-----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, BJCWMP7VrfetuCkI9tKq4sR+3pdJH5G1pl8HvlpIfa8rs8137RJQxKVaaMSNa/PV TqfcEQCBePtggdH7AnBkcQ== 0000950134-00-000623.txt : 20000203 0000950134-00-000623.hdr.sgml : 20000203 ACCESSION NUMBER: 0000950134-00-000623 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000201 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: 001-14315 FILM NUMBER: 518571 BUSINESS ADDRESS: STREET 1: 7301 FAIRVIEW CITY: HOUSTON TEXAS STATE: TX ZIP: 77041 BUSINESS PHONE: 7134667788 MAIL ADDRESS: STREET 1: 7301 FAIRVIEW STREET 2: P O BOX 40220 CITY: HOUSTON STATE: TX ZIP: 77041 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL COMPONENTS INCORPORATED DATE OF NAME CHANGE: 19600201 10-K405 1 FORM 10-K FOR FISCAL YEAR END OCTOBER 31, 1999 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-14315 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: Common Stock, $0.01 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of 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 January 5, 2000, was $274,331,448. The number of shares of common stock of the registrant outstanding on January 5, 2000, was 18,566,412. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Parts I and II of this Annual Report is incorporated by reference from the registrant's 1999 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 1, 2000. =============================================================================== 2 PART I ITEM 1. BUSINESS. GENERAL NCI Building Systems, Inc. is one of North America's largest integrated manufacturers of metal products for the building industry. We operate 39 manufacturing and distribution facilities located in 17 states and Mexico. We sell metal components and engineered building systems, offering one of the most extensive metal product lines in the building industry with well-recognized brand names. We believe that our leading market positions and strong track record of growth and profitability have resulted from our focus on: o Controlling operating and administrative costs o Managing working capital and fixed assets o Developing new markets o Successfully identifying strategic growth opportunities We believe that metal products have gained and continue to gain a greater share of the new construction and repair and retrofit markets. This is due to increasing acceptance and recognition of the benefits of metal products in building applications. Metal components offer builders, designers, architects and end-users several advantages, including lower long-term costs, longer life, attractive aesthetics and design flexibility. Similarly, engineered building systems offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. In May 1998, we acquired Metal Building Components, Inc. ("MBCI") for a purchase price of $588.5 million. The MBCI acquisition, which doubled our revenue base, made us the largest domestic manufacturer of nonresidential metal components and significantly improved our product mix. Before our combination with MBCI, both companies had individually demonstrated strong growth in sales. Over the five fiscal years before the MBCI acquisition, NCI achieved compound annual growth rates of 32.0% in sales. Over the five fiscal years before its acquisition by NCI, MBCI achieved compound annual growth rates of 15.8% in sales. We were founded in 1984 and we reincorporated in Delaware on December 31, 1991. Our principal offices are located at 7301 Fairview, Houston, Texas 77041 and our telephone number is (713) 466-7788. Unless indicated otherwise, references in this report to NCI, us, or we include our predecessors and our subsidiaries. BUSINESS SEGMENTS We have divided our operations into two reportable segments: engineered building systems and metal building components, based upon similarities in product line, manufacturing process, marketing and management of its business. Products of both segments are similar in basic raw materials used and manufacturing. The engineered building systems segment includes the manufacturing of structural framing and supplies value added engineering and drafting, which are typically not part of metal building component products or services. Our approximate sales to outside customers, operating income and total assets attributable to these business segments were as follows for the periods indicated (in thousands): 3
1997 1998 1999 SALES TO OUTSIDE CUSTOMERS: Engineered building systems ..... $ 257,093 63% $ 277,347 41% $ 310,324 33% Metal building components ....... 150,658 37 397,984 59 626,226 67 Intersegment sales .............. -- -- 25,094 4 59,692 6 Corporate eliminations .......... -- -- (25,094) (4) (59,692) (6) ----------- ------- ----------- -------- ----------- ------- Total net sales ............. $ 407,751 100% $ 675,331 100% $ 936,550 100% =========== ======= =========== ======== =========== ======= OPERATING INCOME: Engineered building systems ..... $ 25,518 10% $ 29,576 11% $ 37,509 12% Metal building components ....... 17,064 11 51,497 13 72,441 12 Corporate eliminations .......... (293) -- (1,764) -- 582 -- ----------- ------- ----------- -------- ----------- ------- Total operating income ...... $ 42,289 10% $ 79,309 12% $ 110,532 12% =========== ======= =========== ======== =========== ======= TOTAL ASSETS: Engineered building systems ..... $ 91,703 47% $ 86,342 10% $ 88,673 10% Metal building components ....... 61,911 32 352,407 43 364,533 43 Corporate eliminations .......... 42,718 22 384,788 47 402,277 47 ----------- ------- ----------- -------- ----------- ------- Total assets ................ $ 196,332 100% $ 823,537 100% $ 855,783 100% =========== ======= =========== ======== =========== =======
For more business segment information, please see the Supplementary Business Segment Information contained in our 1999 Annual Report to Shareholders. Metal Building Components. We are the largest domestic supplier of metal components to the nonresidential building industry and have a market share at least twice that of our largest competitor. We are also one of the largest suppliers in the U.S. of roll-up doors for self-storage facilities. We design, manufacture, sell and distribute one of the widest selections of components for a variety of new construction applications as well as repair and retrofit uses. The following are the types of components we sell: o Metal roof and wall systems o Fascia o Overhead doors o Mansard accessories o Interior and exterior doors o Trim accessories Our components are used in the following markets: o Industrial o Commercial o Governmental o Agricultural o Community o Residential As part of our metal components manufacturing, we also provide hot roll and light gauge metal coil coating and painting services and products. We coat and paint hot roll metal coils for our own use in metal components manufacturing, supplying substantially all of our internal metal coating and painting requirements. On average, our own use accounts for about 75% of our production. We also coat and paint hot roll metal coils and light gauge metal for third parties for a variety of applications, including heating and air conditioning systems, water heaters, lighting fixtures and office furniture. We market our metal components products and metal coating and painting services nationwide primarily through a direct sales force under several brand names. These brand names include "Metal Building Components," "American Building Components," "DBCI," "MBCI," "IPS," "Metal Coaters," "Metal-Prep," "DOUBLECOTE" and "Midwest Metal Coatings." 2 4 Engineered Building Systems. We are one of the largest domestic suppliers of engineered building systems. We design, manufacture and market engineered building systems, self-storage building systems and metal home framing systems for commercial, industrial, agricultural, governmental, community and residential uses. We market these systems nationwide through authorized builder networks totaling over 1,200 builders and a direct sales force under several brand names. These brand names include "Metallic Buildings," "Mid-West Steel Buildings," "A & S Buildings," "All American Systems," "Steel Systems" and "Mesco." INDUSTRY OVERVIEW The building industry encompasses a broad range of metal products, principally composed of steel, sold through a variety of distribution channels for use in diverse applications. These metal products include metal components and engineered building systems. Metal Building Components. Manufacturers of metal components for the building industry supply pre-formed components, including roof and wall panels, doors, partitions, related trim, accessories and other metal components used in engineered building systems and other repair, retrofit and new construction applications for commercial, industrial, agricultural, governmental, community and residential uses. Metal components are used in a wide variety of construction applications, including purlins and girts, roofing, walls, doors, trim and other parts of traditional buildings, as well as in architectural applications and engineered building systems. We estimate the metal components market including roofing applications to be a multi-billion dollar market, although market data is limited. We believe that the metal components business is less affected by economic cycles than the engineered building systems business due to the use of metal components in repair and retrofit applications. We believe that metal products have gained and continue to gain a greater share of new construction and repair and retrofit markets due to increasing acceptance and recognition of the benefits of metal products in building applications. Metal roofing accounts for a significant portion of the overall metal components market, but only approximately 6% of total annual roofing market expenditures, estimated at over $21.0 billion based on available industry information. As a result, we believe that significant opportunities exist for metal roofing, with its advantages over conventional roofing materials, to increase its overall share of this market. Metal roofing systems have several advantages over conventional roofing systems, including the following: o Lower lifecycle cost. The total cost over the life of metal roofing systems is lower than that of conventional roofing systems for both new construction and retrofit roofing. For new construction, the cost of installing metal roofing is greater than the cost of conventional roofing. Yet, the longer life and lower maintenance costs of metal roofing make the cost more attractive. For retrofit roofing, although installation costs are 60-70% higher for metal roofing due to the need for a sloping support system, the lower ongoing costs more than offset the initial cost. o Increased longevity. Metal roofing systems generally last for 20 years without requiring major maintenance or replacement. This compares to five to ten years for conventional roofs. The cost of leaks and roof failures associated with conventional roofing can be very high, including damage to building interiors and disruption of the functional usefulness of the building. Metal roofing prolongs the intervals between costly and time-consuming repair work. o Attractive aesthetics and design flexibility. Metal roofing systems allow architects and builders to integrate colors and geometric design into the roofing of new and existing buildings, providing an increasingly fashionable means of enhancing a building's aesthetics. Conventional roofing material is generally tar paper or a gravel surface, and building designers tend to conceal roofs made with these materials. 3 5 Engineered Building Systems. Engineered building systems consist of engineered structural beams and panels that are welded and roll formed in a factory and shipped to a construction site complete and ready for assembly. Engineered building systems manufacturers design an integrated system that meets applicable building code requirements. These systems consist of primary structural framing, secondary structural members like purlins and girts and covering for roofs and walls. Over the last 15 years, engineered building systems have significantly increased penetration of the market for nonresidential low rise structures and are being used in a broad variety of other applications. According to the Metal Building Manufacturers Association, reported sales of engineered building systems have increased from approximately $1.5 billion in 1993 to $2.7 billion in 1998. We believe this increase has resulted primarily from (1) the significant cost advantages offered by these systems, (2) increased architectural acceptance of engineered building systems for construction of commercial and industrial building projects, (3) advances in design versatility and production processes and (4) a favorable economic environment. We believe the cost of an engineered building system generally represents approximately 15-20% of the total cost of constructing a building, which includes land cost, labor, plumbing, electrical, heating and air conditioning systems installation and interior finish. 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 an engineered building system with masonry, glass and wood exterior facades to meet the aesthetic requirements of customers while preserving the inherent characteristics of engineered building systems. As a result, the uses for engineered building systems now include office buildings, showrooms, retail stores, banks, schools, warehouses, factories and distribution centers, and government and community centers for which aesthetics and architectural features are important considerations of the end users. In our marketing efforts, we and other major manufacturers generally emphasize the following characteristics of engineered building systems to distinguish them from other methods of construction: o Shorter construction time. In many instances, it takes less time to construct an engineered building than other building types. In addition, because most of the work is done in the factory, the likelihood of weather interruptions is reduced. o More efficient material utilization. The larger engineered building systems manufacturers use computer-aided analysis and design to fabricate structural members with high strength-to-weight ratios, minimizing raw materials costs. o Lower construction costs. The in-plant manufacture of engineered building systems, coupled with automation, allows the substitution of less expensive factory labor for much of the skilled on-site construction labor otherwise required for traditional building methods. o Greater ease of expansion. Engineered building systems can be modified quickly and economically before, during or after the building is completed to accommodate all types of expansion. Typically, an engineered building system can be expanded by removing the end or side walls, erecting new framework and adding matching wall and roof panels. o Lower maintenance costs. Unlike wood, metal will not deteriorate because of cracking, rot or insect damage. Furthermore, factory-applied roof and siding panel coatings resist cracking, peeling, chipping, chalking and fading. Consolidation. Over the last several years, there has been consolidation in the metal components and engineered building systems industry, which includes a large number of small local and regional firms. We believe that this industry will continue to consolidate, driven by the needs of manufacturers to increase manufacturing capacity, achieve greater process integration and add geographic diversity to meet customers' product and delivery needs, improve production efficiency and manage costs. 4 6 PRODUCTS AND MARKETS Our product lines consist of metal components for the building industry and engineered building systems. Metal Building Components. Our metal components consist of individual components, including secondary structural framing, covering systems and associated metal trims, that are sold directly to contractors or end users for use in the building industry, including the construction of metal buildings. We also stock and market metal component parts for use in the maintenance and repair of existing buildings. Specific component products consist of end and side wall panels, roof panels, purlins, girts, partitions, header panels and related trim and screws. We believe we offer the widest selection of metal components in the building industry. Purlins and girts are medium gauge, roll formed steel components. They are supplied to builders for secondary structural framing. We custom produce purlins and girts for our customers and offer the widest selection of sizes and profiles in the United States. Covering systems, consisting of wall and roof panels, protect the rest of the structure and the contents of the building from the weather. They also contribute to the structural integrity of the building. Our metal roofing products are attractive and durable. We use standing seam roof technology to replace traditional built-up and single-ply roofs as well as to provide a distinctive look to new construction. We manufacture and design metal roofing systems for sales to regional metal building manufacturers, general contractors and subcontractors. We believe we have the broadest line of standing seam roofing products in the building industry. We also have 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. Although metal roofing is somewhat more expensive than traditional roofing in upfront costs, its durability and low maintenance costs make metal roofing a lower cost roofing product after the first 10 years. We manufacture overhead doors and interior and exterior doors for use in metal and other buildings. We are one of the largest suppliers in the U.S. of roll-up doors to builders of self-storage facilities. We provide our own metal coating and painting products and services for use in component manufacturing. We also provide pre-painted hot roll coils to manufacturers of engineered building systems and metal components. Either a customer provides coils through its own supply channels, which are processed by us, or we purchase hot roll coils and process them for sale as a packaged product. We also pre-paint light gauge steel coils for steel mills, which supply the painted coils to various industrial users, including manufacturers of engineered building systems, metal components and lighting fixtures. Our metal coating and painting operations apply a variety of paint systems to metal coils. The process generally includes cleaning and painting the coil and slitting it to customer specifications. We believe that pre-painted metal coils are a better quality product, environmentally cleaner and more cost-effective than painted metal products prepared in other manufacturers' in-house painting operations. Painted metal coils also offer manufacturers the opportunity to produce a broader and more aesthetically pleasing range of products. Engineered Building Systems. Engineered building systems consist of pre-engineered structural beams and panels that are welded and roll formed in a factory and shipped to a construction site complete and ready for assembly. We design an integrated engineered building system that meets customer specifications and allows easy on-site assembly by the builder or independent contractor. Engineered building systems typically consist of three systems: 5 7 o Primary structural framing. 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. o Secondary structural framing. 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. o Covering systems. Covering systems consist of roof and wall 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 engineered building system. These components include doors, windows, gutters and interior partitions. SALES, MARKETING AND CUSTOMERS Metal Building Components. We sell metal components directly to regional manufacturers, contractors, subcontractors, distributors, lumberyards, cooperative buying groups and other customers under the brand names "Metal Building Components," "American Building Components," "MBCI" and "IPS." Roll-up doors, interior and exterior doors, interior partitions and walls, header panels and trim are sold directly to contractors and other customers under the brand names "Doors & Building Components" or "DBCI." These components also are produced for integration into self storage and engineered building systems sold by us. We market our components products within four product lines: commercial/industrial, architectural, wood frame builders and residential. Customers include regional engineered building systems manufacturers, general contractors, subcontractors, roofing installers, architects and end-users. Commercial and industrial businesses are heavy users of metal components and metal buildings systems. Standing seam roof and architectural customers are growing in importance. As metal buildings become a more acceptable building alternative and aesthetics become an increasingly important consideration for end users of metal buildings, we believe that architects are participating in metal building design and purchase decisions to a greater extent. Wood frame builders also purchase our metal components through distributors, lumberyards, cooperative buying groups and chain stores for various uses, including agricultural buildings. Residential customers are generally contractors building upscale homes that require an architect-specified product. Our metal components sales operations are organized into four geographic regions. Each region is headed by a general sales manager supported by individual plant sales managers. Each local sales office is located adjacent to a manufacturing plant and is staffed by a direct sales force responsible for contacting customers and architects and a sales coordinator who supervises the sales process from the time the order is received until it is shipped and invoiced. The regional and local focus of our customers requires extensive knowledge of local business conditions. During fiscal 1999, our largest customer for metal components accounted for less than 2% of our total sales. We provide our customers with product catalogs tailored to our product lines, which include product specifications and suggested list prices. Some of our catalogs are available on-line through the Internet, which enables architects and other customers to download drawings for use in developing project specifications. 6 8 Customers place orders via telephone or facsimile to a sales coordinator at the regional office who enters it onto a standard order form. The form is then sent via computer to the plant and downloaded automatically to the production machines. We have a small number of national accounts for our coating and painting products and services and rely on a single sales manager. Our metal coating joint ventures have independent sales forces. Engineered Building Systems. We sell engineered building systems to builders nationwide under the brand names "Metallic Buildings," "A&S Buildings" and "Mesco." We market engineered building systems through an in-house sales force to authorized builder networks of over 1,200 builders. We market engineered building systems under the brand name "Mid-West Steel Buildings" directly to contractors in Texas and surrounding states using an in-house sales force. We also sell engineered building systems under the name "All American Systems" and various private labels. Our authorized builder networks consist of independent general contractors that market our Metallic Buildings, A&S Buildings and Mesco products to end users. Most of our sales of engineered building systems outside of Texas and surrounding states are through our authorized builder networks. We rely upon maintaining a satisfactory business relationship for continuing job orders from our authorized builders and do not consider the builder agreements to be material to our business. During fiscal 1999, our largest customer for engineered building systems accounted for less than 2% of our total sales. We enter into an agreement with an authorized builder, which generally grants the builder the non-exclusive right to market our products in a specified territory. The agreement is cancelable by either party on 60 days notice. The agreement does not prohibit the builder from marketing engineered building systems of other manufacturers. We establish an annual sales goal for each builder and provide the builder with sales and pricing information, design and engineering manuals, drawings and assistance, application programs for estimating and quoting jobs and advertising and promotional literature. We also defray a portion of the builder's advertising costs and provide volume purchasing and other pricing incentives to encourage it to deal exclusively or principally with us. 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 an engineered building system on the customer's site and provide general contracting and other services related to the completion of the project. We sell our products to the builder, which generally includes the price of the building as a part of its overall construction contract with its customer. MANUFACTURE AND DESIGN Metal Building Components. We operate 37 facilities used for manufacturing of metal components for the building industry, including our metal coating and painting operations. We believe this broad geographic penetration gives us an advantage over our components competitors because major elements of a customer's decision are the speed and cost of delivery from the manufacturing facility to the product's ultimate destination. With the exception of our architectural and standing seam products, we are not involved in the design process for the components we manufacture. We also own a fleet of trucks to deliver our products to our customers in a more timely manner than most of our competitors. Our doors, interior partitions and other related panels and trim products are manufactured at dedicated plants in Georgia, Texas and Arizona. Orders are processed at the Georgia plant and sent to the appropriate plant, which is generally determined based upon the lowest shipping cost. 7 9 Metal component products are roll-formed or fabricated at each plant using roll-formers and other metal working equipment. 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. We operate two metal coating and painting facilities for hot rolled, medium gauge steel coils and two metal coating and painting facilities for painting light gauge steel coils. These facilities primarily service our needs, but we also process steel coils at these facilities for other manufacturers. Metal coating and painting processes involve applying various types of chemical treatments and paint systems to flat rolled continuous coils of metal, including steel and aluminum. These processes give the coils a baked-on finish that both protects the metal and makes it more attractive. Initially, various metals in coil form are flattened, cleaned and pretreated. The metal is then coated, oven cured, cooled, recoiled and packaged for shipment. Slitting and embossing services can also be performed on the coated metal before shipping according to customer specifications. Hot roll steel coils typically are used in the production of secondary structural framing of metal buildings and other structural applications. Painted light gauge steel coils are used in the manufacture of products for building exteriors, metal doors, lighting fixtures and appliances. Our metal coating operation is one of only two metal coaters in the United States to receive the Supplier Excellence Award from Bethlehem Steel Corporation. We are a joint venture partner in two metal coating operations. We own 50% of a metal coating joint venture with a processing plant in Jackson, Mississippi for painting light gauge steel coils. We also own 50% of a joint venture that recently constructed a hot rolled coil coating facility in Granite City, Illinois that commenced operations in April, 1999. The Granite City facility is used to slit and coat hot rolled coils of medium gauge steel for use in manufacturing purlins and girts. We have agreed to purchase a substantial portion of our production requirements for that product from the Granite City joint venture. Engineered Building Systems. After we receive an order, our engineers design the engineered building system to meet the customer's requirements and to satisfy applicable building codes and zoning requirements. To expedite this process, we use computer-aided design and engineering systems to generate engineering and erection drawings and a bill of materials for the manufacture of the engineered building system. We employ approximately 228 engineers and draftsmen in this area. Once the specifications and designs of the customer's project have been finalized, the manufacturing of frames and other building systems begins at one of our six frame manufacturing facilities in Texas, Georgia, South Carolina or Tennessee or our joint venture facility in Mexico. The fabrication of the primary structural framing consists of a process in which rigid steel plates are punched and sheared and then routed through an automatic welding machine and sent through further fitting and welding processes. The secondary structural framing and the covering subsystem are roll-formed steel products that are manufactured at our full manufacturing facilities as well as our components plants. Once manufactured, structural framing members and covering systems are shipped to the job site for assembly. We generally are not responsible for any on-site construction. The time elapsed between our 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. We own 51% of a joint venture, which began operation of a framing facility in Monterrey, Mexico in July 1997. We purchase substantially all of the framing systems produced by the Mexico joint venture. 8 10 RAW MATERIALS The principal raw material used in the manufacture of our metal components products and engineered building systems is steel. Components are fabricated from common steel products produced by mills including bars, plates, sheets and galvanized sheets. During the 1999 fiscal year, we purchased approximately 82% of our steel requirements from National Steel Corporation and Bethlehem Steel Corporation. No other steel supplier accounted for more than 10% of steel purchases for the same period. We believe concentration of our steel purchases among a small group of suppliers that have mills and warehouse facilities close to our facilities enables us, as a large customer of those suppliers, to obtain better service and delivery. These suppliers generally maintain an inventory of the types of materials we require. This enables us to utilize a form of "just-in-time" inventory management with regard to raw materials. We do not have any long-term contracts for the purchase of raw materials. A prolonged labor strike against one of our principal domestic suppliers could have a material adverse effect on our operations. Alternative sources, however, including foreign steel, are currently believed to be sufficient to maintain required deliveries. BACKLOG At October 31, 1999, the total backlog for orders for our products believed by us to be firm was $157 million. This compares with a total backlog for our products of $137 million at October 31, 1998. The increases in backlog reflect the results of our marketing activities and market demand. Backlog primarily consists of engineered building systems. Job orders generally are cancelable by customers at any time for any reason. 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, 1999 currently is scheduled to extend beyond October 31, 2000. COMPETITION Competition in the metal components and metal buildings markets of the building industry is intense. It is based primarily on: o price o speed of construction o ability to provide added value in the design and engineering of buildings o service o quality o delivery We compete with a number of other manufacturers of metal components and engineered building systems for the building industry, ranging from small local firms to large national firms. Most of these competitors operate on a regional basis, although we believe that at least four other manufacturers of engineered building systems and several manufacturers of metal components have nationwide coverage. In addition, we and other manufacturers of metal components and engineered building systems compete with alternative methods of building construction, which may be perceived as more traditional, more aesthetically pleasing or having other advantages. REGULATORY MATTERS We must comply with a wide variety of federal, state and local laws and regulations governing the protection of the environment. These laws and regulations cover air emissions, discharges to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances, the cleanup of contamination, the control of noise and odors and other materials and health and safety matters. Laws protecting the environment 9 11 generally have become more stringent than in the past and are expected to continue to do so. Environmental laws and regulations generally impose strict liability. This means that in some situations we could be exposed to liability for cleanup costs, and toxic tort or other damages as a result of conduct that was lawful at the time it occurred or because of the conduct of or conditions caused by prior operators or other third parties. This strict liability is regardless of fault on our part. We believe we are in substantial compliance with all environmental standards applicable to our operations. We cannot assure you, however, that cleanup costs, natural resource damages, criminal sanctions, toxic tort or other damages arising as a result of environmental laws and costs associated with complying with changes in environmental laws and regulations will not be substantial and will not have a material adverse effect on our financial condition. From time to time, claims have been made against us under environmental laws. We have insurance coverage applicable to some environmental claims and to specified locations after payment of the applicable deductible. We do not anticipate material capital expenditures to meet current environmental quality control standards. We cannot assure you that more stringent regulatory standards will not be established that might require material capital expenditures. We also must comply with federal, state and local laws and regulations governing occupational safety and health, including review by the federal Occupational Health and Safety Administration and similar state agencies. We believe we are in substantial compliance with applicable laws and regulations. Compliance does not have a material adverse affect on our business. The engineered building systems we manufacture must meet zoning and building code requirements adopted by local governmental agencies. PATENTS, LICENSES AND PROPRIETARY RIGHTS We have a number of United States patents and pending patent applications, including patents relating to metal roofing systems and metal overhead doors. We do not, however, consider patent protection to be a material competitive factor in our industry. We also have several registered trademarks and pending registrations in the United States. EMPLOYEES As of October 31, 1999, we had approximately 3,550 employees, of whom over 2,570 were manufacturing and engineering personnel. We regard our employee relations as satisfactory. Our employees are not represented by a labor union or collective bargaining agreement. The United Steel Workers of America petitioned the National Labor Relations Board to be recognized as the collective bargaining representative of the production and maintenance employees of our Tallapoosa, Georgia facility. A union election was held at the Tallapoosa facility in January 1996, and the union lost the election. Similar elections were held at our Mattoon, Illinois facility in November 1997 and our Rancho Cucamongo, California facility in August 1998 and November 1999. The United Steel Workers of America lost each of those elections. ITEM 2. PROPERTIES. The Company conducts manufacturing operations at the following facilities:
Square Owned Facility Products Feet or Leased - -------- -------- ------- --------- Chandler, Arizona Doors and related metal components 35,000 Leased Tomlinson, Arizona Metal components(1) 65,980 Owned Atwater, California Metal components(2) 85,700 Owned Rancho Cucamonga, California Metal coating and painting 98,000 Owned
10 12
Square Owned Facility Products Feet or Leased - -------- -------- ------- --------- Tampa, Florida Metal components(3) 28,775 Owned Adel, Georgia Metal components(1) 59,550 Owned Douglasville, Georgia Metal components(4) 110,536 Owned Douglasville, Georgia Doors and related metal components 60,000 Owned Marietta, Georgia Metal coating and painting 125,700 Owned Tallapoosa, Georgia Engineered building systems(5) 246,000 Leased Metal components Nampa, Idaho Metal components(3) 42,900 Owned Granite City, Illinois(6) Metal coating and painting 94,000 Owned Mattoon, Illinois Metal components(2) 90,600 Owned Shelbyville, Indiana Metal components(3) 66,450 Owned Nicholasville, Kentucky Metal components(7) 41,280 Owned Monterrey, Mexico(8) Engineered building systems(9) 64,125 Owned Jackson, Mississippi Metal components(2) 96,000 Owned Jackson, Mississippi(9) Metal coating and painting 363,200 Owned Omaha, Nebraska Metal components(6) 51,750 Owned Rome, New York Metal components(3) 57,700 Owned Oklahoma City, Oklahoma Metal components(1) 59,695 Owned Chester, South Carolina Engineered building systems(5) 124,000 Owned Metal components Caryville, Tennessee Engineered building systems(5) 193,800 Owned Metal components Memphis, Tennessee Metal coating and painting 61,500 Owned Nesbitt, Tennessee Metal components(1) 71,720 Owned Ennis, Texas Metal components and studs 33,000 Owned Grand Prairie, Texas Metal components(1) 48,027 Owned Houston, Texas Metal components 97,000 Owned Houston, Texas (10) Metal components(4) 209,355 Owned Houston, Texas Metal coating and painting 39,550 Owned Houston, Texas(11) Engineered building systems(5) 358,375 Owned Metal components Houston, Texas Doors 23,625 Owned Houston, Texas Engineered building systems (9) 70,200 Leased Lubbock, Texas Metal components(1)(7) 64,320 Owned San Antonio, Texas Metal components(3) 52,360 Owned Southlake, Texas Engineered building systems(5) 123,000 Owned Metal components Stafford, Texas Metal components 56,840 Leased Salt Lake City, Utah Metal components(1) 93,150 Owned Colonial Heights, Virginia Metal components(1) 37,000 Owned
- --------------------- (1) Secondary structures and covering systems. (2) Includes secondary structures and covering systems. (3) Covering systems or products. (4) Full components product range. (5) Primary structures, secondary structures and covering systems. (6) We own a 50% interest in a joint venture that owns this facility. (7) Specialized products. (8) We own a 51% interest in a joint venture that owns this facility. (9) Primary structures. (10) Includes 18,000 square feet used for the principal offices of the metal building components division. (11) Includes 33,600 square feet used for our principal executive offices and the principal offices of the engineered buildings division. 11 13 We also maintain several drafting office facilities and retail locations in various states. We have short-term leases for these additional facilities. We believe that our present facilities are adequate for our current and projected operations. We have purchased approximately five acres of land in Houston, Texas where we have constructed a new 60,000 square foot facility. The new facility will be used as our principal executive and administrative offices. We are constructing a new facility on land that we already own in Houston, which will manufacture primary structures. When completed, the new facility will replace the manufacturing facility for primary structures that we currently lease in Houston. ITEM 3. LEGAL PROCEEDINGS. We are involved in various legal proceedings that we consider to be in the normal course of business. We believe that these proceedings will not have a material adverse effect on our results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 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 our 1999 Annual Report to Shareholders, bottom of page 28, regarding the market for our common stock. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference from our 1999 Annual Report to Shareholders, top of the inside front cover. 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 our 1999 Annual Report to Shareholders: Management's Discussion and Analysis of Results of Operations and Financial Condition, pages 25 through 27. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this Item is incorporated by reference from our 1999 Annual Report to Shareholders, page 27. 12 14 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 our 1999 Annual Report to Shareholders.
Pages of Annual Report to Shareholders --------------- Selected quarterly financial data 28 Consolidated statements of income for each of the three years in the period ended October 31, 1999 14 Consolidated balance sheets at October 31, 1999 and 1998 15 Consolidated statements of shareholders' equity for each of the three years in the period ended October 31, 1999 16 Consolidated statements of cash flows for each of the three years in the period ended October 31, 1999 17 Notes to consolidated financial statements 18--23 Report of independent auditors 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III The information required by Items 10 through 13 of Part III is incorporated by reference from the indicated pages of our definitive proxy statement for our annual meeting of shareholders to be held on March 1, 2000.
Pages of Proxy Statement --------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. 3--7 ITEM 11. EXECUTIVE COMPENSATION. 8--11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 1--3 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 15
13 15 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. 3.1 Restated Certificate of Incorporation of NCI (filed as Exhibit 3.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.2 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.1.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.3 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated by reference herein) 3.4 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 2.4 to NCI's registration statement on Form 8-A filed with the SEC on July 20, 1998 and incorporated by reference herein) 3.5 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.5 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 3.6 Amended and Restated By-Laws of NCI, as amended through February 5, 1992 (filed as Exhibit 3.2 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.7 Amendment No. 1 to Amended and Restated By-Laws of NCI (filed as Exhibit 3.7 to NCI's registration statement no. 333-80029 and incorporated by reference herein) *3.8 Amendment No. 2 to Amended and Restated By-Laws of NCI 4.1 Form of certificate representing shares of Company's common stock (filed as Exhibit 1 to NCI's registration statement on Form 8-A filed with the SEC on July 20, 1998 and incorporated by reference herein) 14 16 4.2 Credit Agreement, dated March 25, 1998 (the "Credit Agreement"), by and among NCI, NationsBank, N.A. (as successor in interest to NationsBank of Texas, N.A.), as administrative agent ("NationsBank"), NationsBanc Montgomery Securities LLC, as arranger and syndication agent, Swiss Bank Corporation, as documentation agent ("Swiss Bank"), and the several lenders named therein (filed as Exhibit 4.3 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.3 First Amendment to Credit Agreement, dated May 1, 1998, among NCI, NationsBank, Swiss Bank and the parties named therein (filed as Exhibit 4.4 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.4 Second Amendment to Credit Agreement, dated May 5, 1998, among NCI, NationsBank, Swiss Bank and the parties named therein (filed as Exhibit 4.5 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.5 Waiver, Consent and Third Amendment to Credit Agreement, dated May 5, 1999, among NCI, Nations Bank, UBS AG and the parties named therein (filed as Exhibit 4.5 to NCI's registration statement No. 333-80029 and incorporated by reference herein) 4.6 Master Assignment and Acceptance, dated as of May 6, 1998, among NationsBank, Swiss Bank and the several lenders named therein (filed as Exhibit 4.6 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.7 Facility A Notes (Revolving Credit), dated May 6, 1998, of NCI in favor of lenders named therein (filed as Exhibit 4.7 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.8 Facility B Notes (Term Loan), dated May 6, 1998, of NCI in favor of lenders named therein (filed as Exhibit 4.8 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.9 Guaranty, dated May 1, 1998, between NationsBank and A&S Building Systems, L.P. (filed as Exhibit 4.10 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.10 Guaranty, dated May 1, 1998, between NationsBank and NCI Building Systems, L.P. (filed as Exhibit 4.11 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.11 Guaranty, dated May 1, 1998, between NationsBank and NCI Holding Corp. (filed as Exhibit 4.12 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.12 Guaranty, dated May 1, 1998, between NationsBank and NCI Operating Corp. (filed as Exhibit 4.13 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 15 17 4.13 Guaranty, dated May 1, 1998, between NationsBank and Metal Building Components, L.P. (formerly MBCI Operating, L.P.) (filed as Exhibit 4.16 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.14 Guaranty, dated May 1, 1998, between NationsBank and Metal Coaters Operating, L.P. (filed as Exhibit 4.17 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.15 Guaranty, dated May 13, 1998, between NationsBank and Metal Coaters of California, Inc. (filed as Exhibit 4.18 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.16 Pledge Agreement, dated May 1, 1998, between NCI and NationsBank (filed as Exhibit 4.19 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.17 Pledge Agreement, dated May 1, 1998, between NCI Holding Corp. and NationsBank (filed as Exhibit 4.20 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.18 Assignment of Partnership Interests, dated May 1, 1998, between NCI Operating Corp. and NationsBank (filed as Exhibit 4.22 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.19 Assignment of Partnership Interests, dated May 1, 1998, between NCI Holding Corp. and NationsBank (filed as Exhibit 4.23 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.20 Promissory Note, dated May 5, 1998, of NCI Holding Corp. in favor of NCI (filed as Exhibit 4.26 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.21 Note Pledge Agreement, dated May 5, 1998, between NCI and NationsBank (filed as Exhibit 4.27 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.22 Loan Agreement "A," dated September 1, 1991, between the City of Mattoon and NCI (filed as Exhibit 4.11 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.23 $250,000 Promissory Note A, dated October 31, 1991, in favor of the City of Mattoon executed by NCI (filed as Exhibit 4.12 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.24 Loan Agreement "B," dated September 1, 1991, between the City of Mattoon and NCI (filed as Exhibit 4.13 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 16 18 4.25 $250,000 Promissory Note B, dated January 20, 1992, in favor of the City of Mattoon executed by NCI (filed as Exhibit 4.14 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.26 Stock Retention and Registration Agreement, dated November 13, 1995, by and between NCI, Doors & Building Components, Inc., and David B. Curtis (filed as Exhibit 4.14 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1995, and incorporated by reference herein) 4.27 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 NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, and incorporated by reference herein) 4.28 Rights Agreement, dated June 24, 1998, between NCI and Harris Trust and Savings Bank (filed as Exhibit 2 to NCI's registration statement on Form 8-A (filed with the SEC on July 9, 1998 and incorporated by reference herein) 4.29 First Amendment to Rights Agreement, dated June 24, 1999, by and between NCI and Harris Trust and Savings Bank (filed as Exhibit 3 to NCI's registration statement on Form 8- A, Amendment No. 1 filed with the SEC on June 25, 1999 and incorporated by reference herein) 10.1 Employment Agreement, dated April 10, 1989, between NCI and Johnie Schulte, Jr. (filed as Exhibit 10.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 10.2 Amendment to Employment Agreement, dated February 21, 1992, between NCI and Johnie Schulte, Jr. (filed as Exhibit 10.1.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) *10.3 Amended and Restated Bonus Program, as amended and restated on December 11, 1998 and September 9, 1999 10.4 Amended and Restated Nonqualified Stock Option Plan, as amended and restated on December 12, 1996 (filed as Exhibit 10.4 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) *10.5 Amendment No. 1 to Amended and Restated Stock Option Plan *10.6 Amendment No. 2 to Amended and Restated Stock Option Plan 10.7 Form of Employee Stock Option Agreement (filed as Exhibit 4.3 to NCI's registration statement no. 33-52080 and incorporated by reference herein) 10.8 Form of Director Stock Option Agreement (filed as Exhibit 4.4 to NCI's registration statement no. 33-52080 and incorporated by reference herein) 10.9 401(k) Profit Sharing Plan (filed as Exhibit 4.1 to NCI's registration statement no. 33-52078 and incorporated by reference herein) 17 19 10.10 Form of Metallic Builder Agreement (filed as Exhibit 10.10 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 10.11 Form of A&S Builder Agreement (filed as Exhibit 10.17 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated by reference herein) 10.12 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 NCI's Current Report on Form 8-K dated October 14, 1994 and incorporated by reference herein) 10.13 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 NCI's Current Report on Form 8-K dated October 14, 1994 and incorporated by reference herein) 10.14 Form of Mesco Metal Buildings Agreement (filed as Exhibit 4.13 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 and incorporated by reference herein) 10.15 Asset Purchase Agreement, dated October 13, 1995, by and among Doors & Building Components, Inc., David B. Curtis, DBCI Acquisition Corp. and NCI (filed as Exhibit 2 to NCI's Current Report on Form 8-K dated November 13, 1995 and incorporated by reference herein) 10.16 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 NCI (filed as Exhibit 2 to NCI's Current Report on Form 8-K dated April 1, 1996 and incorporated by reference herein). 10.17 Employment Agreement, dated April 1, 1996, between NCI and John T. Eubanks (filed as Exhibit 10.19 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1997 and incorporated by reference herein) 10.18 Stock Purchase Agreement, dated March 25, 1998, by and among BTR Australia Limited and NCI, and joined therein for certain purposes by BTR plc (filed as Exhibit 2.1 to NCI's Current Report on Form 8-K dated May 19, 1998 and incorporated by reference herein) 10.19 Letter Agreement, dated May 4, 1998, by and among NCI, BTR Australia Limited and BTR plc, amending the Stock Purchase Agreement (filed as Exhibit 2.2 to NCI's Current Report on Form 8-K dated May 19, 1998 and incorporated by reference herein) 10.20 Note Purchase Agreement, dated April 30, 1999, by and among NCI, the guarantors named therein, Warburg Dillon Read LLC, Montgomery NationsBanc Securities LLC, First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. (filed as Exhibit 10.18 to NCI's registration statement no. 333-80029 and incorporated by reference herein) 18 20 10.21 Registration Rights Agreement, dated May 5, 1999, by and among NCI, the guarantors named therein, Warburg Dillon Read LLC, Montgomery NationsBanc Securities LLC, First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. (filed as Exhibit 10.19 to NCI's registration statement no. 333-80029 and incorporated by reference herein) 10.22 Indenture, dated May 5, 1999, by and among NCI, the guarantors named therein and Harris Trust Company of New York (filed as Exhibit 10.20 to NCI's registration statement no. 333-80029 and incorporated by reference herein) *13 1999 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 1999 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K. *21 List of Subsidiaries *23 Consent of Independent Auditors *27 Financial Data Schedule - -------------------------- * Filed herewith (b) Reports on Form 8-K. None "This Annual Report contains forward-looking statements concerning our business and operations. Although we believe 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 our filings with the SEC. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations." 19 21 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 31st day of January, 1999. NCI BUILDING SYSTEMS, INC. By: /s/ Johnie Schulte ----------------------------------------- Johnie Schulte, 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 31st day of January, 1999.
Name Title ---- ----- /s/ Johnie Schulte Chief Executive Officer and Director - -------------------------- (principal executive officer) Johnie Schulte /s/ Robert J. Medlock Executive Vice President, Chief Financial - -------------------------- Officer and Director Robert J. Medlock (principal accounting and financial 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/ A.R. Ginn Director - -------------------------- A.R. Ginn /s/ Kenneth W. Maddox Director - -------------------------- Kenneth W. Maddox /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
20 22 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, 1999: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges ............ $ 2,321,000 $ 2,402,000 $ 1,414,000 $ 3,309,000 Year ended October 31, 1998: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges ............ $ 1,498,000 $ 2,625,000 $ 1,802,000 $ 2,321,000 Year ended October 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts and backcharges ............ $ 1,629,000 $ 1,223,000 $ 1,354,000 $ 1,498,000
(1) Uncollectible accounts, net of recoveries. 21 23 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- 3.1 Restated Certificate of Incorporation of NCI (filed as Exhibit 3.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.2 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.1.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.3 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 and incorporated by reference herein) 3.4 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 2.4 to NCI's registration statement on Form 8-A filed with the SEC on July 20, 1998 and incorporated by reference herein) 3.5 Certificate of Amendment to Restated Certificate of Incorporation of NCI (filed as Exhibit 3.5 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 3.6 Amended and Restated By-Laws of NCI, as amended through February 5, 1992 (filed as Exhibit 3.2 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 3.7 Amendment No. 1 to Amended and Restated By-Laws of NCI (filed as Exhibit 3.7 to NCI's registration statement no. 333-80029 and incorporated by reference herein) *3.8 Amendment No. 2 to Amended and Restated By-Laws of NCI 4.1 Form of certificate representing shares of Company's common stock (filed as Exhibit 1 to NCI's registration statement on Form 8-A filed with the SEC on July 20, 1998 and incorporated by reference herein) 4.2 Credit Agreement, dated March 25, 1998 (the "Credit Agreement"), by and among NCI, NationsBank, N.A. (as successor in interest to NationsBank of Texas, N.A.), as administrative agent ("NationsBank"), NationsBanc Montgomery Securities LLC, as arranger and syndication agent, Swiss Bank Corporation, as documentation agent ("Swiss Bank"), and the several lenders named therein (filed as Exhibit 4.3 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.3 First Amendment to Credit Agreement, dated May 1, 1998, among NCI, NationsBank, Swiss Bank and the parties named therein (filed as Exhibit 4.4 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein)
24 4.4 Second Amendment to Credit Agreement, dated May 5, 1998, among NCI, NationsBank, Swiss Bank and the parties named therein (filed as Exhibit 4.5 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.5 Waiver, Consent and Third Amendment to Credit Agreement, dated May 5, 1999, among NCI, Nations Bank, UBS AG and the parties named therein (filed as Exhibit 4.5 to NCI's registration statement No. 333-80029 and incorporated by reference herein) 4.6 Master Assignment and Acceptance, dated as of May 6, 1998, among NationsBank, Swiss Bank and the several lenders named therein (filed as Exhibit 4.6 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.7 Facility A Notes (Revolving Credit), dated May 6, 1998, of NCI in favor of lenders named therein (filed as Exhibit 4.7 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.8 Facility B Notes (Term Loan), dated May 6, 1998, of NCI in favor of lenders named therein (filed as Exhibit 4.8 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.9 Guaranty, dated May 1, 1998, between NationsBank and A&S Building Systems, L.P. (filed as Exhibit 4.10 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.10 Guaranty, dated May 1, 1998, between NationsBank and NCI Building Systems, L.P. (filed as Exhibit 4.11 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.11 Guaranty, dated May 1, 1998, between NationsBank and NCI Holding Corp. (filed as Exhibit 4.12 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.12 Guaranty, dated May 1, 1998, between NationsBank and NCI Operating Corp. (filed as Exhibit 4.13 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.13 Guaranty, dated May 1, 1998, between NationsBank and Metal Building Components, L.P. (formerly MBCI Operating, L.P.) (filed as Exhibit 4.16 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.14 Guaranty, dated May 1, 1998, between NationsBank and Metal Coaters Operating, L.P. (filed as Exhibit 4.17 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.15 Guaranty, dated May 13, 1998, between NationsBank and Metal Coaters of California, Inc. (filed as Exhibit 4.18 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein)
25 4.16 Pledge Agreement, dated May 1, 1998, between NCI and NationsBank (filed as Exhibit 4.19 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.17 Pledge Agreement, dated May 1, 1998, between NCI Holding Corp. and NationsBank (filed as Exhibit 4.20 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.18 Assignment of Partnership Interests, dated May 1, 1998, between NCI Operating Corp. and NationsBank (filed as Exhibit 4.22 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.19 Assignment of Partnership Interests, dated May 1, 1998, between NCI Holding Corp. and NationsBank (filed as Exhibit 4.23 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.20 Promissory Note, dated May 5, 1998, of NCI Holding Corp. in favor of NCI (filed as Exhibit 4.26 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.21 Note Pledge Agreement, dated May 5, 1998, between NCI and NationsBank (filed as Exhibit 4.27 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) 4.22 Loan Agreement "A," dated September 1, 1991, between the City of Mattoon and NCI (filed as Exhibit 4.11 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.23 $250,000 Promissory Note A, dated October 31, 1991, in favor of the City of Mattoon executed by NCI (filed as Exhibit 4.12 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.24 Loan Agreement "B," dated September 1, 1991, between the City of Mattoon and NCI (filed as Exhibit 4.13 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.25 $250,000 Promissory Note B, dated January 20, 1992, in favor of the City of Mattoon executed by NCI (filed as Exhibit 4.14 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 4.26 Stock Retention and Registration Agreement, dated November 13, 1995, by and between NCI, Doors & Building Components, Inc., and David B. Curtis (filed as Exhibit 4.14 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1995, and incorporated by reference herein) 4.27 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 NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, and incorporated by reference herein)
26 4.28 Rights Agreement, dated June 24, 1998, between NCI and Harris Trust and Savings Bank (filed as Exhibit 2 to NCI's registration statement on Form 8-A (filed with the SEC on July 9, 1998 and incorporated by reference herein) 4.29 First Amendment to Rights Agreement, dated June 24, 1999, by and between NCI and Harris Trust and Savings Bank (filed as Exhibit 3 to NCI's registration statement on Form 8- A, Amendment No. 1 filed with the SEC on June 25, 1999 and incorporated by reference herein) 10.1 Employment Agreement, dated April 10, 1989, between NCI and Johnie Schulte, Jr. (filed as Exhibit 10.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 10.2 Amendment to Employment Agreement, dated February 21, 1992, between NCI and Johnie Schulte, Jr. (filed as Exhibit 10.1.1 to NCI's registration statement no. 33-45612 and incorporated by reference herein) *10.3 Amended and Restated Bonus Program, as amended and restated on December 11, 1998 and September 9, 1999 10.4 Amended and Restated Nonqualified Stock Option Plan, as amended and restated on December 12, 1996 (filed as Exhibit 10.4 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 and incorporated by reference herein) *10.5 Amendment No. 1 to Amended and Restated Stock Option Plan *10.6 Amendment No. 2 to Amended and Restated Stock Option Plan 10.7 Form of Employee Stock Option Agreement (filed as Exhibit 4.3 to NCI's registration statement no. 33-52080 and incorporated by reference herein) 10.8 Form of Director Stock Option Agreement (filed as Exhibit 4.4 to NCI's registration statement no. 33-52080 and incorporated by reference herein) 10.9 401(k) Profit Sharing Plan (filed as Exhibit 4.1 to NCI's registration statement no. 33-52078 and incorporated by reference herein) 10.10 Form of Metallic Builder Agreement (filed as Exhibit 10.10 to NCI's registration statement no. 33-45612 and incorporated by reference herein) 10.11 Form of A&S Builder Agreement (filed as Exhibit 10.17 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 and incorporated by reference herein) 10.12 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 NCI's Current Report on Form 8-K dated October 14, 1994 and incorporated by reference herein)
27 10.13 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 NCI's Current Report on Form 8-K dated October 14, 1994 and incorporated by reference herein) 10.14 Form of Mesco Metal Buildings Agreement (filed as Exhibit 4.13 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 and incorporated by reference herein) 10.15 Asset Purchase Agreement, dated October 13, 1995, by and among Doors & Building Components, Inc., David B. Curtis, DBCI Acquisition Corp. and NCI (filed as Exhibit 2 to NCI's Current Report on Form 8-K dated November 13, 1995 and incorporated by reference herein) 10.16 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 NCI (filed as Exhibit 2 to NCI's Current Report on Form 8-K dated April 1, 1996 and incorporated by reference herein). 10.17 Employment Agreement, dated April 1, 1996, between NCI and John T. Eubanks (filed as Exhibit 10.19 to NCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1997 and incorporated by reference herein) 10.18 Stock Purchase Agreement, dated March 25, 1998, by and among BTR Australia Limited and NCI, and joined therein for certain purposes by BTR plc (filed as Exhibit 2.1 to NCI's Current Report on Form 8-K dated May 19, 1998 and incorporated by reference herein) 10.19 Letter Agreement, dated May 4, 1998, by and among NCI, BTR Australia Limited and BTR plc, amending the Stock Purchase Agreement (filed as Exhibit 2.2 to NCI's Current Report on Form 8-K dated May 19, 1998 and incorporated by reference herein) 10.20 Note Purchase Agreement, dated April 30, 1999, by and among NCI, the guarantors named therein, Warburg Dillon Read LLC, Montgomery NationsBanc Securities LLC, First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. (filed as Exhibit 10.18 to NCI's registration statement no. 333-80029 and incorporated by reference herein) 10.21 Registration Rights Agreement, dated May 5, 1999, by and among NCI, the guarantors named therein, Warburg Dillon Read LLC, Montgomery NationsBanc Securities LLC, First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. (filed as Exhibit 10.19 to NCI's registration statement no. 333-80029 and incorporated by reference herein) 10.22 Indenture, dated May 5, 1999, by and among NCI, the guarantors named therein and Harris Trust Company of New York (filed as Exhibit 10.20 to NCI's registration statement no. 333-80029 and incorporated by reference herein) *13 1999 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 1999 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K. *21 List of Subsidiaries
28 *23 Consent of Independent Auditors *27 Financial Data Schedule
- ---------------------- * Filed herewith EX-3.8 2 AMENDMENT NO 2 TO AMENDED/RESTATED BY-LAWS OF NCI 1 EXHIBIT 3.8 AMENDMENT NO. 2 TO THE AMENDED AND RESTATED BY-LAWS OF NCI BUILDING SYSTEMS, INC. September 9, 1999 The Amended and Restated By-Laws, dated as of February 5, 1992 (the "By-Laws") and as amended by Amendment No. 1 thereto dated as of March 17, 1999, of NCI Building Systems, Inc., a Delaware corporation (the "Company") are hereby amended as follows: 1. Section 13 of the By-Laws is hereby amended to read in its entirety as follows: SECTION 13. How Constituted and Powers. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If no alternate be so appointed, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member; provided, that members of the Audit Committee and the Compensation Committee may only appoint a "non-employee director" (as defined in Rule 16b-3 promulgated under the Securities and Exchange Act of 1934, as amended) of the Board of Directors. Any committee, to the extent provided in the resolution of the board of directors and not prohibited by law, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it. At any meeting of a committee, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee." EX-10.3 3 AMENDED/RESTATED BONUS PROGRAM AS AMENDED/RESTATED 1 EXHIBIT 10.3 NCI BUILDING SYSTEMS, INC. BONUS PROGRAM [AMENDED AND RESTATED AS OF DECEMBER 11, 1998 AND SEPTEMBER 9, 1999] In 1989, the Board of Directors of NCI Building Systems, Inc. (then named National Components Incorporated), a Delaware corporation (the "Company"), adopted the Bonus Program (the "Program"). The Company subsequently amended the Program from time to time. On December 11, 1998, the Board of Directors of the Company amended and restated the Program in its entirety to, among other things, provide for a new bonus performance standard for persons eligible to participate in the Program and set forth certain adjustments to return on assets and earnings per share growth figures in calculating bonus levels under the Program, and on September 9, 1999, the Compensation Committee of the Board of Directors adopted a corrective amendment and restatement of the Program. The Program, as so amended and restated, is as follows: 1. Purpose. The purpose of the Bonus Program (the "Program") is: (A) To provide exceptional cash rewards earned by exceptional performance such that the aggregate bonuses paid to all of the Company's employees in a fiscal year, including those awarded under the Program, approximate 10% of the pre-tax, pre-bonus profits of the Company for that fiscal year; and (B) To focus management attention on key objectives of the Company by basing their bonus on return on assets and growth in earnings per share. 2. Administration. The Program will be administered and interpreted by the Compensation Committee of the Board of Directors of the Company (the "Committee"). 3. Bonus Performance Standards. (A) Combination of ROA and EPS. Level 1 and Level 2 participants will be eligible for the award of an annual cash bonus equal to a percentage of their respective base salaries, based upon the Company's achievement of both a specified return on assets ("ROA") and a specified increase in earnings per share ("EPS Growth") for the fiscal year. No cash bonuses will be awarded to these participants if (1) both ROA and EPS Growth are less than 20%, or (2) ROA is less than 10%. 2 Subject to the minimum requirements for ROA and EPS Growth, Level 2 participants will be eligible for a cash bonus award based upon the attached grid of ROA and EPS Growth achievement, in which the bonus eligible for award is the percentage of base salary indicated at each intersecting grid mark for ROA and EPS Growth (e.g., ROA of 30% and EPS Growth of 20% results in a 50% cash bonus). The maximum bonus for Level 2 participants will be 85% of base salary. Cash bonus awards for which Level 1 participants are eligible also will be based on the attached grid of ROA and EPS Growth achievement, but will be 1.5 times the percentage of base salary indicated for the Level 2 participants. The maximum bonus for Level 1 participants will be 127.5% of base salary. (B) ROA Only. Level 3 and Level 4 participants will be eligible for the award of a cash bonus equal to a percentage of their respective base salaries, based upon the Company's achievement of a specified ROA for the fiscal year. No cash bonuses will be awarded to these participants if ROA is less than 20%. If ROA is 20% or more, Level 3 participants will be eligible for the award of a cash bonus equal to 25% of base salary and an additional 2.50% of base salary for each 1% increment in ROA over 20%. The maximum bonus for Level 3 participants will be 50% of base salary. If ROA is 20% or more, Level 4 participants will be eligible for the award of a cash bonus equal to 12.5% of base salary and an additional 1.25% of base salary for each 1% increment in ROA over 20%. The maximum bonus for Level 4 participants will be 25% of base salary. 4. Participants and Eligibility. (A) Whether or not to award a cash bonus to any particular participant is within the absolute discretion of the Company and the Committee. No bonus award to a Level 1, 2 or 3 participant may be paid unless and until and approved by the Committee, and no bonus award may be paid to a Level 4 participant unless and until the Committee has approved the aggregate employee bonus pool for that fiscal year. (B) A participant shall not be eligible for and shall not be entitled to receive a bonus for any fiscal year's performance unless the participant is employed by the Company or one of its subsidiaries both on the last day of the fiscal year and on the date of approval by the Committee of the bonus (if a Level 1, 2 or 3 participant) or the aggregate employee bonus pool for that year (if a Level 4 participant). -2- 3 (C) The Committee, in its sole discretion, shall determine the Level 1, Level 2 and Level 3 participants for any given fiscal year. Designation of a manager as a participant for any fiscal year is in the absolute discretion of the Company and the Committee and does not entitle that participant to remain as a participant in any subsequent year. (D) Addition, removal or movement of participants into, from or between any of Levels 1, 2 or 3 must be submitted to and approved by the Committee. The Level 1 managers, with the approval of the Chairman of the Board and President, shall have discretion to add or remove participants at Level 4 without further action of the Committee, provided the aggregate bonuses paid to all employees do not exceed the amount of the employee bonus pool for that year approved by the Committee. 5. ROA and EPS Calculation. The ROA and EPS for each fiscal year (including 1998) shall be calculated using the asset and pre-tax income amounts set forth on the audited annual financial statements of the Company for that fiscal year and, when appropriate to the calculations, the internally generated financial statements for each month and quarter of the fiscal year, prepared in accordance with generally accepted accounting principles, with the following adjustments: (A) For all fiscal years, the following shall be excluded from the calculation of assets: (i) cash; (ii) credit balances on accounts receivable; (iii) deferred income taxes; (iv) deferred financing costs; and (v) goodwill resulting from the acquisition of Amatek Holdings, Inc. and its subsidiaries, including Metal Building Components, Inc. ("MBCI Goodwill"). (B) For fiscal years 1998 and 1999 only, the unamortized investment in Midwest Metal Coatings, LLC shall be excluded from the calculation of assets. (C) For all fiscal years, interest expense shall be added back to pre-tax income and income from investment of cash, if any, shall be deducted. (D) For fiscal years 1998 and 1999 only, amortization and depreciation of the MBCI Goodwill and of the investment in Midwest Metal Coatings, LLC shall be added back to pre-tax income and the income or loss of Midwest Metal Coatings, LLC shall be excluded. If the Company conducts a public offering of equity securities, the Committee will evaluate and determine at that time whether any adjustments should be made to the calculation of EPS Growth. 6. Interpretation. The Committee shall interpret the Program and shall prescribe such rules and regulations in connection with the operation of the Program as it determines to be advisable. The Committee may rescind and amend its rules, regulations and interpretations. 7. Amendment or Termination. The Program may be terminated at any time or amended from time to time by the Committee without the consent or approval of the participants in the Program. -3- 4 8. Effect of Program. Neither the adoption of the Program nor any action of the Committee, including action taken at any time to terminate or amend the Program, shall be deemed to give any officer, manager, employee, participant or other person any right to receive a bonus or any other rights, whether as a third party beneficiary or otherwise. -4- EX-10.5 4 AMENDMENT NO 1 TO AMENDED/RESTATED STOCK OPTION 1 EXHIBIT 10.5 AMENDMENT NO. 1 TO THE NCI BUILDING SYSTEMS, INC. NONQUALIFIED STOCK OPTION PLAN MARCH 4, 1998 The NCI Nonqualified Stock Option Plan (amended and restated as of December 12, 1996) (the "Plan") is hereby amended as follows: 1. Section 9 of the Plan is hereby restated in its entirety as follows: 9. RIGHTS OF ESTATE OR BENEFICIARIES IN EVENT OF DEATH. If a participant dies prior to termination of his or her right to exercise an option in accordance with the provisions of the Plan or his or her stock option agreement without having totally exercised the option, the option may be exercised during the remainder of the Option Period by the participant's estate or by the person who acquired the right to exercise the option by bequest or by reason of the death of the participant, either pursuant to the laws of descent and distribution or by beneficiary designation; however, the option must be exercised prior to the date of expiration of the Option Period or one year from the date of the participant's death, whichever first occurs. The participant may designate a beneficiary to exercise an option pursuant to this Section 9 in the event of his or her death on a form designated by the Board for such purpose. 2. Section 13 of the Plan is hereby restated in its entirety as follows: 13. NON-ASSIGNABILITY. Options may not be transferred other than by will or by the laws of descent and distribution or by a beneficiary designation made by the participant. During a participant's lifetime, options granted to a participant may be exercised only by the participant. Signed to be effective the date first written above. /s/ Donnie R. Humphries -------------------------------- Donnie R. Humphries, Secretary EX-10.6 5 AMENDMENT NO 2 TO AMENDED/RESTATED STOCK OPTION 1 EXHIBIT 10.6 AMENDMENT NO. 2 TO THE NCI BUILDING SYSTEMS, INC. NONQUALIFIED STOCK OPTION PLAN November 4, 1999 The NCI Nonqualified Stock Option Plan, as amended and restated as of December 12, 1996 and as amended by Amendment No. 1 to the NCI Building Systems, Inc. Nonqualified Stock Option Plan, dated March 4, 1998 (the "Plan"), is hereby amended as follows: 1. Section 18(g) of the Plan is hereby restated in its entirety as follows: "(g) "Normal Retirement Age" means the age established by the Board from time to time as the normal age for retirement of a director or employee, as applicable. In the absence of a determination by the Board, the Normal Retirement Age for all participants shall be deemed to be 65 years of age." Except as amended by this Amendment No. 2, the Plan shall continue in full force and effect as originally executed and delivered. Any reference in the Plan to the "Plan" shall refer to the Plan as amended by this Amendment No. 2. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to those terms in the Plan. Signed to be effective the date first written above. /s/ Donnie R. Humphries ----------------------- Donnie R. Humphries, Secretary EX-13 6 1999 ANNUAL REPORT TO SHAREHOLDERS 1 NCI BUILDING SYSTEMS, INC. 1999 ANNUAL REPORT 2 SELECTED FINANCIAL DATA
Year ended October 31,(1) ---------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- -------- Sales ........................................... $ 234,215 $ 332,880 $ 407,751 $ 675,331 936,550 Net income ...................................... 17,032 24,814 27,887 37,318 45,873 Net income per share - diluted .................. 1.26 1.51 1.64 2.05 2.46 Working capital ................................. 31,687 51,958 76,746 58,393 33,261 Total assets .................................... 83,082 158,326 196,332 823,537 856,112 Long-term debt, noncurrent portion .............. 278 1,730 1,679 444,477 433,359 Shareholders' equity ............................ $ 57,682 $ 116,175 $ 147,815 $ 223,612 277,290 --------- --------- --------- --------- -------- Average common shares, assuming dilution ............................. 13,530 16,455 17,085 18,192 19,100 ========= ========= ========= ========= ========
(1) All numbers in thousands except net income per share. BUSINESS DESCRIPTION NCI Building Systems is one of the largest integrated manufacturers and marketers of metal building components and engineered metal building systems in North America, and NCI offers one of the most extensive metal product lines in the building industry, under well-recognized brand names. Through internal growth and strategic acquisitions, the company has compiled a record of revenue and earnings growth well above the industry average. In 1998, NCI doubled its size by combining with Metal Building Components, Inc., establishing NCI as a leader in each of its key markets. Today, NCI is: o The largest producer and distributor of metal components for building construction -- growing at an estimated 15% annual rate. o The second largest producer of pre-engineered metal building systems. o The largest supplier of metal roofs in an estimated $20 billion roofing industry. o A leading provider of metal coating and painting services. o An industry leader in growth, profitability and innovation. o A low-cost supplier. The Company is benefiting from a larger sales force and customer base, broader product lines, expanded geographic distribution sites, and increased manufacturing capacity. NCI's long term tar-gets are 15% annual revenue growth, 20% earnings growth and 30% Return on Operating Assets based on it's sound growth strategy and assuming a relatively stable industry economic outlook. NCI CONTINUES TO SUCCESSFULLY MANAGE ITS "MOMENTUM FOR GROWTH." 3 NCI LOCATIONS [MAP] PLANT LOCATIONS: Atwater, California Caryville, Tennessee Chandler, Arizona Chester, South Carolina Douglasville, Georgia Ennis, Texas Grapevine, Texas Hobbs, New Mexico Houston, Texas (6) Jackson, Mississippi (2) Mattoon, Illinois Tallapoosa, Georgia Stafford, Texas Monterrey, Mexico Oklahoma City, Oklahoma Converse, Texas Grand Prairie, Texas Lubbock, Texas Rome, New York Adel, Georgia Salt Lake City, Utah Hernando, Mississippi Memphis, Tennessee Nicholasville, Kentucky Atlanta, Georgia Plant City, Florida Colonial Heights, Virginia Shelbyville, Indiana Omaha, Nebraska Nampa, Florida Tolleson, Arizona Marietta, Georgia 4 OPERATING POLICIES RETURN ON ASSETS Return on Assets (ROA) is defined as operating income divided by average operating assets used in the business (eliminating primarily cash, goodwill, and certain other non-operating assets). 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, the income statement. Return on Assets is a proxy for cash flow, which can reward shareholders with undiluted growth. In fiscal year 1999, NCI earned a return on operating assets employed in the business of 29%. 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 20% per year is a strategic 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. Earnings per share increased 20% in fiscal year 1999. 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 Company and the repayment of debt as opposed to paying dividends. COMPENSATION The company believes in providing base salaries for its management on the low side of industry norm with opportunities, based on performance, to obtain very high bonuses. Specifically, Return on Assets and growth in earnings per share are the criteria 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 and 20% growth in earnings per share are achieved. 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 improved our broad coverage of 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 roducts are designed using sound engineering practices and principles. 5 FELLOW SHAREHOLDERS: NCI realized very good progress during fiscal 1999. We not only achieved new highs in net sales and net income but also substantially completed the successful integration of MBCI that had been acquired in May 1998. A quick synopsis of the financial and operational highlights for the year includes: o Net sales increased 39% to a new record of $936.6 million. o Each quarter included year-to-year gains in sales and income. o Income, excluding an extraordinary item, rose to $46.9 million, up 26%. o Earnings, excluding an extraordinary item, increased to $2.46 per share, up 20% from fiscal 1998. o Offering of $125 million in senior subordinated notes completed. o Debt reduction of $42 million accomplished. o New long-bay metal manufacturing facility opened in Monterrey, Mexico. o Stock repurchase plan approved (11/99). Our goal in this report is not just to summarize the Company's performance for fiscal 1999 but also to communicate why we are confident about NCI's prospects for future growth. To that end, we thought that it would be interesting to include a section that answers the questions we typically get from investors. NCI has a firm commitment to build long-term value for shareholders, and an important part of that mission involves making sure that our strategy and fundamentals are thoroughly understood by Wall Street. We believe you will find their questions pertinent and our answers hopefully clear and informative. FINANCIAL GAINS CONTINUE GROWTH Our record sales of $936.6 million for fiscal 1999 represent more than a fivefold increase in NCI's size over the past five years. Net income over this same period has risen more than fourfold. Earnings, excluding extraordinary items, have increased from $0.77 per share in 1994 to $2.46 per share, a compound growth of 26%. We are especially pleased that our growth during fiscal 1999 included year-to-year increases in net sales and net income in each quarter. The incremental contribution from MBCI was obviously a positive factor influencing our performance, but we recorded meaningful progress throughout the organization. The strides reflected in the Company's income statement translated [PICTURE] From left to right: C.A. Rundell, Johnie Schulte, Jr., and A.R. Ginn. 1 6 directly into our ability to effect a meaningful reduction in our long-term debt. Although we funded a relatively large capital expenditure program of $33 million during fiscal 1999, we generated sufficient cash to reduce our indebtedness by $42 million. We also essentially converted $125 million of our bank debt into fixed rate obligations through the successful public offering of 10-year senior subordinated notes. We understood that the opportunity to acquire MBCI meant accepting a period in which we would operate with more financial leverage than was typical for NCI. Our results for fiscal 1999 solidly substantiated our ability to manage these increased borrowings and still accomplish above-average growth in earnings. We believe that we will continue to generate cash beyond our capital spending needs and will use a portion of those funds to reduce our financial leverage further. INTEGRATION OF MBCI PROVIDES ADDITIONAL BENEFITS As we indicated a year ago, a key focus of our energies during fiscal 1999 was the full integration of MBCI. This scope of this acquisition was considerable. We more than doubled our annualized net sales, expanded our manufacturing facilities from 22 to 38 and increased our base of employees by 50%. We readily acknowledge that growth through acquisitions, no matter how logical to one's existing operations, is challenging. Perhaps the most complicated dimension of bringing two businesses together involves a merging of cultures. That sounds like a concept strictly out of a business textbook, but our experience in prior transactions is that it is central to the success of any integration process. We knew that our two organizations had considerable similarities with aggressive marketing programs and an emphasis on customer service. We also recognized the truth of the adage that if one thinks all contingencies have been addressed in any major business combination, one should just think again.
93 94 95 96 97 98 99 ------ ------ ------ ------ ------ ------ ------ EARNINGS PER SHARE 0.48 0.77 1.26 1.52 1.64 2.05 2.46
We are very pleased to report that the net effect of this major step for NCI has been overwhelmingly positive. We were cautious enough to decide that the rational way to effect this unification was gradual. Our immediate goal was to capture the increased purchasing leverage that our larger size afforded us with suppliers. We also began to realize synergies by closing surplus plants, rationalizing corporate functions and relying more on captive units for functions such as coating. These savings to date on an annualized basis have been more than $15 million. The gains beyond this point will come through cross-selling opportunities as well as further economies of scale, particularly as we consolidate the administrative and sales units during the coming year. These latter savings are difficult to predict but should provide vital impetus to our future growth. The essential factor in realizing these synergies will be teamwork within our entire organization. NCI has always worked hard to operate as efficiently as possible, and the additional tasks imposed by the MBCI transaction presented real challenges to our management. A solid commitment to our plan, hard work and longer hours have brought us to the point where we can look back with a sound sense of accomplishment. The path has not been without some bumps along the way, which were expected. We also counted on a "can-do" spirit that fully met our expectations. We still have further tasks to complete in realizing the full benefit of our combined size and resources and know that we can depend on the same level of energy that has been evident from each individual within NCI. 2 7 INDUSTRY OUTLOOK REMAINS BRIGHT Other sections of this report highlight the main points that make us confident about the growth outlook for NCI. The metal building industry has accomplished much in terms of penetrating the commercial construction market. Originally viewed as just an economical, fast method to erect buildings, the industry's introduction of new products and development of new designs has literally transformed our market so that today almost half of all commercial buildings are either entirely metal systems or employ metal components, notably, roofs. Further refinements in coatings and the ability to meet higher tolerances in the manufacturing process suggest that the future is bright indeed. [PICTURE] NEW LONG BAY CAPACITY HIGHLIGHTS GROWTH INITIATIVES Innovation is a hallmark of NCI. We were far from the first metal building manufacturer when this company was founded in 1984. We knew that our success would depend on doing things differently than the competition. We welcomed that challenge and believe that much of what we have accomplished has established industry benchmarks for productivity and customer service. We are keenly aware that the expectations that count are not ours but those of our customers, and we are always seeking ways to meet their needs more efficiently. During fiscal 1999 we completed our new venture into the long-bay metal building market that appears to offer exceptional growth potential for NCI. We have established a low-cost operating structure in this initiative that provides a solid platform for future progress and expect fiscal 2000 to benefit from this activity. We are also excited about our development of a metal garage system that appears to have very broad commercial and consumer appeal, especially in rural markets. The system we have developed includes all of the metal structural items and fasteners and is engineered with tolerances that guarantee easy bolt-up assembly. [PICTURE] LBS INSTALLATION: The Long Bay System is easily installed because of its inherent rigidity and is then bolted in place. 3 8 STOCK VALUATION DISCUSSED The price action of our shares during fiscal 1999 is difficult to reconcile with our financial performance. We accept our responsibility as managers to generate the corporate results that will yield long-term appreciation for shareholders. We then expect investors to value our shares based on our record and apparent prospects for future gains. It is obvious, however, that the factors which influence investors' valuation of equities involve dynamics well beyond any corporation's own results. This reasonably means that there are periods in which a firm's valuation can be out of synch with its performance. The inescapable fact is that fiscal 1999 is now in the record books, and we have to look ahead. We view the outlook for fiscal 2000 favorably and are set on executing the plan that has been established for increased sales and net income. The plan approved by the Board in November to repurchase approximately 1 million shares tangibly expresses our confidence in NCI's outlook. Beyond that commitment, we will continue to pro-actively seek to build broader awareness of NCI among institutional and individual investors to make sure that our fundamentals are properly understood. GROWTH STRATEGY REMAINS UNCHANGED "If it's not broke, don't try fixing it." We agree. NCI has attained a solid record of growth through a strategic plan founded on the simple premise of building an organization committed to leading change, not following it. We like the modifiers of "aggressive," "energized" and "competitive." We accept that in stretching ourselves to the fullest, we will make mistakes; but the greater concern would be in not encouraging our team to find ways to offer customers new products and services. We like our prospects in the metal construction products industry, and we appreciate the endorsement you have given by becoming a shareholder. We promise our best to make this a successful investment for you. Sincerely, /s/ C. A. RUNDELL ----------------------------- C. A. Rundell Chairman of the Board /s/ JOHNIE SCHULTE, JR. ----------------------------- Johnie Schulte, Jr. Chief Executive Officer /s/ A. R. GINN ----------------------------- A. R. Ginn President and Chief Operating [PICTURE] AESTHETICS AND FEASIBILITY ARE HIGHLY CONSIDERED DURING THE DESIGN PHASE OF COMPLEX METAL BUILDINGS. THE FINISHED PRODUCT IS AN ATTRACTIVE FACILITY WITH MAXIMUM USABLE SPACE. 4 9 ANSWERS TO QUESTIONS FROM ANALYSTS AND INVESTORS NCI is fortunate to have its shares actively covered by a number of analysts with prominent brokerage firms. In addition to ongoing contacts with these analysts, we meet regularly with institutional investors to advise them of our progress and respond to their inquiries. We thought it would be helpful to offer the following section that answers the questions typically asked by analysts and investors about NCI. WHAT IMPACT WOULD AN OVERALL ECONOMIC SLOWDOWN HAVE ON YOUR BUSINESS? Although economic trends appear favorable for continued progress in fiscal 2000, demand for metal building systems and components is obviously influenced by the general pace of business and the buoyancy of the economy. It is interesting to contrast the historical pattern of demand for our products, however, with the wide cyclical swings typically associated with new construction. Shipments of metal building components through our MBCI unit have increased every year since this business unit was started in 1976. MBCI did complete some acquisitions over this period, but the core trend over this 23 year period was one of steadily mounting demand in the components market and aggressive increase in market share. Repair and remodeling activities do account for a significant portion of the demand for components so perhaps the consistency of that growth is not surprising. The other portion of our business is engineered metal building systems where one might reasonably expect more of an impact from changes in capital spending plans by companies. Here too, however, we have a record of more than 10 years without a decline in sales. Our growth in some years was clearly stronger than in others, but we recorded gains each year. We are optimistic that the broad economic trends remain favorable over the next several quarters, but our record suggests that NCI's exposure to normal fluctuations in business conditions would be muted.
93 94 95 96 97 98 99 -------- -------- -------- -------- -------- -------- -------- (in thousands) GROWTH CHART - SALES 134,506 167,767 234,215 332,880 407,751 675,331 936,550
[PICTURE] METAL BUILDING PRODUCTION IS AUTOMATED FOR PRECISION, WHICH ALLOWS FOR FAST, EXACT ERECTION. 5 10 WHAT IS THE CURRENT MIX OF YOUR SALES BETWEEN METAL BUILDING SYSTEMS AND COMPONENTS? Of our $936.6 million in net sales for fiscal 1999, components accounted for 67% and engineered building systems represented 33% of sales. Excluding the impact from possible future acquisitions, we expect relatively little change in the mix of sales over the next several years. Prior to the acquisition of MBCI and a coating operation in 1998, engineered metal building systems accounted for more than two-thirds of our total sales. Our current mix presents a more diversified and stable base of business targeted not only at new construction but also repair and remodeling. [PICTURE] Red iron going up: Metal building systems are erected quickly enabling specialty crews to begin the finishing process. [PICTURE] Components protect and serve: The rockwall insulated panels on this distribution center protect the interior contents and provide a beautifully finished appearance. BUT HAVEN'T ACQUISITIONS ACCOUNTED FOR A SIGNIFICANT PORTION OF YOUR GROWTH? We have successfully augmented our internal growth in both the systems and components segments of our business. We have also added complementary operations including metal coating and door manufacturing units. Although these acquisitions have added constructively to our growth, we have still recorded internal gains and are confident about the future opportunity for continued organic expansion as a result of the growth of the metal building industry as a whole and our plans to capture increasing market share. NCI/MBCI TIMELINE OF SUCCESSFUL ACQUISITIONS [CHART] 6 11 WHAT IS THE LIKELIHOOD OF ADDITIONAL ACQUISITIONS? Although we obviously cannot predict the timing or probability of any future acquisitions, we believe the fundamental dynamics of our industry favor additional opportunities for NCI to purchase complementary operations. NCI's growth and above-average profitability provide tangible evidence of the significant economies of scale that are attainable in our business. Increased procurement leverage with steel producers and other suppliers; improved quality control and manufacturing scheduling as a result of our vertical integration; and increased productivity because of our size are advantages for NCI that translate into value for customers. Smaller, independent manufacturers and marketers of systems and components face the need to invest increasing sums of capital in information systems and new manufacturing processes to remain competitive. This translates into persistent pressure on their margins. Trade statistics indicate that there are an estimated 50 manufacturers that compete in the metal building industry. We believe that there will be ongoing consolidation among these firms and intend to remain active in reviewing potential acquisitions. We also are interested in intensifying and broadening our vertical integration through operations such as the metal coating business units that we have purchased in recent years. [PICTURE] WHAT LEVEL OF CAPITAL INVESTMENT ARE YOU BUDGETING FOR FISCAL 2000? Our business demands an ongoing capital investment program, and we are committed to making the appropriate expenditures to remain a leader in establishing industry benchmarks for productivity and efficiency. Our spending for fiscal 2000 is budgeted to be $20-$25 million, down from $33 million in fiscal 1999. The timing of large projects such as the long bay system manufacturing facility that was completed in fiscal 1999 will cause our spending to fluctuate somewhat from one year to the next. [PICTURE] Components add color and definition: NCI's wide variety of panel profiles and colors provide a distinctive appearance to multi-building projects.
93 94 95 96 97 98 99 ------ ------ ------ ------- ------- ------- ------- (in thousands) CAPITAL EXPENDITURE 3,000 4,200 6,700 10,300 11,332 20,834 33,261
[PICTURE] Computer controlled machinery ensures that all components are manufactured to exacting standards. 7 12 IS THE HIGHER DEBT/CAPITAL RATIO THAT RESULTED FROM THE MBCI TRANSACTION CAUSING YOU TO DEFER ANY CAPITAL SPENDING NEEDS? Not at all. One of our imperative requirements in the MBCI transaction was retaining a sound financial position that would allow us to make the investments in information systems, additional manufacturing capacity and other distribution facilities necessary to support the Company's future growth. Our EBITDA in fiscal 1999 totaled $144 million. That was sufficient not only to fund an unusually large level of capital expenditures but also to reduce our debt by $42 million. [PICTURE] NCI'S HIGHLY TRAINED TECHNICIANS CREATE COMPUTER GENERATED MODELS FOR TESTING BEFORE THE MANUFACTURING PROCESS BEGINS.
99 98 -------- -------- (in thousands) DEBT REDUCTION 444,477 397,062
WHAT ARE YOUR PLANS FOR A FURTHER REDUCTION IN YOUR FINANCIAL LEVERAGE? Based on the balance sheet at the close of fiscal 1999, we had reduced our debt by $130 million, or 23%, from the level immediately after the MBCI transaction. That pay down was accomplished over an approximate 18-month period. Assuming the same level of EBITDA as in fiscal 1999, we believe that there should be at least $55 million in available funds for additional debt reduction and stock repurchase in fiscal 2000. During fiscal 1999 we also lowered our exposure to fluctuations in short-term interest rates and our debt repayment schedule by refinancing $125 million of our debt by issuing fixed-rate, 10-year senior subordinated notes. Our coverage ratios relating to this debt have increased considerably as the debt has been reduced and our equity base increased. [CHART] WHY INSTITUTE A STOCK REPURCHASE PROGRAM VERSUS USING THOSE FUNDS TO REDUCE DEBT? We believe the repurchase of our shares at prevailing market levels offers a very attractive investment alternative for NCI. We believe that the funds generated from operations will be sufficient not only to execute this program but also to continue reducing our leverage. Market conditions will obviously determine how many shares we repurchase, but the Board decided that a repurchase program tangibly reinforced its confidence in NCI's prospects as well as providing the potential for a significant return on the capital committed to this activity. WHAT ARE YOUR INTERNAL GROWTH GOALS? According to industry figures, sales of metal building systems have increased 7% annually for the past five years and amount to approximately $3 billion annually. Demand for metal building components is estimated to have risen at a rate possibly twice this level. Factors driving this expansion are proven durability and cost effectiveness as well as enhanced aesthetics. The cost of constructing a metal building can be as much as 20% less than that of a conventional building. With that impressive cost advantage, metal buildings are expected to continue accounting for an increasing portion of the total commercial building market. Components, which represent a larger portion of sales than metal building systems, have broader growth opporunities. Most observers believe that the intrinsic growth in demand for metal components will also be aided by an increasing penetration of metal roofs into the residential housing market. In some areas of the country, metal roofs are today the standard for both commercial and residential construction. 8 13 Against this positive industry backdrop, our strategic goal is to continue increasing NCI's market share. We have a well-established position as a low-cost supplier that we have been able to capitalize on by accounting for more than our present customers' needs while expanding our marketing base. We have a broad geographic footprint with manufacturing/distribution facilities in 18 states, and our efficient "hub-and-spoke" concept offers meaningful advantages in terms of transportation costs and local market responsiveness. In sum, we believe there is substantial potential to grow through our present operations and have identified a number of other marketing initiatives that we intend to pursue. The entry into the long bay building market is just such an effort. We completed construction of our facility in Mexico to build these systems during fiscal 1999 and are planning to focus considerable marketing resources on this product category in fiscal 2000. WHAT IS THE POTENTIAL FOR NCI IN THE LONG BAY MARKET? We believe the demand for long bay systems exceed $1 billion annually. This is essentially a new market for NCI, and we believe our strategy for success is sound. These larger buildings typically involve considerably less custom engineering and design than the metal systems in which NCI already has a strong market position. Because of this relative standardization, long bay systems demand close control over manufacturing costs to realize an attractive return on capital. We believe the manufacturing capacity we have established in Mexico provides a highly efficient infrastructure for NCI. We are especially pleased about the opportunity this venture offers to establish a marketing presence in the conventional construction market, notably in those warehouses and other commercial buildings that involve erected concrete walls spanned by a metal roof. [PICTURE] HUGE COILS OF STEEL ARE COLD ROLLED TO CREATE NCI'S 100 PANEL PROFILES. [PICTURE] The Long Bay System fits in place... [PICTURE] ...is bolted to the main frame... [PICTURE] ...and is quickly ready for the roofing system to be installed. 9 14 WHAT LED TO THE LARGE ACTIVITY IN INSIDER TRANSACTIONS DURING FISCAL 1999? Much of the insider activity during fiscal 1999 was driven by tax considerations related to the May 1998 acquisition of MBCI. Although shares of NCI were issued to certain MBCI owners, that stock was considered ordinary income to the recipients. This led to considerable tax liabilities in some instances, and the need to meet those cash obligations through personal borrowings. During fiscal 1999 several of these individuals decided to eliminate or reduce these loans by selling at least a portion of their holdings. [PICTURE] RESEARCH & DEVELOPMENT: COMPONENTS ARE TESTED FOR WIND RESISTANCE IN NCI'S R&D LABORATORY AT THE HARDY STREET FACILITY. [PICTURE] ENVIRONMENTAL PRESSURES ARE APPLIED... [PICTURE] ...AND RESULTS ARE CAREFULLY LOGGED. 10 15 ARE YOU SATISFIED WITH THE DEGREE OF SYNERGIES THAT HAVE BEEN REALIZED TO DATE WITH THE INTEGRATION OF MBCI AND OTHER RECENT ACQUISITIONS? We have realized approximately $20 million in cost savings as a result of capitalizing on our increased procurement leverage with suppliers. That is well within the goal that we set when completing MBCI and the other transactions. We also had identified considerable cross-selling opportunities that we anticipated would involve more time to attain. We established solid momentum in this area during fiscal 1999, and an important objective for us in fiscal 2000 is to extend this progress. [PICTURE] TESTING, CORRECTING, AND RETESTING FOR PERFECT RESULTS PROVIDE QUALITY PRODUCTS ON WHICH NCI STAKES ITS REPUTATION. [PICTURE] The finished product is the result of years of experience, technical precision, and attention to detail. This makes NCI Building Systems one of the largest integrated manufacturers and marketers of metal building components and engineered metal building systems in North America. 11 16 PROFILE NCI is a manufacturer and marketer of engineered metal building systems and components. The company contributes to the building process by designing structures to user specifications, then manufacturing the appropriate parts for its customers -- frequently authorized builders -- to erect and make ready for occupancy. Components are sold to many of the same markets where engineering is not required. NCI aggressively markets its products nationwide through several channels under the following trade names: Metallic Building Company, Mid-West Steel Building Company, Doors & Building Components, Steel Systems, A&S Building Systems, Classic Steel Frame Homes, Mesco Metal Buildings, MBCI, ABC, IPS, DOUBLECOTE, Metal Prep, Metal Coaters of Georgia, Metal Coaters of California and Mid-West Metal Coatings. NCI's products are directed at the non-residential market, primarily industrial and low-rise commercial applications. [PICTURE] NEW CORPORATE HEADQUARTERS SCHEDULED TO BE COMPLETED IN 2000. LOCATED AT 10943 NORTH SAM HOUSTON PARKWAY WEST, HOUSTON, TEXAS 77064. FORWARD - LOOKING STATEMENTS "This Annual Report contains forward-looking statements concerning the business and operations of the Company. Although the Company believes that the expectations reflected in these 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 factors include, but are not limited to, industry cyclicality and seasonality, adverse weather conditions, fluctuations in customer demand and order patterns, raw material pricing, competitive activity and pricing pressure, the ability to make strategic activities accretive to earning, and general economic conditions affecting the construction industry, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including its most recent annual and quarterly reports on Forms 10(k) and 10(Q), the Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in its expectations." 12 17 1999 FINANCIAL REVIEW 13 18 CONSOLIDATED STATEMENTS OF INCOME NCI BUILDING SYSTEMS, INC. (IN THOUSANDS, EXCEPT PER SHARE DATA)
October 31, ------------------------------- 1997 1998 1999 --------- --------- --------- Sales ............................................... $ 407,751 $ 675,331 $ 936,550 Cost of sales ....................................... 299,407 497,862 694,909 --------- --------- --------- Gross profit .................................... 108,344 177,469 241,641 Operating expenses .................................. 66,055 96,100 131,109 Nonrecurring acquisition expense .................... -- 2,060 -- --------- --------- --------- Income from operations .......................... 42,289 79,309 110,532 Interest expense .................................... (163) (20,756) (35,449) Other income ........................................ 1,999 2,559 3,204 Joint venture income ................................ -- 737 1,675 --------- --------- --------- Income before income taxes ...................... 44,125 61,849 79,962 --------- --------- --------- Provision for income taxes Current ......................................... 15,920 16,573 30,066 Deferred ........................................ 318 7,958 3,022 --------- --------- --------- Total income tax .................................... 16,238 24,531 33,088 --------- --------- --------- Income before extraordinary loss ................ 27,887 37,318 46,874 Extraordinary loss on debt refinancing, net of tax .. -- -- (1,001) --------- --------- --------- Net income .......................................... $ 27,887 $ 37,318 $ 45,873 ========= ========= ========= Net income per common and common equivalent share Basic: Income before extraordinary loss ................ $ 1.73 $ 2.17 $ 2.55 Extraordinary loss .............................. -- -- (0.05) --------- --------- --------- Net income ...................................... $ 1.73 $ 2.17 $ 2.50 ========= ========= ========= Diluted: Income before extraordinary loss ................ $ 1.64 $ 2.05 $ 2.46 Extraordinary loss .............................. -- -- (0.05) ========= ========= ========= Net income .......................................... $ 1.64 $ 2.05 $ 2.41 ========= ========= =========
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 14 19 CONSOLIDATED BALANCESHEETS NCI BUILDING SYSTEMS, INC. (IN THOUSANDS, EXCEPT SHARE DATA)
October 31, --------------------- 1998 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents .................................................. $ 4,599 $ 16,089 Accounts receivable, net ................................................... 99,261 105,608 Inventories ................................................................ 78,001 83,988 Deferred income taxes ...................................................... 6,495 6,943 Prepaid expenses ........................................................... 4,214 5,037 Total current assets ....................................................... 192,570 217,665 Property, plant and equipment, net ............................................. 179,500 197,855 Excess of cost over fair value of acquired net assets .......................... 413,288 398,606 Investment in joint ventures and other assets .................................. 38,179 41,357 Total assets ................................................................... $ 823,537 $ 855,483 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .......................................... $ 31,297 $ 36,297 Accounts payable ........................................................... 62,694 65,209 Accrued compensation and benefits .......................................... 16,261 17,021 Other accrued expense ...................................................... 23,925 38,567 Total current liabilities .................................................. 134,177 157,094 Long-term debt, noncurrent portion ............................................. 444,477 397,062 Deferred income taxes .......................................................... 21,271 24,037 Contingencies Shareholders' equity Preferred stock, $1 par value, 1,000,000 shares authorized, none outstanding .................................... -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 18,064,000 and 18,520,000 shares issued and outstanding, respectively ............. 181 186 Additional paid-in capital ................................................. 89,489 97,289 Retained earnings .......................................................... 133,942 179,815 Total shareholders' equity ..................................................... 223,612 277,290 Total liabilities and shareholders' equity ..................................... $ 823,537 $ 855,483
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 15 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NCI BUILDING SYSTEMS, INC. (IN THOUSANDS)
Additional Common Paid-In Retained Shareholders' Stock Capital Earnings Equity ------- ---------- ---------- ------------- Balance, October 31, 1996 ........................... $ 80 $ 47,358 $ 68,737 $ 116,175 Proceeds from exercise of stock options, including tax benefit thereon ................... 1 2,234 -- 2,235 Shares issued for contribution to 401(k) plan 1 1,517 -- 1,518 Net income .......................................... -- -- 27,887 27,887 ------- ---------- ---------- ------------- Balance, October 31, 1997 ........................... 82 51,109 96,624 147,815 Proceeds from exercise of stock options, including tax benefit thereon ................... 2 4,317 -- 4,319 Two for one split of common stock ................... 82 (82) -- -- Shares issued in connection with the purchase of MBCI ................................ 14 32,186 -- 32,200 Shares issued for contribution to 401(k) plan ..................... 1 1,959 -- 1,960 Net income .......................................... -- -- 37,318 37,318 ------- ---------- ---------- ------------- Balance, October 31, 1998 ........................... 181 89,489 133,942 223,612 Proceeds from exercise of stock options, including tax benefit thereon ................... 3 3,076 -- 3,079 Shares issued for contribution to 401(k) plan ..................... 2 4,724 -- 4,726 Net income .......................................... -- -- 45,873 45,873 ------- ---------- ---------- ------------- Balance, October 31, 1999 ........................... $ 186 $ 97,289 $ 179,815 $ 277,290 ======= ========== ========== =============
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 16 21 CONSOLIDATED STATEMENTS OF CASHFLOWS NCI BUILDING SYSTEMS, INC. (IN THOUSANDS)
October 31, ------------------------------ 1997 1998 1999 -------- --------- --------- Cash flows from operating activities Income before extraordinary loss ............................................... $ 27,887 $ 37,318 $ 46,874 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization ............................................ 7,876 17,818 28,542 Gain on sale of fixed assets ............................................. (3) (32) (11) Provision for doubtful accounts .......................................... 1,223 2,625 2,402 Extraordinary loss on debt refinancing, net of tax ....................... -- -- (1,001) Deferred income tax provision ............................................ 318 7,958 3,022 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts, notes and other receivables .................................... (10,481) (3,663) (8,749) Inventories .............................................................. (5,552) 9,951 (5,987) Prepaid expenses ......................................................... (625) 109 (823) Accounts payable ......................................................... 2,394 24,189 2,515 Accrued expenses ......................................................... 5,579 13,772 27,444 -------- --------- --------- Net cash provided by operating activities ................................ 28,616 110,045 94,228 Cash flows from investing activities: Proceeds from the sale of fixed assets ......................................... 25 98 1,561 Acquisition of Carlisle Engineered Metals, Inc. ................................ (6,230) -- -- Acquisition of Metal Building Components, Inc. ................................. -- (553,510) -- Acquisition of California Finished Metals, Inc. ................................ -- (15,458) -- Changes in other noncurrent assets ............................................. (1,147) (24,450) (9,574) Capital expenditures ........................................................... (11,332) (20,834) (33,262) -------- --------- --------- Net cash used in investing activities .................................... (18,684) (614,154) (41,275) Cash flows from financing activities: Exercise of stock options ...................................................... 1,340 2,494 952 Net (payments) borrowing on revolving lines of credit .......................... -- 281,600 (136,112) Borrowings on long-term debt ................................................... -- 200,000 125,000 Payments on long-term debt ..................................................... (50) (7,552) (31,303) -------- --------- --------- Net cash provided by (used in) financing activities ...................... 1,290 476,542 (41,463) Net increase (decrease) in cash .................................................... 11,222 (27,567) 11,490 Cash at beginning of period ........................................................ 20,944 32,166 4,599 -------- --------- --------- Cash at end of period .............................................................. $ 32,166 $ 4,599 $ 16,089 ======== ========= =========
See Independent Auditor's Report and Accompanying Notes to the Consolidated Financial Statements. 17 22 (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 ("the 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 or as services are performed. Certain prior year amounts have been reclassified to conform with the current year presentation. (b) Accounts Receivable The Company reports accounts receivable net of the allowance for doubtful accounts of $2,321,000 and $3,309,000 at October 31, 1998 and 1999, respectively. Trade accounts receivable are the result of sales of building systems and components to customers throughout the United States and affiliated territories including international builders who resell to end users. 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. (c) Inventories Inventories are stated at the lower of cost or market value, using specific identification or the weighted-average method for steel coils and other raw materials. A summary of inventories follows:
October 31, ------------------- 1998 1999 -------- -------- (in thousands) Raw materials ................ $ 55,190 $ 65,315 Work-in-process and finished goods ............ 22,811 18,673 -------- -------- $ 78,001 $ 83,988 ======== ========
(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, 1997, 1998 and 1999 was $5,893,000, $9,970,000, and $13,468,000 respectively. The Company capitalizes certain costs related to internal use software in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed for Internal Use. Property, plant and equipment consist of the following:
October 31, ------------------- 1998 1999 -------- -------- (in thousands) Land ......................... $ 11,184 $ 12,417 Buildings and improvements ... 74,510 87,893 Machinery, equipment and furniture ............ 109,763 115,768 Transportation equipment ..... 4,711 4,721 Computer software and equipment ............ 8,003 17,759 -------- -------- 208,171 238,558 Less accumulated depreciation. (28,671) (40,703) -------- -------- $179,500 $197,855 ======== ========
Estimated useful lives for depreciation are: Buildings and improvements ............... 10 - 40 years Machinery, equipment and furniture ...................... 5 - 13 years Transportation equipment ................. 3 - 10 years Computer software and equipment ...................... 5 - 7 years
(e) Statement of Cash Flows 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, 1997, 1998 and 1999 was $163,000, $16,733,000, and $30,198,000, respectively. Income taxes paid, net of refunds received, for the years ended October 31, 1997, 1998 and 1999 was $15,676,000, $19,915,000 and $13,247,000, respectively. Non-cash investing or financing activities included: $2,301,000 for the 1999 401(k) plan contributions through the third fiscal quarter of 1999 and $2,428,000 for the related 1998 contributions which were paid in common stock in 1999, $1,960,000 for the 1997 contribution paid in common stock in 1998, and $1,518,000 for 1996 contribution paid in common stock in 1997. (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 periods of fifteen to forty years. Accumulated amortization as of October 31, 1998 was $9,788,000, and $21,581,000 as of October 31, 1999. The carry- 18 23 ing 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 $1,416,000, $2,301,000 and $3,851,000 in 1997, 1998 and 1999, respectively. (i) Long-Lived Assets 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. (j) Stock-Based Compensation The Company uses the intrinsic value method in accounting for its stock-based employee compensation plans. (k) Pending Accounting Changes The Company plans to adopt Statement of Financial Accounting Standards "(SFAS)" No. 133, Accounting for Derivative Instruments and Hedging Activities, effective at the beginning of fiscal 2001. This statement will require derivative positions to be recognized in the balance sheet at fair value. The Company is in the process of reviewing the Statement, and has not yet determined the effect of adoption on results of operations or financial position. (l) Business Segments The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information in 1999. The Company has divided its operations into two reportable segments: engineered building systems and metal building components, based upon similarities in product lines, manufacturing processes, marketing and management of its businesses. Products of both segments are similar in basic raw materials used and manufacturing. The engineered building systems segment includes the manufacturing of structural framing and supplies and value added engineering and drafting, which are typically not part of component products or services. The reporting segments follow the same accounting policies used for the Company's consolidated financial statements. Management evaluates a segments' performance based upon operating income. Intersegment sales are recorded based on prevailing market prices, and consist primarily of products and services provided to the engineered building systems segment by the metal building components segment, including painting and coating of hot rolled material. Information with respect to the segments is included in the three-year comparison labeled Supplementary Business Segment Information on page 24. (2) LONG-TERM DEBT
October 31, --------------------- 1998 1999 --------- --------- (in thousands) Five-year revolving credit line with banks bearing interest at a rate of 30-day LIBOR plus 1.375% (6.9% at October 31, 1999), maturing on July 1, 2003 .................. $ 141,600 $ 124,800 Five-year term loan payable to banks bearing interest at a rate of 90-day LIBOR plus 1.375% (7.0% at October 31, 1999) repayable beginning on October 31, 1998, in quarterly installments beginning with $7.5 million and gradually increasing to $12.5 million on the maturity date, July 1, 2003 .............................. 192,500 161,250 364-day revolving credit facility with banks bearing interest at a rate of 30-day LIBOR plus 1.375% (6.9% at October 31, 1999) maturing on May 1, 2000 ................... 140,000 20,688 Unsecured senior subordinated notes bearing interest at a rate of 9 1/4%, maturing on May 1, 2009 ................... -- 125,000 Note payable to employee bearing interest at 7%, maturing April 1, 2001, with an option to convert into common stock at $14.96 per share ................. 1,500 1,500 Other ..................................... 174 121 --------- --------- 475,774 433,359 Current portion of long-term debt ......... (31,297) (36,297) --------- --------- $ 444,477 $ 397,062 ========= =========
19 24 Aggregate required principal reductions are as follows:
Year Ended October 31, ---------------------- (in thousands) 2000 ................. 36,305 2001 ................. 42,807 2002 ................. 46,260 2003 ................. 182,987 2004 and thereafter .. 125,000 --------- $ 433,359 =========
The Company has a senior credit facility from a syndicated group of banks, which consists of (i) a five-year revolving credit facility of up to $200 million, of which up to $20 million may be utilized in the form of commercial and standby letters of credit, (ii) a five-year term loan facility and (iii) a 364-day revolving credit facility which originally provided for up to $200 million. Loans and letters of credit under the five-year revolver will be available, and amounts repaid may be reborrowed, at any time until July, 2003, subject to the fulfillment of certain conditions precedent, includ-ing the absence of default under the facility. If the 364-day revolver is not repaid by the Company or extended by the lenders, the Company has the option to convert it to a three-year term note. The Company's obligations under the senior credit facility are secured by the pledge of all capital stock, partnership interests and other equity interests of the Company's domestic subsidiaries. All obligations are also guaranteed by each of the Company's domestic corporate subsidiaries and operating limited partnerships. The senior credit facility contains customary financial and restrictive covenants with amounts and ratios negotiated between the Company and the lender. The Company is required to make mandatory prepayments on the senior credit facility upon the occurrence of certain events, including the sale of assets and the issuance and sale of equity securities, in each case subject to certain limitations. On May 5, 1999, the Company completed its offering of $125 million of unsecured Senior Subordinated Notes due 2009 (the "Notes"). The net proceeds of the offering, approximately $121 million, were used to repay a portion of outstanding borrowings under the existing senior credit facility. The indenture governing the Notes provides for interest at 9 1/4%, and the Notes mature on May 1, 2009. The indenture governing the Notes also contains covenants restricting certain activities and transactions by the Company and its subsidiaries including dividends, repurchases of stock, incurrence of additional debt and liens, investments in non-wholly owned entities or ventures and acquisitions or mergers, unless certain financial tests and other requirements are met. As a result of the offering of the Notes, the Company reduced the maximum available borrowings under its 364 day revolver from $200 million to $40 million. The restructuring of the existing senior credit facility resulted in the write-off of approximately $1.6 million ($1.0 million after tax) in deferred financing costs. At October 31, 1999, the remaining unamortized balance in deferred financing costs relating to the senior credit facility and the Notes were $6,201,000 and $3,975,000, respectively. At October 31, 1999, the fair value of the Company's long term debt, based on current interest rates and quoted market prices was $426.7 million, compared with the carrying amount of $433.4 million. At October 31, 1998, the carrying amount of the Company's long-term debt approximated its fair value. (3) RELATED PARTY TRANSACTIONS During 1997, 1998 and 1999, the Company purchased $1,869,000, $1,862,000, and $1,072,000 respectively, of materials from a related party under arm's length transactions. (4) 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, ---------------------------- 1997 1998 1999 -------- -------- -------- (in thousands) Current: Federal ............... $ 15,478 $ 15,371 $ 27,534 State ................. 442 1,202 2,532 -------- -------- -------- Total current ................ 15,920 16,573 30,066 Deferred: Federal .............. 304 7,292 2,760 State ................. 14 666 262 -------- -------- -------- Total deferred ............... 318 7,958 3,022 -------- -------- -------- Total provision ................ $ 16,238 $ 24,531 $ 33,088 ======== ======== ========
The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows: 20 25
Year Ended October 31, ---------------------- 1997 1998 1999 ------ ------ ------ Statutory federal income tax rate 35.0% 35.0% 35.0% Non-deductible goodwill amortization ........................... -- 2.7% 4.2% State income taxes ...................... 1.2% 2.1% 2.3% Other ................................... 0.6 (0.1%) (0.1%) ---- ---- ---- Effective tax rate ..................... 36.8% 39.7% 41.4% ==== ==== ====
Significant components of the Company's deferred tax liabilities and assets are as follows:
------------------ 1998 1999 -------- -------- (in thousands) Deferred tax assets Inventory ................................ $ 1,968 $ 1,693 Bad debt reserve ......................... 1,446 1,328 Accrued insurance reserves ............... 1,258 1,480 Deferred compensation .................... 711 1,416 Other reserves ........................... 1,112 1,026 -------- ------- Total deferred tax assets ................. 6,495 6,943 -------- ------- Deferred tax liabilities Depreciation and amortization ............ 18,327 21,098 Other .................................... 2,944 2,939 -------- ------- Total deferred tax liabilities ............ 21,271 24,037 -------- ------- Net deferred tax asset (liability) ........ $(14,776) $(17,094) -------- -------
Other accrued liabilities includes accrued income taxes of $10,454,000 at October 31, 1999 and income tax receivables of $3,710,000 at October 31, 1998. (5) OPERATING LEASE COMMITMENTS Total rental expense incurred from operating non-cancelable leases for the years ended October 31, 1997, 1998 and 1999 was $4,644,000, $5,527,000 and $6,795,000, respectively. Aggregate minimum required annual payments on long-term operating leases at October 31, 1999 were as follows: Year Ended October 31, (in thousands) - ------------------------------------------- 2000 ........................ $ 2,055 2001 ........................ 1,417 2002 ........................ 829 2003 ........................ 417 2004 ........................ 198 ------- $ 4,916 ======= (6) SHAREHOLDERS' RIGHTS PLAN In June 1998 the Board of Directors adopted a Shareholders' Rights Plan in which one preferred stock purchase right (Right) was declared as a dividend for each common share outstanding. Each Right entitles shareholders to purchase, under certain conditions, one one-hundredth (1 /100th) of a share of newly authorized Series A Junior Participating Preferred Stock at an exercise price of $62.50. Rights will be exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the common shares or commences a tender or exchange offer, upon consummation of which such person or group would beneficially own 20 percent or more of the common shares. In the event that a person or group acquires 20 percent or more of the common shares, the Rights enable dilution of the acquiring person's or group's interest by providing for a 50 percent discount on the purchase of common shares by the non-controlling shareholders. The company will generally be entitled to redeem the Rights at $0.005 per Right at any time before a person or group acquires 20 percent or more of the common shares. Rights will expire on June 24, 2008, unless earlier exercised, redeemed or exchanged. (7) COMMON STOCK In June 1998, the Company's Board of Directors approved a two-for-one split of the Common Stock effective for stockholders of record on July 8, 1998. Share and per share amounts have been restated to reflect the stock split. 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 4,100,000 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 1997, 1998 and 1999 are as follows (in thousands, except per share amounts):
Weighted Number Average of Shares Exercise Price ----------- -------------- Balance, October 31, 1996 ...................... 1,616 $ 7.39 Granted .................................... 314 15.23 Canceled ................................... (10) (12.09) Exercised .................................. (211) (6.34) ------ -------- Balance, October 31, 1997 ...................... 1,709 8.94 Granted .................................... 517 23.65 Canceled ................................... (22) (14.56) Exercised .................................. (313) (7.98) ------ -------- Balance, October 31, 1998 ...................... 1,891 $ 13.06 Granted .................................... 118 22.72 Canceled ................................... (37) (13.27) Exercised .................................. (271) (3.57) ------ -------- Balance, October 31, 1999 ...................... 1,701 $ 15.23 ====== ========
Options exercisable at October 31, 1997, 1998, and 1999 were 841,000, 910,000, and 929,000 respectively. The weighted average exercise prices for options exercisable at October 31, 1997, 21 26 1998 and 1999 were $4.60, $6.67 and $11.11. Exercise prices for options outstanding at October 31, 1999 range from $1.36 to $28.13. The weighted average remaining contractual life of options outstanding at October 31, 1999 is 6.6 years. The following summarizes additional information concerning outstanding options as of October 31, 1999:
OPTIONS OUTSTANDING Range of Number of Weighted-Average Exercise Prices Options Remaining Life Exercise Price - --------------- ---------- ---------------- -------------- $ 1.36 - 9.13 428,000 3.4 years $ 4.98 $ 11.50 - 19.38 707,000 6.9 years $ 14.43 $ 21.56 - 28.13 566,000 8.6 years $ 23.98 ---------- 1,701,000 ==========
OPTIONS EXERCISABLE Range of Number of Weighted-Average Exercise Prices Options Exercise Price - --------------- --------- ---------------- $ 1.36 - 9.13 428,000 $ 4.98 $ 11.50 - 19.38 383,000 $ 13.95 $ 21.56 - 28.13 118,000 $ 24.04 --------- 929,000 =========
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 1997, 1998 and 1999 was $7.89, $12.07 and $12.83, respectively. These values were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: no expected dividend, expected volatility of 38.4%, risk free interest rates ranging from 6.4% to 6.9% for 1997, 4.6% to 5.9% for 1998 and 4.4% to 6.2% for 1999, and expected lives of 7 years. Had compensation expense been recorded based on these hypothetical values, the Company's income and earnings per share would have been as follows (in thousands, except per share data):
1997 1998 1999 -------- -------- -------- Proforma net income before extraordinary loss ....................... $ 27,081 $ 35,887 $ 44,911 Proforma income per share before extraordinary loss - Basic ............... $ 1.68 $ 2.08 $ 2.44 - Diluted ............. $ 1.59 $ 1.98 $ 2.35
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 Basic and diluted net income per share computations are as follows:
Year Ended October 31, ------------------------------------ 1997 1998 1999 -------- -------- -------- (in thousands, except per share data) Income before extraordinary item $ 27,887 $ 37,318 $ 46,874 Add: Interest, net of tax, on convertible debenture assumed converted ............... 66 66 66 -------- -------- -------- Adjusted income before Extraordinary loss ................ $ 27,953 $ 37,384 $ 46,940 ======== ======== ======== Extraordinary loss on debt refinancing, net of tax .... -- -- 1,001 -------- -------- -------- Adjusted net income ................. $ 27,953 $ 37,384 $ 45,939 ======== ======== ======== Weighted average common shares outstanding ................. 16,127 17,212 18,378 Add: Common stock equivalents: Stock options ...................... 858 880 622 Convertible debenture .............. 100 100 100 Weighted average common shares -------- -------- -------- outstanding, assuming dilution ..... 17,085 18,192 19,100 ======== ======== ======== Income per common and common equivalent share: Basic: Income before extraordinary loss $ 1.73 $ 2.17 $ 2.55 Extraordinary loss ................. -- -- (0.05) -------- -------- -------- Net Income ......................... $ 1.73 $ 2.17 $ 2.50 ======== ======== ======== Diluted: Income before extraordinary loss $ 1.64 $ 2.05 $ 2.46 Extraordinary Loss ................. -- -- (0.05) -------- -------- -------- Net income .......................... $ 1.64 $ 2.05 $ 2.41 ======== ======== ========
(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 expense for the years ended October 31, 1997, 1998 and 1999 were $1,967,000, $2,575,000 and $4,144,000 respectively for contributions to the Savings Plan. (11) ACQUISITIONS On May 4, 1998, the Company acquired Metal Building Components, Inc. ("MBCI") through the purchase of all of the outstanding capital stock of Amatek Holdings, Inc. from BTR 22 27 Australia Limited, a wholly owned subsidiary of BTR plc, for a purchase price of approximately $589 million, including cash of $550 million (plus transaction costs) and 1.4 million shares of the Company's common stock valued at $32.2 million. MBCI designs, manufactures, sells and distributes metal components for commercial, industrial, architectural, agricultural and residential construction uses. MBCI also processes its own hot roll coil metal for use in component manufacturing, as well as processing hot roll coil metal and toll coating light gauge metal for use by other parties in the construction of metal building components and numerous other products. The funds for this acquisition were provided from the proceeds of a new $600 million bank credit facility under which the Company initially borrowed $540 million. The acquisition was accounted for using the purchase method of accounting. The excess of cost over the fair value of the acquired assets was approximately $389 million. The consolidated results of operations for 1998 include MBCI since the date of acquisition. Assuming the acquisition of MBCI had been consummated as at the beginning of the period pre-sented, the proforma unaudited results of operations are as follows (in thousands, except per share data):
Year Ended October 31, 1998 --------------------------- Sales $ 871,026 Net income $ 37,143 Net income per share - basic $ 2.07 Net income per share - diluted $ 1.97
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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mistatement. 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, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Houston, Texas December 7, 1999 28 SUPPLEMENTARY BUSINESS SEGMENT INFORMATION (DOLLAR AMOUNTS IN THOUSANDS)
1997 % 1998 % 1999 % --------- ---- --------- ---- --------- ---- %Tot %Tot %Tot SALES TO OUTSIDE CUSTOMERS: Engineered building systems............................ 257,093 63 277,347 41 310,324 33 Metal building components.............................. 150,658 37 397,984 59 626,226 67 Intersegment sales..................................... -- 25,094 4 59,692 6 Corporate/eliminations................................. -- (25,094) (4) (59,692) (6) --------- --- --------- --- --------- --- Total net sales(1)................................... $ 407,751 100 $ 675,331 100 $ 936,550 100 ========= === ========= === ========= === % Sale % Sale % Sale OPERATING INCOME: Engineered building systems............................ 25,518 10 29,576 11 37,509 12 Metal building components.............................. 17,064 11 51,497 13 72,441 12 Corporate/eliminations................................. (293) -- (1,764) -- 582 -- --------- --- --------- --- --------- --- Total operating income............................... $ 42,289 10 $ 79,309 12 $ 110,532 12 ========= === ========= === ========= === %Tot %Tot %Tot JOINT VENTURE INCOME: Engineered building systems............................ -- -- 8 1 150 9 Metal building components.............................. -- -- 729 99 1,525 91 Corporate/eliminations................................. -- -- -- -- -- -- --------- --- --------- --- --------- --- Total joint venture income .......................... $ -- -- $ 737 100 $ 1,675 100 ========= === ========= === ========= === INVESTMENT IN JOINT VENTURES: Engineered building systems............................ 20 28 178 Metal building components.............................. 500 25,937 30,301 Corporate/eliminations................................. -- -- -- --------- --- --------- --- --------- --- Total investment in joint ventures................... $ 520 $ 25,965 $ 30,479 ========= === ========= === ========= === %Tot %Tot %Tot PROPERTY, PLANT AND EQUIPMENT: Engineered building systems............................ 30,712 60 33,244 19 35,931 18 Metal building components ............................. 16,851 33 142,637 79 153,156 77 Corporate/eliminations................................. 3,660 7 3,619 2 8,768 5 --------- --- --------- --- --------- --- Total property, plant and equipment, net............. $ 51,223 100 $ 179,500 100 $ 197,855 100 ========= === ========= === ========= === DEPRECIATION AND AMORTIZATION: Engineered building systems............................ 4,197 5,958 6,893 Metal building components ............................. 3,471 10,346 17,590 Corporate/eliminations................................. 208 1,514 4,059 --------- --- --------- --- --------- --- Total depreciation and amortization ................. $ 7,876 $ 17,818 $ 28,542 ========= === ========= === ========= === CAPITAL EXPENDITURES: Engineered building systems............................ 10,205 7,297 10,067 Metal building components.............................. 818 13,233 17,769 Corporate/eliminations................................. 309 304 5,426 --------- --- --------- --- --------- --- Total capital expenditures........................... $ 11,332 $ 20,834 $ 33,262 ========= === ========= === ========= === %Tot %Tot %Tot TOTAL ASSETS: Engineered building systems............................ 91,703 47 86,342 10 88,673 10 Metal building components.............................. 61,911 31 352,407 43 364,533 43 Corporate/eliminations ................................ 42,718 22 384,788 47 402,277 47 --------- --- --------- --- --------- --- Total assets ........................................ $ 196,332 100 $ 823,537 100 $ 855,483 100 ========= === ========= === ========= ===
(1) The company is not dependent on any one significant customer or group of customers. Substantially all of the company's sales are made within the United States. 24 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents, as a percentage of sales, certain selected consolidated financial data for the Company for the periods indicated:
Year Ended October 31, ------------------------ 1997 1998 1999 ---- ---- ---- Sales.................................. 100.0% 100.0% 100.0% Cost of sales.......................... 73.4 73.7 74.2 ----- ----- ----- Gross profit........................... 26.6 26.3 25.8 Operating expenses..................... 16.3 14.2 14.0 Nonrecurring acquisition expense....... -- 0.3 -- ----- ----- ----- Income from operations................. 10.3 11.8 11.8 Interest expense....................... -- 3.1 3.8 Other income net....................... (0.5) (0.5) (0.5) ----- ----- ----- Income before income taxes............. 10.8 9.2 8.5 Provision for income taxes............. 4.0 3.6 3.5 Income before extraordinary loss....... 6.8 5.6 5.0 Extraordinary loss on debt refinancing, net of tax........................... -- -- (0.1) Net income............................. 6.8% 5.6% 4.9% ===== ===== =====
The Company's various product lines have been aggregated into two business segments: metal building components and engineered building systems. These aggregations are based on the similar nature of the products, distribution of products and management and reporting of those products within the Company. Both segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and terms of financing available for construction. Products of both business segments are similar in basic raw materials used and manufacturing. Engineered building systems includes the manufacturing of structural framing and supplies and value added engineering and drafting, which are typically not part of component products or services. The Company believes it has one of the broadest product offerings of metal building products in the industry. Intersegment sales consist primarily of products and services provided to the engineered buildings segment by the component segment including painting and coating of hot rolled material. This provides better customer service, shorter delivery time and minimizes transportation costs to the customer. RESULTS OF OPERATIONS FOR FISCAL 1999 COMPARED TO 1998 Consolidated sales increased by 39% in the current year compared to the prior year. Most of this increase resulted from the inclusion of MBCI (acquired in May 1998) for the full year in 1999 compared to only six months in 1998. On a pro forma basis, the increase in sales would have been approximately 8%. ENGINEERED BUILDING SYSTEMS sales increased by 12% in 1999 compared to 1998 due to increased market penetration, increased geographic coverage through utilization of component plants and increased product offerings available to engineered building systems customers after the MBCI acquisition. Operating income in 1999 increased by 27% over 1998 which represented 12.1% of sales compared to 10.7% of sales for 1998. Operating income increased at a faster rate than sales volume growth as a result of synergies of the MBCI acquisition including purchase pricing and efficiencies, vertical integration of painting and coating, lower distribution costs from broader geographical locations, improved manufacturing utilization, and product procurement from the metal component segment. METAL BUILDING COMPONENT sales increased 57% in 1999 compared to 1998 primarily from the inclusion of the MBCI acquisition for the full year in 1999. On a pro forma basis, the sales increase would have been approximately 7% for the year. Top line sales growth has been reduced by sales which became intersegment sales after the combination of MBCI with the Company. Since 90% of coating and painting requirements of the Company are performed internally, external sales opportunities may be lost during peak periods. In addition, the external sales which are diverted to one of the Company's joint ventures may result in a reduction of sales growth. Although sales increased by 57%, operating income increased by only 41% in the current year, representing 11.6% of sales in 1999 compared to 12.9% in 1998. A more competitive pricing environment in the current year and new competition in some market areas accounted for the decline in margin performance. CONSOLIDATED OPERATING EXPENSES consisting of engineering and drafting, selling and administrative costs, increased by $35 million, or 36%, in 1999 compared to 1998 which was slightly less than the 39% increase in consolidated sales. As a percent of sales, operating expenses were 14.0% in 1999 compared to 14.2% in 1998. The improvement resulted primarily from the leveraging of fixed costs over the higher sales volume. INTEREST EXPENSE for 1999 was $35.4 million compared to $20.8 million in 1998. In May 1998, the Company borrowed approximately $540 million in bank debt to finance the acquisition of MBCI. During the last six months of 1998 and in 1999, the Company reduced its total indebtedness to $433 million. The reduction in debt coupled with lower interest costs (as leverage decreased) resulted in a lower percentage increase in interest cost being a lower percentage of sales in 1999 as compared to 1998. JOINT VENTURE INCOME increased from $.7 million in 1998 to $1.7 million in 1999 due to the inclusion of MBCI's joint venture operations for the whole year. In April 1999, a 50% joint 25 30 venture for the painting of heavy gauge hot roll coils began operation. This joint venture has incurred start up losses which reduced the overall increase in total joint venture income in 1999. RESULTS OF OPERATIONS FOR FISCAL 1998 COMPARED TO 1997 Consolidated sales for fiscal 1998 increased from $407.8 million in 1997 to $675.3 million, or 66%. The 1998 fiscal year includes the sales of MBCI (acquired in May 1998) for six months. On a pro forma basis, the increase in sales for fiscal 1998 would have been approximately 7% from 1997. Intersegment sales of $25.1 million represent product and services provided by the metal building component segment, principally coating and painting services which were outside sales to the engineered buildings segment in 1997. If these sales had been considered external sales in 1998 as they were in 1997, the sales increase for the year would have been approximately 10% in fiscal year 1998. ENGINEERED BUILDING SYSTEMS sales increased approximately 7% in fiscal 1998 compared to fiscal 1997. This increase resulted from increased market penetration due to growth in the builder customer base and wider geographical distribution. Operating income for fiscal 1998 increased by 16% over fiscal 1997 and represented 10.6% of sales in 1998 and 9.9% in 1997. Improvement in operating income margins resulted from better utilization of manufacturing facilities, lower cost from vertical integration of coating and painting services and lower raw material costs from the consolidation and increase in purchasing power after the acquisition of MBCI. METAL BUILDING COMPONENTS sales increased in fiscal 1998 by 164% compared to fiscal year 1997. The majority of this increase resulted from the MBCI acquisition and the inclusion of MBCI's sales for the last six months of 1998. Operating income of this segment increased by 201% in fiscal year 1998 compared to fiscal 1997 and represented 12.9% of sales in fiscal 1998 and 11.3% in fiscal 1997. The improvement in operating income margin resulted from consolidation of the sales and marketing functions of the component operations of the two companies, improved purchasing power, vertical integration of coating and painting and better utilization of manufacturing facilities. CONSOLIDATED OPERATING EXPENSES increased $30.0 million, or 45%, in fiscal 1998 compared to fiscal 1997 which was less than the 66% sales increase. Operating expenses increased at a slower rate than sales due to improved leverage of fixed costs and the consolidation of the sales and marketing functions of the compo-nent operations. As a percent of sales, operating expenses represented 16.2% in fiscal year 1997 and 14.2% in fiscal year 1998. JOINT VENTURE INCOME of $737,000 in fiscal year 1998 resulted primarily from a 50% ownership of a coil paint line which was acquired as part of the MBCI acquisition. The Company had no joint venture income in 1997. LIQUIDITY AND CAPITAL RESOURCES As of October 31, 1999, the Company had working capital of $60.6 million compared to $58.4 million at the end of fiscal 1998. Better inventory control management and strict credit policies allowed the Company to finance its growth without an increase in net working capital. During fiscal year 1999, the company generated $79.8 million in cash flow from operations before changes in working capital components. This was approximately 21% higher than the $65.7 million generated in fiscal 1998. This cash flow was used primarily to fund capital additions of $33.3 million and reduce debt by $42.4 million during fiscal 1999. In May, 1999, the Company completed its offering of $125 million of senior subordinated notes which mature on May 1, 2009. The notes have an interest rate of 9.25%. The net proceeds of approximately $121 million were used to repay bank indebtedness. As a result of the offering, the Company reduced the maximum available borrowings under its existing 364-day senior revolving credit facility from $200 million to $40 million. After the above refinancing, the Company has a $40 million 364-day senior revolving credit facility which matures on May 1, 2000. At October 31, 1999, the Company had $20.7 million out-standing under this facility . If this revolver is not further extended by the lenders, the Company has the option to convert it to a three-year term note. The Company has a $200 million five year senior revolving credit facility which matures on July 1, 2003 and had $124.8 million outstanding at October 31, 1999. Borrowing under both revolvers may be prepaid and the voluntary reduction of the unutilized portion may be made at anytime in certain agreed minimum amounts, without premium or penalty but subject to LIBOR breakage fees. The Company also has a $200 million senior term loan facility which matures on July 1, 2003. Loans under the term loan are payable in successive quarterly installments, which began on October 31, 1998, with $7.5 million and gradually increasing to $12.5 million on the maturity date. Repayments on the term facility may not be reborrowed by the Company. The balance on the term facility was $161.2 million at October 31, 1999. The Company is required to make mandatory prepayments on the senior credit facilities upon the occurrence of certain events, including the sale of assets and the issuance and sale of equity securities, in each case subject to certain limitations. At October 31, 1999, the Company had approximately $95 million in borrowing capacity under its senior credit facilities. During the year, the Company spent $33.3 million in capital additions for plant expansions, development of new management information systems and a new corporate headquarters building. The Company plans to spend approximately $26 million in capital spending in fiscal 2000. Delays or cancellation of planned projects or changes in the economic outlook could increase or decrease capital spending from the amounts currently anticipated. 26 31 Inflation has not significantly affected the Company's financial position or operations. Metal components and engineered building systems are affected more by the availability of funds for construction than interest rates. No assurance can be given that inflation or interest rates will not fluctuate significantly, either or both of which could have an adverse effect on the Company's operations. Liquidity in future periods will be dependent on internally generated cash flows and the ability to obtain adequate financing for capital expenditures and expansion when needed and the amount of increased working capital necessary to support expected growth. Based on current capitalization, it is expected that future cash flows from operations and the availability of alternative sources of external financing should be sufficient to provide adequate liquidity for the foreseeable future. IMPACT OF THE YEAR 2000 ISSUE The year 2000 issue is the result of computer programs having been written using two digits rather than four to define the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed a review of its computer systems to identify the systems that could be affected by the year 2000 issue and has implemented its plans to attempt to ensure that its management information systems ("MIS") and computer software are year 2000 compliant. This review was part of the Company's overall upgrade of its MIS, which is substantially complete and includes the installation of new systems. As a result, the Company has no separate budget for year 2000 compliance. Expenses relating to reviewing and assessing systems are included in historical operating expenses as part of management information expenses and have not been separately identified. Management completed the upgrade with respect to substantially all of the Company's operations in 1999. Management believes that with the installation of the new systems, conversion to new software and modifications to existing software, the year 2000 issue will pose no significant operational problems for the Company. The Company has discussed with its major vendors and customers the possibility of any year 2000 interface difficulties that may affect the company. The ability of third parties with whom the Company transacts business to address adequately their year 2000 issue is, however, outside the Company's control. To date, the Company has not identified any information technology assets under the control of the Company that present a material risk of not being year 2000 ready or for which a suitable alternative has not been implemented. There can be no assurance, however, that the Company has addressed all issues which could have a materially adverse effect on the Company's business, financial condition and results of operations. In addition, if any third parties who provide goods and services that are critical to the Company's business activities fail to appropriately address their year 2000 issues, there could be a materially adverse effect on the Company's business, results of operations and financial position. MARKET RISK DISCLOSURE The Company is subject to market risk exposure related to changes in interest rates on its senior credit facility, which includes revolving credit notes and term notes. These instruments carry interest at a pre-agreed upon percentage point spread from either the prime interest rate or LIBOR. Under its senior credit facility, the Company may, at its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to six months. At October 31, 1999, the Company had $306.7 million outstanding under its senior credit facility. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $3.1 million on an annual basis. The Company's objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared to fixed-rate borrowings. 27 32 QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- FISCAL YEAR 1998 Sales ................................. $ 97,323 $ 95,349 $ 229,547 $ 253,112 Gross profit........................... 25,437 26,614 60,716 64,702 Income before income taxes............. 9,448 9,981 19,310 23,110 Net income............................. $ 6,052 $ 6,396 $ 11,098 $ 13,772 Net income per common and common equivalent share - Basic(1).......... $ 0.37 $ 0.39 $ 0.62 $ 0.76 Net income per common and common equivalent share - Diluted(1)........ $ 0.35 $ 0.37 $ 0.58 $ 0.73 FISCAL YEAR 1999 Sales.................................. $214,347 $217,365 $ 243,770 $ 261,068 Gross profit........................... 54,277 54,384 63,450 69,530 Income before taxes.................... 13,146 15,373 22,461 28,982 Income before extraordinary loss....... 7,425 8,948 13,495 17,006 Extraordinary loss on debt refinancing, net of tax........................... -- -- (1,001) -- Net income............................. $ 7,425 $ 8,948 $ 12,494 $ 17,006 Net income per common and common equivalent share Basic:(1)............................ $ 0.41 $ 0.49 $ 0.73 $ 0.92 Income before extraordinary loss... -- -- (0.05) -- Net income......................... $ 0.41 $ 0.49 $ 0.68 $ 0.92 Diluted:(1).......................... $ 0.39 $ 0.47 $ 0.71 $ 0.89 Income before extraordinary loss... -- -- (0.05) -- Net income......................... $ 0.39 $ 0.47 $ 0.66 $ 0.89
(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 Company's common stock began trading on the NYSE under the symbol "NCS" on August 13, 1998. The Company's stock previously traded on the Nasdaq National Market. The following table sets forth the quarterly high and low closing sale prices of the Company's common stock, as reported by the Nasdaq National Market or the NYSE, as applicable, 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 1999 High Low - ---------------- ---- --- January 31......................................... $ 19.78 $ 16.88 April 30........................................... $ 26.00 $ 18.06 July 31............................................ $ 32.25 $ 23.13 October 31......................................... $ 27.38 $ 15.44 Fiscal Year 1999 - ---------------- January 31......................................... $ 28.38 $ 21.25 April 30........................................... $ 26.25 $ 20.75 July 31............................................ $ 25.25 $ 18.56 October 31......................................... $ 19.94 $ 15.81
28 33 CORPORATE DATA CORPORATE HEADQUARTERS NCI Building Systems, Inc. 7301 Fairview Houston, Texas 77041 713/466-7788 COMMON STOCK TRANSFER AGENT AND REGISTRAR Harris Trust and Savings Bank Houston, Texas LEGAL COUNSEL Gardere & Wynne, L.L.P. AUDITORS Ernst & Young LLP FORM 10-K The Company's Annual Report on Form 10-K Report for the year ended October 31, 1999, as filed with the Securities and Exchange Commission, is available without charge upon request to Robert J. Medlock at the address of the Corporate Offices. The Company's common stock is traded on the NYSE under the trading symbol NCS. NUMBER OF SHAREHOLDERS As of October 31, 1999, there were 217 shareholders of record of the Company's common stock. The Company has over 9,100 beneficial shareholders. CORPORATE DIRECTORY BOARD OF DIRECTORS
OFFICERS DIRECTORS C.A. RUNDELL, JR. C.A. RUNDELL, JR. T.C. ARNETT* Chairman of the Board Chairman of the Board Private Investor NCI Building Systems, Inc. JOHNIE SCHULTE, JR. GARY L. FORBES** CEO & Chairman of the Executive Committee JOHNIE SCHULTE, JR. Vice President CEO & Chairman of the Executive Committee Equus Incorporated A.R. GINN NCI Building Systems, Inc. President & Chief Operating Officer WILLIAM D. BREEDLOVE** A.R. GINN Vice Chairman KENNETH W. MADDOX President and Chief Operating Officer Hoak Breedlove Wesneski & Co. Executive Vice President, Administration NCI Building Systems, Inc. ROBERT N. MCDONALD* ROBERT J. MEDLOCK KENNETH W. MADDOX Private Investor Executive Vice President & Executive Vice President, Administration Chief Financial Officer * Compensation Committee DANIEL D. ZABCIK ** Audit Committee DONNIE R. HUMPHRIES Private Investor Secretary
ANNUAL MEETING The Annual Meeting of shareholders of NCI Building Systems will be held at 10:00 a.m. (CST) on Wednesday, March 1, 2000, at the Johnie Schulte Conference Center, Houston, Texas. Shareholders of record as of January 5, 2000, will be entitled to vote at this meeting. NCI BUILDING SYSTEMS, INC. 7301 Fairview o Houston, Texas 77041 (713) 466-7788 o www.ncilp.com [LOGO] This annual report is printed on recycled paper containing recovered, post-consumer waste paper. 34 [BACK COVER] NCI BUILDING SYSTEMS, INC. 7301 Fairview Houston, Texas 77041 (713) 466-7788 www.ncilp.com EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 NCI BUILDING SYSTEMS, INC. List of Subsidiaries NCI Holding Corp. Delaware NCI Operating Corp. Nevada Metal Coaters of California, Inc. Texas Building Systems de Mexico, S.A. de C.V. Mexico EX-23 8 CONSENT OF INDEPENDENT AUDITORS 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 7, 1999, included in the 1999 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. We consent to the incorporation by reference in the 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., Registration Statements (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., and Registration Statement (Form S-4 No. 333-80029) of NCI Building Systems, Inc. and in the related Prospectus of our reports with respect to the consolidated financial statements and schedule of NCI Building Systems, Inc., for the year ended October 31, 1999. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Houston, Texas January 26, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR OCT-31-1999 NOV-01-1998 OCT-31-1999 16,089 0 108,917 3,309 83,988 217,665 238,558 40,703 855,483 157,094 0 0 0 186 277,104 855,483 936,550 936,550 694,909 694,909 128,707 2,402 30,570 79,962 33,088 0 0 1,001 0 45,875 2.50 2.41
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