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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2004
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File Number: 333-114041
PLY GEM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 3089 20-0645710
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------------------------
185 Platte Clay Way
Kearney, Missouri 64060
Registrant's telephone number, including area code: 800-800-2244
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 [_]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes [_] No [X]
As of November 15, 2004, there were 100 shares of common stock, $0.01 par value,
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
Combined Consolidated
---------------------- --------------------
Post-Nortek
Recapitalization
Ply Gem Industries, Ply Gem
Inc. Holdings, Inc.
---------------------- --------------------
December 31, 2003 October 2, 2004
---------------------- --------------------
(Amounts in thousands, except share and per
share amounts)
(Unaudited)
ASSETS
CURRENT ASSETS:
Unrestricted cash and cash equivalents....................................$ 8,517 $ 20,540
Restricted cash and cash equivalents...................................... 1,538 -
Accounts receivable, less allowances of $8,695 and $8,314, respectively .. 45,236 92,262
INVENTORIES
Raw materials.......................................................... 19,075 27,729
Work in process ....................................................... 3,648 4,391
Finished goods ........................................................ 21,413 30,829
------- ---------
44,136 62,949
Prepaid expenses and other current assets ................................ 5,280 8,157
Deferred income taxes .................................................... 8,392 2,520
------- ---------
Total current assets................................................. 113,099 186,428
PROPERTY AND EQUIPMENT:
Land...................................................................... 7.395 2,578
Buildings and improvements ............................................... 37,200 18,912
Machinery and equipment .................................................. 88,745 104,154
------- ---------
133,340 125,644
Less accumulated depreciation ............................................ (10,524) (10,992)
------- ---------
Total property and equipment, net ................................... 122,816 114,652
OTHER ASSETS:
Goodwill ................................................................. 219,977 551,583
Intangible assets, less accumulated amortization of $3,837 and $12,845,
respectively.......................................................... 44,363 155,951
Other .................................................................... 3,113 49,511
------- ---------
Total other assets .................................................. 267,453 757,045
------- ---------
$ 503,368 $ 1,058,125
======= =========
LIABILITES AND STOCKHOLDERS' EQUITY / PARENT COMPANY DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt .....................................$ 1,136 $ 2,350
Account payable .......................................................... 18,876 45,951
Accrued expenses and taxes ............................................... 32,452 53,449
------- ---------
Total current liabilities ............................................ 52,464 101,750
Deferred income taxes .................................................... 25,323 33,994
Other long term liabilities .............................................. 30,119 31,330
Long-term debt, less current maturities .................................. 423,161 699,587
STOCKHOLDERS' EQUITY / PARENT COMPANY DEFICIT:
Preferred stock $.01 par, 100 shares authorized, none issued and outstanding - -
Common stock $.01 par, 100 shares authorized, issued and outstanding...... - -
Additional paid-in-capital ............................................... - 173,291
Retained earnings ........................................................ - 18,803
Accumulated other comprehensive loss...................................... - (630)
Parent Company Deficit ................................................... (27,699) -
------- ---------
Total Stockholders' Equity / Parent Company Deficit ............... (27,699) 191,464
------- ---------
$ 503,368 $ 1,058,125
======= =========
- ------------------------
See accompanying notes.
2
PLY GEM HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
---------------------------------------------
Post-Nortek
Recapitalization
Combined Consolidated
---------------- ------------
October 4, 2003 October 2, 2004
--------------------- --------------------
(Amounts in thousands)
NET SALES ............................................... $ 156,549 $ 178,732
Costs and Expenses:
Cost of products sold .................................. 114,496 132,657
Selling, general and administrative expense ............ 19,492 19,723
Amortization of intangible assets ...................... 1,072 1,974
------- -------
135,060 154,354
------- -------
Operating earnings ..................................... 21,489 24,378
Foreign currency gain .................................. - 1,596
Interest expense ....................................... (8,638) (10,332)
Investment income ...................................... 49 61
------- -------
Income before provision for income taxes ............... 12,900 15,703
Provision for income taxes ............................. 5,000 6,101
------- -------
Net income ............................................. $ 7.900 $ 9,602
======= =======
See accompanying notes.
3
PLY GEM HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
Combined
------------------------------------------------------------
Pre-Nortek Post-Nortek Recapitalization Consolidated
Recapitalization Ply Gem Ply Gem Ply Gem
Ply Gem Industries, Industries, Inc. Holdings, Inc.
Industries, Inc. Inc. January 1, 2004 January 23, 2004
January 1, 2003 January 10, to February 11, to October 2, 2004
to January 9, 2003 to 2004
2003 October 4, 2003
---------------- --------------- ---------------- ------------------
(Amounts in thousands)
NET SALES ............................. $ 8,824 $ 410,147 $ 40,612 $ 404,507
COSTS AND EXPENSES:
Cost of products sold ................. 7,651 308,259 33,611 303,872
Selling, general and administrative
expense ............................ 1,529 56,977 8,345 45,413
Amortization of intangible assets ..... 70 3,130 201 3,000
------ ------ ------ ------
9,250 368,366 42,157 352,285
------ ------ ------ ------
Operating earnings (loss) ............. (426) 41,781 (1,545) 52,222
Foreign currency gain ................. - - - 1,596
Interest expense ...................... (976) (24,733) (3,684) (23,356)
Investment income ..................... 2 152 29 81
------ ------ ------ ------
Income (loss) before provision
(benefit) for income taxes ........ (1,400) 17,200 (5,200) 30,543
Provision (benefit) for income taxes .. (500) 6,600 (1,850) 11,740
------ ------ ------ ------
Net income (loss) ..................... $ (900) $ 10,600 $ (3,350) $ 18,803
====== ====== ====== ======
See accompanying notes.
4
PLY GEM HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Combined
------------------------------------------------------------
Pre-Nortek Post-Nortek Recapitalization Consolidated
Recapitalization Ply Gem Ply Gem Ply Gem
Ply Gem Industries, Industries, Inc. Holdings, Inc.
Industries, Inc. Inc. January 1, 2004 January 23, 2004
January 1, 2003 January 10, to February 11, to October 2, 2004
to January 9, 2003 to 2004
2003 October 4, 2003
---------------- --------------- ---------------- ------------------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................... $ (900) $ 10,600 $ (3,350) $ 18,803
ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization expense 327 10,827 1,373 10,334
Non-cash write-off of inventory ....... - 1,387 - 1,974
Non-cash interest expense, net ........ 6 176 26 2,111
Non-cash gain on foreign currency ..... - - - (1,596)
Deferred income taxes ................. 400 800 71 1,027
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF EFFECTS FROM
ACQUISITIONS:
Accounts receivable, net .............. (1,548) (26,032) 1,869 (27,043)
Inventories ........................... 1,012 (624) (3,224) (2,245)
Prepaid expenses and other current
assets ............................. 190 967 (260) 2,512
Accounts payable ...................... 1,736 9,311 7,765 8,874
Accrued expenses and taxes ............ 618 1,070 (3,120) 13,497
Other ................................. 12 (2,233) 498 -
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............ 1,853 6,249 1,648 28,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................. (349) (5,920) (718) (3,477)
Change in restricted cash ............. 1 (7) 1,118 -
Proceeds from sale leaseback .......... - - - 36,000
Payment for acquisitions, net of cash
acquired............................ - - - (881,298)
Other ................................. 36 5 (5) -
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............ (312) (5,922) 395 (848,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .......... - - - 690,934
Payments on long-term debt ............ (45) (1,188) (89) (16,874)
Net transfers to Nortek, Inc. ........ (4,661) 3,797 (7,362) -
Equity contribution ................... - - - 167,007
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............ (4,706) 2,609 (7,451) 841,067
-------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents ................... (3,165) 2,936 (5,408) 20,540
Cash and cash equivalents at the
beginning of the period ............ 6,893 3,728 8,517 -
-------- -------- -------- --------
Cash and cash equivalents at the
end of the period .................. $ 3,728 $ 6,664 $ 3,109 $ 20,540
======== ======== ======== ========
See accompanying notes.
5
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Ply
Gem Holdings, Inc. and the combined financial statements of Ply Gem Industries,
Inc. and CWD Windows and Doors ("Ply Gem Industries, Inc." or "Ply Gem") have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period from January
1, 2004 through February 11, 2004 and January 23, 2004 through October 2, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004.
The condensed combined balance sheet at December 31, 2003 has been derived from
the audited combined financial statements of Ply Gem Industries, Inc. at that
date but does not include all of the information and footnotes required by
generally accepted accounting principles for completed financial statements.
The Company's fiscal quarters are based on periods ending on the last Saturday
of the last week in the quarter. Therefore the financial results of certain
fiscal quarters will not be exactly comparable to the prior and subsequent
fiscal quarters.
Ply Gem Holdings, Inc., a wholly owned subsidiary of Ply Gem Investment
Holdings, Inc., was incorporated on January 23, 2004 for the purpose of
acquiring Ply Gem Industries, Inc. from Nortek (the "Acquisition"). The
Acquisition was completed on February 12, 2004, as Nortek sold Ply Gem
Industries, Inc., to Ply Gem Holdings, Inc., an affiliate of Caxton-Iseman
Capital, Inc., pursuant to the terms of the Stock Purchase Agreement among Ply
Gem Investment Holdings, Inc. and Nortek, Inc. and WDS LLC dated as of December
19, 2003, as amended (the "Purchase Agreement"). Prior to February 12, 2004, the
date of the Acquisition, Ply Gem Holdings, Inc. had no operations and Ply Gem
Industries, Inc. was wholly owned by a subsidiary of WDS LLC, which was a wholly
owned subsidiary of Nortek, Inc. (collectively with subsidiaries "Nortek").
On August 27, 2004 Ply Gem Industries, Inc. acquired all of the outstanding
shares of capital stock of MWM Holding, Inc., ("MWM Holding"), in accordance
with a stock purchase agreement entered into among Ply Gem, MWM Holding, Inc.,
and the selling stockholders. The accompanying financial statements include the
operating results of MWM Holding for the period of August 27, 2004 through
October 2, 2004. In connection with MW Acquisition, the Company's phantom stock
plan was modified to accelerate the vesting term as defined in the related
grants. This modification resulted in a new measurement date for existing grants
under the plan. However, notwithstanding the new measurement date, no additional
compensation expense is required to be recorded.
The accompanying financial statements include the consolidated results of
operations for the period from January 23, 2004 to October 2, 2004 and
consolidated financial position for Ply Gem Holdings, Inc. and Subsidiaries (the
"Company" or "Ply Gem") as of October 2, 2004, and the combined results of
operations of Ply Gem Industries, Inc. for the periods from January 1, 2004 to
February 11, 2004, January 1, 2003 to January 9, 2003, and January 10, 2003 to
October 4, 2003, and results of operations for the three month periods ending
October 2, 2004 and October 4, 2003. The periods presented during calendar 2004
provide the combined operating results of Ply Gem Industries, Inc. from the
beginning of the year, January 1, 2004, until the date of Acquisition, February
12, 2004 (see Note 2), as well as from the date of inception of Ply Gem
Holdings, Inc., January 23, 2004, through the end of the third quarter, October
2, 2004.
The periods presented during calendar 2003 provide the combined operating
results of Ply Gem Industries, Inc. from the beginning of the year, January 1,
2003 until January 9, 2003. On January 9, 2003, Nortek
6
Holdings was acquired by certain affiliates and designees of Kelso & Company
L.P. and certain members of Nortek management in accordance with the Agreement
and Plan of Recapitalization by and among Nortek, Inc., Nortek Holdings, Inc.
and K Holdings, Inc. dated as of June 20, 2002, (the "Recapitalization"). The
period from January 10, 2003 until October 4, 2003 is presented in the
accompanying consolidated and combined financial statements as
"post-recapitalization".
Nortek accounted for the Recapitalization as a purchase in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" ("SFAS No. 141"), which resulted in a new valuation for
the assets and liabilities of Nortek Holdings and its subsidiaries based upon
fair values as of the date of the Recapitalization. As allowed under SEC Staff
Accounting Bulletin No. 54, "Push Down Basis of Accounting Required in Certain
Limited Circumstances", Ply Gem Industries, Inc. reflected certain applicable
purchase accounting adjustments recorded by Nortek Holdings in the combined Ply
Gem Industries, Inc. financial statements as of December 31, 2003 and for the
period from January 10, 2003 through the end of the third quarter, October 4,
2003.
Ply Gem is a diversified manufacturer of residential and commercial building
products, which are sold, primarily in the United States and Canada, and include
a wide variety of products for the residential and commercial construction, the
do-it-yourself and the professional remodeling and renovation markets.
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The consolidated and combined financial statements include the accounts of Ply
Gem Holdings, Inc. and its subsidiaries, all of which are wholly owned, after
the elimination of intercompany accounts and transactions.
ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of these consolidated and combined financial statements in
conformity with accounting principles generally accepted in the United States
involves estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of income and expense
during the reporting periods. Certain of the Company's accounting policies
require the application of judgment in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. The Company periodically evaluates the
judgments and estimates used in their critical accounting policies to ensure
that such judgments and estimates are reasonable for their interim and year-end
reporting requirements. These judgments are based on the Company's historical
experience, current trends and information available from other sources, as
appropriate. If different conditions result from those assumptions used in the
Company's judgments, the results could be materially different from the
Company's estimates.
RECOGNITION OF SALES AND RELATED COSTS, INCENTIVES AND ALLOWANCES
The Company recognizes sales upon the shipment of their products net of
applicable provisions for discounts and allowances. The customer takes title
upon shipment and assumes the risks and rewards of ownership of the product.
Allowances for cash discounts, volume rebates and other customer incentive
programs, as well as gross customer returns, among others, are recorded as a
reduction of sales at the time of sale based upon the estimated future outcome.
Cash discounts, volume rebates and other customer incentive programs are based
upon certain percentages agreed upon with the Company's various customers, which
are typically earned by the customer over an annual period. The Company records
periodic estimates for these amounts based upon the historical results to date,
estimated future results through the end of the contract period and the
contractual provisions of the customer agreements. Customer returns are recorded
on an actual basis throughout the year and also include an estimate at the end
of each reporting period for future customer returns related to sales recorded
prior to the end of the period. The Company generally estimates customer returns
based upon the time lag that historically occurs between the date of the sale
and the date of the return while also factoring in any new business conditions
that might impact the historical analysis such as new product introduction. The
Company also provides for estimates of warranty, bad debts and shipping costs at
the time of sale. Shipping and warranty costs are included in cost of products
sold. Bad debt provisions are included in selling, general and administrative
expense. The amounts recorded are generally based upon historically derived
7
percentages while also factoring in any new business conditions that might
impact the historical analysis such as new product introduction for warranty and
bankruptcies of particular customers for bad debts.
CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
The Company has classified as restricted cash and cash equivalents in the
accompanying consolidated and combined balance sheets certain investments and
marketable securities that are not fully available for use in their operations.
The amount of restricted cash is determined by the existing liabilities on our
municipal bonds. At October 2, 2004 there was no restricted cash balance.
INVENTORIES
Inventories in the accompanying consolidated and combined balance sheets are
valued at the lower of cost or market. At October 2, 2004 and December 31, 2003,
approximately $11,778,000 and $10,097,000 of total inventories, respectively,
were valued on the last-in, first-out method ("LIFO"). Under the first-in,
first-out method ("FIFO") of accounting, such inventories would have been
approximately $982,000 lower at October 2, 2004, and $402,000 higher at December
31, 2003. All other inventories were valued under the FIFO method. In connection
with both LIFO and FIFO inventories, the Company records provisions, as
appropriate, to write-down obsolete and excess inventory to estimated net
realizable value. The process for evaluating obsolete and excess inventory often
requires the Company to make subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventory will be able
to be sold in the normal course of business. Accelerating the disposal process
or incorrect estimates of future sales potential may cause the actual results to
differ from the estimates at the time such inventory is disposed or sold.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment are provided on a
straight-line basis over estimated useful lives, which are generally as follows:
Buildings and improvements 10-35 years
Machinery and equipment, including leases 3-15 years
Leasehold improvements term of lease
Expenditures for maintenance and repairs are expensed when incurred.
Expenditures for renewals and betterments are capitalized. When assets are sold,
or otherwise disposed, the cost and related accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
INTANGIBLE ASSETS, GOODWILL AND OTHER LONG-LIVED ASSETS
The Company applies SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), to its intangible and other long-lived
assets. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets but does not apply to goodwill or
intangible assets that are not being amortized and certain other long-lived
assets.
The Company accounts for acquired goodwill and intangible assets in accordance
with SFAS No. 141. Purchase accounting required by SFAS No. 141 involves
judgment with respect to the valuation of the acquired assets and liabilities in
order to determine the final amount of goodwill (see Note 2). For significant
acquisitions, the Company values items such as property, plant and equipment and
acquired intangibles based upon appraisals and determines the value of assets
and liabilities associated with pension, supplemental executive retirement and
post retirement benefit plans based upon actuarial studies.
8
The Company applies SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142") to goodwill and intangible assets. Under this statement, goodwill and
intangible assets determined to have an indefinite useful life are no longer
amortized, instead these assets are evaluated for impairment on an annual basis
and whenever events or business conditions warrant. All other intangible assets
are amortized over their estimated useful lives and are evaluated for impairment
in accordance with the provisions of SFAS No. 144.
After the Acquisition, intangible assets consist principally of patents,
trademarks, customer relationships, and software costs which are amortized on
the straight-line basis over a weighted average remaining estimated useful life
of approximately 13 years. As of October 2, 2004, the gross carrying amount of
these patents, trademarks and customer relationship assets was $12,000,000,
$51,794,000 and $103,000,000, respectively. Accumulated amortization of these
assets was approximately $479,000, $1,055,000, and $9,617,000, respectively. The
remaining amount attributable to capitalized software costs is not material.
Amortization expense for the three month period ended October 2, 2004 was
$1,974,000. Amortization expense for the period from January 23, 2004 through
October 2, 2004 was $3,000,000. Estimated aggregate amortization for the
remainder of 2004 and five succeeding fiscal years is $1,468,000, $6,022,000,
$6,022,000, $6,022,000, $6,022,000, and $6,022,000.
Prior to the Acquisition, yet subsequent to the Recapitalization, intangible
assets consisted principally of patents, trademarks and customer relationships,
which were amortized on a straight-line basis over a weighted average remaining
estimated useful life of approximately 13 years.
INSURANCE LIABILITIES
The Company records insurance liabilities and related expenses for health,
workers' compensation, product and general liability losses and other insurance
reserves and expenses in accordance with either the contractual terms of their
policies or, if self-insured, the total liabilities that are estimable and
probable as of the reporting date. Insurance liabilities are recorded as current
liabilities to the extent they are expected to be paid in the succeeding year
with the remaining requirements classified as long-term liabilities. The
accounting for self-insured plans requires that significant judgments and
estimates be made both with respect to the future liabilities to be paid for
known claims and incurred but not reported claims as of the reporting date. The
Company relies heavily on historical trends and, in certain cases, actuarial
calculations when determining the appropriate insurance reserves to record in
the consolidated and combined balance sheet for a substantial portion of their
workers compensation and general and product liability losses. In certain cases
where partial insurance coverage exists, the Company must estimate the portion
of the liability that will be covered by existing insurance policies to arrive
at the net expected liability to the Company.
INCOME TAXES
Prior to the Acquisition on February 12, 2004, Nortek was responsible for the
preparation and filing of all income tax returns and the remittances of federal
and state payments on behalf of the Company and its subsidiaries. Accordingly,
for U.S. federal income tax purposes, the Company's results of operations were
included in the consolidated federal income tax returns of Nortek. The U.S.
Subsidiaries file unitary, combined and separate state income tax returns. CWD
Windows was included in the Canadian income tax return of BNC (a subsidiary of
Nortek) and transferred to BNC their share of the Canadian income tax due and
payable. After February 12, 2004, U.S. federal income tax returns will be
prepared and filed by Ply Gem Investment Holdings, Inc. on behalf of the group.
The Company and Ply Gem Investment Holdings, Inc. have executed a tax sharing
agreement pursuant to which tax liabilities for each respective party are
computed on a stand-alone basis. U.S. subsidiaries will continue to file
unitary, combined and separate state income tax returns. CWD Windows will file a
separate Canadian income tax return.
The Company accounts for deferred income taxes using the liability method in
accordance with SFAS No. 109 "Accounting for Income Taxes" ("SFAS No. 109"),
which requires that the deferred tax consequences of temporary differences
between the amounts recorded in the Company's consolidated and combined
financial statements and the amounts included in the Company's federal and state
income tax returns be recognized in the balance sheet. The amounts recorded
reflect estimates of what the final amounts will be when the actual federal,
state and foreign income tax returns are filed for that fiscal year. Estimates
are required with respect to, among other things, the appropriate state income
tax rates to use in the various states that the Company and its subsidiaries are
required to file, the potential utilization of operating and capital loss
carry-forwards for both federal and state income tax purposes and valuation
9
allowances required, if any, for tax assets that may not be realizable in the
future. SFAS No. 109 requires balance sheet classification of current and
long-term deferred income tax assets and liabilities based upon the
classification of the underlying asset or liability that gives rise to a
temporary difference.
COMMITMENTS AND CONTINGENCIES
The Company provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated. Costs accrued have been estimated based upon an analysis
of potential results, assuming a combination of litigation and settlement
strategies and outcomes (see Note 6).
RELATED PARTY TRANSACTIONS
Included in the combined statement of operations in selling, general and
administrative expense are parent company corporate charges of approximately
$4,700,000 and $100,000 for the periods from January 10, 2003 to October 4,
2003, and from January 1, 2003 to January 9, 2003, and approximately $300,000
for the period from January 1, 2004 to February 11, 2004, respectively, related
to accounting, legal, insurance, treasury and other management services provided
by Nortek, which have been allocated based upon a combination of the specific
identification method and as a percentage of the Company's net sales to Nortek's
consolidated net sales. In the opinion of the Company's management, this method
of allocating such costs is reasonable. Included in interest expense is
approximately $3,499,000, $23,603,000, and $942,000, for the periods from
January 1, 2004 to February 11, 2004, January 10, 2003 to October 4, 2003, and
from January 1, 2003 to January 9, 2003, respectively, related to interest owed
to a subsidiary which was wholly owned by Nortek.
The Company has accrued a management fee to be paid to its majority stockholder,
Caxton-Iseman Capital, Inc. of approximately $1,298,000 for the period from
January 23, 2004 to October 2, 2004, and of approximately $603,000 for the three
month period ended October 2, 2004.
FOREIGN CURRENCY
The Company's Canadian subsidiary utilizes the Canadian dollar as its functional
currency. For reporting purposes, the Company translates the assets and
liabilities of its foreign entity at the exchange rates in effect at year-end.
Net sales and expenses are translated using average exchange rates in effect
during the period. Gains and losses from foreign currency translation are
credited or charged to accumulated other comprehensive loss in the accompanying
consolidated and combined balance sheets.
STOCK OPTIONS
On February 12, 2004, Ply Gem Investment Holdings, Inc.'s Board of Directors
adopted the 2004 Stock Option Plan (the Plan) providing for grants of up to
148,050 shares of Ply Gem Investment Holdings, Inc.'s common stock under
nonqualified stock options. Employees of Ply Gem Investment Holdings, Inc. or
any majority-owned subsidiary are eligible for awards, as specified in the
Plan's agreement. Ply Gem Investment Holdings, Inc.'s Board of Directors or
Compensation Committee retains the right to select the grantees and set the term
of each award, which may not be more than ten years. Ply Gem Investment
Holdings, Inc.'s Board of Directors also has the power to determine the terms of
the awards granted, including the number of shares subject to each award and
other matters as specified in the Plan agreement. Generally, the exercise price
of an option must be at least the estimated fair market value of a share as of
the grant date. Awards generally vest over five years from the date of grant.
For the period January 1, 2003 through January 9, 2003 and for the period
January 23, 2004 through October 2, 2004, the Company accounted for its
stock-based employee compensation plan under the recognition and measurement
principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related Interpretations. No stock-based employee compensation cost is reflected
in the statement of operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the
10
effect on net income if the Company had applied the fair value recognition
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
stock-based employee compensation.
Ply Gem Ply Gem
Holdings, Inc. Holdings, Inc.
January 23, 2004 - For the three months
October 2, 2004 ended
------------------ October 2, 2004
--------------------
(AMOUNTS IN THOUSANDS)
Net income as reported $ 18,803 $ 9,602
Deduct: Total stock-based employee compensation
expense determined under fair-value method for all
awards, net of tax effects (11) (5)
--------------- -----------------
Pro forma net income $ 18,792 $ 9,597
=============== =================
In connection with the Acquisition, all of the outstanding Class A Common Stock
options issued by Nortek to Ply Gem Industries, Inc. employees were cancelled.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46
clarifies the application of ARB No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of FIN 46 applied
immediately to variable interest entities created after January 31, 2003 and for
existing variable interest entities no later than the end of the first annual
reporting period beginning after December 15, 2003. The adoption of FIN 46 did
not have a material impact on the Company's consolidated and combined financial
statements.
CONCENTRATION OF CREDIT RISK
The accounts receivable balance related to one customer was approximately
$14,811,000 and $6,324,000 at October 2, 2004 and December 31, 2003,
respectively.
11
2. PURCHASE ACCOUNTING
On February 12, 2004, Ply Gem Holdings, Inc. purchased Ply Gem Industries, Inc.
from Nortek, Inc. The Company accounted for the transaction as a purchase in
accordance with the provisions of SFAS No. 141, which results in a new valuation
for the assets and liabilities of Ply Gem Industries, Inc. and its subsidiaries
based upon fair values as of the date of the purchase. The purchase price,
including approximately $4,275,000 of value attributed to Ply Gem Industries,
Inc. employees' forfeited Nortek stock options, was allocated to the assets and
liabilities based on their relative fair values. The Company allocated the
purchase price of the net assets acquired based on its estimates of the fair
value of assets and liabilities as follows:
(IN THOUSANDS)
-----------------
Other current assets, net of cash $ 77,310
Inventories 50,675
Property, plant and equipment 116,815
Trademarks/Tradenames 25,900
Patents 12,000
Customer relationships 16,000
Goodwill 380,040
Other assets 30,595
Current liabilities (42,817)
Assumed indebtedness (29,473)
Other liabilities (80,411)
-----------------
Purchase price, net of cash acquired $ 556,634
================
On August 27, 2004 Ply Gem Industries, Inc. acquired all of the outstanding
shares of capital stock of MWM Holding, Inc. in accordance with a stock purchase
agreement entered into among Ply Gem, MWM Holding, Inc., and the selling
stockholders (the "MW Acquisition"). The Company accounted for the transaction
as a purchase in accordance with the provisions of SFAS No. 141, which results
in a new valuation for the assets and liabilities of MWM Holding Inc. and its
subsidiaries based upon fair values as of the date of the purchase. The purchase
price, including approximately $2,009,000 of value attributed to MWM Holding,
Inc. employees' forfeited MWM Holding, Inc. stock options, was allocated to the
assets and liabilities based on their relative fair values. The Company
allocated the purchase price of the net assets acquired based on its estimates
of the fair value of assets and liabilities as follows:
(IN THOUSANDS)
-----------------
Other current assets, net of cash $ 21,630
Inventories 13,767
Property, plant and equipment 38,563
Trademarks/Tradenames 25,894
Customer relationships 79,126
Goodwill 171,543
Other assets 14,559
Current liabilities (24,924)
Other liabilities (9,210)
-----------------
Purchase price, net of cash acquired $ 330,948
================
We have estimated the fair value of our assets and liabilities, as of the MW
Acquisition date, utilizing information available at the time our consolidated
financial statements were prepared. These estimates are subject to refinement
until all pertinent information has been obtained.
12
Unaudited pro forma results of operations for the periods January 1, 2003 to
January 9, 2003, January 10, 2003 to October 4, 2003, January 1, 2004 to
February 11, 2004, January 23, 2004 to October 2, 2004, and for the three month
periods ended October 4, 2003 and October 2, 2004, as if both purchases had
occurred at the beginning of the period is as follows:
January 1, 2003 January 10, 2003 January 1, 2004 January 23, 2004
to to to to
January 9, 2003 October 4, 2003 February 11, 2004 October 2, 2004
--------------- --------------- ----------------- ---------------
(AMOUNTS IN THOUSANDS)
Net sales $ 14,761 $ 584,299 $ 67,757 $ 587,149
Net income (loss) (331) 21,418 (3,187) 30,471
Three months Three months
ended ended
October 4, 2003 October 2, 2004
--------------- ---------------
(AMOUNTS IN THOUSANDS)
Net sales $ 223,952 $ 223,101
Net income 15,840 11,501
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of the following:
January 1, 2003 January 10, 2003 January 1, 2004 January 23, 2004
to to to to
January 9, 2003 October 4, 2003 February 11, 2004 October 2, 2004
--------------- --------------- ----------------- ---------------
(AMOUNTS IN THOUSANDS)
Net income (loss) $ (900) $ 10,600 $ (3,350) $ 18,803
Foreign currency translation adjustment 152 1,527 (375) (630)
Minimum pension liability adjustment - 294 - -
Unrealized loss on marketable
securities - (5) - -
---------- ----------- ------------ -----------
Comprehensive income (loss) $ (748) $ 12,416 $ (3,725) $ 18,173
========== =========== ============ ===========
For the three months ended
October 2, 2004 October 4, 2003
--------------- ---------------
(Amounts in thousands)
Net income (loss) $ 9,602 $ 7,900
Foreign currency translation adjustment (514) 66
Minimum pension liability adjustment - (125)
Unrealized loss on marketable securities - 90
---------- ----------
Comprehensive income $ 9,088 $ 7,931
========== ==========
13
4. LONG-TERM DEBT
Long-term debt in the accompanying consolidated and combined balance sheets at
October 2, 2004 and December 31, 2003 consists of the following:
October 2, 2004 December 31, 2003
--------------- -----------------
(AMOUNTS IN THOUSANDS)
Senior term loan facility $ 310,000 $ -
Senior revolver credit facility 18,000 -
Senior subordinated notes 360,333 -
Notes payable to a wholly owned subsidiary of Nortek - 394,735
Mortgage notes and bonds payable 6,604 22,503
Capital lease and other borrowings 7,000 7,059
701,937 424,297
Less current maturities 2,350 1,136
---------- ----------
$ 699,587 $ 423,161
========== ==========
In connection with the Ply Gem Acquisition, the Company entered into new senior
credit facilities with a syndicate of financial institutions and institutional
lenders. The senior credit facilities provide for senior secured financing of up
to $255.0 million, consisting of $190.0 million of term loan facilities with a
maturity of seven years that were drawn in full in connection with the
consummation of the Acquisition and a $65.0 million revolving loan facility,
including a letter of credit subfacility and a $10.0 million swingline
subfacility, with a maturity of five years. The term loan facilities have two
tranches, a $160.0 million tranche under which Ply Gem Industries, Inc. is the
borrower, and a $30.0 million tranche under which our Canadian subsidiary, CWD
Windows and Doors, Inc., is the borrower. The senior credit facilities permit us
to incur up to $50.0 million in additional term loans under the term loan
facilities (including through additional tranches of term loans) which will have
the benefit of the guarantees, and the collateral, described below. Such an
increase in the term loan facilities will occur at our option if certain
conditions are satisfied, including meeting our financial covenants, a senior
leverage ratio on a pro forma basis and receipt of commitments from lenders for
such additional amount.
Subsequent to the Acquisition, we amended and restated our senior credit
facilities on March 3, 2004, to increase our U.S. term loan facility from $160.0
million to $170.0 million and reduce our revolving credit facility from $65.0
million to $55.0 million.
In connection with the MW Acquisition, we entered into an amendment to our
senior credit facilities, which increased by $15.0 million our revolving credit
facility and added an additional term loan facility in the amount of $111.0
million. At closing, we borrowed the entire amount under the new term loan
facility and an additional $6.0 million under the revolving credit facility to
fund the MW Acquisition and pay related costs and expenses.
The interest rates applicable to loans under our new senior credit facilities
will be, at our option, equal to either a base rate plus an applicable interest
margin, or an adjusted LIBOR rate plus an applicable interest margin, as defined
in the senior credit facility agreement.
Our senior credit facilities (following amendments) require scheduled quarterly
payments on the term loan facilities of $500,000 beginning in the quarter ended
July 3, 2004 and for the next 23 calendar quarters thereafter, and payments of
$47,000,000 on June 30, 2010, September 30, 2010, and December 30, 2010 and
$158,000,000 on the maturity date, allocated pro rata between the three
tranches.
The indebtedness of the U.S. borrower (Ply Gem Industries, Inc.) under our
senior credit facilities is guaranteed by Ply Gem Holdings, Inc., and all of our
existing and future direct and indirect subsidiaries, subject to exceptions for
foreign subsidiary guarantees of the U.S. borrower's obligations to the extent
such guarantees are prohibited by applicable law or would result in materially
adverse tax consequences and other exceptions. The indebtedness of the Canadian
borrower under our senior credit facilities is guaranteed by Ply Gem Holdings,
Inc., the U.S. borrower and all of the Canadian borrower's future direct
14
and indirect subsidiaries and is effectively guaranteed by all subsidiaries
guaranteeing the U.S. borrower's obligations under our senior credit facilities.
All indebtedness under our senior credit facilities is secured, subject to
certain exceptions, by a perfected first priority pledge of all of our equity
interests and those of our direct and indirect subsidiaries, and, subject to
certain exceptions, perfected first priority security interests in, and
mortgages on, all tangible and intangible assets (including, without limitation,
accounts receivable, inventory, equipment, general intangibles, inter-company
notes, insurance policies, investment property, intellectual property, certain
real property, cash and proceeds of the foregoing); provided that all tangible
and intangible assets of the Canadian borrower and its subsidiaries are pledged
to secure debt only of the Canadian borrower.
Our senior credit facilities require that we comply on a quarterly basis with
certain financial covenants, including a minimum interest coverage ratio test, a
maximum leverage ratio test and a maximum capital expenditures level.
Concurrently with the Ply Gem Acquisition, Ply Gem Industries, Inc. issued
$225.0 million aggregate principal amount of our 9% senior subordinated notes
due 2012, which are guaranteed by Ply Gem Holdings Inc. and the domestic
subsidiaries of Ply Gem Industries, Inc. Subsequently, in connection with the MW
Acquisition Ply Gem Industries, Inc. issued an additional $135.0 million of its
9% senior subordinated notes due 2012, which are guaranteed by Ply Gem Holdings
Inc. and the domestic subsidiaries of Ply Gem Industries, Inc. Ply Gem Holdings
Inc. is a holding company and has no operations. Under the terms of the
indenture governing the 9% notes, there are restrictions on the ability of Ply
Gem Industries, Inc. to dividend or distribute cash or property to Ply Gem
Holdings Inc.
The table that follows is a summary of maturities of all of the Company's
long-term debt obligations due in each fiscal year after October 2, 2004:
(AMOUNTS IN THOUSANDS)
2004 $ 2,350
2005 2,360
2006 2,376
2007 2,392
2008 2,408
Thereafter 690,051
----------
$ 701,937
==========
Approximately $17,782,000 of letters of credit have been issued under our senior
credit facility and other facilities as additional security for approximately
$13,604,000 of industrial revenue bonds and capital leases outstanding (included
in mortgage notes and bonds payable and other in the long-term debt table above)
at October 2, 2004 relating to several of the Company's manufacturing
facilities.
5. PENSION, RETIREMENT AND PROFIT SHARING PLANS
The Company and its subsidiaries have various pension plans, supplemental
retirement plans for certain officers and profit sharing plans requiring
contributions to qualified trusts and union administered funds.
The Company's policy is to fund currently the actuarially determined annual
contribution of their various qualified defined benefit plans. The Company
expects to contribute approximately $485,000 to the defined benefit pension plan
during 2004.
The Company's net periodic benefit expense for the defined benefit plans for the
periods indicated consists of the following components:
January 1, 2003 January 10, 2003 January 1, 2004 January 23, 2004
to to to to
January 9, 2003 October 4, 2003 February 11, 2004 October 2, 2004
--------------- --------------- ----------------- ---------------
(AMOUNTS IN THOUSANDS)
Service cost $ 3 $ 79 $ 11 $ 64
Interest cost 23 633 97 539
Expected return on plan (18) (503) (81) (451)
assets
Recognized actuarial loss 8 - - -
-------- ------- -------- -------
Net periodic benefit
expense $ 16 $ 209 $ 27 $ 152
======== ======= ======== =======
15
For the three months ended
--------------------------
October 4, 2003 October 2, 2004
--------------- ---------------
(AMOUNTS IN THOUSANDS)
Service cost $ 27 $ 25
Interest cost 219 210
Expected return on plan assets (174) (176)
Recognized actuarial loss - -
-------- --------
Net periodic benefit expense $ 72 $ 59
======== ========
6. COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition, Nortek has indemnified the Company for
certain liabilities as defined in the Purchase Agreement. In the event Nortek
was unable to satisfy amounts due under these indemnifications then the Company
would be liable. The Company believes that Nortek has the financial capacity to
honor the indemnifications and therefore does not anticipate incurring any
losses related to liabilities indemnified by Nortek under the Purchase
Agreement. A receivable related to this indemnification has been recorded in
other long-term assets in the approximate amount of $14,507,000.
The Company has indemnified third parties in certain transactions involving
dispositions of former subsidiaries. As of October 2, 2004 and December 31,
2003, the Company has recorded liabilities in relation to these indemnifications
of approximately $13,536,000 and $18,200,000, respectively, consisting of the
following:
(Amounts in thousands)
2004 2003
---- ----
Product claim liabilities $ 3,808 $ 6,602
Long-term lease liabilities 5,504 6,226
Multiemployer pension plan withdrawal liability 4,224 4,337
Other indemnification liabilities 1,035
-
-------- --------
$ 13,536 $ 18,200
======== ========
The product claim liabilities of approximately $3,808,000 and $6,602,000 at
October 2, 2004 and December 31, 2003, respectively, represented the estimated
costs to resolve the outstanding matters related to a former subsidiary of the
Company, which is a defendant in a number of lawsuits alleging damage caused by
alleged defects in certain pressure treated wood products. The Company had
indemnified the buyer of the former subsidiary for all known liabilities and
future claims relating to such matters and retained the rights to all potential
reimbursements related to insurance coverage. Many of the suits have been
resolved by dismissal or settlement with amounts being paid out of insurance
proceeds or other third party recoveries. The Company and the former subsidiary
continue to vigorously defend the remaining suits. Certain defense and indemnity
costs are being paid out of insurance proceeds and proceeds from a settlement
with suppliers of material used in the production of the treated wood products.
The Company and the former subsidiary have engaged in coverage litigation with
certain insurers and have settled coverage claims with several of the insurers.
The Company had recorded receivables at December 31, 2003 of approximately
$2,385,000, for the estimated recoveries, which are deemed probable of
collection related to insurance litigation matters discussed above. On February
12, 2004, in conjunction with the Acquisition, Nortek and the Company executed a
Novation agreement, removing the
16
Company as the primary obligor. Therefore the liability and a related receivable
have been removed from the consolidated balance sheet as of October 2, 2004.
The long-term lease liabilities of approximately $5,504,000 and $6,226,000 at
October 2, 2004 and December 31, 2003, respectively, relate to the estimated
amounts to be paid, net of any estimated recoveries where subleases are in
place, primarily in connection with various facility leases where the Company
has retained the liability for the lease agreement in connection with the sale
of certain former subsidiaries that utilized the facilities. Accrued costs
include base rent, additional rent for consumer price index increases as defined
in the leases, taxes, utilities, insurance, repairs and maintenance and, if
applicable, the estimated settlement costs to terminate the leases prior to the
end of their scheduled term. The Company has recorded all long-term lease
liabilities at the undiscounted gross amount expected to be paid to settle the
liabilities in the future. Approximately $2,125,000 of these long-term lease
liabilities were settled and paid during fiscal 2003.
The multiemployer pension liability of approximately $4,224,000 and $4,337,000
at October 2, 2004 and December 31, 2003, respectively, relates to liabilities
assumed by the Company in 1998 when its former subsidiary, Studley Products,
Inc. ("Studley") was sold. In connection with the sale, Studley ceased making
contributions to the Production Service and Sales District Council Pension Fund
(the "Pension Fund") and the Company assumed responsibility for all withdrawal
liabilities to be assessed by the Pension Fund. Accordingly, the Company is
making quarterly payments of $89,747 to the Pension Fund through 2018 based upon
the assessment of withdrawal liability received from the Pension Fund. The
multiemployer pension liability represents the present value of the quarterly
payment stream using a 6% discount rate as well as an estimate of additional
amounts that may be assessed in the future by the Pension Fund under the
contractual provisions of the Pension Fund.
Other indemnification liabilities of approximately $1,035,000 at December 31,
2003, principally related to the estimated amounts of various potential
liabilities related to legal, environmental and other matters that may arise in
connection with indemnification agreements provided in conjunction with the
purchase and sale agreements for various subsidiaries, which the Company has
sold over the past several years.
The Company has guaranteed certain obligations of various third parties that
aggregate approximately $27,700,000 at December 31, 2003 related to Ply Gem's
guarantee of rental payments through June 30, 2016 under a facility leased by
SNE Enterprises, Inc. ("SNE"), which was sold on September 21, 2001. The buyer
of SNE has provided certain indemnifications and other rights to the Company for
any payments that it might be required to make pursuant to this guarantee.
Should the buyer of SNE cease making payments then the Company may be required
to make payments on its guarantees. The Company does not anticipate incurring
any loss under these guarantees and accordingly has not recorded any liabilities
at October 2, 2004 or December 31, 2003 in the accompanying consolidated and
combined balance sheets.
The Company sells a number of products and offers a number of warranties. The
specific terms and conditions of these warranties vary depending on the product
sold and country in which the product is sold. The Company estimates the costs
that may be incurred under their warranties and records a liability for such
costs at the time of sale. Factors that affect the Company's warranty
liabilities include the number of units sold, historical and anticipated rates
of warranty claims, cost per claim and new product introduction. The Company
periodically assesses the adequacy of the recorded warranty claims and adjusts
the amounts as necessary.
Changes in the Company's short-term and long-term warranty liabilities are as
follows:
17
January 1, 2003 January 10, 2003 January 1, 2004 January 23, 2004
to to to to
January 9, 2003 October 4, 2003 February 11, 2004 October 2, 2004
--------------- --------------- ----------------- ---------------
(AMOUNTS IN THOUSANDS)
Balance, beginning of period $ 9,379 $ 9,459 $ 9,499 $ 9,491
Warranty expense provided during 91 3,423 330 3,055
period
Settlements made during period (11) (2,268) (338) (2,621)
Liability assumed with MW - - - 3,231
Acquisition
Liability assumed by third party - - - (2,000)
--------------- --------------- ----------------- ---------------
Balance, end of period $ 9,459 $ 10,614 $ 9,491 $ 11,156
=============== =============== ================= ===============
The Company is subject to other contingencies, including legal proceedings and
claims arising out of its businesses that cover a wide range of matters,
including, among others, environmental matters, contract and employment claims,
product liability, warranty and modification, adjustment or replacement of
component parts of units sold, which may include product recalls. Product
liability, environmental and other legal proceedings also include matters with
respect to businesses previously owned. The Company has used various substances
in their products and manufacturing operations, which have been or may be deemed
to be hazardous or dangerous, and the extent of its potential liability, if any,
under environmental, product liability and workers' compensation statutes,
rules, regulations and case law is unclear. Further, due to the lack of adequate
information and the potential impact of present regulations and any future
regulations, there are certain circumstances in which no range of potential
exposure may be reasonably estimated.
As of October 2, 2004, the Company has accrued approximately $800,000 to cover
the estimated costs of known litigation claims, including the estimated cost of
legal services, that the Company is contesting including certain employment and
former shareholder litigation related to the Company.
It is impossible to ascertain the ultimate legal and financial liability with
respect to contingent liabilities, including lawsuits, and therefore no such
estimate has been made.
7. ACCRUED EXPENSES AND TAXES, NET AND OTHER LONG-TERM LIABILITIES
Accrued expenses and taxes, net, consist of the following at October 2, 2004 and
December 31, 2003:
October 2, 2004 December 31, 2003
--------------- -----------------
(AMOUNTS IN THOUSANDS)
Insurance $ 4,787 $ 3,738
Employee compensation and benefits 13,119 7,370
Sales and marketing 13,738 9,142
Product warranty 2,754 2,844
Short-term product claim liability 2,314 2,189
Interest 4,380 163
Other, net 12,357 7,006
-------------- --------------
$ 53,449 $ 32,452
============== ==============
Other long-term liabilities consist of the following at October 2, 2004 and
December 31, 2003:
18
October 2, 2004 December 31, 2003
--------------- -----------------
(AMOUNTS IN THOUSANDS)
Insurance $ 3,876 $ 1,842
Pension liabilities 11,693 9,412
Product warranty 8,402 6,655
Long-term lease liabilities 5,504 6,226
Long-term product claim liability 1,494 4,413
Other 361 1,571
-------------- ---------------
$ 31,330 $ 30,119
============== ===============
8. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION" (SFAS 131) requires companies to
report certain information about operating segments in their financial
statements and established standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. Operating segments
meeting certain aggregation criteria may be combined into one reportable segment
for disclosure purposes. Comparative information for prior years is presented to
conform to our current organizational structure.
The Company has two reportable segments: 1) vinyl siding, fencing, railing, and
decking and 2) windows and doors.
The income (loss) from continuing operations before income taxes of each segment
includes the revenue generated on transactions involving products within that
segment less identifiable expenses. Unallocated income and expenses include
items which are not directly attributed to or allocated to either of our
reporting segments. Such items include interest, legal costs, corporate payroll,
and unallocated finance and accounting expenses. Unallocated corporate assets
include cash and receivables.
Following is a summary of the Company's segment information.
THREE MONTHS ENDED
OCTOBER 2, 2004
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 106,589 $ 72,143 $ - $ 178,732
Income (loss) before income taxes 11,936 8,533 (4,766) 15,703
Total assets 537,125 493,210 27,790 1,058,125
19
FOR THE PERIOD FROM
JANUARY 23, 2004 TO
OCTOBER 2, 2004
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 272,244 $ 132,263 $ - $ 404,507
Income (loss) before income taxes 28,544 12,160 (10,161) 30,543
Total assets 537,125 493,210 27,790 1,058,125
FOR THE PERIOD FROM
JANUARY 1, 2004 TO
FEBRUARY 11, 2004
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 29,546 $ 11,066 $ - $ 40,612
Income (loss) before income taxes (6,509) (2,517) 3,826 (5,200)
Total assets 487,676 51,881 (45,943) 493,614
THREE MONTHS ENDED
OCTOBER 4, 2003
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 108,743 $ 47,806 $ - $ 156,549
Income before income taxes 5,455 4,937 2,508 12,900
Total assets 506,610 74,674 33,190 614,474
20
FOR THE PERIOD FROM
JANUARY 10, 2003 TO
OCTOBER 4, 2003
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 289,221 $ 120,926 $ - $ 410,147
Income before income taxes 777 5,324 11,099 17,200
Total assets 506,610 74,674 33,190 614,474
FOR THE PERIOD FROM
JANUARY 1, 2003 TO
JANUARY 9, 2003
(AMOUNTS IN THOUSANDS)
Siding,
Fencing,
Railing and Windows
Decking and Doors Unallocated Consolidated
----------- --------- ----------- ------------
Net sales $ 6,760 $ 2,064 $ - $ 8,824
Income (loss) before income taxes (1,054) (773) 427 (1,400)
Total assets 490,276 64,011 20,712 574,999
9. SUBSEQUENT EVENTS
Net earnings presented in the accompanying financial statements does
not include the transaction fee associated with the MW Acquisition under the
General Advisory Agreement, dated February 12, 2004, between Ply Gem Industries,
Inc. and a Caxton-Iseman party (the "General Advisory Agreement"). Under the
General Advisory Agreement, the Caxton-Iseman party provides the company with
acquisition and financial advisory services as our Board of Directors shall
reasonably request, and in consideration of these services will receive an
annual fee and a transaction fee upon completion of any acquisitions,
divestitures or sale of our company. Subsequent to the MW Acquisition and the
end of the fiscal quarter it was determined that Ply Gem would pay to the
Caxton-Iseman party the transaction fee of $6.4 million.
10. GUARANTOR/NON-GUARANTOR
In connection with the financing of the Acquisition, the Company sold
$225 million of its 9% Senior Subordinated Notes due 2012 (the "Notes") and
entered into $255 million of new senior credit facilities. As a result of the MW
Acquisition, an additional $135 million of Notes were issued, and the size of
the credit facilities was increased by $126 million. The Notes are secured by
full and unconditional guarantees on a
21
joint and several basis from certain of the Company's 100% owned subsidiaries.
Accordingly, the following guarantor and non-guarantor information is presented
as of October 2, 2004 and for the period from January 1, 2004 to February 11,
2004, the period from January 23, 2004 to October 2, 2004, the period from
January 1, 2003 to January 9, 2003 , the period from January 10, 2003 to October
4, 2003, and for the three month periods ended October 2, 2004 and October 4,
2003.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2004 TO FEBRUARY 11, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
Net Sales........................... $ - $ 37,187 $ 3,425 $ - $ 40,612
Cost and Expenses:
Cost of products sold............... - 30,991 2,620 - 33,611
Selling, general and
administrative expense........... - 7,113 1,232 - 8,345
Amortization of intangible assets - 201 - - 201
-------------- ------------ ---------- ------------ --------
- 38,305 3,852 - 42,157
-------------- ------------ ---------- ------------ --------
Operating loss...................... - (1,118) (427) - (1,545)
Interest expense.................... - (3,684) - - (3,684)
Investment income .................. - 18 11 - 29
-------------- ------------ ---------- ------------ --------
Loss before provision (benefit) for
income taxes..................... - (4,784) (416) - (5,200)
Provision (benefit) for income
taxes............................... - (1,683) (167) - (1,850)
-------------- ------------ ---------- ------------ --------
Net loss............................ $ - $ (3,101) $ (249) $ - $ (3,350)
============== ============ ========== ============ ========
22
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 23, 2004 TO OCTOBER 2, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
Net Sales.......................... $ - $ 371,257 $ 33,250 $ - $ 404,507
Cost and Expenses:
Cost of products sold.............. - 281,804 22,068 - 303,872
Selling, general and
administrative expense............ - 39,961 5,452 - 45,413
Amortization of intangible assets - 3,000 - - 3,000
-------------- ------------ ---------- ------------ ------------
- 324,765 27,520 - 350,689
-------------- ------------ ---------- ------------ ------------
Operating earnings ................ - 46,492 5,730 - 52,222
Foreign currency gain.............. 1,596 1,596
Interest expense................... - (21,727) (1,629) - (23,356)
Investment income ................. - 81 - - 81
-------------- ------------ ---------- ------------ ------------
Income before equity in
subsidiaries' income ........... - 24,846 5,697 - 30,543
Equity in subsidiaries' income
before income taxes ........... 30,543 - - (30,543) -
-------------- ------------ ---------- ------------ ------------
Income before provision (benefit)
for income taxes ............... 30,543 24,846 697 (30,543) 30 543
-------------- ------------ ---------- ------------ ------------
Provision (benefit) for income
taxes.............................. - 10,098 1,642 - 11,740
-------------- ------------ ---------- ------------ ------------
Net income ........................ $ 30,543 $ 14,748 $ 4,055 $ (30,543) $ 18,803
============== ============ ========== ============ ============
23
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2003 TO JANUARY 9, 2003
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
NET SALES.......................... $ - $ 8,263 $ 561 $ - $ 8,824
COST AND EXPENSES:
Cost of products sold.............. - 7,184 467 - 7,651
Selling, general and
administrative expense........... - 1,464 65 - 1,529
Intercompany administrative
charges ........................... - (31) 31 - -
Amortization of intangible assets - 70 - - 70
-------------- ------------ ---------- ------------ --------
- 8,687 563 - 9,250
-------------- ------------ ---------- ------------ --------
Operating loss..................... - (424) (2) - (426)
Interest expense................... - (975) (1) - (976)
Investment income ................. - (1) 3 - 2
-------------- ------------ ---------- ------------ --------
Loss before provision (benefit)
for income taxes ............... - (1,400) - - (1,400)
Provision (benefit) for income
taxes .......................... - (500) - - (500)
-------------- ------------ ---------- ------------ --------
Net loss .......................... $ - $ (900) $ - $ - $ (900)
============== ============ ========== ============ ========
24
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 10, 2003 TO OCTOBER 4, 2003
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
NET SALES.......................... $ - $ 373,876 $ 36,271 $ - $410,147
COST AND EXPENSES:
Cost of products sold.............. - 83,469 24,790 - 308,259
Selling, general and
administrative expense............ - 51,385 5,592 - 56,977
Amortization of intangible assets - 3,130 - - 3,130
-------------- ------------ ---------- ------------ --------
- 337,984 30,382 - 368,366
-------------- ------------ ---------- ------------ --------
Operating earnings ................ - 35,892 5,889 - 41,781
Interest expense................... - (24,734) 1 - (24,733)
Investment income ................ - 120 32 - 152
-------------- ------------ ---------- ------------ --------
Income before provision
(benefit) for income taxes - 11,278 5,922 - 17,200
Provision (benefit) for income
taxes.............................. - 4,234 2,366 - 6,600
-------------- ------------ ---------- ------------ --------
Net income ....................... $ - $ 7,044 $ 3,556 $ - $ 10,600
============== ============ ========== ============ ========
25
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 2, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
NET SALES.......................... $ - $ 163,440 $ 15,292 $ - $ 178,732
COST AND EXPENSES:
Cost of products sold.............. - 122,709 9,948 - 132,657
Selling, general and
administrative expense............ - 17,439 2,284 - 19,723
Amortization of intangible assets - 1,974 - - 1,974
-------------- ------------ ---------- ------------ ------------
- 142,122 12,232 - 154,354
-------------- ------------ ---------- ------------ ------------
Operating earnings................. - 21,318 3,060 - 24,378
Foreign currency gain ............. 1,596 1,596
Interest expense................... - (9,648) (684) - (10,332)
Investment income ................ - 61 - - 61
-------------- ------------ ---------- ------------ ------------
Income before equity in
subsidiaries' income.......... - 11,731 3,972 - 15,703
Equity in subsidiaries' income
before income taxes............. 15,703 - - (15,703) -
-------------- ------------ ---------- ------------ ------------
Income before provision (benefit)
for income taxes................ 15,703 11,731 3,972 (15,703) 15,703
Provision (benefit) for income
taxes.............................. - 5,149 952 - 6,101
-------------- ------------ ---------- ------------ ------------
Net income ....................... $ 15,703 $ 6,582 $ 3,020 $ (15,703) $ 9,602
============== ============ ========== ============ ============
26
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 4, 2003
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
NET SALES.......................... $ - $ 141,217 $ 15,332 $ - $156,549
COST AND EXPENSES:
Cost of products sold.............. - 104,438 10,058 - 114,496
Selling, general and
administrative expense............. - 17,372 2,120 - 19,492
Amortization of intangible assets - 1,072 - - 1,072
-------------- ------------ ---------- ------------ --------
- 122,882 12,178 - 135,060
-------------- ------------ ---------- ------------ --------
Operating earnings ................ - 18,335 3,154 - 21,489
Interest expense................... - (8,638) - - (8,638)
Investment income ................ - 34 15 - 49
-------------- ------------ ---------- ------------ --------
Income before provision
(benefit) for income taxes ..... - 9,731 3,169 - 12,900
Provision (benefit) for income
taxes.............................. - 3,733 1,267 - 5,000
-------------- ------------ ---------- ------------ --------
Net income ....................... $ - $ 5,998 $ 1,902 $ - $ 7,900
============== ============ ========== ============ ========
27
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 2, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
ASSETS
CURRENT ASSETS:
Unrestricted cash and cash
equivalents $ - $ 16,821 $ 3,719 $ - $ 20,540
Accounts receivable, net - 84,746 7,516 - 92,262
Inventories:
Raw materials - 24,751 2,978 - 27,729
Work in process - 3,516 875 - 4,391
Finished goods - 29,397 1,432 - 30,829
-------------- ------------ ---------- ------------ ------------
Total inventory - 57,664 5,285 - 62,949
-------------- ------------ ---------- ------------ ------------
Prepaid expenses and other
current assets - 7,695 462 - 8,157
Deferred income taxes - 2,520 - - 2,520
-------------- ------------ ---------- ------------ ------------
Total current assets - 169,446 16,982 - 186,428
-------------- ------------ ---------- ------------ ------------
Investments in subsidiaries 192,094 - - (192,094) -
PROPERTY AND EQUIPMENT, AT COST:
Land - 2,439 139 - 2,578
Buildings and improvements - 18,436 476 - 18,912
Machinery and equipment - 102,043 2,111 - 104,154
-------------- ------------ ---------- ------------ ------------
- 122,918 2,726 - 125,644
Less accumulated depreciation - (10,767) (225) - (10,992)
-------------- ------------ ---------- ------------ ------------
Total property and equipment,
net - 112,151 2,501 - 114,652
-------------- ------------ ---------- ------------ ------------
OTHER ASSETS:
Goodwill - 505,963 45,620 - 551,583
Intangible assets, net - 155,951 - - 155,951
Intercompany note receivable - 9,346 - (9,346)
Other - 49,511 - - 49,511
-------------- ------------ ---------- ------------ ------------
Total other assets - 720,771 45,620 (9,346) 757,045
-------------- ------------ ---------- ------------ ------------
$ 192,094 $ 1,002,368 $ 65,103 $ (201,440) $ 1,058,125
============== ============ ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt $ - $ 2,050 $ 300 $ - $ 2,350
Accounts payable - 43,051 2,900 - 45,951
Accrued expenses and taxes - 49,495 3,954 - 53,449
-------------- ------------ ---------- ------------ ------------
Total current liabilities - 94,596 7,154 - 101,750
-------------- ------------ ---------- ------------ ------------
Deferred income taxes 33,994 - 33,994
Intercompany note payable - - 9,346 (9,346) -
Other long term liabilities - 30,453 877 - 31,330
Long-term debt, less current
maturities - 670,037 29,550 - 699,587
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par, 100
shares authorized, none issued
and outstanding - - - - -
Common stock $.01 par, 100 shares
authorized, issued and outstanding - - - - -
Additional paid-in-capital 173,291 158,291 15,000 (173,291) 173,291
Retained earnings 18,803 14,997 3,806 (18,803) 18,803
Accumulated other comprehensive
loss - - (630) - (630)
-------------- ------------ ---------- ------------ ------------
$ 192,094 $ 1,002,368 $ 65,103 $ (201,440) $ 1,058,125
============== ============ ========== ============ ============
28
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2004 TO FEBRUARY 11, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ - $ (3,101) $ (249) $ - $ (3,350)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization
expense - 1,282 91 - 1,373
Non-cash interest expense, net - 26 - - 26
Deferred income taxes 71 71
CHANGES IN CERTAIN ASSETS AND
LIABILITIES:
Accounts receivable, net - 546 1,323 - 1,869
Inventories - (2,742) (482) - (3,224)
Prepaid expenses and other current
assets - (230) (30) - (260)
Accounts payable - 8,167 (402) - 7,765
Accrued expenses and taxes - (1,314) (1,806) - (3,120)
Other - 498 - - 498
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES - 3,203 (1,555) - 1,648
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures - (702) (16) - (718)
Change in restricted cash - 1,118 - - 1,118
Other - 1 (6) - (5)
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES - 417 (22) - 395
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt - (89) - - (89)
Net transfers to Nortek, Inc. - (7,286) (76) - 7,362)
-------------- ------------ ---------- ------------ --------
NET CASH USED IN FINANCING
ACTIVITIES - (7,375) (76) - (7,451)
Net increase (decrease) in cash
and cash equivalents - (3,755) (1,653) - 5,408)
Cash and cash equivalents at the
beginning of the period - 6,106 2,411 - 8,517
-------------- ------------ ---------- ------------ --------
Cash and cash equivalents at the
end of the period $ - $ 2,351 $ 758 $ - $ 3,109
============== ============ ========== ============ ========
29
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 23, 2004 TO OCTOBER 2, 2004
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 18,803 $ 14,748 $ 4,055 $ (18,803) $ 18,803
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization
expense - 10,033 301 - 10,334
Non-cash interest expense, net - 2,111 - - 2,111
Non-cash gain on currency
transaction (1,596) (1,596)
Amortization of purchase price
allocated to inventory 1,974 1,974
Deferred income taxes 1,027 1,027
Equity in subsidiaries' net income (18,803) - - 18,803 -
CHANGES IN CERTAIN ASSETS AND
LIABILITIES:
Accounts receivable, net - (23,770) (3,273) - (27,043)
Inventories - (1,780) (465) - (2,245)
Prepaid expenses and other current
assets - 2,737 (225) - 2,512
Accounts payable - 7,013 1,861 - 8,874
Accrued expenses and taxes - 10,831 2,666 - 13,497
Other - - - - -
-------------- ------------ ---------- ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES - 24,924 3,324 - 28,248
-------------- ------------ ---------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures - (3,264) (213) - (3,477)
Payment for acquisitions, net of
cash acquired - (822,056) (59,242) - 881,298)
Proceeds from sale leaseback - 36,000 - - 36,000
-------------- ------------ ---------- ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES - (789,320) (59,455) - (848,775)
-------------- ------------ ---------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt - 660,934 30,000 - 690,934
Proceeds from intercompany loans,
net - (15,000) 15,000 - -
Proceeds from Intercompany
investment - (15,000) 15,000 - -
Payments on long-term debt - (16,724) (150) - (16,874)
Equity contribution - 167,007 - - 167,007
-------------- ------------ ---------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES - 781,217 59,850 - 841,067
-------------- ------------ ---------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents - 16,821 3,719 - 20,540
Cash and cash equivalents at the
beginning of the period - - - - -
-------------- ------------ ---------- ------------ ------------
Cash and cash equivalents at the
end of the period $ - $ 16,821 $ 3,719 $ - $ 20,540
============== ============ ========== ============ ============
30
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2003 TO JANUARY 9, 2003
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ - $ (826) $ (74) $ - $ (900)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization
expense - 308 19 - 327
Non-cash interest expense, net - 6 - - 6
Deferred income taxes - 400 - - 400
CHANGES IN CERTAIN ASSETS AND
LIABILITIES:
Accounts receivable, net - (1,771) 223 - (1,548)
Inventories - 967 45 - 1,012
Prepaid expenses and other current
assets - 186 4 - 190
Accounts payable - 1,350 386 - 1,736
Accrued expenses and taxes - 1,016 (398) - 618
Other - - 12 - 12
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES - 1,636 217 - 1,853
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures - (348) (1) - (349)
Change in restricted cash - 1 - - 1
Other - 36 - - 36
-------------- ------------ ---------- ------------ --------
NET CASH USED IN INVESTING
ACTIVITIES - (311) (1) - (312)
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt - (45) - - (45)
Net transfers to Nortek, Inc. - (4,703) 42 - (4,661)
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES - (4,748) 42 - (4,706)
Net increase (decrease) in cash - (3,423) 258 - (3,165)
and cash equivalents
Cash and cash equivalents at the
beginning of the period - 4,070 2,823 - 6,893
-------------- ------------ ---------- ------------ --------
Cash and cash equivalents at the
end of the period $ - $ 647 $ 3,081 $ - $ 3,728
============== ============ ========== ============ ========
31
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2003 TO OCTOBER 4, 2003
Guarantor Non-
Ply Gem Guarantor Guarantor
Holdings, Inc. Subsidiaries Subsidiary Eliminations Combined
-------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ - $ 7,044 $ 3,556 $ - $ 10,600
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization
expense - 10,320 507 - 10,827
Non-cash interest expense, net - 176 - - 176
Amortization of purchase price
Allocated to inventory - 1,387 - - 1,387
Deferred income taxes - 800 - - 800
CHANGES IN CERTAIN ASSETS AND
LIABILITIES:
Accounts receivable, net - (23,838) (2,194) - (26,032)
Inventories - 341 (965) - (624)
Prepaid expenses and other current
assets - 1,105 (138) - 967
Accounts payable - 8,795 516 - 9,311
Accrued expenses and taxes - 861 209 - 1,070
Other - (2,233) - - (2,233)
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES - 4,758 1,491 - 6,249
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures - (5,727) (193) - (5,920)
Change in restricted cash - (7) - - (7)
Other - 18 (13) - 5
-------------- ------------ ---------- ------------ --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES - (5,716) (206) - (5,922)
-------------- ------------ ---------- ------------ --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt - (1,188) - - (1,188)
Net transfers to Nortek, Inc. - 3,428 369 - 3,797
-------------- ------------ ---------- ------------ --------
NET CASH USED IN FINANCING - 2,240 369 - 2,609
ACTIVITIES
Net increase (decrease) in cash and
cash equivalents - 1,282 1,654 - 2,936
Cash and cash equivalents at the
beginning of the period - 647 3,081 - 3,728
-------------- ------------ ---------- ------------ --------
Cash and cash equivalents at the
end of the period $ - $ 1,929 $ 4,735 $ - $ 6,664
============== ============ ========== ============ ========
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information contained in this discussion and in the unaudited Condensed
Consolidated Financial Statements and Accompanying Notes presented in this Form
10-Q should be read in conjunction with information set forth in Amendment No. 5
to Ply Gem Industries, Inc.'s Registration Statement on Form S-4. Certain
statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are "forward-looking statements." See "Special Note
Regarding Forward-Looking Statements."
GENERAL
We are a leading manufacturer of residential exterior building products
in North America. We offer a comprehensive product line of vinyl siding and
skirting, vinyl windows and doors, and vinyl and composite fencing, railing and
decking that serves both the home repair and remodeling and new home
construction sectors in all 50 states and Western Canada. We also manufacture
vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood
windows and steel and fiberglass doors, enabling us to bundle complementary and
color-matched products and accessories with our core vinyl products. We believe
our broad product offering and geographically diverse manufacturing base allow
us to better serve our customers and provide us with a competitive advantage
over other vinyl building products suppliers. We have two reportable segments:
(i) siding, fencing, railing and decking, and (ii) windows and doors.
THE ACQUISITION OF PLY GEM BY PLY GEM HOLDINGS
On February 12, 2004, we were acquired by Ply Gem Holdings, Inc. (we
refer to this as the "Ply Gem Acquisition"). As a result of the Ply Gem
Acquisition, we are no longer a division of Nortek, but have become a
stand-alone company. Prior to the Ply Gem Acquisition, we had a fee arrangement
with our former parent, Nortek, under which we reimbursed Nortek for certain
parent company corporate charges and have accounted for these charges in
accordance with SEC Staff Accounting Bulletin No. 55. For the fiscal years ended
December 31, 2001, 2002 and 2003, our fees to Nortek for these corporate charges
were $5.4 million, $10.2 million and $7.2 million, respectively. This fee
arrangement was terminated in connection with the Ply Gem Acquisition. In
addition, prior to the Ply Gem Acquisition, we paid an allocation of corporate
expenses to Nortek based upon the specific identification method. For the fiscal
years ended December 31, 2001, 2002 and 2003, Nortek's allocations of these
corporate expenses were $(0.3) million, $3.5 million and $3.4 million,
respectively. We estimate that in our first year as a stand-alone company, we
will incur approximately $2.4 million of incremental operating expenses to pay
for services, including accounting, tax, legal, insurance and treasury, which we
previously received from Nortek under these arrangements. Incremental operating
expenses may increase in subsequent years. See Note 1 to the notes to our
consolidated and combined financial statements.
We will in the future pay to a Caxton-Iseman party an annual advisory
fee based on our EBITDA, as defined in our General Advisory Agreement. Under the
General Advisory Agreement, the Caxton-
33
Iseman party provides us with such acquisition and financial advisory services
as our Board of Directors shall reasonably request, and in consideration of
these services will receive an annual fee and a transaction fee upon completion
of any acquisitions, divestitures or sale of our company. With respect to 2004
only, the annual fee is contingent upon achievement of certain financial
performance metrics.
In order to finance the Ply Gem Acquisition, our parent, Ply Gem
Holdings, Inc., received an equity contribution from Ply Gem Investment
Holdings, Inc. and we entered into new senior credit facilities and issued the
initial notes (see Note 4 to our condensed and combined financial statements).
IMPACT OF THE MW ACQUISITION
On August 27, 2004, we acquired MWM Holdings, Inc. and its subsidiaries
(we refer to this as the "MW Acquisition"). As a result of the MW Acquisition,
MWM Holdings, Inc. has become our subsidiary and is included in our windows and
doors segment. In connection with the MW Acquisition, we expect to pay
Caxton-Iseman Capital a transaction fee of approximately $6.4 million based on
our General Advisory Agreement. In order to finance the MW Acquisition, our
parent, Ply Gem Holdings, Inc., received an equity contribution from Ply Gem
Investment Holdings, Inc., amended our senior credit facilities, issued
additional notes, and entered into a sale and leaseback transaction (the "Sale
and Leaseback Transaction") with respect to eight of our properties, whereby we
sold these properties for approximately $36.0 million and simultaneously entered
into long-term leases for these properties with initial annual cash rent of
approximately $3.5 million.
NORTEK RECAPITALIZATION
On January 9, 2003, Nortek Holdings, our former indirect parent, was
acquired by certain affiliates and designees of Kelso & Company L.P. and certain
members of management of our former parent, Nortek. Our company, Ply Gem
Industries, Inc., our subsidiaries and CWD Windows and Doors, a division of
Broan-Nutone Canada, Inc., Nortek and Nortek Holdings accounted for the Nortek
Recapitalization as a purchase in accordance with the provisions of Statement of
Financial Accounting Standards No. 141, "Business Combinations," which resulted
in a new valuation for the assets and liabilities of Nortek Holdings and its
subsidiaries (including us) based upon fair values as of the date of the Nortek
Recapitalization. As permitted under SEC Staff Accounting Bulletin No. 54, "Push
Down Basis of Accounting Required in Certain Limited Circumstances," we have
reflected all applicable purchase accounting adjustments recorded by Nortek
Holdings in our combined financial statements for all future financial
statements covering periods subsequent to the Nortek Recapitalization. See Note
1 of the notes to our combined financial statements.
FINANCIAL STATEMENT PRESENTATION
NET SALES. Net sales represent the selling price of our products plus
certain shipping charges less applicable provisions for discounts and
allowances. Allowances include cash discounts, volume rebates and gross returns
among others.
COST OF PRODUCTS SOLD. Cost of products sold includes direct material
and manufacturing costs, manufacturing depreciation, third-party and in-house
delivery costs and product warranty expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense, or "SG&A expense," includes all non-product related
operating expenses, including selling, marketing, research and development
costs, information technology and other general and administrative expenses.
OPERATING EARNINGS. Operating earnings represents net sales less cost
of products sold, SG&A expense and amortization of goodwill and intangible
assets.
COMPARABILITY. The data for the Pre-Nortek Recapitalization period from
January 1, 2003 through January 9, 2003 has been prepared on a different basis
of accounting due to our former parent Nortek's Recapitalization that took place
on January 9, 2003 and therefore is not directly comparable to the post-Nortek
Recapitalization information presented. The data presented for the nine month
period ended October 4, 2003 includes data using a different basis of accounting
for the Pre-Nortek Recapitalization period from January 1, 2003 to January 9,
2003 and the Post-Nortek Recapitalization period from January 10, 2003 to
October 4, 2003, and therefore those periods are not directly comparable. In
addition, the
34
data presented for the nine month period ended October 2, 2004 includes
predecessor data for Ply Gem Industries, Inc. from January 1, 2004 to February
11, 2004 and successor data for Ply Gem Holdings, Inc. from January 23, 2004 to
October 2, 2004 and therefore those periods are not directly comparable. In
addition, during the period January 23, 2004 (inception) through February 11,
2004, Ply Gem Holdings, Inc., which ultimately acquired Ply Gem Industries,
Inc., conducted no operations.
IMPACT OF COMMODITY PRICING
Our principal raw materials, PVC resin and aluminum, have historically
been subject to rapid price changes. We have in the past been able to
substantially pass on significant cost increases through price increases to our
customers. Our results of operations for individual quarters can and have been
impacted by a delay between the time of PVC resin and aluminum cost increases
and decreases and related price changes that we implement in our products.
IMPACT OF WEATHER
Since our building products are intended for exterior use, our sales
and operating earnings 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, we have historically had lower profits or
losses in the first quarter, and reduced profits in the fourth quarter of each
calendar year due to the weather. Our results of operations for individual
quarters in the future may be impacted by adverse weather conditions.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and
results of operations are based upon our combined and consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. Certain of our accounting policies
require the application of judgments in selecting the appropriate assumptions
for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty. We periodically evaluate the
judgments and estimates used for our critical accounting policies to ensure that
such judgments and estimates are reasonable for our interim and year-end
reporting requirements. These judgments and estimates are based our historical
experience, current trends and information available from other sources, as
appropriate. If different conditions result than those assumptions used in our
judgments, the results could be materially different from our estimates.
Management believes that the two areas where different assumptions could result
in materially different reported results are accounts receivable related to
estimation of allowances for doubtful accounts and inventories in estimating
reserves for obsolete and excess inventory. Although we believe the likelihood
of a material difference in either of these two areas is very low based upon our
historical experience, a 10% change in our allowance for doubtful accounts and
our inventory reserve estimates at October 2, 2004 would result in a $0.83
million and $0.39 million impact upon SG&A expense and cost of products sold,
respectively. Additionally, we have included in the discussion that follows our
estimation methodology for both accounts receivable and inventories. While all
significant policies are important to our combined and consolidated financial
statements, some of these policies may be viewed as being critical. Our critical
accounting policies include:
REVENUE RECOGNITION. We recognize sales based upon shipment of products
to our customers net of applicable provisions for discounts and allowances. The
customer takes title upon shipment and assumes the risks and rewards of
ownership of the product. Revenue includes selling price of the product and all
shipping costs paid by the customer. Revenue is reduced at the time of sale for
estimated sales returns and all applicable allowances and discounts based on
historical experience. We also provide for estimates of warranty, bad debts,
shipping costs and certain sales-related customer programs at the time of sale.
Shipping and warranty costs are included in cost of products sold. Bad debt
expense and sales-related marketing programs are included in selling, general
and administrative expense. We believe that our procedures for estimating such
amounts are reasonable and historically have not resulted in material
adjustments in subsequent periods when the estimates are reconciled to the
actual amounts.
35
ACCOUNTS RECEIVABLE. We maintain an allowance for doubtful accounts for
estimated losses from the inability of our customers to make required payments,
which is provided for in bad debt expense. We determine the adequacy of this
allowance by regularly reviewing our accounts receivable aging and evaluating
individual customers' receivables, considering customers' financial condition,
credit history and other current economic conditions. If a customer's financial
condition were to deteriorate which might impact its ability to make payment,
then additional allowances may be required.
INVENTORIES. Inventories in the accompanying consolidated and combined
balance sheets are valued at the lower of cost or market. At October 2, 2004,
October 4, 2003 and December 31, 2003, approximately $11,778,000, $12,312,000,
and $10,097,000 of total inventories, respectively, were valued on the last-in,
first-out method, or "LIFO." Under the first-in, first-out method, or "FIFO," of
accounting, such inventories would have been approximately $982,000 and $752,000
lower at October 2, 2004 and October 4, 2003, respectively, and $402,000 higher
at December 31, 2003. All other inventories were valued under the FIFO method.
In connection with both LIFO and FIFO inventories, we record provisions, as
appropriate, to write-down obsolete and excess inventory to estimated net
realizable value. The process for evaluating obsolete and excess inventory often
requires subjective judgments and estimates concerning future sales levels,
quantities and prices at which such inventory will be sold in the normal course
of business. Accelerating the disposal process or incorrect estimates of future
sales potential may cause the actual results to differ from the estimates at the
time such inventory is disposed or sold.
ASSET IMPAIRMENT. In accordance with SFAS No. 144, we evaluate the
realizability of certain long-lived assets, which primarily consist of property
and equipment and intangible assets, based on expectations of non-discounted
future cash flows for each subsidiary having a material amount of SFAS No. 144
long-lived assets. If the sum of the expected non-discounted future cash flow is
less than the carrying amount of all assets including SFAS No. 144 long-lived
assets, we would recognize an impairment loss. Based upon our most recent
analysis, we believe that no material impairment of SFAS No. 144 long-lived
assets existed at December 31, 2003.
INSURANCE LIABILITIES. We record insurance liabilities and related
expense for health, workers' compensation, product and general liability losses
and other insurance reserves and expenses in accordance with either the
contractual terms of their policies or, if self-insured, the total liabilities
that are estimable and probable as of the reporting date. Insurance liabilities
are recorded as current liabilities to the extent they are expected to be paid
in the succeeding year with the remaining requirements classified as long-term
liabilities. The accounting for self-insured plans requires that significant
judgments and estimates be made both with respect to the future liabilities to
be paid for known claims and incurred but not reported claims as of the
reporting date. We rely heavily on historical trends and, in certain cases, the
advice and calculations of third-party actuarial consultants when determining
the appropriate insurance reserves to record in our consolidated and combined
balance sheets for a substantial portion of our workers' compensation and
general and product liability losses.
INCOME TAXES. Federal income taxes have been recorded in our combined
financial statements based upon our pro rata share of Nortek's consolidated
federal tax provision. We account for deferred income taxes using the liability
method in accordance with SFAS No. 109 "Accounting for Income Taxes," or "SFAS
No. 109," which requires that the deferred tax consequences of temporary
differences between the amounts recorded in our financial statements and the
amount included in our federal and state income tax returns be recognized in the
balance sheet. The amount recorded in our financial statements at December 31 of
each year reflects estimates of final amounts due to timing of completion and
filing of actual income tax returns. Estimates are required with respect to,
among other things, the appropriate state income tax rates to use in the various
states that we and our subsidiaries are required to file, the potential
utilization of operating and capital loss carry-forwards for both federal and
state income tax purposes and valuation allowances required, if any, for tax
assets that may not be realized in the future. After February 12, 2004, U.S.
federal income tax returns will be prepared and filed by Ply Gem Investment
Holdings, Inc. on behalf of itself, Ply Gem Holdings, Inc., Ply Gem Industries,
Inc. and its subsidiaries. We have executed a tax sharing agreement with Ply Gem
Holdings, Inc. and Ply Gem Investment Holdings, Inc. pursuant to which tax
liabilities for each respective party are computed on a stand-alone basis. U.S.
subsidiaries will continue to file unitary, combined and separate state income
tax returns. CWD Windows and Doors will file separate Canadian income tax
returns.
36
RESULTS OF OPERATIONS
In view of the seasonality of our business, it must be emphasized that
the results of operations for the periods presented are not necessarily
indicative of the results for a full fiscal year.
The following tables set forth our results of operations based on the
amounts and the percentage relationship of the items listed to net sales for the
periods indicated. However, our results of operations set forth in the tables
below may not necessarily reflect what would have occurred if we had been a
separate, stand-alone entity during the periods presented or what will occur in
the future. Our results of operations in future periods may differ from our
historical performance due to changes in our business as discussed above under
"General."
Our nine months ended unaudited statement of operations data for the
predecessor periods includes the Pre-Nortek Recapitalization period of January 1
through January 9, 2003 and the Post-Nortek Recapitalization periods of January
10, 2003 through October 4, 2003 and January 1, 2004 through February 11, 2004
for Ply Gem Industries, Inc. and the period from January 23, 2004 to October 2,
2004 for Ply Gem Holdings, Inc. The Pre-Nortek Recapitalization and Post-Nortek
Recapitalization periods were prepared using different bases of accounting and
therefore are not directly comparable. As a result of the Ply Gem Acquisition on
February 12, 2004, we applied purchase accounting to the period February 12,
2004 through October 2, 2004.
Pre-Nortek Post-Nortek Ply Gem Ply Gem
Recapitalization Recapitalization Industries, Inc. Holdings, Inc.
---------------- ---------------- ---------------- --------------
January 1, 2003 to January 10, 2003 to January 1, 2004 to January 23, 2004 to
January 9, 2003 October 4, 2003 February 11, 2004 October 2, 2004
------------------ ------------------- ------------------- -------------------
(dollars in thousands) (unaudited) (unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Net Sales ......................... $ 8,824 100% $ 410,147 100% $ 40,612 100% $ 404,507 100%
Cost of products sold ............. 7,651 86.7 308,259 75.2 33,611 82.8 303,872 75.1
Gross profit ...................... 1,173 13.3 101,892 24.8 7,001 17.2 100,635 24.9
Selling, general and
administrative
expense ....................... 1,529 17.3 56,977 13.9 8,345 20.5 45,413 11.2
Amortization of intangible
assets 70 0.8 3,130 0.8 201 0.5 3,000 0.7
-------- --------- -------- ---------
Operating earnings (loss) ......... (426) (4.8) 41,781 10.2 (1,545) (3.8) 52,222 12.9
Foreign currency gain.............. 1,596 0.4
Interest expense, net.............. (976) (11.1) (24,733) (6.0) (3,684) (9.1) (23,356) (5.8)
Investment income ................. 2 0.0 152 0.0 29 0.1 81 0.0
-------- --------- -------- ---------
Income (loss) before provision
(benefit) for income taxes .... (1,400) (15.9) 17,200 4.2 (5,200) (12.8) 30,543 7.6
Provision (benefit) for income
taxes (500) (5.7) 6,600 1.6 (1,850) (4.6) 11,740 2.9
-------- --------- -------- ---------
Net income (loss) ................. $ (900) (10.2)% $ 10,600 2.6% $ (3,350) (8.2)% $ 18,803 4.6%
======== ========= ======== =========
For the three months For the three months
Ended October 4, 2003 Ended October 2, 2004
--------------------- ---------------------
(dollars in thousands) (unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Net Sales ............................ $ 156,549 100% $ 178,732 100%
Cost of products sold ................ 114,496 73.1 132,657 74.2
------- -------
Gross profit ......................... 42,053 26.9 46,075 25.8
Selling, general and administrative
expense .......................... 19,492 12.5 19,723 11.0
Amortization of intangible assets 1,072 0.7 1,974 1.1
------- -------
Operating earnings (loss) .......... 21,489 13.7 24,378 13.6
Foreign currency gain ............... 1,596 0.9
Interest expense, net ................ (8,589) (5.5) (10,271) (5.7)
------- -------
Income (loss) before provision
(benefit) for income taxes ....... 12,900 8.2 15,703 8.8
Provision (benefit) for income taxes 5,000 3.2 6,101 3.4
------- -------
Net income (loss) .................... $ 7,900 5.0% $ 9,602 5.4%
========= =========
37
FOR THE 2003 PERIODS OF JANUARY 1, 2003 TO JANUARY 9, 2003 AND JANUARY 10, 2003
TO OCTOBER 4, 2003 COMPARED TO THE 2004 PERIODS OF JANUARY 1, 2004 TO FEBRUARY
11, 2004 AND JANUARY 23, 2004 TO OCTOBER 2, 2004.
NET SALES. (DOLLARS IN THOUSANDS)
Pre-Nortek Post-Nortek Ply Gem
Recapitalization Recapitalization Ply Gem Holdings,
January 1, 2003 January 10, Three Months January 1, Inc. January Three Months
to January 9, 2003 2003 to Ended 2004 to 23, 2004 to Ended
October 4, 2003 October 4, 2003 February 11, October 2, 2004 October 2, 2004
2004
$8,824 $410,147 $156,549 $40,612 $404,507 $178,732
Net sales for the January 1 to February 11, 2004 and January 23 to
October 2, 2004 periods presented increased over the January 1 to January 9,
2003 and January 10 to October 4, 2003 periods presented (the "2003 periods").
The increase in net sales was driven by net sales contributed by MW which
increased sales by $29.2 million over the sales from the 2003 periods. The
increase in net sales was driven by unit volume growth in our siding products
and increased selling prices across both our product segments that resulted from
price increases that we initiated in response to higher raw material costs,
specifically PVC resin and aluminum, and was partially offset by the negative
impact from the hurricanes and the resulting wet weather that occurred during
the third quarter in the southeast region of the United States, as well as
weaker demand for our remodeling window products. We have been working on and
will be launching a new remodeling window product line in either the fourth
quarter of 2004 or the first quarter of 2005. In addition, third quarter sales
volume of our fencing products were lower than prior year due to our customers
reducing inventory levels during the third quarter which we believe was in
response to our improved service capabilities and the aforementioned impact of
wet weather in our southeast region.
Net sales for the three months ended October 2, 2004 (2004 period)
increased by $22.2 million or 14.2% over the three month period ended October 4,
2003 (2003 period), driven by net sales contributed by MW, which increased sales
by $29.2 million. Excluding the effect of MW's contribution and excluding the
results of operations of Thermal-Gard, Inc. in 2003, the assets of which were
sold in February 2004, net sales for the three months ended October 2, 2004
decreased by $5.3 million or 3.4% from the three month period ended October 4,
2003. The $5.3 million decrease in the 2004 period was driven by the hurricanes
and the resulting wet weather that occurred during the third quarter in the
southeast region of the United States, and weaker demand for our remodeling
window products, for which we will be launching a new remodeling window product
line in either the fourth quarter of 2004 or the first quarter of 2005. In
addition, third quarter sales volume of our fencing products were lower than the
prior year due to our customers reducing inventory levels during the third
quarter, which we believe was in response to our improved service capabilities
and the aforementioned impact of wet weather in our southeast region. Lower unit
volume in both segments during the third quarter was partially offset by
increased selling price across both our product segments that resulted from
price increases that were initiated in response to higher raw material costs,
specifically PVC resin and aluminum.
38
COST OF PRODUCTS SOLD. (DOLLARS IN THOUSANDS)
Pre-Nortek Post-Nortek Ply Gem
Recapitalization Recapitalization Ply Gem Holdings,
January 1, 2003 January 10, Three Months January 1, Inc. January Three Months
to January 9, 2003 2003 to Ended 2004 to 23, 2004 to Ended
October 4, 2003 October 4, 2003 February 11, October 2, 2004 October 2, 2004
2004
$7,651 $308,259 $114,496 $33,611 $303,872 $132,657
Percent of net sales:
86.7% 75.2% 73.1% 82.8% 75.1% 74.2%
Cost of products sold for the January 1 to February 11, 2004 and
January 23 to October 2, 2004 periods increased compared to cost of products
sold for the January 1 to January 9, 2003 and January 10 to October 4, 2003
periods presented. The increase in cost of products sold was primarily due to
increased unit sales volume which was largely driven by MW's sales contribution.
The increase in cost of products sold as a percentage of sales resulted from
higher raw material cost, specifically PVC resin and aluminum, both of which saw
significant increases in market prices during the 2004 periods. Increased raw
material costs were largely offset by increases in selling prices and
operational efficiency improvements across both our reporting segments. The
operational efficiency improvements that were realized in our siding, fencing,
railing and decking segment were due primarily to i) the closure of our Butler,
PA siding facility in May of 2003, and ii) the renegotiation of our PVC resin
pricing effective July 1, 2003. The operational efficiency improvements that
were realized in our windows and doors segment were the result of the successful
implementation of lean manufacturing techniques that were implemented by our
management team during 2003. The periods presented for both 2003 and 2004 were
impacted by application of purchase accounting, primarily from the non-cash
write off of excess purchase price allocated to inventory, which impacted the
2003 periods presented and the 2004 periods presented by $1.4 million and $2.0
million, respectively.
Cost of products sold for the three months ended October 2, 2004 was
$132.7 million or 74.2% of sales, compared to $114.5 million or 73.1% of sales
for the three months ended October 4, 2003. The $18.2 million increase in cost
of products sold was driven by increased unit sales volume, which was largely
driven by MW's sales contribution and the negative impact of higher cost of
products sold as a percentage of sales. The increase in cost of products sold as
a percentage of net sales resulted from higher raw material cost, specifically
PVC resin and aluminum, both of which saw significant increases in market prices
during the third quarter of 2004 compared to the third quarter of 2003. PVC
resin market price increased in the third quarter of 2004 by approximately 32.1%
compared to the same period in 2003, while aluminum ingot market costs increased
by approximately 24.1% in the third quarter of 2004 compared to the same period
in 2003. The increase in raw material cost was partially offset by an increase
in selling prices that was launched in the first six months of the year in both
our reporting segments, and an additional price increase that was launched in
our siding, fencing, railing and decking segment in August 2004. In addition,
the favorable impact of operational efficiency improvements that we realized in
both our reporting segments continued to help offset the increase in raw
material cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. (DOLLARS IN THOUSANDS)
Pre-Nortek Post-Nortek Ply Gem
Recapitalization Recapitalization Ply Gem Holdings,
January 1, 2003 January 10, Three Months January 1, Inc. January Three Months
to January 9, 2003 2003 to Ended 2004 to 23, 2004 to Ended
October 4, 2003 October 4, 2003 February 11, October 2, 2004 October 2, 2004
2004
$1,529 $56,977 $19,492 $8,345 $45,413 $19,723
Percent of net sales:
17.3% 13.9% 12.5% 20.5% 11.2% 11.0%
SG&A expense for the January 1 to February 11, 2004 and January 23 to
October 2, 2004 periods presented decreased from the January 1 to January 9,
2003 and January 10 to October 4, 2003 periods presented. The decline was
largely due to the elimination of the Nortek management fee and the decline in
corporate expenses following the Ply Gem Acquisition. The SG&A expense for the
2003 periods presented included Nortek's management fee of $4.8 million and $4.2
million of allocated corporate expense, where as the SG&A for the 2004 periods
presented included $0.2 million for Nortek's management fee, $0.3 million of
allocated corporate expense and $1.3 million of accrued Caxton-Iseman
39
Capital general advisory fee. The decline in SG&A expense was further impacted
by a decrease of $.8 million in SG&A costs due to the closing of operations of
our Thermal-Gard, Inc. subsidiary, and iii) certain one-time cost totaling $1.3
million incurred in the 2003 periods presented related to the closure of our
Butler, Pennsylvania manufacturing facility in May 2003 and severance and
relocation costs incurred in our windows and doors segment. These decreases in
SG&A expense were partially offset by the addition of SG&A expenses relating to
our newly acquired MW subsidiary, consisting of $2.8 million of expense incurred
during the period August 27 through October 2, 2004, $2.4 million of corporate
stand-alone costs, and $0.3 million of incremental rent expense related to the
sale lease-back transaction that was completed in conjunction with the MW
Acquisition.
SG&A expense for the three months ended October 2, 2004 increased by
$0.2 million from the three months ended October 4, 2003. SG&A expense for the
three months ended October 4, 2003 included Nortek's management fee of $2.5
million and $1.2 million of allocated corporate expense, compared to SG&A
expense for the 2004 periods presented which included no Nortek management fee
or allocated corporate expense, but did include $0.6 million of accrued
Caxton-Iseman Capital general advisory fee. Furthermore, the decline in SG&A
expense was impacted by i) a decrease of $0.4 million in SG&A costs due to the
closing of operations of our Thermal-Gard, Inc. subsidiary, and ii) certain
one-time cost totaling $0.3 million incurred in the 2003 periods presented
related to the closure of our Butler, Pennsylvania manufacturing facility in May
2003 and severance and relocation costs incurred in our windows and doors
segment. These decreases in SG&A expense were partially offset by the addition
of SG&A expenses relating to our newly acquired MW subsidiary, consisting of
$2.8 million incurred during the period August 27 through October 2, 2004, $0.6
million of corporate stand-alone costs, and $0.3 million of incremental rent
expense related to the sale lease-back transaction that was completed in
conjunction with the MW Acquisition.
OPERATING EARNINGS (LOSS). (DOLLARS IN THOUSANDS)
Pre-Nortek Post-Nortek Ply Gem
Recapitalization Recapitalization Ply Gem Holdings,
January 1, 2003 January 10, Three Months January 1, Inc. January Three Months
to January 9, 2003 2003 to Ended 2004 to 23, 2004 to Ended
October 4, 2003 October 4, 2003 February 11, October 2, 2004 October 2, 2004
2004
$(426) $41,781 $21,489 $(1,545) $52,222 $24,378
Percent of net sales:
(4.8)% 10.2% 13.7% (3.8)% 12.9% 13.6%
Operating earnings for the January 1 to February 11, 2004 and January
23 to October 2, 2004 periods presented increased over the periods presented for
January 1 to January 9, 2003 and January 10 to October 4, 2003. As discussed
above with regard to net sales, the increase in operating earnings was
principally due to $4.0 million of operating earnings contributed by MW from the
August 27, 2004 through October 2, 2004 period, lower SG&A expense due to lower
corporate management charges, and one-time costs that were incurred in the 2003
periods presented. Operating earnings were reduced by depreciation expense and
amortization of intangible assets, which were approximately $0.3 million and
$10.8 million for the 2003 periods January 1 to January 9, 2003 and January 10,
2003 to October 4, 2003, respectively, and were approximately $1.4 million and
$10.3 million for the 2004 periods January 1 to February 11, 2004 and January 23
to October 2, 2004 respectively. The periods presented for both 2003 and 2004
were impacted by the application of purchase accounting, primarily from the
non-cash write off of excess purchase price allocated to inventory, which
impacted cost of products sold for the 2003 periods presented and the 2004
periods presented by $1.4 million and $2.0 million, respectively.
Operating earnings for the three months ended October 2, 2004 increased
by $2.9 million over the three month period ended October 4, 2003. As discussed
above, the increase in operating earnings was principally due to $4.0 million of
operating earnings contributed by MW from August 27, 2004 through October 2,
2004, lower SG&A expense due to lower corporate management charges, and one-time
costs that were incurred in the 2003 periods presented. These improvements in
the third quarter 2004 operating earnings were partially offset by higher
material cost, specifically PVC resin and aluminum, that was not fully offset by
price increases within the quarter. Operating earnings were reduced by
depreciation expense and amortization of intangible assets, which were
approximately $3.7 million for the three month period ended October 4, 2003 and
approximately $5.1 million for the three month period ended October 2, 2004.
40
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Our primary cash needs are for working capital, capital expenditures
and debt service. We have historically financed these cash requirements through
internally generated cash flow and funds borrowed under our former credit
facility (which was terminated in July 2002) and from our former parent, Nortek.
Net cash provided by operating activities for the 2004 periods of
January 1 to February 11, 2004 and January 23 to October 2, 2004 was $1.6
million and $32.3 million, respectively, while net cash provided by operating
activities for the 2003 periods of January 1 to January 9, 2003 and January 10
to October 4, 2003 was $1.9 million and $6.2 million, respectively. The increase
in net cash provided by operating activities for the 2004 periods presented
compared to the 2003 periods presented was primarily driven by improved earnings
and improved working capital.
Net cash provided by (used in) investing activities for the 2004
periods of January 1 to February 11, 2004 and January 23 to October 2, 2004 was
$0.4 million and ($852.8) million respectively, while net cash used in
investing activities for the 2003 periods of January 1 to January 9, 2003 and
January 10 to October 4, 2003 were ($0.3) million and ($5.9) million
respectively. The increase in cash used in investing activities during the 2004
periods presented was driven by the cash used to fund the Ply Gem Acquisition
and the MW Acquisition.
Net cash provided by (used in) financing activities for the 2004
periods of January 1 to February 11, 2004 and January 23 to October 2, 2004 was
($7.5) million and $841.1 million respectively, while net cash provided by (used
in) financing activities for the 2003 periods of January 1 to January 9, 2003
and January 10 to October 4, 2003 were ($4.7) million and $2.6 million
respectively. The increase in net cash provided by financing activities for the
2004 periods presented was driven by the cash provided from our new capital
structure that resulted from the consummation of the Ply Gem Acquisition and the
MW Acquisition, which includes our new senior subordinated notes, new senior
term loan facilities, our new senior revolving credit facility and $167.0
million of equity contribution.
Our capital expenditures for the 2004 periods of January 1 to February
11, 2004 and January 23 to October 2, 2004 were $0.7 million and $3.5 million,
respectively, as compared to our capital expenditures for the 2003 periods of
January 1 to January 9, 2003 and January 10 to October 4, 2003 which were $0.3
million and $5.9 million, respectively. We expect our capital expenditures in
the near future to remain consistent with our expenditures in past periods.
IMPACT OF THE PLY GEM ACQUISITION AND THE MW ACQUISITION
We intend to fund our ongoing capital and working capital requirements,
including our internal growth, through a combination of cash flows from
operations and, if necessary, from borrowings under the revolving credit portion
of our new senior credit facilities. As of October 2, 2004, we had $701.9
million of indebtedness and $20.3 million of availability under our new
revolving credit facility. Concurrently with the Ply Gem Acquisition, we issued
$225 million aggregate principal amount of our 9% senior subordinated notes due
2012, which are guaranteed by Ply Gem Holdings Inc. and the domestic
subsidiaries of Ply Gem Industries, Inc. Ply Gem Holdings Inc. is a holding
company and has no operations. Under the terms of the indenture governing the 9%
notes, there are restrictions on the ability of Ply Gem Industries, Inc. to
dividend or distribute cash or property to Ply Gem Holdings Inc. Our new senior
credit facilities consisted of a $65.0 million revolving credit facility and
$190.0 million of term loan facilities. We borrowed the full amounts under the
term loan facilities and approximately $3.0 million under the revolving credit
facility. Subsequent to the Ply Gem Acquisition, we amended and restated our new
senior credit facilities on March 3, 2004 to increase our U.S. term loan
facility from $160.0 million to $170.0 million and reduce our revolving credit
facility from $65.0 million to $55.0 million. We utilized the additional $10.0
million to pay down existing indebtedness under our municipal loan agreements.
In connection with the MW Acquisition, we entered into an amendment to our
senior credit facilities, which increased by $15.0 million our revolving credit
facility and added an additional term loan facility in the amount of $111.0
million. We also issued an additional $135.0 million aggregate principal amount
of our 9% senior subordinated notes due 2012, which are guaranteed by Ply Gem
Holdings Inc. and the domestic subsidiaries of Ply Gem Industries, Inc. At
closing, we borrowed the entire amount under the new term loan facility and an
additional $6.0 million under the revolving credit facility to fund the MW
Acquisition and pay related costs and expenses.
The borrowings under the revolving credit facility will be available
until its maturity to fund our working capital requirements, capital
expenditures and other general corporate needs. The revolving credit facility
will mature five years after the closing and will have no scheduled amortization
or
41
commitment reductions. The term loan facilities will mature seven years after
the closing and will have quarterly scheduled amortizations of $500,000
beginning in the quarter ended June 30, 2004 and for the next 23 calendar
quarters thereafter, $47,000,000 on each of June 30, 2010, September 30, 2010,
December 31, 2010, and $158,000,000 on the maturity date. Interest payments on
the senior subordinated notes and required principal and interest payments on
borrowings under our new senior credit facilities will substantially increase
our cash requirements. Our significant debt service obligations, under certain
circumstances, have material consequences to you.
Our senior credit facilities and the indenture for the senior
subordinated notes impose certain restrictions on us, including restrictions on
our ability to incur indebtedness, pay dividends, make investments, grant liens,
sell our assets and engage in certain other activities. The terms of our new
senior credit facilities and the terms of the senior subordinated notes also
significantly restrict our ability to pay dividends and otherwise distribute
assets to our parent, Ply Gem Holdings. In addition, our new senior credit
facilities require us to comply with certain financial ratios. Indebtedness
under our new senior credit facilities is secured by substantially all of our
assets, including our real and personal property, inventory, accounts
receivable, intellectual property and other intangibles. In addition, our new
senior credit facilities are guaranteed by our direct parent and secured by its
assets (including our equity interests), as well as guaranteed and secured by
the equity interests and substantially all of the assets of our current and, if
any, future subsidiaries, subject to exceptions.
Pursuant to the Sale and Leaseback Transaction, we sold eight of our
properties for approximately $36.0 million, and simultaneously entered into
long-term leases for those properties with initial annual cash rent of
approximately $3.5 million. The net proceeds of the Sale and Leaseback
Transaction were used to fund a portion of the purchase price of the MW
Acquisition.
Because of the inherent seasonality in our business and the resulting
working capital requirements, our liquidity position within a given year will
fluctuate. The seasonal effect that creates greatest capital needs is
experienced during the first six months of the year and we anticipate the need
to borrow funds under our existing revolving credit facility to support this
requirement. However, we anticipate that the funds generated by operations and
funds available under our new senior credit facilities will be adequate to
finance our ongoing operational cash flow needs, capital expenditures (as
described above), debt service obligations, management incentive expenses, fees
payable under our General Advisory Agreement and other contractual obligations
for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations under
financing arrangements and lease commitments as of October 2, 2004, including
interest amounts. Except for the senior subordinated notes, the interest rates
are generally variable and have been presented at the current rates. Actual
rates for future periods may differ from those presented here. Additionally, we
have reflected the pension obligation in future periods as being equal to the
2004 annual funding requirement.
MORE THAN
LESS 3 YEARS YET
TOTAL THAN LESS THAN 5 YEARS
AMOUNT 1 YEAR 1-3 YEARS 5 YEARS OR MORE
------------ --------- -------------------- ----------- --------
(DOLLARS IN THOUSANDS)
Revolving credit facility $ 22,708 $ 757 $ 2,371 $ 1,580 $ 18,000
Term loan facilities 393,613 15,576 46,201 122,852 208,984
Mortgage notes and industrial
revenue bonds payable 15,677 520 1,607 1,124 12,426
Senior subordinated notes 603,000 32,400 97,200 64,800 408,600
Non-cancelable lease commitments 76,426 5,793 14,021 7,448 49,164
Pension obligations 5,254 485 1,455 970 2,344
------------ -------- --------- ---------- --------
Total $ 1,116,678 $ 55,531 $ 162,855 $ 198,774 $699,518
============ ======== ========= ========== ========
INFLATION; SEASONALITY
42
Our performance is dependent to a significant extent upon the levels of
home repair and remodeling and new home construction spending, all of which are
affected by such factors as interest rates, inflation, consumer confidence and
unemployment.
The demand for our products is seasonal, particularly in the Northeast
and Midwest regions of the United States and Western Canada where inclement
weather during the winter months usually reduces the level of building and
remodeling activity in both the home repair and remodeling and new home
construction sectors. Our sales are usually lower during the first and fourth
quarters. Since a portion of our manufacturing overhead and operating expenses
are relatively fixed throughout the year, operating income and net earnings tend
to be lower in quarters with lower sales levels. In addition, the demand for
cash to fund our working capital is greater from late in the fourth quarter
through the first quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143") addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 with early adoption permitted. We
adopted SFAS No. 143 on January 1, 2003. Adoption of this accounting standard
was not material to our financial statements included elsewhere herein.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections" ("SFAS No. 145"),
was issued in April 2002 and addresses the reporting of gains and losses
resulting from the extinguishment of debt, accounting for sale-leaseback
transactions and rescinds or amends other existing authoritative pronouncements.
SFAS No. 145 requires that any gain or loss on extinguishment of debt that does
not meet the criteria of APB 30 for classification as an extraordinary item
shall not be classified as extraordinary and shall be included in earnings from
continuing operations. The provisions of this statement related to the
extinguishment of debt are effective for financial statements issued in fiscal
years beginning after May 15, 2002 with early application encouraged. We adopted
SFAS No. 145 on January 1, 2003 and adoption of this accounting standard was not
material to the results presented in the financial statements included elsewhere
herein.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for
Costs Associated with Exit of Disposal Activities" ("SFAS No. 146"), which
addresses the accounting and reporting for costs associated with exit or
disposal activities, nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3") and substantially nullifies EITF Issue No. 88-10, "Costs
Associated with Lease Modification or Termination" ("EITF 88-10"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as defined in EITF 94-3 was recognized at the date of
an entity's commitment to an exit plan. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material effect on our
financial statements included elsewhere herein.
In the fourth quarter 2003, we adopted the fair value method of
accounting for stock-based compensation in accordance with SFAS No. 123. We
adopted SFAS No. 123 using the prospective method of transition in accordance
with SFAS No. 148, "Accounting for Stock-Based Compensation - Transaction and
Disclosure" ("SFAS No. 148"). The prospective method under SFAS No. 148 required
us to adopt SFAS No. 123 effective January 1, 2003 for all stock options issued
during 2003. Prior to January 1, 2003, we accounted for options granted to
employees using the intrinsic value method pursuant to the provisions of APB 25,
under which no compensation cost was recognized since the options were granted
with exercise prices equal to the fair market value of the common stock at the
date of grant. The adoption of this accounting standard was not material to the
results presented in the financial statements included elsewhere herein.
Following the consummation of the Transactions on
43
February 12, 2004, we have accounted for options granted to employees using the
intrinsic value method pursuant to the provisions of APB 25.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). Along with new disclosure
requirements, FIN 45 requires guarantors to recognize, at the inception of
certain guarantees, a liability for the fair value of the obligation undertaken
in issuing the guarantee. This differs from the prior practice to record a
liability only when a loss is probable and reasonably estimable. The recognition
and measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We adopted the disclosure
provisions of FIN 45 as of December 31, 2002 and adopted the entire
interpretation on January 1, 2003. Adoption of FIN 45 was not material to our
financial statements included elsewhere herein.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN
46 clarifies the application of ARB No. 51, "Consolidated Financial Statements,"
to certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of FIN 46 apply to us
immediately for variable interest entities created after January 31, 2003 and
for existing variable interest entities no later than the end of the first
annual reporting period beginning after December 15, 2003. We do not expect any
material impact on our financial statements as a result.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which
clarifies the financial accounting and reporting proscribed by SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
for derivative instruments, including certain derivative instruments embedded in
other contracts. Certain provisions of SFAS No. 149 related to implementation
issues of SFAS No. 133 are already effective and other provisions related to
forward purchases or sales are effective for both existing contracts and new
contracts entered into after June 30, 2003. We had previously adopted SFAS No.
133, including the implementation issues addressed in SFAS No. 149, and the
adoption of the new provisions of SFAS No. 149 on July 1, 2003 did not have a
material impact on our financial statements included elsewhere herein.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"), which addresses the accounting and reporting for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003 and for
all existing financial instruments beginning in the first interim period after
June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. We adopted SFAS No. 150 on July 1, 2003. Adoption of this
accounting standard did not have a material impact on our financial statements
included elsewhere herein.
In December 2003, the FASB issued the revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132")
to require additional disclosures to those in the original SFAS No. 132 about
the assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
revised SFAS No. 132 provides only for additional disclosures and does not
change the accounting for pension and postretirement plans.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We based these
forward-looking statements on our current expectations and projections about
future events. Our actual results could differ materially from those discussed
in, or implied by, these forward-looking statements. Forward-looking statements
are identified by words such as "believe," "anticipate," "expect," "intend,"
"plan," "will," "may" and other similar expressions. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or
44
circumstances are forward-looking statements. The following factors could cause
our actual results to differ materially from those implied by the
forward-looking statements in this Quarterly Report:
o our high degree of leverage and significant debt service obligations;
o restrictions under the indenture governing the notes and our senior
credit facilities;
o the competitive nature of our industry;
o changes in interest rates, and general economic, home repair and
remodeling and new home construction market conditions;
o changes in the price and availability of raw materials; and
o changes in our relationships with our significant customers.
Other factors that could cause actual results to differ from those implied
by the forward-looking statements contained in this Quarterly Report are set
forth in Amendment No. 5 to our Registration Statement on Form S-4. We undertake
no obligation to update the forward-looking statements in this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal interest rate exposure relates to the term loans outstanding
under our new senior credit facilities. We have $310.0 million of term loans
outstanding, bearing interest at a variable rate, based on an adjusted LIBOR
rate plus an applicable interest margin or the base rate plus an applicable
interest margin. Each quarter point increase or decrease in the interest rate on
the term loans would change our interest expense by approximately $0.8 million
per year. We also have a revolving credit facility which provides for borrowings
of up to $70.0 million, which will also bear interest at variable rates in the
same manner as the term loan facilities. Assuming the new revolving credit
facility is fully drawn, each quarter point increase or decrease in the
applicable interest rate would change our interest expense by approximately $0.2
million per year. We are also party to several municipal loan agreements, some
of which accrue interest at a variable rate. The aggregate net amount of
principal outstanding on the municipal loans that is subject to a variable rate
of interest is $13.6 million, as of October 2, 2004. Each quarter point increase
or decrease in the interest rate on the municipal loans subject to variable
rates of interest would change our interest expense by approximately $0.03
million per year. In the future we may enter into interest rate swaps, involving
exchange of floating or fixed rate interest payments, to reduce our exposure to
interest rate volatility.
Our term loan facility has three tranches, a $170.0 million tranche under
which Ply Gem Industries, Inc. is the borrower, a $111.0 million tranche under
which Ply Gem Industries, Inc. is the borrower, and a $30.0 million tranche
under which our Canadian subsidiary is the borrower. Because the $30.0 million
Canadian loan is denominated in US dollars, and the Canadian subsidiary's
functional currency is Canadian dollars, there exists a risk of currency
translation gain or loss. Each quarter point increase or decrease in the
currency translation rate would create a gain or loss of approximately $0.08
million.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures as of October 2, 2004 were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission's rules
and forms.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended October 2, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
45
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
(a) EXHIBITS
The exhibit listed below is filed as part of Form 10-Q for quarter ended October
2, 2004.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
31.1* Certification by President and Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2* Certification by Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934
32.1* Certification by President and Chief Executive Officer pursuant
to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2* Certification by Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLY GEM HOLDINGS, INC.
(Registrant)
Date: November 15, 2004
By: /s/ LEE D. MEYER
------------------------
Lee D. Meyer
President and Chief Executive Officer
Date: November 15, 2004
By: /s/ SHAWN K. POE
------------------------
Shawn K. Poe
Vice President, Chief Financial
Officer, Treasurer and Secretary
46