SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-----------------------------
AUGUST 20, 1998
(Date of Report)
NCI BUILDING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-19885 76-0127701
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
7301 FAIRVIEW
HOUSTON, TEXAS 77041
(Address of principal executive offices)
(713) 466-7788
(Registrant's telephone number,
including area code)
ITEM 5: OTHER EVENTS
The following unaudited and audited consolidated Financial Statements
of the Registrant are attached hereto and made a part hereof in order to reflect
the Company's adoption of SFAS No. 128:
(i) Report of Ernst & Young LLP
(ii) Consolidated Balance Sheets--October 31, 1996 and 1997, and
April 30, 1998 (Unaudited)
(iii) Consolidated Statements of Income--Years Ended October 31,
1995, 1996 and 1997, and for the Six Months Ended April 30,
1997 and 1998 (Unaudited)
(iv) Consolidated Statements of Shareholders' Equity--Years Ended
October 31, 1995, 1996 and 1997, and for the Six Months Ended
April 30, 1998 (Unaudited)
(v) Consolidated Statements of Cash Flows--Years Ended October 31,
1995, 1996 and 1997, and for the Six Months Ended April 30,
1997 and 1998 (Unaudited)
(vi) Notes to Consolidated Financial Statements
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits. The following exhibits are filed herewith:
23 Consent of Ernst & Young LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NCI BUILDING SYSTEMS, INC.
(Registrant)
By: /s/ Robert J. Medlock
----------------------------------------
Robert J. Medlock, Vice President and
Chief Financial Officer
Dated: August 20, 1998
2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
NCI Building Systems, Inc.
We have audited the accompanying consolidated balance sheets of NCI Building
Systems, Inc. as of October 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended October 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NCI Building
Systems, Inc. at October 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 8, 1997
except for Note 9, as to which the date is
July 31, 1998
F-1
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 31,
---------------------- APRIL 30,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 20,944 $ 32,166 $ 37,972
Accounts receivable--Trade................................................ 35,477 45,946 32,923
Other receivables--Note 11................................................ 2,272 1,060 3,031
Inventories--Note 1....................................................... 28,693 37,381 40,725
Deferred income taxes--Note 5............................................. 2,925 3,463 3,631
Prepaid expenses.......................................................... 299 942 1,233
---------- ---------- -----------
Total current assets...................................................... 90,610 120,958 119,515
Property, plant and equipment, net--Note 1.................................. 42,752 51,223 51,758
Other assets:
Excess of cost over fair value of acquired net assets--Note 1............. 22,673 21,072 20,361
Other..................................................................... 2,292 3,079 5,237
---------- ---------- -----------
Total other assets........................................................ 24,965 24,151 25,598
---------- ---------- -----------
Total assets................................................................ $ 158,327 $ 196,332 196,871
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 48 $ 47 $ 47
Accounts payable.......................................................... 21,527 23,921 14,170
Accrued compensation and benefits......................................... 7,762 9,688 5,269
Other accrued expense..................................................... 6,738 8,538 9,212
Accrued income taxes...................................................... 2,577 2,018 (831)
---------- ---------- -----------
Total current liabilities................................................. 38,652 44,212 27,867
Long-term debt, noncurrent portion--Note 3.................................. 1,730 1,679 1,653
Deferred income taxes--Note 5............................................... 1,770 2,626 2,934
---------- ---------- -----------
Contingencies--Note 8
Shareholders' equity--Note 7
Preferred stock, $1 par value, 1,000 shares authorized, none
outstanding............................................................. -- -- --
Common stock, $.01 par value, 25,000 shares authorized, 15,934, 16,251 and
16,518 shares issued and outstanding, respectively...................... 159 163 165
Additional paid-in capital................................................ 47,279 51,028 55,180
Retained earnings......................................................... 68,737 96,624 109,072
---------- ---------- -----------
Total shareholders' equity................................................ 116,175 147,815 164,417
---------- ---------- -----------
Total liabilities and shareholders' equity.................................. $ 158,327 $ 196,332 $ 196,871
---------- ---------- -----------
---------- ---------- -----------
See Independent Auditor's Report and
Accompanying Notes to the Consolidated Financial Statements.
F-2
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Sales................................................ $ 234,215 $ 332,880 $ 407,751 $ 174,512 $ 192,672
Cost of sales........................................ 169,815 241,374 299,407 128,408 140,621
---------- ---------- ---------- ---------- ----------
Gross profit....................................... 64,400 91,506 108,344 46,104 52,051
---------- ---------- ---------- ---------- ----------
Operating expenses................................... 38,111 53,095 66,055 30,363 34,030
---------- ---------- ---------- ---------- ----------
Income from operations............................. 26,289 38,411 42,289 15,741 18,021
Interest expense..................................... (56) (108) (163) (77) (84)
Other income......................................... 822 1,586 1,999 765 1,492
---------- ---------- ---------- ---------- ----------
Income before income taxes......................... 27,055 39,889 44,125 16,429 19,429
---------- ---------- ---------- ---------- ----------
Provision (benefit) for income taxes--Note 5
Current............................................ 10,493 15,899 15,920 5,973 6,841
Deferred........................................... (470) (823) 318 122 140
---------- ---------- ---------- ---------- ----------
Total income tax..................................... 10,023 15,076 16,238 6,095 6,981
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 17,032 $ 24,813 $ 27,887 $ 10,334 $ 12,448
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per share--Basic--Note 9.................. $ 1.36 $ 1.60 $ 1.73 $ .65 $ .76
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per share--Diluted--Note 9................ $ 1.26 $ 1.51 $ 1.64 $ .61 $ .72
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See Independent Auditor's Report and
Accompanying Notes to the Consolidated Financial Statements.
F-3
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ---------- -------------
Balance, October 31, 1994....................................... $ 125 $ 12,666 $ 26,891 $ 39,682
Proceeds from exercise of stock options, including tax benefit
thereon....................................................... 145 -- 145
Shares issued for contribution to 401K plan..................... 1 822 -- 823
Net income...................................................... -- -- 17,032 17,032
----- ----------- ---------- -------------
Balance, October 31, 1995....................................... 126 13,633 43,923 57,682
Proceeds from stock offering.................................... 22 24,748 -- 24,770
Proceeds from exercise of stock options, including tax benefit
thereon....................................................... 5 2,720 -- 2,725
Shares issued for contribution to 401K plan..................... 1 1,008 -- 1,009
Shares issued in connection with the purchase of DBCI........... 6 5,169 -- 5,175
Net income...................................................... -- -- 24,814 24,814
----- ----------- ---------- -------------
Balance, October 31, 1996....................................... 160 47,278 68,737 116,175
Proceeds from exercise of stock options, including tax benefit
thereon....................................................... 2 2,233 -- 2,235
Shares issued for contribution to 401K plan..................... 1 1,517 -- 1,518
Net income...................................................... -- -- 27,887 27,887
----- ----------- ---------- -------------
Balance, October 31, 1997....................................... 163 51,028 96,624 147,815
Proceeds from exercise of stock options, including tax benefit
thereon....................................................... 2 4,152 -- 4,154
Net income...................................................... -- -- 12,448 12,448
----- ----------- ---------- -------------
Balance, April 30, 1998 (unaudited)............................. $ 165 $ 55,180 $ 109,072 $ 164,417
----- ----------- ---------- -------------
----- ----------- ---------- -------------
See Independent Auditor's Report and
Accompanying Notes to the Consolidated Financial Statements.
F-4
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Cash flows from operating activities
Net income................................................ $ 17,032 $ 24,814 $ 27,887 $ 10,334 $ 12,448
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 3,226 5,791 7,876 3,795 4,417
(Gain)/loss on sale of fixed assets..................... 4 2 (3) (3) --
Provision for doubtful accounts......................... 1,101 681 1,223 428 993
Deferred income tax (benefit)/provision................. (470) (823) 318 122 140
Changes in current assets and liability accounts net of
effects of acquisitions:
Increase in accounts, notes and other receivable.......... (3,097) (9,857) (10,481) 866 10,059
Increase in inventories................................... (2,483) (4,521) (5,552) (4,494) (3,343)
(Increase) decrease in prepaid expenses................... 97 (35) (625) (596) (291)
Increase (decrease) in accounts payable................... (2,009) 3,043 2,394 (2,333) (8,928)
Increase in accrued expenses.............................. 4,858 1,603 5,244 886 (2,608)
Increase (decrease) in income taxes payable............... (245) 3,843 335 (2,604) (2,851)
--------- --------- --------- --------- ---------
Net cash provided by operating activities............... 18,014 24,541 28,616 6,401 10,036
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from the sale of fixed assets.................... 7 115 25 25 36
Acquisition of Royal Buildings............................ (910) -- -- -- --
Acquisition of Mesco Metal Buildings...................... -- (20,631) -- -- --
Acquisition of Doors & Building Components, Inc. ......... -- (11,000) -- -- --
Acquisition of Carlisle Engineered Metals, Inc. .......... -- (2,840) (6,230) (6,230) --
(Increase) decrease in other noncurrent assets............ 8 (1,988) (1,147) (651) (2,476)
Capital expenditures...................................... (5,837) (10,319) (11,332) (4,038) (3,959)
--------- --------- --------- --------- ---------
Net cash applied to investing activities................ (6,732) (46,663) (18,684) (10,894) (6,399)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of stock........................... -- 24,770 -- -- --
Exercise of stock options................................. 71 750 1,340 749 2,195
Borrowings on line of credit and notes.................... -- -- -- -- --
Principal payments on long-term debt, line of credit and
notes payable........................................... (47) (85) (50) (25) (26)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities..... 24 25,435 1,290 724 2,169
--------- --------- --------- --------- ---------
Net increase in cash.................................... 11,306 3,313 11,222 (3,769) 5,806
Cash beginning of period.................................... 6,325 17,631 20,944 20,944 32,166
--------- --------- --------- --------- ---------
Cash at end of period....................................... $ 17,631 $ 20,944 $ 32,166 $ 17,175 $ 37,972
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See Independent Auditor's Report and
Accompanying Notes to the Consolidated Financial Statements.
F-5
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REPORTING ENTITY
These financial statements include the operations and activities of NCI
Building Systems, Inc. and its wholly-owned subsidiaries (Company) after the
elimination of all material intercompany accounts and balances. The Company
designs, manufactures and markets metal building systems and components for
commercial, industrial, agricultural and community service use. The Company
recognizes revenues as jobs are shipped.
(b) ACCOUNTS RECEIVABLE
The Company reports accounts receivable net of the allowance for doubtful
accounts of $1,662, $1,629 and $1,498 at April 30, 1998, October 31, 1996 and
1997, respectively. Trade accounts receivable are the result of sales of
buildings and components to customers throughout the United States and
affiliated territories including international builders who resell to end users.
Although the Company's sales historically have been concentrated in Texas and
surrounding states, in recent years it has been expanding its authorized builder
organization and customer base into the midwestern states and, to a lesser
extent, into south central, southeastern and coastal states. All sales are
denominated in United States dollars. Credit sales do not normally require a
pledge of collateral; however, various types of liens may be filed to enhance
the collection process. Company management is not aware of any significant
concentrations of credit or market risks related to receivables or other
financial instruments reported in these financial statements.
(c) INVENTORIES
Inventories are stated at the lower of cost or market value, using specific
identification for steel coils and the weighted-average method for other raw
materials. A summary of inventories follows (in thousands):
OCTOBER 31,
-------------------- APRIL 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
Raw materials.............................................. $ 21,515 $ 28,943 $ 31,898
Work-in-process and finished goods......................... 7,178 8,438 8,827
--------- --------- -----------
$ 28,693 $ 37,381 $ 40,725
--------- --------- -----------
--------- --------- -----------
(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 six months
F-6
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ended April 30, 1998 and the years ended October 31, 1995, 1996, and 1997 was
$3,424, $2,995, $4,236, and $5,893, respectively.
OCTOBER 31,
----------------------- APRIL 30,
1996 1997 1998
----------- ---------- -----------
(IN THOUSANDS)(UNAUDITED)
Land.................................................... $ 3,174 $ 3,969 $ 3,935
Buildings and improvements.............................. 20,136 23,600 25,452
Machinery, equipment and furniture...................... 31,866 41,393 43,461
Transportation equipment................................ 911 1,089 1,069
Computer software....................................... 156 481 464
----------- ---------- -----------
$ 56,243 $ 70,532 $ 74,381
----------- ---------- -----------
Less accumulated depreciation........................... (13,492) (19,309) 22,623
----------- ---------- -----------
$ 42,751 $ 51,223 $ 51,758
----------- ---------- -----------
----------- ---------- -----------
Estimated useful lives for depreciation are:
Buildings and improvements...................................... 10-20 years
Machinery, equipment and furniture.............................. 5-10 years
Transportation equipment........................................ 3-10 years
Computer software............................................... 5 years
(e) CASH FLOWS STATEMENT
For purposes of the cash flows statement, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents. Total interest paid for the six months ended April 30, 1998
and the years ended October 31, 1995, 1996 and 1997 was $84, $56, $108 and $163,
respectively. Income taxes paid for the six months ended April 30, 1998 and the
years ended October 31, 1995, 1996 and 1997 was $9,277, $11,033, $12,763 and
$15,776 respectively. Non-cash investing or financing activities included:
$1,518 for the 1996 contribution for the 401k plan which was paid in common
stock in 1997, and $1,009 for the 1995 contribution for the 401k plan which was
paid in common stock in 1996.
(f) EXCESS OF COST OVER FAIR VALUE OF ACQUIRED NET ASSETS
Excess of cost over fair value of acquired net assets is amortized on a
straight-line basis over fifteen years. Accumulated amortization as of April 30,
1998 was $3,753, as of October 31, 1997 was $3,042 and as of October 31, 1996
was $1,441. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill would be reduced by the estimated
shortfall of cash flows.
F-7
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 $587,
$1,196, $1,267 and $1,416 for the six months ended April 30, 1998 and for the
years ended October 31, 1995, 1996 and 1997, respectively.
(i) LONG-LIVED ASSETS
In fiscal 1997, the Company adopted SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Impairment losses are recognized when indicators of impairment are present and
the estimated undiscounted cash flows are not sufficient to recover the assets
carrying amount. Assets held for disposal are measured at the lower of carrying
value or estimated fair value, less costs to sell. The effect of adopting SFAS
No. 121 was not material to the financial statements.
(j) STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which encourages companies to apply a new fair value
approach allowing the recognition of compensation cost related to stock options
using an option pricing model. Under Statement No. 123, companies are permitted
to continue using current accounting rules for employee stock options, but are
required to disclose pro forma net income and earnings per share information as
if the new fair value approach had been adopted. The Company has elected to
continue to use the intrinsic value method under Accounting Principles Board
Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options. The pro forma
information regarding net income and earnings per share, as required by
Statement No. 123, has been disclosed as if the Company had accounted for its
employee stock options under the fair value method of that Statement.
(k) PENDING ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is effective for financial statements issued
for periods ending after December 15, 1997. The impact of Statement No. 128 on
the calculation of earnings per share is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
is effective for the Company's fiscal year ending October 31, 1999. The Company
does not anticipate that the adoption of this standard will have a material
impact on the financial statements.
F-8
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(2) NOTES PAYABLE (SHORT-TERM BORROWINGS)
The Company has a revolving unsecured credit line of $6 million with a bank
bearing interest that fluctuates with prime, (commitment fee 1/4% on unused
portion) all of which was unused at October 31, 1996 and 1997, respectively. The
revolving credit line expires in February, 1999.
(3) LONG-TERM DEBT
OCTOBER 31,
-------------------- APRIL 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
Six year reducing revolving credit line of $.7 million with a
bank bearing interest that fluctuates with prime, with
$73,000 quarterly reducing borrowing base.................. $ -- $ -- $ --
Notes payable to City of Mattoon bearing interest at 3%
secured by certain equipment, repayable in aggregate
monthly installments of $4,828 maturing through November
2001....................................................... 277 226 200
Note payable to employee bearing interest at 7% maturing
April 1, 2001, with an option to convert into common stock
at $14.9625 per share...................................... 1,500 1,500 1,500
--------- --------- -----------
1,777 1,726 1,700
Current portion of long-term debt............................ (47) (47) (47)
--------- --------- -----------
$ 1,730 $ 1,679 $ 1,653
--------- --------- -----------
--------- --------- -----------
Aggregate required principal reductions are as follows (in thousands):
YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------------
1998................................................................................. $ 47
1999................................................................................. 53
2000................................................................................. 55
2001................................................................................. 1,557
2002................................................................................. 14
---------
$ 1,726
---------
---------
The loan agreements related to the revolving line and short-term borrowings
contain, among other things, provisions relative to additional borrowings and
restrictions on the amount of retained earnings available for the payment of
dividends and the repurchase of common stock and provisions requiring the
maintenance of certain net worth and other financial ratios.
F-9
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(3) LONG-TERM DEBT (CONTINUED)
Under the most restrictive of these covenants, such dividends or stock
repurchases are limited to 20% of the Company's net income for any 12-month
period, which is further restricted on a quarterly basis, based on the ratio of
cash flow (net income plus depreciation and amortization) for the previous
12-month period to current maturities of long-term debt plus dividends and stock
repurchases.
The carrying amount of the Company's long-term debt approximates its fair
value.
(4) RELATED PARTY TRANSACTIONS
During the six months ended April 30, 1998 and in the years ended October
31, 1995, 1996 and 1997, the Company purchased $829, $1,053, $1,417 and $1,869
respectively, of materials from a related party under arm's length transactions.
(5) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Taxes on income from continuing operations consist of the following (in
thousands):
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Current:
Federal................................ $ 9,733 $ 14,531 $ 15,479 $ 5,744 $ 6,617
State.................................. 760 1,368 441 229 224
--------- --------- --------- --------- ---------
Total current............................ 10,493 15,899 15,920 5,973 6,841
Deferred:
Federal................................ (445) (746) 304 114 135
State.................................. (25) (77) 14 8 5
--------- --------- --------- --------- ---------
Total deferred........................... (470) (823) 318 122 140
--------- --------- --------- --------- ---------
Total provision.......................... $ 10,023 $ 15,076 $ 16,238 $ 6,095 $ 6,981
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The reconciliation of income tax computed at the United States federal
statutory tax rate to the effective income tax rate is as follows:
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
Statutory federal income tax rate............. 35.0% 35.0% 35.0% 35.0% 35.0%
State income taxes............................ 1.8 2.4 1.2 1.5 .7
Other......................................... 0.3 0.4 0.6 .6 .2
--- --- --- --- ---
Effective tax rate.......................... 37.1% 37.8% 36.8% 37.1% 35.9%
--- --- --- --- ---
--- --- --- --- ---
F-10
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(5) INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
SIX MONTHS
ENDED
APRIL 30,
1996 1997 1998
--------- --------- -----------
Deferred tax assets
Capitalized overhead in inventory........................... $ 1,211 $ 1,632 $ 1,746
Bad debt reserve............................................ 603 527 585
Accrued reserves............................................ 637 595 549
Other....................................................... 573 709 751
--------- --------- -----------
Total deferred tax assets..................................... 3,024 3,463 3,631
--------- --------- -----------
Deferred tax liabilities
Depreciation and amortization............................... 1,427 1,675 1,880
Other....................................................... 442 951 1,054
--------- --------- -----------
Total deferred tax liabilities................................ 1,869 2,626 2,934
--------- --------- -----------
Net deferred tax asset (liability)............................ $ 1,155 $ 837 $ 697
--------- --------- -----------
--------- --------- -----------
(6) OPERATING LEASE COMMITMENTS
Total rental expense incurred from operating leases for the six months ended
April 30, 1998 and the years ended October 31, 1995, 1996 and 1997 was $2,380,
$2,639, $3,990 and $4,644 respectively.
Aggregate minimum required annual payments on long-term operating leases at
October 31, 1996 were as follows (in thousands):
YEAR ENDED OCTOBER 31,
- ----------------------
1998.............................................................................. $ 2,573
1999.............................................................................. 1,806
2000.............................................................................. 914
2001.............................................................................. 508
2002.............................................................................. 252
-----------
$ 6,053
-----------
-----------
(7) STOCK OPTIONS
The Board of Directors has approved a non-statutory employee stock option
plan. This plan includes the future granting of stock options to purchase up to
4,100 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
F-11
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(7) STOCK OPTIONS (CONTINUED)
is earned in 25% increments over the first four years of the option period.
Stock option transactions during 1995, 1996 and 1997 are as follows (in
thousands):
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
Balance, October 31, 1994........................................... 1,393 $ 2.73
Granted........................................................... 159 8.64
Canceled.......................................................... 0 0
Exercised......................................................... (28) (2.51)
----- -------------
Balance, October 31, 1995........................................... 1,524 $ 3.35
Granted........................................................... 630 12.75
Canceled.......................................................... (46) (9.82)
Exercised......................................................... (492) (1.52)
----- -------------
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 $ 8.93
----- -------------
----- -------------
Options exercisable at October 31, 1995, 1996, and 1997 were 1,095, 783, and
841, respectively. The weighted average exercise prices for options exercisable
at October 31, 1995, 1996 and 1997 were $1.88, $3.00 and $4.60, respectively.
Exercise prices for options outstanding at October 31, 1997 range from $.80 to
$18.62. The weighted average remaining contractual life of options outstanding
at October 31, 1997 is 6.3 years.
In accordance with the terms of APB No. 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of the grant, the Company records no compensation expense for
its stock option awards. As required by SFAS No. 123, the Company provides the
following disclosure of hypothetical values for these awards. The weighted
average grant-date fair value of options granted during 1996 was $6.05 and
during 1997 was $7.33. These values were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
dividend of 0%, expected volatility of 32.7%, risk free interest rates ranging
from 5.5% to 6.7% for 1996 and from 6.4% to 6.9% for 1997, and expected lives of
7 years. Had compensation expense been recorded based on these hypothetical
values, the Company's 1997 net income would have been $27.1 million or $1.59 per
share. A similar computation for 1996 would have resulted in net income of $24.4
million, or $1.48 per share. Because options vest over several years and
additional options grants are expected, the effects of these hypothetical
calculations are not likely to be representative of similar future calculations.
(8) LITIGATION
The Company is involved in certain litigation that the Company considers to
be in the normal course of business. Management of the Company believes that
such litigation will not result in any material losses.
F-12
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(9) NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, which requires the
presentation of basic and diluted earnings per share. Under the new statement,
the dilutive effect of stock options is excluded from basic earnings per share,
but included in the computation of diluted earnings per share. The new statement
is effective for periods ending after December 15, 1997. The Company adopted the
new statement during the first quarter of fiscal year 1998. Earnings per share
amounts for all periods presented have been restated. The computations are as
follows (in thousands, except per share data):
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30, 1998
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
Net income...................................... $ 17,032 $ 24,814 $ 27,887 $ 10,334 $ 12,448
Add: Interest, net of tax on convertible
debentures assumed converted.................. -- 38 66 34 34
--------- --------- --------- --------- ---------
Adjusted net income............................. $ 17,032 $ 24,852 $ 27,953 $ 10,368 $ 12,482
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding...... 12,545 15,499 16,127 15,970 16,390
Add: Common stock equivalents
Stock option plan............................. 985 898 858 966 896
Convertible debentures........................ -- 58 100 100 100
--------- --------- --------- --------- ---------
Weighted average common shares outstanding,
assuming dilution............................. 13,530 16,455 17,085 17,036 17,386
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share--basic..................... $ 1.36 $ 1.60 $ 1.73 $ .65 $ .76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share--diluted................... $ 1.26 $ 1.51 $ 1.64 $ .61 $ .72
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan (the "Savings Plan") which
covers all eligible employees. The Savings Plan requires the Company to match
employee contributions up to a certain percentage of a participant's salary. No
other contributions may be made to the Savings Plan. Contributions accrued for
the Savings Plan for the years ended October 31, 1995, 1996 and 1997 were $775,
$1,155 and $1,604 respectively.
(11) ACQUISITIONS
In November 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of Doors and Building Components, Inc. ("DBCI"), a
manufacturer of roll-up steel overhead doors used primarily in self-storage and
commercial/industrial applications, for approximately $12 million in cash and
300,000 shares of common stock of the Company, valued at $5.2 million. Based on
the final determination of book value of the purchased assets, the price was
reduced by approximately $2.5 million of which $1.5 million is due from the
seller and was recorded as a receivable in the October 31, 1996 balance sheet.
This amount was settled in cash in December, 1996. The excess of cost over fair
value of the acquired net assets recorded was $11.4 million.
F-13
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PRESENTED FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1998
IS UNAUDITED)
(11) ACQUISITIONS (CONTINUED)
In April, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of Mesco Metal Buildings, a division of Anderson
Industries, Inc. ("Mesco"), a manufacturer of metal building systems and
components, for approximately $20.8 million in cash and a $1.5 million 7%
convertible subordinated debenture due April, 2001. The excess of cost over fair
value of the acquired net assets recorded was $10.9 million.
Accordingly, the consolidated results of operations include DBCI and Mesco
since the date of acquisition. Both acquisitions were accounted for using the
purchase method. Assuming the acquisition of DBCI and Mesco had been consummated
as of November 1, 1995, the pro forma unaudited results of operations for the
year ended October 31, 1996 are as follows (in millions, except per share data):
Sales................................................. $ 347
Net income............................................ 26
Net income per share.................................. $ 1.60
F-14
INDEX TO EXHIBITS
23 Consent of Ernst & Young LLP