Associated Materials Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2005


o		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 Incorporation of Organization)		(I.R.S. Employer 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

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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of November 14, 2005, the Registrant had 100 shares of common stock outstanding, all of which is held by an affiliate of the Registrant.

ASSOCIATED MATERIALS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months			Nine Months
	Ended			Ended
	October 1,			October 2,
	2005			2004
Operating Activities
Net income	$	12,135		$	27,485
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		15,339			15,565
Amortization of deferred financing costs		2,267			1,102
Amortization of management fee		3,000			—
Stock compensation expense		319			—
Receivable from parent		(418	)		2,496
Changes in operating assets and liabilities:
Accounts receivable, net		(49,259	)		(52,785	)
Inventories		(29,387	)		(29,807	)
Income taxes		9,244			1,690
Accounts payable and accrued liabilities		54,157			36,749
Other		(2,396	)		(2,820	)

Net cash provided by (used in) operating activities		15,001			(325	)

Investing Activities
Additions to property, plant and equipment		(18,961	)		(16,970	)

Net cash used in investing activities		(18,961	)		(16,970	)

Financing Activities
Net increase in revolving line of credit		—			2,376
Repayments of term loan		(437	)		—
Dividends		(38,275	)		—
Settlement of promissory notes		(11,607	)		—
Equity contribution from Holdings		—			14,498
Financing costs		—			(168	)

Net cash provided by (used in) financing activities		(50,319	)		16,706

Net decrease in cash		(54,279	)		(589	)
Effect of exchange rate changes on cash		36			(7	)

Cash at beginning of period		58,054			4,282

Cash at end of period	$	3,811		$	3,686


Supplemental information:
Cash paid for interest	$	16,575		$	13,249

Cash paid (received) for income taxes	$	(3,551	)	$	13,020

See accompanying notes.

-3-

ASSOCIATED MATERIALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER AND NINE MONTHS ENDED OCTOBER 1, 2005

(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. In the opinion of management, these interim consolidated financial statements contain all of the normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three and nine month periods ended October 1, 2005 and October 2, 2004. 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 1, 2005.

A detailed description of the Company’s significant accounting policies and management judgments is located in the audited financial statements for the year ended January 1, 2005, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”).

The Company is a wholly owned subsidiary of Associated Materials Holdings Inc. (“Holdings”), which is a wholly owned subsidiary of AMH Holdings, Inc. (“AMH”). AMH is a wholly owned subsidiary of AMH Holdings II, Inc. (“AMH II”) which is controlled by affiliates of Investcorp S.A. (“Investcorp”) and Harvest Partners, Inc. (“Harvest Partners”). AMH and AMH II were incorporated in connection with the recapitalization transactions described in Note 2. Holdings, AMH and AMH II do not have material assets or operations other than a direct or indirect ownership of the common stock of the Company.

Certain prior period amounts have been reclassified to conform with the current period presentation.

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4.” SFAS No. 151 requires certain inventory costs to be recognized as current period expenses. This standard also provides guidance for the allocation of fixed production overhead costs. This standard is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. The Company will adopt this standard in fiscal 2006. The Company is in the process of determining the impact, if any, this standard will have on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment.” This standard revises SFAS No. 123, “Accounting for Stock Based Compensation,” Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related accounting interpretations, and eliminates the use of the intrinsic value method. The Company currently uses the intrinsic value method under APB Opinion No. 25 to value stock options for reporting purposes and the minimum value method under SFAS No. 123 to value stock options for pro forma disclosure purposes. SFAS No. 123 (Revised) requires the expensing of all stock-based compensation, including stock options, using a fair value based method. The Company will adopt this standard in fiscal 2006. SFAS No. 123 (Revised) requires companies that used the minimum value method for pro forma disclosure purposes in accordance with SFAS No. 123 to adopt the new standard prospectively. As a result, the Company will continue to account for stock options granted prior to January 1, 2006 using the APB Opinion No. 25 intrinsic value method, unless such options are subsequently modified, repurchased or cancelled after January 1, 2006. For stock options granted after January 1, 2006, the Company will recognize compensation expense over the requisite service period, in accordance with SFAS No. 123 (Revised). The ultimate impact this standard will have on the Company’s financial statements will depend on the amount and terms of share-based payments granted after the date of adoption.

-4-

Note 2 — Recapitalization Transactions

AMH was incorporated in Delaware on February 19, 2004. As part of a restructuring agreement dated as of March 4, 2004, stockholders and option holders of Holdings became stockholders and option holders of AMH and are no longer stockholders and option holders of Holdings. AMH has no material assets or operations other than its 100% ownership of Holdings, the Company’s direct parent company. On March 4, 2004, AMH completed an offering of $446 million aggregate principal at maturity in 2014 of 11 1/4% senior discount notes (“11 1/4% 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 and a director. Through Holdings, AMH contributed $14.5 million to the Company to pay the bonus. The completion of the aforementioned transactions constituted the March 2004 dividend recapitalization.

On December 22, 2004, AMH completed a recapitalization transaction in which the then outstanding capital stock of AMH was reclassified as a combination of voting and non-voting shares of Class B common stock and shares of voting and non-voting convertible preferred stock. All of the shares of the convertible preferred stock were immediately sold to affiliates of Investcorp for an aggregate purchase price of $150 million, with the result that affiliates of Investcorp acquired a 50% equity interest in AMH and the existing shareholders, led by Harvest Partners, retained shares of Class B common stock representing a 50% equity interest in AMH, all on a fully diluted basis. Each of Investcorp and Harvest Partners, through their respective affiliates, have a 50% voting interest in AMH. Immediately following these transactions, pursuant to a restructuring agreement, the shareholders of AMH contributed their shares of the capital stock of AMH to AMH II, a Delaware corporation formed for the purpose of becoming the direct parent company of AMH, in exchange for shares of the capital stock of AMH II mirroring (in terms of type and class, voting rights, preferences and other rights) the shares of AMH capital stock contributed by such shareholders. In connection with this transaction, on December 22, 2004, the Company increased its senior credit facility by $42 million and AMH II issued $75 million of 13 5/8% senior notes due 2014 (“13 5/8% notes”). AMH II then declared and paid a dividend on shares of its Class B common stock in an aggregate amount of approximately $96.4 million, which included approximately $3.4 million in aggregate proceeds received by AMH II through AMH, upon the exercise of options to purchase AMH common stock. Of this $96.4 million dividend, approximately $62.7 million was paid in cash and approximately $33.7 million was paid in the form of promissory notes issued by AMH II to each of its Class B common shareholders. In the first quarter of 2005, the Company made an intercompany loan of $33.7 million to AMH II through its direct and indirect parent companies. Subsequently, the Company and its direct and indirect parent companies declared a dividend in forgiveness of the intercompany loan.

On December 22, 2004, in connection with such transactions, the Company paid a bonus in the aggregate amount of approximately $22.3 million to certain members of the Company’s management and a director. Approximately $14.3 million of the bonus, including payroll taxes, was paid in cash on December 22, 2004, with promissory notes issued by the Company for the remaining $8.0 million. These promissory notes were settled in cash during the first quarter of fiscal year 2005. The Company incurred transaction related costs of $28.4 million, which includes $16.3 million paid for investment banking and legal expenses, which have been classified as recapitalization transaction costs in the Company’s statements of operations, and $12.1 million for financing related costs, which were recorded in other assets on the Company’s balance sheets. The Company issued promissory notes of $3.6 million in December 2004 for the payment of a portion of these fees related to the transaction, which were settled in cash in the first quarter of 2005. The Company also recognized stock compensation expense of $30.8 million, including payroll taxes, related to stock options exercised in the transaction. The completion of the aforementioned transactions constituted the December 2004 recapitalization transaction.

Note 3 — Inventories

Inventories are valued at the lower of cost (first in, first out) or market. Inventories consist of the following (in thousands):


	October 1,		January 1,
	2005		2005
Raw materials	$	33,149	$	27,127
Work-in-process		11,847		9,570
Finished goods and purchased stock		100,253		78,090

	$	145,249	$	114,787

-5-

Note 4 — Goodwill and Other Intangible Assets

Goodwill represents the purchase price in excess of the fair value of the tangible and intangible net assets acquired in a business combination. Goodwill of $234.8 million as of both October 1, 2005 and January 1, 2005 consists of $198.3 million from the April 2002 merger transaction and $36.5 million from the acquisition of Gentek Holdings, Inc. (“Gentek”) in 2003. 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
	Amortization		October 1, 2005						January 1, 2005
	Period				Accumulated		Net Carrying				Accumulated		Net Carrying
	(in Years)		Cost		Amortization		Value		Cost		Amortization		Value
Trademarks and trade names		15	$	109,280	$	6,112	$	103,168	$	109,280	$	4,712	$	104,568
Patents		10		6,550		2,253		4,297		6,550		1,763		4,787
Customer base		7		4,824		1,615		3,209		4,762		1,073		3,689

Total other intangible assets			$	120,654	$	9,980	$	110,674	$	120,592	$	7,548	$	113,044

The Company has determined that trademarks and trade names totaling $81.1 million (included in the $109.3 million in the table above) consisting primarily of the Alside^®, Revere^® and Gentek^® trade names have indefinite useful lives. Amortization expense related to other intangible assets was approximately $0.8 million for each of the quarters ended October 1, 2005 and October 2, 2004 and $2.4 million for each of the nine month periods ended October 1, 2005 and October 2, 2004.

Note 5 — Long-Term Debt

Long-term debt consists of the following (in thousands):


	October 1,		January 1,
	2005		2005
9 3/4% notes	$	165,000	$	165,000
Term loan under credit facility		174,563		175,000

Total debt		339,563		340,000
Less current portion		1,750		875

Long-term debt	$	337,813	$	339,125

Under the term loan facility, the Company is required to make minimum quarterly principal amortization payments of 1% per year. The Company made the first such quarterly principal payment of $0.4 million on September 30, 2005. Also, on an annual basis beginning with the year ended December 31, 2005, the Company is required to make principal payments based on a percentage of excess cash flows as defined in the amended and restated credit facility. The Company records as a current liability term loan principal payments that are estimated to be due within twelve months, which includes excess cash flow principal repayments when the likelihood of those payments becomes probable. As of October 1, 2005, the Company has recorded a current liability of approximately $1.8 million representing the minimum quarterly principal amortization payments due within the next twelve months.

In March 2004, AMH completed an offering of $446 million aggregate principal at maturity of 11 1/4% senior discount notes, which mature on March 1, 2014. The accreted value of the 11 1/4% notes as of October 1, 2005 was $306.9 million. In December 2004, AMH II completed an offering of 13 5/8% senior notes, which mature on December 1, 2014. The accreted value

-6-

of the 13 5/8% notes as of October 1, 2005 was $77.1 million. Because AMH and AMH II are holding companies with no operations, they must receive distributions, payments or loans from subsidiaries to satisfy obligations on the 11 1/4% notes and the 13 5/8% notes. An acceleration of the Company’s credit facility and the 9 3/4% notes as a result of a future default would have a material adverse effect on the Company’s ability to make such distributions, payments or loans to its direct and indirect parent companies. The Company does not guarantee the 11 1/4% notes or the 13 5/8% notes and has no obligation to make any payments with respect thereto. Total AMH II debt, including that of its consolidated subsidiaries, was approximately $723.6 million as of October 1, 2005.

Note 6 — Stock Plans

The Company measures stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25. The Company follows the disclosure provisions required under SFAS No. 123. 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. 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 nine months ended October 1, 2005 and October 2, 2004 would have been (in thousands):


	Quarter			Quarter			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 1,			October 2,			October 1,			October 2,
	2005			2004			2005			2004
Net income as reported	$	11,701		$	19,865		$	12,135		$	27,485
Stock-based employee compensation expense included in reported net income, net of tax		—			—			187			—
Pro forma stock based employee compensation cost, net of tax		(191	)		(48	)		(555	)		(129	)

Pro forma net income	$	11,510		$	19,817		$	11,767		$	27,356

Note 7 — Comprehensive Income

Comprehensive income differs from net income due to foreign currency translation adjustments as follows (in thousands):


	Quarter		Quarter		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	October 1,		October 2,		October 1,		October 2,
	2005		2004		2005		2004
Net income as reported	$	11,701	$	19,865	$	12,135	$	27,485
Foreign currency translation adjustments		4,359		2,399		2,353		1,266

Comprehensive income	$	16,060	$	22,264	$	14,488	$	28,751

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Note 8 — 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”) as well as a defined benefit pension plan covering Gentek Canadian salaried employees and hourly union employees at the Lambeth, Ontario Canada plant, a defined benefit pension plan for the hourly union employees at its Burlington, Ontario Canada plant and a defined benefit pension plan for the hourly union employees at its Pointe Claire, Quebec Canada plant (the “Foreign Plans”). Accrued pension liabilities are included in other liabilities in the accompanying balance sheets. The actuarial valuation measurement date for the defined benefit pension plans is December 31. Components of defined benefit pension plan costs are as follows (in thousands):


	Quarter						Quarter
	Ended						Ended
	October 1,						October 2,
	2005						2004
	Domestic			Foreign			Domestic			Foreign
	Plans			Plans			Plans			Plans
Net periodic pension cost
Service cost	$	123		$	344		$	113		$	284
Interest cost		718			522			649			451
Expected return on assets		(759	)		(554	)		(704	)		(445	)
Amortization of unrecognized net loss		143			—			88			—

Net periodic pension cost	$	225		$	312		$	146		$	290


	Nine Months						Nine Months
	Ended						Ended
	October 1,						October 2,
	2005						2004
	Domestic			Foreign			Domestic			Foreign
	Plans			Plans			Plans			Plans
Net periodic pension cost
Service cost	$	370		$	1,003		$	321		$	832
Interest cost		2,058			1,524			1,905			1,324
Expected return on assets		(2,276	)		(1,615	)		(2,112	)		(1,305	)
Amortization of unrecognized net loss		428			1			228			—

Net periodic pension cost	$	580		$	913		$	342		$	851

Note 9 — Facility Closure

During the fourth quarter of 2004, the Company committed to a plan to close its vinyl siding manufacturing plant located in Freeport, Texas. The Company recorded $0.5 million and $4.0 million in pre-tax charges during the quarter and nine months ended October 1, 2005, respectively. The facility closure costs incurred in 2005 included relocation costs for certain equipment, inventory and employees, facility shut down costs and contract termination costs. The Company does not anticipate incurring additional facility closure costs subsequent to the end of the third quarter of 2005. The total pre-tax charge related to the Freeport facility closure was $8.5 million, of which $4.5 million was recorded in the fourth quarter of 2004. The plant was closed to rationalize production capacity and reduce fixed costs.

-8-

Note 10 — 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, Gentek Building Products Inc. and Alside, Inc. (“Guarantor Subsidiaries”). Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or operations. Gentek Building Products Limited (“Non-Guarantor Subsidiary”) is a Canadian company and does not guarantee the Company’s 9 3/4% notes. 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 the event of default on the Subsidiary Guarantees other than its subordination to senior indebtedness.

ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
October 1, 2005
(In thousands)
(Unaudited)


			Guarantor			Non-Guarantor		Reclassification/
	Parent		Subsidiaries			Subsidiary		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	71	$	252		$	3,488	$	—		$	3,811
Accounts receivable, net		114,521		30,951			33,355		—			178,827
Intercompany receivables		—		(5,958	)		22,497		(16,539	)		—
Receivable from parent		3,908		—			—		—			3,908
Inventories		92,399		19,610			33,240		—			145,249
Income taxes receivable		—		2,059			—		(2,059	)		—
Deferred income taxes		—		16,319			3,393		(1,459	)		18,253
Other current assets		8,657		1,294			1,331		—			11,282

Total current assets		219,556		64,527			97,304		(20,057	)		361,330

Property, plant and equipment, net		108,357		4,472			33,154		—			145,983
Goodwill		198,270		36,517			—		—			234,787
Other intangible assets, net		97,362		11,992			1,320		—			110,674
Investment in subsidiaries		139,955		73,080			—		(213,035	)		—
Other assets		17,362		—			119		—			17,481

Total assets	$	780,862	$	190,588		$	131,897	$	(233,092	)	$	870,255


Liabilities and Stockholder’s Equity
Current liabilities:
Accounts payable	$	68,028	$	19,982		$	33,807	$	—		$	121,817
Intercompany payables		16,539		—			—		(16,539	)		—
Accrued liabilities		49,284		7,815			8,425		—			65,524
Current portion of long-term debt		1,750		—			—		—			1,750
Deferred income taxes		1,459		—			—		(1,459	)		—
Income taxes payable		1,653		—			693		(2,059	)		287

Total current liabilities		138,713		27,797			42,925		(20,057	)		189,378

Deferred income taxes		50,416		5,559			6,852		—			62,827
Other liabilities		17,072		17,277			9,040		—			43,389
Long-term debt		337,813		—			—		—			337,813
Stockholder’s equity		236,848		139,955			73,080		(213,035	)		236,848

Total liabilities and stockholder’s equity	$	780,862	$	190,588		$	131,897	$	(233,092	)	$	870,255

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ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 1, 2005
(In thousands)
(Unaudited)


			Guarantor			Non-Guarantor		Reclassification/
	Parent		Subsidiaries			Subsidiary		Eliminations			Consolidated
Net sales	$	227,844	$	66,084		$	81,235	$	(46,914	)	$	328,249
Cost of sales		171,059		63,566			65,803		(46,914	)		253,514

Gross profit		56,785		2,518			15,432		—			74,735
Selling, general and administrative expense		37,279		4,605			6,696		—			48,580
Facility closure costs		541		—			—		—			541

Income (loss) from operations		18,965		(2,087	)		8,736		—			25,614
Interest expense, net		7,959		—			175		—			8,134
Foreign currency loss		—		—			267		—			267

Income (loss) before income taxes		11,006		(2,087	)		8,294		—			17,213
Income taxes (benefit)		3,258		(1,017	)		3,271		—			5,512

Income (loss) before equity income from subsidiaries		7,748		(1,070	)		5,023		—			11,701
Equity income from subsidiaries		3,953		5,023			—		(8,976	)		—

Net income	$	11,701	$	3,953		$	5,023	$	(8,976	)	$	11,701

ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 1, 2005
(In thousands)
(Unaudited)


			Guarantor			Non-Guarantor		Reclassification/
	Parent		Subsidiaries			Subsidiary		Eliminations			Consolidated
Net sales	$	605,284	$	176,729		$	200,475	$	(120,306	)	$	862,182
Cost of sales		455,362		165,719			165,438		(120,306	)		666,213

Gross profit		149,922		11,010			35,037		—			195,969
Selling, general and administrative expense		115,175		15,847			19,138		—			150,160
Facility closure costs		3,956		—			—		—			3,956

Income (loss) from operations		30,791		(4,837	)		15,899		—			41,853
Interest expense, net		22,878		—			509		—			23,387
Foreign currency loss		—		—			556		—			556

Income (loss) before income taxes		7,913		(4,837	)		14,834		—			17,910
Income taxes (benefit)		2,499		(2,186	)		5,462		—			5,775

Income (loss) before equity income from subsidiaries		5,414		(2,651	)		9,372		—			12,135
Equity income from subsidiaries		6,721		9,372			—		(16,093	)		—

Net income	$	12,135	$	6,721		$	9,372	$	(16,093	)	$	12,135

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ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
January 1, 2005
(In thousands)


			Guarantor		Non-Guarantor		Reclassification/
	Parent		Subsidiaries		Subsidiary		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	43,693	$	6,883	$	7,478	$	—		$	58,054
Accounts receivable, net		88,930		20,803		18,569		—			128,302
Intercompany receivables		—		—		8,582		(8,582	)		—
Receivable from parent		3,490		—		—		—			3,490
Inventories		65,854		19,435		29,498		—			114,787
Income taxes receivable		10,347		—		—		(1,487	)		8,860
Deferred income taxes		—		16,471		3,393		(1,611	)		18,253
Other current assets		10,844		1,302		792		—			12,938

Total current assets		223,158		64,894		68,312		(11,680	)		344,684

Property, plant and equipment, net		100,184		5,033		33,480		—			138,697
Goodwill		198,270		36,526		—		—			234,796
Other intangible assets, net		99,038		12,510		1,496		—			113,044
Investment in subsidiaries		130,881		59,996		—		(190,877	)		—
Other assets		19,460		—		174		—			19,634

Total assets	$	770,991	$	178,959	$	103,462	$	(202,557	)	$	850,855


Liabilities and Stockholder’s Equity
Current liabilities:
Accounts payable	$	41,446	$	13,753	$	19,940	$	—		$	75,139
Intercompany payables		7,028		1,554		—		(8,582	)		—
Accrued liabilities		39,569		9,782		7,664		—			57,015
Notes payable		11,607		—		—		—			11,607
Current portion of long-term debt		875		—		—		—			875
Deferred income taxes		1,611		—		—		(1,611	)		—
Income taxes payable		—		855		632		(1,487	)		—

Total current liabilities		102,136		25,944		28,236		(11,680	)		144,636

Deferred income taxes		50,264		5,711		6,745		—			62,720
Other liabilities		19,150		16,423		8,485		—			44,058
Long-term debt		339,125		—		—		—			339,125
Stockholder’s equity		260,316		130,881		59,996		(190,877	)		260,316

Total liabilities and stockholder’s equity	$	770,991	$	178,959	$	103,462	$	(202,557	)	$	850,855

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ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 2, 2004
(In thousands)
(Unaudited)


			Guarantor		Non-Guarantor			Reclassification/
	Parent		Subsidiaries		Subsidiary			Eliminations			Consolidated
Net sales	$	222,546	$	47,561	$	65,608		$	(21,307	)	$	314,408
Cost of sales		156,446		40,205		52,003			(21,307	)		227,347

Gross profit		66,100		7,356		13,605			—			87,061
Selling, general and administrative expense		37,625		5,222		5,869			—			48,716

Income from operations		28,475		2,134		7,736			—			38,345
Interest expense, net		6,064		—		154			—			6,218
Foreign currency gain		—		—		(35	)		—			(35	)

Income before income taxes		22,411		2,134		7,617			—			32,162
Income taxes		9,052		1,215		2,030			—			12,297

Income before equity income from subsidiaries		13,359		919		5,587			—			19,865
Equity income from subsidiaries		6,506		5,587		—			(12,093	)		—

Net income	$	19,865	$	6,506	$	5,587		$	(12,093	)	$	19,865

ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 2, 2004
(In thousands)
(Unaudited)


			Guarantor		Non-Guarantor		Reclassification/
	Parent		Subsidiaries		Subsidiary		Eliminations			Consolidated
Net sales	$	575,740	$	135,941	$	164,444	$	(55,794	)	$	820,331
Cost of sales		406,940		115,915		132,529		(55,794	)		599,590

Gross profit		168,800		20,026		31,915		—			220,741
Selling, general and administrative expense		108,377		16,614		17,159		—			142,150
Transaction costs — bonuses		14,498		—		—		—			14,498

Income from operations		45,925		3,412		14,756		—			64,093
Interest expense, net		18,192		7		285		—			18,484
Foreign currency loss		—		—		580		—			580

Income before income taxes		27,733		3,405		13,891		—			45,029
Income taxes		11,259		1,382		4,903		—			17,544

Income before equity income from subsidiaries		16,474		2,023		8,988		—			27,485
Equity income from subsidiaries		11,011		8,988		—		(19,999	)		—

Net income	$	27,485	$	11,011	$	8,988	$	(19,999	)	$	27,485

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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^®, Revere^® and Gentek^® 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 129 supply centers. Approximately 60% of the Company’s products are sold to contractors engaged in the home repair and remodeling market with 40% sold to the new construction market. This represents a slight shift during the first nine months of 2005 from the Company’s historical mix of approximately two-thirds of its sales to the higher margin home repair and remodeling market and one-third of its sales to the lower margin 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. The Company believes it can sustain moderate short-term interest rate and mortgage rate increases without a significant negative impact on its net sales. Overall, the Company believes the fundamentals for the building products industry remain strong as the population continues to age, homes continue to get older, household formation continues to be strong and vinyl remains the optimal material for exterior cladding and window solutions, all of which bodes well for the demand for the Company’s remodeling products in the future. Further, despite an increase in mortgage interest rates during the third quarter of 2005 and a continuing decline in consumer confidence levels, single family housing starts and existing home sales remained consistent during the third quarter of 2005 with the rates from the first half of the year.

Due to the high price of oil and natural gas and strong overall consumption of raw materials, the Company, along with the entire building products industry, has experienced significant inflation in key raw material commodity costs – particularly for vinyl resin, aluminum and steel, as well as in other raw materials such as microingredients used in the Company’s vinyl siding products – during the first nine months of 2005. To offset these increases, the Company announced price increases on certain of its product offerings in 2004 as well as the first quarter of 2005; however, the impact of the commodity cost increases has exceeded the benefits of the selling price increases. Average commodity prices for vinyl resin decreased by approximately 5% and aluminum prices remained relatively flat during the third quarter of 2005 from the prior quarter. However, other raw materials such as microingredients used in the Company’s vinyl siding products continued to increase in cost. Overall, the Company estimates that increases in raw material costs, net of price increases, resulted in a decrease in gross profit of approximately $2.3 million and $11.2 million for the quarter and nine months ended October 1, 2005, respectively.

As a result of the impact of Hurricanes Katrina and Rita, which has led to a significant increase in energy costs, the Company believes the costs of vinyl resin and other key raw materials are likely to increase significantly in the fourth quarter of 2005. Since August 2005, the cost per pound of vinyl resin has increased by approximately 35% and the price of microingredients has increased by approximately 25%. The Company, along with others in the building products industry, announced price increases on its vinyl siding products. The Company’s announced price increases of approximately 15% became effective during the fourth quarter of 2005. The Company also announced a surcharge on vinyl windows of $3 per window. If the Company achieves the full amount of the announced price increases, the Company believes the impact of the price increases could substantially offset the impact of anticipated increased commodity costs. However, the Company cannot ensure that it will achieve all of the announced price increases. The Company’s ability to maintain gross profit levels on its products during periods of rising raw material costs depends on the Company’s ability to obtain selling price increases. Further, the results of operations for individual quarters can and have been negatively impacted by a delay between the timing of raw material cost increases and price increases on the Company’s products. Actual commodity costs can vary from the Company’s expectations as these costs are impacted by external factors beyond the Company’s control.

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.

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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 and repays such borrowings in periods of higher cash flow. The Company typically generates the majority of its cash flow in the third and fourth quarters.

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, increasing sales through independent specialty distributor customers, realizing synergies from the Gentek acquisition, developing innovative new products, and driving operational excellence by reducing costs and increasing customer service levels. The Company has recognized $4.9 million of synergies related to the Gentek acquisition during the first nine months of 2005, and the Company expects to recognize an additional $0.6 million for the fourth quarter of 2005. Further, the Company has implemented salaried headcount reductions beginning in the third quarter of 2005 that the Company expects will result in approximately $3.5 million to $4.0 million of annualized cost savings beginning in 2006. The Company expects to realize cost savings of approximately $0.7 million, net of related severance costs, in the fourth quarter of 2005 as a result of these headcount reductions. Also, the Company has implemented additional spending reductions that the Company expects will provide additional savings beginning in 2006.

Results of Operations

The following table sets forth for the periods indicated the results of the Company’s operations (in thousands):


	Quarter		Quarter			Nine Months
	Ended		Ended			Ended		Nine Months Ended
	October 1,		October 2,			October 1,		October 2,
	2005		2004			2005		2004
Net sales	$	328,249	$	314,408		$	862,182	$	820,331
Cost of sales		253,514		227,347			666,213		599,590

Gross profit		74,735		87,061			195,969		220,741
Selling, general and administrative expense		48,580		48,716			150,160		142,150
Transaction costs — bonuses		—		—			—		14,498
Facility closure costs		541		—			3,956		—

Income from operations		25,614		38,345			41,853		64,093
Interest expense, net		8,134		6,218			23,387		18,484
Foreign currency (gain) loss		267		(35	)		556		580

Income before income taxes		17,213		32,162			17,910		45,029
Income taxes		5,512		12,297			5,775		17,544

Net income	$	11,701	$	19,865		$	12,135	$	27,485


Other Data:
EBITDA (a)	$	30,609	$	43,702		$	56,636	$	79,078
Adjusted EBITDA (a)		32,417		43,667			64,467		94,156


(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 indentures governing the notes also 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. Adjusted EBITDA is not a measure determined in accordance with GAAP and 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) as a measure of the Company’s liquidity. The reconciliation of the Company’s net income to EBITDA and adjusted EBITDA is as follows (in thousands):

-16-


	Quarter Ended		Quarter Ended			Nine Months Ended		Nine Months Ended
	October 1, 2005		October 2, 2004			October 1, 2005		October 2, 2004
Net income	$	11,701	$	19,865		$	12,135	$	27,485
Interest expense, net		8,134		6,218			23,387		18,484
Income taxes		5,512		12,297			5,775		17,544
Depreciation and amortization		5,262		5,322			15,339		15,565

EBITDA		30,609		43,702			56,636		79,078
Foreign currency (gain) loss		267		(35	)		556		580
Transaction costs — bonuses (b)		—		—			—		14,498
Amortization of management fee (c)		1,000		—			3,000		—
Stock compensation expense		—		—			319		—
Facility closure costs (d)		541		—			3,956		—

Adjusted EBITDA	$	32,417	$	43,667		$	64,467	$	94,156


(b)		Represents management and director bonuses paid in connection with the March 2004 dividend recapitalization.

(c)		Represents amortization of a prepaid management fee paid in connection with the December 2004 recapitalization transaction.

(d)		Represents one-time costs associated with the closure of the Freeport, Texas manufacturing facility consisting primarily of equipment relocation expenses. Total pre-tax expenses related to the Freeport closing were $8.5 million, including a $4.5 million pre-tax charge recorded in the fourth quarter of 2004.

Quarter Ended October 1, 2005 Compared to Quarter Ended October 2, 2004

Net sales increased 4.4%, or $13.8 million, during the third quarter of 2005 compared to the same period in 2004 driven primarily by price increases implemented during the first quarter of 2005 and during 2004 as well as increased sales volumes for vinyl windows. While the Company experienced a 10% unit volume percentage increase during the third quarter of 2005 for windows, this growth rate was lower than in the comparable period of 2004. The Company’s vinyl siding units were flat for the third quarter of 2005 compared to the same period in the prior year. However, the Company’s U.S. unit volume percentage decrease for vinyl siding of approximately 1.5% compares favorably to a reported industry unit decline of 7% during the third quarter of 2005, resulting in the Company gaining market share. Overall, the Company continues to experience sales weakness in certain key markets, particularly the Midwest and Central regions of the U.S., which it believes is due in part to weakness in the home repair and remodeling market. In addition, the Company believes the manufacturing inefficiencies relating to the consolidation of the Freeport, Texas vinyl siding facility into the Ennis, Texas facility, which negatively impacted the Company’s service levels, resulted in a negative impact on vinyl siding sales volumes in the third quarter of 2005, as well as negatively impacted other products sold through the Company’s supply center network such as outside purchased products.

Gross profit in the third quarter of 2005 was $74.7 million, or 22.8% of net sales, compared to gross profit of $87.1 million, or 27.7% of net sales, in the third quarter of 2004. The decrease in gross profit margin percentage was partially due to significantly increased costs in two of the Company’s key raw materials – vinyl resin and aluminum, which together represents approximately 25% of the Company’s cost of sales – which were partially offset by the impact of price increases. The Company estimates that commodity cost increases, net of price increases, negatively impacted gross profit for the third quarter of 2005 by approximately $2.3 million. Substantially higher freight costs, due primarily to fuel cost increases, and manufacturing inefficiencies which were incurred relating to the consolidation of the Freeport, Texas vinyl siding facility into the Ennis, Texas facility also had a negative impact on gross profit of approximately $2.6 million and $4.0 million, respectively, for the third quarter of 2005.

Selling, general and administrative expense was $48.6 million, or 14.8% of net sales, for the third quarter of 2005 versus $48.7 million, or 15.5% of net sales, for the same period in 2004. Excluding $1.0 million of amortization related to prepaid management fees paid in connection with the December 2004 recapitalization transaction, selling, general and administrative expenses decreased from the prior year as a result of decreased marketing expenses and lower bonus expense. These decreases were partially offset by increased expenses in the Company’s supply center network relating primarily to higher payroll costs and building and truck lease expenses, as well as expenses relating to new supply centers opened during the past twelve months. During the third quarter of 2005, the Company incurred additional facility closure costs of approximately $0.5 million relating to the closing of its Freeport, Texas manufacturing plant. Income from operations was $25.6 million for the third quarter of 2005 compared to $38.3 million for the same period in 2004.

Interest expense increased $1.9 million for the third quarter of 2005 compared to the same period in 2004. The increase in interest expense is due to higher interest rates on floating rate debt, additional borrowings on the term loan as a result of the December 2004 recapitalization transaction and higher average borrowings on the revolving loan portion of the credit facility during the third quarter of 2005 compared to the same period in 2004.

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Net income decreased to $11.7 million for the quarter ended October 1, 2005 compared to $19.9 million for the quarter ended October 2, 2004. The decrease in net income is primarily a result of the factors discussed above which had a negative impact on gross profit, as well as higher amounts in 2005 for facility closure costs and interest expense.

EBITDA for the third quarter of 2005 was $30.6 million. This compares to EBITDA of $43.7 million for the same period in 2004. Adjusted EBITDA for the third quarter of 2005 was $32.4 million compared to adjusted EBITDA of $43.7 million for the same period in 2004. Adjusted EBITDA for the quarter ended October 1, 2005 excludes one-time costs of $0.5 million associated with the closure of the Company’s Freeport, Texas manufacturing facility, $1.0 million of amortization related to prepaid management fees paid in connection with the December 2004 recapitalization transaction, and $0.3 million of foreign currency losses.

The plant closure costs in the third quarter of 2005 of $0.5 million related to the closing of the Freeport, Texas vinyl siding manufacturing facility, which included relocation costs for certain equipment, inventory and employees. The Company does not anticipate incurring additional facility closure costs subsequent to the end of the third quarter of 2005. The total pre-tax charge related to the Freeport facility closure was $8.5 million, of which $4.5 million was recorded in the fourth quarter of 2004. The Freeport plant closure was a result of the Company’s strategy to consolidate its U.S. vinyl siding manufacturing operations into its Ennis, Texas facility. While over time the Company believes this plant consolidation will lower its costs and improve service levels, the manufacturing inefficiencies as a result of the consolidation had a negative impact on gross profit of approximately $4.0 million for the third quarter of 2005 and $7.5 million for the first nine months of 2005. The Company is working through a comprehensive best practices project list for the Ennis facility intended to improve service levels and lower manufacturing costs. However, the Company believes that manufacturing costs in the fourth quarter of 2005 at the Ennis facility will continue to be higher when compared to the same period in the prior year.

Nine Months Ended October 1, 2005 Compared to Nine Months Ended October 2, 2004

Net sales increased by 5.1%, or $41.9 million, for the nine months ended October 1, 2005 compared to the same period in 2004 driven primarily by price increases along with increased sales volumes for vinyl windows. The Company’s total vinyl siding units were up 1% for the nine months ended October 1, 2005 compared to the same period in the prior year. Although the Company’s U.S. vinyl siding unit sales were flat during the first nine months of 2005 compared to the same period in the prior year, this compares favorably to a reported industry unit decline of 6% during this period. Gross profit for the nine months ended October 1, 2005 was $196.0 million, or 22.7% of net sales, compared to gross profit of $220.7 million, or 26.9% of net sales, for the same period in 2004. The decrease in gross profit margin percentage was primarily due to significantly increased costs of the Company’s key raw materials, partially offset by the impact of price increases. The Company estimates that commodity cost increases, net of price increases, negatively impacted gross profit for the first nine months of 2005 by approximately $11.2 million. Substantially higher freight costs, due primarily to fuel cost increases, and manufacturing inefficiencies which were incurred relating to the consolidation of the Freeport, Texas vinyl siding facility into the Ennis, Texas facility also had a negative impact on gross profit.

Selling, general and administrative expense increased to $150.2 million, or 17.4% of net sales, for the nine months ended October 1, 2005 versus $142.2 million, or 17.3% of net sales, for the same period in 2004, due primarily to increased expenses in the Company’s supply center network. Selling, general and administrative expense for the nine months ended October 1, 2005 includes $3.0 million of amortization related to prepaid management fees paid in connection with the December 2004 recapitalization transaction and non-cash stock compensation expense of $0.3 million. During the nine months ended October 1, 2005, the Company incurred facility closure costs of approximately $4.0 million relating to the closing of its Freeport, Texas manufacturing plant. During the nine months ended October 2, 2004, the Company paid $14.5 million of bonuses to certain members of senior management and a director in conjunction with the March 2004 dividend recapitalization. Income from operations was $41.9 million for the nine months ended October 1, 2005 compared to $64.1 million for the same period in 2004.

Interest expense increased $4.9 million for the nine months ended October 1, 2005 compared to the same period in 2004. The increase in interest expense is due to higher interest rates on floating rate debt, additional borrowings on the term loan as a result of the December 2004 recapitalization transaction and higher average borrowings on the revolving loan portion of the credit facility during the first nine months of 2005 compared to the same period in 2004.

Net income decreased to $12.1 million for the nine months ended October 1, 2005 compared to $27.5 million for the nine months ended October 2, 2004. The decrease in net income is primarily a result of significant increases in commodity costs which had an impact on gross profit, as well as higher amounts in 2005 for selling, general and administrative expense, facility closure costs and interest expense, partially offset by the $14.5 million bonus paid in 2004.

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EBITDA was $56.6 million for the nine months ended October 1, 2005 compared to EBITDA of $79.1 million for the same period in 2004. For the nine months ended October 1, 2005, adjusted EBITDA was $64.5 million compared to adjusted EBITDA of $94.2 million for the same period in 2004. Adjusted EBITDA for the nine months ended October 1, 2005 excludes one-time costs of $4.0 million associated with the closure of the Company’s Freeport, Texas manufacturing facility, $3.0 million of amortization related to prepaid management fees paid in connection with the December 2004 recapitalization transaction, $0.6 million of foreign currency losses, and $0.3 million of non-cash stock compensation expense. Adjusted EBITDA for the nine months ended October 2, 2004 excludes a bonus paid to certain members of Company management and a director totaling approximately $14.5 million associated with the completion of the March 2004 dividend recapitalization and $0.6 million of foreign currency losses.

Liquidity and Capital Resources

The following sets forth a summary of the Company’s cash flows for the nine months ended October 1, 2005 and October 2, 2004 (in thousands):


	Nine Months			Nine Months
	Ended			Ended
	October 1,			October 2,
	2005			2004
Cash provided by (used in) operating activities	$	15,001		$	(325	)
Cash used in investing activities		(18,961	)		(16,970	)
Cash provided by (used in) financing activities		(50,319	)		16,706

Cash Flows

At October 1, 2005, the Company had cash and cash equivalents of $3.8 million and available borrowing capacity of approximately $71.9 million under the revolving portion of its credit facility. Outstanding letters of credit as of October 1, 2005 totaled $8.1 million securing various insurance letters of credit.

Cash Flows from Operating Activities

Net cash provided by operations was $15.0 million for the nine months ended October 1, 2005 compared to net cash used in operations of $0.3 million for the nine months ended October 2, 2004. The cash provided by operations for the nine months ended October 1, 2005 reflects the operating results for the period and an increase in accounts payable as a result of obtaining improved payment terms with certain of the Company’s metals raw material suppliers and discontinuing taking cash discounts with certain of the Company’s other key suppliers, partially offset by the seasonal increase of accounts receivable and inventory levels. Higher commodity costs for the Company’s key raw materials also contributed to the increase in inventory dollars and accounts payable. The Company expects that net cash used for changes in accounts receivable, inventory, accounts payable, non-interest accruals and other current assets will be approximately $10 million to $12 million for the year ending December 31, 2005. Net cash provided by operating activities for the nine months ended October 1, 2005 also reflects $10.1 million of income tax refunds received in 2005 related to deductions associated with the December 2004 recapitalization transaction. Due to these refunds, the Company expects to have a net cash inflow from taxes of approximately $4 million for the year ending December 31, 2005.

The cash used in operations for the nine months ended October 2, 2004 reflects the operating results for the period and an increase in accounts payable and accrued liabilities, offset by the seasonal increase of accounts receivable and inventory levels. Additionally, the Company made estimated federal income tax payments in the third quarter of 2004, while no such estimated payments were required in the third quarter of 2005.

Cash Flows from Investing Activities

Capital expenditures totaled $19.0 million and $17.0 million for the nine months ended October 1, 2005 and October 2, 2004, respectively, of which $3.5 million and $4.8 million were incurred in the third quarters of 2005 and 2004, respectively. Capital expenditures in 2005 were primarily to increase capacity at the Company’s Ennis, Texas siding facility and to purchase land and equipment for the new window plant leased in Yuma, Arizona, which began window production in the third quarter of 2005. The Yuma plant was built to meet growing product demand in the Company’s Western markets and to alleviate capacity constraints at the Company’s Bothell, Washington window plant. 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

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facilities. The Company’s estimate for total capital expenditures for 2005 has been reduced to approximately $21.5 million from $27 million as certain capacity and cost reduction projects have been deferred to future years or cancelled.

Cash Flows from Financing Activities

Cash flows from financing activities for the nine months ended October 1, 2005 include dividend payments of $38.3 million, payments on promissory notes of $11.6 million and repayments on the term loan of $0.4 million. The dividend payments consist of a $33.7 million dividend paid in the first quarter of 2005 to forgive an intercompany loan made in connection with the December 2004 recapitalization transaction and a $4.6 million dividend paid in the third quarter of 2005 to fund AMH II’s scheduled interest payment on its 13 5/8% notes. Cash flows from financing activities for the nine months ended October 2, 2004 include borrowings on the revolving loan portion of the Company’s credit facility of $2.4 million, a capital contribution from Holdings of $14.5 million and $0.2 million paid for financing costs.

During the quarter ended October 1, 2005, the Company repaid $44.8 million of borrowings on the revolving loan portion of the Company’s credit facility, resulting in no outstanding borrowings on the revolving loan at October 1, 2005. Cash used to repay the revolving loan was primarily generated from improvements in working capital as well as reduced capital expenditures in the third quarter of 2005 compared to the first half of the year. The increased cash flows from working capital was primarily a result of changes in inventory levels — a source of cash of $3.0 million during the third quarter of 2005 as compared to a use of cash of $4.7 million during the third quarter of 2004 — along with increases in accounts payable.

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 October 1, 2005 includes $174.6 million of outstanding term loans due through 2010 that bear interest at the London Interbank Offered Rate (“LIBOR”) plus 2.25% payable quarterly at the end of each calendar quarter, and up to $80 million of available borrowings provided by the revolving loans (including a Canadian subfacility of $20 million), which expire in 2009 and bear interest at LIBOR plus a margin of 2.75%, which can increase to as much as 3.00% or decline to as low as 2.25% based on the Company’s leverage ratio, as defined in the credit facility. The Company had no outstanding borrowings on the revolving loan portion of the Company’s credit facility at October 1, 2005.

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. Continued compliance with debt covenants is primarily based on the Company’s future financial and operating performance, which to a certain extent is subject to general economic, financial, competitive and other factors that are beyond its control. The Company expects that its financial performance in the fourth quarter of 2005 and in fiscal 2006 will continue to be negatively impacted by those factors that have affected financial performance for the nine months ended October 1, 2005. Those factors include the inability to fully offset increases in commodity costs with price increases, the increase in fuel costs and the continued inefficiencies with respect to the consolidation of the Freeport, Texas vinyl siding plant into the Ennis, Texas facility. The impact of these factors on the Company’s operating results and leverage may cause the Company to seek amendments to its financial covenants in the Company’s credit facility. The Company was in compliance with its covenants as of October 1, 2005. However, no assurance can be given that the Company will be able to maintain compliance in the future. If the Company is not in compliance with its financial covenant requirements, and the non-compliance is not cured or waived, the Company would be in default and the credit facility lenders could cause repayment of the credit facility to be accelerated, in which case amounts outstanding under the credit facility would become immediately due and payable. In addition, the 9 3/4% notes would become due and payable upon an acceleration of the Company’s credit facility.

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December 2004, AMH II completed an offering of 13 5/8% senior notes, which mature on December 1, 2014. The accreted value of the 13 5/8% notes as of October 1, 2005 was $77.1 million. Because AMH and AMH II are holding companies with no operations, they must receive distributions, payments or loans from subsidiaries to satisfy obligations on the 11 1/4% notes and the 13 5/8% notes. An acceleration of the Company’s credit facility and the 9 3/4% notes as a result of a future default would have a material adverse effect on the Company’s ability to make such distributions, payments or loans to its direct and indirect parent companies. The Company does not guarantee the 11 1/4% notes or the 13 5/8% notes and has no obligation to make any payments with respect thereto. Furthermore, the terms of the indenture governing the Company’s 9 3/4% notes and senior credit facility significantly restrict the Company and its subsidiaries from paying dividends and otherwise transferring assets to AMH and the indenture governing AMH’s 11 1/4% notes further restricts AMH from making restricted payments. In the third quarter of 2005, the Company and its direct and indirect parent companies declared a dividend of approximately $4.6 million to AMH II. The dividend was used to fund AMH II’s scheduled interest payment on its 13 5/8% notes. The Company expects to have sufficient cash to be able to make distributions to its parent companies to allow them to make required payments on their debt for the foreseeable future and the Company anticipates that the terms of the 11 1/4% notes’ indenture will permit it to make such distributions. Delaware law may restrict the Company’s ability to make certain distributions. The Company continues to evaluate its ability under Delaware law to make such distributions. There can be no assurances, however, that Delaware law will permit such distributions. If the Company is unable to distribute sufficient funds to its parent companies to allow them to make required payments on their debts, AMH II may be required to refinance all or a part of the 13 5/8% notes or borrow more money. AMH II may not be able to refinance its indebtedness or borrow money on acceptable terms. If a default occurs under the 13 5/8% notes, the holders of such notes could elect to declare such indebtedness due and payable and exercise their remedies under the indenture governing the 13 5/8% notes, which could have a material adverse effect on the Company. Total AMH II debt, including that of its consolidated subsidiaries, was approximately $723.6 million as of October 1, 2005. The Company expects to make cash payments for interest of approximately $32 million to $33 million for the year ending December 31, 2005. This amount includes the $4.6 million dividend to AMH II through the Company’s direct and indirect parent companies for the interest payment on the 13 5/8% notes.

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’s principal raw materials – vinyl resin, aluminum, and steel – have historically been subject to significant price changes. Although commodity costs for vinyl resin and steel decreased in the third quarter of 2005, overall raw material pricing on the Company’s key commodities is higher than in the prior year. The Company estimates that increases in raw material costs, net of price increases, resulted in a decrease in gross profit of approximately $2.3 million for the quarter ended October 1, 2005 and $11.2 million for the first nine months of 2005. Further, the Company anticipates additional significant increases in the costs of vinyl resin as well as other key raw materials during the fourth quarter of 2005 as a result of the impact of Hurricanes Katrina and Rita which caused disruptions in the supply of natural gas, feedstocks and utilities and led to a significant increase in energy costs. The Company announced price increases on all vinyl siding products and a surcharge on vinyl windows that became effective during the fourth quarter of 2005. These announced price increases, along with the Company’s price increases on certain of its products announced in the first quarter of 2005 and throughout 2004, are intended to offset the raw material inflation. However, there can be no assurances that the Company will be able to achieve the announced price increases or any future price increases. In addition, there may be a delay from quarter to quarter between the timing of raw material cost increases and price increases on the Company’s products. At October 1, 2005, 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. Such statements reflect the current views of the Company’s management with respect to its operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:

	•		the Company’s operations and results of operations;

	•		changes in home building industry, economic conditions, interest rates, foreign currency exchange 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;

-21-

	•		market acceptance of price increases;

	•		changes in national and regional trends in new housing starts and home remodeling;

	•		changes in weather conditions;

	•		the Company’s ability to comply with certain financial covenants in the loan documents governing its indebtedness;

	•		the Company’s ability to make distributions, payments or loans to its parent companies to allow them to make required payments on their debt;

	•		increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products;

	•		shifts in market demand;

	•		increases in the Company’s indebtedness;

	•		increases in costs of environmental compliance;

	•		increases in capital expenditure requirements;

	•		potential conflict between existing Alside and 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 1, 2005 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 or revise these forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require it to do so.

-22-

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 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 LIBOR. At October 1, 2005, the Company had borrowings of $174.6 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 quarter ended October 1, 2005 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, the Company does realize 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 October 1, 2005, 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 October 1, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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

(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.

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	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets		1
October 1, 2005 (Unaudited) and January 1, 2005

Consolidated Statements of Operations (Unaudited)		2
Quarters ended October 1, 2005 and October 2, 2004
Nine months ended October 1, 2005 and October 2, 2004

Consolidated Statements of Cash Flows (Unaudited)		3
Nine months ended October 1, 2005 and October 2, 2004

Notes to Consolidated Financial Statements (Unaudited)		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		23

Item 4. Controls and Procedures		23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 6. Exhibits		24

SIGNATURES		25
EX-31.1 302 Certification for CEO
EX-31.2 302 Certification for CFO
EX-32.1 906 Certification for CEO
EX-32.2 906 Certification for CFO


		ASSOCIATED MATERIALS INCORPORATED
		(Registrant)

Date: November 15, 2005	By:	/s/ Michael Caporale, Jr.
		Michael Caporale, Jr.
		Chairman, President and
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ D. Keith LaVanway

		D. Keith LaVanway
		Vice President – Finance,
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and
		Principal Accounting Officer)


Date: November 15, 2005	By:	/s/ Michael Caporale, Jr.

		Michael Caporale, Jr.
		Chairman, President and
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 15, 2005	By:	/s/ D. Keith LaVanway

		D. Keith LaVanway
		Vice President – Finance,
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and
		Principal Accounting Officer)


Date: November 15, 2005	By:	/s/ Michael Caporale, Jr.

		Michael Caporale, Jr.
		Chairman, President and
		Chief Executive Officer
		(Principal Executive Officer)

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	(Unaudited)
	October 1,		January 1,
	2005		2005
Assets
Current assets:
Cash and cash equivalents	$	3,811	$	58,054
Accounts receivable, net		178,827		128,302
Receivable from parent		3,908		3,490
Inventories		145,249		114,787
Income taxes receivable		—		8,860
Deferred income taxes		18,253		18,253
Other current assets		11,282		12,938

Total current assets		361,330		344,684

Property, plant and equipment, net		145,983		138,697
Goodwill		234,787		234,796
Other intangible assets, net		110,674		113,044
Other assets		17,481		19,634

Total assets	$	870,255	$	850,855


Liabilities and Stockholder’s Equity
Current liabilities:
Accounts payable	$	121,817	$	75,139
Accrued liabilities		65,524		57,015
Notes payable		—		11,607
Current portion of long-term debt		1,750		875
Income taxes payable		287		—

Total current liabilities		189,378		144,636

Deferred income taxes		62,827		62,720
Other liabilities		43,389		44,058
Long-term debt		337,813		339,125
Stockholder’s equity		236,848		260,316

Total liabilities and stockholder’s equity	$	870,255	$	850,855


	Quarter		Quarter			Nine Months
	Ended		Ended			Ended		Nine Months Ended
	October 1,		October 2,			October 1,		October 2,
	2005		2004			2005		2004
Net sales	$	328,249	$	314,408		$	862,182	$	820,331
Cost of sales		253,514		227,347			666,213		599,590

Gross profit		74,735		87,061			195,969		220,741
Selling, general and administrative expense		48,580		48,716			150,160		142,150
Transaction costs — bonuses		—		—			—		14,498
Facility closure costs		541		—			3,956		—

Income from operations		25,614		38,345			41,853		64,093
Interest expense, net		8,134		6,218			23,387		18,484
Foreign currency (gain) loss		267		(35	)		556		580

Income before income taxes		17,213		32,162			17,910		45,029
Income taxes		5,512		12,297			5,775		17,544

Net income	$	11,701	$	19,865		$	12,135	$	27,485

	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

	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.

	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.