1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
F0RM 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 31, 1998
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: 0-24956
ASSOCIATED MATERIALS INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
2200 Ross Avenue, Suite 4100 East, Dallas, Texas 75201
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (214) 220-4600
------------------------------
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check [X] 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
--- ---
Shares of Common Stock, $.0025 par value outstanding at May 8, 1998:
6,852,024 Shares of Class B Common Stock, $.0025 par value outstanding at May 8,
1998: 1,550,000
2
ASSOCIATED MATERIALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets................................................................................ 1
March 31, 1998 (Unaudited) and December 31, 1997
Statements of Operations (Unaudited).......................................................... 2
Quarter ended March 31, 1998 and 1997
Statements of Cash Flows (Unaudited).......................................................... 3
Quarter ended March 31, 1998 and 1997
Notes to Financial Statements (Unaudited)..................................................... 4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................. 6
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders...................................... 9
Item 6. Exhibits and Reports on Form 8-K......................................................... 9
SIGNATURES .................................................................................. 10
3
Part I. Financial Information
Item 1. Financial Statements
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash........................................................................... $ 1,865 $ 1,935
Accounts receivable, net....................................................... 45,363 49,197
Inventories.................................................................... 61,806 56,621
Income taxes receivable........................................................ 4,043 266
Other current assets........................................................... 3,559 3,291
----------- -----------
Total current assets................................................................ 116,636 111,310
Property, plant and equipment, net.................................................. 56,140 53,855
Investment in Amercord Inc.......................................................... 10,130 10,694
Other assets........................................................................ 3,138 2,645
----------- -----------
Total assets........................................................................ $ 186,044 $ 178,504
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Bank overdrafts................................................................ $ 6,558 $ 4,769
Accounts payable............................................................... 18,523 17,174
Accrued liabilities............................................................ 17,300 25,862
Revolving line of credit....................................................... 5,147 564
Current portion of long-term debt.............................................. 1,750 1,750
----------- -----------
Total current liabilities........................................................... 49,278 50,119
Deferred income taxes............................................................... 2,737 1,951
Other liabilities .................................................................. 2,950 3,100
Long-term debt...................................................................... 80,250 78,600
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 100,000 at March 31, 1998 and December 31, 1997
Outstanding shares - 0 at March 31, 1998 and
December 31, 1997........................................................ - -
Common stock, $.0025 par value:
Authorized shares - 15,000,000
Outstanding shares - 6,852,024 at March 31, 1998
and 4,893,504 at December 31, 1997....................................... 17 12
Common stock, Class B, $.0025 par value:
Authorized and outstanding shares - 1,550,000 at
March 31, 1998 and 2,700,000 at December 31, 1997........................ 4 7
Less: Treasury stock, at cost - 41,396 shares at March 31, 1998
and December 31, 1997...................................................... (542) (542)
Capital in excess of par....................................................... 11,988 505
Retained earnings.............................................................. 39,362 44,752
----------- -----------
Total stockholders' equity..................................................... 50,829 44,734
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 186,044 $ 178,504
=========== ===========
See accompanying notes.
-1-
4
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Quarter Ended
March 31,
--------------------------------
1998 1997
---------- ----------
Net sales...................................................................... $ 78,650 $ 79,116
Cost of sales.................................................................. 56,320 59,101
---------- ----------
22,330 20,015
Selling, general and administrative expense.................................... 20,474 19,302
---------- ----------
Income from operations......................................................... 1,856 713
Interest expense............................................................... 2,283 2,633
---------- ----------
(427) (1,920)
Equity in earnings (loss) of Amercord Inc...................................... (564) 2
---------- ----------
Loss before income taxes and extraordinary item................................ (991) (1,918)
Income tax benefit............................................................. (224) (788)
---------- ----------
Loss before extraordinary item................................................. (767) (1,130)
Extraordinary loss from retirement of debt, net of income taxes................ (4,054) --
---------- ----------
Net loss....................................................................... $ (4,821) $ (1,130)
========== ==========
Basic and Diluted Earnings Per Common Share:
Loss before extraordinary item................................................. $ (0.10) $ (0.15)
Extraordinary loss from retirement of debt..................................... (0.52) --
---------- ----------
Net loss per common share...................................................... $ (0.62) $ (0.15)
========== ==========
See accompanying notes.
-2-
5
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Quarter Ended
March 31,
---------------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net loss....................................................................... $ (4,821) $ (1,130)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................................. 1,739 1,550
Deferred income taxes..................................................... 786 (723)
(Equity) loss in earnings of Amercord Inc................................. 564 (2)
Loss on sale of assets.................................................... 8 --
Extraordinary loss on retirement debt..................................... 4,054 --
Changes in operating assets and liabilities:
Accounts receivable, net............................................... 3,834 (872)
Inventories............................................................ (5,185) 1,248
Income taxes receivable................................................ (935) (653)
Bank overdrafts........................................................ 1,789 790
Accounts payable and accrued liabilities............................... (7,213) (4,774)
Other assets and liabilities........................................... (588) 497
---------- ----------
Net cash used by operating activities.......................................... (5,968) (4,069)
INVESTING ACTIVITIES
Proceeds from sale of assets................................................... 9 --
Additions to property, plant and equipment, net................................ (3,942) (1,932)
---------- ----------
Net cash used in investing activities.......................................... (3,933) (1,932)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt................................... 75,000 --
Net proceeds from issuance of common stock..................................... 11,485 -
Net increase in revolving line of credit....................................... 4,583 6,248
Principal payments of long-term debt........................................... (450) (450)
Principal payments on 11 1/2% Senior Subordinated Notes........................... (72,900) --
Prepayment premium on early retirement of debt................................. (4,809) --
Debt issuance cost............................................................. (2,509) --
Dividends paid................................................................. (569) (379)
Treasury stock acquired........................................................ -- (200)
Options exercised.............................................................. -- 58
---------- ----------
Net cash provided by financing activities...................................... 9,831 5,277
---------- ----------
Net decrease in cash........................................................... (70) (724)
Cash at beginning of period.................................................... 1,935 2,384
---------- ----------
Cash at end of period.......................................................... $ 1,865 $ 1,660
========== ==========
Supplemental information:
Cash paid for interest......................................................... $ 4,958 $ 4,621
========== ==========
Net cash paid for income taxes................................................. $ 771 $ 807
========== ==========
See accompanying notes.
-3-
6
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated (the
"Company") for the quarter ended March 31, 1998 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 generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 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 results of operations for
any interim period are not necessarily indicative of the results of operations
for a full year.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or market.
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- -----------
Raw materials.......................................................... $ 18,758 $ 16,352
Work in process........................................................ 5,811 4,936
Finished goods and purchased stock..................................... 37,237 35,333
--------- ----------
$ 61,806 $ 56,621
========= ==========
NOTE 3 - INVESTMENT IN AMERCORD INC. ("AMERCORD")
The Company's investment in Amercord, a 50% owned affiliate, is accounted for
using the equity method. Condensed statements of operations for Amercord are
presented below (in thousands):
Quarter Ended
March 31,
-----------------------------
1998 1997
--------- ----------
Net sales.............................................................. $ 16,647 $ 21,616
Costs and expenses..................................................... 18,085 21,187
--------- ----------
Income (loss) from operations.......................................... (1,438) 429
Interest expense....................................................... 352 423
Income tax expense (benefit)........................................... (663) 2
--------- ----------
Net income (loss)...................................................... $ (1,127) $ 4
========= ==========
Company's share of net income (loss)................................... $ (564) $ 2
========= ==========
NOTE 4 - LONG-TERM DEBT
In March 1998, the Company purchased $72.9 million of its outstanding 11 1/2%
Senior Subordinated Notes due August 15, 2003 ("11 1/2% Notes") through a tender
offer and consent solicitation. As a result of this transaction, the Company
incurred an extraordinary charge of approximately $4.1 million net of income
taxes of $2.8 million resulting from the
-4-
7
premium paid in connection with the purchase of the 11 1/2% Notes and the write
off of debt issuance costs associated with such 11 1/2% Notes.
Simultaneously with the consummation of the tender offer, the Company issued $75
million of 9 1/4% Senior Subordinated Notes due March 1, 2008 (the "9 1/4%
Notes") with interest payable semi-annually on March 1 and September 1
commencing September 1, 1998. The 9 1/4% Notes are senior subordinated unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future "Senior Indebtedness" of the Company (as that term is
defined in the indenture pursuant to which the 9 1/4% Notes were issued (the
"9 1/4% Note Indenture")).
The 9 1/4% Notes are redeemable at the Company's option, in whole or in part, at
any time on or after March 1, 2003, at redemption prices set forth in the 9 1/4%
Note Indenture. The 9 1/4% Note Indenture includes certain covenants that limit
the Company's ability to incur additional indebtedness, pay dividends and make
other restrictive payments, consummate certain transactions and other matters
similar to those which existed under the indenture pursuant to which the 11 1/2%
Notes were issued (the "11 1/2% Note Indenture").
NOTE 5 - STOCKHOLDERS' EQUITY
In March 1998, the Company completed an initial public offering ("IPO") of
2,448,120 shares of common stock at an offering price to the public of $16.00
per share. In the IPO, 808,520 shares were sold by the Company and 1,639,600
shares were sold by certain of the Company's stockholders. The offering resulted
in an increase in stockholder's equity of $11.5 million.
In connection with the IPO, 1,150,000 shares of Class B common stock were
converted into 1,150,000 shares of common stock.
NOTE 6 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter Ended
March 31,
---------------------------
1998 1997
--------- --------
Numerator:
Numerator for basic and diluted loss per common
share - loss before extraordinary item............................. $ (767) $ (1,130)
Denominator:
Denominator for basic and diluted loss per common
share - weighted-average shares.................................... 7,829 7,594
Basic and diluted loss per common share................................ $ (0.10) $ (0.15)
======== =========
NOTE 7 - RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with current
period presentation.
-5-
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
The table below sets forth for the periods indicated certain items of the
Company's financial statements by segment:
Quarter Ended March 31,
-------------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Percentage of Percentage of
Amount Total Net Sales Amount Total Net Sales
---------- --------------- --------- ----------------
Total Company:
Net sales - Alside............................... $ 64,393 81.9% $ 64,827 81.9%
Net sales - AmerCable............................ 14,257 18.1 14,289 18.1
---------- ------- --------- -------
Total net sales................................ 78,650 100.0 79,116 100.0
Gross profit..................................... 22,330 28.4 20,015 25.3
Selling, general and
administrative expense (1)..................... 20,474 26.0 19,302 24.4
---------- ------- --------- -------
Income from operations........................... $ 1,856 2.4% $ 713 .9%
========== ======= ========= =======
Alside:
Net sales........................................ $ 64,393 100.0% $ 64,827 100.0%
Gross profit..................................... 19,343 30.0 17,876 27.6
Selling, general and
administrative expense......................... 18,642 29.0 17,745 27.4
---------- ------- --------- -------
Income from operations........................... $ 701 1.0% $ 131 .2%
========== ======= ========= =======
AmerCable:
Net sales........................................ $ 14,257 100.0% $ 14,289 100.0%
Gross profit..................................... 2,987 21.0 2,139 15.0
Selling, general and
administrative expense......................... 1,225 8.6 1,046 7.3
---------- ------- --------- -------
Income from operations........................... $ 1,762 12.4% $ 1,093 7.7%
========== ======= ========= =======
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $607,000 and $511,000 for the three-month periods ended March 31,
1998 and 1997, respectively.
Overview
The Company's income from operations increased to $1.9 million for the
first quarter 1998 as compared to $713,000 for the 1997 period due to increased
profitability at both Alside and AmerCable. The Company's net sales were flat
for the first quarter 1998 at $78.7 million as compared to $79.1 million for the
same period in 1997. The Company's net loss before extraordinary item was
$767,000 ($.10 per share) for the 1998 period as compared to a net loss of
$1,130,000 ($.15 per share) for the same period in 1997 due to increased
operating income and lower interest expense. An extraordinary loss of $4.1
million net of income tax ($0.52 per share) was incurred as a result of the
repurchase of $72.9 million of the $75.0 million of 11 1/2% Senior Subordinated
Notes due August 15, 2003.
Alside. Alside's net sales remained relatively flat at $64.4 million
for the quarter ended March 31, 1998 as compared to $64.8 million for the same
period in 1997 as sales volume was unfavorably impacted by high precipitation.
Unit sales of vinyl siding increased 3.8% for the first quarter 1998 as compared
to the 1997 period. Unit sales of windows decreased 11.4% due to installation
delays by the Company's customers due to inclement weather. Gross profit as a
percentage of sales increased to 30.0% for the 1998 period as compared to 27.6%
for the same
-6-
9
period in 1997 principally due to lower material costs. Income from operations
increased $570,000 to $701,000 for the 1998 period due to lower material costs.
Selling, general and administrative expense increased to $18.6 million from
$17.7 million in 1997 due to increased personnel costs with the addition of
supply center personnel and increased bad debt expense of $500,000.
AmerCable. AmerCable's net sales were flat for the first quarter of 1998
as compared to the 1997 period due primarily to lower copper prices. AmerCable's
products are generally priced with copper as a pass through component. Gross
profit as a percentage of sales increased to 21% for the 1998 period as compared
to 15% for the 1997 period due to improved product mix. Selling, general and
administrative expense increased from $1.0 million in 1997 to $1.2 million in
1998 due primarily to increased personnel costs, including profit sharing.
Income from operations was $1.8 million for the quarter ended March 31, 1998 as
compared to $1.1 million for the same period in 1997.
Amercord. The Company recorded a loss of $564,000 in the after-tax loss
of Amercord for the quarter ended March 31, 1998 as compared with income of
$2,000 during the same period in 1997. Amercord's net sales decreased 23% to
$16.6 million due to lower tire cord sales volume and lower sales prices for
both tire cord and tire bead. Gross profit decreased from $1.1 million in 1997
to $(.8) million in 1998 due primarily to a decrease in average unit sales
prices for tire cord and tire bead. Selling, general and administrative expense
decreased from $652,000 in 1997 to $597,000 in 1998.
Net interest expense decreased $350,000 or 13.3% in the quarter ended
March 31, 1998 compared to the same period in 1997 due to a decrease in the
Company's average borrowing, the repurchase of $72.9 million of 11 1/2% Notes
and the issuance of the 9 1/4% Notes.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings under the Company's existing credit facility were $5.1
million at March 31, 1998, excluding outstanding letters of credit totaling $7.0
million securing $4.9 million of taxable notes and certain other obligations.
Because of the seasonal nature of Alside's business, the Company's borrowing
requirements are traditionally highest during the second quarter. At March 31,
1998, the Company had an available borrowing capacity of approximately $37.8
million.
Net cash used by operations was $6.0 million in the quarter ended March
31, 1998 compared with $4.1 million in the same period in 1997. The increase in
cash used by operations in the 1998 period was due principally to higher
inventories resulting from lower sales for the period ended March 31, 1998 as
compared to the 1997 period.
Capital expenditures totaled $3.9 million for the quarter ended March
31, 1998, compared with $1.9 million during the same period in 1997.
Expenditures in the 1998 period were primarily used to increase window welding
and assembly capacity and increase vinyl siding extrusion capacity. Presently
anticipated capital expenditures for 1998 of $25 million include funds for the
construction of a new vinyl siding manufacturing facility to increase vinyl
siding extrusion capacity, as well as expenditures to increase window welding
capacity and window assembly capacity.
In March 1998, the Company completed a tender offer and consent
solicitation with respect to its 11 1/2% Notes. In the tender offer, the Company
purchased $72.9 million of the $75.0 million 11 1/2% Notes. Simultaneously with
the consummation of the tender offer, the Company issued $75 million of 9 1/4%
Notes. Concurrently with these transactions, the Company completed an initial
public offering of 2,448,120 shares of common stock of which 808,520 shares were
sold by the Company. The remaining 1,639,600 shares were sold by certain of the
Company's stockholders including the holder of the Class B common stock who
converted 1,150,000 shares of Class B common stock into common stock on a
one-to-one basis in connection with the offering. Net proceeds to the Company,
after underwriting discounts and offering expenses, from the common stock and
9 1/4% Note offerings were $11.5 million and $72.4 million, respectively.
The Company presently intends to redeem the $2.1 million of 11 1/2%
Notes that remain outstanding promptly after August 15, 1998, the first date on
which the 11 1/2% Notes may be redeemed by the Company under the terms of the 11
1/2% Note Indenture. The applicable redemption price on such date is 104.313% of
the outstanding principal amount of the 11 1/2% Notes.
-7-
10
The Company believes the future cash flows from operations and its
borrowing capacity under its existing credit agreement will be sufficient to
satisfy its obligations to pay principal and interest on its outstanding debt,
maintain current operations and provide sufficient capital for presently
anticipated capital expenditures. However, there can be no assurances that the
cash so generated by the Company will be sufficient for such purposes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past two years. Inflation could adversely
affect the Company if inflation results in significantly higher interest rates
or substantial weakness in economic conditions. Alside's principal raw material,
vinyl resin, has been subject to rapid price changes. Alside has historically
been able to pass on price increases to its customers. No assurances can be
given that Alside will continue to be able to pass on any price increases.
-8-
11
Part II Other Information
Item 4. Submission of Matters to a Vote of Security-Holders
On January 28, 1998, stockholders of the Company took action by written
consent in lieu of an annual meeting of stockholders to re-elect Richard I.
Galland and Gary D. Trabka as directors of the Company to serve for three-year
terms expiring at the Company's annual meeting of stockholders to be held in
2001. The Company's other directors are William W. Winspear, Donald L. Kaufman
and A.B. Lerner (whose current terms will expire at the Company's 2000 annual
meeting of stockholders) and James F. Leary and A.A. Meitz (whose current terms
will expire at the Company's 1999 meeting of stockholders). In March 1998, Mr.
Trabka resigned as a director of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 - Indenture, dated as of March 1, 1998, between the Company
and U.S. Trust Company of Texas, N.A., as Trustee (the "9 1/4%
Note Indenture").
4.2 - Senior Subordinated Note issued under the 9 1/4% Note
Indenture.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, Associated Materials
Incorporated filed no Current Reports on Form 8-K.
-9-
12
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 11, 1998 By: \s\ Robert L. Winspear
-------------------------------------------
Robert L. Winspear
Vice President and Chief Financial Officer
Date: May 11, 1998 By: \s\ Robert L. Winspear
--------------------------------------------
Robert L. Winspear
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-10-
13
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
4.1 Indenture, dated as of March 1, 1998, between the Company and U.S. Trust
Company of Texas, N.A., as Trustee (the "9 1/4% Note Indenture").
4.2 Senior Subordinated Note issued under the 9 1/4% Note Indenture.
27 Financial Data Schedule.
-11-