HIGH YIELD/                                                                                                               ...
announced on February 3, 2006, Associated’s President and CEO, Michael Caporale,    resigned, effective at the time a succ...
offerings, the majority of products sold support the installation of siding. The following sectionwill focus on Associated...
Raw Materials. Primary raw materials used in the manufacture of Associated’s windows andsiding include prime polyvinyl chl...
SidingSiding, or exterior cladding, is the material applied to the exterior of a house to protect it fromweather and pests...
home buyer, though, the less-than-ideal exterior is more than made up for by increased homesquare footage.Vinyl siding can...
Competition. As mentioned above, the siding industry is considerably more consolidated thanthe fenestration industry. Each...
Figure 2                                                     SIDING PRODUCT COMPARISON                                    ...
MARKETSAssociated Materials’ business is affected by macro trends across a number of different markets.The following secti...
Figure 5                                                                                                     Figure 6     ...
learned to install the product, installation time has decreased and competition has increased,driving installation costs d...
with regard to rising mortgage interest rates, the JCHS points out that less than one-third of allhome remodeling is finan...
19% in Canada. Based on recent data from the U.S. Department of Commerce, new home startsin the Northeast, Midwest and Wes...
aluminum and micro-ingredients, the rise in PVC has placed pressure on Associated’sgross margins, contributing to a gross ...
SUPPLY CHAINAssociated is relatively unique among exterior building products manufacturers in that itprimarily distributes...
Each of Associated’s supply centers is evaluated as a distinct profit center that compensates itspersonnel based on profit...
CORPORATE STRUCTURE          Figure 16                                                                                    ...
December 31, 2005, the Company is required to make principal payments based upon apercentage of Excess Cash Flow.The credi...
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
Associated Materials 060307
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Associated Materials 060307

  1. 1. HIGH YIELD/ DISTRESSED MILLER TABAK ROBERTS SECURITIES, LLC RESEARCH_________________________________________________________ REPORT Associated Materials Inc. (SIDE) Mdys/ Current BondCoupon Description Issuer Maturity CUSIP S&P Amt O/S Yield YTW Price Opinion 9.750% Senior Subordinated Notes Associated 04/15/12 045709AE2 Caa2/CCC $ 165MM 9.7% 9.6% 100.50 Hold 11.250% Senior Discount Notes AMH 03/01/14 001706AB6 Caa3/CCC $ 307MM 0.0% 15.8% 53.75 Sell 13.625% Senior Notes AMH II 12/01/14 NA NA $ 77MM NA NA NA NA* 11.25% Senior Discount Notes were issued at an aggregate principal amount of $446 million.Moodys and S&Ps outlook is stable. March 7, 2006 Ronald A. Rich (212) 692-5185 rrich@mtrdirect.comOPINIONWe initiate coverage of Associated Materials with a HOLD recommendation on thestructurally senior 9.75% Senior Subordinated Notes and a SELL recommendation on the11.25% Senior Discount Notes. We expect the company to successfully navigate lowerliquidity levels in the second quarter of fiscal 2006 and 2007, though we believe there are anumber of external forces that could potentially compromise the company’s medium-termfinancial health, including further raw material cost increases, a mature vinyl siding market,a rising mortgage interest rate environment, and a softening new home construction market.In our restructuring scenario, to which we have applied a cumulative probability of 32.5%, the9.75% Senior Subordinated Notes are fully covered by distributable value, while the 11.25%Senior Discount Notes are substantially impaired. As compared with our investment hurdlerates of 9.5% and 20.0% on the Senior Subordinated Notes and the Senior Discount Notes, wecalculate an expected internal rate of return of 9.0% and 9.8%, respectively. While the 9.75%Senior Subordinated Notes could come under pricing pressure should our fundamental viewmaterialize, our HOLD recommendation reflects our belief that the Notes are currently fullyvalued.SUMMARY• Headquartered in Cuyahoga Falls, OH, Associated Materials Inc. is a leading manufacturer and distributor of vinyl windows, vinyl siding, aluminum and steel siding, and accessories, with net sales of $1.1 billion. Harvest Partners and Investcorp own the company.• The company has recently been adversely affected by softness in the repair and remodeling markets within pockets of the Midwest and Central regions, soaring polyvinyl chloride and aluminum costs, as well as slowing growth in its vinyl siding segment. Additionally, as 331 MADISON AVENUE NEW YORK, NEW YORK 10017 (212) 867-7959 FAX (212) 867-6492 (800) 452-4528 (888) HI-YIELD www.MTRdirect.com Please refer to the last page of this report for important disclosures
  2. 2. announced on February 3, 2006, Associated’s President and CEO, Michael Caporale, resigned, effective at the time a successor is named; we consider this a negative.• We expect continued strong unit growth in window sales, offset by slightly declining unit volumes in siding and accessories. Gross margins are anticipated to continue to be under pressure, with raw material recovery projected to begin in the fourth quarter of fiscal 2006.• Fiber-cement siding, via James Hardie Industries, is acquiring an increasing share of the siding market, possibly to the long-term detriment of vinyl siding and Associated Materials.• We project that prime polyvinyl chloride pricing will abate at a rate of $0.02 per pound per quarter, while aluminum will maintain its bull run through 2006, resulting in a year-over-year net negative effect on gross profit through the third quarter of fiscal 2006.• The debt load associated with the company and its parent entities was acquired in connection with its take-private transaction and two dividend recapitalizations. Net leverage and net interest/dividend coverage through the 13.625% Senior Notes are 7.5x and 1.3x, respectively.• LTM adjusted EBITDA is $95.7 million for the period ending September 30, 2005, as compared with $124.0 million in the prior-year period. Liquidity at the end of the third quarter of 2005 was $75.7 million, comprised of $3.8 million of cash and $71.9 million of revolver availability. Our base case scenario produces a trough liquidity position in the second quarter of 2006 of $30.0 million.BUSINESS OVERVIEWAssociated Materials Inc. (“Associated” or “Company”) is a leading manufacturer and distributorof exterior building products with LTM sales of $1.1 billion for the period ending September 30,2005. The Company’s core products consist of vinyl windows, vinyl siding, aluminum and steelsiding, and accessories, and are complemented by vinyl fencing, decking and railing products, aswell as third-party manufactured products. Associated distributes its products through acompany-owned network of 129 supply centers (70% of net sales) and approximately 250independent distributors across the U.S. and Canada. Products are marketed to an estimated50,000 contractors, as well as to an increasing new home builder base. Approximately 60% ofAssociated’s products are currently sold to contractors engaged in the home repair andremodeling market, while 40% is sold to the new construction market; historically, therepair/remodel market has accounted for 66% of sales. As of January 1, 2005, the Company hadapproximately 3,317 full-time employees, with an estimated 615 workers covered by collectivebargaining agreements.Recent financial performance has been adversely affected by a number of factors. The Companyhas experienced a slowing in its home repair and remodeling market within pockets of theMidwest and Central regions, flat vinyl siding unit volumes, and lower Other product volumes.Rising raw material costs (resin and aluminum), a very competitive and possibly maturing vinylsiding market, higher freight costs due to higher fuel costs, and manufacturing efficienciesrelated to a plant consolidation, have all impacted gross margins.PRODUCT LINESAssociated Materials manufactures and distributes vinyl windows, vinyl siding, aluminum trimcoil, aluminum and steel siding, and accessories, as well as vinyl fencing, decking and railing.As a specialty distributor, it offers a wide variety of products within its company-owned supplycenters that are complemented by third-party products (15% of net sales), including roofingmaterials, insulation, and installation equipment and tools. Outside of the Company’s core 2
  3. 3. offerings, the majority of products sold support the installation of siding. The following sectionwill focus on Associated’s primary product lines, as well as those elements that differentiatethem and drive their competitive dynamic.WindowsVinyl windows comprised 31% of Associated’s 2004 net sales, totaling $339 million.Associated manufactures and distributes its windows across the economy, standard and premiumcategories under the Alside, Revere, Gentek and Preservation brand names. The Company’seconomy windows are sold primarily into the new construction market, while the standard andpremium windows are typically used in repair and remodeling. All of Associated’s windows aremade to order and, in the repair and remodeling segment, are custom manufactured to fit existingwindow openings. Custom fabrication results in a less expensive and higher quality installation.The Company manufactures its windows at facilities in Ohio, Iowa, North Carolina, Washingtonand London, Ontario (Canada), most of which utilize vinyl extrusions produced in its WestSalem, Ohio vinyl extrusion facility. Associated expects to complete construction of a newwindow manufacturing facility in Yuma, Arizona in 2006.Types. All windows share the same basic construction - glass, mounted in a sash that sits in aframe. The arrangement of these elements produces various styles, including double-hungwindows (the most popular), casement windows, sliding windows, bay windows, hopperwindows and awning windows. Each suits a certain style of house and has benefits that differaccording to weather and use. Associated manufactures most styles of window.Materials. With regard to exterior building material products, consumers seek the best looking,lowest maintenance product for a given price point. Windows are no exception and haveevolved to offer consumers a greater choice of materials, and varying appearance andmaintenance attributes. Wood tends to be the most popular material, especially for that part ofthe window that is seen from the interior. While it does not conduct cold or allow forcondensation as much as other materials, it is subject to shrinkage and swelling. A woodwindow will require repainting on its exterior every few years. A clad-wood window addressesthe maintenance issue with cladding, made of extruded aluminum or vinyl, on its exterior. Thecladding covers both the sash and frame, and is virtually maintenance-free. Vinyl cladding isconstructed so that its color permeates the material, reducing the appearance of wear. Ascompared with vinyl, aluminum-clad windows are offered in a greater variety of colors, but willscratch. The all-vinyl window, which is produced by Associated, is among the least expensivewindow types and is resistant to heat loss and condensation. The newest material technologiescombine wood fiber and thermoplastic polymers to produce a window that has the dimensionalstability and insulating properties of wood and the rot imperviousness of vinyl.Product Features. Energy efficiency in windows is an ongoing focus for new productdevelopment, incorporating multiple panes of glass, gas fillings, and heat-sensitive coatings.Most new windows utilize dual-pane glass, in which a layer of inert gas, such as krypton orargon, is sealed between the inner and outer panes. Another method of achieving energy savingsis through a low-emissivity (low-E) coating, an invisible layer of metallic oxide that reduces thepassage of heat through the glass. Low-E coatings also filter ultraviolet radiation, protectingfurniture and artwork from fading. Associated’s window line incorporates these energy savingfeatures, which is consistent with most major manufacturers. Another popular trend is makingthe vinyl window exterior appear more like wood by creating the appearance of a grain in thevinyl. 3
  4. 4. Raw Materials. Primary raw materials used in the manufacture of Associated’s windows andsiding include prime polyvinyl chloride (“PVC”), resin stabilizers and pigments, packagingmaterials, window hardware and glass. With many of these materials reliant upon energy-related feedstock, and with raw materials accounting for an estimated 50% of the cost ofgoods sold, Associated has come under pressure to maintain margins in the face of risingcosts. Between the third and fourth quarters of fiscal 2005, the Company experienced a35% increase in its cost of resin, as well as a 25% increase in the cost of micro-ingredients.Pricing. Due to the high degree of competitor fragmentation and product feature proliferation inthe fenestration (the arrangement of windows in a wall) industry, the pricing of windows is lesstransparent to the end-user than the price of siding. This has allowed manufacturers to betterexploit price/benefit trade-offs and price their products more opportunistically. A vinyl windowproduced for the new construction market costs approximately $180, while a replacementwindow will cost around $210. A wood window can be $100 to $150 more than a vinyl window,and a vinyl-clad wood window can be even more expensive.Decision-maker. The primary decision-maker Figure 1in the purchase of a window depends upon BUILDING PRODUCTSwhether the window is being sold into the new Top Industry Participantsconstruction or repair/remodel market. In a WINDOW MANUFACTURERS SIDING MANUFACTURERS Associated Materials Associated Materialssurvey conducted by the National Fenestration Jeld-Wen AlcoaRating Council in 2001, home builders Anderson Pella Owens Corning Louisiana-Pacificaccounted for 87% of decision-makers for Atrium Windows & Doors Silver Line Building Products Royal Group Technologies CertainTeedwindow purchases in the new construction Weather Shield Milgard Windows Ply Gem Industries James Hardiemarket. Builders appear to be very loyal to MI Windows & Doors Kaycan Building Materials Marvin Windows & Doors Heartland Building Productsparticular manufacturers and cited high quality PRO DEALERS SPECIALTY DISTRIBUTORS Hughes Supply Associated Materialsand consistent, reliable service as their two top Stock Building Supply Rinker Materialsreasons for their ongoing relationship with the 84 Lumber Lanoga ABC Supply Bradco Supplymanufacturer. In the repair/remodel market, BMHC Builders FirstSource Allied Building Products Pacific Coast Building Productsconsumers have a greater impact on the The Strober Organization Norandex Distribution (Owens) Huttig Building Products Beacon Roofing Supplypurchase decision, speaking to the importance Hope Lumber & Supply Harvey Industries RETAILERS HOME BUILDERSof brand recognition and transparency regarding Home Depot D.R. Hortonefficiency made possible through energy- Lowes Companies Wal-mart Pulte Homes Lennar Corp.efficiency ratings systems. Sears Menards Centex Corp. KB Home CCA Global Partners Beazer Homes USA Sherwin-Williams The Ryland GroupCompetition. The fenestration industry is Stock Building Supply Hovnanian Enterprises 84 Lumber M.D.C. Holdingshighly fragmented, comprised of an estimated Lanoga NVR Source: MTRfour to five hundred window manufacturers.Companies compete primarily on relationships with distributors and home builders, price/benefitand service. Leading window manufacturers include Anderson, Jeld-Wen, Pella, AtriumWindows & Doors, MI Windows & Doors, Milgard Windows, Silver Line Building Products,Weather Shield, Marvin Windows & Doors, Ply Gem Industries, Simonton Windows,CertainTeed (owned by St. Gobain), Royal Group Technologies, Owens Corning and AssociatedMaterials (see Figure 1). Strategic consolidation, as well as private equity investment, continuesto shape the competitive landscape of the industry. As of July 2005, Window & Door Magazineestimated that the nation’s top five window manufacturers accounted for approximately one-thirdof all residential window units, up from 25% in 1995. 4
  5. 5. SidingSiding, or exterior cladding, is the material applied to the exterior of a house to protect it fromweather and pests, helping to prevent moisture penetration and the growth of biologicalcontaminants such as mold, dust mites and bacteria. In fiscal 2004, vinyl siding accounted for28% of Associated Materials’ net sales, or $306 million. The Company manufacturers its vinylsiding in a variety of patterns and colors across the economy, standard and premium categories.As with windows, economy siding is sold into the new construction market, while standard andpremium siding are primarily used in the repair/remodel market. Associated also manufactures abroad range of painted and vinyl coated aluminum trim coil to support vinyl siding installations.In addition, the Company makes aluminum siding and accessories that are sold into specificmarkets, such as Canada.Types. There are a number of different types of exterior cladding, including wood, vinyl, metal,composite wood, fiber-cement, stucco, brick and stone. Each presents its own trade-offs thatcenter on upfront product cost, maintenance and appearance (see Figure 2).Materials. While it has long been considered the standard for exterior cladding, wood is losingmarket share to other cladding materials. According to the U.S. Census Bureau, wood sidingwas used on 10% of new homes in 2002, as compared with 30% in 1970. The primary issue hasbeen its cost, as well as the cost of maintenance. Depending upon the weather of a particularregion, wood siding must be repainted every three to five years. Vinyl, the current marketleader, and fiber-cement have progressively taken market share from wood, due primarily totheir lower maintenance requirements (see Markets). Vinyl siding does not have to be paintedand can usually be washed clean with a garden hose. Fiber-cement has become increasinglypopular and may have recently reached a tipping point in market recognition. Given theimportance of its emergence, fiber-cement siding will be discussed in greater detail below. Insome parts of the country, masonry sidings are popular. These systems include thin brick,cultured stone, concrete brick and stucco. Brick and stone have the lowest life cycle costbecause of low maintenance costs, but they also have the highest initial cost.Geography. Over time, different materials have come to dominate distinct geographic markets,driven by local weather, style and affordability. Historically, vinyl siding has been the exteriorcladding of choice in the Midwest, followed by the Mid-Atlantic and South Atlantic regions.Wood cladding is common in the Northeast, Pacific Northwest and South Central regions.Stucco accounts for approximately 50% of the South West, while brick is readily found in theSouth Central region.Vinyl Siding Pros. With a 40%-plus market share position, vinyl siding is the exterior claddingof choice for homes priced up to $300,000. Beyond its low maintenance benefits, its popularityhas grown over the past decade due to new product offerings such as wood-like textures, shingleand shake-style panels, more appealing trim components and deeper colors. In addition, mostlarger vinyl siding manufacturers warranty their products to the original owner for fifty years orfor life.Vinyl Siding Cons. When queried about the leadership position of vinyl siding in the exteriorcladding market, competing materials manufacturers will ask, “What person says that, when shegrows up, she would like to live in a plastic house?” The question makes an over-simplifiedpoint, but it does speak to the primary downside of vinyl siding – it is not wood. For the starter- 5
  6. 6. home buyer, though, the less-than-ideal exterior is more than made up for by increased homesquare footage.Vinyl siding can be damaged by impact, severe winds and heat reflecting off a window. Becausevinyl siding expands and contracts in response to temperature changes, the quality of installationgreatly affects the appearance and longevity of a vinyl siding application. Poor workmanshipcan lead to bulges, warping and separations in the siding, sags in the vinyl soffitt and ripples inthe fascia.Quality. The quality of vinyl siding often begins with its thickness. Economy siding, typically0.040 inches thick, is sold into the new construction market, while standard and premium siding,often 0.044 to 0.048 inches thick, is more common in the repair/remodel market. Thickness notonly influences the stiffness of the siding, but also its thermal stability. Thin panels can bulgeand buckle, and those thinner than 0.040 inches can sag in hot weather. Rigid panels will alsobetter survive high winds. Recent advancements include a foam-backed siding in whichconventional vinyl is fused with expanded polystyrene. The result is a more rigid board that canhave a wider reveal and a straighter face. The foam-backed siding is priced up to 50% more thanconventional vinyl, positioning it up-market and making it less competitive with substituteproducts.Raw Materials. PVC is the primary raw material used in the production of vinyl siding. It isheated until molten and then extruded into sheets that are then embossed with a brushed orwood-grain pattern that provides texture and reduces PVC’s synthetic look. Additives are usedto improve impact resistance and prevent UV damage and color fading. Color pigments aremixed with the vinyl resin before the plastic is extruded, so that the color permeates the siding.Some manufacturers co-extrude one layer of vinyl over another, with the bottom layer comprisedof both prime and recycled PVC.Pricing. With six primary manufacturers in the marketplace and an estimated fifteensecondary producers, pricing in the vinyl siding market is relatively transparent. Priceincreases by manufacturers typically follow a herd mentality, with some leading (Alcoa) andothers following (Associated). Vinyl siding’s on-the-wall cost (installed), depending uponthickness, can range between $1.50 and $2.00 per square foot, with a typical installationrequiring 2,500 square feet of siding. By comparison, fiber-cement and wood plank’s on-the-wall cost is approximately $2.65 per square foot and $3.50 per square foot, respectively.Decision-maker. In a study published in the July 2001 Forest Products Journal, it was foundthat, among architects, contractors and homeowners, homeowners were by far the least likely toselect the siding for new residential construction projects. Architects and contractors did indicatethat homeowner opinion was important, though, and cited appearance and performance as themost important influences in their selection of siding material. Among cost factors, installationand warranty costs ranked the highest. Our conversations with building materials distributorsreinforce this conclusion and extend it to include most repair/remodel installations. Empirically,distributors have found that consumers have limited awareness of siding manufacturers and arehighly influenced by their contractor and architect. This speaks to the value of Associated’ssupply centers and the Company’s ability to directly represent its product to its customer.It has also been noted that builders and lumberyards are highly price sensitive, whilerepair/remodel contractors place a greater emphasis on brand. 6
  7. 7. Competition. As mentioned above, the siding industry is considerably more consolidated thanthe fenestration industry. Each manufacturer tends to emphasize a particular segment of thesiding market, which will also drive its products’ presence in certain distribution channels. Forexample, Alcoa’s product line focuses on higher-end, higher margin siding, which will typicallynot be found in lumberyards; Royal Group Technologies produces a lower-end product that itmarkets to home builders. Leading siding manufacturers include Alcoa, Royal GroupTechnologies, CertainTeed, Louisiana-Pacific, Owens Corning, Ply Gem, James HardieIndustries and Associated Materials.Seasonality. Given that most of the Company’s building products are intended for exterior use,sales are somewhat seasonal, with an emphasis on the second and third fiscal quarters and amarked low in the first quarter of the year. This seasonality is more pronounced in theCompany’s siding line as compared to windows. 7
  8. 8. Figure 2 SIDING PRODUCT COMPARISON Cost per Siding Types Description SF Pros Cons Manufacturers Alcoa, Associated Does not need to be Materials, Does not look like painted, color CertainTeed, wood, fewer color permeates thickness, Crane, choices than wood, $ 1.50 - low maintenance, Heartland, VINYL more easily damaged 2.00 improving likeness to Louisiana- and more difficult to wood, material and Pacific, Nailite, repair than wood, little installation costs are Owens Corning, insulation value, relatively low Royal Group Technologies, Variform Unmatched beauty and durability, takes a variety of finishes, easy to install and Boards, shingles, $ 3.00 - repair, some insulation Expensive, must be WOOD Boise Cascade shakes 4.00 value, available painted or stained prestained, primed or unfinished, fire- retardent, environment- friendly Least expensive, easiest composite to $ 1.50 - Plywood install, best suited to Boise Cascade 2.00 contemporary-styled homes Preprimed and Boise Cascade, Oriented Strand Molded to look like $ 1.50 - Does not look like COMPOSITE WOOD prefinished in a variety Louisiana- Board (OSB) clapboard 2.00 wood of colors Pacific Preprimed and Does not look like Molded to look like $ 1.50 - Louisiana- Hardboard prefinished in a variety wood, questionable clapboard 2.00 Pacific of colors durability Panels made of kiln- No mortar required, Thin Brick Expensive fired clay bricks maintenance free $ 12.00 - No mortar required, Owens Corning, Stone Expensive 15.00 maintenance free Eldorado Stone U.S. Gypsum, Available in a number Sand and cement $ 12.00 - Dryvit, Senergy, Stucco of colors, textures and product 16.00 Parex, Simplex, MASONRY patterns, waterproof La Habra, STO Available in planks or panels, variety of Made of cement sand textures, primed, Brittle, tough on James Hardie, and cellulose fiber, Fiber-cement $ 2.65 prefinished or blades, requires CertainTeed, designed to look like unprimed, impact topcoat maintenance Nichiha wood resistant, termite and fireproof Durable, less prone to Alcoa, Owens Aluminum corrosion, less Corning, Revere, Poor insulator, limited expensive than steel Rollex METAL colors, denting, difficult Durable, resists dents to install and repair Steel better than aluminumSource: New-Siding.com and MTR 8
  9. 9. MARKETSAssociated Materials’ business is affected by macro trends across a number of different markets.The following section will discuss those elements that define each of these markets, addressingmarket size, historical trends and market drivers.WindowsDriven by growth in remodeling and an increasing trend toward larger homes that require agreater number of windows, domestic window demand has grown rapidly over the past ten years.The vinyl window’s initial success in the marketplace came at the expense of aluminum, but it isincreasingly taking market share from wood. The Freedonia Group has estimated that vinylwindow demand will grow at a compounded annual rate of 5.0% between 2002 and 2012;this compares with Associated’s approximate 10% year-to-date unit volume growth. In2004, Ducker Research estimated that vinyl windows accounted for 35.1% of all windows usedin new construction and 52.3% of windows used in the repair and remodel market (see Figures 3,4). Vinyl’s success in the repair/remodel market stems from the manufacturing flexibilityrequired to produce a wide variety of custom sizes. Industry participants attribute recentstrong demand for windows to the consumer’s desire to lower monthly energy bills.Looking forward, replacement windows are estimated to grow to 59% of total window demandin 2008 and to 62% of total window demand in 2012. As for vinyl’s future market share, vinylwindow manufacturers are optimistic about continued growth in the segment and expect vinyl tocontinue to take share from wood and aluminum.Figure 3 Figure 4 VINYL WINDOW SHARE OF WINDOW MARKET RESIDENTIAL WINDOW MARKET (In Millions of Units) 35.5% 52.5% 32.0 New Construction Repair/Remodel 52.0% 35.0% 30.0 28.0 Units 51.5% 34.5% 26.0 51.0% 24.0 34.0% 50.5% 22.0 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Percentage of New Construction Percentage of Repair/Remodel New Construction Repair/RemodelSource: Ducker Research Co. from National Fenestration Rating Council Source: Ducker Research Co. from National Fenestration Rating CouncilSidingBased upon figures from the National Association of Home Builders, the exterior claddingmarket as a whole is expected to be flat through 2006 at 12.0 billion square feet; this compareswith 11.9 billion square feet in 2003. As shown in Figure 5, exterior cladding in therepair/remodel segment is expected to continue to grow to 6.5 billion square feet in 2006, whilethe new construction market is projected to remain relatively flat at 5.5 billion square feet. 9
  10. 10. Figure 5 Figure 6 EXTERIOR CLADDING U.S. SHIPMENTS OF VINYL SIDING AND SOFFIT* (In Billions of SF) (In Millions of Squares) 6.6 45.0 Squares (10x10SF) 40.0 6.2 Square Feet 35.0 5.8 30.0 5.4 25.0 20.0 5.0 2002 2003 2004 2005P 2006P 15.0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 New Construction Repair/RemodelSource: NAHB from James Hardie Industries * Data reflects only companies reporting shipments to VSI, except 1991 data. Source: Vinyl Siding Institute from Plastics NewsVinyl siding has grown tremendously over the past twenty years, peaking at an estimated 41.3million squares in 2004 (see Figure 6). Much of its market share growth has been rooted in itslow installation and maintenance costs. Rising resin and micro-ingredient costs have driven theprice of vinyl siding higher and closer to that of potential substitutes, such as fiber-cement.Vinyl siding unit volumes are down 2.6% year-over-year in 2005, and some industryparticipants believe that the category has matured. We have had numerous conversationswith building materials distributors and extrusion equipment manufacturers, and webelieve that fiber-cement siding may very well be taking market share from vinyl siding.Fiber-cement Siding. Introduced in the United States in the early 1980’s, fiber-cement may be atits tipping point in terms of market growth acceleration. The technology gained a footholdwithin the southern U.S. as a much-needed replacement to hardboard. Hardboard, a combinationof wood pulp and resin, had experienced tremendous problems due to moisture, which resulted inwarping, deterioration, delaminating and rotting. Fiber-cement siding made its initial marketinroads as the replacement technology to hardboard.Fiber-cement siding is made of cement, sand and cellulose fiber that has been cured withpressurized steam, offering the homeowner that which vinyl cannot – the look of wood. Theaesthetic of fiber-cement siding is considered superior to vinyl by many. It is less expensivethan brick or masonry, it is stiff Figure 7and solid on the wall, it isextremely durable, it sheds JAMES HARDIE MARKET PENETRATIONwater, and requires painting as (In Billions of SF)little as every ten years. 1.6 13.0%Though still more expensive Share of U.S. Siding 1.4 12.0%than vinyl, the on-the-wall price 1.2 11.0% Square Feet Marketof fiber-cement siding has been 1.0 10.0% 0.8 9.0%in decline, as the price of vinyl 0.6 8.0%has been increasing. This is 0.4 7.0%primarily due to the labor 0.2 6.0%component of installation. 2000 2001 2002 2003 2004 2005EConsiderably heavier than Fiber-cement Siding Hardie Market Sharevinyl, a fiber-cement siding Source: James Hardie Industriesinstallation requires one-thirdmore man-hours to install; it also requires its own tools and skill set for installation. In thebeginning stages of market penetration, there were few contractors that had the experience toinstall fiber-cement siding, and those who had it charged a premium. As more contractors have 10
  11. 11. learned to install the product, installation time has decreased and competition has increased,driving installation costs down. In addition, as land values have soared over the past decade, thecost of siding has become a smaller component of the overall cost of housing, creating greaterpricing inelasticity. Detractors of fiber-cement siding cite that it is heavy (2.3 pounds per squarefeet), brittle (resulting in greater waste during installation), requires special installation tools andis more difficult to install.We believe that most vinyl manufacturers are fully aware of the threat of fiber-cement andare working to develop competing products. Evidently, the technology is not easy toduplicate, and market penetration may require an approach that vinyl siding manufacturers donot currently have. With an estimated 90% market share of the fiber-cement siding market,James Hardie has projected that it will have penetrated 12.6% of the U.S. siding market in 2005(see Figure 7).Repair and Remodel Figure 8Historically, the repair/remodelmarket has accounted for two- THE REMODELING MARKETthirds of Associated’s net sales. 290 50%This has changed somewhat 270through fiscal 2005, reflecting Billions of Dollars 250 Market Sharesoftness in some repair/remodel 230 45%markets, as well as a greater 210corporate emphasis on new 190 40% 170home builders. As of the third 150quarter of fiscal 2005, 130 35%repair/remodel net sales 1995 1997 1999 2001 2003 2005Edeclined to 60% from 66% of Total Residential Spending Remodel Spending as % Totaltotal year-to-date sales, Source: Joint Center for Housing Studies, Harvard Universityreflecting a material shift inyear-over-year end-market sales.Strength in the repair/remodel market is driven by underlying demand and the consumer’s abilityto pay for this demand. During the recent market expansion, demand has been driven byfavorable demographics led by the baby boom generation, an aging housing stock, increasedaverage home size and low financing rates. As shown in Figure 8, remodeling spending, whilehaving increased from $153 Figure 9billion in 1995 to an estimated CONSUMER CONFIDENCE$275 billion in 2005, grew at aslower rate than new 110.0construction spending. 100.0 90.0 IndexIn a recent presentation on the 80.0state of the U.S. homeimprovement industry, the Joint 70.0Center for Housing Studies 60.0(JCHS) at Harvard University 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05addressed a number of concerns National East North Centralregarding the future of the Source: The Conference Boardrepair/remodel market. Firstly, 11
  12. 12. with regard to rising mortgage interest rates, the JCHS points out that less than one-third of allhome remodeling is financed (though studies by the Federal Reserve Board have found that asignificant share of recent refinancings was used for home improvements). Secondly, Centerdata suggests that high-end income growth has kept pace with home price inflation, allowingrecent homebuyers to continue to afford home improvements. Lastly, as baby boomers agebeyond their prime remodeling years, their consumption is being replaced by Generation X’ersthat possess greater spending power than their predecessors, compensating for the variance inpopulation size.In the near-term, the JCHS expects remodeling spending to continue to grow modestly, askey drivers of home improvement spending, such as home sales, employment increases andincome growth, remain steady. The latter two elements directly affect consumer confidence,which is a leading indicator for remodeling expenditures. In Figure 9, we have graphed theConsumer Confidence Index, as reported by The Conference Board, juxtaposing the East NorthCentral region with the rest of the country. Comprised of Ohio, Indiana, Illinois, Michiganand Wisconsin, the East North Central region (the Midwest region accounted for anestimated 24% of Associated’s 2004 net sales) is not only lagging the rest of the country,but it is also diverging.New Home ConstructionNew home construction currently accounts for 40% of Associated’s net sales, and that figuremay continue to grow depending upon the repair/remodel market and management’s successwith developing new home builder business. While new home construction sales are lowermargin than those to the repair/remodel market, we believe that the home builder marketrepresents an under-tapped opportunity for the Company and a means to better leveragethe Company’s supply centers. From a defensive point of view, increased penetration ofthis market would provide Associated with EBITDA contribution that should help to offsetthe softness in its Midwest and Central repair/remodel markets.Since 1991, housing starts have Figure 10increased at a compounded NEW HOME STARTSannual growth rate of 4.9%. Seasonally Adjusted Annual RateDriven by low mortgageinterest rates, favorable 2,200 Units In Thousandsdemographics, increasing 2,100 2,000immigrant demand for starter 1,900homes, and maturing baby 1,800boomers seeking second homes, 1,700this rate has accelerated to 1,60012.3% over the past two years; 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05simultaneously, new home Nationalstarts increased from aseasonally adjusted annual rate Source: U.S. Department of Commerceof 1.7 million units in the first quarter of 2003 to a peak of 2.1 million units in the third quarterof 2005 (see Figure 10). The Homeownership Alliance predicts that these demand drivers willlead to 1.85 million to 2.17 million new U.S. housing starts per year through 2014.We estimate that Associated’s net sales are geographically allocated in the following manner forfiscal 2004: 21% in the Northeast, 24% in the Midwest, 30% in the South, 6% in the West, and 12
  13. 13. 19% in Canada. Based on recent data from the U.S. Department of Commerce, new home startsin the Northeast, Midwest and West regions for the fourth quarter of 2005 are down from peaklevels, while reaching a new high in the South region (see Figures 11,12). The Northeast andWest regions exhibited peak home starts in the third quarter of 2005 at 198,000 and 550,000seasonally adjusted annual units, respectively. New home starts in the Midwest peaked at403,000 units in the third quarter of 2003 and are currently down 17% from peak levels.Figure 11 Figure 12 NEW HOME STARTS NEW HOME STARTS % Change from Peak Home Starts % Change from Peak Home Starts 5% 5% 0% 0% -5% -5% % Change % Change -10% -10% -15% -15% -20% -25% -20% -30% -25% 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 Northeast South Midwest WestSource: U.S. Department of Commerce and MTR Source: U.S. Department of Commerce and MTRThe National Association of Home Builders’ chief economist, David Seiders, expects overallhousing starts to reach 1.94 million units in 2006, down 5.8% from an estimated 2.06 millionunits in 2005.Raw MaterialsAs compared with the effects of changing end-user and product markets, the effect ofAssociated’s cost of raw materials, net of price increases, may prove to be more difficult tomanage and may have the greatest impact on the Company’s near-term liquidity.Polyvinyl Chloride. Resin is an important component of Associated’s raw material mix,accounting for an approximate 13% of total cost of goods sold. The Company’s vinyl siding andvinyl window products utilize PVC, as well as micro-ingredients that are responsible for avariety of physical properties. PVC is a widely used plastic found in products ranging fromclothing to plumbing fixtures, and its presence is so pervasive in the building industry through itsuse in pipe, conduit, frames and siding, that its demand cycles with construction trends. TheAmerican Plastics Council estimates that rigid pipe and tubing account for half of all domesticPVC sales in the United States and Canada, while other construction-related uses account foralmost 22%. PVC is produced Figure 13from its monomer, vinylchloride, which is dependent PRIME PVC PRICINGupon the feedstocks natural gas, 75chlorine and ethylene. 70 PVC (cents/lb) 65 60Pricing on prime PVC has 55increased 90.8% since the first 50 45quarter of fiscal 2003, moving 40from 38 cents per pound to 72.5 35cents per pound in the fourth 03 03 03 03 04 04 04 04 05 05 05 05 E P P P 06 06 06 06 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2Q 3Q 4Q 1Qquarter of 2005 (see Figure 13). Prime PVCAlong with increases in otherraw materials such as steel, Source: Plastics News, Bloomberg and MTR 13
  14. 14. aluminum and micro-ingredients, the rise in PVC has placed pressure on Associated’sgross margins, contributing to a gross profit reduction (due to raw material cost increases)of $11.2 million for the nine months ended September 30, 2005 (adjusted gross profit forthe nine months ended September 30, 2004 was $221 million).PVC pricing is not only dependent on petrochemical pricing but also on the supply and demanddynamic of its chemical and monomer feeds. Dow Chemical is expected to close its vinylchloride monomer plant in the first half of 2006, accounting for an estimated 10% reduction indomestic production capacity. It has been speculated that PVC pricing has increased to a levelthat will spur the use of substitutes such as concrete and ductile iron for rigid pipe in theconstruction industry. While there appears to be a number of opposing forces on pricing, wehave based our projections on our conversations with PVC producers, which predict somepricing relief over the coming year.Forecasted PVC pricing is an important driver in our model for the Company’s projected grossmargin. The extent of its impact will depend upon the market’s acceptance of pricing pass-throughs. We have forecast PVC pricing to begin to abate to 70 cents per pound in the firstquarter of 2006, and thereafter to decline to 60 cents per pound in the second quarter of2007; the decrease will be driven by increased supply due to normalized domesticproduction capacity following Hurricanes Katrina and Rita, as well as augmented Chinaproduction capacity (as forecasted by CMAI, reaching 35% in 2005 and 17% in 2006).Aluminum. Management has Figure 14stated that aluminum and steel ALUMINUM PRICINGaccount for 12% ofAssociated’s total cost of goods 1.30sold. In addition to its use in 1.20 Dollars per Poundsiding and siding accessories, 1.10aluminum is a key raw material 1.00 0.90in the Company’s metal 0.80offerings (18% of 2004 net 0.70sales), including trim coil and 0.60flatstock. Since 2003, P P P 03 03 03 03 04 04 04 04 05 05 05 05 E 06 06 06 06 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2Q 3Q 4Q 1Qaluminum has consistentlytrended upward, increasing Aluminum48.6% through the fourth Source: The London Metal Exchange Limited via the Companyquarter of 2005 (see Figure 14). According to American Metal Market, many industry sourcesbelieve that the aluminum market has been greatly supported by investment fund interest, giventhat aluminum supply is not that constrained. It has been estimated that, by the end of 2005,there had been $80 billion invested in commodity index funds, up from $50 billion twelvemonths earlier. In addition, the industry is concerned with the possibility of a UnitedSteelworkers strike at a number of Alcoa facilities, with formal contract negotiations scheduledto begin in early May 2006. Offsetting these demand drivers is the possible start-up of idledsmelting capacity, as well as substitute products that become more competitive as aluminumpricing increases. Having reached $1.18 per pound, many metal analysts believe that theprice of aluminum will continue to move higher over the next six months. As shown inFigure 14, our model assumes that aluminum will increase through the third quarter of 2006,peaking at $1.29 per pound. 14
  15. 15. SUPPLY CHAINAssociated is relatively unique among exterior building products manufacturers in that itprimarily distributes its products through a network of company-owned supply centers. Thisvertically integrated structure is core to the Company’s growth strategy, carrying with it distinctpros and cons. In this section, we will discuss the makeup of distribution channels in thebuilding products industry, the manner in which Associated’s structure differs, and itsimplications for the Company.The building products Figure 15 BUILDING PRODUCTSdistribution landscape is Supply Chaincomprised of pro dealers, Home Buildersspecialty distributors (also Specialty Warehouse Home Contractors,known as short-line Distributors Centers Homeownersdistributors) and retailers Pro Dealers Contractors Warehouse(see Figure 15). Each is Home Centers Contractors, Homeownersdifferentiated through the Home Buildersproducts and services it Building Product Manufacturers Contractorsoffers and the end-markets Home Builderseach serves. The pro dealer Specialty Distributors Warehouse Contractors, Homeowners Home Centersprimarily supplies the home Contractorsbuilder, the remodeling Warehouse Home Contractors, Homeowners Centerscontractor, and the Home Builderswarehouse home center, Source: MTRoffering a broad range ofproducts. As home builders have consolidated over the past decade, large pro dealers have seentheir share of sales concentrate among fewer customers. This, typically, has meant loweraverage gross margins. On the whole, this segment’s business has become more relationshipdriven and often entails a bundled service offering that helps to ensure a loyal customer base,including such benefits as advice on project design and material selection, next day delivery,delivery to the job site, and help with resolving customer disputes. Just like pro dealers,specialty distributors also sell to home builders, contractors and warehouse home centers.Specialty distributors specialize in a few particular product lines, offering greater breadth anddepth of SKU’s than pro dealers, which often translates into fewer inventory turns. They willalso carry complementary product lines that are needed for a particular project, providing a one-stop shopping experience for the contractor. Because the specialty distributor focuses onparticular product segments, it can often react faster than the pro dealer to customer servicedemands, an important aspect of differentiation. Over the past fifteen years, warehouse homecenters, led by Home Depot and Lowe’s, have increasingly accounted for a larger share of salesto the do-it-yourself homeowner, as well as contractors. Home Depot views contractors as keyto its growth and has installed “pro desks” in more than 1,400 stores. In a move to more broadlyand effectively serve the business customer, Home Depot announced in January 2006 that it willacquire Hughes Supply for $3.2 billion, or 11.1x LTM EBITDA. Hughes Supply, one of thenation’s largest diversified wholesale distributors of construction-related products, has more than500 locations in 40 states.Focusing on vinyl windows and siding, as well as on complementary and supplementary productlines, Associated Materials is considered a specialty distributor. Leveraging a footprint of 129company-owned supply centers and approximately 250 independent distributors throughout theU.S. and Canada, the Company claims direct access to over 50,000 professional contractors. 15
  16. 16. Each of Associated’s supply centers is evaluated as a distinct profit center that compensates itspersonnel based on profitability. For the nine months ended September 30, 2005, the Companyopened four new supply centers, in-line with Company guidance. Associated’s managementunderstands the importance of supplementing its center network with an independent distributorbase, one of the main reasons for its 2003 acquisition of Gentek Holdings. The Companyprovides its independent distributor network with private label product, as well as sales andmarketing support. Sales to independent distributors for fiscal 2004 accounted for approximately30% of total net sales.Distribution within the building products industry is also segmented by one- and two-stepdistribution channels. On the manufacturing side of the supply chain, one-step distribution refersto the direct sale to builders, while the two-step model makes use of distributors. With regard tobuilding material distributors, one-step distribution refers to product sold to an end-user; two-step distribution is the sale of product from one distributor to another that will ultimately sell tothe end customer. Both are common in the building materials marketplace.The Company believes that managing its own supply centers allows it to build long-standingcustomer relationships, develop customized marketing programs, monitor customer preferences,and better manage distribution logistics. Given the Company’s understanding for its localmarkets, we were surprised that it does not have a better sense for the underpinnings of the recentsoftness in pockets of the Midwest and Central regions. Based upon discussions with industryparticipants, customer relationship management appears to be very important, especiallywith regard to products such as siding where brand recognition by the consumer is limited.There are also a number of drawbacks to owning supply centers, which include higherfixed costs, inventory financing costs, management focus, and channel conflict, which limitsthe independent distributors with which the Company can do business. Medium-term, wecan envision a scenario in which Associated’s core contractor customer base is attackedfrom two fronts: from up-market by pro dealers who may decide to diversify their focus inlight of a potentially softening home builder customer base; and from down-market bywarehouse home centers (such as Home Depot via its acquisition of Hughes Supply). Theformer would likely prove more to be a less plausible threat, given the differences in customerservice needs between the two customer groups. We believe that the Company’s decision toleverage infrastructure and increase its emphasis on home builders is a positive, even though theincremental business will result in overall lower gross margin. The incremental gross margindecrease may, in part, be recouped through the increased leverage of the supply centers. 16
  17. 17. CORPORATE STRUCTURE Figure 16 AMH Holdings II (AMH II) 13.625% Senior Notes AMH Holdings, Inc. (AMH) 11.25% Senior Disc Notes Gtd Credit Facility Capital stock secures credit facility Associated Materials Holdings Inc. (Holdings) Gtd Credit Facility Associated Materials Inc. (Associated) 9.75% Senior Sub Notes $ 70MM Revolver $ 175MM Term Alside, Inc. Gentek Holdings, Inc. Gentek Bldg. Products, Inc. Gentek Bldg. Products, Ltd. Gt 9.75% on Sr. Sub basis Gt 9.75% on Sr. Sub basis Gt 9.75% on Sr. Sub basis Ontario, CA Gtd Credit Facility Gtd Credit Facility Gtd Credit Facility $ 20MM Revolver Capital stock secures credit facility Capital stock secures credit facility Capital stock secures credit facility 2/3 Capital stock secures credit facility (no operations) Canadian Subs Gtd Gentek Credit Facility Source: Company reportsCAPITAL STRUCTUREAs shown in Figure 16, there are four debt issues affiliated with Associated Materials. The U.S.portion of the credit facility and the Senior Subordinated Notes were issued at AssociatedMaterials Inc., the operating holding company, while the credit facility’s Canadian sub-facilitywas issued at Gentek Building Products Ltd. The Senior Discount Notes have each been issuedat distinct holding companies and are not obligations of Associated. Associated MaterialsHoldings Inc. (“Holdings”), the direct parent of the Company, is a pass-through entity and has nomaterial relevance to debt service.Senior Credit FacilityAssociated’s senior credit facility is comprised of a $70 million U.S. revolving loan, a US$20million Canadian revolving sub-facility, and a $174.6 million term loan. As of September 30,2005, the credit facility had no outstanding borrowings on the revolvers, and net of $8.1 millionof LC’s, it had revolver availability of $71.9 million. The revolving credit facility bears interestat LIBOR plus a margin of 3.25%, which can decline to as low as 2.50% depending upon theCompany’s leverage ratio; it is scheduled to expire in April 2009. The credit facility’s term loanbears interest at LIBOR plus 2.50%, payable quarterly, and is due in August 2010. Under theterm loan facility, the Company is required to make minimum quarterly principal amortizationpayments of 1% per year, commencing September 30, 2005. Also, on an annual basis beginning 17
  18. 18. December 31, 2005, the Company is required to make principal payments based upon apercentage of Excess Cash Flow.The credit facility is secured by a security interest in substantially all of the Company’s assetsand the assets of the domestic guarantors under the credit facility, and a pledge of the Company’scapital stock, the capital stock of Holdings and the capital stock of the Company’s domesticsubsidiaries (and up to two-thirds of the voting stock of “first tier” foreign subsidiaries). Thecredit facility is jointly and severally guaranteed by AMH Holdings (“AMH”), Holdings and allof the Company’s direct and indirect wholly owned domestic subsidiaries. All obligations ofGentek under the credit facility are secured by the capital stock and assets owned by Gentek andits Canadian subsidiaries, and are also jointly and severally guaranteed by Gentek’s whollyowned Canadian subsidiaries.On February 1, 2006, Associated Materials entered into Amendment No. 1 to its SecondAmended and Restated Credit Agreement. The Amendment (1) increased the interest margins oneach of the term loan facility and revolving credit facility by 25 basis points; (2) increased theU.S. portion of the revolving credit facility from U.S.$60 million to U.S.$70 million; and (3)amended certain covenants, in particular, the Leverage Ratio, the Interest Coverage Ratio and theFixed Charge Coverage Ratio. The Credit Agreement (in addition to the Note indentures) alsogoverns the restricted payments required to service the Senior Discount Notes at the holdingcompany levels. In addition, the Agreement limits capital expenditures to $28 million in fiscal2005, and to $25 million in any fiscal year thereafter, with unused amounts able to be carriedforward. Coinciding with the seasonal drawdown on the revolver, we project that the Companywill come close to falling out of compliance with its leverage ratio covenant in the secondquarter of fiscal 2006.9.75% Senior Subordinated NotesAssociated issued $165 million of 9.75% Senior Subordinated Notes in April 2002 in connectionwith its take-private transaction. The Notes bear interest at an annual rate of 9.75%, payablesemiannually in April and October, and are scheduled to mature in April 2012.The 9.75% Notes are general unsecured obligations of the Company, subordinated in right ofpayment to senior indebtedness and senior in right of payment to any current or futuresubordinated indebtedness of the Company. The Company’s payment obligations under theNotes are fully and unconditionally guaranteed, jointly and severally on a senior subordinatedbasis, by its domestic wholly owned subsidiaries Gentek Holdings, Inc., Gentek BuildingProducts Inc. and Alside, Inc. Gentek Building Products Limited is a Canadian company anddoes not guarantee the Company’s 9.75% Notes.The 9.75% Notes indenture allows the Company to incur indebtedness such that the calculatedpro forma Consolidated Coverage Ratio exceeds 2.0x. The Consolidated Coverage Ratio isdefined as the ratio of EBITDA for the most recent four consecutive fiscal quarters for whichfinancial statements are available to Consolidated Interest Expense for such four fiscal quarters;Consolidated Interest Expense includes, among other items, non-cash interest expense, interestexpense attributable to capital lease obligations, amortization of debt discount and debt issuancecosts, and capitalized interest. Notwithstanding the Consolidated Coverage Ratio, the Companycan incur Permitted Indebtedness that includes, among other items, indebtedness pursuant to theCredit Agreement, not to exceed the greater of (a) $165 million less net available cash used torepay balances owed under the Credit Agreement, and (b) the sum of 65% of the book value of 18

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