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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Form 10-K
(Mark one)
[X] Annual Report pursuant to the Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
__________ to _________.
Commission File Number 33-64788
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ASSOCIATED MATERIALS INCORPORATED
(Exact name of Registrant as specified in its charter)
-------------------
DELAWARE 75-1872487
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2200 ROSS AVENUE, SUITE 4100 EAST
DALLAS, TEXAS 75201
(Address of executive offices)
214-220-4600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
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 [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant - Not Applicable
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. [ ] - Not Applicable
As of March 1, 1997 the registrant had 4,893,504 shares of Common Stock, par
value $.0025 per share, and 2,700,000 shares of Class B Common Stock, par value
$.0025 per share, outstanding.
PART I
ITEM 1. BUSINESS
Associated Materials Incorporated ("Associated" or the "Company") is
principally engaged in the manufacture and distribution of exterior residential
building products through its Alside division ("Alside"). Alside was founded in
1947 when it introduced the first residential aluminum siding. Alside's
principal products today are vinyl siding and vinyl replacement windows. In
addition to Alside, Associated's operations include its AmerCable division
("AmerCable"), a specialty electrical cable manufacturer, and Amercord, Inc.
("Amercord"), a 50% owned affiliate managed by the Company that manufactures and
sells steel tire cord and tire bead wire to tire manufacturers. In 1996, Alside
accounted for approximately 88% of the Company's net sales and approximately
104% of the Company's income from operations, exclusive of corporate selling,
general and administrative expenses. The Company's investment in Amercord is
accounted for under the equity method of accounting. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this report and Note 13 to the Company's Consolidated Financial Statements at
Item 14 of this report for a presentation of industry segment data.
The Company was incorporated in Delaware in 1983. Unless the context
requires otherwise, the terms "Associated" and "Company" refer to the business
and operations of Associated Materials Incorporated, including Alside and
AmerCable, but not Amercord.
ALSIDE
OVERVIEW. Alside is a major integrated manufacturer and nationwide
distributor principally of exterior residential building products. These
products are marketed on a wholesale basis primarily to professional contractors
engaged in home remodeling and new home construction. Alside competes in the
siding and window segments of the exterior residential building products market
primarily through the manufacture and distribution of vinyl siding products and
vinyl replacement windows. Alside's sales of vinyl siding products and vinyl
replacement windows in 1996 were $206.5 million, or approximately 66% of
Alside's 1996 net sales. Alside also manufactures vinyl window extrusions,
cabinets, vinyl fencing, and plastic shutters. Alside markets these products and
more than 2,000 other complementary building products to professional
contractors principally through its nationwide network of 66 Alside Supply
Centers. The Company believes that its network of Supply Centers provides Alside
with a competitive advantage. Approximately 80% of Alside's 1996 net sales were
made through its Supply Centers, including sales through the Alside Builder
Service Division.
Vinyl siding competes with other materials, such as wood, metals and
masonry, for a share of the residential siding market. Vinyl siding has greater
durability and requires less maintenance than wood siding and generally is less
expensive than wood, metal or masonry siding. Additionally, in recent years,
wood siding products have been affected by both price volatility and, in certain
areas of the country, product shortages. The Company believes that vinyl siding
products account for approximately 45% of the total siding market and
historically have been used primarily in the home remodeling marketplace. After
its introduction in the mid-1970's, vinyl siding was initially sold as a
maintenance-free specialty replacement product. During the 1980's, vinyl siding
became the preferred siding product for professional home remodeling contractors
and their customers. In the 1990's, vinyl siding has achieved increasing
acceptance in new residential construction as builders and home buyers have
recognized vinyl's low maintenance, durability and price advantages. The Company
believes that this market acceptance will enable vinyl siding to increase its
share of the new construction market while remaining the preferred product for
the remodeling marketplace.
Vinyl windows require less maintenance, provide greater durability than
either wood or aluminum windows and provide greater energy efficiency than
aluminum windows. The Company believes approximately 35% of all windows sold are
vinyl windows, although in the home remodeling marketplace, where Alside
primarily competes, vinyl windows are estimated to account for more than 70% of
the market. After their
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introduction in the early 1980's, vinyl windows gained initial acceptance in the
remodeling marketplace because remodeling contractors and their customers were
the first to recognize the favorable attributes of vinyl replacement windows. In
recent years, vinyl windows have gained acceptance in the new construction
marketplace due to the increasing recognition of vinyl's favorable attributes,
the enactment of local legal or building code requirements that mandate more
energy efficient windows and the increased development and promotion of vinyl
window products by national window manufacturers. The Company believes that
these factors should continue to result in increased sales opportunities for its
vinyl window products in both the home remodeling and new construction markets.
BUSINESS STRATEGY. Alside's business strategy is to increase its sales
volume and market share by improving its sales and marketing efforts with a
particular emphasis on the improvement of its Alside Supply Centers. Over the
past several years, Alside has initiated programs to identify and segment its
customer base, develop marketing strategies for each particular customer segment
and train its sales force. In addition, Alside plans to broaden its penetration
into exterior residential building products by introducing innovative and
complementary new products that capitalize on its vinyl manufacturing expertise.
Alside's business strategy also includes continued improvement on its low
manufacturing costs.
As part of its emphasis on its Supply Centers, Alside is continuing the
reengineering program started in late 1995 which transfers more of the
day-to-day management authority to the Supply Centers and away from Alside's
headquarters in Akron, Ohio. As a part of this program, Alside reduced its
workforce in Akron, Ohio by approximately 70 employees resulting in savings of
approximately $1.4 million in 1996 compared to 1995. The Company expects to save
approximately $2.6 million in 1997 as it incurs a full year's benefit from these
savings. Although the cost savings are significant, Alside believes that the
primary benefit of the reengineering program is a greater responsiveness to
Supply Center customers by making it easier for these customers to do business
with Alside.
MARKETING AND DISTRIBUTION. Traditionally, most vinyl siding has been
sold to the home remodeling marketplace through independent distributors. The
Company believes that Alside is one of only three major vinyl siding
manufacturers that markets its products primarily through manufacturer-owned
distribution centers. Alside has a nationwide distribution network of 66 Alside
Supply Centers which market Alside manufactured products and other building
products to more than 30,000 professional home improvement and new construction
contractors. Alside supports its contractor-customer base with marketing and
promotional programs that include product sample cases, sales literature,
product videos and other sales and promotional materials. Professional
contractors use these materials to sell remodeling or construction services to
prospective customers. The customer then generally relies on the professional
contractor to specify the brand of siding or window to be purchased, subject to
the customer's price, color and quality requirements.
In addition to sales and promotional support, contractors look to their
local Alside Supply Center to provide a broad range of specialty product
offerings in order to maximize their ability to attract remodeling and home
building customers. The Company believes that Alside Supply Centers provide "one
stop shopping" to meet the specialized needs of its contractor-customers. Alside
distributes more than 2,000 building and remodeling products, including a broad
range of Company-manufactured vinyl siding and vinyl window products as well as
products manufactured by others, including metal siding, wood windows, roofing
materials, insulation, cabinets, and installation equipment. In 1996
approximately 80% of Alside's sales were made through its Supply Centers,
including sales through the Alside Builder Service Division.
Many of Alside's contractor-customers have established long-standing
relationships with their local Supply Center based upon individualized service
and credit terms, quality products, timely delivery, breadth of product
offerings, strong sales and promotional programs and competitive prices.
Alside's vinyl replacement windows provide an example of the competitive
advantages promoted by the contractors in selling Alside's products to its
customers. Alside custom manufactures each vinyl replacement window to fit the
existing window opening rather than framing the window opening to accommodate a
standard-size prefabricated window. Custom
3
fabrication provides the contractor with a product that is less expensive to
install and more attractive after installation.
Alside believes that distributing products through its Supply Centers
provides certain other advantages. For example, Alside's daily contact with its
customers enables it to closely monitor activity in each of the remodeling and
new construction markets in which Alside competes. This direct presence in the
marketplace permits Alside to obtain current market information, providing
Alside with the ability to more quickly adapt its product offerings on a
location-by-location basis.
Each Supply Center is evaluated as a separate profit center, and Supply
Center personnel compensation is based in part on the Supply Center's operating
results. Decisions to open new Supply Centers, and to close or relocate existing
Supply Centers, are based on Alside's continuing assessment of market conditions
and individual location profitability. Alside added two Supply Centers to its
distribution network in 1996, net of location closures. During 1997, Alside
intends to focus on improving the profitability of its existing Supply Centers
and may not open any additional locations.
Through certain of its Supply Centers, Alside's Builder Service
Division provides full-service product installation of its vinyl siding
products, principally to new home builders who value the importance of
installation services. Alside also provides installation services for vinyl
replacement windows through certain of its Supply Centers. Alside expects to
continue to selectively develop such sales opportunities in markets where it can
effectively do so without disrupting a Supply Center's relationships with its
professional contractor-customers.
Alside also sells its manufactured products to large direct dealers and
distributors, generally in those areas where no Alside Supply Center currently
exists. Such sales accounted for approximately 20% of Alside's net sales in
1996. Despite their aggregate lower percentage of total sales, Alside's largest
individual customers are its large direct dealers and independent distributors.
Alside carefully monitors and evaluates its activity with these customers to
ensure the profitability of this higher volume and lower margin business. No
single customer accounted for more than 5% of Alside's 1996 sales. Alside
intends to increase its network of independent distributors in 1997.
COMPETITION. Few companies within the residential siding industry
compete with Alside on both the manufacturing and distribution levels, as well
as across its broad product offerings. There are, however, numerous small and
large manufacturers of metal and vinyl siding products, including Aluminum
Company of America, Certainteed Corporation, Jannock, Ltd., Fibreboard
Corporation, PlyGem Industries, Inc., Reynolds Metals Company, and Royal
Technologies Ltd., some of whom have greater financial resources than the
Company. Alside competes with many of these same companies, as well as local
lumber yards, in its capacity as a distributor of such products. The market for
vinyl replacement windows is highly fragmented, and Alside believes that no
single manufacturer accounts for a significant percentage of national sales.
Alside believes that the market trend towards sales of welded vinyl windows
which Alside began manufacturing in 1992, and which require expensive, more
sophisticated production equipment, will result in further consolidation of the
window fabrication industry. Alside and its competitors generally compete on
price, product performance and sales and service support to professional
contractors. Competition varies by region. Retail mass merchandisers have
targeted professional remodeling contractors as customers. The Company believes,
however, that broader product range and sales and promotional support combined
with competitive prices will continue to service these contractors more
effectively than retail mass merchandisers.
PRODUCTS. Alside's principal product offerings are vinyl siding
products and vinyl replacement windows and have been the principal focus of its
operations since 1989. Vinyl siding products and vinyl replacement windows
together accounted for approximately 66% of Alside's 1996 net sales.
Alside continues to increase and improve upon the breadth of its vinyl
siding and window product lines. In late 1995 Alside introduced a premium siding
product that encompassed a reinforced lock to provide greater rigidity. This
highly successful product helped Alside gain a greater share of the premium
siding market in 1996.
4
Alside will continue to expand its premium product line offerings in 1997. In
addition, Alside has recently introduced a new siding product designed to help
it penetrate the new construction market. Alside believes that the market for
economy siding products, including those targeted towards the new construction
market, is the fastest growing segment of the vinyl siding market. In 1992,
Alside introduced a welded vinyl window that has provided contractors with an
alternative higher-end window product that further enhances the contractor's
sales presentation to the prospective remodeling homeowner. Alside has also
expanded its window product line to increase its penetration into the new
construction market. The Company believes that with these new siding and window
products, Alside is able to compete more effectively with other siding or window
manufacturers.
To complete its line of siding products, Alside also distributes metal
siding and related products manufactured by other companies. In 1996,
approximately 10% of Alside's sales were derived from metal siding and related
products. The Company expects the sale of metal siding products to continue to
decline as these products are displaced by vinyl products. Alside also
distributes a variety of complementary building products manufactured by others,
including metal and wood windows, roofing materials, insulation and cabinets.
In addition to the siding and window product lines discussed above,
Alside also manufactures semi-custom cabinets for the kitchen and bath
industries under the brand name UltraCraft. Alside's sales of cabinets accounted
for approximately 5% of its net sales in 1996. UltraCraft generally distributes
its products through cabinet dealers and not Alside Supply Centers. In 1993
Alside introduced vinyl fence as a product line under the brand name UltraGuard.
UltraGuard is a leading manufacturer of both residential and agricultural vinyl
fence. Sales of UltraGuard fence accounted for less than 5% of Alside's net
sales in 1996. UltraGuard markets its fence products through a network of fence
dealers and does not rely on the Alside Supply Centers for distribution.
EMPLOYEES. Alside's employment needs vary seasonally with the
operation's sales and production levels. As of December 31, 1996, Alside had
approximately 1,335 full-time employees, including approximately 500 hourly
workers. The West Salem, Ohio plant is Alside's only unionized manufacturing
facility, employing approximately 95 covered workers. Additionally,
approximately 40 hourly workers in certain Supply Center locations are covered
by collective bargaining agreements. The Company considers Alside's labor
relations to be good.
Alside operates vinyl replacement window manufacturing plants in Cedar
Rapids, Iowa; Kinston, North Carolina; and Akron, Ohio with leased employees.
The Company believes that the employee leasing program provides it with
scheduling flexibility for seasonal production loads and with competitive
advantages in obtaining principally unskilled labor personnel. The aggregate
number of leased employees in the window plants ranges from approximately 500 to
700 people, based on seasonal production requirements.
MATERIALS. The principal raw materials used by Alside are vinyl resins,
resin stabilizers and pigments, packaging materials, window hardware and glass,
all of which are available from a number of suppliers. The price of vinyl resin
has been volatile at times. Alside has contracts with two suppliers to purchase
a substantial portion of its vinyl resin requirements. Historically, Alside
generally has been able to pass on price increases in raw materials to its
customers. However, there can be no assurance that Alside will be able to
continue to do so in the future.
TRADEMARKS AND PATENTS. Alside has registered and nonregistered trade
names and trademarks covering the principal brand names and product lines under
which its products are marketed. Although Alside considers each of these items
to be valuable, the Company does not currently believe such property, other than
the "Alside(R)" trademark, to be material. Alside has obtained patents on
certain claims associated with its siding products, which the Company believes
distinguish Alside's new products from those of its competitors.
5
AMERCABLE
AmerCable manufactures and markets a variety of jacketed electrical
cable utilized in underground and surface mining, shipboard, marine, offshore
drilling rig, transportation and a variety of other specialized industrial
applications. AmerCable principally manufactures specialty cable to meet
industry technical standards and end-users' specifications. AmerCable markets
its cable principally to independent distributors who resell to the end user.
AmerCable accounted for approximately 12% of the Company's net sales in 1996.
AmerCable modified its business strategy in the second quarter of 1996
to focus on a core group of cable products which AmerCable believed that it had
the greatest manufacturing efficiencies as well as marketing and distribution
capabilities. Concurrent with this shift in its business strategy, AmerCable
reduced its workforce by approximately 15% to eliminate certain non-value added
processes and focus its efforts on its core products. During the last two
quarters of 1996, AmerCable experienced lower costs, improved manufacturing
efficiencies and a higher on-time delivery rate.
AmerCable's mining cable products accounted for 49% of its 1996 sales.
AmerCable believes that its "Tiger Brand(R)" cable products are a leader in the
domestic mining cable market. AmerCable sells its mining cable products
principally to independent distributors, many of whom are active in the eastern
mining regions of the United States. AmerCable has also recently initiated
programs to sell mining cable to other independent distributors for resale
internationally. International sales represented approximately 10% of mining
cable sales in 1996.
AmerCable's marine, shipboard and transportation products accounted for
30% of AmerCable's 1996 sales. This product line requires certain industry
specifications for low smoke and low/non-halogen characteristics. AmerCable
believes its marine and shipboard cable products are leaders in meeting such
requirements. In 1993, the Company purchased certain rights to manufacture and
sell an insulation compound marketed under the trade name "Gexol(R)" and
exclusive rights to the Gexol(R) name. Although AmerCable had been selling
products under the Gexol(R) name, it believes that its right to manufacture the
compound and control the tradename has contributed to growth in marine
applications of this product. In February 1996, AmerCable opened its
Offshore/Marine Cable Specialists division to expand and improve its presence in
the offshore marine market. This division will market AmerCable manufactured
products such as Gexol(R), as well as products manufactured by others.
AmerCable's industrial and utility cable products accounted for 21% of
its 1996 sales. These products, including diesel locomotive cable, portable
power cable, jumper cable, clear grounding cable, and flexible robotic power
distribution cable, are principally used in heavy duty flexible power
distribution applications. The products are distributed principally through a
network of independent distributors.
As of December 31, 1996, AmerCable employed approximately 160 people,
including 93 hourly workers. AmerCable maintains good relations with its
employees.
AmerCable competes with numerous small and large manufacturers,
including BICC Cables Corp., Rockbestos Suprenant Wire & Cable, Inc., BIW Cable
Systems, Inc., General Cable Corp., and Essex Group Inc. Many of its competitors
have substantially greater resources than the Company. AmerCable generally does
not compete in the more commodity-oriented wire and cable markets, such as
residential building wire and computer network cable.
The principal raw material used by AmerCable is copper strand, which is
available from a number of suppliers. Historically, copper strand has been
subject to rapid price movements. AmerCable generally prices its cable products
based upon market prices for copper at time of shipment. Therefore, sudden
decreases in copper prices can result in inventory being in excess of its net
realizable value. During 1996, AmerCable recorded a charge of $500,000 to write
copper inventory down to its net realizable value due to a sudden
6
decrease in copper prices. In certain instances, AmerCable may guarantee a fixed
copper price for its products where there is a significant time lag between the
purchase order and shipment. In these cases, AmerCable generally attempts to
hedge its position on copper.
AMERCORD
Amercord, the Company's 50% owned affiliate, principally manufactures
and markets steel tire cord and tire bead wire to the tire manufacturing
industry for use in the production of steel belted radial tires. Amercord is
jointly owned by the Company and Ivaco, Inc. ("Ivaco"), a Canadian steel and
wire producer. Pursuant to an agreement with Ivaco, Associated provides
management services relating to the day-to-day operations of Amercord for an
annual fee of $200,000, principally for financial management services.
Tire cord is comprised of fine strands of steel wire used to reinforce
the tread area in radial tires. Tire bead wire is used in the manufacturing of
all tires to hold the tire to the rim. A large portion of Amercord's tire cord
and tire bead wire is utilized in the manufacture of replacement tires as
opposed to original equipment tires. Amercord presently believes that the
importance of steel tire cord and tire bead wire as they relate to the
performance of tires will continue into the foreseeable future.
Due both to the nature of the tire industry and the consolidation in
this industry in recent years, Amercord has a small customer base. During 1996,
three customers, The Michelin Tire Corporation ("Michelin"), Cooper Tire and
Rubber Company ("Cooper") and Dunlop Tire Corporation, each purchased in excess
of 10%, and collectively purchased an aggregate of 84%, of Amercord's tire cord
output. During 1996, four customers, Michelin, Cooper, The Goodyear Tire &
Rubber Company ("Goodyear") and The Bridgestone Tire Company, each purchased in
excess of 10%, and collectively purchased an aggregate of 82%, of Amercord's
tire bead wire output. As a result of the relatively small number of customers,
the loss of one or more major customers could have a material adverse effect on
Amercord's business. Additionally, further consolidation in the tire industry
could require Amercord to become more closely aligned with fewer tire
manufacturers.
Amercord believes it is one of ten domestic tire cord manufacturers and
one of six domestic tire bead manufacturers. Tire cord competitors include
larger companies such as Bekaert Steel Wire Corporation ("Bekaert") and American
Tokyo Rope, Inc., each of which have greater capital resources than Amercord.
Two of the world's largest tire manufacturers, Goodyear and Michelin, also
produce a significant portion of their steel tire cord requirements. Tire bead
competitors include Bekaert and National Standard Corporation. Amercord is one
of only two tire reinforcement suppliers that manufacture both tire cord and
tire bead. Amercord believes that this capacity improves its competitive
position.
The tire cord and tire bead wire markets are highly concentrated and
intensely competitive. The addition of several new tire cord manufacturing
plants in the United States and the expansion of existing facilities by a number
of companies, including Amercord, in recent years has further intensified the
industry's competitive pricing environment. Imported tire cord also has provided
competitive pressure. Amercord's average selling prices have been declining in
recent years reflecting this competitive environment. The Company presently
expects Amercord's average selling prices to further decline in 1997.
In 1996, Amercord's net sales increased 8.4% as volume increased 9.9%
and 7.6% for tire bead and tire cord, respectively. Amercord's gross profit
increased by 29% in 1996 primarily as a result of lower unit production costs
and higher sales volume experienced in 1996.
During 1995, Amercord's net sales increased 8.8% as volume increases of
23.5% and 8.0% for tire bead and tire cord respectively, were partially offset
by a 4.3% decrease in the average unit selling price of tire cord. Amercord's
gross profit increased 21.1% primarily as a result of higher sales and lower
unit production costs experienced in 1995. The table below summarizes Amercord's
operating results for each of the years in the three-year period ended December
31, 1996:
7
1996 1995 1994
---- ---- ----
(in thousands)
Net sales.............. $87,538 $80,764 $74,226
Gross profit........... 7,600 5,893 4,867
Net income ............ 3,448 1,074 200
Amercord's strategy is to be the tire cord, beadwire and specialty wire
product supplier of choice. Amercord plans to achieve this by continuing to
improve its product quality to conform more tightly with its customers'
specifications. As a result of this emphasis, Amercord's unit operating costs
have declined in the last three years. The reduction in operating costs have
permitted Amercord to more aggressively market its traditional products to both
existing and new customers.
Amercord's manufacturing and office headquarters occupy 490,000 square
feet of space in Lumber City, Georgia. The principal raw material used is steel
rod, which is purchased from several different suppliers. Amercord employed
approximately 720 people at December 31, 1996, including 610 hourly workers. No
employees are covered by collective bargaining agreements. The Company considers
Amercord's labor relations to be good.
Amercord expects to capitalize on its position as a supplier of high
quality tire cord, tire bead wire and other similar steel wire by expanding its
current manufacturing capacity. However, Amercord presently operates near its
current capacity and future sales growth is dependent upon Amercord's ability to
increase its capacity with additional equipment or by making its existing
processes more efficient. Since its inception as a separate enterprise in 1986,
Amercord has satisfied its working capital and capital expenditure requirements
from internally generated funds and existing credit facilities. Due to such
requirements, no dividends have been paid to Associated or Ivaco. The Company
believes Amercord's internally generated cash flow and credit facilities will
provide sufficient capital to fund its currently planned capital expenditures.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to numerous federal and state statutes and
regulations relating to, among other things, air and water quality, the
discharge of materials into the environment and safety and health issues. The
Company does not expect compliance with such provisions to have a material
impact on the Company's earnings or competitive position in the foreseeable
future. Additionally, no significant capital expenditures are anticipated
related to compliance with such provisions.
The Company entered into a consent order dated August 25, 1992 with the
United States Environmental Protection Agency pertaining to the alleged use of
hazardous waste storage facilities at its Akron, Ohio location. With the
exception of a small above-ground storage area, the use of such facilities was
terminated prior to the acquisition of the Alside assets by the Company from USX
Corporation ("USX") in 1984. The effects of the past practices at this facility
are continuing to be investigated and as a result the Company is unable to
reasonably estimate a reliable range of the aggregate cost of corrective action
at this time. The Company believes that USX bears financial responsibility for
substantially all of the direct costs of corrective action at such facilities
under the relevant contract terms and under statutory and common law. To date,
USX has reimbursed the Company for substantially all of the direct costs of
corrective action at such facilities, and the Company expects that USX will
continue to reimburse the Company for substantially all of the direct costs of
corrective action at such facilities. As a result, the Company believes that any
material claims resulting from this proceeding will not have a material adverse
effect on the Company.
ITEM 2. PROPERTIES
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The Company's principal facilities as described below:
Capacity
Location Principal Use (Square Feet)
- -------- ------------- -------------
ALSIDE
Akron, Ohio................ Alside Headquarters, 70,000
Vinyl Fencing and
Vinyl Windows 577,000(1)
Ennis, Texas............... Vinyl Siding Products 256,000
West Salem, Ohio........... Vinyl Window Extrusions,
Fencing and Plastic Shutters 173,000
Liberty, North Carolina.... Cabinets 154,000
Kinston, North Carolina.... Vinyl Windows 236,000(2)
Cedar Rapids, Iowa......... Vinyl Windows 128,000(2)
AMERCABLE
El Dorado, Arkansas........ AmerCable Headquarters and
Electrical Cable 317,000
- ---------------
(1) A portion of this facility is presently not used for production
purposes.
(2) Leased facilities.
Management believes that the Company's manufacturing plants are
generally in good operating condition and are adequate to meet anticipated
requirements in the near future. The Company, however, expects to further
increase its vinyl siding and vinyl window production capacity if the Company's
sales expectations are met. See Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Alside's vinyl extrusion plants generally operate on a three shift
basis to optimize equipment productivity and utilize additional equipment
capacity to meet higher seasonal needs. Alside's window plants generally operate
on a single shift basis utilizing both a second shift and increased numbers of
leased production personnel to meet higher seasonal needs. AmerCable's
electrical cable plant operates on a five-day, twenty-four hour basis to
optimize its extrusion equipment. The Company expects that existing
manufacturing capacity, with budgeted expansion, will be sufficient to
accommodate its expected growth in 1997.
Alside also operates 66 Alside Supply Centers in major metropolitan
areas throughout the United States. Except for one owned location in Akron,
Ohio, the Company leases its Supply Centers for terms generally ranging from
five to seven years with renewal options. The Supply Centers range in size from
6,000 square feet to 55,000 square feet depending on their sales volume and the
breadth and type of products offered in each location.
The leases for Alside's window plants extend through 2000 for the Cedar
Rapids location, and 2003 for the Kinston location. The Cedar Rapids' location's
lease is renewable for an additional five years. The Kinston location's lease is
renewable for two additional five-year terms.
AmerCable Offshore/Marine Cable Specialists division is located in
Houston, Texas. This sales/distribution facility occupies 32,000 square feet of
lease space.
The Company's corporate headquarters occupy approximately 3,000 square
feet of leased office space in Dallas, Texas.
9
Under its credit agreement with the Company (the "Credit Agreement"),
KeyBank N.A. ("KeyBank") holds a security interest in the Company's contract
rights, including real property leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of its business, none of which, after giving effect to the
provisions of the agreement with USX (described in Item 1 --
"Business-Government Regulation and Environmental Matters" ) and the Company's
existing insurance coverage, is expected to have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's
outstanding equity securities.
At March 1, 1997, the Company had 27 record holders of common stock,
par value $.0025 per share ("Common Stock"). The Prudential Insurance Company of
America ("Prudential"), is the record holder of all of the outstanding Class B
Common Stock, par value $.0025 per share ("Class B Common Stock"), which shares
of Class B Common Stock are convertible, at the holder's option, into shares of
Common Stock on a basis of one share of Common Stock for each share of Class B
Common Stock.
Both the Credit Agreement and the Indenture pursuant to which $75
million of outstanding principal amount of the Company's 11 1/2% Senior
Subordinated notes ("Senior Subordinated Notes") were issued, contain certain
restrictions with respect to the payment of cash dividends and other
distributions by the Company. On March 3, 1997 the Company paid a cash dividend
of $.05 per share on its common stock and Class B Common Stock, the first cash
dividend paid with respect to its Common Stock and Class B Common Stock since
the Company's formation in 1983. The Board of Directors of the Company does not
presently anticipate paying regular cash dividends, but may periodically
consider paying dividends based on the Company's financial condition and cash
requirements to fund operations.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below for the five-year
period ended December 31, 1996 was derived from the financial statements of the
Company which have been audited by Ernst & Young LLP, independent auditors. The
data should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements,
related notes and other financial information included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales......................... $ 277,318 $ 312,972 $ 352,606 $ 350,029 $ 356,471
Cost of sales..................... 202,979 230,408 258,669 264,080 255,579
Selling, general and
administrative expenses........ 59,507 63,670 70,482 73,207 77,740
--------- --------- --------- --------- ---------
Income from operations............ 14,832 18,894 23,455 12,742 23,152
Interest expense.................. 6,754 7,581 10,580 11,474 10,882
Equity in earnings of Amercord.... 760 1,039 100 537 1,724
--------- --------- --------- --------- ---------
Income before income tax expense.. 8,838 12,352 12,975 1,805 13,994
Income tax expense................ 3,137 4,666 5,101 545 5,172
--------- --------- --------- --------- ---------
Income before extraordinary item.. 5,701 7,686 7,874 1,260 8,822
Extraordinary item (1)............ - 1,876 - - -
--------- --------- --------- --------- ---------
Net income........................ 5,701 5,810 7,874 1,260 8,822
Preferred dividends............... 911 583 - - -
--------- --------- --------- --------- ---------
Income applicable to common stock. $ 4,790 $ 5,227 $ 7,874 $ 1,260 $ 8,822
========= ========= ========= ========= =========
OTHER DATA:
EBITDA (2)........................ $ 19,253 $ 23,779 $ 27,959 $ 18,082 $ 29,025
Interest expense.................. 6,754 7,581 10,580 11,474 10,882
Capital expenditures.............. 2,818 5,489 9,323 7,683 8,110
Ratio of EBITDA to interest expense 2.85x 3.14x 2.64x 1.58x 2.67
DECEMBER 31,
------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................... $ 25,721 $ 51,417 $ 51,336 $ 46,551 $ 51,821
Total assets...................... 129,762 149,881 169,414 172,053 177,709
Total short-term debt, including
current maturities of long-term debt 22,790 2,321 15,719 19,921 14,808
Long-term debt, less current
maturities..................... 29,209 85,600 83,850 82,100 80,350
Redeemable preferred stock........ 9,000 - - - -
Stockholders' equity.............. 30,325 14,114 22,046 23,306 32,246
- --------------
(1) The extraordinary item represents, net of tax, the loss recognized on the
prepayment premium paid on the retirement of the Company's 15% Senior
Secured Notes in August, 1993.
12
(2) EBITDA is calculated as income from operations plus depreciation and
amortization. The Company has included information concerning EBITDA
because it believes that EBITDA is used by certain investors as one measure
of an issuer's historical ability to service its debt and because EBITDA is
an element in the covenants in its Credit Agreement. EBITDA should not be
considered by an investor as an alternative to, or more meaningful than,
net income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
GENERAL. The Company's results of operations are primarily affected by
the operating results of Alside. Because its residential building products are
consumer durable goods, Alside's sales are impacted by the availability of
consumer credit, consumer interest rates, employment trends, changes in levels
of consumer confidence, national and regional trends in new housing starts, and
general economic conditions. Alside's sales are also affected by changes in
consumer preferences with respect to types of building products. Alside's
products are used in the repair and remodeling as well as the new construction
sectors of the building industry. For the year ended December 31, 1996, Alside
believes that its sales were made primarily to the repair and remodeling sector.
The Company operates with substantial operating and financial leverage.
A significant portion of selling, general and administrative expenses associated
with Alside's distribution network of Supply Centers is inelastic. These
selling, general and administrative expenses neither increase nor decrease
proportionately with sales. As a result, a percentage change in Alside's net
sales will have a greater percentage effect on Alside's operating income. In
addition, interest expense related to the Company's long-term debt of $80.4
million at December 31, 1996 is relatively fixed as the debt amortizes at only
$1.75 million per year. (See Note 8 to the Company's financial statements at
Item 14 of this report.)
Alside's net sales increased 4.7% for the year ended December 31, 1996
compared to 1995. Alside's net sales decreased 3.3% for the year ended December
31, 1995 compared to 1994. Alside's revenue growth during 1996 has been
positively impacted by favorable economic conditions and the continuing
transition of the siding and replacement window markets from metal and wood
products to vinyl products. The Company believes that the increase in 1996 sales
and the decrease in 1995 sales resulted from trends in consumer confidence, new
housing starts and interest rates.
The Company believes that vinyl products will continue to gain market
share from metal and wood products because of vinyl's favorable attributes.
Although no assurances can be given, the Company further believes that these
increases in market share together with Alside's increased marketing efforts
will increase Alside's sales of vinyl siding, vinyl windows and other
complementary products.
13
SEGMENT DATA. Alside accounted for more than 85% of the Company's net
sales and income from operations in each of the three years ended December 31,
1996. In 1996, Alside accounted for approximately 104% of the Company's income
from operations exclusive of corporate selling, general and administrative
expenses. Management believes that a discussion of the Company's results and
financial position for these periods is enhanced by presenting segment
information for Alside and AmerCable. The tables below set forth for the periods
indicated certain items of the Company's financial statements:
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Percentage Percentage Percentage
of Total of Total of Total
Amount Net Sales Amount Net Sales Amount Net Sales
--------- ----- --------- ----- --------- -----
(dollars in thousands)
CONSOLIDATED:
Net Sales-Alside .............. $ 314,645 88.3% $ 300,561 85.9% $ 310,926 88.2%
Net Sales-AmerCable ........... 41,826 11.7 49,468 14.1 41,680 11.8
--------- ----- --------- ----- --------- -----
Total net sales ............. 356,471 100.0 350,029 100.0 352,606 100.0
Cost of sales ................. 255,579 71.7 264,080 75.5 258,669 73.4
Selling, general and admin-
istrative expenses (1) ...... 77,740 21.8 73,207 20.9 70,482 20.0
--------- ----- --------- ----- --------- -----
Income from operations ........ $ 23,152 6.5% $ 12,742 3.6% $ 23,455 6.6%
========= ===== ========= ===== ========= =====
ALSIDE:
Net sales ..................... $ 314,645 100.0% $ 300,561 100.0% $ 310,926 100.0%
Cost of sales ................. 216,009 68.7 214,933 71.5 217,145 69.8
Selling, general and admin-
istrative expenses .......... 72,264 23.0 69,078 23.0 65,978 21.2
--------- ----- --------- ----- --------- -----
Income from operations ........ $ 26,372 8.3% $ 16,550 5.5% $ 27,803 8.9%
========= ===== ========= ===== ========= =====
AMERCABLE:
Net sales ..................... $ 41,826 100.0% $ 49,468 100.0% $ 41,680 100.0%
Cost of sales ................. 39,570 94.6 49,147 99.4% 41,524 99.6
Selling, general and admin-
istrative expenses .......... 3,223 7.7 1,997 4.0 1,702 4.1
--------- ----- --------- ----- --------- -----
Income (loss) from operations . $ (967) (2.3)% $ (1,676) (3.4)% $ (1,546) (3.7)%
========= ===== ========= ===== ========= =====
(1) Consolidated selling, general and administrative expenses include
corporate expenses of $2.3 million, $2.1 million and $2.8 million for
the years 1996, 1995 and 1994, respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31,
1995.
ALSIDE. Alside's income from operations was $26.4 million for the period
ended December 31, 1996 compared to $16.6 million for the same period 1995. The
increase in income from operations of $9.8 million or 59.3% was due primarily to
higher sales volume and a decrease in vinyl resin costs.
Alside's net sales increased $14.1 million or 4.7% in 1996 compared with
1995 due to increased sales volume of vinyl siding, vinyl windows, vinyl fencing
and complementary building products distributed through its Supply Centers. Unit
sales of vinyl siding and windows increased by 8.9% and 5.2%, respectively, in
1996 as compared to 1995. The increase in vinyl sales was partially offset by a
decrease in sales of metal siding as consumer preference continues to shift from
metal to vinyl products. The Company expects the transition
14
from metal to vinyl products to continue. Cost of sales as a percentage of net
sales decreased to 68.7% in the 1996 period from 71.5% in the 1995 period as a
result of lower material costs, primarily vinyl resin.
Selling, general, and administrative expense remained constant as a percentage
of net sales at 23.0% for 1996 and 1995. Increased advertising costs, higher
lease expense associated with both new and expanded Supply Centers, and higher
employee incentive compensation resulted in an increase in selling, general, and
administrative expense from $69.1 million in 1995 to $72.3 million in 1996. The
increase in selling, general, and administrative expense was partially offset by
an overall decrease in salaries of $800,000 consisting of a $1.8 million
decrease in Alside's headquarters salaries and a $1.0 million increase in Supply
Center salaries for the period ended December 31, 1996. The decrease in Alside's
headquarters salaries was primarily the result of Alside's reengineering program
in which many of the business processes performed at Alside's Akron, Ohio
headquarters either were eliminated or performed by Supply Center personnel.
This reengineering program was substantially completed in 1996.
AMERCABLE. AmerCable's loss from operations in 1996 was $967,000
compared to a loss of $1.7 million in 1995 due to decreased sales volume being
offset by higher sales prices, lower copper prices, and improved manufacturing
efficiencies. During the first half of 1996, AmerCable recorded charges of
$500,000 to write down copper inventory to its net realizable value and $275,000
for severance charges related to a 15% workforce reduction as part of a business
reorganization. Net of these charges, AmerCable's loss from operations for the
year ended 1996 was $192,000. AmerCable recorded income from operations of
$931,000 for the second half of 1996. Sales decreased $7.6 million or 15.4% in
1996 as compared to 1995 due to a decrease in sales volume and lower copper
prices which were only partially offset by higher sales prices. The decrease in
sales volume and the higher sales prices were due primarily to the
implementation of AmerCable's modified business strategy which focuses on
producing core products which better utilize its manufacturing efficiencies and
marketing and distribution capabilities. Despite the decrease in sales volume
resulting from the modified strategy, profit margins have increased across all
product lines due to the focus on fewer products. AmerCable generally prices its
products based upon the copper price at the time of shipment; therefore,
decreased copper prices during 1996 accounted for approximately 25% of the
decrease in sales. The marine, shipboard, and transportation ("M/S/T") product
line had the most significant volume decrease as AmerCable decreased its focus
on transportation products having lower profit margins. Increased sales of
higher margin marine products partially offset the decrease in sales volume.
AmerCable's cost of sales decreased as a percentage of sales to 94.6% in 1996 as
compared to 99.4% in 1995 due to improved manufacturing efficiencies, better
material utilization and higher selling prices.
Selling, general and administrative expense increased from $2.0 million
in 1995 to $3.2 million in 1996 due to the severance charges described above and
the costs associated with opening of the distribution center in Houston, Texas.
OTHER. The Company recorded $1.7 million in equity in the after tax
earnings of Amercord in 1996 compared to $537,000 during the same period in
1995. In 1996, Amercord recorded a $1.2 million gain to reflect the cumulative
effect of an accounting change when it changed it's accounting policy for
maintenance parts. Amercord now capitalizes the cost of these parts upon
purchase and expenses such parts when used in the production cycle. Amercord
previously expensed the maintenance parts upon purchase. Amercord recorded a
pre-tax gain of $3.1 million in connection with the settlement of disputed
royalty payments for the years 1990-1995 and recorded a $2.7 million loss for a
write down of certain production equipment pursuant to Statement of Financial
Accounting Standards No. 121. The Company's equity in the earnings of Amercord,
exclusive of the items described above, was approximately $900,000.
Amercord's net sales increased 8.4% to $87.5 million in 1996 from $80.8
million in 1995 primarily due to a 9.9% and a 7.6% increase in tire bead and
tire cord volume, respectively. Gross profit increased $1.7 million or 29.0% in
1996 compared with the same period 1995 due to higher sales and lower unit
production costs experienced in 1996. Selling, general and administrative
expense as a percentage of net sales remained constant at 3% for 1996 and 1995.
15
The Company's net interest expense decreased $592,000 or 5.2% in 1996
compared with the same period in 1995 primarily due to a decrease in the average
borrowings under the Company's revolving line of credit.
Net income was $8.8 million in 1996 compared to $1.2 million in 1995 due
to higher operating income at Alside as well as improvements at both AmerCable
and Amercord.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994.
ALSIDE. Alside's net sales decreased $10.4 million or 3.3% in 1995
compared with 1994 due principally to decreases in sales of metal and vinyl
siding and accessories and other complementary building products distributed
through its Supply Centers which decreases were partially offset by sales
increases in vinyl fencing and windows. A reduction of 5.0% in unit sales of
vinyl siding in 1995 as compared to 1994 was partially offset by price increases
implemented to offset increases in raw material costs, principally vinyl resin.
Cost of sales as a percentage of net sales increased to 71.5% in the 1995 period
from 69.8% in the 1994 period due primarily to higher unit vinyl window
production costs and increases in the cost of vinyl resin. Although Alside was
able to recover the cost of vinyl resin price increases, it was not able to
recover any incremental margin on the vinyl resin price increases for its vinyl
siding products which caused its gross profit percentage to decline. Alside
experienced higher window production costs, including raw material and direct
labor costs, which it was unable to pass through completely to its customers.
The higher window production costs in 1995 are partially due to the start-up of
Alside's third window manufacturing facility in Akron, Ohio. Selling, general
and administrative expense increased $3.1 million or 4.7% due principally to
severance costs, higher self-insured losses as well as higher lease expenses
associated with both new and expanded Supply Centers. Alside recorded severance
charges of $1.2 million in the last two quarters of 1995 related to the
severance of approximately 70 personnel at its Akron, Ohio headquarters as a
result of the reengineering program discussed above. Selling, general and
administrative expense as a percentage of net sales increased to 23.0% in the
1995 period from 21.2% in the 1994 period due to the cost increases discussed
above. Alside's income from operations in the 1995 period was $16.6 million, an
$11.3 million or 40.5% decrease over the 1994 period due principally to lower
sales volume, increased production costs experienced in 1995, particularly in
vinyl windows, and an increased level of selling, general and administrative
costs.
AMERCABLE. AmerCable's net sales increased $7.8 million or 18.7% in
1995 compared with 1994 due to a 13.1% increase in sales volume experienced in
1995. Sales were also aided by price increases implemented to offset raw
material costs, principally copper strand and rubber compounds. Cost of sales as
a percentage of net sales decreased slightly in 1995 compared to 1994. Lower
unit production costs experienced in 1995 as compared to 1994 were offset by
lower sales prices experienced on certain shipboard and transportation cable
sales. The lower shipboard and transportation sales prices were a result of
several fixed price contracts received in 1994 that were adversely impacted by
increases in raw material costs when the products were produced in the first
half of 1995. In addition, during 1995, AmerCable recorded a $700,000 charge to
write down certain inventory to net realizable value. Selling, general and
administrative expense as a percentage of net sales remained relatively constant
in the two periods being compared. AmerCable's loss from operations in 1995 was
$1.7 million compared to $1.5 million for the same period in 1994 as a result of
increased sales being more than offset by the loss on fixed price contracts,
higher material costs, and the inventory writedown described above.
OTHER. The Company recorded $537,000 in equity in the after tax
earnings of Amercord in 1995 compared to $100,000 during the same period in
1994. Amercord's net sales increased 8.8% to $80.8 million in 1995 from $74.2
million in 1994 as a 23.5% increase in tire bead volume and a 8.0% increase in
tire cord volume was partially offset by a 1.4% and 4.3% decrease in tire bead
and tire cord unit selling prices, respectively. Gross profit increased $1.0
million or 21.1% in 1995 compared with the same period in 1994 as higher sales
and lower unit production costs experienced in 1995 were offset by industry
competitive pressures which have significantly decreased the average unit
selling price for tire cord. Selling, general and administrative
16
expenses decreased from $2.5 million in 1994 to $2.3 million in 1995. Amercord's
interest expense increased slightly from $1.8 in 1994 to $1.9 million in 1995.
The Company's net interest expense increased $894,000 or 8.4% in 1995
compared with the same period in 1994 primarily due to an increase in the
average borrowings under the Company's revolving line of credit as well as
increases in short-term interest rates from the prior year.
Income applicable to common stock was $1.2 million in 1995 compared to
$7.9 million in 1994 due primarily to lower Alside sales volume and decreased
gross margins combined with increased selling, general and administrative
expenses.
QUARTERLY FINANCIAL DATA
GENERAL. Because most of Alside's building products are intended for
exterior use, Alside's sales and operating profits tend to be lower during
periods of inclement weather. Weather conditions in the first quarter of each
calendar year historically result in that quarter producing significantly less
sales than in any other period of the year. As a result, the Company has
historically had losses in the first quarter and reduced profits in the fourth
quarter of each calendar year due to the significant impact of Alside on the
Company's performance.
Quarterly sales and operating profit data for Alside in 1996 and 1995
are shown in the table below:
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
QUARTERLY NET SALES:
First..................................... $ 55,113 $ 58,435
Second.................................... 85,403 80,247
Third..................................... 93,170 86,614
Fourth.................................... 80,959 75,265
--------- ---------
Total................................... $ 314,645 $ 300,561
========= =========
QUARTERLY OPERATING PROFIT (LOSS):
First..................................... $ (1,676) $ (458)
Second.................................... 10,482 6,027
Third..................................... 11,623 6,908
Fourth.................................... 5,943 4,073
--------- ---------
Total................................... $ 26,372 $ 16,550
========= =========
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company amended and restated the Credit Agreement
with KeyBank to increase the facility to permit borrowings of up to $50 million
and to extend the term of such agreement to May 31, 1999. The Credit Agreement
contains substantially the same terms and conditions as the previous agreement.
Available borrowings under the Credit Agreement are limited to the lesser of the
total facility less unused letters of credit or availability based on
percentages of eligible accounts receivable and inventories. The Credit
Agreement is secured by substantially all of the Company's assets other than the
Company's owned real property and its shares of Amercord. At December 31, 1996,
$9.1 million of this facility had been used to issue a letter of credit securing
the outstanding $7.3 million of the Company's taxable variable rate demand notes
(the "Taxable Notes") as well as various insurance letters of credit. At
December 31, 1996 the Company had an available borrowing capacity of
approximately $27.8 million.
17
Net cash provided by (used in) operating activities was $15.1 million,
$5.3 million and $(3.3) million in 1996, 1995 and 1994, respectively. The
increased operating cash flows in 1996 were primarily due to Alside's improved
operating results. The increase in accounts receivable was due to the increase
in sales for 1996. The increase in inventory reflected a wider product offering
by Alside which was offset by the corresponding increase in accounts payable and
accrued liabilities. Cash flows from operations increased in 1995 as compared to
1994 because of lower working capital requirements.
Capital expenditures totaled $8.1 million, $7.7 million and $9.3
million in 1996, 1995 and 1994, respectively. Expenditures in the 1996 period
were primarily used to increase Alside's capacity to produce welded vinyl
windows, enhance the Company's window tooling design capability, continue
automating its window assembly process and increase vinyl window extrusion
capacity. Significant expenditures made during the 1995 and 1994 period include
expenditures to further automate the window assembly process and to purchase
equipment to be used for the production of vinyl fencing and vinyl garage doors.
The Company has historically funded such capital expenditure requirements out of
cash generated from operating activities and borrowings under its bank credit
facility.
The Company believes that current capital expenditures represent a base
level of spending needed to maintain its vinyl siding and vinyl replacement
window production equipment as well as provide for modest increases in plant
productivity and operating capacity. However, depending upon future sales
growth, in future years the Company may incur increased capital expenditures
principally to further expand its vinyl siding and vinyl window capacity, expand
its Alside Supply Center network and introduce new products. The Board of
Directors of the Company has authorized capital expenditures in 1997 of $8.4
million. Presently anticipated capital expenditures for 1997 will increase vinyl
siding extrusion capacity, window welding capacity and window assembly capacity.
Approximately $730,000 of the 1997 capital expenditures have been allocated for
AmerCable.
The Company also believes that future cash flows from operations and
its borrowing capacity under the Credit Agreement will be sufficient to satisfy
debt service requirements, maintain current operations and provide sufficient
capital for presently anticipated capital expenditures. However, there can be no
assurances that the cash so generated by the Company will be sufficient for such
purposes.
Beyond 1997, if the Company's sales expectations are met, the Company
may seek to obtain additional debt and/or equity capital to finance capital
expenditures to expand its manufacturing capacity, as well as for the additional
working capital required to support inventory and other costs associated with
the higher sales volumes. No assurances can be given that the Company will be
able to obtain such additional capital or the terms on which such financing can
be obtained.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past three years. Inflation could adversely
affect the Company if inflation results in significantly higher interest rates
or substantial weakness in economic conditions. Alside's principal raw material,
vinyl resin, has been subject to rapid price increments. Alside has historically
been able to pass on price increases to its customers. No assurances can be
given that Alside will continue to be able to pass on any price increases.
CERTAIN FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) relating to
the Company that are based on the beliefs of the management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend," and
similar expressions, as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations of the
18
Company as well as its customers and suppliers, including as a result of the
availability of consumer credit, interest rates, employment trends, changes in
levels of consumer confidence, changes in consumer preferences, national and
regional trends in new housing starts, raw material costs, pricing pressures,
shifts in market demand, and general economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions or
estimates prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included at pages F-1 to F-16 to
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 1, 1997 the directors, executive officers and key employees of the
Company were as follows:
Name Age Title
- ---- --- -----
William W. Winspear 63 Chairman of the Board,
President and Chief Executive
Officer of the Company
Donald L. Kaufman 65 President and Chief Executive
Officer of Alside and Vice
President and Director of the
Company
Richard I. Galland (1)(2) 80 Director
James F. Leary (1)(2) 67 Director
A. A. Meitz (1)(2) 59 Director
Gary D. Trabka (3) 42 Director
Robert F. Hogan, Jr. 40 President and Chief Executive
Officer of AmerCable and Vice
President of the Company
Robert L. Winspear 31 Vice President, Treasurer and
Secretary of the Company
James R. Bussman (4) 49 Executive Vice President -
Corporate Services of Alside
and Vice President of the
Company
Michael R. St. Clair (4) 50 Executive Vice President -
Finance of Alside and Vice
President of the Company
Alfred L. Vapenik, Jr. (4) 50 Executive Vice President -
Business Development and
Planning of Alside
Benjamin L. McGarry (4) 49 Group Vice President - Vinyl
Manufacturing of Alside
Wayne D. Fredrick (4) 50 Group Vice President - Window
Products of Alside
- --------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Pursuant to a stockholders' agreement among Prudential, the Winspear
Family Limited Partnership, a Texas limited partnership (the "Winspear
Partnership"), of which Mr. William W. Winspear is the managing general
partner, and the Company (the "Stockholders' Agreement"), Prudential
may, under certain circumstances, nominate up to two persons to the
Board of Directors of the Company and the Winspear Partnership agreed
to vote its shares of Common Stock in favor of such nominees. Pursuant
to the Stockholders' Agreement, Prudential designated Mr. Trabka to
serve as a Director of the Company. There is currently a vacancy on the
Board of Directors resulting from the resignation, in August 1994, of
one of the
20
Directors nominated by Prudential. See Item 13 -- "Certain
Relationships and Related Transactions -- Stockholders' Agreement."
(4) Messrs. Bussman, St. Clair, Vapenik, McGarry, and Fredrick are
considered key employees of the Company because of their
responsibilities as divisional officers in the respective capacities
indicated. The Company does not, however, consider such employees to be
executive officers of the Company.
Pursuant to the Company's Certificate of Incorporation, the Company has
three classes of directors serving staggered three-year terms. Officers of the
Company serve at the discretion of the Board of Directors.
The following is a brief description of the business experience of the
Directors, executive officers and certain key employees of the Company for at
least the past five years.
Mr. William W. Winspear has been Chairman of the Board, President and
Chief Executive Officer of the Company since its inception in 1983, and serves
in the class of directors whose terms expire at the 1997 annual meeting of
stockholders. Mr. Winspear was President and Chief Executive Officer of
Chaparral Steel Company from 1975 to 1982. Mr. Winspear is the father of Robert
L. Winspear. Mr. William W. Winspear is Chairman of the Board of Amercord.
Mr. Kaufman has been President of Alside since 1974 and has been Chief
Executive Officer of Alside since 1982. Mr. Kaufman joined Alside in 1955 and
became a Director and a Vice President of the Company in 1984. Mr. Kaufman
serves in the class of directors whose terms expire at the 1997 annual meeting
of stockholders.
Mr. Galland became a Director of the Company in 1984, and serves in the
class of directors whose terms expire at the 1998 annual meeting of
stockholders. Mr. Galland was formerly Chairman of the Board and Chief Executive
Officer of American Petrofina Incorporated and formerly Of Counsel to the law
firm of Jones, Day, Reavis & Pogue. Mr. Galland is also a director of D. R.
Horton, Inc. and Texas Industries, Inc.
Mr. Leary became a Director of the Company in 1984, and serves in the
class of directors whose term expires at the 1999 annual meeting of
stockholders. Mr. Leary has been Vice Chairman - Finance of Search Capital
Group, Inc., a consumer finance company, since September 1995 as well as serving
as President of Sunwestern Management Inc., an investment management company,
since 1982. Mr. Leary is also a director of Capstone Growth Fund and Capstone
Fixed Income Fund, and Phaseout of America, Inc.
Mr. Meitz became a Director of the Company in 1993, and serves in the
class of directors whose terms expire at the 1999 annual meeting of
stockholders. Mr. Meitz retired as Senior Vice President of the consulting firm
of Booz, Allen & Hamilton in 1994 where he was employed since 1965. Mr. Meitz is
a director of Greyhound Lines, Inc., and Banctec Inc.
Mr. Trabka became a Director of the Company in February 1994, and
serves in the class of directors whose terms expire at the 1998 annual meeting
of stockholders. Mr. Trabka has been a Managing Director of the Prudential
Capital Group since February 1989. Prior to 1989 Mr. Trabka was Vice President
of Corporate Finance with Prudential. Mr. Trabka is also Chairman of the Board
of Directors of Food Barn Stores, Inc. ("FBS"). On January 5, 1993, FBS filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.
On July 7, 1994, the bankruptcy court confirmed FBS's liquidating plan of
reorganization. Prudential holds approximately 90% of the unsecured debt of FBS,
as well as less than a majority of the equity of FBS, but had the power to vote
virtually all the shares of stock of FBS as a result of defaults in the loan
agreements between FBS and Prudential. Mr. Trabka serves as a director of FBS at
the request of Prudential. Mr. Trabka is also a director of the Prudential Home
Mortgage Company, Inc.
21
Mr. Hogan has been President and Chief Executive Officer of AmerCable
since November 1993 and Vice President of the Company since 1984. Prior to
becoming President of AmerCable, Mr. Hogan was Treasurer and Secretary of the
Company from 1984 to 1993.
Mr. Robert L. Winspear joined the Company in June 1993 and was named
Vice President, Treasurer and Secretary in October 1993. Prior to joining the
Company, Mr. Winspear was a Senior in the Financial Consulting and Audit
division of Arthur Andersen LLP, where he had been employed since 1988. Mr.
Winspear is also a director of Amercord. Mr. Winspear is the son of William W.
Winspear.
Mr. Bussman has been Executive Vice President of Corporate Services of
Alside since 1983. Mr Bussman has held various other position with Alside since
1972, and was named a Vice President of the Company in 1984.
Mr. St. Clair was named Executive Vice President-Finance of Alside in
December 1994. Mr. St. Clair had been Senior Vice President-Finance of Alside
since joining the Company from The Warner & Swasey Company in 1985. Mr. St.
Clair was named a Vice President of the Company in 1986.
Mr. Vapenik was named Executive Vice President of Business Development
and Planning of Alside in January 1996. Mr. Vapenik joined Alside in August 1995
as Senior Vice President of Business Development and Planning. From 1990 to 1995
he was the President of the consulting firm Hansen-Vapenik & Associates, Inc.
Prior to 1990 Mr. Vapenik was employed by Wolverine Technologies, a vinyl siding
manufacturer, since 1982.
Mr. McGarry was named Group Vice President - Vinyl Manufacturing of
Alside in January 1997. From 1984 to 1996 Mr. McGarry was Senior Vice President
- - Manufacturing of Alside. Mr. McGarry joined Alside in 1980.
Mr. Fredrick was named Group Vice President - Window Products of Alside
in January 1997. From 1990 to 1996 Mr. Fredrick was Senior Vice President -
Window Products of Alside. Mr. Fredrick first joined Alside in 1973.
22
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by the
Company for services rendered in 1996, 1995 and 1994 by the Chief Executive
Officer and each of the other executive officers of the Company at December 31,
1996 whose total annual salary and bonus exceeded $100,000. For the purposes of
this report, Messrs. W.W. Winspear, Kaufman, Hogan and R.L.
Winspear are referred to as the "named executive officers."
Summary Compensation Table (1)
------------------------------------------------------
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation
- ----------------------------------- ---------- --------- --------- -------------
William W. Winspear 1996 $ 400,000 $ 214,362 $ 30,250 (2)
Chairman of the Board, President 1995 $ 398,333 $ 28,005 $ 30,250
and Chief Executive Officer 1994 $ 376,666 $ 328,908 $ 28,250
Donald L. Kaufman 1996 $ 345,000 $ 181,666 $ 102,742 (3)
President and Chief Executive 1995 $ 343,335 $ 102,595 $ 127,199
Officer of Alside 1994 $ 318,350 $ 200,023 $ 80,385
Robert F. Hogan, Jr. 1996 $ 150,000 $ 0 $ 5,250 (4)
President and Chief Executive 1995 $ 150,000 $ 0 $ 5,250
Officer of AmerCable 1994 $ 147,500 $ 0 $ 5,250
Robert L. Winspear 1996 $ 82,292 $ 21,436 $ 2,880 (5)
Vice President, 1995 $ 79,583 $ 2,801 $ 2,785
Treasurer and Secretary 1994 $ 74,167 $ 19,734 $ 2,596
- -----------------------
(1) Perquisites and other personal benefits received by the named executive
officers are not included in the Summary Compensation Table because the
aggregate amount of such compensation, if any, did not meet disclosure
thresholds established under current regulations of the Securities and
Exchange Commission. During 1996, 1995 and 1994 no named executive
officer was granted any options to purchase any class of common stock
of the Company or any stock appreciation rights with respect to such
shares.
(2) For 1996 includes directors fees of $25,000 and allocation or accruals
under AmerCable's retirement plan of $5,250.
(3) For 1996 includes directors fees of $25,000. Mr. Kaufman also received
a cash payment of $77,742 in 1996 representing the present value of
additional pension benefits that would otherwise have been accrued for
his benefit under the Alside retirement plan but for Internal Revenue
Service benefit limitations. See "Executive Agreement" below in this
Item 11.
(4) Includes amounts accrued or allocated under AmerCable's retirement plan
of $5,250 in 1996.
(5) Includes amounts accrued or allocated under AmerCable's retirement plan
of $2,880 in 1996.
EXECUTIVE AGREEMENT
Pursuant to an agreement with the Company, Mr. Kaufman is entitled to
receive severance pay in an amount equal to his total earnings for the
twelve-month period prior to the termination of his employment for any cause.
Under this agreement, Mr. Kaufman was also entitled to receive annual cash
payments in lieu of additional retirement benefits through age 65. Such payments
were determined based on the additional pension benefits which would have been
accrued for the benefit of Mr. Kaufman under the Alside retirement plan but for
Internal Revenue Service benefit limitations.
23
DIRECTOR COMPENSATION
In 1996, Directors, including Directors who are employees of the
Company, received an annual stipend of $15,000 plus $2,500 for each Directors'
meeting attended. Directors were also reimbursed for reasonable travel expenses
incurred in connection with attendance at Directors' meetings.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth as of March 1, 1997, the beneficial
ownership of Common Stock by (i) each person known by Associated to own
beneficially more than 5% of the outstanding Common Stock, (ii) each Director of
the Company, (iii) each named executive officer, and (iv) all Directors and
executive officers of the Company as a group. Unless otherwise indicated below,
to the knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock.
Shares Percentage
Beneficially of Common
Name and Address of Beneficial Owner Owned Shares (1)
------------------------------------------------ ------------ ------------
William W. Winspear (2)......................... 3,851,200 50.7%
2200 Ross Avenue Suite 4100 East
Dallas, TX 75201
The Prudential Insurance Company of America (3). 2,700,000 35.6%
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102
Richard I. Galland.............................. 40,000 *
Robert F. Hogan, Jr............................. 80,000 1.1%
Donald L. Kaufman (4)........................... 367,000 4.8%
Robert L. Winspear (5).......................... 80,800 1.1%
James F. Leary ................................. 10,000 *
A. A. Meitz .................................... 40,000 *
Gary D. Trabka (6).............................. 0 -
All directors and executives officers
as a group (8 persons)........................ 4,469,000 57.9%
- ---------------
* Less than 1%.
(1) The percentages shown assume the conversion of all outstanding shares of
Class B Common Stock into shares of Common Stock. See Note 3 below.
(2) All such shares are held of record by the Winspear Partnership of which Mr.
William W. Winspear is the Managing General Partner.
25
(3) Prudential owns of record 2,700,000 shares of Class B Common Stock which
may be converted at any time at the election of the holder into Common
Stock on a one for one basis. Holders of shares of Class B Common Stock
have rights and privileges identical to the rights and privileges of the
Common Stock, except that shares of Class B Common Stock may vote (with the
Common Stock) only on (i) any amendment to the Company's Certificate of
Incorporation, (ii) any sale or other disposition of all or substantially
all of the Company's assets, (iii) any merger or consolidation of the
Company, and (iv) any liquidation, dissolution or winding up of the
Company. See Note (6) below.
(4) Includes options to purchase 50,000 shares of Common Stock and 132,000
shares of Common Stock held by trusts for the benefit of certain members of
Mr. Kaufman's family. Excludes 6,000 shares held by a charitable foundation
of which Mr. Kaufman is the trustee, as to which Mr. Kaufman disclaims
beneficial ownership.
(5) Includes options to purchase 20,000 shares of Common Stock.
(6) Mr. Gary Trabka is a Managing Director of Prudential's Specialized Finance
Group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
The Company, the Winspear Partnership and Prudential are parties to a
stockholders' agreement (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement, Prudential and the Winspear Partnership agreed (i) not
to transfer, prior to an underwritten initial public offering of the Company's
Common Stock (an "IPO"), any of their shares of Common Stock or Class B Common
Stock, with certain limited exceptions, without offering the right to purchase
such shares, first, to the non-selling party and, second, to the Company, (ii)
if the Winspear Partnership, or any subsequent holders of its shares of Common
Stock, intends to sell any of such shares (other than in an underwritten public
offering or to an affiliate), to permit Prudential to participate in such sale
on a pro rata basis, (iii) if the Winspear Partnership, or any subsequent
holders of their shares of Common Stock, elect to sell such of its shares of
Common Stock as would (together with the shares Prudential is required to sell
under this clause) exceed 50% of the outstanding shares of Common Stock on a
fully diluted basis, to require Prudential and subsequent holders of its shares
to participate in such sale on a pro rata basis, and (iv) prior to an IPO to
grant, first, the Company and, second the other parties to the Stockholders'
Agreement the right to purchase their shares of Common Stock or Class B Common
Stock which would otherwise be transferred as a result of a default,
foreclosure, forfeiture, court order or other involuntary transfer. The
Stockholders' Agreement also requires, so long as Prudential and certain
Prudential affiliates beneficially own at least 15% of the outstanding Common
Stock ( on a fully diluted basis), all shares of Common Stock ( and any other
voting securities) subject to the Stockholders' Agreement to be voted to elect
two persons designated by Prudential to a seven-person Board of Directors. Under
those provisions of the Stockholders' Agreement, Prudential has the right, if
the Company expands the Board to eight members, to require the securities
subject to the Stockholders' Agreement to be voted to (i) expand the Board to
nine members, (ii) limit the size of the Board to nine members, and (iii) elect
a third Director designated by Prudential. If Prudential and its affiliates
beneficially own at least 5% (but less than 15%) of the Common Stock, such
provisions require such shares to be voted to elect to the Board one person
designated by Prudential. In addition, in the Stockholders' Agreement the
Company has granted to Prudential, the Winspear Partnership and subsequent
holders of their shares preemptive rights prior to an IPO to acquire additional
shares of Common Stock or equivalent securities (or options, warrants, rights or
other securities exchangeable or convertible for any such shares) to maintain
their then-current percentage beneficial ownership interest in the Company,
provided such preemptive rights do not apply to the issuance of up to 150,000
shares of Common Stock to Directors or employees of the Company nor to the
issuance of securities as consideration for an acquisition of a business
approved by the Company's Board of Directors. Finally, under the Stockholders'
Agreement, if prior to an IPO the Company sells all or substantially
26
all of its assets, the stockholder parties to the Agreement are required to use
their best efforts to liquidate and dissolve the Company and distribute the
Company's assets unless Prudential's shares are bought by the Company or the
other stockholder parties at a mutually agreeable price to be negotiated at the
time. Unless earlier terminated, the Stockholders' Agreement expires August 19,
2003.
Pursuant to the Stockholders' Agreement, Prudential designated Mr.
Trabka to serve as a Director of the Company. There is currently a vacancy on
the Board of Directors resulting from the resignation, effective in August 1994,
of one of the Directors nominated by Prudential.
27
PART V
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are included in this report.
(A)(1) FINANCIAL STATEMENTS
Associated Materials Incorporated
---------------------------------
Page
----
Report of Independent Auditors................................. F-1
Balance Sheets as of December 31, 1996 and 1995................ F-2
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................. F-3
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994....................... F-4
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................. F-5
Notes to Financial Statements.................................. F-6
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of schedules, or because the information required is included in the
financial statements and notes thereto.
(B) REPORTS ON FORM 8-K
During the quarter ended December 31, 1996, the Company filed no Current
Reports on Form 8-K.
(C) EXHIBITS
3.1 - Restated Certificate of Incorporation, as amended, of Associated
Materials Incorporated (the "Company") (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-84110 (the "1994 Registration Statement")).
3.2 - Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the 1994 Registration Statement).
4.1 - Indenture, dated as of August 1, 1993, between the Company and U.S.
Trust Company of Texas, N.A., as Trustee (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K")).
4.2 - Form of Senior Subordinated Note issuable under the Indenture
(incorporated by reference to Exhibit 4.2 to the Company's
Registration on Form S-1, Commission File No. 33-64788 (the "1993
Registration Statement")).
4.3 - Registration Rights Agreement, dated as of August 19, 1993, among
the Company, PruSupply Capital Assets, Inc. ("PruSupply"), W.W.
Winspear, M.M. Winspear, D.J. Allan, M.G. Winspear, D.W. Winspear,
R.L. Winspear, B.W. Meyer and The Principal/The Eppler, Guerin &
Turner, Inc. (incorporated by reference to Exhibit 4.3 to the 1993
Form 10-K).
28
4.4 - Stockholders' Agreement, dated as of August 19, 1993, among the
Company, PruSupply, W.W. Winspear and M.M. Winspear (incorporated
by Reference to Exhibit 4.4 to the 1993 Form 10-K).
4.5 - Amendment to the Stockholders' Agreement, dated as of April 1, 1994
among the Company, PruSupply, W.W. Winspear and M.M. Winspear
(incorporated by reference to Exhibit 4.5 to the 1994 Registration
Statement).
4.6 - Second Amendment to the Stockholders' Agreement, dated as of July
1, 1994, among the Company, PruSupply, W.W. Winspear and M.M.
Winspear (incorporated by reference to Exhibit 4.6 to the 1994
Registration Statement).
4.7 - Third Amendment to the Stockholders' Agreement, dated as of October
12, 1994, among the Company, Prudential and the Winspear Family
Limited Partnership (incorporated by reference to Exhibit 5.15 to
the 1994 Registration Statement).
4.8 - Assumption Agreement, effective as of July 29, 1994, by the
Winspear Family Limited Partnership (incorporated by reference to
Exhibit 4.7 to the 1994 Registration Statement).
4.9 - Assumption Agreement, effective as of September 30, 1994 by The
Prudential Insurance Company of America ("Prudential")
(incorporated by reference to Exhibit 4.14 to the 1994 Registration
Statement).
4.10 - Trust Indenture, dated as of June 1, 1992, between the Company and
KeyBank, N.A. (formerly Society National Bank) ("KeyBank"),
relating to the Company's taxable variable rate demand notes
("Taxable Notes") (incorporated by reference to Exhibit 4.43 to the
1993 Registration Statement).
4.11 - Remarketing Agreement, dated as of June 1, 1992, between the
Company and KeyBank as Remarketing Agent, relating to the Taxable
Notes (incorporated by reference to Exhibit 4.44 to the 1993
Registration Statement).
4.12 - Note Purchase Agreement, dated as of June 26, 1992, between the
Company and Automated Cash Management Trust, relating to the
Taxable Notes (incorporated by reference to Exhibit 4.45 to the
1993 Registration Statement).
4.13 - Irrevocable Letter of Credit, dated as of June 1, 1992, between the
Company and KeyBank relating to the Taxable Notes (incorporated by
reference to Exhibit 4.46 to the 1993 Registration Statement).
4.14 - Master Agreement, dated as of April 5, 1993, between the Company
and KeyBank evidencing an interest rate swap relating to the
Taxable Notes (incorporated by reference to Exhibit 4.47 to the
1993 Registration Statement).
10.1 - Agreement of Sale, dated as of January 30, 1984, between USX
Corporation (formerly United States Steel Corporation) ("USX") and
the Company (incorporated by reference to Exhibit 10.1 to the 1993
Registration Statement).
10.2 - Amendment Agreement, dated as of February 29, 1984, between USX and
the Company (incorporated by reference to Exhibit 10.2 to the 1993
Registration Statement).
10.3 - Asset Purchase Agreement, dated as of June 25, 1986, between the
Company and Amercord, Inc. ("Amercord") (incorporated by reference
to Exhibit 10.4 to the 1993 Registration Statement).
29
10.4 - Subscription and Stockholders Agreement, dated as of June 25, 1986,
among the Company, Florida Wire and Cable Company ("Florida Wire"),
GCR S.p.A. ("GCR") and Amercord (the "Subscription Agreement")
(incorporated by reference to Exhibit 10.5 to the 1993 Registration
Statement).
10.5 - Letter Agreement, dated as of June 25, 1986, among Ivaco, Inc.
("Ivaco"), the Company Amercord, Giuseppe Bruni ("Bruni"), GCR,
Riva Steel S.p.A. ("Riva") and Florida Wire (the "Subscription
Letter Agreement") (incorporated by reference to Exhibit 10.6 to
the 1993 Registration Statement).
10.6 - Amendment to Subscription Letter Agreement and Subscription
Agreement, dated June 23, 1988, among Ivaco, the Company, Amercord,
Bruni, GCR, Riva and Florida Wire (incorporated by reference to
Exhibit 10.7 to the 1993 Registration Statement).
10.7 - Management Agreement, effective as of May 1, 1986, between Amercord
and the Company (incorporated by reference to Exhibit 10.8 to the
1993 Registration Statement).
10.8 - Form of Indemnification Agreement between the Company and each of
the Directors and executive officers of the Company (incorporated
by reference to Exhibit 10.14 to the 1994 Registration Statement).
10.9* - Profit Sharing Plan of the Company (incorporated by reference to
Exhibit 10.14 to the 1993 Registration Statement).
10.10*- Alside Retirement Plan (incorporated by reference to Exhibit 10.16
to the 1993 Registration Statement).
10.11*- Form of Option Agreement (incorporated by reference to Exhibit
10.17 to the 1993 Form 10-K).
10.12 - Associated Materials Incorporated 1994 Stock Incentive Plan
(incorporated by reference to Exhibit 10.18 to the 1994
Registration Statement).
10.13*- Letter Agreement, dated May 13, 1983, between Donald L. Kaufman and
Company, as amended (incorporated by reference to Exhibit 10.4 to
the 1994 Registration Statement).
10.14 - Second Amended and Restated Loan and Security Agreement, dated as
of April 2, 1996, between the Company and KeyBank (the "Credit
Agreement") (incorporated by reference to Exhibit 10.1 to the March
31, 1996 Form 10-Q).
10.15 - Third Amended and Restated Note, dated April 2, 1996, from the
Company to KeyBank relating to the Credit Agreement, (incorporated
by reference to Exhibit 10.1 to the March 31, 1996 Form 10-Q).
10.16 - Collateral Patent, Trademark and License Agreement, dated
February 29, 1984, between the Company and KeyBank (incorporated by
reference to Exhibit 4.31 to the 1993 Registration Statement).
10.17 - Second Amendment to Collateral Patent, Trademark and License
Assignment, dated as of April 2, 1996, between the Company and
KeyBank incorporated by reference to Exhibit 10.1 to the March 31,
1996 Form 10-Q).
21.1 - List of Subsidiaries of the Company.
30
24.1 - Powers of Attorney of certain Directors of the Company.
27.1 - Financial Data Schedule.
- --------------
* Constitutes a compensatory plan or arrangement.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Security
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on March 17, 1997.
ASSOCIATED MATERIALS INCORPORATED
By /s/ ROBERT L. WINSPEAR
Robert L. Winspear
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Signature Title
--------- -----
Chairman of the Board, President and
/s/ WILLIAM W. WINSPEAR Chief Executive Officer
William W. Winspear (Principal Executive Officer)
/s/ ROBERT L. WINSPEAR Vice President, Treasurer and Secretary
Robert L. Winspear (Principal Financial and Accounting Officer)
RICHARD I. GALLAND* Director
Richard I. Galland
DONALD L. KAUFMAN* Director
Donald L. Kaufman
JAMES F. LEARY* Director
James F. Leary
A. A. MEITZ* Director
A. A. Meitz
Director
Gary D. Trabka
* Robert L. Winspear by signing his name hereto, signs this document on behalf
of the above-named directors of Associated Materials Incorporated on the 17th
day of March, 1997 pursuant to powers of attorney executed on behalf of
Associated Materials Incorporated and each of such directors, and filed herewith
with the Securities and Exchange Commission.
By /s/ ROBERT L. WINSPEAR
Robert L. Winspear
ATTORNEY-IN FACT
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the Registrant's last fiscal year nor any proxy
material has been sent to security holders.
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Associated Materials Incorporated
Dallas, Texas
We have audited the accompanying balance sheets of Associated Materials
Incorporated as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associated Materials
Incorporated at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 14, 1997
F-1
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
-----------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash............................................. $ 2,384 $ 2,279
Accounts receivable, net of allowance
for doubtful accounts of $3,749
and $2,769 at December 31, 1996
and 1995, respectively...................... 47,208 48,755
Inventories...................................... 58,357 55,922
Income taxes receivable.......................... 587 427
Other current assets............................. 3,025 1,967
--------- ---------
Total current assets................................. 111,561 109,350
Property, plant and equipment, net................... 51,649 49,566
Investment in Amercord Inc........................... 11,320 9,596
Deferred tax assets.................................. - 118
Other assets......................................... 3,179 3,423
--------- ---------
Total assets......................................... $ 177,709 $ 172,053
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts.................................. $ 4,853 $ 6,047
Accounts payable................................. 17,114 14,489
Accrued liabilities.............................. 22,965 22,342
Revolving line of credit......................... 13,058 18,171
Current portion of long-term debt................ 1,750 1,750
--------- ---------
Total current liabilities............................ 59,740 62,799
Deferred income taxes................................ 1,884 -
Other liabilities ................................... 3,489 3,848
Long-term debt....................................... 80,350 82,100
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value:
Authorized shares - 100,000 at
December 31, 1996 and 1995
Issued and outstanding shares -
0 at December 31, 1996 and 1995........... - -
Common stock, $.0025 par value:
Authorized shares - 15,000,000
Issued and outstanding shares -
4,893,504 at December 31, 1996
and 4,832,000 at December 31, 1995......... 12 12
Common stock, Class B, $.0025 par value:
Authorized, issued, and outstanding
shares - 2,700,000 at December 31,
1996 and 1995.............................. 7 7
Capital in excess of par......................... 185 67
Retained earnings................................ 32,042 23,220
--------- ---------
Total stockholders' equity....................... 32,246 23,306
--------- ---------
Total liabilities and stockholders' equity........... $ 177,709 $ 172,053
========= =========
SEE ACCOMPANYING NOTES.
F-2
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Net sales .................................. $356,471 $350,029 $352,606
Cost of sales .............................. 255,579 264,080 258,669
-------- -------- --------
100,892 85,949 93,937
Selling, general, and administrative ....... 77,740 73,207 70,482
-------- -------- --------
Income from operations ..................... 23,152 12,742 23,455
Interest expense ........................... 10,882 11,474 10,580
-------- -------- --------
12,270 1,268 12,875
Equity in earnings of Amercord Inc. ........ 1,724 537 100
-------- -------- --------
Income before income tax expense ........... 13,994 1,805 12,975
Income tax expense ......................... 5,172 545 5,101
-------- -------- --------
Net income ................................. $ 8,822 $ 1,260 $ 7,874
======== ======== ========
Earnings per common share: ................. $ 1.14 $ 0.16 $ 1.02
======== ======== ========
Weighted average common and common
equivalent shares outstanding .......... 7,714 7,663 7,757
======== ======== ========
SEE ACCOMPANYING NOTES.
F-3
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Class B Capital Total
Common Stock Common Stock in Excess Retained Stockholders'
Shares Amount Shares Amount Of Par Earnings Equity
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1993 ..... 4,808 $ 12 2,700 $ 7 $ 9 $14,086 $14,114
Net income ..................... -- -- -- -- -- 7,874 7,874
Exercise of Common Stock options
and related tax benefits ....... 24 -- -- -- 58 -- 58
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1994 ..... 4,832 12 2,700 7 67 21,960 22,046
Net income ..................... -- -- -- -- -- 1,260 1,260
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1995 ..... 4,832 12 2,700 7 67 23,220 23,306
Net income ..................... -- -- -- -- -- 8,822 8,822
Exercise of Common Stock options
and related tax benefits ....... 62 -- -- -- 118 -- 118
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1996 ..... 4,894 $ 12 2,700 $ 7 $ 185 $32,042 $32,246
======= ======= ======= ======= ======= ======= =======
SEE ACCOMPANYING NOTES.
F-4
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income .......................................... $ 8,822 $ 1,260 $ 7,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 5,873 5,340 4,504
Deferred income taxes ........................... 2,002 (1,167) (1,093)
Provision for losses on accounts receivable ..... 3,087 2,853 2,104
Equity in earnings of Amercord Inc. ............. (1,724) (537) (100)
Loss (gain) on sale of assets ................... 10 (446) (31)
Changes in operating assets and liabilities:
Accounts receivable ......................... (1,540) (4,674) (8,849)
Inventories ................................. (2,435) 3,014 (7,936)
Other current assets ........................ (1,058) (292) (267)
Bank overdrafts ............................. (1,194) 986 (680)
Accounts payable ............................ 2,625 (2,165) (386)
Accrued liabilities ......................... 623 1,392 2,509
Income taxes receivable/payable ............. (160) 46 (560)
Other assets ................................ (203) (45) (85)
Other liabilities ........................... 327 (237) (252)
-------- -------- --------
Net cash provided by (used in) operating activities . 15,055 5,328 (3,248)
INVESTING ACTIVITIES
Additions to property, plant and equipment .......... (8,110) (7,683) (9,323)
Proceeds from sale of assets ........................ 23 480 117
-------- -------- --------
Net cash used in investing activities ............... (8,087) (7,203) (9,206)
FINANCING ACTIVITIES
Net increase (decrease) in revolving line of credit . (5,113) 4,202 13,398
Principal payments of long-term debt ................ (1,750) (1,750) (1,750)
-------- -------- --------
Net cash provided by (used in) financing activities . (6,863) 2,452 11,648
-------- -------- --------
Net increase (decrease) in cash ..................... 105 577 (806)
Cash at beginning of period ......................... 2,279 1,702 2,508
-------- -------- --------
Cash at end of period ............................... $ 2,384 $ 2,279 $ 1,702
======== ======== ========
Supplemental Information:
Cash paid for interest .............................. $ 10,895 $ 11,459 $ 10,518
======== ======== ========
Net cash paid for income taxes ...................... $ 3,546 $ 1,658 $ 6,739
======== ======== ========
SEE ACCOMPANYING NOTES.
F-5
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
LINE OF BUSINESS
Associated Materials Incorporated (the "Company") consists of two
operating divisions, Alside and AmerCable, and a 50%-owned affiliate, Amercord
Inc. ("Amercord"), which is accounted for by the equity method. Alside is
engaged principally in the manufacture and distribution of exterior residential
building products to professional contractors. AmerCable manufactures jacketed
electrical cable utilized in a variety of industrial applications. Amercord
manufactures and sells steel tire cord and tire bead wire used in the tire
manufacturing industry.
ACCOUNTING CHANGES
During 1996 the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 allows
the Company to use the intrinsic value method or the fair market value to
determine the cost of stock compensation. The Company will continue to use the
intrinsic value method to measure stock-based compensation costs in accordance
with APB Opinion No. 25.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" during 1996. The adoption of SFAS No. 121 had no effect on the
financial statements at the time of adoption. An impairment loss was recorded
for the Company's affiliate, Amercord, as discussed in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
REVENUE RECOGNITION
Product sales are recognized at the time of shipment.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is
provided by the straight-line method over the estimated useful lives of the
assets which range from 3 to 30 years.
FEDERAL INCOME TAX
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Negative book balances
are classified as bank overdrafts on the accompanying balance sheets.
F-6
EARNINGS PER COMMON SHARE
Earnings per common share computations, determined using the treasury
stock method, were based on weighted average common and common equivalent shares
outstanding during the periods presented. Fully diluted earnings per common
share are not significantly different than primary earnings per common share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding the reported amounts of assets and liabilities, 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.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
$6.8 million, $6.3 million, and $5.5 million in 1996, 1995 and 1994,
respectively.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
F-7
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. INVESTMENT IN AMERCORD
The Company's investment in Amercord, a 50% owned affiliate, is accounted
for using the equity method. Amercord manufactures and sells steel tire cord and
tire bead wire used in the tire manufacturing industry. Equity in the
undistributed earnings of Amercord since acquisition through December 31, 1996
totals $6,070,000.
Condensed financial information for Amercord Inc. is presented below (in
thousands):
Results of Operations
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Net sales ........................................... $ 87,538 $ 80,764 $ 74,226
Costs and expenses .................................. 82,229 77,148 72,070
-------- -------- --------
Income from operations .............................. 5,309 3,616 2,156
Interest expense .................................... (1,734) (1,911) (1,842)
Income tax expense .................................. (1,323) (631) (114)
-------- -------- --------
Net income before cumulative effect of a change in
accounting principle ............................ 2,252 1,074 200
Cumulative effect of a change in accounting principle
(net of tax) .................................... 1,196 -- --
-------- -------- --------
Net income .......................................... 3,448 1,074 200
-------- -------- --------
Company's share of net income ....................... $ 1,724 $ 537 $ 100
======== ======== ========
Financial Position
December 31,
-------------------
1996 1995
------- -------
Assets (pledged):
Current assets ..................................... $15,829 $14,408
Noncurrent assets .................................. 36,535 40,791
------- -------
Total assets (pledged) ......................... $52,364 $55,199
======= =======
Liabilities and stockholders' equity:
Current liabilities ................................ $15,486 $14,063
Noncurrent liabilities ............................. 13,666 21,370
Stockholders' equity ............................... 23,212 19,766
------- -------
Total liabilities and stockholders' equity ..... $52,364 $55,199
======= =======
In 1996, Amercord recorded a $1,196,000 gain to reflect the cumulative
effect of an accounting change when it changed it's accounting policy for
maintenance parts. Amercord now capitalizes the cost of these parts upon
purchase and expenses such parts when used in the production cycle. Amercord
previously expensed the maintenance parts upon purchase. Amercord recorded a
pre-tax gain of $3,093,000 in connection with the settlement of disputed royalty
payments for the years 1990-1995 and recorded a $2,723,000 loss for a write down
of certain production equipment pursuant to Statement of Financial Accounting
Standards No. 121.
F-8
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts on accounts receivable for
the years ended December 31 consist of (in thousands):
1996 1995 1994
------ ------ ------
Balance at beginning of period ................... $2,769 $2,563 $2,684
Provision for losses ..................... 3,087 2,853 2,104
Losses sustained (net of recoveries) ..... 2,107 2,647 2,225
------ ------ ------
Balance at end of period ......................... $3,749 $2,769 $2,563
====== ====== ======
4. INVENTORIES
Inventories at December 31 consist of (in thousands):
1996 1995
------- -------
Raw materials .................................... $14,903 $12,962
Work-in-progress ................................. 5,276 6,175
Finished goods and purchased stock ............... 38,178 36,785
------- -------
$58,357 $55,922
======= =======
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consist of (in thousands):
1996 1995
------- -------
Land ........................................... $ 1,290 $ 1,290
Buildings ...................................... 21,319 20,034
Machinery and equipment ........................ 73,463 67,611
------- -------
96,072 88,935
Less accumulated depreciation .................. 44,423 39,369
------- -------
$51,649 $49,566
======= =======
6. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of (in thousands):
1996 1995
------- -------
Employee compensation .......................... $ 6,558 $ 5,928
Sales promotions and incentives ................ 2,692 2,143
Employee benefits .............................. 8,424 8,814
Interest ....................................... 3,307 3,320
Other .......................................... 1,984 2,137
------- -------
$22,965 $22,342
======= =======
F-9
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. REVOLVING CREDIT ARRANGEMENTS
In April 1996, the Company amended and restated its credit agreement with
KeyBank N.A. to increase the total credit facility to $50 million and extend the
term to May 31, 1999. The amended and restated agreement otherwise contains
substantially the same terms and conditions as the previous agreement. During
1996, the total credit facility ranged between $40 million and $50 million. The
total credit facility at December 31, 1996 was $50 million. Available borrowings
under the credit agreement are limited to the lesser of the total facility less
unused letters of credit or availability based on percentages of eligible
accounts receivable and inventories. Unused letters of credit totaled $9,125,000
at December 31, 1996, of which $7,261,000 was related to the Taxable Notes (see
Note 8) and $890,000 was related to insurance. The Company's available borrowing
capacity at December 31, 1996 was approximately $27,817,000. The credit
agreement includes covenants that require the maintenance of certain financial
ratios and net worth and that place restrictions on the repurchase of common
stock and the payment of dividends. Outstanding borrowings under the agreement
are collateralized by substantially all of the assets of the Company.
Interest is payable on the utilized revolving credit facility at either the
prime commercial rate (8.25% at December 31, 1996) or LIBOR (5.53% at December
31, 1996) plus 2.25% at the option of the Company and on the unused credit
facility at a rate of .25%. Letter of credit fees of 1.5% are paid at
origination.
The weighted average interest rate for borrowings under the revolving credit
facility during the period was 8.23% and 8.67% for December 31, 1996 and 1995,
respectively.
8. LONG-TERM DEBT
Long-term debt at December 31 consists of (in thousands):
1996 1995
------- -------
Taxable Variable Rate Demand Notes ................. $ 7,100 $ 8,850
11 1/2% Senior Subordinated Notes due 2003 ......... 75,000 75,000
------- -------
82,100 83,850
Less amounts due in one year ....................... 1,750 1,750
------- -------
$80,350 $82,100
======= =======
Scheduled principal payments are $1,750,000 in each year through 1998 and
$3,600,000 in 1999.
Interest on the Taxable Notes was payable monthly at the greater of the 30
or 90 day commercial paper rate plus 0.125%. Effective April 5, 1994, the
Company entered into an interest rate swap which fixed the interest rate on the
Taxable Variable Rate Demand Notes (the "Taxable Notes") at 5.57% per annum for
a period of five years. The Taxable Notes are payable in quarterly installments
ranging from $400,000 to $450,000 through January 1, 1999, with the remaining
balance due on April 1, 1999. The Taxable Notes are secured by an irrevocable
letter of credit in accordance with the credit agreement (see Note 7). The
Taxable Notes contain similar covenants and restrictions in the Company's credit
agreement described in Note 7.
Interest on the Senior Subordinated Notes is payable semiannually. The
Senior Subordinated Notes are unsecured. The Indenture pursuant to which the
Senior Subordinated Notes were issued contains covenants that, among other
things, limit the ability of the Company to incur additional indebtedness, pay
dividends, make certain investments and repurchase stock or subordinated
indebtedness.
The estimated fair value of the Taxable Notes at December 31, 1996 was
$7,100,000. The Taxable Notes have a variable interest rate and therefore trade
at face value. The fair value of the Senior Subordinated Notes at December 31,
1996 was $77,250,000 based upon quoted market price.
F-10
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. COMMITMENTS
Commitments for future minimum lease payments under noncancelable operating
leases, principally for manufacturing and distribution facilities and certain
equipment, are approximately $8,111,000, $6,432,000, $4,761,000, $3,117,000,
$1,734,000, and $1,598,000 for the years ending December 31, 1997, 1998, 1999,
2000, 2001, and thereafter, respectively. Lease expense was approximately
$10,391,000, $9,186,000, and $8,525,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
10. INCOME TAXES
Income tax expense for the years ended December 31 consists of (in
thousands):
1996 1995 1994
------ ------- -------
Current .................... $3,170 $ 1,712 $ 6,194
Deferred ................... 2,002 (1,167) (1,093)
------ ------- -------
$5,172 $ 545 $ 5,101
====== ======= =======
State income tax expense was $918,000, $153,000, and $1,034,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes as of December 31 are as follows (in
thousands):
1996 1995
------- ------
Deferred tax assets:
Medical benefits ............................... $ 1,680 $1,642
Bad debt expense ............................... 1,301 1,040
Pension expense ................................ 1,806 2,239
Inventory costs ................................ 994 1,319
Other .......................................... 805 1,218
------- ------
Total deferred tax assets .......................... 6,586 7,458
Deferred tax liabilities:
Depreciation ................................... 7,976 7,163
Other .......................................... 494 177
------- ------
Total deferred tax liabilities ..................... 8,470 7,340
------- ------
Net deferred tax assets (liabilities) .............. $(1,884) $ 118
======= ======
F-11
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The reconciliation of the statutory rate to the Company's effective income
tax rate for the years ended December 31 follows:
1996 1995 1994
------ ------ ------
Statutory rate .......................... 34.0% 34.0% 34.2%
State income taxes, net of
federal income tax benefit ........... 4.3 5.6 5.3
Equity in earnings of Amercord Inc. ..... (3.3) (8.1) (0.2)
Other ................................... 1.9 (1.3) --
------ ------ ------
Effective rate .......................... 36.9% 30.2% 39.3%
====== ====== ======
11. STOCKHOLDERS' EQUITY
On September 14, 1994, the Company amended and restated its Certificate of
Incorporation to (i) change the par value of the Common Stock and Class B Common
Stock from no par value to a par value of $.0025 per share, (ii) increase the
number of authorized shares of Common Stock from 10 million to 15 million and
increase the number of authorized shares of Class B Common Stock from 1.35
million to 2.7 million, and (iii) authorize 100,000 shares of Preferred Stock
$.01 par value. In addition, on such date the Company effected a two-for-one
stock split of the then issued and outstanding shares of Common Stock and Class
B Common Stock. All common stock and share data presented have been adjusted
retroactively for the stock split and new par value (after the split) of $.0025
per share.
The Class B Common Stock is convertible on a one-for-one basis into Common
Stock at any time subject to legal restrictions, if any, applicable to the
holder of such shares. The Class B Common Stock has the same rights and
privileges extended to the Common Stock except that holders of Class B Common
Stock may vote only on matters pertaining to changes in the Certificate of
Incorporation; the sale, lease, or disposition of certain assets; mergers or
consolidations; or the liquidation or dissolution of the Company.
F-12
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
12. STOCK OPTIONS
The Company has stock option plans, whereby it grants non-statutory stock
options to certain directors, officers and key employees. The Company has
authorized 800,000 shares of common stock to be issued under these plans. The
options granted in 1994, 1995 and 1996 were granted at fair market value on the
grant date and are exercisable for ten years. One-half of the options vest upon
grant date and the remainder vest after two years.
Transactions during 1994, 1995 and 1996 under this plan are summarized
below:
SHARES PRICE
-------- -------
Options outstanding at December 31, 1993 .... 315,800 $ .003 to $5.00
Exercised ............................... (24,000) $ .003
Granted ................................. 12,000 $6.00
Expired or cancelled .................... (4,800) $ .003
-------- ------
Options outstanding at December 31, 1994 .... 299,000 $ .003 to $6.00
Granted ................................. 33,000 $5.00
Expired or cancelled .................... (69,800) $ .003 to $6.00
--------
Options outstanding at December 31, 1995 .... 262,200 $ .003 to $5.00
Exercised ............................... (62,400) $ .003
Granted ................................. 12,500 $5.00
-------- ------
Options outstanding at December 31, 1996 .... 212,300 $2.925 to $5.00
Options to purchase 189,550, 239,700, and 195,100 shares were exercisable at
December 31, 1996, 1995 and 1994. The weighted average exercise price of options
outstanding was $3.47 and $2.57 at December 31, 1996 and 1995, respectively.
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Range in Remaining Average Average
Exercise Prices Shares Life In Years Exercise Price Shares Exercise Price
- --------------- ------- ------------- -------------- ------ --------------
$2.925 156,800 6.67 $2.925 156,800 $2.925
$5.000 55,500 8.59 $5.000 32,750 $5.000
The Company has adopted the disclosure provisions of SFAS No. 123 in 1996,
and continues to measure stock-based compensation in accordance with APB No. 25.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value of
the options was estimated at the date of the grant using the minimum value
method option pricing model assuming dividend yields of 0.0% and a
weighted-average expected life of an option of 10 years. A risk-free interest
rate of 6.87% and 6.76% was used for 1996 and 1995, respectively. The effect of
applying SFAS No. 123's fair value method to the Company's stock options results
in net income and earnings per share that are not materially different from the
amounts reported.
F-13
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
13. SEGMENTS OF BUSINESS
The Company operates in two industry segments: building products and
electrical cable products. The principal business activities of the building
segment include the manufacture of vinyl siding, vinyl replacement windows and
cabinets, and the wholesale distribution of these and other complementary
building products principally to professional home remodeling and new
construction contractors. The principal business activity of the electrical
cable segment is the manufacture and sale of jacketed electrical cable.
Comparative financial data by industry segment for the years ended December
31 are as follows (in thousands):
1996 1995 1994
--------- --------- ---------
Net sales:
Building products .......................... $ 314,645 $ 300,561 $ 310,926
Electrical cable products .................. 41,826 49,468 41,680
--------- --------- ---------
$ 356,471 $ 350,029 $ 352,606
========= ========= =========
Operating profits (losses):
Building products .......................... $ 26,372 $ 16,550 $ 27,803
Electrical cable products .................. (967) (1,676) (1,546)
Corporate expense .......................... (2,253) (2,132) (2,802)
--------- --------- ---------
$ 23,152 $ 12,742 $ 23,455
========= ========= =========
Identifiable assets:
Building products .......................... $ 133,023 $ 131,570 $ 129,109
Electrical cable products .................. 24,746 27,091 26,877
Corporate .................................. 19,940 13,392 13,428
--------- --------- ---------
$ 177,709 $ 172,053 $ 169,414
========= ========= =========
Depreciation and amortization:
Building products .......................... $ 4,282 $ 3,466 $ 2,716
Electrical cable products .................. 1,154 1,334 1,248
Corporate .................................. 437 540 540
--------- --------- ---------
$ 5,873 $ 5,340 $ 4,504
========= ========= =========
Net additions to property, plant, and equipment:
Building products .......................... $ 6,982 $ 6,669 $ 7,920
Electrical cable products .................. 1,128 1,014 1,403
--------- --------- ---------
$ 8,110 $ 7,683 $ 9,323
========= ========= =========
The Company operates principally in the United States. Operating profit for
each segment is net sales less operating expenses. Identifiable assets by
segment are those used in the Company's operations in each segment. Corporate
assets are principally the Company's investment in Amercord. Neither aggregate
export sales nor sales to a single customer have accounted for 10% or more of
consolidated net sales in any of the years presented.
F-14
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. RETIREMENT PLANS
DEFINED BENEFIT PLANS
The Company has defined benefit contributory pension plans (the Plans)
covering substantially all of its salaried employees and certain nonsalaried
employees. Employees are fully vested upon attaining five years of service
including past service with the businesses acquired by the Company. The
Company's policy is to fund pension costs as required.
The actuarial present value at December 31, 1996 and 1995 was determined
using a discount rate of 7.5% and projected compensation increases of 4.5%. The
expected long-term rate of return on assets was 9%. Plan assets consist
primarily of common stock, U.S. government obligations, corporate bonds and real
estate.
Retirement plan costs, as determined by the projected unit credit cost
method, are summarized below for the years ended December 31 (in thousands):
1996 1995 1994
------- ------- -------
Benefit cost for service during the year ...... $ 1,110 $ 742 $ 738
Interest cost on projected benefit obligation . 1,744 1,553 1,341
Return on assets .............................. (3,356) (3,412) (120)
Net amortization .............................. 1,901 2,360 (919)
------- ------- -------
Net retirement plan costs ..................... $ 1,399 $ 1,243 $ 1,040
======= ======= =======
A schedule reconciling the projected benefit obligation with the Company's
recorded pension liability as of December 31 is shown below (in thousands):
1996 1995
-------- --------
Accumulated benefit obligation, including vested benefits
of $19,752 and $17,608, respectively ..................... $ 20,755 $ 18,854
Effect of projected salary increases ......................... 5,490 5,421
-------- --------
Present value of the projected benefit obligation ............ 26,245 24,275
Plan assets at fair value .................................... 23,120 18,785
-------- --------
Plan assets less than the present value of the projected
benefit obligation ....................................... 3,125 5,490
The recorded pension liability (included in accrued current
liabilities in the balance sheets) is calculated by adding
to the above amount:
Unrecognized net gains ................................ 3,450 1,216
The portion of the liability which, under SFAS No. 87,
is being amortized over 16 years ...................... (1,127) (1,350)
-------- --------
Recorded pension liability ................................... $ 5,448 $ 5,356
======== ========
F-15
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
RETIREMENT SAVINGS & PROFIT SHARING PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan")
intended to provide assistance in accumulating personal savings for retirement.
The 401(k) Plan qualified as a tax-exempt plan under Sections 401(a) and 401(k)
of the Internal Revenue Code and covers all full-time employees of AmerCable.
For the years ended December 31, 1996, 1995 and 1994 the Company's pre-tax
contributions to the 401(k) Plan were $145,000, $136,000 and $123,000,
respectively.
15. CONTINGENCIES
The Company entered into a consent order dated August 25, 1992 with the
United States Environmental Protection Agency pertaining to the alleged use of
hazardous waste storage facilities at its Akron, Ohio location. With the
exception of a small above-ground storage area, the use of such facilities was
terminated prior to the acquisition of the facilities by the Company from USX
Corporation (USX) in 1984. The Company believes that USX bears financial
responsibility for substantially all of the direct costs of corrective action at
such facilities under relevant contract terms and under statutory and common
law. The effects of the past practices of this facility are continuing to be
investigated and as a result the Company is unable to reasonably estimate a
reliable range of the aggregate cost of corrective action at this time. To date,
USX has reimbursed the Company for substantially all of the direct costs of
corrective action at such facilities. The Company expects that USX will continue
to reimburse the Company for substantially all of the direct costs of corrective
action at such facilities. As a result, the Company believes that any material
claims resulting from this proceeding will not have a material adverse effect on
the Company.
During 1996, Statement of Position 96-1 "Environmental Remediation
Liabilities" was issued effective for fiscal years beginning after December 15,
1996. SOP 96-1 provides authoritative guidance on the recognition, measurement
and disclosure of environmental remediation liabilities. The Company believes
the application of SOP 96-1 will not have a material effect on the financial
statements upon application.
F-16