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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
____________ to ____________.
Commission File Number 0-24956
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ASSOCIATED MATERIALS INCORPORATED
(Exact name of Registrant as specified in its charter)
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DELAWARE 75-1872487
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2200 ROSS AVENUE, SUITE 4100 EAST
DALLAS, TEXAS 75201
(Address of executive offices)
(214) 220-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant - $9,256,568
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of January 15, 1998, the registrant had 4,934,900 shares of Common Stock, par
value $.0025 per share, and 2,700,000 shares of Class B Common Stock, par value
$.0025 per share, outstanding.
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PART I
ITEM 1. BUSINESS
Associated Materials Incorporated (the "Company") is a leading,
vertically integrated manufacturer and nationwide distributor of exterior
residential building products through its Alside division ("Alside"). Alside's
core products are vinyl siding and vinyl windows. These products are marketed on
a wholesale basis to more than 30,000 professional contractors engaged in home
remodeling and new home construction principally through Alside's nationwide
network of 66 Alside Supply Centers. In recent years Alside has expanded its
product offerings to include vinyl fencing, vinyl decking and vinyl garage
doors. In 1997, Alside accounted for approximately 87% of the Company's net
sales. In addition to Alside, the Company's operations include its AmerCable
division ("AmerCable"), a specialty electrical cable manufacturer. Amercord Inc.
("Amercord"), a 50%-owned affiliate managed by the Company, manufactures and
sells steel cord and bead wire to tire manufacturers.
The Company has filed a registration statement with the Securities and
Exchange Commission (the "Commission") to sell, through an initial public
offering (the "Stock Offering"), up to 2,448,120 shares of the Company's common
stock, par value .0025 per share ("Common Stock"). Of these shares, 700,000
shares of Common Stock (808,520 shares if the over-allotment option to be
granted to the underwriters in the Stock Offering is exercised in full) will be
sold by the Company with the remaining 1,428,800 shares (1,639,600 if the
over-allotment option to be granted to the underwriters in the Stock Offering is
exercised in full) to be sold by certain stockholders of the Company (the
"Selling Stockholders"). In addition, the Company has filed a registration
statement with the Commission to sell $75,000,000 aggregate principal amount of
Senior Subordinated Notes due 2008 (the "New Notes"). The New Notes will be
issued pursuant to an indenture (the "New Indenture") having terms substantially
similar to the indenture pursuant to which the Company's existing 11 1/2% Senior
Subordinated Notes due August 15, 2003 (the "Existing Notes") were issued (the
"Existing Indenture"). The issuance of the New Notes in such offering (the "Note
Offering") is conditioned upon the successful completion of a tender offer and
consent solicitation (the "Tender Offer" which, together with the Note Offering
and the Stock Offering, are collectively referred to herein as the "Offerings")
with respect to the Existing Notes. The Stock Offering is not contingent upon
the completion of the Note Offering and the Note Offering is not contingent upon
the completion of the Stock Offering. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
The Company was incorporated in Delaware in 1983. Unless the context
requires otherwise, the "Company" refers to the business and operations of
Associated Materials Incorporated, including Alside and AmerCable, but not
Amercord.
INDUSTRY OVERVIEW
Vinyl siding competes with other materials, such as wood, masonry and
metals, for a share of the residential siding market. Vinyl siding has greater
durability and requires less maintenance than wood siding, and generally is less
expensive than wood, masonry or metal siding. According to an industry study
jointly prepared by Sabre Associates, Inc. and Pure Strategy (the "Sabre
Study"), based on unit sales, vinyl siding accounted for approximately 47% of
the exterior siding market in 1996 versus approximately 17% in 1985. Since the
early 1980's, vinyl siding has become the preferred siding product for
professional home remodeling contractors and their customers, and commanded
approximately 62% of the home remodeling marketplace for siding in 1996. More
recently, vinyl siding has achieved increased acceptance in the new construction
market, as builders and home buyers have recognized vinyl's low maintenance,
durability and price advantages. The Company believes that vinyl siding will
continue to gain market share in the new residential construction market while
remaining the preferred product of the remodeling marketplace.
Vinyl windows require less maintenance, are more durable than either
wood or aluminum windows and provide greater energy efficiency than aluminum
windows. According to the Sabre Study, based on unit sales, approximately 45% of
all residential windows sold in 1996 were vinyl windows versus approximately 27%
in 1991. Since the early 1990's, vinyl windows have become the preferred window
product for professional home remodeling contractors and their customers, and
commanded approximately 75% of the home remodeling marketplace for windows in
1996. More recently, vinyl windows have achieved increased acceptance in the new
construction market as a result of builders and home buyers recognizing vinyl's
favorable attributes, the enactment of local legal or building code requirements
that mandate more energy efficient windows and the increased development and
promotion of vinyl window products by national window manufacturers. The
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Company believes that vinyl windows will continue to gain market share in the
new residential construction market while remaining the preferred product of the
remodeling marketplace.
According to the Sabre Study, total sales of vinyl siding and vinyl
windows are each projected to increase approximately 7% annually between 1996
and 2000 and the new construction market for each of these vinyl products is
expected to grow at a rate of approximately 10% per year from 1996 to 2000.
ALSIDE
Products. Alside's principal product offerings are vinyl siding and
vinyl windows, which together accounted for approximately 68% of Alside's 1997
net sales. Alside also manufactures a variety of other products including vinyl
fencing, vinyl decking, vinyl garage doors and semi-custom cabinets.
The vinyl siding market consists of four segments: builder, economy,
standard and premium. Vinyl siding quality is determined by its rigidity,
resistance to fading, thickness and ease of installation as well as other
factors. Historically, Alside targeted its products primarily to the standard
segment. More recently, the Company has broadened its product lines to increase
its penetration of the premium and economy segments. For example, in late 1995,
Alside introduced its patented Charter Oak siding which enabled Alside to
significantly penetrate the premium segment of the vinyl siding market. In 1997,
Alside introduced its Conquest siding product which has enabled Alside to
achieve additional market penetration in the economy segment of the siding
industry. While the Company currently does not manufacture a siding product
specifically designed for the builder segment of the market, it does market its
Conquest and Alpha products to the new construction market. In addition, the
Company intends to produce a product specifically targeted for this market
following the construction of its new vinyl siding manufacturing facility. In
addition to the new products described above, Alside has increased the number of
colors and profiles offered within its existing siding products and continues to
increase and improve upon the breadth of its vinyl siding product line. Alside
offers limited warranties ranging from 50-year warranties to lifetime warranties
with its siding products.
Alside divides its window products into the economy, standard and
premium categories. Product quality within the vinyl window industry is
determined by a number of competitive features including method of construction
and materials used. Rather than manufacturing standard size windows, Alside
custom manufactures virtually all of its windows to fit existing window
openings. Custom fabrication provides Alside's customers with a product that is
less expensive to install and more attractive after installation. All of
Alside's window products are accompanied by a limited lifetime warranty.
A summary of Alside's siding and window product offerings is presented
in the table below according to the Company's product line classification and
includes the new CenterLock product which the Company intends to introduce in
the first quarter of 1998.
<TABLE>
<CAPTION>
PRODUCT LINE SIDING PRODUCTS WINDOW PRODUCTS
- ------------ --------------- ---------------
<S> <C> <C>
Premium Charter Oak UltraMaxx
Greenbriar Omni
Highland Cedar
Williamsport
Standard Odyssey Geneva
CenterLock Excalibur
Economy Conquest Performance Series --
Alpha New Construction
Centurion
</TABLE>
In addition to its siding and window product lines, Alside also
manufactures semi-custom cabinets for the kitchen and bath under the brand name
UltraCraft. Alside's sales of cabinets accounted for approximately 5% of its net
sales in 1997. Unit sales of UltraCraft cabinets have increased 33.7% in 1997 as
compared to 1996 due to the Company's efforts to expand and improve its dealer
customer base. In 1993, Alside introduced vinyl fencing as a product line under
the brand name UltraGuard, currently a leading brand of both agricultural and
residential vinyl fencing. Although sales of UltraGuard
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fencing accounted for less than 5% of Alside's net sales in 1997, unit sales of
UltraGuard have increased at an annual rate of over 35% since its introduction.
Alside introduced a raised panel vinyl garage door in 1997 under the brand name
Premium Garage Doors. Alside primarily markets its cabinets, fencing and garage
doors through independent dealers and not through its Supply Centers.
To complete its line of siding products, Alside also distributes metal
siding and related building products manufactured by other companies. Metal
siding products accounted for approximately 19% of Alside's 1993 sales. In 1997,
approximately 6% of Alside's sales were derived from metal siding and related
building products. The Company expects the sale of metal siding products to
continue to decline as these products are displaced by vinyl products. Alside
also selectively distributes a variety of complementary building products
manufactured by others, including wood windows, roofing materials, insulation,
cabinets and installation equipment.
Marketing and Distribution. Traditionally, most vinyl siding has been
sold to the home remodeling marketplace through independent distributors. The
Company believes that Alside is one of only two major vinyl siding manufacturers
that market their products primarily through company-owned distribution centers.
Alside has a nationwide distribution network of 66 Alside Supply Centers which
market Alside manufactured products and other complementary building products to
more than 30,000 professional home improvement and new construction contractors.
The Company believes that Alside Supply Centers provide "one-stop shopping" to
meet the specialized needs of its contractor-customers by distributing more than
2,000 building and remodeling products, including a broad range of
Company-manufactured vinyl siding and vinyl windows as well as products
manufactured by others, including metal siding, wood windows, roofing materials,
insulation, cabinets and installation equipment. In 1997, approximately 78% of
Alside's sales were made through its Supply Centers. In addition to sales and
promotional support, contractors look to their local Alside Supply Center to
provide a broad range of specialty product offerings in order to maximize their
ability to attract remodeling and homebuilding customers.
Alside believes that distributing products through its Supply Centers
provides the Company with certain competitive advantages such as (i)
long-standing customer relationships, (ii) the ability to implement targeted
marketing programs and (iii) a permanent presence in local markets. Many of
Alside's contractor-customers have established, long-standing relationships with
their local Supply Center based upon individualized service and credit terms,
quality products, timely delivery, breadth of product offerings, strong sales
and promotional programs and competitive prices. Alside supports its
contractor-customer base with marketing and promotional programs that include
product sample cases, sales literature, product videos and other sales and
promotional materials. Professional contractors use these materials to sell
remodeling construction services to prospective customers. The customer
generally relies on the professional contractor to specify the brand of siding
or window to be purchased, subject to the customer's price, color and quality
requirements. Alside's daily contact with its contractor-customers also enables
it to closely monitor activity in each of the remodeling and new construction
markets in which Alside competes. This direct presence in the marketplace
permits Alside to obtain current local market information, providing Alside with
the ability to act promptly to adapt its product offerings on a location-by-
location basis.
Many of Alside's contractor-customers install both vinyl siding and
vinyl windows. Because Alside manufactures and distributes both vinyl windows
and vinyl siding, its contractor-customers can acquire both products from a
single source, which the Company believes provides Alside with a competitive
advantage in marketing these products to its target customer base. Furthermore,
Alside has the ability to achieve economies of scale in sales and marketing by
developing integrated programs on either a national or local basis for its vinyl
siding and vinyl window products.
Each of Alside's 66 Supply Centers is evaluated as a separate profit
center, and compensation of Supply Center personnel is based in part on the
Supply Center's operating results. Decisions to open new Supply Centers, and to
close or relocate existing Supply Centers, are based on Alside's continuing
assessment of market conditions and individual location profitability. Alside
added two Supply Centers to its distribution network in 1996. No additional
Supply Centers were added in 1997. The Company presently expects to open up to
four new Supply Centers in 1998.
Through certain of its Supply Centers, Alside's Builder Service
Division provides full-service product installation of its vinyl siding
products, principally to new homebuilders who value the importance of
installation services. Alside also provides installation services for vinyl
replacement windows through certain of its Supply Centers.
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Alside also sells its manufactured products to large direct dealers and
distributors, generally in those areas where no Alside Supply Center currently
exists. Such sales accounted for approximately 22% of Alside's net sales in
1997. Despite their aggregate lower percentage of total sales, Alside's largest
individual customers are its large direct dealers and independent distributors.
Alside carefully monitors and evaluates its activity with these customers to
ensure the profitability of this higher volume and lower margin business. No
single customer accounted for 5% or more of Alside's 1997 sales. Alside
increased its network of independent distributors in 1997 and intends to seek to
further increase its network of independent distributors in 1998 in strategic
areas to improve its penetration into certain markets.
Manufacturing. Alside currently manufactures all of its vinyl siding at
its Ennis, Texas plant, which the Company believes is a low-cost manufacturing
facility. In 1998, the Company intends to expand its production capacity at this
plant. In order to meet its current sales expectations for Alside's siding
products, the Company intends to begin construction of a new vinyl manufacturing
facility in 1998. The new facility, which is expected to become operational in
1999, would initially increase Alside's vinyl siding production capacity by
approximately 25%. With a moderate investment in additional production
equipment, the Company expects that Alside's total vinyl siding production
capacity will be increased by approximately 50% from its 1998 capacity. Alside
also operates a vinyl extrusion facility in West Salem, Ohio to produce vinyl
window extrusions as well as vinyl fence and garage door panels. Alside operates
three window fabrication plants which each use vinyl extrusions manufactured by
Alside for the majority of their production requirements, produce their own
glass inserts and utilize high speed welding and cleaning equipment for their
welded window products. By producing its own vinyl extrusions and glass inserts,
Alside believes it achieves significant cost savings and higher product quality
compared to purchasing these materials from third-party suppliers.
Alside's vinyl extrusion plants generally operate on a three shift
basis to optimize equipment productivity and utilize additional equipment to
increase capacity to meet higher seasonal needs. Alside's window plants
generally operate on a single shift basis utilizing both a second shift and
increased numbers of leased production personnel to meet higher seasonal needs.
Raw Materials. The principal raw materials used by Alside are vinyl
resins, resin stabilizers and pigments, packaging materials, window hardware and
glass, all of which are available from a number of suppliers. The price of vinyl
resin has been, and may continue to be, volatile. Alside has contracts with two
suppliers to purchase substantially all of its vinyl resin requirements and
believes that its requirements could also be met by other suppliers. Prior to
1997, Alside generally had been able to pass through price increases in raw
materials to its customers. During 1996, the average price of vinyl resin was
lower than 1995 levels. In 1997, the price of vinyl resin increased during the
first six months and then declined. Alside did not generally pass on any
additional costs or savings resulting from the fluctuations in resin prices in
1996 and 1997.
Competition. Except for Owens Corning, no company within the
residential siding industry competes with Alside on both the manufacturing and
distribution levels. There are, however, numerous small and large manufacturers
of metal and vinyl siding products, including Aluminum Company of America,
CertainTeed Corporation, Jannock Limited, Nortek, Inc. and Royal Group
Technologies Limited, some of whom are larger in size and have greater financial
resources than the Company. Alside competes with Owens Corning and numerous
large and small distributors of building products in its capacity as a
distributor of such products. The market for vinyl replacement windows is highly
fragmented, and Alside believes that no single manufacturer accounts for a
significant percentage of national sales. Alside believes that the market trend
towards sales of welded vinyl windows, which Alside began manufacturing in 1992
and which require expensive, more sophisticated production equipment, will
result in further consolidation of the window fabrication industry. Alside and
its competitors generally compete on price, product performance, and sales and
service support to professional contractors. Competition varies by region.
Alside also faces competition from alternative materials: wood and aluminum in
the window markets, and wood, masonry and metal in the siding market. However,
the Company believes Alside's products are competitive, and in most sectors are
gaining share at the expense of alternative materials due to vinyl's superior
qualities, including its lower material cost, durability and low maintenance
requirements.
AMERCABLE
AmerCable manufactures and markets a variety of jacketed electrical
cable utilized in underground and surface mining, shipboard, marine, offshore
drilling, transportation and a variety of other specialized industrial
applications. AmerCable principally manufactures specialty cable designed to
meet industry technical standards and end-users' specifications. AmerCable
markets its cable principally to independent distributors who resell to the end
user, except for
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those products that are distributed through its Offshore/Marine Cable Specialist
division. AmerCable's electrical cable plant operates on a five-day, 24-hour
basis. AmerCable accounted for approximately 13% of the Company's net sales in
1997.
AmerCable modified its business strategy in the second quarter of 1996
to focus on a core group of cable products which enabled AmerCable to take
advantage of manufacturing efficiencies as well as marketing and distribution
capabilities. Concurrently with this shift in its business strategy, AmerCable
reduced its workforce by approximately 15% to eliminate certain non-value added
processes and to focus its efforts on its core products. As a result of this
strategy, AmerCable has experienced lower costs, improved manufacturing
efficiencies and on-time delivery rates, and substantially improved productivity
in 1997. For 1997, as compared to 1996, AmerCable's sales increased 28.4% due to
increased sales volume and prices.
AmerCable manufactures and sells three types of cable products: mining
cables; marine, shipboard and transportation cables; and industrial cables which
accounted for 44%, 36% and 20% of its 1997 sales, respectively. AmerCable's
marine, shipboard and transportation cable products meet required industry
specifications for low smoke and low/non halogen characteristics. AmerCable
completes its line of cable products with industrial and utility cable products,
including diesel locomotive cable, portable power cable, jumper cable and
flexible robotic power distribution cable.
The principal raw material used by AmerCable is copper strand, which is
available from a number of suppliers. Historically, copper strand has been
subject to rapid price movements. AmerCable generally prices its cable products
based upon market prices for copper at time of shipment. As a result, sudden
decreases in copper prices can result in inventory being in excess of its net
realizable value. During 1996, AmerCable recorded a charge of $500,000 to write
copper inventory down to its net realizable value due to a sudden decrease in
copper prices. In certain instances, AmerCable may guarantee a fixed copper
price for its products where there is a significant time lag between the
purchase order and shipment.
In these cases, AmerCable generally attempts to hedge its position on copper.
AmerCable competes with numerous large and small manufacturers,
including BICC Cables Corporation, Rockbestos Suprenant Cable Corp., BIW Cable
System, Inc., General Cable Corporation, and Essex Group Inc. Many of its
competitors have substantially greater resources than the Company. AmerCable
generally does not compete in the more commodity-oriented wire and cable
markets, such as residential building wire and computer network cable.
AMERCORD
Amercord, the Company's 50%-owned affiliate, principally manufactures
and markets steel cord and bead wire to the tire manufacturing industry. Tire
cord is comprised of fine strands of steel wire used to reinforce the tread area
in radial tires. Tire bead wire is used in the manufacturing of all tires to
hold the tire to the rim. Amercord is jointly owned by the Company and Ivaco,
Inc. ("Ivaco"), a Canadian steel and wire producer. Pursuant to an agreement
with Ivaco, the Company provides management services relating to the day-to-day
operations of Amercord for an annual fee of $200,000, principally for financial
management services. Since its inception as a separate enterprise in 1986,
Amercord has satisfied its working capital and capital expenditure requirements
from internally generated funds and existing credit facilities. Due to such
requirements, no dividends have been paid to the Company or Ivaco and no further
cash contributions have been made to Amercord by the Company or Ivaco. The
Company believes Amercord's internally generated cash flow and credit facilities
will provide sufficient capital to fund its currently planned capital
expenditures.
Amercord believes it is one of eight domestic tire cord manufacturers
and one of six domestic tire bead manufacturers. Tire cord competitors include
larger companies such as Bekaert Corporation (U.S.A.) ("Bekaert") and American
Tokyo Rope, Inc., each of which have greater capital resources than Amercord.
Three of the world's largest tire manufacturers, The Goodyear Tire & Rubber
Company ("Goodyear"), Bridgestone/Firestone, Inc. and Michelin North America
("Michelin"), also produce a significant portion of their steel tire cord
requirements. Tire bead competitors include Bekaert and National-Standard
Company. Amercord is one of only two tire reinforcement suppliers that
manufacture both tire cord and tire bead. Amercord believes that this capability
improves its competitive position.
Amercord has a small customer base. During 1997, three customers,
Michelin, Cooper Tire and Rubber Company ("Cooper") and Dunlop Tire Corporation,
each purchased in excess of 10%, and collectively purchased an aggregate of 81%,
of Amercord's tire cord output. During 1997, three customers, Michelin, Cooper
and Bridgestone/Firestone, Inc., each purchased in excess of 10%, and
collectively purchased an aggregate of 68%, of Amercord's tire bead wire output.
As a result of the relatively small number of customers, the loss of one or more
major customers could have a material adverse
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effect on Amercord's business. Additionally, further consolidation in the tire
industry could require Amercord to become more closely aligned with fewer tire
manufacturers.
MANAGEMENT INFORMATION SYSTEMS
The Company uses a variety of hardware and software technologies in its
operations. Alside utilizes mainframe computer systems to operate its accounting
and certain manufacturing systems. Each Alside Supply Center has its own IBM
AS400 computer which processes inventory, receivables and other financial data,
which data is transmitted to Alside's headquarters on a daily basis. AmerCable
installed a new financial and manufacturing information system in 1996 which
runs on a PC platform. The Company has completed its assessment of the effect of
Year 2000 on its management information systems and is currently Year 2000
compliant with respect to substantially all of its systems. The Company does not
expect any material future expenditures will be required in order to become Year
2000 compliant.
EMPLOYEES
Alside's employment needs vary seasonally with sales and production
levels. As of December 31, 1997, Alside had approximately 1,500 full-time
employees, including approximately 560 hourly workers. The West Salem, Ohio
plant is Alside's only unionized manufacturing facility, employing approximately
100 covered workers as of December 31, 1997. Additionally, approximately 35
hourly workers in certain Supply Center locations are covered by collective
bargaining agreements. The Company considers Alside's labor relations to be
good.
Alside operates vinyl window manufacturing plants in Cedar Rapids,
Iowa; Kinston, North Carolina; and Akron, Ohio with leased employees. The
Company believes that the employee leasing program provides it with scheduling
flexibility for seasonal production loads and with competitive advantages in
obtaining principally unskilled labor personnel. The aggregate number of leased
employees in the window plants ranges from approximately 400 to 600 people,
based on seasonal production requirements.
As of December 31, 1997, AmerCable employed 170 people, including 95
hourly workers, none of whom are covered by collective bargaining agreements.
AmerCable maintains good relations with its employees.
TRADEMARKS AND PATENTS
Alside has registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which its products
are marketed. Although Alside considers each of these items to be valuable, the
Company does not currently believe such property, other than the "Alside(R)"
trademark, to be material. Alside has obtained patents on certain claims
associated with its siding products, which the Company believes distinguish
Alside's new products from those of its competitors.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to numerous federal and state statutes and
regulations relating to, among other things, air and water quality, the
discharge of materials into the environment and safety and health issues. The
Company does not expect compliance with such provisions to have a material
impact on the Company's earnings or competitive position in the foreseeable
future. Additionally, no significant capital expenditures are presently
anticipated related to compliance with such provisions.
The Company entered into a consent order dated August 25, 1992 with the
United States Environmental Protection Agency pertaining to corrective action
requirements associated with the use of hazardous waste storage facilities at
its Akron, Ohio location. With the exception of a small container storage area,
the use of such facilities was terminated prior to the acquisition of the Alside
assets by the Company from USX Corporation ("USX") in 1984. The effects of the
past practices at this facility are continuing to be investigated pursuant to
the terms of the consent order. The Company believes that USX bears financial
responsibility for substantially all of the direct costs of corrective action at
such facilities under the relevant contract terms and under statutory and common
law. To date, USX has reimbursed the Company for substantially all of the direct
costs of corrective action at such facilities, and the Company expects that USX
will continue to reimburse the Company for substantially all of the direct costs
of corrective action at such facilities. As a result, the Company believes that
any material claims resulting from this proceeding will not have a material
adverse effect on the Company.
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ITEM 2. PROPERTIES
The Company's manufacturing operations include both owned and leased
facilities as described below:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE SQUARE FEET
-------- ------------- -----------
<S> <C> <C>
ALSIDE
Akron, Ohio Alside Headquarters 70,000
Vinyl Fencing, Vinyl Garage Doors and 577,000
Vinyl Windows
Ennis, Texas Vinyl Siding Products 256,000
West Salem, Ohio Vinyl Window Extrusions, Fencing 173,000
and Garage Door Panels
Liberty, North Carolina Cabinets 154,000
Kinston, North Carolina Vinyl Windows 236,000(1)
Cedar Rapids, Iowa Vinyl Windows 128,000(1)
AMERCABLE
El Dorado, Arkansas AmerCable Headquarters and 317,000
Electrical Cable
</TABLE>
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(1) Leased facilities.
Management believes that the Company's manufacturing plants are
generally in good operating condition and are adequate to meet anticipated
requirements in the near future. The Company is currently planning to
significantly increase its vinyl production capacity by constructing a new vinyl
manufacturing facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business --Alside -- Manufacturing."
Alside also operates 66 Alside Supply Centers in major metropolitan
areas throughout the United States. Except for one owned location in Akron,
Ohio, the Company leases its Supply Centers for terms generally ranging from
five to seven years with renewal options. The Supply Centers range in size from
6,000 square feet to 55,000 square feet depending on their sales volume and the
breadth and type of products offered at each location.
The leases for Alside's window plants extend through 2000 for the Cedar
Rapids location, and 2003 for the Kinston location. Each lease is renewable at
the Company's option for an additional five-year period. The Company's corporate
headquarters occupy approximately 3,500 square feet of leased office space in
Dallas, Texas. Under the Company's existing credit agreement with KeyBank, N.A.
(the "Credit Agreement"), the bank lender holds a security interest in the
Company's contract rights, including real property leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of its business, none of which, after giving effect to the
Company's existing insurance coverage, is expected to have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's
outstanding equity securities.
At January 15, 1998, the Company had 27 record holders of Common Stock.
The Prudential Insurance Company of America ("Prudential"), is the record holder
of all of the outstanding Class B Common Stock, par value $.0025 per share
("Class B Common Stock"), which shares of Class B Common Stock are convertible,
at the holder's option, into shares of Common Stock on a basis of one share of
Common Stock for each share of Class B Common Stock. In this report, the
Company's Common Stock and Class B Common Stock are referred to collectively as
"common shares."
The Company paid its first cash dividend of $.05 per common share in
March 1997. On January 28, 1998, the Board of Directors of the Company announced
a cash dividend of $.075 per common share ($569,513 in the aggregate), payable
to stockholders of record on February 2, 1998. The Company presently intends to
pay an annual cash dividend. However, the Company's future dividend policy will
depend upon the Company's capital requirements, results of operations, financial
condition and such other factors as the Company's Board of Directors deems
relevant. Further, the payment of cash dividends is restricted by covenants in
the Credit Agreement and the Existing Indenture, and will be restricted under
the terms of the New Indenture.
-8-
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below for the five-year
period ended December 31, 1997 was derived from the financial statements of the
Company which have been audited by Ernst & Young LLP, independent auditors. The
data should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements,
related notes and other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ........................................... $ 312,972 $ 352,606 $ 350,029 $ 356,471 $ 397,690
Cost of sales ....................................... 230,408 258,669 264,080 255,579 283,514
--------- --------- --------- --------- ---------
Gross profit ........................................ 82,564 93,937 85,949 100,892 114,176
Selling, general and administrative expenses ........ 63,670 70,482 73,207 77,740 81,142
--------- --------- --------- --------- ---------
Income from operations .............................. 18,894 23,455 12,742 23,152 33,034
Interest expense .................................... 7,581 10,580 11,474 10,882 9,795
Equity in earnings (loss) of Amercord(1) ........... 1,039 100 537 1,724 (626)
--------- --------- --------- --------- ---------
Income before income tax expense .................... 12,352 12,975 1,805 13,994 22,613
Income tax expense .................................. 4,666 5,101 545 5,172 9,524
--------- --------- --------- --------- ---------
Income before extraordinary item .................... 7,686 7,874 1,260 8,822 13,089
Extraordinary item (2) .............................. 1,876 -- -- -- --
--------- --------- --------- --------- ---------
Net income .......................................... 5,810 7,874 1,260 8,822 13,089
Preferred dividends ................................. 583 -- -- -- --
--------- --------- --------- --------- ---------
Income applicable to common stock ................... $ 5,227 $ 7,874 $ 1,260 $ 8,822 $ 13,089
========= ========= ========= ========= =========
SHARE DATA:
Basic earnings per common share ...................... $ 0.84 $ 1.05 $ 0.17 $ 1.16 $ 1.72
Diluted earnings per common share(3) ................. 0.42 1.01 0.16 1.14 1.69
Weighted average number of diluted shares ............ 12,352 7,789 7,695 7,746 7,756
Dividends per share .................................. -- -- -- -- $ 0.05
OTHER DATA:
EBITDA (4) .......................................... $ 23,779 $ 27,959 $ 18,082 $ 29,025 $ 39,555
Capital expenditures ................................ 5,489 9,323 7,683 8,110 8,758
Cash provided by (used in) operating activities ..... 3,982 (3,248) 5,328 15,055 22,496
Cash used in investing activities ................... (4,663) (9,206) (7,203) (8,087) (7,941)
Cash provided by (used in) financing activities ..... 1,801 11,648 2,452 (6,863) (15,004)
Ratio of EBITDA to interest expense ................. 3.14x 2.64x 1.58x 2.67x 4.04x
Ratio of earnings to fixed charges .................. 2.16x 1.92x 1.12x 1.93x 2.60x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ..................................... $ 51,417 $ 51,336 $ 46,551 $ 51,821 $ 61,191
Total assets ........................................ 149,881 169,414 172,053 177,709 178,504
Short-term debt, including current maturities ...... 2,321 15,719 19,921 14,808 2,314
Long-term debt, less current maturities ............. 85,600 83,850 82,100 80,350 78,600
Stockholders' equity ................................ 14,114 22,046 23,306 32,246 44,734
</TABLE>
- ---------------------
(1) In 1996, the Company's equity in the earnings of Amercord was effected by a
change in accounting principle, a settlement of a royalty dispute and an
asset impairment writedown, the net amount of which was approximately
$800,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 to the Financial Statements.
(2) The extraordinary item represents, net of tax, the loss recognized on the
prepayment premium paid on the retirement of the Company's 15% Senior
Secured Notes in August 1993.
(footnotes continued on the following page)
-9-
<PAGE> 11
(3) In accordance with the Commission Staff Accounting Bulletin, Topic 4D,
common shares issued during the 12-month period prior to the initial filing
of the Company's registration statement relating to the Stock Offering at
prices below the assumed public offering price have been included in the
calculation as if such shares were outstanding for all periods presented.
(4) EBITDA is calculated as income from operations plus depreciation and
amortization. The Company has included information concerning EBITDA
because it believes that EBITDA is used by certain investors as one measure
of an issuer's historical ability to service its debt. EBITDA should not be
considered by an investor as an alternative to, or more meaningful than,
net income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity. EBITDA may not be comparable to
similarly titled measures reported by other companies. EBITDA as presented
above for the Company may not be comparable to similarly titled measures
reported by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
General. The Company consists of two operating divisions, Alside and
AmerCable. In addition, Amercord, a 50%-owned affiliate, is accounted for using
the equity method. The Company's results of operations are primarily affected by
the operating results of Alside, which accounted for more than 85% of the
Company's net sales in each of the last three years. Because its residential
building products are consumer durable goods, Alside's sales are impacted by the
availability of consumer credit, consumer interest rates, employment trends,
changes in levels of consumer confidence, national and regional trends in new
housing starts and general economic conditions. Alside's sales are also affected
by changes in consumer preferences with respect to types of building products.
Alside's products are used in the repair and remodeling, as well as the new
construction, sectors of the building industry. For each of the three years in
the period ended December 31, 1997, Alside believes that its sales were made
primarily to the repair and remodeling sector.
The Company believes that vinyl building products will continue to gain
market share from metal and wood products due to vinyl's favorable attributes,
which include its durability, lower maintenance cost and lower cost compared to
wood and metal. Although no assurances can be given, the Company further
believes that these increases in market share, together with Alside's increased
marketing efforts, will increase Alside's sales of vinyl siding, vinyl windows
and other complementary building products.
The principal raw material used in Alside's products is vinyl resin
which in the past has fluctuated significantly in price. These fluctuations can
impact Alside's profitability. In general, short-term fluctuations in vinyl
resin prices do not affect the selling prices of the Company's vinyl window
products. Prior to 1997, the prices of the Company's vinyl siding products have
generally increased or decreased with the price of vinyl resin. During 1996 the
average price of vinyl resin was lower than 1995 levels. In 1997, the price of
vinyl resin increased during the first six months and then declined. Alside did
not generally pass on any additional costs or savings resulting from the
fluctuations in resin prices in 1996 and 1997.
The Company operates with substantial operating and financial leverage.
Significant portions of Alside's selling, general and administrative expenses
are fixed costs that neither increase nor decrease proportionately with sales.
As a result, a percentage change in Alside's net sales will have a greater
percentage effect on Alside's income from operations. In addition, interest
expense related to the Company's long-term debt is relatively fixed.
AmerCable. AmerCable modified its business strategy in the second
quarter of 1996 to focus on a core group of cable products that AmerCable
believed better utilized its manufacturing efficiencies and marketing and
distribution capabilities. Concurrently with this shift in its business
strategy, AmerCable reduced its workforce by approximately 15% to eliminate
certain non-value added processes and to focus its efforts on its core products.
As a result of this strategy, AmerCable has lowered its costs and improved
manufacturing efficiencies and on-time delivery rates, thereby substantially
improving its profitability.
Amercord. The Company presently expects Amercord's average selling
prices to decline further during 1998. Although Amercord continues to develop
programs to reduce its cost structure and improve its manufacturing
efficiencies, the Company does not currently expect Amercord to earn a profit in
1998. Since its inception as a separate enterprise in 1986, Amercord has
satisfied its working capital and capital expenditure requirements from
internally generated funds and independent credit facilities that are not
guaranteed by the Company and Amercord has neither received capital from the
Company nor made any distributions to the Company. The Company presently
believes that Amercord's internally generated cash flow and credit facilities
will provide sufficient capital to fund its operations and currently planned
capital expenditures and as a result, the Company does not presently anticipate
a need to make additional capital contributions to Amercord.
-10-
<PAGE> 12
Segment Data. Alside accounted for more than 85% of the Company's net
sales and income from operations in each of the three years in the period ended
December 31, 1997. In 1997, Alside accounted for approximately 85% of the
Company's income from operations exclusive of corporate selling, general and
administrative expenses. Management believes that a discussion of the Company's
results and financial position for these periods is enhanced by presenting
segment information for Alside and AmerCable. The tables below set forth for the
periods indicated certain items from the Company's financial statements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997
-------------------------- ------------------------ --------------------------
% OF % OF % OF
TOTAL NET TOTAL NET TOTAL NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
--------- --------- --------- --------- --------- ---------
( IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
Net sales - Alside ....................... $ 300,561 85.9% $ 314,645 88.3% $ 344,000 86.5%
Net sales - AmerCable .................... 49,468 14.1 41,826 11.7 53,690 13.5
--------- ----- --------- ----- --------- -----
Total net sales ........................ 350,029 100.0 356,471 100.0 397,690 100.0
Gross profit ............................. 85,949 24.5 100,892 28.3 114,176 28.7
Selling, general and
administrative expenses(1) ............. 73,207 20.9 77,740 21.8 81,142 20.4
--------- ----- --------- ----- --------- -----
Income from operations .................. 12,742 3.6 23,152 6.5 33,034 8.3
Interest expense ......................... 11,474 3.3 10,882 3.1 9,795 2.5
Equity in earnings (loss) of Amercord .... 537 0.2 1,724 0.5 (626) (0.1)
--------- ----- --------- ----- --------- -----
Income before income tax expense ......... 1,805 0.5 13,994 3.9 22,613 5.7
Income tax expense ....................... 545 0.1 5,172 1.4 9,524 2.4
--------- ----- --------- ----- --------- -----
Net income ............................. $ 1,260 0.4% $ 8,822 2.5% $ 13,089 3.3%
========= ===== ========= ===== ========= =====
ALSIDE:
Net sales ................................ $ 300,561 100.0% $ 314,645 100.0% $ 344,000 100.0%
Gross profit ............................. 85,628 28.5 98,636 31.3 104,716 30.4
Selling, general and
administrative expenses ................ 69,078 23.0 72,264 23.0 74,301 21.6
Income from operations .................. 16,550 5.5 26,372 8.3 30,415 8.8
AMERCABLE:
Net sales ................................ $ 49,468 100.0% $ 41,826 100.0% $ 53,690 100.0%
Gross profit ............................. 321 0.6 2,256 5.4 9,460 17.6
Selling, general and
administrative expenses ................ 1,997 4.0 3,223 7.7 4,374 8.1
Income (loss) from operations ........... (1,676) (3.4) (967) (2.3) 5,086 9.5
</TABLE>
- -----------------------
(1) Consolidated selling, general and administrative expenses include corporate
expenses of $2.1 million, $2.3 million and $2.5 million for the years 1995,
1996 and 1997, respectively.
-11-
<PAGE> 13
RESULTS OF OPERATIONS
Year Ended December 31, 1997 compared to the Year Ended December 31,
1996.
General. The Company's net sales increased $41.2 million or 11.6% in
1997 as compared to 1996 due to an increase in sales volume at its Alside and
AmerCable divisions. Income from operations increased $9.9 million or 42.7% in
1997 as compared to 1996 due to increased sales volume at Alside and AmerCable
as well as manufacturing efficiency improvements at AmerCable. The Company's net
income increased $4.3 million or 48.4% in 1997 as compared to 1996 due to
increased operating income at its divisions which was partially offset by a loss
from its Amercord affiliate.
Alside. Alside's net sales increased $29.4 million or 9.3% in 1997 as
compared to 1996 due to increased unit sales in virtually all product lines
except metal siding. Unit sales of vinyl siding and vinyl windows increased
11.2% and 16.0%, respectively, in 1997 as compared to 1996. Alside's 1997 sales
were also favorably impacted by increased unit sales volume of cabinets and
vinyl fence of 33.7% and 40.4%, respectively, as compared to 1996. In addition,
the average unit selling price of vinyl siding increased in 1997 due to Alside's
increased sales of premium siding products. The increase in Alside's sales was
partially offset by a decrease in metal siding sales as consumer preference
continued to shift away from metal siding. Gross profit as a percentage of sales
decreased to 30.4% in 1997 as compared to 31.3% in 1996 principally due to
increases in raw materials costs, primarily vinyl resin. Selling, general and
administrative expense decreased as a percentage of net sales to 21.6% in 1997
from 23.0% in 1996. Selling, general and administrative expenses increased by
2.8% or $2.0 million to $74.3 million in 1997 due primarily to increased
advertising expenditures and higher employee compensation. Income from
operations increased 15.3% or $4.0 million in 1997 as compared to 1996 due to
increased sales volume which was partially offset by increased raw material
costs.
AmerCable. AmerCable's net sales increased $11.9 million or 28.4% in
1997 as compared to 1996 due to increased sales volume across all product lines.
Gross profit as a percentage of net sales increased to 17.6% in 1997 from 5.4%
in 1996 due to a 35% improvement in manufacturing efficiency (defined by the
Company as production volume per labor hour). The increases in sales and gross
profit were due primarily to AmerCable's implementation of its new business
strategy in May 1996 to focus on the production of core products which better
utilize its manufacturing and distribution capabilities. Selling, general and
administrative expenses increased to $4.4 million in 1997 from $3.2 million in
1996 due to higher incentive compensation. Income from operations increased to
$5.1 million in 1997 as compared to a loss from operations of $967,000 in 1996.
The increase was due to improved manufacturing efficiencies and increased sales
volume.
Amercord. The Company recorded a loss of $626,000 reflecting its share
of the after-tax loss of Amercord for the year ended 1997 as compared to income
of $1.7 million for the same period in 1996. The Company's equity in Amercord's
after-tax income for the year ended 1996 was approximately $900,000 exclusive of
the cumulative change in accounting principle, a royalty settlement and an
equipment writedown. Amercord's net sales decreased 14.5% to $74.9 million in
1997 compared to 1996 due primarily to a decrease in sales volume and a decrease
in the average unit sales price of its products. Gross profit decreased to $1.9
million in 1997 from $7.6 million in 1996 due primarily to lower sales prices
and decreased manufacturing efficiencies. Selling, general and administrative
expenses decreased 9.9% to $2.4 million in 1997 from $2.7 million in 1996.
Other. Net interest expense decreased $1.1 million or 10.0% in 1997 as
compared to 1996 primarily due to a decrease in the average borrowings under the
Credit Agreement, as well as interest income of $280,000 related to a $1.4
million income tax refund.
Year Ended December 31, 1996 compared to the Year Ended December 31,
1995.
General. The Company's net sales increased $6.4 million or 1.8% in
1996, compared with 1995, due to higher Alside sales volume which was partially
offset by lower AmerCable sales volume. The Company's income from operations
increased $10.4 million or 81.7% in 1996 as compared to 1995 due primarily to
higher sales volume and lower raw material costs at its Alside division. The
Company's net income increased $7.6 million to $8.8 million for the year ended
December 31, 1996 as compared to 1995 due primarily to higher income from
operations at its Alside division as well as improvements at both AmerCable and
Amercord.
Alside. Alside's net sales increased $14.1 million or 4.7% in 1996
compared with 1995 due to increased sales volume of vinyl siding, vinyl windows,
vinyl fencing and complementary building products distributed through its Supply
-12-
<PAGE> 14
Centers. Unit sales of vinyl siding and vinyl windows increased by 8.9% and
5.2%, respectively, in 1996 as compared to 1995. The increase in vinyl product
sales was partially offset by a decrease in sales of metal siding as consumer
preference continued to shift from metal to vinyl products. Gross profit as a
percentage of net sales increased to 31.3% in the 1996 period from 28.5% in the
1995 period as a result of lower material costs, primarily vinyl resin. Selling,
general and administrative expense remained constant as a percentage of net
sales at 23.0% for 1996 and 1995. Increased advertising costs, higher lease
expenses associated with both new and expanded Supply Centers, and higher
employee incentive compensation resulted in an increase in selling, general and
administrative expenses to $72.3 million in 1996 from $69.1 million in 1995. The
increase in selling, general and administrative expenses was partially offset by
an overall decrease in salaries of $800,000 consisting of a $1.8 million
decrease in Alside's headquarters salaries and a $1.0 million increase in Supply
Center salaries for the period ended December 31, 1996. The decrease in Alside's
headquarters salaries was primarily the result of Alside's reengineering program
in which many of the business processes performed at Alside's Akron, Ohio
headquarters either were eliminated or transferred to Supply Center personnel.
The personnel reductions related to this program and the related expenditures
were substantially completed in 1996. Alside's income from operations was $26.4
million for the period ended December 31, 1996 compared to $16.6 million for the
same period in 1995. The increase in income from operations of $9.8 million or
59.3% was due primarily to higher sales volume and a decrease in vinyl resin
costs.
AmerCable. AmerCable's net sales decreased $7.6 million or 15.4% in
1996 as compared to 1995 due to a decrease in sales volume and lower copper
prices which were only partially offset by higher sales prices. The decrease in
sales volume and the higher sales prices were due primarily to the
implementation of AmerCable's modified business strategy which focuses on
producing core products which better utilize its manufacturing efficiencies and
marketing and distribution capabilities. Despite the decrease in sales volume
resulting from the modified strategy, profit margins have increased across all
product lines due to the focus on fewer products. AmerCable generally prices its
products based upon the copper price at the time of shipment; therefore,
decreased copper prices during 1996 accounted for approximately 25% of the
decrease in sales. The marine, shipboard and transportation product line had the
most significant volume decrease as AmerCable decreased its focus on
transportation products having lower profit margins. Increased sales of higher
margin marine products partially offset the decrease in sales volume.
AmerCable's gross profit increased as a percentage of sales to 5.4% in 1996 as
compared to 0.6% in 1995 due to improved manufacturing efficiencies, better
material utilization and higher selling prices. Selling, general and
administrative expenses increased to $3.2 million in 1996 from $2.0 million in
1995 due to the severance charges described below and the costs associated with
the opening of a distribution center in Houston, Texas. AmerCable's loss from
operations in 1996 was $967,000 compared to a loss of $1.7 million in 1995 due
to decreased sales volume being offset by higher sales prices, lower copper
prices and improved manufacturing efficiencies. During the first half of 1996,
AmerCable recorded charges of $500,000 to write down copper inventory to its net
realizable value and $275,000 for severance charges related to a 15% workforce
reduction as part of a business reorganization. These severance charges were
paid in 1996. Net of these charges, AmerCable's loss from operations for the
year ended 1996 was $192,000.
AmerCable recorded income from operations of $931,000 for the second half of
1996.
Amercord. The Company recorded $1.7 million in equity in the after-tax
earnings of Amercord in 1996 compared to $537,000 during the same period in
1995. In 1996, Amercord recorded a $1.2 million gain to reflect the cumulative
effect of an accounting change when it changed its accounting policy for
maintenance parts. Amercord now capitalizes the cost of these parts upon
purchase and expenses such parts when used in the production cycle. Amercord
previously expensed the maintenance parts upon purchase. Amercord recorded a
pre-tax gain of $3.1 million in connection with the settlement of disputed
royalty payments for the years 1990-1995 and recorded a $2.7 million loss for a
write down of certain production equipment pursuant to Statement of Financial
Accounting Standards No. 121. The Company's equity in the earnings of Amercord,
exclusive of the items described above, was approximately $900,000. Amercord's
net sales increased 8.4% to $87.5 million in 1996 from $80.8 million in 1995
primarily due to a 9.9% and a 7.6% increase in tire bead and tire cord volume,
respectively. Gross profit increased $1.7 million or 29.0% in 1996 compared with
the same period in 1995 due to higher sales and lower unit production costs
experienced in 1996. Selling, general and administrative expenses as a
percentage of net sales remained constant at 3% for 1996 and 1995.
Other. The Company's net interest expense decreased $592,000 or 5.2% in
1996 compared with the same period in 1995 primarily due to a decrease in the
average borrowings under the Credit Agreement.
-13-
<PAGE> 15
QUARTERLY FINANCIAL DATA
General. Because most of Alside's building products are intended for
exterior use, Alside's sales and operating profits tend to be lower during
periods of inclement weather. Weather conditions in the first quarter of each
calendar year historically result in that quarter producing significantly less
sales revenue than in any other period of the year. As a result, the Company has
historically had losses in the first quarter and reduced profits in the fourth
quarter of each calendar year due to the significant impact of Alside on the
Company's performance.
Quarterly sales and operating profit data for the Company in 1996 and
1997 are shown in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Net sales - Alside ........................ $ 55,113 $ 85,403 $ 93,170 $ 80,959
Net sales - AmerCable ..................... 10,313 10,530 9,989 10,994
-------- -------- -------- --------
Total net sales ......................... 65,426 95,933 103,159 91,953
Gross profit .............................. 14,555 28,680 31,963 25,694
Income (loss) from operations ............. (3,222) 9,010 11,466 5,898
Net income (loss) ......................... (3,473) 4,571 5,532 2,192
Basic earnings (loss) per common share .... (0.46) 0.60 0.73 0.29
Diluted earnings (loss) per common share .. (0.45) 0.59 0.71 0.28
1997
Net sales - Alside ........................ $ 64,827 $ 94,165 $ 98,483 $ 86,525
Net sales - AmerCable ..................... 14,289 13,511 12,644 13,246
-------- -------- -------- --------
Total net sales ......................... 79,116 107,676 111,127 99,771
Gross profit .............................. 20,015 32,982 32,616 28,563
Income from operations .................... 713 12,155 11,099 9,067
Net income (loss) ......................... (1,130) 5,693 4,544 3,982
Basic earnings (loss) per common share .... (0.15) 0.75 0.60 0.52
Diluted earnings (loss) per common share .. (0.15) 0.73 0.59 0.51
</TABLE>
- -----------------------
(1) In accordance with the Commission Staff Accounting Bulletin, Topic 4D,
common shares issued during the 12-month period prior to the initial filing
of the Company's registration statement relating to the Stock Offering at
prices below the assumed public offering price have been included in the
calculation as if such shares were outstanding for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.3 million, $15.1
million and $22.5 million in 1995, 1996 and 1997, respectively. The increased
operating cash flows in 1997 were due primarily to a $4.3 million increase in
net income due to improved operating performance at Alside and AmerCable, as
well as lower working capital requirements in 1997 as compared to 1996. The
increased operating cash flows in 1996 were primarily due to Alside's improved
operating results.
In April 1996, the Company amended and restated the Credit Agreement to
increase the facility to permit borrowings of up to $50 million and to extend
the term to May 31, 1999. Available borrowings under the Credit Agreement are
limited to the lesser of the total facility less unused letters of credit or
availability based on percentages of eligible accounts receivable and
inventories. The Credit Agreement is secured by substantially all of the
Company's assets other than the Company's owned real property and its shares of
Amercord. At December 31, 1997, $7.5 million of this facility had been used to
issue a $5.5 million letter of credit securing the Company's taxable variable
rate notes (the "Taxable Notes") as well as $2.0 million securing various
insurance letters of credit. At December 31, 1997 the Company had an available
borrowing capacity under the Credit Agreement of approximately $40.4 million.
Capital expenditures totaled $7.7 million, $8.1 million and $8.8
million in 1995, 1996 and 1997, respectively. Expenditures in 1997 were
primarily used to increase vinyl extrusion capacity for siding, windows and
fencing as well as to increase and automate window fabrication capacity.
Expenditures in 1996 were primarily used to increase Alside's capacity to
produce welded vinyl windows, enhance the Company's window tooling design
capability, continue automating
-14-
<PAGE> 16
its window assembly process, and increase vinyl window extrusion capacity.
Significant expenditures made during 1995 include expenditures to further
automate the window assembly process and to purchase equipment to be used for
the production of vinyl fencing and vinyl garage doors. The Company has
historically funded such capital expenditure requirements out of cash generated
from operating activities and borrowings under its bank credit facility.
The Company believes that historical capital expenditures represent a
base level of spending needed to maintain its vinyl siding and vinyl window
production equipment as well as provide for modest increases in plant
productivity and operating capacity. Presently anticipated capital expenditures
for 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.
The net proceeds of the Stock Offering will be used to partially fund capital
expenditures in 1998. In the event the Company would decide not to proceed with
the Stock Offering, the Company presently intends to seek to fund substantially
all of its current 1998 capital expenditure plan with cash from operations,
available borrowings under the Credit Agreement and, if necessary, alternative
sources of financing.
The Company has completed its assessment of the effect of Year 2000 on
its management information systems and is currently Year 2000 compliant with
respect to substantially all of its systems. The Company does not expect any
material future expenditures will be required in order to become fully Year 2000
compliant.
The Company believes that future cash flows from operations and its
borrowing capacity under the Credit Agreement, together with the net proceeds
from the Offerings, will be sufficient to satisfy debt service requirements,
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.
The Company currently has outstanding $75,000,000 of the Existing
Notes. The Existing Notes are callable at the option of the Company beginning in
August 1998 at 104.313% of the outstanding principal amount thereof, decreasing
to 100% of the principal amount in August 2001. In connection with the Note
Offering, the Company has commenced the Tender Offer to purchase all outstanding
principal amount of the Existing Notes.
In the Stock Offering, the Company and the Selling Stockholders are
offering a total of 2,128,800 shares of Common Stock (plus up to an additional
319,320 shares, in the aggregate, pursuant to an overallotment option to be
granted to the underwriters by the Company and certain of the Selling
Stockholders). Of these shares, 700,000 shares of Common Stock (808,520 if the
over-allotment option is exercised in full) are being offered by the Company and
1,428,800 shares of Common Stock (1,639,600 if the over-allotment option is
exercised in full) are being offered by the Selling Stockholders. The Stock
Offering is presently expected to generate net cash proceeds to the Company of
approximately $10.6 million (assuming the Underwriters' over-allotment option is
not exercised), assuming an initial public offering price of $17.00 per share.
The actual net proceeds to the Company will vary depending on the initial public
offering price of the Common Stock in the Stock Offering. The Company intends to
use such net proceeds to fund, in part, the Company's 1998 capital expenditure
plan, including the construction of a new vinyl siding manufacturing facility in
order to expand the Company's production capacity. See
"Business-Alside-Manufacturing." Pending such use, the Company intends to use
the net proceeds from the Stock Offering to repay outstanding borrowings under
the Credit Agreement. The balance of the net proceeds, if any, will be invested
in short-term investment grade securities pending such use. The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
Concurrently with the Stock Offering, the Company is publicly offering
$75,000,000 aggregate principal amount of New Notes in the Note Offering. The
Company is effecting the Note Offering at this time to lower the interest rate
and to extend the term of its existing subordinated debt. The consummation of
the Stock Offering and the consummation of the Note Offering are not conditioned
upon each other. The New Notes will be issued pursuant to the New Indenture and
will be general unsecured obligations of the Company, subordinate in right of
payment to all existing and future senior indebtedness of the Company, including
amounts borrowed under the Credit Agreement. The terms of the New Indenture are
expected to be substantially similar to the terms of the Existing Indenture as
currently in effect.
In connection with the Note Offering, the Company has commenced the
Tender Offer to purchase for cash all of the Existing Notes, of which
$75,000,000 aggregate principal amount are currently outstanding. The Company is
also soliciting consents from holders of Existing Notes to amend the Existing
Indenture in order to eliminate substantially all of the restrictive covenants
and certain other provisions contained in the Existing Indenture (the "Proposed
Amendments"). Holders of Existing Notes who tender their Existing Notes in the
Tender Offer will be required to consent to the Proposed
-15-
<PAGE> 17
Amendments. Under the terms of the Existing Indenture, consents from the holders
of a majority in principal amount of the Existing Notes will be required to
approve the Proposed Amendments. The Company intends to fund the costs
associated with the purchase of the Existing Notes pursuant to the Tender Offer
(estimated at approximately $80.3 million) with the proceeds of the sale of the
Notes and borrowings under the Credit Agreement. The Tender Offer is conditioned
on the completion of the Note Offering and the receipt of the requisite consents
to the Proposed Amendments.
If the Company completes the Note Offering, the Company presently
intends to redeem all Existing Notes that remain outstanding following the
Tender Offer promptly after August 15, 1998, the first date on which the
Existing Notes may be redeemed by the Company under the terms of the Existing
Indenture. The applicable redemption price on such date is 104.313% of the
outstanding principal amount of the Existing Notes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations
have not been material during the past three years. Inflation could adversely
affect the Company if inflation results in significantly higher interest rates
or substantial weakness in economic conditions. Alside's principal raw material,
vinyl resin, has been subject to rapid price increments. Although Alside has
historically been able to pass on price increases to its customers, Alside did
not generally pass on any additional costs or savings resulting from the
fluctuation in resin prices in 1996 and 1997. No assurances can be given that
Alside will be able to pass on any price increases in the future.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 130 Reporting Comprehensive Income and
Statement of Financial Accounting Standards No. 131 Disclosures About Segments
of an Enterprise and Related Information which are effective for financial
statement periods beginning after December 15, 1997. The Company believes that
these statements will have no effect on the Company's financial position,
results of operations or cash flows.
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 management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend," and
similar expressions, as they relate to the Company or the Company's 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, 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.
-16-
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED MATERIALS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors................................................................................. 18
Balance Sheets at December 31, 1997 and 1996................................................................... 19
Statements of Operations for each of the three years in the period ended December 31, 1997..................... 20
Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997.......... 21
Statements of Cash Flows for each of the three years in the period ended December 31, 1997..................... 22
Notes to Financial Statements.................................................................................. 23
</TABLE>
-17-
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Associated Materials Incorporated
Dallas, Texas
We have audited the accompanying balance sheets of Associated Materials
Incorporated as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associated Materials
Incorporated at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
January 29, 1998
-18-
<PAGE> 20
ASSOCIATED MATERIALS INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------------
1996 1997
----------- ---------
<S> <C> <C>
Current assets:
Cash ........................................................................ $ 2,384 $ 1,935
Accounts receivable, net of allowance for doubtful accounts of $3,749
and $4,423 at December 31, 1996 and 1997, respectively .................... 47,208 49,197
Inventories ................................................................. 58,357 56,621
Income taxes receivable ..................................................... 587 266
Other current assets ........................................................ 3,025 3,291
--------- ---------
Total current assets ........................................................... 111,561 111,310
Property, plant and equipment, net ............................................. 51,649 53,855
Investment in Amercord Inc. .................................................... 11,320 10,694
Other assets ................................................................... 3,179 2,645
--------- ---------
Total assets ................................................................... $ 177,709 $ 178,504
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ............................................................. $ 4,853 $ 4,769
Accounts payable ............................................................ 17,114 17,174
Accrued liabilities ......................................................... 22,965 25,862
Revolving line of credit .................................................... 13,058 564
Current portion of long-term debt ........................................... 1,750 1,750
--------- ---------
Total current liabilities ...................................................... 59,740 50,119
Deferred income taxes .......................................................... 1,884 1,951
Other liabilities .............................................................. 3,489 3,100
Long-term debt ................................................................. 80,350 78,600
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 100,000 shares at December 31, 1996 and 1997
Issued shares - 0 at December 31, 1996 and 1997 .......................... -- --
Common stock, $.0025 par value:
Authorized shares - 15,000,000 at December 31, 1996 and 1997 Issued shares
- 4,893,504 at December 31, 1996 and 4,934,900 at
December 31, 1997 ..................................................... 12 12
Common stock Class B, $.0025 par value:
Authorized and issued shares - 2,700,000 at December 31, 1996
and 1997 .............................................................. 7 7
Less: Treasury stock, at cost - 0 shares at December 31, 1996 and
41,396 at December 31, 1997 .............................................. -- (542)
Capital in excess of par .................................................... 185 505
Retained earnings ........................................................... 32,042 44,752
--------- ---------
Total stockholders' equity ..................................................... 32,246 44,734
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 177,709 $ 178,504
========= =========
</TABLE>
See accompanying notes.
-19-
<PAGE> 21
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales ..................................... $ 350,029 $ 356,471 $ 397,690
Cost of sales ................................. 264,080 255,579 283,514
--------- --------- ---------
85,949 100,892 114,176
Selling, general and administrative ........... 73,207 77,740 81,142
--------- --------- ---------
Income from operations ........................ 12,742 23,152 33,034
Interest expense .............................. 11,474 10,882 9,795
--------- --------- ---------
1,268 12,270 23,239
Equity in earnings (loss) of Amercord Inc. .... 537 1,724 (626)
--------- --------- ---------
Income before income tax expense .............. 1,805 13,994 22,613
Income tax expense ............................ 545 5,172 9,524
--------- --------- ---------
Net income .................................... $ 1,260 $ 8,822 $ 13,089
========= ========= =========
Basic earnings per common share ............... $ 0.17 $ 1.16 $ 1.72
========= ========= =========
Diluted earnings per common share ............. $ 0.16 $ 1.14 $ 1.69
========= ========= =========
</TABLE>
See accompanying notes.
-20-
<PAGE> 22
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK TREASURY STOCK CAPITAL IN TOTAL
------------------ ----------------- --------------- EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OF PAR EARNINGS EQUITY
------ ------ ------ ------ ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 4,832 $ 12 2,700 $ 7 -- $ -- $ 67 $21,960 $ 22,046
Net income..................... -- -- -- -- -- -- -- 1,260 1,260
------ ---- ----- ---- ---- ----- ----- ------- --------
Balance at December 31, 1995..... 4,832 12 2,700 7 -- -- 67 23,220 23,306
Net income..................... -- -- -- -- -- -- -- 8,822 8,822
Exercise of Common Stock
options and related tax
benefits.................... 62 -- -- -- -- -- 118 -- 118
------ ---- ----- ---- ---- ----- ----- ------- --------
Balance at December 31, 1996..... 4,894 12 2,700 7 -- -- 185 32,042 32,246
Net income..................... -- -- -- -- -- -- -- 13,089 13,089
Cash dividends................. -- -- -- -- -- -- -- (379) (379)
Exercise of Common Stock
options and related tax
benefits..................... 41 -- -- -- -- -- 320 -- 320
Purchase of treasury shares.... -- -- -- -- 41 (542) -- -- (542)
------ ---- ----- ---- ---- ----- ----- ------- --------
Balance at December 31, 1997..... 4,935 $ 12 2,700 $ 7 41 $(542) $ 505 $44,752 $ 44,734
====== ==== ===== ==== ==== ===== ===== ======= ========
</TABLE>
See accompanying notes.
-21-
<PAGE> 23
ASSOCIATED MATERIALS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 1,260 $ 8,822 $ 13,089
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 5,340 5,873 6,521
Deferred income taxes .................................................. (1,167) 2,002 67
Provision for losses on accounts receivable ............................ 2,853 3,087 3,500
(Equity) loss in earnings of Amercord Inc. ............................. (537) (1,724) 626
Loss (gain) on sale of assets .......................................... (446) 10 (348)
Changes in operating assets and liabilities:
Accounts receivable .................................................. (4,674) (1,540) (5,489)
Inventories .......................................................... 3,014 (2,435) 1,736
Other current assets ................................................. (292) (1,058) (266)
Bank overdrafts ...................................................... 986 (1,194) (84)
Accounts payable ..................................................... (2,165) 2,625 60
Accrued liabilities .................................................. 1,392 623 2,897
Income taxes receivable/payable ...................................... 46 (160) 480
Other assets ......................................................... (45) (203) 96
Other liabilities .................................................... (237) 327 (389)
-------- -------- --------
Net cash provided by operating activities ................................ 5,328 15,055 22,496
INVESTING ACTIVITIES
Additions to property, plant and equipment ............................... (7,683) (8,110) (8,758)
Proceeds from sale of assets ............................................. 480 23 817
-------- -------- --------
Net cash used in investing activities .................................... (7,203) (8,087) (7,941)
FINANCING ACTIVITIES
Net increase (decrease) in revolving line of credit ...................... 4,202 (5,113) (12,494)
Principal payments of long-term debt ..................................... (1,750) (1,750) (1,750)
Dividends paid ........................................................... -- -- (379)
Treasury stock acquired .................................................. -- -- (542)
Options exercised ........................................................ -- -- 161
-------- -------- --------
Net cash provided by (used in) financing activities ...................... 2,452 (6,863) (15,004)
-------- -------- --------
Net increase (decrease) in cash .......................................... 577 105 (449)
Cash at beginning period ................................................. 1,702 2,279 2,384
-------- -------- --------
Cash at end of period .................................................... $ 2,279 $ 2,384 $ 1,935
======== ======== ========
Supplemental Information:
Cash paid for interest ............................................... $ 11,459 $ 10,895 $ 10,110
======== ======== ========
Net cash paid for income taxes ....................................... $ 1,658 $ 3,546 $ 9,098
======== ======== ========
</TABLE>
See accompanying notes.
-22-
<PAGE> 24
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Line of Business
Associated Materials Incorporated (the "Company") consists of two
operating divisions, Alside and AmerCable, and a 50%-owned affiliate, Amercord
Inc. ("Amercord"), which is accounted for using the equity method. Alside is
engaged principally in the manufacture and distribution of exterior residential
building products to professional contractors throughout the United States.
AmerCable manufactures jacketed electrical cable utilized in a variety of
industrial applications. Amercord manufactures and sells steel tire cord and
tire bead wire used in the tire manufacturing industry.
Accounting Changes
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 123 allows the Company to use the intrinsic value method or the fair
market value to determine the cost of stock compensation. The Company will
continue to use the intrinsic value method to measure stock-based compensation
costs in accordance with APB Opinion No. 25.
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") during 1996. The adoption of SFAS No.
121 had no effect on the financial statements at the time of adoption. An
impairment loss was recorded for the Company's affiliate, Amercord. See Note 2.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" which are effective for financial statement
periods beginning after December 15, 1997. The Company believes that these
statements will have no effect on the Company's financial position, results of
operations or cash flows.
Revenue Recognition
Product sales are recognized at the time of shipment.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is
provided by the straight-line method over the estimated useful lives of the
assets which range from 3 to 30 years.
Income Tax
Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Negative book balances
are classified as bank overdrafts on the accompanying balance sheets.
-23-
<PAGE> 25
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Derivatives
The Company has an interest rate swap in order to manage interest rate
risk on a portion of its long-term debt (see Note 8). Gains or losses based
upon differences in the market interest rate and the fixed rate are recognized
in the period such differences are incurred. In addition, the Company may
attempt to hedge its position with respect to raw material or currency
fluctuations on specific contracts. In these instances, the Company may enter
into forward contracts or purchase options, the cost of which are realized upon
the completion of the contract. The nominal amounts outstanding under these
contracts were not material at December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was $8.0 million, $6.8 million and $6.3 million in 1997, 1996 and 1995,
respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period presentation.
-24-
<PAGE> 26
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. INVESTMENT IN AMERCORD
The Company's investment in Amercord, a 50% owned affiliate, is
accounted for using the equity method. Amercord manufactures and sells steel
tire cord and tire bead wire used in the tire manufacturing industry. Equity in
the undistributed earnings of Amercord since acquisition through December 31,
1997 totals $5,444,000.
Condensed financial information for Amercord is presented below (in
thousands):
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- ------------- ---------
<S> <C> <C> <C>
Net sales.................................................................. $ 80,764 $ 87,538 $ 74,880
Costs and expenses......................................................... 77,148 82,229 75,349
--------- --------- ---------
Income (loss) from operations.............................................. 3,616 5,309 (469)
Interest expense........................................................... (1,911) (1,734) (1,518)
Income tax (expense) benefit............................................... (631) (1,323) 735
--------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle..................................................... 1,074 2,252 (1,252)
Cumulative effect of a change in accounting principle
(net of tax)............................................................. -- 1,196 --
--------- --------- ---------
Net income (loss).......................................................... 1,074 3,448 (1,252)
--------- --------- ---------
Company's share of net income (loss)....................................... $ 537 $ 1,724 $ (626)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL POSITION
DECEMBER 31,
---------------------------
1996 1997
--------- ---------
<S> <C> <C>
Assets (pledged).......................................................................... $ 52,364 $ 50,075
Liabilities............................................................................... 29,152 28,115
Stockholders' equity...................................................................... 23,212 21,960
</TABLE>
In 1996, Amercord recorded a $1,196,000 gain to reflect the cumulative
effect of an accounting change when it changed its accounting policy for
maintenance parts. Amercord now capitalizes the cost of these parts upon
purchase and expenses such parts when used in the production cycle. Amercord
previously expensed the maintenance parts upon purchase. Also in 1996, Amercord
recorded a pre-tax gain of $3,093,000 in connection with the settlement of
disputed royalty payments for the years 1990-1995 and recorded a $2,723,000
loss for a write down of certain production equipment pursuant to SFAS No. 121.
-25-
<PAGE> 27
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts on accounts receivable
for the years ended December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Balance at beginning of period........................................ $2,563 $2,769 $ 3,749
Provision for losses................................................ 2,853 3,087 3,500
Losses sustained (net of recoveries)................................ 2,647 2,107 2,826
------ ------ -------
Balance at end of period.............................................. $2,769 $3,749 $ 4,423
====== ====== =======
</TABLE>
4. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials....................................................................... $14,903 $16,352
Work-in-progress.................................................................... 5,276 4,936
Finished goods and purchased stock.................................................. 38,178 35,333
------- -------
$58,357 $56,621
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Land................................................................................ $1,290 $ 1,290
Buildings........................................................................... 21,319 22,740
Machinery and equipment............................................................. 73,463 79,390
------- -------
96,072 103,420
Less accumulated depreciation....................................................... 44,423 49,565
------- -------
$51,649 $ 53,855
======= ========
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Employee compensation............................................................... $6,558 $7,612
Sales promotions and incentives..................................................... 2,692 3,408
Employee benefits................................................................... 8,424 9,201
Interest............................................................................ 3,307 3,272
Other............................................................................... 1,984 2,369
------- -------
$22,965 $25,862
======= =======
</TABLE>
-26-
<PAGE> 28
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. REVOLVING CREDIT ARRANGEMENTS
In April 1996, the Company amended and restated its credit agreement
with KeyBank, N.A. ("Credit Agreement") to increase the total credit facility
to $50 million and extend the term to May 31, 1999. Available borrowings under
the Credit Agreement are limited to the lesser of the total facility less
unused letters of credit or availability based on percentages of eligible
accounts receivable and inventories. Unused letters of credit totaled
$7,468,000 at December 31, 1997, of which $5,471,000 was related to the Taxable
Notes (see Note 8) and $1,997,000 was primarily related to insurance. The
Company's available borrowing capacity at December 31, 1997 was approximately
$40.4 million. The Credit Agreement includes covenants that require the
maintenance of certain financial ratios and net worth and that place
restrictions on the repurchase of common stock and the payment of dividends.
Outstanding borrowings under the agreement are collateralized by substantially
all of the assets of the Company.
Interest is payable on the utilized revolving credit facility at
either the prime commercial rate (8.50% at December 31, 1997) or LIBOR (5.72%
at December 31, 1997) plus 2.00% at the option of the Company and on the unused
credit facility at a rate of .25%. Letter of credit fees of 1.5% are paid at
origination.
The weighted average interest rate for borrowings under the revolving
credit facility during the period was 8.07% and 8.23% for December 31, 1997 and
1996, respectively.
8. LONG-TERM DEBT
Long-term debt at December 31 consists of (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- ---------
<S> <C> <C>
Taxable Variable Rate Demand Notes.................................................. $ 7,100 $ 5,350
11 1/2% Senior Subordinated Notes due 2003.......................................... 75,000 75,000
------- -------
82,100 80,350
Less amounts due in one year........................................................ 1,750 1,750
------- -------
$80,350 $78,600
======= =======
</TABLE>
Scheduled principal payments are $1,750,000 in 1998 and $3,600,000 in
1999.
Interest on the Taxable Variable Rate Demand Notes (the "Taxable
Notes") is payable monthly at the greater of the 30 or 90 day commercial paper
rate plus 0.125%. Effective April 5, 1993, the Company entered into an interest
rate swap which fixed the interest rate on the Taxable Notes at 5.57% per annum
for a period of five years. The Taxable Notes are payable in quarterly
installments ranging from $400,000 to $450,000 through January 1, 1999, with
the remaining balance due on April 1, 1999. The Taxable Notes are secured by an
irrevocable letter of credit in accordance with the Credit Agreement (see Note
7). The Taxable Notes contain similar covenants and restrictions in the Credit
Agreement described in Note 7.
Interest on the Senior Subordinated Notes is payable semiannually. The
Senior Subordinated Notes are unsecured. The Indenture pursuant to which the
Senior Subordinated Notes were issued contains covenants that, among other
things, limit the ability of the Company to incur additional indebtedness, pay
dividends, make certain investments and repurchase stock or subordinated
indebtedness.
The estimated fair value of the Taxable Notes at December 31, 1997 was
$5,350,000. The Taxable Notes have a variable interest rate and therefore trade
at face value. The fair value of the Senior Subordinated Notes at December 31,
1997 was $79,688,000 based upon quoted market price.
-27-
<PAGE> 29
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. COMMITMENTS
Commitments for future minimum lease payments under noncancelable
operating leases, principally for manufacturing and distribution facilities and
certain equipment, are approximately $9,200,000, $7,530,000, $5,319,000,
$3,428,000, $2,565,000 and $1,382,000 for the years ending December 31, 1998,
1999, 2000, 2001, 2002 and thereafter, respectively. Lease expense was
approximately $10,901,000, $10,391,000 and $9,186,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
10. INCOME TAXES
Income tax expense for the years ended December 31 consists of (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ---------------------- --------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes................ $ 1,559 $ (981) $ 2,252 $ 1,918 $ 7,816 $ 55
State income taxes.................. 153 (186) 918 84 1,641 12
--------- --------- --------- --------- --------- --------
$ 1,712 $ (1,167) $ 3,170 $ 2,002 $ 9,457 $ 67
========= ========= ========= ========= ========= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income taxes as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Deferred tax assets:
Medical benefits................................................................. $ 1,680 $1,581
Bad debt expense................................................................. 1,301 1,847
Pension expense.................................................................. 1,806 3,427
Inventory costs.................................................................. 994 247
Other............................................................................ 805 305
------ ------
Total deferred tax assets.......................................................... 6,586 7,407
Deferred tax liabilities:
Depreciation..................................................................... 7,976 8,519
Other............................................................................ 494 839
------ -----
Total deferred tax liabilities..................................................... 8,470 9,358
----- -----
Net deferred tax liabilities....................................................... $(1,884) $(1,951)
======= =======
</TABLE>
The reconciliation of the statutory rate to the Company's effective
income tax rate for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................... 34.0% 34.0% 35.0%
State income tax loss, net of federal income tax benefit.......... 5.6 4.3 4.6
Equity in (earnings) loss of Amercord............................. (8.1) (3.3) .8
Other............................................................. (1.3) 1.9 1.7
---- ---- ----
Effective rate.................................................... 30.2% 36.9% 42.1%
==== ==== ====
</TABLE>
28
<PAGE> 30
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
11. STOCKHOLDERS' EQUITY
The Class B Common Stock is convertible on a one-for-one basis into
Common Stock at any time subject to legal restrictions, if any, applicable to
the holder of such shares. The Class B Common Stock has the same rights and
privileges extended to the Common Stock except that the holder of Class B
Common Stock may vote only on matters pertaining to changes in the Certificate
of Incorporation; the sale, lease, or disposition of certain assets; mergers or
consolidations; or the liquidation or dissolution of the Company.
12. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128
which replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Earnings per share amounts for all periods presented
have been restated to conform to SFAS 128 requirements, and in accordance with
the Securities and Exchange Commission ("Commission") Staff Accounting
Bulletin, Topic 4D, common shares issued during the 12-month period prior to
the initial filing of the registration statement with respect to the proposed
offering of Common Stock at prices below the assumed public offering price have
been included in the calculation of diluted earnings per share as if they were
outstanding for all periods presented (see Note 17).
The following table sets forth the computation of basic and diluted
earnings per share but does not reflect additional shares to be offered in
conjunction with the registration statement with respect to the proposed
offering of Common Stock as disclosed in Note 17:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per common share--
income available to common shareholders...................... $ 1,260 $ 8,822 $ 13,089
Denominator:
Denominator for basic earnings per common share--
weighted-average shares....................................... 7,532 7,594 7,594
Effect of dilutive securities:
Employee stock options..................................... 163 152 162
Denominator for diluted earnings per common share--
adjusted weighted-average shares............................. 7,695 7,746 7,756
======= ======= =======
Basic earnings per common share........................................ $ 0.17 $ 1.16 $ 1.72
======= ======= =======
Diluted earnings per common share...................................... $ 0.16 $ 1.14 $ 1.69
======= ======= =======
</TABLE>
-29-
<PAGE> 31
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
13. STOCK OPTIONS
The Company has a stock option plan, whereby it grants non-statutory
stock options to certain directors, officers and key employees. The Company has
authorized 800,000 shares of common stock to be issued under the plan. The
options granted in 1995, 1996 and 1997 were granted at fair market value on the
grant date and are exercisable for ten years. One-half of the options vest upon
grant date and the remainder vest after two years.
Transactions during 1995, 1996 and 1997 under this plan are summarized
below:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1994................................ 299,000 $ .003 to $6.00
Granted............................................................ 33,000 $5.00
Expired or canceled................................................ (69,800) $ .003 to $6.00
-------- ----------------
Options outstanding at December 31, 1995................................ 262,200 $ .003 to $5.00
Exercised.......................................................... (62,400) $.003
Granted............................................................ 12,500 $5.00
-------- ----------------
Options outstanding at December 31, 1996................................ 212,300 $ 2.925 to $5.00
Exercised.......................................................... (40,500) $ 2.925 to $5.00
Granted............................................................ 140,000 $12.00 to $16.00
Expired or canceled................................................ (4,500) $5.00
-------- ----------------
Options outstanding at December 31, 1997................................ 307,300 $2.925 to $16.00
</TABLE>
Options to purchase 233,550, 189,550 and 239,700 shares were
exercisable at December 31, 1997, 1996 and 1995, respectively. The weighted
average exercise price of options outstanding was $7.79, $3.47 and $2.57 at
December 31, 1997, 1996 and 1995, respectively.
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING --------------------------------
SHARES LIFE IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
------ ------------- -------------- ------- --------------
<S> <C> <C> <C> <C>
136,800 5.67 $ 2.925 136,800 $ 2.925
30,500 7.41 $ 5.000 26,750 $ 5.000
100,000 9.17 $12.000 50,000 $12.000
40,000 9.42 $16.000 20,000 $16.000
</TABLE>
The Company adopted the disclosure provisions of SFAS No. 123 in 1996,
and continues to measure stock-based compensation in accordance with APB No.
25. Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The weighted average fair value at date of grant for options granted during
1997, 1996, and 1995 was $6.09, $2.56 and $2.39 per option, respectively. The
fair value of the options was estimated at the date of the grant using the
minimum value method option pricing model assuming dividend yields of 1.0% and
a weighted-average expected life of an option of 10 years. A risk-free interest
rate of 7.03%, 6.87% and 6.76% was used for 1997, 1996 and 1995, respectively.
Stock based compensation costs would have reduced net income by
$389,000, $17,000 and $55,000 and $.05, $.00 and $.01 per basic and diluted
share in 1997, 1996 and 1995, respectively, if the fair values of the options
granted in that year had been recognized as compensation expense on a
straight-line basis over the vesting period of the grant. The pro forma effect
on net income for 1997, 1996 and 1995 is not representative of the pro forma
effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
30
<PAGE> 32
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. SEGMENTS OF BUSINESS
The Company operates in two industry segments: building products and
electrical cable products. The principal business activities of the building
segment include the manufacture of vinyl siding, vinyl replacement windows and
cabinets, and the wholesale distribution of these and other complementary
building products principally to professional home remodeling and new
construction contractors. The principal business activity of the electrical
cable segment is the manufacture and sale of jacketed electrical cable.
Comparative financial data by industry segment for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
Building products.................................... $ 300,561 $ 314,645 $ 344,000
Electrical cable products............................ 49,468 41,826 53,690
---------- ---------- ----------
$ 350,029 $ 356,471 $ 397,690
========== ========== ==========
Operating profits (losses):
Building products.................................... $ 16,550 $ 26,372 $ 30,415
Electrical cable products............................ (1,676) (967) 5,086
Corporate expense.................................... (2,132) (2,253) (2,467)
---------- ---------- ----------
$ 12,742 $ 23,152 $ 33,034
========== ========== ==========
Identifiable assets:
Building products.................................... $ 131,570 $ 133,023 $ 139,751
Electrical cable products............................ 27,091 24,746 20,349
Corporate............................................ 13,392 19,940 18,404
---------- ---------- ----------
$ 172,053 $ 177,709 $ 178,504
========== ========== ==========
Depreciation and amortization:
Building products.................................... $ 3,466 $ 4,282 $ 5,029
Electrical cable products............................ 1,334 1,154 1,096
Corporate............................................ 540 437 396
---------- ---------- ----------
$ 5,340 $ 5,873 $ 6,521
========== ========== ==========
Net additions to property, plant, and equipment:
Building products.................................... $ 6,669 $ 6,982 $ 8,108
Electrical cable products............................ 1,014 1,128 635
Corporate............................................ -- -- 15
---------- ---------- ----------
$ 7,683 $ 8,110 $ 8,758
========== ========== ==========
</TABLE>
The Company operates principally in the United States. Operating
profit for each segment is net sales less operating expenses. Identifiable
assets by segment are those used in the Company's operations in each segment.
Corporate assets are principally the Company's investment in Amercord. Neither
aggregate export sales nor sales to a single customer have accounted for 10% or
more of consolidated net sales in any of the years presented.
-31-
<PAGE> 33
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
15. RETIREMENT PLANS
The Company has defined benefit contributory pension plans (the
"Plans") covering substantially all of its salaried employees and certain
nonsalaried employees. Employees are fully vested upon attaining five years of
service including past service with the businesses acquired by the Company. The
Company's policy is to fund pension costs in accordance with actuarially based
computations.
The actuarial present value at December 31, 1997 and 1996 was
determined using a discount rate of 7.0% and 7.5%, respectively, and projected
compensation increases of 4.5%. The expected long-term rate of return on assets
was 9%. Plan assets consist primarily of equity securities, U.S. government
obligations, corporate bonds and real estate.
Retirement plan costs, as determined by the projected unit credit cost
method, are summarized below for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Benefit cost for service during the year..................... $ 742 $ 1,110 $ 1,165
Interest cost on projected benefit obligation................ 1,553 1,744 1,863
Return on assets............................................. (3,412) (3,356) (4,614)
Net amortization............................................. 2,360 1,901 2,649
------- ------- -------
Net retirement plan costs.................................... $ 1,243 $ 1,399 $ 1,063
======= ======= =======
</TABLE>
A schedule reconciling the projected benefit obligation with the
Company's recorded pension liability as of December 31 is shown below (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits
of $17,608 and $22,924, respectively..................................... $ 20,755 $ 24,066
Effect of projected salary increases......................................... 5,490 6,172
--------- ---------
Present value of the projected benefit obligation............................ 26,245 30,238
Plan assets at fair value.................................................... 23,120 27,363
--------- ---------
Plan assets less than the present value of the projected
benefit obligations...................................................... 3,125 2,875
The recorded pension liability (included in the accrued current
liabilities in the balance sheets) is calculated by adding to the
above amount:
Unrecognized net gains............................................... 3,450 4,489
The portion of the liability which, under SFAS No. 87,
is being amortized over 16 years................................. (1,127) (905)
--------- ---------
Recorded pension liability................................................... $ 5,448 $ 6,459
========= =========
</TABLE>
The Company sponsors a defined contribution plan (the "401(k) Plan")
intended to provide assistance in accumulating personal savings for retirement.
The 401(k) Plan qualified as a tax-exempt plan under Sections 401(a) and 401(k)
of the Internal Revenue Code and covers all full-time employees of AmerCable.
The Company matches up to 3.5% of eligible compensation. For the years ended
December 31, 1997, 1996 and 1995 the Company's pre-tax contributions to the
401(k) Plan were $175,000, $145,000 and $136,000, respectively.
-32-
<PAGE> 34
ASSOCIATED MATERIALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
16. CONTINGENCIES
The Company entered into a consent order dated August 25, 1992 with the
United States Environmental Protection Agency pertaining to corrective action
requirements associated with the use of hazardous waste storage facilities at
its Akron, Ohio location. With the exception of a small container storage area,
the use of such facilities was terminated prior to the acquisition of the
facilities by the Company from USX Corporation (USX) in 1984. The Company
believes that USX bears financial responsibility for substantially all of the
direct costs of corrective action at such facilities under relevant contract
terms and under statutory and common law. The effects of the past practices of
this facility are continuing to be investigated pursuant to the terms of the
consent order and as a result the Company is unable to reasonably estimate a
reliable range of the aggregate cost of corrective action at this time. To
date, USX has reimbursed the Company for substantially all of the direct costs
of corrective action at such facilities. The Company expects that USX will
continue to reimburse the Company for substantially all of the direct costs of
corrective action at such facilities. As a result, the Company believes that
any material claims resulting from this proceeding will not have a material
adverse effect on the Company.
17. PUBLIC OFFERINGS
The Company has filed a registration statement with the Commission to
sell, through an initial public offering, 2,128,800 shares (before
over-allotment) of the Company's Common Stock (the "Stock Offering"). Of these
shares, 700,000 shares of Common Stock (808,520 shares if the over-allotment
option is exercised in full) will be sold by the Company with the remaining
1,428,800 shares to be sold by certain stockholders. In addition, the Company
has filed a registration statement with the Commission to sell $75,000,000
aggregate principal amount of Senior Subordinated Notes due 2008 (the "New
Notes"). The issuance of the New Notes in such offering (the "Note Offering")
is conditioned upon the successful completion of a tender offer and consent
solicitation with respect to the Company's outstanding Senior Subordinated
Notes (Note 8). The Stock Offering is not contingent upon the completion of the
Note Offering and the Note Offering is not contingent upon the completion of
the Stock Offering.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-33-
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors, executive officers and certain key employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William W. Winspear (1).......... 64 Chairman of the Board, President and Chief Executive Officer of
the Company
Donald L. Kaufman (1)............ 66 President and Chief Executive Officer of Alside and Vice President
and Director of the Company
Richard I. Galland (2)(3)........ 81 Director
James F. Leary (3)(4)............ 67 Director
Alan B. Lerner (1)............... 67 Director
A. A. Meitz (3)(4)............... 60 Director
Gary D. Trabka (2)(5)............ 43 Director
Robert F. Hogan, Jr.............. 41 President and Chief Executive Officer of AmerCable and Vice
President of the Company
Robert L. Winspear............... 32 Vice President, Treasurer and Secretary of the Company
James R. Bussman (6)............. 50 Executive Vice President -- Corporate Services of Alside and Vice
President of the Company
Michael R. St. Clair (6)......... 51 Executive Vice President -- Finance of Alside and Vice President of
the Company
Wayne D. Fredrick (6)............ 51 Group Vice President -- Window Products of Alside
Benjamin L. McGarry (6).......... 50 Group Vice President -- Vinyl Manufacturing of Alside
</TABLE>
- --------------------
(1) Serves in the class of directors whose terms expire at the Annual Meeting
of Stockholders in 2000.
(2) Serves in the class of directors whose terms expire at the Annual Meeting
of Stockholders in 2001.
(3) Member of the Compensation Committee and the Audit Committee.
(4) Serves in the class of directors whose terms expire at the Annual Meeting
of Stockholders in 1999.
(5) Pursuant to an agreement among The Prudential Company of America
("Prudential"), the Winspear Limited Partnership, a Texas limited
partnership (the "Winspear Partnership") and the Company (the
"Stockholders' Agreement"), Prudential may, under certain circumstances,
nominate up to three persons to the Board of Directors of the Company and
the Winspear Partnership has agreed to vote its shares of Common Stock in
favor of such nominees. Pursuant to the Stockholders' Agreement,
Prudential designated Mr. Trabka to serve as a Director of the Company.
Mr. Trabka has informed the Company that he intends to resign as a
director following the completion of the Stock Offering. Further,
Prudential has informed the Company that it does not presently intend to
exercise its right under the Stockholders' Agreement to nominate persons
to serve as directors following the completion of the Stock Offering. See
"Certain Relationships and Related Transactions -- Stockholders'
Agreement."
(6) Messrs. Bussman, St. Clair, Fredrick and McGarry are considered key
employees of the Company because of their responsibilities as divisional
officers in the respective capacities indicated. The Company does not,
however, consider such employees to be executive officers of the Company.
The following is a brief description of the business experience of the
Directors, executive officers and certain key employees of the Company for at
least the past five years.
Mr. William W. Winspear has been Chairman of the Board, President and
Chief Executive Officer of the Company since its inception in 1983. Mr.
Winspear was President and Chief Executive Officer of Chaparral Steel Company
from 1975 to 1982. Mr. William W. Winspear is Chairman of the Board of
Amercord. Mr. Winspear is the father of Robert L. Winspear.
-34-
<PAGE> 36
Mr. Kaufman has been President of Alside since 1974 and has been Chief
Executive Officer of Alside since 1982. Mr. Kaufman joined Alside in 1955 and
became a Director and a Vice President of the Company in 1984.
Mr. Galland became a Director of the Company in 1984. Mr. Galland was
formerly Chairman of the Board and Chief Executive Officer of American
Petrofina Incorporated, an energy exploration and production company and
formerly Of Counsel to the law firm of Jones, Day, Reavis & Pogue. Mr. Galland
is also a director of D. R. Horton, Inc., a homebuilding company, and Texas
Industries, Inc., a steel and construction materials production company.
Mr. Leary became a Director of the Company in 1984. Since September
1995, Mr. Leary has been Vice Chairman - Finance and a director of Search
Financial Services Inc., a consumer finance company, as well as serving as
President of Sunwestern Management Inc., an investment management company,
since 1982. Mr. Leary is also a director of Capstone Growth Fund and Capstone
Fixed Income Fund, and Phase-Out of America, Inc., a company that manufactures
smoking cessation devices.
Mr. Lerner became a Director of the Company in May 1997. Mr. Lerner
retired as Senior Executive Vice President from Associates Corporation of North
America, a consumer and commercial finance company in 1993, where he had been
employed since 1981.
Mr. Meitz became a Director of the Company in 1993. Mr. Meitz retired
as Senior Vice President of the consulting firm of Booz, Allen & Hamilton, Inc.
in 1994 where he was employed since 1965. Mr. Meitz is a director of Greyhound
Lines, Inc., and Banctec, Inc., a computer systems development and support
services company.
Mr. Trabka became a Director of the Company in February 1994. Mr.
Trabka has been a Managing Director of the Prudential Capital Group since
February 1989. Prior to 1989 Mr. Trabka was Vice President of Corporate Finance
with Prudential. Mr. Trabka serves as a director of Food Barn Stores, Inc., a
retail grocery chain at the request of Prudential. Mr. Trabka is also a
director of the Prudential Home Mortgage Company, Inc. Mr. Trabka has been
designated by Prudential to serve as a director of the Company pursuant to the
Stockholders' Agreement. See "Certain Relationships and Related Transactions
- --Stockholders' Agreement."
Mr. Hogan has been President and Chief Executive Officer of AmerCable
since November 1993 and Vice President of the Company since 1984. Prior to
becoming President of AmerCable, Mr. Hogan was Treasurer and Secretary of the
Company from 1984 to 1993.
Mr. Robert L. Winspear joined the Company in June 1993 and was named
Vice President, Treasurer and Secretary in October 1993. Prior to joining the
Company, Mr. Winspear was a Senior in the Financial Consulting and Audit
division of Arthur Andersen LLP, where he had been employed since 1988. Mr.
Winspear is also a director of Amercord. Mr. Winspear is the son of William W.
Winspear.
Mr. Bussman has been Executive Vice President -- Corporate Services of
Alside since 1983. Mr Bussman has held various other positions with Alside
since 1972, and was named a Vice President of the Company in 1984.
Mr. St. Clair was named Executive Vice President -- Finance of Alside
in December 1994. Mr. St. Clair had been Senior Vice President -- Finance of
Alside since joining the Company from The Warner & Swasey Company, Inc., a
machine tool manufacturing company in 1985. Mr. St. Clair was named a Vice
President of the Company in 1986.
Mr. Fredrick was named Group Vice President -- Window Products of
Alside in January 1997. From 1990 to 1996, Mr. Fredrick was Senior Vice
President -- Window Products of Alside. Mr. Fredrick joined Alside in 1973.
Mr. McGarry was named Group Vice President -- Vinyl Manufacturing of
Alside in January 1997. From 1984 to 1996, Mr. McGarry was Senior Vice
President -- Manufacturing of Alside. Mr. McGarry joined Alside in 1980.
Officers of the Company serve at the discretion of the Board of
Directors.
-35-
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by the
Company for services rendered in 1997, 1996 and 1995 by the Chief Executive
Officer and each of the other executive officers of the Company. For the
purposes of this report, Messrs. W.W. Winspear, Kaufman, Hogan and R.L.
Winspear are referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
-------------------------------------- -----------------
FISCAL SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(2) COMPENSATION
- --------------------------- ------ --------- --------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
William W. Winspear............... 1997 $ 436,667 $ 342,930 -- $ 31,600(3)
Chairman of the Board, 1996 $ 400,000 $ 214,362 -- $ 30,250
President and Chief 1995 $ 398,333 $ 28,005 -- $ 30,250
Executive Officer
Donald L. Kaufman................. 1997 $ 378,333 $ 209,529 100,000 $ 26,000(4)
President and Chief 1996 $ 345,000 $ 181,666 -- $ 102,742
Executive Officer of Alside 1995 $ 343,335 $ 102,595 -- $ 127,199
Robert F. Hogan, Jr............... 1997 $ 172,917 $ 206,654 -- $ 5,600(5)
President and Chief 1996 $ 150,000 $ -- -- $ 5,250
Executive Officer of AmerCable 1995 $ 150,000 $ -- -- $ 5,250
Robert L. Winspear................ 1997 $ 100,816 $ 34,293 -- $ 3,529(6)
Vice President, Treasurer 1996 $ 82,292 $ 21,436 -- $ 2,880
and Secretary 1995 $ 79,583 $ 2,801 -- $ 2,785
</TABLE>
- -----------------------
(1) Perquisites and other personal benefits received by the named executive
officers are not included in the Summary Compensation Table because the
aggregate amount of such compensation, if any, did not meet disclosure
thresholds established under current regulations of the Commission.
(2) In February 1997, Mr. Kaufman was granted options to purchase 100,000
shares of Common Stock at $12.00 per share, the fair market value of the
Common Stock on the date of grant. The options vested 50% on the date of
grant and the balance vests on the second anniversary of the date of
grant.
(3) Includes directors fees of $26,000 and amounts accrued or allocated under
AmerCable's retirement plan of $5,600.
(4) Includes directors fees of $26,000.
(5) Includes amounts accrued or allocated under AmerCable's retirement plan of
$5,600.
(6) Includes amounts accrued or allocated under AmerCable's retirement plan of
$3,529.
-36-
<PAGE> 38
OPTION/SAR GRANTS IN 1997
The following table provides information regarding the grant of stock
options to the named executive officers in 1997. In addition, hypothetical
gains of 5% and 10%, along with a third column representing a 0% gain (listed
in the table under "Potential Realizable Value at Assumed Annual Rates of Stock
Price Appreciation for Option Term"), are shown for these stock options. These
hypothetical gains are based on assumed rate of annual compound stock price
appreciation of 0%, 5% and 10% from the date the stock options were granted
over the full option term of ten years.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS/ OF STOCK PRICE
UNDERLYING SARS APPRECIATION
OPTIONS/ GRANTED TO EXERCISE FOR OPTION TERM (3)
SARS EMPLOYEES PRICE PER EXPIRATION -----------------------------------
NAME GRANTED IN 1997 SHARE (2) DATE 0% 5% 10%
---- -------------- ----------------- ----------- --------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William W. Winspear 0 -- % $ -- -- $ -- $ -- $ --
Donald L. Kaufman 100,000(1) 100 12.00 February 25, 2007 -- 754,673 1,912,491
Robert F. Hogan 0 -- -- -- -- -- --
Robert L. Winspear 0 -- -- -- -- -- --
</TABLE>
- -------------------------
(1) The exercise price was equal to the fair market value of the Common Stock
on the date of grant. The Company has not granted stock appreciation
rights.
(2) The option for such shares became 50% vested on the date of grant and the
balance vests on the second anniversary of the grant.
(3) The potential realizable value portion of the foregoing table illustrate
value that might be realized upon exercise of the option immediately prior
to the expiration of its term, assuming the specified compounded rates of
appreciation on the Common Stock over the term of the option. The use of
the assumed 5% and 10% annual rates to stock price appreciation are
established by the Commission and is not intended by the Company to
forecast possible future appreciation of the price of its Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION/SAR VALUES
The following table provides information, for each of the named
executive officers, regarding the exercise of options during 1997 and
unexercised options held as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT
AT DECEMBER 31, 1997 (1) DECEMBER 31, 1997 (2)
------------------------------ -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William W. Winspear 0 $ 0 0 0 $ 0 $ 0
Donald L. Kaufman 0 0 50,000 50,000 250,000 250,000
Robert F. Hogan 0 0 0 0 0 0
Robert L. Winspear 0 0 20,000 0 281,500 0
</TABLE>
- -------------------------
(1) The Company has not granted stock appreciation rights.
(2) Value was determined based upon $17.00 per share (the mid-point of the
price range per share for Common Stock in the Stock Offering) multiplied
by the number of shares of Common stock of the Company underlying such
options.
-37-
<PAGE> 39
COMPENSATION AND INCENTIVE PROGRAMS
Profit Sharing Plan. The Company maintains a profit sharing plan (the
"Profit Sharing Plan") providing for annual bonus awards to certain key
employees, including each of the executive officers of the Company. Such bonus
amounts are based on the Company and, in the cases of Alside and AmerCable
personnel, the divisions meeting certain performance goals established by the
Company's Board of Directors. The Profit Sharing Plan is administered by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"), none of the members of which is eligible for a bonus award
pursuant to this Plan. Bonus payments under the Profit Sharing Plan are not
guaranteed. Cash bonuses accrued under the Profit Sharing Plan in 1997, 1996
and 1995 to each of the named executive officers are set forth in the Summary
Compensation Table.
Alside Retirement Plan. The Company maintains a defined benefit
pension plan, the Alside Retirement Plan (the "Alside Plan"). The Alside Plan
covers all Alside employees who have completed one year of service, except for
various designated groups of hourly and union employees. Mr. Kaufman is the
only executive officer of the Company entitled to receive benefits pursuant to
the Alside Plan. Mr. Kaufman, who is age 66, would be eligible to receive a
monthly pension amount of approximately $14,000 if he were to retire in 1998.
The Company believes that Mr. Kaufman intends to remain in his current position
as President and Chief Executive Officer of Alside and has no current intention
to retire.
Executive Agreement. Pursuant to an agreement with the Company, Mr.
Kaufman is entitled to receive severance pay in an amount equal to his total
earnings for the twelve-month period prior to the termination of his employment
for any reason.
DIRECTOR COMPENSATION
Directors, including Directors who are employees of the Company,
receive an annual retainer of $16,000 plus $2,500 for each Directors' meeting
attended. Directors are also reimbursed for reasonable travel expenses incurred
in connection with attendance at Directors' meetings.
Mr. Lerner was granted options to purchase 40,000 shares of Common
Stock at $16.00 per share in May 1997 upon first being elected to the Board of
Directors and the Company. The options became 50% vested on the date of grant
and the balance vests on the second anniversary of the date of grant.
-38-
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth as of January 15, 1998, the beneficial
ownership of Common Stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (ii) each Director
of the Company, (iii) each named executive officer, and (iv) all Directors and
executive officers of the Company as a group. Unless otherwise indicated below,
to the knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY COMMON
NAME OF BENEFICIAL OWNER OWNED SHARES (1)
------------------------ ------------ -------------
<S> <C> <C>
William W. Winspear..................................................... 3,851,200 50.7%
2200 Ross Avenue, Suite 4100 East
Dallas, TX 75201 (2) (3)
The Prudential Insurance Company of America............................. 2,700,000 35.6%
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102 (4)
Richard I. Galland...................................................... 40,000 *
Robert F. Hogan, Jr..................................................... 80,000 1.1%
Donald L. Kaufman (5)................................................... 367,000 4.8%
James F. Leary (6)...................................................... 10,000 *
Alan B. Lerner (6)...................................................... 20,000 *
A.A. Meitz (6).......................................................... 40,000 *
Gary D. Trabka (7)...................................................... 0 --
Robert L. Winspear (3) (6).............................................. 80,800 1.1%
All Directors and executive officers as a group (9 persons)............. 4,489,000 59.1%
</TABLE>
- --------------------
* Less than 1%.
(1) The percentages shown assume the conversion of all outstanding shares of
Class B Common Stock into shares of Common Stock.
(2) All such shares are held of record by the Winspear Partnership of which
Mr. William W. Winspear is the Managing General Partner.
(3) William W. Winspear is the father of Robert L. Winspear.
(4) Prudential owns of record 2,700,000 shares of Class B Common Stock which
may be converted at any time at the election of the holder into Common
Stock on a one to one basis. The holder of shares of Class B Common Stock
has rights and privileges identical to the rights and privileges of the
Common Stock, except that the holder of shares of Class B Common Stock may
vote (with the holders of Common Stock) only on (i) any amendment to the
Company's Certificate of Incorporation, (ii) any sale or other disposition
of all or substantially all of the Company's assets, (iii) any merger or
consolidation of the Company, and (iv) any liquidation, dissolution or
winding up of the Company.
(5) Includes options exercisable within 60 days of the date hereof for 50,000
shares and includes 132,000 shares of Common Stock held by trusts for the
benefit of certain members of Mr. Kaufman's family, as to which Mr.
Kaufman disclaims beneficial ownership. Excludes 6,000 held by a
charitable foundation of which Mr. Kaufman is trustee, as to which Mr.
Kaufman disclaims beneficial ownership.
(6) Includes options exercisable within 60 days of the date hereof by Messrs.
Leary, Lerner, Meitz and R.L. Winspear for 10,000, 20,000, 40,000 and
20,000 shares, respectively.
(7) Mr. Trabka is a Managing Director of the Prudential Capital Group. See
Note 4.
-39-
<PAGE> 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
The Company, the Winspear Partnership and Prudential are parties to a
stockholders' agreement (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement, Prudential and the Winspear Partnership agreed (i) not
to transfer, prior to an underwritten initial public offering of the Company's
Common Stock (an "IPO"), any of their shares of Common Stock or Class B Common
Stock, with certain limited exceptions, without offering the right to purchase
such shares, first, to the non-selling party and, second, to the Company, (ii)
if the Winspear Partnership, or any subsequent holder of its shares of Common
Stock, intends to sell any of such shares (other than in an underwritten public
offering or to an affiliate), to permit Prudential to participate in such sale
on a pro rata basis, (iii) if the Winspear Partnership, or any subsequent
holder of its shares of Common Stock, elects to sell shares of Common Stock, to
require Prudential and subsequent holders of its shares to participate in such
sale on a pro rata basis (but only if the total number of shares of Common
Stock to be sold pursuant to this clause exceeds 50% of the outstanding shares
of Common Stock and Class B Common Stock on a fully diluted basis), and (iv)
prior to an IPO to grant, first, the Company and, second the other parties to
the Stockholders' Agreement the right to purchase their shares of Common Stock
or Class B Common Stock which would otherwise be transferred as a result of a
default, foreclosure, forfeiture, court order or other involuntary transfer.
The Stockholders' Agreement also requires, so long as Prudential and certain
Prudential affiliates beneficially own at least 15% of the outstanding Common
Stock (on a fully diluted basis), all shares of Common Stock (and any other
voting securities) subject to the Stockholders' Agreement to be voted to elect
two persons designated by Prudential to a seven-person Board of Directors.
Under those provisions of the Stockholders' Agreement, Prudential has the
right, if the Company expands the board to eight members, to require the
securities subject to the Stockholders' Agreement to be voted to (i) expand the
Board to nine members, (ii) limit the size of the Board to nine members, and
(iii) elect a third Director designated by Prudential. If Prudential and its
affiliates beneficially own at least 5% (but less than 15%) of the Common
Stock, such provisions require such shares to be voted to elect to the Board
one person designated by Prudential. In addition, in the Stockholders'
Agreement the Company has granted to Prudential, the Winspear Partnership and
subsequent holders of their shares of preemptive rights prior to an IPO to
acquire additional shares of Common Stock or equivalent securities (or options,
warrants, rights or other securities exchangeable or convertible for any such
shares) to maintain their then-current percentage beneficial ownership interest
in the Company, provided such preemptive rights do not apply to the issuance of
up to 150,000 shares of Common Stock to Directors or employees of the Company
nor to the issuance of securities as consideration for an acquisition of a
business approved by the Company's Board of Directors. Finally, under the
Stockholders' Agreement, if prior to an IPO the Company sells all or
substantially all of its assets, the stockholder parties to the Agreement are
required to use their best efforts to liquidate and dissolve the Company and
distribute the Company's assets unless Prudential's shares are bought by the
Company or the other stockholder parties at a mutually agreeable price to be
negotiated at the time. Unless earlier terminated, the Stockholders' Agreement
expires August 19, 2003.
Pursuant to the Stockholders' Agreement, Prudential designated Mr.
Trabka to serve as a Director of the Company. Prudential currently has the
right to nominate two additional directors. Mr. Trabka has informed the Company
that he intends to resign as a Director following the completion of the Stock
Offering. Further, Prudential has informed the Company that it does not
presently intend to exercise its right under the Stockholders' Agreement to
nominate persons to serve as directors following the completion of the Stock
Offering.
REGISTRATION RIGHTS AGREEMENT
Under the terms of an agreement among the Company, Prudential and
certain other stockholders (the "Registration Rights Agreement"), beginning one
year after the completion of an IPO, upon the request of either Prudential or
the Winspear Partnership and its private transferees, the Company shall,
subject to certain exceptions, be required to effect two registrations of the
Common Stock, provided that certain minimum and maximum numbers of shares are
included in the request. The Registration Rights Agreement also grants
secondary offering rights ("piggy-back" rights) to Prudential, the Winspear
Partnership and certain other stockholders in connection with such requested
registrations and any other Company registration of Common Stock or Common
Stock equivalents. The registration rights may not be transferred, with certain
exceptions, to persons who, after such transfer, would hold less than 100,000
shares of Common Stock or Class B Common Stock.
The Registration Rights Agreement further provides that the Company
will bear all expenses associated with the Company's obligation to effect such
registrations, other than underwriting discounts, commissions and transfer
taxes, if any. The Company's obligation to pay such expenses includes the
out-of-pocket expenses (including legal and accounting expenses) for the first
registration of Common Stock by Prudential or its private transferees, up to
$100,000, and for the first registration of Common Stock by the Winspear
Partnership or its private transferees, up to $100,000, including the
registration effected in connection with an IPO.
-40-
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are included in this report.
(a)(1) FINANCIAL STATEMENTS
See Index to Financial Statements at Item 8 on page 17 of this report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of schedules, or because the information required is included in the
financial statements and notes thereto.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1997, the Company filed a
Current Report on Form 8-K, dated December 12, 1997. The report included
information under Item 5 --Other Events.
(c) EXHIBITS
3.1 -- Restated Certificate of Incorporation, as amended, of Associated
Materials Incorporated (the "Company") (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-84110 (the "1994 Registration Statement")).
3.2 -- Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the 1994 Registration Statement).
4.1 -- Form of Indenture between the Company and U.S. Trust Company of
Texas, N.A., as Trustee (the "New Indenture") (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1, Commission File No. 33-42067 (the "1997 Debt Registration
Statement")).
4.2 -- Form of Senior Subordinated Note under the New Indenture
(incorporated by reference to Exhibit A to Exhibit 4.1 to the 1997
Debt Registration Statement).
4.3 -- Indenture, dated as of August 1, 1993, between the Company and U.S.
Trust Company of Texas, N.A., as Trustee (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K")).
4.4 -- Form of Senior Subordinated Note issuable under the Indenture
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Commission File No. 33-64788
(the "1993 Registration Statement")).
4.5 -- Registration Rights Agreement, dated as of August 19, 1993, among
the Company, PruSupply Capital Assets, Inc. ("PruSupply"), W.W.
Winspear, M.M. Winspear, D.J. Allan, M.G. Winspear, D.W. Winspear,
R.L. Winspear, B.W. Meyer, The Principal/The Eppler, Guerin &
Turner, Inc., Frank T. Lauinger, John Wallace and Bonnie B. Smith
(incorporated by reference to Exhibit 4.3 to the 1993 Form 10-K).
4.6 -- Stockholders' Agreement, dated as of August 19, 1993, among the
Company, PruSupply, W.W. Winspear and M.M. Winspear (incorporated
by reference to Exhibit 4.4 to the 1993 Form 10-K).
4.7 -- Amendment to the Stockholders' Agreement, dated as of April 1,
1994, among the Company, PruSupply, W.W. Winspear and M.M. Winspear
(incorporated by reference to Exhibit 4.5 to the 1994 Registration
Statement).
-41-
<PAGE> 43
4.8 -- Second Amendment to the Stockholders' Agreement, dated as of July 1,
1994, among the Company, PruSupply, W.W. Winspear and M.M. Winspear
(incorporated by reference to Exhibit 4.6 to the 1994 Registration
Statement).
4.9 -- Third Amendment to the Stockholders' Agreement, dated as of
October 12, 1994, among the Company, Prudential and the Winspear
Family Limited Partnership (incorporated by reference to Exhibit
4.15 to the 1994 Registration Statement).
4.10 -- Assumption Agreement, effective as of July 29, 1994, by the
Winspear Family Limited Partnership (incorporated by reference to
Exhibit 4.7 to the 1994 Registration Statement).
4.11 -- Assumption Agreement, effective as of September 30, 1994 by The
Prudential Insurance Company of America ("Prudential")
(incorporated by reference to Exhibit 4.14 to the 1994 Registration
Statement).
4.12 -- Trust Indenture, dated as of June 1, 1992, between the Company and
KeyBank, N.A. (formerly Society National Bank) ("KeyBank"),
relating to the Company's taxable variable rate demand notes
("Taxable Notes") (incorporated by reference to Exhibit 4.43 to the
1993 Registration Statement).
4.13 -- Remarketing Agreement, dated as of June 1, 1992, between the
Company and KeyBank as Remarketing Agent, relating to the Taxable
Notes (incorporated by reference to Exhibit 4.44 to the 1993
Registration Statement).
4.14 -- Note Purchase Agreement, dated as of June 26, 1992, between the
Company and Automated Cash Management Trust, relating to the
Taxable Notes (incorporated by reference to Exhibit 4.45 to the
1993 Registration Statement).
4.15 -- Irrevocable Letter of Credit, dated as of June 1, 1992, between
the Company and KeyBank relating to the Taxable Notes (incorporated
by reference to Exhibit 4.46 to the 1993 Registration Statement).
4.16 -- Master Agreement, dated as of April 5, 1993, between the Company
and KeyBank evidencing an interest rate swap relating to the
Taxable Notes (incorporated by reference to Exhibit 4.47 to the
1993 Registration Statement).
10.1 -- Agreement of Sale, dated as of January 30, 1984, between USX
Corporation (formerly United States Steel Corporation) ("USX") and
the Company (incorporated by reference to Exhibit 10.1 to the 1993
Registration Statement).
10.2 -- Amendment Agreement, dated as of February 29, 1984, between USX
and the Company (incorporated by reference to Exhibit 10.2 to the
1993 Registration Statement).
10.3 -- Subscription and Stockholders Agreement, dated as of June 25,
1986, among the Company, Florida Wire and Cable Company ("Florida
Wire"), GCR S.p.A. ("GCR") and Amercord Inc. (the "Subscription
Agreement") (incorporated by reference to Exhibit 10.5 to the 1993
Registration Statement).
10.4 -- Management Agreement, effective as of May 1, 1986, between
Amercord Inc. and the Company (incorporated by reference to Exhibit
10.8 to the 1993 Registration Statement).
10.5 -- Form of Indemnification Agreement between the Company and each of
the Directors and executive officers of the Company (incorporated
by reference to Exhibit 10.14 to the 1994 Registration Statement).
10.6* -- Profit Sharing Plan of the Company (incorporated by reference to
Exhibit 10.15 to the 1993 Registration Statement).
10.7* -- Alside Retirement Plan (incorporated by reference to Exhibit
10.16 to the 1993 Registration Statement).
10.8 -- Associated Materials Incorporated Amended and Restated 1994 Stock
Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997).
-42-
<PAGE> 44
10.9* -- Letter Agreement, dated May 13, 1983, between Donald L. Kaufman
and Company, as amended (incorporated by reference to Exhibit 10.4
to the 1994 Registration Statement).
10.10 -- Second Amended and Restated Loan and Security Agreement, dated as
of April 2, 1996, between the Company and KeyBank (the "Credit
Agreement") (incorporated by reference to Exhibit 10.1 to the
March 31, 1996 Form 10-Q).
10.11 -- Third Amended and Restated Note, dated April 2, 1996, from the
Company to KeyBank relating to the Credit Agreement (incorporated
by reference to Exhibit 10.1 to the March 31, 1996 Form 10-Q).
11.1 -- Computation of Ratio of Earnings Per Share.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- List of Subsidiaries of the Company.
24.1 -- Powers of Attorney of Directors and certain executive officers of
the Company.
27.1 -- Financial Data Schedule.
-----------------
* Constitutes a compensatory plan or arrangement.
-43-
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Dallas, State of Texas on January 30, 1998.
ASSOCIATED MATERIALS INCORPORATED
By: /s/ ROBERT L. WINSPEAR
---------------------------------------------
Robert L. Winspear
Vice President, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities
and on the date indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
WILLIAM W. WINSPEAR* Chairman of the Board, President and
---------------------------- Chief Executive Officer
William W. Winspear (Principal Executive Officer)
/s/ ROBERT L. WINSPEAR Vice President, Secretary and Treasurer
---------------------------- (Principal Financial and Accounting Officer)
Robert L. Winspear
RICHARD I. GALLAND* Director
----------------------------
Richard I. Galland
DONALD L. KAUFMAN* Director
----------------------------
Donald L. Kaufman
JAMES F. LEARY* Director
----------------------------
James F. Leary
ALAN B. LERNER* Director
----------------------------
Alan B. Lerner
A. A. MEITZ* Director
----------------------------
A. A. Meitz
Director
----------------------------
Gary D. Trabka
</TABLE>
Robert L. Winspear, by signing his name hereto, signs and
executes this document on behalf of each of the above-named officers and
directors of Associated Materials Incorporated on the 30th day of January,
1998, pursuant to powers of attorney executed on behalf of each of such
officers and directors, and contemporaneously filed hereunto with the
Securities and Exchange Commission.
* By: /s/ ROBERT L. WINSPEAR
-------------------------------
Robert L. Winspear
Attorney-in-Fact
-44-
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 -- Restated Certificate of Incorporation, as amended, of Associated
Materials Incorporated (the "Company") (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-84110 (the "1994 Registration Statement")).
3.2 -- Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the 1994 Registration Statement).
4.1 -- Form of Indenture between the Company and U.S. Trust Company of
Texas, N.A., as Trustee (the "New Indenture") (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1, Commission File No. 33-42067 (the "1997 Debt Registration
Statement")).
4.2 -- Form of Senior Subordinated Note under the New Indenture
(incorporated by reference to Exhibit A to Exhibit 4.1 to the 1997
Debt Registration Statement).
4.3 -- Indenture, dated as of August 1, 1993, between the Company and U.S.
Trust Company of Texas, N.A., as Trustee (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K")).
4.4 -- Form of Senior Subordinated Note issuable under the Indenture
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Commission File No. 33-64788
(the "1993 Registration Statement")).
4.5 -- Registration Rights Agreement, dated as of August 19, 1993, among
the Company, PruSupply Capital Assets, Inc. ("PruSupply"), W.W.
Winspear, M.M. Winspear, D.J. Allan, M.G. Winspear, D.W. Winspear,
R.L. Winspear, B.W. Meyer, The Principal/The Eppler, Guerin &
Turner, Inc., Frank T. Lauinger, John Wallace and Bonnie B. Smith
(incorporated by reference to Exhibit 4.3 to the 1993 Form 10-K).
4.6 -- Stockholders' Agreement, dated as of August 19, 1993, among the
Company, PruSupply, W.W. Winspear and M.M. Winspear (incorporated
by reference to Exhibit 4.4 to the 1993 Form 10-K).
4.7 -- Amendment to the Stockholders' Agreement, dated as of April 1,
1994, among the Company, PruSupply, W.W. Winspear and M.M. Winspear
(incorporated by reference to Exhibit 4.5 to the 1994 Registration
Statement).
4.8 -- Second Amendment to the Stockholders' Agreement, dated as of July
1, 1994, among the Company, PruSupply, W.W. Winspear and M.M.
Winspear (incorporated by reference to Exhibit 4.6 to the 1994
Registration Statement).
4.9 -- Third Amendment to the Stockholders' Agreement, dated as of
October 12, 1994, among the Company, Prudential and the Winspear
Family Limited Partnership (incorporated by reference to Exhibit
4.15 to the 1994 Registration Statement).
4.10 -- Assumption Agreement, effective as of July 29, 1994, by the
Winspear Family Limited Partnership (incorporated by reference to
Exhibit 4.7 to the 1994 Registration Statement).
4.11 -- Assumption Agreement, effective as of September 30, 1994 by The
Prudential Insurance Company of America ("Prudential")
(incorporated by reference to Exhibit 4.14 to the 1994 Registration
Statement).
4.12 -- Trust Indenture, dated as of June 1, 1992, between the Company and
KeyBank, N.A. (formerly Society National Bank) ("KeyBank"),
relating to the Company's taxable variable rate demand notes
("Taxable Notes") (incorporated by reference to Exhibit 4.43 to the
1993 Registration Statement).
</TABLE>
<PAGE> 47
<TABLE>
<S> <C>
4.13 -- Remarketing Agreement, dated as of June 1, 1992, between the
Company and KeyBank as Remarketing Agent, relating to the Taxable
Notes (incorporated by reference to Exhibit 4.44 to the 1993
Registration Statement).
4.14 -- Note Purchase Agreement, dated as of June 26, 1992, between the
Company and Automated Cash Management Trust, relating to the
Taxable Notes (incorporated by reference to Exhibit 4.45 to the
1993 Registration Statement).
4.15 -- Irrevocable Letter of Credit, dated as of June 1, 1992, between
the Company and KeyBank relating to the Taxable Notes (incorporated
by reference to Exhibit 4.46 to the 1993 Registration Statement).
4.16 -- Master Agreement, dated as of April 5, 1993, between the Company
and KeyBank evidencing an interest rate swap relating to the
Taxable Notes (incorporated by reference to Exhibit 4.47 to the
1993 Registration Statement).
10.1 -- Agreement of Sale, dated as of January 30, 1984, between USX
Corporation (formerly United States Steel Corporation) ("USX") and
the Company (incorporated by reference to Exhibit 10.1 to the 1993
Registration Statement).
10.2 -- Amendment Agreement, dated as of February 29, 1984, between USX
and the Company (incorporated by reference to Exhibit 10.2 to the
1993 Registration Statement).
10.3 -- Subscription and Stockholders Agreement, dated as of June 25,
1986, among the Company, Florida Wire and Cable Company ("Florida
Wire"), GCR S.p.A. ("GCR") and Amercord Inc. (the "Subscription
Agreement") (incorporated by reference to Exhibit 10.5 to the 1993
Registration Statement).
10.4 -- Management Agreement, effective as of May 1, 1986, between
Amercord Inc. and the Company (incorporated by reference to Exhibit
10.8 to the 1993 Registration Statement).
10.5 -- Form of Indemnification Agreement between the Company and each of
the Directors and executive officers of the Company (incorporated
by reference to Exhibit 10.14 to the 1994 Registration Statement).
10.6* -- Profit Sharing Plan of the Company (incorporated by reference to
Exhibit 10.15 to the 1993 Registration Statement).
10.7* -- Alside Retirement Plan (incorporated by reference to Exhibit
10.16 to the 1993 Registration Statement).
10.8 -- Associated Materials Incorporated Amended and Restated 1994 Stock
Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997).
10.9* -- Letter Agreement, dated May 13, 1983, between Donald L. Kaufman
and Company, as amended (incorporated by reference to Exhibit 10.4
to the 1994 Registration Statement).
10.10 -- Second Amended and Restated Loan and Security Agreement, dated as
of April 2, 1996, between the Company and KeyBank (the "Credit
Agreement") (incorporated by reference to Exhibit 10.1 to the
March 31, 1996 Form 10-Q).
10.11 -- Third Amended and Restated Note, dated April 2, 1996, from the
Company to KeyBank relating to the Credit Agreement (incorporated
by reference to Exhibit 10.1 to the March 31, 1996 Form 10-Q).
11.1 -- Computation of Ratio of Earnings Per Share.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- List of Subsidiaries of the Company.
24.1 -- Powers of Attorney of Directors and certain executive officers of
the Company.
27.1 -- Financial Data Schedule.
</TABLE>
- -----------------
* Constitutes a compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 11.1
ASSOCIATED MATERIALS INCORPORATED
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Income applicable to common stock........... $ 5,227 $7,874 $1,260 $8,822 $13,089
======= ====== ====== ====== =======
Weighted average number of basic common
shares outstanding........................ 6,235 7,532 7,532 7,594 7,594
Basic earnings per common share............. $ 0.84 $ 1.05 $ 0.17 $ 1.16 $ 1.72
======= ====== ====== ====== =======
Exercise outstanding warrants and options... 6,249 439 402 352 307
Repurchase of shares under the treasury
stock method.............................. (132) (182) (239) (200) (145)
Weighted average number of diluted common
shares outstanding........................ 12,352 7,789 7,695 7,746 7,756
Diluted earnings per common share........... $ 0.42 $ 1.01 $ 0.16 $ 1.14 $ 1.69
======= ====== ====== ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 12.1
ASSOCIATED MATERIALS INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA
----------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before income tax expense.... $12,352 $12,975 $ 1,805 $13,994 $22,613 $24,632
Fixed Charges:
Interest expense.................. $ 7,581 $10,580 $11,474 $10,882 $ 9,795 $ 7,926
Portion of rents representative of
interest factor................ 2,833 2,957 3,301 3,737 3,904 3,904
Amortization of debt.............. 202 540 540 445 398 247
------- ------- ------- ------- ------- -------
Total fixed charges....... $10,616 $14,077 $15,315 $15,064 $14,097 $12,077
Earnings.......................... $22,968 $27,052 $17,120 $29,058 $36,710 $36,709
Ratio of earnings to fixed
charges........................... 2.16x 1.92x 1.12x 1.93x 2.60x 3.04x
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF ASSOCIATED MATERIALS INCORPORATED
NONE
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints William W. Winspear and Robert L. Winspear and either
of them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, to sign on behalf Associated Materials
Incorporated, a Delaware corporation (the "Company"), and on behalf of the
undersigned in my capacity as an officer and/or a director of the Company, the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
to sign any or all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder, granting unto said
attorney or attorneys-in-fact, and either of them with or without the other,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned may
or could in person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or either of them or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of January 28, 1998.
<TABLE>
<S> <C>
/s/ WILLIAM W. WINSPEAR /s/ JAMES F. LEARY
- ----------------------- -----------------------
William W. Winspear James F. Leary
/s/ ROBERT L. WINSPEAR /s/ ALAN B. LERNER
- ----------------------- -----------------------
Robert L. Winspear Alan B. Lerner
/s/ RICHARD I. GALLAND /s/ A.A. MEITZ
- ----------------------- -----------------------
Richard I. Galland A. A. Meitz
/s/ DONALD L. KAUFMAN
- ----------------------- -----------------------
Donald L. Kaufman Gary D. Trabka
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,935
<SECURITIES> 0
<RECEIVABLES> 53,620
<ALLOWANCES> 4,423
<INVENTORY> 56,621
<CURRENT-ASSETS> 111,310
<PP&E> 103,420
<DEPRECIATION> 49,565
<TOTAL-ASSETS> 178,504
<CURRENT-LIABILITIES> 50,119
<BONDS> 75,000
0
0
<COMMON> 19
<OTHER-SE> 44,715
<TOTAL-LIABILITY-AND-EQUITY> 178,504
<SALES> 397,690
<TOTAL-REVENUES> 0
<CGS> 283,514
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 81,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,795
<INCOME-PRETAX> 22,613
<INCOME-TAX> 9,524
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,089
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.69
</TABLE>
