Filed Pursuant to Rule 424(b)(3)
Registration No. 333-92010;
333-92010-01
PROSPECTUS SUPPLEMENT NO. 5
(TO PROSPECTUS DATED OCTOBER 18, 2002,
TO THE PROSPECTUS SUPPLEMENT NO. 1 DATED NOVEMBER 1, 2002,
TO THE PROSPECTUS SUPPLEMENT NO. 2 DATED FEBRUARY 21, 2003
TO THE PROSPECTUS SUPPLEMENT NO. 3 DATED MARCH 28, 2003 AND
TO THE PROSPECTUS SUPPLEMENT NO. 4 DATED MAY 2, 2003)
ASSOCIATED MATERIALS INCORPORATED
OFFER TO EXCHANGE
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
FOR UP TO
$165,000,000 OF 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
---------------------
This prospectus supplement no. 5 relates to the offer by Associated
Materials Incorporated ("we," "us" or "our company") to exchange up to
$165,000,000 in aggregate principal amount of our new 9 3/4% senior subordinated
notes due 2012 for a like aggregate principal amount of our issued and
outstanding 9 3/4% senior subordinated notes due 2012. The exchange offer
expired on November 26, 2002 and is no longer open for participation.
On May 12, 2003, we filed our quarterly report on Form 10-Q for the quarter
ended March 29, 2003 with the United States Securities and Exchange Commission.
The attached information, consisting of the quarterly report on Form 10-Q,
supplements the information in the prospectus supplement no. 1 dated November 1,
2002 and prospectus supplement no. 3 dated March 28, 2003. The prospectus
supplement no. 1 supplemented and superceded the information in the prospectus
dated October 18, 2002, the prospectus supplement no. 2 dated February 21, 2003
supplemented the information in the prospectus supplement no. 1, the prospectus
supplement no. 3 supplemented and superceded the information in the prospectus
supplement no. 2, the prospectus supplement no. 4 supplemented the information
in the prospectus supplement no. 1 and prospectus supplement no. 3, and this
prospectus supplement no. 5 supplements and supercedes the information in the
prospectus supplement no. 4. This prospectus supplement no. 5 should be read in
conjunction with the prospectus supplement no. 1 and prospectus supplement no.
3, which are attached.
Investing in the exchange notes involves risks. SEE "RISK FACTORS"
BEGINNING ON PAGE 18 OF THE PROSPECTUS SUPPLEMENT NO. 1 FOR A DISCUSSION OF
CERTAIN FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN THE
NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT NO. 5. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus Supplement No. 5 is May 12, 2003.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
__ EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
-----------------------------------------
or
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number: 000-24956
ASSOCIATED MATERIALS INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of Organization)
3773 State Rd. Cuyahoga Falls, Ohio 44223
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (330) 929 -1811
-----------------------------
Former Fiscal Year: December 31st
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -----
As of May 5, 2003, the Registrant had 100 shares of Common Stock
outstanding, all of which is held by an affiliate of the Registrant.
ASSOCIATED MATERIALS INCORPORATED
REPORT FOR THE QUARTER ENDED MARCH 29, 2003
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets......................................................... 1
March 29, 2003 (Unaudited) and December 31, 2002 - Successor
Statements of Operations (Unaudited)................................... 2
Quarter ended March 29, 2003 - Successor
Quarter ended March 31, 2002 - Predecessor
Statements of Cash Flows (Unaudited)................................... 3
Quarter ended March 29, 2003 - Successor
Quarter ended March 31, 2002 - Predecessor
Notes to Financial Statements (Unaudited).............................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 12
Item 4. Controls and Procedures.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
SIGNATURES................................................................... 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(In thousands)
(Unaudited)
March 29, December 31,
2003 2002
----------- ------------
Successor
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,853 $ 13,022
Accounts receivable, net.......................................... 62,252 67,861
Inventory......................................................... 65,366 60,369
Income taxes receivable........................................... 8,106 4,675
Deferred income taxes............................................. 3,653 3,653
Other current assets.............................................. 4,235 4,604
----------- -----------
Total current assets............................................ 146,465 154,184
Property, plant and equipment, net................................... 99,293 99,113
Goodwill............................................................. 197,461 197,461
Trademarks and trade names, net...................................... 97,108 97,504
Patents, net......................................................... 6,020 6,186
Other assets......................................................... 10,696 11,089
----------- -----------
Total assets................................................ $ 557,043 $ 565,537
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................. $ 27,505 $ 31,319
Accrued liabilities............................................... 28,815 34,319
----------- -----------
Total current liabilities....................................... 56,320 65,638
Deferred income taxes................................................ 58,976 58,976
Other liabilities.................................................... 20,898 20,746
Long-term debt....................................................... 248,100 242,408
Stockholder's equity................................................. 172,749 177,769
----------- -----------
Total liabilities and stockholder's equity.................. $ 557,043 $ 565,537
=========== ===========
See accompanying notes
-1-
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
------------------------------------
Successor Predecessor
--------- -----------
Net sales............................................................ $ 110,944 $ 123,198
Cost of sales........................................................ 82,776 90,778
----------- -----------
Gross profit......................................................... 28,168 32,420
Selling, general and administrative expense.......................... 31,310 31,219
----------- -----------
Income (loss) from operations........................................ (3,142) 1,201
Interest expense, net................................................ 5,438 1,669
Merger transaction costs............................................. - 2,002
----------- -----------
Loss before taxes.................................................... (8,580) (2,470)
Income taxes......................................................... (3,560) (951)
------------ ------------
Net loss............................................................. $ (5,020) $ (1,519)
============ ============
See accompanying notes
-2-
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
---------------------------------
Successor Predecessor
--------- -----------
OPERATING ACTIVITIES
Net loss........................................................ $ (5,020) $ (1,519)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 2,717 2,979
Tax benefit from stock option exercise..................... - 113
Amortization of deferred financing costs................... 344 -
Changes in operating assets and liabilities:
Accounts receivable, net................................. 5,609 4,126
Inventories.............................................. (4,997) (4,838)
Income taxes............................................. (3,431) (2,533)
Accounts payable and accrued liabilities................. (9,318) (10,844)
Other.................................................... 570 523
---------- ----------
Net cash used in operating activities........................... (13,526) (11,993)
INVESTING ACTIVITIES
Additions to property, plant and equipment...................... (2,335) (3,118)
---------- -----------
Net cash used in investing activities........................... (2,335) (3,118)
FINANCING ACTIVITIES
Net increase in revolving line of credit........................ 6,600 -
Redemption of 9 1/4% senior subordinated notes.................. (908) -
Dividends paid.................................................. - (339)
Stock options................................................... - 94
---------- ----------
Net cash provided by (used in) financing activities............. 5,692 (245)
---------- -----------
Net decrease in cash............................................ (10,169) (15,356)
Cash at beginning of period..................................... 13,022 28,869
---------- ----------
Cash at end of period........................................... $ 2,853 $ 13,513
========== ==========
Supplemental information:
Cash paid for interest.......................................... $ 103 $ 3,493
========== ==========
Cash paid (received) for income taxes........................... $ (129) $ 2,254
=========== ==========
See accompanying notes
-3-
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 29, 2003
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial reporting, the
instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in its annual report
on form 10-K for the year ended December 31, 2002. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have been
included.
The Company elected to change its fiscal year from a calendar year
ending on December 31st to a 52 / 53 week fiscal year that ends on the Saturday
closest to December 31st. The first quarter of fiscal 2003 began on January 1,
2003 and ended on March 29, 2003. The Company's 2003 fiscal year end will be
January 3, 2004.
The Company's results of operations prior to the date of the merger
transaction (see Note 2) are presented as the results of the Predecessor. The
results of operations, including the merger transaction and results thereafter,
are presented as the results of the Successor. In addition, the Company
completed the sale of its AmerCable division on June 24, 2002. AmerCable's first
quarter 2002 results are included in the results of continuing operations of the
Predecessor.
The Company is a manufacturer of exterior residential building
products, which are distributed through 90 company-owned Supply Centers across
the United States. The Company produces a broad range of vinyl siding and vinyl
window product lines as well as vinyl fencing, vinyl decking and vinyl garage
doors. Because most of the Company's building products are intended for exterior
use, the Company's sales and operating profits tend to be lower during periods
of inclement weather. Weather conditions in the first quarter of each year
historically result in that quarter producing significantly less sales revenue
and profits than in any other period of the year. Therefore, the results of
operations for any interim period are not necessarily indicative of the results
of operations for a full year. The Company's net loss and comprehensive loss are
the same for each period presented.
NOTE 2 - PRO FORMA INFORMATION
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly-owned
subsidiary of Associated Materials Holdings Inc. ("Holdings"), which is
controlled by affiliates of Harvest Partners, Inc. The merger was accounted for
using the purchase method of accounting. The total consideration of $379.5
million was allocated to tangible and intangible assets acquired and liabilities
assumed based on fair values at the date of the acquisition based on valuation
estimates and certain assumptions. The purchase consideration of $379.5 million,
tender offer of the $74.0 million of 9 1/4% notes and debt extinguishment costs
of $7.6 million were financed through: (1) the issuance of $165 million of 9
3/4% senior subordinated notes due 2012 ("9 3/4% notes"), (2) $125 million from
a new $165 million credit facility ("credit facility"), (3) $164.8 million cash
contribution from Holdings and (4) cash of approximately $6.3 million,
representing a portion of the Company's total cash of $6.8 million on hand at
the time of the acquisition.
On June 24, 2002, the Company completed the sale of its AmerCable
division to AmerCable Incorporated, a newly formed entity controlled by Wingate
Partners III, L.P. and members of AmerCable's management for net proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement. The Company used the net proceeds to repay a
portion of its credit facility.
-4-
The following pro forma information for the quarter ended March 31,
2002 was prepared as if the merger transaction and the sale of AmerCable
occurred as of the beginning of the period. On a pro forma basis, the Company
would have had:
Quarter
Ended
March 31,
2002
---------
Net sales...................................................................... $ 111,062
Net loss....................................................................... $ (2,586)
NOTE 3 - INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Inventories consisted of the following (in thousands):
March 29, December 31,
2003 2002
---- ----
Raw materials.................................................................. $ 12,144 $ 13,545
Work-in-process................................................................ 5,041 3,928
Finished goods and purchased stock............................................. 48,181 42,896
---------- ----------
$ 65,366 $ 60,369
========== ==========
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $197.5 million consists of the purchase price for the
merger transaction in excess of the fair value of the tangible and intangible
net assets acquired. Other intangible assets consist of the Company's trademarks
and trade name of $98.7 million and patents of approximately $6.8 million. The
Company has determined one trademark and the Alside trade name totaling $74.7
million have indefinite useful lives. The remaining $24.0 million of trademarks
are being amortized on a straight-line basis over their estimated remaining
useful lives of 15 years. Patents are being amortized on a straight-line basis
over their estimated remaining useful lives of 10 years. Amortization expense
related to trademarks and patents was approximately $0.4 million and $0.2
million, respectively for the quarter ended March 29, 2003. There was no
amortization expense for the quarter ended March 31, 2002. Accumulated
amortization related to trademarks and patents was approximately $1.6 million
and $0.8 million, respectively as of March 29, 2003 and approximately $1.2
million and $0.6 million, respectively as of December 31, 2002.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 29, December 31,
2003 2002
---- ----
9 3/4% notes................................................................... $ 165,000 $ 165,000
Term loan under credit facility................................................ 76,500 76,500
Revolving loans under credit facility.......................................... 6,600 -
9 1/4% notes................................................................... - 908
---------- ----------
$ 248,100 $ 242,408
========== ==========
The Company's $165 million of 9 3/4% notes due in 2012 pay interest
semi-annually in April and October. The Company's credit facility includes term
loans due through 2009 that bear interest at the London Interbank Offered Rate
(LIBOR) plus 3.50%, payable quarterly at the end of each calendar quarter, and
up to $40 million of available borrowings provided by revolving loans, which
expire in 2007. No interest was paid on the credit facility in the first quarter
of 2003 due to the fiscal quarter ending before March 31, 2003.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell its assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage of interest expense. The Company was in compliance with its
covenants as of March 29, 2003. On
-5-
an annual basis, the Company is required to make principal payments on the term
loan under its credit facility based on a percentage of excess cash flows as
defined in the credit facility. The payments on the term loan in 2002 were
sufficient such that no additional principal payments were required in 2003
under the excess cash flow provision. The Company records as a current liability
those principal payments that are estimated to be due within 12 months under the
excess cash flow provision of the credit facility when the likelihood of those
payments becomes probable.
The Company has one subsidiary, which is a wholly owned subsidiary
having no assets, liabilities or operations. This subsidiary fully and
unconditionally guarantees the Company's 9 3/4% notes.
NOTE 6 - STOCK PLANS
The Company measures stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 -
"Accounting for Stock Issued to Employees." The Company follows the disclosure
provisions required under Financial Accounting Standard Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation." Pro forma information regarding net income is required by SFAS
No. 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that statement using a minimum value
approach for companies with private equity. FASB SFAS No. 148 - "Accounting for
Stock-Based Compensation" requires this information to be disclosed on a
quarterly basis. The pro forma effect on net loss for the quarters ended March
29, 2003 and March 31, 2002 would have been (in thousands):
Quarter Quarter
Ended Ended
March 29, March 31,
2003 2002
---- ----
Successor Predecessor
--------- -----------
Net loss as reported ....................................... $ (5,020) $ (1,519)
Pro forma stock based employee compensation cost, net of tax (32) (57)
------------- -------------
Pro forma net loss.......................................... $ (5,052) $ (1,576)
============== =============
NOTE 7 - INCOME TAXES
As a result of relocating the Company's corporate office from Texas to
Ohio, the Successor's state and local income tax rate increased, raising the
Company's total effective tax rate to 41.5% from 38.5%. Due to the seasonal
nature of the Company's operating results, the Company has recorded an income
tax benefit on the loss before taxes for the quarter ended March 29, 2003.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly-owned
subsidiary of Associated Materials Holdings Inc., which is controlled by
affiliates of Harvest Partners, Inc.
The Company's results of operations prior to the date of the merger
transaction are presented as the results of the Predecessor. The results of
operations, including the merger transaction and results thereafter, are
presented as the results of the Successor. In addition, the Company completed
the sale of its AmerCable division on June 24, 2002. AmerCable's first quarter
2002 results are included in the results of continuing operations of the
Predecessor.
The Company has changed the way it describes its historical financial
performance in connection with the adoption by the SEC of rules affecting the
use and disclosure of non-GAAP financial measures. Accordingly, EBITDA as used
in this report has not been adjusted for items that may impact its comparability
to prior periods, including items such as AmerCable's results of operations and
merger transaction costs. A reconciliation of EBITDA to net loss is included in
the table below.
The following table sets forth for the periods indicated the results of
the Company's operations by segment:
-7-
ASSOCIATED MATERIALS INCORPORATED
CONDENSED SUCCESSOR / PREDECESSOR STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
QUARTER QUARTER
ENDED ENDED
MARCH 29, MARCH 31,
2003 2002
SUCCESSOR PREDECESSOR
--------- -----------
Net sales
Alside............................. $110,944 $ 111,062
AmerCable.......................... - 12,136
-------- ---------
Total.......................... 110,944 123,198
Gross profit
Alside............................. 28,168 30,691
AmerCable.......................... - 1,729
-------- ---------
Total.......................... 28,168 32,420
Selling, general and administrative expense
Alside............................. 31,310 29,572
AmerCable.......................... - 1,647
-------- ---------
Total . 31,310 31,219
-------- ---------
Income (loss) from operations
Alside............................. (3,142) 1,119
AmerCable.......................... - 82
-------- ---------
Total.......................... (3,142) 1,201
Interest expense, net................... 5,438 1,669
-------- ---------
Loss before other non-operating expenses and
income taxes......................... (8,580) (468)
Merger transaction costs (a)............ - 2,002
-------- ---------
Loss before taxes....................... (8,580) (2,470)
Income taxes............................ (3,560) (951)
--------- ----------
Net loss ............................... $ (5,020) $ (1,519)
========= ==========
Reconciliation of net loss to EBITDA (b)(c):
- --------------------------------------------
Net loss ............................... $ (5,020) $ (1,519)
Interest ............................... 5,438 1,669
Taxes ............................... (3,560) (951)
Depreciation and amortization........... 2,717 2,979
-------- ---------
EBITDA ............................... $ (425) $ 2,178
========= =========
(a) Merger transaction costs include investment banking and legal fees
incurred by the Predecessor in conjunction with the strategic review
process and subsequent merger transaction with Harvest Partners.
(b) EBITDA is calculated as net loss plus interest, taxes, depreciation and
amortization. The Company considers EBITDA to be an important indicator
of its operational strength and performance of its business. The
Company has included EBITDA because it believes it is used by certain
investors as one measure of a company's ability to service its debt.
EBITDA should be considered in addition to, not as a substitute for the
Company's net income or loss or to cash flows as well as other measures
of financial performance in accordance with accounting principles
generally accepted in the United States. EBITDA, as it is defined in
the Company's credit facility and indenture governing the 9 3/4% notes,
excludes non-recurring items. The credit facility and indenture
governing the 9 3/4% notes have certain financial covenants that use
ratios utilizing the Company's EBITDA. EBITDA has not been prepared in
accordance with accounting principles generally accepted in the United
States. Therefore, EBITDA as presented by the Company, may not be
comparable to similarly titled measures reported by other companies.
(c) AmerCable's EBITDA for the quarter ended March 31, 2002 is calculated
as its net income of $0.1 million, plus depreciation and amortization
of $0.5 million. AmerCable's interest and taxes for this period were
less than $0.1 million.
-8-
Quarter Ended March 29, 2003 Compared to Quarter Ended March 31, 2002
- ---------------------------------------------------------------------
Alside
Subsequent to the merger transaction and sale of AmerCable, Alside
represents the ongoing operations of the Company.
Net sales were $110.9 million for the quarter ended March 29, 2003,
essentially flat compared to $111.1 million for the same period in 2002. Unit
sales of vinyl siding decreased 15% while unit sales of vinyl windows increased
8% for the first quarter of 2003 compared to the same period in 2002. The
decrease in unit sales of vinyl siding is primarily a result of the severe
winter weather conditions in many of the Company's key geographic areas as well
as continued macroeconomic uncertainties, including historically low consumer
confidence. According to available industry data, the vinyl siding industry
decreased 5% during the first quarter of 2003 compared to the same period in
2002. The Company believes its vinyl siding performance was below the industry
in the first quarter due to its competitors' customers building inventory in
advance of industry-wide price increases effective April 1, 2003 and as a result
of special promotions offered during slower winter months. As the majority of
the Company's vinyl siding sales are made directly to contractors through its
company-owned supply centers, its revenue would not be significantly impacted by
the above mentioned factors. Gross profit for the quarter ended March 29, 2003
was $28.2 million, or 25.4% of net sales, compared to $30.7 million, or 27.6% of
net sales, for the quarter ended March 31, 2002. The decrease in gross profit
margin percentage was a result of window sales comprising a larger proportion of
total sales in the first quarter of 2003 compared to the same period in 2002
along with increased resin costs. Selling, general and administrative expense
increased to $31.3 million, or 28.2% of net sales, for the quarter ended March
29, 2003 compared to $29.6 million, or 26.6% of net sales, for the same period
in 2002. The increase in selling, general and administrative expense is
primarily a result of seven new supply centers added over the past twelve
months. The loss from operations was $3.1 million in the first quarter of 2003
compared to income from operations of $1.1 million for the same period in 2002.
Successor and Predecessor Results
The Successor had net sales and a net loss of $110.9 million and $5.0
million, respectively, for the quarter ended March 29, 2003. Interest expense
during this period was $5.4 million and consisted primarily of interest on the 9
3/4% notes, term loan and revolving loans under the credit facility and
amortization of deferred financing costs. As a result of relocating the
Company's corporate office from Texas to Ohio, the Successor's state and local
income tax rate increased, raising the Company's total effective tax rate to
41.5% from 38.5%. Due to the seasonal nature of the Company's operating results,
the Company has recorded an income tax benefit on the loss before taxes for the
quarter ended March 29, 2003.
The Predecessor had net sales and a net loss of $123.2 million and $1.5
million for the quarter ended March 31, 2002. Interest expense was $1.7 million
and consisted primarily of interest on the Company's then outstanding 9 1/4%
notes. The Predecessor's results include $2.0 million of transaction costs
consisting of investment banking and legal fees in conjunction with the
strategic review process and subsequent merger transaction. Income taxes for
this period were recorded at an effective tax rate of 38.5%.
EBITDA
EBITDA for the first quarter of 2003 was a loss of $0.4 million
compared to earnings of $2.2 million for the same period in 2002. EBITDA for the
quarter ended March 31, 2002 includes $0.6 million of EBITDA relating to the
AmerCable division and merger transaction costs of $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 2003, the Company had cash and cash equivalents of $2.9
million and available borrowing capacity of approximately $30.8 million under
the revolving portion of its credit facility. Outstanding letters of credit as
of March 29, 2003, totaled $2.6 million securing various insurance letters of
credit.
Net cash used in operations was $13.5 million and $12.0 million for the
quarters ended March 29, 2003 and March 31, 2002, respectively. The cash used in
operations for both periods reflects the operating results for each quarter, the
seasonal increase of inventory levels required for the summer selling season,
payments of accrued profit sharing and customer sales incentives partially
offset by a decrease in accounts receivable.
-9-
Capital expenditures totaled $2.3 million and $3.1 million for the
quarters ended March 29, 2003 and March 31, 2002, respectively. Capital
expenditures in the 2002 period include expenditures related to the Company's
former AmerCable division of $1.6 million. Capital expenditures in the first
quarter of 2003 were primarily to replace vinyl siding extrusion and handling
equipment at the Company's Ennis, Texas manufacturing location and expenditures
related to opening two new supply centers. The Company expects to open two
additional supply centers in 2003.
Cash flows from financing activities for the quarter ended March 29,
2003 include borrowings on the revolving portion of the Company's credit
facility of $6.6 million and the redemption of the remaining outstanding 9 1/4%
notes of $0.9 million. The $0.9 million of 9 1/4% notes were redeemed at
104.625% of the principal amount of such notes plus accrued and unpaid interest
through the date of redemption. For the quarter ended March 31, 2002, cash flows
from financing activities include the payment of dividends of $0.3 million
partially offset by cash received from stock option exercises of $0.1 million.
The Company's 9 3/4% notes pay interest semi-annually in April and
October. The Company's credit facility includes $76.5 million of outstanding
term loans due through 2009 that bear interest at the London Interbank Offered
Rate (LIBOR) plus 3.50%, payable quarterly at the end of each calendar quarter,
and up to $40 million of available borrowings provided by revolving loans, which
expire in 2007. No interest was paid on the credit facility in the first quarter
of 2003 due to the fiscal quarter ending before March 31, 2003.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell its assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage of interest expense. The Company was in compliance with these
covenants as of March 29, 2003. On an annual basis, the Company is required to
make principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2002 were sufficient such that no additional principal
payments were required in 2003 under the excess cash flow provision. The Company
records as a current liability those principal payments that are estimated to be
due within 12 months under the excess cash flow provision of the credit facility
when the likelihood of those payments becomes probable.
The Company guaranteed $3.0 million of a secured note in connection
with the sale of a portion of its ownership interest in Amercord, Inc. Ivaco,
Inc., pursuant to the terms of the note, agreed to indemnify the Company for 50%
of any loss under the guarantee. The guarantee was exercised by Amercord's
lender, and the Company has settled with this lender for its portion of the
liability for approximately $1.2 million, which was fully paid in April 2003.
The Company retains a right to any collateral proceeds that secure the note;
however, the Company believes that the value of such collateral is not
sufficient to cover any significant portion of the Company's liability.
The Company believes that for the foreseeable future cash flows from
operations and its borrowing capacity under its credit facility will be
sufficient to satisfy its obligations to pay principal and interest on its
outstanding debt, maintain current operations, and provide sufficient capital
for presently anticipated capital expenditures. There can be no assurances,
however, that the cash generated by the Company will be sufficient for these
purposes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation have not been
material to its operating results for each of the past three years, including
interim periods. The Company's principal raw material, vinyl resin, has been
subject to rapid price changes. Through price increases, the Company has
historically been able to pass on significant resin cost increases. The results
of operations for individual quarters can and have been negatively impacted by a
delay between the time of vinyl resin cost increases and price increases in the
Company's products. However, over longer periods of time, the impact of the cost
increases in vinyl resin has historically not been material. Resin prices have
continued to increase in 2003. The Company has announced price increases for its
vinyl siding and vinyl windows beginning in April 2003 to offset the increase in
resin costs. Because of the delay of the announced price increases to April
2003, the gross profit margin percentage for the quarter ended March 29, 2003
was negatively impacted. While the Company expects that any additional
significant resin cost increases in 2003 will be offset by price increases to
its customers, there can be no assurances that the Company will be able to pass
on any future price increases including the announced April 2003 price
increases.
-10-
CERTAIN FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this report regarding the prospects of the industry and the Company's prospects,
plans, financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, it does not assure that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from the forward-looking
statements:
- changes in home building industry, economic, interest rates and
other conditions;
- changes in availability of consumer credit, employment trends,
levels of consumer confidence and consumer preferences;
- changes in raw material costs and availability;
- changes in national and regional trends in new housing starts;
- changes in weather conditions;
- the Company's ability to comply with certain financial covenants
in the loan documents;
- increases in competition from other manufacturers of vinyl
building products as well as alternative building products;
- increases in the Company's indebtedness;
- increases in costs of environmental compliance; and
- the other factors discussed under the heading "Risk Factors" in
the Company's annual report on Form 10-K for the year ended
December 31, 2002 and elsewhere in this report.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements included in this report. These forward-looking statements speak only
as of the date of this report. The Company does not intend to update these
statements unless the securities laws require it to do so.
-11-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has outstanding borrowings under the term loan and
revolving loan portions of its credit facility. Interest under the credit
facility is based on the variable London Interbank Offered Rate (LIBOR). At
March 29, 2003, the Company had borrowings of $76.5 million under the term loan
and $6.6 million under revolving loans. The effect of a 1/8% increase or
decrease in interest rates would increase or decrease total interest expense for
the quarter ended March 29, 2003 by approximately $0.1 million.
FOREIGN CURRENCY EXCHANGE RISK
The Company's revenues are primarily from domestic customers and are
realized in U.S. dollars. Accordingly, the Company believes its direct foreign
currency exchange risk is not material. In the past, the Company has hedged
against foreign currency exchange rate fluctuations on specific sales or
equipment purchasing contracts. At March 29, 2003, the Company had no currency
hedges in place.
COMMODITY PRICE RISK
See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Effects of Inflation" for a discussion of
the market risk related to the Company's principal raw material, vinyl resin.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days before the filing of this
quarterly report (the "Evaluation Date"). Based on their evaluation as
of the Evaluation Date, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Exchange
Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within required
time periods.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that are
designed to provide reasonable assurance that the Company's books and
records accurately reflect the Company's transactions and that the
Company's established policies and procedures are followed. There were
no significant changes to the Company's internal controls or other
factors that could significantly affect its internal controls
subsequent to their evaluation as of the Evaluation Date, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
-12-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which, after giving effect to the Company's
existing insurance coverage, is expected to have a material adverse effect on
the Company.
From time to time, the Company is involved in a number of proceedings
and potential proceedings relating to environmental and product liability
matters. The Company handles these claims in the ordinary course of business and
maintains product liability insurance covering certain types of claims. Although
it is difficult to estimate the Company's potential exposure to these matters,
the Company believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- --- --------
Exhibit
Number Description
- ------ -----------
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
(b) Reports on Form 8-K
- ------------------------
Report Date Description
- ----------- -----------
February 21, 2003 The Company filed a current report on Form 8-K to report
its financial results for the fourth quarter and year
ended December 31, 2002 (Item 9).
-13-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASSOCIATED MATERIALS INCORPORATED
---------------------------------
(Registrant)
Date: May 12, 2003 By: /s/ Michael Caporale., Jr.
---------------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
By: /s/ D. Keith LaVanway
---------------------------------------------
D. Keith LaVanway
Vice President, Chief Financial Officer
Treasurer and Secretary
(Principal Financial and Accounting Officer)
-14-
CERTIFICATION
I, Michael Caporale, Jr., President, Chief Executive Officer and Director,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Materials Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/ Michael Caporale, Jr.
---------------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
-15-
CERTIFICATION
I, D. Keith LaVanway, Vice President, Chief Financial Officer, Treasurer and
Secretary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Materials Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/ D. Keith LaVanway
----------------------------------
D. Keith LaVanway
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
-16-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
-17-
PROSPECTUS SUPPLEMENT NO. 3
(TO PROSPECTUS DATED OCTOBER 18, 2002,
TO THE PROSPECTUS SUPPLEMENT NO. 1 DATED NOVEMBER 1, 2002 AND TO THE PROSPECTUS
SUPPLEMENT NO. 2 DATED FEBRUARY 21, 2003)
ASSOCIATED MATERIALS INCORPORATED
OFFER TO EXCHANGE
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
FOR UP TO
$165,000,000 OF 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
---------------------
This prospectus supplement no. 3 relates to the offer by Associated
Materials Incorporated ("we," "us" or "our company") to exchange up to
$165,000,000 in aggregate principal amount of our new 9 3/4% senior subordinated
notes due 2012 for a like aggregate principal amount of our issued and
outstanding 9 3/4% senior subordinated notes due 2012. The exchange offer
expired on November 26, 2002 and is no longer open for participation.
On March 27, 2003, we filed our annual report on Form 10-K for the fiscal
year ended December 31, 2002 with the United States Securities and Exchange
Commission. The attached information, consisting of the annual report on Form
10-K, supplements the information in the prospectus supplement no. 1 dated
November 1, 2002. The prospectus supplement no. 1 supplemented and superceded
the information in the prospectus dated October 18, 2002, the prospectus
supplement no. 2 dated February 21, 2003 supplemented the information in the
prospectus supplement no. 1 and this prospectus supplement no. 3 supplements and
supercedes the information in the prospectus supplement no. 2. This prospectus
supplement no. 3 should be read in conjunction with the prospectus supplement
no. 1, which is attached.
Investing in the exchange notes involves risks. SEE "RISK FACTORS"
BEGINNING ON PAGE 18 OF THE PROSPECTUS SUPPLEMENT NO. 1 FOR A DISCUSSION OF
CERTAIN FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN THE
NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT NO. 3. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus Supplement No. 3 is March 28, 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<Table>
(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, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
COMMISSION FILE NUMBER 000-24956
---------------------
ASSOCIATED MATERIALS INCORPORATED
(Exact name of Registrant as specified in its charter)
---------------------
<Table>
DELAWARE 75-1872487
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
3773 STATE ROAD
CUYAHOGA FALLS, OHIO 44223
(Address of principal executive offices)
(330) 929-1811
(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:
NONE
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
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant at June 30, 2002: None
As of March 21, 2003, the Registrant had 100 shares of Common Stock
outstanding, all of which is held by an affiliate of the Registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Associated Materials Incorporated (the "Company") was incorporated in
Delaware in 1983 and is a leading, vertically integrated manufacturer and
nationwide distributor of exterior residential building products through its
Alside division ("Alside"). The Company's core products are vinyl siding and
vinyl windows, which together comprised approximately 72% of the Company's 2002
total building product net sales. These products are marketed on a wholesale
basis to more than 35,000 professional contractors engaged in home remodeling
and new home construction principally through the Company's nationwide network
of 90 Alside Supply Centers. The Company's vinyl product offerings also include
vinyl fencing, decking and railing, as well as vinyl garage doors. Approximately
two-thirds of the Company's products are sold to contractors engaged in the home
repair and remodeling market with one-third sold to the new construction market.
The supply centers provide "one-stop" shopping to the Company's contractor
customers, carrying products, accessories and tools necessary to complete a
vinyl siding or window project. In addition, the supply centers provide high
quality product literature, product samples and installation training to these
customers. The Company believes that the strength of its products and
distribution network has developed strong brand loyalty and long-standing
relationships with local contractors and has enabled the Company to consistently
gain market share over the last five years. Approximately 75% of the Company's
2002 total building product net sales were generated through the Company's
network of supply centers with the remainder sold to independent distributors
primarily in markets where the Company currently does not have supply centers.
The Company also sells direct to siding and window customers.
On March 16, 2002, the Company entered into a merger agreement ("Merger
Agreement") with Associated Materials Holdings Inc. ("Holdings") and its wholly
owned subsidiary, Simon Acquisition Corp. The Merger Agreement provided for the
acquisition of all shares of the Company's then outstanding common stock through
a cash tender offer of $50.00 per share. The Merger Agreement also required that
the Company commence a tender offer to purchase all of its then outstanding
9 1/4% notes. On April 19, 2002, the cash tender offer for the Company's then
outstanding common stock and the cash tender offer for approximately $74.0
million of the Company's then outstanding 9 1/4% notes was completed. Simon
Acquisition Corp. was then merged with and into the Company with the Company
continuing as a privately held, wholly owned subsidiary of Holdings. The
completion of the aforementioned transactions constitute the merger transaction
("Merger Transaction"). Holdings is controlled by affiliates of Harvest
Partners, Inc. The purchase consideration of $379.5 million, tender offer of
$74.0 million of 9 1/4% notes and debt extinguishment costs of $7.6 million were
financed through: (1) the issuance of $165 million of 9 3/4% Senior Subordinated
Notes due 2012 ("9 3/4% notes"), (2) $125 million from a new $165 million credit
facility ("credit facility"), (3) $164.8 million cash contribution from Holdings
and (4) cash of approximately $6.3 million, representing a portion of the
Company's total cash of $6.8 million on hand at the time of the acquisition.
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly-formed entity controlled by members of
AmerCable's management and Wingate Partners III, L.P., for cash proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement dated as of the same date. The Company used the
net proceeds to repay a portion of its credit facility. AmerCable is a leading
manufacturer of specialty electrical cable products primarily used in the
mining, marine and offshore drilling industries. In 2001, AmerCable accounted
for approximately 12% of the Company's total net sales.
FINANCIAL INFORMATION ABOUT SEGMENTS
Prior to the Merger Transaction and sale of AmerCable, the Company had two
reportable segments: building products and electrical cable products. Subsequent
to the Merger Transaction and sale of AmerCable, the Company is in the single
business of manufacturing and distributing exterior residential building
1
products. See Note 16 in the Notes To Financial Statements in Item 8. "Financial
Statements and Supplementary Data."
INDUSTRY OVERVIEW
Demand for residential building products is driven by a number of factors,
including consumer confidence, availability of credit, new housing starts and
general economic cycles. Historically, the demand for repair and remodeling
products, where the Company is primarily focused, has been less cyclical than
demand for new home construction and is less sensitive to these factors. Drivers
of repair and remodeling demand include:
- Favorable Demographics. The segment of the population age 55 years and
above, which favors professionally installed, low maintenance home
improvements is estimated to grow by 25% over the next five years and 50%
over the next ten years.
- Aging of the housing stock. The average home age increased from 23 years
in 1985 to 29 years in 2000, and over 70% of the current housing stock
was built prior to 1980.
- Increase in average home size. The average home size increased over 25%
from 1,785 square feet in 1985 to 2,306 square feet in 2000.
- Favorable mortgage interest rates. Mortgage interest rates in 2002
reached historically low levels.
In addition, repair and remodeling projects tend to utilize a greater mix
of premium products with higher margins than those used in new construction
projects.
Vinyl comprises the largest share of the residential siding and window
markets. Vinyl has greater durability, requires less maintenance and provides
greater energy efficiency than many competing siding and window products.
According to industry reports, based on unit sales, vinyl accounted for
approximately 44% of the exterior siding market and approximately 58% of the
residential window market in 2001. More recently, vinyl siding has achieved
increasing acceptance in the new construction market, as builders and home
buyers have recognized vinyl's low maintenance, durability and price advantages.
Vinyl windows also 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 siding and vinyl windows will continue to gain market share
in the new residential construction market while remaining the preferred product
of the remodeling marketplace. Vinyl competes with wood, masonry, fiber cement
and metal in the siding market and wood and aluminum in the window market.
Products. The Company's principal product offerings are vinyl siding and
vinyl windows, which together accounted for approximately 72% of its 2002 total
building product sales. The Company also manufactures a variety of other
products including vinyl fencing, decking and railing, as well as vinyl garage
doors.
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. Since its introduction of Charter Oak in 1995, the Company has
established itself as a leader in innovation within the vinyl siding industry.
Since 1995, the Company has broadened its product lines to increase its
penetration of the premium and economy segments. The Company believes that its
innovation in product development was significant to its siding sales growth in
the past and will continue to be a key factor in its future sales growth. For
example, the introduction of Charter Oak enabled the Company to penetrate the
premium segment of the vinyl siding market. The Company believes that Charter
Oak continues to set the standard for premium vinyl siding products today.
Alside introduced its Conquest siding product in 1997, which has enabled the
Company to achieve additional market penetration in the economy/new construction
segment of the siding industry. During 1998, the Company introduced CenterLock,
a patented product positioned in the premium market segment. In addition to its
innovation, the Company has been able to broaden its historically strong
position in the standard vinyl siding segment. In 1999, the Company introduced
2
Odyssey Plus, an improved and updated version of its popular Odyssey siding
product. The Company introduced its Seneca and Landscape products in order to
broaden its offerings for the standard and economy segments in 2000. In addition
to these products, the Company has increased the number of colors and profiles,
including acrylics and dark colors, offered within its existing siding products
and continues to increase and improve upon the breadth of its vinyl siding
product lines. The Company provides limited 50-year to lifetime warranties on
its siding products.
The Company divides its window products into 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. Alside custom manufactures substantially 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. The Company's custom windows are used primarily in the repair and
remodeling market. One of the fastest growing segments of the window market is
the new construction segment. The Company acquired substantially all the assets
of Alpine Industries, Inc. in October 2000. Alpine primarily manufactures new
construction windows, and this acquisition increased the Company's presence in
the new construction market. Substantially all of the Company's window products
are accompanied by a limited lifetime warranty.
A summary of the Company's siding and window product offerings is presented
in the table below according to the Company's product line classification:
<Table>
<Caption>
PRODUCT LINE SIDING PRODUCTS WINDOW PRODUCTS
- ------------ --------------------------- ---------------------------
Premium.................... Preservation Preservation
Charter Oak Sheffield
CenterLock UltraMaxx
Board and Batten Alpine 9000 Series
Williamsport
Standard................... Odyssey Plus Geneva
Seneca Excalibur
Alpine 8000 Series
Economy.................... Conquest Performance Series --
Landscape New Construction
Centurion
Alpine 7000 Series
</Table>
The Company produces vinyl fencing, decking and railing under the brand
name UltraGuard(R), consisting of both agricultural and residential vinyl
fencing. Sales of UltraGuard(R) fencing accounted for less than 5% of the
Company's total building product net sales in 2002. Alside introduced a raised
panel vinyl garage door in 1997 under the brand name Premium Garage Door(TM).
Alside primarily markets its fencing, decking and railing and garage doors
through independent dealers.
To complete its line of exterior residential building products, the Company
also distributes building products manufactured by other companies. These
products include metal siding, roofing materials, insulation, cabinets and
installation equipment and tools.
Marketing and Distribution. Traditionally, most vinyl siding is sold to
the home remodeling marketplace through independent distributors. The Company
believes that it is one of only two major vinyl siding manufacturers that
markets its products primarily through nationwide company-owned distribution
centers. The Company has a nationwide distribution network of 90 Alside Supply
Centers through which the Company markets manufactured products and other
complementary building products to more than 35,000 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 siding and vinyl
windows as well as products manufactured by others. In 2002, approximately 75%
of the Company's total building product net sales were made through its supply
centers. In addition to sales and promotional
3
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.
The Company believes that distributing products through its supply centers
provides the Company with certain competitive advantages such as (a) building
long-standing customer relationships, (b) developing comprehensive, customized
marketing programs to assist the Company's customer contractors (c) closely
monitoring developments in local customer preferences and (d) ensuring product
availability through integrated logistics between the Company's manufacturing
and distribution facilities. Many of the Company's contractor customers have
established long-standing relationships with their local supply center based on
individualized service and credit terms, quality products, timely delivery,
breadth of product offerings, strong sales and promotional programs and
competitive prices. The Company 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. The
Company'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
the Company competes. This direct presence in the marketplace permits the
Company to obtain current local market information, providing it with the
ability to recognize trends in the marketplace earlier and adapt its product
offerings on a location-by-location basis.
Many of the Company's contractor customers install both vinyl siding and
vinyl windows. Because the Company manufactures and distributes both vinyl
siding and vinyl windows, its contractor customers can acquire both products
from a single source. The Company believes that marketing both vinyl siding and
vinyl windows to its target customer base provides it a competitive market
advantage. Furthermore, the Company 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. In 2000,
the Company introduced Preservation as the industry's first bundled premium
siding and window marketing program. The Company's unique position as a
manufacturer and distributor of both vinyl siding and windows has enabled it to
offer Preservation to select dealers.
Each of Alside's 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 the Company's continuing
assessment of market conditions and individual location profitability. During
2002, the Company added seven supply centers to its distribution network. The
Company presently expects to open up to five new supply centers in 2003. The
Company has developed formal training and recruiting programs for supply center
personnel, which it expects will improve its ability to staff new locations.
Through certain of its supply centers, the Company's Alside Installed
Services 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.
The Company 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 25% of the Company's 2002 net
sales. Despite their aggregate lower percentage of total sales, Alside's largest
individual customers are its large direct dealers and independent distributors.
The Company carefully monitors and evaluates its activity with these customers
to ensure the profitability of this higher volume, lower margin business. No
single customer accounted for 5% or more of the Company's 2002 net sales. The
Company continues to expand its network of independent distributors in strategic
areas to improve its penetration into certain markets.
Alside Window Company Northwest ("Alside Northwest"), which consists of the
assets purchased from Alpine in October 2000, has historically sold its window
products through a variety of channels including direct to builders and to
independent distributors and lumberyards. Alside Northwest has also sold its
products
4
into foreign markets, principally the Far East. Since its acquisition, Alside
Northwest has continued many of these distribution relationships and expanded
its product distribution through certain Alside Supply Centers.
Manufacturing. The Company manufactures its vinyl siding products at its
Ennis and Freeport, Texas facilities. The Company believes that, with planned
capital projects in 2003, it will have adequate capacity to meet its sales
expectations for the foreseeable future. The Company operates a vinyl extrusion
facility in West Salem, Ohio to produce vinyl window extrusions as well as vinyl
fencing, decking and railing and garage door panels. The Company operates three
window fabrication plants, which each use vinyl extrusions manufactured by
Alside for a portion of their production requirements and utilize high speed
welding and cleaning equipment for their welded window products. By internally
producing a portion of its vinyl extrusions, the Company believes it achieves
significant cost savings and higher product quality compared to purchasing these
materials from third-party suppliers. The Company's Alside Northwest facility
produces its glass inserts, but has a long-term contract to purchase its vinyl
extrusions from a third-party supplier.
The Company'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. The Company'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 the Company are vinyl
resin, resin stabilizers and pigments, packaging materials, window hardware and
glass, all of which are available from a number of suppliers. The Company has a
contract with its resin supplier to supply substantially all of its contract
vinyl resin requirements and believes that other suppliers could also meet its
requirements. The price of vinyl resin has been, and will likely continue to be,
volatile. The Company generally has been able to pass through price increases in
raw materials to its customers. The price of vinyl resin increased significantly
during 2002. The Company implemented price increases in late 2002 to partially
offset the increases in vinyl resin prices. The Company presently expects vinyl
resin prices to increase in 2003. While the Company expects that any future
significant resin cost increases will be offset by price increases to its
customers, there can be no assurances that the Company will be able to pass on
any future price increases.
Competition. Except for Owens Corning, the Company believes that 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 vinyl siding products, some of which 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 Company believes that
Alside is the fifth largest manufacturer of vinyl siding with approximately 8%
of the U.S. market. 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 window
fabrication industry will continue to experience consolidation due to the
increased capital requirements for manufacturing welded vinyl windows. The trend
towards welded windows, which require more expensive production equipment as
well as more sophisticated information systems, has driven these increased
capital requirements. 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 market, and wood, masonry, fiber
cement and metal in the siding market.
ACQUISITIONS AND DIVESTITURES
In October 2000, the Company acquired substantially all of the assets of
Alpine for $7.6 million in cash and the assumption of certain payroll related
and property tax liabilities. Included in the acquired assets was Alpine's
leased window fabrication facility located in Bothell, Washington. This facility
manufactures vinyl windows primarily for the new construction market. This
acquisition significantly increased the Company's presence on the West Coast.
The acquisition was accounted for using the purchase method of accounting.
The Company completed the sale of its UltraCraft operation, a manufacturer
of semi-custom frameless cabinets, in June 2000. Pre-tax net proceeds from the
sale were $18.9 million after working capital adjustments and transaction costs.
The Company recorded a pre-tax gain of $8.0 million on the sale.
5
EMPLOYEES
The Company's employment needs vary seasonally with sales and production
levels. As of December 31, 2002, the Company had approximately 2,550 full-time
employees, including approximately 1,446 hourly workers. The West Salem, Ohio
plant is the Company's only unionized manufacturing facility, employing
approximately 114 covered workers as of December 31, 2002. The collective
bargaining agreement for the West Salem facility was successfully renegotiated
in November 2001 for a three-year term. Additionally, approximately 76 hourly
workers in certain supply center locations are covered by collective bargaining
agreements. The Company considers its labor relations to be good.
Alside utilizes leased employees to supplement its own workforce at its
vinyl window fabrication plants. The Company believes that the employee leasing
program provides it with scheduling flexibility for seasonal production
requirements. The aggregate number of leased employees in the window plants
ranges from approximately 300 to 650 people based on seasonality.
TRADEMARKS AND PATENTS
The Company has registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which its products
are marketed. The allocation of purchase price from the Merger Transaction
resulted in $98.7 million in trademarks and trade names of which $24.0 million
have remaining useful lives of 15 years and $74.7 million have indefinite lives.
The indefinite lived trademark and trade name consist of one trademark and the
Alside(R) trade name. The allocation of purchase price also resulted in $6.8
million of patents with estimated useful lives of 10 years. The Company has
obtained patents on certain claims associated with its siding, fencing, decking
and railing, and garage door products, which the Company believes distinguish
Alside's 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.
Certain environmental laws, including the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended,
("CERCLA"), and comparable state laws, impose strict, and in certain
circumstances joint and several, liability upon specified responsible parties,
which include certain former owners and operators of waste sites designated for
clean up by environmental regulators. A facility initially owned by USX
Corporation ("USX") and subsequently owned by the Company, in Lumber City,
Georgia, which is now owned by Amercord, is subject to a Consent Order entered
into by Amercord with the Georgia Department of Natural Resources in 1994. We
are not a party to the Consent Order. We understand that soil and groundwater in
certain areas of the site (including in the area of two industrial waste
landfills) are being investigated under CERCLA by the United States
Environmental Protection Agency to determine whether remediation of those areas
may be required and whether the site should be listed on the state of federal
list of priority sites requiring remediation. Amercord, the current site owner,
does not have adequate financial resources to carry out additional remediation
that may be required, and if substantial remediation is required, claims may be
made against the Company, which could result in material expenditures. Should it
be necessary to incur costs related to the remediation of this site, the Company
and USX have agreed to share in those costs.
6
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Not applicable.
RISK FACTORS
The following discussion of risks relating to the Company's business should
be read carefully in connection with evaluating the Company's business,
prospects and the forward-looking statements contained in this report on Form
10-K and oral statements made by representatives of the Company from time to
time. Any of the following risks could materially adversely affect the Company's
business, operating results, financial condition and the actual outcome of
matters as to which forward-looking statements are made. For additional
information regarding forward-looking statements, see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Forward-Looking Statements."
The Company's business is subject to a number of risks and uncertainties,
including those described below.
The Company's substantial level of indebtedness could adversely affect its
financial condition and prevent it from fulfilling its obligations on the notes.
The Company has a substantial amount of indebtedness, which will require
significant interest payments. As of December 31, 2002, the Company had
approximately $242.4 million of indebtedness and interest expense from
continuing operations for the 257 days ended December 31, 2002 of approximately
$16.9 million. Approximately $76.5 million of such debt is variable rate debt
and the effect of a 1% increase or decrease in interest rates would increase or
decrease such total annual interest expense by approximately $0.8 million.
The Company's substantial level of indebtedness could have important
consequences, including the following:
- the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired;
- the Company must use a substantial portion of its cash flow from
operations to pay interest and principal on the notes and other
indebtedness, which will reduce the funds available to the Company for
other purposes such as potential acquisitions and capital expenditures;
- the Company is exposed to fluctuations in interest rates, because the new
credit facility has a variable rate of interest;
- the Company has a higher level of indebtedness than some of its
competitors, which may put it at a competitive disadvantage and reduce
the Company's flexibility in planning for, or responding to, changing
industry conditions, including increased competition;
- the Company is more vulnerable to general economic downturns and adverse
developments in its business; and
- the Company's failure to comply with financial and other restrictive
covenants in the indenture governing the 9 3/4% notes and other debt
obligations, some of which require the Company to maintain specified
financial ratios and limit the Company's ability to incur additional debt
and sell assets, could result in an event of default that, if not cured
or waived, could harm the Company's business or prospects and could
result in bankruptcy.
The Company expects to obtain money to pay its expenses and to pay the
principal and interest on the notes, new credit facility and other debt from
cash flow from operations. The Company's ability to meet expenses depends on
future performance, which will be affected by financial, business, economic and
other factors. The Company will not be able to control many of these factors,
such as economic conditions in the markets in which it operates and pressure
from competitors. The Company cannot be certain that cash flow will be
sufficient to allow it to pay principal and interest on its debt, including the
9 3/4% notes, and meet its other obligations. If the Company does not have
enough money, it may be required to refinance all or part of
7
its existing debt, including the 9 3/4% notes, sell assets or borrow more money.
The Company may not be able to refinance on acceptable terms, if at all. In
addition, the terms of existing or future debt agreements, including the credit
facility and the indenture governing the 9 3/4% notes, may restrict the Company
from pursuing any of these alternatives. The failure to generate sufficient cash
flow or to achieve such alternative financing could significantly and adversely
affect the value of the 9 3/4% notes.
The Company will be able to incur more indebtedness and the risks
associated with its substantial leverage, including its ability to service its
indebtedness, will increase.
The indenture relating to the 9 3/4% notes and the credit agreement
governing the new credit facility will permit the Company, subject to specified
conditions, to incur a significant amount of additional indebtedness. In
addition, the Company may incur an additional $37.4 million of indebtedness
under the revolving portion of its credit facility. If the Company incurs
additional debt, the risks associated with its substantial leverage, including
its ability to service its debt, would increase.
The right to receive payments on the 9 3/4% notes and guarantees is
subordinated to the Company's senior debt.
Payment on the notes and guarantees is subordinated in right of payment to
all of the Company's and its guarantors' senior debt. As of December 31, 2002,
the notes and the related guarantees were subordinated to approximately $76.5
million of senior debt. In addition, $37.4 million of senior debt was available
for borrowing under the revolving portion of its credit facility. As a result,
upon any distribution to creditors or the creditors of the guarantors in a
bankruptcy, liquidation, reorganization or similar proceeding relating to the
Company or its guarantors or its or their property, the holders of the senior
debt will be entitled to be paid in full in cash before any payment may be made
on the 9 3/4% notes or the guarantees thereof. In these cases, the Company and
its guarantors may not have sufficient funds to pay all of its creditors, and
holders of the 9 3/4% notes may receive less, ratably, than the holders of
senior debt. In addition, all payments on the 9 3/4% notes and the related
guarantees will be blocked in the event of a payment default on the designated
senior debt and may be blocked for up to 179 consecutive days in the event of
certain non-payment defaults on designated senior debt.
The indenture for the 9 3/4% notes and credit facility impose significant
operating and financial restrictions on the Company, which may prevent it from
capitalizing on business opportunities and taking some corporate actions.
The indenture for the 9 3/4% notes and credit facility impose, and the
terms of any future debt may impose, significant operating and financial
restrictions on the Company. These restrictions, among other things, limit the
Company's ability and that of its subsidiaries to:
- incur or guarantee additional indebtedness;
- pay dividends or make other distributions;
- repurchase stock;
- make investments;
- sell or otherwise dispose of assets including capital stock of
subsidiaries;
- create liens;
- enter into agreements restricting the Company's subsidiaries' ability to
pay dividends;
- enter into transactions with affiliates; and
- consolidate, merge or sell all of its assets.
These covenants may adversely affect the Company's ability to finance
future operations or capital needs to pursue available business opportunities.
8
In addition, the credit facility requires the Company to maintain other
specified financial ratios. These covenants may adversely affect the Company's
ability to finance its future operations or capital needs or to pursue available
business opportunities or limit the ability to plan for or react to market
conditions or meet capital needs or otherwise restrict activities or business
plans. A breach of any of these covenants or inability to maintain the required
financial ratios could result in a default in respect of the related
indebtedness. If a default occurs, the relevant lenders could elect to declare
the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing that
indebtedness.
The exterior building products industry is cyclical and downturns in the
industry or the economy could negatively affect business, operating results and
the value of the 9 3/4% notes.
The exterior building products industry is cyclical and is significantly
affected by changes in national and local economic and other conditions such as
employment levels, migration trends, availability of financing, interest rates
and consumer confidence. These factors can negatively affect the demand for and
pricing of the Company's products. A prolonged recession affecting the
residential construction industry could also result in a significant decrease in
the Company's financial performance. The occurrence or continuation of any of
the above items, many of which are outside the Company's control, and the items
described below could have a negative impact on business and adversely affect
the value of the 9 3/4% notes.
Increases in interest rates and the reduced availability of financing for
home improvements may cause sales and profitability to decrease.
In general, demand for home improvement products is adversely affected by
increases in interest rates and the reduced availability of financing. If
interest rates increase and consequently, the ability of prospective buyers to
finance purchases of home improvement products and invest in new real estate is
adversely affected, sales, gross margins and cash flow may also be adversely
impacted and the impact may be material.
The Company has substantial fixed costs and, as a result, operating income
is sensitive to changes in net sales.
The Company operates with significant operating and financial leverage.
Significant portions of the Company's manufacturing, selling, general and
administrative expenses are fixed costs that neither increase nor decrease
proportionately with sales. As a result, a percentage change in the Company's
net sales will have a greater percentage effect on income from operations,
assuming the Company continues to offset increases in vinyl resin costs with
price increases to its customers. In addition, a significant portion of the
Company's interest expense is fixed.
The company could face potential product liability claims relating to
products it manufactures or distributes.
The Company faces a business risk of exposure to product liability claims
in the event that the use of its products is alleged to have resulted in injury
or other adverse effects. The Company currently maintains product liability
insurance coverage, but it may not be able to obtain such insurance on
acceptable terms in the future, if at all, or any such insurance may not provide
adequate coverage against potential claims. Product liability claims can be
expensive to defend and can divert management and other personnel for months or
years regardless of the ultimate outcome. An unsuccessful product liability
defense could have a material adverse effect on the Company's business,
financial condition, results of operations or business prospects or ability to
make payments on the 9 3/4% notes when due.
The Company has significant goodwill and other intangible assets.
The Company has accounted for the Merger Transaction using the purchase
method of accounting. The purchase price has been allocated to assets and
liabilities based on the fair values of the assets acquired and the liabilities
assumed. The excess of cost over fair value of the new identifiable assets
acquired has been recorded as goodwill. These purchase price allocations have
been made based upon valuations and other studies. As a result of the merger,
the Company has approximately $105.5 million of other intangible assets and
$197.5 million of goodwill. Given the significant amount of goodwill and other
intangible assets as a result of the merger, any future impairment of the
goodwill and other intangible assets recorded could have an
9
adverse effect on the Company's results of operations and financial position;
however, the extent of any such impairment, if any, cannot be predicted at this
time.
The Company is controlled by affiliates of Harvest Partners, Inc., whose
interests may be different than other investors.
By reason of Harvest Partners and its affiliates ownership of the Company
and the ability of Harvest Partners and its affiliates, pursuant to a
stockholders agreement among stockholders of Associated Materials Holdings Inc.,
to designate a majority of the members of the board of directors of Holdings,
Harvest Partners will control actions to be taken by the Company's stockholder
and/or board of directors, including amendments to the Company's certificate of
incorporation and by-laws and approval of significant corporate transactions,
including mergers and sales of substantially all of the Company's assets. The
interest of Harvest Partners and its affiliates interests may be materially
different than other investors in the Company. For example, Harvest Partners may
cause the Company to pursue a growth strategy, which could impact the Company's
ability to make payments under the indenture governing the 9 3/4% notes and the
new credit facility or cause a change of control. In addition, to the extent
permitted by the indenture and the new credit facility, Harvest Partners may
cause the Company to pay dividends rather than make capital expenditures.
ITEM 2. PROPERTIES
The Company's operations include both owned and leased facilities as
described below:
<Table>
<Caption>
LOCATION PRINCIPAL USE SQUARE FEET
- -------- ------------- -----------
Akron, Ohio................ Associated Materials Incorporated and Alside
Headquarters 70,000
Vinyl Windows, Vinyl Fencing, Decking and
Railing and Vinyl Garage Doors 577,000
Ennis, Texas............... Vinyl Siding Products 301,000
Freeport, Texas............ Vinyl Siding Products 120,000
West Salem, Ohio........... Vinyl Window Extrusions, Fencing, Decking and
Railing and Vinyl Garage Door Panels 173,000
Kinston, North Carolina.... Vinyl Windows 319,000(1)
Cedar Rapids, Iowa......... Vinyl Windows 128,000(1)
Bothell, Washington........ Vinyl Windows 159,000(1)
</Table>
- ---------------
(1) 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.
Alside also operates 90 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 50,000 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 2011 for the Bothell
location and 2005 for the Cedar Rapids and Kinston locations. Each lease is
renewable at the Company's option for an additional five-year period. Following
the Merger Transaction, the Company moved its corporate headquarters to the
Akron, Ohio location.
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.
10
From time to time, the Company is involved in a number of proceedings and
potential proceedings relating to environmental and product liability matters.
The Company handles these claims in the ordinary course of business and
maintains product liability insurance covering certain types of claims. Although
it is difficult to estimate the Company's potential exposure to these matters,
the Company believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 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
There is no established public trading market for the Company's common
equity securities.
HOLDERS
As of February 28, 2003, Holdings was the Company's sole record holder of
its common stock.
DIVIDENDS
Prior to the Merger Transaction, the Company paid dividends of $0.20 per
share in 2001 and $0.05 per share in the 108 days ended April 18, 2002. The
Company presently does not intend to pay cash dividends. In addition, the
Company's credit facility and indenture governing the 9 3/4% notes restrict
dividend payments.
EQUITY COMPENSATION PLANS
The Company has no outstanding equity compensation plans under which equity
securities of the Company are authorized for issuance.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the five-year period ended
December 31, 2002 was derived from the audited financial statements of the
Company. The Company's results of operations prior to the date of the Merger
Transaction are presented as the results of the Predecessor. The results of
operations, including the Merger Transaction and results thereafter, are
presented as the results of the Successor and include 257 days from April 19,
2002 to December 31, 2002. In addition, the Company completed the sale of its
AmerCable division on June 24, 2002. AmerCable's results through April 18, 2002
are included in the results of continuing operations of the Predecessor.
Subsequent to April 18, 2002, AmerCable's results are presented as discontinued
operations of the Successor as it was the Successor's decision to divest this
division. The 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.
<Table>
ONE
HUNDRED
EIGHT TWO HUNDRED
DAYS FIFTY-SEVEN
YEAR ENDED DECEMBER 31, ENDED DAYS ENDED
----------------------------------------- APRIL 18, DECEMBER 31,
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- --------- ------------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales................... $410,111 $455,268 $499,393 $595,819 $180,230 $ 449,324
Cost of sales............... 285,822 317,596 353,994 425,366 130,351 317,077
-------- -------- -------- -------- -------- ---------
Gross profit................ 124,289 137,672 145,399 170,453 49,879 132,247
Selling, general and
administrative expenses... 88,727 96,028 107,255 119,945 43,272 86,097
Other income, net(1)........ 2,673 -- -- -- -- --
-------- -------- -------- -------- -------- ---------
Income from operations...... 38,235 41,644 38,144 50,508 6,607 46,150
Interest expense............ 7,565 6,779 6,046 6,795 2,068 16,850
Gain on the sale of
UltraCraft(2)............. -- -- 8,012 -- -- --
Merger transaction
costs(3).................. -- -- -- -- 9,319 --
Equity in loss of
Amercord.................. 1,881 1,337 -- -- -- --
Write-down of Amercord(4)... 4,351 -- -- 2,393 -- --
-------- -------- -------- -------- -------- ---------
Income (loss) before income
tax expense............... 24,438 33,528 40,110 41,320 (4,780) 29,300
Income tax expense.......... 11,382 13,038 16,555 15,908 977 12,161
-------- -------- -------- -------- -------- ---------
Income (loss) from
continuing operations
before extraordinary
item...................... 13,056 20,490 23,555 25,412 (5,757) 17,139
Loss from discontinued
operations................ -- -- -- -- -- (521)
Extraordinary items,
net(5).................... (4,107) -- -- -- -- (4,434)
-------- -------- -------- -------- -------- ---------
Net income (loss)........... $ 8,949 $ 20,490 $ 23,555 $ 25,412 $ (5,757) $ 12,184
======== ======== ======== ======== ======== =========
</Table>
12
<Table>
<Caption>
ONE
HUNDRED TWO
EIGHT HUNDRED
DAYS FIFTY-SEVEN
YEAR ENDED DECEMBER 31, ENDED DAYS ENDED
----------------------------------------- APRIL 18, DECEMBER 31,
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- --------- ------------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
OTHER DATA:
EBITDA(6)................... $ 32,235 $ 48,826 $ 55,706 $ 59,034 $ 1,257 $ 46,380
Adjusted EBITDA(7).......... 38,497 45,941 40,386 53,066 9,356 55,210
Capital expenditures........ 14,261 18,915 11,925 15,022 3,817 8,938
Cash provided by (used in)
operating activities...... 26,799 15,244 22,968 43,989 (18,258) 42,577
Cash used in investing
activities................ (14,712) (17,619) (5,538) (9,861) (3,597) (359,984)
Cash provided by (used in)
financing activities...... 942 (9,157) (4,983) (21,138) (245) 324,736
</Table>
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(8)...................... $ 80,370 $ 87,763 $106,635 $110,632 $ 88,546
Total assets(8)......................... 190,464 208,181 235,712 258,660 565,537
Short-term debt, including current
maturities............................ 3,600 -- -- -- --
Long-term debt, less current
maturities............................ 75,000 75,000 75,000 75,000 242,408
Stockholders' equity.................... 64,378 79,326 97,990 102,675 177,769
</Table>
- ---------------
(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) The Company recorded an $8.0 million pre-tax gain on the sale of its
UltraCraft operation, a manufacturer of semi-custom cabinets, in June 2000.
(3) Merger transaction costs include investment banking and legal fees incurred
by the Predecessor in conjunction with the strategic review process and
subsequent Merger Transaction with Harvest Partners.
(4) In 1998, the Company recorded a pretax write-down on its investment in
Amercord in anticipation of a loss on the sale of Amercord. In 2001, the
Company recorded a $2.4 million loss upon the write-off of its remaining
investment in Amercord due to the deterioration of Amercord's operations.
(5) In 1998, the extraordinary item represents, net of tax, the loss recognized
on the write-off of debt issuance costs and the prepayment premium paid on
the purchase of the Company's 11 1/2% senior subordinated notes. In 2002,
the extraordinary items include, net of tax, $2.8 million for the
extinguishment of substantially all of the Successor's assumed 9 1/4% notes
and $1.6 million for the expense of financing fees related to an interim
credit facility utilized for the Merger Transaction, which was repaid
shortly thereafter.
(6) EBITDA is calculated as net income (loss) plus interest, taxes, depreciation
and amortization. The Company presents EBITDA because it believes that
EBITDA is used by certain investors as one measure of a company's historical
ability to service its debt. EBITDA should not be considered an alternative
to, or more meaningful than, net income (loss) as an indicator of a
company's operating performance or to cash flows as a measure of liquidity.
EBITDA has not been prepared in accordance with accounting principles
generally accepted in the United States. Therefore, EBITDA as presented by
13
the Company, may not be comparable to similarly titled measures reported by
other companies. The reconciliation of net income (loss) to EBITDA is as
follows:
<Table>
<Caption>
ONE
HUNDRED TWO
EIGHT HUNDRED
DAYS FIFTY-SEVEN
YEAR ENDED DECEMBER 31, ENDED DAYS ENDED
------------------------------------- APRIL 18, DECEMBER 31,
1998 1999 2000 2001 2002 2002
------- ------- ------- ------- --------- ------------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
Net income (loss)....................... $ 8,949 $20,490 $23,555 $25,412 $(5,757) $12,184
Interest -- Continuing operations...... 7,565 6,779 6,046 6,795 2,068 16,850
-- Discontinued operations.... -- -- -- -- -- 1,213
Taxes -- Continuing operations...... 11,382 13,038 16,555 15,908 977 12,161
-- Discontinued operations.... -- -- -- -- -- (370)
-- Extraordinary items........ (2,878) -- -- -- -- (3,145)
Depreciation and amortization
-- Continuing operations...... 7,217 8,519 9,550 10,919 3,969 7,169
-- Discontinued operations.... -- -- -- -- -- 318
------- ------- ------- ------- ------- -------
EBITDA.................................. $32,235 $48,826 $55,706 $59,034 $ 1,257 $46,380
======= ======= ======= ======= ======= =======
</Table>
(7) Adjusted EBITDA represents EBITDA plus certain non-recurring items less
AmerCable's operating results. The Company believes that Adjusted EBITDA
presents a more meaningful discussion than EBITDA since Adjusted EBITDA
corresponds to EBITDA as it is defined in the Company's credit facility and
in the indenture governing the 9 3/4% notes as it excludes non-recurring
items. The credit facility and indenture governing the 9 3/4% notes have
certain financial covenants that use ratios utilizing the Company's Adjusted
EBITDA. The definition of EBITDA under the Company's credit facility does
not exclude the results of AmerCable. The Company has, however, excluded the
results of AmerCable when calculating Adjusted EBITDA as AmerCable will not
be included in the Company's ongoing operations. The nonrecurring items and
results of AmerCable are expected to have no ongoing cash requirements and
no impact on the Company's ongoing operations. Adjusted EBITDA has not been
prepared in accordance with accounting principles generally accepted in the
United States. Adjusted EBITDA as presented by the Company may not be
comparable to similarly titled measures reported by other companies. EBITDA
reconciles to Adjusted EBITDA as follows:
<Table>
<Caption>
ONE
HUNDRED TWO
EIGHT HUNDRED
DAYS FIFTY-SEVEN
YEAR ENDED DECEMBER 31, ENDED DAYS ENDED
------------------------------------- APRIL 18, DECEMBER 31,
1998 1999 2000 2001 2002 2002
------- ------- ------- ------- --------- ------------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
EBITDA.......................... $32,235 $48,826 $55,706 $59,034 $ 1,257 $46,380
Extraordinary items,
pre-tax(a).................... 6,985 -- -- -- -- 7,579
AmerCable's EBITDA(b)........... (6,955) (4,222) (7,308) (8,361) (1,220) (640)
Loss on write down of Amercord
Inc.(c)....................... 4,351 -- -- 2,393 -- --
Merger transaction costs(d)..... -- -- -- -- 9,319 --
Cost of sales adjustment(e)..... -- -- -- -- -- 1,891
Equity loss in Amercord,
Inc.(f)....................... 1,881 1,337 -- -- -- --
Gain on sale of Ultracraft(g)... -- -- (8,012) -- -- --
------- ------- ------- ------- ------- -------
Adjusted EBITDA................. $38,497 $45,941 $40,386 $53,066 $ 9,356 $55,210
======= ======= ======= ======= ======= =======
</Table>
14
- ---------------
(a) See (5) above for a description of the extraordinary items.
(b) AmerCable's EBITDA is calculated as its net income plus interest,
taxes, depreciation and amortization.
(c) Represents the write down of the Company's investment in Amercord
Inc. to its net realizable value.
(d) See (3) above for a description of Merger Transaction costs.
(e) The cost of sales adjustment is the expense related to an inventory
fair value adjustment recorded at the time of the merger.
(f) Represents the loss on the Company's investment in Amercord Inc.
(g) Represents the gain the Company realized on the sale of its
Ultracraft cabinet division.
(8) Certain prior period amounts have been reclassified to conform with the
current period presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Prior to the Merger Transaction and the sale of AmerCable, the Company
consisted of two operating divisions, Alside and AmerCable. Subsequent to the
Merger Transaction and the sale of AmerCable, Alside and Corporate represent the
ongoing operations of the Company. The Company is now in the single business of
manufacturing and distributing exterior residential building products.
On March 16, 2002, the Company entered into a merger agreement ("Merger
Agreement") with Associated Materials Holdings Inc. ("Holdings") and its wholly
owned subsidiary, Simon Acquisition Corp. The Merger Agreement provided for the
acquisition of all shares of the Company's then outstanding common stock through
a cash tender offer for $50.00 per share. The Merger Agreement also required
that the Company commence a tender offer to purchase all of its then outstanding
9 1/4% notes. On April 19, 2002, the cash tender offer for the Company's then
outstanding common stock and the cash tender offer for approximately $74.0
million of the Company's then outstanding 9 1/4% notes was completed. Simon
Acquisition Corp. was then merged with and into the Company with the Company
continuing as a privately held, wholly owned subsidiary of Holdings (which is
controlled by affiliates of Harvest Partners, Inc.).
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly-formed entity controlled by members of
AmerCable's management and Wingate Partners III, L.P., for cash proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement dated as of the same date. The Company used the
net proceeds to repay a portion of its credit facility. AmerCable is a leading
manufacturer of specialty electrical cable products primarily used in the
mining, marine and offshore drilling industries. AmerCable accounted for
approximately 12% and 13% of the Company's net sales in 2001 and 2000,
respectively.
Accounting principles generally accepted in the United States require the
Company's results of operations prior to the date of the Merger Transaction to
be presented as the results of the Predecessor. The results of operations,
including the Merger Transaction and results thereafter, are presented as the
results of the Successor and include 257 days from April 19, 2002 to December
31, 2002. AmerCable's results through April 18, 2002 are included in the results
of continuing operations of the Predecessor. Subsequent to April 18, 2002,
AmerCable's results are presented as discontinued operations of the Successor as
it was the Successor's decision to divest this division.
Alside, which currently represents all of the Company's operations,
accounted for more than 87% of the Company's net sales in 2001 and 2000. Because
its exterior residential building products are consumer durable goods, the
Company's sales are impacted by the availability of consumer credit, consumer
interest rates, employment trends, changes in levels of consumer confidence,
national and regional trends in new housing starts and general economic
conditions. The Company's sales are also affected by changes in consumer
preferences with respect to types of building products. The Company's products
are used in the repair and
15
remodeling, as well as the new construction, sectors of the building industry.
The Company believes that approximately two-thirds of its total building product
net sales were made to the repair and remodeling sector in 2002, 2001 and 2000.
The Company believes that vinyl building products 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. Although no
assurances can be given, the Company further believes that these increases in
market share, together with increased marketing efforts, will increase the
Company's sales of vinyl siding, vinyl windows and other complementary building
products.
The Company operates with significant operating and financial leverage.
Significant portions of the Company's manufacturing, selling, general and
administrative expenses are fixed costs that neither increase nor decrease
proportionately with sales. As a result, a percentage change in the Company's
net sales will have a greater percentage effect on income from operations,
assuming the Company continues to offset increases in vinyl resin costs with
price increases to its customers. In addition, a significant portion of the
Company's interest expense is fixed.
16
The following table sets forth for the periods indicated the results of the
Company's operations by segment (in thousands):
<Table>
<Caption>
ONE TWO
HUNDRED HUNDRED
EIGHT DAYS FIFTY-SEVEN YEAR ENDED
ENDED DAYS ENDED ------------------------------------------
APRIL 18, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2002 2001 2000
----------- ------------ ------------ ------------ ------------
PREDECESSOR SUCCESSOR COMBINED PREDECESSOR PREDECESSOR
Net sales
Alside.......................................... $161,959 $449,324 $611,283 $524,528 $434,845
AmerCable....................................... 18,271 -- 18,271 71,291 64,548
-------- -------- -------- -------- --------
Total................................... 180,230 449,324 629,554 595,819 499,393
Gross profit
Alside.......................................... 47,102 132,247 179,349 156,626 131,704
AmerCable....................................... 2,777 -- 2,777 13,827 13,695
-------- -------- -------- -------- --------
Total................................... 49,879 132,247 182,126 170,453 145,399
Selling, general and administrative expense
Alside & Corporate.............................. 41,080 86,097 127,177 112,771 99,375
AmerCable....................................... 2,192 -- 2,192 7,174 7,880
-------- -------- -------- -------- --------
Total................................... 43,272 86,097 129,369 119,945 107,255
-------- -------- -------- -------- --------
Income from operations
Alside & Corporate.............................. 6,022 46,150 52,172 43,855 32,329
AmerCable....................................... 585 -- 585 6,653 5,815
-------- -------- -------- -------- --------
Total................................... 6,607 46,150 52,757 50,508 38,144
Interest, net..................................... 2,068 16,850 18,918 6,795 6,046
-------- -------- -------- -------- --------
Income from continuing operations before other
non-operating expenses, income taxes and
extraordinary items............................. 4,539 29,300 33,839 43,713 32,098
Gain on the sale of Ultracraft.................... -- -- -- -- 8,012
Merger transaction costs.......................... 9,319 -- 9,319 -- --
Loss on writedown of Amercord Inc................. -- -- -- 2,393 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and extraordinary items............
(4,780) 29,300 24,520 41,320 40,110
Income taxes...................................... 977 12,161 13,138 15,908 16,555
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
extraordinary items............................. (5,757) 17,139 11,382 25,412 23,555
Loss from discontinued operations................. -- (521) (521) -- --
Extraordinary items, net of tax................... -- (4,434) (4,434) -- --
-------- -------- -------- -------- --------
Net income (loss)................................. $ (5,757) $ 12,184 $ 6,427 $ 25,412 $ 23,555
======== ======== ======== ======== ========
</Table>
17
<Table>
<Caption>
ONE TWO
HUNDRED HUNDRED
EIGHT DAYS FIFTY-SEVEN YEAR ENDED
ENDED DAYS ENDED ------------------------------------------
APRIL 18, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2002 2001 2000
----------- ------------ ------------ ------------ ------------
PREDECESSOR SUCCESSOR COMBINED PREDECESSOR PREDECESSOR
Reconciliation of net income (loss) to EBITDA(1):
Net income (loss)............................... $ (5,757) $ 12,184 $ 6,427 $ 25,412 $ 23,555
Interest -- Continuing operations........... 2,068 16,850 18,918 6,795 6,046
-- Discontinued operations......... -- 1,213 1,213 -- --
Taxes -- Continuing operations........... 977 12,161 13,138 15,908 16,555
-- Discontinued operations......... -- (370) (370) -- --
-- Extraordinary items............. -- (3,145) (3,145) -- --
Depreciation and amortization
-- Continuing operations........... 3,969 7,169 11,138 10,919 9,550
-- Discontinued operations......... -- 318 318 -- --
-------- -------- -------- -------- --------
EBITDA.......................................... $ 1,257 $ 46,380 $ 47,637 $ 59,034 $ 55,706
======== ======== ======== ======== ========
Reconciliation of EBITDA to Adjusted EBITDA(1):
EBITDA.......................................... $ 1,257 $ 46,380 $ 47,637 $ 59,034 $ 55,706
Extraordinary items, pre-tax.................... -- 7,579 7,579 -- --
AmerCable's EBITDA.............................. (1,220) (640) (1,860) (8,361) (7,308)
Loss on writedown of Amercord Inc............... -- -- -- 2,393 --
Merger transaction costs........................ 9,319 -- 9,319 -- --
Cost of sales adjustment........................ -- 1,891 1,891 -- --
Gain on sale of Ultracraft...................... -- -- -- -- (8,012)
-------- -------- -------- -------- --------
Adjusted EBITDA................................. $ 9,356 $ 55,210 $ 64,566 $ 53,066 $ 40,386
======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
TWO HUNDRED
FIFTY-SEVEN DAYS ONE HUNDRED YEARS ENDED DECEMBER 31,
ENDED EIGHT DAYS ENDED ---------------------------------------------
DECEMBER 31, 2002 APRIL 18, 2002 2001 2000
--------------------- --------------------- --------------------- ---------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
-------- ---------- -------- ---------- -------- ---------- -------- ----------
SUCCESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(DOLLARS IN THOUSANDS)
ALSIDE/CORPORATE:
Net sales................... $449,324 100.0% $161,959 100.0% $524,528 100.0% $434,845 100.0%
Gross profit................ 132,247 29.4 47,102 29.1 156,626 29.9 131,704 30.3
Selling, general and
administrative
expenses(2)............... 86,097 19.2 41,080 25.4 112,771 21.5 99,375 22.9
-------- ----- -------- ----- -------- ----- -------- -----
Income from operations...... $ 46,150 10.3% $ 6,022 3.7% $ 43,855 8.4% $ 32,329 7.4%
======== ===== ======== ===== ======== ===== ======== =====
Depreciation and
amortization.............. $ 7,169 $ 3,334 $ 9,211 $ 8,057
Capital expenditures........ $ 8,938 $ 2,036 $ 11,663 $ 8,217
</Table>
18
<Table>
<Caption>
ONE HUNDRED YEARS ENDED DECEMBER 31,
EIGHT DAYS ENDED ---------------------------------------------
APRIL 18, 2002 2001 2000
--------------------- --------------------- ---------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
-------- ---------- -------- ---------- -------- ----------
PREDECESSOR PREDECESSOR PREDECESSOR
(DOLLARS IN THOUSANDS)
AMERCABLE(3):
Net sales....................................... $ 18,271 100.0% $ 71,291 100.0% $ 64,548 100.0%
Gross profit.................................... 2,777 15.2 13,827 19.4 13,695 21.2
Selling, general and administrative expenses.... 2,192 12.0 7,174 10.1 7,880 12.2
-------- ----- -------- ----- -------- -----
Income from operations.......................... $ 585 3.2% $ 6,653 9.3% $ 5,815 9.0%
======== ===== ======== ===== ======== =====
Depreciation and amortization................... $ 635 $ 1,708 $ 1,493
Capital expenditures............................ $ 1,781 $ 3,359 $ 3,708
</Table>
- ---------------
(1) See Item 6. Selected Financial Data for description of EBITDA and Adjusted
EBITDA including the purpose and usefulness of these financial measures.
(2) Certain prior period amounts have been reclassified to conform with the
current period presentation. Includes corporate expenses of $1.3 million for
the 108 days ended April 18, 2002 and $5.0 million and $4.0 million for the
years ended December 31, 2001 and 2000, respectively. The Company's
corporate office was relocated from Texas to Ohio after the Merger
Transaction.
(3) Subsequent to April 18, 2002, AmerCable's results are presented as
discontinued operations of the Successor as it was the Successor's decision
to divest this division.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 (COMBINED SUCCESSOR AND PREDECESSOR RESULTS)
COMPARED TO YEAR ENDED DECEMBER 31, 2001
Alside and Corporate
Net sales increased 16.5% to $611.3 million for the year ended December 31,
2002 compared to $524.5 million for the same period in 2001 due to increased
sales of vinyl windows and vinyl siding. Unit sales of vinyl windows and vinyl
siding increased 38% and 6%, respectively, for the year ended December 31, 2002
compared to the same period in 2001. The increase in sales volume is the result
of the Company's marketing investments and continued expansion of its nationwide
distribution network of supply centers. The Company also believes that the
increased sales volume can be attributed to consumers' demand for professional
remodeling services including vinyl replacement windows and vinyl siding as a
means to enhance home values during a time of historically low interest rates.
While vinyl siding unit sales increased for the full year, unit sales of vinyl
siding decreased 3% during the fourth quarter of 2002 compared to the same
period in 2001. The decrease in unit sales of vinyl siding in the fourth quarter
is primarily a result of the continuing macroeconomic uncertainties, which are
impacting the entire vinyl siding industry. The Company believes the vinyl
siding industry decreased 5% during the fourth quarter of 2002. Gross profit
increased to $179.3 million, or 29.3% of net sales, for the year ended December
31, 2002 compared to $156.6 million, or 29.9% of net sales, for the same period
in 2001. The decrease in gross profit margin percentage was a result of window
sales, which have a lower gross margin percentage, comprising a larger
proportion of total sales in 2002 compared to 2001. More recently, gross profit
in the fourth quarter of 2002 was $43.7 million, or 27.5% of net sales. This
compares to $43.5 million, or 30.1% of net sales, in the fourth quarter of 2001.
In addition to being impacted by the mix of window sales versus siding sales,
this decrease in gross margin percentage was due to increased resin costs and
short-term manufacturing inefficiencies resulting from process and product
changes implemented at the Company's vinyl siding manufacturing facilities in
the fourth quarter. SG&A expense increased to $127.2 million, or 20.8% of net
sales, for the year ended December 31, 2002 versus $112.8 million, or 21.5% of
net sales, in the same period in 2001. SG&A expense increased as a result of
seven new supply centers
19
added during 2002, personnel added to support sales growth at existing supply
centers, additional marketing investments to drive higher sales and increased
commission expense resulting from the higher sales. Income from operations
increased to $52.2 million, or 8.5% of net sales, for the year ended December
31, 2002 compared to $43.9 million, or 8.4% of net sales, for the same period in
2001.
EBITDA and Adjusted EBITDA
EBITDA for the year ended December 31, 2002 was $47.6 million compared to
$59.0 million for the same period in 2001. EBITDA for the year ended December
31, 2002 includes $1.9 million of EBITDA relating to the Company's AmerCable
division, Merger Transaction costs of $9.3 million, pre-tax extraordinary
expenses of $7.6 million and a cost of sales expense of $1.9 million relating to
an inventory fair value adjustment recorded at the time of the Merger
Transaction. Adjusted EBITDA, excluding the amounts discussed above, was $64.6
million for the year ended December 31, 2002. EBITDA for the year ended December
31, 2001 includes EBITDA of $8.4 million relating to the Company's AmerCable
division and a charge of $2.4 million for the write-down of the Company's
investment in Amercord Inc. Adjusted EBITDA for the year ended December 31,
2001, excluding the amounts discussed above, was $53.1 million. Adjusted EBITDA
increased $11.5 million or 21.7% for the year ended December 31, 2002 compared
to the prior year. The increase in Adjusted EBITDA is primarily a result of the
Company's increased sales volume.
Successor and Predecessor Results
The Successor had net sales and net income of $449.3 million and $12.2
million, respectively, for the period from April 19, 2002 to December 31, 2002.
Interest expense during this period was $16.9 million and consisted primarily of
interest on the 9 3/4% notes, term loan and revolving loans under the credit
facility, an interim credit facility temporarily utilized for the Merger
Transaction and amortization of deferred financing costs. As a result of
relocating the Company's corporate office from Texas to Ohio, the Successor's
state and local income tax rate increased, raising the Company's total effective
tax rate to 41.5% from 38.5%. The Successor's results include extraordinary
items of $4.4 million, net of tax, for a portion of the premium paid to
extinguish $74.0 million of the Successor's assumed 9 1/4% notes and financing
fees related to an interim credit facility utilized for the Merger Transaction
which was repaid shortly thereafter and a loss from discontinued operations of
$0.5 million, net of tax, from the Company's AmerCable division.
The Predecessor had net sales and a net loss of $180.2 million and $5.8
million for the period from January 1, 2002 to April 18, 2002. Interest expense
was $2.1 million and consisted primarily of interest on the Company's then
outstanding 9 1/4% notes for the time period from January 1, 2002 to April 18,
2002. The Predecessor's results include $9.3 million of transaction costs
consisting of investment banking and legal fees in conjunction with the
strategic review process and subsequent Merger Transaction. The Predecessor's
results of operations for the year ended December 31, 2001 include the $2.4
million charge for the write-down of its investment in Amercord Inc. In addition
to recording income taxes at an effective rate of 38.5%, the Predecessor's tax
provision for 2002 includes an estimate for $7.3 million of Merger Transaction
costs that the Company considers to be non-deductible for income tax purposes.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000 -- PREDECESSOR
The Company's net sales increased $96.4 million or 19.3% to $595.8 million
for the year ended 2001 as compared to the 2000 period due primarily to strong
sales at the Company's Alside division. Income from operations increased $12.4
million or 32.4% to $50.5 million for the 2001 period compared to $38.1 million
for the 2000 period due primarily to higher operating profits at Alside. Net
income increased 7.9% to $25.4 million in 2001 compared to $23.6 million in
2000. The 2001 results include the $2.4 million write-down of the Company's
Amercord investment while the 2000 period results included the $8.0 million
pre-tax gain on the sale of the Company's UltraCraft cabinet operations and an
additional $1.1 million in income tax expense recorded due to an adjustment to a
deferred tax asset. Excluding these items, the Company's net income was $26.9
million in 2001 and $19.7 million in 2000.
20
Alside and Corporate
Alside's net sales increased 20.6% to $524.5 million in 2001 compared to
$434.8 million in the 2000 period due to higher sales volume of vinyl windows,
vinyl siding and complementary building products, such as roofing, foam
insulation, tools and other materials manufactured by third parties and sold
through Alside's Supply Centers. Unit sales of vinyl windows increased 48% for
the 2001 period compared to the 2000 period, exclusive of the operations of
Alpine, which were acquired in October 2000. Vinyl window unit sales increased
84% including the Alpine operations. Unit sales of vinyl siding increased 11%
for the 2001 period while the Company believes that the vinyl siding industry as
a whole decreased slightly. Gross profit increased to $156.6 million in 2001
compared to $131.7 million in 2000, but decreased as a percentage of sales to
29.8% in 2001 from 30.3% in 2000 due to window sales comprising a larger
proportion of total sales in 2001. This was partially offset by lower raw
material costs and improved manufacturing efficiencies. Selling, general and
administrative expense increased to $112.8 million, or 21.4% of net sales in
2001 compared to $99.4 million, or 22.9% of net sales in 2000. The increase was
a result of the new supply centers added in 2001, personnel added to support
sales growth at existing supply centers, a full year of expenses from the Alpine
acquisition, higher incentive compensation, costs associated with obtaining a
fairness opinion in connection with the repurchase of the Company's class B
common stock and additional compensation expense recorded due to a modification
of certain outstanding stock options. Income from operations increased 35.7% to
$43.9 million as higher gross profits were partially offset by higher selling,
general and administrative expenses.
AmerCable
Net sales increased 10.4% to $71.3 million for the 2001 period compared to
$64.5 million for the same period in 2000 due to higher sales of marine and
mining cable products which were partially offset by lower sales of industrial
cable products, including telecommunications cable products. Gross profit
increased to $13.8 million in 2001 compared to $13.7 million in 2000 but
decreased as a percentage of sales due to higher labor and overhead costs and
unfavorable fixed cost absorption. Selling, general and administrative expense
was $7.2 million for the period ended 2001 compared to $7.9 million for the same
period in 2000 as lower bad debt expense was partially offset by higher
personnel costs. In 2000, AmerCable recorded $1.4 million in additional bad debt
expense as the result of a customer bankruptcy. Income from operations increased
14.4% to $6.7 million in 2001 compared to $5.8 million for the same period in
2000 due to slightly higher gross profit and lower selling, general and
administrative expense due to the additional $1.4 million in bad debt expense
recorded in 2000.
Other
Net interest expense increased $0.7 million or 12.4% in 2001 compared to
2000 due primarily to a decrease in the Company's investment income. The
Company's average investment balance decreased during 2001 as compared to 2000
due to the Company's repurchase of 1.0 million shares of its Class B common
stock at an aggregate cost of $19.5 million in April 2001. The overall decrease
in interest rates during 2001 also contributed to lower investment income. The
Company recorded interest income of $0.4 million in 2001 as compared to $1.1
million in 2000.
QUARTERLY FINANCIAL DATA
Because most of the Company's building products are intended for exterior
use, 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
and operating results than in any other period of the year. As a result, the
Company has historically had small profits or losses in the first quarter and
reduced profits in the fourth quarter of each calendar year.
21
Quarterly sales and operating profit data for the Company in 2002 and 2001
are shown in the table below:
<Table>
THREE EIGHTEEN THREE
MONTHS DAYS SEVENTY-THREE THREE MONTHS MONTHS
ENDED ENDED DAYS ENDED ENDED ENDED
MARCH 31 APRIL 18 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- -------- -------- --------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
2002
Net sales -- Alside................. $111,062 $50,897 $113,960 $176,673 $158,691
Net sales -- AmerCable.............. 12,136 6,135 -- -- --
-------- ------- -------- -------- --------
Total net sales................ 123,198 57,032 113,960 176,673 158,691
Gross profit........................ 32,420 17,459 34,669 53,893 43,685
Income from operations.............. 1,201 5,406 13,002 19,336 13,812
Income (loss) before extraordinary
items............................. (1,519) (4,238) 4,172 7,799 4,647
Net income (loss)................... (1,519) (4,238) (262) 7,799 4,647
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
PREDECESSOR
(IN THOUSANDS)
2001
Net sales -- Alside............................. $89,939 $139,206 $150,942 $144,441
Net sales -- AmerCable.......................... 18,672 19,539 17,722 15,358
------- -------- -------- --------
Total net sales............................ 108,611 158,745 168,664 159,799
Gross profit.................................... 27,197 47,266 49,592 46,398
Income (loss) from operations................... (930) 16,994 19,142 15,302
Net income (loss)............................... (3,015) 9,311 10,714 8,402
</Table>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of $13.0
million and available borrowing capacity of approximately $37.4 million under
the revolving portion of its credit facility. Outstanding letters of credit as
of December 31, 2002, totaled $2.6 million securing various insurance letters of
credit.
For the 257 days ended December 31, 2002, cash provided by operations was
$42.6 million, reflecting the improved results of the ongoing operations of the
Company. This time period includes the majority of the second quarter and the
entire third quarter, the periods during which the Company historically produces
the strongest operating results due to the favorable weather conditions.
Offsetting the favorable operations are the increased interest payments the
Company has made under the new capital structure since the Merger Transaction.
For the 108 days ended April 18, 2002 net cash used in operations was $18.3
million. Cash used in this period reflects an increase in inventory due to the
new supply centers opened in 2002 and payments of certain customer incentives
and employee commissions accrued during the previous year. In addition, cash
used in this period includes merger transaction costs incurred by the
Predecessor of $9.3 million. These were partially offset by the improved
operating results of the ongoing operations of the Company. This time period
primarily includes the first quarter, the period during which the Company
historically produces lower operating results due to the unfavorable weather
conditions. Cash flows from operations of the Predecessor include the working
capital needs of AmerCable for the period from January 1, 2002 to April 18,
2002.
Cash provided by operations was $44.0 million and $23.0 million in 2001 and
2000, respectively. Cash flows from operations increased $21.0 million in 2001
compared to 2000 due to higher operating profits and higher accounts payable and
accrued liabilities, which were partially offset by higher accounts receivable.
The
22
increase in accounts payable was due to higher fourth quarter sales and the
timing of vendor payments while the increase in accrued liabilities was due to
higher commission and profit sharing accruals at the Company's Alside division.
Sales for the fourth quarter of 2001 were 26% higher than the same period in
2000 resulting in an increase in accounts receivable for 2001 compared to the
2000 period. Inventory levels have not increased proportionately with sales due
to improved inventory management and the significant increase in vinyl window
sales, which have relatively small amounts of finished goods inventory due to
the fact that the Company's window products are custom fabricated to the
customer's specifications.
For the 257 days ended December 31, 2002, capital expenditures of the
Successor totaled $8.9 million. The combined capital expenditures of the
Predecessor, excluding AmerCable, and the Successor totaled $11.0 million for
the year ended December 31, 2002. This compares to capital expenditures of $11.7
million ($15.0 million less $3.3 million of AmerCable's capital expenditures)
for the same period in 2001. For the 108 days ended April 18, 2002, capital
expenditures of the Predecessor totaled $3.8 million, which includes AmerCable's
capital expenditures of $1.8 million. Capital expenditures in the 2002 period
were primarily for production equipment to enhance capacity and reduce costs.
Capital expenditures totaled $15.0 million and $11.9 million in 2001 and
2000, respectively. Alside's 2001 expenditures were used primarily to increase
window and fencing capacity and for a new company wide information system.
Capital expenditures associated with the system implementation totaled $3.1
million in 2001. Expenditures at AmerCable were used to expand manufacturing
capacity. Capital expenditures in 2000 were used primarily to increase extrusion
capacity for window profiles, fencing and siding products, improve window
efficiency and upgrade window information systems at Alside and increase
capacity and processing efficiency at AmerCable.
The Company believes that capital expenditures ranging from $8.0 million to
$10.0 million represent a base level of spending needed to maintain its
manufacturing facilities as well as provide for modest increases in capacity and
further automation. Estimated capital expenditures for 2003 are $12.0 million.
The budget includes expenditures to replace existing vinyl siding extrusion and
handling equipment to increase capacity at our Ennis, Texas manufacturing
location, expand the existing supply center network and to further implement the
company wide information system.
Cash flows from the Successor's investing activities also include the
Merger Transaction for $379.5 million and net proceeds from the sale of
AmerCable totaling $28.3 million.
Cash flows from the Successor's financing activities include: (1) the
issuance of $165 million of 9 3/4% notes due 2012, (2) $125 million from a new
$165 million credit facility, (3) $164.8 million cash contribution from Holdings
and (4) cash of approximately $6.3 million, representing a portion of the
Company's total cash of $6.8 million on hand to finance the Merger Transaction
of $379.5 million, tender offer of the 9 1/4% notes of $74.0 million and debt
extinguishment costs of $7.6 million. The tender offer premium paid for the
9 1/4% notes was approximately $7.3 million, of which $4.9 million is included
as an extraordinary item representing the portion of the premium in excess of
the fair market value of the 9 1/4% notes. Upon completion of the Merger
Transaction, the Company was then obligated to make a change of control offer
for the approximate $1.0 million of remaining outstanding 9 1/4% notes at a
price of 101% of the principal amount thereof, plus accrued and unpaid interest.
The change of control offer was completed on June 21, 2002 with an additional
approximate $0.1 million of the 9 1/4% notes being tendered. Pursuant to the
indenture governing the 9 1/4% notes, in March 2003 the Company redeemed all the
remaining approximate $0.9 million of 9 1/4% notes. The remaining 9 1/4% notes
were redeemed at 104.625% of the principal amount of such notes plus accrued and
unpaid interest through the date of redemption. The Company permanently reduced
borrowings under the term loan by $48.5 million using net proceeds from the sale
of AmerCable of approximately $28.3 million and 2002 operating cash flows of
approximately $20.2 million.
The Company's 9 3/4% notes pay interest semi-annually. The Company's credit
facility includes $76.5 million of outstanding term loans due through 2009 that
bear interest at the London Interbank Offered Rate (LIBOR) plus 3.50%, payable
quarterly, and up to $40 million of available borrowings provided by revolving
loans, which expire in 2007. The Company has one subsidiary, which is a wholly
owned subsidiary having no assets, liabilities or operations. This subsidiary
fully and unconditionally guarantees the 9 3/4% notes.
23
The credit facility and the indenture governing the 9 3/4% notes contain
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell its assets or declare dividends.
In addition, under the credit facility the Company is required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense. The Company was in compliance with these covenants
as of December 31, 2002.
The Company guaranteed $3.0 million of a secured note in connection with
the sale of a portion of its ownership interest in Amercord. Ivaco, Inc.,
pursuant to the terms of the note, agreed to indemnify the Company for 50% of
any loss under the guarantee. The guarantee was exercised by Amercord's lender
and the Company has accrued approximately $1.3 million as of December 31, 2002
for its anticipated portion of the liability related to this guarantee. The
Company retains a right to any collateral proceeds that secure the note;
however, the Company believes that the value of such collateral is not
sufficient to cover any significant portion of the Company's liability.
Because most of the Company's building products are intended for exterior
use, sales tend to be lower during periods of inclement weather. Weather
conditions in the first quarter of each calendar year usually result in that
quarter producing significantly less net sales and net cash flow from operations
than in any other period of the year. Consequently, the Company has historically
had small profits or losses in the first quarter and reduced profits from
operations in the fourth quarter of each calendar year. To meet seasonal cash
flow needs during the periods of reduced sales and net cash flows from
operations, the Company anticipates borrowing under the revolving loan portion
of its credit facility. The Company believes that for the foreseeable future
cash flows from operations and its borrowing capacity under its credit facility
will be sufficient to satisfy its obligations to pay principal and interest on
its outstanding debt, maintain current operations and provide sufficient capital
for presently anticipated capital expenditures. There can be no assurances,
however, that the cash generated by the Company and available under the credit
facility will be sufficient for these purposes.
CONTRACTUAL OBLIGATIONS
The Company has commitments for maturities of long-term debt and future
minimum lease payments under noncancelable operating leases, principally for
manufacturing and distribution facilities and certain equipment. The following
summarizes certain of the Company's scheduled maturities of long-term debt and
obligations for future minimum lease payments under non-cancelable operating
leases at December 31, 2002 and the effect such items are expected to have on
the Company's liquidity and cash flow in future periods (in thousands):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN 2-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------- --------- --------- --------- --------
Long-Term Debt..................... $242,408 -- -- -- $242,408
Operating Leases................... $ 49,401 $14,825 $20,831 $9,310 $ 4,435
</Table>
RELATED PARTY TRANSACTIONS
The Company entered into a management agreement with Harvest Partners, Inc.
Under the management agreement, Harvest Partners received a one-time fee of $5.0
million in connection with structuring and implementing the acquisition of the
Company. In addition, Harvest Partners provides the Company with financial
advisory and strategic planning services. For these services, Harvest Partners
receives an annual fee of approximately $0.8 million, payable on a quarterly
basis in advance. The fee will be adjusted on a yearly basis in accordance with
the U.S. Consumer Price Index. In 2002, the Company incurred approximately $0.6
million of management fees paid to Harvest Partners for the period from the
acquisition date to December 31, 2002. The agreement also provides that Harvest
Partners will receive transaction fees in connection with financings,
acquisitions and divestitures of the Company. Such fees will be a percentage of
the applicable transaction. The Company reimburses Harvest Partners for all
out-of-pocket expenses. The
24
management agreement has a term of five years from its date of execution and
will automatically be renewed on a yearly basis, beginning in 2004, unless
otherwise specified by Harvest Partners.
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly-formed entity controlled by members of
AmerCable management and Wingate Partners III, L.P., for net proceeds of
approximately $28.3 million in cash and the assumption of certain liabilities
pursuant to an asset purchase agreement dated as of the same date. Robert F.
Hogan, Jr., president and chief executive officer of the AmerCable division and
vice president of the Company prior to the sale, is the president, chief
executive officer and chairman of the board of AmerCable Incorporated.
RETIREMENT PLANS
Defined benefit pension plans are subject to additional minimum pension
liability requirements under Statement of Financial Accounting Standards
("SFAS") No. 87 -- "Employers' Accounting for Pensions". At December 31, 2002
the Company recorded an additional minimum pension liability totaling
approximately $4.3 million, net of tax, for its defined benefit pension plans.
The additional minimum pension liability was recorded as a charge to
stockholder's equity as a component of accumulated other comprehensive income.
EFFECTS OF INFLATION
The Company believes that the effects of inflation have not been material
to its operating results for each of the past three years, including interim
periods. The Company's principal raw material, vinyl resin, has been subject to
rapid price changes. Through price increases, the Company has historically been
able to pass on significant resin cost increases. The results of operations for
individual quarters can and have been negatively impacted by a delay between the
time of vinyl resin cost increases and price increases in the Company's
products. However, over longer periods of time, the impact of the cost increases
in vinyl resin has historically not been material. Resin prices significantly
increased throughout 2002. For the year ended December 31, 2002, the Company was
able to substantially offset the impact of the resin cost increase with price
increases to its customers. The Company presently expects vinyl resin prices to
increase in 2003. While the Company expects that any future significant resin
cost increases will be offset by price increases to its customers, there can be
no assurances that the Company will be able to pass on any future price
increases.
FINANCIAL ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 -- "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." The provisions of SFAS No.
145 related to the rescission of SFAS No. 4 require that any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented be reclassified as a component of income before income taxes.
The Successor recorded extraordinary items of $4.4 million, net of tax, related
to debt extinguishment. The Company is required to adopt the provisions of this
standard in its fiscal year beginning on January 1, 2003 and will make the
required reclassifications during 2003.
In July 2002, the FASB issued SFAS No. 146 -- "Accounting for Costs
Associated with Exit or Disposal Activities." The provisions of SFAS No. 146
require companies to recognize costs associated with exit or disposal activities
as they are incurred rather than at the date of a commitment to an exit or
disposal plan. The statement replaces guidance previously provided by Emerging
Issues Task Force Number 94-3 - "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is required to adopt the
provisions of this standard in its fiscal year beginning on January 1, 2003. The
Company believes the adoption of this standard will not impact the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45 -- "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The provisions of Interpretation No. 45
requires certain guarantees to be recorded at fair value and increases the
disclosure requirements related to guarantees. The Company is required to adopt
the accounting provisions of this
25
interpretation in its fiscal year beginning on January 1, 2003. The Company
believes the adoption of this interpretation will not have a material effect on
the Company's financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148 -- "Accounting for
Stock-Based Compensation -- Transition and Disclosure." The provisions of SFAS
No. 148 amend SFAS No. 123 -- "Accounting for Stock-Based Compensation" by
providing alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS No.
148 also requires more prominent and frequent disclosures in financial
statements about the effects of stock-based compensation. The Company has
adopted the disclosure provisions of SFAS No. 148.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
General. The Company's discussion and analysis of its financial condition
and results of operations are based upon the Company's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the
Company evaluates its estimates, including those related to customer programs
and incentives, bad debts, inventories, income taxes and pensions and benefits.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
financial statements.
Revenue Recognition. The Company primarily sells and distributes its
products through two channels: direct sales from its manufacturing facilities to
independent distributors and dealers and sales to contractors through its
Company owned supply centers. Direct sales revenue is recognized when the
Company's manufacturing facility ships the product. Sales to contractors are
recognized either when the contractor receives product directly from the supply
centers or when the supply centers deliver the product to the contractor's job
site. A substantial portion of the Company's sales is in the repair and
replacement segment of the building products industry. Therefore, vinyl windows
are manufactured to specific measurement requirements received from the
Company's customers. Revenues are recorded net of estimated returns, customer
incentive programs and other incentive offerings including special pricing
agreements, promotions and other volume-based incentives. Revisions to these
estimates are charged to income in the period in which the facts that give rise
to the revision become known.
Bad Debt. The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. The allowance for doubtful accounts is based on review of the overall
condition of accounts receivable balances and review of significant past due
accounts. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories. The Company values its inventories at the lower of cost
(first-in, first-out) or market. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Goodwill and Other Intangible Assets. The Company has accounted for the
Merger Transaction using the purchase method of accounting. The purchase price
has been allocated to assets and liabilities based on the fair values of the
assets acquired and the liabilities assumed. The excess of cost over fair value
of the new identifiable assets has been recorded as goodwill. These allocations
have been made based upon valuations and other studies.
26
Under the provisions of SFAS No. 142 -- "Goodwill and Other Intangible
Assets," goodwill and intangible assets with indefinite useful lives must be
reviewed annually for impairment using a fair-value based approach. As the
Company does not have a market for its equity, management performs the annual
impairment analysis utilizing a discounted cash flow model, which considers
forecasted operating results discounted at an estimated weighted average cost of
capital. Given the significant amount of goodwill and other intangible assets as
a result of the merger, any future impairment of the goodwill and other
intangible assets could have an adverse effect on the Company's results of
operations and financial position. Although management does not anticipate any
significant impairment of these assets, the extent of any such future impairment
cannot be predicted at this time and is dependent on future operating results.
Income Taxes. The Company accounts for income taxes in accordance with
SFAS No. 109 -- "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. SFAS No. 109
also requires that deferred tax assets be reduced by a valuation allowance if it
is more likely than not that some portion or all of the deferred tax asset will
not be realized. The Company reviews the recoverability of any tax assets
recorded on the balance sheet and provides any necessary allowances as required.
Pension. The Company's pension costs are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates and expected return on plan assets. In selecting these assumptions,
management considers current market conditions, including changes in interest
rates and market returns on plan assets. Changes in the related pension benefit
costs may occur in the future due to changes in assumptions.
CERTAIN FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
report regarding the prospects of the industry and the Company's prospects,
plans, financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, it does not assure that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from the forward-looking
statements:
- changes in home building industry, economic, interest rates and other
conditions;
- changes in availability of consumer credit, employment trends, levels of
consumer confidence and consumer preferences;
- changes in raw material costs and availability;
- changes in national and regional trends in new housing starts;
- changes in weather conditions;
- the Company's ability to comply with certain financial covenants in the
loan documents;
- increases in competition from other manufacturers of vinyl building
products as well as alternative building products;
- increases in the Company's indebtedness;
- increases in costs of environmental compliance; and
- the other factors discussed under the heading "Risk Factors" and
elsewhere in this report.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements included in this report. These forward-looking
27
statements speak only as of the date of this report. The Company does not intend
to update these statements unless the securities laws require it to do so.
WEB SITE ADDRESS
As a matter of Company policy, the Company makes available its quarterly
and annual financial reports filed with the Securities and Exchange Commission
on its web site. The filings are available, free of charge, at
www.associatedmaterials.com.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has outstanding borrowings under the term loan of its credit
facility and may borrow under the revolving credit facility from time to time
for general corporate purposes, including working capital and capital
expenditures. Interest under the credit facility is based on the variable London
Interbank Offered Rate (LIBOR). At December 31, 2002, the Company had borrowings
of $76.5 million under the term loan. The effect of a 1/8% increase or decrease
in interest rates would increase or decrease total interest expense for the year
ended December 31, 2002 by approximately $0.1 million.
The Company has $165.0 million of senior subordinated notes due 2012 that
bear a fixed interest rate of 9 3/4%. The fair value of the Company's 9 3/4%
notes is sensitive to changes in interest rates. In addition, the fair value is
affected by the Company's overall credit rating, which could be impacted by
changes in the Company's future operating results.
FOREIGN CURRENCY EXCHANGE 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, 2002 the Company had no currency
hedges in place.
COMMODITY PRICE RISK
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Effects of Inflation" for a discussion of the
market risk related to the Company's principal raw material, vinyl resin.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED MATERIALS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
-----
Report of Independent Auditors.............................. 30
Balance Sheets as of December 31, 2002 -- Successor and
December 31, 2001 -- Predecessor.......................... 31
Statements of Operations.................................... 32
Two hundred fifty-seven days ended December 31,
2002 -- Successor
One hundred eight days ended April 18, 2002 -- Predecessor
Years ended December 31, 2001 and 2000 -- Predecessor
Statements of Stockholders' Equity and Comprehensive
Income.................................................... 33-34
Two hundred fifty-seven days ended December 31,
2002 -- Successor
One hundred eight days ended April 18, 2002 -- Predecessor
Years ended December 31, 2001 and 2000 -- Predecessor
Statements of Cash Flows.................................... 35
Two hundred fifty-seven days ended December 31,
2002 -- Successor
One hundred eight days ended April 18, 2002 -- Predecessor
Years ended December 31, 2001 and 2000 -- Predecessor
Notes to Financial Statements............................... 36
</Table>
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Associated Materials Incorporated
We have audited the accompanying balance sheets of Associated Materials
Incorporated as of December 31, 2002 and 2001 and the related statements of
operations, stockholders' equity, and cash flows for the two hundred fifty-seven
day period ended December 31, 2002, the one hundred eight day period ended April
18, 2002 and each of the two years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2002 and 2001, and the results of its operations
and its cash flows for the two hundred fifty-seven day period ended December 31,
2002, the one hundred eight day period ended April 18, 2002 and each of the two
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
February 14, 2003
30
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
SUCCESSOR PREDECESSOR
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,022 $ 28,869
Accounts receivable, net of allowance for doubtful
accounts of $5,552 and $5,117 at December 31, 2002 and
2001, respectively..................................... 67,861 65,784
Inventories............................................... 60,369 74,574
Income taxes receivable................................... 4,675 --
Deferred income taxes..................................... 3,653 4,353
Other current assets...................................... 4,604 3,394
-------- --------
Total current assets........................................ 154,184 176,974
Property, plant and equipment, net.......................... 99,113 77,733
Goodwill.................................................... 197,461 --
Trademarks and trade names, net............................. 97,504 --
Patents, net................................................ 6,186 --
Other assets................................................ 11,089 3,953
-------- --------
Total assets................................................ $565,537 $258,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,319 $ 29,579
Accrued liabilities....................................... 34,319 35,265
Income taxes payable...................................... -- 1,498
-------- --------
Total current liabilities................................... 65,638 66,342
Deferred income taxes....................................... 58,976 9,444
Other liabilities........................................... 20,746 5,199
Long-term debt.............................................. 242,408 75,000
Commitments and Contingencies
Stockholders' equity:
Predecessor --
Preferred stock, $0.01 par value:
Authorized shares -- 100,000 shares at December 31,
2001
Issued shares -- 0 at December 31, 2001.............. -- --
Common stock, $0.0025 par value:
Authorized shares -- 15,000,000 at December 31, 2001
Issued shares -- 7,842,003 at December 31, 2001...... -- 19
Common stock Class B, $0.0025 par value:
Authorized and issued shares -- 0 at December 31,
2001................................................ -- --
Less: Treasury stock, at cost -- 1,078,476 shares at
December 31, 2001..................................... -- (14,476)
Capital in excess of par............................... -- 17,124
Retained earnings...................................... -- 100,008
Successor --
Common stock, $0.01 par value:
Authorized shares -- 1,000 at December 31, 2002
Issued shares -- 100 at December 31, 2002............ -- --
Capital in excess of par............................... 169,932 --
Accumulated other comprehensive loss................... (4,347) --
Retained earnings...................................... 12,184 --
-------- --------
Total stockholders' equity.................................. 177,769 102,675
-------- --------
Total liabilities and stockholders' equity.................. $565,537 $258,660
======== ========
</Table>
See accompanying notes.
31
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
<Table>
<Caption>
TWO HUNDRED FIFTY- ONE HUNDRED EIGHT YEAR ENDED
SEVEN DAYS ENDED DAYS ENDED DECEMBER 31,
DECEMBER 31, APRIL 18, -------------------
2002 2002 2001 2000
------------------ ----------------- -------- --------
SUCCESSOR PREDECESSOR
(IN THOUSANDS)
Net sales............................. $449,324 $180,230 $595,819 $499,393
Cost of sales......................... 317,077 130,351 425,366 353,994
-------- -------- -------- --------
Gross profit.......................... 132,247 49,879 170,453 145,399
Selling, general and administrative
expenses............................ 86,097 43,272 119,945 107,255
-------- -------- -------- --------
Income from operations................ 46,150 6,607 50,508 38,144
Interest expense, net................. 16,850 2,068 6,795 6,046
-------- -------- -------- --------
29,300 4,539 43,713 32,098
Merger transaction costs.............. -- 9,319 -- --
Gain on the sale of UltraCraft........ -- -- -- 8,012
Write-down of investment in Amercord
Inc. ............................... -- -- 2,393 --
-------- -------- -------- --------
Income (loss) before income taxes..... 29,300 (4,780) 41,320 40,110
Income tax expense.................... 12,161 977 15,908 16,555
-------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
items............................... 17,139 (5,757) 25,412 23,555
Loss from discontinued operations,
net................................. (521) -- -- --
Extraordinary items, net.............. (4,434) -- -- --
-------- -------- -------- --------
Net income (loss)..................... $ 12,184 $ (5,757) $ 25,412 $ 23,555
======== ======== ======== ========
</Table>
See accompanying notes.
32
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<Table>
<Caption>
CLASS B
COMMON STOCK COMMON STOCK TREASURY STOCK CAPITAL IN TOTAL
--------------- --------------- ----------------- EXCESS RETAINED STOCKHOLDERS'
PREDECESSOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OF PAR EARNINGS EQUITY
- ----------- ------ ------ ------ ------ ------ -------- ---------- -------- -------------
(IN THOUSANDS)
Balance at December 31,
1999.................... 7,025 $ 17 1,550 $ 4 555 $ (6,626) $13,154 $ 72,777 $ 79,326
Net income and total
comprehensive
income................ -- -- -- -- -- -- -- 23,555 23,555
Cash dividends ($0.10
per share)............ -- -- -- -- -- -- -- (801) (801)
Exercise of common stock
options and related
tax benefits.......... 73 -- -- -- -- -- 860 -- 860
Purchase of treasury
shares................ -- -- -- -- 400 (5,799) -- -- (5,799)
Common stock issued
under Employee Stock
Purchase Plan......... 66 1 -- -- -- -- 848 -- 849
------ ---- ------ ----- ------ -------- ------- -------- ---------
Balance at December 31,
2000.................... 7,164 18 1,550 4 955 (12,425) 14,862 95,531 97,990
Net income and total
comprehensive
income................ -- -- -- -- -- -- -- 25,412 25,412
Cash dividends ($0.20
per share)............ -- -- -- -- -- -- -- (1,438) (1,438)
Exercise of common stock
options and related
tax benefits.......... 67 -- -- -- -- -- 1,387 -- 1,387
Purchase of treasury
shares................ -- -- -- -- 123 (2,051) -- -- (2,051)
Common stock issued
under Employee Stock
Purchase Plan......... 61 -- -- -- -- -- 875 -- 875
Retirement of Class B
common stock.......... -- -- (1,000) (3) -- -- -- (19,497) (19,500)
Conversion of Class B
common stock to common
stock................. 550 1 (550) (1) -- -- -- -- --
------ ---- ------ ----- ------ -------- ------- -------- ---------
Balance at December 31,
2001.................... 7,842 19 -- -- 1,078 (14,476) 17,124 100,008 102,675
Net income and total
comprehensive
income................ -- -- -- -- -- -- -- (5,757) (5,757)
Exercise of common stock
options and related
tax benefits.......... 404 1 -- -- -- -- 10,325 -- 10,326
Merger transaction with
AMI Holdings.......... (8,246) (20) -- -- (1,078) 14,476 (27,449) (94,251) (107,244)
------ ---- ------ ----- ------ -------- ------- -------- ---------
Balance at April 18,
2002.................... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
====== ==== ====== ===== ====== ======== ======= ======== =========
</Table>
See accompanying notes.
33
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME -- (CONTINUED)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER TOTAL
--------------- EXCESS RETAINED COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
SUCCESSOR SHARES AMOUNT OF PAR EARNINGS LOSS EQUITY INCOME
- --------- ------ ------ ---------- -------- ------------- ------------- -------------
Equity contribution by AMI
Holdings................. -- $ -- $169,932 $ -- $ -- $169,932 $ --
Net income................. -- -- -- 12,184 -- 12,184 12,184
Minimum pension liability
adjustment............... -- -- -- -- (4,347) (4,347) (4,347)
---- ------ -------- ------- ------- -------- -------
Balance at December 31,
2002....................... -- $ -- $169,932 $12,184 $(4,347) $177,769 $ 7,837
==== ====== ======== ======= ======= ======== =======
</Table>
See accompanying notes.
34
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
TWO HUNDRED FIFTY- ONE HUNDRED EIGHT YEAR ENDED
SEVEN DAYS ENDED DAYS ENDED DECEMBER 31,
DECEMBER 31, APRIL 18, -------------------
2002 2002 2001 2000
------------------ ----------------- -------- --------
SUCCESSOR PREDECESSOR
------------------ ---------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) from continuing operations........... $ 17,139 $ (5,757) $ 25,412 $ 23,555
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by (used
in) operating activities:
Depreciation and amortization........................ 7,169 3,969 10,919 9,550
Deferred income taxes................................ 1,738 783 1,164 1,691
Provision for losses on accounts receivable.......... 1,240 649 1,468 2,884
Write-down of investment in Amercord Inc............. -- -- 2,393 --
Loss on sale of assets............................... (3) 38 43 558
Gain on the sale of UltraCraft....................... -- -- -- (8,012)
Tax benefit from stock option exercises.............. -- 113 411 92
Cost of sales expense related to an inventory fair
value purchase accounting adjustment............... 1,891 -- -- --
Amortization of deferred financing costs............. 1,565 -- -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (6,028) (6,895) (16,022) (3,492)
Inventories........................................ 1,712 (5,170) (145) (5,180)
Other current assets............................... (574) (739) 818 (677)
Accounts payable................................... 3,220 3,816 10,306 1,882
Accrued liabilities................................ 5,575 (8,142) 5,847 2,556
Income taxes receivable/payable.................... 7,709 (1,399) 1,951 (227)
Other assets....................................... 41 (442) (242) (1,804)
Other liabilities.................................. 183 918 (334) (408)
--------- -------- -------- --------
Net cash provided by (used in) operating activities.... 42,577 (18,258) 43,989 22,968
INVESTING ACTIVITIES
Additions to property, plant and equipment............. (8,938) (3,817) (15,022) (11,925)
Proceeds from sale of assets........................... 110 220 142 86
Acquisition of predecessor's equity.................... (379,488) -- -- --
Purchase of Alpine Industries, Inc. assets............. -- -- -- (7,565)
Proceeds from sale of AmerCable........................ 28,332 -- -- --
Proceeds from the sale of UltraCraft................... -- -- -- 18,885
(Purchase)/sale of short-term investment............... -- -- 5,019 (5,019)
--------- -------- -------- --------
Net cash used in investing activities.................. (359,984) (3,597) (9,861) (5,538)
FINANCING ACTIVITIES
Equity contribution from Holdings...................... 164,807 -- -- --
Proceeds from issuance of 9 3/4% Senior Subordinated
Notes................................................ 165,000 -- -- --
Proceeds from borrowings under term loan............... 125,000 -- -- --
Repayments of term loan................................ (48,500) -- -- --
Net proceeds from issuance of common stock............. 100 -- 875 849
Repayment of 9 1/4% Senior Subordinated Notes.......... (74,092) -- -- --
Debt extinguishments costs............................. (7,579) -- -- --
Repurchase of Class B common stock..................... -- -- (19,500) --
Options exercised...................................... -- 94 976 768
Dividends paid......................................... -- (339) (1,438) (801)
Treasury stock acquired................................ -- -- (2,051) (5,799)
--------- -------- -------- --------
Net cash provided by (used in) financing activities.... 324,736 (245) (21,138) (4,983)
--------- -------- -------- --------
Net increase (decrease) in cash from continuing
operations........................................... 7,329 (22,100) 12,990 12,447
Net cash used in discontinued operations............... (1,076) -- -- --
--------- -------- -------- --------
Cash at beginning of period............................ 6,769 28,869 15,879 3,432
--------- -------- -------- --------
Cash at end of period.................................. $ 13,022 $ 6,769 $ 28,869 $ 15,879
========= ======== ======== ========
Supplemental Information:
Cash paid for interest............................. $ 12,226 $ 4,479 $ 7,176 $ 7,177
========= ======== ======== ========
Cash paid for income taxes......................... $ 1,532 $ 2,254 $ 12,633 $ 15,292
========= ======== ======== ========
</Table>
See accompanying notes.
35
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Associated Materials Incorporated (the "Company") was incorporated in
Delaware in 1983 and is a leading, vertically integrated manufacturer and
nationwide distributor of exterior residential building products through its
Alside division ("Alside"). The Company's core products are vinyl siding and
vinyl windows.
BASIS OF PRESENTATION
The Company's results of operations prior to the date of the Merger
Transaction (see Note 2) are presented as the results of the Predecessor. The
results of operations, including the Merger Transaction and results thereafter,
are presented as the results of the Successor and include 257 days from April
19, 2002 to December 31, 2002. The Company is a wholly owned subsidiary of
Associated Materials Holdings Inc. In addition, as discussed in Note 2, the
Company completed the sale of its AmerCable division on June 24, 2002.
AmerCable's results through April 18, 2002 are included in the results of
continuing operations of the Predecessor. Subsequent to April 18, 2002,
AmerCable's results are presented as discontinued operations of the Successor as
it was the Successor's decision to divest this division.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions regarding the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company primarily sells and distributes its products through two
channels: direct sales from its manufacturing facilities to independent
distributors and dealers and sales to contractors through its Company owned
supply centers. Direct sales revenue is recognized when the Company's
manufacturing facility ships the product. Sales to contractors are recognized
either when the contractor receives product directly from the supply centers or
when the supply centers deliver the product to the contractor's job site. A
substantial portion of the Company's sales is in the repair and replacement
segment of the building products industry. Therefore, vinyl windows are
manufactured to specific measurement requirements received from the Company's
customers. Revenues are recorded net of estimated returns, customer incentive
programs and other incentive offerings including special pricing agreements,
promotions and other volume-based incentives. Revisions to these estimates are
charged to income in the period in which the facts that give rise to the
revision become known.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
36
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The cost of maintenance
and repairs of property, plant and equipment is charged to operations in the
period incurred. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, which are as follows:
<Table>
Building and improvements................................... 7 to 30 years
Computer equipment.......................................... 3 years
Machinery and equipment..................................... 3 to 15 years
</Table>
LONG-LIVED ASSETS WITH DEPRECIABLE OR AMORTIZABLE LIVES
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Depreciation
on assets held for sale is discontinued and such assets are reported at the
lower of the carrying amount or fair value less costs to sell.
GOODWILL AND OTHER INTANGIBLE ASSETS WITH INDEFINITE LIVES
The Company reviews goodwill and other intangible assets with indefinite
lives for impairment on an annual basis or more frequently if events or
circumstances change that would impact the value of these assets. The impairment
test is conducted using a fair-value based approach. As the Company did not
record any goodwill and other indefinite lived intangible assets until the
Merger Transaction in the second quarter, an impairment test was not conducted
in 2002 in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142 -- "Goodwill and
Other Intangible Assets."
PENSIONS
The Company's pension costs are developed from actuarial valuations.
Inherent in these valuations are key assumptions including discount rates and
expected return on plan assets. In selecting these assumptions, management
considers current market conditions, including changes in interest rates and
market returns on plan assets. Changes in the related pension benefit costs may
occur in the future due to changes in assumptions.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No.
109 -- "Accounting for Income Taxes," which requires that deferred tax assets
and liabilities be recognized for the effect of temporary differences between
the book and tax bases of recorded assets and liabilities. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will not
be realized. The Company reviews the recoverability of any tax assets recorded
on the balance sheet and provides any necessary allowances as required.
STOCK PLANS
The Company measures stock-based compensation using the intrinsic value in
accordance with Accounting Principles Board Opinion No. 25 -- "Accounting for
Stock Issued to Employees." The Company follows the disclosure provisions
required under SFAS No. 123 -- "Accounting for Stock Based Compensation." Pro
37
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
forma information regarding net income is required by SFAS No. 123, and has been
determined as if the Company had accounted for its stock options under the fair
value method of that statement using a minimum value approach for companies with
private equity. The pro forma effect on net income for the years ended December
31 would have been (in thousands):
<Table>
<Caption>
257 DAYS 108 DAYS YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, APRIL 18, -----------------
2002 2002 2001 2002
------------ --------- ------- -------
SUCCESSOR PREDECESSOR
Net income as reported...................... $12,184 $(5,757) $25,412 $23,555
Pro forma stock based employee compensation
cost, net of tax.......................... (212) (65) (344) (977)
------- ------- ------- -------
Pro forma net income........................ $11,972 $(5,822) $25,068 $22,578
======= ======= ======= =======
</Table>
MARKETING AND ADVERTISING
The Company expenses marketing and advertising costs as incurred. Marketing
and advertising expense was $7.2 million for the 257 days ended December 31,
2002, $3.8 million for the 108 days ended April 18, 2002, $9.9 million in 2001
and $9.2 million in 2000.
INTEREST INCOME
Interest income was approximately $0.1 million for the 257 days ended
December 31, 2002, $0.1 million for the 108 days ended April 18, 2002, $0.4
million in 2001 and $1.1 million in 2000 and is included in interest expense,
net.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, -- "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 require that any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented be reclassified
as a component of income before income taxes. The Successor recorded
extraordinary items of $4.4 million, net of tax, related to debt extinguishment.
The Company is required to adopt the provisions of this standard in its fiscal
year beginning on January 1, 2003 and will make the required reclassifications
during 2003.
In July 2002, the FASB issued SFAS No. 146 -- "Accounting for Costs
Associated with Exit or Disposal Activities." The provisions of SFAS No. 146
require companies to recognize costs associated with exit or disposal activities
as they are incurred rather than at the date of a commitment to an exit or
disposal plan. The statement replaces guidance previously provided by Emerging
Issues Task Force Number 94-3 -- "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is required to adopt the
provisions of this standard in its fiscal year beginning on January 1, 2003. The
adoption of this standard will not have a material impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45 -- "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The provisions of Interpretation No. 45
requires certain guarantees to be recorded at fair value and increases the
disclosure
38
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirements related to guarantees. The Company is required to adopt the
accounting provisions of this interpretation in its fiscal year beginning on
January 1, 2003. The adoption of this interpretation will not have a material
effect on the Company's financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS no. 148 -- "Accounting for
Stock-Based Compensation -- Transition and Disclosure." The provisions of SFAS
No. 148 amend SFAS No. 123 -- "Accounting for Stock-Based Compensation" by
providing alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS No.
148 also requires more prominent and frequent disclosures in financial
statements about the effects of stock-based compensation. The Company has
adopted the disclosure provisions of SFAS No. 148.
2. ACQUISITIONS AND DIVESTITURES
On March 16, 2002, the Company entered into a merger agreement ("Merger
Agreement") with Associated Materials Holdings, Inc. ("Holdings") and its wholly
owned subsidiary, Simon Acquisition Corp. The Merger Agreement provided for the
acquisition of all shares of the Company's then outstanding common stock through
a cash tender offer for $50.00 per share. The Merger Agreement also required
that the Company commence a tender offer to purchase all of its then outstanding
9 1/4% senior subordinated notes due March 1, 2008 ("9 1/4% notes").
On April 19, 2002, the cash tender offer for the Company's then outstanding
common stock and the cash tender offer for approximately $74.0 million of the
Company's then outstanding 9 1/4% notes was completed. Simon Acquisition Corp.
was then merged with and into the Company with the Company continuing as a
privately held, wholly owned subsidiary of Holdings (which is controlled by
affiliates of Harvest Partners, Inc.). The completion of the aforementioned
transactions constitute the merger transaction ("Merger Transaction"). Following
the completion of the Merger Transaction, the Company's then outstanding shares
of common stock were delisted from NASDAQ.
The merger has been accounted for using the purchase method of accounting.
The total purchase consideration of $379.5 million has been allocated to
tangible and intangible assets acquired and liabilities assumed based on
respective fair values at the date of acquisition based on valuation estimates
and certain assumptions. The allocation of purchase price has resulted in $197.5
million in goodwill and $105.5 million in other intangibles, including $6.8
million of patents with estimated useful lives of 10 years and $98.7 million
assigned to trademarks of which $24.0 million have remaining useful lives of 15
years and $74.7 million have indefinite lives (See Note 4). The allocation of
purchase price is reflected in the December 31, 2002 balance sheet. The purchase
consideration of $379.5 million, tender offer of the $74.0 million of 9 1/4%
notes and debt extinguishment costs of $7.6 million were financed through: (1)
the issuance of $165 million of 9 3/4% senior subordinated notes due 2012
("9 3/4% notes"), (2) $125 million from a new $165 million credit facility
("credit facility"), (3) $164.8 million cash contribution from Holdings and (4)
cash of approximately $6.3 million, representing a portion of the Company's
total cash of $6.8 million on hand at the time of the acquisition.
In connection with the merger, the Predecessor incurred merger related
costs, including legal and investment banking fees, which have been classified
as Merger Transaction costs in the Predecessor's accompanying statements of
operations.
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly formed entity controlled by Wingate Partners
III, L.P. and members of AmerCable's management for net proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement. The Company used the net proceeds to repay a
portion of its credit facility. No gain or loss on the sale of AmerCable was
recorded in the statements of operations, as the fair value assigned to
AmerCable's net assets acquired in the Merger Transaction approximated the net
proceeds
39
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
received from the subsequent sale of AmerCable. Operating results of
discontinued operations for the period from April 19, 2002 to June 24, 2002 were
as follows (in thousands):
<Table>
<Caption>
257 DAYS ENDED
DECEMBER 31, 2002
-----------------
Net sales................................................... $8,197
Income from operations...................................... 322
Interest allocated to discontinued operations............... 1,213
Net loss from discontinued operations....................... $ (521)
</Table>
Interest allocated to discontinued operations includes the interest on
$28.3 million of borrowings under the term loan for the period from April 19,
2002 to June 24, 2002 plus interest expense related to the accelerated
amortization of deferred financing fees of the Company's credit facility related
to the proceeds from the sale of AmerCable used to reduce the term loan.
On October 6, 2000, the Company acquired substantially all of the assets of
Alpine Industries, Inc. for $7.6 million in cash and the assumption of certain
payroll related and property tax liabilities. Included in the acquired assets is
Alpine's leased window fabrication facility located in Bothell, Washington. This
facility manufactures vinyl windows for the new construction and remodeling
markets. The Company accounted for the acquisition using the purchase method of
accounting and the results of operations have been included in the Company's
income statement from the date of acquisition.
The Company completed the sale of its UltraCraft operation, a manufacturer
of semi-custom frameless cabinets, in June 2000. Pre-tax net proceeds from the
sale were $18.9 million after working capital adjustments and transaction costs.
The Company recorded a pre-tax gain on the sale of $8.0 million.
3. RELATED PARTIES
The Company entered into a management agreement with Harvest Partners, Inc.
Under the management agreement, Harvest Partners received a one-time fee of $5.0
million in connection with structuring and implementing the acquisition of the
Company. In addition, Harvest Partners provides the Company with financial
advisory and strategic planning services. For these services, Harvest Partners,
Inc. receives an annual fee of approximately $0.8 million, payable on a
quarterly basis in advance, beginning on the date of execution of this
agreement. The fee will be adjusted on a yearly basis in accordance with the
U.S. Consumer Price Index. In 2002, the Company incurred approximately $0.6
million of management fees paid to Harvest Partners for the period from the
acquisition date to December 31, 2002, which are included in selling, general
and administrative expenses in the statement of operations. The agreement also
provides that Harvest Partners will receive transaction fees in connection with
financings, acquisitions and divestitures of the Company. Such fees will be a
percentage of the applicable transaction. The Company reimburses Harvest
Partners for all out-of-pocket expenses. The management agreement has a term of
five years from its date of execution and will automatically be renewed on a
yearly basis, beginning in 2004, unless otherwise specified by Harvest Partners.
As discussed in Note 2, the Company sold its AmerCable division to a
newly-formed entity that is controlled in part by former members of the
Company's management.
4. GOODWILL, TRADEMARKS, TRADE NAMES AND PATENTS
Goodwill of $197.5 million consists of the purchase price for the Merger
Transaction in excess of the fair value of the tangible and intangible net
assets acquired. The Company's trademarks and trade names total $98.7 million
and patents total approximately $6.8 million. The Company has determined that
one trademark and the Alside trade name totaling $74.7 million have an
indefinite useful life. The remaining $24.0 million of trademarks are being
amortized on a straight-line basis over their estimated remaining useful lives
of 15 years.
40
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Patents are being amortized on a straight-line basis over their estimated
remaining useful lives of 10 years. Accumulated amortization and amortization
expense related to trademarks and patents were approximately $1.2 and $0.6
million, respectively as of and for the 257 days ended December 31, 2002.
Estimated annual amortization expense for trademarks and patents combined is
approximately $2.3 million.
5. PRO FORMA INFORMATION
The following pro forma information for the years ended December 31, 2002
and 2001 was prepared as if the Merger Transaction and sale of AmerCable
occurred as of the beginning of each period presented. On a pro forma basis, the
Company would have reported (in thousands):
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Net sales................................................... $611,283 $524,528
Income before extraordinary items........................... $ 16,345 $ 8,929
Net income.................................................. $ 11,911 $ 8,929
</Table>
The pro forma information is not necessarily indicative of the results that
would have occurred had the Merger Transaction and sale of AmerCable occurred at
the beginning of the periods presented, nor is it necessarily indicative of
future results. The pro forma results of operations for all periods presented
include a $1.9 million expense related to an inventory fair value adjustment
recorded at the time of the Merger Transaction. In addition, the pro forma
results of operations for the year ended December 31, 2001 includes a $2.4
million loss on the writedown of Amercord Inc.
6. INVESTMENT IN AMERCORD
The Company owns a 9.9% interest in Amercord Inc. ("Amercord"), which
manufactured and marketed steel cord and bead wire to the tire manufacturing
industry. During 2001, Amercord ceased operations, and the Company wrote-off its
remaining $2.4 million investment.
The Company guaranteed $3.0 million of a secured note in connection with
the sale of a portion of the ownership interest in Amercord. Ivaco, Inc.,
pursuant to the terms of the note, agreed to indemnify the Company for 50% of
any loss under the guarantee. The guarantee was exercised by Amercord's lender
and the Company has accrued approximately $1.3 million as of December 31, 2002
for its anticipated portion of the liability related to this guarantee. The
Company retains a right to any collateral proceeds that secure the note;
however, the Company has determined that the value of such collateral is not
sufficient to cover any significant portion of the Company's liability.
41
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts on accounts receivable for
the years ended December 31 consist of (in thousands):
<Table>
<Caption>
257 DAYS 108 DAYS YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, APRIL 18, ---------------
2002 2002 2001 2000
------------ --------- ------ ------
SUCCESSOR PREDECESSOR
Balance at beginning of period................ $5,486 $5,117 $6,168 $4,864
Provision for losses.......................... 1,240 649 1,468 2,884
Losses sustained (net of recoveries).......... (653) (280) (2,519) (1,358)
Allowance for AmerCable receivables sold...... (521) -- -- --
Allowance for UltraCraft receivables sold..... -- -- -- (222)
------ ------ ------ ------
Balance at end of period...................... $5,552 $5,486 $5,117 $6,168
====== ====== ====== ======
</Table>
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
allowance for doubtful accounts is based on a review of the overall condition of
accounts receivable balances and a review of significant past due accounts. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
8. INVENTORIES
Inventories at December 31 consist of (in thousands):
<Table>
<Caption>
2002 2001
SUCCESSOR PREDECESSOR
--------- -----------
Raw materials............................................... $13,545 $21,102
Work-in-progress............................................ 3,928 4,597
Finished goods and purchased stock.......................... 42,896 48,875
------- -------
$60,369 $74,574
======= =======
</Table>
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of (in thousands):
<Table>
2002 2001
SUCCESSOR PREDECESSOR
-------- --------
Land........................................................ $ 1,550 $ 1,878
Buildings................................................... 29,817 30,231
Construction in process..................................... 2,451 2,970
Machinery and equipment..................................... 70,672 119,151
-------- --------
104,490 154,230
Less accumulated depreciation............................... 5,377 76,497
-------- --------
$ 99,113 $ 77,733
======== ========
</Table>
Depreciation expense was approximately $5.4 million for the 257 days ended
December 31, 2002, $3.9 million for the 108 days ended April 18, 2002, $10.6
million in 2001 and $9.3 million in 2000.
42
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. ACCRUED AND OTHER LIABILITIES
Accrued liabilities at December 31 consist of (in thousands):
<Table>
2002 2001
SUCCESSOR PREDECESSOR
------- -------
Employee compensation....................................... $11,394 $15,648
Sales promotions and incentives............................. 8,597 8,929
Employee benefits........................................... 4,592 3,656
Interest.................................................... 3,435 2,322
Taxes other than income..................................... 2,559 2,610
Other....................................................... 3,742 2,100
------- -------
$34,319 $35,265
======= =======
</Table>
Other liabilities of approximately $20.7 million and $5.2 million at
December 31, 2002 and 2001, respectively, consist primarily of accruals for
pension liabilities and retiree medical benefits.
11. LONG-TERM DEBT
Long-term debt at December 31 consists of (in thousands):
<Table>
2002 2001
SUCCESSOR PREDECESSOR
-------- -------
9 3/4% notes................................................ $165,000
Term loan under credit facility............................. 76,500
9 1/4% notes................................................ 908 $75,000
-------- -------
$242,408 $75,000
======== =======
</Table>
In connection with the Merger Transaction, on April 23, 2002 the Company
issued $165 million of 9 3/4% notes due in 2012 that pay interest semi-annually
on April 15 and October 15. The 9 3/4% notes are general unsecured obligations
of the Company subordinated in right of payment to senior indebtedness and
senior in right of payment to any current or future subordinated indebtedness of
the Company. The Company has one subsidiary, which is a wholly owned subsidiary
having no assets, liabilities or operations, that fully and unconditionally
guarantees the Company's 9 3/4% notes.
In conjunction with the merger, the Company entered into a new $165 million
credit facility, which included $125 million of term loans due through 2009 that
bear interest at the London Interbank Offered Rate (LIBOR) plus 3.50%, payable
quarterly, and up to $40 million of available borrowings provided by revolving
loans, which expire in 2007. The credit facility is secured by a pledge of the
capital stock of the Company and a perfected lien and security interest in all
of the tangible and intangible assets of the Company. The term loan has been
permanently reduced by $48.5 million, which resulted in approximately $1.4
million of accelerated amortization of deferred financing costs. At December 31,
2002, the Company had available borrowing capacity of approximately $37.4
million under the revolving portion of its credit facility. The facility
requires the Company to pay a commitment fee of 0.5% per annum on any unused
amounts under the revolving portion of the facility. Outstanding letters of
credit at December 31, 2002 totaled approximately $2.6 million securing various
insurance letters of credit.
None of the Company's long-term debt matures within five years; however, on
an annual basis the Company is required to make principal payments on the term
loan under its credit facility based on a
43
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
percentage of excess cash flows as defined in the credit facility. The payments
under the term loan in 2002 were sufficient such that no additional principal
payments were required under the excess cash flow provision.
The credit facility and the indenture governing the 9 3/4% notes contain
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell its assets or declare dividends.
In addition, under the credit facility the Company is required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense. The Company was in compliance with its covenants
as of December 31, 2002.
In connection with the Merger Transaction, on April 19, 2002 the Company
completed a cash tender offer for approximately $74.0 million of the Company's
9 1/4% notes. The tender offer premium paid for the 9 1/4% notes was
approximately $7.3 million, of which $4.9 million is included as an
extraordinary item representing the portion of the premium in excess of the fair
market value of the 9 1/4% notes. The Company was then obligated to make a
change of control offer for the approximate $1.0 million of remaining
outstanding 9 1/4% notes at a price of 101% of the principal amount thereof,
plus accrued and unpaid interest. The change of control offer was completed on
June 21, 2002 with approximately $0.1 million of 9 1/4% notes being tendered.
The remaining 9 1/4% notes mature in 2008.
The weighted average interest rate for borrowings under the credit facility
was 5.9% for the 257 days ended December 31, 2002 and 5.9% for the former credit
facility for the year ended December 31, 2001. For the 108 days ended April 18,
2002, there were no borrowings under the former credit facility.
The fair value of the 9 3/4% notes at December 31, 2002 was $173.3 million
based upon quoted market prices.
12. COMMITMENTS
Commitments for future minimum lease payments under noncancelable operating
leases, principally for manufacturing and distribution facilities and certain
equipment, are as follows (in thousands):
<Table>
2003........................................................ $14,825
2004........................................................ 12,174
2005........................................................ 8,657
2006........................................................ 5,563
2007........................................................ 3,747
Thereafter.................................................. 4,435
</Table>
Lease expense was approximately $12.4 million for the 257 days ended
December 31, 2002, $6.0 million for the 108 days ended April 18, 2002, $17.9
million in 2001 and $14.7 million in 2000. The Company's lease agreements
typically contain renewal options.
44
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
Income tax expense for the years ended December 31 consists of (in
thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
257 DAYS ENDED 108 DAYS ENDED ---------------------------------------
DECEMBER 31, 2002 APRIL 18, 2002 2001 2000
------------------ ------------------ ------------------ ------------------
SUCCESSOR PREDECESSOR
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- -------- ------- --------
Federal income taxes........ $6,127 $1,151 $177 $711 $13,835 $ 948 $13,800 $1,510
State income taxes.......... 781 587 17 72 909 216 1,064 181
------ ------ ---- ---- ------- ------ ------- ------
$6,908 $1,738 $194 $783 $14,744 $1,164 $14,864 $1,691
====== ====== ==== ==== ======= ====== ======= ======
</Table>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes as of December 31 are as follows (in
thousands):
<Table>
<Caption>
2002 2001
SUCCESSOR PREDECESSOR
--------- -----------
Deferred tax assets:
Medical benefits.......................................... $ 2,548 $ 1,966
Bad debt expense.......................................... 2,551 1,914
Pension................................................... 2,746 --
Inventory costs........................................... 583 763
Capital loss on Amercord Inc. ............................ -- 472
Accrued expenses and other................................ 3,164 1,222
-------- -------
Total deferred tax assets................................... 11,592 6,337
Deferred tax liabilities:
Depreciation.............................................. 22,765 9,889
Intangible assets......................................... 43,032 --
Pension expense........................................... -- 779
Other..................................................... 1,118 760
-------- -------
Total deferred tax liabilities.............................. 66,915 11,428
-------- -------
Net deferred tax liabilities................................ $(55,323) $(5,091)
======== =======
</Table>
The reconciliation of the statutory rate to the Company's effective income
tax rate for the years ended December 31 follows:
<Table>
<Caption>
257 DAYS 108 DAYS YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, APRIL 18, -------------
2002 2002 2001 2000
------------ --------- ----- -----
SUCCESSOR PREDECESSOR
Statutory rate.................................... 35.0% (35.0)% 35.0% 35.0%
State income tax, net of federal income tax
benefit......................................... 2.2 (2.2) 1.8 2.0
Non-deductible merger transaction costs........... -- 58.9 -- --
Other............................................. 4.3 (1.3) 1.7 4.3
---- ----- ---- ----
Effective rate.................................... 41.5% 20.4% 38.5% 41.3%
==== ===== ==== ====
</Table>
45
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As a result of relocating the Company's corporate office from Texas to
Ohio, the Successor's state and local income tax rate increased, raising the
Company's total effective tax rate to 41.5% from 38.5%. In addition, the
Predecessor's tax provision includes an estimate for $7.3 million of Merger
Transaction costs that the Company considers to be non-deductible for income tax
purposes. Income tax expense for the 257 days ended December 31, 2002 consists
of a $12.1 million provision for continuing operations, net of a $0.3 million
benefit from discontinued operations and a $3.2 million benefit from
extraordinary items.
In 2000, the Company recorded $1.1 million in additional income tax expense
due to an adjustment to a deferred tax asset, which was recorded in 1986
pursuant to the spin-off of the Company's tire cord operation into Amercord. The
effect of this adjustment is included in the other category in the rate
reconciliation. Exclusive of this adjustment, the Company's effective tax rate
would have been 38.5%.
14. STOCKHOLDERS' EQUITY
SUCCESSOR
As discussed in Note 2, the Company is a wholly owned subsidiary of
Holdings. The Company has the authority to issue 1,000 shares of $0.01 par value
common stock, of which 100 shares are issued and outstanding at December 31,
2002. The Company's contributed capital consists of $164.9 million of cash
contributions and non-cash financing of approximately $5.0 million representing
the fair value of stock options of the Predecessor held by certain employees
that were converted into options of Holdings.
The Company reports comprehensive income in its consolidated statement of
stockholders' equity. Comprehensive income includes net income and all other
non-owner changes in equity during the period. Comprehensive income for the 257
days ended December 31, 2002 includes a minimum pension liability adjustment of
approximately $7.4 million, net of a related tax benefit of approximately $3.1
million. The Company had no non-owner changes impacting equity for the 108 days
ended April 18, 2002 or the years ended December 31, 2001 or 2000.
PREDECESSOR
In October 1998 the Company's Board of Directors approved a stock
repurchase program that authorized the Company to purchase up to 800,000 shares
of common stock in open market transactions depending on market, economic and
other factors. In November 2000, the Board authorized the repurchase of an
additional 800,000 shares of common stock under the Company's stock repurchase
program, bringing the total number of shares under the plan to 1,600,000 shares.
During 2001 and 2000, the Company repurchased 123,306 and 399,774 shares of its
common stock under the stock repurchase program at a cost of approximately $2.0
million and $5.8 million. The repurchase of the Company's Class B common stock
described below was not part of this stock repurchase program.
On April 29, 2001, the Company repurchased 1,000,000 shares of its Class B
common stock from The Prudential Insurance Company of America ("Prudential") and
its wholly owned subsidiary, PCG Finance Company II, LLC ("PCG") at $19.50 per
share, or $19.5 million in the aggregate, which has been reflected primarily as
a reduction to retained earnings. The share purchase was financed through
available cash and borrowings under the Company's then available $50 million
credit facility. Following the purchase, Prudential and PCG converted the
remaining 550,000 shares of Class B common stock held by these entities into
550,000 shares of common stock pursuant to the terms of the Company's
Certificate of Incorporation. The Company subsequently retired all 1,550,000
previously authorized shares of Class B common stock.
46
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. STOCK PLANS
SUCCESSOR
In June 2002, Holdings adopted the Associated Materials Holdings Inc. 2002
Stock Option Plan (the "Plan"). The board of directors of Holdings administers
the Plan and selects eligible executives, directors, employees and consultants
of Holdings and its affiliates, including the Company, to receive options. The
board of directors of Holdings also will determine the number and type of shares
of stock covered by options granted under the Plan, the terms under which
options may be exercised, the exercise price of the options and other terms and
conditions of the options in accordance with the provisions of the Plan. In
2002, the board of directors authorized 467,519 shares of Holdings' common stock
and 55,758 shares of Holdings' preferred stock under this Plan. An option holder
may pay the exercise price of an option by any legal manner that the board of
directors of Holdings permits. Option holders generally may not transfer their
options except in the event of death. If Holdings undergoes a change in control,
as defined in the Plan, all outstanding time-vesting options become immediately
fully exercisable, while the performance-based options may become immediately
exercisable upon achievement of certain specified criteria. The board of
directors of Holdings may adjust outstanding options by substituting stock or
other securities of any successor or another party to the change in control
transaction, or cash out such outstanding options, in any such case, generally
based on the consideration received by its stockholders in the transaction.
Subject to particular limitations specified in the Plan, the board of directors
may amend or terminate the Plan. The Plan will terminate no later than 10 years
following its effective date; however, any options outstanding under the option
plan will remain outstanding in accordance with their terms.
Options were granted at fair market value on the grant date and are
exercisable under varying terms for up to ten years. The options granted in 2002
include the following:
- Options to purchase shares of Holdings' common stock at the fair market
value on the date of grant, which will vest over time;
- Options to purchase shares of Holdings' common stock at the fair market
value on the date of grant, which will vest 100% on the eighth
anniversary from the date of grant provided that the option vesting may
be accelerated upon the occurrence of a liquidity event, as defined in
the Plan, and the achievement of a specified internal rate of return on
the funds invested by Harvest Partners, Inc. and minimum aggregate
proceeds for the investment by Harvest Partners (performance-based
options) and;
- Options to purchase shares of Holdings' common stock and preferred stock
as a unit, comprised of one share of preferred stock and a specified
fraction of a share of common stock granted in exchange for a portion of
the outstanding options to purchase shares of the Predecessor's common
stock, which became fully vested upon the change in control ("Roll-Over
Options").
Transactions during the 257 days ended December 31, 2002 under this plan
are summarized below:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES PRICE EXERCISE PRICE
------- ---------------- ----------------
Granted.................................... 506,450 $ 5.85 to $22.65 $11.75
Expired or canceled........................ (22,500) $ 5.85 to $18.00 14.78
------- ---------------- ------
Options outstanding December 31, 2002...... 483,950 $10.00 to $22.65 $11.61
======= ================ ======
</Table>
Options to purchase 95,712 shares of Holdings' common stock and 55,758
shares of Holdings' preferred stock were exercisable at December 31, 2002. As
the Roll-Over Options are required to be exercised as a unit (as described
above), the weighted average exercise price of the Roll-Over Options has been
allocated among the options for preferred and common stock.
47
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value at date of grant for options granted during
2002 using the minimum value method was $3.57 per option. The fair value of the
options was estimated at the date of the grant using the minimum value method
with the following assumptions for 2002: dividend yield of 0.0% for options for
common shares and 8.0% for options for preferred shares, a weighted-average risk
free interest rate of 5.02% and an expected life of the option of 8 years. Stock
based compensation would have reduced net income by approximately $0.2 million
for the 257 days ended December 31, 2002 if the fair values of the options
granted had been recognized as compensation expense on a straight-line basis
over the vesting period of the grants.
PREDECESSOR
The Company had a stock option plan, whereby it granted stock options to
certain directors, officers and key employees. The Company authorized 1,200,000
shares of common stock to be issued under the plan. Options were granted at fair
market value on the grant date and were exercisable for ten years. Options
vested by either of the following methods: 50% vesting upon the grant date with
the other 50% vesting after two years or 20% vesting upon the grant date with an
additional 20% vesting each year commencing on the first anniversary of the
grant date. All outstanding options granted under the stock option plan were
non-statutory stock options. As of April 18, 2002, all options were either
exercised or converted to options of Holdings.
Transactions during 2000, 2001 and the 108 days ended April 18, 2002 under
this plan are summarized below:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES PRICE EXERCISE PRICE
-------- ---------------- ----------------
Options outstanding at December 31,
1999.................................... 567,300 $2.93 to $16.00 $ 8.50
Exercised................................. (73,486) $5.00 to $11.88 $ 9.57
Granted................................... 167,500 $11.88 to $16.56 $13.50
Expired or canceled....................... (26,514) $9.00 to $11.88 $ 9.72
-------- ---------------- ------
Options outstanding at December 31,
2000.................................... 634,800 $2.93 to $16.56 $ 9.65
Exercised................................. (67,300) $2.93 to $11.88 $ 5.76
Granted................................... 20,000 $17.88 $17.88
Expired or canceled....................... (19,000) $9.00 to $11.88 $ 9.45
-------- ---------------- ------
Options outstanding at December 31,
2001.................................... 568,500 $2.925 to $17.88 $10.41
Exercised................................. (403,500) $2.925 to $17.88 $ 9.48
Converted to options of Holdings.......... (165,000) $2.925 to $17.88 $12.68
-------- ---------------- ------
Options outstanding April 18, 2002........ -- -- --
======== ================ ======
</Table>
The weighted average fair value at date of grant for options granted during
2001 using the Black Scholes method was $8.39 per option. The fair value of the
options was estimated at the date of the grant using the Black Scholes option
pricing model with the following assumptions for 2001: dividend yield of .95%,
volatility factor of the expected market price of the stock of .330, a
weighted-average risk free interest rate of 5.10% and an expected life of the
option of 10 years. Stock based compensation would have reduced net income (or
increased net loss) by approximately $0.1 million for the 108 days ended April
18, 2002 and $0.3 million and $1.0 million for the years ended December 31, 2001
and 2000, respectively.
Effective October 1, 1998 the Company established an Employee Stock
Purchase Plan ("ESPP"). The ESPP allowed employees to purchase the Company's
common stock at 85% of the lower of the fair market value on the first day of
the purchase period or the last day of the purchase period. The Company had
registered 500,000 shares of common stock for issuance under the ESPP. Employees
purchased 60,679 and 65,873 shares under the ESPP at average prices of $14.42
and $12.87 per share during 2001 and 2000,
48
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The Company's Board of Directors approved the suspension of the
ESPP effective December 31, 2001.
16. BUSINESS SEGMENTS
SUCCESSOR
Subsequent to the Merger Transaction and sale of AmerCable, the Company is
in the single business of manufacturing and distributing exterior residential
building products.
PREDECESSOR
Prior to the Merger Transaction and sale of AmerCable, the Company had two
reportable segments: building products and electrical cable products. The
principal business activities of the building products segment are the
manufacture of vinyl siding, vinyl windows and the wholesale distribution of
these and other complementary building products principally to professional home
remodeling and new construction contractors. The principal business activity of
the electrical cable segment was the manufacture and sale of jacketed electrical
cable.
The Company had evaluated performance and allocated resources based on
operating profit, which is comprised of net sales less operating costs and
expenses.
Comparative financial data by reportable segment for the 108 days ended
April 18, 2002 and the years ended December 31, 2001 and 2000 are as follows (in
thousands):
<Table>
<Caption>
108 DAYS YEAR ENDED
ENDED DECEMBER 31,
APRIL 18, -------------------
2002 2001 2000
--------- -------- --------
Net sales:
Building products.................................. $161,959 $524,528 $434,845
Electrical cable products.......................... 18,271 71,291 64,548
-------- -------- --------
$180,230 $595,819 $499,393
======== ======== ========
Operating profits (losses):
Building products.................................. $ 7,328 $ 48,889 $ 36,300
Electrical cable products.......................... 585 6,653 5,815
Corporate expense.................................. (1,306) (5,034) (3,971)
-------- -------- --------
$ 6,607 $ 50,508 $ 38,144
======== ======== ========
</Table>
<Table>
<Caption>
Identifiable assets:
Building products.................................... $189,142 $165,990
Electrical cable products............................ 34,054 34,255
Corporate............................................ 35,464 35,467
-------- --------
$258,660 $235,712
======== ========
Depreciation and amortization:
Building products.................................... $3,253 $ 8,901 $ 7,767
Electrical cable products............................ 635 1,708 1,493
Corporate............................................ 81 310 290
------ -------- --------
$3,969 $ 10,919 $ 9,550
====== ======== ========
</Table>
49
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
Additions to property, plant and equipment:
Building products.................................... $2,036 $ 11,652 $ 7,936
Electrical cable products............................ 1,781 3,359 3,708
Corporate............................................ -- 11 281
------ -------- --------
$3,817 $ 15,022 $ 11,925
====== ======== ========
</Table>
Identifiable assets by segment are those used in the Company's operations
in each segment. Corporate assets are principally the Company's cash and cash
equivalents and short-term investments. The Company operates principally in the
United States. Neither aggregate export sales nor sales to a single customer
have accounted for 10% or more of consolidated net sales in any of the years
presented.
17. RETIREMENT PLANS
The Company sponsors a defined benefit pension plan, The Premium Building
Products Company Hourly Employees Pension Plan ("Premium Plan"), which covers
approximately 250 participants. The Company froze the Alside defined benefit
retirement plan ("Alside Plan") in 1998 and replaced it with a defined
contribution plan. Prepaid pension and accrued pension liabilities are included
in other assets and other liabilities in the accompanying balance sheets.
Information regarding the Company's defined benefit plans is as follows (in
thousands):
<Table>
<Caption>
2002 2001
----------------- -----------------
ALSIDE PREMIUM ALSIDE PREMIUM
PLAN PLAN PLAN PLAN
------- ------- ------- -------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of
year......................................... $27,624 $1,234 $25,733 $1,100
Service cost................................... 185 48 209 37
Interest cost.................................. 1,919 92 1,887 77
Plan amendments................................ -- -- -- 43
Actuarial (gain) loss.......................... 1,326 182 1,102 (2)
Benefits paid.................................. (1,449) (23) (1,307) (21)
------- ------ ------- ------
Projected benefit obligation at end of year.... $29,605 $1,533 $27,624 $1,234
======= ====== ======= ======
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year...... $28,732 $1,007 $32,414 $ 880
Actual return on plan assets................... (3,740) (138) (2,375) (57)
Employer contributions......................... -- 132 -- 205
Benefits paid.................................. (1,449) (23) (1,307) (21)
------- ------ ------- ------
Fair value of assets at end of year............ 23,543 978 28,732 1,007
Funded status.................................. (6,062) (555) 1,108 (227)
Unrecognized:
Transition obligation........................ -- -- -- 14
Prior service costs.......................... -- -- -- 80
Cumulative net loss.......................... -- -- 876 43
------- ------ ------- ------
Accrued pension asset (liability).............. $(6,062) $ (555) $ 1,984 $ (90)
======= ====== ======= ======
</Table>
50
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001
----------------- -----------------
ALSIDE PREMIUM ALSIDE PREMIUM
PLAN PLAN PLAN PLAN
------- ------- ------- -------
KEY ASSUMPTIONS AS OF DECEMBER 31
Discount rate.................................. 6.75% 6.75% 7.25% 7.25%
Long-term rate of return on assets............. 9.00% 9.00% 9.00% 9.00%
Salary increases............................... N/A N/A N/A N/A
NET PERIODIC PENSION (BENEFIT) COST
Service cost................................... $ 185 $ 48 $ 209 $ 37
Interest cost.................................. 1,919 92 1,887 77
Expected return on assets...................... (2,467) (93) (2,864) (83)
Amortization of unrecognized:
Transition obligation........................ -- 2 -- 7
Prior service costs.......................... -- 3 -- 6
Cumulative net gain.......................... -- -- (217) (5)
------- ------ ------- ------
Net periodic pension (benefit) cost............ $ (363) $ 52 $ (985) $ 39
======= ====== ======= ======
</Table>
In 2002, the Company recognized in the statement of comprehensive income an
additional minimum pension liability adjustment of approximately $7.4 million,
($4.3 million net of tax). The additional liability is included in other
liabilities in the balance sheet as of December 31, 2002.
The Company sponsors a defined contribution plan (the "401(k) Plan")
intended to provide assistance in accumulating personal savings for retirement.
The 401(k) Plan is qualified as a tax-exempt plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The 401(k) Plan covers all full-time,
non-union employees and matches up to 4.0% of eligible compensation. The
Company's pre-tax contributions to this plan were approximately $1.8 million for
the 257 days ended December 31, 2002, $1.0 million for the 108 days ended April
18, 2002, $2.1 million in 2001 and $2.0 million in 2000.
Previously, the Company sponsored the AmerCable 401(k) Plan, which covered
all full-time employees of AmerCable and matched up to 4.0% of eligible
compensation (3.5% of eligible compensation prior to 2001). The Company's
pre-tax contributions to this plan were approximately $50 thousand for the
period from the date of the Merger Transaction to the date AmerCable was sold,
$0.1 million for the 108 days ended April 18, 2002, $0.3 million in 2001 and
$0.2 million in 2000.
18. EXTRAORDINARY ITEMS
Extraordinary items include $4.9 million ($2.8 million net of tax) for a
portion of the premium paid to extinguish substantially all of the Successor's
assumed 9 1/4% notes and $2.7 million ($1.6 million net of tax) for the
financing fees related to an interim credit facility utilized for the Merger
Transaction, which was repaid shortly thereafter.
19. CONTINGENCIES
In the ordinary course of business, the Company is involved in various
legal proceedings. The Company is of the opinion that the ultimate resolution of
these matters will not have a material adverse effect on the results of
operations or the financial position of the Company.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about the board of directors and
executive officers for the Company.
<Table>
<Caption>
NAME AGE POSITION(S)
- ---- --- -----------
Ira D. Kleinman...................... 46 Director
Michael Caporale, Jr. ............... 51 President, Chief Executive Officer and Director
D. Keith LaVanway.................... 38 Vice President, Chief Financial Officer,
Treasurer and Secretary
Kenneth L. Bloom..................... 40 President of Alside Siding & Window Company
Robert M. Franco..................... 49 President of Alside Supply Centers
Thomas W. Arenz...................... 45 Director
Jonathan C. Angrist.................. 31 Director
</Table>
Set forth below is a brief description of the business experience of each
of our directors and executive officers as of March 21, 2003.
IRA D. KLEINMAN, AGE 46. Mr. Kleinman has been a director since the Merger
Transaction. Mr. Kleinman is chairman of the Board and a director of Associated
Materials Holdings Inc. Mr. Kleinman has been a General Partner of Harvest
Partners for more than five years and is currently a member of Harvest
Associates III, LLC and Harvest Associates IV, LLC. Mr. Kleinman is also a
director for Global Power Equipment Inc.
MICHAEL CAPORALE, JR., AGE 51. Mr. Caporale has been the President and
Chief Executive Officer of the Company and a director since the Merger
Transaction. Mr. Caporale was named Chief Executive Officer of the Alside
division and became a director in February 2001. Mr. Caporale joined the Company
in January 2000 as President of the Alside Window Company, became President and
Chief Operating Officer of the Alside division in April 2000 and was named a
Vice President of the Company in August 2000. Mr. Caporale is President and
Chief Executive Officer and a director of Associated Materials Holdings Inc.
Prior to joining the Company, Mr. Caporale was the President of Great Lakes
Window, Inc., a subsidiary of Nortek, Inc., where he had been employed since
1995.
D. KEITH LAVANWAY, AGE 38. Mr. LaVanway has been Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since the Merger
Transaction. Mr. LaVanway joined the Company in February 2001 as Vice
President -- Chief Financial Officer of Alside and was also named a Vice
President of the Company. Mr. LaVanway is Vice President -- Finance of
Associated Materials Holdings Inc. Prior to joining the Company, Mr. LaVanway
was employed by Nortek, Inc. from 1995 to 2001, most recently as Vice
President -- Chief Financial Officer of Peachtree Doors and Windows Company.
KENNETH L. BLOOM, AGE 40. Mr. Bloom joined the Company in July 2000 as
Alside's Vice President of Window Manufacturing. In March 2001, Mr. Bloom was
named President of Alside Window Company. Mr. Bloom was named President of
Alside Siding & Window Company in August 2002. Prior to joining the Company, Mr.
Bloom was Corporate Vice President of Field Container Co., L.P., where he had
been employed since 1996.
ROBERT M. FRANCO, AGE 49. Mr. Franco joined the Company in August 2002 as
President of Alside Supply Centers. Prior to joining the Company, Mr. Franco was
most recently Vice President of the Exterior Systems Business of Owens-Corning,
Inc., where he had worked in a variety of key management positions for over
twenty years.
52
THOMAS W. ARENZ, AGE 45. Mr. Arenz has been a director since shortly after
the Merger Transaction. Mr. Arenz is Treasurer, Assistant Secretary and a
director of Associated Materials Holdings Inc. Mr. Arenz joined Harvest
Partners, Inc. in November 1996 and became a Principal in October 1997. Mr.
Arenz has over 16 years of private equity investment and corporate finance
experience. From 1995 to 1996, Mr. Arenz was with the North American subsidiary
of Preussag AG, a German multinational corporation, most recently as President.
From 1991 to 1995, Mr. Arenz was a Principal at Joseph Littlejohn & Levy, a
management buyout firm. Mr. Arenz was also in the corporate finance departments
at Kidder, Peabody & Co. from 1990 to 1991 and Drexel Burnham Lambert from 1986
to 1990.
JONATHAN C. ANGRIST, AGE 31. Mr. Angrist has been a director since the
Merger Transaction. Mr. Angrist is Secretary, Assistant Treasurer and a director
of Associated Materials Holdings Inc. Mr. Angrist is also currently Vice
President of Harvest Partners. From 1993 to 1997, Mr. Angrist was a consultant
with Sibson & Company. Mr. Angrist is also a director for IRMC Holdings, Inc.
All of the Company's directors are elected on an annual basis with terms
expiring as of the annual meeting of stockholders. All of the officers serve at
the discretion of the board of directors. The Company may expand the size of the
board of directors so that it is the same as the board of Holdings.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation paid by the Company
for services rendered in 2002, 2001 and 2000 by the chief executive officer and
each of the other executive officers of the Company.
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------ ---------------------
FISCAL OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS (#)(2) COMPENSATION
- --------------------------- ------ -------- ---------- --------------- --------------------- ------------
Michael Caporale, Jr.(3)... 2002 $488,308 $ 284,000 -- 205,892(10) $ 21,446(16)
President and Chief 46,415(10)
Executive Officer 2001 $412,504 $ 354,409 -- 0 $281,002(17)
2000 $335,417 $ 140,000 -- 100,000(11) $127,439(17)
D. Keith LaVanway(4)....... 2002 $265,958 $ 92,950 -- 66,981(12) $ 9,341(18)
Vice President and Chief 4,678(12)
Financial Officer 2001 $195,844 $ 92,868 -- 10,000(11) $135,689(19)
Kenneth L. Bloom(5)........ 2002 $220,008 $ 56,800 -- 56,483(13) $ 8,000(20)
President of Alside 2001 $210,000 $ 60,694 -- 4,665(13) $ 3,500(20)
Siding
And Windows 2000 $ 87,950 $ 80,000 -- 0 $110,181(21)
10,000(11)
Robert M. Franco(6)........ 2002 $102,407 $ 165,000 -- 21,256(14) $ 25,247(22)
President of Alside
Supply Centers
William W. Winspear(7)..... 2002 $178,333 $1,000,000 -- 0 $ 16,467(23)
Former Chairman of the 2001 $530,833 $ 667,185 -- 0 $ 44,800
Board, President and 2000 $507,500 $ 612,870 -- 0 $ 39,450
Chief Executive Officer
</Table>
53
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------ ---------------------
FISCAL OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS (#)(2) COMPENSATION
- --------------------------- ------ -------- ---------- --------------- --------------------- ------------
Robert F. Hogan, Jr.(8).... 2002 $129,290 $ -- -- 15,000(15) $ 5,172(20)
Former President and 2001 $262,500 $ 177,930 -- 0 $ 6,800
Chief Executive Officer 2000 $249,167 $ 158,435 -- 0 $ 5,950
of the Company's
AmerCable division
Robert L. Winspear(9)...... 2002 $ 73,375 $ -- -- 0 $625,167(24)
Former Vice President 2001 $208,333 $ 66,719 -- 0 $ 6,800
and Chief Financial 2000 $197,500 $ 61,287 -- 0 $ 5,950
Officer
</Table>
- ---------------
(1) Perquisites and other personal benefits received by the Company's other
executive officers are not included in the Summary Compensation Table
because the aggregate amount of this compensation, if any, did not meet
disclosure thresholds established under current SEC regulations.
(2) Options granted in 2002 were granted in accordance with the Associated
Materials Holdings Inc. 2002 Stock Option Plan. The option grants include
the following:
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest over time ("Time-Based
Options"). All Time-Based Options granted to executives during
September 2002 were immediately vested 16% on the date of grant,
representing 10% vesting upon grant plus four months of vesting from
May 2002 through August 2002, with remaining vesting of 1.5% per month
over 56 months;
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest 100% on the eighth
anniversary from the date of grant, provided that the option vesting
may be accelerated upon the occurrence of a liquidity event and the
achievement of a specified internal rate of return ("IRR") on the
investment by Harvest Partners, Inc. in Holdings ("IRR Options"). A
liquidity event is defined as the occurrence of (a) a transaction or
series of transactions which results in the sale or transfer of (i)
more than a majority of the assets of Holdings and its subsidiaries or
(ii) a majority of the capital stock of Holdings or a widely
distributed sale of the common stock of Holdings in an underwritten
public offering which yields a minimum required amount of net proceeds
to Holdings and (b) the funds of Harvest Partners, Inc. receive a
minimum required aggregate net cash proceeds for its investment in
Holdings ("Liquidity Event");
- Options to purchase shares of Holdings common stock and preferred
stock as a unit, comprised of one share of preferred stock and a
specified fraction of a share of common stock ("Roll-Over Options").
These options were granted in exchange for the outstanding options to
purchase Associated Materials Incorporated common stock ("Predecessor
Company Options"). Roll-Over Options were granted at an exercise
price, which preserves the intrinsic value of the Predecessor Company
Options. Each Roll-Over Option grant was 100% vested as of the date of
grant.
(3) Mr. Caporale joined the Company in January 2000.
(4) Mr. LaVanway joined the Company in February 2001.
(5) Mr. Bloom joined the Company in July 2000.
(6) Mr. Franco joined the Company in August 2002.
(7) Mr. W. Winspear retired from the Company upon consummation of the Merger
Transaction.
(8) Immediately following the sale of AmerCable in June 2002, Mr. Hogan ceased
to be an officer of the Company and became the president, chief executive
officer and chairman of the board of the newly-formed entity that acquired
the Company's AmerCable division. Mr. Hogan has relinquished his rights to
severance from the Company.
(9) Mr. R. Winspear ceased to be the vice president and chief financial officer
of the Company after consummation of the Merger Transaction.
54
(10) In September 2002, Mr. Caporale was granted an option to purchase 205,892
shares of Holdings common stock and 46,415 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 106,280 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 63,768 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 23,221 shares of
preferred stock and 17,781 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7657 shares of common stock, at a unit exercise price of
$31.09;
- Roll-Over Options granted with an option to purchase 23,194 shares of
preferred stock and 18,063 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7788 shares of common stock, at a unit exercise price of
$29.91.
In January 2000, Mr. Caporale was granted Predecessor Company Options to
purchase 50,000 shares of Company common stock at $14.4375 per share,
the fair market value on the grant date. In March 2000, Mr. Caporale was
granted Predecessor Company Options to purchase an additional 50,000
shares of Company common stock at $13.875 per share, the fair market
value on the grant date. The Predecessor Company Options granted for
Company common stock vested 50% on the date of grant and 50% on the
second anniversary of the grant date. Both option grants became 100%
vested upon consummation of the Merger Transaction and were converted
into the Roll-Over Options described herein.
(11) The options shown, which are Predecessor Company Options, were issued
pursuant to a plan that is no longer in existence and have been rolled over
into new options of Holdings. These options were the basis for the
Roll-Over Options, described herein.
(12) In September 2002, Mr. LaVanway was granted an option to purchase 66,981
shares of Holdings common stock and 4,678 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 39,855 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 23,913 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,678 shares of
preferred stock and 3,213 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.686832 shares of common stock, at a unit exercise price of
$38.21.
In February 2001, Mr. LaVanway was granted Predecessor Company Options
to purchase 10,000 shares of Associated Materials Incorporated common
stock at $17.875 per share, the fair market value on the grant date. The
Predecessor Company Options granted for Company common stock vested 20%
on the date of grant and 20% on each anniversary of the grant date
thereafter. This option grant became 100% vested upon consummation of
the Merger Transaction and was converted into the Roll-Over Options
described herein.
(13) In September 2002, Mr. Bloom was granted an option to purchase 56,483
shares of Holdings common stock and 4,665 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 33,212 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 19,927 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,665 shares of
preferred stock and 3,344 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.716827 shares of common stock, at a unit exercise price of
$35.50.
55
In August 2000, Mr. Bloom was granted Predecessor Company Options to
purchase 10,000 shares of Associated Materials Incorporated common stock
at $16.5625 per share, the fair market value on the grant date. The
Predecessor Company Options granted for Company common stock vested 20%
on the date of grant and 20% on each anniversary of the grant date
thereafter. This option grant became 100% vested upon consummation of
the Merger Transaction and was converted into the Roll-Over Options
described herein.
(14) In September 2002, Mr. Franco was granted an option to purchase 21,256
shares of Holdings common stock as follows:
- Time-Based Options granted with the option to purchase 13,285 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 7,971 shares of common
stock at $10 per share.
(15) On June 24, 2002, Mr. Hogan was granted Roll-Over Options, which consisted
entirely of options to purchase 15,000 shares of Holdings' preferred stock,
in exchange for his existing Predecessor Company Options. These options
were surrendered upon the sale of the AmerCable division.
(16) Includes director fees of $12,000, amounts accrued or allocated under a
defined contribution plan of $8,000 and the payment of income taxes of
$1,446 related to certain expenses included in 2001.
(17) Amounts shown for 2001 and 2000 were changed to reflect the
reclassification of payment of income taxes relating to relocation expenses
paid by the Company to All Other Compensation.
(18) Includes amounts accrued or allocated under a defined contribution plan of
$8,000 and the payment of income taxes of $1,341 related to certain
expenses included in 2001.
(19) Includes relocation expenses of $77,641 and the income taxes related to
relocation expenses of $58,048, both incurred by Mr. LaVanway and paid by
the Company under the terms of his employment agreement.
(20) Includes amounts accrued or allocated under a defined contribution plan.
(21) Includes relocation expenses of $64,317 and the income taxes related to
relocation expenses of $45,864, both incurred by Mr. Bloom and paid by the
Company under the terms of his employment agreement.
(22) Includes relocation expenses of $13,000 and the income taxes related to
relocation expenses of $12,247, both incurred by Mr. Franco and paid by the
Company under the terms of his employment agreement.
(23) Includes directors fees of $14,000 and amounts accrued or allocated under a
defined contribution plan of $2,467.
(24) Includes a severance payment of $622,000 and amounts accrued or allocated
under a defined contribution plan of $3,167.
COMPENSATION AND INCENTIVE PROGRAMS
INCENTIVE BONUS PLAN
The Company maintains an Incentive Bonus Plan providing for annual bonus
awards to certain key employees, including each of the executive officers of the
Company. Bonus amounts are based on growth in the estimated equity value of
Holdings. This plan is administered by the Company's board of directors. Mr.
Caporale, a member of the board of directors for the Company, is eligible for a
bonus award under this plan. Bonus payments under the Incentive Bonus Plan are
not guaranteed. Cash bonuses accrued in 2002, 2001 and 2000 to each of the
Company's executive officers are set forth in the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
Mr. Caporale entered into an employment agreement with the Company
effective as of April 19, 2002. Under the terms of his employment agreement, Mr.
Caporale serves as the Company's President, Chief Executive Officer and a member
of the board of directors. Mr. Caporale's employment agreement provides for an
initial base salary of $500,000, an annual incentive bonus based on growth in
the estimated equity value of Holdings, certain perquisites and participation in
employee benefit programs made available to other senior
56
executives. The initial term of the employment agreement is three years. The
terms of the employment agreement provide that on the first anniversary of the
equity tender offer completion date and each successive anniversary thereof, the
term of the employment agreement will automatically extend by one year unless
the Company delivers to Mr. Caporale a notice not to extend the employment term.
The terms of the employment agreement provide that if Mr. Caporale's employment
is involuntarily terminated by the Company without cause or if Mr. Caporale
resigns for good reason, he will be entitled to severance equal to $1,000,000
per year, together with continued health and dental benefits, for two years,
plus a pro rata incentive bonus for the year of termination.
Mr. LaVanway entered into an employment agreement with the Company
effective as of April 19, 2002. Under the terms of his employment agreement, Mr.
LaVanway serves as the Company's Vice President -- Chief Financial Officer. Mr.
LaVanway's employment agreement provides for an initial base salary of $275,000
and an annual incentive bonus based on growth in the estimated equity value of
Holdings. The initial term of the employment agreement is two years. The terms
of the employment agreement provide that on the first anniversary of the equity
tender offer completion date and each successive anniversary thereof, the term
of the employment agreement will automatically extend by one year unless the
Company gives to Mr. LaVanway a notice not to extend the employment term. The
employment agreement provides that if Mr. LaVanway's employment is involuntarily
terminated by the Company without cause within two years following the equity
tender offer completion date, Mr. LaVanway is entitled to the following
severance compensation and benefits: (1) two times Mr. Lavanway's base pay at
the highest rate in effect for any period prior to his termination, (2) two
times his cash bonus (equal to the highest applicable cash bonus earned during
the three years immediately preceding the calendar year 2002, when the change in
control occurred), (3) if the termination of employment occurs after June 30 in
any year, a prorated bonus for that calendar year, (4) health, life insurance
and other employee welfare benefits substantially similar to those provided
prior to his termination, subject to reduction to the extent comparable benefits
are actually received by Mr. LaVanway from another employer during this period,
and (5) certain outplacement services. If Mr. LaVanway's employment is
involuntarily terminated by the Company without cause after the two-year period
following the equity tender offer completion date, he will be entitled to
severance equal to his annual base salary for twelve months or the remaining
employment term, whichever is longer, plus a pro rata bonus for the year of
termination.
Mr. Bloom entered into an employment agreement with the Company effective
as of April 19, 2002. Under the terms of his employment agreement, Mr. Bloom
serves as the President of Alside Siding and Window Company. Mr. Bloom's
employment agreement provides for an initial base salary of $220,000 and an
annual incentive bonus pursuant to a plan established by the Company. The
initial term of the employment agreement is two years. The terms of the
employment agreement provide that on the first anniversary of the equity tender
offer completion date and each successive anniversary thereof, the term of the
employment agreement will automatically extend by one year unless the Company
gives Mr. Bloom a notice not to extend the employment term. The employment
agreement provides that if Mr. Bloom's employment is involuntarily terminated by
the Company without cause, he will be entitled to severance equal to his annual
base salary for twelve months or the remaining employment term, whichever is
longer, plus a pro rata bonus for the year of termination.
Mr. Franco entered into an employment agreement with the Company effective
as of August 21, 2002. Under the terms of his employment agreement, Mr. Franco
serves as the President of Alside Supply Centers. Mr. Franco's employment
agreement provides for an initial base salary of $250,000 and an annual
incentive bonus based on growth in the estimated equity value of Holdings. The
initial term of the employment agreement is two years. The terms of the
employment agreement provide that on the first anniversary of the equity tender
offer completion date and each successive anniversary thereof, the term of the
employment agreement will automatically extend by one year unless the Company
gives Mr. Franco a notice not to extend the employment term. The employment
agreement provides that if Mr. Franco's employment is involuntarily terminated
by the Company without cause, he will be entitled to severance equal to his
annual base salary for twelve months or the remaining employment term, whichever
is longer, plus a pro rata bonus for the year of termination.
57
Each of the executive officers' employment agreements include
non-competition, non-solicitation, confidentiality and other restrictive
covenants.
SEVERANCE AGREEMENTS
On December 27, 2001, the Company had entered into severance agreements
with two of its executive officers, Robert F. Hogan, Jr. and Robert L. Winspear.
These severance agreements were only to become operative upon a "change in
control" of the Company. The severance agreements generally provided that if,
within a two-year period following a change in control, the Company terminated
the employment of the executive other than as a result of his death or
disability, or for cause, or if the executive terminated employment with the
Company under certain circumstances, the executive was entitled to receive
severance compensation. For Mr. Hogan and Mr. Winspear, this severance
compensation would be: (i) two times the executive's base pay at the highest
rate in effect for any period prior to his termination, (ii) two times the
executive's cash bonus (equal to the highest applicable cash bonus earned during
the three years immediately preceding the year in which the change in control
occurred) and (iii) if the termination of employment occurs after June 30 in any
year, a prorated bonus for that calendar year. In addition, health and life
insurance benefits substantially similar to those provided prior to termination
would continue for a two-year period, subject to reduction to the extent
comparable benefits were actually received by the executive from another
employer during this period. The Company's severance agreements with Mr. Hogan
and Mr. R. Winspear also provided that if any amount to be paid to the executive
under the severance agreement was determined to be non-deductible by reason of
Section 280G of the Internal Revenue Code, the severance benefits would be
reduced to the extent necessary so that Section 280G did not cause any amount to
be non-deductible to the Company. Upon the sale of the AmerCable division to
Wingate Partners III, L.P., Mr. Hogan relinquished his rights to severance from
the Company. Upon the consummation of the Merger Transaction, Mr. R. Winspear
was terminated from the employment of the Company and collected severance in
accordance with his severance agreement.
NON-COMPETITION AGREEMENT
In connection with the execution of the Merger Agreement, Mr. William W.
Winspear, who was the Company's Chairman, President and Chief Executive Officer
prior to the completion of the equity tender offer, entered into a
non-competition agreement with the Company. Mr. Winspear has agreed that he will
not directly or indirectly own, operate, manage, control, consult with, provide
services for, or in any manner engage in the building products/siding and
windows business or the electrical cable manufacturing business in competition
with the Company within the United States for a period of three years beginning
on the offer completion date ("Restricted Period"). Mr. Winspear has also agreed
that during the Restricted Period he will not directly or indirectly (1) induce
any of the Company's employees to leave its employ, (2) hire any person who is
the Company's employee, or (3) induce any customer, supplier, distributor or
other person having a significant business relationship with the Company to
cease doing business with the Company, or otherwise intentionally adversely
interfere with such a relationship. Mr. Winspear retired from the Company upon
completion of the equity tender offer.
NON-SOLICITATION AGREEMENT
In connection with the execution of the merger agreement, Mr. Robert L.
Winspear, who was the Company's Vice President and Chief Financial Officer prior
to the merger, entered into a non-solicitation agreement with the Company. Mr.
Robert Winspear has agreed that he will not, directly or indirectly, for a
period of two years following the completion of the equity tender offer: (1)
induce any of the Company's employees that was party to an employment or
severance agreement with the Company on March 16, 2002 to leave its employ, (2)
hire any such person, or (3) induce any customer, supplier, distributor or other
person having a significant business relationship with the Company to cease
doing business with the Company or otherwise intentionally adversely interfere
with such a relationship.
58
COMMITTEES OF THE BOARD OF DIRECTORS
There are currently no committees of the Company's board of directors. The
Company may elect to expand the size of its board of directors, create
committees for its board of directors and may elect the same board members and
committee members as that of Holdings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors for for the Company did not have a compensation
committee in the year ended December 31, 2002. Mr. Caporale, who also serves as
President and Chief Executive Officer of the Company, participates in
deliberations with the board of directors of the Company concerning executive
officer compensation from time to time. In addition, Mr. Caporale is a director
of Holdings. The board of directors for Holdings did not have a compensation
committee during the year ended December 31, 2002. During 2002, no other
executive officer of the Company served as a member of the compensation
committee of another entity. For a more detailed discussion of relationships
between Holdings and the Company see "Certain Relationships and Related
Transactions."
DIRECTOR COMPENSATION
Prior to the Merger Transaction, directors, including directors who were
employees of the Company, received an annual retainer of $16,000 plus $3,500 for
each board of directors meeting and $1,000 for each committee meeting attended
in person or $1,000 for each such meeting in which participation was by
telephone. Directors were also reimbursed for reasonable travel expenses
incurred in attending board meetings and committee meetings. Subsequent to the
Merger Transaction, the Company currently reimburses its non-employee directors
for all out-of-pocket expenses incurred in the performance of their duties as
directors.
ASSOCIATED MATERIALS HOLDINGS INC. 2002 STOCK OPTION PLAN
In June 2002, Holdings adopted the Associated Materials Holdings Inc. 2002
Stock Option Plan (the "Plan"). The board of directors of Holdings administers
the Plan and selects eligible executives, directors, employees and consultants
of Holdings and its affiliates, including the Company, to receive options. The
board of directors of Holdings also will determine the number and type of shares
of stock covered by options granted under the Plan, the terms under which
options may be exercised, the exercise price of the options and other terms and
conditions of the options in accordance with the provisions of the Plan. An
option holder may pay the exercise price of an option by any legal manner that
the board of directors of Holdings permits. Option holders generally may not
transfer their options except in the event of death. If Holdings undergoes a
change in control, as defined in the Plan, all outstanding Time-Based Options
become immediately fully exercisable, while the IRR Options may become
immediately exercisable upon achievement of certain specified criteria. The
board of directors of Holdings may adjust outstanding options by substituting
stock or other securities of any successor or another party to the change in
control transaction, or cash out such outstanding options, in any such case,
generally based on the consideration received by its stockholders in the
transaction. Subject to particular limitations specified in the Plan, the board
of directors may amend or terminate the Plan. The Plan will terminate no later
than 10 years following its effective date; however, any options outstanding
under the option plan will remain outstanding in accordance with their terms.
Certain employees of the Company who held options immediately prior to the
Merger Transaction to purchase shares of the Predecessor's common stock have
converted such options into options to purchase shares of Holdings' common
stock, preferred stock or both. Certain employees of the Company may also
receive new options to purchase shares of common stock of Holdings. Mr. Caporale
may require Holdings to repurchase shares of stock of Holdings that have been
purchased through the exercise of certain options granted to him upon the
occurrence of specified events.
59
OPTION/SAR GRANTS IN 2002
The following table provides information regarding the grant of Holdings'
stock options to each of the Company's executive officers in 2002.
<Table>
<Caption>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
-------------------------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS/SARS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM(2)
UNDERLYING OPTIONS/ EMPLOYEES IN EXERCISE PRICE -------------------------
NAME SARS GRANTED 2002 PER SHARE EXPIRATION DATE 5% 10%
- ---- ------------------- ---------------- -------------- ----------------- ----------- -----------
Michael Caporale,
Jr.(3)................. 106,280 common 22.0% $10.00 September 4, 2012 $ 668,389 $1,693,829
63,768 common 13.2% $10.00 September 4, 2012 $ 401,034 $1,016,298
23,221 preferred/ 8.5% $31.09 January 17, 2010 $3,754,875 $3,867,609
17,781 common
23,194 preferred/ 8.5% $29.91 March 1, 2010 $3,822,182 $3,939,454
18,063 common
D. Keith LaVanway(4)..... 39,855 common 8.2% $10.00 September 4, 2012 $ 250,646 $ 635,186
23,913 common 4.9% $10.00 September 4, 2012 $ 150,388 $ 381,112
4,678 preferred/ 1.7% $38.21 February 22, 2011 $ 795,287 $ 820,501
3,213 common
Kenneth L. Bloom(5)...... 33,212 common 6.9% $10.00 September 4, 2012 $ 208,868 $ 529,314
19,927 common 4.1% $10.00 September 4, 2012 $ 125,320 $ 317,585
4,665 preferred/ 1.7% $35.50 August 25, 2010 $ 772,119 $ 796,004
3,344 common
Robert M. Franco(6)...... 13,285 common 2.7% $10.00 September 4, 2012 $ 83,549 $ 211,729
7,971 common 1.6% $10.00 September 4, 2012 $ 50,129 $ 127,037
William W. Winspear...... -- --% $ -- -- $ -- $ --
Robert F. Hogan, Jr...... -- --% $ -- -- $ -- $ --
Robert L. Winspear....... -- --% $ -- -- $ -- $ --
</Table>
- ---------------
(1) Options granted in 2002 were granted in accordance with the Associated
Materials Holdings Inc. 2002 Stock Option Plan. The option grants include
the following:
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest over time ("Time-Based
Options"). All Time-Based Options granted to executives during September
2002 were immediately vested 16% on the date of grant, representing 10%
vesting upon grant plus four months of vesting from May 2002 through
August 2002, with remaining vesting of 1.5% per month over 56 months;
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest 100% on the eighth
anniversary from the date of grant, provided that the option vesting may
be accelerated upon the occurrence of a liquidity event and the
achievement of a specified internal rate of return ("IRR") on the
investment by Harvest Partners, Inc. in Holdings ("IRR Options"). A
liquidity event is defined as the occurrence of (a) a transaction or
series of transactions which results in the sale or transfer of (i) more
than a majority of the assets of Holdings and its subsidiaries or (ii) a
majority of the capital stock of Holdings or a widely distributed sale of
the common stock of Holdings in an underwritten public offering which
yields a minimum required amount of net proceeds to Holdings and (b) the
funds of Harvest Partners, Inc. receive a minimum required aggregate net
cash proceeds for its investment in Holdings ("Liquidity Event");
- Options to purchase shares of Holdings common stock and preferred stock
as a unit, comprised of one share of preferred stock and a specified
fraction of a share of common stock ("Roll-Over Options"). These options
were granted in exchange for the outstanding options to purchase
Associated Materials common stock ("Predecessor Company Options").
Roll-Over Options were granted at an exercise price, which preserves the
intrinsic value of the Predecessor Company Options. Each Roll-Over Option
grant was 100% vested as of the date of grant.
60
(2) The potential realizable value set forth for common stock in the table above
illustrates the value that would be realized upon exercise of the option
immediately prior to the expiration of its term, assuming the specified
compounded rates of appreciation on the common stock over the term of the
option. The use of the assumed 5% and 10% annual rates of stock price
appreciation are established by the Securities and Exchange Commission and
is not intended by the Company to forecast possible appreciation of the
price of its common stock. The potential realizable value for preferred
shares is $100 per share plus accumulated dividends of 8% per year for the
remaining life of the option. Preferred stock is not convertible into common
stock.
(3) In September 2002, Mr. Caporale was granted an option to purchase 205,892
shares of Holdings common stock and 46,415 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 106,280 shares of
common stock at $10 per share;
- IRR Options granted with the option to purchase 63,768 shares of common
stock at $10 per share;
- Roll-Over Options granted with an option to purchase 23,221 shares of
preferred stock and 17,781 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7657 shares of common stock, at a unit exercise price of
$31.09.
- Roll-Over Options granted with an option to purchase 23,194 shares of
preferred stock and 18,063 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7788 shares of common stock, at a unit exercise price of
$29.91.
(4) In September 2002, Mr. LaVanway was granted an option to purchase 66,981
shares of Holdings common stock and 4,678 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 39,855 shares of
common stock at $10 per share;
- IRR Options granted with the option to purchase 23,913 shares of common
stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,678 shares of
preferred stock and 3,213 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.686832 shares of common stock, at a unit exercise price of
$38.21.
(5) In September 2002, Mr. Bloom was granted an option to purchase 56,483 shares
of Holdings common stock and 4,665 shares of Holdings' preferred stock as
follows:
- Time-Based Options granted with the option to purchase 33,212 shares of
common stock at $10 per share;
- IRR Options granted with the option to purchase 19,927 shares of common
stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,665 shares of
preferred stock and 3,344 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.716827 shares of common stock, at a unit exercise price of
$35.50.
(6) In September 2002, Mr. Franco was granted an option to purchase 21,256
shares of Holdings common stock as follows:
- Time-Based Options granted with the option to purchase 13,285 shares of
common stock at $10 per share;
- IRR Options granted with the option to purchase 7,971 shares of common
stock at $10 per share.
61
AGGREGATED OPTION/SAR EXERCISES IN 2002
AND DECEMBER 31, 2002 OPTION/SAR VALUES
The following table provides information regarding the exercise of
Holdings' or the predecessor Company's options during 2002 and unexercised
options held as of December 31, 2002 for each of the Company's executive
officers.
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SECURITIES DECEMBER 31, 2002(1)(3) DECEMBER 31, 2002(2)
ACQUIRED ON VALUE --------------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ---------- ----------------- ------------- ----------- -------------
Michael Caporale, Jr.(4)... -- $ -- 23,382 common 82,898 common $ 193,837 $687,224
-- 63,768 common $ -- $528,637
23,221 preferred/ -- $2,049,141 $ --
17,781 common
23,194 preferred/ -- $2,079,663 $ --
18,063 common
D. Keith LaVanway(5)....... -- $ -- 8,768 common 31,087 common $ 72,687 $257,711
-- 23,913 common $ -- $198,239
4,678 preferred/ -- $ 372,753 $ --
3,213 common
Kenneth L. Bloom(6)........ -- $ -- 7,307 common 25,905 common $ 60,575 $214,752
-- 19,927 common $ -- $165,195
4,665 preferred/ -- $ 386,919 $ --
3,344 common
Robert M. Franco(7)........ -- $ -- 2,923 common 10,362 common $ 24,232 $ 85,901
-- 7,971 common $ -- $ 66,080
William W. Winspear........ -- $ -- -- -- $ -- $ --
Robert F. Hogan, Jr. ...... -- $ -- -- -- $ -- $ --
Robert L. Winspear......... 40,000 $1,761,500 -- -- $ -- $ --
</Table>
- ---------------
(1) The Company has not granted stock appreciation rights.
(2) The per share common equity value on December 31, 2002 was $18.29 per share,
which was based on a calculation of common equity value which includes
Adjusted EBITDA, an estimated EBITDA multiple and December 31, 2002 cash and
debt of the Company. The value of unexercised common options was calculated
by multiplying the per share common stock value by the number of shares of
common stock issuable upon exercise of these options, less exercise price.
Preferred share value was based on a $100 per share value, plus accumulated
preferred stock dividends of 8% since the closing of the Merger Transaction,
less the exercise price of these options.
(3) Options granted in 2002 were granted in accordance with the Associated
Materials Holdings, Inc. 2002 Stock Option Plan. The option grants include
the following:
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest over time ("Time-Based
Options"). All Time-Based Options granted to executives during
September 2002 were immediately vested 16% on the date of grant,
representing 10% vesting upon grant plus four months of vesting from
May 2002 through August 2002, with remaining vesting of 1.5% per month
over 56 months;
- Options to purchase shares of Holdings common stock at the fair market
value on the date of grant, which will vest 100% on the eighth
anniversary from the date of grant, provided that the option vesting
may be accelerated upon the occurrence of a liquidity event and the
achievement of a specified internal rate of return ("IRR") on the
investment by Harvest Partners, Inc. in
62
Holdings ("IRR Options"). A liquidity event is defined as the
occurrence of (a) a transaction or series of transactions which
results in the sale or transfer of (i) more than a majority of the
assets of Holdings and its subsidiaries or (ii) a majority of the
capital stock of Holdings or a widely distributed sale of the common
stock of Holdings in an underwritten public offering which yields a
minimum required amount of net proceeds to Holdings and (b) the funds
of Harvest Partners, Inc. receive a minimum required aggregate net
cash proceeds for its investment in Holdings ("Liquidity Event");
- Options to purchase shares of Holdings common stock and preferred
stock as a unit, comprised of one share of preferred stock and a
specified fraction of a share of common stock ("Roll-Over Options").
These options were granted in exchange for the outstanding options to
purchase Associated Materials Incorporated common stock ("Predecessor
Company Options"). Roll-Over Options were granted at an exercise
price, which preserves the intrinsic value of the Predecessor Company
Options. Each Roll-Over Option grant was 100% vested as of the date of
grant.
(4) In September 2002, Mr. Caporale was granted an option to purchase 205,892
shares of Holdings common stock and 55,758 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 106,280 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 63,768 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 23,221 shares of
preferred stock and 17,781 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7657 shares of common stock, at a unit exercise price of
$31.09.
- Roll-Over Options granted with an option to purchase 23,194 shares of
preferred stock and 18,063 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.7788 shares of common stock, at a unit exercise price of
$29.91.
(5) In September 2002, Mr. LaVanway was granted an option to purchase 66,981
shares of Holdings common stock and 4,678 shares of Holdings' preferred
stock as follows:
- Time-Based Options granted with the option to purchase 39,855 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 23,913 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,678 shares of
preferred stock and 3,213 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.686832 shares of common stock, at a unit exercise price of
$38.21.
(6) In September 2002, Mr. Bloom was granted an option to purchase 56,483 shares
of Holdings common stock and 4,665 shares of Holdings' preferred stock as
follows:
- Time-Based Options granted with the option to purchase 33,212 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 19,927 shares of
common stock at $10 per share;
- Roll-Over Options granted with an option to purchase 4,665 shares of
preferred stock and 3,344 shares of common stock. Each option must be
exercised as a unit, with each unit comprising one share of preferred
stock and 0.716827 shares of common stock, at a unit exercise price of
$35.50.
63
(7) In September 2002, Mr. Franco was granted an option to purchase 21,256
shares of Holdings common stock as follows:
- Time-Based Options granted with the option to purchase 13,285 shares
of common stock at $10 per share;
- IRR Options granted with the option to purchase 7,971 shares of common
stock at $10 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly owned subsidiary of Holdings. The capital stock of
Holdings consists of preferred stock, par value $0.01 per share (the "preferred
stock"), class A common stock, par value $0.01 per share (the "class A common
stock") and class B non-voting common stock, par value $0.01 per share ("class B
common stock" and collectively with the class A common stock, the "common
stock"). The preferred stock is senior in right of payment to the common stock.
Holders of preferred stock have no voting rights except as required by law.
Harvest Funds (as defined by footnote 3 below) owns approximately 30.7% of the
voting stock of Holdings and is party to an amended and restated stockholders
agreement dated as of April 19, 2002, regarding the ownership and voting of the
common stock of Holdings. By virtue of such stock ownership and stockholders
agreement, Harvest Funds will have the ability to designate a majority of the
board of directors of Holdings and to control actions to be taken by the
Company's stockholder and/or board of directors, including amendments to the
Company's certificate of incorporation and by-laws and approval of significant
corporate transactions, including mergers and sales of substantially all of the
Company's assets.
The following table sets forth certain information as of February 28, 2003
regarding the beneficial ownership of:
- Harvest Funds in Holdings;
- the directors of Holdings
- the directors and named executive officers of the Company; and
- all directors and executive officers of the Company and directors of
Holdings as a group.
The Company determined beneficial ownership in accordance with the rules of
the Commission, which generally require inclusion of shares over which a person
has voting or investment power. Share ownership in each case includes shares
that may be acquired within sixty days through the exercise of any options.
Except as otherwise indicated, the address for each of the named individuals is
c/o Associated Materials Incorporated, 280 Park Avenue, New York, New York
10017.
<Table>
<Caption>
CLASS A
COMMON STOCK PREFERRED STOCK VOTING SECURITIES
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
Harvest Funds(1)(2)(3)........ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Ira D. Kleinman(4)............ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Michael Caporale, Jr.(5)...... 65,602 3.9% 46,415 3.0% 65,602 3.9%
D. Keith LaVanway(6).......... 14,372 * 4,678 * 14,372 *
Thomas W. Arenz(7)............ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Jonathan C. Angrist(8)........ -- -- -- -- -- --
Kenneth L. Bloom(9)........... 12,643 * 4,665 * 12,643 *
Robert M. Franco(10).......... 3,720 * -- -- 3,720 *
Dennis Vollmershausen(11)..... 1,893 * 900 * 1,893 *
Kevin Hayes(12)............... 228,719 14.0% 205,847 13.9% 228,719 14.0%
All directors and executive
officers as a group (9
persons).................... 826,949 47.9% 712,505 46.3% 826,949 47.9%
</Table>
64
- ---------------
* Less than 1%.
(1) Holdings is controlled by Harvest Funds, by reason of their collective
right to designate a majority of the members of the board of directors of
Holdings. Harvest Funds are Harvest Partners III, L.P., Harvest Partners
III Beteilingungsgesellschaft Burgerlichen Rechts (mit
Haftungsbeschrankung) ("Harvest Partners III, GbR"), Harvest Partners IV,
L.P. and Harvest Partners IV GmbH & Co. KG ("Harvest Partners IV KG").
Harvest Associates III, L.L.C., which has six members, is the general
partner of Harvest Partners III, L.P. and Harvest Partners III, GbR.
Harvest Associates IV, L.L.C., which has six members, is the general
partner of Harvest Partners IV, L.P. and Harvest Partners IV KG. Harvest
Partners, Inc. provides management services for Harvest Associates III,
L.L.C. in connection with Harvest Partners III, L.P. and Harvest Partners
III, GbR and for Harvest Associates IV, L.L.C. in connection with Harvest
Partners IV, L.P. and Harvest Partners IV KG.
(2) Includes 131,978 shares of common stock and 118,780 shares of preferred
stock owned by Harvest Partners III, L.P. and 18,022 shares of common stock
and 16,220 shares of preferred stock owned by Harvest Partners III, GbR for
each of which Harvest Associates III, L.L.C. is the general partner.
Harvest Funds may hold two classes of preferred stock or notes convertible
into preferred stock. Harvest Associates III, L.L.C. has six members, each
of whom has equal voting rights and who may be deemed to share beneficial
ownership of the shares of common stock of Holdings. The six members are
Ira Kleinman, Harvey Mallement, Stephen Eisenstein, Harvey Wertheim,
William Kane and Thomas Arenz. Mr. Kleinman and Mr. Arenz are on the
Company's board of directors. Each of Messrs. Kleinman, Mallement,
Eisenstein, Wertheim, Kane and Arenz disclaims beneficial ownership of the
shares of common stock owned by Harvest Partners III, L.P. and Harvest
Partners III GbR.
(3) Includes 273,000 shares of common stock and 245,700 shares of common stock
owned by Harvest Partners IV, L.P. and 77,000 shares of common stock and
69,300 shares of preferred stock owned by Harvest Partners IV GmbH & Co. KG
or Harvest Partners IV KG, for each of which Harvest Associates IV, L.L.C.
is the general partner. Harvest Associates IV, L.L.C. has six members, each
of whom has equal voting rights and who may be deemed to share beneficial
ownership of the shares of common stock of Holdings beneficially owned by
it. The six members are Ira Kleinman, Harvey Mallement, Stephen Eisenstein,
Harvey Wertheim, William Kane and Thomas Arenz. Mr. Kleinman and Mr. Arenz
are on the Company's board of directors. Each of Messrs. Kleinman,
Mallement, Eisenstein, Wertheim, Kane and Arenz disclaims beneficial
ownership of the shares of common stock owned by Harvest Partners IV, L.P.,
Harvest Partners IV KG. Harvest Partners III, L.P., Harvest Partners III
GbR, Harvest Partners IV, L.P. and Harvest Partners IV KG are collectively
referred to as the "Harvest Funds." The address of the named entities is
280 Park Avenue, 33rd Floor, New York, New York 10017.
(4) Includes shares of class A common stock and preferred stock owned by
Harvest Partners III, L.P. and shares of class A common stock and preferred
stock owned by Harvest Partners III GbR, for each of which Harvest
Associates III, L.L.C. is the general partner. Also includes shares of
class A common stock and preferred stock owned by Harvest Partners IV, L.P.
and Harvest Partners IV KG, for each of which Harvest Partners IV, L.L.C.
is the general partner. Mr. Kleinman is a member of Harvest Associates,
III, L.L.C. and Harvest Partners IV, L.L.C. and may be deemed to share
beneficial ownership of the shares of common stock of Holdings beneficially
owned by them. Mr. Kleinman disclaims beneficial ownership of common shares
owned by Harvest Partners III, L.P., Harvest Partners III GbR, Harvest
Partners IV, L.P. and Harvest Partners IV KG.
(5) Includes options to purchase 65,602 shares of class A common stock and
46,415 shares of preferred stock. This reflects the conversion of options
held by Mr. Caporale to purchase shares of common stock of the Predecessor
prior to the merger into options to purchase shares of common and preferred
stock of Holdings.
(6) Includes options to purchase 14,372 shares of class A common stock and
4,678 shares of preferred stock. This reflects the conversion of options
held by Mr. LaVanway to purchase shares of common stock of the Predecessor
prior to the merger into options to purchase shares of common and preferred
stock of Holdings.
65
(7) Includes shares of class A common stock and preferred stock owned by
Harvest Partners III, L.P. and shares of class A common stock and preferred
stock owned by Harvest Partners III GbR, for each of which Harvest
Associates III, L.L.C. is the general partner. Also includes shares of
class A common stock and preferred stock owned by Harvest Partners IV, L.P.
and Harvest Partners IV KG, for each of which Harvest Partners IV, L.L.C.
is the general partner. Mr. Arenz is a member of Harvest Associates, III,
L.L.C. and Harvest Partners IV, L.L.C. and may be deemed to share
beneficial ownership of the shares of common stock of Holdings beneficially
owned by them. Mr. Arenz disclaims beneficial ownership of common shares
owned by Harvest Partners III, L.P., Harvest Partners III GbR, Harvest
Partners IV, L.P. and Harvest Partners IV KG.
(8) Mr. Angrist is a director of Holdings and the Company.
(9) Includes options to purchase 12,643 shares of class A common stock and
4,665 shares of preferred stock. This reflects the conversion of options
held by Mr. Bloom to purchase shares of common stock of the Predecessor
prior to the merger into options to purchase shares of common and preferred
stock of Holdings.
(10) Includes options to purchase 3,720 shares of class A common stock.
(11) Includes 1,000 shares of common stock and 900 shares of preferred stock
owned through a personal holding company in the name of 3755428 Canada Inc,
a Canadian corporation. Mr. Vollmershausen is the sole shareholder of this
corporation. Mr. Vollmershausen was also granted options to purchase 893
shares of class A common stock.
(12) Mr. Hayes is a director for Holdings, representing four of Holdings
stockholders, Weston Presidio Capital IV, L.P. ("Fund IV"), Weston Presidio
Capital III, L.P. ("Fund III"), WPC Entrepreneur Fund, L.P. ("WP EF") and
WPC Entrepreneur Fund II, L.P. ("WP EF II"). Fund IV, Fund III, WP EF and
WPEF II are collectively referred to as the "Weston Funds." Mr. Hayes'
election as a director is prescribed by the Holdings stockholders'
agreement. The shares included in the table above includes shares held by
the Weston Funds as follows: Fund III holds 65,992 shares of Class A common
stock and 59,393 shares of preferred stock; Fund IV holds 156,986 shares of
Class A Common Stock and 141,288 shares of preferred stock; WP EF holds
3,256 shares of class A common stock and 2,930 shares of preferred stock;
and WP EF II holds 2,485 shares of class A common stock and 2,236 shares of
preferred stock.
Mr. Hayes is a member or partner, as the case may be, of the general
partner of the Weston Funds. Mr. Hayes disclaims beneficial ownership of
the shares held by the Weston Funds, except to the extent of his pecuniary
interest therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE MERGER
THE MERGER AGREEMENT
On March 16, 2002, the Company, Simon Acquisition Corp. and Holdings
(formerly known as Harvest/ AMI Holdings Inc.) entered into an agreement and
plan of merger pursuant to which Simon Acquisition Corp. commenced a tender
offer to purchase all of the issued and outstanding shares of common stock of
the Predecessor, at a price of $50.00 per share, net to the seller in cash.
Following the completion of the merger, Simon Acquisition Corp. merged into the
Company and the Company continued as the surviving corporation.
The Merger Agreement contained customary representations and warranties by
the Company to Simon Acquisition Corp. and Holdings, as well as customary
representations and warranties by Simon Acquisition Corp. and Holdings to the
Company.
The Merger Agreement provides that the Company will indemnify and hold
harmless each person who is now or at any time has been a director or officer of
the Company, and their heirs and personal representatives, against liabilities
and expenses incurred in connection with any proceeding arising out of or
pertaining to any action or omission occurring prior to the effective time of
the merger.
66
Pursuant to the merger agreement, promptly following the commencement of
the equity tender offer, the Company commenced a tender offer for its then
outstanding 9 1/4% notes and a solicitation of consents from holders of the
existing notes to amend certain terms of the related indenture to facilitate the
financings contemplated by the merger agreement.
Following the merger of Simon Acquisition Corp. with the Company on April
19, 2002, the Company became a wholly owned subsidiary of Holdings. As a result,
Holdings has the right to appoint all of the Company's directors.
TENDER AND VOTING AGREEMENT
In connection with the execution of the merger agreement, Mr. William W.
Winspear, who, at the time, was the Chairman of the Board, President and Chief
Executive Officer of the Company and who beneficially owned at the time of the
merger agreement 3,097,242 shares of common stock of the Predecessor,
representing approximately 42% of the outstanding shares of common stock of the
Company on a fully diluted basis, entered into a tender and voting agreement
with Simon Acquisition Corp. and Holdings. Mr. Winspear agreed to validly tender
all of his shares and, until the termination of the tender and voting agreement,
to vote or cause to be voted all of the shares which Mr. Winspear has the right
to vote in favor of the merger and the approval of the terms of the merger
agreement and in favor of each of the other transactions contemplated by the
merger agreement, and against any other action that could adversely affect the
transactions contemplated by the merger agreement. Mr. Winspear made customary
representations and warranties relating to ownership of shares of the Company,
power and authority, execution and delivery, no conflicts, no finder's fees, and
reliance by Holdings.
THE STOCKHOLDERS AGREEMENT
The stockholders of Holdings have entered into a stockholders agreement,
which governs certain relationships among, and contains certain rights and
obligations of, such stockholders. The stockholders agreement, among other
things, (1) limits the ability of the stockholders to transfer their shares in
Holdings except in certain permitted transfers as defined therein; (2) provides
for certain tag-along obligations and certain bring-along rights; (3) provides
for certain registration rights; and (4) provides for certain preemptive rights.
The stockholders agreement provides that the parties thereto must vote
their shares to elect a board of directors consisting of at least four persons
designated by the stockholders who are affiliates of Harvest Partners, Inc., our
chief executive officer, a person designated by PPM America Private Equity Fund,
LP and a person designated by Weston Presidio Service Company, LLC. Pursuant to
the stockholders agreement, Harvest Partners, Inc. will have the power to
control the amendment of the certificate of incorporation of Holdings, excluding
changes that would disproportionately and adversely affect the rights of any
stockholder (other than stockholders who are affiliates of Harvest Partners,
Inc.). In addition, all stockholders of Holdings have granted the Harvest funds
the right, in certain circumstances, to require such stockholders to sell their
shares in Holdings in a sale of substantially all of the assets of Holdings or a
majority of the common stock of Holdings or the Company, to any party other than
an affiliate of Harvest Partners, Inc.
Pursuant to the stockholders agreement, the stockholders (other than
stockholders that are affiliates of Harvest Partners, Inc.) are granted
"tag-along" rights under which such stockholders have the option of
participating in certain sales of capital stock of Holdings by the stockholders
who are affiliates of Harvest Partners, Inc. at the same price and other terms
as such affiliates.
Pursuant to the stockholders agreement, the stockholders are entitled to
certain rights with respect to registration under the Securities Act of certain
shares held by them including, in the case of affiliates of Harvest Partners,
Inc., certain demand registration rights. The stockholders agreement also
provides for certain preemptive rights. Subject to certain conditions, the
preemptive rights grant the right to purchase shares in a share issuance of
Holdings.
The stockholders agreement provides that it shall terminate, except with
respect to the registration rights of the stockholders, upon the closing of an
underwritten registered public offering of common stock of Holdings.
67
MANAGEMENT AGREEMENT
The Company entered into a management agreement with Harvest Partners.
Under the management agreement, Harvest Partners received a one-time fee of $5.0
million in connection with structuring and implementing the acquisition of the
Company. In addition, Harvest Partners provides the Company with financial
advisory and strategic planning services. For these services, Harvest Partners
receives an annual fee of $0.8 million, payable on a quarterly basis in advance,
which began on the date of execution of this agreement. The fee will be adjusted
on a yearly basis in accordance with the U.S. Consumer Price Index. The
agreement also provides that Harvest Partners will receive transaction fees in
connection with financings, acquisitions and divestitures of the Company. Such
fees will be a percentage of the applicable transaction. The Company will
reimburse Harvest Partners for all out-of-pocket expenses. The management
agreement has a term of five years from its date of execution and will
automatically be renewed on a yearly basis, beginning in 2004, unless otherwise
specified by Harvest Partners.
AMERCABLE
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly-formed entity controlled by members of
AmerCable management and Wingate Partners III, L.P., for net proceeds of
approximately $28.3 million in cash and the assumption of certain liabilities
pursuant to an asset purchase agreement dated as of the same date. Robert F.
Hogan, Jr., president and chief executive officer of the AmerCable division and
vice president of the Company prior to the sale, is the president, chief
executive officer and chairman of the board of AmerCable Incorporated.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days before the filing of this annual
report (the "Evaluation Date"). Based on their evaluation as of the
Evaluation Date, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Exchange Act) are effective
to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within required time periods.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that
are designed to provide reasonable assurance that the Company's books and
records accurately reflect the Company's transactions and that the
Company's established policies and procedures are followed. There were no
significant changes to the Company's internal controls or other factors
that could significantly affect its internal controls subsequent to their
evaluation as of the Evaluation Date, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are included in this report.
(A)(1) FINANCIAL STATEMENTS
See Index to Financial Statements at Item 8 on Page 29 of this report.
(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted due to the absence of
conditions under which they are required or because the information required is
included in the financial statements or the notes thereto.
(B) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 2002.
68
(C) EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of March 16, 2002, by
and among Associated Materials Holdings Inc. (formerly known
as Harvest/AMI Holdings Inc.), Simon Acquisition Corp. and
the Company (incorporated by reference to Exhibit 99(d)(1)
of Schedule TO filed by Associated Materials Holdings, Inc.
and certain affiliates, Commission File No. 005-53705, filed
on March 22, 2002).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
3.3 Certificate of Incorporation of Alside, Inc. (incorporated
by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4/A, Commission File No. 333-92010,
filed on September 12, 2002).
3.4 Amended and Restated Bylaws of Alside, Inc. (incorporated by
reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-4/A, Commission File No. 333-92010,
filed on September 12, 2002).
4.1 Registration Rights Agreement, dated as of April 23, 2002,
by and among the Company, AMI Management Company, Credit
Suisse First Boston Corporation, UBS Warburg LLC and CIBC
World Markets Corp. (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-4,
Commission File No. 333-92010, filed on July 3, 2002).
4.2 Indenture governing the Company's 9 3/4% Senior Subordinated
Notes Due 2012, dated as of April 23, 2002, by and among the
Company, AMI Management Company and Wilmington Trust Company
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
4.3 Supplemental Indenture governing the Company's 9 3/4% Senior
Subordinated Notes Due 2012, dated as of May 10, 2002 by and
among the Company, AMI Management Company, Alside, Inc. and
Wilmington Trust Company (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
4.4 Form of the Company's 9 3/4% Senior Subordinated Note Due
2012 (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
4.5 Form of Indenture governing the Company's 9 1/4% Senior
Subordinated Notes due 2008, between the Company and The
Bank of New York Trust Company of Florida, N.A. (as
successor to U.S. Trust Company of Texas, N.A.)
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1/A, File No. 333-42067,
filed on January 30, 1998).
4.6 First Supplemental Indenture governing the Company's 9 1/4%
Senior Subordinated Notes due 2008, dated as of April 4,
2002, by and among the Company and The Bank of New York
Trust Company of Florida, N.A (as successor to U.S. Trust
Company of Texas, N.A.) (incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
4.7 Form of 9 1/4% Senior Subordinated Note due 2008
(incorporated by reference to Exhibit A of 4.1 to the
Company's Registration Statement on Form S-1/A, Commission
File No. 333-42067, filed on January 30, 1998).
</Table>
69
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Credit Agreement, dated as of April 19, 2002, by and among
the Company, Associated Materials Holdings Inc., the various
financial institutions and other Persons from time to time
parties thereto, UBS AG, Stamford Branch, as administrative
agent, Credit Suisse First Boston, Cayman Islands Branch, as
syndication agent, CIBC World Markets Corp., as
documentation agent, and UBS Warburg LLC and Credit Suisse
First Boston Corporation, as joint lead arrangers (the
"Credit Agreement") (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-4,
Commission File No. 333-92010, filed on July 3, 2002).
10.2 Borrower Security and Pledge Agreement of the Company, dated
as of April 19, 2002, by the Company, in favor of UBS AG,
Stamford Branch, as administrative agent (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.3 Form of Subsidiary Security and Pledge Agreement, by each
subsidiary of the Company from time to time party thereto in
favor of UBS AG, Stamford Branch, as administrative agent,
on behalf of the Secured Parties (as defined in the Credit
Agreement) (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
10.4 Form of Subsidiary Guaranty, by each subsidiary of the
Company from time to time party thereto in favor of UBS AG,
Stamford Branch, as administrative agent, on behalf of the
Secured Parties (as defined in the Credit Agreement)
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.5 Assumption Agreement, dated as of April 19, 2002, by and
among the Company and AMI Management Company, as guarantors
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.6 Agreement of Sale, dated as of January 30, 1984, between USX
Corporation (formerly United States Steel Corporation)
("USX") and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1, Commission File No. 33-64788).
10.7 Amendment Agreement, dated as of February 29, 1984, between
USX and the Company (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1,
File No. 33-64788).
10.8 Form of Indemnification Agreement between the Company and
each of the directors and executive officers of the Company
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, File No. 33-84110).
10.9 Incentive Bonus Plan of the Company (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K filed for December 31, 2000).
10.10 Severance Agreement, dated December 27, 2001, between the
Company and Robert F. Hogan, Jr. (incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K
filed for December 31, 2001).
10.11 Management Agreement, dated as of April 19, 2002, by and
between Harvest Partners, Inc. and the Company (incorporated
by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.12 Asset Purchase Agreement, dated as of June 24, 2002, between
the Company and AmerCable Incorporated (incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.13 Associated Materials Holdings Inc. 2002 Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.14 Employment Agreement, dated as of July 1, 2002, between the
Company and Michael Caporale, Jr. (incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on
Form S-4/ A, Commission File No. 333-92010, filed on
September 12, 2002).
</Table>
70
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.15 Employment Agreement, dated as of August 21, 2002, between
the Company and D. Keith LaVanway (incorporated by reference
to Exhibit 10.15 to the Company's Registration Statement on
Form S-4/A, Commission File No. 333-92010, filed on
September 12, 2002).
10.16 Agreement, dated as of January 1, 1998, between Shintech
Incorporated and the Alside division of the Company
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on October 16, 2002).*
10.17 Associated Materials Holding Inc. Stock Option Award
Agreement, dated September 4, 2002, between Associated
Materials Holdings Inc. and Michael Caporale, Jr.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-4/A, Commission File No.
333-92010, filed on October 10, 2002).
10.18 Associated Materials Holding Inc. Stock Option Award
Agreement, dated September 4, 2002, between Associated
Materials Holdings Inc. and Michael Caporale, Jr.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-4/A, Commission File No.
333-92010, filed on September 12, 2002).
10.19 Employment Agreement, dated as of August 21, 2002, between
the Company and Kenneth L. Bloom (incorporated by reference
to Exhibit 10.19 to the Company's Registration Statement on
Form S-4/A, Commission File No. 333-92010, filed on October
10, 2002).
10.20 Employment Agreement, dated as of August 21, 2002, between
the Company and Robert M. Franco (incorporated by reference
to Exhibit 10.20 to the Company's Registration Statement on
Form S-4/ A, Commission File No. 333-92010, filed on October
10, 2002).
10.21 Severance Agreement, dated as of December 27, 2001, between
the Company and Robert L. Winspear (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K filed for December 31, 2001).
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
99.1 Form of Letter of Transmittal (incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
99.2 Form of Notice of Guaranteed Delivery (incorporated by
reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
99.3 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**
99.4 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**
</Table>
- ---------------
* Certain provisions of this exhibit have been omitted pursuant to a request
for confidential treatment of information in accordance with Rule 406 of the
Securities Act.
** This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASSOCIATED MATERIALS INCORPORATED
By: /s/ MICHAEL CAPORALE, JR.
------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ D. KEITH LAVANWAY
------------------------------------
D. Keith LaVanway
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial Officer and
Principal
Accounting Officer)
Date: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL CAPORALE, JR. President, Chief Executive Officer March 27, 2003
- ------------------------------------------------ and Director
Michael Caporale, Jr. (Principal Executive Officer)
/s/ D. KEITH LAVANWAY Vice President, Chief Financial March 27, 2003
- ------------------------------------------------ Officer, Treasurer and Secretary
D. Keith LaVanway (Principal Financial Officer and
Principal Accounting Officer)
/s/ IRA D. KLEINMAN Chairman of the Board March 27, 2003
- ------------------------------------------------
Ira D. Kleinman
/s/ THOMAS W. ARENZ Director March 27, 2003
- ------------------------------------------------
Thomas W. Arenz
/s/ JONATHAN C. ANGRIST Director March 27, 2003
- ------------------------------------------------
Jonathan C. Angrist
</Table>
72
CERTIFICATION
I, Michael Caporale, Jr., President, Chief Executive Officer and Director,
certify that:
1. I have reviewed this annual report on Form 10-K of Associated
Materials Incorporated;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ MICHAEL CAPORALE, JR.
------------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer
and Director
(Principal Executive Officer)
73
CERTIFICATION
I, D. Keith LaVanway, Vice President, Chief Financial Officer, Treasurer
and Secretary, certify that:
1. I have reviewed this annual report on Form 10-K of Associated
Materials Incorporated;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ D. KEITH LAVANWAY
------------------------------------
D. Keith LaVanway
Vice President, Chief Financial
Officer,
Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
74
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of March 16, 2002, by
and among Associated Materials Holdings Inc. (formerly known
as Harvest/AMI Holdings Inc.), Simon Acquisition Corp. and
the Company (incorporated by reference to Exhibit 99(d)(1)
of Schedule TO filed by Associated Materials Holdings, Inc.
and certain affiliates, Commission File No. 005-53705, filed
on March 22, 2002).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
3.3 Certificate of Incorporation of Alside, Inc. (incorporated
by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4/A, Commission File No. 333-92010,
filed on September 12, 2002).
3.4 Amended and Restated Bylaws of Alside, Inc. (incorporated by
reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-4/A, Commission File No. 333-92010,
filed on September 12, 2002).
4.1 Registration Rights Agreement, dated as of April 23, 2002,
by and among the Company, AMI Management Company, Credit
Suisse First Boston Corporation, UBS Warburg LLC and CIBC
World Markets Corp. (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-4,
Commission File No. 333-92010, filed on July 3, 2002).
4.2 Indenture governing the Company's 9 3/4% Senior Subordinated
Notes Due 2012, dated as of April 23, 2002, by and among the
Company, AMI Management Company and Wilmington Trust Company
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
4.3 Supplemental Indenture governing the Company's 9 3/4% Senior
Subordinated Notes Due 2012, dated as of May 10, 2002 by and
among the Company, AMI Management Company, Alside, Inc. and
Wilmington Trust Company (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
4.4 Form of the Company's 9 3/4% Senior Subordinated Note Due
2012 (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
4.5 Form of Indenture governing the Company's 9 1/4% Senior
Subordinated Notes due 2008, between the Company and The
Bank of New York Trust Company of Florida, N.A. (as
successor to U.S. Trust Company of Texas, N.A.)
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1/A, File No. 333-42067,
filed on January 30, 1998).
4.6 First Supplemental Indenture governing the Company's 9 1/4%
Senior Subordinated Notes due 2008, dated as of April 4,
2002, by and among the Company and The Bank of New York
Trust Company of Florida, N.A (as successor to U.S. Trust
Company of Texas, N.A.) (incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
4.7 Form of 9 1/4% Senior Subordinated Note due 2008
(incorporated by reference to Exhibit A of 4.1 to the
Company's Registration Statement on Form S-1/A, Commission
File No. 333-42067, filed on January 30, 1998).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Credit Agreement, dated as of April 19, 2002, by and among
the Company, Associated Materials Holdings Inc., the various
financial institutions and other Persons from time to time
parties thereto, UBS AG, Stamford Branch, as administrative
agent, Credit Suisse First Boston, Cayman Islands Branch, as
syndication agent, CIBC World Markets Corp., as
documentation agent, and UBS Warburg LLC and Credit Suisse
First Boston Corporation, as joint lead arrangers (the
"Credit Agreement") (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-4,
Commission File No. 333-92010, filed on July 3, 2002).
10.2 Borrower Security and Pledge Agreement of the Company, dated
as of April 19, 2002, by the Company, in favor of UBS AG,
Stamford Branch, as administrative agent (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.3 Form of Subsidiary Security and Pledge Agreement, by each
subsidiary of the Company from time to time party thereto in
favor of UBS AG, Stamford Branch, as administrative agent,
on behalf of the Secured Parties (as defined in the Credit
Agreement) (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Commission
File No. 333-92010, filed on July 3, 2002).
10.4 Form of Subsidiary Guaranty, by each subsidiary of the
Company from time to time party thereto in favor of UBS AG,
Stamford Branch, as administrative agent, on behalf of the
Secured Parties (as defined in the Credit Agreement)
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.5 Assumption Agreement, dated as of April 19, 2002, by and
among the Company and AMI Management Company, as guarantors
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.6 Agreement of Sale, dated as of January 30, 1984, between USX
Corporation (formerly United States Steel Corporation)
("USX") and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1, Commission File No. 33-64788).
10.7 Amendment Agreement, dated as of February 29, 1984, between
USX and the Company (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1,
File No. 33-64788).
10.8 Form of Indemnification Agreement between the Company and
each of the directors and executive officers of the Company
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, File No. 33-84110).
10.9 Incentive Bonus Plan of the Company (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K filed for December 31, 2000).
10.10 Severance Agreement, dated December 27, 2001, between the
Company and Robert F. Hogan, Jr. (incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K
filed for December 31, 2001).
10.11 Management Agreement, dated as of April 19, 2002, by and
between Harvest Partners, Inc. and the Company (incorporated
by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.12 Asset Purchase Agreement, dated as of June 24, 2002, between
the Company and AmerCable Incorporated (incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
10.13 Associated Materials Holdings Inc. 2002 Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on July 3, 2002).
10.14 Employment Agreement, dated as of July 1, 2002, between the
Company and Michael Caporale, Jr. (incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on
Form S-4/ A, Commission File No. 333-92010, filed on
September 12, 2002).
10.15 Employment Agreement, dated as of August 21, 2002, between
the Company and D. Keith LaVanway (incorporated by reference
to Exhibit 10.15 to the Company's Registration Statement on
Form S-4/A, Commission File No. 333-92010, filed on
September 12, 2002).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16 Agreement, dated as of January 1, 1998, between Shintech
Incorporated and the Alside division of the Company
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-4, Commission File No.
333-92010, filed on October 16, 2002).*
10.17 Associated Materials Holding Inc. Stock Option Award
Agreement, dated September 4, 2002, between Associated
Materials Holdings Inc. and Michael Caporale, Jr.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-4/A, Commission File No.
333-92010, filed on October 10, 2002).
10.18 Associated Materials Holding Inc. Stock Option Award
Agreement, dated September 4, 2002, between Associated
Materials Holdings Inc. and Michael Caporale, Jr.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-4/A, Commission File No.
333-92010, filed on September 12, 2002).
10.19 Employment Agreement, dated as of August 21, 2002, between
the Company and Kenneth L. Bloom (incorporated by reference
to Exhibit 10.19 to the Company's Registration Statement on
Form S-4/A, Commission File No. 333-92010, filed on October
10, 2002).
10.20 Employment Agreement, dated as of August 21, 2002, between
the Company and Robert M. Franco (incorporated by reference
to Exhibit 10.20 to the Company's Registration Statement on
Form S-4/ A, Commission File No. 333-92010, filed on October
10, 2002).
10.21 Severance Agreement, dated as of December 27, 2001, between
the Company and Robert L. Winspear (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K filed for December 31, 2001).
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
99.1 Form of Letter of Transmittal (incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form
S-4, Commission File No. 333-92010, filed on July 3, 2002).
99.2 Form of Notice of Guaranteed Delivery (incorporated by
reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-4, Commission File No. 333-92010, filed
on July 3, 2002).
99.3 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**
99.4 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**
</Table>
- ---------------
* Certain provisions of this exhibit have been omitted pursuant to a request
for confidential treatment of information in accordance with Rule 406 of the
Securities Act.
** This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.
PROSPECTUS SUPPLEMENT NO. 1
(TO PROSPECTUS DATED OCTOBER 18, 2002)
ASSOCIATED MATERIALS INCORPORATED
OFFER TO EXCHANGE
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
FOR UP TO
$165,000,000 OF 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
---------------------
This prospectus supplement and the letter of transmittal relate to the
proposed offer by Associated Materials Incorporated ("we," "us" or "our
company") to exchange up to $165,000,000 in aggregate principal amount of our
new 9 3/4% senior subordinated notes due 2012 for a like aggregate principal
amount of our issued and outstanding 9 3/4% senior subordinated notes due 2012.
We refer to the new notes we are issuing in this exchange offer as the exchange
notes. We sometimes refer to the outstanding notes and the exchange notes
collectively as the notes.
This prospectus supplement supplements the prospectus dated October 18,
2002. Our unaudited financial results for the third quarter and nine months
ended September 30, 2002 are added in the section captioned "Prospectus
Summary -- Recent Unaudited Third Quarter Financial Results" on pages 3 to 8 of
this prospectus supplement.
Material terms of the exchange offer:
- The terms of the exchange notes we will issue in the exchange offer will
be substantially identical to the terms of the outstanding notes, except
that transfer restrictions and registration rights relating to the
outstanding notes will not apply to the exchange notes.
- The exchange offer expires at 5:00 p.m., New York City time, November 26,
2002, unless we extend it.
- All outstanding notes that are validly tendered in the exchange offer and
not withdrawn will be exchanged.
- Tenders of outstanding notes may be withdrawn at any time before the
expiration of the exchange offer.
- Any outstanding notes not validly tendered will remain subject to existing
transfer restrictions.
- There is no public market for the notes. We do not intend to have the
notes listed on any securities exchange or quoted on any quotation system.
- The exchange of outstanding notes for exchange notes will not be a taxable
transaction for U.S. federal income tax purposes, but you should see the
discussion under the heading "Summary of Material United States Federal
Income Tax Considerations" on page 135 for more information.
- We will not receive any proceeds from the exchange offer and we will pay
the expenses of the exchange offer.
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
relating to the exchange offer states that by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus
supplement, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the expiration
of the exchange offer, we will make this prospectus supplement available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Investing in the exchange notes involves risks. SEE "RISK FACTORS" BEGINNING
ON PAGE 18 OF THIS PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE OFFER AND AN
INVESTMENT IN THE NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this prospectus supplement is November 1, 2002.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE PAGE
---- ----
NOTICE TO NEW HAMPSHIRE RESIDENTS..... i MANAGEMENT............................ 75
MARKET DATA........................... ii DESCRIPTION OF CAPITAL STOCK.......... 81
PROSPECTUS SUMMARY.................... 1 CERTAIN RELATIONSHIPS AND RELATED
RISK FACTORS.......................... 18 TRANSACTIONS........................ 82
FORWARD-LOOKING STATEMENTS............ 26 PRINCIPAL STOCKHOLDERS................ 85
USE OF PROCEEDS....................... 27 DESCRIPTION OF CERTAIN INDEBTEDNESS... 88
CAPITALIZATION........................ 28 DESCRIPTION OF THE NOTES.............. 92
THE TRANSACTIONS...................... 29 BOOK-ENTRY, DELIVERY AND FORM......... 131
UNAUDITED PRO FORMA FINANCIAL SUMMARY OF MATERIAL UNITED STATES
INFORMATION......................... 30 FEDERAL INCOME TAX CONSIDERATIONS... 135
SELECTED HISTORICAL FINANCIAL DATA.... 37 PLAN OF DISTRIBUTION.................. 136
MANAGEMENT'S DISCUSSION AND ANALYSIS LEGAL MATTERS......................... 136
OF FINANCIAL CONDITION AND RESULTS EXPERTS............................... 136
OF OPERATIONS....................... 40 AVAILABLE INFORMATION................. 137
BUSINESS.............................. 55 INDEX TO FINANCIAL STATEMENTS......... F-1
THE EXCHANGE OFFER.................... 64
</Table>
---------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON, OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE LETTER OF TRANSMITTAL. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO
SELL THESE SECURITIES.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
ANNOTATED, 1955, AS AMENDED ("RSA 421-B"), WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
i
MARKET DATA
Market data and other statistical information used throughout this
prospectus supplement are based on independent industry publications, government
publications, reports by market research firms or other published independent
sources. Some data are also based on our good faith estimates, which are derived
from our review of internal surveys, as well as the independent sources listed
above. Industry reports referred to herein are from the most recently available
industry study prepared by Pure Strategy in 2002 and other independent industry
sources. Although we believe these sources are reliable, we have not
independently verified the information.
ii
PROSPECTUS SUMMARY
This summary highlights the material information contained elsewhere in
this prospectus supplement, including cross-referenced sections. You should
carefully read the entire prospectus supplement including the "Risk Factors"
section and the financial data and related notes, before investing in the notes.
Unless otherwise indicated, information presented on a pro forma basis for the
six months ended June 30, 2002 and the twelve months ended December 30, 2001 was
prepared as if the merger and related transactions discussed under "The
Transactions" and the sale of the AmerCable division occurred on January 1,
2001. Unless the context otherwise requires, all references to "us," "we," "our"
and "our company" refer to Associated Materials Incorporated both before and
after the merger, in each case, with its subsidiaries.
COMPANY OVERVIEW
We are a leading, vertically integrated manufacturer and nationwide
distributor of exterior residential building products. These products are
marketed through our Alside division on a wholesale basis to more than 35,000
professional contractors engaged in home repair and remodeling and new home
construction. We distribute our products primarily through our nationwide
network of 89 supply centers operating under the Alside(R) brand name. In 2001,
Alside accounted for more than 88% of our total net sales and, following the
sale of our AmerCable division, currently represents all of our operations. See
"-- Recent Developments". For the twelve months ended December 31, 2001, on a
pro forma basis, we generated total net sales and net income of $524.5 million
and $8.5 million, respectively. As of June 30, 2002, the notes and the related
guarantees were subordinated to approximately $96.5 million of our senior debt.
In addition, $37.4 million of additional senior debt was available for borrowing
under our new credit facility. We also had approximately $0.9 million of debt
that ranked equally with the notes.
The core products we manufacture and distribute are vinyl siding and vinyl
windows which together comprised approximately 71% of Alside's 2001 net sales.
We also manufacture and distribute vinyl fencing, decking and railing, and vinyl
garage doors and distribute other complementary products which are manufactured
by third parties. Approximately two thirds of Alside's products are sold to
contractors engaged in the home repair and remodeling market with one third sold
to the new construction market. Our supply centers provide "one stop" shopping
to our contractor customers, carrying products, accessories and tools necessary
to complete a vinyl siding or window project. In addition, our supply centers
provide high quality product literature, product samples and installation
training to these customers. We believe that the strength of our products and
distribution network has developed strong brand loyalty and long-standing
relationships with local contractors and has enabled us to consistently gain
market share over the last five years. Approximately 80% of Alside's 2001 net
sales were generated through our network of supply centers with the remainder
sold through independent distributors primarily in markets where we currently do
not have supply centers.
Due to our vertically integrated distribution strategy, innovative new
product development and operational excellence, we have consistently generated
sales growth in excess of industry averages. From 1996 to 2001, Alside generated
a compounded annual growth rate in net sales of 10.7%. In 2001, Alside's net
sales grew by 20.6% over the prior year. We believe that our historical
investment in manufacturing and distribution capabilities and our initiatives to
reduce costs and enhance operating efficiencies throughout our production,
distribution and supply chain provide us with a strong platform for future
growth and profitability.
For a more complete description of our business and industry, including
information on our products, competitive strengths and business strategy, please
see the section captioned "Business."
THE TRANSACTIONS
On March 16, 2002, Associated Materials Incorporated, Associated Materials
Holdings Inc. and its wholly owned subsidiary, Simon Acquisition Corp. entered
into a merger agreement pursuant to which, among other things, each stockholder
of Associated Materials Incorporated received $50.00 in cash for
1
each share of Associated Materials Incorporated stock. Associated Materials
Holdings Inc. is controlled by affiliates of Harvest Partners, Inc. In
connection with the merger agreement and related documents, the following
transactions were completed, which we refer to as the "transactions":
- a cash tender offer by Simon Acquisition Corp. for 100% of the shares of
common stock of Associated Materials Incorporated at a price of $50.00
per share;
- an investment in Associated Materials Holdings Inc. made by affiliates of
Harvest Partners, Inc. and other equity investors, including $7.2 million
of rollover equity by certain members of management, totaling
approximately $172 million;
- the merger of Simon Acquisition Corp. into Associated Materials
Incorporated, with Associated Materials Incorporated as the surviving
corporation;
- the borrowing by Associated Materials Incorporated of approximately $125
million in term loans under a new credit facility. The new credit
facility includes a $40 million revolving credit facility for working
capital and general corporate purposes;
- a debt tender offer and consent solicitation by Associated Materials
Incorporated for all $75 million aggregate principal amount of its 9 1/4%
senior subordinated notes; and
- the offering of $165 million aggregate principal amount of the
outstanding notes.
The equity tender offer expired on April 18, 2002. Over 90% of the
outstanding shares of common stock of Associated Materials Incorporated were
tendered and Simon Acquisition Corp. merged into Associated Materials
Incorporated on April 19, 2002. Associated Materials Incorporated is now a
wholly owned subsidiary of Associated Materials Holdings Inc.
The debt tender offer expired on April 18, 2002. Approximately $74 million
aggregate principal amount of the existing 9 1/4% notes was tendered. Subsequent
to the merger, we commenced a change of control offer pursuant to the indenture
governing the existing 9 1/4% notes to purchase the existing 9 1/4% notes not
tendered in the debt tender offer. The change of control offer expired on June
21, 2002 and approximately $0.1 million aggregate principal amount of such notes
was tendered and accepted. We intend to discharge the remaining approximate $0.9
million of 9 1/4% notes pursuant to the indenture governing such notes. We may
also, from time to time, purchase such notes through open market purchases,
privately negotiated transactions, tender offers, exchange offers or otherwise,
upon such terms and at such prices as we may determine. We expect that all
discharged notes will be redeemed on or after March 1, 2003 at 104.625% of the
principal amount of such notes ($1,046.25 per $1,000 principal amount of such
notes), plus accrued and unpaid interest, if any, to the date of purchase.
We have summarized below the sources and uses of funds for the above
mentioned transactions (other than the change of control offer related to the
existing 9 1/4% notes).
<Table>
<Caption>
SOURCES ($ IN MILLIONS) USES ($ IN MILLIONS)
------- --------------- ---- ---------------
New credit facility........... $125.0 Purchase of equity of
9 3/4% senior subordinated Associated Materials
notes due 2012(1)........... 165.0 Incorporated............... $360.8
Equity financing(2)........... 172.0 Debt tender offer(3)......... 82.3
Cash on hand.................. 4.8 Transaction costs(4)......... 23.7
------ ------
$466.8 $466.8
====== ======
</Table>
- ---------------
(1) The equity tender offer closed on April 19, 2002, prior to the closing of
the offering of the notes on April 23, 2002, and we borrowed under a $215
million unsecured interim credit facility to complete the equity tender
offer. The proceeds from the offering of the outstanding notes along with
proceeds from the term loan under the new credit facility were used to repay
the interim credit facility.
2
(2) Approximately $172 million of the equity financing was contributed by
affiliates of Harvest Partners, Inc. and other equity investors, including
members of management.
(3) Represents the purchase of approximately $74 million aggregate principal
amount of the 9 1/4% senior subordinated notes plus a tender premium of $7.3
million and accrued interest.
(4) Includes discounts to the initial purchasers, bank fees, financial advisory
fees and legal, accounting and other costs payable or reimbursable in
connection with the transactions.
RECENT DEVELOPMENTS
On June 24, 2002, we completed the sale of our AmerCable division to
AmerCable Incorporated, a newly-formed entity controlled by members of AmerCable
management and Wingate Partners III, L.P., for cash proceeds of approximately
$28.3 million in cash and the assumption of certain liabilities pursuant to an
asset purchase agreement dated as of the same date. We used the net proceeds to
repay a portion of our new credit facility in accordance with certain terms
thereof. AmerCable is a leading manufacturer of specialty electrical cable
products primarily used in the mining, marine and offshore drilling industries.
In 2001, AmerCable accounted for approximately 12% of our total net sales.
------------------------
RECENT UNAUDITED THIRD QUARTER FINANCIAL RESULTS
Our unaudited third quarter 2002 net sales from continuing operations were
$176.7 million, a 17.0% increase over $150.9 million for the same period in
2001. For the nine months ended September 30, 2002, net sales from continuing
operations were $452.6 million or 19.1% higher than $380.1 million for the same
period in 2001. Results of continuing operations for all periods presented
exclude our AmerCable division, which was sold on June 24, 2002.
EBITDA (as defined below) for the third quarter of 2002 was $22.2 million
compared to $21.9 million for the same period in 2001. EBITDA and Adjusted
EBITDA (as defined below) were the same for the third quarter of 2002. Adjusted
EBITDA for the third quarter of 2001, excluding EBITDA of $2.1 million from our
AmerCable division, was $19.8 million. EBITDA increased $2.4 million or 12.0% in
the third quarter of 2002 compared to Adjusted EBITDA for the same period in the
prior year. The increase in EBITDA is primarily a result of our increased sales
volume.
EBITDA for the nine months ended September 30, 2002 was $30.9 million
compared to $41.0 million in the same period in 2001. EBITDA for the nine months
ended September 30, 2002 includes $1.9 million of EBITDA relating to our
AmerCable division, merger transaction costs of $9.3 million, pre-tax
extraordinary expenses of $7.6 million and a cost of sales adjustment of $1.9
million relating to an inventory fair value adjustment recorded at the time of
the merger on April 19, 2002. Adjusted EBITDA, excluding the amounts discussed
above, was $47.8 million for the nine months ended September 30, 2002. EBITDA
for the nine months ended September 30, 2001 includes EBITDA of $6.9 million
relating to our AmerCable division and a charge of $2.4 million for the
write-down of our investment in Amercord Inc. Adjusted EBITDA for the nine
months ended September 30, 2001, excluding the amounts discussed above, was
$36.5 million. Adjusted EBITDA increased $11.3 million or 31.1% for the nine
months ended September 30, 2002 compared to the same period in the prior year.
The increase in Adjusted EBITDA is primarily a result of our increased sales
volume.
Results of Continuing Operations
Unit sales of vinyl windows and vinyl siding increased 32% and 5%,
respectively, for the third quarter of 2002 compared to the same period in 2001.
The increased sales volume is a result of our marketing investment and our
nationwide distribution network of supply centers. We also believe that the
increased sales volume can be attributed to consumers' demand for professional
remodeling services including vinyl replacement windows and vinyl siding as a
means to enhance home values during a time of historically low interest rates.
Gross profit increased to $53.9 million, or 30.5% of net sales, in the third
quarter of 2002
3
compared to $46.1 million, or 30.5% of net sales, in the third quarter of 2001.
Selling, general and administrative expense increased to $34.6 million, or 19.6%
of net sales, for the third quarter of 2002 versus $28.6 million, or 19.0% of
net sales, in the same period in 2001. SG&A expense increased as a result of
seven new supply centers added during 2002, personnel added to support sales
growth at existing supply centers, additional marketing investments to drive
higher sales volume, and increased commissions resulting from the higher sales.
Income from operations increased to $19.3 million, or 10.9% of net sales, for
the third quarter of 2002 compared to $17.5 million, or 11.6% of net sales, for
the same period in 2001.
Unit sales of vinyl windows and vinyl siding increased 47% and 9%,
respectively, for the nine months ended September 30, 2002 compared to the same
period in 2001. We believe increased sales volume is a result of the reasons
discussed above. Gross profit increased to $135.7 million, or 30.0% of net
sales, for the nine months ended September 30, 2002 compared to $113.1 million,
or 29.8% of net sales, for the same period in 2001. SG&A expense increased to
$97.3 million, or 21.5% of net sales, for the nine months ended September 30,
2002 versus $83.4 million, or 21.9% of net sales, in the same period in 2001.
SG&A expense increased for the reasons discussed above. Income from operations
increased to $38.4 million, or 8.5% of net sales, for the nine months ended
September 30, 2002 compared to $29.7 million, or 7.8% of net sales, for the same
period in 2001.
Predecessor and Successor Results of Operations
Accounting principles generally accepted in the United States require
operating results prior to the merger completed on April 19, 2002 to be
presented as the Predecessor's results in the historical financial statements.
Operating results subsequent to the merger are presented as the Successor's
results in the historical financial statements and include 165 days from April
19, 2002 to September 30, 2002. AmerCable's results are included in continuing
operations of the Predecessor. Subsequent to the merger, AmerCable's results are
treated as discontinued operations due to the Successor's decision to sell this
division.
The Successor had net sales and net income of $290.6 million and $7.5
million, respectively, for the period from April 19, 2002 to September 30, 2002.
The Successor's results include the loss from discontinued operations of $0.5
million, net of tax, for our AmerCable division and extraordinary items of $4.4
million, net of tax, for the extinguishment of substantially all of the
Successor's assumed 9 1/4% senior subordinated notes and financing fees related
to an interim credit facility utilized for the merger which was repaid shortly
thereafter.
The Predecessor had net sales and a net loss of $180.2 million and $5.8
million for the period from January 1, 2002 to April 18, 2002. The Predecessor's
results include $9.3 million of transaction costs associated with the
Predecessor's strategic review process and merger.
Liquidity
We had approximately $19.7 million of cash on hand at September 30, 2002
after repayment of $10 million of bank debt during the quarter using cash
generated from operations. Capital expenditures from continuing operations for
the third quarter of 2002 were $3.4 million or $8.7 million year to date. This
compares to $2.3 million and $9.8 million for the prior year third quarter and
year to date periods, respectively. We expect capital expenditures from
continuing operations to be approximately $11.2 million in 2002.
4
ASSOCIATED MATERIALS INCORPORATED
CONDENSED PREDECESSOR/SUCCESSOR STATEMENTS OF OPERATIONS (a)
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
ONE
ONE HUNDRED
THREE THREE HUNDRED SIXTY-FIVE
MONTHS MONTHS EIGHT DAYS DAYS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 18, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2002 2002 2001
------------- ------------- ----------- ------------- ------------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR SUCCESSOR COMBINED PREDECESSOR
Net sales
Alside................... $176,673 $150,942 $161,959 $290,633 $452,592 $380,087
AmerCable................ -- 17,722 18,271 -- 18,271 55,933
-------- -------- -------- -------- -------- --------
Total.................. 176,673 168,664 180,230 290,633 470,863 436,020
Gross profit
Alside................... 53,893 46,075 47,102 88,562 135,664 113,139
AmerCable................ -- 3,517 2,777 -- 2,777 10,916
-------- -------- -------- -------- -------- --------
Total.................. 53,893 49,592 49,879 88,562 138,441 124,055
Selling, general and
administrative expense
Alside................... 33,280 27,565 39,774 54,732 94,506 79,413
Corporate................ 1,277 1,042 1,306 1,492 2,798 3,988
-------- -------- -------- -------- -------- --------
Subtotal............... 34,557 28,607 41,080 56,224 97,304 83,401
AmerCable................ -- 1,843 2,192 -- 2,192 5,448
-------- -------- -------- -------- -------- --------
Total.................. 34,557 30,450 43,272 56,224 99,496 88,849
-------- -------- -------- -------- -------- --------
Income (loss) from
operations
Alside................... 20,613 18,510 7,328 33,830 41,158 33,726
Corporate................ (1,277) (1,042) (1,306) (1,492) (2,798) (3,988)
-------- -------- -------- -------- -------- --------
Subtotal............... 19,336 17,468 6,022 32,338 38,360 29,738
AmerCable................ -- 1,674 585 -- 585 5,468
-------- -------- -------- -------- -------- --------
Total.................. 19,336 19,142 6,607 32,338 38,945 35,206
Interest, net.............. 6,002 1,721 2,068 10,983 13,051 5,154
-------- -------- -------- -------- -------- --------
Income from continuing
operations before other
non-operating expenses,
income taxes and
extraordinary items...... 13,334 17,421 4,539 21,355 25,894 30,052
Merger transaction
costs(b)................. -- -- 9,319 -- 9,319 --
Loss on writedown of
Amercord Inc............. -- -- -- -- -- 2,393
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes and
extraordinary items...... 13,334 17,421 (4,780) 21,355 16,575 27,659
Income taxes............... 5,535 6,707 977 8,863 9,840 10,649
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary
items.................... 7,799 10,714 (5,757) 12,492 6,735 17,010
Loss from discontinued
operations............... -- -- -- (521) (521) --
Extraordinary items, net of
tax(c)................... -- -- -- (4,434) (4,434) --
-------- -------- -------- -------- -------- --------
Net income (loss).......... $ 7,799 $ 10,714 $ (5,757) $ 7,537 $ 1,780 $ 17,010
======== ======== ======== ======== ======== ========
</Table>
5
<Table>
<Caption>
ONE
ONE HUNDRED
THREE THREE HUNDRED SIXTY-FIVE
MONTHS MONTHS EIGHT DAYS DAYS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 18, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2002 2002 2001
------------- ------------- ----------- ------------- ------------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR SUCCESSOR COMBINED PREDECESSOR
Reconciliation of net
income (loss) to
EBITDA(d):
Net income (loss).......... $ 7,799 $ 10,714 $ (5,757) $ 7,537 $ 1,780 $ 17,010
Interest -- Continuing
operations..... 6,002 1,721 2,068 10,983 13,051 5,154
-- Discontinued
operations(e)... -- -- -- 1,213 1,213 --
Taxes -- Continuing
operations..... 5,535 6,707 977 8,863 9,840 10,649
-- Extraordinary
items.......... -- -- -- (3,145) (3,145) --
-- Discontinued
operations..... -- -- -- (370) (370) --
Depreciation and
amortization
-- Continuing
operations..... 2,849 2,797 3,969 4,246 8,215 8,146
-- Discontinued
operations..... -- -- -- 318 318 --
-------- -------- -------- -------- -------- --------
EBITDA..................... $ 22,185 $ 21,939 $ 1,257 $ 29,645 $ 30,902 $ 40,959
======== ======== ======== ======== ======== ========
Reconciliation of EBITDA to
Adjusted EBITDA(f):
EBITDA..................... $ 22,185 $ 21,939 $ 1,257 $ 29,645 $ 30,902 $ 40,959
Extraordinary items, pre-
tax(c)................... -- -- -- 7,579 7,579 --
AmerCable's EBITDA(g)...... -- (2,139) (1,220) (640) (1,860) (6,863)
Loss on writedown of
Amercord Inc............. -- -- -- -- -- 2,393
Merger transaction
costs(b)................. -- -- 9,319 -- 9,319 --
Cost of sales
adjustment(h)............ -- -- -- 1,891 1,891 --
-------- -------- -------- -------- -------- --------
Adjusted EBITDA............ $ 22,185 $ 19,800 $ 9,356 $ 38,475 $ 47,831 $ 36,489
======== ======== ======== ======== ======== ========
</Table>
- ---------------
(a) Operating results prior to the merger completed on April 19, 2002, are
presented as the Predecessor's results of operations and include 108 days
from January 1, 2002 to April 18, 2002. Operating results subsequent to the
merger are presented as the Successor's results of operations and include
165 days from April 19, 2002 to September 30, 2002. AmerCable's results are
included in continuing operations of the Predecessor prior to the merger.
Subsequent to the merger, AmerCable's results are treated as discontinued
operations due to the Successor's decision to sell this division.
(b) Merger transaction costs include investment banking and legal fees incurred
by the Predecessor in conjunction with the merger transaction with Harvest
Partners, Inc.
(c) Extraordinary items include $4.9 million ($2.8 million net of tax) for the
extinguishment of substantially all of the Successor's assumed 9 1/4% notes
and $2.7 million ($1.6 million net of tax) for the financing fees related to
an interim credit facility utilized for the merger which was repaid shortly
thereafter.
(d) EBITDA is calculated as net income (loss) plus interest, taxes, depreciation
and amortization. We have included EBITDA because we believe that EBITDA is
used by certain investors as one measure of a company's historical ability
to service its debt. EBITDA should not be considered an alternative to, or
more meaningful than, net income as an indicator of a company's operating
performance or to cash flows as a measure of liquidity. EBITDA has not been
prepared in accordance with generally accepted accounting principles.
Therefore, EBITDA, as presented by us, may not be comparable to similarly
titled measures reported by other companies.
6
(e) Includes accelerated amortization of $0.8 million of debt issuance costs as
a result of using the proceeds from the sale of AmerCable to permanently
reduce the credit facility.
(f) Adjusted EBITDA represents EBITDA plus certain non-recurring items less
AmerCable's operating results. We believe that Adjusted EBITDA presents a
more meaningful discussion than EBITDA since Adjusted EBITDA corresponds to
EBITDA as it is defined in our new credit facility and in the indenture
governing the notes as it excludes non-recurring items. The new credit
facility and indenture governing the notes have certain financial covenants
that use ratios utilizing our Adjusted EBITDA. The definition of EBITDA
under our new credit facility does not exclude the results of AmerCable. We
have, however, excluded the results of AmerCable when calculating Adjusted
EBITDA as AmerCable will not be included in our ongoing operations. The
nonrecurring items and results of AmerCable are expected to have no ongoing
cash requirements and no impact on our ongoing operations. Adjusted EBITDA
has not been prepared in accordance with generally accepted accounting
principles. Adjusted EBITDA, as presented by us, may not be comparable to
similarly titled measures reported by other companies.
(g) AmerCable's EBITDA is calculated as its net income plus interest, taxes,
depreciation and amortization.
(h) The cost of sales adjustment is the expense of an inventory fair value
adjustment recorded at the time of the merger.
7
ASSOCIATED MATERIALS INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
SUCCESSOR
(UNAUDITED) PREDECESSOR
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,746 $ 28,869
Accounts receivable, net.................................. 79,872 65,784
Inventory................................................. 68,159 74,574
Other current assets...................................... 4,172 3,394
Income taxes receivable................................... 2,371 --
-------- --------
Total current assets................................... 174,320 172,621
Property, plant and equipment, net.......................... 99,134 77,733
Goodwill.................................................... 199,348 --
Other intangible assets..................................... 107,190 --
Other assets................................................ 12,440 3,953
-------- --------
Total assets........................................... $592,432 $254,307
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 50,869 $ 29,579
Accrued liabilities....................................... 42,842 35,356
Income taxes payable...................................... -- 1,498
-------- --------
Total current liabilities.............................. 93,711 66,433
Deferred income taxes....................................... 62,886 5,091
Other liabilities........................................... 6,059 5,108
Long-term debt.............................................. 252,408 75,000
Stockholders' equity........................................ 177,368 102,675
-------- --------
Total liabilities and stockholders' equity............. $592,432 $254,307
======== ========
</Table>
OUR SPONSOR
Affiliates of Harvest Partners, Inc. control our board of directors.
Harvest Partners, Inc., founded in 1981, is a private equity sponsor with
approximately $1 billion of invested and committed capital. Harvest Partners,
Inc., whose investments include Career Horizons, Inc., Global Power Equipment
Group Inc. (NYSE: GEG), Home Care Industries, Inc., Home Care Supply, Inc.,
IntelliRisk Management Corp., and Symbol Technologies, Inc., focuses on
management buyouts and growth financings of profitable, middle-market specialty
services, manufacturing and value-added distribution businesses, with a
particular emphasis on multinational transactions. Harvest Partners, Inc. has
significant capital available through its managed funds, into which numerous
U.S., European and Asian industrial corporations and financial institutions have
invested.
------------------------
Our principal executive office is located at 3773 State Road, Cuyahoga
Falls, Ohio 44223 and our telephone number there is (800) 257-4335. We were
incorporated in Delaware in 1983.
8
THE EXCHANGE OFFER
The following is a summary of the principal terms of the exchange offer. A
more detailed description is contained in this prospectus supplement under the
section entitled "The Exchange Offer."
The Exchange Offer............ We are offering to exchange all of our
outstanding notes for $165 million principal
amount of exchange notes. The terms of the
exchange and outstanding notes are
substantially identical in all respects,
including principal amount, interest rate and
maturity, except that the exchange notes are in
general freely transferable and are not subject
to any covenant regarding registration under
the Securities Act. To be exchanged, an
outstanding note must be properly tendered and
accepted. Unless we terminate the exchange
offer, all outstanding notes that are validly
tendered and not validly withdrawn will be
exchanged. We will issue the exchange notes
promptly after the expiration of the exchange
offer.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, on November 26, 2002,
unless we decide to extend this expiration
date. In that case, the phrase "expiration
date" will mean the latest date and time to
which we extend the exchange offer.
Conditions to the Exchange
Offer......................... We may terminate or amend the exchange offer
if:
- any legal proceeding or government action
materially impairs our ability to complete
the exchange offer, or
- any SEC rule, regulation or interpretation
materially impairs the exchange offer.
We may waive any or all of these conditions. At
this time, there are no adverse proceedings,
actions or developments pending or, to our
knowledge, threatened, and no governmental
approvals are necessary to complete the
exchange offer. The exchange offer is not
conditioned upon any minimum principal amount
of outstanding notes tendered.
Withdrawal Rights............. You may withdraw the tender of your outstanding
notes at any time before the expiration date.
The Registration Rights
Agreement..................... You have the right to exchange your outstanding
notes for exchange notes with substantially
identical terms. This exchange offer is being
made to satisfy these rights. Except in limited
circumstances described under "The Exchange
Offer -- Background and Purpose of the Exchange
Offer," after the exchange offer is complete,
you will no longer be entitled to any exchange
or registration rights with respect to your
notes.
Resales of the Exchange
Notes......................... We believe that the exchange notes issued in
the exchange offer may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that:
- you are acquiring the exchange notes in the
ordinary course of your business;
9
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to
participate in the distribution of the
exchange notes; and
- you are not an "affiliate" of our company
or any of our subsidiaries, as that term is
defined in Rule 405 of the Securities Act.
See "The Exchange Offer -- Resale of the
Exchange Notes."
The Commission, however, has not considered
this exchange offer in the context of a
no-action letter, and we cannot be sure that
the staff of the Commission would make the same
determination with this exchange offer as it
has in other circumstances. Furthermore, if you
do not meet the above conditions, you may incur
liability under the Securities Act. We do not
assume, or indemnify you against, this
liability.
Each broker-dealer that is issued exchange
notes in the exchange offer for its own account
in exchange for outstanding notes which were
acquired by it as a result of market-making or
other trading activities must acknowledge that
it will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of the exchange
notes issued in the exchange offer. A broker-
dealer may use this prospectus supplement for
an offer to resell, resale or other retransfer
of the exchange notes issued to it in the
exchange offer.
The exchange offer is not being made to, nor
will we accept surrenders for exchange from,
the following:
- holders of outstanding notes in any
jurisdiction in which this exchange offer
or the acceptance of the exchange offer
would not be in compliance with the
applicable securities or "blue sky" laws of
that jurisdiction, and
- holders of outstanding notes who are
"affiliates" of our company or any of our
subsidiaries.
Procedures for Tendering...... If you wish to tender outstanding notes, you
must (a)(1) complete, sign and date the letter
of transmittal, or a facsimile of it, according
to its instructions and (2) send the letter of
transmittal, together with your outstanding
notes to be exchanged and other required
documentation, to Wilmington Trust Company who
is the exchange agent, at the address provided
in the letter of transmittal; or (b) tender
through DTC pursuant to DTC's Automated Tender
Offer Program, or ATOP system. The letter of
transmittal or a valid agent's message through
ATOP must be received by Wilmington Trust
Company by 5:00 p.m., New York City time, on
the expiration date. See "The Exchange
Offer -- Procedures for Tendering," and
"-- Book-Entry Tender." By executing the letter
of transmittal, you are representing to us that
you are acquiring the exchange notes in the
ordinary course of your business, that you are
not participating, do not intend to participate
and have no arrangement or understanding with
any person to participate in the distribution
of exchange notes, and that you are not an
"affiliate" of ours. See "The Exchange Offer --
Procedures for Tendering," and "-- Book-Entry
Tender."
10
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose outstanding
notes are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee, and you wish to tender your
outstanding notes in the exchange offer, you
should contact the registered holder promptly
and instruct the registered holder to tender on
your behalf. If you are a beneficial owner and
wish to tender on your own behalf, you must,
before completing and executing the letter of
transmittal and delivering your outstanding
notes, either make appropriate arrangements to
register ownership of the outstanding notes in
your name or obtain a properly completed bond
power from the registered holder. See "The
Exchange Offer -- Procedure if the Outstanding
Notes Are Not Registered in Your Name," and
"-- Beneficial Owner Instructions to Holders of
Outstanding Notes."
The transfer of registered ownership may take
considerable time and may not be possible to
complete before the expiration date.
Guaranteed Delivery
Procedures.................... If you wish to tender your outstanding notes
and time will not permit your required
documents to reach the exchange agent by the
expiration date, or you cannot complete the
procedure for book-entry transfer on time or
you cannot deliver certificates for your
outstanding notes on time, then before the
expiration date you may tender your outstanding
notes as described in this prospectus
supplement under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures."
Failure to Tender Outstanding
Notes......................... If you are eligible to participate in the
exchange offer and you do not tender your
outstanding notes, you will not have any
further registration or exchange rights and
your outstanding notes will continue to have
restrictions on transfer. Outstanding notes may
not be offered or sold, unless registered under
the Securities Act and applicable state
securities laws or under an exemption from the
Securities Act and applicable state securities
laws. We do not currently plan to register the
outstanding notes under the Securities Act
after the completion of the exchange offer.
Accordingly, the trading market for the
outstanding notes could be adversely affected.
In addition, after the consummation of the
exchange offer, it is anticipated that the
outstanding principal amount of the outstanding
notes available for trading will be
significantly reduced. The reduced float will
adversely affect the liquidity and market price
of the outstanding notes. A smaller outstanding
principal amount of notes available for trading
may also tend to make the trading price more
volatile.
Acceptance of Outstanding
Notes and Delivery of Exchange
Notes....................... In general, we will accept any and all
outstanding notes that are properly tendered in
the exchange offer and not withdrawn before
5:00 p.m., New York City time, on the
expiration date. The exchange offer will be
considered consummated when we, as soon as
practicable after the expiration date, accept
for exchange the outstanding notes tendered,
deliver them to the trustee for
11
cancellation and issue the exchange notes. We
will deliver the exchange notes as soon as
practicable after the expiration date.
Interest on the Outstanding
Notes......................... Interest will not be paid on outstanding notes
that are tendered and accepted in the exchange
offer.
Interest on the Exchange
Notes......................... The exchange notes will bear interest at the
rate of 9 3/4% per year, payable semi-annually
in arrears on April 15 and October 15,
commencing October 15, 2002.
Listing of the Exchange
Notes......................... We do not intend to have the outstanding notes
or the exchange notes listed on any securities
exchange or arrange for quotation on any
automated dealer quotation system.
Federal Income Tax
Considerations................ We believe that the exchange of outstanding
notes for exchange notes generally will not be
a taxable event for United States federal
income tax purposes. Please see "Summary of
Material United States Federal Income Tax
Considerations" for more information.
Appraisal Rights.............. You do not have any appraisal or dissenters'
rights in connection with this exchange offer.
Use of Proceeds............... We will not receive any proceeds from the
issuance of the exchange notes in the exchange
offer.
Fees and Expenses............. We will pay all of the expenses incident to the
exchange offer.
Exchange Agent................ Wilmington Trust Company is serving as the
exchange agent in connection with the exchange
offer.
Please review the information in the section captioned "The Exchange Offer"
for more detailed information concerning the exchange offer.
12
THE EXCHANGE NOTES
Issuer........................ Associated Materials Incorporated
Notes Offered................. We are offering up to a total of $165 million
in principal amount of our 9 3/4% Senior
Subordinated Notes due 2012, which have been
registered under the Securities Act.
The exchange notes will evidence the same debt
as the outstanding notes and will be issued
under, and entitled to the benefits of, the
same indenture. The terms of the exchange notes
are the same as the terms of the outstanding
notes in all material respects except that the
exchange notes:
- have been registered under the Securities
Act;
- do not include rights to registration under
the Securities Act; and
- do not contain transfer restrictions
applicable to the outstanding notes.
Maturity Date................. April 15, 2012.
Interest...................... 9 3/4% per year, payable semi-annually in
arrears on April 15 and October 15, commencing
October 15, 2002.
Ranking....................... The exchange notes and the guarantees will
rank:
- junior to all of our and our guarantors'
existing and future senior indebtedness and
secured indebtedness, including any
borrowings under our new credit facility;
- equally with any of our and our guarantors'
existing and future senior subordinated
indebtedness, including trade payables;
- senior to any of our and our guarantors'
future subordinated indebtedness; and
- effectively junior to all liabilities of
our future subsidiaries that have not
guaranteed the exchange notes.
As of June 30, 2002, the notes and the related
guarantees were subordinated to approximately
$96.5 million of our senior debt. In addition,
$37.4 million of senior debt was available for
borrowing under our new credit facility. We
also had approximately $0.9 million of debt
that ranked equally with the notes.
Mandatory Redemption.......... There is no mandatory redemption or sinking
fund payment with respect to the exchange
notes.
Optional Redemption........... Before April 15, 2005, we may redeem exchange
notes in an aggregate principal amount not to
exceed 35% of the aggregate principal amount of
the notes originally issued in one or more
equity offerings, as long as:
- we pay to holders of the exchange notes
109.75% of the principal amount of notes
plus accrued and unpaid interest;
- we redeem the exchange notes within 90 days
of completing the equity offering; and
- at least 65% of the original principal
amount of notes issued under the indenture
remains outstanding afterward.
13
We may redeem the exchange notes, in whole or
in part, on or after April 15, 2007, at the
redemption price set forth in this prospectus
supplement under "Description of the
Notes -- Optional Redemption."
Optional Redemption Upon a
Change
of Control.................... At any time on or prior to April 15, 2007, we
may redeem the exchange notes upon a change of
control at a price equal to 100% of the
principal amount plus a make-whole premium. See
"Description of the Notes -- Redemption Upon a
Change of Control."
Change of Control............. If a change of control occurs, we will be
required to make an offer to purchase the
exchange notes at a price equal to 101% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
purchase.
Subsidiary Guarantees......... The exchange notes will be fully,
unconditionally and jointly and severally
guaranteed on a senior subordinated basis by
our existing domestic subsidiary and certain of
our future domestic subsidiaries.
Restrictive Covenants......... The indenture contains covenants that limit our
ability and that of our subsidiaries to:
- incur additional indebtedness;
- pay dividends or distributions on, or
redeem or repurchase, our capital stock;
- make investments;
- engage in transactions with affiliates;
- transfer or sell assets;
- incur liens;
- restrict dividend or other payments to us
from our subsidiaries;
- issue or sell capital stock of our
subsidiaries; and
- consolidate, merge or transfer all or
substantially all of our assets and the
assets of our subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described in "Description of the
Notes -- Certain Covenants."
Use of Proceeds............... We will not receive any proceeds from the
issuance of the exchange notes.
Subordination................. All payments on the notes and the related
guarantees will be blocked in the event of a
payment default on our designated senior debt
and may be blocked for up to 179 consecutive
days in the event of certain non-payment
defaults on our designated senior debt.
RISK FACTORS
See "Risk Factors" for a discussion of the factors you should carefully
consider before deciding to invest in the notes.
14
SUMMARY FINANCIAL DATA
Accounting principles generally accepted in the United States require
operating results for our company prior to the merger completed on April 19,
2002 to be presented as the Predecessor's results in the historical financial
statements. Operating results subsequent to the merger for our company are
presented as the Successor's results in the historical financial statements and
include 73 days from April 19, 2002 to June 30, 2002. AmerCable's results are
included in continuing operations of the Predecessor. Subsequent to the merger,
AmerCable's results are presented as discontinued operations due to the
Successor management's decision to sell this division.
The following table sets forth our summary historical statement of
operations data for the one hundred eight days ended April 18, 2002 and the
seventy-three days ended June 30, 2002 and for the first six months of 2001 and
for each of the three years in the period ended December 31, 2001. Also
presented is our summary historical balance sheet data as of June 30, 2002 and
December 31, 1999, 2000 and 2001. The statement of operations data for each of
the three years in the period ended December 31, 2001 and the balance sheet data
as of December 31, 1999, 2000 and 2001 were derived from our audited financial
statements included elsewhere in this prospectus supplement. The financial data
for the one hundred eight days ended April 18, 2002 and the seventy-three days
ended June 30, 2002 and the first six months of 2001 have been derived from our
unaudited interim financial information included elsewhere in this prospectus
supplement, which, in the opinion of our management, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the unaudited interim periods. The operating results for any
interim period are not necessarily indicative of the operating results for a
full fiscal year.
The following table also presents unaudited summary pro forma statement of
operations data for the year ended December 31, 2001 and the six months ended
June 30, 2002, which have been prepared assuming the transactions and the sale
of AmerCable had occurred on January 1, 2001. The summary pro forma data does
not purport to represent what our results of operations would have been if the
transactions and the sale of AmerCable had occurred at any date, nor does this
data purport to represent the results of operations for any future period. The
pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable.
The summary historical and pro forma financial data should be read in
conjunction with "Unaudited Pro Forma Financial Information," "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our historical financial statements and
the notes thereto included elsewhere herein.
<Table>
<Caption>
PRO FORMA SIX ONE HUNDRED
YEAR MONTHS EIGHT DAYS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
--------------------------------------- DECEMBER 31, JUNE 30, APRIL 18,
1999 2000 2001 2001 2001 2002
----------- ----------- ----------- ------------ ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS)
INCOME STATEMENT DATA:
Total net sales........... $455,268 $499,393 $595,819 $524,528 $267,356 $180,230
Cost of sales............. 317,596 353,994 425,366 369,289 192,893 130,351
-------- -------- -------- -------- -------- --------
Gross profit.............. 137,672 145,399 170,453 155,239 74,463 49,879
Selling, general and
administrative
expenses................. 96,028 107,255 119,945 113,481 58,399 43,272
-------- -------- -------- -------- -------- --------
Income from operations.... 41,644 38,144 50,508 41,758 16,064 6,607
Interest expense.......... 6,779 6,046 6,795 24,800 3,433 2,068
Net income (loss)......... 20,490 23,555 25,412 8,521 6,296 (5,757)
OTHER DATA:
Depreciation and
amortization............. $ 8,519 $ 9,550 $ 10,919 $ 9,931 $ 5,349 $ 3,969
Capital expenditures...... 18,915 11,925 15,022 11,663 9,803 3,817
EBITDA(1)................. 48,826 55,706 59,034 49,296 19,020 1,257
Adjusted EBITDA(2)........ 45,941 40,386 53,066 53,580 16,689 9,356
Pro forma interest
expense.................. 24,800
Ratio of Adjusted EBITDA
to interest expense...... 2.2x
Ratio of earnings to fixed
charges(3)............... 3.9x 4.3x 4.1x 1.5x 2.6x --
<Caption>
PRO FORMA
SIX
SEVENTY-THREE MONTHS
DAYS ENDED ENDED
JUNE 30, JUNE 30,
2002 2002
------------- ---------
SUCCESSOR
(IN THOUSANDS)
INCOME STATEMENT DATA:
Total net sales........... $ 113,960 $275,919
Cost of sales............. 79,291 191,755
--------- --------
Gross profit.............. 34,669 84,164
Selling, general and
administrative
expenses................. 21,667 63,295
--------- --------
Income from operations.... 13,002 20,869
Interest expense.......... 4,981 11,561
Net income (loss)......... (262) 1,011
OTHER DATA:
Depreciation and
amortization............. $ 1,715 $ 4,894
Capital expenditures...... 3,680 5,296
EBITDA(1)................. 7,460 18,184
Adjusted EBITDA(2)........ 16,290 25,763
Pro forma interest
expense.................. 11,561
Ratio of Adjusted EBITDA
to interest expense...... 2.2x
Ratio of earnings to fixed
charges(3)............... 2.1x 1.6x
</Table>
15
<Table>
<Caption>
SIX ONE HUNDRED
MONTHS EIGHT DAYS SEVENTY-THREE
YEAR ENDED DECEMBER 31, ENDED ENDED DAYS ENDED
--------------------------------------- JUNE 30, APRIL 18, JUNE 30,
1999 2000 2001 2001 2002 2002
----------- ----------- ----------- ----------- ----------- -------------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR SUCCESSOR
(IN THOUSANDS)
Cash provided by (used in) operating
activities................................. 15,244 22,968 43,989 4,389 (18,258) 13,622
Cash used in investing activities........... (17,619) (5,538) (9,861) (4,715) (3,597) (352,724)
Cash provided by (used in) financing
activities................................. (9,157) (4,983) (21,138) (12,186) (245) 344,636
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, AS OF
--------------------------------------- JUNE 30,
1999 2000 2001 2002
----------- ----------- ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR SUCCESSOR
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,432 $ 15,879 $ 28,869 $ 11,227
Working capital............................................. 85,878 102,064 106,188 84,376
Goodwill.................................................... -- -- -- 201,590
Other intangibles........................................... -- -- -- 108,148
Total assets................................................ 206,296 231,141 254,307 573,308
Total debt.................................................. 75,000 75,000 75,000 262,408
Stockholders'('s) equity.................................... 79,326 97,990 102,675 170,569
</Table>
- ---------------
(1) EBITDA is calculated as net income plus interest, taxes, depreciation and
amortization. We have included information concerning EBITDA because we
believe that EBITDA is used by certain investors as one measure of a
company'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 our operating performance or to cash flows as a measure of
liquidity. EBITDA has not been prepared in accordance with generally
accepted accounting principles. EBITDA, as presented by us, may not be
comparable to similarly titled measures reported by other companies. The
reconciliation of net income to EBITDA is as follows:
<Table>
<Caption>
ONE
SIX HUNDRED
PRO FORMA MONTHS EIGHT DAYS
YEAR ENDED YEAR ENDED ENDED ENDED
--------------------------------------- DECEMBER 31, JUNE 30, APRIL 18,
1999 2000 2001 2001 2001 2002
----------- ----------- ----------- ------------ ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS)
Net income (loss).............. $20,490 $23,555 $25,412 $ 8,521 $ 6,296 $(5,757)
Interest -- Continuing
operations......... 6,779 6,046 6,795 24,800 3,433 2,068
-- Discontinued
operations......... -- -- -- -- -- --
Taxes -- Continuing
operations......... 13,038 16,555 15,908 6,044 3,942 977
-- Discontinued
operations......... -- -- -- -- -- --
-- Extraordinary
items.............. -- -- -- -- -- --
Depreciation and amortization
-- Continuing
operations......... 8,519 9,550 10,919 9,931 5,349 3,969
-- Discontinued
operations......... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
EBITDA......................... $48,826 $55,706 $59,034 $49,296 $19,020 $ 1,257
======= ======= ======= ======= ======= =======
<Caption>
SEVENTY- PRO FORMA
THREE DAYS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2002
---------- ----------
SUCCESSOR
(IN THOUSANDS)
Net income (loss).............. $ (262) $ 1,011
Interest -- Continuing
operations......... 4,981 11,561
-- Discontinued
operations......... 1,213 --
Taxes -- Continuing
operations......... 3,328 3,863
-- Discontinued
operations......... (370) --
-- Extraordinary
items.............. (3,145) (3,145)
Depreciation and amortization
-- Continuing
operations......... 1,397 4,894
-- Discontinued
operations......... 318 --
------- -------
EBITDA......................... $ 7,460 $18,184
======= =======
</Table>
(2) Adjusted EBITDA represents EBITDA plus certain non-recurring items less
AmerCable's operating results. We believe that Adjusted EBITDA presents a
more meaningful discussion than EBITDA since Adjusted EBITDA corresponds to
EBITDA as it is defined in our new credit facility and in the indenture
governing the notes as it excludes non-recurring items. The new credit
facility and indenture governing the notes have certain financial covenants
that use ratios utilizing our Adjusted EBITDA. The definition of EBITDA
under our new credit facility does not exclude the results of AmerCable. We
have, however, excluded the results of AmerCable when calculating Adjusted
EBITDA as AmerCable will not be included in our ongoing operations. The
nonrecurring items and results of AmerCable are expected to have no ongoing
cash requirements and no impact on our ongoing operations. Adjusted EBITDA
has not been prepared in accordance with generally accepted
16
accounting principles. Adjusted EBITDA, as presented by us, may not be
comparable to similarly titled measures reported by other companies. EBITDA
reconciles to Adjusted EBITDA as follows:
<Table>
<Caption>
ONE
SIX HUNDRED
PRO FORMA MONTHS EIGHT DAYS
YEAR ENDED YEAR ENDED ENDED ENDED
--------------------------------------- DECEMBER 31, JUNE 30, APRIL 18,
1999 2000 2001 2001 2001 2002
----------- ----------- ----------- ------------ ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS)
EBITDA......................... $48,826 $55,706 $59,034 $49,296 $19,020 $ 1,257
Extraordinary items,
pre-tax(a)................... -- -- -- -- -- --
AmerCable's EBITDA(b).......... (4,222) (7,308) (8,361) -- (4,724) (1,220)
Loss on writedown of Amercord
Inc.(c)...................... -- -- 2,393 2,393 2,393 --
Merger transaction costs(d).... -- -- -- -- -- 9,319
Cost of sales adjustment(e).... -- -- -- 1,891 -- --
Equity loss in Amercord,
Inc.(f)...................... 1,337 -- -- -- -- --
Gain on Sale of
Ultracraft(g)................ -- (8,012) -- -- -- --
------- ------- ------- ------- ------- -------
Adjusted EBITDA................ $45,941 $40,386 $53,066 $53,580 $16,689 $ 9,356
======= ======= ======= ======= ======= =======
<Caption>
SEVENTY- PRO FORMA
THREE DAYS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2002
---------- ----------
SUCCESSOR
(IN THOUSANDS)
EBITDA......................... $ 7,460 $18,184
Extraordinary items,
pre-tax(a)................... 7,579 7,579
AmerCable's EBITDA(b).......... (640) --
Loss on writedown of Amercord
Inc.(c)...................... -- --
Merger transaction costs(d).... -- --
Cost of sales adjustment(e).... 1,891 --
Equity loss in Amercord,
Inc.(f)...................... -- --
Gain on Sale of
Ultracraft(g)................ -- --
------- -------
Adjusted EBITDA................ $16,290 $25,763
======= =======
</Table>
(a) Extraordinary items include $4.9 million ($2.8 million net of tax) for the
extinguishment of substantially all of the Successor's assumed 9 1/4% notes
and $2.7 million ($1.6 million net of tax) for the financing fees related to
an interim credit facility utilized for the merger which was repaid shortly
thereafter.
(b) AmerCable's EBITDA is calculated as its net income plus interest, taxes,
depreciation and amortization.
(c) Represents the writedown of our investment in Amercord Inc. to its net
realizable value.
(d) Merger transaction costs include investment banking and legal fees incurred
by the Predecessor in conjunction with the merger transaction with Harvest
Partners.
(e) The cost of sales adjustment is the expense related to an inventory fair
value adjustment recorded at the time of the merger.
(f) Represents the loss on our equity investment in Amercord Inc.
(g) Represents the gain we realized upon the sale of our Ultracraft cabinet
division.
(3) The deficiency in the ratio of earnings to fixed charges is approximately
$4.8 million for the one hundred eight days ended April 18, 2002.
17
RISK FACTORS
You should consider carefully the information set forth in this section
along with all the other information provided to you in this prospectus
supplement before tendering your outstanding notes for exchange notes in the
exchange offer.
RISKS RELATING TO THE NOTES
OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS ON THE NOTES.
We have a substantial amount of indebtedness, which will require
significant interest payments. As of June 30, 2002, we had approximately $262.4
million of indebtedness and our interest expense for the six months ended June
30, 2002 would have been approximately $11.6 million on a pro forma basis.
Approximately $96.5 million of such debt is variable rate debt and the effect of
a 1% increase or decrease in interest rates would increase or decrease such
total annual interest expense by approximately $1.0 million. In addition,
subject to restrictions in the indenture for the notes and our credit
facilities, we may incur additional indebtedness.
Our substantial level of indebtedness could have important consequences to
you, including the following:
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired;
- we must use a substantial portion of our cash flow from operations to pay
interest and principal on the notes and other indebtedness, which will
reduce the funds available to us for other purposes such as potential
acquisitions and capital expenditures;
- we are exposed to fluctuations in interest rates, because our new credit
facility has a variable rate of interest;
- we have a higher level of indebtedness than some of our competitors,
which may put us at a competitive disadvantage and reduce our flexibility
in planning for, or responding to, changing conditions in our industry,
including increased competition;
- we are more vulnerable to general economic downturns and adverse
developments in our business; and
- our failure to comply with financial and other restrictive covenants in
the indenture governing the notes and our other debt obligations, some of
which require us to maintain specified financial ratios and limit our
ability to incur additional debt and sell assets, could result in an
event of default that, if not cured or waived, could harm our business or
prospects and could result in our bankruptcy.
We expect to obtain money to pay our expenses and to pay the principal and
interest on the notes, our new credit facility and other debt from cash flow
from our operations. Our ability to meet our expenses depends on our future
performance, which will be affected by financial, business, economic and other
factors. We will not be able to control many of these factors, such as economic
conditions in the markets where we operate and pressure from competitors. We
cannot be certain that our cash flow will be sufficient to allow us to pay
principal and interest on our debt, including the notes, and meet our other
obligations. If we do not have enough money, we may be required to refinance all
or part of our existing debt, including the notes, sell assets or borrow more
money. We may not be able to do so on terms acceptable to us, if at all. In
addition, the terms of existing or future debt agreements, including our credit
facilities and the indenture, may restrict us from pursuing any of these
alternatives. The failure to generate sufficient cash flow or to achieve such
alternative could significantly adversely affect the value of the notes.
18
WE WILL BE ABLE TO INCUR MORE INDEBTEDNESS AND THE RISKS ASSOCIATED WITH OUR
SUBSTANTIAL LEVERAGE, INCLUDING OUR ABILITY TO SERVICE OUR INDEBTEDNESS, WILL
INCREASE.
The indenture relating to the notes and the credit agreement governing our
new credit facility will permit us, subject to specified conditions, to incur a
significant amount of additional indebtedness. In addition, we may incur an
additional $40 million of indebtedness under our new revolving credit facility.
If we incur additional debt, the risks associated with our substantial leverage,
including our ability to service our debt, would increase.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES AND GUARANTEES IS SUBORDINATED TO
OUR SENIOR DEBT.
Payment on the notes and guarantees are subordinated in right of payment to
all of our and the guarantors' senior debt. As of June 30, 2002, the notes and
the related guarantees were subordinated to approximately $96.5 million of our
senior debt. In addition, $37.4 million of senior debt was available for
borrowing under our new credit facility. As a result, upon any distribution to
our creditors or the creditors of the guarantors in a bankruptcy, liquidation,
reorganization or similar proceeding relating to us or our guarantors or our or
their property, the holders of our senior debt will be entitled to be paid in
full in cash before any payment may be made on the notes or the guarantees
thereof. In these cases, we and the guarantors may not have sufficient funds to
pay all of our creditors, and holders of senior subordinated notes may receive
less, ratably, than the holders of our senior debt. In addition, all payments on
the notes and the related guarantees will be blocked in the event of a payment
default on our designated senior debt and may be blocked for up to 179
consecutive days in the event of certain non-payment defaults on our designated
senior debt.
In connection with the transactions, we entered into a new credit facility
which provided for a $125 million term loan, which was permanently reduced by
$28.5 million from net proceeds from the sale of AmerCable and a $40 million
revolving credit facility. Upon the closing of the merger, we borrowed
approximately $2.0 million under our revolving credit facility in order to
temporarily cash collateralize existing letters of credit in the amount of $2.6
million. As of June 30, 2002, we had availability of approximately $37.4 million
under the new credit facility. We repaid such borrowings promptly thereafter and
have been issued new letters of credit. In addition, the indenture governing the
notes and our new credit facility permit us, subject to specified limitations,
to incur additional debt, some or all of which may be senior debt.
SOME OF OUR FUTURE SUBSIDIARIES MAY NOT BE GUARANTORS OF THE NOTES AND A
BANKRUPTCY, LIQUIDATION OR REORGANIZATION OF ANY OF THE FUTURE NON-GUARANTOR
SUBSIDIARIES WOULD LIMIT OUR ABILITY TO USE THE ASSETS OF SUCH SUBSIDIARIES TO
SATISFY OUR OBLIGATIONS ON THE NOTES.
Currently, our only subsidiary guarantees our obligations under the notes.
In the future, only subsidiaries that guarantee our obligations under our new
credit agreement are required to guarantee our obligations under the notes.
Additionally, under certain circumstances discussed in the Description of Notes
under the definition of "Unrestricted Subsidiary", we may be able to have
subsidiaries that do not guarantee the notes. The notes are structurally
subordinated to all of the liabilities of our subsidiaries that do not guarantee
the notes in the future. In the event of a bankruptcy, liquidation or
reorganization of any of the non-guarantor subsidiaries, holders of their
indebtedness and their trade creditors will generally be entitled to payment on
their claims from assets of those subsidiaries before any assets are made
available for distribution to us. Under some circumstances, the terms of the
notes will permit our non-guarantor subsidiaries to incur additional specified
indebtedness.
IF WE FAIL TO MEET OUR PAYMENT OR OTHER OBLIGATIONS UNDER THE NEW CREDIT
AGREEMENT, THE LENDERS UNDER OUR NEW CREDIT AGREEMENT COULD FORECLOSE ON, AND
ACQUIRE CONTROL OF, SUBSTANTIALLY ALL OF OUR ASSETS.
In connection with the incurrence of indebtedness under the new credit
facility, the lenders under the new credit facility received a pledge of all of
the equity interests of our existing domestic subsidiary and will receive a
pledge of all of the equity interests of any future domestic subsidiaries and
the voting stock
19
of any of our future foreign subsidiaries that are held directly by us or our
domestic subsidiary (but not to exceed in most cases 66 2/3% of the voting stock
of such subsidiaries). Additionally, these lenders generally have a lien on
substantially all of our accounts receivable, cash, general intangibles,
investment property and future acquired material property. As a result of these
pledges and liens, if we fail to meet our payment or other obligations under the
new credit facility, the lenders under the credit agreement would be entitled to
foreclose on substantially all of our assets and liquidate these assets. Under
those circumstances, we may not have sufficient funds to pay principal, premium,
if any, and interest on the notes. As a result, the holders of the notes may
lose a portion of or the entire value of their investment.
THE INDENTURE FOR THE NOTES AND OUR NEW CREDIT FACILITY IMPOSE SIGNIFICANT
OPERATING AND FINANCIAL RESTRICTIONS ON US, WHICH MAY PREVENT US FROM
CAPITALIZING ON BUSINESS OPPORTUNITIES AND TAKING SOME CORPORATE ACTIONS.
The indenture for the notes and our new credit facility impose, and the
terms of any future debt may impose, significant operating and financial
restrictions on us. These restrictions, among other things, limit our ability
and that of our subsidiaries to:
- incur or guarantee additional indebtedness;
- pay dividends or make other distributions;
- repurchase our stock;
- make investments;
- sell or otherwise dispose of assets including capital stock of
subsidiaries;
- create liens;
- enter into agreements restricting our subsidiaries' ability to pay
dividends;
- enter into transactions with affiliates; and
- consolidate, merge or sell all of our assets.
These covenants may adversely affect our ability to finance our future
operations or capital needs to pursue available business opportunities.
In addition, our new credit facility requires us to maintain other
specified financial ratios. These covenants may adversely affect our ability to
finance our future operations or capital needs or to pursue available business
opportunities or limit our ability to plan for or react to market conditions or
meet capital needs or otherwise restrict our activities or business plans. A
breach of any of these covenants or our inability to maintain the required
financial ratios could result in a default in respect of the related
indebtedness. If a default occurs, the relevant lenders could elect to declare
the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing that
indebtedness.
THE GUARANTEES MAY BE VOIDED UNDER SPECIFIC LEGAL CIRCUMSTANCES.
The notes are guaranteed by our existing domestic restricted subsidiary and
will be guaranteed by certain of our future domestic restricted subsidiaries.
The guarantees may be subject to review under U.S. federal bankruptcy law and
comparable provisions of state fraudulent conveyance laws if a bankruptcy or
reorganization case or lawsuit is commenced by or on behalf of our guarantor's
unpaid creditors. Under these laws, if a court were to find in such a bankruptcy
or reorganization case or lawsuit that, at the time any guarantor issued a
guarantee of the notes, the guarantor:
- issued the guarantee with the intent of hindering, delaying or defrauding
current or future creditors;
- was a defendant in an action for money damages or had a judgment for
money damages docketed against it if, in either case, after final
judgment, the judgment is unsatisfied; or
20
- received less than reasonably equivalent value or fair consideration for
issuing the guarantee of the notes and such guarantor:
- was insolvent or was rendered insolvent by reason of issuing the
guarantee;
- was engaged, or about to engage, in a business or transaction for which
its remaining assets constituted unreasonably small capital to carry on
its business; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the relevant fraudulent transfer or
conveyance statutes);
then such court could void the guarantee of such guarantor, subordinate the
amounts owing under such guarantee to such guarantor's presently existing or
future debt or take other actions detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, a company would be considered insolvent if, at the
time it incurred the debt or issued the guarantee:
- the sum of its debts (including contingent liabilities) was greater than
its assets, at fair valuation;
- the present fair saleable value of its assets at the time was less than
the amount required to pay the probable liability on its total existing
debts and liabilities (including contingent liabilities) as they become
absolute and mature; or
- it could not pay its debts as they become due.
If the guarantees of the notes were challenged, we cannot be sure as to the
standard that a court would use to determine whether any of the guarantors was
solvent at the relevant time or, regardless of the standard that the court uses,
that the issuance of the guarantees would not be voided or the guarantees would
not be subordinated to the guarantor's other debt. If such a case were to occur,
the guarantee could also be subject to the claim that, since the guarantee was
incurred for our benefit and that of our parent holding company, and only
indirectly for the benefit of the guarantor, the obligations of the applicable
guarantor were incurred for less than fair consideration. If a guarantee is
voided as a fraudulent conveyance or otherwise found to be unenforceable, you
will not have a claim against that guarantor but will remain a creditor of ours
and any guarantor whose obligation was not set aside or found to be
unenforceable.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE EXCHANGE NOTES, YOU MAY NOT
BE ABLE TO RESELL THEM.
Although holders of exchange notes who are not our "affiliates" within the
meaning of the Securities Act may resell or otherwise transfer their exchange
notes without compliance with the registration requirements of the Securities
Act, there is currently no existing market for the exchange notes, and a public
market for the exchange notes may not develop in the future or, if developed,
may not continue. If no active trading market develops, you may not be able to
resell your exchange notes at their fair market value or at all. Future trading
prices of the exchange notes will depend on many factors, including, among other
things, our ability to effect this exchange offer, prevailing interest rates,
our operating results and the market for similar securities. We have been
informed by the initial purchasers of the outstanding notes, that they intend to
make a market in the exchange and the outstanding notes. However, they may cease
their market-making at any time. There has also been no public market for the
outstanding notes. To the extent that outstanding notes are tendered and
accepted in the exchange offer, the market for the remaining untendered
outstanding notes could be adversely affected. See "The Exchange Offer --
Consequences of Failure to Exchange."
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused volatility in trading prices and market liquidity.
It is possible that the market for the exchange notes will be subject to
disruptions. Any disruptions may have a negative effect on noteholders,
regardless of our prospects and financial performance. We do not intend to have
the outstanding notes or the
21
exchange notes listed on any securities exchange or arrange for quotation on any
automated dealer quotation system.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.
Upon a "change of control," as defined in the indenture, we will be
required under certain circumstances to make an offer to repurchase the notes at
a price equal to 101% of the principal amount thereof, together with any accrued
and unpaid interest and additional interest to the date of repurchase. If a
change of control were to occur, we may not have sufficient funds to pay the
purchase price for all of the notes that we might be required to purchase. Our
failure to purchase, or give notice of purchase of, the notes would be a default
under the indenture, which would in turn be a default under our new credit
facility. In addition, a change of control may constitute an event of default
under our new credit facility. A default under our new credit facility would
result in an event of default under the indenture governing the notes if the
lenders were to accelerate the debt under our new credit facility.
If the foregoing occurs, we may not have enough assets to satisfy all
obligations under our new credit facility and the indenture related to the
notes. The source of funds for any purchase of notes will be our available cash
or cash generated from our operations or other sources, including borrowing,
sales of assets or sales of equity. If we do not have sufficient cash on hand,
we will seek to refinance the indebtedness under our new credit facility and the
notes or obtain a waiver from the lenders or you, as a holder of the notes. We
may not, however, be able to obtain a waiver or refinance our indebtedness on
commercially reasonable terms, if at all. In addition, the terms of our senior
credit facility may limit our ability to repurchase all of the notes in such
event. The financial effect of this repurchase could cause a default under our
other debt, even if the event itself would not cause a default. Accordingly, it
is possible that we will not have sufficient funds at the time of such event to
make the required repurchase of notes or that restrictions in our new credit
facility will not allow such repurchases.
RISKS RELATING TO OUR COMPANY
THE EXTERIOR BUILDING PRODUCTS INDUSTRY IS CYCLICAL AND DOWNTURNS IN THE
INDUSTRY OR THE ECONOMY COULD NEGATIVELY AFFECT OUR BUSINESS, OPERATING RESULTS
AND THE VALUE OF THE NOTES.
The exterior building products industry is cyclical and is significantly
affected by changes in national and local economic and other conditions such as
employment levels, migration trends, availability of financing, interest rates
and consumer confidence. These factors can negatively affect the demand for and
pricing of our products. A prolonged recession affecting the residential
construction industry could also result in a significant decrease in our
financial performance. The occurrence or continuation of any of the above items,
many of which are outside our control, and the items described below could have
a negative impact on our business and adversely affect the value of the notes.
INCREASES IN INTEREST RATES AND THE REDUCED AVAILABILITY OF FINANCING FOR HOME
IMPROVEMENTS MAY CAUSE OUR SALES AND PROFITABILITY TO DECREASE.
In general, demand for home improvement products is adversely affected by
increases in interest rates and the reduced availability of financing. If
interest rates increase and consequently, the ability of prospective buyers to
finance purchases of home improvement products and invest in new real estate is
adversely affected, our sales, gross margins and cash flow may also be adversely
impacted and the impact may be material.
WE HAVE SUBSTANTIAL FIXED COSTS AND, AS A RESULT, OUR OPERATING INCOME IS
SENSITIVE TO CHANGES IN OUR NET SALES.
A significant portion of our selling, general and administrative expenses
are fixed costs, which do not fluctuate proportionately with sales. As a result,
a percentage decline in our net sales has a greater percentage effect on our
operating income. As a result, we may have less cash available for capital
spending, debt and interest payments.
22
CHANGES IN RAW MATERIAL COSTS AND AVAILABILITY CAN ADVERSELY AFFECT OUR PROFIT
MARGIN.
Our principal raw material, vinyl resin, has been subject to rapid price
changes, particularly in 1999 and 2000. We expect the price of vinyl resin to
increase significantly in 2002. Through price increases to our customers, we
have historically been able to pass on significant resin cost increases. The
results of operations for individual quarters can and have been negatively
impacted by a delay between the time of vinyl resin cost increases and price
increases in our products. While we expect that any significant resin cost
increases in 2002 will be offset by price increases to our customers, we may not
be able to pass on any future price increases.
Additionally, a major interruption in the delivery of vinyl resin to us
would disrupt our operations and could have an adverse effect on our financial
condition and results of operations. We have a contract which expires on
December 31, 2002 with a vendor to supply substantially all of our vinyl resin
requirements. In the event we are unable to renew the contract, we believe our
requirements could also be met by other suppliers without a material impact on
our operations.
SINCE OUR PRODUCTS ARE INTENDED FOR EXTERIOR USE, OUR QUARTERLY RESULTS ARE
AFFECTED BY WEATHER CONDITIONS.
Because most of our 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, we have historically had small profits or losses in the first
quarter and reduced profits from operations in the fourth quarter of each
calendar year.
WE FACE COMPETITION FROM OTHER VINYL BUILDING PRODUCT MANUFACTURERS AND
ALTERNATIVE BUILDING MATERIALS.
We believe that no other company within the vinyl building product market
competes with us in both manufacturing and distribution, except for Owens
Corning. However, we do compete with other manufacturers of vinyl building
products. Some of these companies are larger and have greater financial
resources than us. We also compete with Owens Corning and numerous large and
small distributors of building products in our capacity as a distributor of
these products. Additionally, our products face competition from alternative
materials: wood and aluminum in the window market, and wood, masonry, fiber
cement and metal in the siding market. An increase in competition by other
building product manufacturers and alternative building materials may adversely
impact our business and financial performance.
WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL STATUTES AND REGULATIONS, WHICH MAY
RESULT IN SIGNIFICANT COSTS IN ENVIRONMENTAL COMPLIANCE AND REMEDIATION.
Our operations are subject to various environmental statutes and
regulations, including laws and regulations addressing materials used in the
manufacturing of our products. In addition, certain of our operations are
subject to federal, state and local environmental laws and regulations that
impose limitations or other requirements on the discharge of pollutants into the
air, water and soil, establish standards for the treatment, transport, storage
and disposal of solid and hazardous wastes, and remediation of soil and
groundwater contamination. Such laws and regulations may also impact the
availability of materials used in manufacturing our products. We believe we are
in material compliance with applicable environmental requirements, and do not
expect these requirements to result in material expenditures in the foreseeable
future. However, additional future expenditures may be necessary as compliance
standards and technology change, and unforeseen significant expenditures
required to maintain compliance, including unforeseen liabilities, could have an
adverse effect on our business and financial condition.
We 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
our Akron, Ohio location. With the exception of a small container storage area,
the use of these facilities was terminated prior to our acquisition of the
Alside assets from USX Corporation in 1984. The effects of the past practices at
this facility are continuing to be investigated (through continued
23
groundwater monitoring) pursuant to the terms of the consent order. We believe
that USX bears 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 us for substantially
all of the direct costs of corrective action at these facilities. We expect that
USX will continue to reimburse us. Payments, however, may not continue to be
made by USX or USX may not have adequate financial resources to fully reimburse
us for these costs.
Certain environmental laws, including the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended,
("CERCLA"), and comparable state laws, impose strict, and in certain
circumstances joint and several, liability upon specified responsible parties,
which include certain former owners and operators of waste sites designated for
clean up by environmental regulators. A facility formerly owned by our company
in Lumber City, Georgia, which is now owned by Amercord Inc., a company in which
we currently hold a minority interest, is currently undergoing soil and
groundwater investigation, pursuant to a Consent Order entered into by Amercord
Inc. with the Georgia Department of Natural Resources in 1994. We are not a
party to these activities. We also understand that soil and groundwater in
certain areas of the site (including in the area of two industrial waste
landfills) are being investigated under CERCLA by the United Stated
Environmental Protection Agency to determine whether remediation of those areas
may be required and whether the site should be listed on the state or federal
list of priority sites requiring remediation. Amercord Inc., the current site
owner, may not have adequate financial resources to carry out additional
remediation that may be required, or if substantial remediation is required,
claims may be made against us, which could result in material expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Amercord Inc."
Also, we cannot be certain that we have identified all environmental
matters giving rise to potential liability. More stringent future environmental
requirements or stricter enforcement of existing requirements, the discovery of
unknown conditions, or our past use of hazardous materials could result in
increased expenditures or liabilities which could have an adverse effect on our
business and financial condition. Any judgment in an environmental proceeding
entered against us or our subsidiary that is greater than $10.0 million and is
not discharged, paid, waived or stayed within 60 days after becoming final and
non-appealable would be an event of default in the indenture governing the
exchange notes.
WE COULD FACE POTENTIAL PRODUCT LIABILITY CLAIMS RELATING TO PRODUCTS WE
MANUFACTURE OR DISTRIBUTE.
We face a business risk of exposure to product liability claims in the
event that the use of our products is alleged to have resulted in injury or
other adverse effects. We currently maintain product liability insurance
coverage but we may not be able to obtain such insurance on acceptable terms in
the future, if at all, or any such insurance may not provide adequate coverage
against potential claims. Product liability claims can be expensive to defend
and can divert management and other personnel for months or years regardless of
the ultimate outcome. An unsuccessful product liability defense could have a
material adverse effect on our business, financial condition, results of
operations or prospects or our ability to make payments on the notes when due.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
Our success largely depends on the continuing services of our key employees
and our ability to attract new personnel. Although we intend to enter into
employment agreements with various key officers, loss of their services could
harm our business.
WE HAVE GROWN SIGNIFICANTLY DURING THE PAST FIVE YEARS WHICH HAS PLACED
SIGNIFICANT DEMANDS ON OUR RESOURCES AND WE MAY NOT BE ABLE TO EFFECTIVELY
MANAGE THE GROWTH OR FUTURE GROWTH.
We have grown significantly in recent years from total net sales of $400.0
million in 1997 to $595.8 million in 2001. During the same period, on a pro
forma basis, we have grown from total net sales of $345.1 million in 1997 to
$524.5 million in 2001. This historical growth and any future growth will
24
continue to place demands on our resources. Accordingly, our future success and
profitability will depend, in part, on our ability to enhance our management and
operating systems, respond and adapt to rapid changes in technology, obtain
financing for strategic acquisitions and investments in new supply centers,
retain employees due to policy and procedural changes and retain customers due
to our ability to manage change. We may not be able to successfully manage any
significant expansion or obtain adequate financing on favorable terms to manage
our growth.
WE HAVE SIGNIFICANT GOODWILL AND INTANGIBLE ASSETS.
We have accounted for the merger using the purchase method of accounting.
The purchase price has been allocated to assets and liabilities based on the
fair values of the assets acquired and the liabilities assumed. The excess of
cost over fair value of the new identifiable assets acquired has been recorded
as goodwill. These allocations have been made based upon valuations and other
studies that have not yet been finalized. As a result of the merger, we expect
to have approximately $108.3 million of other intangible assets and $201.6
million of goodwill.
Given the significant amount of goodwill and other intangible assets as a
result of the merger, any future impairment of the goodwill and other intangible
assets recorded could have an adverse effect on our results of operations and
financial position; however, the extent of any such impairment, if any, cannot
be predicted at this time.
WE ARE CONTROLLED BY AFFILIATES OF HARVEST PARTNERS, INC., WHOSE INTERESTS IN
OUR BUSINESS MAY BE DIFFERENT THAN YOURS.
By reason of Harvest Partners, Inc.'s and its affiliates ownership of us
and the ability of Harvest Partners, Inc. and its affiliates, pursuant to a
stockholders agreement among stockholders of Associated Materials Holdings Inc.,
to designate a majority of the members of the Board of Directors of Associated
Materials Holdings Inc., Harvest Partners, Inc. will control actions to be taken
by our stockholder and/or board of directors, including amendments to our
certificate of incorporation and by-laws and approval of significant corporate
transactions, including mergers and sales of substantially all of our assets.
You should consider that the interests of Harvest Partners, Inc. and its
affiliates will likely differ from yours in material respects. For example,
Harvest Partners, Inc. may cause us to pursue a growth strategy (including
acquisitions which are not accretive to earnings), which could impact our
ability to make payments under the indenture and the new credit facility or
cause a change of control. In addition, to the extent permitted by the indenture
and the new credit facility, Harvest Partners, Inc. may cause us to pay
dividends rather than make capital expenditures.
25
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
prospectus supplement, including, without limitation, statements under the
captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and other statements located elsewhere in this prospectus supplement,
in each case regarding the prospects of our industry and our prospects, plans,
financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from our forward-looking
statements:
- changes in home building industry, economic, interest rates and other
conditions;
- changes in availability of consumer credit, employment trends, levels of
consumer confidence and consumer preferences;
- changes in raw material costs and availability;
- changes in national and regional trends in new housing starts;
- changes in weather conditions;
- our ability to comply with certain financial covenants in our loan
documents;
- increase in competition from other manufacturers of vinyl building
products as well as alternative building products;
- increase in our indebtedness;
- increase in costs of environmental compliance; and
- the other factors discussed under the heading "Risk Factors" and
elsewhere in this prospectus supplement.
All subsequent forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements included in this document. These forward-looking statements speak
only as of the date of this prospectus supplement. We do not intend to update
these statements unless the securities laws require us to do so.
26
USE OF PROCEEDS
We have summarized below the sources and uses of funds for the
transactions.
SOURCES AND USES
($ IN MILLIONS)
<Table>
<Caption>
SOURCES USES
------- ----
New credit facility................. $125.0 Purchase of equity of Associated
9 3/4% senior subordinated notes due Materials Incorporated............ $360.8
2012(1)........................... 165.0 Debt tender offer(3)................ 82.3
Equity financing(2)................. 172.0 Transaction costs(4)................ 23.7
Cash on hand........................ 4.8 ------
------ $466.8
$466.8 ======
======
</Table>
- ---------------
(1) The equity tender offer closed on April 19, 2002, prior to the closing of
the offering of the notes on April 23, 2002, and we borrowed under a $215
million unsecured interim credit facility to complete the equity tender
offer. The proceeds from the offering of the notes along with proceeds from
the term loan under the new credit facility were used to repay the interim
credit facility. The interim credit facility had a maturity date of April
19, 2003, subject to extension, and an interest rate per annum equal to the
greatest of (i) 12.5%, (ii) the then applicable rate per annum on 10 year
United States Treasury Notes plus 750 basis points and (iii) the 3-month
LIBOR plus 1,050 basis points.
(2) Approximately $172 million of the equity financing was contributed by
affiliates of Harvest Partners, Inc. and other equity investors, including
members of management.
(3) Represents the purchase of approximately $74 million aggregate principal
amount of the 9 1/4% senior subordinated notes plus a tender premium of $7.3
million and accrued interest.
(4) Includes discounts to the initial purchasers, bank fees, financial advisory
fees and legal, accounting and other costs payable or reimbursable in
connection with the transactions.
The exchange offer is intended to satisfy certain of our obligations under
the registration rights agreement dated as of April 23, 2002. We will not
receive any cash proceeds from this exchange offer. In consideration for issuing
the exchange notes as contemplated in this prospectus supplement, we will
receive in exchange the outstanding notes in like principal amount. The
outstanding notes surrendered in exchange for the exchange notes will be retired
and cancelled and cannot be reissued. The issuance of the exchange notes will
not result in any increase in our indebtedness.
27
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2002, and reflects the Transactions and the sale
of AmerCable. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical financial statements and the related notes thereto and our
unaudited pro forma financial information and the related notes thereto, each
included elsewhere herein.
<Table>
<Caption>
AS OF JUNE 30,
2002
--------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 11,227
========
Long-term debt:
Old Credit Agreement...................................... $ --
New Credit Facility(1).................................... 96,500
9 1/4% Senior Subordinated Notes(2)....................... 908
9 3/4% Senior Subordinated Notes.......................... 165,000
--------
Total long-term debt................................... 262,408
Total stockholder's equity.................................. 170,569
--------
Total capitalization........................................ $432,977
========
</Table>
- ---------------
(1) In connection with the transactions, we entered into a new credit facility
which provided for a $125 million term loan, which was permanently reduced
by $28.5 million from net proceeds from the sale of AmerCable, and a $40
million revolving credit facility. Upon the closing of the merger, we
borrowed approximately $2.0 million under our revolving credit facility in
order to temporarily cash collateralize existing letters of credit. We
repaid such borrowings promptly thereafter and have been issued new letters
of credit in the amount of $2.6 million. As of June 30, 2002, we had
availability of approximately $37.4 million under the new credit facility.
(2) $74 million aggregate principal amount of our 9 1/4% senior subordinated
notes was purchased in the debt tender offer. Subsequent to the merger, we
commenced a change of control offer pursuant to the indenture governing the
9 1/4% notes to purchase the 9 1/4% notes not tendered in the debt tender
offer. The change of control offer expired on June 21, 2002 and
approximately $0.1 million aggregate principal amount of such notes was
tendered and accepted. We intend to discharge the remaining approximate $0.9
million outstanding 9 1/4% notes pursuant to the indenture governing such
notes. We may also, from time to time, purchase such notes through open
market purchases, privately negotiated transactions, tender offers, exchange
offers or otherwise, upon such terms and at such prices as we may determine.
We expect that all discharged notes will be redeemed on or after March 1,
2003 at 104.625% of the principal amount of such notes ($1,046.25 per $1,000
principal amount of such notes), plus accrued and unpaid interest, if any,
to the date of purchase.
28
THE TRANSACTIONS
On March 16, 2002, we entered into a merger agreement with Associated
Materials Holdings Inc., a Delaware corporation, and Simon Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Associated Materials
Holdings Inc. Pursuant to the merger agreement, Simon Acquisition Corp.
commenced a tender offer to purchase all of the outstanding shares of our common
stock at a price of $50.00 per share. The merger was consummated on April 19,
2002. Our common stock was delisted from The Nasdaq National Market. The
outstanding notes were issued in connection with the merger of Simon Acquisition
Corp. with and into us. After the merger, we continued as the surviving
corporation and became a wholly owned subsidiary of Associated Materials
Holdings Inc., which is controlled by affiliates of Harvest Partners, Inc. Our
business and operations continued as they were being conducted prior to the
merger.
In addition, we commenced a tender offer and consent solicitation to
purchase all of our outstanding 9 1/4% senior subordinated notes due March 1,
2008 and to receive consents from the holders of such notes to amend the terms
of the indenture governing such notes. The debt tender offer expired on April
18, 2002. Approximately $74 million aggregate principal amount of the $75
million outstanding 9 1/4% notes was tendered. We amended the indenture
governing the 9 1/4% notes to remove substantially all the restrictive covenants
pursuant to a supplemental indenture dated as of April 4, 2002, which became
effective on April 23, 2002. The indenture governing the 9 1/4% notes is subject
to a "change of control" provision pursuant to which the notes outstanding after
the completion of the debt and equity tender offers are redeemable at an amount
equal to 101% of the principal amount of the 9 1/4% notes at the option of the
holder, plus accrued and unpaid interest, if any, to the date of purchase.
Subsequent to the merger, we commenced a change of control offer pursuant to
such provision to purchase the 9 1/4% notes not tendered in the debt tender
offer. The change of control offer expired on June 21, 2002 and approximately
$0.1 million aggregate principal amount of the 9 1/4% notes was tendered and
accepted. We intend to discharge the remaining approximate $0.9 million of
9 1/4% notes pursuant to the indenture governing the 9 1/4% notes. We may also,
from time to time, purchase such notes through open market purchases, privately
negotiated transactions, tender offers, exchange offers or otherwise, upon such
terms and at such prices as we may determine. We expect that all discharged
notes will be redeemed on or after March 1, 2003 at 104.625% of the principal
amount of such notes ($1,046.25 per $1,000 principal amount of such notes), plus
accrued and unpaid interest, if any, to the date of purchase.
The equity tender offer closed prior to the closing of the offering of the
outstanding notes and we borrowed under a $215 million unsecured interim credit
facility to complete the equity tender offer. In connection with the merger, we
terminated our previous credit facility and entered into a new $165 million
senior secured credit facility. The new credit facility consists of a $125
million term loan, which was permanently reduced by $28.5 million from the net
proceeds from the sale of AmerCable, and a $40 million revolving loan. The
proceeds from the offering of the outstanding notes along with proceeds from the
term loan under the new credit facility were used to repay such interim credit
facility.
For more information regarding the merger agreement and the related
agreements entered into in connection with the merger, see "Certain
Relationships and Related Transactions."
29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been derived by
the application of pro forma adjustments to our historical financial statements
included elsewhere in this prospectus supplement. The unaudited pro forma
statements of operations for the year ended December 31, 2001 and the six months
ended June 30, 2002 give effect to the transactions and the sale of AmerCable as
if the transactions and the sale of AmerCable had occurred as of January 1,
2001. The pro forma adjustments are based upon available information,
preliminary estimates and certain assumptions that we believe are reasonable,
and are described in the accompanying notes.
Accounting principles generally accepted in the United States require
operating results for our company prior to the merger completed on April 19,
2002 to be presented as the Predecessor's results in the historical financial
statements. Operating results subsequent to the merger for our company are
presented as the Successor's results in the historical financial statements and
include seventy-three days from April 19, 2002 to June 30, 2002. AmerCable's
results are included in continuing operations of the Predecessor. Subsequent to
the merger, AmerCable's results are presented as discontinued operations due to
the Successor management's decision to sell this division.
On March 16, 2002, Associated Materials Incorporated, Associated Materials
Holdings Inc. and its wholly owned subsidiary, Simon Acquisition Corp., entered
into a merger agreement pursuant to which, among other things, each of our
stockholders received $50.00 in cash for each share of our stock. The equity
tender offer expired on April 18, 2002, with over 90% of the outstanding shares
of our common stock being tendered. Simon Acquisition Corp. merged with and into
us on April 19, 2002, with Associated Materials Incorporated continuing as the
surviving corporation and becoming a wholly owned subsidiary of Associated
Materials Holdings Inc.
The merger and related refinancing transactions required total cash of
approximately $466.8 million, which was used to purchase our common stock in the
equity tender offer, to consummate the debt tender offer for our 9 1/4% senior
subordinated notes due 2008 and to pay fees and expenses related to the
transactions. The transactions were financed through an equity contribution of
approximately $172 million by Associated Materials Holdings Inc. (who received
an equity contribution of approximately $164.8 million of cash from the equity
investors and $7.2 million of rollover equity by certain members of management),
cash on hand of approximately $4.8 million, a new term loan of $125 million from
the new credit facility and proceeds from the issuance of the outstanding notes.
The equity tender offer closed prior to the closing of the offering of the
outstanding notes and we borrowed under a $215 million interim credit facility
to complete the equity tender offer. The proceeds from the issuance of the
outstanding notes along with proceeds from the term loan under the new credit
facility were used to repay the interim credit facility. The net proceeds from
the sale of AmerCable were used to permanently reduce borrowings under the new
credit facility by $28.5 million in accordance with certain terms thereof.
The acquisition was accounted for under the purchase method of accounting.
The total cost of the transactions has been allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values as of the date of the transactions. The excess of the purchase price
over the historical basis of the net assets acquired has been allocated based on
preliminary valuation estimates and certain assumptions that management believes
are reasonable. As a result, the actual allocation is subject to the valuation
of our assets and liabilities being finalized. Therefore, the actual allocation
of purchase price and the resulting effect on income from operations may differ
from the pro forma amounts included herein.
The pro forma statements should not be considered indicative of results
that would have been achieved had the transactions or the sale of AmerCable been
consummated on January 1, 2001 and do not purport to indicate results of
operations for any future period. The unaudited pro forma financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "The Transactions," "Use of
Proceeds," "Prospectus Summary -- Recent Developments" and the historical
financial statements and the notes thereto included elsewhere in this prospectus
supplement.
30
ASSOCIATED MATERIALS INCORPORATED
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
<Table>
<Caption>
ONE HUNDRED SEVENTY-THREE
EIGHT DAYS DAYS
ENDED ENDED
APRIL 18, 2002 JUNE 30, 2002 AMERCABLE TRANSACTION
PREDECESSOR SUCCESSOR PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(a) ADJUSTMENTS PRO FORMA
-------------- ------------- -------------- ----------- ---------
Total net sales............. $180,230 $113,960 $(18,271) $ -- $275,919
Cost of sales............... 130,351 79,291 (15,494) (2,393)(b) 191,755
-------- -------- -------- ------- --------
Gross profit................ 49,879 34,669 (2,777) 2,393 84,164
Selling, general and
administrative expenses... 43,272 21,667 (2,192) 548 (b) 63,295
-------- -------- -------- ------- --------
Income from operations...... 6,607 13,002 (585) 1,845 20,869
Interest expense, net....... 2,068 4,981 -- 4,512 (c) 11,561
Merger transaction costs.... 9,319 -- -- (9,319)(d) --
-------- -------- -------- ------- --------
Income (loss) before
taxes..................... (4,780) 8,021 (585) 6,652 9,308
Income tax expense.......... 977 3,328 (225) (217)(e) 3,863
-------- -------- -------- ------- --------
Income (loss) from
continuing operations..... (5,757) 4,693 (360) 6,869 5,445
Discontinued operations, net
of tax.................... -- (521) 521 -- --
Extraordinary items, net of
tax....................... -- (4,434) -- -- (4,434)
-------- -------- -------- ------- --------
Net income (loss)........... $ (5,757) $ (262) $ 161 $ 6,869 $ 1,011
======== ======== ======== ======= ========
Ratio of earnings to fixed
charges(f)................ -- 2.1x 1.6x
</Table>
31
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
(a) These pro forma adjustments reflect Associated Materials Incorporated's
sale of the AmerCable division and the resulting elimination of AmerCable's
results of operations and results of discontinued operations. We completed the
sale of AmerCable on June 24, 2002.
(b) Details of the pro forma adjustments to cost of sales and selling,
general and administrative expenses reflect the following: (i) the elimination
of an expense included in the historical results of the Successor in the
seventy-three days ended June 30, 2002 related to the liquidation of an
inventory fair value adjustment recorded at the time of the transactions as this
expense is reflected as an adjustment included in the unaudited pro forma
statement of operations for the year ended December 31, 2001 and should not be
reflected in expense twice as the inventory related to the fair value adjustment
was liquidated over an approximate two month period, (ii) the elimination of
compensation expense related to the corporate chief executive officer ("CEO")
and the corporate chief financial officer ("CFO"), who were terminated upon
consummation of the transactions, (iii) incremental depreciation and
amortization of tangible and intangible assets recorded in conjunction with the
acquisition, (iv) the annual management services fee payable to Harvest Partners
for services including those historically provided by the CEO and corporate CFO
and (v) elimination of historical amortization of deferred financing costs.
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
------------------------
Cost of sales:
Elimination of expense related to an inventory fair value
adjustment................................................ $(1,891)
Net decrease in depreciation and amortization............... (502)
-------
$(2,393)
=======
Selling, general and administrative expenses:
CEO and CFO compensation.................................... $ (367)
Increase in depreciation and amortization................... 734
Management services fee..................................... 250
Amortization of historical deferred financing costs......... (69)
-------
$ 548
=======
</Table>
The acquisition has been accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations" and the resulting goodwill and other intangible
assets have been accounted for under Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." The estimated increase in fair
value of property, plant and equipment is approximately $24.9 million, with
estimated useful lives ranging between 5 and 25 years. In addition, we believe
we have intangible assets related to patents and trademarks that will ultimately
be assigned fair market values in the final purchase price allocation. Based on
the preliminary purchase price allocation, the value assigned to patents is
approximately $8.6 million with estimated useful lives of 10 years, the value
assigned to trademarks with remaining useful lives of 15 years is $26.7 million
and the value assigned to trademarks with indefinite lives is $73.0 million. The
purchase price in excess of fair value of net assets acquired, including
identifiable intangibles, has been recorded as goodwill. Based on the
preliminary purchase price allocation, the value assigned to goodwill is
approximately $201.6 million. The allocation of the purchase price, the related
assignment of asset lives, and resulting depreciation and amortization expense
are based on preliminary estimates, which may differ from the final purchase
price allocation and the final lives assigned to the assets. Any change in the
fair value or lives assigned to amortizable or depreciable assets may impact
future operating results.
32
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS -- (CONTINUED)
(c) The pro forma adjustments to interest expense reflect the following:
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED
JUNE 30, 2002
------------------
Commitment fee on revolving credit facility................. $ 99
Term loan................................................... 2,650
9 3/4% Senior Subordinated Notes............................ 8,044
Existing 9 1/4% Senior Subordinated Notes not tendered...... 42
Amortization of deferred financing costs.................... 726
--------
Pro forma interest expense.................................. 11,561
Less: historical interest expense, net -- Predecessor....... (2,068)
-- Successor......... (4,981)
--------
Total adjustment............................................ $ 4,512
========
</Table>
Interest expense was calculated as follows: (i) commitment fee on unused
portion of the revolving credit facility of 1/2%; (ii) a rate of 5 4/10%
(average London Interbank Offered Rate ("LIBOR") for the six months ended June
30, 2002 of 1 9/10% + 3 1/2%) on the new credit facility net of repayment using
the proceeds from the AmerCable sale; (iii) one half of annual administration
fee of $75,000 on the new credit facility; (iv) an interest rate of 9 3/4% on
the notes; (v) an interest rate of 9 1/4% on the 9 1/4% notes not tendered; and
(vi) six months of amortization of deferred financing costs.
The effect of a 1/8% increase or decrease in interest rates would increase
or decrease total pro forma interest expense by approximately $60,000 for the
six months ended June 30, 2002.
(d) Represents the elimination of merger transaction costs including
investment banking and legal fees incurred by the Predecessor in conjunction
with the merger transaction.
(e) As a result of relocating our corporate office from Texas to Ohio, our
state and local income tax rate increased, raising our total effective tax rate
to 41.5%. This amount represents the necessary adjustment to reflect a pro forma
income tax provision of 41.5%.
(f) The deficiency in the ratio of earnings to fixed charges is
approximately $4.8 million on an historical basis for the one hundred eight days
ended April 18, 2002.
33
ASSOCIATED MATERIALS INCORPORATED
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
AMERCABLE TRANSACTION
HISTORICAL PRO FORMA PRO FORMA
PREDECESSOR ADJUSTMENTS(a) ADJUSTMENTS PRO FORMA
----------- -------------- ----------- ---------
Total net sales............................. $595,819 $(71,291) $ -- $524,528
Cost of sales............................... 425,366 (57,464) 1,387(b) 369,289
-------- -------- -------- --------
Gross profit................................ 170,453 (13,827) (1,387) 155,239
Selling, general and administrative
expenses.................................. 119,945 (7,174) 710(b) 113,481
-------- -------- -------- --------
Income from operations...................... 50,508 (6,653) (2,097) 41,758
Interest expense, net....................... 6,795 -- 18,005(c) 24,800
Write-down of investment in Amercord Inc.... 2,393 -- -- 2,393
-------- -------- -------- --------
Income before income taxes.................. 41,320 (6,653) (20,102) 14,565
Income tax expense.......................... 15,908 (2,561) (7,303)(d) 6,044
-------- -------- -------- --------
Net income(e)............................... $ 25,412 $ (4,092) $(12,799) $ 8,521
======== ======== ======== ========
Ratio of earnings to fixed charges.......... 4.1x 1.5x
</Table>
34
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
(a) These pro forma adjustments reflect Associated Materials Incorporated's
sale of the AmerCable division and the resulting elimination of AmerCable's
results of operations. We completed the sale of AmerCable on June 24, 2002.
(b) Details of the pro forma adjustments to cost of sales and selling,
general and administrative expenses reflect the following: (i) expense related
to the liquidation of an inventory fair value adjustment recorded at the time of
the merger as the inventory related to the fair value adjustment was liquidated
over an approximate two month period, (ii) the elimination of compensation
expense related to the corporate chief executive officer ("CEO") and the
corporate chief financial officer ("CFO"), who were terminated upon consummation
of the transactions, (iii) incremental depreciation and amortization of tangible
and intangible assets recorded in conjunction with the acquisition, (iv) the
annual management services fee payable to Harvest Partners for services
including those historically provided by the CEO and corporate CFO, (v) increase
in pension expense based on actuarial valuations and (vi) elimination of
historical amortization of deferred financing costs.
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31, 2001
------------------
Cost of sales:
Expense related to an inventory fair value adjustment....... $ 1,891
Net decrease in depreciation and amortization............... (504)
-------
$ 1,387
=======
Selling, general and administrative expenses:
CEO and CFO compensation.................................... $(1,473)
Increase in depreciation and amortization................... 1,498
Management services fee..................................... 750
Increase in pension expense................................. 209
Amortization of historical deferred financing costs......... (274)
-------
$ 710
=======
</Table>
The acquisition has been accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations" and the resulting goodwill and other intangible
assets have been accounted for under Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." The estimated increase in fair
value of property, plant and equipment is approximately $24.9 million, with
estimated useful lives ranging between 5 and 25 years. In addition, we believe
we have intangible assets related to patents and trademarks that will ultimately
be assigned fair market values in the final purchase price allocation. Based on
the preliminary purchase price allocation, the value assigned to patents is
approximately $8.6 million with estimated useful lives of 10 years, the value
assigned to trademarks with remaining useful lives of 15 years is $26.7 million
and the value assigned to trademarks with indefinite lives is $73.0 million. The
purchase price in excess of fair value of net assets acquired, including
identifiable intangibles, has been recorded as goodwill. Based on the
preliminary purchase price allocation, the value assigned to goodwill is
approximately $201.6 million. The allocation of the purchase price, the related
assignment of asset lives, and resulting depreciation and amortization expense
are based on preliminary estimates, which may differ from the final purchase
price allocation and the final lives assigned to the assets. Any change in the
fair value or lives assigned to amortizable or depreciable assets may impact
future operating results.
35
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS -- (CONTINUED)
(c) The pro forma adjustments to interest expense reflect the following:
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31, 2001
------------------
Commitment fee on revolving credit facility................. $ 200
Term loan................................................... 6,967
9 3/4% Senior Subordinated Notes............................ 16,088
Existing 9 1/4% Senior Subordinated Notes not tendered...... 91
Amortization of deferred financing costs.................... 1,454
-------
Pro forma interest expense.................................. 24,800
Less: historical interest expense, net...................... (6,795)
-------
Total adjustment............................................ $18,005
=======
</Table>
Interest expense was calculated as follows: (i) commitment fee on unused
portion of the revolving credit facility of 1/2%; (ii) a rate of 7 1/10%
(average London Interbank Offered Rate ("LIBOR") for the year ended December 31,
2001 of 3 6/10% + 3 1/2%) on the new credit facility net of repayment using the
proceeds from the AmerCable sale; (iii) administration fee of $75,000 on the new
credit facility; (iv) an interest rate of 9 3/4% on the notes; (v) an interest
rate of 9 1/4% on the 9 1/4% notes not tendered; and (vi) twelve months of
amortization of deferred financing costs.
The effect of a 1/8% increase or decrease in interest rates would increase
or decrease total pro forma interest expense by approximately $0.1 million for
the year ended December 31, 2001.
(d) As a result of relocating our corporate office from Texas to Ohio, our
state and local income tax rate increased, raising our total effective tax rate
to 41.5%. This amount represents the necessary adjustment to reflect a pro forma
income tax provision of 41.5%.
(e) The pro forma statement of operations does not include pro forma
adjustments for the write-off of debt issuance costs in connection with the
unsecured interim credit facility, the accelerated amortization of the debt
issuance costs related to the repayment of a portion of the new credit facility
with the proceeds from the sale of AmerCable or the portion of the tender offer
premium in excess of market value of the existing 9 1/4% senior subordinated
notes. These costs represent non-recurring expenses which were recorded in the
Successor's statement of operations in the seventy-three days ended June 30,
2002.
36
SELECTED HISTORICAL FINANCIAL DATA
Accounting principles generally accepted in the United States require
operating results for our company prior to the merger completed on April 19,
2002 to be presented as the Predecessor's results in the historical financial
statements. Operating results subsequent to the merger for our company are
presented as the Successor's results in the historical financial statements and
include seventy-three days from April 19, 2002 to June 30, 2002. AmerCable's
results are included in continuing operations of the Predecessor. Subsequent to
the merger, AmerCable's results are presented as discontinued operations due to
the Successor management's decision to sell this division.
The following table sets forth our selected historical statement of
operations data for the one hundred eight days ended April 18, 2002 and the
seventy-three days ended June 30, 2002 and for the first six months of 2001 and
for each of the five years in the period ended December 31, 2001. Also presented
is our selected historical balance sheet data as of June 30, 2002 and December
31, 1997, 1998, 1999, 2000 and 2001. The statement of operations data for each
of the three years in the period ended December 31, 2001 and the balance sheet
data as of December 31, 2000 and 2001 were derived from our audited financial
statements included elsewhere in this prospectus supplement. The statement of
operations data for the two years ended December 31, 1997 and 1998 and the
balance sheet data as of December 31, 1997, 1998 and 1999 were derived from our
audited financial statements that are not included in this prospectus
supplement.
The selected financial data presented below for the one hundred eight days
ended April 18, 2002 and the seventy-three days ended June 30, 2002 and the
first six months of 2001 have been derived from our unaudited interim financial
information included elsewhere in this prospectus supplement, which, in the
opinion of our management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
unaudited interim periods. The operating results for any interim period are not
necessarily indicative of the operating results for a full fiscal year. No
separate financial information for Simon Acquisition Corp. has been provided in
this prospectus supplement because (1) Simon Acquisition Corp. was formed for
the purposes of the transactions and did not conduct any operations and (2)
Simon Acquisition Corp. had no material assets. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
included elsewhere in this prospectus supplement. Our historical results are not
necessarily indicative of our future results.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS, EXCEPT FOR RATIOS)
INCOME STATEMENT DATA:
Net sales(1)................. $399,974 $410,111 $455,268 $499,393 $595,819
Cost of sales(1)............. 285,798 285,822 317,596 353,994 425,366
-------- -------- -------- -------- --------
Gross profit................. 114,176 124,289 137,672 145,399 170,453
Selling, general and
administrative expenses.... 81,142 88,727 96,028 107,255 119,945
Other income, net............ -- 2,673 -- -- --
-------- -------- -------- -------- --------
Income from operations....... 33,034 38,235 41,644 38,144 50,508
Interest expense............. 9,795 7,565 6,779 6,046 6,795
Gain on the sale of
UltraCraft................. -- -- -- 8,012 --
Merger transaction costs..... -- -- -- -- --
Equity in loss of Amercord
Inc........................ 626 1,881 1,337 -- --
Write-down of Amercord
Inc........................ -- 4,351 -- -- 2,393
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 22,613 24,438 33,528 40,110 41,320
Income tax expense........... 9,524 11,382 13,038 16,555 15,908
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before
extraordinary item......... 13,089 13,056 20,490 23,555 25,412
Loss from discontinued
operations, net............ -- -- -- -- --
<Caption>
ONE HUNDRED SEVENTY-THREE
SIX MONTHS EIGHT DAYS DAYS
ENDED ENDED ENDED
JUNE 30, APRIL 18, JUNE 30,
2001 2002 2002
----------- ----------- -------------
PREDECESSOR PREDECESSOR SUCCESSOR
(IN THOUSANDS, EXCEPT FOR RATIOS)
INCOME STATEMENT DATA:
Net sales(1)................. $267,356 $180,230 $113,960
Cost of sales(1)............. 192,893 130,351 79,291
-------- -------- --------
Gross profit................. 74,463 49,879 34,669
Selling, general and
administrative expenses.... 58,399 43,272 21,667
Other income, net............ -- -- --
-------- -------- --------
Income from operations....... 16,064 6,607 13,002
Interest expense............. 3,433 2,068 4,981
Gain on the sale of
UltraCraft................. -- -- --
Merger transaction costs..... -- 9,319 --
Equity in loss of Amercord
Inc........................ -- -- --
Write-down of Amercord
Inc........................ 2,393 -- --
-------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 10,238 (4,780) 8,021
Income tax expense........... 3,942 977 3,328
-------- -------- --------
Income (loss) from continuing
operations before
extraordinary item......... 6,296 (5,757) 4,693
Loss from discontinued
operations, net............ -- -- (521)
</Table>
37
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS, EXCEPT FOR RATIOS)
Extraordinary item, net...... -- (4,107) -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 13,089 $ 8,949 $ 20,490 $ 23,555 $ 25,412
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(2).................... $ 38,929 $ 32,235 $ 48,826 $ 55,706 $ 59,034
Adjusted EBITDA(3)........... 33,373 38,497 45,941 40,386 53,066
Capital expenditures......... 8,758 14,261 18,915 11,925 15,022
Cash provided by (used in)
operating activities....... 22,496 26,799 15,244 22,968 43,989
Cash used in investing
activities................. (7,941) (14,712) (17,619) (5,538) (9,861)
Cash provided by (used in)
financing activities....... (15,004) 942 (9,157) (4,983) (21,138)
Ratio of earnings to fixed
charges(4)................. 2.6x 3.0x 3.9x 4.3x 4.1x
<Caption>
ONE HUNDRED SEVENTY-THREE
SIX MONTHS EIGHT DAYS DAYS
ENDED ENDED ENDED
JUNE 30, APRIL 18, JUNE 30,
2001 2002 2002
----------- ----------- -------------
PREDECESSOR PREDECESSOR SUCCESSOR
(IN THOUSANDS, EXCEPT FOR RATIOS)
Extraordinary item, net...... -- -- (4,434)
-------- -------- --------
Net income (loss)............ $ 6,296 $ (5,757) $ (262)
======== ======== ========
OTHER DATA:
EBITDA(2).................... $ 19,020 $ 1,257 $ 7,460
Adjusted EBITDA(3)........... 16,689 9,356 16,290
Capital expenditures......... 9,803 3,817 3,680
Cash provided by (used in)
operating activities....... 4,389 (18,258) 13,622
Cash used in investing
activities................. (4,715) (3,597) (352,724)
Cash provided by (used in)
financing activities....... (12,186) (245) 344,636
Ratio of earnings to fixed
charges(4)................. 2.6x -- 2.1x
</Table>
<Table>
<Caption>
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------------------------------------------- ----------
1997 1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- ----------- ----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR SUCCESSOR
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.................. $ 61,191 $ 79,225 $ 85,878 $102,064 $106,188 $ 84,376
Goodwill......................... -- -- -- -- -- 201,590
Other intangibles................ -- -- -- -- -- 108,148
Total assets..................... 178,504 189,319 206,296 231,141 254,307 573,308
Total debt....................... 80,914 78,600 75,000 75,000 75,000 262,408
Stockholders'('s) equity......... 44,734 64,378 79,326 97,990 102,675 170,569
</Table>
- ---------------
(1) Certain prior period amounts have been reclassified to conform with the
current period presentation.
(2) EBITDA is calculated as net income plus interest, taxes, depreciation and
amortization. We have included information concerning EBITDA because we
believe that EBITDA is used by certain investors as one measure of a
company'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 our operating performance or to cash flows as a measure of
liquidity. EBITDA has not been prepared in accordance with generally
accepted accounting principles. EBITDA, as presented by us, may not be
comparable to similarly titled measures reported by other companies. The
reconciliation of net income to EBITDA is as follows:
<Table>
<Caption>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------------------------------------- JUNE 30,
1997 1998 1999 2000 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
(IN THOUSANDS)
Net income (loss).............. $13,089 $ 8,949 $20,490 $23,555 $25,412 $ 6,296
Interest -- Continuing
operations....... 9,795 7,565 6,779 6,046 6,795 3,433
-- Discontinued
operations.......... -- -- -- -- -- --
Taxes -- Continuing
operations.......... 9,524 11,382 13,038 16,555 15,908 3,942
-- Discontinued
operations.......... -- -- -- -- -- --
-- Extraordinary items... -- (2,878) -- -- -- --
Depreciation and amortization
-- Continuing
operations.......... 6,521 7,217 8,519 9,550 10,919 5,349
-- Discontinued
operations.......... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
EBITDA......................... $38,929 $32,235 $48,826 $55,706 $59,034 $19,020
======= ======= ======= ======= ======= =======
<Caption>
ONE HUNDRED SEVENTY-THREE
EIGHT DAYS DAYS
ENDED ENDED
APRIL 18, JUNE 30,
2002 2002
----------- -------------
PREDECESSOR SUCCESSOR
(IN THOUSANDS)
Net income (loss).............. $(5,757) $ (262)
Interest -- Continuing
operations.......... 2,068 4,981
-- Discontinued
operations.......... -- 1,213
Taxes -- Continuing
operations.......... 977 3,328
-- Discontinued
operations.......... -- (370)
-- Extraordinary items... -- (3,145)
Depreciation and amortization
-- Continuing
operations.......... 3,969 1,397
-- Discontinued
operations.......... -- 318
------- -------
EBITDA......................... $ 1,257 $ 7,460
======= =======
</Table>
38
(3) Adjusted EBITDA represents EBITDA plus certain non-recurring items less
AmerCable's operating results. We believe that Adjusted EBITDA presents a
more meaningful discussion than EBITDA since Adjusted EBITDA corresponds to
EBITDA as it is defined in our new credit facility and in the indenture
governing the notes as it excludes non-recurring items. The new credit
facility and indenture governing the notes have certain financial covenants
that use ratios utilizing our Adjusted EBITDA. The definition of EBITDA
under our new credit facility does not exclude the results of AmerCable. We
have, however, excluded the results of AmerCable when calculating Adjusted
EBITDA as AmerCable will not be included in our ongoing operations. The
nonrecurring items and results of AmerCable are expected to have no ongoing
cash requirements and no impact on our ongoing operations. Adjusted EBITDA
has not been prepared in accordance with generally accepted accounting
principles. Adjusted EBITDA, as presented by us, may not be comparable to
similarly titled measures reported by other companies. EBITDA reconciles to
Adjusted EBITDA as follows.
<Table>
<Caption>
SIX MONTHS
ENDED
YEAR ENDED
------------------------------------------------------------------- JUNE 30,
1997 1998 1999 2000 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
EBITDA................................. $38,929 $32,235 $48,826 $55,706 $59,034 $19,020
Extraordinary Items, pre-tax(a)........ -- 6,985 -- -- -- --
AmerCable's EBITDA(b).................. (6,182) (6,955) (4,222) (7,308) (8,361) (4,724)
Loss on writedown of Amercord
Inc.(c)............................... -- 4,351 -- -- 2,393 2,393
Merger transaction costs(d)............ -- -- -- -- -- --
Cost of sales adjustment(e)............ -- -- -- -- -- --
Equity loss in Amercord, Inc.(f)....... 626 1,881 1,337 -- -- --
Gain on Sale of Ultracraft(g).......... -- -- -- (8,012) -- --
------- ------- ------- ------- ------- -------
Adjusted EBITDA........................ $33,373 $38,497 $45,941 $40,386 $53,066 $16,689
======= ======= ======= ======= ======= =======
<Caption>
ONE HUNDRED SEVENTY-THREE
EIGHT DAYS DAYS
ENDED ENDED
APRIL 18, JUNE 30,
2002 2002
PREDECESSOR SUCCESSOR
----------- -------------
(IN THOUSANDS)
EBITDA................................. $1,257 $ 7,460
Extraordinary Items, pre-tax(a)........ -- 7,579
AmerCable's EBITDA(b).................. (1,220) (640)
Loss on writedown of Amercord
Inc.(c)............................... -- --
Merger transaction costs(d)............ 9,319 --
Cost of sales adjustment(e)............ -- 1,891
Equity loss in Amercord, Inc.(f)....... -- --
Gain on Sale of Ultracraft(g).......... -- --
------ -------
Adjusted EBITDA........................ $9,356 $16,290
====== =======
</Table>
(a) Extraordinary items include $4.9 million ($2.8 million net of tax) for
the extinguishment of substantially all of the Successor's assumed
9 1/4% notes and $2.7 million ($1.6 million net of tax) for the
financing fees related to an interim credit facility utilized for the
merger which was repaid shortly thereafter.
(b) AmerCable's EBITDA is calculated as its net income plus interest,
taxes, depreciation and amortization.
(c) Represents the writedown of our investment in Amercord Inc. to its net
realizable value.
(d) Merger transaction costs include investment banking and legal fees
incurred by the Predecessor in conjunction with the merger transaction
with Harvest Partners.
(e) The cost of sales adjustment is the expense related to an inventory
fair value adjustment recorded at the time of the merger.
(f) Represents the loss on our equity investment in Amercord Inc.
(g) Represents the gain we realized upon the sale of our Ultracraft cabinet
division.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, income or loss from discontinued
operations and extraordinary gains or losses, plus fixed charges. Fixed
charges consist of interest expense, including amortization of debt issuance
costs and the interest component of rent expense. The deficiency in the
ratio of earnings to fixed charges is approximately $4.8 million for the one
hundred eight days ended April 18, 2002.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus supplement contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in forward-looking statements for many reasons, including the risks
described in "Risk Factors" and elsewhere in this prospectus supplement. You
should read the following discussion with the sections of this prospectus
supplement titled "Unaudited Pro Forma Financial Information," "Selected
Historical Financial Data" and our financial statements and related notes
included elsewhere in this prospectus supplement.
OVERVIEW
GENERAL
Prior to the merger and the sale of AmerCable, we consisted of two
operating divisions, Alside and AmerCable. In addition, we own an interest in
Amercord Inc., which was accounted for using the equity method until November
1999 when it was recapitalized, reducing our interest in Amercord Inc. from 50%
to 9.9%. Since the recapitalization, we have accounted for Amercord Inc. under
the cost method.
On March 16, 2002, Associated Materials Incorporated, Associated Materials
Holdings Inc. and its wholly owned subsidiary, Simon Acquisition Corp. entered
into a merger agreement pursuant to which, among other things, each stockholder
of Associated Materials Incorporated received $50.00 in cash for each share of
Associated Materials Incorporated stock. Pursuant to the merger agreement, Simon
Acquisition Corp. merged into Associated Materials Incorporated on April 19,
2002. Associated Materials Incorporated is now a wholly owned subsidiary of
Associated Materials Holdings Inc., which is controlled by affiliates of Harvest
Partners, Inc. Subsequent to the merger, our business and operations continued
as they were being conducted prior to the merger.
On June 24, 2002, we completed the sale of our AmerCable division to
AmerCable Incorporated, a newly-formed entity controlled by members of AmerCable
management and Wingate Partners III, L.P., for cash proceeds of approximately
$28.3 million in cash and the assumption of certain liabilities pursuant to an
asset purchase agreement dated as of the same date. We used the net proceeds to
repay a portion of our new credit facility in accordance with certain terms
thereof. AmerCable is a leading manufacturer of specialty electrical cable
products primarily used in the mining, marine and offshore drilling industries.
In 2001, AmerCable accounted for approximately 12% of our total net sales.
Accounting principles generally accepted in the United States require
operating results for our company prior to the merger completed on April 19,
2002 to be presented as the Predecessor's results in the historical financial
statements. Operating results subsequent to the merger for our company are
presented as the Successor's results in the historical financial statements and
include seventy-three days from April 19, 2002 to June 30, 2002. AmerCable's
results are included in continuing operations of the Predecessor. Subsequent to
the merger, AmerCable's results are presented as discontinued operations due to
the Successor management's decision to sell this division.
Alside, which currently represents all of our operations, accounted for
more than 87% of our net sales in each of the last three years. Because our
residential building products are consumer durable goods, our sales are impacted
by a number of factors, including 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. Our sales are also affected by changes in consumer preferences with
respect to types of building products. Our products are used in the repair and
remodeling, as well as the new construction, sectors of the building industry.
We believe that approximately two thirds of Alside's sales were made to the
repair and remodeling sector in 2001, 2000 and 1999.
We believe that vinyl building products 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. We
further believe that these increases in market share, together with our
40
increased marketing efforts, will increase our sales of vinyl siding, vinyl
windows and other complementary vinyl building products.
We operate with significant operating and financial leverage, which
increased substantially following the completion of the transactions
contemplated by the merger agreement. Significant portions of our selling,
general and administrative expenses are fixed costs that neither increase nor
decrease proportionately with sales. As a result, a percentage change in our net
sales will have a greater percentage effect on our income from operations. In
addition, interest expense related to our long-term debt contains both fixed and
variable components.
CONDENSED PREDECESSOR/SUCCESSOR STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
ONE
EIGHTEEN SEVENTY- THREE THREE HUNDRED SEVENTY-
DAYS THREE DAYS MONTHS MONTHS EIGHT DAYS THREE DAYS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
APRIL 18, JUNE 30, JUNE 30, JUNE 30, APRIL 18, JUNE 30, JUNE 30,
2002 2002 2002 2001 2002 2002 2002
----------- ---------- -------- ----------- ----------- ---------- ----------
PREDECESSOR SUCCESSOR COMBINED PREDECESSOR PREDECESSOR SUCCESSOR COMBINED
Net sales
Alside........................... $50,897 $113,960 $164,857 $139,206 $161,959 $113,960 $275,919
AmerCable........................ 6,135 -- 6,135 19,539 18,271 -- 18,271
------- -------- -------- -------- -------- -------- --------
Total.......................... 57,032 113,960 170,992 158,745 180,230 113,960 294,190
Gross profit
Alside........................... 16,411 34,669 51,080 43,346 47,102 34,669 81,771
AmerCable........................ 1,048 -- 1,048 3,920 2,777 -- 2,777
------- -------- -------- -------- -------- -------- --------
Total.......................... 17,459 34,669 52,128 47,266 49,879 34,669 84,548
Selling, general and administrative
expense
Alside........................... 11,266 21,452 32,718 26,973 39,774 21,452 61,226
Corporate........................ 242 215 457 1,570 1,306 215 1,521
------- -------- -------- -------- -------- -------- --------
Subtotal....................... 11,508 21,667 33,175 28,543 41,080 21,667 62,747
AmerCable........................ 545 -- 545 1,729 2,192 -- 2,192
------- -------- -------- -------- -------- -------- --------
Total.......................... 12,053 21,667 33,720 30,272 43,272 21,667 64,939
------- -------- -------- -------- -------- -------- --------
Income (loss) from operations
Alside........................... 5,145 13,217 18,362 16,373 7,328 13,217 20,545
Corporate........................ (242) (215) (457) (1,570) (1,306) (215) (1,521)
------- -------- -------- -------- -------- -------- --------
Subtotal....................... 4,903 13,002 17,905 14,803 6,022 13,002 19,024
AmerCable........................ 503 -- 503 2,191 585 -- 585
------- -------- -------- -------- -------- -------- --------
Total.......................... 5,406 13,002 18,408 16,994 6,607 13,002 19,609
Interest, net...................... 399 4,981 5,380 1,854 2,068 4,981 7,049
------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before other non-operating
expenses, income taxes and
extraordinary items.............. 5,007 8,021 13,028 15,140 4,539 8,021 12,560
Merger transaction costs (a)....... 7,317 -- 7,317 -- 9,319 -- 9,319
Loss on writedown of Amercord
Inc.............................. -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and extraordinary items.......... (2,310) 8,021 5,711 15,140 (4,780) 8,021 3,241
Income taxes....................... 1,928 3,328 5,256 5,829 977 3,328 4,305
------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
items............................ (4,238) 4,693 455 9,311 (5,757) 4,693 (1,064)
Loss from discontinued
operations....................... -- (521) (521) -- -- (521) (521)
Extraordinary items, net of tax
(b).............................. -- (4,434) (4,434) -- -- (4,434) (4,434)
------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $(4,238) $ (262) $ (4,500) $ 9,311 $ (5,757) $ (262) $ (6,019)
======= ======== ======== ======== ======== ======== ========
<Caption>
SIX
MONTHS
ENDED
JUNE 30,
2001
-----------
PREDECESSOR
Net sales
Alside........................... $229,145
AmerCable........................ 38,211
--------
Total.......................... 267,356
Gross profit
Alside........................... 67,064
AmerCable........................ 7,399
--------
Total.......................... 74,463
Selling, general and administrative
expense
Alside........................... 51,848
Corporate........................ 2,946
--------
Subtotal....................... 54,794
AmerCable........................ 3,605
--------
Total.......................... 58,399
--------
Income (loss) from operations
Alside........................... 15,216
Corporate........................ (2,946)
--------
Subtotal....................... 12,270
AmerCable........................ 3,794
--------
Total.......................... 16,064
Interest, net...................... 3,433
--------
Income from continuing operations
before other non-operating
expenses, income taxes and
extraordinary items.............. 12,631
Merger transaction costs (a)....... --
Loss on writedown of Amercord
Inc.............................. 2,393
--------
Income (loss) from continuing
operations before income taxes
and extraordinary items.......... 10,238
Income taxes....................... 3,942
--------
Income (loss) from continuing
operations before extraordinary
items............................ 6,296
Loss from discontinued
operations....................... --
Extraordinary items, net of tax
(b).............................. --
--------
Net income (loss).................. $ 6,296
========
</Table>
41
<Table>
<Caption>
ONE
EIGHTEEN SEVENTY- THREE THREE HUNDRED SEVENTY-
DAYS THREE DAYS MONTHS MONTHS EIGHT DAYS THREE DAYS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
APRIL 18, JUNE 30, JUNE 30, JUNE 30, APRIL 18, JUNE 30, JUNE 30,
2002 2002 2002 2001 2002 2002 2002
----------- ---------- -------- ----------- ----------- ---------- ----------
PREDECESSOR SUCCESSOR COMBINED PREDECESSOR PREDECESSOR SUCCESSOR COMBINED
Reconciliation of net income (loss)
to EBITDA (c):
Net income (loss).................. $(4,238) $ (262) $ (4,500) $ 9,311 $ (5,757) $ (262) $ (6,019)
Interest -- Continuing
operations............ 399 4,981 5,380 1,854 2,068 4,981 7,049
-- Discontinued
operations(d)......... -- 1,213 1,213 -- -- 1,213 1,213
Taxes -- Continuing operations... 1,928 3,328 5,256 5,829 977 3,328 4,305
-- Discontinued
operations.............. -- (370) (370) -- -- (370) (370)
-- Extraordinary items..... -- (3,145) (3,145) -- -- (3,145) (3,145)
Depreciation and amortization
-- Continuing operations... 990 1,397 2,387 2,688 3,969 1,397 5,366
-- Discontinued
operations.............. -- 318 318 -- -- 318 318
------- -------- -------- -------- -------- -------- --------
EBITDA............................. $ (921) $ 7,460 $ 6,539 $ 19,682 $ 1,257 $ 7,460 $ 8,717
======= ======== ======== ======== ======== ======== ========
Reconciliation of EBITDA to
Adjusted EBITDA (e):
EBITDA............................. $ (921) $ 7,460 $ 6,539 $ 19,682 $ 1,257 $ 7,460 $ 8,717
Extraordinary items, pre-tax(b).... -- 7,579 7,579 -- -- 7,579 7,579
AmerCable's EBITDA(f).............. (661) (640) (1,301) (2,656) (1,220) (640) (1,860)
Loss on writedown of Amercord
Inc.............................. -- -- -- -- -- -- --
Merger transaction costs(a)........ 7,317 -- 7,317 -- 9,319 -- 9,319
Cost of sales adjustment(g)........ -- 1,891 1,891 -- -- 1,891 1,891
------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA.................... $ 5,735 $ 16,290 $ 22,025 $ 17,026 $ 9,356 $ 16,290 $ 25,646
======= ======== ======== ======== ======== ======== ========
<Caption>
SIX
MONTHS
ENDED
JUNE 30,
2001
-----------
PREDECESSOR
Reconciliation of net income (loss)
to EBITDA (c):
Net income (loss).................. $ 6,296
Interest -- Continuing
operations............ 3,433
-- Discontinued
operations(d)......... --
Taxes -- Continuing operations. 3,942
-- Discontinued
operations............ --
-- Extraordinary items... --
Depreciation and amortization
-- Continuing operations. 5,349
-- Discontinued
operations............ --
--------
EBITDA............................. $ 19,020
========
Reconciliation of EBITDA to
Adjusted EBITDA (e):
EBITDA............................. $ 19,020
Extraordinary items, pre-tax(b).... --
AmerCable's EBITDA(f).............. (4,724)
Loss on writedown of Amercord
Inc.............................. 2,393
Merger transaction costs(a)........ --
Cost of sales adjustment(g)........ --
--------
Adjusted EBITDA.................... $ 16,689
========
</Table>
- ---------------
(a) Merger transaction costs include investment banking and legal fees incurred
by the Predecessor in conjunction with the merger transaction with Harvest
Partners.
(b) Extraordinary items include $4.9 million ($2.8 million net of tax) for the
extinguishment of substantially all of the Successor's assumed 9 1/4% notes
and $2.7 million ($1.6 million net of tax) for the financing fees related to
an interim credit facility utilized for the merger which was repaid shortly
thereafter.
(c) EBITDA is calculated as net income (loss) plus interest, taxes, depreciation
and amortization. We have included EBITDA because we believe that EBITDA is
used by certain investors as one measure of a company's historical ability
to service its debt. EBITDA should not be considered an alternative to, or
more meaningful than, net income as an indicator of a company's operating
performance or to cash flows as a measure of liquidity. EBITDA has not been
prepared in accordance with generally accepted accounting principles.
Therefore, EBITDA, as presented by us, may not be comparable to similarly
titled measures reported by other companies.
(d) Includes accelerated amortization of $0.8 million of debt issuance costs as
a result of using the proceeds from the sale of AmerCable to permanently
reduce the credit facility.
(e) Adjusted EBITDA is calculated as EBITDA plus extraordinary items, merger
transaction costs, writedown of Amercord Inc. and an adjustment to cost of
sales. Adjusted EBITDA also excludes AmerCable's EBITDA. Adjusted EBITDA has
not been prepared in accordance with generally accepted accounting
principles. Therefore, adjusted EBITDA, as presented by us, may not be
comparable to similarly titled measures reported by other companies.
(f) AmerCable's EBITDA is calculated as its net income plus interest, taxes,
depreciation and amortization.
(g) The cost of sales adjustment is the expense related to an inventory fair
value adjustment recorded at the time of the merger.
42
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Alside and Corporate Expenses
Subsequent to the merger transaction and sale of AmerCable, Alside and
corporate expenses represent ongoing operations of our company.
Net sales from continuing operations increased 18.4% to $164.9 million for
the three months ended June 30, 2002 compared to $139.2 million for the same
period in 2001 due to increased sales of vinyl windows and vinyl siding. Results
from continuing operations exclude our AmerCable division, which was sold on
June 24, 2002. Unit sales of vinyl windows and vinyl siding increased 48.5% and
9.1%, respectively, for the second quarter of 2002 compared to the same period
in 2001. The increased sales are a result of our ability to capitalize on our
national distribution network, provide industry leading products and drive
operational excellence.
Gross profit increased to $51.1 million, or 31.0% of net sales, in the
second quarter of 2002 compared to $43.3 million, or 31.1% of net sales, in the
second quarter of 2001. The increase in gross profit is due to the increased
sales. Selling, general and administrative expense increased 16.2% to $33.2
million, or 20.1% of net sales, in the second quarter of 2002 versus $28.5
million, or 20.5% of net sales, in the same period in 2001. SG&A expense
increased as a result of six new supply centers added in the second quarter as
well as personnel added to support sales growth at existing supply centers.
Income from operations increased 21.0% to $17.9 million for the second quarter
of 2002 compared to $14.8 million for the same period in 2001.
EBITDA and Adjusted EBITDA
EBITDA for the second quarter of 2002 was $6.5 million compared to $19.7
million in the same period in 2001. EBITDA for the second quarter of 2002
includes $1.3 million of EBITDA relating to our AmerCable division, merger
transaction costs of $7.3 million, pre-tax extraordinary expenses of $7.6
million and a non-cash cost of sales expense of $1.9 million relating to an
inventory fair value adjustment recorded at the time of the merger. Adjusted
EBITDA, excluding the amounts discussed above, was $22.0 million. Adjusted
EBITDA for the second quarter of 2001, excluding EBITDA of $2.7 million from our
AmerCable division, was $17.0 million. Adjusted EBITDA increased $5.0 million or
29.4% in the second quarter of 2002 compared to the same period in the prior
year.
Successor and Predecessor Results
The Successor had net sales and a net loss of $114.0 million and $0.3
million, respectively, for the period from April 19, 2002 to June 30, 2002.
Interest expense during this period was $5.0 million and consisted primarily of
interest on our 9 3/4% notes, term loan and revolving credit facility under the
new credit facility, an interim credit facility temporarily utilized for the
merger transaction and amortization of deferred financing costs. As a result of
relocating our corporate office from Texas to Ohio, the Successor's state and
local tax rate has increased, raising out total effective tax rate to 41.5% from
38.5%. The Successor's results include extraordinary items of $4.4 million, net
of tax, for the premium paid to extinguish $74.0 million of the Successor's
assumed 9 1/4% notes and financing fees related to an interim credit facility
utilized for the merger transaction which was repaid shortly thereafter and the
loss from discontinued operations of $0.5 million, net of tax, for our AmerCable
division.
The Predecessor had net sales and a net loss of $57.0 million and $4.2
million for the period from April 1, 2002 to April 18, 2002. The Predecessor's
results include $7.3 million of transaction costs consisting of investment
banking and legal fees associated with the merger transaction with Harvest
Partners, Inc. Interest expense was $0.4 million and consisted primarily of
interest on our 9 1/4% notes for the time period from April 1, 2002 to the date
of the tender offer of these notes. In addition to recording income taxes at an
effective rate of 38.5%, we have recorded an estimated tax provision for the
portion of the Predecessor's merger transaction costs that are not deductible.
43
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Alside and Corporate Expenses
Net sales increased 20.4% to $275.9 million for the six months ended June
30, 2002 compared to $229.1 million for the same period in 2001 due to increased
sales of vinyl windows and vinyl siding. Unit sales of vinyl windows and vinyl
siding increased 57.1% and 11.7%, respectively, for the six months ended June
30, 2002 compared to the same period in 2001. Gross profit increased to $81.8
million, or 29.6% of net sales, for the six months ended June 30, 2002 compared
to $67.1 million, or 29.3% of net sales, for the same period in 2001. The
increase in gross profit is due to the increased sales. SG&A expense increased
14.5% to $62.7 million, or 22.7% of net sales, for the six months ended June 30,
2002 versus $54.8 million, of 23.9% of net sales, in the same period in 2001.
SG&A expense increased for the year-to-date period as a result of seven new
supply centers added as well as personnel added to support sales growth at
existing supply centers. Income from operations increased 55.0% to $19.0 million
for the six months ended June 30, 2002 compared to $12.3 million for the same
period in 2001.
EBITDA and Adjusted EBITDA
EBITDA for the six months ended June 30, 2002 was $8.7 million compared to
$19.0 million in the same period in 2001. EBITDA for the six months ended June
30, 2002 includes $1.9 million of EBITDA relating to our AmerCable division,
merger transaction costs of $9.3 million, pre-tax extraordinary expenses of $7.6
million and a cost of sales expense of $1.9 million relating to an inventory
fair value adjustment recorded at the time of the merger transaction. Adjusted
EBITDA, excluding the amounts discussed above, was $25.6 million. EBITDA for the
six months ended June 30, 2001 includes EBITDA of $4.7 million relating to our
AmerCable division and a charge of $2.4 million for the write-down of our
investment in Amercord Inc. Adjusted EBITDA for the six months ended June 30,
2001, excluding the amounts discussed above, was $16.7 million. Adjusted EBITDA
increased $8.9 million or 53.7% for the six months ended June 30, 2002 compared
to the same period in the prior year.
Successor and Predecessor Results
The Successor's results of operations for the period from April 19, 2002 to
June 30, 2002 are discussed in the three month comparison of results.
The Predecessor had net sales and a net loss of $180.2 million and $5.8
million for the period from January 1, 2002 to April 18, 2002. Interest expense
was $2.0 million and consisted primarily of interest on our company's 9 1/4%
notes for the time period from January 1, 2002 to April 18, 2002. The
Predecessor's results include $9.3 million of transaction costs consisting of
investment banking and legal fees associated with the merger transaction. The
Predecessor's results of operations for the six months ended June 30, 2001
include the $2.4 million charge for the write-down of our investment in Amercord
Inc. In addition to recording income taxes at an effective rate of 38.5%, the
Predecessor's tax provision for 2002 includes an estimate for $7.3 million of
the merger transaction costs that may not be deductible for income tax purposes.
44
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SEGMENT DATA
Alside accounted for more than 87% of our net sales and income from
operations in each of the last three years. In 2001, Alside accounted for
approximately 88% of our income from operations exclusive of corporate selling,
general and administrative expenses. Management believes that a discussion of
our 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 our financial statements:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
PREDECESSOR
------------------------------------------------------------------
% OF % OF % OF
TOTAL NET TOTAL NET TOTAL NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED:
Net sales(1)......................... $595,819 100.0% $499,393 100.0% $455,268 100.0%
Gross profit......................... 170,453 28.6 145,399 29.1 137,672 30.2
Selling, general and administrative
expenses(2)........................ 119,945 20.1 107,255 21.5 96,028 21.1
-------- ----- -------- ----- -------- -----
Income from operations............... 50,508 8.5 38,144 7.6 41,644 9.1
Interest expense..................... 6,795 1.1 6,046 1.2 6,779 1.5
Gain on the sale of UltraCraft....... -- -- 8,012 1.6 -- --
Equity in loss of Amercord Inc....... -- -- -- -- 1,337 0.3
Write-down of Amercord Inc........... 2,393 0.4 -- -- -- --
-------- ----- -------- ----- -------- -----
Income before income taxes........... 41,320 7.0 40,110 8.0 33,528 7.3
Income tax expense................... 15,908 2.7 16,555 3.3 13,038 2.8
-------- ----- -------- ----- -------- -----
Net income........................... $ 25,412 4.3% $ 23,555 4.7% $ 20,490 4.5%
======== ===== ======== ===== ======== =====
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
PREDECESSOR
------------------------------------------------------------------
% OF % OF % OF
TOTAL NET TOTAL NET TOTAL NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
ALSIDE:
Net sales(1)......................... $524,528 100.0% $434,845 100.0% $410,107 100.0%
Gross profit......................... 156,626 29.8 131,704 30.3 129,996 31.7
Selling, general and administrative
expenses........................... 107,737 20.5 95,404 22.0 87,588 21.4
-------- ----- -------- ----- -------- -----
Income from operations............... $ 48,889 9.3% $ 36,300 8.3% $ 42,408 10.3%
======== ===== ======== ===== ======== =====
Total Assets......................... $189,142 $165,990 $167,024
</Table>
45
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
PREDECESSOR
------------------------------------------------------------------
% OF % OF % OF
TOTAL NET TOTAL NET TOTAL NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
AMERCABLE:
Net sales(1)......................... $ 71,291 100.0% $ 64,548 100.0% $ 45,161 100.0%
Gross profit......................... 13,827 19.4 13,695 21.2 7,676 17.0
Selling, general and administrative
expenses........................... 7,174 10.1 7,880 12.2 4,801 10.6
-------- ----- -------- ----- -------- -----
Income from operations............... $ 6,653 9.3% $ 5,815 9.0% $ 2,875 6.4%
======== ===== ======== ===== ======== =====
Total Assets......................... $ 34,054 $ 34,255 $ 26,673
</Table>
- ---------------
(1) Certain prior period amounts have been reclassified to conform with the
current period presentation.
(2) Consolidated selling, general and administrative expenses include corporate
expenses of $5.0 million, $4.0 million and $3.6 million for the years 2001,
2000 and 1999, respectively.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000 -- PREDECESSOR
General
Our net sales increased $96.4 million or 19.3% to a record high of $595.8
million for the year ended 2001 as compared to the 2000 period due primarily to
strong sales at our Alside division. Income from operations increased $12.4
million or 32.4% to $50.5 million for the 2001 period compared to $38.1 million
for the 2000 period due primarily to higher operating profits at Alside. Net
income increased 7.9% to $25.4 million or $3.46 per share in 2001 compared to
$23.6 million or $2.85 per share in 2000. The 2001 results include the $2.4
million write-down of our Amercord Inc. investment while the 2000 period results
included the $8.0 million pre-tax gain on the sale of our UltraCraft cabinet
operations and an additional $1.1 million in income tax expense recorded due to
an adjustment to a deferred tax asset. Excluding these items, our net income and
earnings per share were $26.9 million or $3.67 per share in 2001 and $19.7
million or $2.39 per share in 2000. In April 2001, we repurchased 1.0 million
shares of our outstanding Class B common stock. Our weighted average shares
outstanding were 7.3 million in 2001 and 8.3 million in 2000. Exclusive of the
repurchase of the shares of Class B common stock, our weighted average shares
outstanding and earnings per share for 2001 were 8.0 million and $3.20,
respectively.
Alside
Alside's net sales increased 20.6% to $524.5 million in 2001 compared to
$434.8 million in the 2000 period due to higher sales volume of vinyl windows,
vinyl siding and complementary building products, such as roofing, foam
insulation, tools and other materials manufactured by third parties and sold
through Alside's supply centers. Unit sales of vinyl windows increased 48.1% for
the 2001 period compared to the 2000 period, exclusive of the operations of
Alpine, which were acquired in October 2000. Vinyl window unit sales increased
83.5% including the Alpine operations. Unit sales of vinyl siding increased
11.1% for the 2001 period while we believe that the vinyl siding industry as a
whole decreased slightly. Gross profit increased 18.9% to $156.6 million for the
2001 period compared to $131.7 million for the same period in 2000, but
decreased as a percentage of sales to 29.8% in 2001 from 30.3% in 2000 due to
changes in product mix to lower margin vinyl windows. Gross profit margins on
vinyl siding and windows each increased over 2000 due to lower raw material
costs and improved manufacturing efficiencies. Selling, general and
administrative expense increased to $107.7 million in 2001 compared to $95.4
million in 2000, but decreased as a percentage of sales. The increase was due to
higher personnel costs and higher supply center expenditures. The increase in
personnel costs was due to normal salary increases, an increase in the
46
number of salaried personnel due to the Alpine acquisition in 2000, higher
incentive compensation due to increased profitability at Alside and higher
severance expense. Supply center costs increased due to higher personnel costs
due to an increase in number of supply center personnel, higher incentive
compensation and increased lease expense due to the opening of additional
locations and increased lease expense at existing locations. Income from
operations increased 34.7% to $48.9 million as higher gross profits were
partially offset by higher selling, general and administrative expense.
AmerCable
Net sales increased 10.4% to $71.3 million for the 2001 period compared to
$64.5 million for the same period in 2000 due to higher sales of marine and
mining cable products which were partially offset by lower sales of industrial
cable products, including telecommunications cable products. Gross profit
increased to $13.8 million in 2001 compared to $13.7 million in 2000 but
decreased as a percentage of sales due to higher labor and overhead costs and
unfavorable fixed cost absorption. Selling, general and administrative expense
was $7.2 million for the period ended 2001 compared to $7.9 million for the same
period in 2000 as lower bad debt expense was partially offset by higher
personnel costs. In 2000, AmerCable recorded $1.4 million in additional bad debt
expense as the result of a customer bankruptcy. Income from operations increased
14.4% to $6.7 million in 2001 compared to $5.8 million for the same period in
2000 due to slightly higher gross profit and lower selling, general and
administrative expense due to the additional $1.4 million in bad debt expense
recorded in 2000.
Other
Net interest expense increased $749,000 or 12.4% in 2001 compared to 2000
due primarily to a decrease in our investment income. Our average investment
balance decreased during 2001 as compared to 2000 due to our repurchase of 1.0
million shares of our Class B common stock at an aggregate cost of $19.5 million
in April 2001. The overall decrease in interest rates during 2001 also
contributed to lower investment income. We recorded interest income of $377,000
in 2001 as compared to $1.1 million in 2000. Corporate selling, general and
administrative expense increased to $5.0 million for 2001 compared to $4.0
million for the 2000 period due to the cost associated with obtaining a fairness
opinion in connection with the repurchase of our Class B common stock and
additional compensation expense recorded due to a modification of certain
outstanding stock options.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999 -- PREDECESSOR
General
Our net sales increased 9.7% to $499.4 million in 2000 as compared to
$455.3 million in 1999 due to higher sales at our Alside and AmerCable
divisions. Income from operations decreased 8.4% to $38.1 million in 2000 as
compared to $41.6 million in 1999 as higher operating profits from our AmerCable
division were offset by lower operating profits at Alside. Net income increased
to $23.6 million in 2000 as compared to $20.5 million in 1999. The increase in
net income was due to the sale of our UltraCraft cabinet operations in June
2000, which resulted in a pre-tax gain of $8.0 million.
Alside
Net sales at Alside increased to $434.8 million in 2000 as compared to
$410.1 million in 1999 due to higher sales prices in vinyl siding and higher
sales volume in vinyl windows and vinyl fencing. Vinyl siding sales increased in
2000 as compared to 1999 as higher sales prices which were implemented to offset
higher vinyl resin costs were partially offset by a slight decrease in siding
unit volume. Vinyl window sales increased 9.7% in 2000 due primarily to a 6.5%
increase in unit sales volume while sales of vinyl fencing, decking and railing
increased 28.5% due to higher sales volume. Gross profit increased to $131.7
million in 2000 but decreased as a percentage of sales as Alside was unable to
recover any incremental margin on the selling price increases that resulted due
to higher vinyl resin prices. Selling, general and administrative expense
increased to $95.4 million in 2000 as compared to $87.6 million in 1999 due to
the opening of
47
eight additional supply centers as well as higher personnel costs and higher
legal expense. Income from operations decreased to $36.3 million in 2000 from
$42.4 million in 1999 as higher gross profits were more than offset by higher
selling, general and administrative expense.
AmerCable
AmerCable's net sales increased 42.9% to $64.5 million in 2000 as compared
to $45.2 million in 1999 due to higher volume across all product lines. Sales
increased by 86% in the industrial segment as sales of power cable to the
telecommunications industry were very strong. Gross profit increased to $13.7
million in 2000 up from $7.7 million in 1999 due to higher sales and improved
fixed cost absorption. Gross profit as a percentage of sales increased to 21.2%
as compared to 17.0% in 1999. Selling, general and administrative expense
increased to $7.9 million in 2000 as compared to $4.8 million in 1999. The
increase was due to a $1.4 million increase in bad debt expense as well as
higher personnel costs and higher incentive compensation. Bad debt expense
increased by $1.4 million in 2000 as a result of a large customer that filed for
bankruptcy. Income from operations increased to $5.8 million in 2000 as compared
to $2.9 million in 1999 due to higher gross profits, which were offset in part
by higher selling, general and administrative expense.
Other
Net interest expense decreased $733,000 or 10.8% in 2000 as compared to
1999 primarily due to an increase in our investment income. We recorded interest
income of $1.1 million in 2000 as compared to $329,000 in 1999. We recorded $1.1
million in additional income tax expense due to an adjustment to a 1986 deferred
tax asset recorded pursuant to the spin-off of the tire cord division into
Amercord Inc. This adjustment increased the effective tax rate from 38.5% to
41.3%.
Amercord Inc.
In November 1999, Amercord Inc. was recapitalized, and in that transaction
our interest in Amercord Inc. was reduced from 50% to 9.9%. As a result of the
recapitalization, we received $1.2 million in cash (net of related expenses) and
a subordinated note for $1.5 million due November 2004. We have the right to
require Amercord Inc. to purchase our remaining 9.9% interest for $2.0 million
in November 2003. For the reasons described in the following paragraph, we do
not presently expect Amercord Inc. will have the financial ability to meet these
obligations.
Amercord Inc.'s operating results and financial position deteriorated
during the first quarter 2001. We believed we would not recover our investment
in Amercord Inc. and wrote off our $2.4 million investment in Amercord Inc.
during the first quarter of 2001. Amercord Inc. ceased operations during the
second quarter of 2001.
QUARTERLY FINANCIAL DATA
GENERAL
Because most of Alside's building products are intended for exterior use,
our 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, we have historically had
small profits or losses in the first quarter, and reduced profits in the fourth
quarter of each calendar year due to the significant impact of Alside on our
performance.
48
Our quarterly sales and operating profit data for the six months ended June
30, 2002 and quarterly results for years 2001 and 2000 are shown in the table
below:
<Table>
<Caption>
THREE MONTHS EIGHTEEN DAYS SEVENTY-THREE
ENDED ENDED DAYS ENDED
MARCH 31 APRIL 18 JUNE 30
PREDECESSOR PREDECESSOR SUCCESSOR
------------ ------------- -------------
2002
Net sales -- Alside............................ $111,062 $50,897 $113,960
Net sales -- AmerCable......................... 12,136 6,135 --
-------- ------- --------
Total net sales................................ 123,198 57,032 113,960
Gross profit................................... 32,420 17,459 34,669
Income from operations......................... 1,201 5,406 13,002
Net loss....................................... (1,519) (4,238) (262)
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR
-------------------------------------------------
2001
Net sales -- Alside.................... $ 89,939 $139,206 $150,942 $144,441
Net sales -- AmerCable................. 18,672 19,539 17,722 15,358
-------- -------- -------- --------
Total net sales........................ 108,611 158,745 168,664 159,799
Gross profit........................... 27,197 47,266 49,592 46,398
Income (loss) from operations.......... (930) 16,994 19,142 15,302
Net income (loss)...................... (3,015) 9,311 10,714 8,402
<Caption>
PREDECESSOR
-------------------------------------------------
2000
Net sales -- Alside.................... $ 87,141 $119,135 $118,715 $109,854
Net sales -- AmerCable................. 16,278 15,246 16,096 16,928
-------- -------- -------- --------
Total net sales........................ 103,419 134,381 134,811 126,782
Gross profit........................... 28,593 39,733 40,277 36,796
Income from operations................. 4,310 12,715 13,155 7,964
Net income............................. 1,591 11,894 5,967 4,103
</Table>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash and cash equivalents of $11.2 million and
available borrowing capacity of approximately $37.4 million under our credit
facility. Our outstanding letters of credit as of June 30, 2002, totaled $2.6
million securing various insurance letters of credit.
For the one hundred eight days ended April 18, 2002, net cash used in
operations of the Predecessor was $18.3 million. For the seventy-three days
ended June 30, 2002 net cash provided by operations of the Successor was $13.6
million. Cash flows from operations of the Predecessor also include the working
capital needs of AmerCable for the period from January 1, 2002 to April 18,
2002. AmerCable's cash flows for the period from April 19, 2002 to June 24, 2002
are shown as net cash used in discontinued operations. The net $4.7 million use
of cash from operations ($18.3 million of cash used in the Predecessor less
$13.6 million of cash provided by the Successor) for the six months ended June
30, 2002 compares to $4.4 million of cash provided by operations of the
Predecessor for the same period in 2001. The decrease in cash from operations in
2002 was due primarily to the payment of merger transaction
49
costs by the Predecessor and increases in inventory from opening seven new
supply centers and to support increased sales partially offset by the improved
operating results.
Cash flows from the Successor's investing activities also include the
merger transaction for $377.8 million and net proceeds from the sale of
AmerCable totaling $28.3 million.
Cash flows from the Successor's financing activities include: (1) the
issuance of $165 million of 9 3/4% notes due 2012, (2) $125 million from a new
$165 million credit facility, (3) $164.8 million cash contribution from
Associated Materials Holdings Inc. and (4) cash of approximately $4.6 million,
representing a portion of our company's total cash on hand of $6.8 million to
finance the merger transaction of $377.8 million, tender offer of the 9 1/4%
notes of $74.0 million and debt extinguishment costs of $7.6 million. The tender
offer premium paid for the 9 1/4% notes was approximately $7.3 million, of which
$4.9 million is included as an extraordinary item representing the portion of
the premium in excess of the fair market value of the 9 1/4% notes. The tender
offer closed on April 19, 2002, prior to the closing of the offering of the
outstanding notes on April 23, 2002. We borrowed under a $215 million unsecured
interim credit facility to complete the tender offer. The proceeds from the
offering of the outstanding notes along with proceeds from the term loan under
the new credit facility were used to repay such interim credit facility. Upon
completion of the merger transaction, we were then obligated to make a change of
control offer for the approximate $1.0 million of remaining outstanding 9 1/4%
notes at a price of 101% of the principal amount thereof, plus accrued and
unpaid interest. The change of control offer was completed on June 21, 2002 with
an additional approximate $0.1 million of the 9 1/4% notes being tendered. Net
proceeds from the sale of AmerCable were subsequently used to permanently reduce
borrowings under the term loan by $28.5 million.
Our 9 3/4% notes pay interest semi-annually. Our credit facility includes
$96.5 million of outstanding term loans due through 2009 that bear interest at
the London Interbank Offered Rate (LIBOR) plus 3.50%, payable quarterly, and up
to $40 million of available borrowings provided by revolving loans, which expire
in 2007. We have one subsidiary, which is a wholly owned subsidiary having no
assets, liabilities or operations. This subsidiary fully and unconditionally
guarantees our 9 3/4% notes.
The new credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit our ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell our assets or declare dividends.
In addition, under the new credit facility we will be required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense beginning September 30, 2002. See "Description of
Certain Indebtedness -- New Credit Facility".
Net cash provided by operating activities was $44.0 million, $23.0 million
and $15.2 million in 2001, 2000 and 1999, respectively. Cash flows from
operations increased $21.0 million in 2001 compared to 2000 due to higher
operating profits and higher accounts payable and accrued liabilities which were
partially offset by higher accounts receivable. The increase in accounts payable
was due to higher fourth quarter sales and the timing of vendor payments while
the increase in accrued liabilities was due to higher commission and profit
sharing accruals in our Alside division. Sales for the fourth quarter of 2001
were 26% higher than the same period in 2000 resulting in an increase in
accounts receivable for 2001 compared to the 2000 period. Inventory levels have
not increased proportionately with sales due to improved inventory management
and the significant increase in vinyl window sales, which have relatively small
amounts of finished goods inventory due to the fact that our window products are
custom fabricated to the customer's specifications. Cash flows from operations
increased in 2000 as compared to 1999 due primarily to lower working capital
requirements.
For the one hundred eight days ended April 18, 2002, capital expenditures
of the Predecessor totaled $3.8 million, which includes AmerCable's capital
expenditures of $1.9 million. For the seventy-three days ended June 30, 2002,
capital expenditures of the Successor totaled $3.3 million. The combined capital
expenditures of the Predecessor, excluding AmerCable, and the Successor totaled
$5.2 million for the six months ended June 30, 2002. This compares to capital
expenditures of $7.6 million ($9.8 million less $2.2 million of AmerCable's
capital expenditures) for the same period in 2001. Capital expenditures in the
50
2002 period were primarily for the production of new casement window tooling,
related production line expenditures and leasehold improvements for the opening
of seven new supply centers. Our 2002 budget includes expenditures to replace
existing window tooling to facilitate the manufacture of new products, increase
window and siding capacity to meet anticipated sales growth, expand our existing
supply center network and approximately $400,000 for the ERP system
implementation. We believe that capital expenditures ranging from $8.0 million
to $10.0 million represent a base level of spending needed to maintain our
manufacturing facilities as well as provide for modest increases in capacity and
further automation.
Capital expenditures totaled $15.0 million, $11.9 million and $18.9 million
in 2001, 2000 and 1999, respectively. Alside's 2001 expenditures were used
primarily to increase window and fencing capacity and for the new ERP system,
which will be implemented over the next two years at a total cost of
approximately $12.0 million. Capital expenditures associated with the ERP
implementation totaled $3.1 million in 2001 and 2000. Expenditures at AmerCable
were used to expand manufacturing capacity. Capital expenditures in 2000 were
used primarily to increase extrusion capacity for window profiles, fencing and
siding products, improve window efficiency and upgrade window information
systems at Alside and increase capacity and processing efficiency at AmerCable.
Expenditures in 1999 were primarily used to complete the new vinyl siding
manufacturing facility in Freeport, Texas, expand extrusion capacity for window
profiles and vinyl fencing, expand capacity and increase manufacturing
efficiency for semi-custom cabinets and increase production flexibility and
capacity at AmerCable. Capital expenditures for the new vinyl siding
manufacturing plant were $9.8 million in 1999. We have historically funded these
capital expenditure requirements out of cash generated from operating activities
or borrowings under our bank credit facility.
We have commitments for future minimum lease payments under noncancelable
operating leases, principally for manufacturing and distribution facilities and
certain equipment. The minimum commitments under these leases for 2002, 2003,
2004, 2005, 2006 and thereafter are $13.5 million, $11.4 million, $8.8 million,
$6.1 million, $3.4 million and $5.4 million, respectively.
In connection with the recapitalization of Amercord Inc. in November 1999,
we guaranteed a $3.0 million note secured by Amercord Inc.'s real property.
Amercord Inc. ceased operations in the second quarter of 2001. As of the date of
this prospectus supplement, the lender has not requested us to make payment
under the guarantee. Should the guarantee be exercised by Amercord Inc.'s
lender, we and Ivaco Inc., another stockholder of Amercord Inc., have the option
to assume the loan. Ivaco Inc. has indemnified us for 50% of any loss under the
guarantee up to $1.5 million. Based on a third party appraisal of Amercord
Inc.'s real property, we believe that we are adequately secured under our
guarantee of the $3.0 million Amercord Inc. note such that no loss is
anticipated with respect to this guarantee.
Effective October 1, 1998, we established an Employee Stock Purchase Plan,
or "ESPP". Employees participating in the ESPP can purchase shares of our common
stock at a 15% discount to fair market value through payroll deductions of up to
25% of their eligible compensation. We initially registered 250,000 shares of
common stock with the Commission for issuance pursuant to the ESPP and
registered an additional 250,000 shares during 2001. During 2001, 2000 and 1999,
we issued 60,679, 65,873 and 80,919 shares of common stock pursuant to the ESPP,
resulting in net proceeds of approximately $875,000, $848,000 and $851,000,
respectively. Our Board of Directors approved the suspension of the ESPP
effective December 31, 2001.
On October 27, 1998 our Board of Directors approved a program to repurchase
up to 800,000 shares of common stock in open market transactions depending on
market, economic and other factors. On November 28, 2000 our Board of Directors
authorized the repurchase of an additional 800,000 shares under the program for
a total of 1.6 million shares. At December 31, 2001, we had repurchased 1.0
million shares of common stock under this program at a cost of $13.9 million.
The Class B common stock repurchase described below was not part of this stock
repurchase program.
On April 29, 2001, we repurchased 1,000,000 shares of our Class B common
stock from The Prudential Insurance Company of America, or Prudential, and its
wholly owned subsidiary, PCG Finance Company II, LLC, or "PCG", at $19.50 per
share, or $19.5 million in the aggregate, which has been
51
reflected primarily as a reduction to retained earnings. The share purchase was
financed through available cash and borrowings under our existing credit
facility. Following the purchase, Prudential and PCG converted the remaining
550,000 shares of Class B common stock held by these entities into 550,000
shares of common stock pursuant to the terms of our certificate of
incorporation. We have retired all 1,550,000 previously authorized shares of
Class B common stock.
We believe that available cash and cash flow from operations, together with
borrowings under the new credit facility, will be sufficient to cover our
working capital, capital expenditures and debt service needs for the foreseeable
future. Our ability to make scheduled payments of principal or interest on, or
to refinance, our indebtedness, or to fund planned capital expenditures, will
depend on our future performance, which is subject to general economic
conditions, competition in the building product environment and other factors.
We may not generate sufficient cash flow from operations, realize anticipated
revenue growth and operating improvements or obtain future capital in a
sufficient amount or on acceptable terms, to enable us to service our
indebtedness or to fund our other liquidity needs.
We intend to discharge the remaining approximate $0.9 million of 9 1/4%
notes pursuant to the indenture governing such notes on or after March 1, 2003.
We expect the remaining 9 1/4% notes will be redeemed at 104.625% of the
principal amount of such notes plus accrued and unpaid interest through the date
of purchase.
EFFECTS OF INFLATION
We believe that the effects of inflation have not been material to our
operating results for each of the past three years, including interim periods.
Our principal raw material, vinyl resin, has been subject to rapid price
changes. Through price increases, we have historically been able to pass on
significant resin cost increases. The results of operations for individual
quarters can and have been negatively impacted by a delay between the time of
vinyl resin cost increases and price increases in our products. However, over
longer periods of time, the impact of the cost increases in vinyl resin has
historically not been material. While we expect that any significant resin cost
increases in 2002 will be offset by price increases to our customers, should we
be unable to pass on any future price increases, our profitability could be
impacted.
FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" which
has eliminated the pooling of interests method for mergers and acquisitions. The
purchase method of accounting is required for all business combinations
initiated after June 30, 2001. SFAS No. 141 supersedes APB Opinion No. 16,
"Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." As discussed in the "Unaudited Pro
Forma Financial Information" section of this prospectus supplement, the merger
has been accounted for under the purchase method of accounting proscribed under
this Statement.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" which addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized but
instead be reviewed annually for impairment using a fair-value based approach.
Intangible assets that have a finite life will continue to be amortized over
their respective estimated useful lives. The Statement is effective for fiscal
years beginning after December 15, 2001. As discussed in the "Unaudited Pro
Forma Financial Information" section of this prospectus supplement, the merger
has resulted in a purchase price allocation to tangible and intangible assets
with both finite and indefinite lives. On an annual basis, we will test goodwill
and those intangible assets with indefinite lives for impairment.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs and
52
establishes consistent accounting treatment for these items. This Statement is
effective for fiscal years beginning after June 15, 2002. We believe the
adoption of this Statement will not have a material effect on our financial
position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial reporting and accounting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business (as previously defined
in that Opinion). This Statement also amends ARB No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement is effective for fiscal
years beginning after December 15, 2001. We have accounted for the sale of our
AmerCable division under the provisions of this Statement and as such
AmerCable's results are presented as "Discontinued Operations" subsequent to the
merger.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 require that any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented be reclassified. We recorded extraordinary items of $4.4
million, net of tax, related to debt extinguishment. We are required to adopt
the provisions of this standard in our fiscal year beginning on January 1, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, we evaluate our estimates, including those
related to customer programs and incentives, bad debts, inventories, income
taxes and pensions and benefits. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
REVENUE RECOGNITION
Revenues are recorded net of estimated customer programs and incentive
offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged to income in
the period in which the facts that give rise to the revision become known.
BAD DEBT
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The allowance for
doubtful accounts is based on review of the overall condition of accounts
receivable balances and review of significant past due accounts. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of our ability to make payments, additional allowances may be
required.
53
INVENTORY
We value our inventories at the lower of cost (first-in, first-out) or
market. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires that deferred tax assets and liabilities be
recognized for the effect of temporary differences between the book and tax
bases of recorded assets and liabilities. SFAS No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. We review the recoverability of any tax assets recorded on the balance
sheet and provide any necessary allowances as required.
PENSION
Our pension costs are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates and expected
return on plan assets. In selecting these assumptions, management considers
current market conditions, including changes in interest rates. Changes in the
related pension benefit costs may occur in the future due to changes in
assumptions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We have outstanding borrowings under the term loan of our new credit
facility and may borrow under the revolving credit facility from time to time
for general corporate purposes, including working capital and capital
expenditures. Interest under the new credit facility is based on the variable
London Interbank Offered Rate (LIBOR). At June 30, 2002, we had borrowings of
$96.5 million under the term loan. The effect of a 1/8% increase or decrease in
interest rates would increase or decrease total interest expense for the six
months ended June 30, 2002 by approximately $60,000.
FOREIGN CURRENCY EXCHANGE RATE RISK
Our revenues are primarily from domestic customers and are realized in U.S.
dollars. Accordingly, we believe our direct foreign currency exchange rate risk
is not material. In the past, we have hedged against foreign currency exchange
rate fluctuations on specific sales or equipment purchasing contracts. At June
30, 2002 we had no currency hedges in place.
COMMODITY PRICE RISK
See "-- Effects of Inflation" for a discussion of the market risk related
to our principal raw material, vinyl resin.
54
BUSINESS
COMPANY OVERVIEW
We are a leading, vertically integrated manufacturer and nationwide
distributor of exterior residential building products. These products are
marketed through our Alside division on a wholesale basis to more than 35,000
professional contractors engaged in home repair and remodeling and new home
construction. We distribute our products primarily through our nationwide
network of 89 supply centers operating under the Alside(R)brand name. In 2001,
Alside accounted for more than 88% of our total net sales.
The core products we manufacture and distribute are vinyl siding and vinyl
windows which together comprised approximately 71% of Alside's 2001 net sales.
We also manufacture and distribute vinyl fencing, decking and railing, and vinyl
garage doors and distribute other complementary products which are manufactured
by third parties. Approximately two thirds of Alside's products are sold to
contractors engaged in the home repair and remodeling market with one third sold
to the new construction market. Our supply centers provide "one stop" shopping
to our contractor customers, carrying products, accessories and tools necessary
to complete a vinyl siding or window project. In addition, our supply centers
provide high quality product literature, product samples and installation
training to these customers. We believe that the strength of our products and
distribution network has developed strong brand loyalty and long-standing
relationships with local contractors and has enabled us to consistently gain
market share over the last five years. Approximately 80% of Alside's 2001 net
sales were generated through our network of supply centers with the remainder
sold through independent distributors primarily in markets where we currently do
not have supply centers.
Due to our vertically integrated distribution strategy, innovative new
product development and operational excellence, we have consistently generated
sales growth in excess of industry averages. From 1996 to 2001, Alside generated
a compounded annual growth rate in net sales of 10.7%. In 2001, Alside's net
sales grew by 20.6% over the prior year. We believe that our historical
investment in manufacturing and distribution capabilities and our initiatives to
reduce costs and enhance operating efficiencies throughout our production,
distribution and supply chain provide us with a strong platform for future
growth and profitability.
INDUSTRY OVERVIEW
Demand for residential building products is driven by a number of factors,
including consumer confidence, availability of credit, new housing starts and
general economic cycles. Historically, the demand for repair and remodeling
products, where we are primarily focused, has been less cyclical than demand for
new home construction and is less sensitive to these factors. Drivers of repair
and remodeling demand include:
- Favorable demographics. The segment of the population age 55 years and
above, which favors professionally installed, low maintenance home
improvements, is estimated to grow by 25% over the next five years and
50% over the next ten years.
- Aging of the housing stock. The average home age increased from 23 years
in 1985 to 29 years in 2000, and over 70% of the current housing stock
was built prior to 1980.
- Increase in average home size. The average home size increased over 25%
from 1,785 square feet in 1985 to 2,306 square feet in 2000.
In addition, repair and remodeling projects tend to utilize a greater mix of
premium products with higher margins than those used in new construction
projects.
We estimate that the residential vinyl siding and vinyl window markets are
approximately $1.7 billion and $3.4 billion in size, respectively. Vinyl
comprises the largest share of the residential siding and window markets. Vinyl
has greater durability, requires less maintenance and provides greater energy
efficiency than many competing siding and window products. According to industry
reports, based on unit sales, vinyl accounted for approximately 44% of the
exterior siding market and approximately 58% of the residential
55
window market in 2001. More recently, vinyl siding has achieved increasing
acceptance in the new construction market, as builders and home buyers have
recognized vinyl's low maintenance, durability and price advantages. Vinyl
windows also 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. We believe
that vinyl siding and vinyl windows will continue to gain market share in the
new residential construction market while remaining the preferred product of the
remodeling marketplace. Vinyl competes with wood, masonry, fiber cement and
metal in the siding market and wood and aluminum in the window market.
OUR COMPETITIVE STRENGTHS
The following competitive strengths have contributed to our growth and have
enabled us to gain market share over the last five years within the U.S. siding
and window markets.
Nationwide Distribution Network of Company-Owned Supply Centers. We are
one of only two major vinyl siding manufacturers in the United States that
markets our products primarily through a company-owned distribution
network. Our national distribution network offers us a dedicated channel
compared to most of our competitors who rely on local third party
distributors who generally carry an assortment of brands and may not focus
on any particular brand. We believe that distributing our vinyl siding and
window products through our nationwide network of 89 Alside supply centers
helps us to: (1) build long-standing customer relationships and Alside
brand loyalty, (2) develop comprehensive, customized marketing programs to
assist our contractor customers, (3) closely monitor developments in local
customer preferences, and (4) ensure product availability through
integrated logistics between our manufacturing and distribution. Our supply
center network has enabled us to grow substantially faster than the
industry. Our vinyl siding unit sales grew at a five year compounded annual
growth rate of 9.2% as compared to an industry average of 2.0% over the
same period and our vinyl window unit sales grew at a five year compounded
annual growth rate of 12.7% as compared to an industry average of 5.8%.
Broad Product Offering. We offer a diverse mix of vinyl siding and vinyl
window products to both the repair and remodeling and new construction
markets across all price points: premium, standard and economy. Including
our manufactured products and products manufactured by third parties, our
supply centers sell more than 2,000 building and remodeling products. Our
broad product offering enables us to meet the specialized needs of our
customers and diversify our sales across all segments of the market. Most
of these products are sold under the Alside brand and are recognized for
their quality and durability. Our product offering includes the well-known
Charter Oak, Preservation, Seneca, Conquest and Landscape vinyl siding
products, and the UltraMaxx, Excalibur, Centurion and Alpine vinyl window
products.
Low-Cost and Vertically Integrated Operations. We believe that we are a
low-cost manufacturer as a result of our manufacturing expertise,
state-of-the-art technology and economies of scale. Our Alside division has
seven manufacturing facilities that produce vinyl siding and windows and
other vinyl products. During the last three years, we invested
approximately $35 million of capital in Alside, most of which was used in
upgrading our manufacturing facilities. This has resulted in significant
operating efficiency and increased capacity for meeting future growth
needs. Within our window operations, our ability to produce vinyl
extrusions, coupled with our high-speed welding and cleaning equipment,
provides us with cost and quality advantages over other vinyl window
manufacturers.
BUSINESS STRATEGY
We seek to distinguish ourselves from other suppliers of residential
building products and to sustain our profitability momentum through a business
strategy focused on the following:
Increase Sales at Existing Supply Centers. We plan to increase sales at
each of our supply centers by continuing to: (1) enhance the vinyl siding
and window product offering and expand third party
56
products to offer a comprehensive package to appeal to a broad range of
market segments; (2) utilize our highly trained sales force to maximize
opportunities with existing customers and identify and capture new
customers; and (3) allow supply centers to quickly respond to local market
dynamics and take advantage of local market opportunities.
Expand Supply Center Network. We intend to selectively expand our
distribution network. We will continue to open additional supply centers in
markets where we already have a presence, allowing us to gain additional
market share in these attractive markets.
Increase Focus on other Distributed Products. We will continue to focus on
maximizing incremental revenue and margin opportunities from products which
Alside does not manufacture. As part of this strategy we plan to identify
additional products to sell through our supply centers to better serve our
contractor customers. In addition, we intend to leverage our purchasing
power by centralizing the purchasing decisions for high-volume distributed
products.
Develop Innovative Products. We plan to capitalize on our vinyl
manufacturing expertise by continuing to develop and introduce innovative
new products that offer performance, cost and other advantages. These
efforts have led to several new product introductions in recent years
including Preservation, the first bundled vinyl siding and vinyl window
program in the industry; CenterLock, a vinyl siding product with a unique
locking mechanism; Eclipse, the industry's only flat-seam vinyl siding; and
Landscape, an economy vinyl siding product with enhanced rigidity providing
the appearance of a higher end product. Our strong customer relationships
provide valuable insight into the latest consumer preferences and product
attributes that appeal to contractors.
Drive Operational Excellence. We will continue to capitalize on
opportunities to reduce costs, increase customer service levels and reduce
lead times. We have historically identified similar opportunities and have
subsequently executed strategic initiatives that resulted in increased
profitability and revenue growth. For example, in 2000 and 2001 we targeted
process efficiency opportunities in our window operations through system
upgrades, flow realignment, and personnel-related initiatives. The
successful implementation of this strategy raised our on-time deliveries to
over 98% while increasing unit volume by over 48% (excluding our
acquisition of Alpine) in 2001.
PRODUCTS
Our principal product offerings are vinyl siding and vinyl windows, which
together accounted for approximately 71% of Alside's 2001 net sales. We also
manufacture a variety of other products including vinyl fencing, decking and
railing, as well as vinyl garage doors.
The vinyl siding market consists of three segments: economy, standard and
premium. Vinyl siding quality is determined by its rigidity, resistance to
fading, thickness and ease of installation as well as other factors. Beginning
with our introduction of Charter Oak in 1995, we have established ourselves as a
leader in product innovation within all segments of the vinyl siding industry,
most recently in the premium and economy segments.
We believe that our innovation in product development was key to
establishing us as a leader in the industry and will continue to be a principal
factor in our sales growth in future years. For example, in late 1995, we
introduced our Charter Oak siding, which enabled us to penetrate the premium
segment of the vinyl siding market. We believe that Charter Oak continues to set
the standard for premium vinyl siding products today. We introduced our Conquest
siding product in 1997, which has enabled us to achieve additional market
penetration in the economy segment of the siding industry. During 1998, we
introduced CenterLock, a patented product positioned in the premium market
segment. In 1999, we introduced Odyssey Plus, an improved and updated version of
our popular Odyssey siding product. We introduced our Seneca and Landscape
products in order to broaden our offerings for the standard and economy segments
in 2000. During 2001, we introduced three new premium siding products:
Preservation, Eclipse and Board and Batten. In addition to these products, we
have increased the number of colors and profiles offered within our existing
siding products and continue to increase and improve upon the breadth of our
vinyl
57
siding product lines. We offer limited warranties ranging from 50-year
warranties to lifetime warranties with our siding products.
We divide our 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. We custom manufacture substantially all of our windows to fit existing
window openings. Custom fabrication provides our customers with a product that
is less expensive to install and more attractive after installation. Our custom
windows are used primarily in the repair and remodeling market. In October 2000,
we strengthened our position in the new construction segment of the window
market through the purchase of substantially all the assets of Alpine
Industries, Inc., which primarily manufactures new construction windows. New
construction is one of the fastest growing segments of the vinyl window market
and the acquisition of Alpine has positioned us to take advantage of this high
growth market segment. This acquisition also gives us a presence in the western
United States. Substantially all of our window products are accompanied by a
limited lifetime warranty.
A summary of our vinyl siding and window product offerings is presented in
the table below according to our product line classification:
<Table>
<Caption>
PRODUCT LINE SIDING PRODUCTS WINDOW PRODUCTS
- ------------ --------------- ---------------
Premium Preservation Preservation
Charter Oak UltraMaxx
CenterLock Alpine 9000 Series
Eclipse
Board and Batten
Williamsport
Standard Odyssey Plus Geneva
Seneca Excalibur
Alpine 8000 Series
Economy Conquest Performance Series
Landscape Centurion
Alpine 7000 Series
</Table>
In addition to vinyl siding and windows, we produce vinyl fencing, decking
and railing under the brand name UltraGuard and vinyl garage doors under the
brand name Premium Garage Doors. We primarily market our fencing, decking and
railing and garage doors through independent dealers.
To complete our line of vinyl siding and window products in our supply
centers, we also distribute building products manufactured by other companies.
These products include metal siding, 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. We are one of only two major vinyl
siding manufacturers that markets products primarily through company-owned
distribution centers. We have a nationwide distribution network of 89 Alside
supply centers through which we market Alside manufactured products and other
complementary building products to over 35,000 professional home improvement and
new construction contractors. The supply centers range in size from 6,000 square
feet to 50,000 square feet depending on sales volume and the breadth and type of
products offered at each location. We believe that our supply centers provide
"one stop" shopping to meet the specialized needs of our contractor customers by
distributing over 2,000 building and remodeling products, including a broad
range of our manufactured vinyl siding and vinyl windows as well as products
manufactured by others. In 2001, approximately 80% of Alside's sales were made
through its supply centers. In addition to sales and promotional support,
contractors look to their local supply centers to provide a broad range of
specialty product offerings in order to maximize their ability to attract
remodeling and homebuilding customers.
58
We believe that distributing products through our supply centers provides
us with certain competitive advantages such as (1) build long-standing customer
relationships, (2) develop comprehensive, customized marketing programs to
assist our contractor customers, (3) closely monitor developments in local
customer preferences, and (4) ensure product availability through integrated
logistics between our manufacturing and distribution. Many of our contractor
customers have established long-standing relationships with their local supply
centers based on individualized service, quality products, timely delivery,
breadth of product offerings, strong sales and promotional programs and
competitive prices. We support our 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
their 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. Our daily contact with our
contractor customers also enables us to closely monitor activity in each of the
remodeling and new construction markets in which we compete. This direct
presence in the marketplace permits us to obtain current local market
information, providing us with the ability to recognize trends in the
marketplace earlier and adapt our product offerings on a location-by-location
basis.
Many of our contractor customers install both vinyl siding and vinyl
windows. Because we manufacture and distribute both vinyl siding and vinyl
windows, our contractor customers can acquire both products from a single
source, which we believe provides us with a competitive advantage in marketing
these products to our target customer base. Furthermore, we have the ability to
achieve economies of scale in sales and marketing by developing integrated
programs on either a national or local basis for our vinyl siding and vinyl
window products. In 2000, we introduced Preservation as the industry's first
bundled premium siding and window marketing program. Our unique position as a
manufacturer and distributor of both vinyl siding and windows has enabled us to
offer Preservation to select dealers.
Each of our 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 our continuing assessment of
market conditions and individual location profitability. During 2001, we added
five supply centers to our distribution network. We have also opened seven new
supply centers in 2002. We have developed formal training and recruiting
programs for supply center personnel which we expect to improve our ability to
staff new locations.
Through certain of our supply centers, our Alside Installed Services
Division provides full-service product installation of our vinyl siding
products, principally to new homebuilders who value the importance of
installation services. We also provide installation services for vinyl
replacement windows through certain of our supply centers.
We sell our manufactured products to large direct dealers and distributors,
generally in those areas where no supply center currently exists. These sales
accounted for approximately 20% of Alside's 2001 net sales. Despite their
aggregate lower percentage of total sales, our largest individual customers are
our large direct dealers and independent distributors. We continue to expand our
network of independent distributors in strategic areas to improve our
penetration into certain markets.
MANUFACTURING
We manufacture our vinyl siding products at our Ennis and Freeport, Texas
facilities. We added the Freeport facility, which was completed in 1999, in
order to provide the necessary capacity to meet our sales expectations for our
siding products. We are able to add incremental extrusion capacity sufficient to
increase our capacity by approximately 50% over 2001 levels without the need for
an additional facility or the expansion of the Freeport facility. We operate a
vinyl extrusion facility in West Salem, Ohio to produce vinyl window extrusions
as well as vinyl fencing, decking and railing and garage door panels. The Ennis,
Texas plant also produces vinyl fencing. We operate three window fabrication
plants which each use vinyl extrusions manufactured by us for the majority of
their production requirements and utilize high
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speed welding and cleaning equipment for their welded window products. By
producing our own vinyl extrusions, we believe we achieve significant cost
savings and higher product quality compared to purchasing these materials from
third-party suppliers. In October 2000, we purchased substantially all of the
assets of Alpine, including its leased window fabrication facility located in
Bothell, Washington. The Bothell facility produces its glass inserts, but has a
long-term contract to purchase its vinyl extrusions from a third-party supplier.
Our 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. Our 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 us are vinyl resins, resin stabilizers
and pigments, packaging materials, window hardware and glass, all of which are
available from a number of suppliers. We have a contract with our resin supplier
to supply substantially all of our vinyl resin requirements, which expires on
December 31, 2002. We believe that we will be able to extend this contract. In
the event we are unable to renew the contract, we believe our requirements could
also be met by other suppliers. The price of vinyl resin has been, and may
continue to be, volatile. We expect the price of vinyl resin to increase
significantly in 2002. We generally have been able to pass through price
increases in raw materials to our customers. While we expect that any
significant resin cost increases in 2002 will be offset by price increases to
our customers, should we be unable to pass on any future price increases, our
profitability could be impacted.
COMPETITION
We believe that no company within the residential siding industry competes
with us on both the manufacturing and distribution levels except for Owens
Corning. There are, however, numerous small and large manufacturers of vinyl
siding products, some of whom are larger in size and have greater financial
resources than us. We compete with numerous large and small distributors of
building products in our capacity as a distributor of these products. We believe
that Alside is the fifth largest manufacturer of vinyl siding with approximately
8% of the U.S. market. The market for vinyl replacement windows is highly
fragmented. We believe that the window fabrication industry will continue to
experience consolidation due to the increased capital requirements for
manufacturing welded vinyl windows. The trend towards welded windows, which
require more expensive production equipment as well as more sophisticated
information systems, has driven these increased capital requirements. We
generally compete on price, product performance, and sales and service support
to professional contractors. Competition varies by region. We also face
competition from alternative materials: wood, masonry, fiber cement and metal in
the siding market and wood and aluminum in the window market.
ACQUISITIONS AND DIVESTITURES
On June 24, 2002, we completed the sale of our AmerCable division to
AmerCable Incorporated, a newly-formed entity controlled by members of
management of the AmerCable division and Wingate Partners III, L.P., for net
proceeds of approximately $28.3 million in cash and the assumption of certain
liabilities pursuant to an asset purchase agreement dated as of the same date.
Following the completion of the sale, we no longer own the assets of, or
operate, the AmerCable division.
The asset purchase agreement in connection with the sale contained
customary representations and warranties by AmerCable Incorporated to us, as
well as certain limited representations and warranties by us to AmerCable
Incorporated.
The asset purchase agreement provides that following the asset sale,
Associated Materials Incorporated and AmerCable Incorporated each will indemnify
and hold harmless the other party and certain related parties and advisors for
the inaccuracy of any representation or warranty, the failure to perform any
covenant or comply with applicable bulk transfer or bulk sale laws and the
incurrence of
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losses in connection with liabilities allocated to each party pursuant to the
asset purchase agreement. Our obligation to indemnify AmerCable Incorporated is
subject to various timing and monetary limitations and can in no event exceed
the purchase price.
In October 2000, we acquired substantially all of the assets of Alpine for
$7.6 million in cash and the assumption of certain payroll related and property
tax liabilities. Included in the acquired assets is Alpine's leased window
fabrication facility located in Bothell, Washington. This facility manufactures
vinyl windows primarily for the new construction market. In addition to new
construction windows, Alpine manufactures premium sound control windows. This
acquisition significantly increased our presence on the West Coast. The
acquisition was accounted for using the purchase method of accounting.
We completed the sale of our UltraCraft operation, a manufacturer of
semi-custom frameless cabinets, in June 2000. Pre-tax net proceeds from the sale
were $18.9 million after working capital adjustments and transaction costs. We
recorded a pre-tax gain of $8.0 million on the sale. UltraCraft represented
approximately 5% of our 1999 net sales.
TRADEMARKS AND PATENTS
We have registered and nonregistered trade names and trademarks covering
the principal brand names and product lines under which our products are
marketed. Although we consider each of these items to be valuable, we do not
currently believe this property, other than the Alside(R) trademark, to be
material. We have obtained patents on certain claims associated with our siding,
fencing, decking and railing, and garage door products, which we believe
distinguish our products from those of our competitors.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our operations are subject to various environmental statutes and
regulations, including laws and regulations addressing materials used in the
manufacturing of our products. In addition, certain of our operations are
subject to federal, state and local environmental laws and regulations that
impose limitations or other requirements on the discharge of pollutants into the
air, water and soil, establish standards for the treatment, transport, storage
and disposal of solid and hazardous wastes, and remediation of soil and
groundwater contamination. Such laws and regulations may also impact the
availability of materials used in manufacturing our products. We believe we are
in material compliance with applicable environmental requirements, and do not
expect these requirements to result in material expenditures in the foreseeable
future. However, additional future expenditures may be necessary as compliance
standards and technology change, and unforeseen significant expenditures
required to maintain compliance, including unforeseen liabilities, could have an
adverse effect on our business and financial condition.
We 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
our Akron, Ohio location. With the exception of a small container storage area,
the use of these facilities was terminated prior to our acquisition of the
Alside assets from USX in 1984. The effects of the past practices at this
facility are continuing to be investigated (through continued groundwater
monitoring) pursuant to the terms of the consent order. We believe that USX
bears 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 us for substantially all of the
direct costs of corrective action at these facilities. We expect that USX will
continue to reimburse us. However, there can be no assurance that payments will
continue to be made by USX or that it will have adequate financial resources to
fully reimburse us for these costs.
Certain environmental laws, including CERCLA and comparable state laws,
impose strict, and in certain circumstances joint and several, liability upon
specified responsible parties which include certain former owners and operators
of waste sites designated for clean up by environmental regulators. A facility
formerly owned by our company in Lumber City, Georgia, which is now owned by
Amercord Inc., a company in which we currently hold a minority interest, is
currently undergoing soil and groundwater investigation pursuant to a Consent
Order entered into by Amercord Inc. with the Georgia Department of
61
Natural Resources in 1994. We are not a party to these activities. We also
understand that soil and groundwater in certain areas of the site (including in
the areas of two industrial waste landfills) are being investigated under CERCLA
by the United States Environmental Protection Agency to determine whether
remediation of those areas may be required and whether the site should be listed
on the state or federal list of priority sites requiring remediation. There can
be no assurance that Amercord Inc., the current site owner, would have adequate
financial resources to carry out additional remediation that may be required, or
that if substantial remediation is required, claims will not be made against us
which could result in material expenditures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Amercord Inc."
Also, we cannot be certain that we have identified all environmental
matters giving rise to potential liability. More stringent future environmental
requirements or stricter enforcement of existing requirements, the discovery of
unknown conditions, or our past use of hazardous materials could result in
increased expenditures or liabilities which could have an adverse effect on you.
PROPERTIES
Our operations include both owned and leased facilities as described below:
<Table>
<Caption>
LOCATION PRINCIPAL USE SQUARE FEET
- -------- ------------- -----------
Akron, Ohio Associated Materials Incorporated and Alside 70,000
Headquarters
Vinyl Windows, Vinyl Fencing, Decking and Railing 577,000
and Vinyl Garage Doors
Ennis, Texas Vinyl Siding Products, Vinyl Fencing, Decking and 301,000
Railing
Freeport, Texas Vinyl Siding Products 120,000
West Salem, Ohio Vinyl Window Extrusions, Fencing and Garage Door 173,000
Panels
Kinston, North Carolina Vinyl Windows 319,000(1)
Cedar Rapids, Iowa Vinyl Windows 128,000(1)
Bothell, Washington Vinyl Windows 159,000(1)
</Table>
- ---------------
(1) Leased facilities.
Our management believes that our facilities are generally in good operating
condition and are adequate to meet anticipated requirements in the near future.
Except for one owned location in Akron, Ohio, we lease our supply centers
for terms generally ranging from five to seven years with renewal options.
The leases for Alside's window plants extend through 2011 for the Bothell
location and 2005 for the Cedar Rapids and Kinston locations. Each lease is
renewable at our option for an additional five-year period. Following the
merger, we moved our corporate headquarters to our location in Akron, Ohio.
EMPLOYEES
Our employment needs vary seasonally with sales and production. As of June
30, 2002, we had approximately 2,429 full-time employees, including
approximately 1,330 hourly workers. We believe that our employee relations are
good. The West Salem, Ohio plant is our only unionized manufacturing facility,
employing approximately 120 covered workers as of June 30, 2002. The collective
bargaining agreement for the West Salem facility was successfully renegotiated
in November 2001 for a three-year term. Additionally, approximately 74 hourly
workers in certain supply center locations are covered by collective bargaining
agreements.
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We utilize leased employees to supplement our own workforce at our vinyl
window fabrication plants located in Akron, Ohio; Kinston, North Carolina; and
Cedar Rapids, Iowa. We believe that the employee leasing program provides us
with scheduling flexibility for seasonal production requirements. The aggregate
number of leased employees in the window plants ranges from approximately 300 to
650 people based on seasonality.
LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the ordinary
course of our business, none of which, after giving effect to our existing
insurance coverage, is expected to have a material adverse effect on us.
From time to time, we are involved in a number of proceedings and potential
proceedings relating to environmental and product liability matters. We handle
these claims in the ordinary course of our business and maintain product
liability insurance covering certain types of claims. Although it is difficult
to estimate our potential exposure to these matters, we believe that the
resolution of these matters will not have a material adverse effect on our
financial position, results of operations or liquidity.
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THE EXCHANGE OFFER
BACKGROUND AND PURPOSE OF THE EXCHANGE OFFER
We issued the outstanding notes on April 23, 2002, in a private placement
to a limited number of qualified institutional buyers and to persons in offshore
transactions in reliance on Regulation S. In connection with this issuance, we
entered into the indenture and the registration rights agreement, pursuant to
which we agreed to, subject to certain exceptions:
- within 90 days after the issue date of the outstanding notes, file an
exchange offer registration statement with the Commission with respect to
a registered offer to exchange the outstanding notes for exchange notes
of our company having terms substantially identical in all material
respects of the outstanding notes (except that the exchange notes will
not contain terms with respect to transfer restrictions);
- use our reasonable best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act within 180
days after the issue date of the outstanding notes;
- as soon as practicable after the effectiveness of the exchange offer
registration statement, offer the exchange notes in exchange for
surrender of the outstanding notes; and
- keep the exchange offer open for not less than 40 days (or longer if
required by applicable law) after the date of notice of the exchange
offer is mailed to holders of the outstanding notes.
Except as discussed below, upon the consummation of the exchange offer, we
will have no further obligations to register your outstanding notes. As soon as
practicable after 5:00 p.m., New York City time on November 26, 2002, unless we
decide to extend this expiration date, the exchange offer will be consummated
when we:
- accept for exchange your outstanding notes tendered and not validly
withdrawn pursuant to the exchange offer; and
- deliver to the trustee for cancellation all your outstanding notes
accepted for exchange and issue to you exchange notes equal in principal
amount to the principal amount of the outstanding notes surrendered by
you.
Each broker dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
REPRESENTATIONS
We need representations from you before you can participate in the exchange
offer. To participate in the exchange offer, we require that you represent to us
that:
- you are acquiring the exchange notes in the ordinary course of your
business;
- neither you nor any other person acting on your behalf is engaging in or
intends to engage in a distribution of your exchange notes;
- neither you nor any other person acting on your behalf has an arrangement
or understanding with any person to participate in the distribution of
the exchange notes;
- neither you nor any other person acting on your behalf is an "affiliate"
of us or any of our subsidiaries, as defined under Rule 405 of the
Securities Act; and
- if you or any other person acting on your behalf is a broker-dealer, you
will receive exchange notes for your own account in exchange for your
outstanding notes that were acquired as a result of
64
market-making activities or other trading activities, and you acknowledge
that you will deliver a prospectus in connection with any resale of your
exchange notes.
RESALE OF THE EXCHANGE NOTES
Based on interpretations by the Commission's staff, as set forth in
no-action letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988), Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) and Shearman &
Sterling, SEC No-Action Letter (available July 2, 1993), we believe that the
exchange notes issued under the exchange offer in exchange for the outstanding
notes may be offered for resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery requirements of the
Securities Act, if:
- you are not an "affiliate," as defined in Rule 405 of the Securities Act,
of our company;
- the exchange notes are acquired in the ordinary course of your business;
and
- you are not engaged in and do not intend to engage in, and have no
arrangement or understanding with any person to participate in any
manner, in the distribution of the exchange notes.
If you are engaged in or intend to engage in, or have any arrangement or
understanding with any person to participate in any manner, in a distribution of
the exchange notes or if you are an affiliate of our company:
- you cannot rely on the position of the Commission's staff mentioned
above; and
- you must comply with the registration and prospectus requirements of the
Securities Act in connection with a secondary resale of the exchange
notes.
TERMS OF THE EXCHANGE OFFER
We will accept any validly tendered outstanding notes which are not
withdrawn before 5:00 p.m., New York City time, on the expiration date. Exchange
notes will be issued in denominations of $1,000 principal amount and integral
multiples of $1,000 in exchange for each $1,000 principal amount of outstanding
notes. You may tender some or all of your outstanding notes in the exchange
offer.
The form and terms of the exchange notes will be the same as the form and
terms of your outstanding notes except that:
- interest on the exchange notes will accrue from the last interest payment
date on which interest was paid on your outstanding notes; and
- the exchange notes have been registered under the Securities Act and will
not bear a legend restricting their transfer.
The exchange notes will evidence the same indebtedness as the outstanding
notes, which they replace. The exchange notes will be issued under, and be
entitled to the benefits of, the same indenture that authorized the issuance of
the outstanding notes. As a result, both the exchange notes and the outstanding
notes will be treated as a single class of debt securities under the indenture.
The exchange offer does not depend upon any minimum aggregate principal amount
of outstanding notes being surrendered for exchange.
This prospectus supplement, together with the letter of transmittal you
received with the prospectus, is being sent to you and to others believed to
have beneficial interests in the outstanding notes. You do not have any
appraisal or dissenters' rights under the General Corporation Law of the State
of Delaware or under the indenture governing your outstanding notes. We intend
to conduct the exchange offer in compliance with the requirements of the
Exchange Act and the rules and regulations of the Commission.
We will have accepted your validly tendered outstanding notes when we have
given oral or written notice to the exchange agent, which will occur as soon as
practicable after the expiration date. The
65
exchange agent will act as agent for you for the purpose of receiving the
exchange notes from us. If we do not accept your tendered outstanding notes for
exchange because of an invalid tender or other valid reason, we will return the
certificates, if any, without expense, to you as promptly as practicable after
the expiration date. Certificates, if any, for exchange notes will likewise be
sent to you as promptly as practicable following our acceptance of the tendered
outstanding notes following the expiration date.
You will not be required to pay brokerage commissions, fees or transfer
taxes in the exchange of your outstanding notes. We will pay all charges and
expenses other than any taxes you may incur in connection with the exchange
offer.
In consideration for issuing the exchange notes as contemplated in this
prospectus supplement, we will receive in exchange the outstanding notes in like
principal amount. The outstanding notes surrendered in exchange for the exchange
notes will be retired and cancelled and cannot be reissued.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
November 26, 2002, unless we extend the expiration date. In any event, we will
hold the exchange offer open for at least forty days. In order to extend the
exchange offer, we will issue a notice by press release or other public
announcement before 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
- to delay accepting your outstanding notes;
- to extend the exchange offer;
- to terminate the exchange offer if any of the conditions have not been
satisfied by giving oral or written notice of any delay, extension or
termination to the exchange agent; or
- to amend the terms of the exchange offer in any manner.
CONDITIONS TO THE EXCHANGE OFFER
We will decide all questions as to the validity, form, eligibility,
acceptance and withdrawal of tendered outstanding notes, and our determination
will be final and binding on you. We reserve the absolute right to reject any
and all outstanding notes not properly tendered or reject any outstanding notes
which would be unlawful in the opinion of our counsel. We also reserve the right
to waive any defects, irregularities or conditions of tender as to particular
outstanding notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. You must cure any defects or irregularities in
connection with tenders of outstanding notes as we determine. Although we intend
to notify you of defects or irregularities with respect to tenders of your
outstanding notes, we, the exchange agent or any other person will not incur any
liability for failure to give any notification. Your tender of outstanding notes
will not be deemed to have been made until any defects or irregularities have
been cured or waived. Any of your outstanding notes received by the exchange
agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to you, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
We reserve the right to purchase or make offers for any outstanding notes
that remain outstanding after the expiration date or to terminate the exchange
offer and, to the extent permitted by applicable law, purchase outstanding notes
in the open market, in privately negotiated transactions or otherwise. The terms
of any of these purchases or offers could differ from the terms of the exchange
offer.
These conditions are for our sole benefit, and we may assert or waive them
at any time or for any reason. Our failure to exercise any of our rights will
not be a waiver of our rights.
66
We will not accept for exchange any outstanding notes you tender, and no
exchange notes will be issued to you in exchange for your outstanding notes, if
at that time any stop order is threatened or in effect with respect to the
registration statement or the qualification of the indenture relating to the
exchange notes under the Trust Indenture Act of 1939. We are required to use
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
In all cases, issuance of exchange notes to you will be made only after
timely receipt by the exchange agent of:
- a book entry confirmation of your outstanding notes into the exchange
agent's account at the book-entry transfer facility or certificates for
your outstanding notes;
- with respect to DTC and its participants, electronic instructions of the
holder agreeing to be bound by the letter of transmittal or a properly
completed and duly executed letter of transmittal; and
- all other required documents.
In the case of outstanding notes tendered by book-entry transfer into the
exchange agent's account at the book-entry transfer facility under the
book-entry transfer procedures described below, your non-exchanged outstanding
notes will be credited to an account maintained with the book-entry transfer
facility. If we do not accept any of your tendered outstanding notes for a valid
reason or if you submit your outstanding notes for a greater principal amount
than you desire to exchange, we will return any unaccepted or non-exchanged
outstanding notes to you at our expense. This will occur as promptly as
practicable after the expiration or termination of the exchange offer for your
outstanding notes.
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue exchange notes to you in exchange
for, any of your outstanding notes and may terminate or amend the exchange offer
if at any time before the acceptance of your outstanding notes for exchange or
the exchange of the exchange notes for your outstanding notes, we determine that
the exchange offer violates applicable law, any applicable interpretation of the
staff of the Commission or any order of any governmental agency or court of
competent jurisdiction.
PROCEDURES FOR TENDERING
Only you may tender your outstanding notes in the exchange offer. Except as
stated under "-- Book-Entry Transfer," to tender your outstanding notes in the
exchange offer, you must:
- complete, sign and date the enclosed letter of transmittal, or a copy of
it;
- have the signature on the letter of transmittal guaranteed if required by
the letter of transmittal; and
- mail, fax or otherwise deliver the letter of transmittal or copy to the
exchange agent before the expiration date.
In addition, either:
- the exchange agent must receive a timely confirmation of a book-entry
transfer of your outstanding notes, if that procedure is available, into
the account of the exchange agent at DTC (the "Book-Entry Transfer
Facility") under the procedure for book-entry transfer described below
before the expiration date;
- the exchange agent must receive certificates for your outstanding notes
and the letter of transmittal before the expiration date; or
- you must comply with the guaranteed delivery procedures described below.
For your outstanding notes to be tendered effectively, the exchange agent
must receive a valid agent's message through DTC's Automatic Tender Offer
Program, or ATOP system, or a letter of transmittal and other required documents
before the expiration date.
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If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in compliance with the terms and
conditions in this prospectus supplement and in the letter of transmittal.
THE METHOD OF DELIVERY OF YOUR OUTSTANDING NOTES, A LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND
RISK. INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. DO NOT SEND A LETTER
OF TRANSMITTAL OR OUTSTANDING NOTES DIRECTLY TO US. YOU MAY REQUEST YOUR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
MAKE THE EXCHANGE ON YOUR BEHALF.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where the outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. See "Plan of Distribution."
PROCEDURE IF THE OUTSTANDING NOTES ARE NOT REGISTERED IN YOUR NAME
If you are a beneficial owner whose outstanding notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you want to tender your outstanding notes, you should contact the registered
holder promptly and instruct the registered holder to tender on your behalf. If
you want to tender on your own behalf, you must, before completing and executing
a letter of transmittal and delivering your outstanding notes, either make
appropriate arrangements to register ownership of the outstanding notes in your
name or obtain a properly completed bond power or other proper endorsement from
the registered holder. We urge you to act immediately since the transfer of
registered ownership may take considerable time.
BOOK-ENTRY TENDER
The exchange agent will make requests to establish accounts at the
book-entry transfer facility for purposes of the exchange offer within two
business days after the date of the prospectus. If you are a financial
institution that is a participant in the book-entry transfer facility's systems,
you may make book-entry delivery of your outstanding notes being tendered by
causing the book-entry transfer facility to transfer your outstanding notes into
the exchange agent's account at the book-entry transfer facility in compliance
with the appropriate procedures for transfer. However, although you may deliver
your outstanding notes through book-entry transfer at the book-entry transfer
facility, you must transmit, and the exchange agent must receive, a letter of
transmittal or copy of the letter of transmittal, with any required signature
guarantees and any other required documents, except as discussed in the
following paragraph, on or before the expiration date or the guaranteed delivery
below must be complied with.
DTC's ATOP is the only method of processing the exchange offer through DTC.
To accept the exchange offer through ATOP, participants in DTC must send
electronic instructions to DTC through DTC's communication system instead of
sending a signed, hard copy letter of transmittal. DTC is obligated to
communicate those electronic instructions to the exchange agent. To tender your
outstanding notes through ATOP, the electronic instructions sent to DTC and
transmitted by DTC to the exchange agent must contain the participant's
acknowledgment of its receipt of and agreement to be bound by the letter of
transmittal for your outstanding notes.
SIGNATURE REQUIREMENTS AND SIGNATURE GUARANTEES
Unless you are a registered holder who requests that your exchange notes be
mailed to you and issued in your name or unless you are a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
68
Program or an "Eligible Guarantor Institution" within the meaning of Rule
17Ad-15 under the Exchange Act, each an "Eligible Institution," you must
guarantee your signature on a letter of transmittal or a notice of withdrawal by
an Eligible Institution.
If a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation or other person acting in a fiduciary or representative
capacity signs the letter of transmittal or any notes or bond powers on your
behalf, that person must indicate their capacity when signing and submit
satisfactory evidence to us with the letter of transmittal demonstrating their
authority to act on your behalf.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of outstanding notes and desire to tender
your outstanding notes, and the procedure for book-entry transfer cannot be
completed on a timely basis, your outstanding notes are not immediately
available or time will not permit your outstanding notes or other required
documents to reach the exchange agent before the expiration date, you may tender
your outstanding notes if:
- the tender is made through an Eligible Institution;
- before the expiration date, the exchange agent receives from an eligible
institution a properly completed and duly executed letter of transmittal
and notice of guaranteed delivery, in the form provided by us;
- a book-entry confirmation or the certificates for all physically tendered
outstanding notes, in proper form for transfer, and all other documents
required by the applicable letter of transmittal are received by the
exchange agent within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery; and
- the notice of guaranteed delivery states your name and address and the
amount of outstanding notes you are tendering, that your tender is being
made thereby and you guarantee that within three NYSE trading days after
the date of execution of the notice of guaranteed delivery, a book-entry
confirmation or the certificates for all physically tendered outstanding
notes, in proper form for transfer, and any other documents required by
the applicable letter of transmittal will be deposited by the Eligible
Institution with the exchange agent.
BENEFICIAL OWNER INSTRUCTIONS TO HOLDERS OF OUTSTANDING NOTES
Only a holder whose name appears on a DTC security position listing as a
holder of outstanding notes, or the legal representative or attorney-in-fact of
this holder, may execute and deliver the letter of transmittal.
Holders of outstanding notes who are not registered holders of, and who
seek to tender, outstanding notes should (1) obtain a properly completed letter
of transmittal for such outstanding notes from the registered holder with
signatures guaranteed by an Eligible Institution and obtain and include with
such letter of transmittal outstanding notes properly endorsed for transfer by
the registered holder thereof or accompanied by a written instrument or
instruments of transfer or exchange from the registered holder with signatures
on the endorsement or written instrument or instruments of transfer or exchange
guaranteed by an Eligible Institution or (2) effect a record transfer of such
outstanding notes and comply with the requirements applicable to registered
holders for tendering outstanding notes before 5:00 p.m., New York City time, on
the expiration date. Any outstanding notes properly tendered before 5:00 p.m.,
New York City time, on the expiration date accompanied by a properly completed
letter of transmittal will be transferred of record by the registrar either
prior to or as of the expiration date at our discretion. We have no obligation
to transfer any outstanding notes from the name of the registered holder of the
note if we do not accept these outstanding notes for exchange.
Tendering holders should indicate in the applicable box in the letter of
transmittal the name and address to which payment of accrued and unpaid interest
in cash on the outstanding notes, certificates evidencing exchange notes and/or
certificates evidencing outstanding notes for amounts not accepted for
69
tender, each as appropriate, are to be issued or sent, if different from the
name and address of the person signing the letter of transmittal. In the case of
issuance in a different name, the employer identification or social security
number of the person named must also be indicated and a substitute Form W-9 for
this recipient must be completed. If these instructions are not given, the
payments, including accrued and unpaid interest in cash on the outstanding
notes, exchange notes or outstanding notes not accepted for tender, as the case
may be, will be made or returned, as the case may be, to the registered holder
of the outstanding notes tendered.
Issuance of exchange notes in exchange for outstanding notes will be made
only against deposit of the tendered outstanding notes.
We will decide all questions as to the validity, form, eligibility,
acceptance and withdrawal of tendered outstanding notes, and our determination
will be final and binding on you. We reserve the absolute right to reject any
and all outstanding notes not properly tendered or reject any outstanding notes
which would be unlawful in the opinion of our counsel. We also reserve the right
to waive any defects, irregularities or conditions of tender as to particular
outstanding notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in a letter of transmittal, will be
final and binding on all parties. You must cure any defects or irregularities in
connection with tenders of outstanding notes as we determine. Although we intend
to notify you of defects or irregularities with respect to tenders of your
outstanding notes, we, the exchange agent or any other person will not incur any
liability for failure to give any notification. Your tender of outstanding notes
will not be deemed to have been made until any defects or irregularities have
been cured or waived. Any of your outstanding notes received by the exchange
agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to you, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
As further described in and otherwise qualified by this prospectus
supplement, we will accept all outstanding notes validly tendered before 5:00
p.m., New York City time, on the expiration date and not validly withdrawn. The
acceptance for exchange of outstanding notes validly tendered and not validly
withdrawn and the delivery of exchange notes and the payment of any accrued and
unpaid interest on the outstanding notes will be made as promptly as practicable
after the expiration date. Subject to rules promulgated pursuant to the Exchange
Act, we expressly reserve the right to delay acceptance of any of the
outstanding notes or to terminate the exchange offer and not accept for exchange
any outstanding notes not theretofore accepted if any of the conditions set
forth under the heading "-- Conditions to the Exchange Offer" shall not have
been satisfied or waived by us. We will deliver exchange notes and make payments
in cash of accrued and unpaid interest on the outstanding notes in exchange for
outstanding notes pursuant to the exchange offer promptly following acceptance
of the outstanding notes. In all cases, exchange for outstanding notes accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of outstanding notes (or confirmation of
book-entry transfer thereof) and a properly completed and validly executed
letter of transmittal (or a manually signed facsimile thereof) or, in the case
of book-entry transfer, an agent's message and any other documents required
thereby.
For purposes of the exchange offer, we shall be deemed to have accepted
validly tendered and not properly withdrawn outstanding notes when, as and if we
give oral or written notice thereof to the exchange agent. The exchange agent
will act as agent for the tendering holders of outstanding notes for the
purposes of receiving the exchange notes from us and transmitting new notes to
the tendering holders. Under no circumstances will any additional amount be paid
by us or the exchange agent by reason of any delay in making such payment or
delivery.
If, for any reason whatsoever, acceptance for exchange of any outstanding
notes tendered pursuant to the exchange offer is delayed, or we are unable to
accept for exchange outstanding notes tendered pursuant to the exchange offer,
then, without prejudice to our rights set forth herein, the exchange agent may
70
nevertheless, on behalf of us and subject to rules promulgated pursuant to the
Exchange Act, retain tendered outstanding notes, and such outstanding notes may
not be withdrawn except to the extent that the tendering holder of such
outstanding notes is entitled to withdrawal rights as described herein. See
"-- Withdrawal Rights."
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence or non-occurrence of certain other events set
forth herein or otherwise, then such unaccepted outstanding notes will be
returned, at our expense, to the tendering holder thereof as promptly as
practicable after the expiration date or the termination of the applicable
exchange offer therefor.
No alternative, conditional or contingent tenders will be accepted. A
tendering holder, by execution of a letter of transmittal, or facsimile thereof,
waives all rights to receive notice of acceptance of such holder's outstanding
notes for exchange.
WITHDRAWAL RIGHTS
You may withdraw your tender of your outstanding notes at any time before
5:00 p.m., New York City time, on the expiration date.
For your withdrawal to be effective, an electronic ATOP transmission or,
for non-DTC participants, written notice of withdrawal must be received by the
exchange agent at its address found in this prospectus supplement before 5:00
p.m., New York City time, on the expiration date.
Your notice of withdrawal must:
- specify your name;
- identify your outstanding notes to be withdrawn, including the
certificate number or numbers, if any, and principal amount of your
outstanding notes;
- be signed by you in the same manner as the original signature on the
letter of transmittal by which your outstanding notes were tendered or be
accompanied by documents of transfer sufficient to have the trustee of
your outstanding notes register the transfer of your outstanding notes
into your name; and
- specify the name in which your outstanding notes are to be registered, if
you do not want your outstanding notes registered in your name.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of your notice, and our determination will be final
and binding on all parties. Any outstanding notes you withdraw will not be
considered to have been validly tendered. We will return your outstanding notes
which have been tendered but not exchanged for any reason without cost to you as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. You may retender your properly withdrawn outstanding notes by
following one of the above procedures before the expiration date.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any outstanding notes not tendered under the exchange offer will remain
outstanding and continue to accrue interest. The outstanding notes will remain
"restricted securities" within the meaning of the Securities Act and will remain
subject to existing transfer restrictions. Accordingly, before the date that is
one year after the later of the issue date and the last date on which we or any
of our affiliates was the owner of the outstanding notes, the outstanding notes
may be resold only
(1) to us or our affiliates;
(2) to a person whom you reasonably believe is a qualified
institutional buyer in a transaction meeting the requirements of Rule 144A,
(3) inside the United States to an institutional accredited investor
(as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act)
that, prior to such transfer, furnishes to
71
the trustee a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the outstanding
notes, the form of which you can obtain from the trustee and, if such
transfer is in respect of an aggregate principal amount of outstanding
notes at the time of transfer of less than $250,000, an opinion of counsel
acceptable to us;
(4) outside the United States in a transaction complying with the
provisions of Rule 903 or Rule 904 under the Securities Act;
(5) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 (if available); or
(6) pursuant to an effective registration statement under the
Securities Act.
In each of cases (1) through (6) above, such sale shall be in accordance with
any applicable securities laws of any state of the United States.
As a result, the liquidity of the market for non-tendered outstanding notes
could be adversely affected upon completion of the exchange offer.
ADDITIONAL REGISTRATION RIGHTS
Under some circumstances, we may be required to file a shelf registration
statement covering resales of the outstanding notes. This requirement will be
triggered if:
- applicable interpretations of the staff of the Commission do not permit
us to effect the exchange offer;
- for any other reason we do not consummate the exchange offer within 220
days of April 23, 2002;
- an initial purchaser of the outstanding notes notifies us following
consummation of the exchange offer that the outstanding notes held by it
are not eligible to be exchanged for exchange notes in the exchange
offer; or
- certain holders are prohibited by law or Commission policy from
participating in the exchange offer or may not resell the exchange notes
acquired by them in the exchange offer to the public without delivering a
prospectus,
then, we will, subject to certain exceptions,
- promptly file a shelf registration statement with the Commission covering
resales of the outstanding notes or the exchange notes, as the case may
be;
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act on or prior to the
180th day after the date on which the shelf registrations statement is
required to be filed; and
- keep the shelf registration statement effective until the earliest of (1)
the time when the outstanding notes covered by the shelf registration
statement can be sold pursuant to Rule 144 without any limitations under
clauses (c), (e), (f) and (h) of Rule 144, (2) two years from the
effective date of the shelf registration statement and (3) the day on
which all outstanding notes registered thereunder are disposed of in
accordance therewith.
We will, in the event a shelf registration statement is filed, among other
things,
- provide to each holder for whom such shelf registration statement was
filed copies of the prospectus which is a part of the shelf registration
statement,
- notify each such holder when the shelf registration statement has become
effective, and
- take certain other actions as are required to permit unrestricted resales
of the outstanding notes or the exchange notes, as the case may be.
72
A holder selling such outstanding notes or exchange notes pursuant to the
shelf registration statement generally
- would be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers,
- will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales, and
- will be bound by the provisions of the registration rights agreement that
are applicable to such holder (including certain indemnification
obligations).
We will pay additional cash interest on the applicable outstanding notes
and exchange notes, subject to certain exceptions,
- if we fail to file an exchange offer registration statement with the
Commission on or prior to the 90th day after the issue date of the
outstanding notes,
- if the exchange offer registration statement is not declared effective by
the Commission on or prior to the 180th day after the issue date of the
outstanding notes,
- if the exchange offer is not consummated on or before the 40th day after
the exchange offer registration statement is declared effective,
- if obligated to file the shelf registration statement, we fail to file
the shelf registration statement with the Commission on or prior to the
60th day after the date on which the obligation to file a shelf
registration statement arises,
- if obligated to file a shelf registration statement, the shelf
registration statement is not declared effective on or prior to the 180th
day after the date on which the obligation to file a shelf registration
statement arises, or
- after the exchange offer registration statement or the shelf registration
statement, as the case may be, is declared effective, such registration
statement thereafter ceases to be effective or usable (subject to certain
exceptions) (each such event a registration default);
from and including the date on which any such registration default shall occur
to but excluding the date on which all registration defaults have been cured.
The rate of the additional interest will be 0.25% per annum for the first
90-day period immediately following the occurrence of a registration default,
and such rate will increase by an additional 0.25% per annum with respect to
each subsequent 90-day period until all registration defaults have been cured at
which point it will reset the coupon rate, up to a maximum additional interest
rate of 1.0% per annum. We will pay such additional interest on regular interest
payment dates. Such additional interest will be in addition to any other
interest payable from time to time with respect to the outstanding notes and the
exchange notes.
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EXCHANGE AGENT
You should direct all executed letters of transmittal to the exchange
agent. Wilmington Trust Company is the exchange agent for the exchange offer.
Questions, requests for assistance and requests for additional copies of the
prospectus supplement or a letter of transmittal should be directed to the
exchange agent addressed as follows:
<Table>
By Registered or Certified By Hand/Overnight Delivery: By Facsimile Transmission:
Mail:
Wilmington Trust Company Wilmington Trust Company (For Eligible Institutions
only)
DC-1615 Reorganization Corporate Trust Reorganization (302) 636-4145
Services
PO Box 8861 Services Confirm by telephone:
Wilmington, DE 19899-8861 Rodney Square North (302) 636-6472
1100 North Market Street
Wilmington, DE 19890-1615
</Table>
FEES AND EXPENSES
We currently do not intend to make any payments to brokers, dealers or
others to solicit acceptances of the exchange offer. The principal solicitation
is being made by mail. However, additional solicitations may be made in person
or by telephone by our officers and employees.
Our estimated cash expenses incurred in connection with the exchange offer
will be paid by us and are estimated to be $0.15 million in the aggregate. This
amount includes fees and expenses of the trustees for the exchange and
outstanding notes, accounting, legal, printing and related fees and expenses.
TRANSFER TAXES
If you tender outstanding notes for exchange, you will not be obligated to
pay any transfer taxes. However, if you instruct us to register exchange notes
in the name of or request that your outstanding notes not tendered or not
accepted in the exchange offer be returned to a person other than you, you will
be responsible for the payment of any transfer tax owed.
LOST OR MISSING CERTIFICATES
If a holder of outstanding notes desires to tender a outstanding note
pursuant to the exchange offer, but the outstanding note has been mutilated,
lost, stolen or destroyed, such holder should write to or telephone the trustee
under the indenture at the address listed below, concerning the procedures for
obtaining replacement certificates for such outstanding note, arranging for
indemnification or any other matter that requires handling by such trustee.
Trustee:
Wilmington Trust Company
Corporate Trust Administration
1100 N. Market Street
Wilmington, DE 19890
Telecopier: (302) 636-4145
Telephone: (302) 636-6453
74
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information about our directors, executive
officers and key employees.
<Table>
<Caption>
NAME AGE POSITION(S)
- ---- --- -----------
Ira D. Kleinman................. 46 Director
Michael J. Caporale, Jr......... 51 President, Chief Executive Officer and Director
D. Keith LaVanway............... 38 Vice President -- Chief Financial Officer,
Treasurer and Secretary
Kenneth L. Bloom................ 39 President of Alside Siding & Windows
Robert M. Franco................ 49 President of Alside Supply Centers
Benjamin L. McGarry............. 55 Alside Group Vice President -- Vinyl Manufacturing
Thomas W. Arenz................. 44 Director
Jonathan C. Angrist............. 31 Director
</Table>
Set forth below is a brief description of the business experience of each
of our directors, executive officers and key employees.
Ira D. Kleinman, Age 46. Mr. Kleinman has been a director since the
merger. Mr. Kleinman is Chairman of the Board and a director of Associated
Materials Holdings Inc. Mr. Kleinman has been a General Partner of Harvest
Partners for more than five years and is currently a member of Harvest
Associates III, LLC and Harvest Associates IV, LLC. Mr. Kleinman is also as a
director for Global Power Equipment Group Inc.
Michael J. Caporale, Jr., Age 51. Mr. Caporale has been the President and
Chief Executive Officer of our company and a director since the merger. Mr.
Caporale was named Chief Executive Officer of the Alside division and became a
director in February 2001. Mr. Caporale joined our company in January 2000 as
President of the Alside Window Company, became President and Chief Operating
Officer of our Alside division in April 2000 and was named a Vice President of
our company in August 2000. Mr. Caporale is President and Chief Executive
Officer and a director of Associated Materials Holdings Inc. Prior to joining
our company, Mr. Caporale was the President of Great Lakes Window, Inc., a
subsidiary of Nortek, Inc., where he had been employed since 1995.
D. Keith LaVanway, Age 38. Mr. LaVanway has been Vice President -- Chief
Financial Officer, Treasurer and Secretary of our company since the merger. Mr.
LaVanway joined our company in February 2001 as Vice President -- Chief
Financial Officer of Alside and was also named a Vice President of our company.
Mr. LaVanway is Vice President -- Finance of Associated Materials Holdings Inc.
Prior to joining us, Mr. LaVanway was employed by Nortek, Inc. from 1995 to
2001, most recently as Vice President -- Chief Financial Officer of Peachtree
Doors and Windows Company.
Kenneth L. Bloom, Age 39. Mr. Bloom joined our company in July 2000 as
Alside's Vice President of Window Manufacturing. In March 2001, Mr. Bloom was
named President of Alside Window Company. Mr. Bloom was named President of
Alside Siding & Windows in August 2002. Prior to joining us, Mr. Bloom was
Corporate Vice President of Field Container Co., L.P., where he had been
employed since 1996.
Robert M. Franco, Age 49. Mr. Franco joined our company in August 2002 as
President of Alside's Supply Centers. Prior to joining us, Mr. Franco was most
recently Vice President of the Exterior Systems Business of Owens-Corning, Inc.,
where he had worked in a variety of key management positions for over twenty
years.
Benjamin L. McGarry, Age 55. Mr. McGarry was named Group Vice
President -- Vinyl Manufacturing of Alside in 1997. From 1984 to 1996, Mr.
McGarry was Senior Vice President -- Manufacturing of Alside. Mr. McGarry joined
Alside in 1980.
75
Thomas W. Arenz, Age 44. Mr. Arenz has been a director since shortly after
the merger. Mr. Arenz is Treasurer, Assistant Secretary and a director of
Associated Materials Holdings Inc. Mr. Arenz joined Harvest Partners, Inc. in
November 1996 and became a Principal in October 1997. Mr. Arenz has over 16
years of private equity investment and corporate finance experience. From 1995
to 1996, Mr. Arenz was with the North American subsidiary of Preussag AG, a
German multinational corporation, most recently as President. From 1991 to 1995,
Mr. Arenz was a Principal at Joseph Littlejohn & Levy, a management buyout firm.
Mr. Arenz was also in the corporate finance departments at Kidder, Peabody & Co.
from 1990 to 1991 and Drexel Burnham Lambert from 1986 to 1990.
Jonathan C. Angrist, Age 31. Mr. Angrist has been a director since the
merger. Mr. Angrist is Secretary, Assistant Treasurer and a director of
Associated Materials Holdings Inc. Mr. Angrist is also currently Vice President
of Harvest Partners. From 1993 to 1997, Mr. Angrist was a consultant of Sibson &
Company. Mr. Angrist is also a director for IRMC Holdings, Inc.
All of our directors will be elected annually with terms expiring as of the
next annual meeting of stockholders. All of our officers serve at the discretion
of the Board of Directors. We may expand the size of our Board of Directors so
that it is the same as the board of our parent company. See "Certain
Relationships and Related Transactions -- The Stockholders Agreement."
Mr. McGarry is considered a key employee because of his responsibilities in
the capacity indicated. We, however, do not consider Mr. McGarry to be an
executive officer. Mr. McGarry has announced his retirement effective on October
31, 2002.
EXECUTIVE COMPENSATION AND COMPENSATION AND INCENTIVE PROGRAMS
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by us for
services rendered in 2001, 2000 and 1999 by our chief executive officer and each
of our other executive officers during such time.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SHARES
------------------------------------- UNDERLYING
FISCAL OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) SARS(2) COMPENSATION
- --------------------------- ------ -------- -------- --------------- ---------- ------------
William W. Winspear(4)............ 2001 $530,833 $667,185 -- 0 $ 44,800(3)
Chairman of the Board, President 2000 $507,500 $612,870 -- 0 $ 39,450
and Chief Executive Officer 1999 $492,917 $512,500 -- 0 $ 36,000
Michael J. Caporale, Jr.(5)....... 2001 $412,504 $354,409 $66,271 0 $ 214,731(6)
President and Chief Executive 2000 $335,417 $140,000 $53,157 100,000 $ 74,282
Officer of our Alside division
Robert F. Hogan, Jr.(7)........... 2001 $262,500 $177,930 -- 0 $ 6,800(8)
President and Chief Executive 2000 $249,167 $158,435 -- 0 $ 5,950
Officer of our AmerCable
division 1999 $238,750 $ 42,985 -- 0 $ 5,600
Robert L. Winspear(9)............. 2001 $208,333 $ 66,719 -- 0 $ 6,800(8)
Vice President and Chief
Financial 2000 $197,500 $ 61,287 -- 0 $ 5,950
Officer 1999 $181,667 $ 51,251 -- 0 $ 5,600
</Table>
- ---------------
(1) Includes amounts for the payment of income taxes relating to relocation
expenses paid by us in 2001 and 2000 and taxable to Mr. Caporale.
Perquisites and other personal benefits received by our other executive
officers are not included in the Summary Compensation Table because the
aggregate amount of this compensation, if any, did not meet disclosure
thresholds established under current SEC regulations.
(2) In January 2000, Mr. Caporale was granted an option to purchase 50,000
shares of common stock at $14.4375 per share, the fair market value on the
grant date. In March 2000, Mr. Caporale was
76
granted an option to purchase an additional 50,000 shares of common stock at
$13.875 per share, the fair market value on the grant date. These options
vested 50% on the date of grant and the balance vests on the second
anniversary of the grant date.
(3) Includes directors fees of $38,000 and amounts accrued or allocated under a
defined contribution plan of $6,800.
(4) Mr. W. Winspear retired from our company upon completion of the equity
tender offer.
(5) Mr. Caporale joined us in January 2000.
(6) Includes directors fees of $25,500, amounts accrued or allocated under a
defined contribution plan of $6,800, a cash payment of $100,002 made under
the terms of Mr. Caporale's employment agreement in consideration of the
cancellation of stock options granted by his previous employer and moving
expenses of $82,429 incurred by Mr. Caporale and paid by us under the terms
of his employment agreement.
(7) Following the sale of AmerCable in June 2002, Mr. Hogan ceased to be an
officer our company and became the president, chief executive officer and
chairman of the board of the newly-formed entity that acquired our AmerCable
division.
(8) Represents amounts accrued or allocated under a defined contribution plan.
(9) Mr. R. Winspear ceased to be the vice president and chief financial officer
of our company following the merger.
COMPENSATION AND INCENTIVE PROGRAMS
Incentive Bonus Plan
We maintain an Incentive Bonus Plan providing for annual bonus awards to
certain key employees, including each of our executive officers. Bonus amounts
are based on our pre-tax profits or, in the case of Alside personnel, the
pre-tax profits or return on invested capital of these divisions. This Plan is
administered by the Compensation Committee, none of the members of which are
eligible for a bonus award under this plan. Bonus payments under the Incentive
Bonus Plan are not guaranteed. Cash bonuses accrued in 2001, 2000 and 1999 to
each of our executive officers are set forth in the Summary Compensation Table.
Employment Agreements
Mr. Caporale has entered into a new employment agreement with us effective
as of the equity tender offer completion date. Under the terms of his new
employment agreement, Mr. Caporale serves as our President, Chief Executive
Officer and a member of our board of directors. Mr. Caporale's new employment
agreement provides for an initial base salary of $500,000, an annual incentive
bonus based on growth in the equity value of Associated Materials Holdings Inc.,
certain perquisites and participation in employee benefit programs made
available to other senior executives. The initial term of the new employment
agreement is three years. The terms of the new employment agreement provide that
on the first anniversary of the equity tender offer completion date and each
successive anniversary thereof, the term of the new employment agreement will
automatically extend by one year unless we deliver to Mr. Caporale a notice not
to extend the employment term. The terms of the new employment agreement provide
that if Mr. Caporale's employment is involuntarily terminated by us without
cause or if Mr. Caporale resigns for good reason, he will be entitled to
severance equal to $1,000,000 per year, together with continued health and
dental benefits, for two years, plus a pro rata incentive bonus for the year of
termination.
Mr. LaVanway has entered into an employment agreement with us effective as
of the equity tender offer completion date. Under the terms of his employment
agreement, Mr. LaVanway serves as our Vice President-Chief Financial Officer.
Mr. LaVanway's employment agreement provides for an initial base salary of
$275,000 and an annual incentive bonus based on growth in the equity value of
Associated Materials Holdings Inc. The initial term of the employment agreement
is two years. The terms of the
77
employment agreement provide that on the first anniversary of the equity tender
offer completion date and each successive anniversary thereof, the term of the
employment agreement will automatically extend by one year unless we give to Mr.
LaVanway a notice not to extend the employment term. The employment agreement
provides that if Mr. LaVanway's employment is involuntarily terminated by us
without cause within two years following the equity tender offer completion
date, Mr. LaVanway is entitled to the following severance compensation and
benefits: (1) two times Mr. LaVanway's base pay at the highest rate in effect
for any period to his termination, (2) two times his cash bonus (equal to the
highest applicable cash bonus earned during the three years immediately
preceding the calendar year 2002 in control occurred), (3) if the termination of
employment occurs after June 30 in any year, a prorated bonus for that calendar
year, (4) health, life insurance and other employee welfare benefits
substantially similar to those provided prior to termination, subject to
reduction to the extent comparable benefits are actually received by Mr.
LaVanway from another employer during this period, and (5) certain outplacement
services. If Mr. LaVanway's employment is involuntarily terminated by us without
cause after the two-year period following the equity tender offer completion
date, he will be entitled to severance equal to his annual base salary for
twelve months or the remaining employment term, whichever is longer, plus a pro
rata bonus for the year of termination.
Mr. Bloom has entered into an employment agreement with us effective as of
the equity tender offer completion date. Under the terms of his employment
agreement, Mr. Bloom serves as the President of Alside Siding and Window
Company. Mr. Bloom's employment agreement provides for an initial base salary of
$220,000 and an annual incentive bonus pursuant to a plan established by us. The
initial term of the employment agreement is two years. The terms of the
employment agreement provide that on the first anniversary of the equity tender
offer completion date and each successive anniversary thereof, the term of the
employment agreement will automatically extend by one year unless we give Mr.
Bloom a notice not to extend the employment term. The employment agreement
provides that if Mr. Bloom's employment is involuntarily terminated by us
without cause, he will be entitled to severance equal to his annual base salary
for twelve months or the remaining employment term, whichever is longer, plus a
pro rata bonus for the year of termination.
Mr. Franco has entered into an employment agreement with us effective as of
the equity tender offer completion date. Under the terms of his employment
agreement, Mr. Franco serves as the President of Alside Supply Centers. Mr.
Franco's employment agreement provides for an initial base salary of $250,000
and an annual incentive bonus based on growth in the equity value of Associated
Materials Holdings Inc. The initial term of the employment agreement is two
years. The terms of the employment agreement provide that on the first
anniversary of the equity tender offer completion date and each successive
anniversary thereof, the term of the employment agreement will automatically
extend by one year unless we give Mr. Franco a notice not to extend the
employment term. The employment agreement provides that if Mr. Franco's
employment is involuntarily terminated by us without cause, he will be entitled
to severance equal to his annual base salary for twelve months or the remaining
employment term, whichever is longer, plus a pro rata bonus for the year of
termination.
Each of the executive officers' employment agreements include
non-competition, non-solicitation, confidentiality and other restrictive
covenants.
Committees of the Board of Directors
Our Board of Directors does not currently have any standing committees.
Director Compensation
Prior to the merger, directors, including directors who were employees of
Associated Materials Incorporated, received an annual retainer of $16,000 plus
$3,500 for each Board meeting and $1,000 for each committee meeting attended in
person or $1,000 for each such meeting in which participation was by telephone.
Directors were reimbursed for reasonable travel expenses incurred in attending
Board and committee meetings. Following the merger, we will reimburse our
non-employee directors for all out-of-
78
pocket expenses incurred in the performance of their duties as directors. No
directors receive compensation for attendance at meetings or for other services
as members of the board of directors.
Option/SAR Grants in 2001
No stock options or stock appreciation rights were granted to our executive
officers in 2001.
Aggregated Option/SAR Exercises in 2001 and December 31, 2001 Option/SAR Values
The following table provides information regarding the exercise of options
during 2001 and unexercised options held as of December 31, 2001 for our
executive officers.
<Table>
<Caption>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 2001(1) DECEMBER 31, 2001(2)
SHARES VALUE --------------------------- ---------------------------
NAME ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
William W. Winspear....... 0 $ 0 0 0 $ 0 $ 0
Michael J. Caporale,
Jr.(3).................. 0 $ 0 50,000 50,000 $1,169,688 $1,169,688
Robert F. Hogan, Jr.(3)... 0 $ 0 24,000 6,000 $ 685,200 $ 171,300
Robert L. Winspear(3)..... 0 $ 0 36,000 4,000 $1,149,300 $ 114,200
</Table>
- ---------------
(1) We have not granted stock appreciation rights.
(2) Based on a price of $37.55 per share of common stock, the closing sale price
on December 31, 2001, multiplied by the number of shares of common stock
issuable upon exercise of these options.
(3) In connection with the merger agreement and the sale of the AmerCable
business none of these options are still outstanding. Options held by
Michael J. Caporale, Jr. were rolled over into options for stock of
Associated Materials Holdings Inc.
New Stock Option Plan
Associated Materials Holdings Inc. adopted a new stock option plan shortly
after the closing of the merger. Associated Materials Holdings Inc. may issue
additional shares of common stock and preferred stock, subject to adjustment if
particular capital changes affect the common stock and preferred stock, upon the
exercise of options granted under the new option plan. The exercise price of an
option granted under the new option plan will be determined by the Compensation
Committee of the Board of Directors of Associated Materials Holdings Inc. An
option holder may pay the exercise price of an option by any legal manner that
the Compensation Committee permits. The Compensation Committee, or the Board of
Directors, will administer the new option plan. The Compensation Committee will
select eligible executives, employees and consultants of Associated Materials
Holdings Inc. and its affiliates, including our company, to receive options and
will determine the number and type of shares of stock covered by options granted
under the new option plan, the terms under which options may be exercised, and
other terms and conditions of options in accordance with the provisions of the
new option plan. Option holders generally may not transfer their options except
in the event of death. If Associated Materials Holdings Inc. undergoes a change
in control, as defined in the new option plan, all outstanding options may
immediately become fully exercisable, and the Compensation Committee may adjust
outstanding options by substituting stock or other securities of any successor
or another party to the change in control transaction, or cash out such
outstanding options, in any such case, generally based on the consideration
received by its stockholders in the transaction. Subject to particular
limitations specified in the new option plan, the Board of Directors may amend
or terminate the new option plan, and the Compensation Committee may amend
options outstanding under the new option plan. The new option plan will
terminate no later than 10 years following its effective date; however, any
options outstanding under the new option plan will remain outstanding in
accordance with their terms.
79
Selected employees of Associated Materials Incorporated who held options
immediately prior to the merger to purchase shares of Associated Materials
Incorporated common stock have converted such options into options to purchase
shares of Associated Materials Holdings Inc. common stock, preferred stock or
both. Selected employees of Associated Materials Incorporated may also receive
new options to purchase shares of common stock of Associated Materials Holdings
Inc. Mr. Caporale may require Associated Materials Holdings Inc. to repurchase
shares of stock of Associated Materials Holdings Inc. that have been purchased
through the exercise of certain options granted to him upon the occurrence of
specified events.
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DESCRIPTION OF CAPITAL STOCK
We amended our certificate of incorporation and bylaws following the
consummation of the merger. The following is a summary description of our
capital stock. The information contained herein is subject to the detailed
provisions of our amended certificate of incorporation and bylaws.
Under our amended certificate of incorporation, we will have the authority
to issue 1,000 shares of common stock, par value $.01 per share.
Holders of shares of common stock are entitled to one vote per share in the
election of directors and all other matters submitted to a vote of stockholders.
Holders of common stock have no redemption or conversion rights and no
preemptive or other rights to subscribe for our securities. The outstanding
shares of common stock are fully paid and non-assessable.
All shares of common stock are entitled (1) to share equally in dividends
from sources legally available therefor when, as and if declared by the Board of
Directors, and (2) upon our dissolution, to receive pro rata any of our assets
after the satisfaction of corporate liabilities.
Payment of cash dividends is restricted by covenants in our new credit
agreement and the indenture governing the notes.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE MERGER
THE MERGER AGREEMENT. On March 16, 2002, we, Simon Acquisition Corp. and
Associated Materials Holdings Inc. (formerly known as Harvest/AMI Holdings Inc.)
entered into an agreement and plan of merger pursuant to which Simon Acquisition
Corp. commenced a tender offer to purchase all of the issued and outstanding
shares of common stock of Associated Materials Incorporated, at a price of
$50.00 per share, net to the seller in cash. Following the completion of the
merger, Simon Acquisition Corp. merged into our company and we continued as the
surviving corporation.
The merger agreement contained customary representations and warranties by
us to Simon Acquisition Corp. and Associated Materials Holdings Inc., as well as
customary representations and warranties by Simon Acquisition Corp. and
Associated Materials Holdings Inc. to us.
The merger agreement provides that from and after the effective time of the
merger, as the surviving corporation, we will indemnify and hold harmless each
person who is now, at any time has been or becomes prior to the effective time
of the merger, a director or officer of our company, and their heirs and
personal representatives, against liabilities and expenses incurred in
connection with any proceeding arising out of or pertaining to any action or
omission occurring prior to the effective time of the merger (including, without
limitation, any proceeding which arises out of or relates to the transactions
contemplated by the merger agreement).
Pursuant to the merger agreement, promptly following the commencement of
the equity tender offer, we commenced a tender offer for our 9 1/4% senior
subordinated notes and a solicitation of consents from holders of the existing
notes to amend certain terms of the related indenture to facilitate the
financings contemplated by the merger agreement, including the offering of the
outstanding notes.
On April 19, 2002, following our merger with Simon Acquisition Corp., we
became a wholly owned subsidiary of Associated Materials Holdings Inc. As a
result, Associated Materials Holdings Inc. has the right to appoint all of our
directors.
NON-COMPETITION AGREEMENT. In connection with the execution of the merger
agreement, Mr. William W. Winspear, who was our Chairman, President and Chief
Executive Officer prior to the completion of the equity tender offer, entered
into a non-competition agreement with us. Mr. Winspear has agreed that he will
not directly or indirectly own, operate, manage, control, consult with, provide
services for, or in any manner engage in the building products/siding and
windows business or the electrical cable manufacturing business in competition
with us within the United States for a period of three years beginning on the
offer completion date, which we will refer to as the "restricted period." Mr.
Winspear has also agreed that during the restricted period he will not directly
or indirectly (1) induce any of our employees to leave our employ, (2) hire any
person who is our employee, or (3) induce any customer, supplier, distributor or
other person having a significant business relationship with us to cease doing
business with us, or otherwise intentionally adversely interfere with such a
relationship. Mr. Winspear retired from our company upon completion of the
equity tender offer.
NON-SOLICITATION AGREEMENT. In connection with the execution of the merger
agreement, Mr. Robert L. Winspear, who was our Vice President and Chief
Financial Officer prior to the merger, entered into a non-solicitation agreement
with us. Mr. Robert Winspear has agreed that he will not, directly or
indirectly, for a period of two years following the completion of the equity
tender offer: (1) induce any of our employees that was party to an employment or
severance agreement with us on March 16, 2002 to leave our employ, (2) hire any
such person, or (3) induce any customer, supplier, distributor or other person
having a significant business relationship with us to cease doing business with
us or otherwise intentionally adversely interfere with such a relationship.
TENDER AND VOTING AGREEMENT. In connection with the execution of the merger
agreement, Mr. William W. Winspear, who, at the time, was the Chairman of the
Board, President and Chief Executive Officer of Associated Materials
Incorporated and who beneficially owned at the time of the
82
merger agreement 3,097,242 shares of common stock of Associated Materials
Incorporated, representing approximately 42% of the outstanding shares of common
stock of Associated Materials Incorporated on a fully diluted basis, entered
into a tender and voting agreement with Simon Acquisition Corp. and Associated
Materials Holdings Inc. Mr. Winspear agreed to validly tender all of his shares
and, until the termination of the tender and voting agreement, to vote or cause
to be voted all of the shares which Mr. Winspear has the right to vote in favor
of the merger and the approval of the terms of the merger agreement and in favor
of each of the other transactions contemplated by the merger agreement, and
against any other action that could adversely affect the transactions
contemplated by the merger agreement. Mr. Winspear made customary
representations and warranties relating to ownership of shares of Associated
Materials Incorporated, power and authority, execution and delivery, no
conflicts, no finder's fees, and reliance by Associated Materials Holdings Inc.
THE STOCKHOLDERS AGREEMENT
The stockholders of Associated Materials Holdings Inc. have entered into a
stockholders agreement which governs certain relationships among, and contains
certain rights and obligations of, such stockholders. The stockholders
agreement, among other things, (1) limits the ability of the stockholders to
transfer their shares in Associated Materials Holdings Inc. except in certain
permitted transfers as defined therein; (2) provides for certain tag-along
obligations and certain bring-along rights; (3) provides for certain
registration rights; and (4) provides for certain preemptive rights.
The stockholders agreement provides that the parties thereto must vote
their shares to elect a board of directors consisting of four persons designated
by the stockholders who are affiliates of Harvest Partners, Inc., our chief
executive officer, a person designated by PPM America Private Equity Fund, LP
and a person designated by Weston Presidio Service Company, LLC. Pursuant to the
stockholders agreement, Harvest Partners, Inc. will have the power to control
the amendment of the certificate of incorporation of Associated Materials
Holdings Inc., excluding changes that would disproportionately and adversely
affect the rights of any stockholder (other than stockholders who are affiliates
of Harvest Partners, Inc.). In addition, all stockholders of Associated
Materials Holdings Inc. have granted the Harvest funds the right, in certain
circumstances, to require such stockholders to sell their shares in Associated
Materials Holdings Inc. in a sale of substantially all of the assets of
Associated Materials Holdings Inc. or a majority of the common stock of
Associated Materials Holdings Inc. or our company, to any party other than an
affiliate of Harvest Partners, Inc.
Pursuant to the stockholders agreement, the stockholders (other than
stockholders that are affiliates of Harvest Partners, Inc.) are granted
"tag-along" rights under which such stockholders have the option of
participating in certain sales of capital stock of Associated Materials Holdings
Inc. by the stockholders who are affiliates of Harvest Partners, Inc. at the
same price and other terms as such affiliates.
Pursuant to the stockholders agreement, the stockholders are entitled to
certain rights with respect to registration under the Securities Act of certain
shares held by them including, in the case of affiliates of Harvest Partners,
Inc., certain demand registration rights. The stockholders agreement also
provides for certain preemptive rights. Subject to certain conditions, the
preemptive rights grant the right to purchase shares in a share issuance of
Associated Materials Holdings Inc.
The stockholders agreement provides that it shall terminate, except with
respect to the registration rights of the stockholders, upon the closing of an
underwritten registered public offering of common stock of Associated Materials
Holdings Inc.
MANAGEMENT AGREEMENT
We entered into a management agreement with Harvest Partners, Inc. Under
the management agreement, Harvest Partners, Inc. will receive a one time fee of
$5.0 million in connection with structuring and implementing the acquisition of
our company. In addition, Harvest Partners, Inc. will provide us with financial
advisory and strategic planning services. For these services, Harvest Partners,
Inc. will receive an annual fee of $750,000, payable on a quarterly basis in
advance, beginning on the date of execution of this
83
agreement. The fee will be adjusted on a yearly basis in accordance with the
U.S. Consumer Price Index. The agreement also provides that Harvest Partners,
Inc. will receive transaction fees in connection with financings, acquisitions
and divestitures of our company. Such fees will be a percentage of the
applicable transaction. Harvest Partners, Inc. will be reimbursed by us for all
out-of-pocket expenses. The management agreement has a term of five years from
its date of execution and will automatically be renewed on a yearly basis,
beginning in 2004, unless otherwise specified by Harvest Partners, Inc.
STOCK OPTIONS
Mr. Caporale has entered into an agreement with Associated Materials
Holdings Inc. to convert his prior options to purchase shares of our common
stock held immediately prior to the merger into options to purchase shares of
preferred and common stock of Associated Materials Holdings Inc. with
approximately the same aggregate exercise price and aggregate value, and on the
same general terms and conditions, as his prior options. Mr. Caporale also
received new options to purchase shares of common stock of Associated Materials
Holdings Inc. at a per share exercise price equal to the price per share paid by
other equity investors of Associated Materials Holdings Inc.
REPURCHASE OF CLASS B COMMON STOCK
On April 29, 2001, we repurchased 1,000,000 shares of our Class B common
stock from the Prudential Insurance Company of America and its wholly owned
subsidiary, PCG Finance Company II, LLC. The purchase price was $19.50 per share
of Class B common stock, or $19,500,000 in the aggregate. We financed this stock
repurchase through available cash and borrowings under our existing bank credit
facility. Following the purchase, Prudential and PCG converted their remaining
550,000 shares of Class B common stock into 550,000 shares of common stock. We
retired all 1,550,000 previously authorized shares of Class B common stock.
RELOCATION LOAN
In connection with his joining us, Mr. Caporale moved to the Akron, Ohio
area, where our Alside division is located. As part of his relocation benefits,
on November 16, 2000, we made a non-interest bearing loan to Mr. Caporale in the
amount of $270,407 for the purchase of a new home. Mr. Caporale repaid this loan
in full on February 16, 2001.
AMERCABLE
On June 24, 2002, we completed the sale of our AmerCable division to
AmerCable Incorporated, a newly-formed entity controlled by members of AmerCable
management and Wingate Partners III, L.P., for net proceeds of approximately
$28.3 million in cash and the assumption of certain liabilities pursuant to an
asset purchase agreement dated as of the same date. Robert F. Hogan, Jr.,
president and chief executive officer of our AmerCable division and vice
president of our company prior to the sale, is the president, chief executive
officer and chairman of the board of AmerCable Incorporated.
84
PRINCIPAL STOCKHOLDERS
We are a wholly owned subsidiary of Associated Materials Holdings Inc. The
capital stock of Associated Materials Holdings Inc. consists of preferred stock,
par value $0.01 per share (the "preferred stock"), class A common stock, par
value $0.01 per share (the "class A common stock") and class B non-voting common
stock, par value $0.01 per share ("class B common stock" and collectively with
the class A common stock, the "common stock"). The preferred stock is senior in
right of payment to the common stock. Holders of preferred stock have no voting
rights except as required by law. Harvest Funds (as defined in footnote 3 below)
owns approximately 30.7% of the voting stock of Associated Materials Holdings
Inc. and is party to a stockholders agreement dated as of March 22, 2002,
regarding the ownership and voting of the common stock of Associated Materials
Holdings Inc. By virtue of such stock ownership and stockholders agreement,
Harvest Funds will have the ability to designate a majority of the Board of
Directors of Associated Materials Holdings Inc. and to control actions to be
taken by our stockholder and/or board of directors, including amendments to our
certificate of incorporation and by-laws and approval of significant corporate
transactions, including mergers and sales of substantially all of our assets.
The following table sets forth certain information as of October 1, 2002
regarding the beneficial ownership of:
- Harvest Funds in Associated Materials Holdings Inc.;
- the directors and named executive officers of our company; and
- all executive officers and directors of our company as a group.
We determined beneficial ownership in accordance with the rules of the
Commission, which generally require inclusion of shares over which a person has
voting or investment power. Share ownership in each case includes shares that
may be acquired within sixty days through the exercise of any options. Except as
otherwise indicated, the address for each of the named individuals is c/o
Associated Materials Incorporated, 280 Park Avenue, New York, New York 10017.
<Table>
<Caption>
CLASS A COMMON STOCK PREFERRED STOCK VOTING SECURITIES
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
Harvest Funds(1)(2)(3)........ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Ira D. Kleinman(4)............ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Michael J. Caporale, Jr.
(5)......................... 59,226 3.5% 46,415 3.0% 59,226 3.5%
D. Keith LaVanway(6).......... 11,981 * 4,678 * 11,981 *
Thomas W. Arenz(7)............ 500,000 30.7% 450,000 30.3% 500,000 30.7%
Jonathan C. Angrist(8)........ -- -- -- -- -- --
Kenneth L. Bloom(9)........... 10,651 * 4,665 * 10,651 *
Robert M. Franco(10).......... 2,923 * -- -- 2,923 *
All directors and executive
officers as a group (7
persons).................... 584,780 34.1% 505,758 32.9% 584,780 34.1%
</Table>
- ---------------
* Less than 1%.
(1) Associated Materials Holdings Inc. is controlled by Harvest Funds, by
reason of their collective right to designate a majority of the members of
the board of directors of Associated Materials Holdings Inc. Harvest Funds
are Harvest Partners III, L.P., Harvest Partners III
Beteilingungsgesellschaft Burgerlichen Rechts (mit Haftungsbeschrankung)
("Harvest Partners III, GbR"), Harvest Partners IV, L.P. and Harvest
Partners IV GmbH & Co. KG ("Harvest Partners IV KG"). Harvest Associates
III, L.L.C., which has six members, is the general partner of Harvest
Partners III, L.P. and Harvest Partners III, GbR. Harvest Associates IV,
L.L.C., which has six members, is the general partner of Harvest Partners
IV, L.P. and Harvest Partners IV KG. Harvest Partners, Inc. provides
management services for Harvest Associates III, L.L.C. in connection with
Harvest Partners III, L.P. and Harvest Partners III, GbR and for Harvest
Associates IV, L.L.C. in connection with Harvest Partners IV, L.P. and
Harvest Partners IV KG.
85
(2) Includes 131,978 shares of common stock and 118,780 shares of preferred
stock owned by Harvest Partners III, L.P. and 18,022 shares of common stock
and 16,220 shares of preferred stock owned by Harvest Partners III, GbR for
each of which Harvest Associates III, L.L.C. is the general partner.
Harvest Funds may hold two classes of preferred stock or notes convertible
into preferred stock. Harvest Associates III, L.L.C. has six members, each
of whom has equal voting rights and who may be deemed to share beneficial
ownership of the shares of common stock of Associated Materials
Incorporated. The six members are Ira Kleinman, Harvey Mallement, Stephen
Eisenstein, Harvey Wertheim, William Kane and Thomas Arenz. Mr. Kleinman
and Mr. Mallement are on our board of directors. Each of Messrs. Kleinman,
Mallement, Eisenstein, Wertheim, Kane and Arenz disclaims beneficial
ownership of the shares of common stock owned by Harvest Partners III, L.P.
and Harvest Partners III GbR.
(3) Includes 273,000 shares of common stock and 245,700 shares of common stock
owned by Harvest Partners IV, L.P. and 77,000 shares of common stock and
69,300 shares of preferred stock owned by Harvest Partners IV GmbH & Co. KG
or Harvest Partners IV KG, for each of which Harvest Associates IV, L.L.C.
is the general partner. Harvest Associates IV, L.L.C. has six members, each
of whom has equal voting rights and who may be deemed to share beneficial
ownership of the shares of common stock of Associated Materials
Incorporated beneficially owned by it. The six members are Ira Kleinman,
Harvey Mallement, Stephen Eisenstein, Harvey Wertheim, William Kane and
Thomas Arenz. Mr. Kleinman and Mr. Mallement are on our board of directors.
Each of Messrs. Kleinman, Mallement, Eisenstein, Wertheim, Kane and Arenz
disclaims beneficial ownership of the shares of common stock owned by
Harvest Partners IV, L.P., Harvest Partners IV KG. Harvest Partners III,
L.P., Harvest Partners III GbR, Harvest Partners IV, L.P. and Harvest
Partners IV KG are collectively referred to as the "Harvest Funds." The
address of the named entities is 280 Park Avenue, 33rd Floor, New York, New
York 10017.
(4) Includes shares of class A common stock and preferred stock owned by
Harvest Partners III, L.P. and shares of class A common stock and preferred
stock owned by Harvest Partners III GbR, for each of which Harvest
Associates III, L.L.C. is the general partner. Also includes shares of
class A common stock and preferred stock owned by Harvest Partners IV, L.P.
and Harvest Partners IV KG, for each of which Harvest Partners IV, L.L.C.
is the general partner. Mr. Kleinman is a member of Harvest Associates,
III, L.L.C. and Harvest Partners IV, L.L.C. and may be deemed to share
beneficial ownership of the shares of common stock of Associated Materials
Incorporated beneficially owned by them. Mr. Kleinman disclaims beneficial
ownership of common shares owned by Harvest Partners III, L.P., Harvest
Partners III GbR, Harvest Partners IV, L.P. and Harvest Partners IV KG.
(5) Includes options to purchase 59,226 shares of class A common stock and
46,415 shares of preferred stock. This reflects the conversion of options
held by Mr. Caporale to purchase shares of common stock of Associated
Materials Incorporated prior to the merger into options to purchase shares
of common and preferred stock of Associated Materials Holdings Inc.
(6) Includes options to purchase 11,981 shares of class A common stock and
4,678 shares of preferred stock. This reflects the conversion of options
held by Mr. LaVanway to purchase shares of common stock of Associated
Materials Incorporated prior to the merger into options to purchase shares
of common and preferred stock of Associated Materials Holdings Inc.
(7) Includes shares of class A common stock and preferred stock owned by
Harvest Partners III, L.P. and shares of class A common stock and preferred
stock owned by Harvest Partners III GbR, for each of which Harvest
Associates III, L.L.C. is the general partner. Also includes shares of
class A common stock and preferred stock owned by Harvest Partners IV, L.P.
and Harvest Partners IV KG, for each of which Harvest Partners IV, L.L.C.
is the general partner. Mr. Arenz is a member of Harvest Associates, III,
L.L.C. and Harvest Partners IV, L.L.C. and may be deemed to share
beneficial ownership of the shares of common stock of Associated Materials
Incorporated beneficially owned by them. Mr. Arenz disclaims beneficial
ownership of common shares owned by Harvest Partners III, L.P., Harvest
Partners III GbR, Harvest Partners IV, L.P. and Harvest Partners IV KG.
86
(8) Mr. Angrist is a director of our company.
(9) Includes options to purchase 10,651 shares of class A common stock and
4,665 shares of preferred stock. This reflects the conversion of options
held by Mr. Bloom to purchase shares of common stock of Associated
Materials Incorporated prior to the merger into options to purchase shares
of common and preferred stock of Associated Materials Holdings Inc.
(10) Includes options to purchase 2,923 shares of class A common stock.
None of Harvest Funds, the directors or the executive officers owns shares of
class B common stock.
87
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
The new credit facility provides for the following:
(1) a seven year $125 million term loan which was drawn at closing to
finance the transactions, and
(2) a five year $40 million revolving credit facility, which includes
letters of credit (subject to a $10 million sublimit), which may be used
for, among other things, general corporate purposes including working
capital.
The term loan will amortize beginning six months after closing in quarterly
installments over the six and one-half year amortization period in an aggregate
amount equal to 1% annually for the first five and one-half years of such
amortization period with the balance to be paid in the final year in four equal
installments.
UBS Warburg LLC and Credit Suisse First Boston act as joint-lead arrangers,
UBS AG, Stamford Bank acts as administrative agent, Credit Suisse First Boston
acts as syndication agent and CIBC World Markets Corp. acts as documentation
agent for the syndicate of lenders providing the new credit facility.
Subject to certain exceptions, the new credit facility requires mandatory
repayments and mandatory reductions thereunder with the proceeds from (1) asset
sales, (2) the issuance of debt and equity securities, (3) insurance and
condemnation awards and (4) annual excess cash flow. Voluntary prepayments of
the new credit facility will be permitted at any time, subject to certain notice
requirements and to the payment of certain losses and expenses suffered by the
lenders as a result of the prepayment of "Eurodollar Loans" (as defined in the
new credit facility) prior to the end of the applicable interest period.
The new credit facility bears interest at the sum of the (1) applicable
margin and (2) at our option, either the "Alternate Base Rate" (as defined in
the new credit facility) or the "Eurodollar Rate" (as defined in the new credit
facility). The Alternate Base Rate will be the higher of (1) the rate that UBS
AG, Stamford Branch announces from time to time as its prime commercial lending
rate, as in effect from time to time and (2) one-half of 1% in excess of the
federal funds rate, as published by the Federal Reserve Bank of New York. The
applicable interest margin is initially a percentage per annum equal to (1) in
the case of the term loans maintained as (a) Alternate Base Rate Loans (as
defined in the new credit facility), 2.50%, and (b) Eurodollar Loans (as defined
in the new credit facility), 3.50% and (2) in the case of revolving loans
maintained as (a) Base Rate Loans, 2.00%, and (b) Eurodollar Loans, 3.00%, in
each case with respect to revolving loans subject to adjustments based on
certain levels of financial performance.
With respect to Eurodollar Loans, (1) we may elect interest periods of 1,
2, 3, 6 or, if available, 9 or 12 months and (2) interest will be payable in
arrears at the earlier of (a) the end of an applicable interest period and (b)
quarterly. With respect to Alternate Base Rate Loans, interest will be payable
quarterly on the last business day of each fiscal quarter. Additionally, we will
pay a commitment fee in an amount equal to 0.50% per annum on the daily average
unused portion of the new credit facility, subject to adjustments based on
certain levels of financial performance.
The new credit facility contains certain covenants which impose material
restrictions on our business (and the business of our subsidiaries). Such
restrictions include:
Business Activities: A prohibition on engaging in businesses other
than businesses which we were engaged in on April 19, 2002 (the closing of
the new credit facility), businesses which are reasonable extensions
thereof and businesses reasonably incidental or complimentary thereto or
expansions thereof;
88
Debt: A prohibition on the creation, assumption or incurrence of
indebtedness other than categories of indebtedness including, without
limitation, (1) indebtedness in respect of the new credit facility, (2)
indebtedness between and among us and our subsidiaries, (3) indebtedness
arising from permitted acquisitions, and (4) permitted subordinated
indebtedness;
Liens: A prohibition on the creation, assumption or incurrence of
liens upon any of our property, revenues or assets other than categories of
liens including, without limitation, (1) liens securing payment in respect
of the new credit facility, (2) liens arising from permitted acquisitions
and (3) liens arising from permitted indebtedness;
Investments: A prohibition on the creation, assumption or incurrence
of investments other than categories of investments including, without
limitation, (1) investments in cash and cash equivalents, (2) permitted
capital expenditures, (3) investments by way of contributions to the
capital of our subsidiaries that are guarantors of the new credit facility
and (4) investments in respect of permitted acquisitions;
Restricted Payments: A prohibition on the payment of cash dividends
to, or the redemption of stock from, stockholders other than categories of
such payments or redemptions including, without limitation, (1) to or from
Associated Materials Holdings Inc. for the payment of reasonable
administrative fees and other fees to non-affiliated non-officer directors
arising in the ordinary course and (2) to or from Associated Materials
Holdings Inc. as necessary for the payment by Associated Materials Holdings
Inc. of permitted qualifying subordinated debt;
Capital Expenditures: A prohibition on the making of or the entering
into a commitment to make capital expenditures in any fiscal year in an
aggregate amount greater than $17,500,000 for such fiscal year, which
amount may be increased in connection with permitted acquisitions, casualty
proceeds, net disposition proceeds, net equity proceeds or excess cash
flow;
Prepayment of Subordinated Debt: A prohibition on the payment or
prepayment of any subordinated debt (including the notes) other than
scheduled payments of such debt or payments permitted by the new credit
facility or the documents governing such subordinated debt;
Capital Stock: A prohibition on the issuance of any capital stock
other than capital stock issued to Associated Materials Holdings Inc. and
pledged pursuant to the Holdings Pledge Agreement (as defined in the new
credit facility);
Consolidation, Merger, Acquisitions, etc.: A prohibition on the
liquidation or dissolution, consolidation with, or merger into or with any
entity, or other consummation of any acquisition of any entity or all or
substantially all of the assets of any entity other than (1) the
dissolution or merger of any of our subsidiaries into us, (2) the purchase
by us of the assets or capital stock of any of our subsidiaries and (3)
permitted negotiated mergers or acquisitions;
Dispositions: A prohibition on the asset dispositions other than
categories of asset dispositions including, without limitation,
dispositions in respect of permitted (1) sales, (2) leasebacks, (3)
consolidations, (4) mergers and (5) acquisitions;
Modification of Certain Agreements: A prohibition on the modification
of, or entering into a forbearance from exercising our rights with respect
to our subordinated indebtedness, other than a modification or forbearance
to (1) extend the date of payment, (2) reduce the required payment or (3)
make the covenants, events of default or remedies less restrictive on us;
Transactions with Affiliates: A prohibition on transactions with our
affiliates, other than transactions on terms customary for similar
arms-length transactions and otherwise in compliance with the terms and
conditions of the new credit facility;
Restrictive Agreements: A prohibition on entering into any agreement
prohibiting (1) the creation or assumption of any lien upon any of our
properties, revenues or assets for the benefit of a
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secured party under the new credit facility and (2) our ability to amend or
otherwise modify the new credit facility;
Sales and Leasebacks: A prohibition on entering into any sale and
leaseback transaction with a present value of lease payments greater than
$2,500,000; and
Take or Pay Contracts: A prohibition on entering into take or pay
contracts, other than take or pay contracts entered in the ordinary course
of business and consistent with our past practices.
In addition, the new credit facility contains the following financial
covenants:
Leverage Ratio: Our leverage ratio (which is approximately equal to
the ratio of (1) the sum of our total debt and the total debt of our
subsidiaries to (2) the sum of our EBITDA and the EBITDA of our
subsidiaries) may not be greater than a maximum ratio that ranges from
5.00:1 for the third fiscal quarter of the 2002 fiscal year to 3.50:1 for
the second fiscal quarter of the 2005 fiscal year and each fiscal quarter
thereafter;
Interest Coverage Ratio: Our interest coverage ratio (which is
approximately equal to the ratio of (1) the sum of our EBITDA and the
EBITDA of our subsidiaries to (2) the sum of our interest expense and the
interest expense of our subsidiaries) may not be less than a minimum ratio
that ranges from 2.20:1 for the third fiscal quarter of the 2002 fiscal
year to 2.75:1 for the first fiscal quarter of the 2005 fiscal year and
each fiscal quarter thereafter; and
Fixed Charge Coverage Ratio: Our fixed charge coverage ratio (which
is approximately equal to the ratio of (1) the sum of our EBITDA and the
EBITDA of our subsidiaries to (2) the sum of (A) our interest expenses and
the interest expenses of our subsidiaries, (B) scheduled principal
repayments of indebtedness by us and our subsidiaries and (C) all income
taxes paid by us and our subsidiaries) may not be less than a minimum ratio
that ranges from 1.00:1 for the third fiscal quarter of the 2002 fiscal
year to 1.30:1 for the first fiscal quarter of the 2005 fiscal year and
each fiscal quarter thereafter.
In the new credit facility, "EBITDA" means, for any applicable period, the
sum of
(a) Our net income, plus
(b) to the extent deducted in determining net income, the sum of (i)
all non-cash charges, (ii) income tax expense (whether paid or deferred),
(iii) interest expense and non-cash interest expense, (iv) fees, costs,
expenses and prepayment premiums paid by our parent company or any of its
subsidiaries in respect of the transactions (discussed on page 23) in an
amount not exceeding $32,500,000, (v) amounts attributable to amortization
and depreciation of assets and (vi) extraordinary cash charges related to
the extinguishment or repayment of Indebtedness, minus
(c) to the extent included in net income, non-cash credits; provided
that, we are deemed to have been a subsidiary of our parent company for all
applicable fiscal quarters included in the calculation of EBITDA under the
new credit facility.
The new credit facility contains customary events of default, including
payment defaults, breaches of representations and warranties, covenant defaults,
cross-default and cross-acceleration to certain other debt, certain events of
bankruptcy and insolvency, certain events under the Employee Retirement Income
Security Act of 1974, as amended, material judgments, actual or asserted failure
of any guaranty or security document supporting the new credit facility to be in
full force and effect and change of control. If such a default occurs, the
lenders under the new credit facility would be entitled to take various actions,
including all actions permitted to be taken by a secured creditor, the
acceleration of amounts due under the new credit facility and requiring that all
such amounts be immediately paid in full.
All obligations under the new credit facility are jointly and severally
guaranteed by Associated Materials Holdings Inc. and all of our direct and
indirect wholly owned domestic subsidiaries. The debt under the new credit
facility is secured by a pledge of our capital stock and the capital stock of
our subsidiaries (but not to exceed 66 2/3 of the voting stock of foreign
subsidiaries), and a perfected lien and
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security interest in substantially all of our owned real and personal assets
(tangible and intangible) and the owned real and personal assets (tangible and
intangible) of Associated Materials Holdings Inc. and each of our direct and
indirect wholly owned domestic subsidiaries. Our future wholly owned domestic
subsidiaries will be required to guarantee the new credit facility and to secure
such guarantee with substantially all of their owned real and personal assets
(tangible and intangible).
The new credit facility, including the terms and conditions described
above, is subject to modification, amendment and waiver by the parties thereto.
OUR 9 1/4% SENIOR SUBORDINATED NOTES
We currently have outstanding senior subordinated notes due March 1, 2008.
The principal amount of these senior subordinated notes bears annual interest at
9 1/4%. These existing notes are governed by an indenture between us and Bank of
New York Trust Company of Florida, N.A. (formerly U.S. Trust Company of Texas,
N.A.).
We commenced a tender offer and consent solicitation to purchase all of our
$75 million outstanding 9 1/4% notes and to receive consents from holders of
such notes to amend the terms of the indenture governing such notes. The debt
tender offer expired on April 18, 2002. Approximately $74 million aggregate
principal amount of the 9 1/4% notes was tendered. We amended the indenture
governing the 9 1/4% notes to remove substantially all the restrictive covenants
pursuant to a supplemental indenture dated as of April 4, 2002.
Subsequent to the merger, we commenced a change of control offer pursuant
to the indenture governing the 9 1/4% notes to purchase the 9 1/4% notes not
tendered in the debt tender offer. The change of control offer expired on June
21, 2002 and approximately $0.1 million aggregate principal amount of such notes
was tendered and accepted. We intend to discharge the remaining approximately
$0.9 million outstanding 9 1/4% notes pursuant to the indenture governing such
notes. We may also, from time to time, purchase such notes through open market
purchases, privately negotiated transactions, tender offers, exchange offers or
otherwise, upon such terms and at such prices as we may determine. We expect
that all discharged notes will be redeemed on or after March 1, 2003 at 104.625%
of the principal amount of such notes ($1,046.25 per $1,000 principal amount of
such notes), plus accrued and unpaid interest, if any, to the date of purchase.
AMERCORD INC. GUARANTEE
In connection with the recapitalization of Amercord Inc. in November 1999,
we guaranteed a $3.0 million note secured by Amercord Inc.'s real property. To
date, the lender has not requested us to make payment under the guarantee.
Should the guarantee be exercised by Amercord Inc.'s lender, we and Ivaco Inc.,
another stockholder of Amercord Inc., have the option to assume the loan. Ivaco
Inc. has indemnified us for 50% of any loss under the guarantee up to $1.5
million. Based on a third party appraisal of Amercord Inc.'s real property, we
believe that we are adequately secured under our guarantee of the $3.0 million
Amercord Inc. note such that no losses are anticipated with respect to this
guarantee.
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DESCRIPTION OF THE NOTES
We issued the outstanding notes under an indenture (the "Indenture") among
us and Wilmington Trust Company, as trustee, in a private transaction that was
exempt from the registration requirements of the Securities Act. We will issue
the exchange notes under the same indenture. The terms of the notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended. A copy of the Indenture has been
filed as an exhibit to this exchange offer registration statement. As used in
this section, the term "Notes" refers collectively to the outstanding notes and
the exchange notes, and the term "Company" refers only to Associated Materials
Incorporated ("Associated Materials"), and does not refer to any of our
subsidiaries.
Certain terms used in this description are defined under the subheading
"-- Certain Definitions."
The terms of the outstanding notes and the exchange notes are identical,
both of which are governed by the Indenture described herein. The following
description is only a summary of the material provisions of the Indenture. We
urge you to read the Indenture, because it, not this description, defines your
rights as holders of these Notes. You may request copies of this agreement at
our address set forth under the heading "Available Information."
BRIEF DESCRIPTION OF THE NOTES
THE NOTES
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are subject to registration with the SEC pursuant to the Registration
Rights Agreement.
EACH SUBSIDIARY GUARANTY
- unconditionally guarantees the obligations of the Company under the
Notes; and
- is a senior subordinated obligation of the relevant Subsidiary Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Company issued the Notes initially with a maximum aggregate principal
amount of $165.0 million. The Company issued the Notes in denominations of
$1,000 and any integral multiple of $1,000. The Notes will mature on April 15,
2012. Subject to our compliance with the covenant described under the subheading
"-- Certain Covenants -- Limitation on Indebtedness," we are permitted to issue
more Notes under the Indenture in an unlimited aggregate principal amount (the
"Additional Notes"). The Notes and the Additional Notes, if any, will be treated
as a single class for all purposes of the Indenture, including waivers,
amendments, redemptions and offers to purchase. Unless the context otherwise
requires, for all purposes of the Indenture and this "Description of the Notes,"
references to the Notes include any Additional Notes actually issued.
Interest on these Notes will accrue at the rate of 9 3/4% per annum and
will be payable semiannually in arrears on April 15 and October 15, commencing
on October 15, 2002. We will make each interest payment to the holders of record
of these Notes on the immediately preceding April 1 and October 1.
Interest on these Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
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OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to April 15, 2007.
On and after April 15, 2007, we will be entitled at our option to redeem
all or a portion of these Notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed in percentages of principal amount
on the redemption date), plus accrued interest to the redemption date (subject
to the right of Holders of record on the related record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period commencing on April 15 of the years set forth below:
<Table>
<Caption>
PERIOD REDEMPTION PRICE
- ------ ----------------
2007........................................................ 104.875%
2008........................................................ 103.250
2009........................................................ 101.625
2010 and thereafter......................................... 100.000%
</Table>
In addition, before April 15, 2005, we may at our option on one or more
occasions redeem Notes (which includes Additional Notes, if any) in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of the
Notes (which includes Additional Notes, if any) at a redemption price (expressed
as a percentage of principal amount) of 109.75%, plus accrued and unpaid
interest to the redemption date with the net cash proceeds from one or more
Equity Offerings (provided that if the Equity Offering is an offering by
Associated Materials Holdings, Inc. ("Parent"), a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Notes is
contributed to the equity capital of the Company); provided that
(1) at least 65% of such aggregate principal amount of Notes (which
includes Additional Notes, if any) remains outstanding immediately after
the occurrence of each such redemption (other than Notes held, directly or
indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 90 days after the date of the
related Equity Offering.
We cannot predict with any certainty whether we will redeem the Notes or
the criteria that we will use in determining whether to redeem the Notes. In
addition, many of the factors that may influence our decision are likely to be
beyond our control. The general economic environment, our capitalization, the
interest rate environment, refinancing options and our cash flow are just a few
of the many factors that may influence our decision at the time. We may, for
example, be more likely to redeem the Notes if interest rates are low, favorable
refinancing alternatives are available or if we have substantial excess cash
flow.
REDEMPTION UPON A CHANGE OF CONTROL
At any time on or prior to April 15, 2007, the Notes may also be redeemed,
in whole but not in part, at the option of the Company upon the occurrence of a
Change of Control, notice of which is sent no later than 30 days after the
occurrence of such Change of Control by notice mailed by first-class mail to
each Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued but
unpaid interest, if any, to, the date of redemption (the "Change of Control
Redemption Date").
"Applicable Premium" means, with respect to a Note at any Change of Control
Redemption Date, the greater of:
(1) 1.0% of the principal amount of such Note; or
(2) the excess of
(a) the present value at such time of:
(x) the redemption price of such Note at April 15, 2007 (such
redemption price being described under "-- Optional Redemption"),
plus
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(y) all required interest payments (excluding accrued but
unpaid interest) due on such Note through April 15, 2007
computed using a discount rate equal to the Treasury Rate plus 50
basis points, over
(b) the principal amount of such Note.
"Treasury Rate" means the yield to maturity at the Change of Control
Redemption Date of United States Treasury securities with a constant maturity
(as compiled and published in the most recent Federal Reserve Statistical
Release H.15(519) which has become publicly available at least two Business Days
prior to the Change of Control Redemption Date (or, if such Statistical Release
is no longer published, any publicly available source or similar market data))
most nearly equal to the period from the Change of Control Redemption Date to
April 15, 2007, provided, however, that if the period from the Change of Control
Redemption Date to April 15, 2007 is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the period
from the Change of Control Redemption Date to April 15, 2007 is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes to be redeemed on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. Except as
required under "-- Escrow of Proceeds; Mandatory Redemption," we will cause
notices of redemption to be mailed by first-class mail at least 30 but not more
than 60 days before the redemption date to each holder of Notes to be redeemed
at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
Except as set forth above under "-- Change of Control" and "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock," we are not
required to make any mandatory redemption or sinking fund payments with respect
to the Notes. We may at any time and from time to time purchase Notes in the
open market or otherwise.
SUBSIDIARY GUARANTIES
Each Subsidiary Guarantor will jointly and severally guarantee, on an
unsecured senior subordinated basis, our obligations under these Notes. The
obligations of each Subsidiary Guarantor under its Subsidiary Guaranty will be
limited as necessary to prevent the guarantee of that Subsidiary Guaranty from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors -- The guarantees may be voided under specific legal circumstances."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled upon payment in full of all guaranteed obligations
under the Indenture to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
94
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- The
guarantees may be voided under specific legal circumstances."
Pursuant to the Indenture, a Subsidiary Guarantor may consolidate with,
merge with or into or transfer all or substantially all its assets to any other
Person to the extent described below under "-- Certain Covenants -- Merger and
Consolidation"; provided, however, that if such other Person is not the Company,
such Subsidiary Guarantor's obligations under its Subsidiary Guaranty must be
expressly assumed by such other Person, unless such merger or transfer occurs as
part of an Asset Disposition of such Subsidiary Guarantor in accordance with the
applicable provisions of the Indenture.
The Subsidiary Guaranty of a Subsidiary Guarantor will be released
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor;
(2) upon the sale or disposition of all or substantially all the
assets of a Subsidiary Guarantor;
(3) if the Company properly designates any Restricted Subsidiary that
is a Subsidiary Guarantor as an Unrestricted Subsidiary in accordance with
the applicable provisions of the Indenture; or
(4) at such time as such Subsidiary Guarantor no longer Guarantees or
otherwise has outstanding any other Indebtedness of the Company or another
Subsidiary Guarantor;
in the case of paragraphs (1) and (2), other than to the Company or an Affiliate
of the Company and as permitted by the Indenture.
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the Notes
and the payment of any Guaranty and all other Subordinated Note Obligations will
be subordinate in right of payment to the prior payment in full in cash or cash
equivalents of all Senior Indebtedness of the Company or the relevant Subsidiary
Guarantor, including all Bank Indebtedness of the Company and such Subsidiary
Guarantor under the Credit Agreement.
As of June 30, 2002, the Company and its Subsidiary had $96.5 million of
Senior Indebtedness all of which is secured.
In addition, the Company would have had additional availability of $37.4
million for borrowing of Senior Indebtedness under the Credit Agreement after
completion of the Transactions and the sale of the Company's AmerCable division.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Guaranty in
accordance with the provisions of the Indenture. The Notes and each Subsidiary
Guaranty will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company and the relevant Subsidiary Guarantor, respectively.
We and the Subsidiary Guarantors have agreed in the Indenture that we and
they will not Incur, any Indebtedness that is contractually subordinate or
junior in right of payment to our Senior Indebtedness or the Senior Indebtedness
of such Subsidiary Guarantors, unless such Indebtedness is Senior Subordinated
Indebtedness of the applicable Person or is expressly subordinated in right of
payment to Senior
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Subordinated Indebtedness of such person. The Indenture does not treat unsecured
Indebtedness as subordinated or junior to Secured Indebtedness merely because it
is unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the Notes or pay any other Subordinated Note Obligation or make any deposit
pursuant to the provisions described under "-- Defeasance" below and may not
purchase, redeem or otherwise retire any Notes (collectively, "pay the Notes")
if either of the following occurs (a "Payment Default")
(1) any Designated Senior Indebtedness of the Company is not paid in
full in cash when due; or
(2) any other default on Designated Senior Indebtedness of the Company
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full according to its terms. Regardless of the foregoing, we are
permitted to pay the Notes if we and the Trustee receive written notice
approving such payment from the Representatives of all Designated Senior
Indebtedness with respect to which the Payment Default has occurred and is
continuing.
During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness of the Company pursuant to which
the maturity thereof may be accelerated without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, we will not be permitted to pay the Notes for a period
(a "Payment Blockage Period") commencing upon the receipt by the Trustee (with a
copy to us) of written notice (a "Blockage Notice") of such default from the
Representative of the Bank Indebtedness or, if no Bank Indebtedness is
outstanding, the Representative of such other Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter. The Payment Blockage Period will end earlier if such Payment
Blockage Period is terminated
(1) by written notice to the Trustee and us from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured,
waived or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full according to its terms.
Notwithstanding the provisions described above, unless a Payment Default
exists, we are permitted to resume paying the Notes after the end of such
Payment Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period irrespective of the number of
defaults with respect to our Designated Senior Indebtedness during such period.
Upon any payment or distribution upon a total or partial liquidation or
dissolution or reorganization of or similar proceeding relating to the Company
or its property,
(1) the holders of Senior Indebtedness of the Company will be entitled
to receive payment in full in cash or cash equivalents of such Senior
Indebtedness before the holders of the Notes are entitled to receive any
payment;
(2) until the Senior Indebtedness of the Company is paid in full in
cash or cash equivalents, any payment or distribution to which holders of
the Notes would be entitled but for the subordination provisions of the
Indenture will be made to holders of such Senior Indebtedness as their
interests may appear, except that holders of Notes may receive certain
Capital Stock and subordinated debt obligations; and
96
(3) if a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders
of the Notes are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness of the Company or the Representative of such Designated Senior
Indebtedness of the acceleration. If any Designated Senior Indebtedness of the
Company is outstanding, neither the Company nor any Subsidiary Guarantor may pay
the Notes until five Business Days after the Representatives of all the issues
of such Designated Senior Indebtedness receive notice of such acceleration and,
thereafter, may pay the Notes only if the Indenture otherwise permits payment at
that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of holders of the Notes to
receive payment by a Subsidiary Guarantor pursuant to a Subsidiary Guaranty will
be subordinated in right of payment to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor. The terms of the subordination
provisions described above with respect to the Company's obligations under the
Notes apply equally to a Subsidiary Guarantor and the obligations of such
Subsidiary Guarantor under the Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in
the event of a liquidation or insolvency proceeding, creditors of the Company or
a Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or
a Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
holders of the Notes, and creditors of ours who are not holders of Senior
Indebtedness may recover less, ratably, than holders of our Senior Indebtedness
and may recover more, ratably, than the holders of the Notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder shall have the right to require that the Company purchase
such Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than (directly or indirectly) one or more
Permitted Holders, is or becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), except that such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time, and except that any Person that is deemed
to have beneficial ownership of shares solely as the result of being part
of a group pursuant to Rule 13d-5(b)(1) of the Exchange Act shall be deemed
not to have beneficial ownership of any shares held by a Permitted Holder
forming a part of such group), directly or indirectly, of more than 35% of
the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in Rules
13d-3 and 13d-5 the Exchange Act), directly or indirectly, in the
aggregate, a lesser percentage of the total voting power of the Voting
Stock of the Company than such other person and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Company (for the
purposes of this clause (1), such other person shall be deemed to
beneficially own any Voting Stock of a specified person held by a parent
entity, if such other person is the beneficial owner (as defined in this
provision), directly or indirectly, of more than 35% of the voting power of
the Voting Stock of such parent entity and the Permitted Holders
beneficially own (as defined in this provision), directly or indirectly, in
the aggregate a lesser percentage of the voting
97
power of the Voting Stock of such parent entity and do not have the right
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of such parent entity);
(2) individuals who after the first board meeting after the
consummation of the Merger constituted the Board of Directors of Parent or
the Company (together with any new directors whose election by such Board
of Directors or whose nomination for election by the shareholders of the
Parent or the Company was approved by a vote of a majority of the directors
of the Parent or the Company then still in office who were either directors
after the first board meeting after the consummation of the Merger or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Parent or
the Company then in office;
(3) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(4) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
Within 30 days following any Change of Control, unless we have exercised
our option to redeem all the Notes as described under "Redemption Upon a Change
of Control", we will mail a notice to each Holder with a copy to the Trustee
(the "Change of Control Offer") stating
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase (subject
to the right of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control;
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the
covenant described hereunder, that a Holder must follow in order to have
its Notes purchased.
If the terms of the Credit Agreement or any other Senior Indebtedness
prohibit the Company from making a Change of Control Offer or from purchasing
the Notes pursuant thereto, prior to the mailing of the notice to noteholders
described in the preceding paragraph, but in any event within 30 days following
any Change of Control, the Company covenants to:
(1) repay in full all Indebtedness outstanding under the Credit
Agreement and such other Senior Indebtedness or offer to repay in full all
such Indebtedness and repay the Indebtedness of each lender who has
accepted such offer; or
(2) obtain the requisite consent under the Credit Agreement and such
other Senior Indebtedness to permit the purchase of the Notes as described
above.
The Company must first comply with the covenant described above before it
will be required to purchase Notes in the event of a Change of Control;
provided, however, that the Company's failure to comply with the covenant
described in the preceding sentence or to make a Change of Control Offer
98
because of any such failure shall constitute a Default described in clause (4)
under "-- Defaults" below (and not under clause (2) thereof). As a result of the
foregoing, a holder of the Notes may not be able to compel the Company to
purchase the Notes unless the Company is able at the time to refinance all
Indebtedness outstanding under the Credit Agreement or obtain requisite consents
under the Credit Agreement.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the Initial
Purchasers. The Company does not have the present intention to engage in a
transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future.
Subject to the limitations discussed below, we could, in the future, enter
into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness." Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture will not
contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
The Credit Agreement will prohibit us from purchasing any Note and will
also provide that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when we are prohibited from purchasing Notes,
we may seek the consent of our lenders to the purchase of Notes or may attempt
to refinance the borrowings that contain such prohibition. If we do not obtain
such a consent or repay such borrowings, we will remain prohibited from
purchasing Notes. In such case, our failure to offer to purchase Notes would
constitute a Default under the Indenture, which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to holders of notes.
Future Indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such Indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of Notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company to any Person. Although there is
a limited body of case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
99
Accordingly, in certain circumstances there may be a degree of uncertainty as to
whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of the Company. As a result, it may be unclear
as to whether a Change of Control has occurred and whether a holder of Notes may
require the Company to make an offer to repurchase the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and its Restricted Subsidiaries will be entitled to Incur Indebtedness
(including Additional Notes issued after the Issue Date) if, on the date of such
Incurrence and after giving effect thereto on a pro forma basis, no Default has
occurred and is continuing and the Consolidated Coverage Ratio exceeds 2 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness ("Permitted Indebtedness"):
(1) Indebtedness Incurred by the Company and its Restricted
Subsidiaries pursuant to the Credit Agreement; provided, however, that,
immediately after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and
then outstanding does not exceed the greater of (A) $165.0 million less the
sum of all mandatory principal payments with respect to such Indebtedness
pursuant to paragraph (a)(3)(A) of the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" (which principal
payments in the case of revolving loans are accompanied by a corresponding
permanent commitment reduction) and (B) the sum of (x) 65% of the book
value of the inventory of the Company and its Restricted Subsidiaries and
(y) 85% of the book value of the accounts receivable of the Company and its
Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Restricted Subsidiary or to
the holder of a Lien permitted under the Indenture) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the obligor
thereon and (B) if the Company is the obligor on such Indebtedness and the
holders of Bank Indebtedness do not have a security interest therein or the
obligee is a Restricted Subsidiary that is not a Guarantor, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations with respect to the Notes;
(3) the Notes, the Exchange Notes and related Guarantees (other than
any Additional Notes);
(4) Indebtedness outstanding on the Issue Date and/or the Merger Date
(other than Indebtedness described in clause (1) or (3) of this covenant);
(5) Refinancing Indebtedness;
(6) Hedging Obligations of the Company or any Restricted Subsidiary
not for the purpose of speculation;
(7) obligations in respect of letters of credit, performance, bid,
surety, appeal and other similar bonds and completion guarantees, payment
obligations in connection with self-insurance or similar
100
requirements provided by the Company or any Restricted Subsidiary in the
ordinary course of business;
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; provided,
however,that such Indebtedness is extinguished within five Business Days of
its Incurrence;
(9) Indebtedness (including Capital Lease Obligations) Incurred by the
Company or any of its Restricted Subsidiaries to finance the purchase,
lease, construction or improvement of property (real or personal) or
equipment (whether through the direct purchase of assets or the Capital
Stock of any Person owning such assets) within 180 days after such
purchase, lease or improvement in an aggregate principal amount which, when
added together with the amount of Indebtedness Incurred pursuant to this
clause (9) and then outstanding, does not exceed $5.0 million (including
any Refinancing Indebtedness with respect thereto);
(10) Indebtedness Incurred and outstanding on or prior to the date on
which such Person was acquired by the Company or any Restricted Subsidiary
or assumed by the Company or a Restricted Subsidiary at the time of
acquisition of all or any portion of the assets (or any business or product
line of another Person) (other than Indebtedness Incurred in connection
with or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Subsidiary became a Restricted Subsidiary or was
acquired by the Company); provided, however, at the time of such
acquisition and after giving effect thereto, the aggregate principal amount
of all Indebtedness Incurred pursuant to this clause (10) and then
outstanding does not exceed $5.0 million;
(11) any Guarantee (including the Subsidiary Guaranties) by the
Company or a Restricted Subsidiary of Indebtedness or other obligations of
the Company or any of its Restricted Subsidiaries so long as the Incurrence
of such Indebtedness by the Company or such Restricted Subsidiary is
permitted under the terms of the Indenture;
(12) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary of the Company providing for indemnification,
adjustment of purchase price, earn out or other similar obligations, in
each case, incurred or assumed in connection with the disposition or
acquisition of any business, assets or a Restricted Subsidiary of the
Company; and
(13) Indebtedness of the Company or of any of its Restricted
Subsidiaries in an aggregate principal amount which, when taken together
with all other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (13) above or paragraph (a)), does not
exceed $12.5 million (which amount may, but need not be, incurred in whole
or in part under clause (b)(1) above).
(c) Notwithstanding the foregoing, neither the Company nor any Subsidiary
Guarantor will Incur any Indebtedness pursuant to the foregoing paragraph (b)
(other than (b)(1) above or under the Credit Agreement pursuant to (b)(13)
above) if the proceeds thereof are used, directly or indirectly, to Refinance
any Subordinated Obligations of the Company or any Subsidiary Guarantor unless
such Indebtedness shall be subordinated to the Notes or the applicable
Subsidiary Guaranty to at least the same extent as such Subordinated
Obligations.
(d) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
any Subsidiary Guarantor will Incur (1) any Indebtedness if such Indebtedness is
subordinate in right of payment to any Senior Indebtedness of the Company or
such Subsidiary Guarantor, as applicable, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness of the Company or such Subsidiary Guarantor, as
applicable, or (2) any Secured Indebtedness (for borrowed money including
Capital Lease Obligations) that is not Senior Indebtedness of such Person (other
than Indebtedness solely between or among the Company and a Subsidiary Guarantor
or between or among the Subsidiary Guarantors) unless contemporaneously
therewith such Person makes effective provision to secure the Notes or the
relevant Subsidiary Guaranty,
101
as applicable, equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
(e) For purposes of determining compliance with this covenant, (1) in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above, the Company, in its sole discretion, will
classify such item of Indebtedness at the time of Incurrence and only be
required to include the amount and type of such Indebtedness in one of the above
clauses and (2) the Company will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described above and
(3) the Company will be entitled from time to time to reclassify any
Indebtedness Incurred pursuant to any clause in paragraph (b) above such that it
will be deemed as having been Incurred under another clause in paragraph (b).
Accrual of interest, accretion or amortization of original issue discount, the
payment of interest on any Indebtedness in the form of additional Indebtedness
with the same terms, the payment of dividends on Disqualified Stock in the form
of additional shares of the same class of Disqualified Stock and change in the
amount outstanding due solely to the result of fluctuations in the exchange
rates of currencies will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant.
(f) For purposes of determining compliance with any U.S. dollar restriction
on the Incurrence of Indebtedness where the Indebtedness Incurred is denominated
in a different currency, the amount of such Indebtedness will be the U.S. Dollar
Equivalent determined on the date of the Incurrence of such Indebtedness,
provided, however, that if any such Indebtedness denominated in a different
currency is subject to a Currency Agreement with respect to U.S. dollars
covering all principal, premium, if any, and interest payable on such
Indebtedness, the amount of such Indebtedness expressed in U.S. dollars will be
as provided in such Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being Refinanced
will be the U.S. Dollar Equivalent of the Indebtedness Refinanced, except to the
extent that (1) such U.S. Dollar Equivalent was determined based on a Currency
Agreement, in which case the Refinancing Indebtedness will be determined in
accordance with the preceding sentence, and (2) the principal amount of the
Refinancing Indebtedness exceeds the principal amount of the Indebtedness being
Refinanced, in which case the U.S. Dollar Equivalent of such excess will be
determined on the date such Refinancing Indebtedness is Incurred.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if, at the time the Company
or such Restricted Subsidiary makes such Restricted Payment,
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date (the amount expended for such
purpose if other than in cash, having the fair market value of such
property as determined in good faith by the Company) would exceed the sum
of (without duplication)
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the first fiscal quarter ending
after the Issue Date occurs to the end of the most recent fiscal
quarter for which internal financial statements are available on or
prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company) and 100% of any cash capital contribution
received by the Company from its shareholders subsequent to the Issue
Date; plus
102
(C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or the fair value of
any other property, distributed by the Company upon such conversion or
exchange); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments made by the Company or any Restricted Subsidiary in any
Person resulting from repurchases, repayments or redemptions of such
Investments by such Person, proceeds realized on the sale of such
Investment and proceeds representing the return of capital, in each case
received by the Company or any Restricted Subsidiary, and (y) to the
extent such Person is an Unrestricted Subsidiary, the portion
(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Unrestricted Subsidiary
is designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any such Person, the
amount of Investments (excluding Permitted Investments) previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person.
(b) The preceding provisions will not prohibit
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock of
the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees to the extent that the
purchase by such plan or trust is financed by Indebtedness of such plan or
trust to the Company or any Restricted Subsidiary or Indebtedness
Guaranteed by the Company or a Restricted Subsidiary) or a substantially
concurrent cash capital contribution received by the Company from its
shareholders; provided, however, that (A) such Restricted Payment shall be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale or such cash capital contribution (to
the extent so used for such Restricted Payment) shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or any Subsidiary Guarantor made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness which is
permitted to be Incurred pursuant to the covenant described under
"-- Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided however that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of, shares of, or options to purchase
shares of, common stock or preferred stock of the Parent or the Company or
any of its Subsidiaries by the Company or any of its Subsidiaries (or
payments paid to the Parent to consummate such repurchases or other
acquisitions in accordance with the provisions of this clause (4)) from
employees, former employees, directors, consultants, former consultants or
former directors of the Company or any of its Subsidiaries upon the death,
disability or termination of employment of such employees, directors or
consultants, pursuant to the terms of the agreements (including employment
and consulting agreement or amendments thereto) or plans approved by the
Board of Directors; provided, however, that the aggregate amount of such
repurchases and other acquisitions shall not exceed the sum of (A) $2.5
million in any fiscal year and (B) the cash proceeds of any "key man" life
insurance policies that are used to make such repurchases; provided,
however, that amounts not used pursuant to this clause (4) in a year may be
carried forward for use in future years; provided further, however, that
such repurchases and other acquisitions shall be included in the
calculation of the amount of Restricted Payments;
103
(5) the Transactions; provided, however, that Restricted Payments used
to effect the Transactions will be excluded in the calculation of the
amount of Restricted Payments;
(6) dividends, loans, advances or other distributions to Parent to be
used by Parent solely (a) to pay its franchise taxes and other fees
required to maintain its corporate existence and to pay for general
corporate and overhead expenses (including salaries and other compensation
of the employees, directors fees, indemnification obligations, professional
fees and expenses) incurred by Parent in the ordinary course of its
business; provided, however, that such dividends shall not exceed $750,000
in any calendar year; provided, further, however, that such dividends shall
be excluded in the calculation of the amount of Restricted Payments;
(7) payments to Parent in respect of Federal, state, foreign and local
taxes attributable to (or arising as a result of) the operations of the
Company and its Subsidiaries; provided, however, that the amount of such
payments in any fiscal year do not exceed the amount that the Company and
its Subsidiaries would be required to pay in respect of Federal, state,
foreign and local taxes for such fiscal year were the Company to pay such
taxes as a stand-alone taxpayer (whether or not all such amounts are
actually used by Parent for such purposes); provided, further, however,that
such payments shall be excluded in the calculation of the amount of
Restricted Payments;
(8) repurchase of Capital Stock deemed to occur upon the exercise of
stock options or warrants if such Capital Stock represents a portion of the
exercise price thereof and repurchases of Capital Stock deemed to occur
upon the withholding of a portion of the Capital Stock granted or awarded
to an employee to pay for the statutory minimum taxes payable by such
employee upon such grant or award; provided, however, that such amount
shall be excluded in the calculation of the amount of Restricted Payments;
or
(9) Restricted Payments not exceeding $7.5 million in the aggregate;
provided, however, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or result therefrom) and (B)
such Restricted Payments shall be included in the calculation of the amount
of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date (including the Indenture and the
Credit Agreement);
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or Refinancings of the Indebtedness referred to in any of the
foregoing clauses and restrictions contained in Indebtedness incurred after
the date hereof in accordance with the terms of the Indenture; provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or Refinancings are not materially
more restrictive with respect to such dividend and other payment
restrictions than those contained in the applicable instrument governing
such indebtedness as in effect on the date
104
of the Indenture; provided that, with respect to any agreement governing
such other Indebtedness, the provisions relating to such encumbrance or
restriction are no less favorable to the Company in any material respect as
determined by the Company in its reasonable and good faith judgment than
the provisions contained in the Credit Agreement as in effect on the Issue
Date;
(iv) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(v) any such encumbrance or restriction consisting of customary
non-assignment provisions in contracts or in leases governing leasehold
interest and in intellectual property contracts and licenses;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of assets
(including Capital Stock) of such Restricted Subsidiary permitted by the
Indenture pending the closing of such sale or disposition;
(vii) any restriction arising under applicable law, regulation or
order;
(viii) restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages; and
(ix) restrictions on the transfer of assets subject to any Lien
permitted under the Indenture imposed by the holder of such Lien.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration), as
determined in good faith by the Company, or in the case of an Asset
Disposition in excess of $10 million, by the Board of Directors of the
Company, of the shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of cash or cash equivalents;
and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be) pursuant to one or more of the following:
(A) to the extent the Company elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness of the Company (including cash collateralization of letters
of credit and similar credit transactions constituting Senior
Indebtedness) or Indebtedness (other than any Disqualified Stock) of a
Restricted Subsidiary (or, in the case of a revolving credit facility,
effect a permanent reduction in availability thereunder regardless of
the fact that no prepayment may be required) (in each case other than
Indebtedness owed to the Company or a Subsidiary of the Company) or
repay Indebtedness secured by such asset within one year from the later
of the date of such Asset Disposition or the receipt of such Net
Available Cash;
(B) to the extent of the balance of such Net Available Cash after
application (if any) in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash; and
(C) to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to
the holders of the Notes (and to holders of other
105
Senior Subordinated Indebtedness of the Company designated by the
Company) to purchase Notes at 100% of their principal amount thereof
(and such other Senior Subordinated Indebtedness of the Company)
pursuant to and subject to the conditions set forth in paragraph (b)
below;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company
or such Restricted Subsidiary shall permanently retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $10.0 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash may be invested in a
manner not prohibited by the Indenture and/or applied to temporarily reduce
revolving credit indebtedness.
For the purposes of clause (a)(2) above of this covenant, any of the
following are deemed to be cash or cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition;
(2) securities, notes or other obligations received by the Company or
any Restricted Subsidiary from the transferee that are converted by the
Company or such Restricted Subsidiary into cash within 90 days after the
date of such Asset Disposition (to the extent of the cash received); and
(3) any Additional Assets (so long as such Additional Assets are
acquired for fair market value in connection with the transaction giving
rise to such Asset Disposition, as determined in good faith by the Board of
Directors of the Company or such Restricted Subsidiary, as applicable).
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Subordinated Indebtedness of the Company) pursuant to
clause (a)(3)(C) above, the Company will purchase Notes tendered pursuant to an
offer by the Company for the Notes (and such other Senior Subordinated
Indebtedness) at a purchase price of 100% of their principal amount (or, in the
event such other Senior Subordinated Indebtedness of the Company was issued with
significant original issue discount, 100% of the accreted value thereof) without
premium, plus accrued but unpaid interest (or, in respect of such other Senior
Subordinated Indebtedness of the Company, such lesser price, if any, as may be
provided for by the terms of such Senior Subordinated Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the securities tendered exceeds the Net Available Cash allotted to their
purchase, the Company will select the securities to be purchased on a pro
ratabasis but in round denominations, which in the case of the Notes will be
denominations of $1,000 principal amount or multiples thereof. The Company shall
not be required to make such an offer to purchase Notes (and other Senior
Subordinated Indebtedness of the Company) pursuant to this covenant if the Net
Available Cash available therefor is less than $10.0 million (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition). Upon completion of each offer to purchase Notes pursuant to
this covenant, the amount of Net Available Cash will be reset to zero.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
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LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are not materially less
favorable to the Company or such Restricted Subsidiary than those that
could be obtained at the time of the Affiliate Transaction in arm's-length
dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $2.0
million, a majority of the Board of Directors of the Company have
determined in good faith that the criteria set forth in clause (1) are
satisfied and have approved the relevant Affiliate Transaction as evidenced
by a resolution of the Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of
$10.0 million, the Board of Directors of the Company shall also have
received a written opinion from an Independent Qualified Party to the
effect that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries or is not
materially less favorable to the Company and its Restricted Subsidiaries
than could reasonably be expected to be obtained at the time in an
arm's-length transaction with a Person who was not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not apply to
(1) any Investment (including a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board
of Directors of the Company;
(3) loans or advances to employees or consultants in the ordinary
course of business, but in any event not to exceed $2.0 million in the
aggregate outstanding at any one time;
(4) the payment of reasonable fees and compensation to, the provision
of employee benefit arrangements and indemnity for the benefit of,
directors, officers, employees and consultants of the Company and its
Restricted Subsidiaries;
(5) any Affiliate Transaction between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries;
(6) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company and loans or advances to employees to purchase
Capital Stock;
(7) any agreement with the Company or any Restricted Subsidiary as in
effect as of the Issue Date or any amendment or replacement thereto or any
transaction contemplated thereby (including pursuant to any amendment or
replacement thereto) so long as any such amendment or replacement agreement
is not more disadvantageous to the Company or such Restricted Subsidiary in
any material respect than the original agreement as in effect on the Issue
Date;
(8) the payment of management, consulting and advisory fees and
related expenses made pursuant to the Harvest Management Services Agreement
as in effect on the Issue Date or any amendment or replacement thereto or
any transaction contemplated thereby (including pursuant to any amendment
or replacement thereto) so long as any such amendment or replacement
agreement is not more disadvantageous to the Company or such Restricted
Subsidiary in any material respect than the original agreement as in effect
on the Issue Date;
107
(9) any consulting or employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business
consistent with the past practice of the Company or such Restricted
Subsidiary; and
(10) any tax sharing agreement or arrangement and payments pursuant
thereto among the Company and its Subsidiaries and other Person (including
Parent) with which the Company or its Subsidiaries is required or permitted
to file a consolidated tax return or with which the Company or any of its
Restricted Subsidiaries is or could be part of a consolidated group for tax
purposes in amounts not otherwise prohibited by the Indenture.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company
(1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any Capital Stock of a Restricted
Subsidiary to any Person (other than the Company or a Restricted
Subsidiary), and
(2) will not permit any Restricted Subsidiary, directly or indirectly,
to issue or sell or otherwise dispose of any of its Capital Stock (other
than, if necessary, shares of its Capital Stock constituting directors' or
other legally required qualifying shares) to any Person (other than to the
Company or a Restricted Subsidiary),
unless
(A) immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary; or
(B) immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto would have been permitted to be made under the
covenant described under "-- Limitation on Restricted Payments" if made
on the date of such issuance, sale or other disposition; or
(C) the sale or issuance of Capital Stock if the proceeds therefrom
are applied in accordance with "-- Limitation on Sales of Assets and
Subsidiary Stock".
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form reasonably satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; and
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(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture;
provided, however, that (i) the Company may effect the Transactions, and (ii)
clause (3) will not be applicable to (A) a Restricted Subsidiary consolidating
with, merging into or transferring all or part of its properties and assets to
the Company or (B) the Company merging with an Affiliate of the Company solely
for the purpose and with the sole effect of reincorporating the Company in
another jurisdiction.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person (other
than the Company or the Subsidiary Guarantor) unless
(1) except in the case of a Subsidiary Guarantor that has been
disposed of in its entirety to another Person (other than to the Company or
a Subsidiary of the Company), whether through a merger, consolidation or
sale of Capital Stock or assets, if in connection therewith the Company
provides an Officers' Certificate to the Trustee to the effect that the
Company will comply with its obligations under the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" in respect of such
disposition, the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by a Guaranty Agreement,
in a form satisfactory to the Trustee, all the obligations of such
Subsidiary under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time
of such transaction), no Default shall have occurred and be continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the Indenture.
FUTURE SUBSIDIARY GUARANTORS
The Company will cause each domestic Restricted Subsidiary that guarantees
or incurs any Indebtedness under the Credit Agreement to, at the same time,
execute and deliver to the Trustee a Guaranty Agreement pursuant to which such
Restricted Subsidiary will Guarantee payment of the Notes on the same terms and
conditions as those set forth in the Indenture.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC (unless the SEC will not accept such a filing and commencing with
the effectiveness of the Exchange Offer or Shelf Registration Statement) and
will in any event provide the Trustee and Noteholders within 15 days after it
files with the SEC with such annual reports and such information, documents and
other reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filings of such information, documents and reports under such Sections;
provided, however, that the Company shall not be so obligated to file such
reports with the SEC if the SEC does not permit such filing, in
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which event the Company will make available such information to the Trustee and
Holders of Notes within 15 days after the time the Company would be required to
file such information with the SEC if it were subject to Section 13 or 15(d) of
the Exchange Act.
In addition, the Company will furnish to the Holders of the Notes and to
prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the Notes are not freely transferable under the Securities Act.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon redemption, upon required purchase, upon declaration
of acceleration or otherwise;
(3) the failure by the Company or any Subsidiary Guarantor to comply
with its obligations under "-- Certain Covenants -- Merger and
Consolidation" above;
(4) the failure by the Company or any Subsidiary Guarantor to comply
for 30 days after notice with any of its obligations in the covenants
described above under "Change of Control" (other than a failure to purchase
Notes) or under "-- Certain Covenants" under "-- Limitation on
Indebtedness," "-- Limitation on Restricted Payments," "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries," "-- Limitation
on Sales of Assets and Subsidiary Stock" (other than a failure to purchase
Notes), "-- Limitation on Affiliate Transactions," or "-- Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries";
(5) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or any Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money (other than
judgments which are covered by enforceable insurance policies issued by
solvent carriers) in excess of $10.0 million is entered against the Company
or any Significant Subsidiary, and is not discharged, paid, waived or
stayed within 60 days after same becomes final and non-appealable (the
"judgment default provision"); or
(9) any Subsidiary Guaranty of a Significant Subsidiary ceases to be
in full force and effect (other than in accordance with the terms of such
Guaranty) for 30 days after notice or any Subsidiary Guarantor that is a
Significant Subsidiary denies or disaffirms its obligations under its
Guaranty.
However, a default under clauses (4), (5) and (8) will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding Notes notify the Company of the default (and demand that same be
remedied) and the Company does not cure such default within the time specified
after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will
110
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Notwithstanding the foregoing, in the event of a declaration of
acceleration in respect of the Notes because an Event of Default specified in
clause (6) above shall have occurred and be continuing, such declaration of
acceleration shall be automatically annulled if the Indebtedness that is the
subject of such Event of Default has been discharged or paid or such Event of
Default shall have been cured or waived by the holders of such Indebtedness and
written notice of such discharge, cure or waiver, as the case may be, shall have
been given to the Trustee by the Company or by the requisite holders of such
Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days
after such declaration of acceleration in respect of the Notes and (a) no Person
shall have commenced judicial proceedings to foreclose upon assets of the
Company or any of its Restricted Subsidiaries or shall have exercised any right
under applicable law or applicable security documents to take ownership of any
of such assets in lieu of foreclosure and (b) no other Event of Default with
respect to the Notes shall have occurred which has not been cured or waived
during such 30-day period.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless
(1) such holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
111
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (voting as a single class) (including consents obtained in
connection with a tender offer for, exchange for or purchase of, the Notes) and
any past default or compliance with any provisions may also be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding Note
affected thereby, an amendment or waiver may not, among other things,
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the amount payable upon the redemption of any Note or
change the time at which any Note may be redeemed as described under
"-- Optional Redemption" or shall be redeemed as described under "-- Escrow
of Proceeds; Special Mandatory Redemption" above;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders; or
(9) make any change in any Guaranty that would adversely affect the
Noteholders in any material respect.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Subsidiary Guarantors and Trustee may amend the
Indenture
(1) to cure any ambiguity, omission, mistake, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company or any Subsidiary Guarantor under the Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add guarantees with respect to the Notes, including any
Subsidiary Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or a Subsidiary Guarantor
for the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company or a Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of
any holder of the Notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company or a Subsidiary Guarantor then
112
outstanding unless the holders of such Senior Indebtedness (or their
Representative) consent to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required
to mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the Notes, the
Guaranties and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes.
In addition, at any time we may terminate our obligations under "-- Change
of Control" and under the covenants described under "-- Certain Covenants," the
operation of clauses (3) and (4) of the first paragraph under "-- Defaults," the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under "--
Defaults" above and the limitations contained in clause (3) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above
("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes and the guarantees may not be accelerated because
of an Event of Default with respect thereto. If we exercise our covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (6), or (7) (with respect only to
Significant Subsidiaries) above or because of the failure of the Company to
comply with clause (3) of the first paragraph under "-- Certain
Covenants -- Merger and Consolidation" above. If we exercise our legal
defeasance option or our covenant defeasance option, each Subsidiary Guarantor
will be released from all of its obligations with respect to its Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law). In addition, in order to exercise our
defeasance option, the defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture (other than a breach or violation of
the Indenture resulting from the borrowing of funds to be applied to such
deposit and the grant of any Lien securing such borrowing), the Credit Agreement
or any other material agreement or instrument to which the Company or any of its
Restricted Subsidiaries is a party or is bound.
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CONCERNING THE TRUSTEE
Wilmington Trust Company is to be the Trustee under the Indenture. We have
appointed the Trustee as Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, member,
incorporator or stockholder of the Company, Parent or any Subsidiary Guarantor
will have any liability for any obligations of the Company or any Subsidiary
Guarantor under the Notes, any Subsidiary Guaranty or the Indenture or for any
claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder of the Notes by accepting a Note waives and releases all
such liability and such waiver and release are part of the consideration for
issuance of the Notes. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver and release may not be effective to waive
liabilities under the U.S. Federal securities laws, and it is the view of the
SEC that such a waiver is against public policy.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means
(1) any property, plant, equipment or other assets used or usable in a
Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "-- Certain Covenants -- Limitation on
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Restricted Payments," and "-- Certain Covenants -- Limitation on Affiliate
Transactions" only, "Affiliate" shall also mean any beneficial owner of Capital
Stock representing 10% or more of the total voting power of the Voting Stock (on
a fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease (other than operating leases
entered into in the ordinary course of business), transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary
other than, in the case of clauses (1), (2) and (3) above,
(A) a disposition or transfer by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Restricted
Subsidiary;
(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, (x)
a disposition that constitutes a Restricted Payment permitted by the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments" or a Permitted Investment or (y) a disposition of all or
substantially all the assets of the Company in accordance with the covenant
described under "-- Certain Covenants -- Merger and Consolidation";
(C) sales or other dispositions of obsolete, uneconomical, negligible,
damaged, worn-out or surplus assets in the ordinary course of business
(including but not limited to equipment, inventory and intellectual
property);
(D) a disposition of assets with a fair market value of less than or
equal to $1.0 million, not to exceed $5.0 million in the aggregate in any
12 month period;
(E) sale or discount of accounts receivable in connection with the
compromise or collection thereof;
(F) sale or exchange of equipment in connection with the purchase or
other acquisition of equipment; and
(G) sales or grants of licenses to use intellectual property.
provided, however, that a disposition of all or substantially all the assets of
the Company and its Restricted Subsidiaries taken as a whole will be governed by
the provisions of the Indenture described above under the caption "-- Change of
Control" and/or the provisions described above under the caption "-- Merger and
Consolidation" and not by the provisions described above under the caption
"-- Limitation on Sales of Assets and Subsidiary Stock" covenant.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended); provided, however, that if such Sale/Leaseback Transaction results in
a Capital Lease
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Obligation, the amount of Indebtedness represented thereby will be determined in
accordance with the definition of "Capital Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Facilities" means the bank facilities under to the Credit Agreement.
"Bank Indebtedness" means all Obligations pursuant to the Credit Agreement.
"Board of Directors" with respect to a Person means the Board of Directors
of such Person or any committee thereof duly authorized to act on behalf of such
Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial statements are
available on or prior to the date of such determination to (y) Consolidated
Interest Expense for such four fiscal quarters; provided, however, that
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period (and, if
such Indebtedness is revolving Indebtedness, the amount of Indebtedness
deemed to be outstanding for such period shall be the average outstanding
amount of such Indebtedness during such period);
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness;
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(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive)
attributable to the assets which are the subject of such Asset Disposition
for such period, or increased by an amount equal to EBITDA (if negative),
attributable thereto for such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated
Interest Expense attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest
Expense for such period attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets (including Capital Stock), the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in accordance with Regulation S-X under the
Exchange Act or as otherwise acceptable to the SEC. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest on
such Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication,
(1) interest expense attributable to Capital Lease Obligations and the
interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments or receipts pursuant to Hedging Obligations;
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(7) dividends declared and paid in cash or Disqualified Stock in
respect of (A) all Preferred Stock of Restricted Subsidiaries and (B) all
Disqualified Stock of the Company, in each case held by Persons other than
the Company or a Wholly Owned Subsidiary in each case other than dividends
payable in Qualified Stock;
(8) interest incurred in connection with Investments in discontinued
operations; and
(9) interest accruing on any Indebtedness of any other Person (other
than a Subsidiary) to the extent such Indebtedness is Guaranteed by (or
secured by the assets of) the Company or any Restricted Subsidiary and such
Indebtedness is accelerated or any payment is actually made in respect of
such Guarantee; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company or a
Restricted Subsidiary thereof) in connection with Indebtedness Incurred by
such plan or trust,
and less, to the extent included in such interest expense the amortization
during such period of capitalized financing costs; provided, however, that the
aggregate amount of amortization relating to any such capitalized financing
costs deducted in calculating Consolidated Interest Expense shall not exceed
5.0% of the aggregate amount of the financing giving rise to such capitalized
financing costs.
"Consolidated Net Income" means, for any period, the sum of (1) net income
of the Company and its Subsidiaries and (2) to the extent deducted in
calculating net income of the Company and its Subsidiaries, any non-recurring
fees, expenses or charges related to the Transactions; provided, however, that
there shall not be included in such Consolidated Net Income
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that
(A) subject to the exclusion contained in clause (3) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period to
the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(2) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income;
(2) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that
(A) subject to the exclusion contained in clause (3) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(3) any gain or loss (and the related tax effects) realized upon the
sale or other disposition of any assets of the Company, its consolidated
Restricted Subsidiaries or any other Person (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of
in the ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person;
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(4) extraordinary, non-cash or non-recurring gains, losses or charges,
including (i) those related to impairment of goodwill and other intangible
assets and (ii) the write-off of deferred financing costs and related
premiums paid in connection with any early extinguishment of Indebtedness
and the related tax effects;
(5) the cumulative effect of a change in accounting principles; and
(6) any net income or loss attributable to discontinued operations.
Notwithstanding the foregoing, for the purposes of the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"Credit Agreement" means the Credit Agreement dated as of April 19, 2002,
by and among the Company, the lenders referred to therein, UBS AG, Stamford
Branch, as Administrative Agent, Credit Suisse First Boston, as Syndication
Agent and CIBC World Markets Corp., as Documentation Agent, together with the
related documents thereto (including any guarantees and security documents,
whether in effect on the Issue Date or entered into thereafter), as amended,
extended, renewed, restated, supplemented or otherwise modified (in whole or in
part, and without limitation as to amount, terms, conditions, covenants and
other provisions) from time to time, and any agreement (and related document)
governing Indebtedness incurred to Refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be outstanding under
such Credit Agreement or a successor Credit Agreement, whether by the same or
any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" with respect to a Person means
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, that portion of any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable at the option of the holder) or
upon the happening of any event
(1) matures (excluding any maturity as a result of an optional
redemption by the issuer thereof) or is mandatorily redeemable (other than
redeemable only for Capital Stock of such Person which is not itself
Disqualified Stock) pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence
of certain events or otherwise, in whole or in part;
in each case on or prior to the date that is 91 days after the Stated Maturity
of the Notes; provided, however, that if such Capital Stock is issued to any
employee or to any plan for the benefit of employees
119
of the Company or its Subsidiaries or by any such plan to such employees, such
Capital Stock shall not constitute Disqualified Stock solely because it may be
required to be repurchased by the Company in order to satisfy obligations as a
result of such employee's death or disability; and provided further, however,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or
"change of control" occurring prior to the date that is 91 days after the Stated
Maturity of the Notes shall not constitute Disqualified Stock if
(1) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable to the holders of such Capital
Stock than the terms applicable to the Notes as described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Change of Control."
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes based on the income or profits of, and
the depreciation and amortization and non-cash charges of, a Restricted
Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion, including by reason of minority
interest) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Equity Financing" means the financing by Parent of at least $172.0 million
of equity capital to provide a portion of the funds for the Equity Tender Offer
and the Merger.
"Equity Offering" means a primary offering of common stock or common equity
of Parent or the Company.
"Equity Tender Offer" means the cash tender offer for 100% of the shares of
common stock of the Company at a price of $50.00 per share.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in
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(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep well, to purchase
assets, goods, securities or services, to take or pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guaranty" means each Subsidiary Guaranty, as applicable.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the Notes on the terms provided for in the
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement or similar
Agreement.
"Holder" means the Person in whose name a Note is registered on the
Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(1) the principal in respect of (A) indebtedness of such Person for
borrowed money and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Per son under any title retention agreement
(but excluding trade accounts payable arising in the ordinary course of
business);
121
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Subsidiary of such
Person, the principal amount of such Preferred Stock to be determined in
accordance with the Indenture (but excluding, in each case, any accrued
dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that in the case of Indebtedness sold at a discount, the amount of such
Indebtedness at any time will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments",
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors of the
Company.
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"Issue Date" means April 23, 2002.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lenders" means the lenders from time to time party to the Credit
Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Merger" means the merger of Simon Acquisition Corp. with and into the
Company pursuant to the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger dated as of March
16, 2002 by and among Simon Acquisition Corp., Parent and the Company.
"Merger Date" means April 19, 2002.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form), in each case net of
(1) all legal, title and recording tax expenses, underwriting
discounts, commissions and other fees and expenses incurred (including,
without limitation, fees and expenses of counsel, accountants and
investment bankers), and all Federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP, as a consequence of
such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any current or contingent
liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Note Tender Offer" means the tender offer by the Company of all of our
existing 9 1/4% senior subordinated notes due 2008 of the Company, including the
change of control offer required pursuant to the indenture governing the
existing notes and the defeasance of any remaining existing notes after such
change of control offer.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Officer" means the Chairman of the Board, the President, Chief Financial
Officer, any Vice President, the Treasurer or the Secretary of the Company.
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"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Parent" means Associated Materials Holdings, Inc., a Delaware corporation,
and its successors.
"Permitted Holders" means Harvest Partners, Inc., and its affiliates and
funds managed by Harvest Partners, Inc. and/or its affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in
(1) the Company, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however,that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however,that such trade terms may include such concessionary trade terms as
the Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, moving, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business;
(6) loans or advances to employees, directors or consultants made in
the ordinary course of business in an aggregate amount not to exceed $2.0
million at any time outstanding;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock";
(9) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment
or accounts receivable or (b) as a result of a foreclosure by the Company
or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured
Investment in default;
(10) Hedging Obligations of the Company's or any Restricted
Subsidiary's business and not for the purpose of speculation;
(11) Investments existing on the Issue Date and any such Investment
that replaces or refinances such Investment in such Person existing on the
Issue Date in an amount not exceeding the amount of the Investment being
replaced or refinanced; provided, however, the new Investment is on terms
and conditions no less favorable than the Investment being renewed or
replaced;
(12) Guarantees of Indebtedness otherwise permitted under the
Indenture;
(13) Investments the payment of which consists of Qualified Stock of
Parent or the Company;
(14) Investments in the Notes;
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(15) Investments consisting of obligations of one or more consultants,
officers, directors or other employees of the Company or any of its
Subsidiaries in connection with such consultants, officers', directors' or
employees' acquisition of shares of capital stock of Parent or the Company
so long as no cash is paid by the Company or any of its Subsidiaries to
such consultants, officers, directors or employees in connection with the
acquisition of any such obligations; and
(16) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (16) that are at the time
outstanding, not to exceed $2.5 million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Qualified Stock" means any Capital Stock that is not Disqualified Stock.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary incurred pursuant to
paragraph (a) of the covenant "Limitation on Indebtedness" or subclause (3),
(4), (5), (7), (8) or (10) of paragraph (b) of the covenant "Limitation on
Indebtedness"; provided, however, that
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
provided, further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
among the Company, Credit Suisse First Boston Corporation, UBS Warburg LLC and
CIBC World Markets Corp. entered into in connection with the issuance of the
Notes.
"Related Business" means any business in which the Company or any of its
Restricted Subsidiaries was engaged on the Issue Date and any business
reasonably related, ancillary or complementary to any business of the Company or
any of its Restricted Subsidiaries in which the Company was engaged on the Issue
Date or a reasonable expansion thereof.
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"Representative" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to the Company or a Restricted Subsidiary);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
of such Person (other than the purchase, re purchase or other acquisition
of Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each
case due within one year of the date of such purchase, repurchase or other
acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor for borrowed money that is secured by a Lien on an asset of
the Company or a Subsidiary Guarantor.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred, including, and together with, all Obligations under
the Credit Agreement; and
(2) accrued and unpaid interest (including interest accruing on or
after the filing of, or which would have accrued but for the filing of, any
petition in bankruptcy or for reorganization relating to such Person
whether or not post-filing interest is allowed in such proceeding) in
respect of (A) indebtedness of such Person for borrowed money, including,
and together with, all Obligations under the Credit Agreement, (B) Hedging
Obligations and (C) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
expressly provided that such obligations are subordinate or pari passu in right
of payment to the Notes or the Guaranty of such Person, as the case may be;
provided, however, that Senior Indebtedness shall not include
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or
owing by such Person;
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(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect
to any other Indebtedness or other obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the Indenture, except to the extent that the
Indebtedness so incurred was extended by the lenders thereof in reliance on
a certificate executed and delivered by the president, chief executive
officer or chief financial or accounting officer of the Company in which
certificate such officer certified that the incurrence of such Indebtedness
was permitted under the proviso in paragraph (a) or clause (1) or (13) in
paragraph (b) under the caption "Certain Covenants -- Limitation on
Indebtedness."
"Senior Subordinated Indebtedness" means, with respect to a Person, the
Notes (in the case of the Company), the Guaranty (in the case of a Subsidiary
Guarantor) and any other Indebtedness of such Person that specifically provides
that such Indebtedness is to rank pari passu with the Notes or such Guaranty, as
the case may be, in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of such Person which is
not Senior Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Note Obligations" means all Obligations with respect to the
Notes, including, without limitation, principal, premium (if any), interest
payable pursuant to the terms of the Notes (including upon the acceleration or
redemption thereof), together with and including any amounts received or
receivable upon the exercise of rights of rescission or other rights of action
(including claims for damages) or otherwise.
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Guaranty of
such Person, as the case may be, pursuant to a written agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock or is at the time owned or
controlled, directly or indirectly, by
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each domestic Subsidiary of the Company that
executes the Indenture as a guarantor on the Issue Date and each other domestic
Subsidiary of the Company that thereafter guarantees the Notes pursuant to the
terms of the Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
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"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any State thereof or any foreign country
recognized by the United States of America, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 365 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings
Group;
(5) investments in securities with maturities of one year or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.; and
(6) money market funds at least 95% of the assets of which constitute
Temporary Cash Investments of the kind described in clauses (1) through (5)
of this definition.
"Transactions" means, collectively, the Merger, the Equity Tender Offer,
the Note Tender Offer, the Equity Financing, the Bank Facilities and this
Offering.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec. 77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Trustee" means Wilmington Trust Company until a successor replaces it and,
thereafter, means the successor.
"U.S. Dollar Equivalent" means with respect to any monetary amount in a
currency other than U.S. dollars, at any time for determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as published in The Wall Street
Journal in the "Exchange Rates" column under the heading "Currency Trading" on
the date two Business Days prior to such determination.
Except as described under "-- Certain Covenants -- Limitation on
Indebtedness", whenever it is necessary to determine whether the Company has
complied with any covenant in the Indenture or a Default has occurred and an
amount is expressed in a currency other than U.S. dollars, such amount will be
treated as the U.S. Dollar Equivalent determined as of the date such amount is
initially determined in such currency.
128
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Unrestricted Subsidiary" means
(1) any Subsidiary of an Unrestricted Subsidiary; and
(2) any Subsidiary of the Company which is designated after the Issue
Date as an Unrestricted Subsidiary by a board resolution of the Board of
Directors of the Company;
provided that a Subsidiary may be so designated as an Unrestricted Subsidiary
only if
(A) such designation is in compliance with "-- Certain Covenants --
Limitation on Restricted Payments" above;
(B) immediately after giving effect to such designation, the Company
could have incurred at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to "Certain Covenants -- Limitation on
Indebtedness" above;
(C) no Default or Event of Default has occurred and is continuing or
results therefrom; and
(D) neither the Company nor any Restricted Subsidiary will at any time
(i) provide a guarantee of, or similar credit support to, any
Indebtedness of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness),
(ii) be directly or indirectly liable for any Indebtedness of such
Subsidiary or
(iii) be directly or indirectly liable for any other Indebtedness
which provides that the holder thereof may (upon notice, lapse of time
or both) declare a default thereon (or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity) upon the
occurrence of a default with respect to any other Indebtedness that is
Indebtedness of such Subsidiary (including any corresponding right to
take enforcement action against such Subsidiary),
except in the case of clause (i) or (ii) to the extent
(i) that the Company or such Restricted Subsidiary could otherwise
provide such a guarantee or incur such Indebtedness (other than as
Permitted Indebtedness) pursuant to "-- Certain Covenants -- Limitation
on Indebtedness" above and
(ii) the provision of such guarantee and the incurrence of such
Indebtedness otherwise would be permitted under "-- Certain Covenants --
Limitation on Restricted Payments" above.
The Trustee will be provided with an officers' certificate stating that such
designation is permitted and setting forth the basis upon which the calculations
required by this definition were computed, together with a copy of the board
resolution adopted by the Board of Directors of the Company making such
designation.
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (A) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (B) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
of the Company shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the resolution of the Board of Directors of the Company giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
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"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and other legally
required qualifying shares) is owned by the Company or one or more Wholly Owned
Subsidiaries.
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BOOK-ENTRY, DELIVERY AND FORM
The outstanding notes were offered and sold to qualified institutional
buyers in reliance on Rule 144A and in offshore transactions in reliance on
Regulation S. Except as set forth below, exchange notes will be issued in
registered, global form in minimum denominations of $1,000 and integral
multiples of $1,000 in excess of $1,000.
THE GLOBAL NOTES
Except as described below, we initially issued the outstanding notes and we
will initially issue the exchange notes in the form of one or more notes in
registered, global form without interest coupons. These global notes will be
deposited upon issuance with, or on behalf of, DTC and registered in the name of
DTC, or its nominee, or will remain in the custody of the trustee pursuant to
the FAST Balance Certificate Agreement between DTC and the trustee. All
interests in global notes, including those held through Euroclear Bank SA/N.V.,
as operator of the Euroclear System, or Clearstream Banking, societe anonyme may
be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or Clearstream may also be subject to the procedures and
requirements of these systems.
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in physical, certificated form except in the limited circumstances described
below. You may hold your beneficial interests in the global notes directly
through DTC if you have an account with DTC or directly through organizations
that have an account with DTC.
Any beneficial interest in one of the global notes that is transferred to a
person who takes delivery in the form of an interest in another global note
will, upon transfer, cease to be an interest in this global note and become an
interest in the other global note and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other global note for as long as it remains such an
interest.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to contact the system or
its participants directly to discuss these matters.
DTC has advised us that it is
- a limited purpose trust company organized under the laws of the State of
New York,
- a "banking organization" within the meaning of the New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
participants include securities brokers and dealers, including the initial
purchasers of the outstanding notes; banks and trust companies; clearing
corporations and some other organizations. Indirect access to DTC's system is
also available to other entities such as banks, brokers, dealers and trust
companies; these indirect participants clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Investors who
are not participants may beneficially own securities held by or on behalf of DTC
only through participants or indirect participants. The ownership interests in,
and transfers of ownership
131
interests in, each security held by or on behalf of DTC are recorded on the
records of the participants and indirect participants.
DTC has also advised us that, pursuant to procedures established by it,
(1) upon deposit of the global notes, DTC will credit the accounts of
participants with an interest in the global notes; and
(2) ownership of these interests in the global notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the participants) or by
the participants and the indirect participants (with respect to other
owners of beneficial interest in the global notes).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons will be limited
to that extent. Because DTC can act only on behalf of participants, which in
turn act on behalf of indirect participants, the ability of a person having
beneficial interests in a global note to pledge such interests to persons that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE GLOBAL NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF GLOBAL NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of DTC and, if the holder is not a participant or an
indirect participant in DTC, on the procedures of the participant through which
the holder owns its interest, to exercise any rights of a holder of Notes under
the indenture or the global note. We understand that under existing industry
practice, if we request any action of holders of notes, or a holder that is an
owner of a beneficial interest in a global note desires to take any action that
DTC, as the holder of the global note, is entitled to take, then DTC would
authorize its participants to take the action and the participants would
authorize holders owning through participants to take the action or would
otherwise act upon the instruction of these holders. Neither we nor the trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of notes by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to the notes.
Payments in respect of the principal of, and interest and premium and
additional interest, if any, on a global note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the persons in whose names the notes, including the global notes, are
registered as the owners of the notes for the purpose of receiving payments and
for all other purposes. Consequently, neither we, the trustee nor any agent of
us or the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interest in the global notes or for maintaining, supervising or
reviewing any of DTC's records or any participant's or indirect
participant's records relating to the beneficial ownership interests in the
global notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the global notes (including principal and
interest), is to credit the accounts of the relevant participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
participants and the indirect participants to the beneficial owners of the
global notes will be governed by standing instructions and customary practices
and will be the responsibility of the participants or the indirect participants
and will not be the responsibility of DTC, the trustee or us.
132
Neither we nor the trustee will be liable for any delay by DTC or any of its
participants in identifying the beneficial owners of the global notes, and we
and the trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants, in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf of delivering or receiving interests in the relevant global note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositaries for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account DTC has credited the interests in the global notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
participant or participants has or have given such direction. However, if there
is an event of default under the notes, DTC reserves the right to exchange the
global notes for notes in certificated form, and to distribute such notes to its
participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither we nor the trustee nor any of their respective
agents will have any responsibility for the performance by DTC, Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive notes in registered
certificated form if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global notes and DTC fails to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under the
Exchange Act;
(2) we, at our option, notify the trustee in writing that we elect to
cause the issuance of certificated notes; or
(3) there has occurred and is continuing a default or event of default
with respect to the notes.
In addition, beneficial interests in a global note may be exchanged for
certificated notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, certificated notes
delivered in exchange for any global note or beneficial interests in global
notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend, unless that legend
is not required by applicable law.
133
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated notes may not be exchanged for beneficial interests in any
global note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes.
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the notes represented by the global
notes (including principal, premium, if any, interest and liquidated damages, if
any) by wire transfer of immediately available funds to the accounts specified
by the global note holder. We will make all payments of principal, interest and
premium and additional interest, if any, with respect to certificated notes by
wire transfer of immediately available funds to the accounts specified by the
holders of the certificated notes or, if no such account is specified, by
mailing a check to each such holder's registered address.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a global note by or through a Euroclear or Clearstream participant
to a participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
134
SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following section summarizes the material anticipated U.S. federal
income tax consequences relating to the exchange of outstanding notes for
exchange notes pursuant to the exchange offer. This description is based upon
the Internal Revenue Code of 1986, as amended, existing and proposed Treasury
regulations, existing administrative pronouncements and judicial decisions, each
as available and in effect as of the date hereof. All of the foregoing are
subject to change, and any such change could be retroactive and could affect the
continuing validity of this description.
This description deals only with exchange notes held as capital assets by
holders that acquire the exchange notes pursuant to the exchange offer. This
description does not discuss all of the tax consequences that may be relevant to
holders that are subject to special tax rules, such as (1) certain financial
institutions, (2) real estate investment trusts, (3) regulated investment
companies, (4) grantor trusts, (5) insurance companies, (6) dealers or traders
in securities or currencies, (7) persons holding notes in connection with a
hedging transaction, straddle, conversion transaction or other integrated
transaction, or (8) persons who have ceased to be United States citizens or to
be taxed as resident aliens. This description also does not address the U.S.
federal estate and gift tax consequences or any applicable foreign, state or
local tax laws.
Holders should consult their tax advisors with regard to the application of
U.S. federal income and estate tax laws to their particular situation, as well
as any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction.
EXCHANGE OFFER
The exchange of outstanding notes by a holder for exchange notes pursuant
to the exchange offer will not constitute a taxable exchange for U.S. federal
income tax purposes. A holder will not recognize gain or loss upon the receipt
of exchange notes pursuant to the exchange offer and will be required to treat
the exchange notes and any payments thereon for U.S. federal income tax purposes
as if the exchange offer had not occurred. A holder's holding period for
exchange notes will include the holding period for the outstanding notes
exchanged pursuant to the exchange offer and a holder's adjusted basis in
exchange notes will be the same as such holder's adjusted basis in such
outstanding notes.
ORIGINAL ISSUE DISCOUNT
As discussed under "Description of the Notes -- Change of Control," a
holder of exchange notes shall have the right to require that we purchase such
holder's exchange notes at a price equal to 101% of the principal amount thereof
upon a Change of Control of our company (as defined therein). Generally, if we
are obligated to redeem exchange notes at more than such exchange notes'
adjusted issue price (as determined under the Code), the exchange notes may be
treated as having original issue discount ("OID"). However, under the Treasury
regulations, if our obligation to redeem the exchange notes at a premium is a
remote contingency, then such contingent obligation will not generate OID. We
believe that a Change of Control, and thus our obligation to redeem exchange
notes at a premium, is a remote contingency. Accordingly, a holder's right to
put its exchange notes to us at a premium should not give rise to OID.
THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSEQUENCES RELATING TO THE EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE
NOTES PURSUANT TO THE EXCHANGE OFFER OR THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE EXCHANGE NOTES. YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR
REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR
SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY
STATE, LOCAL, OR OTHER TAXING JURISDICTION.
135
PLAN OF DISTRIBUTION
We are not using any underwriters for this exchange offer. We are also
bearing the expenses of the exchange.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This prospectus
supplement, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that, for a period of 180 days after the expiration date, we will make this
prospectus supplement, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
January 16, 2003, all dealers effecting transactions in the exchange notes may
be required to deliver a prospectus.
We will not receive any proceeds from any sale of outstanding notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concession received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this prospectus supplement and any amendment or supplement
to this prospectus supplement to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, (including the expenses of one counsel for the holders of the
outstanding notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the outstanding notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by
White & Case LLP, New York, New York.
EXPERTS
The financial statements of Associated Materials Incorporated at December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, appearing in this prospectus supplement forming part of a registration
statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
136
AVAILABLE INFORMATION
This prospectus supplement forms a part of a registration statement that we
filed with the Securities and Exchange Commission, or the Commission, on Form
S-4 under the Securities Act of 1933, as amended, in connection with the
offering of the exchange notes. You will find additional information about us
and the exchange notes in the registration statement.
We are currently not subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, but will become subject to those
requirements in connection with the exchange offer. Accordingly, we will file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and other information with the Commission as long as we are required to
do so under the Exchange Act. You may read and copy any document we file at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference room. Our Commission filings also
will be available to the public from commercial document retrieval services and
at the Internet world wide website maintained by the Commission at
http:www.sec.gov. In addition, you may request a copy of these documents at no
cost to you, by writing or telephoning us at: Associated Materials Incorporated,
3773 State Road, Cuyahoga Falls, Ohio 44223, telephone number: (800) 257-4335
(Attention: Corporate Secretary).
Our common stock was traded on The Nasdaq National Market (Symbol: SIDE).
Following the completion of the merger, our common stock was delisted from The
Nasdaq National Market. On April 19 and April 24, 2002, we filed a Form 15 with
the Commission suspending our obligations to file reports under Section 12(g)
and 15(d) of the Exchange Act.
137
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Audited Financial Statements:
Report of Independent Auditors............................ F-2
Balance Sheets at December 31, 2001 and 2000.............. F-3
Statements of Operations for the years ended December 31,
2001, 2000 and 1999.................................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999....................... F-5
Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.................................... F-6
Notes to Financial Statements............................. F-7
Unaudited Financial Statements:
Balance Sheets at June 30, 2002 -- Successor and December
31, 2001 -- Predecessor................................ F-20
Statements of Operations.................................. F-21
Three months ended June 30, 2001 -- Predecessor........ F-21
Eighteen days ended April 18, 2002 -- Predecessor...... F-21
Seventy-three days ended June 30, 2002 -- Successor.... F-21
Six months ended June 30, 2001 -- Predecessor.......... F-21
One hundred eight days ended April 18,
2002 -- Predecessor................................... F-21
Seventy-three days ended June 30, 2002 -- Successor.... F-21
Statements of Cash Flows.................................. F-22
Six months ended June 30, 2001 -- Predecessor.......... F-22
One hundred eight days ended April 18,
2002 -- Predecessor................................... F-22
Seventy-three days ended June 30, 2002 -- Successor.... F-22
Notes to Financial Statements............................. F-23
</Table>
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Associated Materials Incorporated
We have audited the accompanying balance sheets of Associated Materials
Incorporated as of December 31, 2001 and 2000 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Dallas, Texas
February 8, 2002
F-2
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,869 $ 15,879
Short term investment..................................... -- 5,019
Accounts receivable, net of allowance for doubtful
accounts of $5,117 and $6,168 at December 31, 2001 and
2000, respectively..................................... 65,784 50,853
Inventories............................................... 74,574 74,429
Income taxes receivable................................... -- 453
Other current assets...................................... 3,394 4,213
-------- --------
Total current assets........................................ 172,621 150,846
Property, plant and equipment, net.......................... 77,733 73,917
Investment in Amercord Inc.................................. -- 2,393
Other assets................................................ 3,953 3,985
-------- --------
Total assets...................................... $254,307 $231,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 29,579 $ 19,273
Accrued liabilities....................................... 35,356 29,509
Income taxes payable...................................... 1,498 --
-------- --------
Total current liabilities................................... 66,433 48,782
Deferred income taxes....................................... 5,091 3,927
Other liabilities........................................... 5,108 5,442
Long-term debt.............................................. 75,000 75,000
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 100,000 shares at December 31,
2001 and 2000
Issued shares -- 0 at December 31, 2001 and 2000....... -- --
Common stock, $.0025 par value:
Authorized shares -- 15,000,000 at December 31, 2001
and 2000
Issued shares -- 7,842,003 at December 31, 2001 and
7,164,024 at December 31, 2000........................ 19 18
Common stock Class B, $.0025 par value:
Authorized and issued shares -- 0 at December 31, 2001
and 1,550,000 at December 31, 2000.................... -- 4
Less: Treasury stock, at cost -- 1,078,476 shares at
December 31, 2001 and 955,170 at December 31, 2000..... (14,476) (12,425)
Capital in excess of par.................................. 17,124 14,862
Retained earnings......................................... 100,008 95,531
-------- --------
Total stockholders' equity.................................. 102,675 97,990
-------- --------
Total liabilities and stockholders' equity.................. $254,307 $231,141
======== ========
</Table>
See accompanying notes.
F-3
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................................. $595,819 $499,393 $455,268
Cost of sales.............................................. 425,366 353,994 317,596
-------- -------- --------
Gross profit............................................... 170,453 145,399 137,672
Selling, general and administrative expenses............... 119,945 107,255 96,028
-------- -------- --------
Income from operations..................................... 50,508 38,144 41,644
Interest expense, net...................................... 6,795 6,046 6,779
-------- -------- --------
43,713 32,098 34,865
Gain on the sale of UltraCraft............................. -- 8,012 --
Equity in loss of Amercord Inc............................. -- -- 1,337
Write-down of investment in Amercord Inc................... 2,393 -- --
-------- -------- --------
Income before income taxes................................. 41,320 40,110 33,528
Income tax expense......................................... 15,908 16,555 13,038
-------- -------- --------
Net income................................................. $ 25,412 $ 23,555 $ 20,490
======== ======== ========
Earnings Per Common Share -- Basic:
Net income............................................... $ 3.62 $ 2.94 $ 2.52
======== ======== ========
Earnings Per Common Share -- Assuming Dilution:
Net income............................................... $ 3.46 $ 2.85 $ 2.46
======== ======== ========
</Table>
See accompanying notes.
F-4
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
CLASS B CAPITAL
COMMON STOCK COMMON STOCK TREASURY STOCK IN TOTAL
--------------- --------------- ----------------- EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OF PAR EARNINGS EQUITY
------ ------ ------ ------ ------ -------- ------- -------- -------------
(IN THOUSANDS)
Balance at December 31,
1998....................... 6,939 $17 1,550 $ 4 88 $ (1,048) $12,273 $ 53,132 $ 64,378
Net income and total
comprehensive income..... -- -- -- -- -- -- -- 20,490 20,490
Cash dividends ($0.10 per
share)................... -- -- -- -- -- -- -- (845) (845)
Exercise of common stock
options and related tax
benefits................. 5 -- -- -- -- -- 30 -- 30
Purchase of treasury
shares................... -- -- -- -- 467 (5,578) -- -- (5,578)
Common stock issued under
Employee Stock Purchase
Plan..................... 81 -- -- -- -- -- 851 -- 851
----- --- ------ ---- ----- -------- ------- -------- --------
Balance at December 31,
1999....................... 7,025 17 1,550 4 555 (6,626) 13,154 72,777 79,326
Net income and total
comprehensive income..... -- -- -- -- -- -- -- 23,555 23,555
Cash dividends ($0.10 per
share)................... -- -- -- -- -- -- -- (801) (801)
Exercise of common stock
options and related tax
benefits................. 73 -- -- -- -- -- 860 -- 860
Purchase of treasury
shares................... -- -- -- -- 400 (5,799) -- -- (5,799)
Common stock issued under
Employee Stock Purchase
Plan..................... 66 1 -- -- -- -- 848 -- 849
----- --- ------ ---- ----- -------- ------- -------- --------
Balance at December 31,
2000....................... 7,164 18 1,550 4 955 (12,425) 14,862 95,531 97,990
Net income and total
comprehensive income..... -- -- -- -- -- -- -- 25,412 25,412
Cash dividends ($0.20 per
share)................... -- -- -- -- -- -- -- (1,438) (1,438)
Exercise of common stock
options and related tax
benefits................. 67 -- -- -- -- -- 1,387 -- 1,387
Purchase of treasury
shares................... -- -- -- -- 123 (2,051) -- -- (2,051)
Common stock issued under
Employee Stock Purchase
Plan..................... 61 -- -- -- -- -- 875 -- 875
Retirement of Class B
common stock............. -- -- (1,000) (3) -- -- -- (19,497) (19,500)
Conversion of Class B
common stock to common
stock.................... 550 1 (550) (1) -- -- -- -- --
----- --- ------ ---- ----- -------- ------- -------- --------
Balance at December 31,
2001....................... 7,842 $19 -- $ -- 1,078 $(14,476) $17,124 $100,008 $102,675
===== === ====== ==== ===== ======== ======= ======== ========
</Table>
See accompanying notes.
F-5
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $25,412 $23,555 $20,490
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 10,919 9,550 8,519
Deferred income taxes..................................... 1,164 1,691 (380)
Provision for losses on accounts receivable............... 1,468 2,884 2,323
Equity in loss of Amercord Inc............................ -- --
Write-down of investment in Amercord Inc.................. 2,393 -- --
Loss on sale of assets.................................... 43 558 51
Gain on the sale of UltraCraft............................ -- (8,012)
Tax benefit from stock option exercises................... 411 92 15
Changes in operating assets and liabilities:
Accounts receivable..................................... (16,022) (3,492) (9,150)
Inventories............................................. (145) (5,180) (13,406)
Other current assets.................................... 818 (677) (300)
Accounts payable........................................ 10,306 1,882 5,220
Accrued liabilities..................................... 5,847 2,556 1,536
Income taxes receivable/payable......................... 1,951 (227) (808)
Other assets............................................ (242) (1,804) (38)
Other liabilities....................................... (334) (408) (165)
------- ------- -------
Net cash provided by operating activities................... 43,989 22,968 15,244
INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (15,022) (11,925) (18,915)
Proceeds from sale of assets................................ 142 86 65
Purchase of Alpine Industries, Inc. assets.................. -- (7,565) --
Proceeds from the sale of UltraCraft........................ -- 18,885 --
(Purchase)/sale of short-term investment.................... 5,019 (5,019) --
Proceeds from sale of Amercord interest..................... -- -- 1,231
------- ------- -------
Net cash used in investing activities....................... (9,861) (5,538) (17,619)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock.................. 875 849 851
Principal payments of long-term debt........................ -- -- (3,600)
Repurchase of Class B common stock.......................... (19,500) -- --
Options exercised........................................... 976 768 15
Dividends paid.............................................. (1,438) (801) (845)
Treasury stock acquired..................................... (2,051) (5,799) (5,578)
------- ------- -------
Net cash used in financing activities....................... (21,138) (4,983) (9,157)
------- ------- -------
Net increase (decrease) in cash............................. 12,990 12,447 (11,532)
Cash at beginning of period................................. 15,879 3,432 14,964
------- ------- -------
Cash at end of period....................................... $28,869 $15,879 $ 3,432
======= ======= =======
Supplemental Information:
Cash paid for interest.................................... $ 7,176 $ 7,177 $ 7,108
======= ======= =======
Cash paid for income taxes................................ $12,633 $15,292 $14,313
======= ======= =======
</Table>
See accompanying notes.
F-6
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. 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 cable utilized in a variety of industrial applications. The
Company also owns an interest in Amercord Inc. ("Amercord"), which was accounted
for using the equity method until November 1999 when Amercord was recapitalized,
reducing the Company's interest in Amercord from 50% to 9.9%. Since the
recapitalization, the Company has accounted for Amercord under the cost method.
See Note 2.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales are recognized at the time of shipment and when payment is
reasonably certain. Revenues are recorded net of estimated customer programs and
incentive offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged to income in
the period in which the facts that give rise to the revision become known.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
by the straight-line method over the estimated useful lives of the assets which
are as follows:
<Table>
Building and improvements................................... 7 to 30 years
Computer equipment.......................................... 3 years
Machinery and equipment..................................... 3 to 15 years
</Table>
INCOME TAX
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SHORT-TERM INVESTMENT
At December 31, 2000 the Company had a $5.0 million commercial paper
investment, with an original maturity of six months, reported as a short-term
investment on the balance sheet. The Company classified the investment as
held-to-maturity as the Company had the intent and held the investment to
maturity. The investment was carried at amortized cost.
DERIVATIVES
From time to time the Company hedges its position with respect to raw
material or currency fluctuations on specific contracts by entering into forward
contracts or purchase options, the cost of which are realized upon the
completion of the contract as cost of sales. The contracts effectively meet risk
reduction and correlation criteria and are recorded using hedge accounting. No
such contracts were in place at December 31, 2001 or 2000.
INTEREST INCOME
Interest income was $377,000, $1.1 million and $329,000 in 2001, 2000 and
1999, respectively, and is included in interest expense, net.
MARKETING AND ADVERTISING
The Company expenses marketing and advertising costs as incurred. Marketing
and advertising expense was $9.9 million, $9.2 million and $8.5 million in 2001,
2000 and 1999, respectively.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets held
for sale are reported at the lower of the carrying amount or fair value less
costs to sell.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" which has eliminated the pooling of interests method for
mergers and acquisitions. All business combinations initiated after June 30,
2001 are required to be accounted for using the purchase method of accounting.
SFAS No. 141 supersedes APB Opinion No. 16, "Business Combinations" and SFAS No.
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." The
Company has not made any acquisitions that were accounted for by the pooling of
interests method. The Company believes the adoption of this Statement will not
have a material effect on the Company's financial position, results of
operations or cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" which addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." SFAS No. 142 requires
F-8
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
goodwill and intangible assets with indefinite useful lives no longer be
amortized but instead be reviewed annually for impairment using a fair-value
based approach. Intangible assets that have a finite life will continue to be
amortized over their respective estimated useful lives. The Statement is
effective for fiscal years beginning after December 15, 2001. The Company has
not recorded goodwill or other intangible assets with respect to any
acquisition. The Company believes the adoption of this Statement will not have a
material effect on the Company's financial position, results of operations or
cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs and establishes
consistent accounting treatment for these items. This Statement is effective for
fiscal years beginning after June 15, 2002. The Company believes the adoption of
this Statement will not have a material effect on the Company's financial
position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial reporting and accounting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business (as previously defined
in that Opinion). This Statement also amends ARB No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement is effective for fiscal
years beginning after December 15, 2001. The Company believes the adoption of
this Statement will not have a material effect on the Company's financial
position, results of operations or cash flows.
In September 2000, the Emerging Issues Task Force issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs" which was effective for
the fourth quarter of 2000. The EITF concluded that amounts billed to a customer
in a sale transaction related to shipping and handling should be classified as
revenue. The EITF also concluded that if costs incurred related to shipping and
handling are significant and not included in cost of sales, an entity should
disclose both the amount of such costs and the line item on the income statement
that includes such costs. Prior to implementing EITF 00-10, the Company
classified shipping and handling amounts billed to a customer as revenue. Costs
incurred related to shipping and handling were classified as a reduction of
revenue. The Company has reclassified prior period information to conform with
the provisions of EITF 00-10.
2. INVESTMENT IN AMERCORD
The Company owns a 9.9% interest in Amercord, a manufacturer of steel tire
cord and tire bead wire used in the tire manufacturing industry.
During the fourth quarter of 1999, Amercord was recapitalized, reducing the
Company's interest in Amercord from 50% to 9.9%. As a result of the
recapitalization, the Company received cash of $1.2 million (net of related
expenses) and a subordinated note for $1.5 million due November 2004. In
addition, the Company has the right to require Amercord to purchase the
Company's remaining 9.9% interest for $2.0 million in November 2003. After
Amercord's recapitalization, the Company accounted for Amercord using the cost
method of accounting. Prior to Amercord's recapitalization, the Company
accounted for Amercord using the equity method of accounting. The Company
recorded equity in the losses of Amercord of $1.3 million in 1999.
F-9
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amercord's operating results and financial position deteriorated during the
first quarter 2001. The Company believed it would not recover its investment in
Amercord and wrote off its $2.4 million investment in Amercord during the first
quarter of 2001. Amercord ceased operations during the second quarter of 2001.
In connection with the recapitalization of Amercord in November 1999, the
Company guaranteed a $3.0 million note secured by Amercord's real property. To
date, the lender has not requested the Company to make payment under the
guaranty. Should the guaranty be exercised by Amercord's lender, the Company and
Ivaco Inc., another stockholder of Amercord, have the option to assume the loan.
Ivaco Inc. has indemnified the Company for 50% of any loss under the guaranty up
to $1.5 million. Based on a third party appraisal of Amercord's real property,
the Company believes that it is adequately secured under its guaranty of the
$3.0 million Amercord note such that no losses are anticipated with respect to
this guaranty.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts on accounts receivable for
the years ended December 31 consist of (in thousands):
<Table>
<Caption>
2001 2000 1999
------ ------ ------
Balance at beginning of period............................. $6,168 $4,864 $4,159
Provision for losses....................................... 1,468 2,884 2,323
Losses sustained (net of recoveries)....................... 2,519 1,358 1,618
Allowance for UltraCraft receivables sold.................. -- 222 --
------ ------ ------
Balance at end of period................................... $5,117 $6,168 $4,864
====== ====== ======
</Table>
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
allowance for doubtful accounts is based on review of the overall condition of
accounts receivable balances and review of significant past due accounts. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
4. INVENTORIES
Inventories at December 31 consist of (in thousands):
<Table>
<Caption>
2001 2000
------- -------
Raw materials............................................... $21,102 $23,229
Work-in-progress............................................ 4,597 5,101
Finished goods and purchased stock.......................... 48,875 46,099
------- -------
$74,574 $74,429
======= =======
</Table>
F-10
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of (in thousands):
<Table>
<Caption>
2001 2000
-------- --------
Land........................................................ $ 1,878 $ 1,878
Buildings................................................... 30,231 29,601
Construction in process..................................... 2,970 1,985
Machinery and equipment..................................... 119,151 106,596
-------- --------
154,230 140,060
Less accumulated depreciation............................... 76,497 66,143
-------- --------
$ 77,733 $ 73,917
======== ========
</Table>
6. ACCRUED LIABILITIES AND OTHER LIABILITIES
Accrued liabilities at December 31 consist of (in thousands):
<Table>
<Caption>
2001 2000
------- -------
Employee compensation....................................... $15,648 $12,450
Sales promotions and incentives............................. 8,929 6,813
Employee benefits........................................... 3,747 3,450
Interest.................................................... 2,322 2,313
Other....................................................... 4,710 4,483
------- -------
$35,356 $29,509
======= =======
</Table>
Other liabilities of $5,108,000 and $5,442,000 at December 31, 2001 and
2000, respectively, consist primarily of accruals for retiree medical benefits
related to the 1989 closure of the Company's metal plant.
7. DEBT
In May 1999, the Company amended its $50 million credit agreement with
KeyBank, N.A. ("Credit Agreement") to extend the term to May 31, 2002. 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. Unused letters of credit totaled
$1,898,000 at December 31, 2001, primarily related to insurance coverage. The
Company's available borrowing capacity at December 31, 2001 was approximately
$48,102,000. The Credit Agreement includes covenants that require the
maintenance of certain financial ratios and net worth and that place
restrictions on the repurchase of common stock and the payment of dividends. One
covenant in the Credit Agreement requires the Company to maintain a minimum
ratio of cash inflows to cash outflows determined for the preceding twelve-month
period at the end of each calendar quarter. During 2001, the Company repurchased
1.0 million shares of its Class B common stock at an aggregate cost of $19.5
million. In order to complete the Class B common stock repurchase, the Company
obtained a waiver under the Credit Agreement to exclude the Class B common stock
repurchase from the covenant calculation of cash inflows to cash outflows. The
Company was in compliance with all Credit Agreement covenants at December 31,
2001. Outstanding borrowings under the Credit Agreement are secured by
substantially all of the assets of the Company other than the Company's real
property, equipment and its interest in Amercord.
F-11
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest is payable on borrowings under the revolving credit facility at
either the prime commercial rate (4.75% at December 31, 2001) or LIBOR plus
1.00% at the option of the Company and on the unused credit facility at a rate
of .20%. Letter of credit fees of 1.125% are paid at origination.
The weighted average interest rate for borrowings under the revolving
credit facility was 5.9% and 8.4% for the years ended December 31, 2001 and
2000, respectively.
Long-term debt at December 31, 2001 and 2000 consists of $75 million of
9 1/4% Senior Subordinated Notes due 2008. The fair value of the 9 1/4% Notes at
December 31, 2001 was $76.6 million based upon quoted market price.
The Company's ability to make restricted payments, such as the repurchase
of stock and the payment of dividends, is restricted by covenants in its Credit
Agreement and the Indenture pursuant to which the Company's 9 1/4% Senior
Subordinated Notes were issued. At December 31, 2001, the Company had the
ability to make restricted payments of up to $15.7 million under the terms of
the Indenture, the more restrictive of the two agreements.
8. ACQUISITIONS AND DIVESTITURES
On October 6, 2000, the Company acquired substantially all of the assets of
Alpine Industries, Inc. for $7.6 million in cash and the assumption of certain
payroll related and property tax liabilities. Included in the acquired assets is
Alpine's leased window fabrication facility located in Bothell, Washington. This
facility manufactures vinyl windows for the new construction and remodeling
markets. The Company accounted for the acquisition using the purchase method of
accounting and the results of operations have been included in the Company's
income statement from the date of acquisition.
The Company completed the sale of its UltraCraft operation, a manufacturer
of semi-custom frameless cabinets, in June 2000. Pre-tax net proceeds from the
sale were $18.9 million after working capital adjustments and transaction costs.
The Company recorded a pre-tax gain on the sale of $8.0 million. UltraCraft
represented approximately 5% of the Company's 1999 net sales.
Under the terms of the 9 1/4% Note Indenture, the Company was obligated to
make an offer to repurchase the 9 1/4% Notes using the after-tax net proceeds
from the UltraCraft sale, to the extent the Company did not use these net
proceeds within one year of the sale to repay senior indebtedness or to acquire
assets used in, or other businesses similar to, the business currently conducted
by the Company. As a result of the Company's acquisition of the Alpine assets
together with other capital expenditures, the Company believes that it was not
obligated to make an offer to repurchase the 9 1/4% Notes.
9. COMMITMENTS
Commitments for future minimum lease payments under noncancelable operating
leases, principally for manufacturing and distribution facilities and certain
equipment, are as follows (in thousands):
<Table>
2002........................................................ $13,961
2003........................................................ 11,624
2004........................................................ 8,933
2005........................................................ 6,168
2006........................................................ 3,423
Thereafter.................................................. 5,410
</Table>
Lease expense was approximately $17,859,000, $14,673,000 and $13,141,000
for the years ended December 31, 2001, 2000 and 1999, respectively. The
Company's lease agreements typically contain renewal options.
F-12
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
Income tax expense for the years ended December 31 consists of (in
thousands):
<Table>
<Caption>
2001 2000 1999
------------------ ------------------ ------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- --------
Federal income taxes......... $13,835 $ 948 $13,800 $1,510 $11,776 $(364)
State income taxes........... 909 216 1,064 181 1,642 (16)
------- ------ ------- ------ ------- -----
$14,744 $1,164 $14,864 $1,691 $13,418 $(380)
======= ====== ======= ====== ======= =====
</Table>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes as of December 31 are as follows (in
thousands):
<Table>
<Caption>
2001 2000
------- -------
Deferred tax assets:
Medical benefits.......................................... $ 1,966 $ 2,095
Bad debt expense.......................................... 1,914 1,979
Inventory costs........................................... 763 1,108
Capital loss on Amercord Inc.............................. 472 472
Other..................................................... 1,222 616
------- -------
Total deferred tax assets................................... 6,337 6,270
Deferred tax liabilities:
Depreciation.............................................. 9,889 8,975
Pension expense........................................... 779 302
Other..................................................... 760 920
------- -------
Total deferred tax liabilities.............................. 11,428 10,197
------- -------
Net deferred tax liabilities................................ $(5,091) $(3,927)
======= =======
</Table>
The reconciliation of the statutory rate to the Company's effective income
tax rate for the years ended December 31 follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit......... 1.8 2.0 3.2
Other....................................................... 1.7 4.3 0.7
---- ---- ----
Effective rate.............................................. 38.5% 41.3% 38.9%
==== ==== ====
</Table>
During the third quarter 2000, the Company recorded $1.1 million in
additional income tax expense due to an adjustment to a deferred tax asset,
which was recorded in 1986 pursuant to the spin-off of the Company's tire cord
operation into Amercord. The effect of this adjustment is included in the other
category in the rate reconciliation. Exclusive of this adjustment, the Company's
effective tax rate would have been 38.5%.
F-13
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY
In October 1998 the Company's Board of Directors approved a stock
repurchase program that authorized the Company to purchase up to 800,000 shares
of common stock in open market transactions depending on market, economic and
other factors. In November 2000, the Board authorized the repurchase of an
additional 800,000 shares of common stock under the Company's stock repurchase
program, bringing the total number of shares under the plan to 1,600,000 shares.
During 2001, 2000 and 1999, the Company repurchased 123,306, 399,774 and 467,000
shares of its common stock under the stock repurchase program at a cost of
$2,051,000, $5,799,000 and $5,578,000. The repurchase of the Company's Class B
common stock described below was not part of this stock repurchase program.
On April 29, 2001, the Company repurchased 1,000,000 shares of its Class B
common stock from The Prudential Insurance Company of America ("Prudential") and
its wholly owned subsidiary, PCG Finance Company II, LLC ("PCG") at $19.50 per
share, or $19.5 million in the aggregate, which has been reflected primarily as
a reduction to retained earnings. The share purchase was financed through
available cash and borrowings under the Company's $50,000,000 credit facility.
Following the purchase, Prudential and PCG converted the remaining 550,000
shares of Class B common stock held by these entities into 550,000 shares of
common stock pursuant to the terms of the Company's Certificate of
Incorporation. The Company has retired all 1,550,000 previously authorized
shares of Class B common stock.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator:
Numerator for basic and diluted earnings per common
share -- Net income................................ $25,412 $23,555 $20,490
Denominator:
Denominator for basic earnings per common share --
weighted-average shares............................ 7,023 8,007 8,126
Effect of dilutive securities:
Employee stock options............................. 311 251 218
------- ------- -------
Denominator for diluted earnings per common share --
adjusted weighted-average shares................... 7,334 8,258 8,344
======= ======= =======
Basic earnings per common share......................... $ 3.62 $ 2.94 $ 2.52
======= ======= =======
Diluted earnings per common share....................... $ 3.46 $ 2.85 $ 2.46
======= ======= =======
</Table>
Options to purchase 50,000 and 40,000 shares of common stock with a
weighted average exercise price of $16.11 and $16.00 per share were outstanding
for the years ended December 31, 2000 and December 31, 1999, respectively, but
were excluded from the diluted earnings per share calculation because the option
exercise price was greater than the average market price of the common stock
during the period.
F-14
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK PLANS
The Company has a stock option plan, whereby it grants stock options to
certain directors, officers and key employees. The Company has authorized
1,200,000 shares of common stock to be issued under the plan. Options were
granted at fair market value on the grant date and are exercisable for ten
years. Options vest by either of the following methods: 50% vests upon the grant
date with the other 50% vesting after two years or 20% vests upon the grant date
with an additional 20% vesting each year commencing on the first anniversary of
the grant date. All outstanding options granted under the stock option plan are
non-statutory stock options.
Transactions during 1999, 2000 and 2001 under this plan are summarized
below:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES PRICE EXERCISE PRICE
------- ------------------ ----------------
Options outstanding at December 31,
1998................................... 572,300 $2.925 to $16.00 $ 8.45
Exercised................................ (5,000) $2.925 $ 2.925
------- ------------------ -------
Options outstanding at December 31,
1999................................... 567,300 $2.925 to $16.00 $ 8.50
Exercised................................ (73,486) $5.00 to $11.875 $ 9.57
Granted.................................. 167,500 $11.875 to $16.563 $ 13.50
Expired or canceled...................... (26,514) $9.00 to $11.875 $ 9.72
------- ------------------ -------
Options outstanding at December 31,
2000................................... 634,800 $2.925 to $16.563 $ 9.65
Exercised................................ (67,300) $2.925 to $11.875 $ 5.76
Granted.................................. 20,000 $17.875 $17.875
Expired or canceled...................... (19,000) $9.00 to $11.875 $ 9.45
------- ------------------ -------
Options outstanding at December 31,
2001................................... 568,500 $2.925 to $17.875 $ 10.41
=======
</Table>
Options to purchase 456,000, 476,800 and 407,800 shares were exercisable at
December 31, 2001, 2000 and 1999, respectively. The weighted average exercise
price of options outstanding was $10.41, $9.65 and $8.50 at December 31, 2001,
2000 and 1999, respectively.
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE SHARES LIFE IN YEARS PRICE SHARES PRICE
- ----- ------- ------------- -------- -------- ---------
$2.925 to $5.00.................... 105,500 2.21 $ 3.328 105,500 $ 3.328
$9.00 to $12.00.................... 293,000 6.20 $10.196 252,500 $10.268
$13.875 to $17.875................. 170,000 7.61 $15.169 98,000 $15.159
</Table>
The Company has adopted the disclosure provisions of SFAS No. 123 but
continues to measure stock-based compensation in accordance with APB No. 25. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The weighted
average fair value at date of grant for options granted during 2001 and 2000
using the Black-Scholes method was $8.39 and $12.58 per option, respectively. No
options were granted in 1999. The fair value of the options was estimated at the
date of the grant using the Black-Scholes option pricing model with the
following assumptions for 2001 and 2000, respectively: dividend yield of .95%
and .67%, volatility factor of the
F-15
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expected market price of the stock of .330 and .307, a weighted-average risk
free interest rate of 5.10% and 6.38% and an expected life of the option of 10
years.
Stock based compensation costs would have reduced net income by $344,000,
$977,000 and $475,000 or $0.05, $0.12 and $0.06 per basic and diluted share in
2001, 2000 and 1999, respectively, if the fair values of the options granted in
that year had been recognized as compensation expense on a straight-line basis
over the vesting period of the grant. The pro forma effect on net income for
2001, 2000 and 1999 may not be representative of the pro forma effect on net
income in future years.
Effective October 1, 1998 the Company established an Employee Stock
Purchase Plan ("ESPP"). The ESPP allows employees to purchase the Company's
common stock at 85% of the lower of the fair market value on the first day of
the purchase period or the last day of the purchase period. The Company has
registered 500,000 shares of common stock for issuance under the ESPP. Employees
purchased 60,679, 65,873, and 80,919 shares under the ESPP at average prices of
$14.42, $12.87 and $10.52 per share during 2001, 2000 and 1999, respectively.
The Company's Board of Directors approved the suspension of the ESPP effective
December 31, 2001.
14. BUSINESS SEGMENTS
The Company has two reportable segments: building products and electrical
cable products. The principal business activities of the building products
segment are the manufacture of vinyl siding, vinyl windows and the wholesale
distribution of these and other complementary building products principally to
professional home remodeling and new construction contractors. The principal
business activity of the electrical cable segment is the manufacture and sale of
jacketed electrical cable.
The Company evaluates performance and allocates resources based on
operating profit, which is net sales less operating costs and expenses.
Comparative financial data by reportable segment for the years ended
December 31 are as follows (in thousands):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Net sales:
Building products.................................. $524,528 $434,845 $410,107
Electrical cable products.......................... 71,291 64,548 45,161
-------- -------- --------
$595,819 $499,393 $455,268
======== ======== ========
Operating profits (losses):
Building products.................................. $ 48,889 $ 36,300 $ 42,408
Electrical cable products.......................... 6,653 5,815 2,875
Corporate expense.................................. (5,034) (3,971) (3,639)
-------- -------- --------
$ 50,508 $ 38,144 $ 41,644
======== ======== ========
Identifiable assets:
Building products.................................. $189,142 $165,990 $167,024
Electrical cable products.......................... 34,054 34,255 26,673
Corporate.......................................... 31,111 30,896 12,599
-------- -------- --------
$254,307 $231,141 $206,296
======== ======== ========
</Table>
F-16
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Depreciation and amortization:
Building products.................................. $ 8,901 $ 7,767 $ 6,900
Electrical cable products.......................... 1,708 1,493 1,347
Corporate.......................................... 310 290 272
-------- -------- --------
$ 10,919 $ 9,550 $ 8,519
======== ======== ========
Additions to property, plant and equipment:
Building products.................................. $ 11,652 $ 7,936 $ 16,018
Electrical cable products.......................... 3,359 3,708 2,897
Corporate.......................................... 11 281 --
-------- -------- --------
$ 15,022 $ 11,925 $ 18,915
======== ======== ========
</Table>
Identifiable assets by segment are those used in the Company's operations
in each segment. Corporate assets are principally the Company's cash and cash
equivalents and short-term investments. The Company operates principally in the
United States. Neither aggregate export sales nor sales to a single customer
have accounted for 10% or more of consolidated net sales in any of the years
presented.
15. RETIREMENT PLANS
The Company sponsors a defined benefit pension plan, The Premium Building
Products Company Hourly Employees Pension Plan ("Premium Plan"), which covers
approximately 250 participants. The Company froze the Alside defined benefit
retirement plan ("Alside Plan") effective December 31, 1998 and replaced it with
a defined contribution plan effective January 1, 1999. As a result of the plan
freeze, the Company recorded a $5,951,000 curtailment gain in 1998. Prepaid
pension and accrued pension liabilities are included in other assets and accrued
liabilities in the accompanying balance sheets.
Information regarding the Company's defined benefit plans is as follows:
<Table>
<Caption>
2001 2000
-------------------------- --------------------------
ALSIDE PLAN PREMIUM PLAN ALSIDE PLAN PREMIUM PLAN
----------- ------------ ----------- ------------
CHANGE IN PROJECTED BENEFIT
OBLIGATION
Projected benefit obligation at
beginning of year.............. $25,733,225 $1,099,907 $26,322,987 $ 990,155
Service cost..................... 209,068 37,396 221,534 41,091
Interest cost.................... 1,887,103 77,462 1,814,543 74,301
Plan amendments.................. -- 42,605 -- --
Actuarial (gain) loss............ 1,101,555 (1,618) (1,608,232) 7,202
Benefits paid.................... (1,307,134) (21,265) (1,017,607) (12,842)
----------- ---------- ----------- ----------
Projected benefit obligation at
end of year.................... $27,623,817 $1,234,487 $25,733,225 $1,099,907
=========== ========== =========== ==========
</Table>
F-17
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2001 2000
-------------------------- --------------------------
ALSIDE PLAN PREMIUM PLAN ALSIDE PLAN PREMIUM PLAN
----------- ------------ ----------- ------------
CHANGE IN PLAN ASSETS
Fair value of assets at beginning
of year........................ $32,413,729 $ 880,459 $34,346,364 $ 918,140
Actual return on plan assets..... (2,374,681) (57,095) (915,028) (24,839)
Employer contributions........... -- 205,000 -- --
Benefits paid.................... (1,307,134) (21,265) (1,017,607) (12,842)
----------- ---------- ----------- ----------
Fair value of assets at end of
year........................... 28,731,914 1,007,099 32,413,729 880,459
Funded status.................... 1,108,097 (227,388) 6,680,504 (219,448)
Unrecognized:
Transition obligation.......... -- 14,200 -- 21,301
Prior service costs............ -- 80,488 -- 44,125
Cumulative net (gain) loss..... 875,940 42,592 (5,681,834) (102,245)
----------- ---------- ----------- ----------
Accrued pension asset
(liability)................. $ 1,984,037 $ (90,108) $ 998,670 $ (256,267)
=========== ========== =========== ==========
KEY ASSUMPTIONS AS OF DECEMBER 31
Discount rate.................... 7.25% 7.25% 7.50% 7.50%
Long-term rate of return on
assets......................... 9.00% 9.00% 9.00% 9.00%
Salary increases................. N/A N/A N/A N/A
NET PERIODIC PENSION (BENEFIT)
COST
Service cost..................... $ 209,068 $ 37,396 $ 221,534 $ 41,091
Interest cost.................... 1,887,103 77,462 1,814,543 74,301
Expected return on assets........ (2,863,811) (84,314) (3,040,376) (82,002)
Amortization of unrecognized:
Transition obligation.......... -- 7,101 -- 7,101
Prior service costs............ -- 6,242 -- 6,242
Cumulative net gain............ (217,727) (5,046) (609,625) (10,239)
----------- ---------- ----------- ----------
Net periodic pension (benefit)
cost........................... $ (985,367) $ 38,841 $(1,613,924) $ 36,494
=========== ========== =========== ==========
</Table>
The Company sponsors two defined contribution plans (the "401(k) Plans")
intended to provide assistance in accumulating personal savings for retirement.
The 401(k) Plans are qualified as a tax-exempt plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The Alside 401(k) Plan covers all
full-time, non-union employees of Alside and matches up to 4.0% of eligible
compensation. For the years ended December 31, 2001, 2000 and 1999, the
Company's pre-tax contribution to the Alside 401(k) Plan was $2.1 million, $2.0
million and $2.1 million, respectively. The AmerCable 401(k) Plan covers all
full-time employees of AmerCable and matches up to 4.0% of eligible compensation
(3.5% of eligible compensation prior to 2001). For the years ended December 31,
2001, 2000 and 1999, the Company's pre-tax contributions to the AmerCable 401(k)
Plan were $281,000, $238,000 and $215,000, respectively.
16. CONTINGENCIES
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
facilities by the
F-18
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company from USX Corporation ("USX") in 1984. The Company believes that USX
bears financial responsibility for substantially all of the direct costs of
corrective action at these facilities under relevant contract terms and under
statutory and common law. The effects of the past practices of these facilities
are continuing to be investigated pursuant to the terms of the consent order and
as a result the Company is unable to reasonably estimate a reliable range of the
aggregate cost of corrective action at this time. To date, USX has reimbursed
the Company for substantially all of the direct costs of corrective action at
these facilities. The Company expects that USX will continue to reimburse 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.
F-19
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2001 2002
------------ -----------
SUCCESSOR
PREDECESSOR (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,869 $ 11,227
Accounts receivable, net.................................. 65,784 76,888
Inventories............................................... 74,574 64,723
Income taxes receivable................................... -- 765
Other current assets...................................... 3,394 4,402
-------- --------
Total current assets........................................ 172,621 158,005
Property, plant and equipment, net.......................... 77,733 92,437
Goodwill.................................................... -- 201,590
Other intangible assets, net................................ -- 108,148
Other assets................................................ 3,953 13,128
-------- --------
Total assets................................................ $254,307 $573,308
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 29,579 $ 42,459
Accrued liabilities....................................... 35,356 31,170
Income taxes payable...................................... 1,498 --
-------- --------
Total current liabilities................................... 66,433 73,629
Deferred income taxes....................................... 5,091 60,729
Other liabilities........................................... 5,108 5,973
Long-term debt.............................................. 75,000 262,408
Stockholder's equity........................................ 102,675 170,569
-------- --------
Total liabilities and stockholder's equity.................. $254,307 $573,308
======== ========
</Table>
See accompanying notes.
F-20
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
EIGHTEEN SEVENTY-THREE ONE HUNDRED SEVENTY-THREE
THREE MONTHS DAYS DAYS SIX MONTHS EIGHT DAYS DAYS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, APRIL 18, JUNE 30, JUNE 30, APRIL 18, JUNE 30,
2001 2002 2002 2001 2002 2002
------------ ----------- ------------- ----------- ----------- -------------
PREDECESSOR PREDECESSOR SUCCESSOR PREDECESSOR PREDECESSOR SUCCESSOR
Net sales................. $158,745 $57,032 $113,960 $267,356 $180,230 $113,960
Cost of sales............. 111,479 39,573 79,291 192,893 130,351 79,291
-------- ------- -------- -------- -------- --------
Gross profit.............. 47,266 17,459 34,669 74,463 49,879 34,669
Selling, general and
administrative
expense................. 30,272 12,053 21,667 58,399 43,272 21,667
-------- ------- -------- -------- -------- --------
Income from operations.... 16,994 5,406 13,002 16,064 6,607 13,002
Interest expense, net..... 1,854 399 4,981 3,433 2,068 4,981
-------- ------- -------- -------- -------- --------
Income from continuing
operations before other
non-operating expenses,
income taxes and
extraordinary items..... 15,140 5,007 8,021 12,631 4,539 8,021
Merger transaction
costs................... -- 7,317 -- -- 9,319 --
Loss on writedown of
Amercord Inc. .......... -- -- -- 2,393 -- --
-------- ------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes and
extraordinary items..... 15,140 (2,310) 8,021 10,238 (4,780) 8,021
Income tax expense........ 5,829 1,928 3,328 3,942 977 3,328
-------- ------- -------- -------- -------- --------
Income (loss) from
continuing operations... 9,311 (4,238) 4,693 6,296 (5,757) 4,693
Loss from discontinued
operations.............. -- -- (521) -- -- (521)
Extraordinary items, net
of tax.................. -- -- (4,434) -- -- (4,434)
-------- ------- -------- -------- -------- --------
Net income (loss)......... $ 9,311 $(4,238) $ (262) $ 6,296 $ (5,757) $ (262)
======== ======= ======== ======== ======== ========
</Table>
See accompanying notes.
F-21
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
SIX ONE HUNDRED
MONTHS EIGHT DAYS SEVENTY-THREE
ENDED ENDED DAYS ENDED
JUNE 30, APRIL 18, JUNE 30,
2001 2002 2002
PREDECESSOR PREDECESSOR SUCCESSOR
----------- ----------- -------------
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ 6,296 $ (5,757) $ 4,693
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization............................. 5,349 3,969 1,397
Loss on the write-down of Amercord Inc. .................. 2,393 -- --
Tax benefit from stock option exercise.................... -- 113 --
Cost of sales expense related to an inventory fair value
purchase accounting adjustment.......................... -- -- 1,891
Amortization of deferred financing costs.................. -- -- 309
Changes in operating assets and liabilities:
Accounts receivable, net................................ (22,156) (6,246) (12,958)
Inventories............................................. (6,811) (5,170) (3,225)
Income taxes receivable/payable......................... 3,879 (616) 2,958
Accounts payable and accrued liabilities................ 15,415 (4,326) 18,761
Other................................................... 24 (225) (204)
-------- -------- ---------
Net cash provided by (used in) operating activities......... 4,389 (18,258) 13,622
INVESTING ACTIVITIES
Acquisition of Predecessor's equity......................... -- -- (377,796)
Proceeds from sale of AmerCable............................. -- -- 28,332
Proceeds from sale of short-term investment................. 5,019 -- --
Proceeds from sale of assets................................ 69 220 --
Additions to property, plant and equipment.................. (9,803) (3,817) (3,260)
-------- -------- ---------
Net cash used in investing activities....................... (4,715) (3,597) (352,724)
FINANCING ACTIVITIES
Net increase in revolving line of credit.................... 8,400 -- --
Net proceeds from issuance of common stock.................. 487 -- --
Repurchase of Class B shares................................ (19,500) -- --
Dividends paid.............................................. (765) (339) --
Equity contribution from Holdings........................... -- -- 164,807
Proceeds from issuance of 9 3/4% Senior Subordinated
Notes..................................................... -- -- 165,000
Proceeds from borrowings under term loan.................... -- -- 125,000
Repayments of term loan..................................... -- -- (28,500)
Repayment of 9 3/4% Senior Subordinated Notes............... -- -- (74,092)
Debt extinguishment costs................................... -- -- (7,579)
Treasury stock acquired..................................... (1,803) -- --
Stock options, other........................................ 588 -- --
Stock options exercised..................................... 407 94 --
-------- -------- ---------
Net cash provided by (used in) financing activities......... (12,186) (245) 344,636
-------- -------- ---------
Net increase (decrease) in cash from continuing
operations................................................ (12,512) (22,100) 5,534
Net cash used in discontinued operations.................... -- -- (1,076)
Cash at beginning of period................................. 15,879 28,869 6,769
-------- -------- ---------
Cash at end of period....................................... $ 3,367 $ 6,769 $ 11,227
======== ======== =========
Supplemental information:
Cash paid for interest...................................... $ 3,622 $ 4,479 $ 1,756
======== ======== =========
Cash paid for income taxes.................................. $ 753 $ 2,254 $ 252
======== ======== =========
</Table>
See accompanying notes.
F-22
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial reporting, the instructions to Form
10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Predecessor's Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
interim financial information have been included.
The Company's results of operations prior to the date of the merger
transaction (see Note 2) are presented as the results of the Predecessor. The
results of operations, including the merger transaction and results thereafter,
are presented as the results of the Successor and include seventy-three days
from April 19, 2002 to June 30, 2002. In addition, as discussed in Note 3, the
Company completed the sale of its AmerCable division on June 24, 2002.
AmerCable's results through April 18, 2002 are included in the results of
continuing operations of the Predecessor. Subsequent to April 18, 2002,
AmerCable's results are presented as discontinued operations of the Successor as
it was the Successor's decision to divest this division.
The Company is a manufacturer of exterior residential building products,
which are distributed through eighty-nine company-owned Supply Centers across
the United States. The Company produces a broad range of vinyl siding and vinyl
window product lines as well as vinyl fencing, vinyl decking and vinyl garage
doors. Because most of the Company's building products are intended for exterior
use, the Company's sales and operating profits tend to be lower during periods
of inclement weather. Therefore the results of operations for any interim period
are not necessarily indicative of the results of operations for a full year. The
Company's net income and comprehensive income are the same for all periods
presented.
2. MERGER TRANSACTION
On March 16, 2002, the Company entered into a merger agreement ("Merger
Agreement") with Associated Materials Holdings, Inc. ("Holdings") and its wholly
owned subsidiary, Simon Acquisition Corp. The Merger Agreement provided for the
acquisition of all shares of the Company's then outstanding common stock through
a cash tender offer for $50.00 per share. The Merger Agreement also required
that the Company commence a tender offer to purchase all of its outstanding
9 1/4% Senior Subordinated Notes due March 1, 2008 ("9 1/4% Notes").
On April 19, 2002, the cash tender offer for the Company's then outstanding
common stock and the cash tender offer for approximately $74.0 million of the
Company's then outstanding 9 1/4% Notes was completed. Simon Acquisition Corp.
was then merged with and into the Company with the Company continuing as a
privately held, wholly owned subsidiary of Holdings (which is controlled by
affiliates of Harvest Partners, Inc.). Following the completion of the merger
transaction, the Company's then outstanding shares were delisted from NASDAQ.
The merger has been accounted for using the purchase method of accounting.
The total purchase consideration of $377.8 million has been allocated to
tangible and intangible assets acquired and liabilities assumed based on
respective fair values at the date of acquisition based on preliminary valuation
estimates and certain assumptions. The preliminary allocation of purchase price
has resulted in $201.6 million in goodwill and $108.3 million in other
intangibles, including $8.6 million of patents with estimated useful
F-23
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lives of 10 years and $99.7 million assigned to trademarks of which $26.7
million have remaining useful lives of 15 years and $73.0 million have
indefinite lives (See Note 6). The preliminary allocation of purchase price is
reflected in the June 30, 2002 balance sheet; however, it is subject to
adjustment as the allocation is based on a preliminary valuation and certain
estimates. The purchase consideration of $377.8 million, tender offer of the
9 1/4% Notes of $74.0 million and debt extinguishment costs of $7.6 million were
financed through: (1) the issuance of $165 million of 9 3/4% Senior Subordinated
Notes due 2012 ("9 3/4% Notes"), (2) $125 million from a new $165 million credit
facility ("credit facility"), (3) $164.8 million cash contribution from Holdings
and (4) cash of approximately $4.6 million, representing a portion of the
Company's total cash on hand of $6.8 million.
In connection with the merger, the Predecessor incurred merger related
costs, including legal and investment banking fees, which have been classified
as merger transaction costs in the Predecessor's accompanying statements of
operations.
3. SALE OF AMERCABLE
On June 24, 2002, the Company completed the sale of its AmerCable division
to AmerCable Incorporated, a newly-formed entity controlled by members of
AmerCable management and Wingate Partners III, L.P., for net proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement. The Company used the net proceeds to repay a
portion of its credit facility. No gain or loss on the sale of AmerCable was
recorded in the statements of operations, as the fair value assigned to
AmerCable's net assets acquired in the merger transaction approximated the net
proceeds received from the subsequent sale of AmerCable.
4. PRO FORMA INFORMATION
The following pro forma information for the three and six months ended June
30, 2002 and 2001 was prepared as if the merger transaction and sale of
AmerCable occurred as of the beginning of each period presented. On a pro forma
basis, the Company would have had (in thousands):
<Table>
<Caption>
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales.................................. $164,857 $139,206 $275,919 $229,145
Income (loss) before extraordinary items... 6,945 3,928 4,339 (2,726)
Net income (loss).......................... 2,511 3,928 (95) (2,726)
</Table>
The pro forma information is not necessarily indicative of the results that
would have occurred had the merger transaction and sale of AmerCable occurred at
the beginning of the periods presented, nor is it necessarily indicative of
future results. The pro forma results of operations for all periods presented
include a $1.9 million expense related to an inventory fair value adjustment
recorded at the time of the merger transaction. In addition, the pro forma
results of operations for the three and six months ended June 30, 2001 include a
$2.4 million loss on the writedown of Amercord Inc.
F-24
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Inventories consisted of the following (in thousands):
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2001 2002
PREDECESSOR SUCCESSOR
------------ ---------
Raw materials............................................... $21,102 $15,258
Work-in-process............................................. 4,597 2,964
Finished goods and purchased stock.......................... 48,875 46,501
------- -------
$74,574 $64,723
======= =======
</Table>
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $201.6 million consists of the purchase price for the merger
transaction in excess of the fair value of the tangible and intangible net
assets acquired. Other intangible assets consist of the Company's trademarks and
tradename of $99.7 million and patents of approximately $8.6 million. The
Company has determined one trademark and the Alside tradename totaling $73.0
million have an indefinite useful life. The remaining $26.7 million of
trademarks are being amortized on a straight-line basis over their estimated
remaining useful lives of fifteen years. Patents are being amortized on a
straight-line basis over their estimated useful lives of ten years. Accumulated
amortization and amortization expense was approximately $0.2 million through
June 30, 2002. Estimated annual amortization expense is approximately $2.6
million. The Company is required to test goodwill and intangible assets with
indefinite lives for impairment on an annual basis or more frequently if events
or circumstances change that would impact the value of these assets.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2001 2002
PREDECESSOR SUCCESSOR
------------ ---------
9 3/4% Notes................................................ $ -- $165,000
Term loan under credit facility............................. -- 96,500
9 1/4% Notes................................................ 75,000 908
------- --------
$75,000 $262,408
======= ========
</Table>
In connection with the merger transaction, on April 23, 2002 the Company
issued $165 million of the 9 3/4% Notes due in 2012 that pay interest
semi-annually. In conjunction with the merger, the Company entered into a new
$165 million credit facility, which included $125 million of term loans due
through 2009 that bear interest at the London Interbank Offered Rate (LIBOR)
plus 3.50%, payable quarterly, and up to $40 million of available borrowings
provided by revolving loans which expire in 2007. Net proceeds from the sale of
AmerCable were subsequently used to permanently reduce borrowings under the term
loan by $28.5 million. This resulted in $0.8 million of accelerated amortization
of deferred financing costs, which are included in the loss from discontinued
operations in the statements of operations.
The credit facility and the indenture governing the 9 3/4% Notes contain
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell its assets or declare dividends.
In
F-25
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
addition, under the credit facility the Company will be required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense.
The Company has one subsidiary, which is a wholly owned subsidiary having
no assets, liabilities or operations. This subsidiary fully and unconditionally
guarantees the Company's 9 3/4% Notes.
In connection with the merger transaction, on April 19, 2002 the Company
completed a cash tender offer for approximately $74.0 million of the Company's
9 1/4% Notes. The tender offer premium paid for the 9 1/4% Notes was
approximately $7.3 million, of which $4.9 million is included as an
extraordinary item representing the portion of the premium in excess of the fair
market value of the 9 1/4% Notes. The Company was then obligated to make a
change of control offer for the approximate $1.0 million of remaining
outstanding 9 1/4% Notes at a price of 101% of the principal amount thereof,
plus accrued and unpaid interest. The change of control offer was completed on
June 21, 2002 with an additional approximate $0.1 million of notes being
tendered.
8. STOCKHOLDER'S EQUITY
As discussed in Note 2, the Company is a wholly owned subsidiary of
Holdings. The Company has the authority to issue 1,000 shares of $.01 par value
common stock, of which 100 shares are issued and outstanding at June 30, 2002.
9. INCOME TAXES
As a result of relocating the Company's corporate office from Texas to
Ohio, the Successor's state and local income tax rate increased, raising the
Company's total effective tax rate to 41.5% from 38.5%. In addition, the
Predecessor's tax provision includes an estimate for $7.3 million of merger
transaction costs that may not be deductible for income tax purposes.
10. EXTRAORDINARY ITEMS
Extraordinary items include $4.9 million ($2.8 million net of tax) for the
premium paid to extinguish substantially all of the Successor's assumed 9 1/4%
Notes and $2.7 million ($1.6 million net of tax) for the financing fees related
to an interim credit facility utilized for the merger transaction which was
repaid shortly thereafter.
11. IMPACT OF RECENTLY ISSUED BUT NOT ADOPTED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, ("SFAS No.
145") -- "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 require that any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented be reclassified. The Successor recorded extraordinary items of
$4.4 million, net of tax, related to debt extinguishment. The Company is
required to adopt the provisions of this standard in its fiscal year beginning
on January 1, 2003.
F-26
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(ASSOCIATED LOGO)
ASSOCIATED MATERIALS INCORPORATED
OFFER TO EXCHANGE
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
FOR UP TO
$165,000,000 OF 9 3/4% SENIOR SUBORDINATED NOTES DUE 2012
----------------------------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------------------------
November 1, 2002
We have not authorized any dealer, salesperson, or other person to give any
information or represent anything not contained in this prospectus supplement or
the letter of transmittal. This prospectus supplement and the letter of
transmittal do not offer to sell or ask you to buy any securities in any
jurisdiction where it is unlawful. The information contained in this prospectus
supplement is current as of November 1, 2002.
Until January 16, 2003, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------