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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
__ EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
-----------------------------------------
or
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-24956
ASSOCIATED MATERIALS INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of Organization)
3773 State Rd. Cuyahoga Falls, Ohio 44223
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (330) 929 -1811
-----------------------------
Former Fiscal Year: December 31st
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of May 5, 2003, the Registrant had 100 shares of Common Stock
outstanding, all of which is held by an affiliate of the Registrant.
ASSOCIATED MATERIALS INCORPORATED
REPORT FOR THE QUARTER ENDED MARCH 29, 2003
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets......................................................... 1
March 29, 2003 (Unaudited) and December 31, 2002 - Successor
Statements of Operations (Unaudited)................................... 2
Quarter ended March 29, 2003 - Successor
Quarter ended March 31, 2002 - Predecessor
Statements of Cash Flows (Unaudited)................................... 3
Quarter ended March 29, 2003 - Successor
Quarter ended March 31, 2002 - Predecessor
Notes to Financial Statements (Unaudited).............................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 12
Item 4. Controls and Procedures.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
SIGNATURES................................................................... 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(In thousands)
(Unaudited)
March 29, December 31,
2003 2002
----------- ------------
Successor
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,853 $ 13,022
Accounts receivable, net.......................................... 62,252 67,861
Inventory......................................................... 65,366 60,369
Income taxes receivable........................................... 8,106 4,675
Deferred income taxes............................................. 3,653 3,653
Other current assets.............................................. 4,235 4,604
----------- -----------
Total current assets............................................ 146,465 154,184
Property, plant and equipment, net................................... 99,293 99,113
Goodwill............................................................. 197,461 197,461
Trademarks and trade names, net...................................... 97,108 97,504
Patents, net......................................................... 6,020 6,186
Other assets......................................................... 10,696 11,089
----------- -----------
Total assets................................................ $ 557,043 $ 565,537
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................. $ 27,505 $ 31,319
Accrued liabilities............................................... 28,815 34,319
----------- -----------
Total current liabilities....................................... 56,320 65,638
Deferred income taxes................................................ 58,976 58,976
Other liabilities.................................................... 20,898 20,746
Long-term debt....................................................... 248,100 242,408
Stockholder's equity................................................. 172,749 177,769
----------- -----------
Total liabilities and stockholder's equity.................. $ 557,043 $ 565,537
=========== ===========
See accompanying notes
-1-
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
------------------------------------
Successor Predecessor
--------- -----------
Net sales............................................................ $ 110,944 $ 123,198
Cost of sales........................................................ 82,776 90,778
----------- -----------
Gross profit......................................................... 28,168 32,420
Selling, general and administrative expense.......................... 31,310 31,219
----------- -----------
Income (loss) from operations........................................ (3,142) 1,201
Interest expense, net................................................ 5,438 1,669
Merger transaction costs............................................. - 2,002
----------- -----------
Loss before taxes.................................................... (8,580) (2,470)
Income taxes......................................................... (3,560) (951)
------------ ------------
Net loss............................................................. $ (5,020) $ (1,519)
============ ============
See accompanying notes
-2-
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
---------------------------------
Successor Predecessor
--------- -----------
OPERATING ACTIVITIES
Net loss........................................................ $ (5,020) $ (1,519)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 2,717 2,979
Tax benefit from stock option exercise..................... - 113
Amortization of deferred financing costs................... 344 -
Changes in operating assets and liabilities:
Accounts receivable, net................................. 5,609 4,126
Inventories.............................................. (4,997) (4,838)
Income taxes............................................. (3,431) (2,533)
Accounts payable and accrued liabilities................. (9,318) (10,844)
Other.................................................... 570 523
---------- ----------
Net cash used in operating activities........................... (13,526) (11,993)
INVESTING ACTIVITIES
Additions to property, plant and equipment...................... (2,335) (3,118)
---------- -----------
Net cash used in investing activities........................... (2,335) (3,118)
FINANCING ACTIVITIES
Net increase in revolving line of credit........................ 6,600 -
Redemption of 9 1/4% senior subordinated notes.................. (908) -
Dividends paid.................................................. - (339)
Stock options................................................... - 94
---------- ----------
Net cash provided by (used in) financing activities............. 5,692 (245)
---------- -----------
Net decrease in cash............................................ (10,169) (15,356)
Cash at beginning of period..................................... 13,022 28,869
---------- ----------
Cash at end of period........................................... $ 2,853 $ 13,513
========== ==========
Supplemental information:
Cash paid for interest.......................................... $ 103 $ 3,493
========== ==========
Cash paid (received) for income taxes........................... $ (129) $ 2,254
=========== ==========
See accompanying notes
-3-
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 29, 2003
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial reporting, the
instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in its annual report
on form 10-K for the year ended December 31, 2002. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have been
included.
The Company elected to change its fiscal year from a calendar year
ending on December 31st to a 52 / 53 week fiscal year that ends on the Saturday
closest to December 31st. The first quarter of fiscal 2003 began on January 1,
2003 and ended on March 29, 2003. The Company's 2003 fiscal year end will be
January 3, 2004.
The Company's results of operations prior to the date of the merger
transaction (see Note 2) are presented as the results of the Predecessor. The
results of operations, including the merger transaction and results thereafter,
are presented as the results of the Successor. In addition, the Company
completed the sale of its AmerCable division on June 24, 2002. AmerCable's first
quarter 2002 results are included in the results of continuing operations of the
Predecessor.
The Company is a manufacturer of exterior residential building
products, which are distributed through 90 company-owned Supply Centers across
the United States. The Company produces a broad range of vinyl siding and vinyl
window product lines as well as vinyl fencing, vinyl decking and vinyl garage
doors. Because most of the Company's building products are intended for exterior
use, the Company's sales and operating profits tend to be lower during periods
of inclement weather. Weather conditions in the first quarter of each year
historically result in that quarter producing significantly less sales revenue
and profits than in any other period of the year. Therefore, the results of
operations for any interim period are not necessarily indicative of the results
of operations for a full year. The Company's net loss and comprehensive loss are
the same for each period presented.
NOTE 2 - PRO FORMA INFORMATION
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly-owned
subsidiary of Associated Materials Holdings Inc. ("Holdings"), which is
controlled by affiliates of Harvest Partners, Inc. The merger was accounted for
using the purchase method of accounting. The total consideration of $379.5
million was allocated to tangible and intangible assets acquired and liabilities
assumed based on fair values at the date of the acquisition based on valuation
estimates and certain assumptions. The purchase consideration of $379.5 million,
tender offer of the $74.0 million of 9 1/4% notes and debt extinguishment costs
of $7.6 million were financed through: (1) the issuance of $165 million of 9
3/4% senior subordinated notes due 2012 ("9 3/4% notes"), (2) $125 million from
a new $165 million credit facility ("credit facility"), (3) $164.8 million cash
contribution from Holdings and (4) cash of approximately $6.3 million,
representing a portion of the Company's total cash of $6.8 million on hand at
the time of the acquisition.
On June 24, 2002, the Company completed the sale of its AmerCable
division to AmerCable Incorporated, a newly formed entity controlled by Wingate
Partners III, L.P. and members of AmerCable's management for net proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement. The Company used the net proceeds to repay a
portion of its credit facility.
-4-
The following pro forma information for the quarter ended March 31,
2002 was prepared as if the merger transaction and the sale of AmerCable
occurred as of the beginning of the period. On a pro forma basis, the Company
would have had:
Quarter
Ended
March 31,
2002
---------
Net sales...................................................................... $ 111,062
Net loss....................................................................... $ (2,586)
NOTE 3 - INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Inventories consisted of the following (in thousands):
March 29, December 31,
2003 2002
---- ----
Raw materials.................................................................. $ 12,144 $ 13,545
Work-in-process................................................................ 5,041 3,928
Finished goods and purchased stock............................................. 48,181 42,896
---------- ----------
$ 65,366 $ 60,369
========== ==========
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $197.5 million consists of the purchase price for the
merger transaction in excess of the fair value of the tangible and intangible
net assets acquired. Other intangible assets consist of the Company's trademarks
and trade name of $98.7 million and patents of approximately $6.8 million. The
Company has determined one trademark and the Alside trade name totaling $74.7
million have indefinite useful lives. The remaining $24.0 million of trademarks
are being amortized on a straight-line basis over their estimated remaining
useful lives of 15 years. Patents are being amortized on a straight-line basis
over their estimated remaining useful lives of 10 years. Amortization expense
related to trademarks and patents was approximately $0.4 million and $0.2
million, respectively for the quarter ended March 29, 2003. There was no
amortization expense for the quarter ended March 31, 2002. Accumulated
amortization related to trademarks and patents was approximately $1.6 million
and $0.8 million, respectively as of March 29, 2003 and approximately $1.2
million and $0.6 million, respectively as of December 31, 2002.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 29, December 31,
2003 2002
---- ----
9 3/4% notes................................................................... $ 165,000 $ 165,000
Term loan under credit facility................................................ 76,500 76,500
Revolving loans under credit facility.......................................... 6,600 -
9 1/4% notes................................................................... - 908
---------- ----------
$ 248,100 $ 242,408
========== ==========
The Company's $165 million of 9 3/4% notes due in 2012 pay interest
semi-annually in April and October. The Company's credit facility includes term
loans due through 2009 that bear interest at the London Interbank Offered Rate
(LIBOR) plus 3.50%, payable quarterly at the end of each calendar quarter, and
up to $40 million of available borrowings provided by revolving loans, which
expire in 2007. No interest was paid on the credit facility in the first quarter
of 2003 due to the fiscal quarter ending before March 31, 2003.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell its assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage of interest expense. The Company was in compliance with its
covenants as of March 29, 2003. On
-5-
an annual basis, the Company is required to make principal payments on the term
loan under its credit facility based on a percentage of excess cash flows as
defined in the credit facility. The payments on the term loan in 2002 were
sufficient such that no additional principal payments were required in 2003
under the excess cash flow provision. The Company records as a current liability
those principal payments that are estimated to be due within 12 months under the
excess cash flow provision of the credit facility when the likelihood of those
payments becomes probable.
The Company has one subsidiary, which is a wholly owned subsidiary
having no assets, liabilities or operations. This subsidiary fully and
unconditionally guarantees the Company's 9 3/4% notes.
NOTE 6 - STOCK PLANS
The Company measures stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 -
"Accounting for Stock Issued to Employees." The Company follows the disclosure
provisions required under Financial Accounting Standard Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation." Pro forma information regarding net income 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 using a minimum value
approach for companies with private equity. FASB SFAS No. 148 - "Accounting for
Stock-Based Compensation" requires this information to be disclosed on a
quarterly basis. The pro forma effect on net loss for the quarters ended March
29, 2003 and March 31, 2002 would have been (in thousands):
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
---- ----
Successor Predecessor
--------- -----------
Net loss as reported ....................................... $ (5,020) $ (1,519)
Pro forma stock based employee compensation cost, net of tax (32) (57)
------------- -------------
Pro forma net loss.......................................... $ (5,052) $ (1,576)
============== =============
NOTE 7 - INCOME TAXES
As a result of relocating the Company's corporate office from Texas to
Ohio, the Successor's state and local income tax rate increased, raising the
Company's total effective tax rate to 41.5% from 38.5%. Due to the seasonal
nature of the Company's operating results, the Company has recorded an income
tax benefit on the loss before taxes for the quarter ended March 29, 2003.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly-owned
subsidiary of Associated Materials Holdings Inc., which is controlled by
affiliates of Harvest Partners, Inc.
The Company's results of operations prior to the date of the merger
transaction are presented as the results of the Predecessor. The results of
operations, including the merger transaction and results thereafter, are
presented as the results of the Successor. In addition, the Company completed
the sale of its AmerCable division on June 24, 2002. AmerCable's first quarter
2002 results are included in the results of continuing operations of the
Predecessor.
The Company has changed the way it describes its historical financial
performance in connection with the adoption by the SEC of rules affecting the
use and disclosure of non-GAAP financial measures. Accordingly, EBITDA as used
in this report has not been adjusted for items that may impact its comparability
to prior periods, including items such as AmerCable's results of operations and
merger transaction costs. A reconciliation of EBITDA to net loss is included in
the table below.
The following table sets forth for the periods indicated the results of
the Company's operations by segment:
-7-
ASSOCIATED MATERIALS INCORPORATED
CONDENSED SUCCESSOR / PREDECESSOR STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
QUARTER QUARTER
ENDED ENDED
MARCH 29, MARCH 31,
2003 2002
SUCCESSOR PREDECESSOR
--------- -----------
Net sales
Alside............................. $110,944 $ 111,062
AmerCable.......................... - 12,136
-------- ---------
Total.......................... 110,944 123,198
Gross profit
Alside............................. 28,168 30,691
AmerCable.......................... - 1,729
-------- ---------
Total.......................... 28,168 32,420
Selling, general and administrative expense
Alside............................. 31,310 29,572
AmerCable.......................... - 1,647
-------- ---------
Total . 31,310 31,219
-------- ---------
Income (loss) from operations
Alside............................. (3,142) 1,119
AmerCable.......................... - 82
-------- ---------
Total.......................... (3,142) 1,201
Interest expense, net................... 5,438 1,669
-------- ---------
Loss before other non-operating expenses and
income taxes......................... (8,580) (468)
Merger transaction costs (a)............ - 2,002
-------- ---------
Loss before taxes....................... (8,580) (2,470)
Income taxes............................ (3,560) (951)
--------- ----------
Net loss ............................... $ (5,020) $ (1,519)
========= ==========
Reconciliation of net loss to EBITDA (b)(c):
- --------------------------------------------
Net loss ............................... $ (5,020) $ (1,519)
Interest ............................... 5,438 1,669
Taxes ............................... (3,560) (951)
Depreciation and amortization........... 2,717 2,979
-------- ---------
EBITDA ............................... $ (425) $ 2,178
========= =========
(a) Merger transaction costs include investment banking and legal fees
incurred by the Predecessor in conjunction with the strategic review
process and subsequent merger transaction with Harvest Partners.
(b) EBITDA is calculated as net loss plus interest, taxes, depreciation and
amortization. The Company considers EBITDA to be an important indicator
of its operational strength and performance of its business. The
Company has included EBITDA because it believes it is used by certain
investors as one measure of a company's ability to service its debt.
EBITDA should be considered in addition to, not as a substitute for the
Company's net income or loss or to cash flows as well as other measures
of financial performance in accordance with accounting principles
generally accepted in the United States. EBITDA, as it is defined in
the Company's credit facility and indenture governing the 9 3/4% notes,
excludes non-recurring items. The credit facility and indenture
governing the 9 3/4% notes have certain financial covenants that use
ratios utilizing the Company's EBITDA. EBITDA has not been prepared in
accordance with accounting principles generally accepted in the United
States. Therefore, EBITDA as presented by the Company, may not be
comparable to similarly titled measures reported by other companies.
(c) AmerCable's EBITDA for the quarter ended March 31, 2002 is calculated
as its net income of $0.1 million, plus depreciation and amortization
of $0.5 million. AmerCable's interest and taxes for this period were
less than $0.1 million.
-8-
Quarter Ended March 29, 2003 Compared to Quarter Ended March 31, 2002
- ---------------------------------------------------------------------
Alside
Subsequent to the merger transaction and sale of AmerCable, Alside
represents the ongoing operations of the Company.
Net sales were $110.9 million for the quarter ended March 29, 2003,
essentially flat compared to $111.1 million for the same period in 2002. Unit
sales of vinyl siding decreased 15% while unit sales of vinyl windows increased
8% for the first quarter of 2003 compared to the same period in 2002. The
decrease in unit sales of vinyl siding is primarily a result of the severe
winter weather conditions in many of the Company's key geographic areas as well
as continued macroeconomic uncertainties, including historically low consumer
confidence. According to available industry data, the vinyl siding industry
decreased 5% during the first quarter of 2003 compared to the same period in
2002. The Company believes its vinyl siding performance was below the industry
in the first quarter due to its competitors' customers building inventory in
advance of industry-wide price increases effective April 1, 2003 and as a result
of special promotions offered during slower winter months. As the majority of
the Company's vinyl siding sales are made directly to contractors through its
company-owned supply centers, its revenue would not be significantly impacted by
the above mentioned factors. Gross profit for the quarter ended March 29, 2003
was $28.2 million, or 25.4% of net sales, compared to $30.7 million, or 27.6% of
net sales, for the quarter ended March 31, 2002. The decrease in gross profit
margin percentage was a result of window sales comprising a larger proportion of
total sales in the first quarter of 2003 compared to the same period in 2002
along with increased resin costs. Selling, general and administrative expense
increased to $31.3 million, or 28.2% of net sales, for the quarter ended March
29, 2003 compared to $29.6 million, or 26.6% of net sales, for the same period
in 2002. The increase in selling, general and administrative expense is
primarily a result of seven new supply centers added over the past twelve
months. The loss from operations was $3.1 million in the first quarter of 2003
compared to income from operations of $1.1 million for the same period in 2002.
Successor and Predecessor Results
The Successor had net sales and a net loss of $110.9 million and $5.0
million, respectively, for the quarter ended March 29, 2003. Interest expense
during this period was $5.4 million and consisted primarily of interest on the 9
3/4% notes, term loan and revolving loans under the credit facility and
amortization of deferred financing costs. As a result of relocating the
Company's corporate office from Texas to Ohio, the Successor's state and local
income tax rate increased, raising the Company's total effective tax rate to
41.5% from 38.5%. Due to the seasonal nature of the Company's operating results,
the Company has recorded an income tax benefit on the loss before taxes for the
quarter ended March 29, 2003.
The Predecessor had net sales and a net loss of $123.2 million and $1.5
million for the quarter ended March 31, 2002. Interest expense was $1.7 million
and consisted primarily of interest on the Company's then outstanding 9 1/4%
notes. The Predecessor's results include $2.0 million of transaction costs
consisting of investment banking and legal fees in conjunction with the
strategic review process and subsequent merger transaction. Income taxes for
this period were recorded at an effective tax rate of 38.5%.
EBITDA
EBITDA for the first quarter of 2003 was a loss of $0.4 million
compared to earnings of $2.2 million for the same period in 2002. EBITDA for the
quarter ended March 31, 2002 includes $0.6 million of EBITDA relating to the
AmerCable division and merger transaction costs of $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 2003, the Company had cash and cash equivalents of $2.9
million and available borrowing capacity of approximately $30.8 million under
the revolving portion of its credit facility. Outstanding letters of credit as
of March 29, 2003, totaled $2.6 million securing various insurance letters of
credit.
Net cash used in operations was $13.5 million and $12.0 million for the
quarters ended March 29, 2003 and March 31, 2002, respectively. The cash used in
operations for both periods reflects the operating results for each quarter, the
seasonal increase of inventory levels required for the summer selling season,
payments of accrued profit sharing and customer sales incentives partially
offset by a decrease in accounts receivable.
-9-
Capital expenditures totaled $2.3 million and $3.1 million for the
quarters ended March 29, 2003 and March 31, 2002, respectively. Capital
expenditures in the 2002 period include expenditures related to the Company's
former AmerCable division of $1.6 million. Capital expenditures in the first
quarter of 2003 were primarily to replace vinyl siding extrusion and handling
equipment at the Company's Ennis, Texas manufacturing location and expenditures
related to opening two new supply centers. The Company expects to open two
additional supply centers in 2003.
Cash flows from financing activities for the quarter ended March 29,
2003 include borrowings on the revolving portion of the Company's credit
facility of $6.6 million and the redemption of the remaining outstanding 9 1/4%
notes of $0.9 million. The $0.9 million of 9 1/4% notes were redeemed at
104.625% of the principal amount of such notes plus accrued and unpaid interest
through the date of redemption. For the quarter ended March 31, 2002, cash flows
from financing activities include the payment of dividends of $0.3 million
partially offset by cash received from stock option exercises of $0.1 million.
The Company's 9 3/4% notes pay interest semi-annually in April and
October. The Company's credit facility includes $76.5 million of outstanding
term loans due through 2009 that bear interest at the London Interbank Offered
Rate (LIBOR) plus 3.50%, payable quarterly at the end of each calendar quarter,
and up to $40 million of available borrowings provided by revolving loans, which
expire in 2007. No interest was paid on the credit facility in the first quarter
of 2003 due to the fiscal quarter ending before March 31, 2003.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell its assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage of interest expense. The Company was in compliance with these
covenants as of March 29, 2003. On an annual basis, the Company is required to
make principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2002 were sufficient such that no additional principal
payments were required in 2003 under the excess cash flow provision. The Company
records as a current liability those principal payments that are estimated to be
due within 12 months under the excess cash flow provision of the credit facility
when the likelihood of those payments becomes probable.
The Company guaranteed $3.0 million of a secured note in connection
with the sale of a portion of its ownership interest in Amercord, Inc. Ivaco,
Inc., pursuant to the terms of the note, agreed to indemnify the Company for 50%
of any loss under the guarantee. The guarantee was exercised by Amercord's
lender, and the Company has settled with this lender for its portion of the
liability for approximately $1.2 million, which was fully paid in April 2003.
The Company retains a right to any collateral proceeds that secure the note;
however, the Company believes that the value of such collateral is not
sufficient to cover any significant portion of the Company's liability.
The Company believes that for the foreseeable future cash flows from
operations and its borrowing capacity under its credit facility will be
sufficient to satisfy its obligations to pay principal and interest on its
outstanding debt, maintain current operations, and provide sufficient capital
for presently anticipated capital expenditures. There can be no assurances,
however, that the cash generated by the Company will be sufficient for these
purposes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation have not been
material to its operating results for each of the past three years, including
interim periods. The Company's principal raw material, vinyl resin, has been
subject to rapid price changes. Through price increases, the Company has
historically been able to pass on significant resin cost increases. The results
of operations for individual quarters can and have been negatively impacted by a
delay between the time of vinyl resin cost increases and price increases in the
Company's products. However, over longer periods of time, the impact of the cost
increases in vinyl resin has historically not been material. Resin prices have
continued to increase in 2003. The Company has announced price increases for its
vinyl siding and vinyl windows beginning in April 2003 to offset the increase in
resin costs. Because of the delay of the announced price increases to April
2003, the gross profit margin percentage for the quarter ended March 29, 2003
was negatively impacted. While the Company expects that any additional
significant resin cost increases in 2003 will be offset by price increases to
its customers, there can be no assurances that the Company will be able to pass
on any future price increases including the announced April 2003 price
increases.
-10-
CERTAIN FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this report regarding the prospects of the industry and the Company's prospects,
plans, financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, it does not assure that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from the forward-looking
statements:
- changes in home building industry, economic, interest rates and
other conditions;
- changes in availability of consumer credit, employment trends,
levels of consumer confidence and consumer preferences;
- changes in raw material costs and availability;
- changes in national and regional trends in new housing starts;
- changes in weather conditions;
- the Company's ability to comply with certain financial covenants
in the loan documents;
- increases in competition from other manufacturers of vinyl
building products as well as alternative building products;
- increases in the Company's indebtedness;
- increases in costs of environmental compliance; and
- the other factors discussed under the heading "Risk Factors" in
the Company's annual report on Form 10-K for the year ended
December 31, 2002 and elsewhere in this report.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements included in this report. These forward-looking statements speak only
as of the date of this report. The Company does not intend to update these
statements unless the securities laws require it to do so.
-11-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has outstanding borrowings under the term loan and
revolving loan portions of its credit facility. Interest under the credit
facility is based on the variable London Interbank Offered Rate (LIBOR). At
March 29, 2003, the Company had borrowings of $76.5 million under the term loan
and $6.6 million under revolving loans. The effect of a 1/8% increase or
decrease in interest rates would increase or decrease total interest expense for
the quarter ended March 29, 2003 by approximately $0.1 million.
FOREIGN CURRENCY EXCHANGE RISK
The Company's revenues are primarily from domestic customers and are
realized in U.S. dollars. Accordingly, the Company believes its direct foreign
currency exchange risk is not material. In the past, the Company has hedged
against foreign currency exchange rate fluctuations on specific sales or
equipment purchasing contracts. At March 29, 2003, the Company had no currency
hedges in place.
COMMODITY PRICE RISK
See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Effects of Inflation" for a discussion of
the market risk related to the Company's principal raw material, vinyl resin.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days before the filing of this
quarterly report (the "Evaluation Date"). Based on their evaluation as
of the Evaluation Date, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Exchange
Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within required
time periods.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that are
designed to provide reasonable assurance that the Company's books and
records accurately reflect the Company's transactions and that the
Company's established policies and procedures are followed. There were
no significant changes to the Company's internal controls or other
factors that could significantly affect its internal controls
subsequent to their evaluation as of the Evaluation Date, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
-12-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which, after giving effect to the Company's
existing insurance coverage, is expected to have a material adverse effect on
the Company.
From time to time, the Company is involved in a number of proceedings
and potential proceedings relating to environmental and product liability
matters. The Company handles these claims in the ordinary course of business and
maintains product liability insurance covering certain types of claims. Although
it is difficult to estimate the Company's potential exposure to these matters,
the Company believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- --- --------
Exhibit
Number Description
- ------ -----------
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
(b) Reports on Form 8-K
- ------------------------
Report Date Description
- ----------- -----------
February 21, 2003 The Company filed a current report on Form 8-K to report
its financial results for the fourth quarter and year
ended December 31, 2002 (Item 9).
-13-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASSOCIATED MATERIALS INCORPORATED
---------------------------------
(Registrant)
Date: May 12, 2003 By: /s/ Michael Caporale., Jr.
---------------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
By: /s/ D. Keith LaVanway
---------------------------------------------
D. Keith LaVanway
Vice President, Chief Financial Officer
Treasurer and Secretary
(Principal Financial and Accounting Officer)
-14-
CERTIFICATION
I, Michael Caporale, Jr., President, Chief Executive Officer and Director,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Materials Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/ Michael Caporale, Jr.
---------------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
-15-
CERTIFICATION
I, D. Keith LaVanway, Vice President, Chief Financial Officer, Treasurer and
Secretary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Materials Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/ D. Keith LaVanway
----------------------------------
D. Keith LaVanway
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
-16-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
-17-