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 June 30, 1999
-----------------------------------------
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 August 10, 1999:
6,481,883
---------
Shares of Class B Common Stock, $.0025 par value outstanding at August 10, 1999:
1,550,000
---------
2
ASSOCIATED MATERIALS INCORPORATED
FORM 10-Q
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets ........................................................ 1
June 30, 1999 (Unaudited) and December 31, 1998
Statements of Operations (Unaudited) .................................. 2
Quarter and six months ended June 30, 1999 and 1998
Statements of Cash Flows (Unaudited) .................................. 3
Six months ended June 30, 1999 and 1998
Notes to Financial Statements (Unaudited) ............................. 4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ..................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............. 12
Item 6. Exhibits and Reports on Form 8-K ................................. 12
SIGNATURES .................................................................. 13
3
Part I. Financial Information
Item 1. Financial Statements
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
1999 1998
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 1,689 $ 14,964
Accounts receivable, net ................................. 56,260 45,756
Inventories .............................................. 66,127 56,245
Other current assets ..................................... 3,637 3,572
--------- ---------
Total current assets ........................................ 127,713 120,537
Property, plant and equipment, net .......................... 70,601 61,130
Investment in Amercord Inc. ................................. 4,416 4,961
Other assets ................................................ 3,015 2,691
--------- ---------
Total assets ................................................ $ 205,745 $ 189,319
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 29,106 $ 11,713
Accrued liabilities ...................................... 19,644 25,417
Income taxes payable ..................................... 4,000 582
Current portion of long-term debt ........................ -- 3,600
--------- ---------
Total current liabilities ................................... 52,750 41,312
Deferred income taxes ....................................... 3,540 2,616
Other liabilities ........................................... 5,992 6,013
Long-term debt .............................................. 75,000 75,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 100,000 at June 30, 1999 and
December 31, 1998
Issued shares - 0 at June 30, 1999 and
December 31, 1998 .................................. -- --
Common stock, $.0025 par value:
Authorized shares - 15,000,000
Issued shares - 6,987,279 at June 30, 1999
and 6,938,747 at December 31, 1998 .............. 17 17
Common stock, Class B, $.0025 par value:
Authorized and issued shares - 1,550,000 at
June 30, 1999 and December 31, 1998 ............. 4 4
Less: Treasury stock, at cost - 440,396 shares at
June 30, 1999 and 88,396 at December 31, 1998 ...... (4,975) (1,048)
Capital in excess of par .............................. 12,734 12,273
Retained earnings ..................................... 60,683 53,132
--------- ---------
Total stockholders' equity ............................ 68,463 64,378
--------- ---------
Total liabilities and stockholders' equity .................. $ 205,745 $ 189,319
========= =========
See accompanying notes.
-1-
4
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Quarter Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales .......................................... $ 118,908 $ 108,789 $ 203,505 $ 187,439
Cost of sales ...................................... 80,075 74,700 139,517 131,020
--------- --------- --------- ---------
38,833 34,089 63,988 56,419
Selling, general and administrative expense ........ 24,246 22,051 46,141 42,525
--------- --------- --------- ---------
Income from operations ............................. 14,587 12,038 17,847 13,894
Interest expense ................................... 1,760 1,897 3,439 4,180
--------- --------- --------- ---------
12,827 10,141 14,408 9,714
Equity in loss of Amercord Inc. .................... (317) (630) (545) (1,194)
--------- --------- --------- ---------
Income before income taxes and
extraordinary item .............................. 12,510 9,511 13,863 8,520
Income tax expense ................................. 4,914 4,126 5,467 3,902
--------- --------- --------- ---------
Income before extraordinary item ................... 7,596 5,385 8,396 4,618
Extraordinary loss from retirement of debt, net
of income taxes ................................. -- -- -- 4,054
--------- --------- --------- ---------
Net income ......................................... $ 7,596 $ 5,385 $ 8,396 $ 564
========= ========= ========= =========
Earnings Per Common Share - Basic:
Income before extraordinary item ................... $ 0.94 $ 0.64 $ 1.02 $ 0.57
Extraordinary loss from retirement of debt ......... -- -- -- (0.50)
--------- --------- --------- ---------
Net income per common share ........................ $ 0.94 $ 0.64 $ 1.02 $ 0.07
========= ========= ========= =========
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item ................... $ 0.91 $ 0.63 $ 1.00 $ 0.56
Extraordinary loss from retirement of debt ......... -- -- -- (0.49)
--------- --------- --------- ---------
Net income per common share ........................ $ 0.91 $ 0.63 $ 1.00 $ 0.07
========= ========= ========= =========
See accompanying notes.
-2-
5
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
June 30,
----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income .................................................... $ 8,396 $ 564
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 4,019 3,466
Deferred income taxes ................................... 924 (387)
Loss in earnings of Amercord Inc. ....................... 545 1,194
Loss on sale of assets .................................. -- 19
Extraordinary loss on retirement of debt ................ -- 4,054
Changes in operating assets and liabilities:
Accounts receivable, net ............................. (10,504) (5,368)
Inventories .......................................... (9,882) (6,618)
Income taxes receivable/payable ...................... 3,418 5,644
Bank overdrafts ...................................... -- (2,499)
Accounts payable and accrued liabilities ............. 11,620 4,578
Other assets and liabilities ......................... (546) (1,294)
-------- --------
Net cash provided by operating activities ..................... 7,990 3,353
INVESTING ACTIVITIES
Proceeds from sale of assets .................................. 21 45
Additions to property, plant and equipment .................... (13,375) (6,486)
-------- --------
Net cash used by investing activities ......................... (13,354) (6,441)
........
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt .................. -- 75,000
Net proceeds from issuance of common stock .................... 431 11,485
Net decrease in revolving line of credit ...................... -- (564)
Principal payments of long-term debt .......................... (3,600) (850)
Principal payments on 11 1/2% Senior Subordinated Notes ....... -- (72,900)
Prepayment premium of early retirement of debt ................ -- (4,809)
Debt issuance cost ............................................ -- (2,509)
Dividends paid ................................................ (845) (569)
Treasury stock acquired ....................................... (3,927) --
Options exercised ............................................. 30 --
-------- --------
Net cash provided by (used by) financing activities ........... (7,911) 4,284
Net increase (decrease) in cash ............................... (13,275) 1,196
Cash at beginning of period ................................... 14,964 1,935
-------- --------
Cash at end of period ......................................... 1,689 $ 3,131
======== ========
Supplemental information:
Cash paid for interest ........................................ $ 3,439 $ 5,176
======== ========
Net cash paid for income taxes ................................ $ 2,420 $ 1,293
======== ========
See accompanying notes.
-3-
6
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated (the
"Company") for the quarter and six months ended June 30, 1999 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, 1998 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):
June 30, December 31,
1999 1998
------- -------
Raw materials ......................... $20,832 $16,422
Work in process ....................... 4,534 4,728
Finished goods and purchased stock .... 40,761 35,095
------- -------
$66,127 $56,245
======= =======
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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales ...................... $ 13,470 $ 16,280 $ 27,232 $ 32,927
Costs and expenses ............. 14,117 17,915 28,277 36,000
-------- -------- -------- --------
Loss from operations ........... (647) (1,635) (1,045) (3,073)
Interest expense ............... 359 366 684 718
Income tax benefit ............. (372) (740) (640) (1,403)
-------- -------- -------- --------
Net loss ....................... $ (634) $ (1,261) $ (1,089) $ (2,388)
======== ======== ======== ========
Company's share of net loss .... $ (317) $ (630) $ (545) $ (1,194)
======== ======== ======== ========
Amercord is not in compliance with certain financial covenants under its
existing bank credit agreement. Amercord has extended its forbearance agreement
with its lender to August 31, 1999 subject to certain conditions. In connection
with this forbearance agreement, the Company has guaranteed borrowings of up to
$3,000,000 under
-4-
7
Amercord's credit agreement. Amercord is currently negotiating a new credit
agreement. The Company has announced its intention to sell its 50% interest in
Amercord.
NOTE 4 - STOCKHOLDERS' EQUITY
In October 1998 the Company's Board of Directors approved a stock repurchase
program. Under its stock repurchase program, the Company is authorized to
purchase up to 800,000 shares of common stock in open market transactions. At
June 30, 1999, 399,000 shares have been purchased under the program at a cost of
$4,433,000.
During the quarter ended June 30, 1999, the Company purchased 117,000 shares of
its common stock at a cost of $1,468,000. For the six months ended June 30,
1999, the Company has purchased 352,000 shares of its common stock at a cost of
$3,927,000.
NOTE 5 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
Numerator:
Numerator for basic and diluted earnings per
common share - earnings before
extraordinary item ........................ $7,596 $5,385 $8,396 $4,618
Denominator:
Denominator for basic earnings per common -
share weighted-average shares ............... 8,097 8,402 8,218 8,117
Effect of dilutive securities:
Employee stock options ....................... 211 158 179 158
------ ------ ------ ------
Denominator for diluted earnings per common
share - adjusted weighted-average shares ..... 8,308 8,560 8,397 8,275
Basic earnings per common share before
extraordinary item .............................. $ 0.94 $ 0.64 $ 1.02 $ 0.57
====== ====== ====== ======
Diluted earnings per common share before
extraordinary item .............................. $ 0.91 $ 0.63 $ 1.00 $ 0.56
====== ====== ====== ======
For the quarter and six months ended June 30, 1999, options to purchase 40,000
shares of common stock were excluded from the calculation of weighted average
shares outstanding because the average exercise price of these shares was higher
than the average market price of the common stock during the period.
NOTE 6 - AMENDMENT OF REVOLVING CREDIT AGREEMENT
The Company amended its existing $50 million bank credit facility that expired
on May 31, 1999 to extend the term of the credit facility through May 2002. The
Company's amended bank credit agreement released the lender's security interest
in the Company's equipment and improved pricing terms based upon the Company's
financial performance.
-5-
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
The table below sets forth for the periods indicated certain items of the
Company's financial statements by segment:
Quarter Ended June 30,
----------------------------------------------------
1999 1998
------------------------ -------------------------
Percentage of Percentage of
Amount Total Net Sales Amount Total Net Sales
-------- --------------- -------- ---------------
Total Company:
Net sales - Alside ............... $109,155 91.8% $ 94,961 87.3%
Net sales - AmerCable ............ 9,753 8.2 13,828 12.7
-------- -------- -------- --------
Total net sales ............... 118,908 100.0 108,789 100.0
Gross profit ..................... 38,833 32.7 34,089 31.3
Selling, general and
administrative expense (1) .... 24,246 20.4 22,051 20.2
-------- -------- -------- --------
Income from operations ........... $ 14,587 12.3% $ 12,038 11.1%
======== ======== ======== ========
Alside:
Net sales ........................ $109,155 100.0% $ 94,961 100.0%
Gross profit ..................... 37,647 34.5 31,140 32.8
Selling, general and
administrative expense ........ 22,306 20.4 20,129 21.2
-------- -------- -------- --------
Income from operations ........... $ 15,341 14.1% $ 11,011 11.6%
======== ======== ======== ========
AmerCable:
Net sales ........................ $ 9,753 100.0% $ 13,828 100.0%
Gross profit ..................... 1,186 12.2 2,949 21.3
Selling, general and
administrative expense ........ 998 10.2 1,325 9.6
-------- -------- -------- --------
Income from operations ........... $ 188 2.0% $ 1,624 11.7%
======== ======== ======== ========
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $942,000 and $597,000 for the quarters ended June 30, 1999 and 1998,
respectively.
Overview
The Company's net sales increased to $118.9 million or 9.3% for the
second quarter of 1999 as compared to the 1998 period due to higher sales at the
Company's Alside division. Income from operations increased 21.2% to $14.6
million for the second quarter of 1999 due to higher profits at its Alside
division. The Company's net income was $7.6 million or $0.91 per share for the
second quarter of 1999 as compared to $5.4 million or $0.63 per share for the
same period in 1998 due to higher income from operations, lower interest
expense, smaller losses at the Company's Amercord affiliate and improved tax
rates.
ALSIDE. Alside's net sales increased 14.9% to $109.2 million for the
quarter ended June 30, 1999 as compared to $95.0 million for the same period in
1998 due to higher sales volume across all product lines. Unit sales of vinyl
siding increased 17.4% for the second quarter of 1999 as compared to the 1998
period. Unit sales of vinyl windows increased 13.8% for the second quarter of
1999 as compared to 1998 as a result of the ongoing
-6-
9
reorganization of its window manufacturing operations. Gross profit as a
percentage of sales increased to 34.5% for the 1999 period as compared to 32.8%
for the same period in 1998 due to improved production efficiencies and lower
raw material costs. Income from operations increased $4.3 million to $15.3
million for the 1999 period due to higher sales volume and lower material costs.
Selling, general and administrative expense increased $2.2 million to $22.3
million due to higher personnel costs, principally incentive compensation, but
decreased as a percentage of net sales.
AMERCABLE. AmerCable's net sales decreased 29.5% to $9.8 million for
the second quarter of 1999 as compared with $13.8 million for the same period in
1998 due primarily to lower sales to AmerCable's mining and offshore drilling
industry customers due to decreased demand resulting from lower commodity
prices. Gross profit as a percentage of sales decreased to 12.2% for the 1999
period as compared to 21.3% for the 1998 period due to lower fixed cost
absorption resulting from lower production volumes. Income from operations was
$188,000 for the quarter ended June 30, 1999 as compared to $1.6 million for the
same period in 1998. Selling, general and administrative expenses decreased to
$1.0 million for the second quarter of 1999.
AMERCORD. The Company recorded a loss of $317,000 (or $0.04 per share)
reflecting its share of the after-tax loss of Amercord for the quarter ended
June 30, 1999 as compared with a loss of $630,000 (or $0.07 per share) during
the same period in 1998. Amercord's gross profit increased $1.1 million to
$105,000 for the quarter ended June 30, 1999 as compared to $(1.0) million for
the same period in 1998 due primarily to increased manufacturing efficiencies.
Selling, general and administrative expenses increased to $783,000 in the 1999
period from $631,000 for the 1998 period.
OTHER. Net interest expense decreased $137,000 or 7.2% for the second
quarter of 1999 compared with the same period in 1998 due to a decrease in the
Company's average short-term borrowings. The Company recorded interest income of
$10,000 for the quarter ended June 30, 1999. The Company's effective tax rate
has decreased due to lower state taxes.
-7-
10
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998.
The table below sets forth for the periods indicated certain items of the
Company's financial statements by segments.
Six Months Ended June 30,
----------------------------------------------------
1999 1998
------------------------ -------------------------
Percentage of Percentage of
Amount Total Net Sales Amount Total Net Sales
-------- --------------- -------- ---------------
Total Company:
Net sales - Alside ............... $183,264 90.1% $159,354 85.0%
Net sales - AmerCable ............ 20,241 9.9 28,085 15.0
-------- -------- -------- --------
Total net sales ............... 203,505 100.0 187,439 100.0
Gross profit ..................... 63,988 31.4 56,419 30.1
Selling, general and
administrative expense (1) .... 46,141 22.7 42,525 22.7
-------- -------- -------- --------
Income from operations ........... $ 17,847 8.7% $ 13,894 7.4%
======== ======== ======== ========
Alside:
Net sales ........................ $183,264 100.0% $159,354 100.0%
Gross profit ..................... 60,802 33.2 50,483 31.6
Selling, general and
administrative expense ........ 42,121 23.0 38,771 24.3
-------- -------- -------- --------
Income from operations ........... $ 18,681 10.2% $ 11,712 7.3%
======== ======== ======== ========
AmerCable:
Net sales ........................ $ 20,241 100.0% $ 28,085 100.0%
Gross profit ..................... 3,186 15.7 5,936 21.1
Selling, general and
administrative expense ........ 2,192 10.8 2,550 9.1
-------- -------- -------- --------
Income from operations ........... $ 994 4.9% $ 3,386 12.0%
======== ======== ======== ========
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $1,828,000 and $1,204,000 for the six-month periods ended June
30, 1999 and 1998, respectively.
Overview
The Company's net sales increased to $203.5 million up 8.6% for the six
months ended June 30, 1999 as compared to $187.4 million of the same period in
1998 due to strong sales at the Company's Alside division. Income from
operations increased by $4.0 million or 28.5% to $17.8 million for the six
months ended June 30, 1999 due to increased profitability at the Company's
Alside division. The Company's income before extraordinary item increased to
$8.4 million ($1.00 per share) for the six months ended June 30, 1999 as
compared to $4.6 million ($0.56 per share) for the same period in 1998 due to
higher income from operations, lower interest expense and smaller losses from
the Company's Amercord affiliate.
ALSIDE. Alside's net sales for the six months ended June 30, 1999
increased 15.0% to $183.3 million as compared to $159.4 million for the same
period in 1998 due to higher sales volume across all product lines. For the six
months ended June 30, 1999, unit sales of vinyl siding and vinyl windows
increased 18.5% and 10.6%, respectively as compared to the same period in 1998.
Gross profit as a percentage of net sales increased to 33.2% for the six months
ended June 30, 1999 as compared to 31.6% for the same period in 1998. Selling,
general and administrative expense increased to $42.1 million for the six months
ended June 30, 1999 due to higher personnel costs, principally incentive
compensation. Income from operations increased 59.5% to $18.7 million for the
six months ended June 30, 1999 as compared to $11.7 million for the same period
in 1998 due to improved gross profits that were partially offset by increased
selling, general and administrative expenses.
-8-
11
AMERCABLE. AmerCable's net sales decreased to $20.2 million for the six
months ended June 30, 1999 as compared to $28.1 million in the 1998 period due
primarily to lower sales to AmerCable's mining and offshore drilling industry
customers due to decreased demand resulting from lower commodity prices. Gross
profit decreased $2.7 million or 46.3% for the six months ended June 30, 1999 as
compared to the 1998 period principally due to unfavorable fixed cost absorption
resulting from lower production volume and reduced sales volume. Selling,
general and administrative expenses decreased to $2.2 million due primarily to
lower personnel costs. Income from operations decreased to $1.0 million for the
six months ended 1999 as compared to $3.4 million for the same period in 1998.
AMERCORD. The Company recorded a loss of $545,000 for its equity in the
after-tax loss of Amercord for the six months ended June 30, 1999 as compared to
a loss of $1.2 million during the same period in 1998. Amercord's gross profit
increased $2.1 million to $326,000 for the six months ended June 30, 1999 as
compared to $(1.8) million for the same period in 1998 due primarily to
increased manufacturing efficiencies. Selling, general and administrative
expenses increased to $1.4 million in 1999 from $1.2 million in 1998.
OTHER. Net interest expense decreased $741,000 or 17.7% for the six
months ended June 30, 1999 as compared to the same period in 1998 due to a
decrease in the Company's borrowing, the repurchase of $72.9 million of 11 1/2%
Notes and the issuance of the 9 1/4% Notes. The Company recorded interest income
of $141,000 for the six months ended June 30, 1999. The Company's effective tax
rate has decreased due to lower state taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company had cash and cash equivalents of $1.7
million and available borrowing capacity of approximately $45.4 million under
its existing credit facility. Outstanding letters of credit totaled $4.6 million
securing $1.6 million of various insurance letters of credit and $3.0 million
securing a letter of credit to guarantee borrowings of up to $3.0 million of
Amercord's credit facility. The Company amended its existing $50 million bank
credit facility that expired on May 31, 1999 to extend the term of the credit
facility through May 2002. The Company's amended agreement released the lender's
security interest in the Company's equipment and improved pricing terms based
upon the Company's financial performance.
Net cash provided by operations was $8.0 million in the six months ended
June 30, 1999 compared with $3.4 million in the same period in 1998. The
increase in cash provided by operations for the 1999 period was due primarily to
an increase in net income in 1999 as compared to 1998.
Capital expenditures totaled $13.4 million for the six months ended June
30, 1999, compared with $6.5 million during the same period in 1998.
Expenditures in the 1999 period were used primarily in the construction of the
Company's new vinyl siding manufacturing plant as well as to increase production
flexibility and capacity at AmerCable. Capital expenditures on the new vinyl
siding manufacturing plant were $8.2 million in 1999. Operations began at the
Company's new vinyl siding facility in July of 1999.
During the six months ended June 30, 1999, the Company purchased 352,000
shares of its common stock at a cost of $3,927,000. These purchases were made
under its previously announced share repurchase program pursuant to which the
Company is authorized to purchase up to a total of 800,000 shares of the common
stock from time to time in open market transactions. The Company's ability to
repurchase shares of its common stock is subject to the terms of the indenture
pursuant to which its 9 1/4% senior subordinated notes were issued.
Amercord is not in compliance with certain financial covenants under its
existing bank credit agreement. Amercord has extended its forbearance agreement
with its lender to August 31, 1999 subject to certain conditions. In connection
with this forbearance agreement, the Company has guaranteed borrowings of up to
$3.0 million under Amercord's credit agreement. Amercord is currently
negotiating a new credit agreement.
The Company believes the future cash flows from operations and its
borrowing capacity under its existing or new 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
-9-
12
stock repurchase program. However, there can be no assurances that the cash so
generated by the Company will be sufficient for these purposes.
YEAR 2000
Historically, computer programs have used a two-digit format rather
than a four-digit format to refer to the year. After the year 1999, these
computer programs will not recognize the year correctly which may cause the
computer application to fail or to process data incorrectly.
STATE OF READINESS. The Company began its Year 2000 program in 1997 in
order to ensure all systems were Year 2000 compliant. The Company's Alside
division divided its Year 2000 information technology ("IT") project as follows:
mainframe, AS 400 systems, manufacturing systems and PC systems. Alside has
reviewed its mainframe and AS 400 systems and believes all date fields have been
corrected. All mission critical programs within its mainframe have been tested
and are believed to be Year 2000 compliant. The mission critical programs
include the general ledger, accounts payable, billing/receivable and payroll.
Updates to Alside's manufacturing systems were completed in the first quarter of
1999. Testing of its manufacturing systems was completed in the second quarter
of 1999. Alside has established a task force consisting of representatives from
Information Services, distribution and each of the manufacturing facilities to
review the status of its PC systems. Alside identified the system updates
necessary to ensure its PC systems are Year 2000 compliant. These updates are
currently being tested by several locations. Alside anticipates completion of
its PC systems update by October 1999. The Company's AmerCable division believes
its IT systems are Year 2000 compliant. Alside and AmerCable are currently
assessing and updating their non-IT systems. The Company has contacted
significant suppliers to assess Year 2000 compliance and readiness. The majority
of the questionnaires sent to suppliers have been returned. Based upon the
responses received, it appears the Company's suppliers are aware of the Year
2000 issue and are taking the necessary steps to ensure Year 2000 compliance.
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 retained an independent consultant to
assist with Year 2000 compliance for its manufacturing systems and created a PC
systems task force to identify and address certain hardware and software
systems. Alside has spent approximately $250,000 to date and estimates it will
spend an additional $100,000 to complete its Year 2000 program. 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 suppliers. The
Company completed its evaluation of its suppliers and believes its major
suppliers are Year 2000 compliant based upon their responses to the Company's
Year 2000 questionnaire. Based upon supplier readiness, availability of raw
materials from a variety of suppliers and guaranteed delivery contracts with
vinyl resin suppliers, the Company does not anticipate any material production
delays due to raw material unavailability. 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 changes. The average price of vinyl
resin in 1999 has been lower than 1998 levels. However, vinyl resin prices have
increased in 1999 and are expected to exceed 1998 prices in the third and fourth
quarters of 1999. Alside has historically been able to pass on price increases
to its customers. No assurances can be given that Alside will be able to pass on
any price increases in the future.
-10-
13
CERTAIN FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on the beliefs of, and estimates and
assumptions made by and information currently available to, the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," and similar words, as they relate to the Company
or the Company's management, identify forward-looking statements. These
statements reflect the current views of the Company's management regarding the
operations and results of operations of the Company as well as its customers and
suppliers, 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, Year
2000 issues and general economic conditions. These statements are subject to
certain risks and uncertainties. Certain factors that might cause a difference
are discussed in more detail in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. Should one or more of these risks or uncertainties
occur, or should management's assumptions or estimates prove incorrect, actual
results and events may vary materially from those discussed in the
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to commodity price risk, interest rate risk and
foreign currency exchange rate risk. The Company has experienced no significant
changes in market risk during the quarter or six months ended June 30, 1999. The
Company's market risk is described in more detail in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
-11-
14
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The 1999 Annual Meeting of Stockholders of the Company was held on May
20, 1999. The following nominees for director were elected to serve as directors
until the 2002 Annual Meeting of Stockholders:
For Against
--------- -------
James F. Leary 6,424,181 75,523
A. A. Meitz 6,426,491 73,213
The following directors continue in office as directors after the 1999
Annual Meeting for the terms expiring at the annual meeting in the year listed
below:
Term Expires
------------
William W. Winspear 2000
Donald L. Kaufman 2000
Alan B. Lerner 2000
Richard I. Galland 2001
John T. Gray 2001
The stockholders also voted upon and approved the adoption of the
Associated Materials Employee Stock Purchase Plan.
For Against Abstain
--------- ------- -------
6,376,022 116,250 7,432
The stockholders also voted upon and approved the adoption of the
Associated Materials Incorporated Incentive Bonus Plan.
For Against Abstain
--------- ------- -------
6,366,749 125,445 7,510
The stockholders also voted upon and ratified the appointment of Ernst &
Young LLP as the independent auditors of the Company for the fiscal year 1999.
For Against Abstain
--------- ------- -------
6,366,749 125,445 7,510
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Third Amendment to Second Amended and Restated Loan and
Security Agreement and Waiver, dated as of May 21, 1999
between the Company and KeyBank National Association.
27 - Financial Data Schedule.
(b) Reports on Form
During the quarter ended June 30, 1999, Associated Materials
Incorporated filed no Current Reports on Form 8-K.
-12-
15
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: August 10, 1999 By: \s\ Robert L. Winspear
--------------------------------------------
Robert L. Winspear
Vice President and Chief Financial Officer
Date: August 10, 1999 \s\ Robert L. Winspear
--------------------------------------------
Robert L. Winspear
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-13-
16
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 Third Amendment to Second Amended and Restated Loan and Security
Agreement and Waiver, dated as of May 21, 1999 between the Company and
KeyBank National Association.
27 Financial Data Schedule.