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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
____________ to ____________.
Commission File Number 0-24956
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ASSOCIATED MATERIALS INCORPORATED
(Exact name of Registrant as specified in its charter)
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DELAWARE 75-1872487
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2200 ROSS AVENUE, SUITE 4100 EAST
DALLAS, TEXAS 75201
(Address of executive offices)
(214) 220-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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COMMON STOCK, PAR VALUE, $.0025 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock and Class B Common Stock held by
non-affiliates of the Registrant as of March 18, 1999 was approximately
$39,741,382.
As of March 18, 1999 the Registrant had 6,643,351 shares of Common Stock and
1,550,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1999, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, are incorporated herein by
reference in Part III.
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PART I
ITEM 1. BUSINESS
Associated Materials Incorporated (the "Company") is a leading,
vertically integrated manufacturer and nationwide distributor of exterior
residential building products through its Alside division ("Alside"). Alside's
core products are vinyl siding and vinyl windows. These products are marketed on
a wholesale basis to more than 30,000 professional contractors engaged in home
remodeling and new home construction principally through Alside's nationwide
network of 69 Alside Supply Centers. In recent years Alside has expanded its
product offerings to include vinyl fencing, vinyl decking and vinyl garage
doors. In 1998, Alside accounted for approximately 87% of the Company's net
sales. In addition to Alside, the Company's operations include its AmerCable
division ("AmerCable"), a specialty electrical cable manufacturer. Amercord Inc.
("Amercord"), a 50%-owned affiliate managed by the Company, manufactures and
sells steel cord and bead wire to tire manufacturers.
The Company was incorporated in Delaware in 1983. Unless the context
requires otherwise, the "Company" refers to the business and operations of
Associated Materials Incorporated, including Alside and AmerCable, but not
Amercord.
INDUSTRY OVERVIEW
Vinyl siding competes with other materials, such as wood, masonry and
metals, for a share of the residential siding market. Vinyl siding has greater
durability and requires less maintenance than wood siding, and generally is less
expensive than wood, masonry or metal siding. According to the "1996-2000
Plastic Siding and Windows" industry study jointly prepared by Sabre Associates,
Inc. and Pure Strategy (the "Sabre Study"), based on unit sales, vinyl siding
accounted for approximately 47% of the exterior siding market in 1996 versus
approximately 17% in 1985. Since the early 1980's, vinyl siding has become the
preferred siding product for professional home remodeling contractors and their
customers, and commanded approximately 62% of the home remodeling marketplace
for siding according to the most recent Sabre Study. More recently, vinyl siding
has achieved increased acceptance in the new construction market, as builders
and home buyers have recognized vinyl's low maintenance, durability and price
advantages. The Company believes that vinyl siding will continue to gain market
share in the new residential construction market while remaining the preferred
product of the remodeling marketplace.
Vinyl windows require less maintenance, are more durable than either
wood or aluminum windows and provide greater energy efficiency than aluminum
windows. According to the Sabre Study, based on unit sales, approximately 45% of
all residential windows sold in 1996 were vinyl windows versus approximately 27%
in 1991. Since the early 1990's, vinyl windows have become the preferred window
product for professional home remodeling contractors and their customers, and
commanded approximately 75% of the home remodeling marketplace for windows. More
recently, vinyl windows have achieved increased acceptance in the new
construction market as a result of builders and home buyers recognizing vinyl's
favorable attributes, the enactment of local legal or building code requirements
that mandate more energy efficient windows and the increased development and
promotion of vinyl window products by national window manufacturers. The Company
believes that vinyl windows will continue to gain market share in the new
residential construction market while remaining the preferred product of the
remodeling marketplace.
According to the Sabre Study, total sales of vinyl siding and vinyl
windows are each projected to increase approximately 7% annually between 1996
and 2000 and the new construction market for each of these vinyl products is
expected to grow at a rate of approximately 10% per year from 1996 to 2000.
ALSIDE
PRODUCTS. Alside's principal product offerings are vinyl siding and
vinyl windows, which together accounted for approximately 68.0% of Alside's 1998
net sales. Alside also manufactures a variety of other products including vinyl
fencing, vinyl decking, vinyl garage doors and semi-custom cabinets.
The vinyl siding market consists of three segments: economy/new
construction, standard and premium. Vinyl siding quality is determined by its
rigidity, resistance to fading, thickness and ease of installation as well as
other factors. Prior to 1996, Alside targeted its products primarily to the
standard segment. More recently, the Company has broadened its product lines to
increase its penetration of the premium and economy segments. The Company
believes that its
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innovation in product development was key to its siding sales growth in 1997 and
1998 and will continue to be a principal factor in its sales growth in future
years. For example, in late 1995, Alside introduced its patented Charter Oak
siding, which enabled Alside to penetrate the premium segment of the vinyl
siding market. The Company believes that Charter Oak sets the standard for
premium vinyl siding products today. Unit sales of Charter Oak continue to be
strong and gain market share as demonstrated by the 25.1% increase in Charter
Oak unit volume in 1998 as compared to 1997. Alside introduced its Conquest
siding product in 1997, which has enabled Alside to achieve additional market
penetration in the economy/new construction segment of the siding industry.
Conquest accounted for approximately 22.9% of Alside's vinyl siding unit volume
in 1998. During 1998, Alside introduced CenterLock, a patented product
positioned in the standard market segment. In addition, Alside has recently
introduced Odyssey Plus, an improved and updated version of its popular Odyssey
siding product. In addition to the new products described above, Alside has
increased the number of colors and profiles offered within its existing siding
products and continues to increase and improve upon the breadth of its vinyl
siding product lines. Alside offers limited warranties ranging from 50-year
warranties to lifetime warranties with its siding products.
Alside divides its window products into the economy, standard and
premium categories. Product quality within the vinyl window industry is
determined by a number of competitive features including method of construction
and materials used. Rather than manufacturing standard size windows, Alside
custom manufactures virtually all of its windows to fit existing window
openings. Custom fabrication provides Alside's customers with a product that is
less expensive to install and more attractive after installation. All of
Alside's window products are accompanied by a limited lifetime warranty.
A summary of Alside's siding and window product offerings is presented
in the table below according to the Company's product line classification:
--------------------------- -------------------------- ---------------------------
PRODUCT LINE SIDING PRODUCTS WINDOW PRODUCTS
--------------------------- -------------------------- ---------------------------
Premium Charter Oak UltraMaxx
Greenbriar Omni
Highland Cedar
Williamsport
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Standard Odyssey Geneva
Odyssey Plus Excalibur
CenterLock
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Economy Conquest Performance Series -
Alpha New Construction
Centurion
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In addition to its siding and window product lines, Alside also
manufactures semi-custom cabinets for the kitchen and bath under the brand name
UltraCraft. Alside's sales of cabinets accounted for approximately 6% of its net
sales in 1998. In 1993, Alside introduced vinyl fencing as a product line under
the brand name UltraGuard, currently a leading brand of both agricultural and
residential vinyl fencing. Sales of UltraGuard fencing accounted for less than
5% of Alside's net sales in 1998. Alside introduced a raised panel vinyl garage
door in 1997 under the brand name Premium Garage Doors. Alside primarily markets
its cabinets, fencing and garage doors through independent dealers and not
through its Supply Centers.
To complete its line of siding products, Alside also distributes metal
siding and related building products manufactured by other companies. The sale
of metal siding and related building products has declined from 19% of Alside's
sales in 1993 to 5% in 1998 as these products have been displaced by vinyl
products. Alside also selectively distributes a variety of complementary
building products manufactured by others, including wood windows, roofing
materials, insulation, cabinets and installation equipment and tools.
MARKETING AND DISTRIBUTION. Traditionally, most vinyl siding has been
sold to the home remodeling marketplace through independent distributors. The
Company believes that Alside is one of only two major vinyl siding manufacturers
that market their products primarily through company-owned distribution centers.
Alside has a nationwide distribution network of 69 Alside Supply Centers which
market Alside manufactured products and other complementary building products to
more than 30,000 professional home improvement and new construction contractors.
The Company believes that Alside Supply Centers provide "one-stop shopping" to
meet the specialized needs of its contractor-customers by distributing more than
2,000 building and remodeling products, including a broad range of
Company-manufactured vinyl
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siding and vinyl windows as well as products manufactured by others, including
metal siding, wood windows, roofing materials, insulation, cabinets and
installation equipment. In 1998, approximately 79% of Alside's sales were made
through its Supply Centers. In addition to sales and promotional support,
contractors look to their local Alside Supply Center to provide a broad range of
specialty product offerings in order to maximize their ability to attract
remodeling and homebuilding customers.
Alside believes that distributing products through its Supply Centers
provides the Company with certain competitive advantages such as (a)
long-standing customer relationships, (b) the ability to implement targeted
marketing programs and (c) a permanent presence in local markets. Many of
Alside's contractor-customers have established long-standing relationships with
their local Supply Center based upon individualized service and credit terms,
quality products, timely delivery, breadth of product offerings, strong sales
and promotional programs and competitive prices. Alside supports its
contractor-customer base with marketing and promotional programs that include
product sample cases, sales literature, product videos and other sales and
promotional materials. Professional contractors use these materials to sell
remodeling construction services to prospective customers. The customer
generally relies on the professional contractor to specify the brand of siding
or window to be purchased, subject to the customer's price, color and quality
requirements. Alside's daily contact with its contractor-customers also enables
it to closely monitor activity in each of the remodeling and new construction
markets in which Alside competes. This direct presence in the marketplace
permits Alside to obtain current local market information, providing Alside with
the ability to recognize trends in the marketplace earlier and adapt its product
offerings on a location-by-location basis.
Many of Alside's contractor-customers install both vinyl siding and
vinyl windows. Because Alside manufactures and distributes both vinyl windows
and vinyl siding, its contractor-customers can acquire both products from a
single source, which the Company believes provides Alside with a competitive
advantage in marketing these products to its target customer base. Furthermore,
Alside has the ability to achieve economies of scale in sales and marketing by
developing integrated programs on either a national or local basis for its vinyl
siding and vinyl window products.
Each of Alside's 69 Supply Centers is evaluated as a separate profit
center, and compensation of Supply Center personnel is based in part on the
Supply Center's operating results. Decisions to open new Supply Centers, and to
close or relocate existing Supply Centers, are based on Alside's continuing
assessment of market conditions and individual location profitability. Alside
added three Supply Centers to its distribution network in 1998. The Company
presently expects to open up to seven new Supply Centers in 1999.
Through certain of its Supply Centers, Alside's Builder Service
Division provides full-service product installation of its vinyl siding
products, principally to new homebuilders who value the importance of
installation services. Alside also provides installation services for vinyl
replacement windows through certain of its Supply Centers.
Alside sells its manufactured products to large direct dealers and
distributors, generally in those areas where no Alside Supply Center currently
exists. These sales accounted for approximately 21% of Alside's net sales in
1998. Despite their aggregate lower percentage of total sales, Alside's largest
individual customers are its large direct dealers and independent distributors.
Alside carefully monitors and evaluates its activity with these customers to
ensure the profitability of this higher volume and lower margin business. No
single customer accounted for 5% or more of Alside's 1998 sales. Alside
increased its network of independent distributors in 1998 and intends to seek to
further increase its network of independent distributors in 1999 in strategic
areas to improve its penetration into certain markets.
MANUFACTURING. Alside currently manufactures all of its vinyl siding at
its Ennis, Texas plant, which the Company believes is a low-cost manufacturing
facility. In 1998, the Company expanded its production capacity at this plant.
In order to meet its current sales expectations for Alside's siding products,
the Company began construction of a new vinyl manufacturing facility in 1998.
This new facility, which is expected to become operational in the second quarter
of 1999, will increase Alside's vinyl siding production capacity by
approximately 25%. With a moderate investment in additional production
equipment, the Company expects that Alside's total vinyl siding production
capacity could be increased by approximately 50% from its 1998 capacity. Alside
also operates a vinyl extrusion facility in West Salem, Ohio to produce vinyl
window extrusions as well as vinyl fence and garage door panels. Alside operates
three window fabrication plants which each use vinyl extrusions manufactured by
Alside for the majority of their production requirements, produce their own
glass inserts and utilize high speed welding and cleaning equipment for their
welded window products. By producing its own vinyl extrusions and glass inserts,
Alside believes it achieves significant cost savings and higher product quality
compared to purchasing these materials from third-party suppliers.
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Alside's vinyl extrusion plants generally operate on a three-shift
basis to optimize equipment productivity and utilize additional equipment to
increase capacity to meet higher seasonal needs. Alside's window plants
generally operate on a single shift basis utilizing both a second shift and
increased numbers of leased production personnel to meet higher seasonal needs.
RAW MATERIALS. The principal raw materials used by Alside are vinyl
resins, resin stabilizers and pigments, packaging materials, window hardware and
glass, all of which are available from a number of suppliers. The price of vinyl
resin has been, and may continue to be, volatile. Alside has contracts with two
suppliers to supply substantially all of its vinyl resin requirements and
believes that its requirements could also be met by other suppliers. Alside
generally had been able to pass through price increases in raw materials to its
customers.
COMPETITION. Except for Owens Corning, no company within the
residential siding industry competes with Alside on both the manufacturing and
distribution levels. There are, however, numerous small and large manufacturers
of metal and vinyl siding products, including Aluminum Company of America,
CertainTeed Corporation, Jannock Limited, Nortek, Inc. and Royal Group
Technologies Limited, some of whom are larger in size and have greater financial
resources than the Company. Alside competes with Owens Corning and numerous
large and small distributors of building products in its capacity as a
distributor of these products. The market for vinyl replacement windows is
highly fragmented, and Alside believes that no single manufacturer accounts for
a significant percentage of national sales. Alside believes that the market
trend towards sales of welded vinyl windows, which Alside began manufacturing in
1992 and which require expensive, more sophisticated production equipment, will
result in further consolidation of the window fabrication industry. Alside and
its competitors generally compete on price, product performance, and sales and
service support to professional contractors. Competition varies by region.
Alside also faces competition from alternative materials: wood and aluminum in
the window markets, and wood, masonry and metal in the siding market. However,
the Company believes Alside's products are competitive, and in most sectors are
gaining share at the expense of these alternative materials due to vinyl's
superior qualities, including its lower material cost, durability and low
maintenance requirements.
AMERCABLE
AmerCable accounted for approximately 13% of the Company's net sales in
1998. AmerCable manufactures and markets a variety of jacketed electrical cable
specially designed to meet industry technical standards and end-users'
specifications. AmerCable divides its products into three categories: mining
cables, marine and shipboard cables, and industrial cables, which accounted for
43%, 36% and 21% of its 1998 sales, respectively. AmerCable markets its cable
principally to independent distributors who resell to the end user, except for
those products that are distributed through its Offshore/Marine Cable
Specialists division.
The principal raw material used by AmerCable is copper strand, which is
available from a number of suppliers. Historically, copper strand has been
subject to rapid price changes. AmerCable generally prices its cable products
based upon market prices for copper at time of shipment. As a result, sudden
decreases in copper prices can result in inventory being in excess of its net
realizable value. In certain instances, AmerCable may guarantee a fixed copper
price for its products where there is a significant time lag between the
purchase order and shipment. In these cases, AmerCable generally attempts to
hedge its position on copper prices.
AmerCable competes with numerous large and small manufacturers,
including BICC Cables Corporation, Rockbestos Suprenant Cable Corp., BIW Cable
System, Inc., General Cable Corporation and Essex Group Inc. Many of its
competitors have substantially greater resources than the Company. AmerCable
generally does not compete in the more commodity-oriented wire and cable
markets, such as residential building wire and computer network cable.
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AMERCORD
Amercord, the Company's 50%-owned affiliate, manufactures and markets
steel cord and bead wire to the tire manufacturing industry. Tire cord is
comprised of fine strands of steel wire used to reinforce the tread area in
radial tires. Tire bead wire is used in the manufacturing of all tires to hold
the tire to the rim. Amercord is jointly owned by the Company and Ivaco, Inc.
("Ivaco"), a Canadian steel and wire producer. Pursuant to an agreement with
Ivaco, the Company provides management services relating to the day-to-day
operations of Amercord for an annual fee of $200,000, principally for financial
management services. Prior to 1998, Amercord had satisfied its working capital
and capital expenditure requirements from internally generated funds and its
existing credit facilities. During 1998, the Company and Ivaco each made a
$500,000 capital contribution to Amercord. In addition, the Company has
guaranteed up to $2.0 million of certain borrowings under Amercord's bank credit
facility. In late 1998, the Company announced that it intended to seek to sell
its interest in Amercord. The Company recorded a $4.4 million writedown on its
investment in Amercord in 1998. The writedown was determined based upon bids
received from interested parties. The Company presently anticipates it will be
able to sell its interest in Amercord in the second quarter of 1999.
EMPLOYEES
Alside's employment needs vary seasonally with sales and production
levels. As of December 31, 1998, Alside had approximately 1,700 full-time
employees, including approximately 740 hourly workers. The West Salem, Ohio
plant is Alside's only unionized manufacturing facility, employing approximately
100 covered workers as of December 31, 1998. Additionally, approximately 45
hourly workers in certain Supply Center locations are covered by collective
bargaining agreements. The Company considers Alside's labor relations to be
good.
Alside operates vinyl window manufacturing plants in Cedar Rapids,
Iowa; Kinston, North Carolina; and Akron, Ohio with leased production employees.
The Company believes that the employee leasing program provides it with
scheduling flexibility for seasonal production loads and with competitive
advantages in obtaining principally unskilled labor personnel. The aggregate
number of leased employees in the window plants ranges from approximately 400 to
600 people, based on seasonal production requirements.
As of December 31, 1998, AmerCable employed approximately 180 people,
including 95 hourly workers, none of whom are covered by collective bargaining
agreements. AmerCable maintains good relations with its employees.
TRADEMARKS AND PATENTS
Alside has registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which its products
are marketed. Although Alside considers each of these items to be valuable, the
Company does not currently believe property, other than the "Alside(R)"
trademark, to be material. Alside has obtained patents on certain claims
associated with its siding products, which the Company believes distinguish
Alside's new products from those of its competitors.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to numerous federal and state statutes and
regulations relating to, among other things, air and water quality, the
discharge of materials into the environment and safety and health issues. The
Company does not expect compliance with these requirements to have a material
impact on the Company's earnings or competitive position in the foreseeable
future. Additionally, no significant capital expenditures are presently
anticipated related to compliance with these requirements.
The Company entered into a consent order dated August 25, 1992 with the
United States Environmental Protection Agency pertaining to corrective action
requirements associated with the use of hazardous waste storage facilities at
its Akron, Ohio location. With the exception of a small container storage area,
the use of these facilities was terminated prior to the acquisition of the
Alside assets by the Company from USX Corporation ("USX") in 1984. The effects
of the past practices at this facility are continuing to be investigated
pursuant to the terms of the consent order. The Company believes that USX bears
financial responsibility for substantially all of the direct costs of corrective
action at these facilities under the relevant contract terms and under statutory
and common law. To date, USX has reimbursed the Company for substantially all of
the direct costs of corrective action at these facilities, and the Company
expects that USX will continue to reimburse
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the Company for substantially all of the direct costs of corrective action at
these facilities. As a result, the Company believes that any material claims
resulting from this proceeding will not have a material adverse effect on the
Company.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following information concerning the executive officers and other
key employees of the Company is as of March 18, 1999.
William W. Winspear, 65, has been Chairman of the Board, President and
Chief Executive Officer of the Company since its inception in 1983. Mr. Winspear
was President and Chief Executive Officer of Chaparral Steel Company from 1975
to 1982. He is also the Chairman of the Board of Amercord. Mr. Winspear is the
father of Robert L. Winspear.
Donald L. Kaufman, 67, has been President of Alside since 1974 and has
been Chief Executive Officer of Alside since 1982. Mr. Kaufman joined Alside in
1955 and became a Director and a Vice President of the Company in 1984.
Robert F. Hogan, 42, has been President and Chief Executive Officer of
AmerCable since November 1993 and Vice President of the Company since 1984.
Prior to becoming President of AmerCable, Mr. Hogan was Treasurer and Secretary
of the Company from 1984 to 1993.
Robert L. Winspear, 33, joined the Company in June 1993, was named Vice
President, Treasurer and Secretary in October 1993 and was named Chief Financial
Officer in March 1998. Prior to joining the Company, Mr. Winspear was a Senior
in the Financial Consulting and Audit division of Arthur Andersen LLP, where he
had been employed since 1988. Mr. Winspear is also a director of Amercord. Mr.
Winspear is the son of William W. Winspear.
James R. Bussman, 51, has been Executive Vice President - Corporate
Services of Alside since 1983. Mr. Bussman has held various other positions with
Alside since 1972, and was named a Vice President of the Company in 1984.
Michael R. St. Clair, 52, was named Executive Vice President - Finance
of Alside in December 1994. Mr. St. Clair had been Senior Vice President -
Finance of Alside since joining the Company from The Warner & Swasey Company,
Inc., a machine tool manufacturing company, in 1985. Mr. St. Clair was named a
Vice President of the Company in 1986.
Wayne D. Fredrick, 52, was named Group Vice President - Window Products
of Alside in January 1997. From 1990 to 1996, Mr. Fredrick was Senior Vice
President - Window Products of Alside. Mr. Fredrick joined Alside in 1973.
Benjamin L. McGarry, 51, was named Group Vice President - Vinyl
Manufacturing of Alside in January 1997. From 1984 to 1996, Mr. McGarry was
Senior Vice President - Manufacturing of Alside. Mr. McGarry joined Alside in
1980.
James E. Renshaw, 51, joined the Company in August 1998 as President,
Alside Supply Centers. From 1983 to 1998 Mr. Renshaw was employed by
Sherwin-Williams, most recently as President and General Manager of
Sherwin-Williams Eastern Division.
Officers of the Company serve at the discretion of the Board of
Directors. Messrs. Bussman, St. Clair, Fredrick, McGarry and Renshaw are
considered key employees of the Company because of their responsibilities as
divisional officers in the respective capacities indicated. The Company,
however, does not consider these employees to be executive officers of the
Company.
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ITEM 2. PROPERTIES
The Company's operations include both owned and leased facilities as
described below:
LOCATION PRINCIPAL USE SQUARE FEET
-------- ------------- -----------
ALSIDE
Akron, Ohio Alside Headquarters 70,000
Vinyl Fencing, Vinyl Garage Doors and
Vinyl Windows 577,000
Ennis, Texas Vinyl Siding Products 301,000
Freeport, Texas Vinyl Siding Products 120,000 (1)
West Salem, Ohio Vinyl Window Extrusions, Fencing
and Garage Door Panels 173,000
Liberty, North Carolina Cabinets 154,000
Kinston, North Carolina Vinyl Windows 236,000 (2)
Cedar Rapids, Iowa Vinyl Windows 128,000 (2)
AMERCABLE
El Dorado, Arkansas AmerCable Headquarters and 317,000
Electrical Cable
Houston, Texas Cable Distribution 33,000 (2)
- --------------------
(1) Under construction.
(2) Leased facilities.
Management believes that the Company's facilities are generally in good
operating condition and are adequate to meet anticipated requirements in the
near future. The Company is currently constructing a new vinyl siding
manufacturing plant that will significantly increase its vinyl production
capacity. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business --
Alside -- Manufacturing."
Alside also operates 69 Alside Supply Centers in major metropolitan
areas throughout the United States. Except for one owned location in Akron,
Ohio, the Company leases its Supply Centers for terms generally ranging from
five to seven years with renewal options. The Supply Centers range in size from
6,000 square feet to 55,000 square feet depending on sales volume and the
breadth and type of products offered at each location.
The leases for Alside's window plants extend through 2000 for the Cedar
Rapids location and 2003 for the Kinston location. Each lease is renewable at
the Company's option for an additional five-year period. The Company's corporate
headquarters occupy approximately 3,500 square feet of leased office space in
Dallas, Texas. Under the Company's existing credit agreement with KeyBank, N.A.
(the "Credit Agreement"), the bank lender holds a security interest in the
Company's contract rights, including real property leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of its 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on The Nasdaq National Market with
the ticker symbol "SIDE." The following table shows the price range of the
Company's Common Stock since it began trading on a "when issued" basis on
February 26, 1998:
Prices
--------------------------
Quarter High Low
------- ------ ------
1998 First (commencing February 26) $20.00 $16.00
1998 Second 19.88 12.63
1998 Third 13.50 7.50
1998 Fourth 11.75 5.94
HOLDERS
At March 18, 1999, the Company had 31 record holders of Common Stock.
The Prudential Insurance Company of America ("Prudential") is the record holder
of all 1,550,000 shares of the Company's outstanding Class B Common Stock, par
value $.0025 per share ("Class B Common Stock"), which shares of Class B Common
Stock are convertible, at the holder's option, into shares of Common Stock on a
basis of one share of Common Stock for each share of Class B Common Stock. In
this report, the Company's Common Stock and Class B Common Stock are referred to
collectively as "common shares."
DIVIDENDS
The Company paid dividends of $0.05 and $0.075 per common share in 1997
and 1998, respectively. On February 22, 1999, the Board of Directors of the
Company announced a cash dividend of $0.10 per common share payable to
stockholders of record on March 15, 1999. The Company presently intends to pay
an annual cash dividend. However, the Company's future dividend policy will
depend upon the Company's capital requirements, results of operations, financial
condition and other factors as the Company's Board of Directors deems relevant.
Further, the payment of cash dividends is restricted by covenants in the Credit
Agreement and the Indenture pursuant to which the Company's 9 1/4% Senior
Subordinated Notes ("9 1/4% Notes") were issued.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below for the five-year
period ended December 31, 1998 was derived from the financial statements of the
Company which have been audited by Ernst & Young LLP, independent auditors. The
data should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements,
related notes and other financial information included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales ..................................... $ 352,606 $ 350,029 $ 356,471 $ 397,690 $ 407,933
Cost of sales ................................. 258,669 264,080 255,579 283,514 283,644
--------- --------- --------- --------- ---------
Gross profit .................................. 93,937 85,949 100,892 114,176 124,289
Selling, general and administrative expenses .. 70,482 73,207 77,740 81,142 88,727
Other income, net (1) ......................... -- -- -- -- 2,673
--------- --------- --------- --------- ---------
Income from operations ........................ 23,455 12,742 23,152 33,034 38,235
Interest expense .............................. 10,580 11,474 10,882 9,795 7,565
Equity in (earnings) loss of Amercord (2) .... (100) (537) (1,724) 626 1,881
Writedown of Amercord (3) ..................... -- -- -- -- 4,351
--------- --------- --------- --------- ---------
Income before income tax expense .............. 12,975 1,805 13,994 22,613 24,438
Income tax expense ............................ 5,101 545 5,172 9,524 11,382
--------- --------- --------- --------- ---------
Income before extraordinary item .............. 7,874 1,260 8,822 13,089 13,056
Extraordinary item (4) ........................ -- -- -- -- 4,107
--------- --------- --------- --------- ---------
Net income .................................... $ 7,874 $ 1,260 $ 8,822 $ 13,089 $ 8,949
========= ========= ========= ========= =========
SHARE DATA:
Basic earnings per common share before
extraordinary item ........................... $ 1.05 $ 0.17 $ 1.16 $ 1.72 $ 1.58
Diluted earnings per common share before
extraordinary item (5) ....................... 1.01 0.16 1.14 1.69 1.55
Weighted average number of diluted shares ...... 7,789 7,695 7,746 7,756 8,403
Dividends per share ............................ $ -- $ -- $ -- $ 0.05 $ 0.075
OTHER DATA:
EBITDA (6) .................................... $ 27,959 $ 18,082 $ 29,025 $ 39,555 $ 45,452
Capital expenditures .......................... 9,323 7,683 8,110 8,758 14,261
Cash provided by (used in) operating activities (3,248) 5,328 15,055 22,496 26,768
Cash used in investing activities ............. (9,206) (7,203) (8,087) (7,941) (14,712)
Cash provided by (used in) financing activities 11,648 2,452 (6,863) (15,004) 973
Ratio of EBITDA to interest expense ........... 2.64x 1.58x 2.67x 4.04x 6.01x
DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
( IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ............................. $ 51,336 $ 46,551 $ 51,821 $ 61,191 $ 79,225
Total assets ................................ 169,414 172,053 177,709 178,504 189,319
Short-term debt, including current maturities 15,719 19,921 14,808 2,314 3,600
Long-term debt, less current maturities ..... 83,850 82,100 80,350 78,600 75,000
Stockholders' equity ........................ 22,046 23,306 32,246 44,734 64,378
(footnotes on the following page)
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- ---------------------
(1) The Company recorded a $5.9 million curtailment gain due to the freeze of
the Alside Retirement Plan at December 31, 1998. The Company also accrued
an additional $3.3 million expense for retiree medical benefits related to
the 1989 closure of Alside's metal siding plant.
(2) In 1996, the Company's equity in the earnings of Amercord was effected by a
change in accounting principle, a settlement of a royalty dispute and an
asset impairment writedown, the net amount of which was approximately
$800,000 in income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 to the Financial
Statements.
(3) The Company recorded a pretax writedown on its investment in Amercord. The
writedown was based upon bids received from interested parties. See
"Business-Amercord."
(4) The extraordinary item represents, net of tax, the loss recognized on the
writeoff of debt issuance costs and the prepayment premium paid on the
purchase of the Company's 11 1/2% Senior Subordinated Notes ("11 1/2%
Notes") in 1998.
(5) In accordance with the Commission Staff Accounting Bulletin, Topic 4D,
shares of Common Stock issued during the 12-month period prior to the
Company's initial public offering at prices below the initial public
offering price have been included in the calculation as if these shares
were outstanding for all periods presented. Earnings per share for all
periods prior to the initial public offering in 1998 were computed in
accordance with Topic 4D.
(6) EBITDA is calculated as income from operations plus depreciation and
amortization. The Company has included information concerning EBITDA
because it believes that EBITDA is used by certain investors as one measure
of an issuer's historical ability to service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA as presented above for the Company may not be
comparable to similarly titled measures reported by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GENERAL. The Company consists of two operating divisions, Alside and
AmerCable. In addition, Amercord, a 50%-owned affiliate, is accounted for using
the equity method. The Company's results of operations are primarily affected by
the operating results of Alside, which accounted for more than 86% of the
Company's net sales in each of the last three years. Because its residential
building products are consumer durable goods, Alside'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. Alside's sales are also affected
by changes in consumer preferences with respect to types of building products.
Alside's products are used in the repair and remodeling, as well as the new
construction, sectors of the building industry. For each of the three years in
the period ended December 31, 1998, Alside believes that its sales were made
primarily to the repair and remodeling sector.
The Company believes that vinyl building products will continue to gain
market share from metal and wood products due to vinyl's favorable attributes,
which include its durability, lower maintenance cost and lower cost compared to
wood and metal. Although no assurances can be given, the Company further
believes that these increases in market share, together with Alside's increased
marketing efforts, will increase Alside's sales of vinyl siding, vinyl windows
and other complementary building products.
The Company operates with substantial operating and financial leverage.
Significant portions of Alside's selling, general and administrative expenses
are fixed costs that neither increase nor decrease proportionately with sales.
As a result, a percentage change in Alside's net sales will have a greater
percentage effect on Alside's income from operations. In addition, interest
expense related to the Company's long-term debt is relatively fixed.
AMERCABLE. AmerCable modified its business strategy in 1996 to focus on
a core group of cable products that AmerCable believed better utilized its
manufacturing efficiencies and marketing and distribution capabilities. As a
result of this strategy, AmerCable has lowered its costs and improved
manufacturing efficiencies and on-time delivery rates, thereby substantially
improving its profitability.
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AMERCORD. As anticipated, Amercord's average unit selling prices
decreased in 1998 due to increased competitive pressures. Amercord made
improvements in its manufacturing efficiency during 1998. However, these
improvements only partially offset the 9.1% decline in average selling prices.
The Company anticipates Amercord's average selling prices will decline slightly
in 1999. As a result, the Company does not anticipate that Amercord will earn a
profit in 1999. Prior to 1998, Amercord had satisfied its working capital and
capital expenditure requirements from internally generated funds and its
existing credit facilities. During 1998, the Company and Ivaco each made a
$500,000 capital contribution to Amercord. In addition, the Company has
guaranteed up to $2.0 million of certain borrowings under Amercord's bank credit
facility. In late 1998, the Company announced that it intended to seek to sell
its 50% interest in Amercord. The Company recorded a $4.4 million writedown on
its investment in Amercord in 1998. The writedown was determined based upon bids
received from interested parties. The Company presently anticipates it will be
able to sell its interest in Amercord in the second quarter of 1999.
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SEGMENT DATA. Alside accounted for more than 86% of the Company's net
sales and income from operations in each of the three years in the period ended
December 31, 1998. In 1998, Alside accounted for approximately 86% of the
Company's income from operations exclusive of corporate selling, general and
administrative expenses. Management believes that a discussion of the Company's
results and financial position for these periods is enhanced by presenting
segment information for Alside and AmerCable. The tables below set forth for the
periods indicated certain items from the Company's financial statements:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ----------------------
% OF % OF % OF
TOTAL NET TOTAL NET TOTAL NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
--------- --------- --------- --------- --------- ---------
( IN THOUSANDS)
CONSOLIDATED:
Net sales - Alside .................... $ 355,997 87.3% $ 344,000 86.5% $ 314,645 88.3%
Net sales - AmerCable ................. 51,936 12.7 53,690 13.5 41,826 11.7
--------- --------- --------- --------- --------- ---------
Total net sales ..................... 407,933 100.0 397,690 100.0 356,471 100.0
Gross profit .......................... 124,289 30.5 114,176 28.7 100,892 28.3
Selling, general and
administrative expenses (1) ......... 88,727 21.8 81,142 20.4 77,740 21.8
Other income, net ..................... 2,673 0.7 -- -- -- --
--------- --------- --------- --------- --------- ---------
Income from operations ................ 38,235 9.4 33,034 8.3 23,152 6.5
Interest expense ...................... 7,565 1.9 9,795 2.5 10,882 3.1
Equity in (earnings) loss of Amercord . 1,881 0.4 626 0.1 (1,724) (0.5)
Writedown of Amercord ................. 4,351 1.1 -- -- -- --
--------- --------- --------- --------- --------- ---------
Income before income tax expense ...... 24,438 6.0 22,613 5.7 13,994 3.9
Income tax expense .................... 11,382 2.8 9,524 2.4 5,172 1.4
--------- --------- --------- --------- --------- ---------
Income before extraordinary item ...... $ 13,056 3.2% $ 13,089 3.3% $ 8,822 2.5%
========= ========= ========= ========= ========= =========
ALSIDE:
Net sales ............................. $ 355,997 100.0% $ 344,000 100.0% $ 314,645 100.0%
Gross profit .......................... 113,797 32.0 104,716 30.4 98,636 31.3
Selling, general and
administrative expenses ............. 81,282 22.8 74,301 21.6 72,264 23.0
Other income, net ..................... 2,673 0.7 -- -- -- --
--------- --------- --------- --------- --------- ---------
Income from operations ............... $ 35,188 9.9% $ 30,415 8.8% $ 26,372 8.3%
========= ========= ========= ========= ========= =========
AMERCABLE:
Net sales ............................. $ 51,936 100.0% $ 53,690 100.0% $ 41,826 100.0%
Gross profit .......................... 10,492 20.2 9,460 17.6 2,256 5.4
Selling, general and
administrative expenses ............. 4,718 9.1 4,374 8.1 3,223 7.7
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ........ $ 5,774 11.1% $ 5,086 9.5% $ (967) (2.3)%
========= ========= ========= ========= ========= =========
- -----------------------
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $2.7 million, $2.5 million and $2.3 million for the years 1998,
1997 and 1996, respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
GENERAL. The Company's net sales increased $10.2 million to $407.9
million in 1998 as compared to $397.7 million in 1997 due to higher sales at the
Company's Alside division. Income from operations increased $5.2 million or
15.7% to $38.2 million in 1998 due to increased profitability at both the Alside
and AmerCable divisions and $2.7 million operating income resulting from
one-time accounting adjustments at Alside. The Company recorded a pretax
writedown of
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$4.4 million on its Amercord investment. The Company's income before
extraordinary item was $13.1 million, or $1.55 per share on 8.4 million weighted
average shares in 1998 as compared to $13.1 million, or $1.69 per share on 7.8
million shares in 1997. Exclusive of the one-time accounting adjustments and the
extraordinary item, the Company's net income was $14.7 million or $1.75 per
diluted share for the year ended December 31, 1998.
ALSIDE. Net sales increased $12.0 million or 3.5% to $356.0 million in
1998 from $344.0 million in 1997 due to higher sales along all product lines
with the exception of vinyl windows. Net sales of vinyl siding, kitchen cabinets
and vinyl fence increased 9.4%, 14.4% and 17.8% respectively in 1998 as compared
to 1997. Unit sales of vinyl windows decreased 10.6% in 1998 compared to 1997
due to the loss of two customers, one of which ceased operations due to
financial difficulties. Gross profit as a percentage of net sales increased to
32.0% in 1998 from 30.4% in 1997 due primarily to lower resin prices which were
partially offset by the manufacturing inefficiencies at Alside's window
manufacturing plants. Alside has since reorganized its window manufacturing
management and operations to improve quality, increase customer responsiveness
and lower costs. Selling, general and administrative expense increased 9.4% to
$81.3 million in 1998 from $74.3 million in 1997 due primarily to higher
personnel costs, lease expenses and advertising costs. The higher costs were the
result of increases to Alside's sales force, the addition of new and expanded
Supply Center locations and an enhanced focus on sales and marketing. Alside
recorded a $5.9 million curtailment gain upon freezing the Alside Retirement
Plan on December 31, 1998. Alside also accrued an additional $3.3 million for
retiree medical benefits related to the 1989 closing of its metal siding plant.
This additional accrual was based upon a recent actuarial study taking into
account unfavorable claims experience. The net effect of these adjustments was a
$2.7 million increase in operating income. Income from operations as a
percentage of sales increased to 9.9% in 1998 from 8.8% in 1997 due to increased
profits and the accounting adjustments discussed above.
AMERCABLE. AmerCable's net sales decreased 3.3% to $51.9 million in
1998 as compared to $53.7 million in 1997 due primarily to lower copper prices.
AmerCable's products are generally sold with copper as a pass-through component.
AmerCable's net sales would have been approximately $55.1 million if adjusted to
1997 copper prices. Gross profit as a percentage of sales increased to 20.2% in
1998 as compared to 17.6% in 1997 due primarily to improved product mix.
Selling, general and administrative expense increased 7.9% to $4.7 million in
1998 as compared to $4.4 million in 1997 due to higher personnel costs. Income
from operations increased 13.5% to $5.8 million in 1998 from $5.1 million in
1997 due to higher gross profits which were partially offset by higher selling,
general and administrative expense.
AMERCORD. The Company recorded a loss of $1.9 million (or $0.22 per
share) reflecting its share of the after-tax loss of Amercord for the year ended
1998 as compared to a loss of $626,000 for the same period in 1997. Amercord's
loss from operations increased to $4.6 million in 1998 as compared to $469,000
for the same period in 1997. The higher losses in 1998 were due primarily to
lower average sales prices for both tire cord and tire bead. Manufacturing
efficiencies have continued to improve at Amercord but were more than offset by
a 9.1% decrease in average sales price.
OTHER. Net interest expense decreased $2.2 million or 22.8% in 1998 as
compared to 1997 primarily due to a decrease in the Company's borrowings, the
purchase of the 11 1/2% Notes and the issuance of the 9 1/4% Notes. The Company
recorded interest income of $413,000 in 1998.
EXTRAORDINARY ITEM. In March 1998 the Company purchased $72.9 million
of its outstanding 11 1/2% Notes through a tender offer and consent
solicitation. In August 1998, the Company redeemed the $2.1 million principal
amount of the 11 1/2% Notes that remained outstanding after the tender offer. As
a result of the transactions, the Company incurred an extraordinary charge of
approximately $4.1 million net of taxes of $2.9 million resulting from the write
off of debt issuance costs and the premium paid in connection with the purchase
and redemption of the 11 1/2% Notes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996
GENERAL. The Company's net sales increased $41.2 million or 11.6% in
1997 as compared to 1996 due to an increase in sales volume at its Alside and
AmerCable divisions. Income from operations increased $9.9 million or 42.7% in
1997 as compared to 1996 due to increased sales volume at Alside and AmerCable
as well as improvements in manufacturing efficiency at AmerCable. The Company's
net income increased $4.3 million or 48.4% in 1997 as compared to 1996 due to
increased operating income at its divisions which was partially offset by a loss
from its Amercord affiliate.
ALSIDE. Alside's net sales increased $29.4 million or 9.3% in 1997 as
compared to 1996 due to increased unit sales in virtually all product lines
except metal siding. Unit sales of vinyl siding and vinyl windows increased
11.2% and 16.0%, respectively, in 1997 as compared to 1996. Alside's 1997 sales
were also favorably impacted by increased unit sales volume
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of cabinets and vinyl fence of 33.7% and 40.4%, respectively, as compared to
1996. In addition, the average unit selling price of vinyl siding increased in
1997 due to Alside's increased sales of premium siding products. The increase in
Alside's sales was partially offset by a decrease in metal siding sales as
consumer preference continued to shift away from metal siding. Gross profit as a
percentage of sales decreased to 30.4% in 1997 as compared to 31.3% in 1996
principally due to increases in raw materials costs, primarily vinyl resin.
Selling, general and administrative expense decreased as a percentage of net
sales to 21.6% in 1997 from 23.0% in 1996. Selling, general and administrative
expenses increased by 2.8% or $2.0 million to $74.3 million in 1997 due
primarily to increased advertising expenditures and higher employee
compensation. Income from operations increased 15.3% or $4.0 million in 1997 as
compared to 1996 due to increased sales volume which was partially offset by
increased raw material costs.
AMERCABLE. AmerCable's net sales increased $11.9 million or 28.4% in
1997 as compared to 1996 due to increased sales volume across all product lines.
Gross profit as a percentage of net sales increased to 17.6% in 1997 from 5.4%
in 1996 due to a 35% improvement in manufacturing efficiency (defined by the
Company as production volume per labor hour). The increases in sales and gross
profit were due primarily to AmerCable's implementation of its new business
strategy in May 1996 to focus on the production of core products which better
utilize its manufacturing and distribution capabilities. Selling, general and
administrative expenses increased to $4.4 million in 1997 from $3.2 million in
1996 due to higher incentive compensation. Income from operations increased to
$5.1 million in 1997 as compared to a loss from operations of $967,000 in 1996.
The increase was due to improved manufacturing efficiencies and increased sales
volume.
AMERCORD. The Company recorded a loss of $626,000 reflecting its share
of the after-tax loss of Amercord for the year ended 1997 as compared to income
of $1.7 million for the same period in 1996. The Company's equity in Amercord's
after-tax income for the year ended 1996 was approximately $900,000 exclusive of
the cumulative change in accounting principle, a royalty settlement and an
equipment writedown. Amercord's net sales decreased 14.5% to $74.9 million in
1997 compared to 1996 due primarily to a decrease in sales volume and a decrease
in the average unit sales price of its products. Gross profit decreased to $1.9
million in 1997 from $7.6 million in 1996 due primarily to lower sales prices
and decreased manufacturing efficiencies. Selling, general and administrative
expenses decreased 9.9% to $2.4 million in 1997 from $2.7 million in 1996.
OTHER. Net interest expense decreased $1.1 million or 10.0% in 1997 as
compared to 1996 primarily due to a decrease in the average borrowings under the
Credit Agreement, as well as interest income of $280,000 related to a $1.4
million income tax refund.
QUARTERLY FINANCIAL DATA
GENERAL. Because most of Alside's building products are intended for
exterior use, Alside's sales and operating profits tend to be lower during
periods of inclement weather. Weather conditions in the first quarter of each
calendar year historically result in that quarter producing significantly less
sales revenue than in any other period of the year. As a result, the Company has
historically had losses in the first quarter and reduced profits in the fourth
quarter of each calendar year due to the significant impact of Alside on the
Company's performance.
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Quarterly sales and operating profit data for the Company in 1997 and 1998 are
shown in the table below:
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Net sales - Alside ............................ $ 64,827 $ 94,165 $ 98,483 $ 86,525
Net sales - AmerCable ......................... 14,289 13,511 12,644 13,246
-------- -------- -------- --------
Total net sales ............................. 79,116 107,676 111,127 99,771
Gross profit .................................. 20,015 32,982 32,616 28,563
Income from operations ........................ 713 12,155 11,099 9,067
Income (loss) before extraordinary item ....... (1,130) 5,693 4,544 3,982
Basic earnings (loss) per common share ........ (0.15) 0.75 0.60 0.52
Diluted earnings (loss) per common share (1)... (0.15) 0.73 0.59 0.51
1998
Net sales - Alside ............................ $ 64,393 $ 94,961 $102,593 $ 94,050
Net sales - AmerCable ......................... 14,257 13,828 11,608 12,243
-------- -------- -------- --------
Total net sales ............................. 78,650 108,789 114,201 106,293
Gross profit .................................. 22,330 34,089 36,530 31,340
Income from operations ........................ 1,856 12,038 12,574 11,767
Income (loss) before extraordinary item ....... (767) 5,385 5,741 2,697
Basic earnings (loss) per common share
before extraordinary item ................... (0.10) 0.64 0.68 0.32
Diluted earnings (loss) per common share
before extraordinary item ................... (0.10) 0.63 0.67 0.32
- -----------------------
(1) In accordance with the Commission Staff Accounting Bulletin, Topic 4D,
shares of Common Stock issued during the 12-month period prior to the
Company's initial public offering at prices below the initial public
offering price have been included in the calculation as if these shares
were outstanding for all periods presented. Earnings per share for all
periods prior to the initial public offering in 1998 were computed in
accordance with Topic 4D.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $26.8 million, $22.5
million and $15.1 million in 1998, 1997 and 1996, respectively. The increased
operating cash flows in 1998 were due to improved operating performance at
Alside and AmerCable, as well as lower working capital requirements in 1998 as
compared to 1997. The increased operating cash flows in 1997 were due primarily
to an increase in net income due to improved operating performance at Alside and
AmerCable, as well as lower working capital requirements in 1997 as compared to
1996.
In April 1996, the Company amended and restated the Credit Agreement to
increase the facility to permit borrowings of up to $50 million and to extend
the term to May 31, 1999. The Company believes it has the ability to renew its
Credit Agreement. Available borrowings under the Credit Agreement are limited to
the lesser of the total facility less unused letters of credit or availability
based on percentages of eligible accounts receivable and inventories. The Credit
Agreement is secured by substantially all of the Company's assets other than the
Company's owned real property and its shares of Amercord. At December 31, 1998,
$7.6 million of this facility had been used to issue a $3.7 million letter of
credit securing the Company's taxable variable rate notes (the "Taxable Notes")
as well as $1.9 million securing various insurance letters of credit and $2.0
million securing a letter of credit to guarantee up to $2.0 million of
Amercord's borrowing facility. At December 31, 1998 the Company had an available
borrowing capacity under the Credit Agreement of approximately $42.4 million.
Capital expenditures totaled $14.3 million, $8.8 million and $8.1
million in 1998, 1997 and 1996, respectively. Expenditures in 1998 were
primarily used to increase window welding and assembly capacity and to increase
vinyl siding extrusion and blending capacity including the construction of a new
vinyl siding manufacturing plant. The Company began construction on this new
$13.5 million vinyl siding facility in August 1998. The Company expects that
this facility will
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17
become operational in the second quarter of 1999. Capital expenditures on the
new vinyl siding manufacturing plant were $4.2 million in 1998. Due to the delay
in starting construction, a portion of the capital expenditures planned for 1998
will be incurred in 1999. Expenditures in 1997 were primarily used to increase
vinyl extrusion capacity for siding, windows and fencing as well as to increase
and automate window fabrication capacity. Expenditures in 1996 were primarily
used to increase Alside's capacity to produce welded vinyl windows, enhance the
Company's window tooling design capability, continue automating its window
assembly process, and increase vinyl window extrusion capacity. The Company has
historically funded these capital expenditure requirements out of cash generated
from operating activities or borrowings under its bank credit facility.
The Company believes that capital expenditures prior to 1998 represent
a base level of spending needed to maintain its vinyl siding and vinyl window
production equipment as well as provide for modest increases in plant
productivity and operating capacity. Presently anticipated capital expenditures
for 1999 of $20 million includes $9.3 million for the completion of the new
vinyl siding manufacturing facility, as well as expenditures to increase
extrusion capacity for window profiles and vinyl fence. Approximately $3.3
million of the 1999 capital expenditures have been allocated to AmerCable,
primarily to increase production flexibility and capacity by 35%.
In March 1998, the Company completed a tender offer and consent
solicitation with respect to its 11 1/2% Notes. In the tender offer, the Company
purchased $72.9 million of the $75.0 million 11 1/2% Notes. Simultaneously with
the consummation of the tender offer, the Company issued $75.0 million of 9 1/4%
Notes. Concurrently with these transactions, the Company completed an initial
public offering of 2,448,120 shares of Common Stock of which 808,520 shares were
sold by the Company. The remaining 1,639,600 shares were sold by certain of the
Company's stockholders, including the holder of the Class B Common Stock who
converted 1,150,000 shares of Class B Common Stock into Common Stock on a
one-to-one basis in connection with the offering. Net proceeds to the Company,
after underwriting discounts and offering expenses, from the Common Stock and 9
1/4% Note offerings were $11.5 million and $72.4 million, respectively. The
Company redeemed the $2.1 million principal amount of 11 1/2% Notes that
remained outstanding in August 1998.
Amercord is not in compliance with certain financial covenants under
its existing bank credit agreement. Amercord has entered into a forbearance
agreement pursuant to which the lender has agreed not to exercise certain rights
under the credit agreement through March 31, 1999, subject to certain
conditions. Amercord is currently negotiating with the lender to extend the
forbearance agreement to June 30, 1999. In connection with the forbearance
agreement, the Company and Ivaco, Inc. each made a $500,000 capital contribution
to Amercord. In addition, the Company has guaranteed up to $2,000,000 of
borrowings under Amercord's credit agreement.
Effective October 1, 1998, the Company established an Employee Stock
Purchase Plan ("ESPP"). Employees participating in the ESPP can purchase shares
of Common Stock at a 15% discount to fair market value through payroll
deductions of up to 25% of their eligible compensation. The Company registered
250,000 shares of Common Stock with the Securities and Exchange Commission
("SEC") in September 1998 for issuance pursuant to the ESPP. In 1998, the
Company issued 35,327 shares of Common Stock pursuant to ESPP resulting in net
proceeds to the Company of approximately $225,000.
On October 27, 1998 the Company's Board of Directors approved a stock
repurchase program of up to 800,000 shares of Common Stock in open market
transactions depending on market, economic and other factors. The Company had
repurchased 47,000 shares of Common Stock under this program at December 31,
1998.
The Company believes the future cash flows from operations and its
borrowing capacity under its existing credit agreement will be sufficient to
satisfy its obligations to pay principal and interest on its outstanding debt,
maintain current operations, provide sufficient capital for presently
anticipated capital expenditures and fund its stock repurchase program. However,
there can be no assurances that the cash so generated by the Company will be
sufficient for these purposes.
YEAR 2000
Historically, computer programs have used a two-digit format rather
than a four-digit format to refer to the year. After the year 1999, these
computer programs will not recognize the year correctly which may cause the
computer application to fail or to process data incorrectly.
STATE OF READINESS. The Company began its Year 2000 program in 1997 in
order to ensure all systems were Year 2000 compliant. The Company's Alside
division divided its Year 2000 information technology ("IT") project as follows:
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mainframe, AS 400 systems, manufacturing systems and PC systems. Alside has
reviewed its mainframe and AS 400 systems and believes all date fields have been
corrected. All mission critical programs within its mainframe have been tested
and are believed to be Year 2000 compliant. The mission critical programs
include the general ledger, accounts payable, billing/receivable and payroll.
Updates to Alside's manufacturing systems were completed in the first quarter of
1999. Alside has established a task force consisting of representatives from
Information Services and each of the manufacturing facilities to review the
status of its PC systems. The task force identified several non-critical issues
that will be addressed by the second quarter of 1999. The Company's AmerCable
division believes its IT systems are Year 2000 compliant. Alside and AmerCable
are currently assessing and updating their non-IT systems. The Company's Alside
and AmerCable divisions are currently contacting significant customers and
suppliers to assess Year 2000 compliance and readiness. Approximately 50% of the
questionnaires sent to suppliers have been returned. The Company is currently
contacting suppliers who have not responded to the questionnaire. Based upon the
responses received, it appears the Company's suppliers are aware of the Year
2000 issue and are taking the necessary steps to ensure Year 2000 compliance.
The Company will continue to monitor and evaluate the responses to determine the
possible risks that may affect the Company's operations.
COSTS. To date, the Company's costs to address Year 2000 issues have
not been material. The Company's Alside division designs the majority of its
application systems in-house. The process of reviewing the in-house systems and
converting date sensitive fields was done by Alside's computer programmers as
part of routine system maintenance. Alside has retained an independent
consultant to assist with Year 2000 compliance for its manufacturing systems.
Alside has spent approximately $250,000 to update its manufacturing system.
Based upon the review of the PC systems task force, Alside estimates it will
spend approximately $100,000 in 1999 to upgrade certain hardware and software
systems. The Company's AmerCable division installed a new information system in
1996 that is Year 2000 compliant. AmerCable's system acquisition was not
accelerated due to Year 2000 and is therefore not considered as part of the Year
2000 expenditures.
COMPANY RISKS AND CONTINGENCY PLAN. The Company believes that its most
significant remaining Year 2000 risk is associated with its customers and
suppliers. Once the Company completes its customer and supplier readiness
evaluation it will be better able to formulate a contingency plan. The Company
believes its customers will not be significantly impacted by the Year 2000 due
to the nature of the home improvement business.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past three years. Inflation could adversely
affect the Company if inflation results in significantly higher interest rates
or substantial weakness in economic conditions. Alside's principal raw material,
vinyl resin, has been subject to rapid price changes. Although Alside has
historically been able to pass on price increases to its customers, during 1996
and 1997 Alside did not generally pass on any additional costs or savings
resulting from changes in resin prices. No assurances can be given that Alside
will be able to pass on any price increases in the future.
FINANCIAL ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
1999. The Statement establishes accounting and reporting standards for
derivative instruments and requires that a company recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company believes this statement will not
have a material effect on the Company's financial position, results of
operations or cash flows.
CERTAIN FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on the beliefs of, and estimates and
assumptions made by and information currently available to, the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," and similar words, as they relate to the Company
or the Company's management, identify forward-looking statements. These
statements reflect the current views of the Company's management regarding the
operations and results of operations of the Company as well as its customers and
suppliers. These statements are subject to certain risks and uncertainties.
Certain factors that might cause a difference are discussed below. Should one or
more of
17
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these risks or uncertainties occur, or should management's assumptions or
estimates prove incorrect, actual results and events may vary materially from
those discussed in the forward-looking statements.
GENERAL INDUSTRY, ECONOMIC, INTEREST RATES AND OTHER CONDITIONS. The
exterior residential building products industry in which Alside operates may be
significantly affected by changes in national and local economic and other
conditions, including employment levels, changing demographic considerations,
availability of financing, interest rates and consumer confidence, all of which
are outside of the Company's control. A prolonged recession affecting the
residential construction industry could result in a significant decrease in the
Company's financial performance.
SUBSTANTIAL FIXED COSTS. A significant portion of Alside's selling,
general and administrative expenses are fixed costs which do not fluctuate
proportionately with sales. As a result, a percentage decline in Alside's net
sales has a greater percentage effect on Alside's operating income.
CHANGING RAW MATERIAL COSTS AND AVAILABILITY. The principal raw
material used in producing Alside's vinyl products is vinyl resin, which
historically has changed significantly in price. Although Alside has generally
been able to pass on price increases in vinyl resin to its customers, there can
be no assurance that in the future the market will respond favorably to selling
price increases or that the Company will otherwise be able to absorb these cost
increases without significantly affecting its margins. Additionally, a major
interruption in the delivery of vinyl resin to Alside would disrupt Alside's
operations and could have an adverse effect on the Company's financial condition
and results of operations. Alside has contracts with two vendors to supply
substantially all of its vinyl resin requirements and believes its requirements
could also be met by other suppliers. Copper is the principal raw material used
by AmerCable in the manufacture of its products. Historically, copper has been
subject to rapid price changes. A decrease in the price of copper may also
affect the Company's gross margins as AmerCable generally prices its cable
products based on market prices for copper at the time of shipment. As a result,
sudden decreases in copper prices can result in lower gross profit margins in
future periods. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this report.
SUBSTANTIAL FINANCIAL LEVERAGE. The Company has substantial financial
leverage. As of December 31, 1998, the Company's total indebtedness was
approximately $78.6 million and its stockholders' equity was $64.4 million. The
Company's high level of indebtedness presents certain risks to its security
holders and could adversely affect, among other things, the ability of the
Company to obtain additional financing in the future and to respond to market
and general economic conditions, extraordinary capital requirements and other
factors. The Company's bank credit agreement includes covenants that require the
maintenance of certain financial ratios and net worth. This credit agreement
also restricts the Company's ability to repurchase its Common Stock and to pay
dividends. Outstanding borrowings under the bank credit agreement are secured by
substantially all of the assets of the Company. In addition, the Indenture under
which the Company's 9 1/4% notes were issued contains covenants that, among
other things, limits the Company's ability to incur additional indebtedness, pay
dividends, make certain investments and repurchase stock or subordinated
indebtedness. See Item 7. -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in this
report.
RISKS RELATING TO MANUFACTURING EXPANSION. The Company started
construction of a new vinyl siding manufacturing facility in 1998. The Company
expects this facility to start production in the second quarter of 1999. The
construction of a new facility involves certain risks, including construction
cost overruns and delays, the hiring and training of new employees, compliance
with environmental health and safety and other regulatory requirements and the
costs associated with the purchase of new production equipment, tooling and
other machinery. The inability of the Company to start commercial production at
its new manufacturing facility in a timely manner could have an adverse effect
on the Company's results of operations and financial condition. In addition,
when the Company commences production at this new facility, it could experience
lower than anticipated manufacturing efficiencies that may adversely affect the
Company's results of operations and financial condition. Further, there can be
no assurance that the Company will successfully integrate this new facility with
its existing manufacturing facilities or that it will achieve the anticipated
benefits and efficiencies from its expanded manufacturing operations. In
addition, the Company's operating results could be adversely affected if sales
of the Company's products do not increase at a rate sufficient to offset the
Company's increased expenses resulting from this expansion. See Item 1. --
"Business -- Manufacturing" in this report.
WEATHER IMPACTS QUARTERLY RESULTS. Because most of Alside'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 sales revenue than
in any other period of the year. Consequently, the Company has historically had
net losses in the first quarter and reduced profits from operations in the
fourth quarter of
18
20
each calendar year. See Item 7. -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Financial Data" in
this report.
COMPETITION FROM OTHER VINYL BUILDING PRODUCT MANUFACTURERS AND
ALTERNATIVE BUILDING PRODUCT MATERIALS. With the exception of Owens Corning, no
other company within the vinyl residential siding market competes with Alside in
both manufacturing and distribution. However, Alside does compete with other
manufacturers of vinyl building products, including Aluminum Company of America,
CertainTeed Corporation, Jannock Limited, Nortek, Inc. and Royal Group
Technologies Limited. Some of these companies are larger and have greater
financial resources than the Company. The Company also competes with Owens
Corning and numerous large and small distributors of building products in its
capacity as a distributor of these products. Additionally, the Company's
products face competition from alternative materials: wood and aluminum in the
window markets, and wood, masonry and metal in the siding market. There can be
no assurance the Company will not be adversely impacted by its competitors or
alternative materials. See Item 1. -- "Business -- Alside -- Competition" in
this report.
COSTS OF ENVIRONMENTAL COMPLIANCE. The Company's operations are subject
to various environmental statutes and regulations, including laws and
regulations addressing materials used in the manufacturing of the Company's
products. In addition, certain of the Company's operations are subject to
federal, state and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water and establish
standards for the treatment, storage and disposal of solid and hazardous wastes.
Future expenditures may be necessary as compliance standards and technology
change. Unforeseen significant expenditures required to maintain compliance,
including unforeseen liabilities, could have an adverse effect on the Company's
business and financial condition. See Item 1. -- "Business -- Government
Regulation and Environmental Matters" in this report.
YEAR 2000. The Company faces certain risks relating to Year 2000
issues. See Item 7. -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000" in this report.
ITEM 7a. DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company had $18.8 million in short-term investments at December 31,
1998. The short-term investments are highly liquid with original maturities of
less than three months and are subject to interest-rate risk. The value of these
investments would decline in the event of increases in market interest rates.
The Company generally holds these investments until maturity thus avoiding the
losses resulting from sudden changes in interest rates. Declines in interest
rates would reduce the amount of the Company's interest income.
The Company borrows under its revolving credit facility from time to
time for general corporate purposes, including working capital requirements and
capital expenditures. Borrowings under the revolving credit facility bear
interest at either the prime commercial rate or LIBOR plus 2.00% at the option
of the Company. Therefore, the Company is also subject to fluctuations in
interest rates as a result of the terms of this credit facility. At December 31,
1998, the Company had no borrowings under its revolving credit facility.
At December 31, 1998, the Company had $3.6 million of taxable variable
rate notes with interest payable monthly at the greater of the 30 or 90 day
commercial paper rate plus 0.125%. These notes mature on April 1, 1999. Although
the Company is subject to interest rate fluctuations, changes in the interest
rate in the upcoming months would not be material as it relates to the taxable
notes as the interest is paid monthly and the remaining balance is due in early
1999.
The Company has $75.0 million of Senior Subordinated Notes due 2008
that bear a fixed interest rate of 9 1/4%. The fair value of the Company's 9
1/4% Notes is sensitive to changes in interest rates.
The Company has periodically entered into interest rate swap agreements
in order to manage its exposure to interest rate changes. At December 31, 1998,
the Company had no interest rate swaps.
19
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FOREIGN CURRENCY EXCHANGE RATE RISK
The Company's revenues are primarily from domestic customers and are
realized in U.S. dollars. Accordingly, the Company believes its direct foreign
currency exchange rate risk is not material. In the past, the Company has hedged
against foreign currency exchange rate fluctuations on specific sales or
equipment purchasing contracts. At December 31, 1998 the Company had currency
hedges in place in connection with equipment purchases. However, the amounts
involved are not material to the Company.
COMMODITY PRICE RISK
Copper is one of the primary raw materials used by its AmerCable
division. The Company from time to time uses forward contracts as a hedge
against changes in copper prices for specific contracts. At December 31, 1998,
no raw material forward contracts were in place. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Forward-Looking Statements -- Changing Raw Material Costs and
Availability" in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED MATERIALS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors..................................................................... 21
Balance Sheets as of December 31, 1998 and 1997.................................................... 22
Statements of Operations for the years ended December 31, 1998, 1997 and 1996...................... 23
Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996............ 24
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...................... 25
Notes to Financial Statements...................................................................... 26
20
22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Associated Materials Incorporated
Dallas, Texas
We have audited the accompanying balance sheets of Associated Materials
Incorporated as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associated Materials
Incorporated at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 5, 1999
21
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ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents .............................................. $ 14,964 $ 1,935
Accounts receivable, net of allowance for doubtful accounts of $4,159
and $4,423 at December 31, 1998 and 1997, respectively ............... 45,756 49,197
Inventories ............................................................ 56,245 56,621
Income taxes receivable ................................................ -- 266
Other current assets ................................................... 3,572 3,291
--------- ---------
Total current assets ...................................................... 120,537 111,310
Property, plant and equipment, net ........................................ 61,130 53,855
Investment in Amercord Inc. ............................................... 4,961 10,694
Other assets .............................................................. 2,691 2,645
--------- ---------
Total assets .............................................................. $ 189,319 $ 178,504
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ........................................................ $ -- $ 4,769
Accounts payable ....................................................... 11,713 15,083
Accrued liabilities .................................................... 25,417 27,953
Revolving line of credit ............................................... -- 564
Income taxes payable ................................................... 582 --
Current portion of long-term debt ...................................... 3,600 1,750
--------- ---------
Total current liabilities ................................................. 41,312 50,119
Deferred income taxes ..................................................... 2,616 1,951
Other liabilities ......................................................... 6,013 3,100
Long-term debt ............................................................ 75,000 78,600
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 100,000 shares at December 31, 1998 and 1997
Issued shares - 0 at December 31, 1998 and 1997 ..................... -- --
Common stock, $.0025 par value:
Authorized shares - 15,000,000 at December 31, 1998 and 1997 Issued
shares - 6,938,747 at December 31, 1998 and 4,934,900 at
December 31, 1997 ................................................ 17 12
Common stock Class B, $.0025 par value:
Authorized and issued shares - 1,550,000 at December 31, 1998 and
2,700,000 at December 31, 1997 ..................................... 4 7
Less: Treasury stock, at cost - 88,396 shares at December 31, 1998 and
41,396 at December 31, 1997 ......................................... (1,048) (542)
Capital in excess of par ............................................... 12,273 505
Retained earnings ...................................................... 53,132 44,752
--------- ---------
Total stockholders' equity ................................................ 64,378 44,734
--------- ---------
Total liabilities and stockholders' equity ................................ $ 189,319 $ 178,504
========= =========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
--------- --------- ---------
Net sales ........................................ $ 407,933 $ 397,690 $ 356,471
Cost of sales .................................... 283,644 283,514 255,579
--------- --------- ---------
124,289 114,176 100,892
Selling, general and administrative .............. 88,727 81,142 77,740
Other income, net ................................ 2,673 -- --
--------- --------- ---------
Income from operations ........................... 38,235 33,034 23,152
Interest expense ................................. 7,565 9,795 10,882
--------- --------- ---------
30,670 23,239 12,270
Equity in (earnings) loss of Amercord Inc. ....... 1,881 626 (1,724)
Writedown of Amercord Inc. ....................... 4,351 -- --
--------- --------- ---------
Income before income tax and extraordinary item .. 24,438 22,613 13,994
Income tax expense ............................... 11,382 9,524 5,172
--------- --------- ---------
Income before extraordinary item ................. 13,056 13,089 8,822
Extraordinary loss from retirement of debt, net of
income taxes ................................. 4,107 -- --
--------- --------- ---------
Net income ....................................... $ 8,949 $ 13,089 $ 8,822
========= ========= =========
Earnings Per Common Share - Basic:
Income before extraordinary item ................. $ 1.58 $ 1.72 $ 1.16
Extraordinary loss from retirement of debt ....... (0.50) -- --
--------- --------- ---------
Net income ....................................... $ 1.08 $ 1.72 $ 1.16
========= ========= =========
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item ................. $ 1.55 $ 1.69 $ 1.14
Extraordinary loss from retirement of debt ....... (0.49) -- --
--------- --------- ---------
Net income ....................................... $ 1.06 $ 1.69 $ 1.14
========= ========= =========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CLASS B
COMMON STOCK COMMON STOCK TREASURY STOCK
----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ........ 4,832 $ 12 2,700 $ 7 -- $ --
Net income and total
comprehensive income .......... -- -- -- -- -- --
Exercise of Common Stock
options and related tax
benefits ...................... 62 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........ 4,894 12 2,700 7 -- --
Net income and total
comprehensive income .......... -- -- -- -- -- --
Cash dividends ($0.05 per
share) ........................ -- -- -- -- -- --
Exercise of Common Stock
options and related tax
benefits ...................... 41 -- -- -- -- --
Purchase of treasury shares ...... -- -- -- -- 41 (542)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ........ 4,935 12 2,700 7 41 (542)
Net income and total
comprehensive income .......... -- -- -- -- -- --
Cash dividends ($0.075 per
share) ........................ -- -- -- -- -- --
Exercise of Common Stock
options and related tax
benefits ...................... 10 -- -- -- -- --
Purchase of treasury shares ...... -- -- -- -- 47 (506)
Common Stock issued .............. 809 2 -- -- -- --
Common Stock issued under
Employee Stock Purchase
Plan .......................... 35 -- -- -- -- --
Conversion of Class B
Common Stock to Common
Stock ......................... 1,150 3 (1,150) (3) -- --
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ........ 6,939 $ 17 1,550 $ 4 88 $ (1,048)
======== ======== ======== ======== ======== ========
CAPITAL IN TOTAL
EXCESS RETAINED STOCKHOLDERS'
OF PAR EARNINGS EQUITY
-------- -------- --------
Balance at December 31, 1995 ........ $ 67 $ 23,220 $ 23,306
Net income and total
comprehensive income .......... -- 8,822 8,822
Exercise of Common Stock
options and related tax
benefits ...................... 118 -- 118
-------- -------- --------
Balance at December 31, 1996 ........ 185 32,042 32,246
Net income and total
comprehensive income .......... -- 13,089 13,089
Cash dividends ($0.05 per
share) ........................ -- (379) (379)
Exercise of Common Stock
options and related tax
benefits ...................... 320 -- 320
Purchase of treasury shares ...... -- -- (542)
-------- -------- --------
Balance at December 31, 1997 ........ 505 44,752 44,734
Net income and total
comprehensive income .......... -- 8,949 8,949
Cash dividends ($0.075 per
share) ........................ -- (569) (569)
Exercise of Common Stock
options and related tax
benefits ...................... 60 -- 60
Purchase of treasury shares ...... (506)
Common Stock issued .............. 11,483 -- 11,485
Common Stock issued under
Employee Stock Purchase
Plan .......................... 225 -- 225
Conversion of Class B
Common Stock to Common
Stock ......................... -- -- --
-------- -------- --------
Balance at December 31, 1998 ........ $ 12,273 $ 53,132 $ 64,378
======== ======== ========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES
Net income ...................................................... $ 8,949 $ 13,089 $ 8,822
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization ................................. 7,217 6,521 5,873
Deferred income taxes ......................................... 665 67 2,002
Provision for losses on accounts receivable ................... 3,500 3,500 3,087
Equity in (earnings) loss of Amercord Inc. .................... 1,881 626 (1,724)
Writedown of Amercord Inc. .................................... 4,351 -- --
Loss (gain) on sale of assets ................................. 30 (348) 10
Extraordinary loss on retirement of debt, net of income taxes . 4,107 -- --
Other income, net ............................................. (2,673) -- --
Changes in operating assets and liabilities:
Accounts receivable ......................................... (59) (5,489) (1,540)
Inventories ................................................. 376 1,736 (2,435)
Other current assets ........................................ (281) (266) (1,058)
Bank overdrafts ............................................. (4,769) (84) (1,194)
Accounts payable ............................................ (3,370) (2,031) 2,625
Accrued liabilities ......................................... 3,415 4,988 623
Income taxes receivable/payable ............................. 3,726 480 (160)
Other assets ................................................ 66 96 (203)
Other liabilities ........................................... (363) (389) 327
-------- -------- --------
Net cash provided by operating activities ....................... 26,768 22,496 15,055
INVESTING ACTIVITIES
Proceeds from sale of assets .................................... 49 817 23
Additions to property, plant and equipment, net ................. (14,261) (8,758) (8,110)
Investment in Amercord Inc. ..................................... (500) -- --
-------- -------- --------
Net cash used in investing activities ........................... (14,712) (7,941) (8,087)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ........................ 75,000 -- --
Net proceeds from issuance of common stock ...................... 11,710 -- --
Net decrease in revolving line of credit ........................ (564) (12,494) (5,113)
Principal payments of long-term debt ............................ (1,750) (1,750) (1,750)
Principal payments of 11 1/2% Senior Subordinated Notes ......... (75,000) -- --
Prepayment premium on early retirement of debt .................. (4,899) -- --
Debt issuance costs ............................................. (2,509) -- --
Dividends paid .................................................. (569) (379) --
Treasury stock acquired ......................................... (506) (542) --
Options exercised ............................................... 60 161 --
-------- -------- --------
Net cash provided by (used in) financing activities ............. 973 (15,004) (6,863)
-------- -------- --------
Net increase (decrease) in cash ................................. 13,029 (449) 105
Cash at beginning of period ..................................... 1,935 2,384 2,279
-------- -------- --------
Cash at end of period ........................................... $ 14,964 $ 1,935 $ 2,384
======== ======== ========
Supplemental Information:
Cash paid for interest ...................................... $ 8,924 $ 10,110 $ 10,895
======== ======== ========
Cash paid for income taxes, net ............................. $ 8,259 $ 9,098 $ 3,546
======== ======== ========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Line of Business
Associated Materials Incorporated (the "Company") consists of two
operating divisions, Alside and AmerCable, and a 50%-owned affiliate, Amercord
Inc. ("Amercord"), which is accounted for using the equity method. Alside is
engaged principally in the manufacture and distribution of exterior residential
building products to professional contractors throughout the United States.
AmerCable manufactures jacketed electrical