10-Q 1 l03419ae10vq.txt ASSOCIATED MATERIALS INC. 10-Q 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 September 27, 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 Incorporation of Organization) Identification No.) 3773 State Rd. Cuyahoga Falls, Ohio 44223 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (330) 929-1811 ---------------------------- Not Applicable -------------------------------------------------------------------------------- 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 November 10, 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 AND NINE MONTHS ENDED SEPTEMBER 27, 2003
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited)............................................. 1 September 27, 2003 and December 31, 2002 Condensed Consolidated Statements of Operations (Unaudited)................................... 2 Quarter ended September 27, 2003 Quarter ended September 30, 2002 Nine months ended September 27, 2003 One hundred sixty-five days ended September 30, 2002 One hundred eight days ended April 18, 2002 - Predecessor Condensed Consolidated Statements of Cash Flows (Unaudited)................................... 3 Nine months ended September 27, 2003 One hundred sixty-five days ended September 30, 2002 One hundred eight days ended April 18, 2002 - Predecessor Notes to Condensed Consolidated Financial Statements (Unaudited).............................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 22 Item 4. Controls and Procedures................................................................. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................... 23 Item 6. Exhibits and Reports on Form 8-K........................................................ 23 SIGNATURES.......................................................................................... 25
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASSOCIATED MATERIALS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
September 27, December 31, 2003 2002 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ..................... $ 7,938 $ 13,022 Accounts receivable, net ...................... 145,049 67,861 Inventory ..................................... 108,436 60,369 Income taxes receivable ....................... -- 4,675 Deferred income taxes ......................... 5,389 3,653 Other current assets .......................... 8,232 4,604 -------- -------- Total current assets .......................... 275,044 154,184 Property, plant and equipment, net ..................... 130,522 99,113 Goodwill ............................................... 245,017 197,461 Trademarks and trade names, net ........................ 97,873 97,504 Patents, net ........................................... 6,443 6,186 Other assets ........................................... 12,030 11,089 -------- -------- Total assets .................................. $766,929 $565,537 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable .................................... $ 69,072 $ 31,319 Accrued liabilities ................................. 58,563 34,319 Income taxes payable ................................ 6,809 -- -------- -------- Total current liabilities ..................... 134,444 65,638 Deferred income taxes .................................. 50,886 58,976 Other liabilities ...................................... 42,996 20,746 Long-term debt ......................................... 345,000 242,408 Stockholder's equity ................................... 193,603 177,769 -------- -------- Total liabilities and stockholder's equity .... $766,929 $565,537 ======== ========
See accompanying notes. -1- ASSOCIATED MATERIALS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Three Months Three Months Nine Months 165 108 Ended Ended Ended Days Ended Days Ended September 27, September 30, September 27, September 30, April 18, 2003 2002 2003 2002 2002 ------------ ------------- ------------- -------------- ----------- Predecessor ----------- Net sales ................................. $ 223,806 $ 176,673 $ 515,113 $ 290,633 $ 180,230 Cost of sales ............................. 159,587 122,780 365,926 202,071 130,351 --------- --------- --------- --------- --------- Gross profit .............................. 64,219 53,893 149,187 88,562 49,879 Selling, general and administrative expense 38,270 34,557 103,284 56,224 43,272 --------- --------- --------- --------- --------- Income from operations .................... 25,949 19,336 45,903 32,338 6,607 Interest expense, net ..................... 9,706 6,002 20,627 10,983 2,068 Foreign currency gain ..................... (199) -- (199) -- -- Merger transaction costs .................. -- -- -- -- 9,319 Debt extinguishment costs ................. -- -- -- 7,579 -- --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes .................... 16,442 13,334 25,475 13,776 (4,780) Income taxes .............................. 6,823 5,535 10,572 5,718 977 --------- --------- --------- --------- --------- Income (loss) from continuing operations .. 9,619 7,799 14,903 8,058 (5,757) Loss from discontinued operations ......... -- -- -- (521) -- --------- --------- --------- --------- --------- Net income (loss) ......................... $ 9,619 $ 7,799 $ 14,903 $ 7,537 $ (5,757) ========= ========= ========= ========= =========
See accompanying notes. -2- ASSOCIATED MATERIALS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
165 108 Nine Months Days Days Ended Ended Ended September 27, September 30, April 18, 2003 2002 2002 ----------------------------------------- Predecessor ----------- OPERATING ACTIVITIES Income (loss) from continuing operations .................. $ 14,903 $ 8,058 $ (5,757) Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization .................... 8,874 4,246 3,969 Tax benefit from stock option exercise ........... -- -- 113 Cost of sales expense related to an inventory fair value purchase accounting adjustment ............ 1,402 1,891 -- Debt extinguishment costs ........................ -- 7,579 -- Amortization of deferred financing costs ......... 4,953 953 -- Changes in operating assets and liabilities: Accounts receivable, net ................ (33,303) (15,942) (6,246) Inventories ............................. (10,457) (6,661) (5,170) Income taxes ............................ 9,914 (1,794) (616) Accounts payable and accrued liabilities 21,500 38,574 (4,326) Other ................................... 693 57 (225) --------- --------- --------- Net cash provided by (used in) operating activities ....... 18,479 36,961 (18,258) INVESTING ACTIVITIES Acquisition of Predecessor's equity ....................... -- (366,386) -- Acquisition of Gentek Holdings, net of cash acquired ...... (111,032) -- -- Proceeds from sale of AmerCable ........................... -- 28,332 -- Proceeds from sale of assets .............................. -- 35 220 Additions to property, plant and equipment ................ (9,587) (6,681) (3,817) --------- --------- --------- Net cash used in investing activities ..................... (120,619) (344,700) (3,597) FINANCING ACTIVITIES Equity contribution from Associated Materials Holdings Inc. -- 164,807 -- Proceeds from issuance of 9 3/4% senior subordinated notes -- 165,000 -- Proceeds from borrowings under term loan .................. 190,000 125,000 -- Repayments of term loan ................................... (86,500) (38,500) -- Redemption of 9 1/4% senior subordinated notes ............ (908) (74,092) -- Debt extinguishment costs ................................. -- (7,579) -- Financing costs ........................................... (5,571) (12,844) -- Dividends paid ............................................ -- -- (339) Stock options ............................................. -- -- 94 --------- --------- --------- Net cash provided by (used in) financing activities ....... 97,021 321,792 (245) --------- --------- --------- Net increase (decrease) in cash from continuing operations (5,119) 14,053 (22,100) Effect of exchange rates on cash .......................... 35 -- -- Net cash used in discontinued operations .................. -- (1,076) -- Cash at beginning of period ............................... 13,022 6,769 28,869 --------- --------- --------- Cash at end of period ..................................... $ 7,938 $ 19,746 $ 6,769 ========= ========= ========= SUPPLEMENTAL INFORMATION: Cash paid for interest .................................... $ 13,198 $ 3,326 $ 4,479 ========= ========= ========= Cash paid for income taxes ................................ $ 510 $ 6,357 $ 2,254 ========= ========= =========
See accompanying notes. -3- ASSOCIATED MATERIALS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2003 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The unaudited condensed consolidated 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. Certain prior period amounts have been reclassified to conform to the current period presentation. 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 third quarter of fiscal 2003 began on June 29, 2003 and ended on September 27, 2003. The Company's 2003 fiscal year end will be January 3, 2004. The Company's 2003 results of operations include the results of Gentek Holdings, Inc. ("Gentek Holdings") subsequent to its acquisition, which was completed on August 29, 2003 (see Note 2). The Company's 2002 results of operations prior to the date of the merger transaction with Harvest Partners, Inc. ("Harvest Partners") (see Note 3) are presented as the results of the Predecessor. The results of operations, including the merger transaction with Harvest Partners 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 results through April 18, 2002 are included in the results of continuing operations of the Predecessor. Subsequent to April 18, 2002, AmerCable's results are presented as discontinued operations of the Successor as it was the Successor's decision to divest this division. The Company is a manufacturer of exterior residential building products, which are distributed through company-owned distribution centers and independent distributors across the United States and Canada. The Company produces a broad range of vinyl siding and accessories, vinyl windows, and aluminum and steel siding and accessories as well as vinyl fencing, decking and railing 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. Therefore, the results of operations for any interim period are not necessarily indicative of the results of operations for a full year. NOTE 2 - ACQUISITION OF GENTEK HOLDINGS, INC. On August 29, 2003, the Company completed the acquisition of all of the issued and outstanding shares of Gentek Holdings and repaid all of the indebtedness and related accrued interest of Gentek Holdings and its subsidiaries for an aggregate purchase price of approximately $112.1 million, which included $1.1 million of cash acquired, a working capital adjustment and customary transaction fees. Additionally, the Company paid $5.6 million of financing costs of which $1.1 million was paid to Harvest Partners. Gentek Holdings, which was privately held, is the parent of Gentek Building Products, Inc. and Gentek Building Products Limited (collectively, "Gentek"). Gentek manufacturers and distributes vinyl siding and accessories, vinyl windows, and aluminum and steel siding and accessories under the Revere(R) and Gentek(R) brand names. Gentek markets its products to professional contractors on a wholesale basis through thirteen company-owned distribution centers in the mid-Atlantic region of the United States, twenty company-owned distribution centers in Canada and independent distributors in the United States. The Company completed the acquisition to expand its presence in the independent distributor market channel and to achieve potential synergy opportunities related to the vertical integration of the metals products manufactured by Gentek and sold in the Company's Alside supply centers and related to raw material savings from the increased purchasing leverage. -4- In connection with the acquisition, the Company amended and restated its existing credit facility by adding a term loan facility to borrow an additional $113.5 million and expanding its revolving facility from $40 million to $70 million, including a new Canadian subfacility of $15 million. The acquisition has been accounted for using the purchase method of accounting. The total purchase price has been allocated to the tangible and intangible assets and liabilities acquired based upon their estimated fair values as follows (in thousands):
Cash $ 1,088 Accounts receivable.............................................. 43,529 Inventory........................................................ 38,460 Other current assets............................................. 3,947 Deferred income taxes............................................ 1,736 ----------- Total current assets.................................... 88,760 Property, plant and equipment.................................... 28,650 Goodwill......................................................... 47,556 Trademarks and trade names....................................... 1,568 Patents.......................................................... 853 Deferred income taxes............................................ 8,128 ----------- Total assets................................... $ 175,515 =========== Accounts payable................................................. $ 26,179 Accrued liabilities.............................................. 13,258 Income taxes payable............................................. 1,434 ----------- Total current liabilities............................... 40,871 Other liabilities................................................ 22,042 Long-term debt................................................... 7,500 Stockholder's equity............................................. 105,102 ----------- Total liabilities and stockholder's equity..... $ 175,515 ===========
The purchase price allocation is preliminary, based on facts currently known to the Company and is subject to adjustment as the final valuation for the fair value of the acquired tangible property, plant and equipment, intangible assets and warranty liability related to certain steel siding has not been completed. As a result, the actual allocation is subject to the completion of these valuations and therefore may differ. The purchase consideration of $112.1 million was financed through the additional term loans and revolving loans under the amended and restated credit facility. NOTE 3 - 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 completion of the aforementioned transactions constitute the merger transaction with Harvest Partners. The merger was accounted for using the purchase method of accounting. The total consideration of $366.5 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 $366.5 million, financing costs of $13.0 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. -5- The following pro forma information for the quarter and nine months ended September 27, 2003 was prepared as if the acquisition of Gentek Holdings occurred as of the beginning of each period presented. The following pro forma information for the quarter and nine months ended September 30, 2002 were prepared as if the merger transaction with Harvest Partners, the sale of AmerCable and the acquisition of Gentek Holdings occurred as of the beginning of each period presented. On a pro forma basis, the Company would have had (in thousands):
Quarter Ended Nine Months Ended September 27, September 30, September 27, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- Net sales $281,911 $254,266 $705,153 $647,438 Net income $ 12,517 $ 10,811 $ 18,241 $ 13,125
The pro forma information is not necessarily indicative of the results that would have occurred had the merger transaction with Harvest Partners, sale of AmerCable and acquisition of Gentek Holdings occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. The pro forma results of operations include inventory fair value adjustments consisting of $1.4 million for the quarter and nine months ended September 27, 2003 related to the acquisition of Gentek Holdings and $3.3 million for the quarter and nine months ended September 30, 2002 related to the acquisition of Gentek Holdings and merger transaction with Harvest Partners. However, the pro forma results of operations for all periods presented exclude the effect of non-recurring expenses of accelerated amortization of previously capitalized deferred financing fees and certain financing costs paid in conjunction with the amendment to the credit facility totaling $3.9 million. NOTE 4 - INVENTORIES Inventories are valued at the lower of cost (first in, first out) or market. Inventories consisted of the following (in thousands):
September 27, December 31, 2003 2002 -------- -------- Raw materials .................... $ 29,331 $ 13,545 Work-in-process .................. 5,275 3,928 Finished goods and purchased stock 73,830 42,896 -------- -------- $108,436 $ 60,369 ======== ========
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill of $245.0 million consists of the purchase price for the acquisition of Gentek Holdings and the merger transaction with Harvest Partners in excess of the fair value of the tangible and intangible net assets acquired. As the purchase price for the acquisition of Gentek is preliminary, the value of goodwill and intangible assets is subject to adjustment. The Company has determined that one trademark and the Alside trade name totaling $74.7 million have indefinite useful lives. The remaining $25.6 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 September 27, 2003. Amortization expense related to trademarks and patents was approximately $0.7 million and $0.2 million, respectively, for the quarter ended September 30, 2002. Amortization expense related to trademarks and patents was approximately $1.2 million and $0.5 million, respectively, for the nine months ended September 27, 2003. Accumulated amortization related to trademarks and patents was approximately $2.4 million and $1.1 million, respectively, as of September 27, 2003 and approximately $1.2 million and $0.6 million, respectively, as of December 31, 2002. -6- NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following (in thousands):
September 27, December 31, 2003 2002 -------- -------- 9 3/4% notes .................. $165,000 $165,000 Term loan under credit facility 180,000 76,500 9 1/4% notes .................. -- 908 -------- -------- $345,000 $242,408 ======== ========
The Company's $165 million of 9 3/4% notes are due in 2012 and pay interest semi-annually in April and October. In connection with the acquisition of Gentek, the Company amended its existing credit facility by adding a term loan facility to borrow $190 million, which was utilized for the Gentek acquisition and repayment of the Company's existing $76.5 million of term loans and expanded its revolving facility from $40 million to $70 million, including a new Canadian subfacility of $15 million. The term loans are due in August 2010 with minimum principal amortization of 1% per year with quarterly payments of the unamortized principal in the final year of the loan and bears interest at the London Interbank Offered Rate ("LIBOR") plus 2.75% payable quarterly at the end of each calendar quarter. The revolving credit facility expires in 2007 and bears interest at LIBOR plus 3.00% payable quarterly at the end of each calendar quarter. There were no amounts outstanding against the revolving portion of the credit facility at September 27, 2003. The term loan under the Company's amended credit facility was considered to be "substantially different" as defined by FASB Emerging Issues Task Force ("EITF") 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments" as a result of the amendment. The Company recorded accelerated amortization of previously capitalized deferred financing fees and certain financing costs paid in conjunction with the amendment to the credit facility totaling $3.9 million, which is included in interest expense. 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 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 September 27, 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. NOTE 7 - 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 income for the quarter and nine months ended September 27, 2003, quarter and 165 days ended September 30, 2002 and 108 days ended April 18, 2002 would have been (in thousands): -7-
Nine Quarter Quarter Months 165 Days 108 Days Ended Ended Ended Ended Ended September 27, September 30, September 27, September 30, April 18, 2003 2002 2003 2002 2002 ------------- ------------- ------------- ------------- --------- Predecessor ----------- Net income (loss) as reported .. $ 9,619 $ 7,799 $ 14,903 $ 7,537 $ (5,757) Pro forma stock based employee compensation cost, net of tax (33) (32) (99) (204) (65) -------- -------- -------- -------- -------- Pro forma net income (loss) .... $ 9,586 $ 7,767 $ 14,804 $ 7,333 $ (5,822) ======== ======== ======== ======== ========
NOTE 8 - INCOME TAXES As a result of relocating the Company's corporate office from Texas to Ohio in April 2002, the Successor's state and local income tax rate increased, raising the Company's total effective tax rate to 41.5% from 38.5%. In addition, the Predecessor's tax provision included an estimate for merger transaction costs that were not deductible for income tax purposes. NOTE 9 - COMPREHENSIVE INCOME Comprehensive income differs from net income due to foreign currency translation adjustments as follows:
Nine Quarter Quarter Months 165 Days 108 Days Ended Ended Ended Ended Ended September 27, September 30, September 27, September 30, April 18, 2003 2002 2003 2002 2002 ------------ ------------ ------------- ------------ ----------- Predecessor ----------- Net income (loss) as reported $ 9,619 $ 7,799 $14,903 $ 7,537 $(5,757) Foreign currency translation adjustments .............. 931 -- 931 -- -- ------- ------- ------- ------- ------- Comprehensive income (loss) . $10,550 $ 7,799 $15,834 $ 7,537 $(5,757) ======= ======= ======= ======= =======
NOTE 10 - RECENTLY ADOPTED ACCOUNTING STANDARDS On January 1, 2003, the Company adopted the provisions of FASB SFAS No. 145,- "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 require that any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods be reclassified and no longer be presented as an extraordinary item. As a result of adopting this standard, the Company reclassified debt extinguishment costs recorded in the second quarter of 2002. The debt extinguishment costs include $4.9 million for the premium paid to extinguish substantially all of the Successor's assumed 9 1/4% notes and $2.7 million for the financing fees related to an interim credit facility utilized for the merger transaction with Harvest Partners, which was repaid shortly thereafter. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable preferred stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003. On October 29, 2003, the FASB deferred the provisions of paragraphs 9 and 10 and related guidance in the -8- appendices of this pronouncement as they apply to mandatorily redeemable noncontrolling interests. Adoption of the effective or deferred provisions of SFAS No. 150 did not and are expected not to have a material effect on the Company's financial position, results of operations or cash flows. In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46") - "Consolidation of Variable Interest Entities." Companies were required to adopt the provisions of this interpretation immediately for all new variable interest entities and at the end of the interim period beginning after December 15, 2003 for all variable interest entities in which an enterprise acquired an interest in that entity before February 1, 2003. As the Company does not have an interest in any variable interest entities, the adoption of this interpretation did not have a material effect on the Company's financial position, results of operations or cash flows. NOTE 11 - SUBSIDIARY GUARANTORS The Company's payment obligations under the 9 3/4% notes are fully and unconditionally guaranteed, jointly and severally (collectively, the "Subsidiary Guarantees") on a senior subordinated basis, by its domestic wholly-owned subsidiaries: Gentek Holdings, Inc., Gentek Building Products Inc. and Alside, Inc. Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or operations. Gentek Building Products Limited (the "Non-Guarantor Subsidiary") is a Canadian company and does not guarantee the Company's 9 3/4% notes. The operations and cash flows of Gentek Holdings, Inc., Gentek Building Products, Inc. and Gentek Building Products Limited are presented since the date of their acquisition on August 29, 2003. As such, no consolidating statements of operations or cash flows are presented for the three and nine months ended September 30, 2002 as the Company's only guaranteeing subsidiary for those periods did not have any assets, liabilities or operations. The balance sheet information includes all subsidiaries as of September 27, 2003. No consolidating balance sheet is presented as of December 31, 2002 as the Company's only guaranteeing subsidiary as of that date did not have any assets or liabilities. In the opinion of management, separate financial statements of the respective Guarantor Subsidiaries would not provide additional material information, which would be useful in assessing the financial composition of the Guarantor Subsidiaries. None of the Guarantor Subsidiaries has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in event of default on the Subsidiary Guarantee other than its subordination to senior indebtedness. -9- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING BALANCE SHEET September 27, 2003 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Eliminations Consolidated ------ ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ....... $ 7,830 $ (2,224) $ 2,332 $ -- $ 7,938 Accounts receivable, net ........ 95,444 25,571 24,034 -- 145,049 Intercompany receivables ........ 1,847 -- 1,281 (3,128) -- Inventory ....................... 70,146 15,239 23,051 -- 108,436 Deferred income taxes ........... 3,653 1,736 -- -- 5,389 Other current assets ............ 4,318 1,227 2,687 -- 8,232 --------- --------- --------- --------- --------- Total current assets ...... 183,238 41,549 53,385 (3,128) 275,044 Property, plant and equipment, net . 101,677 7,245 21,600 -- 130,522 Goodwill ........................... 197,461 44,726 2,830 -- 245,017 Trademarks and trade names, net .... 96,287 724 862 -- 97,873 Patents, net ....................... 5,587 856 -- -- 6,443 Investment in subsidiaries ......... 107,148 20,000 -- (127,148) -- Other assets ....................... 11,639 -- 391 -- 12,030 --------- --------- --------- --------- --------- Total assets .............. $ 703,037 $ 115,100 $ 79,068 $(130,276) $ 766,929 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ................ $ 44,387 $ 8,823 $ 15,862 $ -- $ 69,072 Intercompany payables ........... -- 3,128 -- (3,128) -- Accrued liabilities ............. 42,501 7,887 8,175 -- 58,563 Income taxes payable ............ 4,998 220 1,591 -- 6,809 --------- --------- --------- --------- --------- Total current liabilities 91,886 20,058 25,628 (3,128) 134,444 Deferred income taxes .............. 58,976 (6,979) (1,111) -- 50,886 Other liabilities .................. 21,072 10,933 10,991 -- 42,996 Long-term debt ..................... 337,500 -- 7,500 -- 345,000 Stockholders' equity ............... 193,603 91,088 36,060 (127,148) 193,603 --------- --------- --------- --------- --------- Total liabilities and stockholder's equity .... $ 703,037 $ 115,100 $ 79,068 $(130,276) $ 766,929 ========= ========= ========= ========= =========
-10- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Three Months Ended September 27, 2003 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Elimination Consolidated --------- --------- --------- --------- --------- Net sales ................................... $ 196,722 $ 13,651 $ 18,185 $ (4,752) $ 223,806 Cost of sales ............................... 137,407 11,808 15,124 (4,752) 159,587 --------- --------- --------- --------- --------- Gross profit ................................ 59,315 1,843 3,061 -- 64,219 Selling, general and administrative expense 35,132 1,652 1,486 -- 38,270 --------- --------- --------- --------- --------- Income from operations ...................... 24,183 191 1,575 -- 25,949 Interest expense, net ....................... 9,647 -- 59 -- 9,706 Foreign currency gain ....................... -- -- (199) -- (199) --------- --------- --------- --------- --------- Income from continuing operations before income taxes ........................... 14,536 191 1,715 -- 16,442 79 Income taxes ................................ 6,032 712 -- 6,823 --------- --------- --------- --------- --------- Income before equity income from subsidiaries 8,504 112 1,003 -- 9,619 Equity income from subsidiaries ............. 1,115 -- (1,115) -- --------- --------- --------- --------- --------- Net income (loss) ........................... $ 9,619 $ 112 $ 1,003 $ (1,115) $ 9,619 ========= ========= ========= ========= =========
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Nine Months Ended September 27, 2003 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Elimination Consolidated --------- --------- --------- --------- --------- Net sales ................................... $ 488,029 $ 13,651 $ 18,185 $ (4,752) $ 515,113 Cost of sales ............................... 343,746 11,808 15,124 (4,752) 365,926 --------- --------- --------- --------- --------- Gross profit ................................ 144,283 1,843 3,061 -- 149,187 Selling, general and administrative expense 100,146 1,652 1,486 -- 103,284 --------- --------- --------- --------- --------- Income from operations ...................... 44,137 191 1,575 -- 45,903 Interest expense, net ....................... 20,568 -- 59 -- 20,627 Foreign currency gain ....................... -- -- (199) -- (199) --------- --------- --------- --------- --------- Income from continuing operations before income taxes ........................... 23,569 191 1,715 -- 25,475 Income taxes ................................ 9,781 79 712 -- 10,572 --------- --------- --------- --------- --------- Income before equity income from subsidiaries 13,788 112 1,003 -- 14,903 Equity income from subsidiaries ............. 1,115 -- -- (1,115) -- --------- --------- --------- --------- --------- Net income (loss) ........................... $ 14,903 $ 112 $ 1,003 $ (1,115) $ 14,903 ========= ========= ========= ========= =========
-11- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine Months Ended September 27, 2003 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassificatio Parent Subsidiaries Subsidiary Elimination Consolidated ------ ------------ ---------- ----------- ------------ Net cash provided by (used in) operating activities $ 21,705 $ (3,048) $ (178) $ -- $ 18,479 INVESTING ACTIVITIES Acquisition of Gentek Holdings, net of cash acquired (111,032) -- -- -- (111,032) Additions to property, plant and equipment ......... (9,422) (74) (91) -- (9,587) --------- --------- --------- ----------- --------- Net cash used in investing activities .............. (120,454) (74) (91) -- (120,619) FINANCING ACTIVITIES Proceeds from borrowings under term loan ........... 182,500 -- 7,500 -- 190,000 Repayments of term loan ............................ (86,500) -- -- -- (86,500) Redemption of 9 1/4% senior subordinated notes ..... (908) -- -- -- (908) Financing costs .................................... (5,571) -- -- -- (5,571) Intercompany transactions .......................... 4,036 898 (4,934) -- -- --------- --------- --------- ----------- --------- Net cash provided by financing activities .......... 93,557 898 2,566 -- 97,021 --------- --------- --------- ----------- --------- Net increase (decrease) in cash from continuing operations ....................................... (5,192) (2,224) 2,297 -- (5,119) Effect of exchange rates on cash ................... -- -- 35 -- 35 Cash at beginning of period ........................ 13,022 -- -- -- 13,022 --------- --------- --------- ----------- --------- Cash at end of period .............................. $ 7,830 $ (2,224) $ 2,332 $ -- $ 7,938 ========= ========= ========= =========== =========
-12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS On August 29, 2003, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Gentek Holdings, Inc. ("Gentek Holdings") and repaid all of the indebtedness and accrued interest of Gentek Holdings and its subsidiaries for an aggregate purchase price of approximately $112.1 million, which included $1.1 million of cash acquired, a working capital adjustment and customary transaction fees. Gentek Holdings, which was privately held, is the parent of Gentek Building Products, Inc. and Gentek Building Products Limited (collectively, "Gentek"). Gentek manufacturers and distributes vinyl siding and accessories, vinyl windows and aluminum and steel siding and accessories under the Revere(R) and Gentek(R) brand names. Gentek markets its products to professional contractors on a wholesale basis through thirteen company-owned distribution centers in the mid-Atlantic region of the United States, twenty company-owned distribution centers in Canada and independent distributors in the United States. In connection with the acquisition, the Company amended its existing credit facility by adding a term loan facility to borrow an additional $113.5 million and expanding its revolving facility from $40 million to $70 million, including a new Canadian subfacility of $15 million. RESULTS OF OPERATIONS The Company's results of operations include the results of Gentek subsequent to its acquisition on August 29, 2003. 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. ("Harvest Partners"). The Company's results of operations prior to the date of the merger transaction with Harvest Partners are presented as the results of the Predecessor. The results of operations, including the merger transaction with Harvest Partners 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 results through April 18, 2002 are included in the continuing operations of the Predecessor. Subsequent to April 18, 2002, AmerCable's results are presented as discontinued operations of the Successor as it was the Successor's decision to divest the division. The following table sets forth for the periods indicated the results of the Company's operations by segment: -13- ASSOCIATED MATERIALS INCORPORATED CONDENSED CONSOLIDATED PREDECESSOR / SUCCESSOR STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
Three Three Nine 108 165 Nine Months Months Months Days Days Months Ended Ended Ended Ended Ended Ended September September September April September September 27, 30, 27, 18, 30, 30, 2003 2002 2003 2002 2002 2002 ------------------------------------------------------------------------------ PREDECESSOR SUCCESSOR COMBINED ----------- --------- -------- Net sales Building products ................. $ 223,806 $ 176,673 $ 515,113 $ 161,959 $ 290,633 $ 452,592 AmerCable ......................... -- -- -- 18,271 -- 18,271 --------- --------- --------- --------- --------- --------- Total .................... 223,806 176,673 515,113 180,230 290,633 470,863 Gross profit Building products ................. 64,219 53,893 149,187 47,102 88,562 135,664 AmerCable ......................... -- -- -- 2,777 -- 2,777 --------- --------- --------- --------- --------- --------- Total .................... 64,219 53,893 149,187 49,879 88,562 138,441 Selling, general and administrative expense Building products ................. 38,270 34,557 103,284 41,080 56,224 97,304 AmerCable ......................... -- -- -- 2,192 -- 2,192 --------- --------- --------- --------- --------- --------- Total .................... 38,270 34,557 103,284 43,272 56,224 99,496 Income from operations Building Products ................. 25,949 19,336 45,903 6,022 32,338 38,360 AmerCable ......................... -- -- -- 585 -- 585 --------- --------- --------- --------- --------- --------- Total .................... 25,949 19,336 45,903 6,607 32,338 38,945 Interest, net (a) ......................... 9,706 6,002 20,627 2,068 10,983 13,051 Foreign currency gain ...................... (199) -- (199) -- -- -- Merger transaction costs (b) ............... -- -- -- 9,319 -- 9,319 Debt extinguishment costs (c) ............. -- -- -- -- 7,579 7,579 --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes ................... 16,442 13,334 25,475 (4,780) 13,776 8,996 Income taxes ............................... 6,823 5,535 10,572 977 5,718 6,695 --------- --------- --------- --------- --------- --------- Net income (loss) from continuing operations 9,619 7,799 14,903 (5,757) 8,058 2,301 Loss from discontinued operations .......... -- -- -- -- (521) (521) --------- --------- --------- --------- --------- --------- Net income (loss) ......................... $ 9,619 $ 7,799 $ 14,903 $ (5,757) $ 7,537 $ 1,780 ========= ========= ========= ========= ========= =========
-14-
Three Three Nine 108 165 Nine Months Months Months Days Days Months Ended Ended Ended Ended Ended Ended September September September April September September 27, 30, 27, 18, 30, 30, 2003 2002 2003 2002 2002 2002 --------------------------------------------------------------- PREDECESSOR SUCCESSOR COMBINED Reconciliation of net income (loss) to EBITDA (d) (e): Net income (loss)............................ 9,619 $7,799 $ 14,903 $(5,757) $ 7,537 $ 1,780 Interest - Continuing operations............. 9,706 6,002 20,627 2,068 10,983 13,051 - Discontinued operations (f)....... - - - - 1,213 1,213 Taxes - Continuing operations............. 6,823 5,535 10,572 977 5,718 6,695 - Discontinued operations........... - - - - (370) (370) Depreciation and Amortization................ - Continuing operations............. 3,362 2,849 8,874 3,969 4,246 8,215 - Discontinued operations........... - - - - 318 318 -------- -------- -------- ------- ------- ------- EBITDA....................................... $ 29,510 $ 22,185 $ 54,976 $ 1,257 $29,645 $30,902 ========= ======== ======== ======= ======= =======
(a) The 2003 periods include accelerated amortization of previously capitalized deferred financing fees and certain financing costs paid in conjunction with the amendment to the credit facility totaling $3.9 million as a result of amending and restating the Company's credit facility for the Gentek Holdings acquisition. (b) 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. (c) Debt extinguishment costs include $4.9 million for the extinguishment of substantially all of the Successor's assumed 9 1/4% senior subordinated notes and $2.7 million for the expense of financing fees related to an interim credit facility utilized for the merger, which was repaid shortly thereafter. (d) EBITDA is calculated as net income (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 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. The Company has changed the way it describes EBITDA in connection with the adoption by the SEC of Regulation G and other rules affecting 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, merger transaction costs, debt extinguishment costs and certain cost of sales expenses relating to inventory fair value adjustments recorded at the time of the merger transaction with Harvest Partners and the acquisition of Gentek. (e) AmerCable's EBITDA is calculated as its net income (loss) plus interest, taxes, depreciation and amortization. For the periods through the date of its sale, AmerCable's EBITDA is calculated as follows:
January April 19, January 1, 2002 2002 1, 2002 To To To April June 24, June 24, 18, 2002 2002 2002 ----------- --------- -------- PREDECESSOR SUCCESSOR COMBINED Reconciliation of net income (loss) to EBITDA: ---------------------------------------------- Net income (loss)......................................... $ 359 $ (521) $ (162) Interest - Discontinued operations (g).................... - 1,213 1,213 Taxes - Continuing operations.......................... 226 - 226 - Discontinued operations............... - (370) (370) Depreciation and Amortization............................. - Continuing operations................. 635 - 635 - Discontinued operations............... - 318 318 ------- ----- ------- EBITDA.................................................... $ 1,220 $ 640 $ 1,860 ======= ===== =======
-15- (f) As mentioned above, the 2003 results include the results of Gentek subsequent to its acquisition on August 29, 2003. A reconciliation of EBITDA excluding the impact of the Gentek acquisition for the quarter and nine months ended September 27, 2003 is as follows: Three Nine Months Months Ended Ended September 27, September 27, 2003 2003 -------------- --------------- Reconciliation of EBITDA excluding the impact of the Gentek ----------------------------------------------------------- acquisition: ------------ EBITDA as presented above................................. $ 29,510 $ 54,976 Less EBITDA from the impact of the Gentek............... acquisition calculated as: Net income....................................... 1,099 1,099 Interest......................................... 59 59 Taxes............................................ 779 779 Depreciation and Amortization.................... 485 485 ------- ------- EBITDA from the impact of the Gentek acquisition...................................... 2,422 2,422 ------- ------- EBITDA excluding impact of Gentek acquisition............. $27,088 $52,554 ======= =======
EBITDA from the impact of the Gentek acquisition includes a cost of sales adjustment of $1.4 million related to an inventory fair value adjustment recorded at the time of the acquisition. Management believes the presentation of non-GAAP financial measures that exclude the operations of Gentek provides useful information to investors regarding the Company's results of operations as these non-GAAP financial measures allow investors to better evaluate ongoing business performance, and factors that influenced performance during the periods under report. (g) Includes accelerated amortization of $0.8 million of debt issuance costs as a result of using the proceeds from the sale of AmerCable to permanently reduce the credit facility. -16- Quarter Ended September 27, 2003 Compared to Quarter Ended September 30, 2002 ----------------------------------------------------------------------------- As discussed below, results of operations include the Company's ongoing building products operations, which include the Company's Alside division and Gentek subsequent to its acquisition on August 29, 2003. Net sales were $223.8 million for the quarter ended September 27, 2003, a 26.7% increase over $176.7 million for the same period in 2002. The 2003 results include $27.1 million of net sales contributed by the Gentek acquisition. Excluding the impact of the Gentek acquisition, net sales from continuing operations increased 11.3%. The increase in sales was primarily driven by an increase in window sales along with sales from the Company's Gentek subsidiary. Gross profit for the quarter ended September 27, 2003 was $64.2 million, or 28.7% of net sales, compared to $53.9 million, or 30.5% of net sales, for the same period in 2002. The decrease in gross profit margin percentage is due to lower margin window sales comprising a larger proportion of total sales in 2003 and the inclusion of Gentek's operations for the month of September, which includes a cost of sales expense of $1.4 million relating to an inventory fair value adjustment recorded at the time of the Gentek acquisition. Additionally, Gentek's gross margin percentage is typically lower than Alside's as a larger proportion of Gentek's sales are to independent distributors versus contractors through company-owned distribution centers. Selling, general and administrative ("SG&A") expense increased to $38.3 million, or 17.1% of net sales, for the quarter ended September 27, 2003 compared to $34.6 million, or 19.6% of net sales, for the same period in 2002. The increase in selling, general and administrative expense is primarily a result of three new supply centers added in 2003 along with the acquisition of Gentek. Income from operations was $25.9 million for the quarter ended September 27, 2003 compared to $19.3 million for the same period in 2002. EBITDA for the quarter ended September 27, 2003 was $29.5 million compared to $22.2 million for the same period in 2002. EBITDA for the third quarter of 2003 includes a cost of sales expense of $1.4 million relating to an inventory fair value adjustment recorded at the time of the Gentek acquisition. Excluding the impact of the Gentek acquisition, EBITDA for the third quarter of 2003 was $27.1 million. Successor and Predecessor Results The Successor had net sales and net income of $223.8 million and $9.6 million, respectively, for the quarter ended September 27, 2003. Interest expense during this period was $9.7 million and consisted primarily of interest on the 9 3/4% notes, term loan and revolving loans under the credit facility, amortization of deferred financing costs and accelerated amortization of previously capitalized deferred financing fees and certain financing costs paid in conjunction with the amendment to the credit facility totaling $3.9 million as a result of amending and restating the Company's credit facility for the Gentek Holdings acquisition. Net gains on foreign currency transactions totaled $0.2 million. As a result of relocating the Company's corporate office from Texas to Ohio in 2002, the Successor's state and local income tax rate increased, raising the Company's total effective tax rate to 41.5% from 38.5%. The Successor recorded an income tax provision of $6.8 million, representing the 41.5% effective tax rate. The Successor had net sales and net income of $176.7 million and $7.8 million, respectively, for the quarter ended September 30, 2002. Interest expense during this period was $6.0 million and consisted primarily of interest on the 9 3/4% notes, term loan under the credit facility and amortization of deferred financing costs. The Successor recorded an income tax provision of $5.5 million, representing the 41.5% effective tax rate. Nine Months Ended September 27, 2003 Compared to Nine Months Ended September 30, -------------------------------------------------------------------------------- 2002 ---- Net sales were $515.1 million for the nine months ended September 27, 2003, a 13.8% increase over $452.6 million for the same period in 2002. The 2003 results include $27.1 million of net sales contributed by the Gentek acquisition. Excluding the impact of the Gentek acquisition, net sales from continuing operations increased 7.8%. The increase in sales was primarily driven by an increase in window sales along with sales from the Company's Gentek subsidiary. Gross profit increased to $149.2 million, or 29.0% of net sales, for the nine months ended September 27, 2003 compared to $135.7 million, or 30.0% of net sales, for the same period in 2002. The decrease in gross profit margin percentage was primarily due to lower margin window sales comprising a larger proportion of total sales in 2003 compared to the same period in 2002. SG&A expense increased to $103.3 million, or 20.1% of net sales, for the nine months ended September 27, 2003 compared to $97.3 million, or 21.5% of net sales, for the same period in 2002. SG&A expense increased for the year-to-date period primarily as a result of the three new supply centers added in 2003 along with the seven new supply centers added in 2002, which had nine full months of -17- expense in 2003. Income from operations was $45.9 million for the nine months ended September 27, 2003 compared to $38.4 million for the same period in 2002. EBITDA for the nine months ended September 27, 2003 was $55.0 million compared to $30.9 million for the same period in 2002. EBITDA for the nine months ended September 27, 2003 includes a cost of sales expense of $1.4 million relating to an inventory fair value adjustment recorded at the time of the acquisition of Gentek. Excluding the impact of the Gentek acquisition, EBITDA for the nine months ended September 27, 2003 was $52.6 million. EBITDA for the nine months ended September 30, 2002 includes $1.9 million of EBITDA relating to the AmerCable division, merger transaction costs of $9.3 million, debt extinguishment costs of $7.6 million and a cost of sales expense of $1.9 million relating to an inventory fair value adjustment recorded at the time of the merger transaction with Harvest Partners. Successor and Predecessor Results The Successor had net sales and net income of $515.1 million and $14.9 million, respectively, for the nine months ended September 27, 2003. Interest expense during this period was $20.6 million and consisted primarily of interest on the 9 3/4% notes, term loan and revolving loans under the credit facility, amortization of deferred financing costs and accelerated amortization of previously capitalized deferred financing fees and certain financing costs paid in conjunction with the amendment to the credit facility totaling $3.9 million as a result of amending and restating the Company's credit facility for the Gentek acquisition. The Successor recorded an income tax provision of $10.6 million, representing the 41.5% effective tax rate. The Successor had net sales and net income of $290.6 million and $7.5 million, respectively, for the period from April 19, 2002 to September 30, 2002. Interest expense during this period was $11.0 million and consisted primarily of interest on the 9 3/4% notes, term loan and revolving loans under the credit facility, an interim credit facility temporarily utilized for the merger transaction with Harvest Partners 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%. The Successor recorded an income tax provision of $5.7 million, representing the 41.5% effective tax rate. The Successor's results include debt extinguishment costs of $7.6 million, including $4.9 million for the premium paid to extinguish $74.0 million of the Successor's assumed 9 1/4% notes and $2.7 million for financing fees related to an interim credit facility utilized for the merger transaction with Harvest Partners, which was repaid shortly thereafter and loss from discontinued operations of $0.5 million, net of tax, for the Company's AmerCable division. The Predecessor had net sales and a net loss of $180.2 million and $5.8 million for the period from January 1, 2002 to April 18, 2002. Interest expense was $2.1 million and consisted primarily of interest on the Company's 9 1/4% notes for the time period from January 1, 2002 to April 18, 2002. The Predecessor's results include $9.3 million of transaction costs consisting of investment banking and legal fees associated with the merger transaction with Harvest Partners. The Predecessor recorded an income tax provision of $1.0 million, representing the 38.5% effective rate and an estimate for merger transaction costs that were not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES At September 27, 2003, the Company had cash and cash equivalents of $7.9 million and available borrowing capacity of approximately $65.5 million under the revolving portion of its credit facility. Outstanding letters of credit against the credit facility as of September 27, 2003, totaled $4.5 million securing various insurance letters of credit. Net cash provided by operations was $18.5 million for the nine months ended September 27, 2003 primarily reflecting the operating results for the period offset by the seasonal increases of accounts receivable and inventory during the summer selling period, partially offset by a seasonal increase in accounts payable. For the 165 days ended September 30, 2002 net cash provided by operations of the Successor was $37.0 million. For the one hundred eight days ended April 18, 2002, net cash used in operations of the Predecessor was $18.3 million. Cash flows from operations of the Predecessor also include the working capital needs of AmerCable for the period from January 1, 2002 to April 18, 2002. AmerCable's cash flows for the period from April 19, 2002 to June 24, 2002 are shown as net cash used in discontinued operations. The net $18.7 million of cash provided by operations ($37.0 million of cash provided by the Successor less $18.3 million of cash used by the Predecessor) for -18- the nine months ended September 30, 2002 primarily reflects the operating results for the period offset by the seasonal increases of accounts receivable and inventory, partially offset by a seasonal increase in accounts payable. Capital expenditures totaled $9.6 million for the nine months ended September 27, 2003 and were primarily to replace vinyl siding extrusion and handling equipment at the Company's Ennis, Texas manufacturing location and expenditures related to opening three new supply centers. Cash flows from investing activities also include the net acquisition amount paid for Gentek of $111.0 million, net of cash acquired. For the 165 days ended September 30, 2002, capital expenditures of the Successor totaled $6.7 million. For the one hundred eight days ended April 18, 2002, capital expenditures of the Predecessor totaled $3.8 million, which includes AmerCable's capital expenditures of $1.9 million. The combined capital expenditures of the Successor and Predecessor, excluding AmerCable, totaled $8.6 million for the nine months ended September 30, 2002. Capital expenditures in the 2002 period were primarily for the production of new casement window tooling, related production line expenditures and leasehold improvements for the opening of seven new supply centers. Cash flows from the Successor's investing activities also include the merger transaction with Harvest Partners totaling $366.4 million and net proceeds from the sale of AmerCable totaling $28.3 million. The purchase consideration of the Gentek acquisition was $112.1 million ($111.0 million, net of cash acquired). In addition, the Company paid $5.6 million of financing costs, repaid $76.5 million of existing Company term loans and $0.6 million of accrued interest under the Company's existing credit facility. The Gentek acquisition purchase consideration, financing costs and the repayment of term loans and accrued interest were financed by cash flows from financing activities for the nine months ended September 27, 2003 including borrowings of $190.0 million under the term loan portion and $10.2 million under the revolving loan portion of the Company's amended and restated credit facility. The Company repaid the $10.2 million of borrowings under the revolving loan portion of its credit facility and $10.0 million of term loans using cash flows from operations and net cash settlements that occurred subsequent to the close of the Gentek acquisition. Additionally, cash flows from financing activities include 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. Cash flows from the Successor's financing activities for the 165 days ended September 30, 2002 include: (1) the issuance of $165 million of 9 3/4% notes due 2012, (2) $125 million from the credit facility, (3) $164.8 million cash contribution from Associated Materials Holdings Inc. and (4) cash of approximately $6.0 million, representing a portion of the Company's total cash on hand of $6.8 million to finance the merger transaction with Harvest Partners of $366.4 million, financing costs of $12.8 million, tender offer of the 9 1/4% notes of $74.0 million and debt extinguishment costs of $7.6 million. The tender offer premium paid for the 9 1/4% notes was approximately $7.3 million, of which $4.9 million is included as debt extinguishment costs representing the portion of the premium in excess of the fair market value of the 9 1/4% notes. Upon completion of the merger transaction with Harvest Partners, the Company was then obligated to make a change of control offer for the approximate $1.0 million of remaining outstanding 9 1/4% notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest. The change of control offer was completed on June 21, 2002 with an additional approximate $0.1 million of the 9 1/4% notes being tendered. The Company permanently reduced borrowings under the term loan by $38.5 million using the net proceeds from the sale of AmerCable and operating cash flows. For the 108 days ended April 18, 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 amended and restated credit facility includes $180.0 million of outstanding term loans due through 2010 that bear interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%, payable quarterly at the end of each calendar quarter, and up to $70 million of available borrowings provided by revolving loans (including a new Canadian subfacility of $15 million), which expire in 2007. The revolving credit facility expires in 2007 and bears interest at LIBOR plus 3.00% payable quarterly at the end of each calendar quarter. 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 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 -19- of interest expense. The Company was in compliance with these covenants as of September 27, 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 twelve 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 amended and restated 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 increased in 2003, but remained relatively flat during the third quarter. The Company increased prices for its vinyl siding and vinyl windows in April 2003 to offset the increase in resin costs. 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. 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; - ability to profit from the Gentek acquisition, including the Company's ability to grow the Gentek brands and the achievement of anticipated synergies; - changes in national and regional trends in new housing starts; -20- - 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. -21- \ ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company has outstanding borrowings under the term loan portion of its credit facility. Interest under the credit facility is based on the variable London Interbank Offered Rate (LIBOR). At September 27, 2003, the Company had borrowings of $180.0 million under the term loan. The effect of a 1/8% increase or decrease in interest rates would increase or decrease total interest expense for the nine months ended September 27, 2003 by approximately $0.2 million. FOREIGN CURRENCY EXCHANGE RISK The Company's revenues are primarily from domestic customers and are realized in U.S. dollars. However, since the acquisition of Gentek, the Company now realizes revenues from sales made through Gentek's Canadian distribution centers in Canadian dollars. The Company's Canadian manufacturing facilities acquire raw materials and supplies from U.S. vendors, which results in foreign currency transactional gains and losses. However payment terms among the Canadian manufacturing facilities and these vendors are short-term in nature. 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 September 27, 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 and other commodity raw materials, steel and aluminum. ITEM 4. 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 the end of the period covered by 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-15(e) and 15d-15(e) 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. There have been no changes to the Company's internal control over financial reporting during the quarter ended September 27, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -22- 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 ------ ----------- 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 32.2 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 (b) Reports on Form 8-K ------------------------ Report Date Description ----------- ----------- July 31, 2003 The Company submitted a current report on Form 8-K filing under Items 7 and 9 a copy of the Stock Purchase Agreement, dated July 31, 2003, by and between the Company and Gentek Holdings, Inc. and furnishing under Item 9 a copy of the press release announcing that the Company had entered into a definitive agreement to acquire Gentek Holdings, Inc. (Items 7 and 9). August 1, 2003 The Company furnished a current report on Form 8-K to report its financial results for the second quarter ended June 28, 2003 (Items 7, 9 and 12). August 1, 2003 The Company furnished a current report on Form 8-K to report certain disclosures made during its second quarter earnings conference call, which was held on August 1, 2003 (Item 9). August 29, 2003 The Company furnished a current report on Form 8-K to report the close of the acquisition of Gentek Holdings, Inc., which occurred on August 29, 2003 (Items 7 and 9). September 12, 2003 The Company furnished a current report on Form 8-K to report the completion of the acquisition of Gentek Holdings, Inc., which occurred on August 29, 2003 (Items 2 and 7). October 3, 2003 The Company furnished a current report on Form 8-K to report that it had made an investor presentation on October 2, 2003 (Item 9).
-23- November 3, 2003 The Company furnished a current report on Form 8-K to report its financial results for the third quarter ended September 27, 2003 (Items 7, 9 and 12). November 7, 2003 The Company furnished a current report on Form 8-K/A to amend the Form 8-K furnished on September 12, 2003 to report the completion of the acquisition of Gentek Holdings, Inc., which occurred on August 29, 2003 (Items 2 and 7).
-24- 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: November 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) -25- EXHIBIT INDEX
Exhibit Number Description ------ ----------- 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 32.2 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
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