Qualitative and Quantitative Disclosures About Market Risk

      Our principal interest rate exposure relates to the term loans outstanding under our new senior credit facilities. We have $200.0 million of term loans outstanding, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin. Each quarter point increase or decrease in the interest rate on the term loans would change our interest expense by approximately $0.5 million per year. We also have a new revolving credit facility which will provide for borrowings of up to $55.0 million, which will also bear interest at variable rates in the same manner as the term loan facilities. Assuming the new revolving credit facility is fully drawn, each quarter point increase or decrease in the applicable interest rate would change our interest expense by approximately $0.1 million per year. We are also party to several municipal loan agreements, some of which accrue interest at a variable rate. The aggregate net amount of principal outstanding on the municipal loans that is subject to a variable rate of interest is $23.7 million, as of April 3, 2004. Each quarter point increase or decrease in the interest rate on the municipal loans subject to variable rates of interest would change our interest expense by approximately $0.1 million per year. In the future we may enter into interest rate swaps, involving exchange of floating or fixed rate interest payments, to reduce our exposure to interest rate volatility.

Recent Accounting Pronouncements

      SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002 with early adoption permitted. We adopted SFAS No. 143 on January 1, 2003. Adoption of this accounting standard was not material to our financial statements included elsewhere herein.

      SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (“SFAS No. 145”), was issued in April 2002 and addresses the reporting of gains and losses resulting from the extinguishment of debt, accounting for sale-leaseback transactions and rescinds or amends other existing authoritative pronouncements. SFAS No. 145 requires that any gain or loss on extinguishment of debt that does not meet the criteria of APB 30 for classification as an extraordinary item shall not be classified as extraordinary and shall be included in earnings from continuing operations. The provisions of this statement related to the extinguishment of debt are effective for financial statements issued in fiscal years beginning after May 15, 2002 with early application encouraged. We adopted SFAS No. 145 on January 1, 2003 and adoption of this accounting standard was not material to the results presented in the financial statements included elsewhere herein.

      Effective January 1, 2003, we adopted SFAS No. 146, “Accounting for Costs Associated with Exit of Disposal Activities” (“SFAS No. 146”), which addresses the accounting and reporting for costs associated with exit or disposal activities, nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) and substantially nullifies EITF Issue No. 88-10, “Costs Associated with Lease Modification or Termination” (“EITF 88-10”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on our financial statements included elsewhere herein.

      In the fourth quarter 2003, we adopted the fair value method of accounting for stock-based compensation in accordance with SFAS No. 123. We adopted SFAS No. 123 using the prospective method of transition in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation — Transaction and Disclosure” (“SFAS No. 148”). The prospective method under SFAS No. 148 required us to adopt SFAS No. 123

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      In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). Along with new disclosure requirements, FIN 45 requires guarantors to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. This differs from the prior practice to record a liability only when a loss is probable and reasonably estimable. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted the disclosure provisions of FIN 45 as of December 31, 2002 and adopted the entire interpretation on January 1, 2003. Adoption of FIN 45 was not material to our financial statements included elsewhere herein.

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply to us immediately for variable interest entities created after January 31, 2003 and for existing variable interest entities no later than the end of the first annual reporting period beginning after December 15, 2003. We do not expect any material impact on our financial statements as a result.

      In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which clarifies the financial accounting and reporting proscribed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) for derivative instruments, including certain derivative instruments embedded in other contracts. Certain provisions of SFAS No. 149 related to implementation issues of SFAS No. 133 are already effective and other provisions related to forward purchases or sales are effective for both existing contracts and new contracts entered into after June 30, 2003. We had previously adopted SFAS No. 133, including the implementation issues addressed in SFAS No. 149, and the adoption of the new provisions of SFAS No. 149 on July 1, 2003 did not have a material impact on our financial statements included elsewhere herein.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”), which addresses the accounting and reporting for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and for all existing financial instruments beginning in the first interim period after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. We adopted SFAS No. 150 on July 1, 2003. Adoption of this accounting standard did not have a material impact on our financial statements included elsewhere herein.

      In December 2003, the FASB issued the revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”) to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 provides only for additional disclosures and does not change the accounting for pension and postretirement plans.

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INDUSTRY OVERVIEW AND TRENDS

      We estimate the total size of the residential exterior building products sectors in which we compete in the U.S. to be approximately $31.0 billion. Demand for exterior building products, including siding and accessories, windows and doors, and fencing, railing and decking, is primarily driven by repair and remodeling of existing homes and construction of new homes, which are affected by changes in national and local economic and demographic conditions, employment levels, availability of financing, interest rates, consumer confidence and other factors.

Home Repair and Remodeling

      Since the early 1990s, demand for home repair and remodeling has remained robust as a result of strong economic growth, low interest rates and favorable demographic trends. According to the U.S. Census Bureau, expenditures for maintenance, repairs and improvements increased from $120.0 billion in 1992 to $138.3 billion in 1997 and $175.7 billion in 2002, representing a five and ten-year compound annual growth rate of 2.9% and 3.9%, respectively.

      Leading drivers of home repair and remodeling expenditures include the age and size of the housing stock, the rate of existing home sales, home size and homeownership rates. According to the Census Bureau, the median age of the U.S. housing stock increased to approximately 29 years in 2000, up 16% from 25 years in 1990. Additionally, over the past fifteen years, the size of a typical new home has increased, with the current average of over 2,300 square feet. Home ownership has also been rising steadily over the past decade from 64.4% in 1992 to 68.3% in 2002.

New Home Construction

      New home construction has experienced strong growth since the early 1990s. Since 1991, housing starts have increased at a compound annual growth rate of 4.9%. With steady growth in new housing starts, the stock of U.S. housing has also increased from approximately 107.0 million at the end of 1991 to 119.9 million at the end of 2002. Mortgage rates, another key driver of home sales and general home improvement work, are currently near 30-year lows. Growth continues to be supported by a favorable interest rate environment and strong demographic trends, as increasing immigration drives demand for starter homes, and maturing baby boomers seek second homes and trade-up properties.

Industry Trends

      Vinyl has taken share and continues to take share from certain alternative materials within exterior residential building products due to its low maintenance, high durability, high performance, ease of installation, energy efficiency, lower price and superior aesthetics.

      U.S. siding sales have grown steadily over the past fifteen years, reaching an estimated $8.2 billion in 2002. Vinyl currently represents approximately 45% of U.S. residential siding sales by volume. According to the Freedonia Group, vinyl is expected to grow to approximately 47% of residential siding sales by volume by 2007. Vinyl siding has grown to represent nearly two-thirds of home repair and remodeling siding sales by volume, and has more than tripled sales by volume to account for approximately 30% of siding used in new home construction between 1992 and 2002.

      The growing demand for vinyl siding is driven by several factors relating to product characteristics and application benefits that provide advantages relative to alternative siding materials. Vinyl’s advantages include low installed cost, high durability, low maintenance, ease of installation, and resistance to rot, mildew and insect infestations. Consumer demand for product style and diversity will support growing demand for accessories and accents such as shakes, scallops and finish trims.

      While manufactured housing currently represents only 5% of vinyl siding applications, vinyl is well positioned to benefit from an expected rebound in shipments of manufactured homes. According to a 2003

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      The U.S. windows and doors demand has grown rapidly over the past ten years and was estimated in 2002 to be $24.5 billion. The primary drivers have been growth in remodeling and an increasing trend towards larger homes that require more windows and doors with more amenities. Unlike many other building products that are commodity-like in nature, windows and doors are decorative-type products with high levels of differentiation and corresponding variations in pricing. Since replacement windows in particular need to fit into pre-existing openings in a house, producers of replacement windows require significant manufacturing flexibility to produce a wide variety of custom sizes.

      As with siding, vinyl has grown to become the preferred material for replacement windows, and in recent years has also achieved increased acceptance in new construction. The Freedonia Group estimates that vinyl window and door shipments will grow at a compound annual rate of 5.0% from $3.6 billion in 2002 to $5.9 billion in 2012. In 2002, vinyl windows accounted for 48.4% of the total demand for windows in the United States. Vinyl accounted for over 54% of the replacement window units sold in 2002, and 38% of the new window units sold in 2002. Vinyl demand is projected to benefit from an increase in sales by volume of replacement windows as a percent of total residential window sales. Replacement windows are estimated to grow to 59% of total window demand in 2008, and further grow to represent 62% of total window demand in 2012.

      Within new home construction, builders are increasingly accepting vinyl as a viable alternative to wood in new windows, and enhancements in material aesthetics have, and are expected to continue to, support demand for new windows made from plastic materials. According to the Freedonia Group, vinyl is expected to overtake wood as the leading material in windows for new home construction by 2007.

      Demand for patio doors has increased from 3.7 million units in 1999 to an estimated 4.0 million units in 2003. Vinyl accounted for approximately 36% of patio door usage in 2002 and is expected to become the leading material used for patio doors by 2004.

      Demand for windows and doors in Canada, as in the U.S., is driven by repair and remodeling of existing homes and construction of new homes. Economic drivers specific to Western Canada include oil and natural gas exploration and production, agriculture and population inflow. Housing starts in Western Canada for 2002 grew approximately 29% from 2001 levels, driven by growth in Western Canada’s population. As of 2001, approximately 21% of all homes were built between 1971 and 1980, while only 15% were built between 1991 and 2001. Among all occupied homes, 67% were more than 20 years old.

      Demand for U.S. fencing and decking products is estimated to be $5.4 billion in 2003. Vinyl and composite materials represent 18.0% of fencing demand and 10.4% of decking sales by volume. The lasting aesthetic appeal and the low maintenance attributes of vinyl and composite fencing and decking have increased demand for the products. Demand for vinyl and composite fencing has grown by over 37% per year from 1997 to 2003, while sales by volume of vinyl and composite decking have grown by approximately 35% annually from 1998 to 2003. Demand for fencing products is expected to grow at an annual rate of 16.8% for the period 2003 to 2008, and sales by volume of vinyl and composite decking products are expected to grow at an annual rate of 17.1% for the same period. Management estimates that U.S. railing sales are approximately $1.1 billion in size and that vinyl and composite represent approximately $100.0 million, or 9.1%, of railing sales.

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