-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VsvBYT1FnzhF2wmVEv7lzhNOSPmr01P0SFMbSfQoQdkGEPnaY1nYZDu78BhDGJBu 23VHSAY2X5hrZi0PXetvBA== 0000950134-98-000610.txt : 19980130 0000950134-98-000610.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950134-98-000610 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCI BUILDING SYSTEMS INC CENTRAL INDEX KEY: 0000883902 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED METAL BUILDINGS & COMPONENTS [3448] IRS NUMBER: 760127701 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19885 FILM NUMBER: 98515789 BUSINESS ADDRESS: STREET 1: P O BOX 40220 CITY: HOUSTON TEXAS STATE: TX ZIP: 77240-0220 BUSINESS PHONE: 7134667788 MAIL ADDRESS: STREET 2: P O BOX 40220 CITY: HOUSTON STATE: TX ZIP: 77240-0220 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL COMPONENTS INCORPORATED DATE OF NAME CHANGE: 19600201 10-K405 1 FORM 10-K FOR YEAR ENDED OCTOBER 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-19885 NCI BUILDING SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0127701 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 7301 FAIRVIEW HOUSTON, TEXAS 77041 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 466-7788 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant on December 31, 1997, was $251,590,239. The number of shares of common stock of the registrant outstanding on December 31, 1997, was 8,177,911. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Parts I and II of this Annual Report is incorporated by reference from the registrant's 1997 Annual Report to Shareholders, and information required by Part III of this Annual Report is incorporated by reference from the registrant's definitive proxy statement for its annual meeting of shareholders to be held on March 4, 1998. ================================================================================ 2 PART I ITEM 1. BUSINESS. GENERAL NCI Building Systems, Inc. (the "Company") designs, manufactures and markets metal building and framing systems, self-storage buildings, overhead doors and other building components for commercial, industrial, agricultural, community service and residential uses. The Company markets its products nationwide through direct sales forces and authorized builder networks under several brand names, including "Metallic Buildings," "Mid-West Steel Buildings," "A&S Buildings," "NCI Building Components," "All American Systems," "Steel Systems," "Mid-West Metallic", "DBCI" and "Mesco". The Company operates from a total of 18 manufacturing facilities in the United States and Mexico. It manufactures framing systems as well as components at five of the facilities, framing systems only at one facility, and components only at the regional "satellite" plants. In April 1989, the Company leased and assumed operation of the Houston facilities of the Mid-West Metallic division of American Buildings Company and purchased that facility in 1993. This facility with its framing capacity, together with the acquisition of the rights to use the "Mid-West" and "Metallic" names, enabled the Company to expand its product lines from building components to metal building systems and resulted in a substantial increase in the Company's authorized builder network in Texas and surrounding states. The Company also established satellite manufacturing plants in Illinois, Mississippi and California in 1991, 1994 and 1996, respectively, to serve the regional markets surrounding those plants and to enhance the Company's ability to develop and serve authorized builder networks in those regions. In June 1996, the Company acquired a metal stud manufacturing facility and equipment in Ennis, Texas from Alabama Metal Industries Corporation. In July 1997, a joint venture 51%-owned by the Company opened a facility in Monterrey, Mexico to manufacture framing systems. The Company also has acquired a number of other businesses in the last five fiscal years. In October 1992, the Company purchased 100% of the capital stock of A&S Building Systems, Inc., a manufacturer of metal building systems having a manufacturing facility with framing capacity in Caryville, Tennessee and a network of approximately 170 authorized builders located primarily in southeastern and midwestern states. In October 1994, the Company acquired substantially all of the assets and business of Ellis Building Components, Inc., a manufacturer of metal building systems having a manufacturing facility with framing capacity in Tallapoosa, Georgia. In March 1995, the Company acquired substantially all of the assets and business of Royal Metal Buildings, Inc., a manufacturer of metal building systems and components with a manufacturing facility in Hobbs, New Mexico, which the Company operates as a regional satellite plant. In November 1995, the Company acquired substantially all of the assets and business of Doors & Building Components, Inc., a manufacturer of roll-up steel overhead doors and interior steel components for self-storage systems with manufacturing facilities in Douglasville, Georgia and Chandler, Arizona. In March 1996, the Company purchased the equipment and operating assets used by Carlisle Engineered Metals, Inc. in its west coast component business and transferred those assets and the acquired business to the Company's Atwater, California facility when it was completed. In April 1996, the Company purchased substantially all of the assets and business of the Mesco Metal Buildings division of Anderson Industries, Inc., a manufacturer of metal building systems having manufacturing facilities with framing capacity in Southlake, Texas and Chester, South Carolina. In February 1997, the Company acquired substantially all of the remaining assets, the insulated panel business and the remaining components business of Carlisle Engineered Metals, Inc. The purchase included a components manufacturing facility in Jemison, Alabama and leases of two facilities in Stafford, Texas, one used for components manufacturing and the other used for manufacturing insulated panels. The Company was founded in 1984 and was reincorporated in Delaware on December 31, 1991. Its principal offices are located at 7301 Fairview, Houston, Texas 77041 and its telephone number is (713) 466-7788. Unless indicated otherwise, references herein to the Company include its predecessors and its subsidiaries. 3 INDUSTRY OVERVIEW Metal building systems are marketed for use primarily in the construction of low-rise, non-residential structures of up to 150,000 square feet. Based upon information published by the Metal Building Manufacturers Association ("MBMA"), on a square footage basis metal building systems accounted for approximately 69% of the structures of that type constructed in 1996. In the early years of the industry, metal building systems were most often used for factories, warehouses, distribution centers and other applications in which the exterior appearance of the building was not as significant a consideration to customers as construction cost, efficiency, speed of construction and other factors. Technological advances in products and materials, as well as significant improvements in engineering and design techniques, have led to the development of structural systems that are compatible with more traditional construction materials. Architects and designers now often combine a metal building system with masonry, glass and wood exterior facades in order to meet the aesthetic requirements of potential customers while preserving the inherent characteristics of metal building systems. As a result, the uses for metal building systems now include office buildings, showrooms, retail stores, banks, schools and government and community centers for which aesthetics and architectural features are important considerations of the end users. In its marketing efforts the Company and other major manufacturers generally emphasize the following characteristics of metal building systems to distinguish them from other methods of construction: Short Construction Time. In many instances, it takes less time to construct a metal building in comparison to other building types. In addition, since most of the work is done in the factory, the likelihood of weather interruptions is reduced. Efficient Material Utilization. The larger metal building manufacturers use computer-aided analysis and design to fabricate structural members with high strength-to-weight ratios, minimizing raw materials costs. Low Construction Costs. The in-plant manufacture of metal building systems, coupled with automation, allows the substitution of less expensive factory labor for much of the skilled on-site construction labor otherwise required. Ease of Expansion. Metal building systems can be modified quickly and economically before, during or after the building is completed to accommodate all types of expansion. Typically, a building system can be expanded by removing the end or side walls, erecting new framework and adding matching wall and roof panels. Low Maintenance Costs. Unlike wood, metal will not deteriorate because of cracking, damp rot or insect damage. Furthermore, factory-applied roof and siding panel coatings resist cracking, peeling, chipping, chalking and fading. Industry demand for metal building systems is cyclical, dependent to a large degree upon the level of non-residential construction activity, the availability of financing for construction projects, interest rates and other factors that affect the construction industry. According to information published by the MBMA, industry-wide metal building system sales increased from approximately $1.0 billion in 1982 to approximately $1.7 billion in 1989, then declined to approximately $1.2 billion by 1991 at which time the industry began experiencing year-to-year increases, to approximately $2.2 billion by 1996. PRODUCTS Metal building systems consist of pre-engineered structural beams and panels that are manufactured in a factory and shipped to a construction site complete and ready for assembly. The Company designs and engineers each metal building system to meet customer specifications and to allow for easy on-site assembly by builders or independent contractors. Metal building systems typically consist of three subsystems: (1) primary structural framing; (2) secondary structural framing; and (3) the covering subsystem, which includes the roof and walls. 2 4 Primary Structural Framing. The primary structural framing, fabricated from heavy-gauge steel, supports the secondary structural framing, roof, walls and all externally applied loads. Through the primary framing, the force of all applied loads is structurally transferred to the foundation. Secondary Structural Framing. The secondary structural framing consists of medium-gauge, roll-formed steel components called purlins and girts. Purlins are attached to the primary frame to support the roof. Girts are attached to the primary frame to support the walls. The secondary structural framing is designed to strengthen the primary structural framing and efficiently transfer applied loads from the roof and walls to the primary structural framing. Covering Subsystem. The covering subsystem consists of roof and siding panels. These panels not only lock out the weather but also contribute to the structural integrity of the overall building system. Roof and siding panels are fabricated from light-gauge, roll-formed steel. Accessory components complete the metal building system. These components include doors, windows, gutters and interior partitions. The Company's metal building component products consist of end and side wall panels, roof panels, purlins, girts and other individual components that otherwise are used in metal building systems, which are sold directly to end users or to contractors for use in constructing small buildings that do not require the design or structural features of complex building systems. The Company also stocks and markets metal component parts for use in the maintenance and repair of existing metal buildings and buildings constructed of materials other than metal. Other component products manufactured by the Company include roll-up doors, interior and exterior doors, lockers, partitions, wall and header panels and related trim. The Company has developed and patented a retrofit metal panel, Retro-R(R), that is used to replace wall and roof panels of metal buildings. Retro-R(R) can be installed over the top of existing metal panels to remodel or preserve a standing structure. During the previous five fiscal years, the Company's revenues attributable to metal building systems and to components were approximately as follows:
YEAR ENDED OCTOBER 31, -------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS) Metal building systems....... $104,792 $126,665 $173,882 $212,998 $246,569 Components................... 29,714 41,102 60,333 119,882 161,182 -------- -------- -------- -------- -------- Total revenues..... $134,506 $167,767 $234,215 $332,880 $407,751 ======== ======== ======== ======== ========
SALES AND MARKETING The Company sells its products under multiple brand names through various distribution channels. These channels include (i) sales through the Company's authorized builder networks, (ii) direct sales to contractors and (iii) private label sales to certain large builders. Management believes that its multi-channel distribution strategy promotes brand loyalty, improves customer service and increases sales. With each distribution channel, the Company's engineering, manufacturing and marketing personnel work directly with the builder or contractor to establish job specifications and modifications, determine the appropriate pricing for the Company's products and services, generate drawings and establish production and delivery schedules. The Company sells to builders and contractors on customary payment terms. The Metallic division and A&S sell metal building systems to builders nationwide under the brand names "Metallic Buildings" and "A&S Buildings," respectively. Since the Company acquired Mesco on April 1, 1996, that division also sells metal building systems under the brand name "Mesco". During fiscal 1996 and fiscal 1997, the combined metal building systems sales of the Metallic division and A&S were $143.3 million and $155.8 million, respectively. During the last seven months of fiscal 1996, the metal building systems sales of Mesco were $17.9 million, and in fiscal 1997, those sales were $32.0 million. The Metallic division markets through an in-house sales force of approximately 49 persons to an authorized builder network of 441 builders. A&S has its own authorized builder network of 300 builders managed by an in-house sales force of 3 5 approximately 14 persons. Mesco has an authorized builder network of 131 builders and an inhouse sales force of 20 persons. The Company's authorized builder networks consist of independent general contractors which market the Company's Metallic Buildings, A&S Buildings and Mesco products to end users. The Company enters into an agreement with an authorized builder, which generally grants the builder the non-exclusive right to market the Company's products in a specified territory and which is cancelable by either party on 60 days' notice. The agreements do not prohibit the builder from marketing metal building systems of other manufacturers. The Company establishes an annual sales goal for each builder and provides to the builder sales and pricing information, design and engineering manuals, drawings and assistance, application programs for estimating and quoting jobs and advertising and promotional literature. The Company also defrays a portion of the builder's advertising costs and provides volume purchasing and other pricing incentives to encourage them to deal exclusively or principally with the Company. The builder is required to maintain a place of business in its designated territory, provide a sales organization, conduct periodic advertising programs and perform construction, warranty and other services for customers and potential customers. An authorized builder usually is hired by an end user to erect a metal building system on the customer's site and provide general contracting and other services ancillary to the completion of the project. The Company sells its products to the builder, which generally includes the price of the building as a part of its overall construction contract with its customer. Most of the Company's metal building system sales outside of Texas and surrounding states are through its authorized builder networks. The Company relies upon maintaining a satisfactory business relationship for the continued receipt of job orders from its authorized builders and does not consider the builder agreements to be material to its business. During fiscal 1997, the Company's largest authorized builder accounted for less than 2% of the Company's total metal building systems sales. The Mid-West division primarily markets metal building systems under the brand name "Mid-West Steel Buildings" directly to contractors in Texas and surrounding states using a sales force of ten persons. The Company also sells metal building systems through the All American division under the name "All American Systems" and various private labels. Metal building components are sold directly to contractors and other customers by the NCI Building Components division under the brand name "NCI Building Components." The NCI Building Components division utilizes an in-house sales force of approximately 60 persons. Roll-up doors, interior and exterior doors, lockers, interior partitions and walls and header panels and trim are sold directly to contractors and other customers by the Doors & Building Components division under the brand names "Doors & Building Components" or "DBCI". These components also are produced by that division for integration into self storage and metal building systems sold by other divisions of the Company. The Doors & Building Components division has an in-house sales force of approximately 6 persons. The Company also seeks to develop niche markets, which may initially represent a small percentage of sales but present growth opportunities and other advantages. The Company's Steel Systems division sells its self-storage systems and components under the brand name "Steel Systems." Development of the Classic Metal Homes division's metal framing systems for residential-use homes continued through fiscal 1997. The Company also markets its products to international builders. Approximately 2.3%, 4.4% and 2.1% of the Company's sales in fiscal 1995, fiscal 1996 and fiscal 1997, respectively, were to customers located in foreign countries. No single foreign country has represented a steady market for the Company's products. Foreign sales are made in United States dollars and under letters of credit. DESIGN AND MANUFACTURE After the Company receives an order, the Company's engineers design the metal building system to meet the customer's requirements and to satisfy applicable building codes. In order to expedite this process, the Company uses computer-aided design and engineering systems to generate engineering and erection drawings and a bill of materials for the manufacture of the building system. 4 6 Once the specifications and designs of the customer's project have been finalized, the manufacturing process begins at one of the Company's five full manufacturing facilities in Texas, Georgia, South Carolina or Tennessee or at the frame manufacturing facility in Monterrey, Mexico operated by the Company's joint venture. The fabrication of the primary structural framing consists of a process in which pieces of rigid steel plates are punched and sheared and then routed through an automatic welding machine and sent through further fitting and welding processes. This process is the most labor intensive in the fabrication of metal building systems. The secondary structural framing and the covering subsystem are roll-formed steel products that are manufactured at the Company's full manufacturing facilities as well as its regional satellite plants. In roll forming, pre-finished coils of steel are unwound and passed through a series of progressive forming rolls which form the steel into various profiles of medium-gauge structural shapes and light-gauge sheets and panels. The fabrication of the secondary framing and covering subsystems is more automated and, thus, is less labor intensive than that of the primary structural framing. Once manufactured, structural framing members and covering subsystems are shipped to the job site for assembly by local contractors. The Company generally is not responsible for any on-site construction. The time elapsed between the Company's receipt of an order and shipment of a completed building system has typically ranged from four to eight weeks, although delivery can extend somewhat longer if engineering and drafting requirements are extensive. The doors, lockers, interior partitions and other panels and trim products of the Doors & Building Components division are manufactured at plants in Georgia, Texas and Arizona, each of which operates independently of the Company's other component plants. The products are roll-formed or fabricated at each plant using roll-formers and other metal working equipment. Orders are processed at the division's home office in Georgia and sent to the appropriate plant, which is generally determined in a manner to obtain the lowest shipping cost. The division's capacity allows it to ship orders in a two- to three-week time period. RAW MATERIALS The principal raw material used in the manufacture of the Company's metal building and component products is steel. Components are fabricated from common steel products produced by mills including bars, plates, sheets and galvanized sheets. In fiscal 1997, the Company purchased more than 40% of its steel requirements from National Steel Corporation. No other steel supplier accounted for more than 6% of the Company's steel purchases. The Company believes concentration of its steel purchases among a small group of suppliers that have mills and warehouse facilities in close proximity to the facilities of the Company enables it, as a large customer of those suppliers, to obtain better service and delivery than many other steel purchasers. These suppliers generally maintain an inventory of the types of materials required by the Company, enabling the Company to utilize a form of "just-in-time" inventory management with regard to raw materials. The Company expects moderate steel price increases during fiscal 1998. The Company does not have any long-term contracts for the purchase of raw materials. A prolonged labor strike against one or more of its principal domestic suppliers could have a material adverse effect on the Company's operations. Alternative sources, however, including foreign steel, are currently believed to be sufficient to maintain required deliveries. JOINT VENTURES In 1997, the Company formed and now owns 51% of a joint venture to build and operate a framing facility in Monterrey, Mexico. This facility began operation in July 1997. The Company purchases substantially all of the framing systems produced by this joint venture. The Company also formed and now owns 50% of a joint venture which will acquire land in southern Illinois and build a hot rolled coil coating facility that is expected to commence operations in calendar 1998. The facility will be used to slit and coat hot rolled coils of medium gauge steel for use in manufacturing purlins and girts. The Company, which uses coated coils in manufacturing metal building systems, has agreed to purchase a substantial portion of its production requirements for that product from the joint venture. 5 7 BACKLOG At October 31, 1997, the total backlog for orders believed by the Company to be firm was $110 million. This compares with a total backlog of $85.6 million at October 31, 1996 and $65.6 million at October 31, 1995. The increases in backlog reflect the results of the marketing activities of the Company, particularly the expansion of its authorized builder networks, market demand and the acquisitions and satellite plant openings completed by the Company since 1992. Job orders generally are cancelable by customers at any time for any reason and, occasionally, orders in the backlog are not completed and shipped for reasons that include changes in the requirements of the customers and the inability of customers to obtain necessary financing or zoning variances. None of the backlog at October 31, 1997 currently is scheduled to extend beyond October 31, 1998. WARRANTIES The Company provides a limited warranty on all fabricated products. This warranty generally provides for repair or replacement of fabricated and roll-formed materials, but does not include the cost of field installation. The Company also passes through to its customers certain warranties it receives on paint coatings, which vary from three to 20 years, and the 20-year warranties it receives on galvalume coated steel. To respond to certain competitive situations, the Company may provide a limited weather tightness warranty of up to 20 years covering potential leakage on certain roofing systems offered by the Company. The Company has not experienced any significant claims under any of its warranties. COMPETITION The Company competes with a number of other manufacturers of metal building systems and components, ranging from small local firms to large national firms, some of which may have greater financial, management and marketing resources than the Company. Most of these competitors operate on a regional basis, although the Company believes that four other manufacturers of metal building systems and several manufacturers of components have nationwide coverage. In addition, the Company and others in the metal building systems and components industry compete with alternative methods of building construction. Competition is based primarily on such factors as price, speed of construction, quality of builder/dealer networks, the ability to provide added value in the design of buildings and, among metal building and component manufacturers, service, quality and delivery times. Based on data reported to the MBMA for the calendar year 1996 the Company believes it ranks as the second largest domestic manufacturer of metal building systems, with approximately 15% of total reported industry sales. The Company believes that the largest metal building manufacturer has approximately 23% of industry sales reported to the MBMA. Reliable information about component sales and the Company's ranking in that market is not available. Foreign companies are not presently a significant factor in the domestic marketplace, and the Company does not expect them to be in the near future because of transportation costs and the short lead times generally required by customers. REGULATORY MATTERS The Company's manufacturing facilities are subject to water and air pollution control standards mandated by federal, state and local laws. The Company believes it is in substantial compliance with all environmental standards applicable to its operations. The Company does not anticipate material capital expenditures to meet current environmental quality control standards, but there can be no assurance that more stringent regulatory standards will not be established which might require such expenditures. The metal building systems manufactured by the Company must meet zoning and building code requirements promulgated by local governmental agencies. PATENTS, LICENSES AND PROPRIETARY RIGHTS The Company has a perpetual, nonexclusive license from Metal Building Components, Inc. to manufacture, distribute, market and sell its standing seam roof systems. The Company does not consider the license to be material to its business due to the availability of other standing seam roof systems, including its own roof 6 8 system. The Company has a United States patent on its Retro-R(R) retrofit metal panel and has applied for another patent with respect to its Retro-R(R) panel. Another patent application is pending for a vented closure for a metallic roofing system. Patent protection is not considered by the Company to be a material competitive factor in its industry. The Company has registered trademarks in the United States for "Metallic" and design, "Retro-R", "Pittsburgh Loc", "Trapezoidal Loc", "NCI" and design, "A&S Building Systems", "Mid-West Steel Building Company", design for Mid-West Steel, "Classic Metal Home" and design, "A&S" and design, "Mesco" and design and "ARS" and design. In addition, the Company has pending U.S. trademark registrations for "Royal K-70", "Dura-20", "VL-12", "VL-16", "VL-18", "Metallic Building Company", "Steel System" and design, "NCI Express" and design, "NCI Building Components", "NCI", "DBCI", "All American Systems", "NCI" and design and "Vertical Loc." The "Metallic" and design mark is also pending registration in Mexico. EMPLOYEES As of October 31, 1997, the Company employed approximately 2,472 employees, of whom 156 were management and supervisory personnel, 206 were administrative personnel, 218 were sales personnel, 227 were engineers and draftsmen, and 1,665 were manufacturing personnel. The Company's employees are not represented by a labor union or collective bargaining agreement although, in January 1996 and November 1997, unions petitioned for but lost elections to be recognized as the collective bargaining representative for production and maintenance employees at the Tallapoosa, Georgia facility and production employees at the Mattoon, Illinois facility. The Company regards its employee relations as satisfactory. ITEM 2. PROPERTIES. The Company conducts manufacturing operations at the following facilities:
SQUARE OWNED/ FACILITY PRODUCTS FEET LEASED -------- -------- ------ ------ Houston, Texas (acquired 1989) Metal building systems(1) 382,000 Owned Components Overhead doors Tallapoosa, Georgia (acquired 1992) Metal building systems(1) 246,000 Leased Components Caryville, Tennessee (acquired 1992) Metal building systems(1) 193,800 Owned Components Chester, South Carolina (acquired 1996) Metal building systems(1) 124,000 Owned Components Southlake, Texas (acquired 1996) Metal building systems(1) 123,000 Owned Components Houston, Texas (opened 1984) Components 97,000 Owned Jackson, Mississippi (opened 1994) Secondary structures 96,000 Owned Covering subsystems Components Mattoon, Illinois (opened 1991) Secondary structures 90,600 Owned Covering subsystems Components Atwater, California (opened 1996) Secondary structures 85,700 Owned Covering subsystems Components Hobbs, New Mexico (acquired 1995) Secondary structures 60,800 Leased Covering subsystems Components
7 9
SQUARE OWNED/ FACILITY PRODUCTS FEET LEASED - ------------------------------------------------- ----------------------------- --------- --------- Douglasville, Georgia (acquired 1995) Overhead doors 60,000 Owned Components Chandler, Arizona (acquired 1995) Overhead doors 35,000 Leased Components Ennis, Texas (acquired 1996) Components 33,000 Owned Studs Stafford, Texas (acquired 1997) Components 99,600 Leased Stafford, Texas (acquired 1997) Insulated panels 57,000 Leased Jemison, Alabama (acquired 1997) Components 41,000 Owned Monterrey, Mexico (opened 1997) Structural 64,125 Owned(2)
- --------------- (1) Includes primary structures, secondary structures and covering subsystems. (2) The Company owns a 51% interest in a joint venture which owns this facility. The principal executive offices of the Company occupy 33,600 square feet of the principal manufacturing facility in Houston. The principal offices of A&S, DBCI and Mesco occupy 16,000 square feet of the Caryville facility, 4,000 square feet of the Douglasville facility, and 16,800 square feet of the Southlake facility, respectively. The Company also maintains several drafting office facilities and retail locations in various states. These office and retail facilities are subject to short-term leases. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various legal proceedings that the Company considers to be in the normal course of business. Management of the Company believes that such litigation will not result in any material losses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 8 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The information required by this Item is incorporated by reference from the Company's 1997 Annual Report to Shareholders, bottom of page 28, regarding the market for common stock of the Company. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference from the Company's 1997 Annual Report to Shareholders, top of page 1. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference from the following portions of the Company's 1997 Annual Report to Shareholders: Management's Discussion and Analysis of Results of Operations and Financial Condition, pages 26 through 28. 9 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements and supplementary financial information are incorporated by reference from the indicated pages in the Company's 1997 Annual Report to Shareholders.
PAGES OF ANNUAL REPORT TO SHAREHOLDERS --------------- Selected Financial Data..................................... 1 Consolidated statements of income for each of the three years in the period ended October 31, 1997................ 16 Consolidated balance sheets at October 31, 1997 and 1996.... 17 Consolidated statements of shareholders' equity for each of the three years in the period ended October 31, 1997...... 18 Consolidated statements of cash flows for each of the three years in the period ended October 31, 1997................ 19 Notes to consolidated financial statements.................. 20 -- 24 Report of independent auditors.............................. 25 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 26 -- 28 Unaudited Quarterly Financial Data.......................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 10 12 PART III The information required by Items 10 through 13 of Part III is incorporated by reference from the indicated pages of the Company's definitive proxy statement for its annual meeting of shareholders to be held on March 4, 1998.
PAGES OF PROXY STATEMENT --------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. 3 -- 6 ITEM 11. EXECUTIVE COMPENSATION...................................... 7 -- 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ITEM 12. MANAGEMENT.................................................. 1 -- 3 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 13
11 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: 1. Consolidated financial statements (see Item 8). 2. Consolidated financial statement schedules. Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are inapplicable or the requested information is shown in the financial statements or noted therein. 3. Exhibits.
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 -- Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's registration statement no. 33-45612 and incorporated herein) 3.2 -- Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1.1 to the Company's registration statement no. 33-45612 and incorporated herein) 3.3 -- Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein) 3.4 -- Amended and Restated By-Laws of the Company, as amended through February 5, 1992 (filed as Exhibit 3.2 to the Company's registration statement no. 33-45612 and incorporated herein) 4.1 -- Form of certificate representing shares of Company's common stock (filed as Exhibit 4.1 to the Company's registration statement no. 33-45612 and incorporated herein) 4.2 -- Stock Registration Agreement, dated April 10, 1989, between the Company and Equus II Incorporated, formerly Equus Investments II, L.P. ("Equus") (filed as Exhibit 4.2 to the Company's registration statement no. 33-45612 and incorporated herein) 4.3 -- Credit Agreement, dated April 30, 1993, between NationsBank of Texas, N.A. and NCI Building Systems, L.P. (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.4 -- First Amendment Agreement, dated February 28, 1994, between NationsBank of Texas, N.A. and NCI Building System, L.P. (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein) 4.5 -- Second Amendment Agreement, dated February 28, 1995, between NationsBank of Texas, N.A. and NCI Building Systems, L.P. (filed as Exhibit 4.13 to the Company's registration statement no. 33-99560 and incorporated herein) 4.6 -- $6,000,000 Revolving Credit Note, dated April 30, 1993, in favor of NationsBank of Texas, N.A., executed by NCI Building Systems, L.P. (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.7 -- $1,750,000 Revolving Credit Note, dated February 28, 1994, in favor of NationsBank of Texas, N.A., executed by NCI Building Systems, L.P. (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein)
12 14
EXHIBIT NO. DESCRIPTION ------- ----------- 4.8 -- Guaranty, dated April 30, 1993, between NationsBank of Texas, N.A. and the Company (filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.9 -- Guaranty, dated April 30, 1993, between NationsBank of Texas, N.A. and A & S Building Systems, Inc. (filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.10 -- Loan Agreement "A," dated September 1, 1991, between the City of Mattoon and the Company (filed as Exhibit 4.11 to the Company's registration statement no. 33-45612 and incorporated herein) 4.11 -- $250,000 Promissory Note A, dated October 31, 1991, in favor of the City of Mattoon executed by the Company (filed as Exhibit 4.12 to the Company's registration statement no. 33-45612 and incorporated herein) 4.12 -- Loan Agreement "B," dated September 1, 1991, between the City of Mattoon and the Company (filed as Exhibit 4.13 to the Company's registration statement no. 33-45612 and incorporated herein) 4.13 -- $250,000 Promissory Note B, dated January 20, 1992, in favor of the City of Mattoon executed by the Company (filed as Exhibit 4.14 to the Company's registration statement no. 33-45612 and incorporated herein) 4.14 -- Stock Retention and Registration Agreement, dated November 13, 1995, by and between the Company, Doors & Building Components, Inc., and David B. Curtis (filed as Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 and incorporated herein) 4.15 -- 7% Convertible Subordinated Debenture dated April 1, 1996 Due April 1, 2001 between NCI Building Systems, Inc. and John T. Eubanks (filed as Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 and incorporated herein) 10.1 -- Employment Agreement, dated April 10, 1989, between the Company and Johnie Schulte, Jr. (filed as Exhibit 10.1 to the Company's registration statement no. 33-45612 and incorporated herein) 10.2 -- Amendment to Employment Agreement, dated February 21, 1992, between the Company and Johnie Schulte, Jr. (filed as Exhibit 10.1.1 to the Company's registration statement no. 33-45612 and incorporated herein) 10.3 -- Summary of Bonus Program (filed as Exhibit 10.2 to the Company's registration statement no. 33-45612 and incorporated herein) 10.4 -- Employee Stock Option Plan (filed as Exhibit 4.1 to the Company's registration statement no. 33-52080 and incorporated herein) 10.5 -- Amendment No. 1 to Stock Option Plan (filed as Exhibit 4.2 to the Company's registration statement no. 33-52080 and incorporated herein) 10.6 -- Amendment No. 2 to Stock Option Plan (filed as Exhibit 10.6 in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein) 10.7 -- Form of Employee Stock Option Agreement (filed as Exhibit 4.3 to the Company's registration statement no. 33-52080 and incorporated herein) 10.8 -- Form of Director Stock Option Agreement (filed as Exhibit 4.4 to the Company's registration statement no. 33-52080 and incorporated herein) 10.9 -- License Agreement, dated June 30, 1989, between Metal Building Components, Inc. and the Company (filed as Exhibit 10.6 to the Company's registration statement no. 33-45612 and incorporated herein)
13 15
EXHIBIT NO. DESCRIPTION ------- ----------- 10.10 -- 401(k) Profit Sharing Plan (filed as Exhibit 4.1 to the Company's registration statement no. 33-52078 and incorporated herein) 10.11 -- Form of Metallic Builder Agreement (filed as Exhibit 10.10 to the Company's registration statement no. 33-45612 and incorporated herein) 10.12 -- Form of A&S Builder Agreement (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein) 10.13 -- Purchase Agreement, dated September 7, 1994, between NCI Building Systems, L.P., Ellis Building Components, Inc., Tony Ellis and Ronald Ellis (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 14, 1994 and incorporated herein) 10.14 -- Amendment to Purchase Agreement, dated October 14, 1994, between NCI Building Systems, L.P., Ellis Building Components, Inc., Tony Ellis and Ronald Ellis (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated October 14, 1994 and incorporated herein) 10.15 -- Form of Mesco Metal Buildings Agreement (filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the FYE October 31, 1996 and incorporated herein) 10.16 -- Amendment No. 3 to Stock Option Plan (filed as Exhibit 4.6 to the Company's Registration Statement No. 333-12921 and incorporated herein) 10.17 -- Asset Purchase Agreement, dated October 13, 1995, by and among Doors & Building Components, Inc. David B. Curtis, DBCI Acquisition Corp. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated November 13, 1995 and incorporated herein) 10.18 -- Asset Purchase Agreement, dated April 1, 1996, by and among Anderson Industries, Inc., Charles W. Anderson, Thomas L. Anderson, Jr., John T. Eubanks, Robert K. Landon, NCI Building Systems, L.P. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 1, 1996 and incorporated herein). *10.19 -- Employment Agreement, dated April 1, 1996, between the Company and John T. Eubanks. *13 -- 1997 Annual Report to Shareholders. With the exception of the information incorporated by reference into Items 5, 6, 7, and 8 of this Form 10-K, the 1997 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K. *21 -- List of Subsidiaries *23 -- Consent of Ernst & Young LLP *27 -- Financial Data Schedule
- --------------- * Filed herewith 14 16 (b) Reports on Form 8-K. None. This Annual Report on Form 10-K contains forward-looking statements concerning the business and operations of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties, and other factors that could cause the actual results to differ materially from those projected. These risks, uncertainties, and other factors include, but are not limited to, industry cyclicality and seasonality, adverse weather conditions, fluctuations in customer demand and other patterns, raw material pricing, competitive activity and pricing pressure, the ability to make strategic activities accretive to earnings, and general economic conditions affecting the construction industry, as well as other risks detailed in this and other filings of the Company with the Securities and Exchange Commission. The Company expressly disclaims any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in its expectations. 15 17 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 on the 28th day of January, 1998. NCI BUILDING SYSTEMS, INC. By: /s/ JOHNIE SCHULTE ---------------------------------- Johnie Schulte, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 28th day of January, 1998.
NAME TITLE ---- ----- /s/ JOHNIE SCHULTE President, Chief Executive Officer and - ----------------------------------------------------- Director (principal executive officer) Johnie Schulte /s/ ROBERT J. MEDLOCK Vice President, Chief Financial Officer and - ----------------------------------------------------- Treasurer (principal financial and Robert J. Medlock accounting officer) /s/ THOMAS C. ARNETT Director - ----------------------------------------------------- Thomas C. Arnett /s/ WILLIAM D. BREEDLOVE Director - ----------------------------------------------------- William D. Breedlove /s/ GARY L. FORBES Director - ----------------------------------------------------- Gary L. Forbes /s/ LEONARD F. GEORGE Executive Vice President and Director - ----------------------------------------------------- Leonard F. George /s/ ROBERT N. MCDONALD Director - ----------------------------------------------------- Robert N. McDonald /s/ C.A. RUNDELL, JR. Director - ----------------------------------------------------- C. A. Rundell, Jr. /s/ DANIEL D. ZABCIK Director - ----------------------------------------------------- Daniel D. Zabcik
16 18 NCI BUILDING SYSTEMS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED TO COSTS AT END DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS(1) OF PERIOD ----------- ---------- ---------------- ------------- ---------- Year ended October 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges................... $1,629,202 $1,223,178 $1,354,232 $1,498,148 Year ended October 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges................... $1,339,772 $ 680,633 $ 391,203 $1,629,202 Year ended October 31, 1995: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges................... $1,040,828 $1,101,038 $ 802,094 $1,339,772
- --------------- (1) Uncollectible accounts, net of recoveries. 17 19 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 -- Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's registration statement no. 33-45612 and incorporated herein) 3.2 -- Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1.1 to the Company's registration statement no. 33-45612 and incorporated herein) 3.3 -- Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein) 3.4 -- Amended and Restated By-Laws of the Company, as amended through February 5, 1992 (filed as Exhibit 3.2 to the Company's registration statement no. 33-45612 and incorporated herein) 4.1 -- Form of certificate representing shares of Company's common stock (filed as Exhibit 4.1 to the Company's registration statement no. 33-45612 and incorporated herein) 4.2 -- Stock Registration Agreement, dated April 10, 1989, between the Company and Equus II Incorporated, formerly Equus Investments II, L.P. ("Equus") (filed as Exhibit 4.2 to the Company's registration statement no. 33-45612 and incorporated herein) 4.3 -- Credit Agreement, dated April 30, 1993, between NationsBank of Texas, N.A. and NCI Building Systems, L.P. (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.4 -- First Amendment Agreement, dated February 28, 1994, between NationsBank of Texas, N.A. and NCI Building System, L.P. (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein) 4.5 -- Second Amendment Agreement, dated February 28, 1995, between NationsBank of Texas, N.A. and NCI Building Systems, L.P. (filed as Exhibit 4.13 to the Company's registration statement no. 33-99560 and incorporated herein) 4.6 -- $6,000,000 Revolving Credit Note, dated April 30, 1993, in favor of NationsBank of Texas, N.A., executed by NCI Building Systems, L.P. (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.7 -- $1,750,000 Revolving Credit Note, dated February 28, 1994, in favor of NationsBank of Texas, N.A., executed by NCI Building Systems, L.P. (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated herein) 4.8 -- Guaranty, dated April 30, 1993, between NationsBank of Texas, N.A. and the Company (filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.9 -- Guaranty, dated April 30, 1993, between NationsBank of Texas, N.A. and A & S Building Systems, Inc. (filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 and incorporated herein) 4.10 -- Loan Agreement "A," dated September 1, 1991, between the City of Mattoon and the Company (filed as Exhibit 4.11 to the Company's registration statement no. 33-45612 and incorporated herein)
18 20
EXHIBIT NO. DESCRIPTION ------- ----------- 4.11 -- $250,000 Promissory Note A, dated October 31, 1991, in favor of the City of Mattoon executed by the Company (filed as Exhibit 4.12 to the Company's registration statement no. 33-45612 and incorporated herein) 4.12 -- Loan Agreement "B," dated September 1, 1991, between the City of Mattoon and the Company (filed as Exhibit 4.13 to the Company's registration statement no. 33-45612 and incorporated herein) 4.13 -- $250,000 Promissory Note B, dated January 20, 1992, in favor of the City of Mattoon executed by the Company (filed as Exhibit 4.14 to the Company's registration statement no. 33-45612 and incorporated herein) 4.14 -- Stock Retention and Registration Agreement, dated November 13, 1995, by and between the Company, Doors & Building Components, Inc., and David B. Curtis (filed as Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 and incorporated herein) 4.15 -- 7% Convertible Subordinated Debenture dated April 1, 1996 Due April 1, 2001 between NCI Building Systems, Inc. and John T. Eubanks (filed as Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 and incorporated herein) 10.1 -- Employment Agreement, dated April 10, 1989, between the Company and Johnie Schulte, Jr. (filed as Exhibit 10.1 to the Company's registration statement no. 33-45612 and incorporated herein) 10.2 -- Amendment to Employment Agreement, dated February 21, 1992, between the Company and Johnie Schulte, Jr. (filed as Exhibit 10.1.1 to the Company's registration statement no. 33-45612 and incorporated herein) 10.3 -- Summary of Bonus Program (filed as Exhibit 10.2 to the Company's registration statement no. 33-45612 and incorporated herein) 10.4 -- Employee Stock Option Plan (filed as Exhibit 4.1 to the Company's registration statement no. 33-52080 and incorporated herein) 10.5 -- Amendment No. 1 to Stock Option Plan (filed as Exhibit 4.2 to the Company's registration statement no. 33-52080 and incorporated herein) 10.6 -- Amendment No. 2 to Stock Option Plan (filed as Exhibit 10.6 in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein) 10.7 -- Form of Employee Stock Option Agreement (filed as Exhibit 4.3 to the Company's registration statement no. 33-52080 and incorporated herein) 10.8 -- Form of Director Stock Option Agreement (filed as Exhibit 4.4 to the Company's registration statement no. 33-52080 and incorporated herein) 10.9 -- License Agreement, dated June 30, 1989, between Metal Building Components, Inc. and the Company (filed as Exhibit 10.6 to the Company's registration statement no. 33-45612 and incorporated herein) 10.10 -- 401(k) Profit Sharing Plan (filed as Exhibit 4.1 to the Company's registration statement no. 33-52078 and incorporated herein) 10.11 -- Form of Metallic Builder Agreement (filed as Exhibit 10.10 to the Company's registration statement no. 33-45612 and incorporated herein) 10.12 -- Form of A&S Builder Agreement (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein)
19 21
EXHIBIT NO. DESCRIPTION ------- ----------- 10.13 -- Purchase Agreement, dated September 7, 1994, between NCI Building Systems, L.P., Ellis Building Components, Inc., Tony Ellis and Ronald Ellis (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 14, 1994 and incorporated herein) 10.14 -- Amendment to Purchase Agreement, dated October 14, 1994, between NCI Building Systems, L.P., Ellis Building Components, Inc., Tony Ellis and Ronald Ellis (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated October 14, 1994 and incorporated herein) 10.15 -- Form of Mesco Metal Buildings Agreement (filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the FYE October 31, 1996 and incorporated herein) 10.16 -- Amendment No. 3 to Stock Option Plan (filed as Exhibit 4.6 to the Company's Registration Statement No. 333-12921 and incorporated herein) 10.17 -- Asset Purchase Agreement, dated October 13, 1995, by and among Doors & Building Components, Inc. David B. Curtis, DBCI Acquisition Corp. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated November 13, 1995 and incorporated herein) 10.18 -- Asset Purchase Agreement, dated April 1, 1996, by and among Anderson Industries, Inc., Charles W. Anderson, Thomas L. Anderson, Jr., John T. Eubanks, Robert K. Landon, NCI Building Systems, L.P. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 1, 1996 and incorporated herein). *10.19 -- Employment Agreement, dated April 1, 1996, between the Company and John T. Eubanks. *13 -- 1997 Annual Report to Shareholders. With the exception of the information incorporated by reference into Items 5, 6, 7, and 8 of this Form 10-K, the 1997 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K. *21 -- List of Subsidiaries *23 -- Consent of Ernst & Young LLP *27 -- Financial Data Schedule
- --------------- * Filed herewith 20 EX-10.19 2 EMPLOYMENT AGMT DATED 4/1/96 BETWEEN CO & EUBANKS 1 EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of April 1, 1996, is made by and between NCI Building Systems, L.P., a Texas limited partnership ("Employer"), and John T. Eubanks, a resident of Texas ("Employee"). W I T N E S S E T H: WHEREAS, concurrently with the execution and delivery of this Agreement, Employer is acquiring substantially all of the business, goodwill and substantially all of the properties and assets of the MESCO Metal Buildings division of Anderson Industries, Inc., a Texas corporation ("Seller"), pursuant to that certain Asset Purchase Agreement, dated as of April 1, 1996 (the "Purchase Agreement"), by and among Employer, NCI Building Systems, Inc. ("NCI"), Seller, Employee, Charles W. Anderson, Robert K. Landon and Thomas L. Anderson, Jr.; and WHEREAS, Employee was and is employed by Seller; and WHEREAS, Employee recognizes and agrees that his agreement to become employed by Employer and his nondisclosure, non-solicitation and non-competition covenants, as set forth herein, are essential to the ability of Employer to retain the goodwill related to the business of Seller being acquired by Employer, and that Employer would not acquire such business and goodwill but for the agreements and covenants of Employee being made herein, NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, as well as other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer hereby agrees to employ Employee and Employee hereby agrees to be employed by Employer on the following terms and conditions: 1. Employment Term. The term of employment under this Agreement shall begin on the date first written above, and shall continue thereafter until the fifth anniversary of such date (the "Employment Term"). The Employment Term may be earlier terminated, as provided elsewhere in this Agreement. 2. Duties of Employee. (a) Employee will serve as the Chief Operating Officer of the MESCO Metal Buildings division of Employer and shall be responsible for the supervision, control and conduct of the business of such division, shall have additional duties as are normally assigned to the Chief Operating Officer of a division of Employer, and any additional responsibilities which may from time to time reasonably be designated by Employer or by Employer's parent corporation, NCI. The duties to be assigned to and performed by Employee shall be commensurate with his education, experience, talents, and abilities. Employee shall report to the President of NCI. 2 (b) Employee agrees during the term of this Agreement to devote all of his business time and his best efforts, skills and abilities exclusively to the performance of his duties as may be assigned to him from time to time, and to the furtherance of the business of Employer and its affiliates; provided, however, that during the first year of the Employment Term Employee shall be entitled to spend up to 20% of his business time closing out the affairs of Seller. Employee shall schedule the business time he devotes to closing out the affairs of Seller in good faith, and shall use his best efforts to schedule such business time, so as not to unreasonably interfere with the performance of his duties to Employer in accordance with this Agreement. (c) Employee will perform his duties in a professional manner and will use his best efforts, skills and abilities to promote, enhance and preserve the business of Employer and its affiliates and the goodwill and relationships they have with their employees, agents, representatives, customers, suppliers, and other persons having business relations with any of them. 3. Compensation. (a) Employee will be paid a base salary at the rate of $150,000 per year, and will receive an annual merit review. The base salary will be paid on a regular and periodic basis in accordance with the normal payroll procedures of Employer and its affiliates, prorated for any partial pay period at the beginning or end of the employment of Employee, and subject to required withholding under applicable tax laws. During any period of disability of Employee, the base salary otherwise payable to Employee will be reduced by the amount of any payments received by Employee pursuant to disability insurance benefits coverages provided by Employer. (b) Employee will be entitled to participate as a Level I participant in the Management Employees Cash Bonus Program of NCI, as the same may be amended from time to time by the Board of Directors of NCI. Bonuses, if any, paid to Employee pursuant to such program shall be paid after the end of each fiscal year of NCI at the same time as the same are paid to other participants, and shall be subject to required withholding under applicable tax laws. Employee understands that bonuses cannot be earned under such program unless a participant is employed by NCI or one of its subsidiaries on the last day of the fiscal year of NCI and, if the employment of a participant terminates for any reason prior to that date, no bonus shall be payable thereunder. (c) Employee will be entitled to receive an option to purchase 25,000 shares of NCI's Common Stock under NCI's Nonqualified Stock Option Plan. The option exercise price per share shall be $28.50, the last sale price of NCI's Common Stock, as reported by NASDAQ/NMS, on the last trading day prior to the public announcement of the acquisition and sale contemplated by the Purchase Agreement. Such option shall be subject to all of the terms and provisions of NCI's Nonqualified Stock Option Plan and shall expire on February 22, 2006. As a precondition to the grant of such option, Employee shall be required to execute and deliver to NCI the standard written option agreement required of all option grantees pursuant to NCI's Nonqualified Stock Option Plan. 2 3 (d) During the Employment Term, Employer shall pay premiums at an annual rate of $40,410 (or quarterly at $10,426.28) on the existing key man life insurance policy for Employee. The insurer and the terms and conditions of such policy are acceptable to Employer, and $5,000,000 of the death benefit under such insurance policy shall be payable to such beneficiary or beneficiaries as may be designated by Employee. (e) Employee will be provided the same medical insurance coverage, vacation, and other employee and fringe benefits (including a car allowance) that NCI and its subsidiaries, including Employer, make available to their employees with positions and responsibilities commensurate to those of Employee. Employee understands and agrees that such benefits may be changed from time to time in the sole discretion of Employer and/or NCI. (f) Employer shall reimburse Employee for all reasonable and proper business expenses incurred and paid by Employee in the course of the performance of Employee's duties, to the extent the expenses are properly documented and reimbursement is consistent with the policies and procedures of Employer as in effect from time to time. 4. Early Termination Rights and Obligations. (a) Either party shall have the right to terminate the employment of Employee hereunder for any reason upon thirty (30) days written notice. (b) Upon termination of the employment of Employee for any reason, whether by Employee or by Employer, Employee shall be entitled to receive such portion of his base salary, at the rate then in effect, and the fringe benefits that were earned by him or accrued for his account through the date of the termination of his employment hereunder. (c) If the employment of Employee is terminated for any reason prior to expiration of the Employment Term, whether by Employee or by Employer, within six months after a Change of Control, Employee shall be entitled to receive a severance payment pursuant to this paragraph (c). If such Change of Control occurs within two years after the date hereof, Employee shall be entitled to receive a severance payment equal to the amount of base salary, at the rate then in effect, that would have been paid to him through two years from the date of such termination, and if such Change of Control occurs two or more years after the date hereof, Employee shall be entitled to a severance payment equal to the amount of base salary, at the rate then in effect, that would have been paid to him through one year from the date of such termination. The severance payment shall be paid to Employee in equal installments on the normal employee pay days of Employer until the severance payment has been paid in full. Each installment shall be in the same amount as the gross pay that would have been payable to Employee on that pay day had his employment not been terminated, less any required withholding under applicable tax laws. For the purpose hereof, a "Change of Control" shall be deemed to have occurred if NCI sells all or substantially all of its assets, is a party to any merger, consolidation or corporate reorganization, or any other person makes a tender or exchange offer for the stock of NCI and the stockholders of NCI immediately prior to the 3 4 consummation thereof own 50% or less of the common stock of the surviving, resulting or purchasing corporation immediately following the consummation thereof. (d) Employer's payment of the amounts owed to Employee pursuant to this Section 4 shall fully satisfy all obligations of Employer to Employee under this Agreement if the employment of Employee is terminated hereunder prior to expiration of the Employment Term, and all obligations of Employer and Employee to each other set forth in Sections 1 through 3 of this Agreement shall terminate and be of no further force or effect. No termination of employment hereunder, whether by Employer or Employee and regardless of reason, shall terminate the provisions of Sections 5 et. seq. of this Agreement and each of such Sections shall remain in full force and effect as binding obligations of the parties in accordance with their express terms. 5. Use or Disclosure of Trade Secrets. (a) Employee acknowledges that in connection with his past employment with Seller and his employment with Employer, Employee has had and will have access to, and is and will become familiar with and make use of the Trade Secrets of the MESCO Metal Buildings division of Seller, Employer, NCI and one or more of the subsidiaries of NCI (collectively with Employer and NCI, the "NCI Affiliates"), and that use of their Trade Secrets by their competitors or the disclosure of their Trade Secrets to their competitors would provide invaluable benefits to those competitors. As a material inducement to Employer to enter into this Agreement and to pay to Employee the compensation stated herein, Employee covenants and agrees that he will not, during the Employment Term or at any time thereafter, either directly or indirectly through any intermediary or on his own or any other person's or entity's behalf, use the Trade Secrets for any purpose or disclose or disseminate the Trade Secrets to any other person or entity. (b) For purposes of this Agreement, "Trade Secrets" shall mean any information or material that directly or indirectly relates to Employer, NCI or another NCI Affiliate and that is proprietary or confidential to any of them or designated by any of them as a Trade Secret and not generally known by non-employees. Trade Secrets include, but are not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing): (i) information relating to the customers of an NCI Affiliate including, but not limited to, customer lists, information relating to customer contracts, the terms of such contracts, key contacts, pricing, discounts and purchasing preferences and history (collectively, "Customer Information"); (ii) information relating to the employees and agents of, and distributors and consultants to an NCI Affiliates including, but not limited to, lists of employees, agents, dealers, builders, distributors and consultants, job descriptions and functions, information relating to employment, agency, dealer, builder, distribution, or consultant contracts, the terms of such contracts, information relating to salaries, bonuses, commissions, benefits, or other compensation, and performance evaluations (collectively, "Employee Information"); 4 5 (iii) information relating to the vendors and suppliers of an NCI Affiliate including, but not limited to, vendor and supplier lists, information relating to vendor and supplier contracts, the terms of such contracts, key contacts, pricing, discounts, and sales and purchasing preferences and history; (iv) procurement, engineering, drawing, manufacturing, production, marketing, pricing, distribution, and business acquisition plans, policies, ideas, concepts and patented or unpatented techniques and "know-how" of an NCI Affiliate, and all designs, drawings, models, data, documentation, research, developments, processes, procedures, materials and literature related thereto; (v) financial information relating to the business of an NCI Affiliate. Trade Secrets also include any information described above which an NCI Affiliate obtains from another party and which such NCI Affiliate treats as proprietary or designates as a Trade Secret, whether or not owned or developed by the NCI Affiliate. 6. Non-Solicitation and Non-Hire Covenants. Employee covenants and agrees that, other than on behalf of Employer, he will not directly or indirectly, through any intermediary or otherwise, either on his own behalf or jointly with or as an owner of or employee, agent, representative, or consultant for any other person, firm, or organization: (a) solicit or induce any person or entity that at the time is, or within six months prior thereto was, an employee, consultant, agent, dealer, builder or distributor of Employer to leave or cease his or her employment or other relationship with Employer for any reason whatsoever, or hire or engage the services of any such current or former employee, consultant, agent, dealer, builder or distributor of Employer; or (b) solicit or induce the then existing or prospective customers of Employer to purchase services or products that are competitive with those marketed and/or offered for sale by Employer as of the date of Employee's termination of employment with Employer, or market or sell any such services or products to any then existing or prospective customer of Employer. For purposes hereof, an "existing or prospective customer" shall mean those persons or firms that Employer or Seller has made a sale to, provided services to or submitted a proposal to in the 12 months preceding Employee's termination of employment with Employer. 7. Non-Competition Covenant. (a) Employee covenants and agrees that he will not directly or indirectly, through any intermediary or otherwise, either on his own behalf or on behalf of another person, company, entity or enterprise, own, manage, operate, control, participate in or be financially or economically connected or interested in, or be employed by or provide services, advice or other financial or operational assistance to, any person, company, entity or enterprise that is engaged anywhere within 5 6 North America in the business of designing, engineering, manufacturing, constructing, marketing, selling or distributing metal buildings and related parts and components (the "Business"). (b) Employee understands and agrees that the foregoing covenant means that he cannot be a sole proprietor, shareholder, partner, investor or other equity owner, or a lender, creditor, lessor or other provider of financing or other economic assistance, or a director, officer, manager, supervisor, employee, agent, consultant, advisor or representative of, to or for any person, company, entity or enterprise that is engaged in the Business anywhere in North America, other than Employer or NCI. (c) Employer agrees that the ownership of capital stock or securities of NCI, or of capital stock of any other publicly-owned company constituting not more than 1% of its voting securities of any such company, shall not constitute a violation or breach of the covenant of Employee set forth in this section. 8. Term of Covenants. The covenants set forth in Sections 6 and 7 shall remain in effect until and shall expire on the later of the second anniversary of the date of termination of Employee's employment with Employer or five years from the date hereof. 9. Consideration for Covenants; Reasonableness. Employee acknowledges and agrees as follows: (a) The Customer Information, the Employee Information and the other Trade Secrets of Employer, NCI and the other NCI Affiliates are unique and were developed or acquired by them through the expenditure of valuable time and resources; that Employer, NCI and the other NCI Affiliates derive independent economic value from these Trade Secrets not being generally known to the public or to other persons who can obtain economic value from their disclosure or use; that Employer, NCI and the other NCI Affiliates have taken all prudent and necessary measures to preserve the proprietary and confidential nature of their Customer Information, their Employee Information and their other Trade Secrets; and that the covenants set forth in Sections 6 and 7 are the most reasonable, efficient and practical means to protect these Trade Secrets. (b) The covenants set forth in Sections 5, 6, 7, and 8 are necessary to protect the goodwill of Seller and the Business being acquired pursuant to the Purchase Agreement and thereafter accruing to Employer during the employment of Employee hereunder, and to ensure that such goodwill will be preserved and continued for the benefit of Employer. (c) Due to the nature of the Business as heretofore conducted by Seller and as contemplated to be continued and conducted by Employer, the scope and the duration of the covenants set forth in Sections 5, 6, 7, and 8 of this Agreement are in all respects reasonable. (d) The covenants set forth in Sections 5, 6, 7, and 8 each constitute a separate agreement independently supported by good and adequate consideration and that each such 6 7 agreement shall be severable from the other provisions of this Agreement and shall survive this Agreement. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants and agreements of Employee set forth in Sections 5, 6, 7 and 8. 10. Specific Performance. Employee acknowledges and agrees that the breach by him of the provisions of Sections 6, 7 or 8 of this Agreement could not be adequately compensated with monetary damages or other legal remedies and would irreparably injure Employer, and, accordingly, that Employer shall be entitled to temporary and permanent injunctive relief without the necessity of independent proof by it as to the inadequacy of legal remedies or the nature or extent of the irreparable harm suffered by it and that specific performance shall be appropriate remedies to enforce the provisions of this Agreement against Employee and Employee waives any claim or defense that there is an adequate remedy at law for such breach. The right of Employer to such relief shall not be construed to prevent it from pursuing, either consecutively or concurrently, any and all other legal or equitable remedies available to it for such breach or threatened breach, specifically including, without limitation, the recovery of monetary damages. 11. Severability and Modification. It is the desire and intent of the parties that the provisions of Sections 6, 7, 8, and 9 be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. If any provision of Sections 6, 7, 8, or 9 relating to the time period, scope of activities or geographic area of restrictions is declared by a court of competent jurisdiction to exceed the maximum permissible time period, scope of activities or geographic area, the same shall be reduced to the maximum which such court deems enforceable. If any provision of Sections 6, 7, 8 and 9 other than those described in the preceding sentence are adjudicated to be invalid or unenforceable, the invalid or unenforceable provisions shall be deemed amended (with respect only to the jurisdiction in which such adjudication is made) in such manner as to render them enforceable and to effectuate as nearly as possible the intentions and agreement of the parties. Furthermore, if any other provision contained in this Agreement should be held illegal, invalid or unenforceable in whole or in part by a court of competent jurisdiction, then it is the intent of the parties hereto that the balance of this Agreement be enforced to the fullest extent permitted by applicable law and, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such invalid provision as may be possible and be legal, valid, and enforceable. 12. Surrender of Books and Records. Employee shall on the termination of his employment in any manner immediately surrender to Employer all lists, books, records, and other documents incident to Employer's and affiliates' businesses and all other property belonging to Employer or any affiliate, it being distinctly understood that all such lists, books, records, and other documents are the property of Employer and such affiliate. 7 8 13. Waiver of Breach. The failure of Employer at any time to require performance by Employee of any provision hereof shall in no way affect Employer's right thereafter to enforce the same, nor shall the waiver by Employer of any breach of any provision hereof be taken or held to be a waiver of any succeeding breach of any provision or as a waiver of the provision itself. 14. Attorneys' Fees. In the event of any suit or judicial proceeding between the parties hereto with respect to this Agreement, the prevailing party shall, in addition to such other relief as the court may award, be entitled to reasonable attorneys' fees and costs, all as actually incurred. 15. Survival. Notwithstanding anything to the contrary contained herein, the provisions of Section 5 et. seq. of this Agreement shall survive the termination of employment of Employee or the termination of the Employment Term under this Agreement. 16. Notice. All notices hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or overnight mail, postage prepaid. Such notices shall be deemed to have been duly given upon receipt, if personally delivered, upon telephonic confirmation of receipt if sent by facsimile transmission, and if mailed, five days after the date of mailing (two days in the case of overnight mail), in each case addressed to the parties at the following addresses or at such other addresses as shall be specified in writing and in accordance with this Section: If to Employer: NCI Building Systems, L.P. c/o NCI Building Systems, Inc. 7301 Fairview Houston, Texas 77041 Telecopier: (713) 466-3368 Attention: Robert J. Medlock If to Employee: The address reflected on the employment records of Employer 17. Entire Agreement. This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof and contains all of the covenants and agreements between the parties with respect thereto. 18. Modification. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto. 19. Governing Law and Venue. This Agreement, and the rights and obligations of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of Texas and venue for any action pursuant hereto shall be in the appropriate state or federal court in Harris County, Texas. 8 9 20. Arbitration. (a) All disputes, controversies and claims between the parties to this Agreement ("Disputes") other than proceedings to obtain injunctive relief shall, to the fullest extent permitted by law, be solely and finally settled by a board of arbitrators consisting of either one arbitrator or three arbitrators as determined pursuant to this Section (the "Arbitrators"). The arbitration proceedings shall be held in Dallas, Texas or such other place or places as may be agreed to by both parties to the dispute. Except as otherwise provided in this Agreement, the arbitration proceedings shall be conducted in accordance with the then effective Commercial Arbitration Rules (the "AAA Rules") of the American Arbitration Association (the "AAA"). (b) Within thirty (30) days of the commencing of any arbitration proceedings by either party in accordance with the AAA Rules, both of the parties shall attempt to agree on and then select one arbitrator (the "Sole Arbitrator"). The Sole Arbitrator shall be a person not subject to disqualification under Section 19 of the AAA Rules. (c) If within such thirty (30) day period, the two parties are unable to agree upon a Sole Arbitrator, each of them shall have five (5) business days (following the expiration of the thirty (30) day period) to select (and provide written notice of such selection to the other party and to the AAA) a Qualifying Arbitrator. A "Qualifying Arbitrator" is a person who is not: (i) any party or any Affiliate of a party; or (ii) counsel to any such person at such time; or (iii) subject to disqualification under Section 19 of the AAA Rules. If either party fails to select a Qualifying Arbitrator and provide such notice within the five (5) day period, the AAA shall make such selection. Within ten (10) days following their selection, the Qualifying Arbitrators shall agree upon and select (and provide written notice of such selection to the parties and to the AAA) a third arbitrator (the "Third Arbitrator") from a list of members of the AAA's National Panel of Commercial Arbitrators. The Third Arbitrator shall be a Qualified Arbitrator. (d) The parties to the Dispute may submit briefs to the Arbitrators with respect to their claims, and the Arbitrators shall hold hearings with respect to the Disputes in accordance with the AAA Rules. The Arbitrators shall have the power to authorize any and all forms of discovery that are reasonable in scope, timing and cost. The final decision of the Arbitrators shall be due on or before the thirtieth (30th) day following the date of the last hearing with respect to the Dispute. The Arbitrators shall make a final decision that, in their judgment: (i) is consistent with, and does not add to, subtract from, or otherwise modify the provisions of this Agreement and the other agreements contemplated hereby and is determined under this Agreement and the other agreements contemplated hereby involved in the Dispute or (ii) if the subject matter of the Disputes is not specifically addressed in this Agreement or the other agreements contemplated hereby, is determined under this Agreement and the other agreements contemplated hereby consistent with the intent of the parties as supported by evidence presented in the arbitration proceeding. The Arbitrators shall send a written statement of the decision (signed by each Arbitrator joining in the decision) to the AAA and both parties, but the Arbitrators shall not be required to provide reasons for their decision. In awarding damages or other remedies or relief, the Arbitrators must honor or 9 10 abide by any applicable limitations or restrictions expressed or described in this Agreement or the other agreements contemplated hereby. (e) In the arbitration proceeding, except as otherwise provided herein: (i) the fees and expenses of counsel shall be paid by the party engaging such counsel; (ii) the fees and expenses of witnesses shall be paid by the party producing such witnesses; (iii) the fees and expenses of each Qualifying Arbitrator shall be borne by the party that selected him or her; and (iv) the fees and expenses of the Third Arbitrator and the AAA, the fees and expenses of any witness produced at the direct request of the Arbitrators, and all other expenses of the arbitration proceeding shall be shared equally by the parties, that is, one-half by each party. (f) To the extent permissible under applicable law, the parties agree that the award of the Arbitrators shall be final and not be subject to judicial review. Judgment on the arbitration award may be entered and enforced in any court having jurisdiction over the parties or their respective assets. It is the intent of the parties that the arbitration provisions hereof be enforced to the fullest extent permitted by applicable law. A party enforcing any award under this Section shall be entitled to recover the costs and expenses associated with such enforcement, including (without limitation) reasonable attorneys' fees. (g) Nothing contained in this Section shall limit the rights of the parties otherwise described in this Agreement or the other agreements contemplated hereby. 21. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one and the same document. 22. Assignment. Employer shall have the right to assign this Agreement and its obligations hereunder to any affiliate and any person, corporation, partnership or other entity that acquires all or substantially all of Employer's assets or stock, or with which Employer merges or consolidates. The rights, duties, and benefits to Employee hereunder are personal to him, and no such right or benefit may be assigned by him. 23. Binding Effect. This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns. 24. Acknowledgment Regarding Counsel. Each of the parties to this Agreement acknowledges that he or it has had the opportunity to seek and has sought counsel to review this Agreement and to obtain and has obtained the advice of such counsel relating thereto. 25. Estate. If Employee dies prior to the expiration of the Employment Term, any monies that may be due him under this Agreement as of the date of his death will be paid to his estate. 10 11 26. Captions. The captions, headings, and arrangements used in this Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] 11 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYER: NCI BUILDING SYSTEMS, L.P. By: NCI Operating Corp., General Partner By: /s/ Robert J. Medlock ------------------------------------- Robert J. Medlock, Vice President and Chief Financial Officer EMPLOYEE: /s/ John T. Eubanks ----------------------------------------- John T. Eubanks 12 EX-13 3 1997 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL DATA
Year ended October 31, (1) ------------------------------------------------ 1993 1994 1995 1996 1997 ------------------------------------------------ Sales......................................... $134,506 $167,767 $234,215 $332,880 $407,751 Net income.................................... 6,333 10,256 17,032 24,814 27,887 Net income per share.......................... .96 1.53 2.52 3.03 3.28 Working capital............................... 15,511 16,885 31,687 51,334 75,929 Total assets.................................. 46,733 63,373 83,082 157,702 195,795 Long-term debt, noncurrent portion............ 1,899 ,326 ,278 1,730 1,679 Shareholders' equity.......................... 28,655 39,682 57,682 116,175 147,815 ------------------------------------------------ Average common shares and equivalents......... 6,578 6,695 6,765 8,198 8,493 ------------------------------------------------
(1) All numbers in thousands except net income per share. OPERATING POLICIES RETURN ON ASSETS Return on assets is defined as operating income divided by average assets used in the business (eliminating primarily cash). NCI's management and directors are thoroughly convinced that this ratio is the best measure of operating performance. Tight control over inventory, receivables, and fixed investment is as important as, and interrelated to, control of the income statement. Return on assets is a proxy for cash flow, which can reward shareholders with undiluted growth. In fiscal year 1997, NCI earned a return on assets employed in the business of 31%. GROWTH The company is dedicated to increasing its market share through strong marketing and low cost, quality manufacturing. Special niches that provide unusual profit and growth opportunities are sought. Overall profit growth of at least 15% per year is an intermediate goal of the company with larger increments possible in the short-term. This growth may be internally generated or it may come from carefully selected acquisitions. DIVIDENDS The company's officers and directors are all large stock or option holders. Thus, there is much sympathy for dividends. However, it is considered appropriate, at this stage of the company's development and in view of the available returns, to invest that money in the growth of the equity of the company as opposed to paying dividends. COMPENSATION The company believes in providing base salaries for its management on the low side of industry norms with opportunities, based on performance, to obtain very high bonuses. Specifically, return on assets is the criterion for performance measurement. Bonuses begin when the ratio of operating income divided by assets used in the business is equal to 20%. Maximum bonuses, at a very high level, can be earned when 30% returns are achieved. This measure is felt to be most important because management of both the balance sheet and the income statement are critical to long-term success, especially in a cyclical industry. CORPORATE RESPONSIBILITY The company is committed to the goal of being an exemplary corporate citizen. Toward that end, we have an intense safety program ongoing in the workplace. We also provide broad coverage health insurance to all employees. There are not only employment, but advancement opportunities through our growth. We have proper awareness and concern for the overall environment. Finally, we employ high quality engineering professionals to ensure that our products are designed using sound engineering practices and principals. 1 2 CONSOLIDATED STATEMENTS OF INCOME NCI BUILDING SYSTEMS, INC.
October 31, ---------------------------------------------------- 1995 1996 1997 ---------------------------------------------------- Sales................................................................ $234,214,508 $332,879,707 $407,751,324 Cost of sales........................................................ 169,814,614 241,373,691 299,407,157 ------------ ------------ ------------ Gross Profit.................................................... 64,399,894 91,506,016 108,344,167 ------------ ------------ ------------ Engineering.......................................................... 8,934,916 11,078,691 13,230,554 Selling.............................................................. 15,777,253 22,365,791 28,797,987 General and administrative........................................... 13,399,120 19,650,136 24,026,136 ------------ ------------ ------------ Total operating expenses............................................. 38,111,289 53,094,618 66,054,677 ------------ ------------ ------------ Income from operations.......................................... 26,288,605 38,411,398 42,289,490 Interest expense..................................................... (55,871) (108,203) (163,008) Other income......................................................... 821,722 1,585,960 1,998,517 ------------ ------------ ------------ Income before income taxes...................................... 27,054,456 39,889,155 44,124,999 ------------ ------------ ------------ Provision (benefit) for income taxes - Note 5 Current......................................................... 10,493,151 15,898,356 15,919,709 Deferred........................................................ (470,495) (822,737) 318,173 ------------ ------------ ------------ Total income tax..................................................... 10,022,656 15,075,619 16,237,882 ------------ ------------ ------------ Net income........................................................... $ 17,031,800 $ 24,813,536 $ 27,887,117 ============ ============ ============ Net income per common and common equivalent share - Note 9................................ $ 2.52 $ 3.03 $ 3.28 ============ ============ ============
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 16 3 CONSOLIDATED BALANCE SHEETS NCI BUILDING SYSTEMS, INC.
OCTOBER 31, ------------------------------ 1996 1997 ------------------------------ ASSETS Current assets: Cash and cash equivalents................................................. $ 20,943,664 $ 32,166,043 Accounts receivable - Trade............................................... 35,477,296 45,945,834 Other receivables - Note 11............................................... 2,271,674 1,060,459 Inventories - Note 1...................................................... 28,692,930 37,381,267 Deferred income taxes - Note 5............................................ 2,925,249 3,462,575 Prepaid expenses.......................................................... 298,702 942,105 ------------ ------------ Total current assets...................................................... 90,609,515 120,958,283 Property, plant and equipment, net - Note 1.................................... 42,751,545 51,222,982 Other assets: Excess of cost over fair value of acquired net assets - Note 1............ 22,672,916 21,072,099 Other..................................................................... 2,292,322 3,078,860 ------------ ------------ Total other assets........................................................ 24,965,238 24,150,959 ------------ ------------ Total assets................................................................... $158,326,298 $196,332,224 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................................... $ 47,402 $ 47,402 Accounts payable.......................................................... 21,527,027 23,921,336 Accrued compensation and benefits......................................... 7,762,288 9,688,015 Other accrued expense..................................................... 6,737,346 8,537,556 Accrued income taxes...................................................... 2,577,168 2,018,139 ------------ ------------ Total current liabilities................................................. 38,651,231 44,212,448 Long-term debt, noncurrent portion - Note 3.................................... 1,729,566 1,679,256 Deferred income taxes - Note 5................................................. 1,770,255 2,625,753 ------------ ------------ Contingencies - Note 8 Shareholders' equity - Note 7 Preferred stock, $1 par value, 1,000,000 shared authorized, none outstanding.................................. -- -- Common stock, $.01 par value, 25,000,000 shares authorized, 7,966,777 and 8,125,739 shares issued and outstanding, respectively............ 79,668 81,257 Additional paid-in capital................................................ 47,358,938 51,109,753 Retained earnings......................................................... 68,736,640 96,623,757 ------------ ------------ Total shareholders' equity................................................ 116,175,246 147,814,767 ------------ ------------ Total liabilities and shareholders' equity..................................... $158,326,298 $196,332,224 ============ ============
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 17 4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NCI BUILDING SYSTEMS, INC.
Additional Common Paid-In Retained Shareholders' Stock Capital Earnings Equity ------- ----------- ----------- ------------- Balance, October 31, 1994............................... $62,286 $12,728,081 $26,891,304 $39,681,671 Proceeds from exercise of stock options, including tax benefit thereon...................... 142 145,474 -- 145,616 Shares issued for contribution to 401K plan ......................... 478 822,920 -- 823,398 Net income.............................................. -- -- 17,031,800 17,031,800 ------- ----------- ----------- ------------ Balance, October 31, 1995............................... 62,906 13,696,475 43,923,104 57,682,485 Proceeds from stock offering............................ 10,865 24,759,142 -- 24,770,007 Proceeds from exercise of stock options, including tax benefit thereon...................... 2,458 2,722,474 -- 2,724,932 Shares issued for contribution to 401K plan.......................... 439 1,008,847 -- 1,009,286 Shares issued in connection with the.................... 3,000 5,172,000 -- 5,175,000 purchase of DBCI Net income.............................................. -- -- 24,813,536 24,813,536 ------- ----------- ----------- ------------ Balance, October 31, 1996............................... 79,668 47,358,938 68,736,640 116,175,246 Proceeds from exercise of stock options, including tax benefit thereon...................... 1,056 2,233,213 -- 2,234,269 Shares issued for contribution to 401K plan.......................... 533 1,517,602 -- 1,518,135 Net income.............................................. -- -- 27,887,117 27,887,117 ------- ----------- ----------- ------------ Balance, October 31, 1997............................... $81,257 $51,109,753 $96,623,757 $147,814,767 ======= =========== =========== ============
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 18 5 CONSOLIDATED STATEMENTS OF CASH FLOWS NCI BUILDING SYSTEMS, INC.
October 31, ------------------------------------------ 1995 1996 1997 ------------------------------------------ Cash flows from operating activities Net Income................................................. $ 17,031,800 $ 24,813,536 $ 27,887,117 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization......................... 3,226,384 5,791,493 7,876,135 (Gain)/loss on sale of fixed assets................... 3,701 1,544 (3,491) Provision for doubtful accounts....................... 1,101,038 680,633 1,223,178 Deferred income tax (benefit)/provision............... (470,495) (822,737) 318,173 Changes in current assets and liability accounts net of effects of acquisitions: Increase in accounts, notes and other receivable........... (3,097,101) (9,856,815) (10,480,501) Increase in inventories.................................... (2,482,505) (4,520,569) (5,552,212) (Increase) decrease in prepaid expenses.................... 97,467 (35,491) (625,367) Increase (decrease) in accounts payable.................... (2,009,477) 3,042,752 2,394,309 Increase in accrued expenses............................... 4,857,823 1,603,120 5,244,072 Increase (decrease) in income taxes payable................ (244,592) 3,843,170 334,743 ------------ ------------ ------------ Net cash provided by operating activities............. 18,014,043 24,540,636 28,616,156 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from the sale of fixed assets..................... 7,181 115,071 25,000 Acquisition of Royal Buildings............................. (910,000) -- -- Acquisition of Mesco Metal Buildings....................... -- (20,631,222) -- Acquisition of Doors & Building Components, Inc............ -- (11,000,000) -- Acquisition of Carlisle Engineered Metals, Inc............. -- (2,840,117) (6,229,981) (Increase) decrease in other noncurrent assets............. 7,725 (1,988,127) (1,146,542) Capital expenditures....................................... (5,836,820) (10,318,399) (11,332,421) ------------ ------------ ------------ Net cash applied to investing activities.............. (6,731,914) (46,662,794) (18,683,944) ------------ ------------ ------------ Cash flows from financing activities: Net proceeds from sale of stock............................ 24,770,007 -- Exercise of stock options.................................. 71,555 749,240 1,340,477 Borrowings on line of credit and notes..................... -- -- -- Principal payments on long-term debt, line of credit and notes payable.................................. (47,389) (84,834) (50,310) ------------ ------------ ------------ Net cash provided by (used in) financing activities... 24,166 25,434,413 1,290,167 ------------ ------------ ------------ Net increase in cash.................................. 11,306,295 3,312,255 11,222,379 Cash beginning of period........................................ 6,325,114 17,631,409 20,943,664 ------------ ------------ ------------ Cash at end of period........................................... $ 17,631,409 $ 20,943,664 $ 32,166,043 ============ ============ ============
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 19 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NCI BUILDING SYSTEMS, INC. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Entity These financial statements include the operations and activities of NCI Building Systems, Inc. and its wholly-owned subsidiaries (Company) after the elimination of all material intercompany accounts and balances. The Company designs, manufactures and markets metal building systems and components for commercial, industrial, agricultural and community service use. The Company recognizes revenues as jobs are shipped. (b) Accounts Receivable The Company reports accounts receivable net of the allowance for doubtful accounts of $1,629,202 and $1,498,148 at October 31, 1996 and 1997, respectively. Trade accounts receivable are the result of sales of buildings and components to customers throughout the United States and affiliated territories including international builders who resell to end users. Although the Company's sales historically have been concentrated in Texas and surrounding states, in recent years it has been expanding its authorized builder organization and customer base into the midwestern states and, to a lesser extent, into south central, southeastern and coastal states. All sales are denominated in United States dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process. Company management is not aware of any significant concentrations of credit or market risks related to receivables or other financial instruments reported in these financial statements. (c) Inventories Inventories are stated at the lower of cost or market value, using specific identification for steel coils and the weighted-average method for other raw materials. A summary of inventories follows:
October 31, --------------------------- 1996 1997 ----------- ----------- Raw materials........................... $21,514,510 $28,943,358 Work-in-process and finished goods........................ 7,178,420 8,437,909 ----------- ----------- $28,692,930 $37,381,267 =========== ===========
(d) Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method for financial reporting purposes and both straight-line and accelerated methods for income tax purposes. Depreciation expense for the years ended October 31, 1995, 1996, and 1997 was $2,995,051, $4,236,397, and $5,892,509, respectively.
October 31, ----------------------------- 1996 1997 ------------ ------------ Land.................................... $ 3,174,539 $ 3,969,005 Buildings and improvements.............. 20,136,496 23,599,534 Machinery, equipment and furniture.......................... 31,865,638 41,393,168 Transportation equipment................ 910,801 1,089,245 Computer software....................... 155,876 480,565 ------------ ------------ $ 56,243,350 $ 70,531,517 Less accumulated depreciation........... (13,491,805) (19,308,535) ------------ ------------ $ 42,751,545 $ 51,222,982 ============ ============
Estimated useful lives for depreciation are: Buildings and improvements.................... 10-20 years Machinery, equipment and furniture ................................ 5-10 years Transportation equipment ..................... 3-10 years Computer softer .............................. 5 years
(e) Cash Flows Statement For purposes of the cash flows statement, the Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Total interest paid for the years ended October 31, 1995, 1996 and 1997 was $55,871, $108,203 and $163,008, respectively. Income taxes ---- 20 7 paid for the years ended October 31, 1995, 1996 and 1997 was $11,032,810, $12,762,769 and $15,776,040 respectively. Non-cash investing or financing activities included: $1,518,135 for the 1996 contribution for the 401k plan which was paid in common stock in 1997, and $1,009,286 for the 1995 contribution for the 401k plan which was paid in common stock in 1996. (f) Excess of Cost Over Fair Value of Acquired Net Assets Excess of cost over fair value of acquired net assets is amortized on a straight-line basis over fifteen years. Accumulated amortization as of October 31, 1997 was $3,041,602, and $1,440,785 as of October 31, 1996. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill would be reduced by the estimated shortfall of cash flows. (g) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (h) Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $1,196,471, $1,267,431 and $1,415,611 in 1995, 1996 and 1997, respectively. (i) Long-Lived Assets In fiscal 1997, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Impairment losses are recognized when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets carrying amount. Assets held for disposal are measured at the lower of carrying value or estimated fair value, less costs to sell. The effect of adopting SFAS No. 121 was not material to the financial statements. (j) Stock-Based Compensation In October 1995, the FASB issued Statement No. 123, Accounting for Stock-based Compensation, which encourages companies to apply a new fair value approach allowing the recognition of compensation cost related to stock options using an option pricing model. Under Statement No. 123, companies are permitted to continue using current accounting rules for employee stock options, but are required to disclose pro forma net income and earnings per share information as if the new fair value approach had been adopted. The Company has elected to continue to use the intrinsic value method under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options. The pro forma information regarding net income and earnings per share, as required by Statement No. 123, has been disclosed as if the Company had accounted for its employee stock options under the fair value method of that Statement. (k) Pending Accounting Changes In February 1997, the Financial Account Standards Board issued Statement No. 128, Earnings Per Share, which is effective for financial statements issued for periods ending after December 15, 1997. The impact of Statement No. 128 on the calculation of earnings per share is not expected to be material. In June 1997, the Financial Account Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for the Company's fiscal year ending October 31, 1999. The Company does not anticipate that the adoption of this standard will have a material impact on the financial statements. 21 8 (2) NOTES PAYABLE (SHORT-TERM BORROWINGS) The Company has a revolving unsecured credit line of $6 million with a bank bearing interest that fluctuates with prime, (commitment fee 1/4% on unused portion) all of which was unused at October 31, 1996 and 1997, respectively. The revolving credit line expires in February, 1999. (3) LONG-TERM DEBT
October 31, ---------------------------- 1996 1997 ----------- ----------- Six year reducing revolving credit line of $.7 million with a bank bearing interest that fluctuates with prime, with $73,000 quarterly reducing borrowing base...................... $ -- $ -- Notes payable to City of Mattoon bearing interest at 3% secured by certain equipment, repayable in aggregate monthly installments of $4,828 maturing through November 2001.................................. 276,968 226,658 Note payable to employee bearing interest at 7% maturing April 1, 2001, with an option to convert into common stock at $29.925 per share............................. 1,500,000 1,500,000 ----------- ----------- 1,776,968 1,726,658 Current portion of long-term debt...................... (47,402) (47,402) ----------- ----------- $ 1,729,566 $ 1,679,256 =========== ===========
Aggregate required principal reductions are as follows:
Year Ended October 31, ------------------------------------------------ 1998............................... 47,402 1999............................... 53,423 2000............................... 55,048 2001............................... 1,556,722 2002............................... 14,063 ----------- $ 1,726,658 ===========
The loan agreements related to the revolving line and short-term borrowings contain, among other things, provisions relative to additional borrowings and restrictions on the amount of retained earnings available for the payment of dividends and the repurchase of common stock and provisions requiring the maintenance of certain net worth and other financial ratios. Under the most restrictive of these covenants, such dividends or stock repurchases are limited to 20% of the Company's net income for any 12-month period, which is further restricted on a quarterly basis, based on the ratio of cash flow (Net Income plus Depreciation and Amortization) for the previous 12-month period to current maturities of long-term debt plus dividends and stock repurchases. The carrying amount of the Company's long-term debt approximates its fair value. (4) RELATED PARTY TRANSACTIONS During 1995, 1996 and 1997, the Company purchased $1,052,829, $1,417,064 and $1,868,922 respectively, of materials from a related party under arm's length transactions. (5) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Taxes on income from continuing operations consist of the following:
Year Ended October 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Current: Federal................ $ 9,733,381 $14,530,670 $15,478,213 State.................. 759,770 1,367,686 441,496 ----------- ----------- ----------- Total current.................... 10,493,151 15,898,356 15,919,709 Deferred: Federal................ (445,063) (745,472) 304,364 State.................. (25,432) (77,265) 13,809 ----------- ----------- ----------- Total deferred................... (470,495) (822,737) 318,173 ----------- ----------- ----------- Total provision................... $10,022,656 $15,075,619 $16,237,882 =========== =========== ===========
The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows:
Year Ended October 31, -------------------------------- 1995 1996 1997 ---- ---- ---- Statutory federal income tax rate.... 35.0% 35.0% 35.0% State income taxes................... 1.8 2.4 1.2 Other................................ 0.3 0.4 0.6 ---- ---- ---- Effective tax rate................. 37.1% 37.8% 36.8% ==== ==== ====
22 9 Significant components of the Company's deferred tax liabilities and assets are as follows:
1996 1997 ---------- ---------- Deferred tax assets Capitalized overhead in inventory. . . . . . . . . $1,210,913 $1,631,113 Bad debt reserve . . . . . . . . . . . . . . . . . 602,804 526,812 Accrued reserves . . . . . . . . . . . . . . . . . 637,293 595,154 Other. . . . . . . . . . . . . . . . . . . . . . . 572,876 709,496 ---------- ---------- Total deferred tax assets. . . . . . . . . . . . . . 3,023,886 3,462,575 ---------- ---------- Deferred tax liabilities Depreciation and amortization. . . . . . . . . . . 1,426,749 1,674,965 Other. . . . . . . . . . . . . . . . . . . . . . . 442,143 950,788 ---------- ---------- Total deferred tax liabilities . . . . . . . . . . . 1,868,892 2,625,753 ---------- ---------- Net deferred tax asset (liability) . . . . . . . . . $1,154,994 $ 836,822 ---------- ----------
(6) OPERATING LEASE COMMITMENTS Total rental expense incurred from operating leases for the years ended October 31, 1995, 1996 and 1997 was $2,639,201, $3,989,603 and $4,643,976 respectively. Aggregate minimum required annual payments on long-term operating leases at October 31, 1996 were as follows:
Year Ended October 31, ---------------------------------------------------------------------- 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,572,804 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,805,843 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 914,310 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . 507,912 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . 251,642 ---------- $6,052,511 ==========
(7) STOCK OPTIONS The Board of Directors has approved a non-statutory employee stock option plan. This plan includes the future granting of stock options to purchase up to 2,050,000 shares as an incentive and reward for key management personnel. Options expire ten years from date of grant. The right to acquire the option shares is earned in 25% increments over the first four years of the option period. Stock option transactions during 1995, 1996 and 1997 are as follows:
Weighted Number Average of Shares Exercise Price --------- -------------- Balance, October 31, 1994. . . . . . . . . . . . . . 696,585 $ 5.47 Granted . . . . . . . . . . . . . . . . . . . . 79,500 17.28 Canceled. . . . . . . . . . . . . . . . . . . . 0 0 Exercised . . . . . . . . . . . . . . . . . . . (14,212) (5.03) -------- ------- Balance, October 31, 1995. . . . . . . . . . . . . . 761,873 $ 6.71 Granted . . . . . . . . . . . . . . . . . . . . 315,000 25.50 Canceled. . . . . . . . . . . . . . . . . . . . (23,082) (19.65) Exercised . . . . . . . . . . . . . . . . . . . (245,850) (3.04) -------- ------- Balance, October 31, 1996. . . . . . . . . . . . . . 807,941 $ 14.78 Granted . . . . . . . . . . . . . . . . . . . . 157,000 30.46 Canceled. . . . . . . . . . . . . . . . . . . . (4,750) (24.18) Exercised . . . . . . . . . . . . . . . . . . . (105,694) (12.68) -------- ------- Balance, October 31, 1997. . . . . . . . . . . . . . 854,497 $ 17.87 ======== =======
Options exercisable at October 31, 1995, 1996, and 1997 were 547,299, 391,648, and 420,620, respectively. The weighted average exercise prices for options exercisable at October 31, 1995, 1996 and 1997 were $3.76, $6.01 and $9.20. Exercise prices for options outstanding at October 31, 1997 range from $1.60 to $37.25. The weighted average remaining contractual life of options outstanding at October 31, 1997 is 6.3 years. In accordance with the terms of APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, the Company records no compensation expense for its stock option awards. As required by SFAS No. 123, the Company provides the following disclosure of hypothetical values for these awards. The weighted average grant-date fair value of options granted during 1996 was $12.10 and during 1997 was $14.66. These values were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: expected dividend of 0%, expected volatility of 32.7%, risk free interest rates ranging from 5.5% to 6.7% for 1996 and from 6.4% to 6.9% for 1997, and expected lives of 7 years. Had compensation expense been recorded based on these hypothetical values, the company's 1997 net income would have been $27.1 million or $3.19 per share. A similar computation for 1996 would have resulted in net income 23 10 of $24.4 million, or $2.97 per share. Because options vest over several years and additional options grants are expected, the effects of these hypothetical calculations are not likely to be representative of similar future calculations. (8) LITIGATION The Company is involved in certain litigation that the Company considers to be in the normal course of business. Management of the Company believes that such litigation will not result in any material losses. (9) NET INCOME PER SHARE Net income per common share is computed by dividing net income after income taxes by the weighted average number of common shares outstanding during 1995, 1996 and 1997 after giving effect for common stock equivalents. Net income per share is calculated as follows:
Year Ended October 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- (in thousands, except per share data) Net income............................... $ 17,032 $ 24,814 $ 27,887 Average common shares outstanding........ 6,272 7,749 8,063 Common equivalent shares for: Stock options....................... 493 449 430 -------- -------- -------- Average shares and equivalents........... 6,765 8,198 8,493 -------- -------- -------- Net income per share..................... $ 2.52 $ 3.03 $ 3.28 -------- -------- --------
(10) EMPLOYEE BENEFIT PLAN The Company has a 401(k) profit sharing plan (the "Savings Plan") which covers all eligible employees. The Savings Plan requires the Company to match employee contributions up to a certain percentage of a participant's salary. No other contributions may be made to the Savings Plan. Contributions accrued for the Savings Plan for the year ended October 31, 1995, 1996 and 1997 were $775,190, $1,154,696 and $1,603,561 respectively. (11) ACQUISITIONS In November 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Doors and Building Components, Inc. ("DBCI"), a manufacturer of roll-up steel overhead doors used primarily in self-storage and commercial/industrial applications, for approximately $12 million in cash and 300,000 shares of common stock of the Company, valued at $5.2 million. Based on the final determination of book value of the purchased assets, the price was reduced by approximately $2.5 million of which $1.5 million is due from the seller and was recorded as a receivable in the October 31, 1996 balance sheet. This amount was settled in cash in December, 1996. The excess of cost over fair value of the acquired net assets recorded was $11.4 million. In April, 1996, the Company acquired substantially all of the assets and assumed certain liabilities of Mesco Metal Buildings, a division of Anderson Industries, Inc.("Mesco"), a manufacturer of metal building systems and components, for approximately $20.8 million in cash and a $1.5 million 7% convertible subordinated debenture due April, 2001. The excess of cost over fair value of the acquired net assets recorded was $10.9 million. Accordingly, the consolidated results of operations include DBCI and Mesco since the date of acquisition. Both acquisitions were accounted for using the purchase method. Assuming the acquisition of DBCI and Mesco had been consummated as of November 1, 1995, the pro forma unaudited results of operations for the year ended October 31, 1996 are as follows: Sales.................................. $ 347,404 Net income............................. 26,345 Net income per share.............. $ 3.21
24 11 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders NCI Building Systems, Inc. We have audited the accompanying consolidated balance sheets of NCI Building Systems, Inc. as of October 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCI Building Systems, Inc. at October 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas December 8, 1997 25 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table presents, as a percentage of sales, certain selected financial data for the Company for the periods indicated:
Year Ended October 31, -------------------------- 1995 1996 1997 -------------------------- Sales. . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100% Cost of sales. . . . . . . . . . . . . . . 72.5 72.5 73.4 ------ ------ ------ Gross profit . . . . . . . . . . . . . . . 27.5 27.5 26.6 Engineering expense. . . . . . . . . . . . 3.8 3.4 3.3 Selling, general and administrative expense . . . . . . . . . . . . . . . . 12.5 12.6 13.0 Income from operations . . . . . . . . . . 11.2 11.5 10.3 Interest expense . . . . . . . . . . . . . 0.0 0.0 0.0 Other(income) expense. . . . . . . . . . . (0.4) (0.5) (0.5) ------ ------ ------ Income before income taxes . . . . . . . . 11.6 12.0 10.8 Provision for income taxes . . . . . . . 4.3 4.5 4.0 ------ ------ ------ Net income . . . . . . . . . . . . . . . . 7.3% 7.5% 6.8% ====== ====== ======
FISCAL 1997 COMPARED TO FISCAL 1996 Sales in fiscal 1997 increased by $74.9 million, or 22%, compared to fiscal 1996. The acquisition of the facilities of Carlisle Engineered Metals ("ECI") in February 1997 and the inclusion of Mesco Metal Buildings ("Mesco") for the whole fiscal year 1997 accounted for approximately $23 million of this increase. The remaining increase of approximately $50 million, or 15%, resulted from growth of the Doors and Building Components sales due to geographic expansion, building systems sales growth due to increased builder recruitment and a full years' operation of the Company's Atwater plant and growth in the component division of the Company. Gross profit increased by $16.8 million, or 18%, compared to fiscal 1996. Gross profit dollars increased at a slower rate than sales due to price competition earlier in the year, bad weather in the first half of 1997 which impacted plant efficiencies and slightly higher raw material costs. In addition, growth in the component and door sales which have lower gross margins than building systems impacted gross profit. As a result, the gross margin percentage in 1997 declined from 27.5% to 26.6%. Engineering costs increased $2.2 million, or 19%, which was in line with the growth in metal building systems sales. Selling, general and administrative costs increased by $10.8 million, or 26%, compared to the prior year. These expenses increased at a slightly higher rate than sales due to the additional expenses resulting from the acquisition of ECI, additional sales expense to support the Classic Steel Frame Homes effort and continued geographic expansion of the Company's sales and marketing effort. Interest expenses increased $5,000 in 1997 as a result of the $1.5 million debenture issued in April 1996 being outstanding all of 1997. Other income, which consists primarily of interest income, increased by $413,000 in fiscal year 1997. This increase was the result of higher level of cash invested during the year. Provision for income taxes increased by 8% in fiscal year 1997 and decreased as a percent of sales from 4.5% in 1996 to 4.0% in 1997. During the year, the Company changed the corporate structure of certain operating units which reduced the amount of state income paid by these units. FISCAL 1996 COMPARED TO FISCAL 1995 Sales in fiscal 1996 increased by $98.7 million, or 42%, compared to fiscal 1995. The acquisition of Doors and Buildings Components, Inc. ("DBCI") in November 1995 and Mesco Metal Buildings, a division of Anderson Industries, Inc. ("Mesco") in April 1996 accounted for $58.7 million of this increase. Excluding the 1996 sales of these two acquisitions, sales increased in 1996 by 17% compared to the prior year. This growth resulted from increased market penetration by the Company in the metal building market, expansion into the Western United States with the opening of a new plant in California and growth of the component division of the Company. Gross profit increased in fiscal 1996 by $27.1 million, or 42% compared to fiscal 1995. This was in line with the increase in sales experienced for the year. Gross profit percent of 27.5% 26 13 was the same as the percent achieved in fiscal year 1995. Slight increases in raw material costs during the year were offset by spreading fixed manufacturing costs over a higher sales base. Engineering expenses increased $2.1 million, or 24%, in fiscal 1996 compared to fiscal 1995. Engineering expenses increased at a slower rate than sales due to increased sales of products which require less engineering effort such as DBCI products and components. Selling, general and administrative expenses ("SG&A") increased $12.8 million, or 44%, compared to the prior year. SG&A increased slightly faster than sales due to the establishment of a west coast sales function to support the new plant location and additional expenses resulting from the two acquisitions made in fiscal 1996. Interest expense increased by $52,000 as a result of the issuance of a $1.5 million subordinated debenture in connection with the acquisition of Mesco. Other income, which consists primarily of interest income, increased by $764,000 in fiscal 1996 compared to fiscal 1995. This increase resulted primarily from the higher level of cash invested during the year and slightly higher average rates of return on invested cash. Provision for income taxes increased by 50.4% in fiscal 1996 and increased as a percent of sales from 4.3% to 4.5%. This increase was due to the increase in state income taxes in fiscal 1996 compared to the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its operations from cash flow from operations, bank borrowing, and the sale of equity in the Company. Internal cash generation has been aided, in the opinion of the Company, by a compensation program under which bonuses are earned based on achieving specified return on assets goals. This program encourages management of the balance sheet as well as the income statement. Net cash flow from operations before changes in working capital components increased to $37.3 million in fiscal 1997 from $30.5 million in fiscal 1996. At October 31, 1997, working capital was approximately $76.7 million, an increase of $24.8 million from fiscal year 1996. The Company maintains a revolving credit facility with a bank lender that currently provides for a maximum credit, subject to borrowing base requirements, of $6.0 million and a six year reducing term revolver with a current borrowing base of $.7 million. The revolving credit facility matures in February 1999 and bears interest at the prime rate. At October 31, 1997, the Company had no borrowing outstanding under either revolving credit facility and had not borrowed during the year. During the year, the Company invested $11.3 million in capital additions including a new plant built in Monterrey, Mexico at a cost of approximately $2.0 million and expanded its plant in Ennis, Texas for approximately $1.0 million. The remainder was spent primarily at other plant locations to increase production capacity. All of these expenditures were paid from internally generated cash. In December 1995, the Company sold in a secondary offering 1,086,000 shares of its common stock for approximately $24.8 million. The proceeds from this offering were used to partially fund the acquisitions of DBCI and Mesco as described in footnote 11 to the Company's consolidated financial statements. Inflation has not significantly affected the Company's financial position or operations. Metal building system sales are affected more by the availability of funds for financing construction than by the rate of interest charged by the lender. No assurance can be given that inflation or the prime rate of interest will not fluctuate significantly, either or both which could have an adverse effect on the Company's operations. Liquidity in future periods will be dependent on internally generated cash flows, the ability to obtain adequate financing for capital expenditures and the amount of increased working capital necessary to support expected growth. Historically, the majority of the Company's total assets are classified as current assets, which consists primarily of trade receivables from customers and raw material inventory, and the 27 14 UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) ratio of "quick assets" (cash plus receivables) to current liabilities has exceeded a 1 to 1 ratio. Based on the current capitalization of the Company, it is expected future cash flow from operations and availability of alternative sources of financing should be sufficient to provide adequate liquidity in future periods. There can be no assurance that liquidity would not be impacted by a severe decline in general economic conditions and higher interest rates which would affect the Company's ability to obtain external financing.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- FISCAL YEAR 1997 Net sales................................................ $82,875 $91,637 $112,484 $120,755 Gross profit............................................. 22,410 23,694 29,774 32,513 Income before income taxes............................... 8,250 8,180 12,653 15,042 Net income............................................... 5,152 5,183 7,971 9,581 Net income per common and common equivalent share............................. $ .61 $ .61 $ .94 $ 1.12 FISCAL YEAR 1996 Net sales................................................ $67,350 $72,171 $ 91,980 $101,379 Gross profit............................................. 17,384 19,547 25,476 29,099 Income before income taxes............................... 6,485 8,132 11,495 13,775 Net income............................................... 4,020 5,051 7,139 8,602 Net income per common and common equivalent share(1).......................... $ 0.53 $ 0.60 $ 0.85 $ 1.03
(1) The sum of the quarterly income per share amounts do not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year based on the respective weighted average common shares outstanding. PRICE RANGE OF COMMON STOCK The following table sets forth the quarterly high and low closing sale prices of the Company's common stock, as reported on NASDAQ/NMS for the prior two years. The prices quoted represent prices between dealers in securities, without adjustments for mark-ups, mark-downs, or commissions, and do not necessarily reflect actual transactions.
FISCAL YEAR 1997 High Low - ------------------------------------------ January 31............ $37.50 $26.75 April 30.............. $38.25 $29.50 July 31............... $37.88 $25.50 October 31............ $39.75 $33.50 FISCAL YEAR 1996 High Low - ------------------------------------------ January 31............ $28.63 $21.00 April 30.............. $38.00 $26.50 July 31............... $38.50 $22.75 October 31............ $35.13 $21.75
28 EX-21 4 LIST OF SUBSIDIARIES 1 EXHIBIT 21 NCI BUILDING SYSTEMS, INC. List of Subsidiaries NCI Holding Corp. Delaware NCI Operating Corp. Nevada A & S Building Systems, Inc. Texas EX-23 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of NCI Building Systems, Inc. of our report dated December 8, 1997, included in the 1997 Annual Report to Shareholders of NCI Building Systems, Inc. Our audits also included the financial statement schedule of NCI Building Systems, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Additionally, we consent to the incorporation by reference in Registration Statements (Form S-8 No. 333-14957 and No. 33-52078) pertaining to the 401(k) Profit Sharing Plan of NCI Building Systems, Inc. and (Form S-8 No. 333-34899, No. 33-52080 and No. 333-12921) pertaining to the Nonqualified Stock Option Plan of NCI Building Systems, Inc. of our reports with respect to the consolidated financial statements and schedules of NCI Building Systems, Inc. for the year ended October 31, 1997. ERNST & YOUNG LLP Houston, Texas January 26, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR OCT-31-1997 NOV-01-1996 OCT-31-1997 32,166,043 0 48,504,441 1,498,148 37,381,267 120,958,283 70,531,517 19,308,535 196,332,224 44,212,448 0 0 0 81,257 147,733,510 196,332,224 407,751,324 407,751,324 299,407,157 64,841,486 (1,998,517) 1,213,191 163,008 44,124,999 16,237,882 0 0 0 0 27,887,117 $3.28 0
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