land. These buildings include our original
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 contains approximately 150,000 square feet of space. 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. Our Fernley facility is located on a
site of approximately 37 acres, which includes outside open storage.
We lease a total of approximately 628,000 square feet of storage
warehouse space under leases with expiration dates from 2002 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, 2001, we operated approximately
80 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
2001, we spent a total of $32.0 million on capital expenditures, primarily for
process improvements, equipment and machinery to increase our production
capacity. We estimate that our capital expenditures in 2002 will total
approximately $5.0 million, most of which will be used to make process and
productivity improvements, to complete the plastic processing plant at our
Winchester, Virginia facility and to complete the installation of our enterprise
resource planning system.
Item 3. Legal Proceedings
Commencing on July 11, 2001, four purported class action lawsuits,
which we refer to collectively as the "securities class action," were filed in
the United States District Court for the Western District of Virginia naming as
defendants the company and Robert G. Matheny, the President and a director of
the company, Roger A. Wittenberg, the Executive Vice President of Material
Sourcing and International Operations and a director of the company, and Anthony
J. Cavanna, the Executive Vice President and Chief Financial Officer and a
director of the company. The plaintiffs in these lawsuits purport to represent a
class of purchasers of the company's securities between November 2, 2000 and
June 18, 2001. The complaints, one of which since has been dismissed
voluntarily, allege that the defendants violated Sections 10(b) and 20(a) of and
Rule 10b-5 under the Securities Exchange Act of 1934 by making false and
misleading public statements or omissions concerning the company's operating and
financial results, expectations, and business and by filing misleading reports
on Forms 10-Q and 10-K with the Securities and Exchange Commission. The
plaintiffs seek unspecified monetary damages together with any other relief
permitted by law, equity and federal statutory provisions identified in the
complaints. The cases have been consolidated and an amended consolidated
complaint, which added as a defendant Andrew U. Ferrari, the company's Executive
Vice President of Marketing and Business Development and a director of the
company, was filed on December 17, 2001. On or about January 31, 2002, the
defendants filed a motion to have the amended consolidated complaint dismissed
with prejudice. That motion is in the process of being briefed and, accordingly,
the defendants' time to answer
-17-
has not yet expired. Discovery is stayed pursuant to the automatic stay
provisions of the Private Securities Litigation Reform Act of 1995. The company
believes that the lawsuits are without merit and intends to vigorously defend
these lawsuits and any other similar lawsuits that may be served on the company.
On or about September 21, 2001, the company was named in a complaint
filed in the Circuit Court for the City of Winchester. The complaint, which we
refer to as the "Bennett complaint," purports to assert a derivative suit for
the benefit of the company against each of its directors. It alleges that during
the same period at issue in the securities class action and in violation of
applicable state and/or federal laws, the individual defendants caused the
company to issue materially misleading disclosures in order to inflate the
company's stock price and permit insider trading by two of the individual
defendants. The Bennett complaint further alleges that the individual defendants
thereby exposed the company to potential damages in connection with the
securities class action. The Bennett complaint seeks a constructive trust in
favor of the company over the profits received from the allegedly improper
insider sales, as well as an unspecified amount of damages allegedly sustained
by the company, together with attorneys' fees, costs and expenses. No damages or
other relief are sought from the company. On October 19, 2001, the Bennett
complaint was removed to the federal court in which the related securities class
action is pending. This lawsuit has been consolidated for pretrial purposes with
the securities class action and stayed pending resolution of the motion to
dismiss the securities class action.
On December 5, 2001, a plaintiff commenced an action against the
company in the United States District Court, Eastern District of Virginia,
Norfolk Division, alleging patent infringement against the company. The company
believes that this claim is without merit and intends to vigorously defend it.
The company denies any liability and has filed a counterclaim against the
plaintiff for declaratory judgment. The company is seeking a ruling that the
plaintiff's patent is invalid and unenforceable, and that the company does not
infringe the patent. The parties have filed initial pleadings in this case.
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 other 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 2001.
-18-
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
during 2000 and 2001:
2001 High Low
First Quarter ..................................... $31.20 $22.08
Second Quarter .................................... 30.92 16.20
Third Quarter ..................................... 25.89 14.64
Fourth Quarter .................................... 20.70 12.29
2000 High Low
First Quarter ..................................... $42.00 $24.25
Second Quarter .................................... 53.63 32.25
Third Quarter ..................................... 58.94 27.44
Fourth Quarter .................................... 46.25 20.31
As of December 31, 2001, there were approximately 205 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. The payment of cash dividends is not
permitted under the terms of our senior credit facility.
In November 2001, in connection with amendments to our senior credit
facility, we issued to the lender in a private offering a warrant exercisable
until January 31, 2005 to purchase up to 707,557 shares of our common stock at
$14.89 per share. For information about this common stock purchase warrant, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." The lender did not pay us any
separate consideration for the warrant. In connection with this offering to an
institutional accredited investor, we relied on the exemption from registration
under the Securities Act of 1933 provided by Section 4(2) of the Securities Act
and Regulation D thereunder.
-19-
Item 6. Selected Financial Data
The following table presents selected financial data as of December 31,
1997, 1998, 1999, 2000 and 2001 and for the five years ended December 31, 2001.
. The selected financial data as of December 31, 2000 and 2001 and
for each of the years in the three-year period ended December 31,
2001 are derived from our audited consolidated financial
statements appearing elsewhere in this report.
. The selected financial data as of December 31, 1997, 1998 and 1999
and for the years ended December 31, 1997 and 1998 are derived
from our financial statements, 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.
-20-
Year Ended December 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
(In thousands, except share and per share data)
Statement of Operations Data (1):
Net sales(2) ................................................ $ 34,137 $ 49,167 $ 77,570 $ 117,568 $ 116,860
Cost of sales(2) ............................................ 16,774 25,305 37,707 61,852 67,973
----------- ----------- ----------- ----------- -----------
Gross profit ................................................ 17,363 23,862 39,863 55,716 48,887
Selling, general and administrative expenses ................ 8,992 12,878 18,370 23,830 31,801
----------- ----------- ----------- ----------- -----------
Income from operations ...................................... 8,371 10,984 21,493 31,886 17,086
Interest expense, net ....................................... 2,777 2,526 1,476 902 3,850
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary item ........... 5,594 8,458 20,017 30,984 13,236
Income taxes ................................................ -- -- 7,281 11,682 4,186
----------- ----------- ----------- ----------- -----------
Income before extraordinary item ............................ 5,594 8,458 12,736 19,302 9,050
Extraordinary loss on the early extinguishment of
debt, net .............................................. -- -- (1,056) -- --
----------- ----------- ----------- ----------- -----------
Net income .................................................. $ 5,594 $ 8,458 $ 11,680 $ 19,302 $ 9,050
=========== =========== =========== =========== ===========
Basic earnings per share .................................... $ 0.55 $ 0.85 $ 0.90 $ 1.37 $ 0.64
=========== =========== =========== =========== ===========
Weighted average basic shares outstanding ................... 9,500,000 9,500,000 12,848,571 14,129,652 14,145,660
=========== =========== =========== =========== ===========
Diluted earnings per share .................................. $ 0.55 $ 0.85 $ 0.90 $ 1.36 $ 0.64
=========== =========== =========== =========== ===========
Weighted average diluted shares outstanding ................. 9,500,000 9,500,000 12,892,784 14,179,475 14,182,457
=========== =========== =========== =========== ===========
Historical income before income tax expense(3) .............. $ 5,594 $ 8,458 $ 20,017
Pro forma income tax expense(3) (unaudited) ................. 2,126 3,214 7,606
----------- ----------- -----------
Pro forma net income(3) (unaudited) ......................... $ 3,468 $ 5,244 $ 12,411
----------- ----------- -----------
Pro forma net income per share, basic(3) (unaudited) ........ $ 0.32 $ 0.55 $ 0.97
=========== =========== ===========
Historical income from operations(4) ........................ $ 8,371 $ 10,984 $ 21,493
Supplemental pro forma interest income (expense),
net(4) (unaudited) ..................................... 150 249 (691)
Supplemental pro forma income tax expense(4)(unaudited) ..... 3,238 4,269 7,905
----------- ----------- -----------
Supplemental pro forma net income(4) (unaudited) ............ $ 5,283 $ 6,964 $ 12,897
=========== =========== ===========
Supplemental pro forma weighted average basic shares
outstanding(4) ......................................... 14,115,450 14,115,450 14,117,297
=========== =========== ===========
Supplemental pro forma basic earnings per share(4) .......... $ 0.37 $ 0.49 $ 0.91
=========== =========== ===========
Cash Flow Data:
Cash flow provided by operating activities .................. $ 6,521 $ 12,228 $ 21,405 $ 15,407 $ 7,004
Cash flow (used in) investing activities .................... (3,252) (17,140) (29,369) (60,114) (31,972)
Cash flow (used in) from financing activities ............... (5,010) 4,112 6,764 44,707 24,968
Other Data (unaudited):
EBITDA(5) ................................................... $ 11,013 $ 14,098 $ 25,937 $ 38,755 $ 25,710
As of December 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ----------- ----------- ----------- -----------
(In thousands)
Balance Sheet Data (1):
Cash and cash equivalents ................................... $ 2,000 $ 1,200 $ -- $ -- $ --
Working capital ............................................. 4,156 (3,193) (4,181) 13,696 3,216
Total assets ................................................ 37,229 51,611 79,303 156,595 184,637
Total debt .................................................. 26,250 33,063 16,937 61,399 86,094
Total members'/stockholders' equity. ........................ 7,534 13,291 49,401 69,041 81,985
-21-
(1) 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. 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.
(2) 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 year
ended December 31, 1997 is not readily available and, accordingly, these
amounts have not been reclassified to conform with this consensus.
(3) 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 (1) above.
(4) Supplemental pro forma interest income (expense), income taxes and net
income (a) exclude interest expense of $2.9 million in 1997, $2.8 million
in 1998 and $.8 million 1999 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.
(5) Consists of earnings before interest, taxes, 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 as a measure of operating performance or to cash
provided by operating activities as a measure of liquidity. This measure of
EBITDA may not be comparable to similarly titled measures reported by other
companies.
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains 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. All statements regarding the company's expected financial
position and operating results, its business strategy and its financing plans
are forward-looking statements. These statements are subject to risks and
uncertainties that could cause the company's actual results to differ materially
from its expectations. Such risks and uncertainties include those discussed in
this report under "Business--Risk Factors."
Overview
The company is the nation's largest manufacturer of non-wood decking
alternative products, which are marketed under the brand name Trex(R). Trex
Wood-Polymer(R) lumber is a wood/plastic composite which is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene.
Trex is used primarily for residential and commercial decking. Trex also has
non-decking product applications, including blocks to cover and protect concrete
floors in heavy industrial plants, applications for parks and recreational
areas, floating and fixed docks and other marine applications, and landscape
edging.
Net Sales. Net sales consist of sales and freight, net of returns and
discounts. The level of net sales is principally affected by sales volume and
the prices paid for Trex. The company's branding and product differentiation
strategy enables the company both to command premium prices and to maintain
price stability for Trex. The company's prices for Trex over the last three
years have increased at a compound annual growth rate of approximately 6.5%.
The company experienced growth in net sales each year from 1992, when
it began operations, through 2000. The net sales increase resulted primarily
from a growth in sales volume. From time to time since 1992, customer demand for
Trex exceeded the company's manufacturing capacity. The constraints of the
company's capacity during these periods limited the rate of the company's net
sales growth. Because of these constraints, the company had to allocate its
product supply to its network of wholesale distributors and retail dealers. In
response to this allocation practice, the company's distributors and dealers
generally stockpiled their inventories of Trex to meet anticipated customer
demand.
The company's net sales in 2001 decreased slightly from the net sales
in 2000. In 1999, 2000 and 2001, the company made capital expenditures totaling
$121.5 million, principally to add production lines and increase the size of its
facilities to accommodate the new lines. The resulting production capacity
increases enabled the company, beginning in the third quarter of 2000, to
eliminate its historical allocation of product supply. As a result of the
termination of the company's allocation practice in 2000, and adverse economic
conditions in 2001, the company's distributors and dealers generally reduced
their inventories of Trex from levels built up as a result of stockpiling in
prior years. Because distributors and dealers were able to meet much of the
customer demand for Trex from their existing inventories, the company
experienced a decrease in new product orders compared to the prior year.
In response to these developments in 2001, the company took a number of
actions to reduce its finished product inventories and conserve working capital.
The company curtailed its production capacity by temporarily suspending
operation of nine of its production lines. The company ended the year with six
production lines in operation, resulting in a capacity utilization of
approximately 40%. In addition, the company suspended construction of an
additional seven production lines at various stages of completion and suspended
construction of a new plastic processing plant. In connection with the
curtailment of
-23-
production capacity, the company terminated 89 employees in the second half of
2001, including 81 employees in its manufacturing operations.
Cost of Sales. 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 19.4% annually. Almost all of the increases were
attributable to higher costs of polyethylene and waste wood fiber, including
shipping costs. Production line rates have increased more than 200% since 1992.
Selling, General and Administrative Expenses. 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.
Interest and Amortization Expense. In connection with its acquisition
of Mobil's Composite Products Division in August 1996, the company incurred
indebtedness 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. Through 2001, the company amortized its goodwill over a 15-year period
in an amount of approximately $0.7 million per year. In accordance with
Financial Accounting Standards Board Statement 142, which the company will adopt
effective January 1, 2002, the company will cease the amortization of goodwill
and does not anticipate any goodwill impairment charges.
Income Taxes. 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 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.
Critical Accounting Policies, Estimates and Risks and Uncertainties
The company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require the company to make estimates and assumptions. The company
believes that of its significant accounting policies described in Note 2 to the
company's consolidated financial statements included elsewhere in this report,
the following may involve a higher degree of judgment and complexity.
-24-
Inventories. The company's inventories have increased from $23.0
million as of December 31, 2000 to $33.2 million as of December 31, 2001. The
company believes that its quantity and mix of inventory will be saleable in the
ordinary course of business and, accordingly, has not established any reserves
for slow moving products or obsolescence. The company accounts for its
inventories at the lower of cost (last-in, first-out, or "LIFO") or market
value. The company anticipates that a significant drop in inventory levels will
occur in 2002 as expected shipments of Trex outpace expected production levels
due to the temporary idling of some of the company's production lines. At
December 31, 2001, the excess of the replacement cost of inventory over the LIFO
value of inventory was approximately $0.9 million. The effect of any future
reductions in inventory levels on future operating results cannot be estimated
at this time.
Property, Plant and Equipment. The company had significant idled
assets and construction in process as of December 31, 2001. As of December 31,
2001, the company's construction in process totaled approximately $42.4 million.
The construction in process consisted primarily of seven production lines in
various stages of completion at the company's Winchester and Fernley
manufacturing facilities and a plastic processing plant. As of December 31, 2001
the company had a total of nine production lines that were idled during the
third and fourth quarters of 2001 to conserve working capital. The company
currently expects that the production lines in process will be completed and put
into service in 2003 or 2004, that the plastic processing plant in process will
be completed and put into service in late 2002 or 2003, and that the idled
production lines will be put back into service during 2002 or 2003. Pursuant to
Financial Accounting Standards Board Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the company has compared the carrying values of its idle equipment and
construction in process against the expected undiscounted cash flows relating to
those assets and has determined that no impairment exists as of December 31,
2001. The significant assumptions inherent in the company's estimate include
increases in sales volumes and maintenance of gross margins that are consistent
with historical levels. Actual results could differ from those estimates. In
such event, the company could incur impairment charges which could adversely
affect the company's operating results and financial condition.
Debt and Debt Covenants. The company's ability to make scheduled
principal payments on its senior term loan, borrow under its revolving credit
facility and continue to comply with its loan covenants will depend primarily on
its success in generating substantial operating cash flow. The company is
required in 2002 to repay $25.0 million of $58.0 million of outstanding
borrowings under its senior term loan. The company's ability to borrow under its
$17.0 million revolving credit facility is tied to a borrowing base that
consists of specified receivables and inventory. To remain in compliance with
its senior credit facility covenants, the company must maintain specified
financial ratios based on its levels of debt, capital and EBITDA. The company
was in compliance with all of its loan covenants as of December 31, 2001 and,
based on its estimates of future sales, net income, cash flow from operations
and capital expenditures, the company expects that it will remain in compliance
with its loan covenants. For a discussion of risks of the company's business
that could affect its compliance with loan covenants, see "Liquidity and Capital
Resources."
Contingencies. The company is subject to lawsuits and other claims
related to securities matters, patent infringement, product liability and other
matters. The company is required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is made after an analysis of each lawsuit and claim. The required
reserves may change in the future as a result of new developments in any such
matter or changes in approach, such as a change in settlement strategy in
dealing with a particular matter.
-25-
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,
---------------------------
1999 2000 2001
------ ------ ------
Net sales .................................................... 100.0% 100.0% 100.0%
Cost of sales ................................................ 48.6 52.6 58.2
----- ----- -----
Gross profit ................................................. 51.4 47.4 41.8
Selling, general and administrative expenses ................. 23.7 20.3 27.2
----- ----- -----
Income from operations ....................................... 27.7 27.1 14.6
Interest expense, net ........................................ 1.9 0.8 3.3
----- ----- -----
Income before taxes and extraordinary item ................... 25.8 26.4 11.3
Income taxes(1) .............................................. 9.4 9.9 3.6
----- ----- -----
Income before extraordinary item ............................. 16.4 16.4 7.7
Extraordinary loss, net of taxes ............................. 1.4 -- --
----- ----- -----
Net income ................................................... 15.1% 16.4% 7.7%
===== ===== =====
____________________
(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.
2001 Compared to 2000
Net Sales. Net sales decreased 0.6% to $116.9 million in 2001 from
$117.6 million in 2000, because of a decrease in sales volume. The decrease in
sales volume resulted primarily from a reduction in new product orders from the
company's distributors and dealers following the company's termination of its
product allocation practice in the third quarter of 2000, as described above
under "Overview." After the termination of product allocation, many distributors
and dealers met a significant portion of customer demand for Trex by reducing
their existing inventories, which they had stockpiled in prior periods. The
decrease in sales volume in 2001 was partially offset by a price increase of
approximately 6.8%. The number of dealer outlets increased from approximately
2,600 at December 31, 2000 to approximately 2,900 at December 31, 2001.
Cost of Sales. Cost of sales increased 9.9% to $68.0 million in 2001
from $61.9 million in 2000. The increase was primarily attributable to higher
manufacturing overhead costs, including utilities, warehousing and depreciation
costs. Cost of sales as a percentage of net sales increased to 58.2% in 2001
from 52.6% in 2000. The increase principally reflected a higher absolute level
of manufacturing overhead costs and an associated decrease of approximately 11%
in the amount of product manufactured from the 2000 level as a result of the
curtailment of production capacity described above under "Overview." The effects
of higher overhead costs and reduced production were partially offset by
operating efficiencies from improved production line rates.
Gross Profit. Gross profit decreased 12.3% to $48.9 million in 2001
from $55.7 million in 2000, reflecting the lower sales volume and higher
manufacturing costs in 2001. Gross profit as a percentage of net sales decreased
to 41.8% in 2001 from 47.4% in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 33.4% to $31.8 million in 2001 from $23.8
million in 2000. The increase was partially
-26-
attributable to higher branding costs, including expenses of promotion,
advertising, public relations, sales literature, trade shows and cooperative
advertising, which increased 24.0% to $10.0 million in 2001 from $8.1 million in
2000. The higher selling, general and administrative expenses also reflected an
increase in corporate personnel and the related hiring and relocation costs,
costs of upgrading accounting and other systems to support growth, an increase
in professional fees relating to the modification of terms of certain of the
company's indebtedness as of September 30, 2001, and an increase in office rent
relating to the company's new headquarters. The effect of the foregoing
increases was partially offset by the elimination of management bonuses and
profit sharing. Selling, general and administrative expenses as a percentage of
net sales increased to 27.2% in 2001 from 20.3% in 2000.
Interest Expense. Net interest expense increased to $3.9 million in
2001 from $0.9 million in 2000. The increase primarily resulted from higher
average debt balances incurred since 2000 to finance the increases in the
company's fixed assets and inventories and from the cessation of interest
capitalization during the third quarter of 2001. As of December 31, 2001, the
company's capital projects in process totaled approximately $42.4 million. The
company has ceased the capitalization of interest on these projects until they
are resumed. The increase in net interest expense also reflected the non-cash
amortization into interest expense of approximately $0.7 million of debt
discount in connection with the modification of the company's senior credit
facility as of September 30, 2001.
Provision for Income Taxes. Income tax expense decreased 64.2% to $4.2
million in 2001 from $11.7 million in 2000. The decrease was primarily
attributable to a decrease in pretax income, which decreased 57.3% to $13.2
million in 2001 from $31.0 million in 2000. A lower level of federal taxable
income and decreases in state income taxes due to changes in apportionment of
income to the states in which the company conducts business contributed to a
lower combined effective rate of approximately 31.6% in 2001 compared to
approximately 37.7% in 2000. The company believes that its effective tax rate
for subsequent periods should approximate 38%.
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
-27-
$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.
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 the period April 8, 1999 through
December 31, 2000, 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.
Liquidity and Capital Resources
The company has financed its operations and growth primarily with cash
flow from operations, borrowings under its credit facility and mortgage loans,
operating leases and normal trade credit terms.
The company's cash flow from operating activities was $21.4 million in
1999, $15.4 million in 2000 and $7.0 million in 2001. Lower net income, an
increase in inventories and a reduction in trade accounts payable accounted for
the significant decrease in cash flows in 2001.
The company's total assets increased from $156.6 million at December
31, 2000 to $184.6 million at December 31, 2001. A substantial portion of this
increase was attributable to a net increase of $23.6 million in property, plant
and equipment. During 2001, the company completed construction of a second
manufacturing building and continued construction of a plastic processing plant
at its Winchester facility. The company also continued construction of
production lines at both its Winchester and Fernley facilities. During the third
quarter of 2001, the company temporarily halted substantially all of its capital
projects to improve management of its investments in inventory and to conserve
working capital. As of December 31, 2001, the company's capital projects in
process totaled approximately $42.4 million. Inventories increased from $23.0
million at December 31, 2000 to $33.2 million at December 31, 2001, as the
company's increased production capacity exceeded demand during 2001. Receivables
decreased $8.1 million, primarily because the company did not repeat sales
promotions offering extended terms at the end of 2001 that it had provided at
the end of 2000.
On November 13, 2001, the company and the lender amended the terms of
the company's senior bank credit facility, primarily to increase the maximum
amount of borrowings available to the company, restructure the form of
borrowings, and modify the term of the facility. The facility includes a
revolving credit facility and a term loan facility. The terms of the revised
credit agreement provide for borrowings under the revolving credit facility of
up to $17.0 million for working capital and general corporate purposes through
January 31, 2003. Amounts drawn under the revolving credit agreement bear
interest at
-28-
an annual rate equal to LIBOR plus 3.00% through June 30, 2002 and LIBOR plus
4.00% thereafter, and are subject to a borrowing base consisting of accounts
receivable and finished goods inventories. The revised agreement also provides
for a $58.0 million term loan, with scheduled principal reductions of $5.0
million on each of March 1, April 1, May 1, June 1 and July 1, 2002. The
remaining principal balance and accrued interest on the term loan will be
payable in full on January 31, 2003. Amounts drawn under the term loan up to
$33.0 million bear interest at an annual rate equal to LIBOR plus 3.00% through
June 30, 2002 and LIBOR plus 4.00% thereafter. Amounts drawn under the term loan
in excess of $33.0 million bear interest at an annual rate equal to LIBOR plus
5.00%. In connection with the revised agreement, the maturity dates of the
company's real estate mortgage loans with this lender were modified and the
interest rates on these loans were increased. The revised agreement, which was
effective as of September 30, 2001, contains restrictive and financial
covenants, and borrowings under the agreement are secured by a lien on
substantially all of the company's assets. The company intends to use borrowings
expected to be available under the two credit facilities primarily to finance
working capital and construction in process.
In connection with the foregoing revisions to the senior credit
agreement, the company issued the lender a warrant exercisable until January 31,
2005 to purchase up to 707,557 shares of the company's common stock at $14.89
per share, the then-current fair market value of the company's common stock. The
warrant relating to one-half of those shares is not exercisable until June 30,
2002 and will only become exercisable if the company does not repay the
revolving credit facility and term loan and an outstanding letter of credit on
or before such date.
Before the foregoing revisions to the senior credit agreement, the
company was not in compliance with certain requirements of the facility,
including covenants that require the company to maintain minimum leverage and
capitalization ratios and to reduce its outstanding borrowings under the credit
facility to $50.0 million as of a specified date. As a result of such
non-compliance, the company was also in violation of certain of its mortgage
loans with a total balance of approximately $9.9 million as of September 30,
2001. The revision of the credit agreement eliminated such non-compliance as of
September 30, 2001 under both the credit facility and such mortgage loans.
The company financed its purchase of its Winchester, Virginia facility
in June 1998 with a ten-year term loan of $3.8 million. Pursuant to revised
terms adopted in connection with the foregoing senior credit agreement
amendments, the term loan will be payable in full on January 31, 2003 or, if
earlier, on the date on which the term loan and revolving credit facility are
repaid, subject to an extension of such maturity dates until January 31, 2005 if
the company meets certain conditions. Under an interest rate swap agreement, the
company pays interest on this loan at an annual rate of 9.12% through June 30,
2002 and 10.12% thereafter.
The company financed its purchase of the Trex Technical Center in
November 1998 in part with the proceeds of a ten-year term loan of $1.0 million.
Pursuant to revised terms adopted in connection with the foregoing senior credit
agreement amendments, the term loan will payable in full on January 31, 2003 or,
if earlier, on the date on which the term loan and revolving credit facility are
repaid, subject to an extension of such maturity dates until January 31, 2005 if
the company meets certain conditions. Under an interest rate swap agreement, the
company pays interest on this loan at an annual rate of 8.80% through June 30,
2002 and 9.80% thereafter.
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 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
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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 original 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. Pursuant to revised terms adopted in connection with the foregoing
senior credit agreement amendments, the term loan will be payable in full on
January 31, 2003 or, if earlier, on the date on which the term loan and
revolving credit facility are repaid, subject to an extension of such maturity
dates until January 31, 2005 if the company meets certain conditions. Under an
interest rate swap agreement, the company pays interest on this loan at an
annual rate of 10.10% through June 30, 2002 and 11.10% thereafter.
On October 3, 2000, the company purchased an additional 11.83 acres of
land adjacent to its original Winchester, Virginia manufacturing facility. The
company financed the purchase through borrowings under its revolving credit
facility.
The following table sets forth the company's contractual cash
obligations at December 31, 2001:
Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Long-term debt .............. $73,941,000 $25,759,000 $42,643,000 $ 349,000 $ 378,000 $ 409,000 $4,403,000
Operating leases ............ 20,225,000 3,521,000 2,708,000 2,113,000 1,767,000 1,592,000 8,524,000
----------- ----------- ----------- ---------- ---------- ---------- ----------
Total contractual cash
obligations ............ $94,166,000 $29,280,000 $45,351,000 $2,462,000 $2,145,000 $2,001,000 $12,927,000
=========== =========== =========== ========== ========== ========== ===========
For information about these contractual cash obligations, see Notes 6
and 8 to the company's consolidated financial statements appearing elsewhere in
this report.
The following table sets forth the company's other commercial
commitments at December 31, 2001:
Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Revolving credit facility ... $ 12,153,000 $ -- $12,153,000 -- -- -- --
Letters of credit ........... 1,429,000 1,429,000 -- -- -- -- --
------------ ---------- ----------- ---------- ---------- ---------- -----------
Total commercial
commitments ............ $ 13,582,000 $1,429,000 $12,153,000 -- -- -- --
============ ========== =========== ========== ========== ========== ===========
As of December 31, 2001, the company's long-term indebtedness,
excluding the revolving credit and term loan facilities, was $16.0 million, with
a weighted average interest rate of 9.0% per annum. As of the same date, the
company's borrowings under its revolving credit and term loan facilities totaled
$70.1 million and had a weighted average interest rate of 5.6% per annum.
Effective interest rates are substantially higher than these rates due to the
non-cash amortization into interest expense of the debt discount associated with
the issuance of the warrant described above.
The company's sources of short-term funding consist of its $17.0
million revolving credit facility and $58.0 million term loan facility. The
company's ability to borrow under the revolving credit facility is tied to a
borrowing base that consists of certain receivables and inventories. As of
December 31, 2001, the company's borrowing base was $18.3 million, and $12.2
million was outstanding under the revolving credit facility. As discussed above,
the $58.0 million term loan facility, of which $58.0 million was
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outstanding as of December 31, 2001, has scheduled principal payments of $5.0
million on each of March 1, April 1, May 1, June 1 and July 1 of 2002.
To remain in compliance with its senior credit facility covenants, the
company must maintain minimum financial ratios based on its debt, capital and
EBITDA. The following table summarizes these financial covenant ratios:
Company Ratio as of
Ratio Covenant December 31, 2001
- ----- -------- -----------------
Trailing twelve month EBITDA Minimum of $22.0 million during the period from $25.7 million
October 1, 2001 through December 31,
2001; minimum of $20.0 million during
the period from January 1, 2002 through
March 31, 2002; minimum of $25.0
million thereafter
Debt to capital Maximum of 55.0% 51.2%
Debt to trailing twelve month Maximum of 4.0:1.0 through June 30, 2002; 3.3:1.0
EBITDA maximum of 3.0:1.0 thereafter
The company's ability to pay down its term loan, borrow under its
revolving credit facility and maintain compliance with the related financial
covenants is dependent primarily on its ability to generate substantial cash
flow from operations. The generation of operating cash flow is subject to the
risks of the company's business, some of which are discussed in this report
under "Business--Risk Factors." These risks include the following:
. fluctuations in the demand for Trex based on general economic
conditions;
. changes in the availability and prices of raw materials needed to
produce Trex;
. the performance of the company's most significant distributors;
and
. the company's ability to compete successfully in the increasingly
competitive decking market.
The company made capital expenditures in 1999, 2000 and 2001 totaling
$121.5 million, primarily to expand manufacturing capacity. The company
currently estimates that its capital requirements in 2002 will total
approximately $5.0 million, since the company expects that increased utilization
of its existing capacity will be sufficient to meet the demand for Trex in 2002.
The company will use its capital expenditures in 2002 primarily for process and
productivity improvements, to complete a plastic processing plant at its
Winchester, Virginia facility, and to complete the installation of its
enterprise resource planning system. The company expects that its capital
requirements will be significantly higher in 2003 and subsequent years as the
company completes its construction in process and then invests in additional
production lines and facilities to meet an anticipated increase in the demand
for Trex.
The company believes that cash flow from operations and borrowings
expected to be available under the company's existing revolving credit facility
will provide sufficient funds to enable the company to fund its planned capital
expenditures, make scheduled principal payments under its term loan, meet its
other cash requirements and maintain compliance with terms of its borrowing
agreements for at least the next 12 months. Thereafter, significant capital
expenditures may be required to provide increased capacity to meet the company's
expected growth in demand for its products. Of its aggregate capital
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expenditures of $121.5 million for the three-year period ended December 31,
2001, the company funded $43.8 million from cash flow from operations and $77.7
million from proceeds of financing activities, including net proceeds of the
company's initial public offering and borrowings under various loan and credit
facilities. The company currently expects that it will fund its future capital
expenditures primarily from financing activities, and therefore expects that its
existing credit facility will have to be refinanced or expanded for the company
to fund a majority, if not all, of its expected significant capital expenditures
in 2003 and subsequent years. 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 1999, 2000 or 2001.
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 the interest rates on its
floating-rate mortgage debt, all of which is based on LIBOR. At December 31,
2001, the company had effectively capped its interest rate exposure at
approximately 9.0% on approximately $16.0 million of its floating-rate debt. A
change of one percentage point in the interest rates applicable to the company's
$70.1 million of variable-rate debt not subject to an interest-rate swap
agreement at December 31, 2001 would result in a fluctuation of approximately
$0.7 million in the company's annual interest expense. 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-22.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
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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 ................ 56 President, Director
Anthony J. Cavanna ............... 62 Executive Vice President and Chief Financial Officer, Director
Andrew U. Ferrari ................ 55 Executive Vice President of Marketing and Business Development,
Director
Roger A. Wittenberg .............. 53 Executive Vice President of Material Sourcing and International
Operations, Director
Harold F. Monahan ................ 56 Senior Vice President and General Manager
William H. Martin, III ........... 71 Director
William F. Andrews ............... 70 Director
Patricia B. Robinson ............. 49 Director
Robert G. Matheny has served as a director and as President of the
company since September 1998 and as President of TREX Company, LLC since August
1996. From July 1992 to August 1996, he was 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, Mr. Matheny served as 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 a director and as Executive Vice
President and Chief Financial Officer of the company since September 1998 and as
Executive Vice President and Chief Financial Officer of TREX Company, LLC since
August 1996. From July 1994 to August 1996, he was a Group Vice President of
Mobil Chemical. From July 1992 to July 1994, he was 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 General Manager of its Films Division
Worldwide. From November 1981 to November 1986, he was President and General
Manager of Mobil Plastics Europe. From January 1981 to November 1981, Mr.
Cavanna was 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 a director of the company since
September 1998. He has served as Executive Vice President of Marketing and
Business Development of the company and TREX Company, LLC since October 2001. He
served as Executive Vice President of Sales and Marketing of the company from
September 1998 to October 2001 and as Executive Vice President of Sales and
Marketing of TREX Company, LLC from August 1996 to October 2001. From April 1992
to August 1996, he was Director of Sales and Marketing of the Composite Products
Division of Mobil Chemical. From February 1989 to April 1992, Mr. Ferrari served
as New Business Manager for Mobil Chemical. From January 1984 to February 1989,
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.
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Roger A. Wittenberg has served as a director of the company since
September 1998. He has served as Executive Vice President of Material Sourcing
and International Operations of the company and TREX Company, LLC since March
2002. Mr. Wittenberg served as Executive Vice President of Technical Operations
& Sourcing of the company from February 2001 to March 2002 and as Executive Vice
President of Technical Operations & Sourcing of TREX Company, LLC from October
2001 to March 2002. He served as Executive Vice President of Technical
Operations of the company from September 1998 to February 2001 and Executive
Vice President of Technical Operations of Trex Company, LLC from August 1996 to
October 2001. 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.
Harold F. Monahan has served as the Senior Vice President and General
Manager of the company and TREX Company, LLC since March 2002. From October 2000
to March 2002, Mr. Monahan served as Senior Vice President for Manufacturing and
Distribution of the company and TREX Company, LLC. 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 Manger of Domestic U.S. Operations, and Surface
Transportations Manager for Domestic U.S. Operations. Mr. Monahan received a
B.S. 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 Directors of
Martin Industries, Inc., a manufacturer and producer of 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 manufacturer of components for electric utilities. 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
Corrections Corporation of America since August 2000 and as Chairman of the
Board of Directors of Katy Industries, Inc. since October 2001. He was named
Chairman of the Board of Directors of Allied Aerospace in January 2002. Mr.
Andrews has been a Principal of Kohlberg & Company, a venture capital firm,
since 1994. From 1995 to 2001, Mr. Andrews served as Chairman of the Board of
Directors of Scovill Fasteners Inc., a designer, manufacturer and distributor of
apparel fasteners. From 1998 to 2001, he served as Chairman of the Board of
Directors of Northwestern Steel and Wire Company, a manufacturer of structural
beams, rod and wire. From 1995 to 1998, he served as Chairman of
Schrader-Bridgeport International, Inc., a manufacturer of tire valves and
pressure control devices. From 1981 to 1986, Mr. Andrews served as Chairman,
President and Chief Executive Officer of Scovill Manufacturing Co., where he
worked for over 28 years. From 1992 to 1994, 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 Chairman, President
and Chief Executive Officer of Singer Sewing Company. Mr. Andrews also serves as
a director of Black Box Corporation and Navistar International Corporation. Mr.
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Andrews received a B.S. degree in Business Administration from the University of
Maryland and an M.B.A. degree in Marketing from Seton Hall University.
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 2002 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 2002 annual
meeting of stockholders.
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 2002 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 2002 annual
meeting of stockholders.
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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-22 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, 2000 and 2001
Consolidated Statements of Operations for the three years ended December 31, 2001
Consolidated Statements of Changes in Members'/Stockholders' Equity and
Comprehensive Income for the three years ended December 31, 2001
Consolidated Statements of Cash Flows for the three years ended December 31, 2001
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 as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and incorporated herein by reference.
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 Form of Non-Incentive Stock Option Agreement under 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. 333-83998) and
incorporated herein by reference.
-36-
10.4 Trex Company, Inc. Amended and Restated 1999 Incentive Plan for
Outside Directors. Filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 and
incorporated herein by reference.
10.5 Form of Distributor Agreement of TREX Company, LLC. Filed herewith.
10.6 Deed of Lease, dated June 15, 2000, between TREX Company, LLC and
Space, LLC. Filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 and incorporated
herein by reference.
10.7 Second Amended and Restated Credit Agreement, dated as of September
30, 2001, among TREX Company, LLC, Trex Company, Inc., and 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, 2001 and
incorporated herein by reference.
10.8 Security Agreement, dated as of September 30, 2001, among TREX
Company, LLC, Trex Company, Inc., and First Union National Bank. Filed
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
10.9 Deed of Trust, Security Agreement and Assignment of Leases and Rents,
dated as of September 30, 2001, granted by TREX Company, LLC to
Western Title Company, Inc. securing First Union National Bank. Filed
as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
10.10 Modified Deed of Trust, Security Agreement and Assignment of Leases
and Rents, dated as of September 30, 2001, granted by TREX Company,
LLC to TRSTE, Inc. securing First Union National Bank. Filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
10.11 $3,780,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001 and incorporated herein by reference.
10.12 $1,035,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.13 $5,940,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.14 $58,000,000 Promissory Note, dated September 30, 2001, made by TREX
Company, LLC and Trex Company, Inc. payable to First Union National
Bank. Filed as Exhibit 10.8 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference.
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10.15 Registration Rights Agreement, dated as of November 13, 2001, among
Trex Company, Inc., First Union National Bank and the other Holders
from time to time thereafter. Filed as Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001 and incorporated herein by reference.
10.16 Trex Company, Inc. Common Stock Purchase Warrant, dated November 13,
2001, issued to First Union National Bank. Filed as Exhibit 10.10 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001 and incorporated herein by reference.
21 Subsidiaries of the Company. Filed herewith.
23 Consent of Ernst & Young LLP, Independent Auditors. Filed herewith.
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TREX COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ................................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets-December 31, 2000 and 2001 ........................................ F-3
Consolidated Statements of Operations for the three years ended December 31, 2001 ............. F-4
Consolidated Statements of Changes in Members'/Stockholders' Equity and
Comprehensive Income for the three years ended December 31, 2001 ........................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 2001 ............. 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, 2000 and 2001, and the related
consolidated statements of operations, changes in members'/stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2001. 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, 2000 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia,
February 8, 2002
F-2
TREX COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents ..................................................... $ -- $ --
Trade accounts receivable ..................................................... 10,582,000 2,507,000
Inventories ................................................................... 23,017,000 33,168,000
Prepaid expenses and other assets ............................................. 689,000 1,306,000
Income taxes receivable ....................................................... -- 1,137,000
Deferred income taxes ......................................................... 478,000 1,946,000
------------ ------------
Total current assets ..................................................... 34,766,000 40,064,000
------------ ------------
Property, plant and equipment, net ................................................. 113,635,000 137,223,000
Intangible assets, net ............................................................. 7,544,000 6,837,000
Other .............................................................................. 650,000 513,000
------------ ------------
Total Assets ............................................................. $156,595,000 $184,637,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable ........................................................ $ 17,082,000 $ 9,495,000
Accrued expenses .............................................................. 2,053,000 630,000
Income taxes payable .......................................................... 574,000 --
Other current liabilities ..................................................... 664,000 964,000
Current portion of long-term debt ............................................. 697,000 25,759,000
------------ ------------
Total current liabilities ................................................ 21,070,000 36,848,000
Deferred income taxes .............................................................. 5,782,000 7,800,000
Line of credit ..................................................................... 44,748,000 12,153,000
Debt-related derivative ............................................................ -- 1,381,000
Long-term debt ..................................................................... 15,954,000 48,182,000
Debt discount ...................................................................... -- (3,712,000)
------------ ------------
Total Liabilities ........................................................ 87,554,000 102,652,000
------------ ------------
Commitments and contingencies
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; 14,135,060 and
14,155,083 shares issued and outstanding at December 31, 2000 and
2001, respectively ......................................................... 141,000 142,000
Additional capital ............................................................ 41,330,000 46,079,000
Retained earnings ............................................................. 27,570,000 36,620,000
Accumulated other comprehensive net loss ...................................... -- (856,000)
------------ ------------
Total Stockholders' Equity ............................................... 69,041,000 81,985,000
------------ ------------
Total Liabilities and Stockholders' Equity. .............................. $156,595,000 $184,637,000
============ ============
See accompanying notes to financial statements.
F-3
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------
1999 2000 2001
---- ---- ----
Net sales .......................................................... $77,570,000 $117,568,000 $116,860,000
Cost of sales ...................................................... 37,707,000 61,852,000 67,973,000
----------- ------------ ------------
Gross profit. ...................................................... 39,863,000 55,716,000 48,887,000
Selling, general, and administrative expenses ...................... 18,370,000 23,830,000 31,801,000
----------- ------------ ------------
Income from operations ............................................. 21,493,000 31,886,000 17,086,000
Interest income .................................................... 83,000 5,000 2,000
Interest expense ................................................... (1,559,000) (907,000) (3,852,000)
----------- ------------ ------------
Income before income taxes and extraordinary item .................. 20,017,000 30,984,000 13,236,000
Income taxes ....................................................... 7,281,000 11,682,000 4,186,000
----------- ------------ ------------
Income before extraordinary item ................................... 12,736,000 19,302,000 9,050,000
Extraordinary loss on the early extinguishment of debt, net of
$704,000 of income tax benefit. ................................. (1,056,000) -- --
----------- ------------ ------------
Net income. ........................................................ $11,680,000 $ 19,302,000 $ 9,050,000
=========== ============ ============
Basic earnings per common share:
Income before extraordinary item .............................. $ 0.98 $ 1.37 $ 0.64
Extraordinary item ............................................ (0.08) -- --
----------- ------------ ------------
Net income .................................................... $ 0.90 $ 1.37 $ 0.64
=========== ============ ============
Weighted average basic shares outstanding .......................... 12,848,571 14,129,652 14,145,660
=========== ============ ============
Diluted earnings per common share:
Income before extraordinary item .............................. $ 0.98 $ 1.36 $ 0.64
Extraordinary item ............................................ (0.08) -- --
----------- ------------ ------------
Net income .................................................... $ 0.90 $ 1.36 $ 0.64
=========== ============ ============
Weighted average diluted shares outstanding ........................ 12,892,784 14,179,475 14,182,457
=========== ============ ============
Pro Forma Data (unaudited, see Note 12):
Historical income before taxes and extraordinary item ......... $20,017,000
Pro forma income taxes ........................................ (7,606,000)
-----------
Pro forma net income .......................................... $12,411,000
===========
Pro forma basic earnings per share ............................ $ 0.97
===========
Pro forma weighted average basic common shares
outstanding ................................................ 12,848,571
===========
Pro forma diluted earnings per share .......................... $ 0.96
===========
Pro forma weighted average diluted common shares
outstanding ................................................ 12,892,784
===========
See accompanying notes to financial statements.
F-4
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/ STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
For The Three Years Ended December 31, 2001
Accumulated Undistributed
Other Income/
Preferred Junior Common Additional Comprehensive Retained
Units Units Stock Capital Loss Earnings Total
----- ----- ----- ------- ---- -------- -----
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 option
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
Comprehensive income:
Net income ......................... -- -- -- -- -- 9,050,000 9,050,000
Cumulative effect upon adoption of
FAS 133, net of tax ............... -- -- -- -- (508,000) -- (508,000)
Unrealized losses on interest
rate swaps, net of tax ............ -- -- -- -- (606,000) -- (606,000)
Derivative loss reclassified to
earnings, net of tax .............. 258,000 258,000
------------
Total comprehensive income .......... 8,194,000
Warrants............................. -- -- -- 4,415,000 -- -- 4,415,000
Employee stock purchase and option
plans .............................. -- -- 1,000 272,000 -- -- 273,000
Tax benefit of stock options ........ -- -- -- 62,000 -- -- 62,000
----------- ----------- ---------- ------------ ---------- ------------ ------------
Balance, December 31, 2001 .......... $ -- $ -- $ 142,000 $ 46,079,000 $ (856,000) $ 36,620,000 $ 81,985,000
=========== =========== ========== ============ ========== ============ ============
See accompanying notes to financial statements.
F-5
TREX COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Operating Activities
Net income ................................................ $ 11,680,000 $ 19,302,000 $ 9,050,000
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 1,075,000
Tax benefit of stock options ......................... -- 93,000 62,000
Depreciation and amortization ........................ 4,457,000 6,869,000 9,326,000
Loss on disposal of property, plant and equipment .... 157,000 18,000 469,000
Changes in operating assets and liabilities:
Trade accounts receivable ....................... (1,232,000) (9,316,000) 8,075,000
Inventories ..................................... (2,661,000) (14,349,000) (10,151,000)
Prepaid expenses and other assets ............... (384,000) (282,000) (480,000)
Trade accounts payable .......................... 3,839,000 10,666,000 (7,587,000)
Accrued expenses ................................ 651,000 316,000 (1,423,000)
Income taxes receivable/payable ................. 117,000 457,000 (1,711,000)
Other ........................................... (151,000) (499,000) 299,000
------------ ------------ ------------
Net cash provided by operating activities ................. 21,405,000 15,407,000 7,004,000
------------ ------------ ------------
Investing Activities
Expenditures for property, plant and equipment ............ (29,369,000) (60,114,000) (31,972,000)
------------ ------------ ------------
Net cash used in investing activities ..................... (29,369,000) (60,114,000) (31,972,000)
------------ ------------ ------------
Financing Activities
Borrowings under mortgages and notes ...................... 11,298,000 5,940,000 58,000,000
Principal payments under mortgages and notes .............. (34,678,000) (512,000) (710,000)
Borrowings under line of credit ........................... 10,793,000 57,249,000 82,890,000
Principal payments under line of credit ................... (5,079,000) (18,215,000) (115,485,000)
Proceeds from initial public offering ..................... 41,055,000 -- --
Proceeds from employee stock purchase and option plans .... 78,000 245,000 273,000
Preferred distributions paid .............................. (3,115,000) -- --
Common distributions paid ................................. (13,588,000) -- --
------------ ------------ ------------
Net cash provided by financing activities ................. 6,764,000 44,707,000 24,968,000
------------ ------------ ------------
Net decrease in cash and cash equivalents ................. (1,200,000) -- --
Cash and cash equivalents at beginning of year ............ 1,200,000 -- --
------------ ------------ ------------
Cash and cash equivalents at end of year .................. $ -- $ -- $ --
============ ============ ============
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.
Through its subsidiary, TREX Company, LLC, the Company manufactures and
distributes wood/plastic composite products primarily for residential and
commercial decking applications, which are marketed under the brand name
Trex(R). The Company operates in one business segment. Trex Wood-Polymer(R)
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.
F-7
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, 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 $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. Of the net
proceeds of approximately $5.6 million from the over-allotment exercise,
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 subsidiaries, TREX
Company, LLC, Winchester Capital, Inc and Trex Wood-Polymer Espana, S.L.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Trex Wood-Polymer Espana, S.L. was formed to hold the Company's 35%
equity interest in Denplax, S.A., a joint venture with a Spanish company
responsible for public environmental programs in southern Spain and with an
Italian equipment manufacturer. The joint venture was formed to recycle
polyethylene at a new facility in El Ejido, Spain. The Company's investment in
Denplax, S.A. is accounted for using the equity method.
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:
F-8
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. For all periods through December 31, 2001, goodwill has been
amortized using the straight-line method over a period of 15 years.
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.
Pursuant to the consensus of the Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs," the company records all
shipping and handling fees in net sales and records all of the related costs in
cost of sales.
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
F-9
tax purposes from a partnership to a C corporation, the Company recorded a
one-time deferred tax charge of $2.6 million.
Research and Development Costs
Research and development costs are expensed as incurred. For the years
ended December 31, 1999, 2000 and 2001, research and development costs were
approximately $1,238,000, $1,440,000 and $1,732,000, respectively.
Advertising Costs
Branding costs including advertising are expensed as incurred. For the
years ended December 31, 1999, 2000 and 2001, branding costs were approximately
$6,915,000, $8,092,000 and $10,034,000, respectively.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, consisting primarily of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and other current liabilities,
and long-term debt to approximate the fair value of the respective assets and
liabilities at December 31, 2000 and 2001.
Derivative Instruments
Effective January 1, 2001, the Company adopted 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.
In order to manage market risk exposure related to changing interest
rates, the Company has entered into interest rate swap agreements effectively
converting its LIBOR-based floating rate debt to a fixed-rate obligation. These
interest rate swap agreements are accounted for as cash flow hedges as permitted
by SFAS No. 133.
The transition adjustment to implement this new standard, which is
presented as a cumulative effect of change in accounting principle, increased
liabilities by approximately $0.8 million, with a corresponding reduction in
stockholders' equity through other comprehensive income (approximately $0.5
million, net of tax). The Company recognized an increase in the liability of
$0.6 million with a corresponding decrease to stockholders' equity through other
comprehensive income (approximately $0.6 million, net of tax and
reclassification to earnings), for the fiscal year ended December 31, 2001. The
Company estimates that of the amounts included in other comprehensive income,
approximately $0.5 million, net of taxes of approximately $0.3 million, will be
reclassified to earnings over the next 12 months.
Comprehensive income for the Company includes net income and derivative
gains or losses that are excluded from net income but included as a separate
component of total stockholders' equity. Comprehensive income for the years
ended December 31, 1999, 2000 and 2001 is as follows:
F-10
1999 2000 2001
------------- ------------- -------------
Net income ................................................ $ 11,680,000 $ 19,302,000 $ 9,050,000
Cumulative effect of a change in accounting principle ..... -- -- (508,000)
Net derivative change in fair value ....................... -- -- (606,000)
Derivative loss reclassified to earnings .................. -- -- 258,000
------------- ------------- -------------
Total comprehensive income ....................... $ 11,680,000 $ 19,302,000 $ 8,194,000
============= ============= =============
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") 141, Business Combinations, and FAS
142, Goodwill and Other Intangible Assets. FAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. The Company expects the implementation of FAS 141 will have no
effect on its earnings and financial position. FAS 142 will require that
goodwill and certain intangibles no longer be amortized, but instead be tested
for impairment at least annually. FAS 142 is required to be applied starting
with fiscal years beginning after December 15, 2001. The Company will adopt FAS
142 in 2002 and does not expect any impairment of goodwill upon adoption.
Goodwill amortization was approximately $0.7 million in each of fiscal years
1999, 2000 and 2001. The adoption of the standard is expected to result in an
increase in net income by approximately $0.4 million in 2002.
Risks and Uncertainties
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.
The Company has significant idled assets and construction in process as
of December 31, 2001. The Company expects that construction in process will be
completed and put into service and that idled assets will be put back into
service. Accordingly, the Company has performed impairment tests on these assets
held for use based on estimated future levels of sales and production and has
determined that no impairment exists as of December 31, 2001. Actual results
could differ from those estimates, potentially resulting in impairment charges
that could adversely affect the Company's results of operations and financial
condition. The excess, if any, of the carrying value of such assets over the
fair values is not readily determinable due to the current state of construction
and their proprietary and unique nature.
The company's ability to pay down its senior term loan, borrow under
its revolving credit facility and continue to comply with its loan covenants
will depend primarily on its success in generating operating cash flow. The
Company is required in 2002 to repay $25.0 million of $58.0 million of
outstanding borrowings under its senior term loan. The Company's ability to
borrow under its $17.0 million revolving credit facility is tied to a borrowing
base that consists of specified receivables and inventory. To remain in
compliance with its senior credit facility covenants, the Company must maintain
specified financial ratios based on its debt, capital and earnings before
interest, taxes, depreciation and amortization. See Note 6.
F-11
3. INVENTORIES
Inventories consist of the following as of December 31:
2000 2001
----------- -----------
Finished goods. .............................................................. $19,523,000 $27,236,000
Raw materials ................................................................ 3,494,000 5,932,000
----------- -----------
$23,017,000 $33,168,000
=========== ===========
At December 31, 2000 and 2001, the excess of the replacement cost of
inventory over the LIFO value of inventory was approximately $1.0 and $0.9
million, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31:
2000 2001
------------ ------------
Building and improvements .................................................... $ 18,893,000 $ 34,858,000
Machinery and equipment ...................................................... 61,848,000 71,478,000
Furniture and equipment ...................................................... 753,000 1,946,000
Forklifts and tractors ....................................................... 159,000 567,000
Data processing equipment .................................................... 1,171,000 2,565,000
Construction in process ...................................................... 39,985,000 42,400,000
Land ......................................................................... 4,934,000 5,353,000
------------ ------------
127,743,000 159,167,000
Accumulated depreciation ..................................................... (14,108,000) (21,944,000)
------------ ------------
$113,635,000 $137,223,000
============ ============
Depreciation expense for the years ended December 31, 1999, 2000 and 2001
totaled $3.6 million, $6.0 million, and $7.9 million, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
2000 2001
----------- -----------
Goodwill ..................................................................... $10,609,000 $10,609,000
Accumulated amortization ..................................................... (3,065,000) (3,772,000)
----------- -----------
$ 7,544,000 $ 6,837,000
=========== ===========
Amortization expense was $0.7 million for each of the years ended
December 31, 1999, 2000 and 2001.
F-12
6. DEBT
On November 13, 2001, the Company and the lender amended the terms of
the Company's senior bank credit facility, primarily to increase the maximum
amount of borrowings available to the Company, restructure the form of
borrowings, and modify the term of the facility. The terms of the revised credit
agreement provide for borrowings under a revolving credit facility of up to
$17.0 million for working capital and general corporate purposes through January
31, 2003. Amounts drawn under the revolving credit agreement bear interest at an
annual rate equal to LIBOR plus 3.00% through June 30, 2002 and LIBOR plus 4.00%
thereafter, and are subject to a borrowing base consisting of accounts
receivable and finished goods inventories. As of December 31, 2001, the
borrowing base totaled approximately $18.3 million. The revised agreement also
provides for a $58.0 million term loan, with scheduled principal reductions of
$5.0 million on each of March 1, April 1, May 1, June 1 and July 1, 2002. The
remaining principal balance and accrued interest on the term loan will be
payable in full on January 31, 2003. Amounts drawn under the term loan up to
$33.0 million bear interest at an annual rate equal to LIBOR plus 3.00% through
June 30, 2002 and LIBOR plus 4.00% thereafter. Amounts drawn under the term loan
in excess of $33.0 million bear interest at an annual rate equal to LIBOR plus
5.00%. As of December 31, 2001, the Company has drawn down $58.0 million under
the term loan. In connection with the revised agreement, the maturity dates of
the Company's real estate mortgage loans with this lender were modified and the
interest rates on these loans were increased by 200 basis points through June
30, 2002 and by 300 basis points thereafter. The mortgage loans will be payable
in full on January 31, 2003 or, if earlier, on the date on which the term loan
and revolving credit facility are repaid, subject to an extension of such
maturity dates until January 31, 2005 if the Company meets certain conditions.
The revised agreement, which was effective as of September 30, 2001, contains
restrictive and financial covenants, and borrowings under the agreement are
secured by a lien on substantially all of the Company's assets.
To remain in compliance with its senior credit facility covenants, the
Company must maintain minimum financial ratios based on its debt, capital and
earnings before interest, taxes, depreciation and amortization, or "EBITDA." The
following table summarizes these financial covenant ratios:
Company Ratio as of
Ratio Covenant December 31, 2001
- ----- -------- -----------------
Trailing twelve month EBITDA Minimum of $22.0 million during the period $ 25.7 million
from October 1, 2001 through December
31, 2001; minimum of $20.0 million
during the period from January 1, 2002
through March 31, 2002; minimum of
$25.0 million thereafter
Debt to capital Maximum of 55.0% 51.2%
Debt to trailing twelve month EBITDA Maximum of 4.0:1.0 through June 30, 2002; 3.3:1.0
maximum of 3.0:1.0 thereafter
In addition, the revised senior credit agreement limits the Company's
ability to, among other things, incur additional debt; issue equity securities;
pay dividends or make distributions; make acquisitions, investments or other
restricted payments; pledge or mortgage assets; sell assets; and consolidate,
merge or sell substantially all its assets.
F-13
Before the foregoing revisions to the senior credit agreement, the
Company was not in compliance with certain requirements of the agreement,
including covenants that require the Company to maintain minimum leverage and
capitalization ratios and to reduce its outstanding borrowings under the credit
facility to $50.0 million as of September 30, 2001. As a result of such
non-compliance, the Company was also in violation of certain of its mortgage
loans with a total balance of approximately $9.9 million as of September 30,
2001. The revision of the credit agreement eliminated such non-compliance as of
September 30, 2001 under both the credit facility and such mortgage loans. As of
December 31, 2001, the Company was in compliance with the revolving credit
facility, term loan and mortgage loans.
In connection with the foregoing revisions to the senior credit
agreement, the Company issued the lender a warrant exercisable until January 31,
2005 to purchase up to 707,557 shares of the Common Stock at $14.89 per share,
the then-current market value. The warrant relating to one-half of those shares
is not exercisable until June 30, 2002 and will only become exercisable if the
Company does not repay the revolving credit facility and term loan and an
outstanding letter of credit on or before such date. The Company has valued the
warrant at approximately $4.4 million, based on calculations using a
Black-Scholes option pricing model and applying a probability factor to
recognize that the portion of the warrant relating to one-half of the 707,557
shares may not become exercisable. The $4.4 million warrant value was
established as a debt discount in the fourth quarter of 2001 and is being
amortized into interest expense through January 31, 2003, which is the maturity
date of loans under the senior credit facility. Debt discount of $0.7 million
was amortized into interest expense in the fourth quarter of 2001, resulting in
a net debt discount of $3.7 million as of December 31, 2001.
As of December 31, 2000 and 2001, $44.7 million and $12.2 million,
respectively, were outstanding under the revolving credit facility and $0 and
$58.0 million, respectively, were outstanding under the term loan.
In April 1999, with a portion of the proceeds of the IPO, the Company
repaid $21.2 million of its 10% senior notes and $5.0 million of its 12%
subordinated notes. In connection with the repayment, the Company recorded an
extraordinary loss on the early prepayment of debt in the amount of $1.1
million, 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 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 revised terms adopted in connection with the senior credit agreement
amendments described above, the loan will be payable in full on January 31, 2003
or, if earlier, on the date on which the term loan and revolving credit facility
are repaid, subject to an extension of such maturity dates until January 31,
2005 if the Company meets certain conditions. Under an interest rate swap
agreement, interest on this loan is payable at an annual rate of 10.10% through
June 30, 2002 and 11.10% thereafter.
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 $4.8
million under two loans to fund, in part, the acquisition of the site of its
second manufacturing facility and the site of its research and development
facility. The loans 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 loan dates. Pursuant to revised terms adopted in
connection with the senior credit agreement amendments described
F-14
above, the loans will be payable in full on January 31, 2003 or, if earlier, on
the date on which the term loan and revolving credit facility are repaid,
subject to an extension of such maturity dates until January 31, 2005 if the
Company meets certain conditions. Under interest rate swap agreements, interest
on these loans is payable at annual rates of 9.12% and 8.80%, respectively,
through June 30, 2002 and 10.12% and 9.80%, respectively, thereafter.
Long-term debt consists of the following as of December 31:
2000 2001
------------ ------------
Mortgage loan, due January 31, 2003, 9.12% through June 30, 2002 and 10.12%
thereafter ................................................................. $ 3,404,000 $ 3,235,000
Mortgage loan, due January 31, 2003, 8.80% through June 30, 2002 and 9.8%
thereafter ................................................................. 948,000 902,000
Mortgage loan, due September 30, 2014, 7.90% .................................... 6,426,000 6,159,000
Mortgage loan, due January 31, 2003, 10.10% through June 30, 2002 and 11.10%
thereafter ................................................................. 5,873,000 5,659,000
Term loan, due January 31, 2003, LIBOR +3.00% to LIBOR +5.00% ................... -- 57,986,000
------------ ------------
16,651,000 73,941,000
Less current portion ............................................................ (697,000) (25,759,000)
------------ ------------
Long-term debt .................................................................. $ 15,954,000 $ 48,182,000
============ ============
Maturities of long-term debt are as follows:
Years ending December 31,
-------------------------
2002 .................................................. $ 25,759,000
2003 .................................................. 42,643,000
2004 .................................................. 349,000
2005 .................................................. 378,000
2006 .................................................. 409,000
Thereafter ............................................ 4,403,000
------------
$ 73,941,000
============
The mortgage loans are secured by the Company's various real estate
holdings and are held by financial institutions.
The Company made interest payments in the aggregate amounts of
approximately $1.5 million, $1.8 million and $5.0 million for the years ended
December 31, 1999, 2000 and 2001, respectively. During 2000 and 2001, the
Company capitalized approximately $1.1 million and $1.9 million of interest,
respectively.
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, 2001 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 $3.8 million, $1.0 million, $6.7 million and
$5.9 million LIBOR-based floating-rate debt 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 (made) as a
result of the agreements are recognized as a reduction of (increase to) interest
expense on the LIBOR-based floating-rate debt. The notional amounts of these
agreements correspond to the outstanding balances of the LIBOR-based debt. The
Company has evaluated and documented these interest-rate swap agreements as cash
flow hedges of LIBOR-based floating-rate debt, in which any
F-15
changes in fair values of the derivatives are recorded in other comprehensive
income, net of deferred taxes, as there is no hedge ineffectiveness.
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, under 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 $2.0 million and 1,000 Class
B units for $0.4 million. The Class A and Class B units are collectively
referred to 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 $3.0 million.
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 $3.1 million 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 $41.1 million. In connection with the Reorganization and
IPO, the Company repaid the note it exchanged for the preferred units, and made
payments totaling $13.6 million to the original Class A and Class B unitholders,
as a distribution of previously undistributed earnings and a return of capital.
See Note 1 for a discussion of the Reorganization and IPO transactions.
Through the Company's employee stock purchase plan and stock option
plan, 14,488 and 20,023 previously unissued shares of Common Stock were issued
to employees and/or non-employee directors for a total of $0.2 million and $0.3
million during 2000 and 2001, respectively.
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
Numerator for basic and diluted:
Income before extraordinary item .................. $12,736,000 $19,302,000 $9,050,000
Preferred dividends ............................... (115,000) -- --
----------- ----------- ----------
12,621,000 19,302,000 9,050,000
Extraordinary item ................................ (1,056,000) -- --
----------- ----------- ----------
Net income available to common shareholders ....... $11,565,000 $19,302,000 $9,050,000
=========== =========== ==========
Denominator:
Weighted average shares outstanding ............... 12,848,571 14,129,652 14,145,660
Effect of dilutive securities:
Stock options .................................... 44,213 49,823 27,091
Warrants ......................................... -- -- 9,706
----------- ----------- ----------
Dilutive potential shares ................ 44,213 49,823 36,797
----------- ----------- ----------
Weighted average shares outstanding
as adjusted ...................................... 12,892,784 14,179,475 14,182,457
=========== =========== ==========
F-16
Basic earnings per share:
Income before extraordinary item.......... $ 0.98 $ 1.37 $ 0.64
Extraordinary item........................ (0.08) -- --
-------- -------- --------
Net income................................ $ 0.90 $ 1.37 $ 0.64
======== ======== ========
Diluted earnings per share:
Income before extraordinary item.......... $ 0.98 $ 1.36 $ 0.64
Extraordinary item........................ (0.08) -- --
-------- -------- --------
Net income................................ $ 0.90 $ 1.36 $ 0.64
======== ======== ========
The earnings per share amounts shown above for 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, 2000 and 2001
reflect the dilutive effect of the exercise of stock options outstanding. In
addition, the diluted weighted average shares outstanding for 2001 reflect the
dilutive effect of the exercise of warrants 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 and Governance Committee of the Board
of Directors, with a maximum vesting period of 10 years.
Stock option activity from inception of the Plan through December 31,
2001 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
==========
2001
Granted .................................... 155,277 $ 23.89
Exercised .................................. (9,874) $ 10.04
Canceled ................................... (18,477) $ 19.31
----------
Outstanding at December 31, 2001 ................ 349,957 $ 22.84
==========
Exercisable at December 31, 2001 ................ 71,203 $ 20.97
==========
F-17
At December 31, 2001, the price range of options outstanding was as
follows:
Weighted Average Weighted
Average Remaining Average
Options Exercise Contractual Options Exercise
Outstanding Price Life (Years) Exercisable Price
----------- ----- ----------- ----------- -----
$10.00-19.99 ................ 96,247 $ 12.42 8.1 29,032 $ 10.19
20.00-29.99 ................ 223,692 26.16 7.0 34,903 27.69
30.00-39.99 ................ 28,373 30.65 8.5 6,858 30.64
40.00 and over ............. 1,645 50.00 5.9 410 50.00
------- ------
349,957 22.84 7.3 71,203 20.97
The grant date weighted average fair value of options granted in 1999,
2000 and 2001 was $7.14, $19.35 and $14.80, 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, 2001, 1,050,043 shares of Common Stock were reserved
for issuance under the Plan in connection with future grants.
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, 2000 and 2001: 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 Common Stock of 55%, 81% and 70% was used for 1999, 2000 and 2001,
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. Because the Company's employee stock options have
characteristics significantly different from those of traded options, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
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, 2000
and 2001 would have reduced income by approximately $0.1 million, $0.4 million
and $1.8 million, respectively, and resulted in basic earnings per share of
$0.89, $1.34 and $0.56, respectively.
On November 13, 2001, the Company and the lender revised the terms of
the Company's senior bank facility, primarily to increase the maximum amount of
borrowings available to the Company, restructure the form of borrowings, and
modify the term of the facility. See Note 6. In connection with the revised
agreement, the Company issued the lender a warrant exercisable until January 31,
2005 to purchase up to 707,557 shares of the Company's Common Stock at $14.89
per share, the then-current market value. The warrant relating to one-half of
those shares is not exercisable until June 30, 2002 and will only become
exercisable if the Company does not repay the revolving credit facility and term
loan and an outstanding letter of credit on or before such date. The Company has
valued the warrant at approximately $4.4 million, based on calculations using a
Black-Scholes option pricing model and applying a probability factor to
recognize that the portion of the warrant relating to one-half of the 707,557
shares may not become exercisable. The following assumptions were used in the
Black-Scholes model: no dividends; expected volatility of 81%; risk-free
interest rate of 3.6%; and expected life of the warrant term of approximately
three years. The $4.4 million warrant value was established as a debt
F-18
discount in the fourth quarter of 2001 and is being amortized into interest
expense through January 31, 2003, which is the maturity date of loans under the
senior credit facility. Debt discount of $0.7 million was amortized into
interest expense in the fourth quarter of 2001, resulting in a net debt discount
of $3.7 million as of December 31, 2001.
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, 2001 were as follows:
Year ending December 31,
------------------------
2002 ..................................................... $ 3,521,000
2003 ..................................................... 2,708,000
2004 ..................................................... 2,113,000
2005 ..................................................... 1,767,000
2006 ..................................................... 1,592,000
Thereafter ............................................... 8,524,000
-----------
$20,225,000
===========
For the years ended December 31, 1999, 2000 and 2001, the Company
recognized rental expenses of approximately $1.5 million, $2.6 million and $4.8
million, 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 $1.1 million,
$0.7 million and $0.2 million to the 401(k) Profit Sharing Plan and $0.3
million, $0.3 million and $0.4 million to the Money Purchase Pension Plan during
the years ended December 31, 1999, 2000 and 2001, respectively. As of December
31, 2000 and 2001, the Company's accrued expenses included approximately $0.8
million and $0.5 million, respectively, for contributions due in respect of the
401(k) Profit Sharing Plan and Money Purchase Pension Plan.
10. INCOME TAXES
The Company's provision for income taxes consists of the following:
Year ended December 31,
---------------------------------------
1999 2000 2001
---- ---- ----
Current ........................ $4,109,000 $ 9,635,000 $2,938,000
Deferred ....................... 3,172,000 2,047,000 1,248,000
--------- --------- ---------
Total provision ................ $7,281,000 $11,682,000 $4,186,000
========== =========== ==========
The provision for income taxes is less than the amount of income tax
determined by applying the U.S. Federal statutory rate of 35 percent to income
before taxes as a result of the following:
Year ended December 31,
---------------------------------------
1999 2000 2001
---- ---- ----
U.S. federal statutory taxes ............................... $6,806,000 $10,854,000 $4,633,000
State and local taxes, net of U.S. federal benefit ......... 797,000 793,000 (600,000)
F-19
Effect of income taxed directly to LLC members ............. (2,961,000) -- --
Deferred taxes arising from Reorganization ................. 2,609,000 -- --
Other ...................................................... 30,000 35,000 153,000
----------- ----------- ----------
$ 7,281,000 $11,682,000 $4,186,000
=========== =========== ==========
Deferred tax assets and liabilities as of December 31, 2000 and 2001
consist of the following:
As of December 31,
------------------
2000 2001
---- ----
Deferred tax assets-current:
Reserves .................................. $ 478,000 $ 1,946,000
Deferred tax liabilities-non-current:
Book versus tax depreciation .............. $(5,782,000) $(7,800,000)
------------ ------------
Net deferred tax liability ..................... $(5,304,000) $(5,854,000)
============ ============
Cash paid for income taxes during the years ended December 31, 1999, 2000
and 2001 was $3,287,000, $9,088,000 and $4,993,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
Commencing on July 11, 2001, four purported class action lawsuits
(collectively, the "securities class action") were filed in the United States
District Court for the Western District of Virginia naming as defendants the
Company and Robert G. Matheny, the President and a director of the Company,
Roger A. Wittenberg, the Executive Vice President of Material Sourcing and
International Operations and a director of the Company, and Anthony J. Cavanna,
the Executive Vice President and Chief Financial Officer and a director of the
Company. The plaintiffs in these lawsuits purport to represent a class of
purchasers of the company's securities between November 2, 2000 and June 18,
2001. The complaints, one of which since has been dismissed voluntarily, allege
that the defendants violated Sections 10(b) and 20(a) of and Rule 10b-5 under
the Securities Exchange Act of 1934 by making false and misleading public
statements or omissions concerning the Company's operating and financial
results, expectations, and business and by filing misleading reports on Forms
10-Q and 10-K with the Securities and Exchange Commission. The plaintiffs seek
unspecified monetary damages together with any other relief permitted by law,
equity and federal statutory provisions identified in the complaints. The cases
have been consolidated and an amended consolidated complaint, which added as a
defendant Andrew U. Ferrari, the Company's Executive Vice President of Marketing
and Business Development and a director of the Company, was filed on December
17, 2001. On or about January 31, 2002, the defendants filed a motion to have
the amended consolidated complaint dismissed with prejudice. That motion is in
the process of being briefed and, accordingly, the defendants' time to answer
has not yet expired. Discovery is stayed pursuant to the automatic stay
provisions of the Private Securities Litigation Reform Act of 1995. Due to the
early stage of this litigation, the Company is unable to conclude that a loss,
if any, is either probable or reasonably estimable. The Company believes that
the lawsuits are without merit and intends to vigorously defend these lawsuits
and any other similar lawsuits that may be served on the Company.
On or about September 21, 2001, the Company was named in a complaint (the
"Bennett complaint") filed in the Circuit Court for the City of Winchester. The
Bennett complaint purports to assert a derivative suit for the benefit of the
Company against each of its directors. It alleges that during the same period at
issue in the securities class action and in violation of applicable state and/or
federal laws, the individual defendants caused the Company to issue materially
misleading disclosures in order to inflate the Company's stock price and permit
insider trading by two of the individual defendants. The
F-20
Bennett complaint further alleges that the individual defendants thereby exposed
the Company to potential damages in connection with the securities class action.
The Bennett complaint seeks a constructive trust in favor of the Company over
the profits received from the allegedly improper insider sales, as well as an
unspecified amount of damages allegedly sustained by the Company, together with
attorneys' fees, costs and expenses. No damages or other relief are sought from
the Company. On October 19, 2001, the Bennett complaint was removed to the
federal court in which the related securities class action is pending. This
lawsuit has been consolidated for pretrial purposes with the securities class
action and stayed pending resolution of the motion to dismiss the securities
class action.
On December 5, 2001, a plaintiff commenced an action against the Company in
the United States District Court, Eastern District of Virginia, Norfolk
Division, alleging patent infringement against the Company. The Company believes
that this claim is without merit and intends to vigorously defend it. The
Company denies any liability and has filed a counterclaim against the plaintiff
for declaratory judgment. The Company is seeking a ruling that the plaintiff's
patent is invalid and unenforceable, and that the Company does not infringe the
patent. The parties have filed initial pleadings in this case. Due to the early
stage of this litigation, the Company is unable to conclude that a loss, if any,
is either probable or reasonably estimable.
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 75%, 75% and 78% of the Company's sales for the years ended
December 31, 1999, 2000 and 2001, respectively, were from its four largest
customers, each of which exceeded 10% of sales. Approximately 24%, 20% and 18%
of the Company's raw materials for the years ended December 31, 1999, 2000 and
2001, respectively, were purchased from its four largest suppliers.
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, 1999. 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 the year 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 for the year ended December 31, 1999:
Numerator:
Historical income from operations ............................. $21,493,000
F-21
Supplemental pro forma interest expense, net............................... (691,000)
Pro forma income tax provision............................................. (7,905,000)
-----------
Supplemental pro forma net income available to common shareholders......... $12,897,000
===========
Denominator:
Denominator for supplemental pro forma basic earnings per common share--
weighted average shares outstanding..................................... 14,117,297
===========
Supplemental pro forma basic earnings per common share..................... $ 0.91
===========
The foregoing supplemental pro forma basic earnings per common share
amount has been adjusted to reflect the Reorganization (see Note 1) as if the
Reorganization had occurred on January 1, 1999. 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, 1999.
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, 1999. Supplemental pro forma net
income available to common shareholders assumes the preferred units were
exchanged as of January 1, 1999. 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.
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2001, the Company purchased
approximately $1.3 million of plastic raw material from Denplax, S.A., a Spanish
joint venture which is 35%-owned by the Company, and paid approximately $0.8
million to one of the joint venture partners for freight services. The Company
had no such transactions in 1999 or 2000. Receivables from and payables to
related parties were not significant as of December 31, 2000 and 2001. The
Company's investment in Denplax was approximately $0.5 million at December 31,
2001 and its equity share of losses from the investment was approximately $0.1
million for the year then ended.
14. INTERIM FINANCIAL DATA (Unaudited)
Three Months Ended
------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
2000 2000 2000 2000 2001 2001 2001 2001
------ ------ ------- ------ ------- ------ ------ ------
Net sales............ $ 39,053,000 $ 36,449,000 $ 25,806,000 $ 16,260,000 $42,196,000 $27,727,000 $ 29,868,000 $17,069,000
Gross profit......... 18,162,000 18,013,000 13,103,000 6,438,000 19,218,000 11,667,000 13,152,000 4,850,000
Net income (loss).... 7,057,000 6,081,000 5,196,000 968,000 7,655,000 287,000 3,403,000 (2,295,000)
Basic net income
(loss) per share.... $ 0.50 $ 0.43 $ 0.37 $ 0.07 $ 0.54 0.02 $ 0.24 $ (0.16)
Diluted net income
(loss) per share... $ 0.50 $ 0.43 $ 0.37 $ 0.07 $ 0.54 0.02 $ 0.24 $ (0.16)
The reduction in gross profit as a percentage of net sales in the
quarter ended December 31, 2001 relative to the quarters ended September 30,
2001 and December 31, 2000 resulted primarily from reduced production in the
quarter ended December 31, 2001 and the resulting reduction in the absorption of
manufacturing overhead. The Company temporarily idled some of its productive
capacity in the third and fourth quarters of 2001 to conserve working capital.
F-22
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.
BY: /S/ Anthony J. Cavanna
------------------------
Anthony J. Cavanna
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer)
Date: March 21, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed as of March 21, 2002 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 Officer)
Robert G. Matheny
/s/ Anthony J. Cavanna Executive Vice President and Chief Financial
- -------------------------- Officer and Director (Principal Financial
Anthony J. Cavanna 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
EXHIBIT INDEX
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 as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and incorporated herein by reference.
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 Form of Non-Incentive Stock Option Agreement under 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. 333-83998) and
incorporated herein by reference.
10.4 Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside
Directors. Filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 and incorporated herein
by reference.
10.5 Form of Distributor Agreement of TREX Company, LLC. Filed herewith.
10.6 Deed of Lease, dated June 15, 2000, between TREX Company, LLC and
Space, LLC. Filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 and incorporated
herein by reference.
10.7 Second Amended and Restated Credit Agreement, dated as of September 30,
2001, among TREX Company, LLC, Trex Company, Inc., and 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, 2001 and
incorporated herein by reference.
10.8 Security Agreement, dated as of September 30, 2001, among TREX Company,
LLC, Trex Company, Inc., and First Union National Bank. Filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
10.9 Deed of Trust, Security Agreement and Assignment of Leases and Rents,
dated as of September 30, 2001, granted by TREX Company, LLC to Western
Title Company, Inc. securing First Union National Bank. Filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 and incorporated herein by
reference.
10.10 Modified Deed of Trust, Security Agreement and Assignment of Leases and
Rents, dated as of September 30, 2001, granted by TREX Company, LLC to
TRSTE, Inc. securing First Union National Bank. Filed as Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001 and incorporated herein by reference.
10.11 $3,780,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001 and incorporated herein by reference.
10.12 $1,035,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.13 $5,940,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to
First Union National Bank. Filed as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.14 $58,000,000 Promissory Note, dated September 30, 2001, made by TREX
Company, LLC and Trex Company, Inc. payable to First Union National
Bank. Filed as Exhibit 10.8 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001 and incorporated
herein by reference.
10.15 Registration Rights Agreement, dated as of November 13, 2001, among
Trex Company, Inc., First Union National Bank and the other Holders
from time to time thereafter. Filed as Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001 and incorporated herein by reference.
10.16 Trex Company, Inc. Common Stock Purchase Warrant, dated November 13,
2001, issued to First Union National Bank. Filed as Exhibit 10.10 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001 and incorporated herein by reference.
21 Subsidiaries of the Company. Filed herewith.
23 Consent of Ernst & Young LLP, Independent Auditors. Filed herewith.
Exhibit 10.5
TREX DISTRIBUTOR AGREEMENT
--------------------------
THIS AGREEMENT is made as of ______________, by and between TREX COMPANY,
LLC, having its principal office at 160 Exeter Drive, Winchester, Virginia
22603-8605 (the "Company") and ______________________________, with its
principal office at ____________________________________________ (the
"Distributor").
1. Appointment of Distributor.
--------------------------
(a) Appointment: Distributor's Location(s)/Territory. Upon the terms
------------------------------------------------
and conditions of this Agreement, the Company hereby appoints the Distributor as
an authorized non-exclusive distributor of the Company's line of composite
decking products (the "Trex Products"), and the Distributor hereby accepts such
appointment, with respect to the Distributor's location(s) and within the
territory ("Territory") set forth in Schedule A attached hereto and incorporated
herein. In such capacity, the Distributor will purchase Trex Products from the
Company and will devote its continuing best efforts to the promotion and sale of
such Trex Products in the Territory.
(b) Amendments to Schedule A. The parties may amend Schedule A from
------------------------
time to time to add or remove Distributor location(s) and/or modify the
Distributor's Territory.
(c) Reservation of Rights by the Company. The Company reserves the
------------------------------------
right to take the following actions within the Distributor's Territory: (i) to
appoint or be represented by other or additional distributors; (ii) to make
sales directly to any or all customers of the same and/or other Company
products, and (iii) to sell exclusively, on a direct basis, to certain types of
customers or specific accounts which Company may, in its sole discretion,
designate from time to time in accordance with then current Company policies.
The Company will notify Distributor prior to appointing additional distributors
in its Territory.
(d) Addition, Discontinuance and Modification of Products. The
-----------------------------------------------------
Company shall have the right at any time to introduce new Trex Products,
discontinue the manufacture or sale of any of its Trex Products and make changes
in the design or construction of any of such Trex Products without incurring any
obligation or liability whatsoever. The Company will give the Distributor thirty
(30) days prior notice of any discontinuance of a Trex Product.
2. Terms of Purchase.
-----------------
(a) Ordering of Trex Products. All orders for Trex Products placed by
-------------------------
Distributor shall be in writing or by fax or e-mail. (A telephone request to
purchase, or to modify an existing order, shall not be considered an order
unless and until followed up in writing.) All orders shall be subject to
acceptance by the Company at Winchester, Virginia.
(b) Prices. The Distributor shall purchase Trex Products at the
------
prices in effect at the time of order. The Company may implement price changes
at any time during the term of this Agreement upon thirty (30) days prior
written notice thereof to Distributor. In addition to the purchase price,
Distributor shall pay to the Company the amount of all taxes, excises or other
governmental charges (except taxes on or measured by net income) that the
Company may be required to pay on the sale or delivery of any Products sold and
delivered hereunder, except where the law otherwise provides.
(c) Delivery. All products shall be shipped FOB shipping point, with
--------
title and risk of loss passing at such point. The shipment destination must be
within the Distributor's Territory. The Company will not ship product outside of
the Distributor's Territory unless the Company elects to do so in certain
limited situations. Any taxes, administrative or governmental charges incurred
as a result of the purchase of Trex Products are the sole responsibility of the
Distributor.
(d) Payment. The Company shall invoice the Distributor for the Trex
-------
Products at the time of shipment and the Distributor shall pay such invoices on
a net ten (10) day basis unless otherwise approved by the Company prior to
shipment. In the event the Distributor fails to pay such invoices within such
period, the Distributor hereby agrees to pay a monthly service charge at one and
one-half percent (1 1/2%), or, if such rate is prohibited under applicable law,
a service charge at such lesser rate of interest as is the maximum rate
permitted to be contracted for under such applicable law.
(e) Warranty. The Company warrants that for a period of one (1) year
--------
from the date of shipment to the Distributor, the Trex Products sold shall be
free from defects in workmanship and materials, and shall conform to the
Company's standard specifications for such Trex Products in effect at the time
of the shipment. If defects occur within the warranty period, the Distributor
shall notify the Company immediately and, upon confirmation by an authorized
Company sales representative of the defects, the Company's sole responsibility
shall be to replace the defective items. This warranty does not apply to defects
not caused by the Company (for example, accidents or abuse while in
Distributor's possession). The Company shall not have any liability of any kind
under this warranty unless the Distributor gives the Company notice of its claim
within thirty (30) days after the date the Distributor knows or should know of
its claim. EXCEPT AS SET FORTH HEREIN, THERE ARE NO WARRANTIES, EXPRESS OR
IMPLIED, WITH RESPECT TO TREX PRODUCTS. THE COMPANY EXPRESSLY EXCLUDES AND
DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY AND ANY WARRANTIES OF FITNESS
FOR A PARTICULAR PURPOSE, APPLICATION OR USE. UNDER NO CIRCUMSTANCES WILL THE
COMPANY BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER SUCH
DAMAGES ARE SOUGHT IN CONTRACT, IN TORT (INCLUDING BUT NOT LIMITED TO NEGLIGENCE
AND STRICT LIABILITY) OR OTHERWISE, AND THE
-2-
COMPANY'S LIABILITY SHALL IN NO EVENT EXCEED THE PURCHASE PRICE OF THE TREX
PRODUCTS ON WHICH SUCH LIABILITY IS BASED.
3. Trex Trademarks. The Distributor shall have the right hereunder to
---------------
represent that it is "an Authorized Distributor of Trex Company Products." Any
other use by the Distributor of the trademark "Trex" or any other trademark
owned by the Company must be in a form and format approved by the Company in
advance of such usage.
4. Promotional Materials. During the term of this Agreement, the Company
---------------------
shall take reasonable action to assist the Distributor in the Distributor's
efforts to promote and sell Trex Products, including the provision of reasonable
quantities of support materials such as product information and sales
promotional literature.
5. Duties of the Distributor.
-------------------------
(a) Sales Activities. The Distributor agrees to use its best efforts
----------------
vigorously and actively to promote the sale of Trex Products in the Territory.
In connection with such efforts, the Distributor, at its sole cost and expense,
shall organize and maintain a sales force and shall maintain adequate sales and
warehouse facilities within the Territory that are satisfactory to the Company.
(b) Storage of Inventory. The Distributor agrees to store Trex
--------------------
Products in accordance with Trex's storage guidelines.
(c) Appropriate Use of Trex Products. The Distributor shall use its
--------------------------------
best efforts to train dealers and contractors in its Territory as to the proper
usage and application of Trex Products in accordance with NES (NER-508)
Contractors Handbook, Trex Usage Guidelines and CSI Spec Data Sheet, supplied by
the Company from time to time to the Distributor.
(d) Inventory Levels. The Distributor agrees to maintain an inventory
----------------
equal to at least fifteen percent (15%) of the mutually agreed upon annual
objective, in various profiles and colors, to adequately serve the needs of its
customers.
(e) Trex Authorized Dealers/Territory. The Distributor agrees to
---------------------------------
resell Trex Products only to Trex Authorized Dealers (as defined by the Company)
who are located within the Territory. The Distributor further agrees not to
resell Trex Products to any Trex Authorized Dealer located within the Territory
where the Distributor has reason to know that such Dealer intends to resell the
Trex Products outside of the Territory.
(f) Advertising. Each printed advertisement, flyer, handbill,
-----------
television spot, radio script, yellow pages listing, webpage or any other
advertising or promotional material bearing or using the trademark or trade name
"Trex" or pertaining to Trex Products must be approved by the Company in writing
prior to
-3-
its use by the Distributor. Such approval will not be unreasonably withheld or
delayed.
(g) Reputation. The Distributor shall continually maintain to the
----------
satisfaction of the Company a general reputation for honesty, integrity and good
credit standing and shall maintain the highest quality standards.
(h) Competing Products. With respect to each Distributor location set
------------------
forth on Schedule A, the Distributor shall not, directly or indirectly, promote,
advertise, manufacture, market, distribute or sell a decking or associated
railing product produced from predominately plastics, or plastics and wood,
which competes with Trex Products.
(i) Compliance With Law. The Distributor shall comply with all laws,
-------------------
ordinances and regulations, both state and federal, applicable to the
Distributor's business.
(j) Expenses. The Distributor shall pay and discharge, and the
--------
Company shall have no obligation to pay for, any expenses or costs of any kind
or nature incurred by the Distributor in connection with its distribution
function hereunder, including, without limitation, any expenses or costs
involved in marketing Trex Products.
(k) Monthly Reports. Within fifteen (15) days after the end of each
---------------
calendar month, the Distributor shall submit a report to the Company setting
forth an ending inventory balance of Trex Products as of the end of such month
and sales of Trex Products for such month (both in the aggregate and for select
markets defined by the Company). The Company shall provide the format of such
report to the Distributor.
(l) Financial Statements. Within forty-five (45) days after the end
--------------------
of each fiscal year, the Distributor shall submit audited financial statements
to the Company.
6. Force Majeure. The Company shall be excused from delay or
-------------
non-performance in the delivery of an order and the Distributor shall have no
claim for damage if and to the extent such delay or failure is caused by
occurrences beyond the control of the Company including, but not limited to,
market conditions; acts of God; war, acts of terrorism, riots and civil
disturbances; expropriation or confiscation of facilities or compliance with any
order or request of governmental authority; strikes, labor or employment
difficulties whether direct or indirect; or any cause whatsoever which is not
within the reasonable control of the Company. The Company shall immediately
notify the Distributor of the existence of any such force majeure condition and
the anticipated extent of the delay or non-delivery. The Company shall, in such
event, have the right to allocate available Trex Products among its customers in
its sole discretion.
-4-
7. Distributor's Remedies. If the Company, for any reason whatsoever,
----------------------
fails or is unable to deliver any Trex Products ordered by the Distributor, the
Distributor's sole and exclusive remedy shall be the recovery of the purchase
price, if any, paid by the Distributor to the Company for such Trex Products.
The Company shall not incur any liability whatsoever for any delay in the
delivery to the designated delivery location of any Trex Products. In no event
shall the Company be liable for any incidental, consequential or other damages
arising out of any failure to deliver any Trex Products to the Distributor or
any delay in the delivery thereof.
8. Relationship of Parties: Indemnification of Company.
---------------------------------------------------
(a) Independent Contractor Status. The relationship of the parties
-----------------------------
established by this Agreement is that of vendor and vendee, and all work and
duties to be performed by the Distributor as contemplated by this Agreement
shall be performed by it as an independent contractor. The full cost and
responsibility for hiring, firing and compensating employees of the Distributor
shall be borne by the Distributor.
(b) No Authority to Bind Company. Nothing in this Agreement or
----------------------------
otherwise shall be construed as constituting an appointment of the Distributor
as an agent, legal representative, joint venturer, partner, employee or servant
of the Company for any purpose whatsoever. The Distributor is not authorized to
transact business, incur obligations, sell goods, solicit orders, or assign or
create any obligation of any kind, express or implied, on behalf of the Company,
or to bind it in any way whatsoever, or to make any contract, promise, warranty
or representation on the Company's behalf with respect to products sold by the
Company or any other matter, or to accept any service of process upon the
Company or receive any notice of any nature whatsoever on the Company's behalf.
(c) Indemnification. Under no circumstances shall the Company be
---------------
liable for any act, omission, contract, debt or other obligation of any kind of
the Distributor or any salesman, employee, agent or other person acting for or
on behalf of the Distributor. The Distributor shall indemnify and hold the
Company harmless from any and all claims, liabilities, losses, damages or
expenses (including reasonable attorneys, fees and costs) arising directly or
indirectly from, as a result of, or in connection with, the Distributor's
operation of the Distributor's business. The terms of this indemnity shall
survive the termination of this Agreement.
9. Confidential Information.
------------------------
(a) Definition. As used in this Section, "Proprietary Information"
----------
means information developed by or for the Company which is not otherwise
generally known in any industry in which the Company is or may become engaged
and includes, but is not limited to, information developed by or for the
Company, whether now owned or hereafter obtained, concerning plans,
-5-
marketing and sales methods, materials, processes, procedures, devices utilized
by the Company, prices, quotes, suppliers, manufacturers, customers with whom
the Company deals (or organizations or other entities or persons associated with
such customers), trade secrets and other confidential information of any type,
together with all written, graphic and other materials relating to all or any
part of the same.
(b) Non-Disclosure. Except as authorized in writing by the
--------------
Company, the Distributor shall not at any time, either during or after the term
of this Agreement, disclose or use, directly or indirectly, any Proprietary
Information of which the Distributor gains knowledge during or by reason of this
Agreement and the Distributor shall retain all such information in trust in a
fiduciary capacity for the sole use and benefit of the Company. In the event
that the Distributor operates one or more locations other than those set forth
on Schedule A, the Distributor shall not disclose any Proprietary Information to
local management or employees of such other location(s).
10. Patent and Trademark Indemnity. The Company will defend at its
------------------------------
expense any legal proceeding brought against the Distributor based on a claim
that Trex Products sold by the Company under this Agreement infringe upon a
United States patent or trademark, provided that the Company is notified
promptly and given full authority, information and assistance for such defense.
If the Distributor complies with the foregoing obligation, the Company will pay
all damages and costs finally adjudicated against the Distributor, but will not
be responsible for any compromise made without the Company's consent. If the
Trex Products are held to be infringing and their use enjoined, the Company may,
at its election and expense, either (1) obtain for the Distributor the right to
continue selling the Trex Products, (2) replace the Trex Products with
noninfringing Products, or (3) refund the purchase price paid, upon return of
the Trex Products to the Company.
11. Term and Termination.
--------------------
(a) Term. The term of this Agreement shall be for a period
----
beginning on the date hereof and ending on _____________. Thereafter, this
Agreement shall automatically renew for successive one (1) year periods unless
either party gives to the other party written notice of termination at least
thirty (30) days prior to the end of the initial or any renewal term.
(b) Voluntary Termination. Either party may terminate this
---------------------
Agreement in its entirety, or with respect to one (1) or more Distributor
location(s) set forth on Schedule A, at any time during the term hereof, with or
without cause, by giving to the other party thirty (30) days prior written
notice of termination. If this Agreement is only terminated with respect to one
(1) or more Distributor location(s) set forth on Schedule A, and there are
remaining Distributor location(s) still remaining on Schedule A, the provisions
of this Agreement relating to termination shall only apply to the terminated
location(s),
-6-
and this Agreement shall remain in full force and effect with respect to the
other Distributor location(s).
(c) Default by the Distributor. This Agreement may be terminated
--------------------------
by the Company immediately upon the failure of the Distributor to pay for Trex
Products purchased by the Distributor in accordance with the terms of Section
2(d) hereof or upon the material default by the Distributor of any other
obligation under this Agreement, or upon the filing of a petition in bankruptcy
or for reorganization under the Bankruptcy Act by the Distributor, or upon the
making of an assignment for benefit of creditors by the Distributor, or upon the
Distributor's taking any action or failing to act in such a manner as to
unfavorably reflect upon the Company.
(d) Effect on Outstanding Orders. Upon the effective date of
----------------------------
termination of this Agreement, all outstanding orders from the Distributor to
the Company shall be deemed cancelled, to the extent Trex Products have not yet
been shipped by the Company.
(e) Repurchase of Inventory. Upon termination of this Agreement
-----------------------
for any reason, the Company shall have the option, within sixty (60) days after
the effective date of such termination, to purchase the Distributor's inventory
which was purchased by the Distributor within the past twelve (12) months prior
to the date of termination. If the Company exercises such option, the
Distributor will sell and release to the Company such inventory at a price equal
to the price initially paid by the Distributor for such Trex Products, provided
the Trex Products have been properly stored in accordance with Trex's storage
guidelines and are in a good and saleable condition.
(f) Return of Company Property. Upon termination of this Agreement
--------------------------
for any reason, the Distributor shall promptly return to the Company any
property of the Company, including, without limitation, all sales and marketing
documents, manuals and other records and proprietary information of the Company,
as well as any samples in the Distributor's possession or control. The
Distributor agrees that it will not make or retain any copy of, or extract from,
such property or materials. The Company agrees to compensate the Distributor for
the cost of any returned sales materials that were authorized by the Company and
purchased by the Distributors within twelve (12) months of the date of
termination.
12. General.
-------
(a) Waiver. Failure of either party at any time to require
------
performance by the other party of any provision hereof shall not be deemed to be
a continuing waiver of that provision, or a waiver of its rights under any other
provision of this Agreement, regardless of whether such provision is of the same
or a similar nature.
-7-
(b) Complete Agreement. This Agreement (including the exhibits
------------------
hereto and all documents and papers delivered pursuant hereto and any written
amendments hereof executed by the parties to this Agreement) constitutes the
entire agreement, and supersedes all prior agreements and understandings, oral
and written, among the parties to this Agreement with respect to the subject
matter hereof. This Agreement may be amended only by written agreement executed
by all of the parties hereto. No purchase order or sales form will be applicable
to any sales pursuant to this Agreement and only the terms of this Distributor
Agreement shall govern such sales.
(c) Applicable Law; Jurisdiction and Venue. This Agreement shall
--------------------------------------
be construed under, and governed by, the laws of the Commonwealth of Virginia.
The parties agree that jurisdiction and venue for any legal proceedings arising
from or in any way connected to this Agreement will lie in the United States
District Court, Western District of Virginia or Frederick County, Virginia, and
both parties hereby submit and consent to the jurisdiction and venue of said
courts.
(d) Severability. If any provision of this Agreement is
------------
unenforceable or invalid, the Agreement shall be ineffective only to the extent
of such provisions, and the enforceability or validity of the remaining
provisions of this Agreement shall not be affected thereby.
(e) Assignment. This Agreement may not be transferred or assigned
----------
in whole or in part by operation of law or otherwise by the Distributor without
the prior written consent of the Company. Upon thirty (30) days prior written
notice to the Distributor, the Company may assign its rights, duties and
obligations under this Agreement. Without written notice, the Company may assign
its rights, duties and obligations under this Agreement to any parent,
subsidiary or other affiliated corporation of the Company.
(f) Notices. Any notice or other communication related to this
-------
Agreement shall be effective if sent by first class mail, postage prepaid, to
the address set forth in this Agreement, or to such other address as may be
designated in writing to the other party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
Trex Company, LLC ________________________
By:______________________________ By:________________________________
Its:_____________________________ Its:_______________________________
-8-
SCHEDULE A
----------
Distributor Location(s) and Territory
-------------------------------------
Distributor Location(s)
- -----------------------
Territory
- ---------
Initials: Company ______
Distributor ______
-9-
Exhibit 21
Subsidiaries of the Registrant
Name of Subsidiary Jurisdiction of Formation
------------------ -------------------------
TREX Company, LLC Delaware
Winchester Capital, Inc. Virginia
Trex Wood-Polymer Espana, S.L. Spain
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 333-76847 and 333-83998) pertaining to the Trex Company,
Inc. 1999 Employee Stock Purchase Plan and the Trex Company, Inc. 1999 Stock
Option and Incentive Plan of our report dated February 8, 2002, with respect to
the consolidated financial statements of Trex Company, Inc. included in its
Annual Report (Form 10-K) for the year ended December 31, 2001, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
March 19, 2002
McLean, Virginia
