1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 September 30, 1998
-----------------------------------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-24956
ASSOCIATED MATERIALS INCORPORATED
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
2200 Ross Avenue, Suite 4100 East, Dallas, Texas 75201
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (214) 220-4600
-----------------------------
Not Applicable
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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 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
----- -----
Shares of Common Stock, $.0025 par value outstanding at November 13, 1998: 6,852,024
Shares of Class B Common Stock, $.0025 par value outstanding at November 13, 1998: 1,550,000
2
ASSOCIATED MATERIALS INCORPORATED
FORM 10-Q
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets................................................................................ 1
September 30, 1998 (Unaudited) and December 31, 1997
Statements of Operations (Unaudited).......................................................... 2
Quarter and nine months ended September 30, 1998 and 1997
Statements of Cash Flows (Unaudited).......................................................... 3
Nine months ended September 30, 1998 and 1997
Notes to Financial Statements (Unaudited)..................................................... 4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................. 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 13
SIGNATURES .................................................................................. 14
3
Part I. Financial Information
Item 1. Financial Statements
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 9,233 $ 1,935
Accounts receivable, net ....................................................... 53,450 49,197
Inventories .................................................................... 63,745 56,621
Income taxes receivable ........................................................ -- 266
Other current assets ........................................................... 3,311 3,291
--------- ---------
Total current assets ................................................................ 129,739 111,310
Property, plant and equipment, net .................................................. 58,386 53,855
Investment in Amercord Inc. ......................................................... 9,355 10,694
Other assets ........................................................................ 3,197 2,645
--------- ---------
Total assets ........................................................................ $ 200,677 $ 178,504
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ................................................................ $ -- $ 4,769
Accounts payable ............................................................... 24,844 17,174
Accrued liabilities ............................................................ 26,542 25,862
Revolving line of credit ....................................................... -- 564
Income taxes payable ........................................................... 4,150 --
Current portion of long-term debt .............................................. 4,050 1,750
--------- ---------
Total current liabilities ........................................................... 59,586 50,119
Deferred income taxes ............................................................... 1,404 1,951
Other liabilities ................................................................... 2,785 3,100
Long-term debt ...................................................................... 75,000 78,600
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 100,000 at September 30, 1998 and December 31, 1997
Issued and outstanding shares - 0 at September 30, 1998 and
December 31, 1997 ..................................................... -- --
Common stock, $.0025 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 6,852,024 at September 30, 1998
and 4,893,504 at December 31, 1997 ....................................... 17 12
Common stock, Class B, $.0025 par value:
Authorized, issued and outstanding shares - 1,550,000 at
September 30, 1998 and 2,700,000 at December 31, 1997 .................... 4 7
Less: Treasury stock, at cost - 41,396 shares at September 30, 1998
and December 31, 1997 ...................................................... (542) (542)
Capital in excess of par ....................................................... 11,988 505
Retained earnings .............................................................. 50,435 44,752
--------- ---------
Total stockholders' equity ..................................................... 61,902 44,734
--------- ---------
Total liabilities and stockholders' equity .......................................... $ 200,677 $ 178,504
========= =========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales.............................................. $ 114,201 $ 111,127 $ 301,640 $ 297,919
Cost of sales.......................................... 77,671 78,511 208,691 212,306
----------- ----------- ----------- -----------
36,530 32,616 92,949 85,613
Selling, general and administrative expense............ 23,956 21,517 66,481 61,646
----------- ----------- ----------- -----------
Income from operations................................. 12,574 11,099 26,468 23,967
Interest expense....................................... 1,802 2,228 5,982 7,501
----------- ----------- ----------- -----------
Equity in loss of Amercord Inc......................... (645) (731) (1,839) (624)
----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item................................................ 10,127 8,140 18,647 15,842
Income tax expense..................................... 4,386 3,596 8,288 6,735
----------- ----------- ----------- -----------
Income before extraordinary item....................... 5,741 4,544 10,359 9,107
Extraordinary loss from retirement of debt, net
of income taxes..................................... (53) - (4,107) -
----------- ----------- ----------- -----------
Net income............................................. $ 5,688 $ 4,544 $ 6,252 $ 9,107
=========== =========== =========== ===========
Earnings Per Common Share:
Income before extraordinary item....................... $ 0.68 $ 0.60 $ 1.26 $ 1.20
Extraordinary loss from retirement of debt............. - - (0.50) -
----------- ----------- ----------- -----------
Net income per common share............................ $ 0.68 $ 0.60 $ 0.76 $ 1.20
=========== =========== =========== ===========
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item....................... $ 0.67 $ 0.58 $ 1.23 $ 1.17
Extraordinary loss from retirement of debt............. - - 0.49 -
----------- ----------- ----------- -----------
Net income per common share - assuming
dilution............................................ $ 0.67 $ 0.58 $ 0.74 $ 1.17
=========== =========== =========== ===========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
September 30,
-----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income ................................................................ $ 6,252 $ 9,107
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization ........................................ 5,374 4,741
Deferred income taxes ................................................ (547) 1,062
Equity in loss of Amercord Inc. ...................................... 1,839 624
Loss on sale of assets ............................................... 19 --
Extraordinary loss on retirement of debt, net of income taxes ........ 4,107 --
Changes in operating assets and liabilities:
Accounts receivable, net .......................................... (4,253) (7,625)
Inventories ....................................................... (7,124) (4,735)
Income taxes receivable/payable ................................... 7,294 2,228
Bank overdrafts ................................................... (4,769) 324
Accounts payable and accrued liabilities .......................... 8,350 11,034
Other assets and liabilities ...................................... (721) (93)
-------- --------
Net cash provided by operating activities ................................. 15,821 16,667
INVESTING ACTIVITIES
Proceeds from sale of assets .............................................. 45 --
Additions to property, plant and equipment ................................ (9,712) (6,307)
Investment in Amercord Inc. ............................................... (500) --
-------- --------
Net cash used in investing activities ..................................... (10,167) (6,307)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt .................................. 75,000 --
Net proceeds from issuance of common stock ................................ 11,485 --
Net decrease in revolving line of credit .................................. (564) (8,089)
Principal payments of long-term debt ...................................... (1,300) (1,300)
Principal payments of 11 1/2% Senior Subordinated Notes ................... (75,000) --
Prepayment premium on early retirement of debt ............................ (4,899) --
Debt issuance costs ....................................................... (2,509) --
Dividends paid ............................................................ (569) (379)
Treasury stock acquired ................................................... -- (542)
Options exercised ......................................................... -- 161
-------- --------
Net cash provided by (used in) financing activities ....................... 1,644 (10,149)
-------- --------
Net increase in cash ...................................................... 7,298 211
Cash at beginning of period ............................................... 1,935 2,384
-------- --------
Cash at end of period ..................................................... $ 9,233 $ 2,595
======== ========
Supplemental information:
Cash paid for interest .................................................... $ 8,857 $ 9,940
======== ========
Net cash paid for income taxes ............................................ $ 2,966 $ 3,445
======== ========
See accompanying notes.
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ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated (the
"Company") for the quarter and nine months ended September 30, 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):
September 30, December 31,
1998 1997
------------- ------------
Raw materials.......................................................... $ 18,482 $ 16,352
Work in process........................................................ 5,167 4,936
Finished goods and purchased stock..................................... 40,096 35,333
--------- ----------
$ 63,745 $ 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales .............................. $ 15,565 $ 17,377 $ 48,492 $ 57,559
Costs and expenses ..................... 17,270 19,327 53,270 58,376
-------- -------- -------- --------
Loss from operations ................... (1,705) (1,950) (4,778) (817)
Interest expense ....................... 343 373 1,061 1,172
Income tax benefit ..................... (758) (860) (2,161) (740)
-------- -------- -------- --------
Net loss ............................... $ (1,290) $ (1,463) $ (3,678) $ (1,249)
======== ======== ======== ========
Company's share of net loss ............ $ (645) $ (731) $ (1,839) $ (624)
======== ======== ======== ========
Amercord has retained McDonald & Company Securities, Inc. to serve as its
financial advisor in connection with the possible sale of Amercord. The Company
is also investigating other possibilities which would involve its continued
investment in Amercord. There can be no assurance as to whether any sale of
Amercord can be completed or the terms or timing thereof.
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Amercord is not in compliance with certain financial covenants under its
existing bank credit agreement. Amercord has entered into a forbearance
agreement pursuant to which the lender has agreed not to exercise certain rights
under the credit agreement through December 31, 1998, subject to certain
conditions. In connection with the forbearance agreement, Associated Materials
and Ivaco, Inc. each made a $500,000 capital contribution to Amercord. In
addition, Associated Materials has guaranteed up to $2,000,000 of borrowings
under Amercord's credit agreement.
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 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").
On August 17, 1998, the Company redeemed the $2.1 million principal amount of 11
1/2% Notes that remained outstanding after the tender offer. As a result of this
transaction, the Company incurred an extraordinary charge of approximately
$53,000 net of income taxes of $37,000 resulting from the premium paid in
connection with the redemption.
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.
On October 27, 1998 the Company's Board of Directors approved a stock repurchase
program of up to 800,000 shares of common stock in open market transactions
depending on market, economic and other factors.
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NOTE 6 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
-------- --------- --------- ---------
Numerator:
Numerator for basic and diluted loss per common
share - income before extraordinary item................... $ 5,741 $ 4,544 $ 10,359 $ 9,107
Denominator:
Denominator for basic earnings per common
share - weighted-average shares............................ 8,402 7,610 8,213 7,614
Effect of dilutive securities:
Employee stock options....................................... 133 162 232 162
-------- --------- --------- ---------
Denominator for diluted earnings per common share -
adjusted weighted-average shares............................. 8,535 7,772 8,445 7,776
======== ========= ========= =========
Basic earnings per common share................................ $ 0.68 $ 0.60 $ 1.26 $ 1.20
======== ========= ========= =========
Diluted earnings per common share.............................. $ 0.67 $ 0.58 $ 1.23 $ 1.17
======== ========= ========= =========
Options to purchase 140,000 shares of common stock with a weighted average
exercise price of $13.14 per share were outstanding during the quarter ended
September 30, 1998 but were not included in the calculation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common stock during the period. Options to purchase 40,000
shares of common stock with an exercise price of $16.00 per share were
outstanding for the nine months ended September 30, 1998 but were excluded from
the diluted EPS calculation for the same reason as stated above.
NOTE 7 - ACCOUNTING CHANGES
In February 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which revised disclosure requirements for pension and
other postretirement plans and standardized footnote disclosures. The Statement,
which is effective for fiscal years beginning after December 15, 1997, does not
change the measurement or recognition of benefit costs.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which is effective for fiscal years beginning after June 15, 1999.
The Company believes this statement will have no effect on the Company's
financial position, results of operations or cash flows.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
The table below sets forth for the periods indicated certain items of the
Company's financial statements by segment:
Quarter Ended September 30,
------------------------------------------------------------------
1998 1997
------------------------------- -----------------------------
Percentage of Percentage of
Amount Total Net Sales Amount Total Net Sales
---------- --------------- --------- ---------------
Total Company:
Net sales - Alside............................... $ 102,593 89.8% $ 98,483 88.6%
Net sales - AmerCable............................ 11,608 10.2 12,644 11.4
---------- ------- --------- -------
Total net sales................................ 114,201 100.0 111,127 100.0
Gross profit..................................... 36,530 32.0 32,616 29.3
Selling, general and
administrative expense (1)..................... 23,956 21.0 21,517 19.4
---------- ------- --------- -------
Income from operations........................... $ 12,574 11.0% $ 11,099 9.9%
========== ======= ========= =======
Alside:
Net sales........................................ $ 102,593 100.0% $ 98,483 100.0%
Gross profit..................................... 34,108 33.2 30,203 30.7
Selling, general and
administrative expense......................... 22,010 21.4 19,646 20.0
---------- ------- --------- -------
Income from operations........................... $ 12,098 11.8% $ 10,557 10.7%
========== ======= ========= =======
AmerCable:
Net sales........................................ $ 11,608 100.0% $ 12,644 100.0%
Gross profit..................................... 2,422 20.9 2,413 19.1
Selling, general and
administrative expense......................... 1,206 10.4 1,126 8.9
---------- ------- --------- -------
Income from operations........................... $ 1,216 10.5% $ 1,287 10.2%
========== ======= ========= =======
(1) Consolidated selling, general and administrative expenses include
corporate expenses of $740,000 and $745,000 for the quarters ended
September 30, 1998 and 1997, respectively.
Overview
General. The Company's net sales increased $3.1 million to $114.2
million for the quarter ended September 30, 1998 as compared to the same period
in 1997 due to higher sales by the Company's Alside division. Income from
operations increased $1.5 million or 13.3% for the third quarter of 1998 as
compared to the same period in 1997 due to higher profits at the Company's
Alside division. The Company's net income was $5.7 million, or $0.67 per share
on 8.5 million weighted average shares for the third quarter of 1998 as compared
to $4.5 million, or $0.58 per share on 7.8 million weighted average shares in
the third quarter of 1997 due to higher income from operations and lower
interest expense. The increase in weighted average shares was the result of an
equity offering completed in March of 1998. An extraordinary loss of $53,000 net
of income tax was incurred as a result of the redemption of the remaining $2.1
million of the $75 million 11 1/2% Senior Subordinated Notes due August 15,
2003.
Alside. Net sales increased $4.1 million or 4.2% to $102.6 million for
the third quarter of 1998 as compared to the same period in 1997 due primarily
to increased sales volume of vinyl siding. Unit sales of vinyl
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siding increased 8.8% while unit sales of windows decreased 9.3% for the third
quarter of 1998 as compared to the same period in 1997. Gross profit as a
percentage of sales increased to 33.2% for the third quarter of 1998 as compared
to 30.7% for the same period in 1997 due primarily to lower vinyl resin prices.
Selling, general and administrative expense increased to $22.0 million or 12.0%
for the third quarter of 1998 as compared to the same period in 1997 due
primarily to higher personnel costs and a litigation claim. Income from
operations increased 14.6% to $12.1 million for third quarter of 1998 as
compared to $10.6 million for the same period in 1997 due to improved
profitability which was partially offset by higher selling, general and
administrative expense.
AmerCable. AmerCable's net sales decreased 8.2% to $11.6 million for
the third quarter ended September 30, 1998 as compared to the same period in
1997 due to lower copper prices. AmerCable's products are generally sold with
copper as a pass-through component. Gross profit as a percentage of sales
increased to 20.9% for the third quarter of 1998 as compared to 19.1% for the
same period in 1997 due to improved product mix. Selling, general and
administrative expense increased 7.1% to $1.2 million for the third quarter of
1998 as compared to 1997 due to higher personnel costs. Income from operations
as a percentage of sales increased slightly to 10.5% for the 1998 period as
compared to 10.2% for the 1997 period as higher profits were partially offset by
higher selling, general and administrative expense.
Amercord. The Company recorded a loss of $645,000 (or $0.07 per share)
for its equity in the after-tax loss of Amercord for the quarter ended September
30, 1998 as compared to a loss of $731,000 for the same period in 1997.
Amercord's net sales decreased $1.8 million to $15.6 million for the quarter
ended September 30, 1998 due primarily to lower tire cord volume and lower sales
prices for both tire bead and tire cord. Gross profit increased to $(1.1)
million for the quarter ended September 30, 1998 as compared to $(1.4) million
for the same period in 1997 due primarily to improved manufacturing efficiency
which was partially offset by lower sales prices. Selling, general and
administrative expense decreased from $581,000 for the quarter ended September
30, 1997 to $557,000 for the same period in 1998 due to lower research and
development expenditures.
Other. Net interest expense decreased $426,000 or 19.1% for the quarter
ended September 30, 1998 as compared to the same period in 1997 due to a
decrease in the Company's borrowings, the repurchase of the 11 1/2% Notes and
the issuance of the 9 1/4% Notes. The Company recorded investment interest
income of $66,000.
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Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997.
The table below sets forth for the periods indicated certain items of the
Company's financial statements by segments.
Nine Months Ended September 30,
------------------------------------------------------------------
1998 1997
------------------------------- -----------------------------
Percentage of Percentage of
Amount Total Net Sales Amount Total Net Sales
---------- --------------- --------- ---------------
Total Company:
Net sales - Alside............................... $ 261,947 86.8% $ 257,475 86.4%
Net sales - AmerCable............................ 39,693 13.2 40,444 13.6
----------- ------- ----------- -------
Total net sales................................ 301,640 100.0 297,919 100.0
Gross profit..................................... 92,949 30.8 85,613 28.7
Selling, general and
administrative expense (1)..................... 66,481 22.0 61,646 20.7
----------- ------- ----------- -------
Income from operations........................... $ 26,468 8.8% $ 23,967 8.0%
=========== ======= =========== =======
Alside:
Net sales........................................ $ 261,947 100.0% $ 257,475 100.0%
Gross profit..................................... 84,591 32.3 78,914 30.6
Selling, general and
administrative expense......................... 60,781 23.2 56,449 21.9
----------- ------- ----------- -------
Income from operations........................... $ 23,810 9.1% $ 22,465 8.7%
=========== ======= =========== =======
AmerCable:
Net sales........................................ $ 39,693 100.0% $ 40,444 100.0%
Gross profit .................................... 8,358 21.1 6,699 16.6
Selling, general and
administrative expense......................... 3,756 9.5 3,295 8.2
----------- ------- ----------- -------
Income from operations........................... $ 4,602 11.6% $ 3,404 8.4%
=========== ======= =========== =======
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $1,944,000 and $1,902,000 for the nine month periods ended
September 30, 1998 and 1997, respectively.
Overview
General. The Company's net sales increased $3.7 million to $301.6
million for the nine months ended September 30, 1998 as compared to the same
period in 1997 due to higher sales by the Company's Alside division. Income from
operations increased $2.5 million or 10.4% for the nine months ended September
30, 1998 as compared to the same period in 1997 due to higher profits at the
Company's Alside and AmerCable divisions. The Company's income before
extraordinary item was $10.4 million, or $1.23 per share on 8.4 million weighted
average shares for the nine months ended September 30, 1998 as compared to $9.1
million, or $1.17 per share on 7.8 million weighted average shares in the same
period in 1997 due to higher income from operations. The increase in weighted
average shares was the result of an equity offering completed in March of 1998.
An extraordinary loss of $4.1 million net of income tax was incurred as a result
of the repurchase of the $75 million 11 1/2% Senior Subordinated Notes due
August 15, 2003.
Alside. Net sales increased $4.5 million to $261.9 million for the nine
months ended September 30, 1998 as compared to the same period in 1997 due
primarily to increased sales volume of vinyl siding. Unit sales of vinyl siding
increased 6.1% while unit sales of windows decreased 10.5% for the nine months
ended September 30, 1998 as compared to the same period in 1997. Gross profit as
a percentage of sales increased to 32.3% for the 1998 period as compared to
30.6% for the 1997 period due primarily to lower vinyl resin prices. Selling,
general and administrative expense increased 7.7% to $60.8 million for the 1998
period as compared to the same period in 1997 due primarily to higher personnel
costs, higher advertising expenditures and higher lease expense. Income from
operations increased to $23.8 million for the 1998 period as compared to $22.5
million for
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the same period in 1997 due to improved profitability which was partially offset
by higher selling, general and administrative expense.
AmerCable. AmerCable's net sales decreased 1.9% to $39.7 million for
the nine months ended September 30, 1998 as compared to the same period in 1997
due primarily to lower copper prices. AmerCable's products are generally sold
with copper as a pass-through component. Gross profit as a percentage of sales
increased to 21.1% for the nine months ended September 30, 1998 as compared to
16.6% for the same period in 1997 due to improved product mix. Selling, general
and administrative expense increased 14.0% to $3.8 million for the nine months
ended September 30, 1998 as compared to 1997 due to higher personnel costs.
Income from operations as a percentage of sales increased to 11.6% for the 1998
period as compared to 8.4% for the 1997 period as higher profits were partially
offset by higher selling, general and administrative expense.
Amercord. The Company recorded a loss of $1.8 million (or $0.22 per
share) for its equity in the after-tax loss of Amercord for the nine months
ended September 30, 1998 as compared to a loss of $624,000 for the same period
in 1997. Amercord's net sales decreased $9.1 million to $48.5 million for the
nine months ended September 30, 1998 due to lower sales volume and lower sales
prices for both tire bead and tire cord. Gross profit decreased to $(2.9)
million for the nine months ended September 30, 1998 as compared to $1.4 million
for the same period in 1997 due almost exclusively to lower sales prices.
Average per unit sales prices decreased approximately 7% for the nine months
ended September 30, 1998. Selling, general and administrative expense decreased
from $2.2 million for the nine months ended September 30, 1997 to $1.8 million
for the same period in 1998 due to lower research and development expenditures.
Other. Net interest expense decreased $1.5 million or 20.3% for the
nine months ended September 30, 1998 as compared to the same period in 1997 due
to a decrease in the Company's borrowings, the repurchase of the 11 1/2% Notes
and the issuance of the 9 1/4% Notes. The Company recorded interest income of
$169,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had cash and cash equivalents of $9.2
million and available borrowing capacity of approximately $41.9 million under
its existing credit facility. Outstanding letters of credit totaled $8.1 million
securing $4.1 million of taxable notes, $2.0 million of borrowings under
Amercord's credit agreement and certain other obligations.
Net cash provided by operations was $15.8 million in the nine months
ended September 30, 1998 compared with $16.7 in the same period in 1997. The
decrease in cash provided by operations in the 1998 period was due principally
to lower net income for the period ended September 30, 1998 as compared to the
1997 period.
Capital expenditures totaled $9.7 million for the nine months ended
September 30, 1998, compared with $6.3 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 and blending capacity.
The Company began construction on its new vinyl siding facility in August 1998
with the anticipation that the facility will be operational by April 1999. Due
to the delay in the commencement of construction, a portion of the capital
expenditures planned for 1998 will be incurred in early 1999.
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 redeemed the $2.1 million principal amount of 11 1/2% Notes that
remained outstanding on August 17, 1998.
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Amercord has retained McDonald & Company Securities, Inc. to serve as
its financial advisor in connection with the possible sale of Amercord. The
Company is also investigating other possibilities which would involve its
continued investment in Amercord. There can be no assurance as to whether any
sale of Amercord can be completed or the terms or timing thereof.
Amercord is not in compliance with certain financial covenants under
its existing bank credit agreement. Amercord has entered into a forbearance
agreement pursuant to which the lender has agreed not to exercise certain rights
under the credit agreement through December 31, 1998, subject to certain
conditions. In connection with the forbearance agreement, Associated Materials
and Ivaco, Inc. each made a $500,000 capital contribution to Amercord. In
addition, Associated Materials has guaranteed up to $2,000,000 of borrowings
under Amercord's credit agreement.
Effective October 1, 1998 the Company established an Employee Stock
Purchase Plan ("ESPP"). Employees participating in the ESPP can purchase shares
at a 15% discount through payroll deductions of up to 25% of their eligible
compensation. The Company registered 250,000 shares of common stock with the SEC
in September 1998 for issuance pursuant to the ESPP.
On October 27, 1998 the Company's Board of Directors approved a stock
repurchase program of up to 800,000 shares of common stock in open market
transactions depending on market, economic and other factors.
The Company believes the future cash flows from operations and its
borrowing capacity under its existing credit agreement will be sufficient to
satisfy its obligations to pay principal and interest on its outstanding debt,
maintain current operations, provide sufficient capital for presently
anticipated capital expenditures and fund its share repurchase program. However,
there can be no assurances that the cash so generated by the Company will be
sufficient for such purposes.
YEAR 2000
Historically, computer programs have used a two-digit format rather
than a four-digit format to refer to the year. After the year 1999, these
computer programs will not recognize the year correctly which may cause the
computer application to fail or to process data incorrectly.
State of Readiness. The Company began its Year 2000 program in 1997 in
order to ensure all systems were Year 2000 compliant. The Company's Alside
division divided its Year 2000 information technology ("IT") project as follows:
mainframe, AS 400 systems, manufacturing systems and PC systems. Alside has
reviewed its mainframe and AS 400 systems and believes all date fields have been
corrected. All mission critical programs within its mainframe have been tested
and are believed to be Year 2000 compliant. The mission critical programs
include the general ledger, accounts payable, billing/receivable and payroll.
Alside estimates that updates to its manufacturing systems are approximately 50%
complete with final completion scheduled for early 1999. Alside is currently
assessing the status of its PC systems. The Company's AmerCable division
believes its IT systems are Year 2000 compliant. Alside and AmerCable are
currently assessing and updating their non-IT systems. The Company's Alside and
AmerCable divisions are currently contacting significant customers and suppliers
to assess Year 2000 compliance and readiness. The responses are being evaluated
to determine the possible risks that may affect the Company's operations.
Costs. To date the Company's costs to address Year 2000 issues have not
been material. The Company's Alside division designs the majority of its
application systems in-house. The process of reviewing the in-house systems and
converting date sensitive fields was done by Alside's computer programmers as
part of routine system maintenance. Alside has retained an independent
consultant to assist with Year 2000 compliance for its manufacturing systems.
Alside presently estimates its manufacturing system update will cost
approximately $250,000. The Company's AmerCable division installed a new
information system in 1996 that is Year 2000 compliant. AmerCable's system
acquisition was not accelerated due to Year 2000 and is therefore not considered
as part of the Year 2000 expenditures.
Company Risks and Contingency Plan. The Company believes that its most
significant remaining Year 2000 risk is associated with its customers and
suppliers. Once the Company completes its customer and supplier
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readiness evaluation it will be better able to formulate a contingency plan. The
Company believes its customers will not be significantly impacted by the Year
2000 due to the nature of the home improvement business.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past 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 increments. 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.
CERTAIN FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect," "intend,"
and similar expressions, as they relate to the Company or its management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to the operations and results of operations of the
Company as well as its customers and suppliers, including as a result of the
availability of consumer credit, interest rates, employment trends, changes in
levels of consumer confidence, changes in consumer preferences, national and
regional trends in new housing starts, raw material costs, pricing pressures,
shifts in market demand, the effects of the Year 2000 on the Company and its
suppliers and customers and general economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions or
estimates prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
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Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Associated Materials Incorporated Employee Stock
Purchase Plan.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated September
21, 1998, under Item 5 - Other Events. The report related to
the announcement of the Company's possible sale of its
Amercord affiliate and changes made to Amercord's existing
credit agreement.
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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: November 13, 1998 By: /s/ Robert L. Winspear
-----------------------------
Robert L. Winspear
Vice President and Chief
Financial Officer
Date: November 13, 1998 By: /s/ Robert L. Winspear
-----------------------------
Robert L. Winspear
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 Associated Materials Incorporated Employee Stock Purchase Plan
27 Financial Data Schedule