Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2004
or
[_] Transition Report Pursuant to Section 13 or 13(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 20-0645710
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
185 PLATTE CLAY WAY, KEARNEY, MISSOURI 64060
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-800-2244
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X] (1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes[_] No [X]
The aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant as of December 31, 2004 was $0.
Documents incorporated by reference: None
The Company had 100 shares of common stock outstanding as of March 31,2005.
(1) The registrant became subject to the filing requirements of Section 15(d)
on January 13, 2005.
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS
This Annual Report on Form 10-K 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. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. All written and oral forward-
looking statements made in connection with this Annual Report on Form 10-K
report are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the "Risk Factors" and other cautionary
statements included herein. We are under no duty to update any of the
forward-looking statements after the date of this Annual Report on Form 10-K
report to conform such statements to actual results or to changes in our
expectations.
There can be no assurance that other factors will not affect the
accuracy of these forward-looking statements or that our actual results will not
differ materially from the results anticipated in such forward-looking
statements. While it is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by us
include, but are not limited to, those factors or conditions described under
"Risk factors," and the following:
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.
PART I
ITEM 1. BUSINESS
THE COMPANY
COMPANY OVERVIEW
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. Vinyl building
products have the leading and increasing share of sales by volume in siding and
windows, and the fastest growing share of sales by volume in fencing in the U.S.
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.
1
Additional information concerning our business is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7 of Part II of this report, incorporated herein by reference.
Unless the context indicates or requires otherwise, (i) the term "Ply
Gem Holdings" refers to Ply Gem Holdings, Inc.; (ii) the term "Ply Gem
Industries" refers to Ply Gem Industries, Inc., our principal operating
subsidiary; and (iii) the terms "we," "our," "ours," "us" and the "Company"
refer collectively to Ply Gem Holdings and its subsidiaries. The use of these
terms is not intended to imply that Ply Gem Holdings and Ply Gem Industries are
not separate and distinct legal entities.
HISTORY
Ply Gem Holdings was incorporated on January 23, 2004 for the purpose
of acquiring Ply Gem Industries from Nortek, Inc. ("Nortek") (the "Ply Gem
Acquisition"). Nortek was at the time a wholly-owned subsidiary of Nortek
Holdings, Inc. ("Nortek Holdings"). The Ply Gem Acquisition was completed on
February 12, 2004, when Nortek sold Ply Gem Industries, Inc., to Ply Gem
Holdings, pursuant to the terms of the Stock Purchase Agreement among Ply Gem
Investment Holdings, Inc., Nortek and WDS LLC, dated as of December 19, 2003, as
amended. Prior to February 12, 2004, Ply Gem Holdings had no operations and Ply
Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly
owned subsidiary of Nortek. Ply Gem Holdings, a Delaware corporation, is a
wholly-owned subsidiary of Ply Gem Investment Holdings, Inc., a Delaware
corporation controlled by an affiliate of Caxton-Iseman Capital, Inc. and its
affiliates. Prior to the Ply Gem Acquisition, Ply Gem Industries was known as
the Windows, Doors and Siding division of Nortek.
On August 27, 2004 Ply Gem Industries acquired all of the outstanding
shares of capital stock of MWM Holding, Inc. ("MWM Holding"), in accordance with
the Stock Purchase Agreement entered into among Ply Gem Industries, MWM Holding,
Inc., and the selling stockholders, dated as of July 23, 2004 (the "MW
Acquisition"). The accompanying financial statements include the operating
results of MWM Holding from August 27, 2004 through December 31, 2004. In
connection with MW Acquisition, our 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 was
incurred and recorded.
MWM Holding, a Delaware corporation, is a wholly-owned subsidiary of
Ply Gem Industries. MWM Holding is the sole owner of all of the outstanding
shares of capital stock of MW Manufacturers Holdings Corp., which is the sole
owner of all of the outstanding shares of MW Manufacturers, Inc. ("MW"). Prior
to the MW Acquisition (described below), MWM Holding, Inc. was owned by
Investcorp SA ("Investcorp") and its affiliates and members of MW management.
OUR STRATEGY
>> CONTINUE SHARE GAINS. We intend to increase our market share in several key
markets, including vinyl siding and fencing in the U.S. and windows and
doors in the South Atlantic, Mid-Atlantic, Midwest, East South Central, and
New England regions and in Western Canada. Continued investments in product
innovation and quality coupled with strong customer service further enhance
our ability to capture market share in each of our markets. Additionally,
we believe there is substantial opportunity across our product families to
cross-sell and bundle products to further leverage our channel partners and
exclusive industry relationships. We intend to leverage MW's strong
relationships in its core geographic markets to increase sales of all of
our products, including taking advantage of cross-selling opportunities to
our customers and MW's customers. With our extensive manufacturing
capabilities, product breadth and national distribution capabilities, we
can provide our customers with a cost-effective, single source from which
to purchase their residential exterior building product needs.
>> EXPAND BRAND COVERAGE AND PRODUCT INNOVATION. We intend to leverage the
reputation of our brands for innovation and quality to fill in our product
offerings and price points. In addition, we plan to maximize the value of
our new product innovations and technologies by deploying best practices
and manufacturing techniques across our product categories. For example, we
believe our recent innovations and expertise in manufacturing composite
materials for railing and decking have favorably
2
positioned our siding and accessories products as the siding sector
prepares for the introduction of composite materials. Together, Ply Gem and
MW currently employ 22 research and development professionals dedicated to
new product development, reformulation, product redesign and other
manufacturing and product improvements.
>> FURTHER IMPROVE OPERATING EFFICIENCIES. While we have significantly
improved our vinyl siding manufacturing cost structure over the last
several years, we believe that there are further opportunities for
improvement. In addition, we intend to introduce similar manufacturing
improvements and best practices in our other product categories, including,
for example, expansion of our virtual plant strategy to our windows
manufacturing facilities. We also plan to optimize product development,
sales and marketing, materials procurement, operations and administrative
functions across all of our product categories. A significant opportunity
involves leveraging total raw material expenditures to obtain volume
discounts and minimize costs. In addition, the integration of our sales and
marketing efforts across our product categories provides an ongoing
opportunity to significantly improve sector penetration while lowering
overall selling, general and administrative expense as a percentage of
sales.
INDUSTRY OVERVIEW
Demand for exterior building products, including siding, fencing,
railing and decking, and windows and doors, is primarily driven by repair and
remodeling of existing homes and construction of new homes, which are affected
by changes in national and local economic and demographic conditions, employment
levels, availability of financing, interest rates, consumer confidence and other
factors.
HOME REPAIR AND REMODELING. Since the early 1990's, demand for home repair and
remodeling has remained robust as a result of strong economic growth, low
interest rates and favorable demographic trends. According to the U.S. Census
Bureau, expenditures for maintenance, repairs, and improvements increased from
$120.0 billion in 1992 to $138.3 billion in 1997 and $166.7 billion in 2003,
representing a five and ten-year compound annual growth rate of 2.9% and 3.0%,
respectively.
Leading drivers of home repair and remodeling expenditures include the
age and size of the housing stock, the rate of existing home sales, home size
and home ownership rates. According to the Census Bureau, the median age of the
U.S. housing stock increased to approximately 29 years in 2000, up 16% from 25
years in 1990. Additionally, over the past fifteen years, the size of a typical
new home has increased, with the current average at over 2,300 square feet. Home
ownership has also been rising steadily over the past decade from 64.4% in 1992
to 69.2% in 2004.
NEW HOME CONSTRUCTION. New home construction has experienced strong growth since
the early 1990s. Between 1991 and 2003, housing starts increased at a compound
annual growth rate of 4.9%. With steady growth in new housing starts, the number
of U.S. housing units has also increased from approximately 102.3 million in
1990 to 122.2 million in 2004.
New home construction continues to be supported by a favorable interest
rate environment and strong demographic trends, as increasing immigration drives
demand for starter homes, and maturing baby boomers seek second homes and
trade-up properties. According to the Joint Center for Housing Studies of
Harvard University, total new home construction between 2005 and 2015 is
expected to reach 18.5-19.5 million units, as compared to 16.4 million units
added in the 1990s.
SIDING, FENCING, RAILING AND DECKING SEGMENT
In our siding, fencing, railing and decking segment, our principal
products include vinyl siding and skirting, vinyl and aluminum soffit, aluminum
trim coil, J-channels, wide crown molding, window and door trim, F-channels,
H-molds, fascia, undersill trims and outside/inside corner posts. We sell our
siding and accessories under our Variform and Napco brand names and under the
Georgia-Pacific brand name through a private label program. We also sell our
Olde Providence line of vinyl siding and accessories to Lowe's under our
Durabuilt private label brand name. Our vinyl and vinyl-composite fencing,
railing and decking products are sold under our Kroy brand name and under the
Georgia-Pacific and Fusion Fence brand names through our private label program.
A summary of our product lines is presented below according to price point:
3
SPECIALTY/SUPER PREMIUM
- -----------------------
o NOSTALGIA SERIES Shakes and Scallops (Variform)
o VICTORIA HARBOR (Variform)
o CEDAR SELECT Shakes and Scallops (Napco)
o AMERICAN "76" COLLECTION (Napco)
o ROUGH SAWN CEDAR (Georgia-Pacific)
o NEW WORLD SCALLOPS (Georgia-Pacific)
o SOMERSET (Georgia-Pacific)
o BOARD AND BATTEN (VARIFORM, NAPCO AND GEORGIA-PACIFIC)
PREMIUM
- -------
o CHATHAM RIDGE (Georgia-Pacific)
o TIMBER OAK (Variform)
o VARIGRAIN Preferred (Variform)
o American Splendor (Napco)
o CEDAR LANE (Georgia-Pacific)
STANDARD
- --------
o CAMDEN POINTE (Variform)
o AMERICAN HERALD (Napco)
o AMERICAN TRADITION (Napco)
o HERITAGE HILL (Georgia-Pacific)
o FOREST RIDGE (Georgia-Pacific)
o SHADOW RIDGE (Georgia-Pacific)
ECONOMY
- -------
o CASTLE RIDGE (Georgia-Pacific)
o CONTRACTOR'S CHOICE (Variform)
o AMERICAN COMFORT (Napco)
o OLDE PROVIDENCE (Napco)
o VISION PRO (Georgia-Pacific)
MANUFACTURED HOUSING
- --------------------
o PARKSIDE (Georgia-Pacific)
o OAKSIDE (Georgia-Pacific)
The breadth of our product lines and our multiple brand and price point
strategy enable us to target all areas of the sectors, including multiple
distribution channels (wholesale, retail and manufactured housing) and end
sectors (home repair and remodeling and new home construction), with minimal
channel conflict.
CUSTOMERS AND DISTRIBUTION
We have a multi-channel distribution network that serves both the home
repair and remodeling and new home construction sectors, which exhibit
different, often counter-balancing, demand characteristics. In conjunction with
our multiple brand and price point strategy, we believe our multi-channel
distribution strategy enables us to increase our sales and sector penetration
while minimizing channel conflict. We believe our strategy reduces our reliance
on any one channel, which provides us with a greater ability to sustain our
financial performance through economic fluctuations.
We sell our siding and accessories to specialty distributors (one-step
distribution) and to wholesale distributors (two-step distribution). Our
specialty distributors sell directly to remodeling contractors and builders. Our
wholesale distributors sell to retail home centers and lumberyards who, in turn,
sell to remodeling contractors, builders and consumers. In the wholesale channel
we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a
distribution operation of the Georgia-Pacific Corporation), the largest building
products distributor in the U.S. Through BlueLinx and our BlueLinx dedicated, 22
person sales force, our Georgia-Pacific private label vinyl siding products are
sold at major retail home centers, lumberyards and manufactured housing
manufacturers. A portion of our siding and accessories is also sold directly to
Lowe's Home Improvement Centers under our Durabuilt brand name. Our growing
customer base of fencing, railing and decking consists of distributors, retail
home centers and lumberyards.
4
Our largest customer, BlueLinx, made up 39.9% of the net sales of our
siding, fencing, railing and decking segment and 24.3% of our consolidated net
sales for the year ended December 31, 2004.
PRODUCTION AND FACILITIES
Vinyl siding, skirting, soffit and accessories are manufactured in our
Kearney, Missouri, Martinsburg, West Virginia, and Jasper, Tennessee facilities,
while all metal products are produced in our Valencia, Pennsylvania facility.
Without further investment to increase capacity, our three vinyl siding plants
have the necessary capacity to support our planned sales growth in vinyl siding
until 2006, when we expect that we will add one new extruder at a cost of
approximately $1.5 million. The metal plant has sufficient capacity to support
planned levels of sales growth for the foreseeable future. Our fencing, railing
and decking products are currently manufactured at our York, Nebraska and Fair
Bluff, North Carolina facilities. Due to anticipated increased demand for
fencing, railing and decking products, we expect additional capacity will be
required in each year through 2006. We expect our capital expenditures in the
near future to remain consistent with our expenditures in past periods.
We generally carry increased working capital during the first half of a
fiscal year to support those months where customer demand exceeds production
capacity. We believe that this is typical within the industry.
RAW MATERIALS AND SUPPLIERS
PVC resin and aluminum are major components in the production of our
siding, fencing, railing and decking products and changes in PVC resin and
aluminum prices have a direct impact on our cost of products sold. Historically,
we have been able to pass on the price increases to our customers. The results
of operations for individual quarters can be negatively impacted by a delay
between the time of raw material cost increases and price increases that we
implement in our products, or conversely can be positively impacted by a delay
between the time of a raw material price decrease and competitive pricing moves
that we implement.
COMPETITION
We compete with other national and regional manufacturers of vinyl
siding, fencing, railing and decking products. We believe we are one of the
largest manufacturers of vinyl siding in North America, alongside CertainTeed,
Owens Corning, Alcoa and Alside. We believe that we account for approximately
13% of the U.S. vinyl siding market. Significant growth in vinyl fencing,
railing and decking has attracted many new entrants, and the sector today is
very fragmented. Our fencing, railing and decking competitors include U.S.
Fence, Homeland, Westech, Bufftech, Outdoor Technologies, Royal, Outdoor Fiberon
and Trex. We generally compete on product quality, breadth of product offering,
sales and service support. In addition to competition from other vinyl siding,
fencing, railing and decking products, our products face competition from
alternative materials: wood, metal, fiber cement and masonry siding. Increases
in competition from other vinyl exterior building products manufacturers and
alternative building materials could cause us to lose customers and lead to
decreases in net sales.
SEASONALITY
Markets for our products are seasonal and can be affected by inclement
weather conditions. Historically, our business has experienced increased sales
in the second and third quarters of the year due to increased construction
during those periods. Because much of our overhead and expense are fixed
throughout the year, our operating profits tend to be lower in the first and
fourth quarter. Inclement weather conditions can affect the timing of when our
products are applied or installed, causing delayed profit margins when such
conditions exist.
WINDOWS AND DOORS SEGMENT
In our windows and doors segment, our principal products include vinyl
and wood windows and patio doors, as well as steel and fiberglass doors that
serve both new home construction and the repair and remodeling sectors in the
United States and Western Canada. Our windows and doors segment includes MW
Manufacturers, Inc. ("MW"), Great Lakes Window, Inc. ("Great Lakes Window"),
Napco Window Systems, Inc. ("Napco Window Systems") and CWD, Inc. ("CWD")
subsidiaries. We sell our
5
windows and doors under our MW, Patriot, Twin Seal, Great Lakes, Ply Gem,
Uniframe, Napco and CWD brand names. A summary of our product lines is presented
below according to price point:
SPECIALTY/SUPER PREMIUM
- -----------------------
o UNIFRAME (GREAT LAKES)
PREMIUM
- -------
o FREEDOM (MW)
o PLY GEM (GREAT LAKES)
o Great Lakes Gold (GREAT LAKES)
o AMBASSADOR (CWD)
o REGENCY (CWD)
STANDARD
- --------
o JEFFERSON (MW)
o CLASSIC (MW)
o TWINSEAL (MW)
o MONITOR (GREAT LAKES)
o GREAT LAKES (GREAT LAKES)
o NAPCO PREMIUM 3000 (NWS)
o NAPCO PREMIUM 2000 (NWS)
o PREMIER (CWD)
o DIPLOMAT (CWD)
o ENVOY (CWD)
ECONOMY
- -------
o NAPCO PRIME (NWS)
o CONSUL (CWD)
o PATRIOT (MW)
The breadth of our product lines and our multiple brand and price point
strategy enable us to target all areas of the sectors, including multiple
distribution channels (wholesale, retail and builder direct) and end sectors
(home repair and remodeling and new home construction), with minimal channel
conflict. In early 2005, we will introduce several new product lines under the
Great Lakes window and Napco Window Systems brands.
CUSTOMERS AND DISTRIBUTION
We have a multi-channel distribution network that serves both the home
repair and remodeling and new home construction sectors, which exhibit
different, often counter-balancing, demand characteristics. In conjunction with
our multiple brand and price point strategy, we believe our multi-channel
distribution strategy enables us to increase our sales and sector penetration
while minimizing channel conflict. We believe our strategy reduces our reliance
on any one channel, which provides us with a greater ability to sustain our
financial performance through economic fluctuations.
Our domestic windows and doors product lines are sold for use in new
home construction and home repair and remodeling through a highly diversified
customer base, which includes for our MW product lines independent building
material dealers, regional/national lumberyard chains, builders direct/OEMs,
retail home centers. MW operates a network of vertically integrated production
and distribution facilities located in Virginia, New Jersey, Mississippi and
North Carolina. Our Great Lakes Window and Napco product lines are sold through
dealers and distributors. Dealers typically market directly to homeowners or
contractors in connection with remodeling requirements while distributors
concentrate on local independent retailers. In Canada, sales of CWD product
lines in the new construction market are predominantly made through direct sales
to builders and contractors, while sales in the renovation market are made
primarily through retail lumberyards. CWD products are distributed through six
distribution centers.
Our three largest customers, NV Ryan, Builders FirstSource and Stock
Builders Supply, each represented 15.8%, 14.2% and 11.2% of the sales of our
windows and doors segment in 2004 respectively.
6
PRODUCTION AND FACILITIES
Our windows and doors manufacturing facilities have benefited from our
continued investment and commitment to product development and product quality
combined with increasing integration of best practices across our product
offerings. In addition, beginning in 2003, MW significantly lowered its
manufacturing cost basis by expanding its existing in-house capacity to extrude
vinyl lineals used in the production of windows. During 2003 and 2004 MW
purchased six new lineal extruders which more than double its previous lineal
production capacity. Management is currently developing plans to further expand
MW's lineal extrusion capacity in 2005 and 2006 to produce lineals for Great
Lakes Window at a lower cost than the price that Great Lakes Window currently
pay for its lineal needs. Additionally, beginning in 2005, the siding, fencing,
railing and decking segment will begin supplying MW with material (specifically
PVC resin compound) at a lower cost than currently paid by MW. We currently have
capacity to provide for expected growth in windows and doors sales through 2006.
The facilities can further expand capacity in a cost effective manner by
expanding production shifts. Ongoing capital investments will focus upon new
product development, expanding lineal production capacity and equipment
maintenance and improvement.
The working capital in our windows and doors segment is seasonal in
relationship to sales and will generally be higher in the second and third
quarters and lower at the beginning and end of the year. Because we have
successfully implemented lean manufacturing techniques and many of our windows
and doors are made to order, inventories in our windows and doors segment do not
change significantly with seasonal demand.
RAW MATERIALS AND SUPPLIERS
PVC compound, wood and glass are major components in the production of
our window and door products. Historically changes in PVC compound and wood
prices have had the most significant impact on our material cost of products
sold in our windows and doors segment. As a result of supplying MW's PVC
compound needs by our siding, fencing, railing and decking segment, management
expects to reduce the production cost of window lineals at MW. Additionally,
management anticipates MW supplying lineals to Great Lakes Window in the future
which will reduce lineal material cost for Great Lakes Windows.
COMPETITION
The vinyl windows and patio doors sector in the U.S. and Canada is
highly fragmented, comprised primarily of local and regional manufacturers. Our
competitors include MI Home Products, Silverline Building Products, Simonton
Windows, Milgard Manufacturing, Inc. (Masco Corp.) and Atrium. We generally
compete on service, product performance, sales and support and our products are
competitively priced. We also face competition from alternative materials,
primarily wood and aluminum.
SEASONALITY
Markets for our products are seasonal and can be affected by inclement
weather conditions. Historically, our business has experienced increased sales
in the second and third quarters of the year due to increased construction
during those periods. Because much of our overhead and expense are fixed
throughout the year, our operating profits tend to be lower in the first and
fourth quarter. Inclement weather conditions can affect the timing of when our
products are applied or installed, causing delayed profit margins when such
conditions exist.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
We are subject to Canadian and U.S. federal, state, provincial and
local environmental laws and regulations that relate to the presence of
hazardous materials, pollution and the protection of the environment, including
those governing emissions to air, discharges to water, use, storage and
transport of hazardous materials, storage, treatment and disposal of waste,
remediation of contaminated sites, and protection of worker health and safety.
From time to time, our facilities are subject to investigation by environmental
regulators. We believe that our current operations are in substantial compliance
with all applicable environmental laws and that we maintain all material permits
required to operate our business.
7
Based on available information, we do not believe that any known
compliance obligations, claims, releases or investigations will have a material
adverse effect on our results of operations, cash flows or financial position.
However, there can be no guarantee that these or newly discovered matters or any
inability to enforce available indemnification agreements we have with Nortek
under the stock purchase agreement governing the Ply Gem Acquisition and Alcan
Aluminum Corporation (an indemnity we received when we purchased our York,
Nebraska facility from Alcan Aluminum Corporation in 1998) will not result in
material costs.
Under the Stock Purchase Agreement governing the MW Acquisition, the MW
Sellers have agreed to indemnify us for the first $250,000 in costs of
compliance with the New Jersey Industrial Site Recovery Act at an MW facility in
Hammonton, New Jersey and for 75% of any such costs in excess of $250,000 but
less than $5.5 million. MW's Rocky Mount, Virginia property is subject to an
environmental investigation pursuant to the Virginia Voluntary Remediation
Program, relating to contamination derived from operations prior to the sale of
the stock of MW by U.S. Industries, Inc. U.S. Industries, Inc. assumed the
obligations to conduct such investigation and to indemnify us, INTER ALIA, with
respect to all liabilities for environmental contamination at the Rocky Mount
property when it sold MW's stock to Fenway Partners in 1995.
We voluntarily comply with the Vinyl Siding Institute, ("VSI"),
Certification Program with respect to our vinyl siding and accessories. Prior to
1998, there was no commonly-adopted industry certification process for vinyl
siding products. Uniform minimum standards were available, but uniform
compliance was not assured. In 1998, the VSI, under the leadership of our
President and Chief Executive Officer, Lee Meyer, at that time the Chairman of
the VSI, instituted a new industry-wide program to assure compliance with
minimum product standards. All major vinyl siding manufacturers, representing
over 90% of all products, now comply with these guidelines.
Under the VSI Certification Program, third party verification and
certifications, provided by Architectural Testing, Inc., ("ATI") is used to
ensure uniform compliance with the minimum standards set by the American Society
for Testing and Materials, ("ASTM"). Those products compliant with ASTM
specifications for vinyl siding will perform satisfactorily in virtually any
environment. ATI initially inspects all qualifying products for compliance and
inspects plants to assure effective quality control programs. In addition,
compliance with advertised specifications is verified. All manufacturing plants
are inspected bi-annually during unannounced visits to monitor compliance. Upon
certification, products are added to the official VSI list of certified products
and are eligible to bear the official VSI certification logo.
EMPLOYEES
As of December 31, 2004, we had approximately 4,300 full-time employees
worldwide, of whom approximately 3,900 were in the United States and
approximately 400 were in Canada. Employees at our Valencia and Sarver,
Pennsylvania plants are our only employees with whom we have a collective
bargaining agreement. Approximately 4.9% of our employees are represented by the
United Steelworkers of America, AFL-CIO-CLC, pursuant to an agreement that
expires on November 30, 2006, for the Valencia, PA employees and an agreement
that expires on January 17, 2010 for the Sarver, PA employees. We consider our
relations with our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
All of the Company's operations are located in the United States and
Canada. Revenue from external customers for the combined 2004 periods of January
1 to February 11, 2004 and January 23 to December 31, 2004, consists of:
o $574.7 million from United States customers
o $48.9 million from Canadian customers
o $2.9 million from all other foreign customers
Revenue from external customers for the combined 2003 periods of
January 1 to January 9, 2003 and January 10 to December 31, 2003, consists of:
o $483.0 million from United States customers
o $46.5 million from Canadian customers
o $1.9 million from all other foreign customers
8
Revenue from external customers for the year 2002 consists of:
o $468.2 million from United States customers
o $38.1 million from Canadian customers
o $2.7 million from all other foreign customers
At December 31, 2004, long-lived assets totaled approximately $51.4
million in Canada and $900.6 million in the United States. We are exposed to
risks inherent in any foreign operation, including foreign exchange rate
fluctuations.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Kearney, Missouri. We own and
lease several additional properties in the U.S. and Canada. We operate the
following facilities as indicated.
LOCATION SQUARE FOOTAGE FACILITY USE
- -------- -------------- ------------
SIDING, FENCING, RAILING AND DECKING SEGMENT
Jasper, TN (2) 270,000 Manufacturing and Administration
Fair Bluff, NC (1) 200.000 Manufacturing and Administration
Kearney, MO (1) 187,000 Manufacturing and Administration
Valencia, PA (1) 175,000 Manufacturing and Administration
Martinsburg, WV (1) 163,000 Manufacturing and Administration
Williamsport, MD (3) 145,000 Warehouse
York, NE (1) 94,000 Manufacturing
Carey, NC (4) 4,470 Administration
WINDOWS AND DOORS SEGMENT
Calgary, AB, Canada (1) 301,000 Manufacturing and Administration
Toledo, OH (1) 301,000 Manufacturing and Administration
Sarver, PA 119,000 Manufacturing and Administration
Rocky Mount, VA (1) 684,000 Manufacturing and Administration
Rocky Mount, VA (1) 160,000 Manufacturing
Hammonton, NJ 355,000 Manufacturing and Administration
Tupelo, MS 200,000 Manufacturing and Administration
Fayetteville, NC 221,000 Manufacturing
(1) These properties are included in long-term leases entered into as a result
of a sale/leaseback agreement entered into in August 2004 as part of the
funding for the purchase of MWM Holding.
(2) The lease for this facility expires on February 1, 2017.
(3) The lease for this facility was on a monthly basis, which expired January
31, 2005. We have moved the warehouse to a location in Martinsburg, WV,
with square footage of 124,000 and a monthly lease which will expire
January 14, 2008.
(4) The lease for this office facility expires November 2006.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our operations. As of December 31, 2004, we were not a party to any
material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of equity holders.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is no established trading market for the common stock of Ply Gem
Holdings, Inc.
HOLDERS
As of March 30, 2004, there was one holder of record of the common
equity securities of Ply Gem Holdings, Inc.
DIVIDENDS
See "Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" for information on the Company's
securities authorized for issuance under the Company's equity compensation
plans.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data set forth below for the five-year period
ended December 31, 2004, except the balance sheet data for the year ended
December 31, 2000, was derived from our audited consolidated and combined
financial statements. Balance sheet data for the year ended December 31, 2000
was derived from our unaudited financial statements. The audited data for the
Pre-Nortek Recapitalization period from January 1, 2000 through January 9, 2003,
(the "Nortek Recapitalization") has been prepared on different bases of
accounting due to the Recapitalization of our former parent Nortek, which took
place on January 10, 2003, and therefore is not directly comparable to
subsequent periods. The periods presented during calendar 2004 provide the
operating results of Ply Gem Industries from the beginning of the year, January
1, 2004, until the date of the Ply Gem Acquisition, February 12, 2004, as well
as from the date of inception of Ply Gem Holdings, Inc., January 23, 2004
through December 31, 2004. Subsequent to the acquisition, the financial
statements presented are on a different basis of accounting. Therefore, they are
not directly comparable to preceding periods. Our results of operations for the
period ended December 31, 2004 include the results of MWM Holding, Inc., from
August 27, 2004, the date of acquisition, through December 31, 2004, as MWM
Holding , Inc. was acquired on August 27, 2004. The data should be read in
conjunction with item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated and combined financial
statements, related notes and other financial information included elsewhere in
this report.
Combined
-------------------------------------------------------------------------------
PRE-NORTEK RECAPITALIZATION POST-NORTEK RECAPITALIZATION
--------------------------- ----------------------------
Consolidated
Ply Gem Ply Gem Ply Gem
Industries, Ply Gem Industries, Holdings,
Ply Gem Industries, Inc. Inc. Industries, Inc. Inc.
------------------------ Jan. 1, Inc. Jan. 1, Jan. 23,
For the Years ended 2003, to Jan. 10, 2003 2004 to 2004 to
December 31, Jan. 9, to Feb. 11, Dec. 31,
2000 2001 2002 2003 Dec. 31, 2003 2004 2004
(Amounts in thousands)
SUMMARY OF OPERATIONS:
Net sales......................... $ 481,278 $ 484,973 $ 508,953 $ 8,824 $ 522,565 $40,612 $ 585,945
Income (loss) from continuing
operations (1),(2) .............. (3,000) 6,800 15,800 (900) 11,000 (3,350) 17,682
Total assets ..................... 809,944 715,744 574,354 N/A 503,368 N/A 1,104,299
Long-term borrowings ............. 216,554 480,227 425,762 N/A 423,161 N/A 702,930
10
(1) Includes foreign currency gain of approximately $1.5 million, net of tax,
for the period January 23, 2004 to December 31, 2004.
(2) In January 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". Under this statement, goodwill and intangible assets
determined to have an indefinite useful life are no longer amortized.
Income (loss) from continuing operations includes amortization expense for
goodwill of approximately $7.4 million and $7.4 million, net of tax, for
the years ended December 31, 2000 and December 31, 2001, respectively.
See the Notes to the consolidated and combined Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein regarding the effect on operating results
of acquisitions, discontinued operations and other matters.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations is intended to clarify the results of our operations,
certain changes in our financial position, liquidity, capital structure and
business developments for the periods covered by the consolidated and combined
financial statements included in this Annual Report on Form 10-K. This
discussion should be read in conjunction with, and is qualified by reference to,
the other related information including, but not limited to, the audited
consolidated and combined financial statements (including the notes thereto and
the independent registered public accounting firm's report thereon), and the
description of our business, all as set forth in this Annual Report on Form
10-K, as well as the risk factors discussed below.
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are "forward-looking statements."
See "Cautionary Statement with Respect to Forward-Looking Statements" and "Risk
Factors."
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 have two
reportable segments: (i) siding, fencing, railing and decking, and (ii) windows
and doors.
Ply Gem Holdings, 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 "Ply Gem Acquisition"). The
Ply Gem Acquisition was completed on February 12, 2004, when Nortek sold Ply Gem
Industries, to Ply Gem Holdings, 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. Prior to February 12, 2004, the date
of the Ply Gem Acquisition, Ply Gem Holdings, had no operations and Ply Gem
Industries, was a wholly-owned subsidiary of WDS LLC, which was a wholly-owned
subsidiary of Nortek.
On August 27, 2004 Ply Gem Industries acquired all of the outstanding
shares of capital stock of MWM Holding, in accordance with a stock purchase
agreement entered into among Ply Gem, MWM Holding and the selling stockholders
in the MW Acquisition. The accompanying financial statements include the
operating results of MWM Holding for the period of August 27, 2004, the date of
acquisition, through December 31, 2004.
On January 9, 2003, Nortek Holdings, the former indirect parent or Ply Gem
Industries, Inc., was acquired by certain affiliates and designees of Kelso &
Company L.P. and certain members of management of our former parent, Nortek. Ply
Gem Industries, Inc., its subsidiaries and CWD Windows and Doors, a division of
Broan-Nutone Canada, Inc., Nortek and Nortek Holdings accounted for the Nortek
Recapitalization as a
11
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 their estimated 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 consolidated and combined financial statements.
We are a holding company with no operations or assets of our own other
than the capital stock of our subsidiaries. The terms of Ply Gem Industries'
credit facility place restrictions on its ability to pay dividends and otherwise
transfer assets to us. Further, the terms of the indenture governing Ply Gem
Industries' senior subordinated notes place restrictions on the ability of Ply
Gem Industries and our other subsidiaries to pay dividends and otherwise
transfer assets to us.
FINANCIAL STATEMENT PRESENTATION
NET SALES. Net sales represent the fixed 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 ("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 intangible assets.
COMPARABILITY. The data for the Pre-Nortek Recapitalization period from
January 1, 2003 through January 9, 2003 and the year ended December 31, 2002 has
been prepared on a different basis of accounting due to our former parent's
(Nortek) Recapitalization which took place on January 9, 2003 and therefore is
not directly comparable to the post-Nortek Recapitalization information
presented. The data presented for the year ended December 31, 2003 includes data
prepared 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 December 31, 2003,
and therefore those periods are not directly comparable. In addition, the data
presented for the year ended December 31, 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 December 31, 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. 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 January 23, 2004 through
December 31, 2004.
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 pass on a
substantial portion of 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
12
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 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 on 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 December 31, 2004 would result in a $0.8
million and $0.4 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 fixed 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.
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 December 31, 2004,
and December 31,2003, approximately $11.7 million and $10.1 million of total
inventories, respectively, were valued on the last-in, first-out method, or
"LIFO." Alternatively, under the first-in, first-out method, or "FIFO," of
accounting, such inventories would have been approximately $1.2 million and $0.4
million higher at December 31, 2004 and December 31, 2003, respectively. 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, "Accounting for the
Impairment or Disposal of Long-Lived Assets", we evaluate the realizability of
certain long-lived assets, which primarily consist of
13
property and equipment and intangible assets, based on recent fair market
appraisals received within the past eleven months for each subsidiary having a
material amount of SFAS No. 144 long-lived assets. We believe that no material
impairment of SFAS No. 144 long-lived assets existed at December 31, 2004.
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. Prior to February 12, 2004, federal income taxes were
recorded in our consolidated and 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 and recorded 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.
RESULTS OF OPERATIONS
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. Unallocated cost of products sold and selling, general and
administrative expenses are not material and are not discussed in the following
section.
Our twelve months ended 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 through December 31, 2003 and January 1 through February 11, 2004 for Ply Gem
Industries, Inc. and the period from January 23 to December 31, 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 January 23, 2004 through
December 31, 2004.
14
SIDING, FENCING, RAILING AND DECKING SEGMENT
NET SALES
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$352,653 $6,760 $363,051 $29,546 $352,167
Net sales for the January 1 to February 11, 2004 and January 23 to
December 31, 2004 periods presented (the "2004 periods") increased by
approximately $11.9 million over the January 1 to January 9, 2003 and January 10
to December 31, 2003 periods presented (the "2003 periods"). The increase in net
sales was driven by unit volume growth in our wholesale, retail home centers,
and manufactured housing channels, and increased selling prices that resulted
from price increases that we initiated in response to higher raw material costs,
specifically PVC resin and aluminum. Sales volume of our fencing products was
lower than the previous year due to the reduction of inventory levels by our
customers during the third quarter which we believe was in response to our
improved service capabilities and the impact of wet weather in our southeast
region. In general, management believes that sales will continue to increase as
vinyl products continue to take market share from other exterior residential
building products due to vinyl's low maintenance, high durability, ease of
installation, energy efficiency, lower price and superior aesthetics.
Net sales for the 2003 periods presented increased approximately $17.2
million over the 2002 fiscal year. The increase in net sales was due to unit
volume growth among both existing and new customers and the positive impact of
price increases that were launched in the first half of 2003 in response to
rising PVC resin material costs.
COST OF PRODUCTS SOLD
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$252,537 $5,909 $274,244 $24,281 $273,338
71.6% 87.4% 75.5% 82.2% 77.6%
Cost of products sold for the 2004 periods presented increased by
approximately $17.5 million over the cost of products sold for the 2003 periods
presented. The increase in cost of products sold was primarily due to increased
unit sales volume. The increase in cost of products sold as a percentage of
sales resulted from higher raw material costs, 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. The operational
efficiency improvements that were realized were due primarily to the closure of
our Butler, PA manufacturing facility in May of 2003, and the renegotiation of
our PVC resin pricing effective July 1, 2003. The periods presented for both
2003 and 2004 were impacted by the application of purchase accounting, primarily
from the non-cash write off of purchase price allocated to inventory. Management
expects increases in certain raw material costs, specifically PVC resin and
aluminum, during 2005 and expects to increase selling prices if these raw
material increases occur.
Cost of products sold for the 2003 periods presented increased by
approximately $27.6 million over the 2002 fiscal year. The increase was largely
driven by the increased costs related to (i) certain
15
purchased materials, in particular, PVC resin, which we estimate negatively
impacted our gross profit by $18.9 million, and (ii) certain costs we incurred
totaling approximately $1.9 million in connection with the start-up of a new
fabrication process to support a significant new retail customer. These costs
were partially offset in the 2003 periods presented by increased selling prices
and specific cost improvement actions, including the renegotiation of our PVC
resin pricing effective July 1, 2003. Additionally, we estimate that we realized
$1.9 million in savings during the 2003 periods presented from the closure of
our Butler, Pennsylvania manufacturing facility in May 2003. The 2003 periods
presented include the impact of the application of purchase accounting,
primarily from the non-cash write off of purchase price allocated to inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$ 40,175 $ 685 $ 41,405 $ 4,272 $ 35,164
11.4% 10.1% 11.4% 14.5% 10.0%
SG&A expense for the 2004 periods presented decreased by approximately
$2.7 million from the 2003 periods presented. The decline in SG&A expense was
impacted by certain one-time costs totaling $1.3 million incurred in the 2003
periods related to the closure of our Butler, PA manufacturing facility in May
2003 and a decrease of $2.7 million in bad debt expense in the siding segment.
These decreases were partially offset by other wage and benefit inflation costs.
Management does not anticipate SG&A expenses as a percentage of sales to change
materially going forward.
SG&A expense for the 2003 presented increased by approximately $1.9
million from the 2002 periods presented as a result of increased bad debt
expense of $1.0 million related to our fence, railing and decking products and
other wage and benefit inflation.
WINDOWS AND DOORS SEGMENT
NET SALES
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$156,300 $2,064 $159,514 $11,066 $233,778
Net sales for the 2004 periods presented increased by approximately
$83.3 million over the 2003 periods presented. The increase in net sales was
primarily driven by the acquisition of MW, which contributed $92.3 million to
our net sales. This increase was partially offset by a decrease of approximately
$5.7 million due to the closing of our Thermal-Gard subsidiary during 2004 and
weaker demand for our Great Lakes repair and remodeling windows which management
believes is due to a dated product line. We will be introducing a new line of
repair and remodeling windows under our Great Lakes and Napco Window Systems
brands in early 2005. Management expects future sales to increase as vinyl
continues to grow as the preferred material for replacement windows, and is
increasingly used in new construction. In addition, management expects that as a
result of the MW Acquisition in August 2004
16
the inclusion of MW's net sales for a full fiscal year will drive increased net
sales in 2005 over the combined 2004 periods presented.
Net sales for the 2003 periods presented increased approximately $5.3
million over the 2002 fiscal year. The increase in net sales was due to unit
volume growth among both existing and new customers.
COST OF PRODUCTS SOLD
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$117,064 $1,742 $119,419 $9,448 $174,985
74.9% 84.4% 74.9% 85.4% 74.9%
Cost of products sold for the 2004 periods increased by approximately
$63.3 million over the cost of products sold for the 2003 periods presented. The
increase in cost of products sold was primarily due to net sales contributed by
MW which increased cost of products sold by $71.5 million. This increase was
partially offset by a decrease of approximately $5.2 million due to the closing
of our Thermal-Gard subsidiary during 2004. The periods presented for both 2003
and 2004 were impacted by the application of purchase accounting, primarily from
the non-cash write off of purchase price allocated to inventory. Management
believes that cost of products sold as a percentage of sales in our window and
doors segment will not materially change but will be favorably impacted by cost
savings and synergies resulting from the MW Acquisition in August 2004.
Cost of products sold for the 2003 periods presented increased by
approximately $4.1 million over the 2002 fiscal year. The increase in cost of
products sold was a result of increased sales volumes in 2003 as compared to
2002. The 2003 periods presented include the impact of the application of
purchase accounting, primarily from the non-cash write off of purchase price
allocated to inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Combined Consolidated
- ---------------------------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Post-Nortek
Pre-Nortek Ply Gem Ply Gem Recapitalization Ply Gem
Recapitalization Industries, Industries, Inc. Ply Gem Holdings,
Ply Gem Inc. January 10, Industries, Inc. Inc. January
Industries, Inc. January 1, 2003 to January 1, 2004 23, 2004 to
Year ended 2003 to December 31, to February 11, December 31,
December 31, 2002 January 9, 2003 2003 2004 2004
(Dollars in thousands)
$ 26,467 $ 673 $ 24,011 $ 3,040 $ 31,827
16.9% 32.6% 15.1% 27.5% 13.6%
SG&A expense for the 2004 presented increased by approximately $10.2
million from the 2003 periods presented. The increase in SG&A expense was
primarily due to the addition of MW operations, which increased expenses by
approximately $9.2 million. Management does not anticipate SG&A expenses as a
percentage of sales to change materially going forward.
SG&A expense for the 2003 presented decreased by approximately $1.8
million from the 2002 periods presented, due to a decline in sales and marketing
related expenses for our Thermal-Gard subsidiary which was closed during 2004.
17
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.
After the Ply Gem Acquisition on February 12, 2004 we have financed these cash
requirements through internally generated cash flow and funds borrowed under our
Ply Gem Industries' credit facility.
Net cash provided by operating activities for the 2004 periods of
January 1, 2004 to February 11, 2004 and January 23, 2004 to December 31, 2004
was $1.6 million and $49.4 million, respectively, while net cash provided by
operating activities for the 2003 periods of January 1, 2003 to January 9, 2003
and January 10, 2003 to December 31, 2003 was $1.9 million and $24.2 million,
respectively. Net cash provided by operating activities for 2002 was $24.1
million. 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. The increase in net cash
provided by operating activities for the 2003 periods compared to the 2002
periods was primarily driven by the $2.6 million impact of discontinued
operations in 2002 and improved working capital, partially offset by reduced
earnings from continuing operations.
Net cash provided by (used in) investing activities for the 2004
periods of January 1, 2004 to February 11, 2004 and January 23, 2004 to December
31, 2004 was $0.4 million and ($890.0) million respectively, while net cash used
in investing activities for the 2003 periods of January 1, 2003 to January 9,
2003 and January 10, 2003 to December 31, 2003 was ($0.3) million and ($8.0)
million respectively. Net cash provided by investing activities for 2002 was
$67.1 million, and included $29.5 million of proceeds from the sale of
discontinued operations and $47.4 million net proceeds from the sale and
purchase of investments and marketable securities. 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, 2004 to February 11, 2004 and January 23, 2004 to December
31, 2004 was ($7.5) million and $847.3 million respectively, while net cash used
in financing activities for the 2003 periods of January 1, 2003 to January 9,
2003 and January 10, 2003 to December 31, 2003 was ($4.7) million and ($11.4)
million respectively. Net cash used in financing activities for 2002 was
($145.0) million. 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 Ply Gem Industries' senior subordinated notes,
Ply Gem Industries' senior term loan facilities, Ply Gem Industries' senior
revolving credit facility, and $169.1 million of equity contribution. The
increase in net cash used in financing activities in 2002 resulted from net
transfers to Nortek, consisting of interest on inter-company loans, and included
the transfer of net proceeds from the sale and purchase of investments and
marketable securities.
Our capital expenditures for the 2004 periods of January 1, 2004 to
February 11, 2004 and January 23, 2004 to December 31, 2004 were $0.7 million
and $6.8 million, respectively, as compared to our capital expenditures for the
2003 periods of January 1, 2003 to January 9, 2003 and January 10, 2003 to
December 31, 2003 which were $0.3 million and $7.7 million, respectively. Our
capital expenditures for 2002 were $9.4 million. 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 Ply Gem Industries' senior credit facilities. As of December 31, 2004, Ply
Gem Industries had $707.6 million of indebtedness and $57.1 million of
availability under its revolving credit facility. Concurrently with the Ply Gem
Acquisition, Ply Gem Industries entered into $255.0 million of new senior credit
facilities, and issued $225 million aggregate principal amount of its 9% senior
subordinated notes due 2012, which are guaranteed by Ply Gem Holdings and the
domestic subsidiaries of Ply Gem Industries. At the time of the Ply Gem
Acquisition on February 12, 2004, our senior credit facilities
18
consisted of a $65.0 million revolving credit facility and $190.0 million of
term loan facilities. The term loan facilities have two tranches, a $160.0
million tranche under which Ply Gem Industries is the borrower, and a $30.0
million tranche under which our Canadian subsidiary, CWD Windows and Doors,
Inc., is the borrower. 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, Ply Gem Industries amended and restated
its senior credit facilities on March 3, 2004 to increase the U.S. term loan
facility from $160.0 million to $170.0 million and reduce the 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 on August 27, 2004, Ply Gem Industries
entered into an amendment to its senior credit facilities, which increased by
$15.0 million the revolving credit facility and added an additional term loan
facility in the amount of $111.0 million. Ply Gem Industries also issued an
additional $135.0 million aggregate principal amount of its 9% senior
subordinated notes due 2012, which are guaranteed by Ply Gem Holdings and the
domestic subsidiaries of Ply Gem Industries. At the closing of the MW
Acquisition, Ply Gem Industries 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.
During December 2004, Ply Gem Industries repaid the entire amount
borrowed against the revolving credit facility. Also during December 2004, Ply
Gem Industries prepaid $5.0 million of the $30.0 million tranche under which our
Canadian subsidiary, CWD Windows and Doors, Inc. is the borrower.
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 of the Ply Gem Acquisition and will
have no scheduled amortization or commitment reductions. The term loan
facilities will mature seven years after the closing of the Ply Gem Acquisition
and have quarterly scheduled amortizations of $0.5 million beginning in the
quarter ended June 30, 2004 and for the next 23 calendar quarters thereafter,
$45.8 million on each of June 30, 2010, September 30, 2010, December 31, 2010,
and $156.8 million on the maturity date.
The senior credit facilities and the indenture for the senior
subordinated notes impose certain restrictions on Ply Gem Industries, including
restrictions on its ability to incur indebtedness, pay dividends, make
investments, grant liens, sell assets and engage in certain other activities.
The terms of the senior credit facilities and the senior subordinated notes also
significantly restrict the ability of Ply Gem Industries to pay dividends and
otherwise distribute assets to Ply Gem Holdings. In addition, the senior credit
facilities require Ply Gem Industries to comply with certain financial ratios.
Indebtedness under the senior credit facilities is secured by substantially all
of Ply Gem Industries' assets, including its real and personal property,
inventory, accounts receivable, intellectual property and other intangibles. In
addition, our U.S. senior credit facilities are guaranteed by Ply Gem Holdings
and secured by its assets (including its 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 domestic subsidiaries, subject to
exceptions.
Ply Gem Industries executed certain sale/leaseback transactions in
connection with the MW Acquisition with respect to 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 were used to fund a portion of the purchase price of
the MW Acquisition. As discussed in Note 9 of the notes to our consolidated and
combined financial statements, due to certain default and exchange provisions in
these leases, treatment of these transactions as sale/leasebacks was not
achieved, resulting in a technical default to the senior credit facilities. We
have requested and received a waiver from the lenders as it relates to the lease
agreements in that these leases shall not constitute indebtedness under our
credit agreement for the restriction on indebtedness covenant and any lien in
connection with such leases shall not constitute liens for the purposes of the
restriction on liens covenant through April 30, 2005 and only so long as these
leases do not represent more than an aggregate of $36.0 million of financing
obligations. We have worked with our leasing company and have amended these
leases so that they receive accounting treatment as operating leases.
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
19
above), debt service obligations, management incentive expenses, fees payable
under the General Advisory Agreement with a Caxton-Iseman party, dated February
12, 2004 (the "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 December 31, 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.
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)
Term loan facilities $ 396,155 $ 16,483 $ 52,449 $ 168,686 $ 158,537
Mortgage notes and industrial
revenue bonds payable 8,225 88 263 174 7,700
Senior subordinated notes 603,000 32,400 97,200 64,800 408,600
Asset financing obligation 80,571 3,528 11,011 7,713 58,319
Non-cancelable lease commitments 14,940 5,422 7,345 1,615 558
Pension obligations 22,165 2,015 6,045 4,030 10,075
----------- -------- --------- --------- ---------
Total $ 1,125,056 $ 59,936 $ 174,313 $ 247,018 $ 643,789
=========== ======== ========= ========= =========
We have reflected the pension obligation in future periods as being
equal to the 2005 annual funding requirement.
INFLATION; SEASONALITY
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 in both segments 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
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN
46 clarified 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 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. There was no material
impact on our financial statements upon adoption.
In the fourth quarter 2003, Ply Gem Industries, Inc. adopted the fair
value method of accounting for stock-based compensation in accordance with SFAS
No. 123. Ply Gem Industries, Inc. 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 Ply Gem Industries, Inc. to adopt
SFAS No. 123 effective January 1, 2003 for all stock options issued during 2003.
Prior to January 1, 2003, Ply Gem Industries, Inc. accounted for
20
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 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 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), which amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement will be
effective for costs incurred during fiscal years beginning after June 15, 2005.
We do not anticipate that the adoption of this statement will have a material
effect on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS No. 153"), which
amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. This Statement is
effective for nonmonetary assets exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not anticipate that the adoption of this statement
will have a material effect on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS
123R"), "Share-Based Payment". SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods and services or incurs liabilities in exchange for goods or services
that are based on the fair value of the entity's equity instruments or that may
be settled by the issuance of those equity instruments. SFAS 123R requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
and to recognize that cost over the period during which an employee is required
to provide service in exchange for the award. We are required and plan to adopt
the provisions of SFAS 123R for the quarter ending October 1, 2005. At this
time, we do not anticipate that the adoption of this statement will have a
material effect on our consolidated financial position or results of operations.
RISKS ASSOCIATED WITH OUR BUSINESS
THE SUBSTANTIAL LEVEL OF OUR INDEBTEDNESS MAY LIMIT OUR CASH FLOW
AVAILABLE TO INVEST IN THE ONGOING NEEDS OF OUR BUSINESS, WHICH COULD PREVENT US
FROM FULFILLING OUR OBLIGATIONS ON THE NOTES.
We have substantial indebtedness. As of December 31, 2004, we had
approximately $707.6 million of indebtedness outstanding and up to $57.1 million
of additional borrowing capacity under the revolving portion of our senior
credit facilities. Under the covenants in the indenture and its senior credit
facilities, Ply Gem Industries could have incurred additional indebtedness of up
to $101.7 million as of December 31, 2004.
Our high level of indebtedness could have important consequences to
you. For example, it could:
o make it more difficult for us to satisfy our obligations on the senior
subordinated notes;
o make it more difficult for us to satisfy our obligations under the
senior credit facilities, exposing us to the risk of defaulting on our
secured debt which could result in a foreclosure on our assets, which
in turn would negatively affect our ability to operate as a going
concern;
o require us to dedicate a substantial portion of our cash flow from
operations to interest and principal payments on our indebtedness,
reducing the availability of our cash flow for other purposes, such as
capital expenditures, acquisitions and working capital;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
21
o increase our vulnerability to general adverse economic and industry
conditions;
o place us at a disadvantage compared to our competitors that have less
debt;
o expose us to fluctuations in the interest rate environment because the
interest rates of our senior credit facilities are at variable rates;
and
o limit our ability to borrow additional funds.
We expect to obtain the money to pay our expenses, fund working capital
and capital expenditures, and to pay the interest on the senior subordinated
notes, senior credit facilities and other debt from cash flow from our
operations and from Ply Gem Industries' existing and available borrowings under
its senior credit facilities. Our ability to meet our expenses thus depends on
our future performance, which will be affected by financial, business, economic
and other factors. We will not be able to control many of these factors, such as
economic conditions in the industry in which we operate and competitive
pressures. Our cash flow may not be sufficient to allow us to pay principal and
interest on our debt (including the senior subordinated notes) and to meet our
other obligations. If we do not have enough money, we may be required to
refinance all or part of our existing debt (including the senior subordinated
notes), sell assets or borrow more money. We may not be able to do so on terms
acceptable to us or at all. In addition, the terms of existing or future debt
agreements, including the senior credit facilities and the indenture governing
the notes, may restrict us from adopting any of these alternatives. The failure
to generate sufficient cash flow or to achieve such alternatives could reduce
the value of the senior subordinated notes and limit our ability to pay
principal of and interest on the notes.
THE INDENTURE FOR THE SENIOR SUBORDINATED NOTES AND THE SENIOR CREDIT
FACILITIES IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY
PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES AND TAKING SOME ACTIONS.
The indenture for the senior subordinated notes and senior credit
facilities impose significant operating and financial restrictions on us. These
restrictions will limit our ability and the ability of our subsidiaries to,
among other things, incur additional indebtedness, make investments, sell
assets, incur certain liens, enter into agreements restricting our subsidiaries'
ability to pay dividends, or merge or consolidate. In addition, the senior
credit facilities require Ply Gem Industries to maintain specified financial
ratios. These covenants prevent us from financing our future operations or
capital needs or pursuing available business opportunities. A breach of any of
these covenants or an inability to maintain the required financial ratios could
result in a default under the related indebtedness. If a default occurs, the
relevant lenders could elect to declare the indebtedness, together with accrued
interest and other fees, to be immediately due and payable and proceed against
any collateral securing that indebtedness.
WE FACE COMPETITION FROM OTHER VINYL EXTERIOR BUILDING PRODUCTS
MANUFACTURERS AND ALTERNATIVE BUILDING MATERIALS. IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, WE COULD LOSE CUSTOMERS AND OUR SALES COULD DECLINE.
We compete with other national and regional manufacturers of vinyl
exterior building products. Some of these companies are larger and have greater
financial resources than us. Accordingly, these competitors may be better able
to withstand changes in conditions within the industries in which we operate and
may have significantly greater operating and financial flexibility than we do.
These competitors could take a greater share of sales and cause us to lose
business from our customers. Additionally, our products face competition from
alternative materials: wood, metal, fiber cement and masonry in siding, and wood
and aluminum in windows. An increase in competition from other vinyl exterior
building products manufacturers and alternative building materials could cause
us to lose our customers and lead to decreases in net sales.
DOWNTURNS IN THE HOME REPAIR AND REMODELING AND NEW HOME CONSTRUCTION
SECTORS OR THE ECONOMY COULD LOWER THE DEMAND FOR, AND PRICING OF, OUR PRODUCTS,
WHICH IN TURN COULD CAUSE OUR NET SALES AND NET INCOME TO DECREASE.
The home repair and remodeling and new home construction sectors may be
significantly affected by changes in economic and other conditions such as gross
domestic product levels, employment levels, demographic trends and consumer
confidence. These factors can lower the demand for and pricing of
22
our products. More specifically, for example, demand for home repair and
remodeling products may be adversely affected by material increases in interest
rates and the reduced availability of financing for home improvements. Any
deterioration in these factors could cause our net sales and net income to
decrease.
CHANGES IN THE COSTS AND AVAILABILITY OF RAW MATERIALS, ESPECIALLY PVC
RESIN AND ALUMINUM, CAN DECREASE OUR PROFIT MARGIN BY INCREASING OUR COSTS.
Our principal raw materials, PVC resin and aluminum, have been subject
to rapid price changes, particularly PVC resin in 2000 and 2004. While we have
historically been able to substantially pass on significant PVC resin and
aluminum cost increases through price increases to our customers, our results of
operations for individual quarters can be and have been hurt by a delay between
the time of PVC resin and aluminum cost increases and price increases in our
products. While we expect that any significant future PVC resin and aluminum
cost increases will be offset over time by price increases to our customers, we
may not be able to pass on any future price increases.
BECAUSE WE DEPEND ON A CORE GROUP OF SIGNIFICANT CUSTOMERS, OUR SALES,
CASH FLOWS FROM OPERATIONS AND RESULTS OF OPERATIONS MAY DECLINE IF OUR KEY
CUSTOMERS REDUCE THE AMOUNT OF PRODUCTS THEY PURCHASE FROM US.
Our top ten customers accounted for approximately 43.0% of our net
sales in the year ended December 31, 2004. Our largest customer, BlueLinx,
formerly a distribution operation of the Georgia-Pacific Corporation,
distributes our vinyl siding and accessories through multiple channels within
its building products distribution division, and accounted for approximately
24.3% of our 2004 net sales. We expect a small number of customers will continue
to account for a substantial portion of our net sales for the foreseeable
future.
The loss of or a significant adverse change in our relationships with
BlueLinx or any other major customer could cause a material decrease in our net
sales. We expect our relationship with BlueLinx to continue.
The loss of, or a reduction in orders from, any significant customers,
losses arising from customers' disputes regarding shipments, fees, merchandise
condition or related matters, or our inability to collect accounts receivable
from any major retail customer could cause a decrease in our net income and our
cash flow. In addition, revenue from customers that have accounted for
significant revenue in past periods, individually or as a group, may not
continue, or if continued, may not reach or exceed historical levels in any
period.
OUR BUSINESS IS SEASONAL AND CAN BE AFFECTED BY INCLEMENT WEATHER
CONDITIONS WHICH COULD AFFECT THE TIMING OF THE DEMAND FOR OUR PRODUCTS AND
CAUSE REDUCED PROFIT MARGINS WHEN SUCH CONDITIONS EXIST.
Markets for our products are seasonal and can be affected by inclement
weather conditions. Historically, our business has experienced increased sales
in the second and third quarters of the year due to increased construction
during those periods. Because much of our overhead and expense are fixed
throughout the year, our operating profits tend to be lower in the first and
fourth quarters. Inclement weather conditions can affect the timing of when our
products are applied or installed, causing reduced profit margins when such
conditions exist.
IF WE ARE UNABLE TO MEET FUTURE CAPITAL REQUIREMENTS OUR PRODUCT
OFFERING MAY BECOME DATED, OUR PRODUCTIVITY MAY DECREASE AND THE QUALITY OF OUR
PRODUCTS DECLINE, WHICH, IN TURN, COULD REDUCE OUR SALES AND PROFITABILITY.
We periodically make capital investments to, among other things,
maintain and upgrade our facilities and enhance our production processes. As we
grow our businesses, we may have to incur significant capital expenditures. If
we do not have, or are unable to obtain adequate funds to make all necessary
capital expenditures when required, or if the amount of future capital
expenditures are materially in excess of our anticipated or current
expenditures, our product offering may become dated, our productivity may
decrease and the quality of our products may decline, which, in turn, could
reduce our sales and profitability.
23
INCREASES IN THE COST OF LABOR, UNION ORGANIZING ACTIVITY AND WORK
STOPPAGES AT OUR FACILITIES OR THE FACILITIES OF OUR SUPPLIERS COULD DELAY OR
IMPEDE OUR PRODUCTION, REDUCE SALES OF OUR PRODUCTS AND INCREASE OUR COSTS.
Our financial performance is affected by the availability of qualified
personnel and the cost of labor. Currently, approximately 4.9% of our employees
are represented by labor unions. We are subject to the risk that strikes or
other types of conflicts with personnel may arise or that we may become a
subject of union organizing activity. Furthermore, some of our direct and
indirect suppliers have unionized work forces. Strikes, work stoppages or
slowdowns experienced by these suppliers could result in slowdowns or closures
of facilities where components of our products are manufactured. Any
interruption in the production or delivery of our products could reduce sales of
our products and increase our costs.
WE MAY BE SUBJECT TO CLAIMS ARISING FROM PLY GEM INDUSTRIES' FORMER
OPERATIONS AS A NORTEK SUBSIDIARY, INCLUDING CLAIMS ARISING FROM DISPOSAL OF
OPERATIONS. NORTEK MAY NOT HAVE THE ABILITY TO FULFILL ITS INDEMNIFICATION
OBLIGATIONS TO US IN CONNECTION WITH THE PLY GEM ACQUISITION, IN WHICH CASE, WE
WOULD BE LIABLE FOR THESE CLAIMS.
Under the terms of the stock purchase agreement governing the Ply Gem
Acquisition, Nortek, has agreed to indemnify us for liabilities arising from its
former ownership or operations of subsidiaries or properties where such
ownership or operation ceased prior to the completion of the Ply Gem
Acquisition, including environmental liabilities, liabilities arising in
connection with certain leases, product liability and other litigations, benefit
plans, and for certain other liabilities. Our ability to seek indemnification
from Nortek is, however, limited by the strength of Nortek's own financial
condition, which could change in the future. These liabilities could be
significant, and if we are unable to enforce the Nortek indemnification
obligations, could make it difficult to pay the interest or principal amount of
the notes when due. Nortek has covenanted to use their reasonable commercial
efforts to novate certain sale and lease contracts relating to discontinued
operations, thereby removing us and our affiliates from certain indemnification
obligations thereunder, which obligations we retained in connection with the
sales of certain of our businesses. Accordingly, Nortek has successfully novated
four sale contracts relating to our discontinued operations, including our
disposition of Hoover Treated Wood Products, Inc., Sagebrush Sales, Peachtree
Doors and Windows and SNE Enterprises. As a consequence, we are no longer
responsible for any indemnification obligations to the buyers of these former
operations. Nortek has also covenanted that after the Ply Gem Acquisition, it
will not dispose of all or substantially all of its property and assets in a
single transaction or series of related transactions, unless the acquirer of
either its residential building products segment or HVAC segment (whichever is
sold first) assumes all of Nortek's obligations (including Nortek's
indemnification obligations) under the stock purchase agreement.
WE MAY BE SUBJECT TO CLAIMS ARISING FROM MW'S OPERATIONS PRIOR TO THE
MW ACQUISITION. OUR ABILITY TO SEEK INDEMNIFICATION FROM THE MW SELLERS IS
LIMITED, AND MAY NOT COVER THESE CLAIMS, IN WHICH CASE, WE WOULD BE LIABLE FOR
THESE CLAIMS.
We recently completed the MW Acquisition. Our ability to seek
indemnification from Investcorp and the other selling stockholders of MWM
Holding is restricted to breaches of a limited amount of corporate
representations and warranties, and for the first $250,000 in costs of
compliance by MW with the New Jersey Industrial Site Recovery Act at an MW
facility in Hammonton, New Jersey and for 75% of any such costs in excess of
$250,000 but less than $5.5 million resulting from the compliance by MW with
that same act.
WE COULD FACE POTENTIAL PRODUCT LIABILITY CLAIMS RELATING TO PRODUCTS
WE MANUFACTURE.
Our historical product liability claims have not been material and
while management is not aware of any material product liability issues, we do
face an inherent business risk of exposure to product liability claims in the
event that the use of any of our products results in personal injury or property
damage. In the event that any of our products prove to be defective, among other
things, we may be responsible for damages related to any defective products and
we may be required to recall or redesign such products. Because of the long
useful life of our products, it is possible that latent defects might not appear
for several years. Any insurance we maintain may not continue to be available on
terms acceptable to us or such coverage may not be adequate for liabilities
actually incurred. Further, any claim or product recall could result in adverse
publicity against, us, which could cause our sales to decline, or increase our
costs.
24
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL, THE LOSS OF WHOM COULD
MATERIALLY AFFECT OUR FINANCIAL PERFORMANCE AND PROSPECTS.
Our continued success depends to a large extent upon the continued
services of our senior management and certain key employees. We have entered
into various equity-based compensation agreements with our senior executives,
including Messrs. Meyer, Wayne, Poe, Watson, Sveinson and McCready, designed to
encourage their retention. We have also entered into similar arrangements with
certain key employees of MW including Messrs Haley and Morstad. Each member of
our senior management team has substantial experience and expertise in our
industry and has made significant contributions to our growth and success. We do
face the risk, however, that members of our senior management may not continue
in their current positions and the loss of the services of any of these
individuals could cause us to lose customers and reduce our net sales, lead to
employee morale problems and/or the loss of key employees, or cause disruptions
to our production. Also, we may be unable to find qualified individuals to
replace any of the senior executive officers who leave our company.
INTERRUPTIONS IN DELIVERIES OF RAW MATERIALS OR FINISHED GOODS COULD
ADVERSELY AFFECT OUR PRODUCTION AND INCREASE OUR COSTS, THEREBY DECREASING OUR
PROFITABILITY.
Our dependency upon regular deliveries from particular suppliers means
that interruptions or stoppages in such deliveries could adversely affect our
operations until arrangements with alternate suppliers could be made. If any of
our suppliers were unable to deliver materials to us for an extended period of
time, as the result of financial difficulties, catastrophic events affecting
their facilities or other factors beyond our control, or if we were unable to
negotiate acceptable terms for the supply of materials with these or alternative
suppliers, our business could suffer. We may not be able to find acceptable
alternatives, and any such alternatives could result in increased costs for us.
Even if acceptable alternatives were found, the process of locating and securing
such alternatives might be disruptive to our business. Extended unavailability
of a necessary raw material or finished good could cause us to cease
manufacturing one or more of our products for a period of time.
ENVIRONMENTAL REQUIREMENTS MAY IMPOSE SIGNIFICANT COSTS AND LIABILITIES
ON US.
Our facilities are subject to numerous U.S. and Canadian federal,
state, provincial and local laws and regulations relating to the presence of
hazardous materials, pollution and the protection of the environment, including
those governing emissions to air, discharges to water, use, storage and
transport of hazardous materials, storage, treatment and disposal of waste,
remediation of contaminated sites and protection of worker health and safety.
From time to time, our facilities are subject to investigation by governmental
regulators. We believe we are in material compliance with all applicable
requirements of such laws and regulations. However, our efforts to comply with
environmental requirements do not remove the risk that we may be held liable, or
incur fines or penalties, and that the amount of liability, fines or penalties
may be material, for, among other things, releases of hazardous substances
occurring on or emanating from current or formerly owned or operated properties
or any associated offsite disposal location, or for newly-discovered
contamination at any of our properties from activities conducted by previous
occupants. Certain environmental laws impose strict, and under certain
circumstances joint and several, liability for the cost of addressing releases
of hazardous substances upon certain classes of persons, including site owners
or operators and persons that disposed or arranged for the disposal of hazardous
substances at contaminated sites. Under the stock purchase agreement governing
the Ply Gem Acquisition, our former parent, Nortek, has agreed to indemnify us
for any such liabilities arising from our former ownership or operation of
subsidiaries or properties where such ownership or operation ceased prior to the
completion of the Ply Gem Acquisition and for certain other properties. Our
ability to seek indemnification from Nortek is, however, limited by the strength
of Nortek's own financial condition. Nortek has also covenanted that after the
Ply Gem Acquisition, it will not dispose of all or substantially all of its
property and assets in a single transaction or series of related transactions,
unless the acquirer of either its residential building products segment or HVAC
segment (whichever is sold first) assumes all of Nortek's obligations (including
Nortek's indemnification obligations) under the stock purchase agreement.
We are currently involved in environmental proceedings involving CWD
Windows and Doors, Inc. (arising from subsurface contamination discovered at our
Calgary, Alberta property), and we may in the future be subject to environmental
proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination
in Punxsutawney, Pennsylvania) and Kroy Building Products, Inc. (relating to
contamination in a drinking water well in York, Nebraska). Under the stock
purchase agreement governing the Ply Gem Acquisition, Nortek is to indemnify us
for fifty percent of any liability in excess of $750,000 with respect to
25
the Calgary contamination and to indemnify us fully for any liability in
connection with the Punxsutawney contamination. Alcan Aluminum Corporation
assumed the obligation to indemnify us with respect to all liabilities for
environmental contamination of the York property when it sold us the property in
1998. Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in
an environmental proceeding in connection with a contaminated landfill site in
Thomson, Georgia. While we had assumed an obligation to indemnify the purchaser
of our former subsidiary when we sold Hoover Treated Wood Products, Inc., our
obligation has been novated and assumed by Nortek.
Under the stock purchase agreement governing the MW Acquisition, the MW
Sellers have agreed to indemnify us for the first $250,000 in costs of
compliance with the New Jersey Industrial Site Recovery Act at an MW facility in
Hammonton, New Jersey and for 75% of any such costs in excess of $250,000 but
less than $5.5 million. MW's Rocky Mount, Virginia property is subject to an
environmental investigation pursuant to the Virginia Voluntary Remediation
Program, relating to contamination derived from operations prior to the sale of
the stock of MW by U.S. Industries, Inc. U.S. Industries, Inc. assumed the
obligations to conduct such investigation and to indemnify us, INTER ALIA, with
respect to all liabilities for environmental contamination at the Rocky Mount
property when it sold MW's stock to Fenway Partners in 1995.
Changes in environmental laws and regulations or in their enforcement,
the discovery of previously unknown contamination or other liabilities relating
to our properties and operations or the inability to enforce the indemnification
obligations of Nortek, the MW Sellers and U.S. Industries, Inc. could result in
significant environmental liabilities which could make it difficult to pay the
interest or principal amount of the notes when due. In addition, we might incur
significant capital and other costs to comply with increasingly stringent U.S.
or Canadian environmental laws or enforcement policies which would decrease our
cash flow available to service our indebtedness.
MANUFACTURING OR ASSEMBLY REALIGNMENTS MAY RESULT IN A DECREASE IN OUR
NEAR-TERM EARNINGS, UNTIL THE EXPECTED COST REDUCTIONS ARE ACHIEVED, DUE TO THE
COSTS OF IMPLEMENTATION.
We continually review our manufacturing and assembly operations and
sourcing capabilities. Effects of periodic manufacturing realignments and cost
savings programs could result in a decrease in our near-term earnings until the
expected cost reductions are achieved. Such programs may include the
consolidation and integration of facilities, functions, systems and procedures.
Such actions may not be accomplished as quickly as anticipated and the expected
cost reductions may be not achieved or sustained.
WE RELY ON A VARIETY OF INTELLECTUAL PROPERTY RIGHTS. ANY THREAT TO, OR
IMPAIRMENT OF, THESE RIGHTS COULD CAUSE US TO INCUR COSTS TO DEFEND THESE
RIGHTS.
As a company that manufactures and markets branded products, we rely
heavily on trademark and service mark protection to protect our brands. We have
a significant number of issued patents and rely on copyright protection for
certain of our technologies. These protections may not adequately safeguard our
intellectual property and we may incur significant costs to defend our
intellectual property rights, which may harm our operating results. There is a
risk that third parties, including our current competitors, will infringe on our
intellectual property rights, in which case we would have to defend these
rights. There is also a risk that third parties, including our current
competitors, will claim that our products infringe on their intellectual
property rights. These third parties may bring infringement claims against us or
our customers.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to market risk from changes in interest rates primarily
through its borrowing activities. In addition, our ability to finance future
acquisition transactions may be impacted if the Company is unable to obtain
appropriate financing at acceptable interest rates. Our principal interest rate
exposure relates to the term loans outstanding under our senior credit
facilities. We had $304.5 million of term loans outstanding at December 31,
2004, 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 will provide 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 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 a municipal loan agreement which accrues interest at a
variable rate. The principal outstanding on the municipal loan is $7.0 million
as of December 31, 2004. Each quarter point increase or decrease in the interest
rate on the municipal loan would change our interest expense by approximately
$0.02 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.
FOREIGN CURRENCY RISK
Our results of operations are affected by fluctuations in the value of
the U.S. dollar as compared to the value of the Canadian dollar. In 2004, the
net impact of foreign currency changes to the Company's results of operations
was a gain of $2.5 million. The impact of foreign currency changes related to
translation resulted in an increase in stockholder's equity of approximately
$2.6 million at December 31, 2004. The revenue or expense reported by us as a
result of currency fluctuations will be greater in times of U.S. dollar
devaluation and less in times of U.S. dollar appreciation. We generally do not
enter into derivative financial instruments to manage foreign currency exposure.
At December 31, 2004, we did not have any significant outstanding foreign
currency hedging contracts.
COMMODITY PRICING RISK
We are subject to significant market risk with respect to the pricing
of principal raw materials, which include PVC resin, aluminum, and wood. If
prices of these raw materials were to increase dramatically, we may not be able
to pass such increases on to its customers and, as a result, gross margins could
decline significantly. We manage the exposure to commodity pricing risk by
continuing to diversify product mix, strategic buying programs and vendor
partnering.
INFLATION
We do not believe that inflation has had a material effect on our
business, financial condition or results of operations. Our lease payments
related to our sale/leaseback agreement include an annual increase based on the
Consumer Price Index, which could expose us to potential higher costs in years
with high inflation.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm....................29
Consolidated and Combined Balance Sheets, December 31, 2004 and 2003.......30
Consolidated and Combined Statements of Operations for each of the
periods in the three-year period ended December 31, 2004 ..................31
Consolidated and Combined Statements of Cash Flows for each of the
periods in the three-year period ended December 31, 2004...................32
Consolidated and Combined Statements of Stockholder's Equity /
Parent Company (Deficit) Investment for each of the periods in the
three-year period ended December 31, 2004 .................................33
Notes to Consolidated and Combined Financial Statements ...................34
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of Ply Gem Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Ply Gem Holdings,
Inc. and subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from January 23, 2004 to December 31, 2004, and the accompanying combined
balance sheet of Ply Gem Industries, Inc. and subsidiaries and CWD Windows &
Doors, a division of Broan-Nutone Canada Inc., all former subsidiaries of
Nortek, Inc., as of December 31, 2003 and the related combined statements of
operations, parent company (deficit) investment, and cash flows for the period
from January 1, 2004 to February 11, 2004, the period from January 10, 2003 to
December 31, 2003, the period from January 1, 2003 to January 9, 2003 and for
the year ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ply Gem Holdings,
Inc. and subsidiaries at December 31, 2004 and the consolidated results of their
operations and their cash flows for the period from January 23, 2004 to December
31, 2004, and the combined financial position of Ply Gem Industries, Inc. and
subsidiaries and CWD Windows & Doors, a division of Broan-Nutone Canada Inc.,
all former subsidiaries of Nortek, Inc., at December 31, 2003 and the combined
results of their operations and their cash flows for the period from January 1,
2004 to February 11, 2004, the period from January 10, 2003 to December 31,
2003, the period from January 1, 2003 to January 9, 2003 and for the year ended
December 31, 2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
- ---------------------
Kansas City, Missouri
March 7, 2005,
except for Note 16,
for which the date is March 29, 2005.
29
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
Combined Consolidated
------------------ ------------------
Post-Nortek
Recapitalization
Ply Gem Ply Gem
Industries, Inc. Holdings, Inc.
------------------ ------------------
December 31, 2003 December 31, 2004
------------------ ------------------
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND
PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS:
Unrestricted cash and cash equivalents....................... $ 8,517 $ 6,794
Restricted cash and cash equivalents......................... 1,538 --
Accounts receivable, less allowances of $8,695 and
$7,940 respectively...................................... 45,236 65,217
INVENTORIES
Raw materials............................................. 19,075 30,505
Work in process........................................... 3,648 4,260
Finished goods ........................................... 21,413 26,731
----------- -----------
44,136 61,496
Prepaid expenses and other current assets.. 5,280 9,796
Deferred income taxes........................................ 8,392 18,356
----------- -----------
Total current assets.................................... 113,099 161,659
PROPERTY AND EQUIPMENT, AT COST:
Land.................................................... .... 7,395 7,257
Buildings and improvements................................... 37,200 46,491
Machinery and equipment ..................................... 88,745 105,162
----------- -----------
133,340 158,910
Less accumulated depreciation................................ (10,524) (11,874)
----------- -----------
Total property and equipment, net....................... 122,816 147,036
OTHER ASSETS:
Goodwill..................................................... 219,977 585,150
Intangible assets, less accumulated amortization of
$3,837 and $5,743, respectively .......................... 44,363 162,657
Other........................................................ 3,113 47,797
----------- -----------
Total other assets...................................... 267,453 795,604
----------- -----------
$ 503,368 $ 1,104,299
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY /
PARENT COMPANY DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt ........................ $ 1,136 $ 2,784
Account payable.............................................. 18,876 34,600
Accrued expenses and taxes................................... 32,452 61,944
----------- -----------
Total current liabilities............................ ... 52,464 99,328
Deferred income taxes........................................ 25,323 72,356
Other long term liabilities.................................. 30,119 32,401
Long-term debt, less current maturities...................... 423,161 704,807
STOCKHOLDER'S 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................................... -- 175,427
Retained earnings............................................ -- 17,682
Accumulated other comprehensive gain ........................ 2,045 2,298
Parent Company Deficit ...................................... (29,744)
----------- -----------
Total Stockholder's Equity / Parent Company
Deficit............................................... (27,699) 195,407
----------- -----------
$ 503,368 $ 1,104,299
=========== ===========
- ------------
See accompanying notes.
30
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
Combined
-----------------------------------------------------------------
Pre-Nortek
Recapitalization Post-Nortek Recapitalization Consolidated
-------------------------------- ------------------------------
(Amounts in thousands)
Ply Gem Ply Gem Ply Gem
Industries, Ply Gem Industries, Ply Gem Holdings,
Inc. Industries, Inc. Industries, Inc.
For the Year Inc. Jan. 10, Inc. Jan. 23,
ended Jan. 1, 2003 2003 to Jan. 1, 2004 2004 to
December 31, to December 31, to December 31,
2003 Jan. 9, 2003 2003 Feb. 11, 2004 2004
Net Sales.............................. $ 508,953 $ 8,824 $ 522,565 $ 40,612 $ 585,945
Costs and Expenses:
Cost of products sold.................. 368,802 7,651 393,674 33,611 448,733
Selling, general and administrative
expense............................. 79,625 1,529 73,933 8,345 67,568
Amortization of intangible assets...... 3,118 70 3,837 201 5,911
-------- --------- --------- --------- ---------
451,545 9,250 471,444 42,157 522,212
-------- --------- --------- --------- ---------
Operating earnings (loss).............. 57,408 (426) 51,121 (1,545) 63,733
Foreign currency gain.................. -- -- - -- 2,473
Interest expense....................... (35,031) (976) (33,117) (3,684) (37,373)
Investment income...................... 1,523 2 196 29 160
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations before provision
(benefit) for income taxes........... 23,900 (1,400) 18,200 (5,200) 28,993
Provision (benefit) for income taxes 8,100 (500) 7,200 (1,850) 11,311
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations........................... 15,800 (900) 11,000 (3,350) 17,682
Income from discontinued operations.... 3,400 -- -- -- --
-------- --------- --------- --------- ---------
Net income (loss)...................... $ 19,200 $ (900) $ 11,000 $ (3,350) $ 17,682
======== ========= ========= ========= =========
- ----------------
See accompanying notes.
31
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Combined
-------------------------------------------------------------
Pre-Nortek Post-Nortek
Recapitalization Recapitalization Consolidated
------------------------------ -------------------------
(Amounts in thousands)
Ply Gem Ply Gem Ply Gem
Industries, Ply Gem Industries, Ply Gem Holdings,
Inc. Industries, Inc. Industries, Inc.
For the Year Inc. Jan. 10, Inc. Jan. 23,
ended Jan. 1, 2003 2003 to Jan. 1, 2004 2004 to
December 31, to December 31, to December 31,
2002 Jan. 9, 2003 2003 Feb. 11, 2004 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing
operations .................................... $ 15,800 $ (900) $ 11,000 $ (3,350) $ 17,682
Income from discontinued operations ........... 3,400 -- -- -- --
Net income (loss) ............................. 19,200 (900) 11,000 (3,350) 17,682
ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization expense ......... 14,071 327 14,702 1,373 17,745
Non-cash write-off of inventory ............... -- -- 1,387 -- 2,416
Non-cash interest expense, net ................ (795) 6 229 26 3,469
Non-cash gain on foreign currency ............. -- -- -- -- (2,473)
Gain on sale of discontinued operations ....... (2,400) -- -- -- --
Deferred income taxes ......................... 3,400 400 1,500 (1,710) 8,025
Deferred income taxes from discontinued
operations ................................. (1,600) -- -- -- --
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF EFFECTS FROM
ACQUISITIONS:
Accounts receivable, net ...................... 4,010 (1,548) 3,133 1,869 1,060
Inventories ................................... (3,259) 1,012 (1,492) (3,224) 1,275
Prepaid expenses and other current assets
.. ............................................ 1,555 190 2,826 (260) (1,527)
Net assets of discontinued operations ......... (1,995) -- -- -- --
Accounts payable .............................. (2,864) 1,736 (536) 7,765 (6,276)
Accrued expenses and taxes .................... (4,358) 618 (5,256) (1,339) 7,318
Other ......................................... (818) 12 (3,288) 498 713
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES .................................... 24,147 1,853 24,205 1,648 49,427
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................... (9,397) (349) (7,687) (718) (6,773)
Change in restricted cash ..................... (21) 1 (7) 1,118 --
Net cash received from businesses
sold or discontinued ....................... 29,516 -- -- -- --
Payment for acquisitions, net of cash
acquired ...................................... -- -- -- -- (883,261)
Purchase of investments and marketable
securities ................................. (95,143) -- -- -- --
Proceeds from the sale of investments
and marketable securities ................... 142,509 -- -- -- --
Other ......................................... (388) 36 (279) (5) --
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .................... 67,076 (312) (7,973) 395 (890,034)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .................. -- -- -- -- 671,338
Proceeds from financing obligation ............ -- -- -- -- 36,000
Payments on long-term debt .................... (11,963) (45) (1,420) (89) (29,204)
Net transfers to Nortek, Inc. ................. (133,030) (4,661) (10,023) (7,362) --
Equity contribution ........................... -- -- -- -- 169,143
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................... (144,993) (4,706) (11,443) (7,451) 847,277
--------- --------- --------- --------- ---------
Impact of exchange rate movements on
cash .......................................... -- -- -- -- 124
Net (decrease) increase in cash and
cash equivalents ........................... (53,770) (3,165) 4,789 (5,408) 6,794
Cash and cash equivalents at the
beginning of the period .................... 60,663 6,893 3,728 8,517 --
--------- --------- --------- --------- ---------
Cash and cash equivalents at the
end of the period .......................... $ 6,893 $ 3,728 $ 8,517 $ 3,109 $ 6,794
========= ========= ========= ========= =========
SUPPLEMENTAL INFORMATION
Interest paid (excluding parent company
charges) .................................. $ 3,253 $ 16 $ 1,272 $ 185 $ 33,805
Income taxes paid (received), net ............. $ 442 $ (6) $ 703 $ -- $ 1,250
See accompanying notes.
32
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED AND COMBINED
STATEMENTS OF STOCKHOLDER'S EQUITY / PARENT COMPANY (DEFICIT) INVESTMENT
Accumulated
Parent Other
Company Additional Comprehensive Total
(Deficit) Paid in Retained Income Stockholder's
Investment Capital Earnings (Loss) Rquity
----------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
BALANCE DECEMBER 31, 2001 ....................... $ 105,390 $ -- $ -- $ (2,390) $ 103,000
Comprehensive income:
Net income ................................... 19,200 -- -- -- 19,200
Currency translation ......................... -- -- -- 56 56
Minimum pension liability, net of
$1,082 tax benefit ........................ -- -- -- (2,009) (2,009)
Unrealized decrease in the
value of marketable securities ............ -- -- -- (306) (306)
---------
Total comprehensive income ...................... 16,941
=========
Debt repayment made by former parent ............ 42,742 -- -- -- 42,742
Net transfers to former parent ................. (132,923) -- -- -- (132,923)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2002 ...................... 34,409 -- -- (4,649) 29,760
Comprehensive loss:
Net loss ..................................... (900) -- -- -- (900)
Currency translation
-- -- -- 152 152
---------
Total comprehensive loss ........................ (748)
=========
Net transfers to former parent ................. (4,555) -- -- -- (4,555)
Balance, January 9, 2003 ........................ 28,954 -- -- (4,497) 24,457
Effect of Recapitalization ...................... (53,583) -- -- 4,497 (49,086)
--------- --------- --------- --------- ---------
BALANCE, JANUARY 9, 2003 ........................ (24,629) -- -- -- (24,629)
AFTER RECAPITALIZATION
Comprehensive income:
Net income ................................... 11,000 -- -- -- 11,000
Currency translation ......................... -- -- -- 2,063 2,063
Minimum pension liability, net of
$10 tax benefit ........................... -- -- -- (18) (18)
---------
Total comprehensive income ...................... 13,045
=========
Net transfers to former parent ................. (12,016) -- -- -- (12,016)
Reduction to goodwill for
purchase accounting revisions ................. (4,195) -- -- -- (4,195)
Employee stock compensation
expense ...................................... 96 -- -- -- 96
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2003 ...................... (29,744) -- -- 2,045 (27,699)
Comprehensive loss::
Net loss ..................................... (3,350) -- -- -- (3,350)
Currency translation ......................... -- -- -- (375) (375)
---------
Total comprehensive loss ........................ -- -- -- -- (3,725)
=========
Balance, February 11, 2004 ...................... (33,094) -- -- 1,670 (31,424)
Effect of Purchase accounting ................... 33,094 141,000 -- (1,670) 172,424
--------- --------- --------- --------- ---------
BALANCE, FEBRUARY 12, 2004 ...................... -- 141,000 -- -- 141,000
AFTER THE PLY GEM ACQUISITION
Comprehensive income:
Net income ................................... -- -- 17,682 -- 17,682
Currency translation ......................... -- -- -- 2,558 2,558
Minimum pension liability .................... -- -- -- (260) (260)
---------
Total comprehensive income ...................... 19,980
=========
Contributions ................................... -- 34,427 -- -- 34,427
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2004 ...................... $ -- $ 175,427 $ 17,682 $ 2,298 $ 195,407
========= ========= ========= ========= =========
See accompanying notes.
33
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Ply Gem Holdings, Inc. and its wholly-owned subsidiaries (individually
and collectively, the "Company" or "Ply Gem") are diversified manufacturers of
residential and commercial building products, operating with two principal
segments: (i) Siding, Fencing, Railing and Decking and (ii) Windows and Doors.
Through these principal segments, Ply Gem industries manufactures and sells,
primarily in the United States and Canada, a wide variety of products for the
residential and commercial construction, manufactured housing, and the
do-it-yourself and professional remodeling and renovation markets.
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. ( "Ply Gem Industries") from Nortek (the "Ply
Gem Acquisition"). The Ply Gem Acquisition was completed on February 12, 2004,
when Nortek, Inc. ("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., Nortek. and
WDS LLC dated as of December 19, 2003, as amended (the "Purchase Agreement").
Prior to February 12, 2004, the date of the Ply Gem 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,
(collectively with subsidiaries "Nortek").
On August 27, 2004 the Company's wholly owned subsidiary, Ply Gem
Industries, 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 Industries, MWM Holding, Inc., and the selling
stockholders (the "MW Acquisition"). The accompanying financial statements
include the operating results of MWM Holding for the period of August 27, 2004
through December 31, 2004.
The accompanying financial statements include the consolidated results
of operations for the period from January 23, 2004 to December 31, 2004 and
consolidated financial position for Ply Gem Holdings and Subsidiaries as of
December 31, 2004, and the combined results of operations of Ply Gem Industries,
Inc. for the periods from January 1, 2003 to January 9, 2003, January 10, 2003
to December 31, 2003 and for the year ended December 31, 2002. The periods
presented during calendar 2004 provide the combined operating results of Ply Gem
Industries from the beginning of the year, January 1, 2004, until the date of
the Ply Gem Acquisition, February 12, 2004 (see Note 2), as well as from the
date of inception of Ply Gem Holdings, January 23, 2004, through December 31,
2004.
The periods presented during calendar 2003 provide the combined
operating results of Ply Gem Industries, from January 1, 2003 until January 9,
2003. On January 9, 2003, Nortek 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 December 31, 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 their estimated 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 December 31,
2003.
34
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,
or Ply Gem Industries, Inc. and its subsidiaries combined with CWD Windows and
Doors, a division of Broan-Nutone Canada, Inc. All intercompany accounts and
transactions have been eliminated.
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. 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.
RECLASSIFICATIONS
Certain amounts in the 2003 combined financial statements have been
reclassified to conform to the 2004 presentation.
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
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 December 31, 2004 there was no restricted
cash balance.
35
INVENTORIES
Inventories in the accompanying consolidated and combined balance
sheets are valued at the lower of cost or market. At December 31, 2004 and
December 31, 2003, approximately $11.7 million and $10.1 million 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 $1.2 million and $0.4 million higher
at December 31, 2004 and December 31, 2003, respectively. 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.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost. Depreciation 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 or useful
life, whichever is shorter
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 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.
The Company applies SFAS No, 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142") to goodwill and certain 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.
INSURANCE LIABILITIES
The Company is self-insured for certain casualty losses. The Company
records insurance liabilities and related expenses for health, workers'
compensation, product and general liability losses and other insurance 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
36
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 Ply Gem Acquisition on February 12, 2004, the Company's
former parent, 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 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 realizable in the future.
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 former parent company (Nortek) corporate charges
of approximately $0.3 million for the period from January 1, 2004 to February
11, 2004, $7.1 million and $0.1 million for the period January 10, 2003 to
December 31, 2003 and the period January 1, 2003 to January 10, 2003,
respectively, and $10.2 million for the year ended December 31, 2002, 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 was reasonable. Included in interest expense is
approximately $3.5 million for the period January 1, 2004 to February 11, 2004,
$31.8 million and $0.9 million for the period January 10, 2003 to December 31,
2003 and the period January 1, 2003 to January 10, 2003, respectively, and $32.7
million for the year ended December 31, 2002, related to interest incurred to a
subsidiary which was wholly owned by Nortek.
Upon completion of the Ply Gem Acquisition, the Company entered
into two advisory agreements with an affiliate of Caxton-Iseman Capital, the
"Caxton-Iseman Party", which we refer to as the "Debt Financing Advisory
Agreement" and the "General Advisory Agreement". Under the Debt Financing
Advisory Agreement, we paid the Caxton-Iseman Party a debt financing arrangement
and advisory fee, equal to 2.375% of the aggregate amount of the debt financing
incurred in connection
37
with the Ply Gem Acquisition ($11.4 million). In connection with the MW
Acquisition, pursuant to the General Advisory Agreement, in November 2004 we
paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price
of MWM Holdings, Inc. ($6.4 million). Under the "General Advisory Agreement" the
Company paid a management fee to the Caxton-Iseman Party of approximately $1.7
million for the period from January 23, 2004 to December 31, 2004. As of
December 31, 2004 no amount was due to or from any related parties.
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 income or loss in the
accompanying consolidated and combined balance sheets. A transaction gain or
loss resulting from fluctuations in the exchange rate may be recognized in the
statement of operations due to debt, denominated in US dollars, recorded by the
Company's Canadian subsidiary.
For the period January 23, 2004 through December 31, 2004, the Company
recorded a gain from foreign currency translation transactions of approximately
$2.5 million. As of December 31, 2004 and December 31, 2003 accumulated other
comprehensive income included a currency translation adjustment of approximately
$2.6 million and $2.1 million, respectively.
STOCK OPTIONS
On February 12, 2004, Ply Gem Investment Holdings, Inc.'s Board of
Directors adopted the 2004 Stock Option Plan (the "Plan") which provides for
grants of up to 140,494 shares of Ply Gem Investment Holdings, Inc.'s common
stock under nonqualified stock options and subsequently increased the grants
provided under the plan up to 184,065 shares on November 30, 2004. Employees of
Ply Gem Investment Holdings, Inc. or any majority-owned subsidiary are eligible
for awards, as specified in the Plan. 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 is at least the estimated fair market value of a
share as of the grant date. Previously granted awards generally vest over five
years from the date of grant.
For the period January 23, 2004 through December 31, 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 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
Holdings, Inc.
January 23, 2004 -
December 31, 2004
(AMOUNTS IN THOUSANDS)
Net income as reported $ 17,682
Deduct: Total stock-based employee compensation
expense determined under fair-value method for all
awards, net of tax effects (18)
----------
Pro forma net income $ 17,664
==========
In connection with the Ply Gem Acquisition, all of the outstanding
Class A Common Stock options issued by Nortek to Ply Gem Industries, Inc.
employees were cancelled.
38
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS
123R"), SHARE-BASED PAYMENT. SFAS 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
and services or incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award and
to recognize that cost over the period during which an employee is required to
provide service in exchange for the award. The Company is required and plans to
adopt the provisions of SFAS 123R for the quarter ending October 1, 2005. At
this time, we do not anticipate that the adoption of this statement will have a
material effect on our consolidated financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), which amended the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). In addition, this Statement required that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement will be
effective for costs incurred during fiscal years beginning after June 15, 2005.
We do not anticipate that the adoption of this statement will have a material
effect on our financial position or results of operations.
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 RISK
The accounts receivable balance related to one customer of our siding,
fencing, railing and decking segment was approximately $9.6 million and $6.3
million at December 31, 2004 and December 31, 2003, respectively. This customer
accounted for approximately 24.3% of net sales for the combined periods from
January 1, 2004 to February 11, 2004 and from January 23, 2004 to December 31,
2004, 28% of net sales for the combined periods from January 1, 2003 to January
9, 2003 and from January 10, 2003 to December 31, 2003, and 27% of net sales for
the year ended December 31, 2002.
Approximately 4.9% of our employees are represented by the United
Steelworkers of America, AFL0-CIO-CLC, pursuant to an agreement that expires on
November 30, 2006.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments including
cash and cash equivalents and long term debt approximates their fair value. The
fair value of the Company's fixed and floating-rate long-term debt was estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
39
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 their estimated fair values as of the date of the
purchase. The purchase price, including approximately $4,275,000 of value
attributed to phantom stock issued to replace Ply Gem Industries, Inc.
employees' forfeited Nortek stock options, was allocated to the assets and
liabilities based on their estimated 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 $ 68,357
Inventories 50,293
Property, plant and equipment 116,626
Trademarks/Tradenames 25,900
Patents 12,000
Customer relationships 16,000
Goodwill 381,723
Other assets 38,661
Current liabilities (55,964)
Assumed indebtedness (29,473)
Other liabilities (71,114)
---------------
Purchase price, net of cash acquired $ 553,009
===============
Based on appraisals received for the purchased intangible assets, $25.9
million was assigned to Trademarks and Tradenames with weighted average lives of
15 years, $12.0 million was assigned to Patents with weighted average lives of
13 years, and $16.0 million was assigned to customer relationships with weighted
average lives of 10 years. As a result of this transaction, debt issue costs in
the amount of $24.6 million were incurred and deferred. Approximately $293.7
million of goodwill was assigned to the siding, fencing, railing and decking
segment and approximately $88.0 million of goodwill was assigned to the windows
and doors segment. None of the domestic goodwill is expected to be deductible
for tax purposes.
On August 27, 2004, Ply Gem Industries, Inc. acquired all of the
outstanding 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. MW is a leading, low-cost, vertically-integrated
manufacturer of vinyl, vinyl clad-wood, vinyl-wood, wood and composite windows.
MW also manufactures vinyl patio doors and markets steel and fiberglass exterior
doors. The acquisition of MW will provide the Company with a number of
strategic, financial and operational benefits. Some of these benefits include an
enhancement of our market position in the vinyl windows market, significant
costs savings through strategic sourcing and enhanced purchasing power, strong
and diversified customer relationships, and the addition of an experienced and
complementary management team.
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 their
estimated fair values as of the date of the purchase. The purchase price,
including approximately $2.0 million of value attributed to phantom stock issued
to replace MWM Holding, Inc. employees' forfeited MWM Holding, Inc. stock
options, was allocated to the assets and liabilities based on their estimated
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:
40
(IN THOUSANDS)
---------------
Other current assets, net of cash $ 22,569
Inventories 14,437
Property and equipment 36,768
Trademarks and Tradenames 32,500
Customer relationships 82,107
Goodwill 199,636
Other assets 14,204
Current liabilities (30,291)
Other liabilities (35,394)
---------------
Purchase price, net of cash acquired $ 336,536
===============
Based on appraisals received for the purchased intangible assets,
approximately $32.5 million was assigned to Trademarks and Tradenames with
indefinite lives and approximately $82.1 million was assigned to customer
relationships with weighted average lives of 15 years. As a result of this
transaction, debt issue costs in the amount of $12.3 million were incurred and
deferred. All of the goodwill was assigned to the windows and doors segment.
None of the goodwill is expected to be deductible for tax purposes. 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.
Unaudited pro forma results of operations for the periods January 1,
2003 to January 9, 2003, January 10, 2003 to December 31, 2003, January 1, 2004
to February 11, 2004, and January 23, 2004 to December 31, 2004, as if both
acquisitions had occurred at the beginning of each of the respective periods is
as follows: (IN THOUSANDS)
January 1, January 10, 2003 January 1, 2004 January 23, 2004
2003 to to to to
January 9, 2003 December 31, 2003 February 11, 2004 December 31, 2004
--------------- ----------------- ----------------- -----------------
Net sales $ 14,761 $ 758,636 $ 67,757 $ 741,442
Net income (loss) (331) 20,012 (3,187) 22,842
3. INTANGIBLE ASSETS, GOODWILL AND OTHER LONG-LIVED ASSETS
The table that follows presents the major components of intangible
assets as of December 31, 2004 and 2003:
Average
Amortization
Period Accumulated Net Carrying
(In Years) Cost Amortization Value
------------ ---------- ------------ ------------
(Amounts in thousands)
2004:
Patents 13 $ 12,000 $ (834) $ 11,166
Trademarks/Tradenames 15 25,900 (1,574) 24,326
Customer relationships 15 98,000 (3,335) 94,665
--------- -------- ---------
Total intangible assets $ 135,900 $ (5,743) $ 130,157
========= ======== =========
Intangible with indefinite lives:
Trademarks $ 32,500 $ -- $ 32,500
2003:
Patents 13 $ 13,200 $ (1,002) $ 12,198
Trademarks/Tradenames 13 25,200 (1,689) 23,511
Customer relationships 13 9,800 (1,146) 8,654
--------- -------- ---------
Total intangible assets $ 48,200 $ (3,837) $ 44,363
========= ======== =========
Amortization expense for the periods from January 1, 2003 to January 9,
2003 and from January 10, 2003 to December 31, 2003 was approximately $0.1
million and $3.8 million, respectively. Amortization
41
expense for the periods from January 1, 2004 to February 11, 2004 and from
January 23, 2004 to December 31, 2004 was approximately $0.2 million and $5.9
million, respectively. Amortization expense for fiscal years 2005, 2006, 2007,
2008, and 2009 is estimated to be approximately $9.8 million each year.
4. DISCONTINUED OPERATIONS
On November 22, 2002, Ply Gem sold the capital stock of its Richwood
subsidiary for approximately $8.5 million of net cash proceeds and recorded a
pre-tax loss of approximately $3.0 million in the fourth quarter of 2002. As
required by SFAS No. 142, Ply Gem allocated $4.2 million of goodwill to Richwood
in connection with the determination of the loss on sale based upon the relative
fair value of Richwood to the total fair value of Ply Gem.
On April 2, 2002, Ply Gem sold the capital stock of its Hoover
subsidiary for approximately $20.0 million of net cash proceeds and recorded a
pre-tax gain of approximately $5.4 million in the second quarter of 2002.
Approximately $8.5 million of the cash proceeds was used to pay down outstanding
debt under Ply Gem's then existing credit facility in the second quarter of
2002.
The Company allocated interest to dispositions that qualified as a
discontinued operation. The interest related to debt instruments, which were
entered into specifically and solely with the entity disposed of and from debt,
which was paid down with proceeds received from the disposition. Interest
allocated to discontinued operations was approximately $0.1 million for the year
ended December 31, 2002.
The table that follows presents a summary of the results of
discontinued operations for the Company for the year ended December 31, 2002:
(IN THOUSANDS)
Net sales $ 25,500
Income before provision for income taxes 2,700
Provision for income taxes 1,100
--------
Income from discontinued operations 1,600
Gain on the sale of discontinued operations 2,400
Tax provision on the sale of discontinued operations 600
--------
1,800
Income from discontinued operations $ 3,400
========
Depreciation and amortization expense $ 831
========
5. LONG-TERM DEBT
Long-term debt in the accompanying consolidated and combined balance
sheets at December 31, 2004 and December 31, 2003 consists of the following:
DECEMBER 31, 2003 DECEMBER 31, 2004
----------------- -----------------
(AMOUNTS IN THOUSANDS)
Senior term loan facility $ -- $ 304,501
Senior subordinated notes -- 360,321
Asset financing obligation -- 35,769
Notes payable to a wholly owned subsidiary of Nortek 394,735 --
Mortgage notes and bonds payable 22,503 --
Other borrowings 7,059 7,000
---------- ----------
424,297 707,591
Less current maturities 1,136 2,784
---------- ----------
$ 423,161 $ 704,807
========== ==========
42
In connection with the Ply Gem Acquisition on February 12, 2004, the
Company entered into new senior credit facilities with a syndicate of financial
institutions and institutional lenders. The senior credit facilities provided
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 Ply Gem 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 permitted 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 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 Ply Gem 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 on August 27, 2004, 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.
During December 2004 we repaid the entire amount of $18.0 million which
was borrowed under the revolving credit facility and at December 31, 2004 have
approximately $57.1 million available borrowing capacity. Also, during December
2004 we prepaid $5.0 million of the $30.0 million tranche under which our
Canadian subsidiary, CWD Windows and Doors, Inc., is the borrower.
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 rates
at December 31, 2004 ranged from 4.37% to 4.67%.
Our senior credit facilities (following amendments) require scheduled
quarterly payments on the term loan facilities of $0.5 million beginning in the
quarter ended July 3, 2004 and for the next 23 calendar quarters thereafter, and
payments of $45.8 million on June 30, 2010, September 30, 2010, and December 30,
2010 and $156.8 million 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 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; 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. Our covenants also restrict the payment of dividends, with certain
exceptions, without the lenders consent in writing.
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
43
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 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.
As discussed in Note 9, the Company executed certain sale/leaseback
transactions. Due to certain default and exchange provisions in these leases,
sale/leaseback treatment was not achieved, resulting in violations to our senior
credit facilities. The Company has requested and received a waiver from its
lenders as it relates to our lease agreements in that these leases shall not
constitute indebtedness under Ply Gem's credit agreement for the restriction on
indebtedness covenant and any lien in connection with such leases shall not
constitute liens for the purposes of the restriction on liens covenant through
April 30, 2005 and only so long as these leases do not represent more than an
aggregate of $36.0 million of financing obligations. See Note 16.
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 December 31,
2004: (AMOUNTS IN THOUSANDS)
Senior Credit
Facilities, Notes Asset Financing
and Other Borrowings Obligation
-------------------- ---------------
2005 $ 1,950 $ 834
2006 1,950 899
2007 1,950 968
2008 1,950 1,042
2009 1,950 1,123
Thereafter 662,072 30,903
---------- ---------
$ 671,822 $ 35,769
========== =========
At December 31, 2004, approximately $13.0 million of letters of credit
have been issued under our senior credit facility for the purposes of: i)
approximately $8.9 million as additional security for approximately $7.0 million
of industrial revenue bonds outstanding (included in other borrowings in the
long-term debt table above), ii) approximately $1.1 million to support our
workers compensation plan at one of our subsidiaries, and iii) approximately
$3.0 million to secure certain environmental obligations.
6. DEFINED BENEFIT PLANS
The Company has two separate pension plans, the Ply Gem Group Pension
Plan (the "Ply Gem Plan") and the MW Manufacturers, Inc. Retirement Plan (the
"MW Plan"). The plans are presented separately in the following discussion.
The following table shows expected benefit payments for the next five
fiscal years and the aggregate five years thereafter from the Ply Gem Plan and
the MW Plan. These benefit payments consist of Qualified Defined Benefit Plan
payments which are made from the respective Plan Trusts and do not represent an
immediate cash outflow to the Company.
44
Expected
Pension Plan
Fiscal Year Payments Benefit Payments
-------------------- ----------------
(IN THOUSANDS)
2005 $ 1,244
2006 1,459
2007 1,360
2008 1,591
2009 1,851
2010-2014 11,760
Pension and profit sharing expense charged to operations aggregated
approximately $0.03 million and $0.4 million for the period January 1, 2004 to
February 11, 2004 and January 23, 2004 to December 31, 2004, respectively,
approximately $0.02 million and $0.3 million for the period January 1, 2003 to
January 9, 2003 and January 10, 2003 to December 31, 2003, respectively, and
approximately $0.2 million for the year ended December 31, 2002. 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 $2.1 million to the defined benefit pension plans during 2005.
PLY GEM PLAN
For the Ply Gem Plan, the Company uses a September 30 measurement date.
The table that follows provides a reconciliation of benefit obligations, plan
assets, and funded status of the plan in the accompanying consolidated and
combined balance sheets at December 31, 2004 and 2003:
December 31,
2003 2004
-------- --------
(AMOUNTS IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at October 1, $ 14,025 $ 14,352
Service cost 106 100
Interest cost 852 842
Actuarial loss 298 585
Benefits and expenses paid (929) (1,075)
-------- --------
PROJECTED BENEFIT OBLIGATION AT SEPTEMBER 30, $ 14,352 $ 14,804
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at October 1, $ 9,063 $ 9,248
Actual return on plan assets 948 1,057
Employer and participant contributions 166 430
Benefits and expenses paid (929) (1,075)
-------- --------
FAIR VALUE OF PLAN ASSETS AT SEPTEMBER 30, $ 9,248 $ 9,660
======== ========
FUNDED STATUS AND FINANCIAL POSITION:
Fair value of plan assets at September 30, $ 9,248 $ 9,660
Benefit obligation at September 30, 14,352 14,804
-------- --------
Funded status (5,104) (5,144)
Amount contributed during fourth quarter 30 85
Unrecognized actuarial loss 28 260
-------- --------
ACCRUED BENEFIT COST $ (5,046) $ (4,799)
======== ========
AMOUNT RECOGNIZED IN THE BALANCE SHEET CONSISTS OF:
Accrued benefit liabilities $ (5,074) $ (5,059)
Accumulated other comprehensive loss 28 260
-------- --------
ACCRUED BENEFIT COST $ (5,046) $ (4,799)
======== ========
The accumulated benefit obligation for the Ply Gem Plan was $14.8
million as of December 31, 2004 and $14.4 million as of December 31, 2003.
45
Plan assets consist of cash and cash equivalents, common stock, U.S.
Government securities, corporate debt and mutual funds, as well as other
investments. The expected long-term rate of return on assets is based on the
Company's historical rate of return. The weighted average rate assumptions used
in determining pension costs and the projected benefit obligation for the
periods indicated are as follows:
For the For the For the For the
period period period period
For the year January 1, January 10, January 1, January 23,
ended 2003 to 2003 to 2004 to 2004 to
December 31, January 9, December February December31,
2002 2003 31, 2003 11, 2004 2004
---------------------------------------------------------------------------
Discount rate for projected
benefit obligation 6.25% 6.25% 6.25% 6.00% 6.00%
Discount rate for pension costs 7.00% 6.25% 6.25% 6.25% 6.25%
Expected long-term average
return on plan assets 8.50% 7.75% 7.75% 7.75% 7.75%
Rate of compensation increase N/A N/A N/A N/A N/A
The Company's net periodic benefit expense (income) for the Ply Gem
Plan for the periods indicated consists of the following components: (IN
THOUSANDS)
For the For the For the For the
period period period period
For the January 1, January 10, January 1, January 23,
year ended 2003 to 2003 to 2004 to 2004 to
December 31, January 9, December February December31,
2002 2003 31, 2003 11, 2004 2004
---------------------------------------------------------------------------
Service cost $ 107 $ 3 $ 106 $ 11 $ 89
Interest cost 867 23 865 97 744
Expected return on plan assets (875) (18) (678) (81) (622)
Recognized actuarial loss 102 8 -- -- --
------ ----- ----- ----- ------
Net periodic benefit expense $ 201 $ 16 $ 293 $ 27 $ 211
====== ===== ===== ===== ======
The Ply Gem Plan weighted-average asset allocations at December 31,
2003 and 2004, by asset category are as follows:
Plan Assets at December 31,
ASSET CATEGORY 2003 2004
-------------- ---- ----
Equity securities 56% 60%
Debt securities 44% 40%
The Ply Gem Plan assets are invested to maximize returns without undue
exposure to risk. The investment objectives are also to produce a total return
exceeding the median of a universe of portfolios with similar average asset
allocation and investment style objectives, and to earn a return, net of fees,
greater or equal to the long-term rate of return used in the actuarial
computations.
Risk is controlled by maintaining a portfolio of assets that is
diversified across a variety of asset classes, investment styles and investment
managers. The plan's asset allocation policies are consistent with the
established investment objectives and risk tolerances. The asset allocation
policies are developed by examining the historical relationships of risk and
return among asset classes, and are designed to provide the highest probability
of meeting or exceeding the return objectives at the lowest possible risk. For
2005, the target allocation is 57% for equity securities, 41% for fixed income
securities and 2% cash.
The Ply Gem plan was frozen as of December 31, 1998, and no further
increases in benefits may occur as a result of increases in service or
compensation.
46
MW PLAN
For the MW Plan, the Company uses a September 30 measurement date for its plans.
The table that follows provides a reconciliation of benefit obligations, plan
assets, and funded status of the plan in the accompanying consolidated balance
sheet at December 31, 2004:
December 31, 2004
---------------------
(AMOUNTS IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at October 1, $ 18,406
Service cost 49
Interest cost 94
Actuarial loss (2)
Benefits and expenses paid (47)
---------
PROJECTED BENEFIT OBLIGATION AT SEPTEMBER 30, $ 18,500
=========
CHANGE IN PLAN ASSETS
Fair value of plan assets at October 1, $ 11,228
Actual return on plan assets 149
Employer and participant contributions 617
Benefits and expenses paid (46)
---------
FAIR VALUE OF PLAN ASSETS AT SEPTEMBER 30, $ 11,948
=========
FUNDED STATUS AND FINANCIAL POSITION:
Fair value of plan assets at September 30, $ 11,948
Benefit obligation at September 30, 18,500
Funded status (6,552)
Amount contributed during fourth quarter --
Unrecognized actuarial loss (81)
---------
ACCRUED BENEFIT COST $ (6,633)
=========
AMOUNT RECOGNIZED IN THE BALANCE SHEET CONSISTS OF:
Accrued benefit liabilities $ (6,633)
Accumulated other comprehensive loss --
---------
ACCRUED BENEFIT COST $ (6,633)
=========
The accumulated benefit obligation for the MW pension plan was $17.0
million as of December 31, 2004.
The MW Plan assets consist of interest-bearing cash, common/collective
trusts, fixed income mutual funds, and equity mutual funds. The expected
long-term rate of return on assets is based on the Company's historical rate of
return. The weighted average rate assumptions used in determining pension costs
and the projected benefit obligation for the periods indicated are as follows:
For the period ending
December 31, 2004
---------------------
Discount rate for projected benefit
obligation 6.15%
Discount rate for pension costs 6.15%
Expected long-term average return on
plan assets 7.50%
Rate of compensation increase 3.00%
The Company's net periodic benefit expense (income) for the MW Plan for
the periods indicated consists of the following components: (IN THOUSANDS)
For the period ending
December 31, 2004
---------------------
Service cost $ 49
Interest cost 94
Expected return on plan assets (71)
Recognized actuarial loss --
-----
Net periodic benefit expense (income) $ 72
=====
47
The MW Plan weighted-average asset allocations at December 31, 2004, by
asset category are as follows:
Plan Assets at
September 30, 2004
------------------
ASSET CATEGORY
Equity securities 50%
Debt securities 48%
Cash and equivalents 2%
The MW Plan assets are invested to maximize returns without undue
exposure to risk. The investment objectives are also to produce a total return
exceeding the median of a universe of portfolios with similar average asset
allocation and investment style objectives, and to earn a return, net of fees,
greater or equal to the long-term rate of return used in the actuarial
computations.
Risk is controlled by maintaining a portfolio of assets that is
diversified across a variety of asset classes, investment styles and investment
managers. The MW Plan's asset allocation policies are consistent with the
established investment objectives and risk tolerances. The asset allocation
policies are developed by examining the historical relationships of risk and
return among asset classes, and are designed to provide the highest probability
of meeting or exceeding the return objectives at the lowest possible risk. For
2005, the target allocation is 50% for equity securities, 49% for fixed income
securities and 1% cash.
The Company has an unfunded nonqualified Supplemental Executive
Retirement Plan for certain employees. The projected benefit obligation relating
to this unfunded plan totaled approximately $254,000 at December 31, 2004.
Pension expense for the plan was approximately $2,000 for the year ended
December 31, 2004.
7. DEFINED CONTRIBUTION PLAN
We have defined contribution 401(k) plans covering substantially all
employees. We match 50% of the first 6% of employee contributions for all plans
except for the plans that are connected to collective bargaining agreements,
which have no company match. We also have the option of making discretionary
contributions. Our contributions under both plans were approximately $0.2
million and $1.6 million for the period from January 1, 2004 to February 11,
2004 and January 23, 2004 to December 31, 2004, respectively, $0.05 million and
$1.8 million for the periods from January 1, 2003 to January 9, 2003 and January
10, 2003 to December 31, 2003, respectively, and $1.9 million for the year ended
December 31, 2002.
8. COMMITMENTS AND CONTINGENCIES
At December 31, 2004, the Company is obligated under lease agreements
for the rental of certain real estate and machinery and equipment used in its
operations. Future minimum rental obligations aggregate approximately $14.9
million at December 31, 2004. A small percentage of our lease agreements contain
clauses for rent increases based on the consumer price index. The obligations
are payable as follows:
(AMOUNTS IN THOUSANDS)
2005 $ 5,422
2006 3,601
2007 2,203
2008 1,541
2009 1,348
Thereafter 825
48
In connection with the Ply Gem 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 $14.1 million.
The Company has indemnified third parties in certain transactions
involving dispositions of former subsidiaries. As of December 31, 2004 and
December 31, 2003, the Company has recorded liabilities in relation to these
indemnifications of approximately $13.2 million and $18.2 million, respectively,
consisting of the following:
(AMOUNTS IN THOUSANDS)
2003 2004
-------- --------
Product claim liabilities $ 6,602 $ 3,813
Long-term lease liabilities 6,226 5,152
Multiemployer pension plan withdrawal liability 4,337 4,187
Other indemnification liabilities 1,035 --
-------- --------
$ 18,200 $ 13,152
======== ========
The product claim liabilities of approximately $3.8 million and $6.6
million at December 31, 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 $2.4 million, for the estimated recoveries, which were deemed
probable of collection related to insurance litigation matters discussed above.
The long-term lease liabilities of approximately $5.2 million and $6.2
million at December 31, 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 specified 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 $1.1 million and $2.1
million of these long-term lease liabilities were settled and paid during fiscal
yeas 2004 and 2003, respectively.
The multiemployer pension liability of approximately $4.2 million and
$4.3 million at December 31, 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 approximately $0.1 million 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 $1.0 million 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
49
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 $27.7 million at December 31, 2003 for 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 December 31, 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:
January 1, 2003 January 10, 2003 January 1, 2004 January 23, 2004
to to to to
January 9, 2003 December 31, 2003 February 11, 2004 December 31, 2004
--------------- ----------------- ----------------- -----------------
(AMOUNTS IN THOUSANDS)
Balance, beginning of period $ 9,379 $ 9,459 $ 9,499 $ 9,491
Warranty expense provided during
Period 91 3,312 330 3,003
Settlements made during period (11) (3,272) (338) (2,630)
Liability assumed with MW
Acquisition -- -- -- 3,231
Liability assumed by third party -- -- -- (2,000)
-------- --------- -------- --------
Balance, end of period $ 9,459 $ 9,499 $ 9,491 $ 11,095
======== ========= ======== ========
In April 2004, certain assets and liabilities (including short-term
and long-term warranties of $2.0 million) of our subsidiary, Thermal-Gard, Inc.,
were sold to a third party.
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 December 31, 2004, the Company has accrued approximately $0.8
million 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.
50
9. SALE LEASEBACK
On August 27, 2004, Ply Gem Industries, Inc. entered into a sale and
leaseback transaction with net proceeds of approximately $36.0 million being
used to fund a portion of the acquisition of MWM Holding, Inc. It was the
Company's intention that these leases meet the criteria for a sale leaseback
transaction and receive accounting treatment as operating leases. Following Ply
Gem Industries' review, the original lease agreements were executed and treated
as a sale leaseback transaction and were accounted for as operating leases in
the Company's third quarter 2004 results. After further review in connection
with the preparation of the December 31, 2004 financial statements, the Company
concluded that for the periods from August 27, 2004 through October 2, 2004 (Ply
Gem Holdings, Inc.'s third quarter) and from October 3, 2004 to December 31,
2004 and January 1, 2005 until an amended lease becomes effective, these leases
did not meet the sale leaseback accounting criteria. The primary discrepancy
that has been identified in the leases relates to default and exchange
provisions contained within the original leases that resulted in prohibited
forms of continuing involvement. Therefore, as of December 31, 2004 and as of
our third quarter ended October 2, 2004 approximately $36.0 million of land and
buildings and the related financial obligation have been recorded on the balance
sheet. Because this resulted in a default of certain debt covenants under Ply
Gem's credit agreement, Ply Gem has requested and received a waiver from our
lenders that provides that these leases shall not constitute indebtedness under
Ply Gem's credit agreement for the restriction of indebtedness covenant and any
lien in connection with such leases shall not constitute a lien for the purposes
of the restriction on liens covenant through April 30, 2005 and only so long as
these leases do not represent more than an aggregate of $36.0 million of capital
lease obligations. See Note 16. The impact of the correct lease accounting on
the third quarter ended October 2, 2004 net earnings was $31,000. However, due
to the impact of this issue on the third quarter 2004 balance sheet, the Company
has included a restated third quarter 2004 balance sheet (Note 14). Assets
subject to the leases are included in the consolidated balance sheet as follows:
DECEMBER 31, 2004
-------------------
(IN THOUSANDS)
Land $ 5,183
Buildings 31,263
-------
36,446
Less: Accumulated depreciation (856)
-------
$ 35,590
=======
The initial term of the leases is twenty years with an option to renew
the lease for a ten year period following the initial term. These leases are net
leases and are non-terminable. The basic annual rent is approximately $3.5
million in the first year with the annual rent rate being subject to adjustment
for increases in the Consumer Price Index upon each anniversary following the
initial basic rent payment date.
10. ACCRUED EXPENSES AND TAXES, AND OTHER LONG-TERM LIABILITIES
Accrued expenses and taxes, net, consist of the following at December 31, 2004
and December 31, 2003:
DECEMBER 31, DECEMBER 31,
2003 2004
------------ ------------
(AMOUNTS IN THOUSANDS)
Insurance $ 3,738 $ 4,460
Employee compensation and benefits 7,370 12,730
Sales and marketing 9,142 14,396
Product warranty 2,844 4,040
Short-term product claim liability 2,189 2,321
Interest 163 12,134
Other 7,006 11,863
-------- --------
$ 32,452 $ 61,944
======== ========
51
Other long-term liabilities consist of the following at December 31, 2004 and
December 31, 2003:
DECEMBER 31, 2003 DECEMBER 31, 2004
----------------- -----------------
(AMOUNTS IN THOUSANDS)
Insurance $ 1,842 $ 3,597
Pension liabilities 9,412 14,454
Product warranty 6,655 7,055
Long-term lease liabilities 6,226 5,152
Long-term product claim liability 4,413 1,492
Other 1,571 651
-------- --------
$ 30,119 $ 32,401
======== ========
11. INCOME TAXES
The following is a summary of the components of earnings (loss) from
continuing operations before provision (benefit) for income taxes: (IN
THOUSANDS)
For the For the For the For the
period period period period
For the year January 1, January 10, January 1, January 23,
ended 2003 to 2003 to 2004 to 2004 to
December 31, January 9, December 31, February December 31,
2002 2003 2003 11, 2004 2004
------------ ---------- ------------ -------- -----------
Domestic $ 18,100 $ (1,400) $ 10,000 $ (4,784) $ 20,664
Foreign
5,800 -- 8,200 (416) 8,329
-------- --------- -------- --------- --------
$ 23,900 $ (1,400) $ 18,200 $ (5,200) $ 28,993
======== ========= ======== ========= ========
The following is a summary of the provision (benefit) for income taxes
from continuing operations included in the accompanying consolidated statement
of operations: (IN THOUSANDS)
For the For the For the
period period period For the period
For the year January 1, January 10, January 1, January 23,
ended 2003 to 2003 to 2004 to 2004 to
December January 9, December 31, February 11, December 31,
31, 2002 2003 2003 2004 2004
------------- ---------- ------------ ------------ ------------
Federal:
Current $ 2,300 $ (900) $ 2,100 $ -- $ 278
Deferred 3,400 400 1,500 (1,381) 6,398
-------- ------- ------- --------- --------
5,700 (500) 3,600 (1,381) 6,676
State:
Current 2,000 -- 2,900 -- 893
Deferred -- -- -- (329) 697
-------- ------- ------- --------- --------
2,000 -- 2,900 (329) 1,590
Foreign:
Current 400 -- 700 (140) 2,115
Deferred -- -- -- -- 930
-------- ------- ------- --------- --------
400 -- 700 (140) 3,045
Total $ 8,100 $ (500) $ 7,200 $ (1,850) $ 11,311
======== ======= ======= ========= ========
52
Income tax payments (refunds), net, were approximately $1.3 million,
$0.7 million, $(0.01) million, and $0.4 million for the period from January 23,
2004 to December 31, 2004, the period from January 1, 2003 to January 9, 2003,
the period January 10, 2003 to December 31, 2003, and for the year ended
December 31, 2002, respectively. In addition, CWD Windows transferred to BNC
approximately $928, $3.7 million, $1.1 million, and $0.9 million for the period
from January 1,2004 to February 11, 2004, the period from January 1, 2003 to
January 9, 2003, the period January 10, 2003 to December 31, 2003, and for the
year ended December 31, 2002.
The table that follows reconciles the federal statutory income tax rate
of continuing operations to the effective tax rate of such earnings of
approximately 35.6% and 39.0%, for the periods from January 1, 2004 to February
11, 2004 and February 12 to December 31, 2004, respectively, 35.7% and 39.6% for
the periods from January 1, 2003 to January 9, 2003 and January 10, 2003 to
December 31, 2003, respectively, and 33.9% for the year ended December 31, 2002
(IN THOUSANDS).
For the For the For the
period period period For the period
For the year January 1, January 10, January 1, January 23,
ended 2003 to 2003 to 2004 to 2004 to
December January 9, December 31, February 11, December 31,
31, 2002 2003 2003 2004 2004
------------- ---------- ------------ ------------ ------------
Income tax provision
(benefit) from continuing
operations at the federal
statutory rate $ 8,365 $ (490) $ 6,370 $ (1,820) $ 10,148
NET CHANGE FROM STATUTORY
RATE:
State income tax 260 -- 455 (239) 1,033
provision (benefit), net
of federal income tax
effect
Effect of subsidiaries
taxed at non U.S.
statutory rate (30) --- 30 6 4
Other, net (495) (10) 345 203 126
------- -------- ------- ---------- --------
$ 8,100 $ (500) $ 7,200 $ (1,850) $ 11,311
======= ======== ======= ========== ========
The tax effect of temporary differences, which gave rise to significant
portions of deferred income tax assets and liabilities as of December 31, 2003
and 2004 are as follows (in thousands):
December 31, December 31,
2003 2004
------------ ------------
Deferred tax assets:
Accounts receivable $ 3,076 $ 3,272
Inventories 789 1,554
Insurance reserves 1,212 2,723
Warranty reserves 2,884 4,193
Pension accrual -- 4,530
Other assets, net 7,039 2,084
Capital loss carry-forward / net loss carry-forward 2,950 16,281
Valuation allowances (2,950) (1,635)
--------- ---------
Total deferred tax assets
15,000 33,002
Deferred tax liabilities:
Property and equipment, net (21,797) (33,402)
Intangible assets, net (10,134) (52,202)
Unrealized foreign currency gain -- (751)
Other liabilities, net
-- (647)
--------- ---------
Total deferred tax liabilities (31,931) (87,002)
--------- ---------
Net deferred tax liability $(16,931) $(54,000)
========= =========
53
The Company has established valuation allowances related to certain
capital loss carry-forwards. At December 31, 2004, Ply Gem has approximately
$4.0 million of capital loss carry-forwards, which can be utilized to offset
capital gains, if any, in future periods, which expire between 2005 and 2007. In
addition, the company has approximately $36.6 million of net operating loss
carry-forwards which can be utilized to offset future taxable income. These loss
carry-forwards will expire between the years 2017 and 2022 if not utilized.
The Company has not provided United States income taxes of
approximately $2.8 million or foreign withholding taxes on un-remitted foreign
earnings in Canada. Notwithstanding the provisions within the American Jobs
Creation Act of 2004, the company continues to consider these amounts to be
permanently invested. As of December 31, 2004, accumulated foreign earnings in
Canada were approximately $7.3 million.
12. STOCK COMPENSATION
The board of directors of Ply Gem Investment Holdings, Inc. administers
the 2004 Stock Option Plan (the "Plan") and selects eligible executives,
directors and employees to receive options. The board of directors also will
determine the number and type of shares of stock covered by options granted
under the Plan, the terms under which options may be exercised, the exercise
price of the options and other terms and conditions of the options in accordance
with the provisions of the Plan. In 2004, the board adopted the Plan providing
for grants of up to 184,065 shares of Ply Gem Investment Holdings, Inc.'s common
stock under nonqualified stock options. Because the Plan did not exist prior to
2004, no comparable information is available or presented for 2003.
A summary of the Company's stock option activity and related
information for the year ended December 31, 2004 is provided below:
WEIGHTED-AVERAGE NUMBER OF
EXERCISE PRICE SHARES
-------------- ---------
Outstanding at January 23, 2004 -- --
Granted $10.00 140,494
Exercised -- --
Canceled -- --
-------
Outstanding at December 31,2004 $10.00 140,494
=======
December 31, 2004
----------------------
Weighted-average fair value of options
granted during the year $1.76
STOCK OPTIONS AS OF DECEMBER 31, 2004
Remaining
Exercise Options Contractual Options
Price Outstanding Life (Years) Exercisable
- ---------------------------------- ------------------ ------------------ -----------------
$10.00 81,494 9.15 --
$10.00 59,000 9.70 --
---------
As of December 31, 2004 140,494 9.38 --
=========
54
The weighted-average remaining contract life for options outstanding at
December 31, 2004 is 9.38 years.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. SFAS No. 123 requires the pro forma information be
determined as if the Company has accounted for its stock options under the fair
value method of that statement. As described below, the fair value accounting
provided under SFAS No.123 requires the use of option valuation models that were
not developed for use in valuing stock options. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 2004: a weighted-average
risk-free interest rate of 3.19%; volatility of 10%; dividend yield of 0.0%; and
a weighted-average expected life of the option of 4.38 years in 2004.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
Upon completion of the Ply Gem Acquisition, certain members of
management were granted awards under the Ply Gem Investment Holdings Phantom
Stock Plan. This Plan is generally designed to provide non-qualified deferred
compensation to participants. Each participant's interest in the plan is
recorded in a bookkeeping account and these accounts are deemed invested in Ply
Gem Investment Holdings' stock. No stock will initially be issued under the
plan, but upon liquidation and payment of a participant's account under the
plan, the value of the account generally may be paid to the participant either
in shares of Ply Gem Investment Holdings' stock having a market value equal to
the account balance or in cash, at the discretion of Ply Gem Investment
Holdings. Vesting in awards occurs ratably over a five year period. 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.
At December 31, 2004, 236,393 shares were outstanding.
13. 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 certain receivables. Interest expense is presented net of
investment income.
Following is a summary of the Company's segment information:
55
FOR THE PERIOD FROM
JANUARY 23, 2004 TO DECEMBER 31, 2004
(Amounts in thousands)
Siding,
Fencing,
Railing and Windows and
Decking Doors Unallocated Consolidated
----------- ----------- ----------- ------------
Net sales $ 352,167 $ 233,778 $ -- $ 585,945
Interest expense (net) 35 2,385 34,793 37,213
Depreciation and amortization 11,134 5,918 693 17,745
Income (loss) before income
taxes 41,439 26,032 (38,478) 28,993
Income tax expense (benefit) -- -- 11,311 11,311
Capital expenditures 4,174 2,437 162 6,773
Total assets 523,110 555,520 25,669 1,104,299
FOR THE PERIOD FROM
JANUARY 1, 2004 TO FEBRUARY 11, 2004
(Amounts in thousands)
Siding,
Fencing,
Railing and Windows and
Decking Doors Unallocated Combined
----------- ----------- ----------- --------
Net sales $ 29,546 $ 11,066 $ -- $ 40,612
Interest expense (net) 3,610 6 39 3,655
Depreciation and amortization 1,301 275 (203) 1,373
Loss before income
taxes (3,010) (1,537) (653) (5,200)
Income tax benefit -- -- (1,850) (1,850)
Capital expenditures 616 102 -- 718
Total assets 487,676 51,881 (45,943) 493,614
FOR THE PERIOD FROM
JANUARY 10, 2003 TO DECEMBER 31, 2003
(Amounts in thousands)
Siding,
Fencing,
Railing and Windows and
Decking Doors Unallocated Combined
----------- ----------- ----------- --------
Net sales $363,051 $159,514 $ -- $522,565
Interest expense (net) 32,557 73 291 32,921
Depreciation and amortization 11,777 2,712 213 14,702
Income (loss) before income
taxes 7,517 12,509 (1,826) 18,200
Income tax expense (benefit) -- -- 7,200 7,200
Capital expenditures 6,871 816 -- 7,687
Total assets 482,270 64,088 (42,990) 503,368
56
FOR THE PERIOD FROM
JANUARY 1, 2003 TO JANUARY 9, 2003
(Amounts in thousands)
Siding,
Fencing,
Railing and Windows and
Decking Doors Unallocated Combined
----------- ----------- ----------- ----------
Net sales $ 6,760 $ 2,064 $ -- $ 8,824
Interest expense (net) 805 1 168 974
Depreciation and amortization 235 74 18 327
Loss before income taxes (699) (378) (323) (1,400)
Income tax benefit -- -- (500) (500)
Capital expenditures 320 29 -- 349
Total assets 490,276 64,011 20,712 574,999
FOR THE YEAR ENDING
DECEMBER 31, 2002
(Amounts in thousands)
Siding,
Fencing,
Railing and Windows and
Decking Doors Unallocated Combined
----------- ----------- ----------- --------
Net sales $352,653 $156,300 $ -- $508,953
Interest expense (net) 34,583 1,005 (2,080) 33,508
Depreciation and amortization 11,088 2,771 212 14,071
Income before income taxes 19,177 9,630 (4,907) 23,900
Income tax expense (benefit) -- -- 8,100 8,100
Capital expenditures 7,508 1,889 -- 9,397
Total assets 490,056 63,410 20,888 574,354
Our Canadian subsidiary represents a majority of our sales to foreign
customers. Other subsidiaries' sales outside the United States are less than 1%
of our total sales.
57
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations.
FISCAL YEAR ENDED DECEMBER 31, 2004
-----------------------------------------------------------------------------
Period Period Quarter Quarter Quarter
Ending Ending Ending Ending Ending
Feb 11, April 2, July 3, October 2, December 31,
2004 2004 2004 2004 2004
(Restated)
Net sales $ 40,612 $ 72,750 $ 153,025 $ 178,732 $ 181,438
Gross Profit 7,001 14,881 39,679 45,961 36,691
Net Income (Loss) (3,350) 59 9,142 9,571 (1,090)
FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------------
Period Period Quarter Quarter Quarter
Ending Ending Ending Ending Ending
Jan 9, April 5, July 5, October 4, December 31,
2003 2003 2003 2003 2003
Net sales $ 8,824 $ 99,124 $ 154,474 $ 156,549 $ 112,418
Gross Profit 1,173 19,025 40,810 42,053 27,003
Net Income (Loss) (900) (5,700) 8,400 2,200 6,100
The following presents the restatement of the Company's third quarter
2004 Balance Sheet as a result of the correction of the error in our lease
accounting (Note 9).
PREVIOUSLY REPORTED RESTATED
------------------- --------
(AMOUNTS IN THOUSANDS)
Land $ 2,578 $ 7,761
Buildings $ 18,912 $ 50,175
Total Property and equipment $ 125,644 $ 162,090
Less accumulated depreciation $ (10,992) $ (11,552)
Property and equipment, net $ 114,652 $ 150,538
Total assets $ 1,058,125 $ 1,094,011
Current maturities of long-term debt $ 2,350 $ 5,946
Total current liabilities $ 101,750 $ 105,346
Long-term debt, less current maturities $ 699,587 $ 731,908
Total liabilities and stockholder's equity $ 1,058,125 $ 1,094,011
58
15. GUARANTOR/NON-GUARANTOR
In connection with the financing of the Ply Gem Acquisition, Ply Gem
Industries sold $225 million of its 9% Senior Subordinated Notes due 2012 (the
"Notes"). As a result of the MW Acquisition, an additional $135 million of Notes
were issued. The Notes are secured by full and unconditional guarantees on a
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 December 31, 2004 and for the period from January 1, 2004 to February 11,
2004, the period from January 23, 2004 to December 31, 2004, the period from
January 1, 2003 to January 9, 2003 , the period from January 10, 2003 to
December 31, 2003, and for the year ended December 31, 2002. The non-guarantor
information presented represents our Canadian subsidiary.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2004 TO FEBRUARY 11, 2004
Non-
Ply Gem Guarantor Guarantor
Industries, 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 ........... 561 6,552 1,232 -- 8,345
Intercompany administrative
charges .......................... (3,166) 3,166 -- -- --
Amortization of intangible assets -- 201 -- -- 201
-------- -------- -------- -------- --------
(2,605) 40,910 3,852 -- 42,157
-------- -------- -------- -------- --------
Operating earnings (loss) ........... 2,605 (3,723) (427) -- (1,545)
Interest expense .................... (39) (3,645) -- -- (3,684)
Investment income -- 18 11 -- 29
-------- -------- -------- -------- --------
Income (loss) before equity in
subsidiaries' loss ............... 2,566 (7,350) (416) -- (5,200)
Equity in subsidiaries' loss
before taxes ..................... (5,667) -- -- 5,667 --
-------- -------- -------- -------- --------
Loss before benefit for income
taxes ............................ (3,101) (7,350) (416) 5,667 (5,200)
Benefit for income taxes -- (1,683) (167) -- (1,850)
-------- -------- -------- -------- --------
Net loss ............................ $ (3,101) $ (5,667) $ (249) $ 5,667 $ (3,350)
======== ======== ======== ======== ========
59
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 23, 2004 TO DECEMBER 31, 2004
Guarantor Non-
Ply Gem Ply Gem Guarantor Guarantor
Holdings, Inc. Industries, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ---------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
Net Sales .................... $ -- $ -- $ 539,357 $ 46,588 $ -- $ 585,945
Cost and Expenses:
Cost of products sold ........ -- -- 417,994 30,739 -- 448,733
Selling, general and
administrative expense .... -- 2,283 57,598 7,687 -- 67,568
Intercompany administrative
charges ................... -- (22,049) 22,049 -- -- --
Amortization of intangible
assets ....................... -- 129 5,782 -- -- 5,911
--------- --------- --------- --------- --------- ---------
-- (19,637) 503,423 38,426 -- 522,212
--------- --------- --------- --------- --------- ---------
Operating earnings ........... -- 19,637 35,934 8,162 -- 63,733
Foreign currency gain ........ -- -- -- 2,473 -- 2,473
Interest expense ............. -- (33,912) (1,143) (2,318) -- (37,373)
Investment income -- 87 61 12 -- 160
--------- --------- --------- --------- --------- ---------
Income before equity in
subsidiaries' income (loss) -- (14,188) 34,852 8,329 -- 28,993
Equity in subsidiaries' income
(loss) before income taxes 17,682 31,870 -- -- (49,552) --
--------- --------- --------- --------- --------- ---------
Income before provision
for income taxes .......... 17,682 17,682 34,852 8,329 (49,552) 28,993
Provision for income taxes -- -- 7,960 3,351 -- 11,311
--------- --------- --------- --------- --------- ---------
Net income ................... $ 17,682 $ 17,682 $ 26,892 $ 4,978 $ (49,552) $ 17,682
========= ========= ========= ========= ========= =========
60
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2003 TO JANUARY 9, 2003
Non-
Ply Gem Guarantor Guarantor
Industries, 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 ................ 68 1,396 65 -- 1,529
Intercompany administrative
charges ............................... (480) 449 31 -- --
Amortization of intangible assets -- 70 -- -- 70
------- ------- ------- ------- -------
(412) 9,099 563 -- 9,250
------- ------- ------- ------- -------
Operating earnings (loss) ................ 412 (836) (2) -- (426)
Interest expense ......................... (12) (963) (1) -- (976)
Investment income -- (1) 3 -- 2
------- ------- ------- ------- -------
Income (loss) before equity in
subsidiaries' losses .................. 400 (1,800) -- -- (1,400)
Equity in subsidiaries' losses
before taxes .......................... (1,800) -- -- 1,800 --
Loss before benefit for income
taxes ................................. (1,400) (1,800) -- 1,800 (1,400)
Benefit for income taxes (500) (600) -- 600 (500)
------- ------- ------- ------- -------
Net loss ................................. $ (900) $(1,200) $ -- $ 1,200 $ (900)
======= ======= ======= ======= =======
61
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 10, 2003 TO DECEMBER 31, 2003
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
Net Sales ............................ $ -- $ 474,015 $ 48,550 $ -- $ 522,565
Cost and Expenses:
Cost of products sold ................ -- 360,913 32,761 -- 393,674
Selling, general and
administrative expense ............ 2,666 63,688 7,579 -- 73,933
Intercompany administrative
charges ........................... (7,813) 7,744 69 -- --
Amortization of intangible assets -- 3,837 -- -- 3,837
--------- --------- --------- --------- ---------
(5,147) 436,182 40,409 -- 471,444
--------- --------- --------- --------- ---------
Operating earnings ................... 5,147 37,833 8,141 -- 51,121
Interest expense ..................... (465) (32,653) 1 -- (33,117)
Investment income 18 120 58 -- 196
--------- --------- --------- --------- ---------
Income before equity in
subsidiaries' earnings ............ 4,700 5,300 8,200 -- 18,200
Equity in subsidiaries' earnings
before taxes ...................... 5,300 -- -- (5,300) --
Income before provision for
income taxes ..................... 10,000 5,300 8,200 (5,300) 18,200
Provision for income taxes ........... 4,300 2,200 2,900 (2,200) 7,200
--------- --------- --------- --------- ---------
Net income ........................... $ 5,700 $ 3,100 $ 5,300 $ (3,100) $ 11,000
========= ========= ========= ========= =========
62
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
Net Sales .............................. $ -- $ 468,961 $ 39,992 $ -- $ 508,953
Cost and Expenses:
Cost of products sold .................. -- 341,105 27,697 -- 368,802
Selling, general and
administrative expense .............. 3,019 70,274 6,332 -- 79,625
Intercompany administrative
charges ............................. (5,041) 4,967 74 -- --
Amortization of intangible assets -- 3,118 -- -- 3,118
--------- --------- --------- --------- ---------
(2,022) 419,464 34,103 -- 451,545
--------- --------- --------- --------- ---------
Operating earnings ..................... 2,022 49,497 5,889 -- 57,408
Interest expense ....................... 601 (35,543) (89) -- (35,031)
Investment expense 1,377 146 -- -- 1,523
--------- --------- --------- --------- ---------
Income from continuing
operations before equity
in subsidiaries' earnings ........... 4,000 14,100 5,800 -- 23,900
Equity in subsidiaries' income
before taxes ........................ 14,100 -- -- (14,100) --
--------- --------- --------- --------- ---------
Income before provision for
income taxes ........................ 18,100 14,100 5,800 (14,100) 23,900
Provision for income taxes ............. 6,100 5,200 2,000 (5,200) 8,100
--------- --------- --------- --------- ---------
Income from continuing
operations .......................... 12,000 8,900 3,800 (8,900) 15,800
Income from discontinued
operations .......................... 3,400 -- -- -- 3,400
--------- --------- --------- --------- ---------
Net income ............................. $ 15,400 $ 8,900 $ 3,800 $ (8,900) $ 19,200
========= ========= ========= ========= =========
63
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004
Guarantor Non-
Ply Gem Ply Gem Guarantor Guarantor
Holdings, Inc. Industries, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- ---------------- ------------ ---------- ------------ ------------
(Amounts in thousands)
ASSETS
CURRENT ASSETS:
Unrestricted cash and cash
equivalents ........................ $ -- $ 1,923 $ 3,483 $ 1,388 $ -- $ 6,794
Accounts receivable, net ........... -- -- 59,855 5,362 -- 65,217
Inventories:
Raw materials ................... -- -- 27,555 2,950 -- 30,505
Work in process ................. -- -- 3,389 871 -- 4,260
Finished goods -- -- 25,186 1,545 -- 26,731
----------- ----------- ----------- ----------- ----------- -----------
Total inventory -- -- 56,130 5,366 -- 61,496
Prepaid expenses and other
current assets .................. -- 1,004 8,169 623 -- 9,796
Deferred income taxes -- -- 18,356 -- -- 18,356
----------- ----------- ----------- ----------- ----------- -----------
Total current assets -- 2,927 145,993 12,739 -- 161,659
----------- ----------- ----------- ----------- ----------- -----------
Investments in subsidiaries ........ 195,407 810,462 -- -- (1,005,869) --
PROPERTY AND EQUIPMENT, AT
COST:
Land ............................... -- -- 4,908 2,349 -- 7,257
Buildings and improvements ......... -- -- 42,648 3,843 -- 46,491
Machinery and equipment -- 158 102,738 2,266 -- 105,162
----------- ----------- ----------- ----------- ----------- -----------
-- 158 150,294 8,458 -- 158,910
Less accumulated depreciation -- (15) (11,372) (487) -- (11,874)
----------- ----------- ----------- ----------- ----------- -----------
Total property and equipment,
net ................................ -- 143 138,922 7,971 -- 147,036
----------- ----------- ----------- ----------- ----------- -----------
OTHER ASSETS:
Goodwill ........................... -- -- 541,730 43,420 -- 585,150
Intangible assets, net ............. -- -- 162,657 -- -- 162,657
Intercompany note receivable ....... -- 9,346 -- -- (9,346) --
Other -- 47,669 128 -- -- 47,797
----------- ----------- ----------- ----------- ----------- -----------
Total other assets -- 57,015 704,515 43,420 (9,346) 795,604
----------- ----------- ----------- ----------- ----------- -----------
$ 195,407 $ 870,547 $ 989,430 $ 64,130 $(1,015,215) $ 1,104,299
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of
long-term debt ..................... $ -- $ 1,700 $ 834 $ 250 $ -- $ 2,784
Accounts payable ................... -- -- 32,885 1,715 -- 34,600
Accrued expenses and taxes -- 17,125 40,232 4,587 -- 61,944
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities ...... -- 18,825 73,951 6,552 -- 99,328
----------- ----------- ----------- ----------- ----------- -----------
Deferred income taxes .............. -- -- 71,463 893 -- 72,356
Intercompany note payable .......... -- -- -- 9,346 (9,346) --
Other long term liabilities ........ -- 17,969 13,531 901 -- 32,401
Long-term debt, less current
maturities ...................... -- 638,346 36,515 29,946 -- 704,807
STOCKHOLDER'S EQUITY:
Preferred stock .................... -- -- -- -- -- --
Common stock ....................... -- -- -- -- -- --
Additional paid-in-capital ......... 175,427 175,427 767,338 9,205 (951,970) 175,427
Retained earnings .................. 17,682 17,682 26,892 4,729 (49,303) 17,682
Accumulated other
comprehensive income (loss) ..... 2,298 2,298 (260) 2,558 (4,596) 2,298
----------- ----------- ----------- ----------- ----------- -----------
$ 195,407 $ 870,547 $ 989,430 $ 64,130 (1,015,215) $ 1,104,299
=========== =========== =========== =========== =========== ===========
64
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2003
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
ASSETS
CURRENT ASSETS:
Unrestricted cash and cash
equivalents ................................ $ 3,851 $ 2,255 $ 2,411 $ -- $ 8,517
Restricted cash ............................... -- 1,538 -- -- 1,538
Accounts receivable, net ...................... -- 39,555 5,681 -- 45,236
Inventories:
Raw materials .............................. -- 16,865 2,210 -- 19,075
Work in process ............................ -- 2,878 770 -- 3,648
Finished goods ............................. -- 20,012 1,401 -- 21,413
--------- --------- --------- --------- ---------
Total inventory ............................ -- 39,755 4,381 -- 44,136
--------- --------- --------- --------- ---------
Prepaid expenses and other
current assets ............................. 138 4,946 196 -- 5,280
Deferred income taxes ......................... 1,878 6,514 -- -- 8,392
--------- --------- --------- --------- ---------
Total current assets .................... 5,867 94,563 12,669 -- 113,099
--------- --------- --------- --------- ---------
Investments in subsidiaries ................... -- -- -- -- --
PROPERTY AND EQUIPMENT, AT COST:
Land .......................................... 345 4,648 2,402 -- 7,395
Buildings and improvements .................... 5,650 27,644 3,906 -- 37,200
Machinery and equipment -- 85,896 2,849 -- 88,745
--------- --------- --------- --------- ---------
5,995 118,188 9,157 -- 133,340
Less accumulated depreciation (225) (9,884) (415) -- (10,524)
--------- --------- --------- --------- ---------
Total property and equipment, net ........... 5,770 108,304 8,742 -- 122,816
OTHER ASSETS:
Goodwill ...................................... -- 214,819 5,158 -- 219,977
Intangible assets, net ........................ -- 44,363 -- -- 44,363
Intercompany note receivable .................. (34,095) -- -- 34,095 --
Other 2,515 598 -- -- 3,113
--------- --------- --------- --------- ---------
Total other assets ......................... (31,580) 259,780 5,158 34,095 267,453
--------- --------- --------- --------- ---------
$ (19,943) $ 462,647 $ 26,569 $ 34,095 $ 503,368
========= ========= ========= ========= =========
LIABILITIES AND PARENT COMPANY DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term
debt ....................................... $ 425 $ 711 $ -- $ -- $ 1,136
Accounts payable .............................. 123 17,271 1,482 -- 18,876
Accrued expenses and taxes 7,925 22,743 1,784 -- 32,452
--------- --------- --------- --------- ---------
Total current liabilities 8,473 40,725 3,266 -- 52,464
Deferred income taxes ......................... (5,348) 30,164 507 -- 25,323
Other long term liabilities ................... 23,361 5,904 854 -- 30,119
Long-term debt, less current
maturities ................................. 3,212 419,949 -- -- 423,161
Parent Company Deficit ........................ (49,641) (34,095) 21,942 34,095 (27,699)
--------- --------- --------- --------- ---------
$ (19,943) $ 462,647 $ 26,569 $ 34,095 $ 503,368
========= ========= ========= ========= =========
65
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing
operations ................................. $ 12,000 $ 8,900 $ 3,800 $ (8,900) $ 15,800
Income from discontinued
operations ................................. 3,400 -- -- -- 3,400
Net income .................................... 15,400 8,900 3,800 (8,900) 19,200
ADJUSTMENTS TO RECONCILE NET LOSS TO
CASH PROVIDED OPERATING ACTIVITIES:
Depreciation and amortization
expense .................................... 217 13,214 640 -- 14,071
Non-cash interest expense, net ................ (795) -- -- -- (795)
Gain on sale of discontinued
operations ................................ (2,400) -- -- -- (2,400)
Deferred income taxes ......................... 800 2,600 -- -- 3,400
Deferred tax provision from
discontinued operations ................... (1,600) -- -- -- (1,600)
CHANGES IN OPERATING ASSETS ...................
AND LIABILITIES:
1,052 3,955 (997) -- 4,010
Inventories -- (3,316) 57 -- (3,259)
Prepaid expenses and other
current assets ............................. (2,696) 4,275 (24) -- 1,555
Net assets of discontinued
operations ................................. (1,995) -- -- -- (1,995)
Accounts payable .............................. 79 (2,687) (256) -- (2,864)
Accrued expenses and taxes .................... 6,361 (11,309) 590 -- (4,358)
Other ......................................... (2,663) 2,148 (303) -- (818)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES .................................... 11,760 17,780 3,507 (8,900) 24,147
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures
-- (8,821) (576) -- (9,397)
Change in restricted cash ..................... -- (21) -- -- (21)
Net cash received from businesses
sold or discontinued ...................... 29,516 -- -- -- 29,516
Purchase of investments and
marketable securities ...................... (95,143) -- -- -- (95,143)
Proceeds from sale of investments
and marketable securities .................. 142,509 -- -- -- 142,509
Other, net .................................... -- (412) 24 -- (388)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY
INVESTING ACTIVITIES .......................... 76,882 (9,254) (552) -- 67,076
CASH FLOWS USED IN
FINANCING ACTIVITIES:
Payments on long-term debt .................... (372) (11,591) -- -- (11,963)
Net transfers to former parent ................ (133,921) (2,081) (5,928) 8,900 (133,030)
--------- --------- --------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES .................................... (134,293) (13,672) (5,928) 8,900 (144,993)
Net decrease in cash and cash
equivalents ................................... (45,651) (5,146) (2,973) -- (53,770)
Cash and cash equivalents at the
beginning of the period ................... 48,354 6,513 5,796 -- 60,663
--------- --------- --------- --------- ---------
Cash and cash equivalents at the end
of the period ................................. $ 2,703 $ 1,367 $ 2,823 $ -- $ 6,893
========= ========= ========= ========= =========
66
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2003 TO JANUARY 9, 2003
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss .................................... $ (900) $(1,200) $ -- $ 1,200 $ (900)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization ...............
expense .................................. 6 303 18 -- 327
Non-cash interest expense, net .............. -- 6 -- -- 6
Deferred income taxes ....................... -- 400 -- -- 400
CHANGES IN OPERATING
ASSETS AND LIABILITIES:
Accounts receivable, net .................... -- (1,771) 223 -- (1,548)
Inventories ................................. -- 967 45 -- 1,012
Prepaid expenses and other
current assets ........................... 228 (42) 4 -- 190
Accounts payable ............................ (106)
1,456 386 -- 1,736
Accrued expenses and taxes .................. (1,335) 2,274 (321) -- 618
Other ....................................... 16 (4) -- -- 12
------- ------- ------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES .................................. (2,091) 2,389 355 1,200 1,853
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures ........................ -- (349) -- -- (349)
Change in restricted cash ................... -- 1 -- -- 1
Other ....................................... -- 36 -- -- 36
------- ------- ------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES .................................. -- (312) -- -- (312)
CASH FLOWS USED IN FINANCING
ACTIVITIES:
Payments on long-term debt .................. (17) (28) -- -- (45)
Net transfers to Nortek, Inc. ............... (725) (2,639) (97) (1,200) (4,661)
------- ------- ------- ------- -------
NET CASH USED IN FINANCING
ACTIVITIES .................................. (742) (2,667) (97) (1,200) (4,706)
Net increase (decrease) in cash and
cash equivalents ............................ (2,833) (590) 258 -- (3,165)
Cash and cash equivalents at the
beginning of the period ................. 2,703 1,367 2,823 -- 6,893
------- ------- ------- ------- -------
Cash and cash equivalents at the
end of the period ........................... $ (130) $ 777 $ 3,081 $ -- $ 3,728
======= ======= ======= ======= =======
67
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 10, 2003 TO DECEMBER 31, 2003
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................. $ 5,700 $ 3,100 $ 5,300 $ (3,100) $ 11,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization
expense .................................. 225 14,077 400 -- 14,702
Amortization of purchase price
allocated to inventory .................. -- 1,140 247 -- 1,387
Non-cash interest expense, net .............. 229 -- -- -- 229
Deferred income taxes ....................... 1,000 500 -- -- 1,500
CHANGES IN OPERATING
ASSETS AND LIABILITIES:
Accounts receivable, net .................... -- 3,394 (261) -- 3,133
Inventories ................................. -- (1,164) (328) -- (1,492)
Prepaid expenses and other
current assets ........................... 2,329 512 (15) -- 2,826
Accounts payable ............................ (8) 252 (780) -- (536)
Accrued expenses and taxes .................. (3,094) (2,357) 195 -- (5,256)
Other ....................................... (3,155) (189) 56 -- (3,288)
-------- -------- -------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES: ................................. 3,226 19,265 4,814 (3,100) 24,205
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures ........................ -- (7,401) (286) -- (7,687)
Change in restricted cash ................... -- (7) -- -- (7)
Other ....................................... -- (279) -- -- (279)
-------- -------- -------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES .................................. -- (7,687) (286) -- (7,973)
CASH FLOWS USED IN FINANCING
ACTIVITIES:
Payments on long-term debt .................. (394) (1,026) -- -- (1,420)
Net transfers to Nortek, Inc. ............... 1,149 (9,074) (5,198) 3,100 (10,023)
-------- -------- -------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES ........................ 755 (10,100) (5,198) 3,100 (11,443)
Net increase (decrease) in cash and
cash equivalents ............................ 3,981 1,478 (670) -- 4,789
Cash and cash equivalents at the
beginning of the period ................. (130) 777 3,081 -- 3,728
-------- -------- -------- -------- --------
Cash and cash equivalents at the
end of the period ........................... $ 3,851 $ 2,255 $ 2,411 $ -- $ 8,517
======== ======== ======== ======== ========
68
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2004 TO FEBRUARY 11, 2004
Non-
Ply Gem Guarantor Guarantor
Industries, Inc. Subsidiaries Subsidiary Eliminations Combined
---------------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $(3,101) $(5,667) $ (249) $ 5,667 $(3,350)
ADJUSTMENTS TO RECONCILE NET LOSS TO
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization
expense ..................................... 39 1,243 91 -- 1,373
Non-cash interest expense, net .................. -- 26 -- -- 26
Deferred income taxes ........................... (5,630) 3,920 -- -- (1,710)
Equity in subsidiaries .......................... 5,667 -- -- (5,667) --
CHANGES IN OPERATING
ASSETS AND LIABILITIES:
Accounts receivable, net ........................ -- 546 1,323 -- 1,869
Inventories ..................................... -- (2,742) (482) -- (3,224)
Prepaid expenses and other
current assets ............................... (45) (185) (30) -- (260)
Accounts payable ................................ (27) 8,194 (402) -- 7,765
Accrued expenses and taxes ...................... (820) 1,287 (1,806) -- (1,339)
Other ........................................... -- 498 -- -- 498
------- ------- ------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ (3,917) 7,120 (1,555) -- 1,648
CASH FLOWS PROVIDED BY (USED IN)
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 USED IN FINANCING
ACTIVITIES:
Payments on long-term debt ...................... (35) (54) -- -- (89)
Net transfers to Nortek, Inc. ...................
-- (7,286) (76) -- (7,362)
------- ------- ------- ------- -------
NET CASH USED IN FINANCING
ACTIVITIES ...................................... (35) (7,340) (76) -- (7,451)
Net decrease in cash and cash
equivalents ..................................... (3,952) 197 (1,653) -- (5,408)
Cash and cash equivalents at the
beginning of the period ..................... 3,851 2,255 2,411 -- 8,517
------- ------- ------- ------- -------
Cash and cash equivalents at the end
of the period ................................... $ (101) $ 2,452 $ 758 $ -- $ 3,109
======= ======= ======= ======= =======
69
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 23, 2004 TO DECEMBER 31, 2004
Guarantor
Ply Gem Ply Gem Non-
Holdings, Industries, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiary Eliminations Combined
--------- ---------- ------------ ---------- ------------ --------
(Amounts in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ................................... $ 17,682 $ 17,682 $ 26,892 $ 4,978 $ (49,552) $ 17,682
ADJUSTMENTS TO RECONCILE NET
INCOME TO CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES: Depreciation and
amortization expense ..................... -- 118 17,162 465 -- 17,745
Non-cash write off of inventory .............. -- -- 2,416 -- -- 2,416
Non-cash interest expense, net ............... -- -- 3,469 -- -- 3,469
Non-cash gain on currency
transaction ................................ -- -- -- (2,473) -- (2,473)
Deferred income taxes ........................ -- -- 7,526 499 -- 8,025
Equity in subsidiaries' net income ........... (17,682) (31,870) -- -- 49,552 --
CHANGES IN OPERATING
ASSETS AND LIABILITIES:
Accounts receivable, net ..................... -- -- 1,718 (658) -- 1,060
Inventories .................................. -- -- 1,364 (89) -- 1,275
Prepaid expenses and other
current assets ............................ -- 1,529 (2,894) (162) -- (1,527)
Accounts payable ............................. -- 154 (6,946) 516 -- (6,276)
Accrued expenses and taxes ................... -- 4,628 (726) 3,416 -- 7,318
Other ........................................ -- -- 1,325 (612) -- 713
--------- --------- --------- --------- ---------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ......................... -- (7,759) 51,306 5,880 -- 49,427
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures ......................... --
-- (6,477) (296) -- (6,773)
Payment for acquisitions, net of
cash acquired ............................. -- (770,667) (53,734) (58,860) -- (883,261)
--------- --------- --------- --------- ---------- ---------
NET CASH USED IN INVESTING
ACTIVITIES ........................... -- (770,667) (60,211) (59,156) -- (890,034)
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from long-term debt ................. -- 641,338 -- 30,000 -- 671,338
Proceeds from financing obligation ........... -- -- 30,571 5,429 -- 36,000
Proceeds from intercompany
loans, net ................................ -- (9,346) -- 9,346 -- --
Proceeds from intercompany
investment ................................ -- (15,000) -- 15,000 -- --
Payments on long-term debt ................... -- (5,786) (18,183) (5,235) -- (29,204)
Equity contribution .......................... -- 169,143 -- -- -- 169,143
--------- --------- --------- --------- ---------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ......................... -- 780,349 12,388 54,540 -- 847,277
--------- --------- --------- --------- ---------- ---------
Impact of exchange rate
movement on cash .......................... -- -- -- 124 -- 124
Net increase in cash and cash
equivalents .................................. -- 1,923 3,483 1,388 -- 6,794
Cash and cash equivalents at the
beginning of the period .................. -- -- -- -- -- --
--------- --------- --------- --------- ---------- ---------
Cash and cash equivalents at the
end of the period ............................ $ -- $ 1,923 $ 3,483 $ 1,388 $ -- $ 6,794
========= ========= ========= ========= ========== =========
70
16. SUBSEQUENT EVENTS
In reference to Note 9, on March 29, 2005, Ply Gem Industries executed
amended lease agreements that addressed the discrepancies contained within the
original lease agreements, such that they now qualify for sale leaseback
treatment and will be prospectively accounted for as operating leases.
Accordingly, approximately $36.0 million of land and buildings and the related
financing obligation will be removed from the Balance Sheet.
As of March 23, 2005, the Company has borrowed $25.5 million on its
revolver to fund seasonal working capital requirements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 15d - 15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer identified a
material weakness in our internal control over financial reporting as discussed
below related to our sale leaseback accounting. Other than the weakness
identified in our sale leaseback accounting, our disclosure controls and
procedures were effective as of the end of the period covered by this report in
timely alerting management to the material information relating to the Company
required to be included in our periodic SEC filings.
In connection with the audit of the Company's financial statements for
the fiscal year ended December 31, 2004, it was determined that we had a
deficiency in internal control over financial reporting related to the
application of lease accounting to a sale leaseback transaction as outlined in
Note 9 to the financial statements. The error in the application of lease
accounting resulted in us restating our balance sheet for the third quarter
ended October 2, 2004. We and our independent auditors have concluded that the
error was a result of a material weakness in our internal control over financial
reporting as it relates to the application of sale leaseback accounting. No
other material weaknesses in internal control over financial reporting were
identified.
Our internal control process had included consultations with
third-party advisors, as deemed necessary, relative to understanding and
properly applying generally accepted accounting principles for the sale
leaseback transaction, which for us is not a regularly recurring transaction.
However, for the transaction in question, the third-party reviews did not
report, and our other internal controls over the application of accounting
policies did not detect, that the presence of certain forms of continuing
involvement in the leased property by us which precluded the use of sale
leaseback accounting. As a result, the property in question and the related
financing liability should have continued to be recorded on the financial
statements.
We will remediate this weakness by increasing the knowledge of our
employees responsible for reviewing and approving the accounting for leasing
transactions, including the review of the conclusions reached by qualified third
parties.
There were no changes in our internal control over financial reporting
that occurred during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
71
ITEM 9B. OTHER INFORMATION
BANK WAIVER
Ply Gem Industries executed certain sale/leaseback transactions in
connection wit the MW Acquisition with respect to 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 were used to fund a portion of the purchase price of
the MW Acquisition. As discussed in Note 9 of the notes to our consolidated and
combined financial statements, due to certain default and exchange provisions in
these leases, treatment of these transactions as sale/leasebacks was not
achieved, resulting in violations to the senior credit facilities. We have
requested and received a waiver from the lenders as it relates to the lease
agreements in that these leases shall not constitute indebtedness under our
credit agreement for the restriction on indebtedness covenant and any lien in
connection with such leases shall not constitute liens for the purposes of the
restriction on liens covenant through April 30, 2005 and only so long as these
leases do not represent more than an aggregate of $36.0 million of financing
obligations. We have worked with our leasing company and have amended these
leases so that they receive accounting treatment as operating leases.
PROMOTIONS
On January 1, 2005, Michael Haley was promoted to Chairman of MW
Manufacturers Inc. and Senior Vice President of Sales and Marketing for Ply Gem
Industries and was elected to Ply Gem Industries' Board of Directors.
On January 1, 2005, Lynn Morstad was promoted to President of MW
Manufacturers Inc.
72
POSITIONS(S)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of Ply Gem Investment Holdings, Inc., Ply Gem
Holdings, Inc., and Ply Gem Industries, Inc. are identical, with the exception
of Michael Haley who is only a member of the Ply Gem Industries Board of
Directors.
NAME AGE POSITION
Frederick Iseman 52 Chairman of the Board and Director
Lee D. Meyer 56 President, Chief Executive Officer and Director
John Wayne 43 President, Siding and Accessories
Shawn Poe 43 Vice President and Chief Financial Officer
Mark Watson 42 President, Great Lakes Window, Inc.
Bryan Sveinson 46 President, CWD Windows & Doors, Inc.
David S. McCready 43 President, Fencing, Railing and Decking
Michael Haley 54 Chairman, MW Manufacturers
Senior Vice President of Sales and Marketing of Ply
Gem Industries, Inc.
Lynn Morstad 41 President, MW Manufacturers, Inc.
Robert A. Ferris 62 Director
Steven M. Lefkowitz 40 Director
John D. Roach 61 Director
Set forth below is a brief description of the business experience of each of the
members of our board of directors and our executive officers.
FREDERICK ISEMAN - CHAIRMAN OF THE BOARD AND DIRECTOR
Since the Ply Gem Acquisition, Frederick Iseman has served as our
chairman of the Board of Directors. Mr. Iseman is currently Chairman and
Managing Partner of Caxton-Iseman Capital, a private equity firm which was
founded by Mr. Iseman in 1993. Prior to establishing Caxton-Iseman Capital, Mr.
Iseman founded Hambro-Iseman Capital Partners, a merchant banking firm. From
1988 to 1990, Mr. Iseman was a member of the Hambro International Venture Fund.
Mr. Iseman is Chairman of the Board of Anteon International Corporation,
Chairman of the Board of Buffets Holdings, Inc. and Buffets, Inc. and a member
of the Advisory Board of Duke Street Capital and the Advisory Board of STAR
Capital Partners Limited.
LEE D. MEYER - PRESIDENT & CHIEF EXECUTIVE OFFICER
Lee D. Meyer was appointed President and Chief Executive Officer of our
company in January 2002. Since the Ply Gem Acquisition, Mr. Meyer has served as
a director. Mr. Meyer previously had been the President of Variform, one of our
siding and accessories subsidiaries. Mr. Meyer joined Variform in 1993 as the
Vice President of Manufacturing, and held successive positions as Vice President
of Operations, Senior Vice President and General Manager, before he became
President of Variform in 1998. Prior to joining Variform, Mr. Meyer held
positions at GE Plastics, Borg Warner Chemicals and the Chemicals Division of
Quaker Oats. Mr. Meyer graduated from the University of Nebraska in 1971 with a
BS in Chemical Engineering and an MBA in Finance and Economics in 1979. He also
received his license as a Registered Professional Engineer in 1979. Mr. Meyer
has been a member of the Vinyl Siding Institute, or the "VSI", since 1994 and is
currently a member of the Board of Directors and is a member of the VSI
Certification Oversight Committee, which oversees voluntary minimum standards
for vinyl siding products. In June 2003, Mr. Meyer completed a tenure of
approximately five years as Chairman of the Vinyl Siding Institute. Mr. Meyer is
also a member of the Windows and Doors Manufacturers Association.
JOHN WAYNE - PRESIDENT, SIDING AND ACCESSORIES
Mr. Wayne was appointed President of our siding and accessories
subsidiaries in January 2002. Mr. Wayne joined our company in 1998, and prior to
his appointment to President had been Vice President of Sales and Marketing for
our Variform and Napco siding and accessories subsidiaries. Prior to joining us,
Mr. Wayne worked for Armstrong World Industries, Inc. from 1985 to 1998, holding
a variety of sales management positions, including Vice President of Sales. Mr.
Wayne graduated from the University of Wisconsin in 1984 with a BBA in Finance
and Marketing. Mr. Wayne is currently the Vice
73
Chairman of the VSI, the Chairman of the VIS Code and Regulatory Committee, and
Chairman of the VSI Steering Committee.
SHAWN POE - CHIEF FINANCIAL OFFICER
Since the Ply Gem Acquisition, Mr. Poe has served as our Vice President
and Chief Financial Officer. Mr. Poe was appointed Vice President of Finance of
our siding and Accessories subsidiaries in Mar 2000. Prior to joining our
company, Mr. Poe held the position of Corporate Controller and various other
accounting positions at Nordyne, Inc., joining the company in 1990. In addition,
Mr. Poe held various accounting positions with Federal Mogul Corporation from
1984 to 1990. Mr. Poe graduated from Southeast Missouri State University in 1984
with a BBS in Accounting. Mr. Poe graduated from Fontbonne College in 1994 with
an MBA.
MARK WATSON - PRESIDENT, GREAT LAKES WINDOW GROUP
Mr. Watson was appointed President of our Great Lakes Window subsidiary
in January 2003. Prior to becoming President, Mr. Watson was the Vice President
of Sales and Marketing for our siding and accessories subsidiaries. Mr. Watson
originally joined our company in 1996 as National Sales Manager of the
Georgia-Pacific product line. Prior to joining us, Mr. Watson held the position
of National Marketing manager with Norco Windows. Mr. Watson graduated from
Western Michigan University in 1985 with a BBA in Marketing. He is also on the
Board of Directors of the Window and Door Manufacturers Association.
BRYAN SVEINSON - PRESIDENT, CWD WINDOWS & DOORS
Mr Sveinson was appointed President of CWD Windows & Doors, Inc. in
April 1999. Mr. Sveinson joined our company in 1993, and prior to his
appointment as President held successive positions as Controller, Vice President
of Finance, and Vice President of Business Development. Prior to joining us, Mr.
Sveinson held senior finance positions with a commercial printing company and a
soft drink manufacturing and distribution company. Mr. Sveinson graduated from
the University of Calgary in 1981 with a Bachelor of Management Degree in
Finance. In addition, Mr. Sveinson is a professional accountant, having achieved
a Certified Management Accountant designation in 1991. Mr. Sveinson is also a
past director of the Canadian Window and Door Manufacturing Association.
DAVID S. MCCREADY - PRESIDENT, FENCING, RAILING AND DECKING
Mr. McCready was appointed President of our fencing, railing and
decking subsidiary on January 5, 2004, after more than 20 years of experience in
the building products industry. Prior to joining our company, Mr. McCready held
the position of General Manager, Architectural Products at The Building
Solutions division of Boise Cascade Corporation, joining the company in 2001. In
addition to that, Mr. McCready held various marketing and sales positions with
Armstrong World Industries, Inc., where he was employed from 1983 to 2000. Mr.
McCready received a BS in Business Administration from the University of
Delaware in 1983.
MICHAEL HALEY - CHAIRMAN OF MW MANUFACTURERS
Mr. Haley was appointed chairman of MW Manufacturers, Inc. and Senior
Vice President of Sales and Marketing and Director for Ply Gem Industries, Inc.
in January 2005. Mr. Haley joined MW Manufacturers, Inc. in June 2001 as
President and served in this capacity until being named Chairman. Prior to
joining MW, Mr. Haley had been the President of American of Martinsville (a
subsidiary of La-Z-Boy Inc.) from 1994 until May 2001. In addition, Mr. Haley
was President of Loewenstein Furniture Group from 1988 to 1994. Mr. Haley
graduated from Roanoke College in 1973 with a Bachelor's Degree in Business
Administration.
LYNN MORSTAD - PRESIDENT, MW MANUFACTURERS
Mr. Morstad was appointed President of MW Manufactures Inc. in January
2005. Mr. Morstad joined MW Manufacturers, Inc. in 2000 as Chief Financial
Officer and prior to being appointed to his present position, had served as
Chief Operating Officer since May 2003. From March 1998 to May 2000, Mr. Morstad
was employed by the Dr. Pepper/Seven Up division of Cadbury Schweppes as Vice
President and Corporate Controller. In addition, Mr. Morstad has more than 8
years experience in senior financial positions with various divisions of the
Newell Company. Mr. Morstad is a graduate of the University of Iowa and a
Certified Public Accountant.
ROBERT A. FERRIS - DIRECTOR
Since the Ply Gem Acquisition, Robert A. Ferris has served as Chairman
of our Executive Committee and director. Mr. Ferris is a Managing Director of
Caxton-Iseman Capital, and has been
74
employed by Caxton-Iseman Capital since March 1998. From 1981 to February 1998,
Mr. Ferris was a General Partner of Sequoia Associates (a private investment
firm headquartered in Menlo Park, California). Prior to founding Sequoia
Associates, Mr. Ferris was a Vice President of Arcata Corporation, a New York
Stock Exchange-listed company. Mr. Ferris is director of Anteon International
Corporation, Buffets Holdings, Inc. and Buffets, Inc.
STEVEN M. LEFKOWITZ - DIRECTOR
Since the Ply Gem Acquisition, Steven M. Lefkowitz has served as a
director. Mr. Lefkowitz is a Managing Director of Caxton-Iseman Capital and has
been employed by Caxton-Iseman Capital since 1993. From 1988 to 1993, Mr.
Lefkowitz was employed by Mancuso & Company, a private investment firm, and
served in several positions including as Vice President and as a Partner of
Mancuso Equity Partners. Mr. Lefkowitz is a director of Anteon International
Corporation, Buffets Holdings, Inc. and Buffets, Inc.
JOHN D. ROACH - DIRECTOR
Since the Ply Gem Acquisition, Mr. Roach has served as a director. Mr.
Roach is Chairman of the Board and Chief Executive Officer of Stonegate
International, a private investment and advisory services company, and has been
employed by Stonegate International since 2001. Mr. Roach served as Chairman of
the Board, President and Chief Executive Office of Builders FirstSource, Inc.
from 1998 to 2001; and as Chairman of the Board, President and Chief Executive
Officer of Fibreboard Corporation from 1991 to 1997. Mr. Roach is also Executive
Chairman of the Board of Unidare US inc., a leading wholesale supplier of
products to the industrial, welding and safety markets, a director of Kaiser
Aluminum Corporation and its subsidiary, Kaiser Aluminum & Chemical Corporation,
a director of Material Sciences Corp., a provider of materials-based solutions,
a director of URS Corporation, an engineering firm, and a director PMI Group,
Inc., a provider of credit enhancement products and lender services.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined Steven Lefkowitz to be the "audit
committee financial expert" as defined by the SEC regulations implementing
Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Lefkowitz is not an
"independent" director as the term is used for the purposes of the New York
Stock Exchange's listing requirements.
CODE OF ETHICS
The Company has adopted a code of ethics that applies to its
Chief Executive Officer, Chief Financial Officer, and all employees. This code
of ethics is posted on our website at Http://www.plygem.com. Any waiver or
amendment to this code of ethics will be timely disclosed on our website.
75
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information on the compensation awarded
to, earned by or paid to our President and Chief Executive Officer, Lee D.
Meyer, and our four other most highly compensated executive officers whose
individual compensation exceeded $100,000 during the twelve months ended
December 31, 2004 for services rendered in all capacities to us.
ANNUAL COMPENSATION
Number of
Shares
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Stock Options Compensation(1)
- --------------------------- ---- ------ ----- ------------ ------------- ---------------
Lee D. Meyer.................. 2004 $ 319,256 $ 194,704 $ 2,404,143 (2) -- $1,012,322
President & Chief Executive 2003 $ 300,664 $ 267,750 $ 1,025,652 (3) 50,000 $13,000
Officer
John Wayne....................... 2004 239,431 120,708 968,544 (4) -- 412,500
President, Siding and Accessories 2003 224,635 134,178 121,271 20,000 13,000
Mark Watson............ 2004 175,000 76,024 345,637 (5) -- 304,281
President, Great Lakes Windows 2003 163,385 69,875 84,453 (6) 7,000 12,974
Group
Shawn Poe.................... 2004 172,555 56,762 344,558 (7) -- 211,311
Vice President and Chief 2003 132,332 63,807 20,113 7,000 11,910
Officer
David S. McCready............ 2004 210,866 28,116 116,940 (8) - 1,980
President, Kroy Building Products 2003 N/A (9)
(2) Includes a $2,393,643 payment to Mr. Meyer in respect to stock options held
by Mr. Meyer in Ply Gem's former parent Nortek.
(3) Includes a dividend payment of $1,004,788 in respect of stock options held
by Mr. Meyer in connection with the Nortek Recapitalization and granted
pursuant to a rollover stock option agreement.
(4) Includes a $957,443 payment to Mr. Wayne in respect to stock options held
by Mr. Wayne in Ply Gem's former parent Nortek.
(5) Includes a $335,137 payment to Mr. Watson in respect to stock options held
by Mr. Watson in Ply Gem's former parent Nortek.
(6) Includes a $73,070 payment in respect to Mr. Watson's relocation.
(7) Includes a $335,137 payment to Mr. Poe in respect to stock options held by
Mr. Poe in Ply Gem's former parent Nortek.
(8) Includes a $109,740 payment in respect to Mr. McCready's relocation.
(9) Mr. McCready joined the Company in January of 2004.
76
(1) Amounts included in "All Other Compensation" are detailed in the below:
ALL OTHER COMPENSATION
One time
payment for
Successful
completion
Matching Profit Sharing Of the Ply Gem
Contribution under Contribution under Transaction in
Named Executive Officer Year the 401(K) Plan (i) the 401(K) Plan (i) February, 2004 Total
- ----------------------- ---- ------------------- ------------------- -------------- -----
Lee D. Meyer 2004 $ 6,332 $ 6,000 $1,000,000 $1,012,322
2003 6,000 7,000 -- 13,000
John Wayne 2004 6,500 6,000 400,000 412,500
2003 6,000 7,000 -- 13,000
Mark Watson 2004 4,281 -- 300,000 304,281
2003 6,373 6,201 -- 12,974
Shawn Poe 2004 5,581 5,730 200,000 211,311
2003 5,730 6,180 -- 11,910
Dave McCready 2004 1,980 -- -- 1,980
2003 -- -- -- --
(i) Messrs. Meyer, Wayne and Watson participate in the Variform, Inc. 401(k)
Savings Plan, Mr. Watson participates in the Great Lakes Window, Inc.
401(k) Savings Plan and Mr. McCready participates in the Kroy Building
Products, Inc. 401(k) Savings Plan.
OPTION GRANTS IN 2004
No options were granted to our named executive officers during 2004.
AGGREGATED OPTION EXERCISES IN 2004 AND FISCAL YEAR-END OPTION VALUES
No options were exercised during 2004.
EQUITY PARTICIPATION PLAN INFORMATION
The following table gives information about the Company's stock option
plan as of December 31, 2004:
(A) (B) (C)
Number of
securities to be Number of securities
issued upon Weighted average available for future
exercise of exercise price issuance under
outstanding of outstanding equity compensation
options, options, plans (excluding
warrants and warrants and securities reflected
Plan Category rights rights in column (a)
Equity compensation plans 140,494 $10.00 43,571
Approved by shareholders
Equity compensation plans not -- -- --
Approved by shareholders
Total 140,494 $10.00 43,571
77
DIRECTOR COMPENSATION
With the exception of Mr. Roach, our directors do not receive any
compensation for performing their directorial duties. Mr. Roach receives $60,000
annually as compensation for serving on our board of directors.
PHANTOM STOCK UNIT PLAN
Upon completion of the Ply Gem Acquisition, each of Messrs. Meyer,
Wayne, Watson and Poe were granted awards under the Ply Gem Investment Holdings
Phantom Stock Plan. This Plan is generally designed to provide non-qualified
deferred compensation to participants. Each participant's interest in the plan
is recorded in a bookkeeping account and these accounts are deemed invested in
Ply Gem Investment Holdings' stock. No stock will initially be issued under the
plan, but, upon liquidation and payment of a participant's account under the
plan, the value of the account generally may be paid to the participant either
in shares of Ply Gem Investment Holdings' stock having a market value equal to
the account balance or in cash, in the discretion of Ply Gem Investment
Holdings. When valuing a participant's account for payment purposes, the
following rules generally apply: if Ply Gem Investment Holdings' stock becomes
publicly traded through an initial public offering, the stock market will
dictate the value of the account; if an event which triggers either "tag-along"
or "drag-along" rights under the stockholders' agreement to which the
stockholders of Ply Gem Investment Holdings are parties occurs, or a "Triggering
Event," the amount paid to shareholders will dictate the value of the account;
and in the event that a participant's employment with us terminates and if
neither a Triggering Event nor an initial public offering occurs prior to the
time the participant is paid the value of his or her account, certain formulas
described in the plan dictate the value of the account (which value differs
depending upon the length of time a participant has been employed with us, the
circumstances surrounding the termination of employment, and our performance).
Following an initial public offering, each participant will generally be paid
out five years thereafter, subject to further deferral opportunities and the
right of Ply Gem Investment Holdings to accelerate such payment, with earlier
payment upon a Triggering Event or a termination of employment. In connection
with the MW Acquisition, the Plan was amended to adjust the vesting schedule for
Phantom Incentive Units (as defined in the Plan), revise the definition of
Phantom Additional Units (as defined in the Plan), and make other conforming
changes to the Plan that address the treatment of phantom equity in the MW
Acquisition.
Messrs. Meyer, Wayne, Watson and Poe were granted 112,800, 38,835,
13,590 and 13,590 Phantom Incentive Units (as defined in the plan) under the
plan, respectively, and Mr. Meyer was granted 44,472 Phantom Additional Units
(as defined in the plan) under the plan. Each Phantom Incentive Unit granted to
these executives represents one share of Ply Gem Investment Holdings common
stock, and each Phantom Additional Unit granted to these executives represents
one share of Ply Gem Investment Holdings common stock and 0.4591 shares of Ply
Gem Investment Holdings senior preferred stock. In connection with the MW
Acquisition, Mr. Haley was granted 13,106 Phantom Additional Units under the
Plan. Each Phantom Additional Unit that was granted to Mr. Haley represents one
share of Ply Gem Investment Holdings common stock and 0.53803 share of Ply Gem
Investment Holdings senior preferred stock.
PHANTOM COMMON STOCK UNIT PLAN
Estimated Future Payouts under Non-Stock
Price-Based Plans
------------------------------------------
(a) (b) (c) (d) (e) (f)
Number of Performance
Shares, or Other
Units or Period Until
Other Maturation or Threshold Target Maximum
NAME Rights (#) Payout (# Shares) (# Shares) (# Shares)
Lee D. Meyer - Common Phantom 157,272 -- 157,272 -- --
- Preferred Phantom 20,419 -- 20,419 -- --
John Wayne - Common Phantom 38,835 -- 38,835 -- --
Mark Watson - Common Phantom 13,590 -- 13,590 -- --
Shawn Poe - Common Phantom 13,590 -- 13,590 -- --
Dave McCready -- -- -- -- --
78
PLY GEM INVESTMENT HOLDINGS STOCK OPTION PLAN
In connection with the Ply Gem Acquisition, we adopted and obtained
shareholder approval of the Ply Gem Investment Holdings 2004 Stock Option Plan,
which provides for the grant of incentive and non-qualified stock options to our
management and key employees. Stock options may be granted under the plan in
respect of up to 1,410,000 common shares of Ply Gem Investment Holdings. Options
awarded under the plan may have vesting conditions based on either an optionee's
continuing provision of services to us or the achievement of performance goals,
in each case, as set forth in the applicable grant agreement.
CHANGE OF CONTROL AND EMPLOYMENT ARRANGEMENTS
Each of Messrs. Meyer, Wayne, Watson and Poe and certain other members
of our management team, participates in our Change in Control Severance Benefit
Plan. This plan generally provides that if, during the 24 months following a
Change in Control (as defined in the plan) in respect of Messrs. Wayne, Watson
and Poe, or during the 36 months following a Change in Control in respect of Mr.
Meyer, we terminate a participant's employment without "Cause" (as defined in
the plan) or there is a "material adverse change" (as defined in the plan) in
the terms of the participant's employment with us, the participant will be
entitled to certain severance benefits. The Ply Gem Acquisition constituted a
Change in Control under the plan. The plan provides for severance payments
during the 24-month period following a termination described above at an annual
rate equal to the sum of the participant's 2003 base salary and performance
incentive bonus, which incentive bonus is calculated on an ad hoc basis by our
CEO, in conjunction with the board, for each individual. The target incentive
bonus earned by each participant is a percentage of base salary and the
performance measure is generally based on achievement of our EBITDA targets (70%
of the incentive bonus opportunity) and cash flow targets (comprising 30% of the
incentive bonus opportunity). In addition, a participant entitled to severance
payments will also receive continuing medical and dental insurance coverage
during the severance period, subject to the participant's payment of any
contributions required of active employees. In connection with the MW
Acquisition, Mr. Haley and certain members of the MW Manufacturers management
team, participate in an employment agreement that provides that they will
continue to receive, in the event of termination, their current compensation,
including performance based compensation, for a period of 12 months.
PENSION PLAN INFORMATION
The Ply Gem Group Pension Plan, or our "Pension Plan," is a qualified
defined benefit pension plan that was frozen as of December 31, 1998, and no
further increases in benefits may occur as a result of increases in service or
compensation. The benefit payable to a participant at normal retirement equals
the accrued benefit as of December 31, 1998 and will be payable as a joint and
50% survivor annuity in the case of a married employee and as a single-life
annuity in the case of an unmarried employee, although lump sum payment options
are available at the participant's option. Our Pension Plan benefits generally
commence upon a participant's attainment of age 65 and equal 15% of the
participant's "average pay" (the highest total average pay, up to $100,000,
during any five consecutive calendar years within the ten calendar years
immediately prior to December 31, 1998) up to the social security integration
level, plus 30% of average pay in excess of the social security integration
level and reduced by one-twentieth for each year of benefit service less than 20
years. Early retirement benefits may commence upon a participant's attainment of
age 55 and 10 years of credited service at a reduced rate. The annual pension
benefits entitled to be paid to our executive officers under our Pension Plan,
beginning at age 65, are as follows: Mr. Meyer, $6,069.84 annually for life, and
Mr. Watson, $1,791.24 annually for life. No other named executive officer has
the right to receive a pension benefit under our Pension Plan.
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Ply Gem Holdings is the sole holder of all 100 issued and outstanding
shares of our common stock. Ply Gem Investment Holdings is the sole holder of
all 100 issued and outstanding shares of common stock of Ply Gem Holdings.
The following table sets forth the number and percentage of the
outstanding shares of common stock of Ply Gem Investment Holdings beneficially
owned as of December 31, 2004 by:
o each named executive officer;
o each of our directors;
o each person known to us to be the beneficial owner of more than 5% of
the common stock of Ply Gem Investment Holdings; and
o all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner
listed on the table below is c/o Ply Gem Industries, Inc., 185 Platt Clay Way,
Kearney, Missouri 64060.
SHARES BENEFICIALLY
OWNED(1)
-------------------
COMMON
NAME OF BENEFICIAL OWNER SHARES(2) %
------------------------ --------- -----
Caxton-Iseman (Ply Gem), L.P.(3).................... 2,874,445 89.5%
Frederick Iseman(3)(4).............................. 2,874,445 89.5%
Robert A. Ferris(3)................................. -- *
Steven M. Lefkowitz(3).............................. -- *
Lee D. Meyer(5)..................................... 8,700 *
John Wayne(6)....................................... 17,565 *
Shawn Poe(7)........................................ 28,710 *
Mark Watson(8)...................................... 28,710 *
Brian Sveinson...................................... 23,406 *
John D. Roach(9).................................... 3,577 *
David S. McCready................................... 35,250 1.1%
Michael Haley(10)................................... 53,000 1.6%
All Directors and Executive Officers as a Group..... 3,073,443 95.6%
- ----------
* Less than 1%.
(1) Determined in accordance with Rule 13d-3 under the Exchange Act.
(2) Ply Gem Investment Holdings also has a series of non-voting senior
preferred stock.
(3) Address is c/o Caxton-Iseman Capital, Inc., 500 Park Avenue, New York, New
York 10022.
(4) By virtue of his indirect control of Caxton-Iseman (Ply Gem) L.P., Mr.
Iseman is deemed to beneficially own the 2,874,445 shares of common stock
held by that entity.
(5) In connection with the Ply Gem Acquisition, Mr. Meyer received phantom
stock units representing 157,272 shares of common stock, and 20,419 shares
of senior preferred stock. In addition, in connection with the MW
Acquisition, Mr. Meyer received 4,724 shares of senior preferred stock.
(6) In connection with the Ply Gem Acquisition, Mr. Wayne received phantom
incentive stock units representing 38,835 shares of common stock.
(7) In connection with the Ply Gem Acquisition, Mr. Poe received phantom
incentive stock units representing 13,590 shares of common stock.
80
(8) In connection with the Ply Gem Acquisition, Mr. Watson received phantom
incentive stock units representing 13,590 shares of common stock.
(9) Address is c/o Stonegate International, 100 Crescent Court, Dallas, Texas
75201.
(10) In connection with the MW Acquisition, Mr. Haley received phantom stock
units representing 13,106 shares of common stock and 7,051 shares of senior
preferred stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon completion of the Ply Gem Acquisition, Ply Gem Industries entered
into two advisory agreements with an affiliate of Caxton-Iseman Capital (the
"Caxton-Iseman Party"), which we refer to as the "Debt Financing Advisory
Agreement" and the "General Advisory Agreement".
Under the Debt Financing Advisory Agreement, Ply Gem Industries paid
the Caxton-Iseman Party a debt financing arrangement and advisory fee, equal to
2.375% of the aggregate amount of the debt financing incurred in connection with
the Ply Gem Acquisition ($11.4 million).
Under the General Advisory Agreement, the Caxton-Iseman Party provides
us with acquisition and financial advisory services as the Board of Directors
shall reasonably request. In consideration of these services, Ply Gem Industries
agrees to pay the Caxton-Iseman Party (1) an annual fee equal to 2% of our
EBITDA, as defined in such agreement, (2) a transaction fee, payable upon the
completion by us of any acquisition, of 2% of the sale price, (3) a transaction
fee, payable upon the completion by us of any divestitures, of 1% of the sale
price, and (4) a transaction fee, payable upon the completion of the sale of our
company, of 1% of the sale price. EBITDA in the General Advisory Agreement is
based on our net income (loss) plus extraordinary losses and/or any net capital
losses realized, provision for income taxes, interest expense (including
amortization or write-off of debt discount and debt issuance costs and
commissions, and other items), depreciation and amortization (including
amortization of goodwill, organization costs, capitalized management fees, and
other items), dividends paid or accrued on preferred stock, certain management
fees paid to the Caxton-Iseman Party, charges related to certain phantom units,
and a number of other items. The annual fee payable in any year may not exceed
the amounts permitted under the senior credit facilities or the indenture
governing the senior secured notes, and the Caxton-Iseman Party is obligated to
return any portion of the annual fee that has been prepaid if an event of
default has occurred and is continuing under either the senior credit facilities
or the indenture governing the senior secured notes.
In connection with the MW Acquisition, pursuant to the General Advisory
Agreement, in November 2004 Ply Gem Industries paid the Caxton-Iseman Party a
transaction fee equal to 2% of the purchase price of the equity of MWM Holdings,
Inc. ($6.4 million). Under the `General Advisory Agreement" the Company paid a
management fee of approximately $1.7 million for the period from January 23,
2004 to December 31, 2004.
The initial term of the General Advisory Agreement is 10 years, and is
automatically renewable for consecutive one-year extensions, unless Ply Gem
Industries or the Caxton-Iseman Party provide notice of termination. In
addition, the General Advisory Agreement may be terminated by the Caxton-Iseman
Party at any time, upon the occurrence of specified change of control
transactions or upon an initial public offering of our shares or shares of any
of our parent companies. If the General Advisory Agreement is terminated for any
reason prior to the end of the initial term, Ply Gem Industries will pay to the
Caxton-Iseman Party an amount equal to the present value of the annual advisory
fees that would have been payable through the end of the initial term, based on
our cost of funds to borrow amounts under our senior credit facilities.
As a result of the Ply Gem Acquisition, Ply Gem Industries is no longer
a division of Nortek, but is 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 those charges in accordance with SEC Staff Accounting Bulletin No.
55. This fee arrangement was terminated in connection with the Ply Gem
Acquisition. In addition, prior to the Ply Gem Acquisition, we paid an certain
corporate expenses to Nortek based upon the specific identification method.
81
TAX SHARING AGREEMENT
As a result of the Ply Gem Acquisition, Ply Gem Investment Holdings is
the common parent of an affiliated group of corporations that will include Ply
Gem Holdings, Ply Gem and their subsidiaries. Ply Gem Investment Holdings will
elect to file consolidated federal income tax returns on behalf of the group.
Accordingly, Ply Gem Investment Holdings, Ply Gem and Ply Gem Holdings have
entered into a Tax Sharing Agreement, under which Ply Gem and Ply Gem Holdings
will make payments to Ply Gem Investment Holdings. These payments will not be in
excess of the tax liabilities of Ply Gem, Ply Gem Holdings, and their respective
subsidiaries, if these tax liabilities had been computed on a stand-alone basis.
PLY GEM TRANSITION SERVICES AGREEMENT
Under the terms of the stock purchase agreement governing the Ply Gem
Acquisition, we entered into a Transition Services Agreement with Nortek,
pursuant to which Nortek would continue to provide to us and our subsidiaries a
number of support services it had provided to us prior to the Ply Gem
Acquisition, for up to six months following the closing of the Ply Gem
Acquisition. We agreed to pay Nortek an escalating monthly fee (no fees were
paid for the first two months, $10,000 was paid for the third month and $20,000
was paid for the fourth month in which transition services were provided). We
also agreed to reimburse Nortek for any actual and direct reasonable expenses it
incurs in providing these transitional services to us. This agreement was
terminated effective June 10, 2004.
NORTEK MANAGEMENT FEE AND PARENT COMPANY CORPORATE CHARGES
As a result of the Ply Gem Acquisition, we are no longer a division of
Nortek, but are 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 those
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. See Nnote 1 to the notes to our
consolidated financial statements included elsewhere in this offering
memorandum.
INTERCOMPANY LOANS
As of December 31, 2003, we had approximately $394.7 million of
outstanding intercompany debt, owed to our former parent, Nortek, and its
wholly-owned subsidiaries. This debt consisted of notes, mortgage notes and
obligations payable, and included notes payable to a subsidiary of Nortek,
relating to dividends payable to Nortek declared during prior years of
approximately $360.8 million, and borrowings related to our acquisition of our
subsidiary, Kroy Building Products, Inc., in 1999 of approximately $33.9
million. These notes were payable on demand and carried interest rates of 8% for
a $280 million note and 9% for the other notes totaling $114.7 million. Pursuant
to the terms of the stock purchase agreement governing the Ply Gem Acquisition,
all such intercompany loans to which we were a party were cancelled prior to the
Ply Gem Acquisition.
PAYMENTS TO OFFICERS AND DIRECTORS IN CONNECTION WITH THE PLY GEM ACQUISITION
AND THE NORTEK RECAPITALIZATION
Our executive officers have the right to the protections described in
the section "Management--Change of Control Arrangements." All of our officers
received phantom stock awards as described in the section "Management--Phantom
Stock Unit Plan" and bonuses as described in the section entitled
"Management--Incentive Bonus Arrangements," in each case in connection with the
Ply Gem Acquisition. In addition, Mr. Meyer received the dividends described in
the section "Management Dividends paid on Rolled Over Options" in connection
with the Nortek Recapitalization.
82
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed to us by the
independent registered public accounting firm, Ernst & Young LLP, for services
rendered during fiscal years 2004 and 2003 (IN THOUSANDS):
2004 2003(5)
---- -------
Audit Fees (1) $ 1,618 $ 465
Audit-Related Fees (2) 55 --
Tax Fees (3) 58 --
All Other Fees (4) -- --
------- ------
Total Fees $ 1,731 $ 465
======= ======
(1) Includes fees for services rendered for the audit of Ply Gem Holdings,
Inc.'s annual financial statements, review of financial statements included
in quarterly reports of Form 10-Q, and work on SEC registration statements.
(2) Includes fees for audit related services for Ply Gem Holdings, Inc. for
2004, for assurance and related services, including employee benefit plan
audits.
(3) Includes fees related to tax compliance and tax planning.
(4) Consists of services other than the services described above under "Audit
Fees", "Audit Related Fees", and "Tax Fees".
(5) Prior to February 12, 2004 all of our audit fees were billed to and paid by
Ply Gem Industries' former parent, Nortek, with the exception of the year
end audit fees which are presented above.
Our audit committee adopted a policy in 2004 to pre-approve all audit
and non-audit services provided by our independent registered public accounting
firm prior to the engagement of our independent registered public accounting
firm with respect to such services.
83
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Consolidated and Combined Financial Statements
The consolidated and combined financial statements and related
notes, together with the report of Ernst & Young LLP, appear in
Part II, Item 8 "Financial Statements and Supplementary Data" of
this Form 10-K.
2. Schedule II Valuation and Qualifying Accounts - page 87
All other schedules have been omitted because they are not
applicable, are insignificant or the required information is shown
in the consolidated financial statements or notes thereto.
3. Exhibits - The following exhibits are filed as part of this Annual
Report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement, dated as of December 19, 2003, among Ply
Gem Investment Holdings, Inc., (f/k/a CI Investment Holdings,
Inc.), Nortek, Inc. and WDS LLC (incorporated by reference from
Exhibit 2.1 to the Company's Registration Statement on Form S-4
(File No. 333-114041)).
2.2 Stock Purchase Agreement, dated as of July 23, 2004, among Ply Gem
Industries, Inc., MWM Holding, Inc. and the stockholders listed on
Schedule 1 thereto (incorporated by reference from Exhibit 2.2 to
the Company's Registration Statement on Form S-4 (File No.
333-114041)).
3.1 Certificate of Incorporation of Ply Gem Holdings, Inc.
(incorporated by reference from Exhibit 3.3 to the Company's
Registration Statement on Form S-4 (File No. 333-114041)).
3.2 Bylaws of Ply Gem Holdings, Inc. (incorporated by reference from
Exhibit 3.4 to the Company's Registration Statement on Form S-4
(File No. 333-114041)).
4.1 Indenture, dated as of February 12, 2004, among Ply Gem Industries,
Inc., the Guarantors thereto and U.S. Bank National Association, as
Trustee (incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (File No.
333-114041)).
4.2 First Supplemental Indenture, dated as of August 27, 2004, among
Ply Gem Industries, MWM Holding, Inc., MW Manufacturers Holding
Corp., MVV Manufacturers, Inc., Lineal Technologies, Inc., Patriot
Manufacturing, Inc. and U.S. Bank National Association, as trustee
(incorporated by reference from Exhibit 4.4 to the Company's
Registration Statement on Form S-4 (File No. 333-114041)).
10.1 Amended and Restated Credit Agreement dated as of February 12,
2004, amended and restated as of March 3, 2004, among Ply Gem
Industries, Inc., as U.S. borrower, CWD Windows and Doors, Inc. as
Canadian borrower, Ply Gem Holdings, Inc. and the other guarantors
party thereto, as guarantors, the lenders party thereto, and UBS
Securities LLC and Deutsche Bank Securities Inc., as joint lead
arrangers and bookrunners (incorporated by reference from Exhibit
10.1 to the Company's Registration Statement on Form S-4 (File No.
333-114041)).
10.2 Credit Agreement dated as of February 12, 2004, among Ply Gem
Industries, Inc., as U.S. Borrower, CWD Windows and Doors, Inc. as
Canadian borrower. Ply Gem Holdings, Inc. and the other guarantors
party thereto, as guarantors, the lenders party thereto, and UBS
Securities LLC and Deutsche Bank Securities Inc., as joint lead
arrangers and bookrunners (incorporated by reference from Exhibit
10.2 to the Company's Registration Statement on Form S-4 (File No.
333-114041)).
10.3 U.S. Security Agreement, dated February 12, 2003, among by Ply Gem
Industries, Inc., as U.S. borrower and the guarantors party thereto
and UBS AG, Stamford Branch, as Collateral Agent (incorporated by
reference from Exhibit 10.3 to the Company's Registration Statement
on Form S-4 (File No. 333-114041)).
84
10.4 Ply Gem Investment Holdings Phantom Stock Plan (incorporated by
reference from Exhibit 10.4 to the Company's Registration Statement
on Form S-4 (File No. 333-114041)).
10.5 Ply Gem Investment Holdings 2004 Stock Option Plan (incorporated by
reference from Exhibit 10.5 to the Company's Registration Statement
on Form S-4 (File No. 333-114041)).
10.6 Change in Control Severance Benefit Plan (incorporated by reference
from Exhibit 10.6 to the Company's Registration Statement on Form
S-4 (File No. 333-114041)).
10.7 Letter from Richard L. Bready to Lee Meyer, dated October 31, 2003,
regarding key employee incentive program (incorporated by reference
from Exhibit 10.7 to the Company's Registration Statement on Form
S-4 (File No. 333-114041)).
10.8 Letter from Richard L. Bready to Shawn Poe, dated October 31, 2003,
regarding key employee incentive program (incorporated by reference
from Exhibit 10.8 to the Company's Registration Statement on Form
S-4 (File No. 333-114041)).
10.9 Letter from Richard L. Bready to John Wayne, dated October 31,
2003, regarding key employee incentive program (incorporated by
reference from Exhibit 10.9 to the Company's Registration Statement
on Form S-4 (File No. 333-114041)).
10.10 Letter from Richard L. Bready to Mark Watson, dated October 31,
2003, regarding key employee incentive program (incorporated by
reference from Exhibit 10.10 to the Company's Registration
Statement on Form S-4 (File No. 333-114041)).
10.11 Letter from Richard L. Bready to Bryan Sveinson, dated October 31,
2003, regarding key employee incentive program (incorporated by
reference from Exhibit 10.11 to the Company's Registration
Statement on Form S-4 (File No. 333-114041)).
10.12 Separation, Consulting and Noncompetition Agreement, dated as of
January 5, 2004, between John T. Forbis and Kroy Building Products,
Inc. (incorporated by reference from Exhibit 10.12 to the Company's
Registration Statement on Form S-4 (File No. 333-114041)).
10.13 Debt Financing Advisory Agreement dated as of February 12, 2004,
between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by
reference from Exhibit 10.13 to the Company's Registration
Statement on Form S-4 (File No. 333-114041)).
10.14 General Advisory Agreement dated as of February 12, 2004, between
Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference
from Exhibit 10.14 to the Company's Registration Statement on Form
S-4 (File No. 333-114041)).
10.15 Tax Sharing Agreement dated as of February 12, 2004, between Ply
Gem Investment Holdings, Inc., Ply Gem Holdings Inc. and Ply Gem
Industries, Inc. (incorporated by reference from Exhibit 10.15 to
the Company's Registration Statement on Form S-4 (File No.
333-114041)).
10.16 Stock Purchase Agreement, dated as of November 22, 2002, between
Alcoa Building Products, Inc., Ply Gem Industries, Inc. and Nortek,
Inc. (incorporated by reference from Exhibit 10.18 to the Company's
Registration Statement on Form S-4 (File No. 333-114041)).
10.17 Letter from Richard L. Bready to John T. Forbis, dated October 31,
2003, regarding key employee incentive program (incorporated by
reference from Exhibit 10.19 to the Company's Registration
Statement on Form S-4 (File No. 333-114041)).
10.18 Second Amended and Restated Credit Agreement dated as of February
12, 2004, as first amended and restated as of March 3, 2004, as
further amended and restated as of August 27, 2004, among Ply Gem
Industries, Inc., as U.S. Borrower, CWD Windows and Doors, Inc. as
Canadian borrower. Ply Gem Holdings, Inc. and the other guarantors
party thereto, as guarantors, the lenders party thereto, and UBS
Securities LLC and Deutsche Bank Securities Inc., as joint lead
arrangers and bookrunners (incorporated by reference from Exhibit
10.21 to the Company's Registration Statement on Form S-4 (File No.
333-114041)).
10.19 Ply Gem Investment Holdings, Inc. Amended and Restated Phantom
Stock Plan (incorporated by reference from Exhibit 10.22 to the
Company's Registration Statement on Form S-4 (File No.
333-114041)).
10.20 Form of Incentive Stock Option Agreement for Ply Gem Investment
Holdings, Inc 2004 Stock Option Plan.
10.21 Waiver, dated as of March 10, 2005, to the Second Amended and
Restated Credit Agreement, dated as of February 12, 2004, first
amended and restated as of March 3, 2004 and further amended and
restated as of August 27, 2004, among Ply Gem Industries, Inc., CWD
Windows and Doors, Inc., Ply Gem Holdings, Inc. and the other
guarantor party thereto, the lenders party thereto and UBS
Securities LLC and Deutsche Bank Securities Inc., as joint lead
arrangers and bookrunners.
85
21.1 List of Subsidiaries of Ply Gem Industries, Inc.
31.1 Chief Executive Officer's Certification Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certification Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certification Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
86
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
DECEMBER 31, 2004
(In Thousands)
Uncollectible
accounts
Balance at Charged to Charged to Addition written off, Balance at
Beginning Costs and Other Due to MW net of End of
of Year Expenses Accounts Acquisition Recoveries Year
Year ended December 31, 2004
Allowance for doubtful
accounts and sales
allowances ............... $(8,695) $ (897) $ (6) $(1,476) $ 3,134 $(7,940)
Year ended December 31, 2003
Allowance for doubtful
accounts and sales
allowances................ $(7,129) $(3,255) $ (74) $ -- $ 1,763 $(8,695)
Year ended December 31, 2002
Allowance for doubtful
accounts and sales
allowances ............... $(5,580) $(3,623) $ (115) $ -- $ 2,189 $(7,129)
87
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: March 31, 2005 By: /s/ Lee D. Meyer
--------------------------------
Lee D. Meyer
President and Chief Executive Officer
In accordance with the Exchange Act this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Lee D. Meyer President, Chief Executive Officer and Director March 31, 2005
- -------------------------------------- (Principal Executive Officer)
Lee D. Meyer
/s/ Shawn K. Poe Vice President, Chief Financial Officer, Treasurer March 31, 2005
- -------------------------------------- and Secretary (Principal Financial and Accounting
Shawn K. Poe Officer)
Chairman of the Board and Director March 31, 2005
- --------------------------------------
Frederick Iseman
/s/ Robert A. Ferris Director March 31, 2005
- --------------------------------------
Robert A. Ferris
/s/ Steven M. Lefkowitz Director March 31, 2005
- --------------------------------------
Steven M. Lefkowitz
Director March 31, 2005
- --------------------------------------
John D. Roach
88