-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrKjH0XmJduHd9G1upBzO/DlZeP7rf8LGxm7AcTeRFZ4DUcl+ZvVNMs3BMyBxS5F wyf5MyL8aQUfebQgDTzfiw== 0000950152-04-006343.txt : 20040817 0000950152-04-006343.hdr.sgml : 20040817 20040817110351 ACCESSION NUMBER: 0000950152-04-006343 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040703 FILED AS OF DATE: 20040817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSOCIATED MATERIALS INC CENTRAL INDEX KEY: 0000802967 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 751872487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24956 FILM NUMBER: 04980867 BUSINESS ADDRESS: STREET 1: 3773 STATE ROAD STREET 2: # CITY: CUYAHOGA FALLS STATE: OH ZIP: 44223 BUSINESS PHONE: 330 929 1811 MAIL ADDRESS: STREET 1: 3773 STATE ROAD STREET 2: # CITY: CUYAHOGA FALLS STATE: OH ZIP: 44223 10-Q 1 l08581ae10vq.txt ASSOCIATED MATERIALS INCORPORATED 10-Q/QUARTER END 7-3-04 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 July 3, 2004 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 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 August 14, 2004, 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 SIX MONTHS ENDED JULY 3, 2004
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets............................................... 1 July 3, 2004 (Unaudited) and January 3, 2004 Consolidated Statements of Operations (Unaudited)......................... 2 Quarters ended July 3, 2004 and June 28, 2003 Six months ended July 3, 2004 and June 28, 2003 Consolidated Statements of Cash Flows (Unaudited)......................... 3 Six months ended July 3, 2004 and June 28, 2003 Notes to Consolidated Financial Statements (Unaudited).................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 20 Item 4. Controls and Procedures.............................................. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 21 Item 6. Exhibits and Reports on Form 8-K..................................... 21 SIGNATURES...................................................................... 22
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASSOCIATED MATERIALS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) July 3, January 3, 2004 2004 ----------- ---------- ASSETS Current assets: Cash and cash equivalents ........................... $ 2,655 $ 4,282 Accounts receivable, net ............................ 152,471 106,975 Inventory ........................................... 122,327 97,907 Deferred income taxes ............................... 7,019 7,019 Other current assets ................................ 6,853 5,564 -------- -------- Total current assets .............................. 291,325 221,747 Property, plant and equipment, net ..................... 142,726 140,846 Goodwill ............................................... 230,411 230,283 Other intangible assets, net ........................... 114,497 116,136 Other assets ........................................... 9,035 9,621 -------- -------- Total assets .................................. $787,994 $718,633 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable .................................... $ 81,633 $ 49,881 Accrued liabilities ................................. 47,401 53,234 Income taxes payable ................................ 3,133 4,934 -------- -------- Total current liabilities ......................... 132,167 108,049 Deferred income taxes .................................. 57,837 58,028 Other liabilities ...................................... 40,021 41,587 Long-term debt ......................................... 331,159 305,000 Stockholder's equity ................................... 226,810 205,969 -------- -------- Total liabilities and stockholder's equity .... $787,994 $718,633 ======== ========
See accompanying notes. -1- ASSOCIATED MATERIALS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net sales....................................... $ 301,602 $ 180,363 $ 505,923 $ 291,307 Cost of sales................................... 218,277 123,563 372,243 206,339 ----------- ----------- ----------- ----------- Gross profit.................................... 83,325 56,800 133,680 84,968 Selling, general and administrative expense..... 48,040 33,704 107,932 65,014 ----------- ----------- ----------- ----------- Income from operations.......................... 35,285 23,096 25,748 19,954 Interest expense, net........................... 6,254 5,483 12,266 10,921 Foreign currency loss........................... 609 - 615 - ----------- ----------- ----------- ----------- Income before taxes............................. 28,422 17,613 12,867 9,033 Income taxes.................................... 11,703 7,309 5,247 3,749 ----------- ----------- ----------- ----------- Net income...................................... $ 16,719 $ 10,304 $ 7,620 $ 5,284 =========== =========== =========== ===========
See accompanying notes. -2- ASSOCIATED MATERIALS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Six Months Ended Ended July 3, June 28, 2004 2003 ---------- ---------- OPERATING ACTIVITIES Net income...................................................... $ 7,620 $ 5,284 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.............................. 10,243 5,512 Amortization of deferred financing costs................... 731 689 Changes in operating assets and liabilities: Accounts receivable, net................................. (45,693) (19,218) Inventories.............................................. (25,060) (10,410) Income taxes............................................. (1,762) 3,641 Accounts payable and accrued liabilities................. 26,730 10,514 Other.................................................... (2,771) (269) ----------- ----------- Net cash used in operating activities........................... (29,962) (4,257) INVESTING ACTIVITIES Additions to property, plant and equipment...................... (12,196) (5,841) ---------- ---------- Net cash used in investing activities........................... (12,196) (5,841) FINANCING ACTIVITIES Net increase in revolving line of credit........................ 26,159 - Equity contribution from Holdings............................... 14,498 - Financing costs................................................. (168) - Redemption of 9 1/4% senior subordinated notes..................... - (908) ---------- ---------- Net cash provided by (used in) financing activities............. 40,489 (908) ---------- ---------- Net decrease in cash............................................ (1,669) (11,006) Effect of exchange rate changes on cash......................... 42 - ---------- ---------- Cash at beginning of period..................................... 4,282 13,022 ---------- ---------- Cash at end of period........................................... $ 2,655 $ 2,016 ========== ========== Supplemental information: Cash paid for interest.......................................... $ 11,442 $ 9,240 ========== ========== Cash paid for income taxes...................................... $ 7,005 $ 108 ========== ==========
See accompanying notes. -3- ASSOCIATED MATERIALS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND SIX MONTHS ENDED JULY 3, 2004 (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 January 3, 2004. 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's 2004 results of operations include the results of Gentek Holdings, Inc., which was acquired on August 29, 2003 (see Note 3). The Company is a wholly owned subsidiary of Associated Materials Holdings Inc. ("Holdings"). The Company is a leading, vertically integrated manufacturer and North American distributor of exterior residential building products. The Company's core products are vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and accessories, and vinyl fencing, decking and railing. 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 - AMH HOLDINGS, INC. On February 19, 2004, AMH Holdings, Inc. ("AMH") was incorporated. AMH has no material assets or operations other than its 100% ownership of Holdings, the Company's parent company. Stockholders and option holders of Holdings became stockholders and option holders of AMH on March 4, 2004 and are no longer stockholders and option holders of Holdings. On March 4, 2004, AMH completed an offering of $446 million aggregate principal at maturity of 11 1/4% senior discount notes. The total gross proceeds were approximately $258.3 million. In connection with the note offering, certain options to acquire preferred and common shares were exercised and the proceeds from the note offering were used to redeem all of AMH's preferred stock including accrued and unpaid dividends, pay a dividend to AMH's common stockholders and pay a bonus to certain members of the Company's senior management. Through Holdings, AMH contributed $14.5 million to the Company to pay the bonus to certain members of the Company's senior management. The management bonus is included in the Company's selling, general and administrative expense for the six months ended July 3, 2004. Interest accrues at a rate of 11 1/4% on the notes in the form of an increase in the accreted value of the notes prior to March 1, 2009. Thereafter, cash interest of 11 1/4% on the notes accrues and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2009. The notes mature on March 1, 2014. The notes are structurally subordinated to all existing and future debt and other liabilities of AMH's existing and future subsidiaries, including the Company and Holdings. NOTE 3 - PRO FORMA INFORMATION On August 29, 2003, the Company acquired all of the issued and outstanding shares of the capital stock of Gentek Holdings, Inc., the parent Company of Gentek Building Products, Inc. and Gentek Building Products Limited, collectively referred to as "Gentek". Gentek manufactures and distributes vinyl windows, vinyl siding, aluminum trim coil, 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 company-owned distribution centers in the mid-Atlantic region of the United States and throughout Canada, as well as to independent distributors in the United States. The acquisition was completed to expand the Company's presence in the independent distributor market channel, to capitalize on synergy opportunities related to the vertical integration of the metals products manufactured by Gentek and sold in the Company's Alside supply centers, and to benefit from raw material savings resulting from increased purchasing leverage. The Company intends to maintain distinct separation of the Revere(R) and Gentek(R) brands from the Company's Alside(R) brand by continuing to offer differentiated product sales and marketing support. -4- The acquisition was accounted for using the purchase method of accounting. 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 warranty liability related to certain steel siding has not been completed. As a result, the actual allocation is subject to completion and therefore may differ. The following pro forma information for the quarter and six months ended June 28, 2003 was prepared as if the acquisition of Gentek Holdings occurred as of the beginning of each period. On a pro forma basis, the Company would have had (in thousands):
Quarter Six Months Ended Ended June 28, June 28, 2003 2003 --------- ---------- Net sales................................................................ $ 257,615 $ 423,241 Net income............................................................... $ 10,158 $ 3,484
The pro forma information is not necessarily indicative of the results that would have occurred had the acquisition of Gentek occurred at the beginning of each period presented, nor is it necessarily indicative of future results. The pro forma results of operations include $1.4 million of expenses related to an inventory fair value adjustment recorded at the time of the Gentek acquisition. NOTE 4 - INVENTORIES Inventories are valued at the lower of cost (first in, first out) or market. Inventories consisted of the following (in thousands):
July 3, January 3, 2004 2004 ---------- ---------- Raw materials............................................................ $ 27,805 $ 24,586 Work-in-process.......................................................... 8,255 6,307 Finished goods and purchased stock....................................... 86,267 67,014 ---------- ---------- $ 122,327 $ 97,907 ========== ==========
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the purchase price in excess of the fair value of the tangible and intangible net assets acquired and consists of $230.4 million including $197.5 million from the purchase price for the April 2002 merger transaction and $32.9 million from the acquisition of Gentek. None of the Company's goodwill is deductible for income tax purposes. The Company's other intangible assets consist of the following (in thousands):
Average July 3, 2004 January 3, 2004 Amortization --------------------------------------- --------------------------------------- Period Accumulated Net Carrying Accumulated Net Carrying (in Years) Cost Amortization Value Cost Amortization Value ------------ ----------- ------------ ------------ ----------- ------------ ------------ Trademarks and trade names........ 15 $ 109,280 $ 3,778 $ 105,502 $ 109,280 $ 2,844 $ 106,436 Patents........................... 10 6,550 1,437 5,113 6,550 1,110 5,440 Customer base..................... 7 4,503 621 3,882 4,628 368 4,260 ----------- ----------- ---------- ----------- ---------- ---------- Total other intangible assets..... $ 120,333 $ 5,836 $ 114,497 $ 120,458 $ 4,322 $ 116,136 =========== =========== ========== =========== ========== ==========
The Company has determined that trademarks and trade names totaling $81.1 million consisting primarily of the Alside(R), Revere(R) and Gentek(R) trade names have indefinite useful lives. Amortization expense related to other intangible assets was approximately $0.8 million and $0.6 million for the quarters ended July 3, 2004 and June 28, 2003, respectively and $1.6 million and $1.1 million for the six months ended July 3, 2004 and June 28, 2003, respectively. -5- NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following (in thousands):
July 3, January 3, 2004 2004 ---------- ---------- 9 3/4% notes............................................................. $ 165,000 $ 165,000 Term loan under credit facility.......................................... 140,000 140,000 Revolving loans under credit facility.................................... 26,159 - ---------- ---------- $ 331,159 $ 305,000 ========== ==========
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 up to 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 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 July 3, 2004. 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 2003 were sufficient such that no additional principal payments were required in 2004 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. 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 quarters and six months ended July 3, 2004 and June 28, 2003 would have been (in thousands):
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 -------- -------- ---------- ---------- Net income as reported ........................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284 Pro forma stock based employee compensation cost, net of tax... (53) (33) (81) (65) -------- -------- ---------- ---------- Pro forma net income........................................... $ 16,666 $ 10,271 $ 7,539 $ 5,219 ======== ======== ========== ==========
NOTE 8 - INCOME TAXES The Company has recorded income taxes at its estimated full fiscal year effective tax rate of approximately 41.5% on the income before taxes for the quarters and six months ended July 3, 2004 and June 28, 2003. -6- NOTE 9 - COMPREHENSIVE INCOME Comprehensive income differs from net income due to foreign currency translation adjustments as follows (in thousands):
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ----------- ----------- ---------- ---------- Net income as reported ................................... $ 16,719 $ 10,304 $ 7,620 $ 5,284 Foreign currency translation adjustments.................. (272) - (1,133) - ----------- ----------- ---------- ---------- Comprehensive income...................................... $ 16,447 $ 10,304 $ 6,487 $ 5,284 =========== =========== ========== ==========
NOTE 10 - RETIREMENT PLANS The Company's Alside division sponsors a defined benefit pension plan which covers hourly workers at its plant in West Salem, Ohio and a defined benefit retirement plan covering salaried employees, which was frozen in 1998 and subsequently replaced with a defined contribution plan. The Company's Gentek subsidiary sponsors a defined benefit pension plan for the hourly union employees at its Woodbridge, New Jersey plant (together with the Alside sponsored defined benefit plans, the "Domestic Plans"). Accrued pension liabilities are included in other liabilities in the accompanying balance sheets. Gentek plan information is presented subsequent to the date of its acquisition on August 29, 2003. The actuarial valuation measurement date for the defined benefit pension plans is December 31. Components of the Domestic Plan costs are as follows (in thousands):
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- NET PERIODIC PENSION COST Service cost....................... $ 104 $ 53 $ 208 $ 106 Interest cost...................... 628 515 1,256 1,030 Expected return on assets.......... (704) (549) (1,408) (1,083) Amortization of unrecognized: Cumulative net loss ............ 70 107 140 214 -------- --------- ---------- ---------- Net periodic pension cost.......... $ 98 $ 126 $ 196 $ 267 ========= ========= ========== ==========
The Company expects to make $0.3 million of contributions to the Domestic Plans in 2004. 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 only presented for the quarter and six months ended July 3, 2004, since Gentek was acquired on August 29, 2003. As such, no consolidating statements of operations or cash flows are presented for the quarter or six months ended June 28, 2003, as the Company's only guaranteeing subsidiary for that period did not have any assets, liabilities or operations. 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 -7- investors or creditors to obtain access to its assets in event of default on the Subsidiary Guarantee other than its subordination to senior indebtedness. ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING BALANCE SHEET July 3, 2004 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Eliminations Consolidated ----------- ------------ ------------- ----------------- ------------ ASSETS Current assets: Cash and cash equivalents............. $ 1,411 $ 1,030 $ 214 $ - $ 2,655 Accounts receivable, net.............. 99,678 25,207 27,586 - 152,471 Intercompany receivables.............. - 843 8,227 (9,070) - Inventory............................. 79,859 14,143 28,325 - 122,327 Deferred income taxes................. 3,925 3,094 - - 7,019 Other current assets.................. 5,152 663 1,038 - 6,853 ----------- ----------- ----------- ------------ ---------- Total current assets................ 190,025 44,980 65,390 (9,070) 291,325 Property, plant and equipment, net....... 105,261 5,484 31,981 - 142,726 Goodwill................................. 197,461 32,950 - - 230,411 Other intangible assets, net............. 100,154 12,856 1,487 - 114,497 Deferred income taxes.................... - 5,897 - (5,897) - Investment in subsidiaries............... 116,314 46,941 - (163,255) - Other assets............................. 8,843 - 192 - 9,035 ----------- ----------- ----------- ------------ ---------- Total assets.................... $ 718,058 $ 149,108 $ 99,050 $ (178,222) $ 787,994 =========== =========== =========== ============= ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable...................... $ 47,913 $ 13,794 $ 19,926 $ - $ 81,633 Intercompany payables................. 9,070 - - (9,070) - Accrued liabilities................... 32,015 8,337 7,049 - 47,401 Income taxes payable.................. 2,537 166 430 - 3,133 ----------- ----------- ----------- ------------ ---------- Total current liabilities........... 91,535 22,297 27,405 (9,070) 132,167 Deferred income taxes.................... 60,425 - 3,309 (5,897) 57,837 Other liabilities........................ 20,288 10,497 9,236 - 40,021 Long-term debt........................... 319,000 - 12,159 - 331,159 Stockholder's equity..................... 226,810 116,314 46,941 (163,255) 226,810 ----------- ----------- ----------- ------------- ---------- Total liabilities and stockholder's equity.......... $ 718,058 $ 149,108 $ 99,050 $ (178,222) $ 787,994 =========== =========== =========== ============= ==========
-8- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING BALANCE SHEET January 3, 2004 (In thousands)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Eliminations Consolidated ----------- ------------ ------------- ----------------- ------------ ASSETS Current assets: Cash and cash equivalents............. $ 2,399 $ 2,982 $ - $ (1,099) $ 4,282 Accounts receivable, net.............. 75,533 17,106 14,336 - 106,975 Intercompany receivables.............. - 4,116 2,553 (6,669) - Inventory............................. 60,909 14,418 22,580 - 97,907 Deferred income taxes................. 3,925 3,094 - - 7,019 Other current assets.................. 4,546 650 368 - 5,564 ----------- ----------- ----------- ----------- ----------- Total current assets................ 147,312 42,366 39,837 (7,768) 221,747 Property, plant and equipment, net....... 99,750 6,616 34,480 - 140,846 Goodwill................................. 197,461 32,822 - - 230,283 Other intangible assets, net............. 101,272 13,201 1,663 - 116,136 Investment in subsidiaries............... 112,938 44,671 - (157,609) - Deferred income taxes.................... - 5,798 - (5,798) - Other assets............................. 9,503 - 118 - 9,621 ----------- ----------- ----------- ----------- ----------- Total assets.................... $ 668,236 $ 145,474 $ 76,098 $ (171,175) $ 718,633 =========== =========== =========== ============ =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable...................... $ 30,045 $ 10,213 $ 10,722 $ (1,099) $ 49,881 Intercompany payables................. 6,669 - - (6,669) - Accrued liabilities................... 36,241 10,302 6,691 - 53,234 Income taxes payable.................. 3,761 389 784 - 4,934 ----------- ----------- ----------- ----------- ----------- Total current liabilities........... 76,716 20,904 18,197 (7,768) 108,049 Deferred income taxes.................... 60,425 - 3,401 (5,798) 58,028 Other liabilities........................ 20,126 11,632 9,829 - 41,587 Long-term debt........................... 305,000 - - - 305,000 Stockholder's equity..................... 205,969 112,938 44,671 (157,609) 205,969 ----------- ----------- ----------- ------------ ----------- Total liabilities and stockholder's equity.......... $ 668,236 $ 145,474 $ 76,098 $ (171,175) $ 718,633 =========== =========== =========== ============ ===========
-9- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Quarter Ended July 3, 2004 (In thousands) (Unaudited)
Non- Guarantor Guarantor Reclassification/ Parent Subsidiaries Subsidiary Elimination Consolidated ------ ------------ ---------- ----------------- ------------ Net sales......................................... $212,763 $48,610 $ 60,033 $ (19,804) $ 301,602 Cost of sales..................................... 148,425 41,316 48,340 (19,804) 218,277 -------- ------- -------- --------- --------- Gross profit...................................... 64,338 7,294 11,693 - 83,325 Selling, general and administrative expense....... 36,462 5,803 5,775 - 48,040 -------- ------- -------- --------- --------- Income from operations............................ 27,876 1,491 5,918 - 35,285 Interest expense, net............................. 6,151 7 96 - 6,254 Foreign currency loss............................. - - 609 - 609 -------- ------- -------- --------- --------- Income from continuing operations before income taxes................................. 21,725 1,484 5,213 - 28,422 Income taxes...................................... 9,015 264 2,424 - 11,703 -------- ------- -------- --------- --------- Income before equity income from subsidiaries..... 12,710 1,220 2,789 - 16,719 Equity income from subsidiaries................... 4,009 2,789 - (6,798) - -------- ------- -------- --------- --------- Net income........................................ $ 16,719 $ 4,009 $ 2,789 $ (6,798) $ 16,719 ======== ======= ======== ========= =========
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Six Months Ended July 3, 2004 (In thousands) (Unaudited)
Non- Guarantor Guarantor Reclassification/ Parent Subsidiaries Subsidiary Elimination Consolidated ------ ------------ ---------- ----------------- ------------ Net sales ........................................ $353,194 $88,380 $ 98,836 $ (34,487) $ 505,923 Cost of sales .................................... 250,494 75,710 80,526 (34,487) 372,243 -------- ------- -------- --------- --------- Gross profit ..................................... 102,700 12,670 18,310 - 133,680 Selling, general and administrative expense ...... 85,250 11,392 11,290 - 107,932 -------- ------- -------- --------- --------- Income from operations ........................... 17,450 1,278 7,020 - 25,748 Interest expense, net ............................ 12,128 7 131 - 12,266 Foreign currency loss ............................ - - 615 - 615 -------- ------- -------- --------- --------- Income from continuing operations before income taxes ......................... 5,322 1,271 6,274 - 12,867 Income taxes ..................................... 2,207 167 2,873 - 5,247 -------- ------- -------- --------- --------- Income before equity income from subsidiaries .... 3,115 1,104 3,401 - 7,620 Equity income from subsidiaries .................. 4,505 3,401 - (7,906) - -------- ------- -------- --------- --------- Net income ....................................... $ 7,620 $ 4,505 $ 3,401 $ (7,906) $ 7,620 ======== ======= ======== ========= =========
-10- ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Six Months Ended July 3, 2004 (In thousands) (Unaudited)
Guarantor Non-Guarantor Reclassification/ Parent Subsidiaries Subsidiary Elimination Consolidated ---------- ------------ ------------- ----------------- ------------ Net cash provided by (used in) operating activities.. $ (19,910) $ (5,335) $ (5,816) $ 1,099 $ (29,962) INVESTING ACTIVITIES Additions to property, plant and equipment........... (11,063) (721) (412) - (12,196) ---------- ------------ ------------- --------------- ------------ Net cash used in investing activities................ (11,063) (721) (412) - (12,196) FINANCING ACTIVITIES Net increase in revolving line of credit............. 14,000 - 12,159 - 26,159 Equity contribution from Holdings.................... 14,498 - - - 14,498 Financing costs...................................... (67) - (101) - (168) Intercompany transactions............................ 1,554 4,104 (5,658) - - ---------- ------------ ------------- --------------- ------------ Net cash provided by financing activities............ 29,985 4,104 6,400 - 40,489 ---------- ------------ ------------- --------------- ------------ Net increase (decrease) in cash from continuing operations........................................... (988) (1,952) 172 1,099 (1,669) Effect of exchange rates on cash..................... - - 42 - 42 Cash at beginning of period.......................... 2,399 2,982 - (1,099) 4,282 ---------- ------------ ------------- --------------- ------------ Cash at end of period................................ $ 1,411 $ 1,030 $ 214 $ - $ 2,655 ========== ============ ============= =============== ============
-11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading, vertically integrated manufacturer and North American distributor of exterior residential building products. The Company's core products are vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and accessories, and vinyl fencing, decking and railing. Vinyl windows and vinyl siding together comprise approximately 60% of the Company's total net sales. These products are marketed under the Alside(R), Revere(R) and Gentek(R) brand names and sold on a wholesale basis to more than 50,000 professional contractors engaged in home remodeling and new home construction principally through the Company's North American network of 125 supply centers. Approximately two-thirds of the Company's products are sold to contractors engaged in the home repair and remodeling market with one-third sold to the new construction market. The supply centers provide "one-stop shopping" to the Company's contractor customers, carrying products, accessories and tools necessary to complete a vinyl window or siding project. In addition, the supply centers provide high quality product literature, product samples and installation training to these customers. Because its exterior residential building products are consumer durable goods, the Company's sales are impacted by the availability of consumer credit, consumer interest rates, employment trends, changes in levels of consumer confidence, national and regional trends in new housing starts and general economic conditions. The Company's sales are also affected by changes in consumer preferences with respect to types of building products. During the second quarter of 2004 single-family housing starts decreased, but existing home sales continued to be very strong. In addition, short-term interest rates recently increased 25 basis points and the Federal Reserve has indicated interest rates would continue to increase throughout 2004 and 2005. The Company believes interest rates can increase by a few hundred basis points and not have a significant negative impact on its net sales. The Company also believes that increased interest rates could result in homeowners remaining in and remodeling their current homes thus benefiting the Company's remodeling sales. Additionally, the Company believes increasing consumer confidence should offset any significant negative impact of the interest rate increases. Overall, the Company believes the fundamentals for the building products industry remains strong. The Company operates with significant operating and financial leverage. Significant portions of the Company's manufacturing, selling, general and administrative expenses are fixed costs that neither increase nor decrease proportionately with sales. In addition, a significant portion of the Company's interest expense is fixed. There can be no assurance that the Company will be able to reduce its fixed costs in response to a decline in its net sales. As a result, a decline in the Company's net sales could result in a higher percentage decline in its income from operations and its net income. Because most of the Company's building products are intended for exterior use, sales tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, the Company has historically had small profits or losses in the first quarter and reduced profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, the Company typically makes borrowings under the revolving loan portion of its credit facility. On August 29, 2003, the Company completed the acquisition 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 $114.3 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 manufactures and distributes vinyl windows, vinyl siding and accessories, aluminum trim coil, 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 company-owned distribution centers in the mid-Atlantic region of the United States and throughout Canada, as well as to independent distributors in the United States. The Gentek acquisition has provided the Company with a number of significant cost savings and other -12- operational opportunities, including increased purchasing leverage, insourcing of distributed metal products, and operational best practices. The Company believes that the Gentek acquisition will provide synergy opportunities of approximately $11 million. The Company has implemented many of the actions necessary to drive these opportunities and expects to realize approximately$6 million of the benefits in 2004 with the remainder expected in 2005. 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 credit facility from $40 million to $70 million, including a new Canadian subfacility of $15 million. The Company seeks to distinguish itself from other suppliers of residential building products and to sustain its profitability through a business strategy focused on increasing sales at existing supply centers, expanding its supply center network where the Company already has a supply center presence, increasing sales through independent specialty distributor customers, realizing synergies from the Gentek acquisition, developing innovative new products, and driving operational excellence by reducing costs, increasing customer service levels and reducing lead times. AMH HOLDINGS, INC. On February 19, 2004, AMH Holdings, Inc. ("AMH") was incorporated. AMH has no material assets or operations other than its 100% ownership of Associated Materials Holdings, Inc. ("Holdings"), the Company's parent company. Stockholders and option holders of Holdings became stockholders and option holders of AMH on March 4, 2004 and are no longer stockholders and option holders of Holdings. On March 4, 2004, AMH completed an offering of $446 million aggregate principal at maturity of 11 1/4% senior discount notes. The total gross proceeds were approximately $258.3 million. In connection with the note offering, certain options to acquire preferred and common shares were exercised and the proceeds from the note offering were used to redeem all of AMH's preferred stock including accrued and unpaid dividends, pay a dividend to AMH's common stockholders and pay a bonus to certain members of the Company's senior management. Through Holdings, AMH contributed $14.5 million to the Company to pay the management bonus. The management bonus is included in the Company's selling, general and administrative expense for the six months ended July 3, 2004. Interest accrues at a rate of 11 1/4% on the notes in the form of an increase in the accreted value of the notes prior to March 1, 2009. Thereafter, cash interest of 11 1/4% on the notes accrues and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2009. The notes mature on March 1, 2014. The AMH notes are structurally subordinated to all existing and future debt and other liabilities of AMH's existing and future subsidiaries, including the Company and Holdings. RESULTS OF OPERATIONS The Company's 2004 results of operations include the results of Gentek, which was acquired on August 29, 2003. Gentek's results as compared to Alside's results typically have a lower gross profit margin percentage as a larger proportion of Gentek's net sales are to independent distributors versus to contractors through company-owned distribution centers. Additionally, a portion of Gentek's sales are from manufacturing and distributing aluminum trim coil and aluminum and steel siding and accessories, which generate lower gross profit margins than vinyl products. Gentek's selling, general and administrative expense as a percentage of net sales is typically lower than Alside's as Gentek does not have as large of a proportion of fixed costs associated with operating company-owned distribution centers. The Company anticipates that on a consolidated basis, its gross profit margin percentage and its selling, general and administrative expense as a percentage of net sales will decrease as compared to periods prior to the Gentek acquisition. The following table sets forth for the periods indicated the results of the Company's operations (in thousands): -13-
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 --------- ---------- ---------- ---------- Net sales............................................. $ 301,602 $ 180,363 $ 505,923 $ 291,307 Gross profit.......................................... 83,325 56,800 133,680 84,968 Selling, general and administrative expense........... 48,040 33,704 107,932 65,014 --------- ---------- ---------- ---------- Income from operations................................ 35,285 23,096 25,748 19,954 Interest expense, net ................................ 6,254 5,483 12,266 10,921 Foreign currency loss................................. 609 - 615 - --------- ---------- ---------- ---------- Loss before income taxes.............................. 28,422 17,613 12,867 9,033 Income taxes.......................................... 11,703 7,309 5,247 3,749 --------- ---------- ---------- ---------- Net income............................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284 ========= ========== ========== ========== Other Data: EBITDA (a)(b)......................................... $ 39,813 $ 25,891 $ 35,376 $ 25,466 Adjusted EBITDA (a)(b)................................ 39,813 25,891 49,874 25,466
(a) EBITDA is calculated as net income plus interest, taxes, depreciation and amortization. Adjusted EBITDA excludes certain items. The Company considers Adjusted EBITDA to be an important indicator of its operational strength and performance of its business. The Company has included Adjusted EBITDA because it is a key financial measure used by management to (i) assess the Company's ability to service its debt and / or incur debt and meet the Company's capital expenditure requirements; (ii) internally measure the Company's operating performance; and (iii) determine the Company's incentive compensation programs. In addition, the Company's credit facility has certain covenants that use ratios utilizing this measure of Adjusted EBITDA. The definition of EBITDA under the indenture governing the 9 3/4% notes due 2012 excludes certain items. Adjusted EBITDA has not been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Adjusted EBITDA as presented by the Company may not be comparable to similarly titled measures reported by other companies. As Adjusted EBITDA is not a measure determined in accordance with GAAP, it should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP), as a measure of the Company's operating results or cash flows from operations (as determined in accordance with GAAP). The reconciliation of net income to EBITDA and Adjusted EBITDA is as follows (in thousands):
Quarter Quarter Six Months Six Months Ended Ended Ended Ended July 3, June 28, July 3, June 28, 2004 2003 2004 2003 -------- -------- ---------- ---------- Reconciliation of net income to EBITDA and Adjusted EBITDA (c) : Net income ............................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284 Interest .............................................. 6,254 5,483 12,266 10,921 Taxes ................................................. 11,703 7,309 5,247 3,749 Depreciation and amortization ......................... 5,137 2,795 10,243 5,512 -------- -------- ---------- ---------- EBITDA ................................................ 39,813 25,891 35,376 25,466 Management bonus (c) .................................. - - 14,498 - -------- -------- ---------- ---------- Adjusted EBITDA ....................................... $ 39,813 $ 25,891 $ 49,874 $ 25,466 ======== ======== ========== ==========
-14- (b) The 2004 results of operations include the results of Gentek. A reconciliation of Gentek's net income to EBITDA for the quarter and six months ended July 3, 2004 is as follows (in thousands):
Quarter Six Months Ended Ended July 3, July 3, 2004 2004 ------- ---------- Reconciliation of Gentek's net income to EBITDA Net income.......................................... $ 3,900 $ 4,365 Interest............................................ 102 138 Taxes............................................... 2,609 2,938 Depreciation and amortization ...................... 1,739 3,580 ------- ---------- Gentek's EBITDA..................................... $ 8,350 $ 11,021 ======= ==========
(c) Represents a management bonus paid in connection with the completion on March 4, 2004 of AMH's offering of senior discount notes. -15- Quarter Ended July 3, 2004 Compared to Quarter Ended June 28, 2003 Net sales increased 67.2% to $301.6 million during the second quarter of 2004 compared to $180.4 million for the same period in 2003, driven by increased vinyl window, vinyl siding and third-party manufactured product sales at Alside along with net sales from Gentek, which contributed $93.8 million of net sales in the second quarter of 2004. Gross profit in the second quarter of 2004 was $83.3 million, or 27.6% of net sales, compared to gross profit of $56.8 million, or 31.5% of net sales, in the second quarter of 2003. The decrease in gross profit margin percentage is primarily due to the impact of the results contributed by Gentek as Gentek's gross margin percentage is typically lower than Alside's. Selling, general and administrative expense increased to $48.0 million, or 15.9% of net sales, for the second quarter of 2004 versus $33.7 million, or 18.7% of net sales, for the same period in 2003. The increase in selling, general and administrative expense is a result of the impact of the acquisition of Gentek, as well as the result of adding two new Alside supply centers in 2004. Income from operations was $35.3 million in the second quarter of 2004 compared to $23.1 million for the same period in 2003. Interest expense increased 14.1% during the second quarter of 2004 compared to the same period in 2003. The increase in interest expense is due to additional borrowings on the term loan as a result of the Gentek acquisition, as well as additional borrowings on the revolving loan portion of the credit facility to meet the seasonal working capital needs of the Company. Due to the seasonal nature of the Company's operating results, the Company has recorded an income tax provision on its income before taxes for the quarters ended July 3, 2004 and June 28, 2003 at its estimated full fiscal year effective rate of approximately 41.5%. Net income increased to $16.7 million for the quarter ended July 3, 2004 compared to $10.3 million for the quarter ended June 28, 2003. The increase in net income is a result of the increased sales and operating income from the Alside division and the $3.9 million of net income contributed by Gentek. EBITDA for the second quarter of 2004 was $39.8 million compared to $25.9 million for the same period in 2003. Gentek contributed $8.4 million of EBITDA in the second quarter of 2004. There were no adjustments to EBITDA for the second quarter of 2004 or 2003. Six Months Ended July 3, 2004 Compared to Six Months Ended June 28, 2003 Net sales increased 73.7% to $505.9 million for the six months ended July 3, 2004 compared to $291.3 million for the same period in 2003, driven by increased vinyl window,vinyl siding and third-party manufactured product sales at Alside along with net sales from Gentek, which contributed $159.2 million of net sales for the six months ended July 3, 2004. Gross profit for the six months ended July 3, 2004 was $133.7 million, or 26.4% of net sales, compared to gross profit of $85.0 million, or 29.2% of net sales, for the same period of 2003. The decrease in gross profit margin percentage is primarily due to the impact of the results contributed by Gentek. Selling, general and administrative expense increased to $107.9 million, or 21.3% of net sales, for the six months ended July 3, 2004 as compared to $65.0 million, or 22.3% of net sales, for the same period in 2003. The increase in selling, general and administrative expense is a result of the $14.5 million management bonus relating to AMH's offering of senior discount notes, the impact of the acquisition of Gentek, as well as the result of adding two new Alside supply centers in 2004 along with three new supply centers in 2003, which had a full six months of expense in 2004. Income from operations was $25.7 million for the six months ended July 3, 2004 compared to $20.0 million for the same period in 2003. Interest expense increased 12.3% for the six months ended July 3, 2004 compared to the same period in 2003. The increase in interest expense is due to additional borrowings on the term loan as a result of the Gentek acquisition, as well as additional borrowings on the revolving loan portion of the credit facility to meet the seasonal working capital needs of the Company. Due to the seasonal nature of the Company's operating results, the Company has recorded an income tax provision on its income before taxes for the six months ended July 3, 2004 and June 28, 2003 at its estimated full fiscal year effective rate of approximately 41.5%. Net income increased to $7.6 million for the six months ended July 3, 2004 compared to $5.3 million for the six months ended June 28, 2003. The increase in net income is a result of the increased sales and operating income from the Alside division and the $4.4 million of net income contributed by Gentek. EBITDA for the six months ended July 3, 2004 was $35.4 million compared to $25.5 million for the same period in 2003. Gentek contributed $11.0 million of EBITDA for the six months ended July 3, 2004. Adjusted EBITDA for the six months ended July 3, 2004 was $49.9 million compared to $25.5 million for the same period in 2003. As compared to EBITDA, Adjusted EBITDA for the six months ended July 3, 2004 excludes a bonus paid to certain -16- members of Company management totaling approximately $14.5 million related to the completion of the offering of senior discount notes on March 4, 2004 by AMH. LIQUIDITY AND CAPITAL RESOURCES The following sets forth a summary of the Company's cash flows for the six months ended July 3, 2004 and June 28, 2003 (in thousands):
Six Months Six Months Ended Ended July 3, June 28, 2004 2003 ---------- ---------- Cash used in operating activities.................. $ (29,962) $ (4,257) Cash used in investing activities.................. (12,196) (5,841) Cash provided by (used in) financing activities.... 40,489 (908)
CASH FLOWS At July 3, 2004, the Company had cash and cash equivalents of $2.7 million and available borrowing capacity of approximately $37.6 million under the revolving portion of its credit facility. Outstanding letters of credit as of July 3, 2004, totaled $6.2 million securing various insurance letters of credit. CASH FLOWS FROM OPERATING ACTIVITIES Net cash used in operations was $30.0 million and $4.3 million for the six months ended July 3, 2004 and June 28, 2003, respectively. The cash used in operations for both periods reflects the operating results for the period, the seasonal increase of inventory and accounts receivable levels, as well as payments of accrued profit sharing and customer sales incentives. Additionally, cash used in operations for the six months ended July 3, 2004 includes the seasonal operating needs of Gentek. CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures totaled $12.2 million and $5.8 million for the six months ended July 3, 2004 and June 28, 2003, respectively. Capital expenditures in the 2004 period include $1.1 million of capital expenditures for Gentek. Capital expenditures in 2004 were primarily to increase extrusion capacity at the Company's West Salem, Ohio manufacturing location and to increase capacity at two of the Company's window manufacturing facilities. Capital expenditures in the 2003 period were primarily to replace vinyl siding extrusion and handling equipment at the Company's Ennis, Texas manufacturing location. The Company's estimate for total capital expenditures for 2004 is approximately $21 million reflecting additional spending to meet capacity requirements at the Company's window manufacturing facilities. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities for the six months ended July 3, 2004 include borrowings on the revolving portion of the Company's credit facility of $26.2 million, a capital contribution from Holdings of $14.5 million and $0.2 million paid for financing costs. Cash flows from financing activities for the six months ended June 28, 2003 reflect the redemption of the remaining outstanding 9 1/4% notes of $0.9 million. The increase in borrowings on the revolving portion of the credit facility for the six months ended July 3, 2004 of $26.2 million as compared to the same period in the prior year is due to the increased working capital requirements as a result of the increased sales, as well as Gentek's seasonal working capital needs. The Company believes there will be no outstanding borrowings on the revolving portion of its credit facility by the end of the third quarter of 2004. In addition, the Company intends to repay a portion of the borrowings on the term loan portion of its credit facility in the third and fourth quarters of 2004. DESCRIPTION OF THE COMPANY'S OUTSTANDING INDEBTEDNESS The Company's 9 3/4% notes pay interest semi-annually in April and October. The Company's credit facility as of April 3, 2004 includes $140 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 -17- million of available borrowings provided by revolving loans (including a Canadian subfacility of $15 million), which expire in 2007 and bear interest at LIBOR plus up to 3.00%. Outstanding borrowings on the revolving portion of the Company's credit facility totaled $26.2 million at July 3, 2004. No interest was paid on the credit facility in the second quarter of 2003 due to the fiscal quarter ending before June 30, 2003. The Company's payment obligations under the 9 3/4% notes are fully and unconditionally guaranteed, jointly and severally 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 is a Canadian company and does not guarantee the Company's 9 3/4% notes. 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 July 3, 2004. 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 2003 and 2002 were sufficient such that no additional principal payments were required 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 may need to refinance all or a portion of its indebtedness on or before their respective maturity dates. There can be no assurance that the Company will be able to refinance any of its indebtedness on commercially reasonable terms or at all. 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 materials, vinyl resin, aluminum, and steel have historically been subject to significant price changes. Raw material pricing on the Company's key commodities continued to increase significantly in the second quarter of 2004. The Company believes that for the remainder of 2004, vinyl resin prices will decrease slightly based on historical seasonal trends. However, the Company believes aluminum costs will remain at their current levels or slightly increase for the remainder of 2004. The Company has announced price increases among all of its product offerings, which it believes will offset the impact of the raw material inflation. While the Company expects that any additional significant raw material price increases in 2004 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 price increases. At July 3, 2004, the Company had no raw material hedge contracts in place. 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 and the Company's ability to pass on price increases to its customers to offset changes in raw material costs; -18- - 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 governing its indebtedness; - increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products; - increases in the Company's indebtedness; - increases in costs of environmental compliance; - increases in capital expenditure requirements; - potential conflict between existing Alside and new Gentek distribution channels; - the achievement of anticipated synergies and operational efficiencies from the Gentek acquisition; and - the other factors discussed under the heading "Risk Factors" in the Company's annual report on Form 10-K for the year ended January 3, 2004 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. -19- 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 and may borrow under the revolving credit facility from time to time for general corporate purposes, including working capital and capital expenditures. Interest under the credit facility is based on the variable London Interbank Offered Rate (LIBOR). At July 3, 2004, the Company had borrowings of $140.0 million under the term loan and $26.2 million under the revolving loan portions of its credit facility. The effect of a 1/8% increase or decrease in interest rates would increase or decrease total interest expense for the six months ended July 3, 2004 by approximately $0.1 million. The Company has $165.0 million of senior subordinated notes due 2012 that bear a fixed interest rate of 9 3/4%. The fair value of the Company's 9 3/4% notes is sensitive to changes in interest rates. In addition, the fair value is affected by the Company's overall credit rating, which could be impacted by changes in the Company's future operating results. 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 Canadian manufacturing facilities and these vendors are short-term in nature. Accordingly, the Company believes its direct foreign currency exchange risk is not material. At July 3, 2004, 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 materials, vinyl resin, aluminum and steel. 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 July 3, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -20- 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*
* 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 - ------------ ----------- May 10, 2004 The Company furnished a current report on Form 8-K to report its financial results for the first quarter ended April 3, 2004 (Items 7 and 12). May 10, 2004 The Company furnished a current report on Form 8-K to report unaudited pro forma consolidated financial statements of the Company for the twelve months ended April 3, 2004 (Items 7 and 9).
-21- 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: August 17, 2004 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) -22- 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
-23- EX-31.1 2 l08581aexv31w1.txt EXHIBIT 31.1 Exhibit 31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 17, 2004 By: /s/ Michael Caporale, Jr. -------------------------------------- Michael Caporale, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) -24- EX-31.2 3 l08581aexv31w2.txt EXHIBIT 31.2 Exhibit 31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 17, 2004 By: /s/ D. Keith LaVanway -------------------------------------- D. Keith LaVanway Vice President - Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) -25- EX-32.1 4 l08581aexv32w1.txt EXHIBIT 32.1 Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Associated Materials Incorporated (the "Company") for the period ended July 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Caporale, Jr., President, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 17, 2004 By: /s/ Michael Caporale, Jr. -------------------------------------- Michael Caporale, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) A signed original of this written statement required by Section 906 has been provided to Associated Materials Incorporated and will be retained by Associated Materials Incorporated and furnished to the Securities and Exchange Commission or its staff upon request. -26- EX-32.2 5 l08581aexv32w2.txt EXHIBIT 32.2 Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Associated Materials Incorporated (the "Company") for the period ended July 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Keith LaVanway, Vice President - Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 17, 2004 By: /s/ D. Keith LaVanway -------------------------------------- D. Keith LaVanway Vice President - Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) A signed original of this written statement required by Section 906 has been provided to Associated Materials Incorporated and will be retained by Associated Materials Incorporated and furnished to the Securities and Exchange Commission or its staff upon request. -27- -----END PRIVACY-ENHANCED MESSAGE-----