10-Q 1 l00890ae10vq.txt ASSOCIATED MATERIALS INCORPORATED 10-Q/3-29-03 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 ------------------ ------------------ Commission file number: 000-24956 ASSOCIATED MATERIALS INCORPORATED -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 75-1872487 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation of Organization) 3773 State Rd. Cuyahoga Falls, Ohio 44223 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (330) 929 -1811 ----------------------------- Former Fiscal Year: December 31st -------------------------------------------------------------------------------- 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 ------- ----- 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-