10-K405 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 (FEE REQUIRED) For the fiscal year ended December 31, 1994. OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission file number 1-4087 ---------------- PLY GEM INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-1727150 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 777 THIRD AVENUE, NEW YORK, NEW YORK 10017 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (212) 832-1550 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED --------------------------------- --------------------------------- Common Stock, $.25 par value New York Stock Exchange
---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant, using the closing price which the registrant's voting stock was sold on such date, was $214,862,000 as of March 24, 1995. The number of shares outstanding of the registrant's common stock, $.25 par value was 14,561,894 as of March 24, 1995. DOCUMENTS INCORPORATED BY REFERENCE
IDENTIFICATION OF DOCUMENT PART INTO WHICH INCORPORATED ---------------------------------- ----------------------------------- Proxy Statement for Annual Meeting of Stockholders to be held on May 11, 1995 Part III -- Items 10, 11, 12 and 13
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. PLY GEM Industries, Inc., a Delaware corporation ("PLY GEM", hereinafter with its subsidiaries referred to collectively as the "Company"), was originally incorporated in 1946 in New York and reincorporated in Delaware in 1987. The Company is a national manufacturer and distributor of a wide range of specialty products for the home improvement industry. The Company believes that it is among the nation's largest manufacturers of wood windows, vinyl siding and accessories, and vinyl windows, and one of the major suppliers of specialty wood and other related products. Each of the Company's ten wholly-owned subsidiaries and its one division have achieved a leading market position within their respective niches of the home improvement industry. The home improvement industry includes products designed for all remodeling, repair and alteration of residential structures whether the work is performed by the homeowner (the "do-it-yourselfer" or "D-I-Y"), or by a professional contractor. Home improvement products, which in some cases are also used in new construction applications, are sold either through retailers or specialty wholesale distributors that in turn sell to retailers, contractors and builders. The success of the recently introduced warehouse home center format, such as that utilized by Home Depot, continues to change the traditional way in which home improvement products are sold. The Company's primary objective is to become the supplier of choice to the home improvement industry for high margin specialty products. The Company believes that it is uniquely positioned to provide products and services to the major home center retailers, which the Company believes is the fastest growing segment of the home improvement industry. The Company's products are distributed through an extensive network which includes major retail home center chains, specialty home remodeling distributors, lumber and building products wholesalers, professional contractors and Company operated distribution centers. The products are marketed throughout the United States and Canada through Company sales personnel and independent representatives. During 1994, the Company announced a restructuring program which is intended to strengthen the Company's core businesses, improve long-term profitability and enhance shareholder value. These actions are part of the Company's continuing effort to identify opportunities to improve its cost structure. The Company's restructuring program provides for a wide range of targeted initiatives including delayering the organization, consolidation and closure of selected regional distribution and manufacturing facilities, abandonment of certain information systems and other actions including lease termination expenses. Implementation of certain of these initiatives has already begun, while others are planned to be completed during 1995. The Company operates predominantly in one business segment -- Home Improvement Products. Prior to 1992, the Company reported in two industry segments, Home Improvement Products and Home Products. The operations of the latter segment, consisting of manufacturing and distribution of disposable paper vacuum cleaner bags, have become less significant over the past several years and as a result the Home Products operations are not material to an understanding of the Company's business taken as a whole. BUSINESSES OF THE COMPANY The Company operates in four primary business groups: Windows, Doors and Siding; Specialty Wood Products; Distribution; and Home Products. Set forth below are the operating entities within each group and the year in which the entity was acquired by the Company. Ply*Gem Manufacturing is a division of the Company and constitutes the Company's original business. 1
YEAR ACQUIRED ------------- WINDOWS, DOORS AND SIDING Variform, Inc. ("Variform")....................................... 1986 Great Lakes Window, Inc. ("Great Lakes").......................... 1986 SNE Enterprises, Inc. ("SNE")..................................... 1989 Richwood Building Products, Inc. ("Richwood")..................... 1992 SPECIALTY WOOD PRODUCTS Ply*Gem Manufacturing Hoover Treated Wood Products, Inc. ("Hoover")..................... 1983 Sagebrush Sales, Inc. ("Sagebrush")............................... 1988 Continental Wood Preservers, Inc. ("Continental")................. 1988 DISTRIBUTION Goldenberg Group, Inc. ("Goldenberg")............................. 1983 Allied Plywood Corporation ("Allied")............................. 1985 HOME PRODUCTS Studley Products, Inc. ("Studley")................................ 1969
WINDOWS, DOORS AND SIDING SNE Enterprises, Inc.: SNE is a major manufacturer of wood windows, competing with companies such as Andersen, Marvin and Pella. The Company believes that it is the second largest supplier of wood windows to the major home center retailers. SNE manufactures a full line of wood and vinyl windows and patio doors, glass and polycarbonate skylights, and wooden interior bifold doors and shutters. Its products are sold primarily under the Crestline (R) and Vetter (R) brand names and include double hung, casement, sliding and awning windows as well as hinged and sliding patio doors. SNE recently introduced a window that offers the maintenance free and insulating benefits of a solid vinyl window yet has a wood interior that can be painted or stained. SNE's windows are available primed or with an exterior cladding of either aluminum or vinyl. They are available in both custom and stock sizes, and are sold through an extensive network of home centers, lumber and building materials retailers, and specialized value added distributors. SNE's products are marketed to both the home improvement and new construction markets. The market for wood windows is highly competitive. SNE differentiates itself from its competition by pursuing a dual brand strategy, having a distribution base in both the remodeling and new construction markets, extensive custom design and manufacturing capabilities, and a superior field service and support network. The Company believes that SNE will continue to grow as its existing products gain brand recognition from cooperative and other advertising programs with its retail customers, and as it introduces new products. Variform, Inc.: Variform is a producer of vinyl siding in the United States and a leading supplier to the major home center retailers. Its vinyl siding, soffit and accessories are produced in a variety of patterns and colors, including woodgrains. Vinyl siding is used in both remodeling and new construction applications and has captured an increasing share of the market for exterior siding materials (which primarily includes wood, aluminum and masonry) due to its ease of installation, durability and low maintenance requirements. Vinyl siding is sold to either specialized wholesale distributors who in turn sell directly to remodeling contractors (one-step distribution), or to building materials distributors who sell to home centers and lumberyards who, in turn, sell to remodeling contractors (two-step distribution). While Variform sells through both channels of distribution, it focuses on the two-step market, where management believes it is the dominant supplier to the major home center retailers and retail lumber yards, primarily through private label programs with building materials distributors. The Company believes that Variform is able to compete on 2 favorable terms as a result of its broad distribution coverage, high quality innovative products, and production efficiency. Additionally, Variform is strongest in the retail segment of the market, which continues to grow at a rate that is faster than the overall market, as warehouse retailers continue to take business away from the traditional one-step market by offering remodeling contractors a "one-stop-shop" for all of their home improvement material needs. Great Lakes Window, Inc.: Great Lakes is a manufacturer of high quality, energy efficient, maintenance free vinyl windows. Its products include double hung, casement, sliding and awning windows, as well as hinged and sliding patio doors. Great Lakes offers a wide selection of products, including a variety of exterior colors and interior woodgrains, several different grille patterns and a wide assortment of glass options. Great Lakes products are primarily used in replacement applications, where windows and patio doors are manufactured for a specific order on a custom size basis. During 1994, Great Lakes introduced a new vinyl window line to penetrate the new construction market which will be sold primarily through two-step distribution. Great Lakes sells its products through its highly trained sales force. It sells its products to specialty window distributors who in turn sell to remodeling contractors, and direct to large remodeling companies. The Company believes that Great Lakes is able to compete successfully due to the breadth and quality of its product offering and its merchandising support. In addition, Great Lakes has been the forerunner in introducing new designs to the industry. Great Lakes' innovative locking system, interior woodgrains and its use of various glass treatments are a few examples of innovations that distinguish Great Lakes from its competition. Great Lakes expects to continue to develop new designs and features for its products in the future. Richwood Building Products, Inc.: Richwood is a manufacturer of siding accessories to the remodeling and new construction markets. Siding accessories include blocks, which allow for the flush mounting of items like light fixtures to the exterior of a home, and gable vents. Their products are sold through a network of manufacturers representatives and directly to home centers, lumberyards and wholesale distributors of building materials, electrical and plumbing products. Richwood is the only manufacturer of siding accessories to offer a color selection that matches the colors offered by most, if not all, major manufacturers of vinyl siding in the United States and Canada. SPECIALTY WOOD PRODUCTS Hoover Treated Wood Products, Inc.: Hoover is a manufacturer of pressure treated wood products, selling to home center chains, lumberyards and building material retailers and wholesalers. Its products include lumber and plywood which have been treated for fire retardancy and for protection against moisture and insect infestation. Sagebrush Sales, Inc.: Sagebrush is a manufacturer and distributor of specialty lumber and building products serving the home improvement and building materials market in the Southwest. Ply*Gem Manufacturing is a manufacturer and distributor of decorative wall coverings. Its products include decorator paneling, planking and tileboard for the home improvement market. Ply*Gem Manufacturing also distributes a complete line of imported ceramic, porcelain and marble floor tile marketed through home centers and lumberyards. Continental Wood Preservers, Inc.: Continental is a Midwestern manufacturer of pressure treated wood products for home improvement retailers and lumberyards in the Midwest. While the specialty wood products industry is very competitive, the Company believes it is able to compete effectively by providing superior customer service, outstanding quality and, wherever possible, proprietary products. The companies within the group focus on high margin, niche markets within the broader defined wood products industry which tends to be commodity driven. Its products are sold through home center retailers and wholesalers of building materials. The Company believes that growth in this segment of its business will result from continued expansion of its share of the home center market. 3 DISTRIBUTION Allied Plywood Corporation: Allied is a national distributor of a broad range of high end specialty wood and wood related products, including hardwood plywood, melamine and other laminated board products, hardwood lumber, solid surface materials and cabinet hardware. It is also a major importer of Russian wood products, through its affiliate, Russian Wood Express Inc. ("Russian Wood"). Allied's customers are industrial woodworkers, including cabinet manufacturers, architectural millworkers, and manufacturers of store fixtures, furniture, signs and exhibits. Allied sells its products through an extensive network of eleven company operated warehouse facilities and utilizes numerous public warehouses located primarily in the East. A hub and spoke distribution network was recently established at Allied to serve its six Northeast distribution centers. This operation, which allows a central warehouse to serve a broad region, now handles approximately 60% of the material sold in the Northeast and has improved inventory turns. Sales are generated by a well trained and experienced sales force. Allied differentiates itself from its competitors, which primarily include local independent distributors, by its superior customer service, geographic coverage and breadth of product line. As a result, it has become a preferred distributor of many products, selling them on an exclusive, or limited exclusive, basis. The Company believes that Allied's future growth will be from the introduction of new products, expansion of its customer base and the development of further opportunities through Russian Wood. Allied recently began to penetrate the retail home center market with some of its products and, the Company believes, will increase its sales to that industry segment. Goldenberg Group, Inc.: Goldenberg is a West Coast distributor and manufacturer of furniture components, laminates and board products to furniture manufacturers and other original equipment manufacturers, building material retailers and wholesalers. HOME PRODUCTS Studley Products, Inc.: Studley is a manufacturer of disposable paper vacuum cleaner bags. In addition, it sells related floor care products. Studley's products are sold to manufacturers of vacuum cleaners, mass merchandisers and other retailers and recently to the retail home center market. Even though the market is very competitive Studley is able to compete on the basis of its technical expertise in the design and manufacture of its products, and in its use of high performance materials. Studley introduced an innovative new vacuum cleaner bag that is able to capture pollen and other allergy causing bacteria through the use of high performance materials. The continued introduction of new products and the fact that many consumers are now likely to own more than one vacuum cleaner are expected to provide opportunities for future growth. PRODUCTION AND FACILITIES The Windows, Doors and Siding group operates ten manufacturing and warehouse facilities in the United States and one in Canada. Vinyl siding is produced by an extrusion process which forms siding through various dies from certain resin compounds, primarily polyvinyl chloride. Siding accessories are manufactured through an injection molding process using proprietary mold designs. Insulated vinyl framed replacement windows are manufactured, using a patented process, from insulated glass and vinyl extrusions. The manufacturing process of wood windows and patio doors involves cutting and shaping of components that are assembled with high speed tools. In 1994, SNE closed three window assembly and distribution facilities and consolidated these operations into its main manufacturing facility in Mosinee, Wisconsin. This action plus the addition of new automated production equipment, will effectively double the manufacturing capacity of SNE and lead to improved service to its customers. The Specialty Woods Products group operates eight production and warehouse facilities in the United States. The treatment process of wood products generally involves vacuum pressure impregnation of chemicals into the wood in an enclosed vessel to ensure thorough penetration to meet industry and 4 government standards. Some of the wood is kiln dried after treatment to remove moisture imparted during the pressure impregnation process, providing a clean, dry and easily handled product. The Company's high-speed laminating production facilities afford flexibility in laminating paper and vinyl to various substrate materials. Specialty lumber products, including siding, decking and paneling are manufactured by the Company in two facilities with a combined annual production capacity in excess of 100 million board feet. The Distribution group operates thirteen distribution centers and utilizes numerous public warehouses located in various major port cities. It also operates two manufacturing facilities. Disposable paper vacuum cleaner bags are manufactured at one facility in the United States and one in Canada. Disposable paper vacuum cleaner bags are manufactured on highly automated equipment, the major part of which was designed and built by the Company. The Company is continuously engaged in designing vacuum cleaner bags for new vacuum cleaner models. RAW MATERIALS The principal raw materials used in the manufacture of the Company's products are polyvinyl chloride, polypropylene, glass, vinyl extrusions, particle board, fiberboard, plywood, various species of lumber such as pine, spruce, luaun, hemlock and fir, various chemicals, filter paper, and paper. The Company purchases its raw materials from a large number of domestic and international sources. The Company believes that there are alternative sources of supply in the event of its inability to purchase from its present suppliers. SEASONALITY The Company's home improvement business is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of activity in both the home improvement and new construction markets. The Company's lowest sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income tends to be lower in quarters with lower sales. Inventory and borrowings to satisfy working capital requirements are usually at their highest level during the second and third quarters. BACKLOG In general, the Company does not produce against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Significant inventories of finished goods, work- in-process and raw materials are maintained to meet delivery requirements of customers. Hoover and Continental maintain a backlog of firm orders to be filled in an amount representing approximately 5% of its annual sales. Distribution consists of warehouse operations where orders are filled from stock and where there is no significant backlog. EMPLOYEES At December 31, 1994 approximately 4,200 persons were employed by the Company. Approximately 1,500 of such employees are covered by collective bargaining agreements which expire at various times over the next five years. Although the Company had two work stoppages of short duration during 1994, neither had a material adverse effect on the Company's operations and the Company considers its relations with its employees to be good. Under the Company's restructuring program, the Company expects to reduce its work force through 1995 by approximately 600 positions. Approximately 150 positions were eliminated under the program during 1994. ITEM 2. PROPERTIES. The Windows, Doors and Siding group operates ten manufacturing and warehouse facilities in the United States and one in Canada ranging in size from approximately 20,000 square feet to 660,000 square feet. Of these facilities, six are owned, and five are leased under net leases that expire at various dates through 2017. The group's manufacturing facilities operated at ranges of approximately 75% to 90% of capacity during 1994. 5 The Specialty Woods group has eight manufacturing and warehouse facilities in the United States ranging in size from approximately 20,000 square feet to 215,000 square feet. Of these facilities, six are owned, and two are leased under net leases that expire in 1996. The group's manufacturing facilities operated at ranges of approximately 60% to 70% of capacity during 1994. The Distribution group operates thirteen distribution centers ranging in size from approximately 16,000 square feet to 177,000 square feet and two manufacturing facilities of approximately 38,000 square feet and 91,000 square feet. Two facilities are owned, and thirteen are leased under leases that expire at various dates through 2003. Goldenberg's two manufacturing facilities operated at approximately 80% of capacity during 1994. Home Products has one manufacturing facility (approximately 160,000 square feet) in the United States and one (approximately 39,000 square feet) in Canada. These facilities are leased by the Company under leases that expire in 2007. The facilities operated at ranges of approximately 60% to 65% of capacity during 1994. The Company's building, machinery and equipment have been generally well maintained, are in good operating condition and are adequate for current and future production requirements. The Company's executive offices are located at 777 Third Avenue, New York, New York and consist of approximately 14,700 square feet of office space which is leased through 1999. ITEM 3. LEGAL PROCEEDINGS. Hoover, a wholly-owned subsidiary of Ply Gem, is a defendant, along with many other parties, in a number of commercial lawsuits, including a purported class action on behalf of certain Maryland homeowners, alleging property damage caused by alleged defects in certain pressure treated interior wood products it produced and sold through August, 1988. Sales of this product constituted less than 3% of the total sales of Ply Gem and its subsidiaries on a consolidated basis during the period January 1, 1984 through December 31, 1990. Ply Gem is also a defendant in many of these suits. The number of lawsuits pending as of December 31, 1994, as well as the number of lawsuits filed in 1993 and 1994 has declined significantly from earlier periods. Many of the suits and claims have been settled. In those suits that remain pending, direct defense costs are being paid by either insurance carriers, under reservations of rights agreements, or out of insurance proceeds. Two actions have proceeded to trial against Hoover and resulted in jury verdicts against it. In one of these actions, judgment was entered in Hoover's favor by the court after a jury verdict against it and the plaintiff's petition to appeal the judgment entered in Hoover's favor was denied. Hoover is appealing the other judgment and believes that it has meritorious grounds for overturning it in whole or in part. Hoover and the Company are engaged in litigation with their insurers regarding coverage for these lawsuits and claims. Hoover has settled its coverage claims with a majority of its insurers and is negotiating settlements with others. Hoover and the Company believe they have meritorious claims for coverage from their remaining unsettled insurers and are seeking declaratory judgments confirming such coverage. The proceeds from settled insurance claims, along with the proceeds from a settlement of claims by Hoover against certain suppliers of materials used by it in the production of treated wood, are available for the settlement of the underlying property damage actions, including the jury verdict now on appeal. The Company believes that Hoover's remaining coverage disputes will be resolved within the next two years on a satisfactory basis and a sufficient amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage, considered its history of successful settlements with primary and excess insurers and consulted with counsel. Hoover and the Company are vigorously defending the underlying lawsuits which cannot be resolved on a reasonable basis and believe that they have meritorious defenses to those suits including, in the case of the Company, the defense that it has been improperly joined, as it did not manufacture or market the Hoover products at issue, and is not legally liable for the damage allegedly caused by them. 6 In evaluating the effect of the lawsuits, a number of factors have been considered, including: the number and exposure posed by the pending lawsuits; the significant decline in the number of lawsuits filed in 1993 and to date; the availability of various legal defenses, including statutes of limitations; the existence of settlement protocols; an agreement indemnifying Hoover as to certain past and future claims; and Hoover's experience to date in settling with its insurance companies and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material adverse effect upon the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1994. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been listed on the New York Stock Exchange since December 1, 1994. Prior to that date, the stock traded on the American Stock Exchange. The following table sets forth, for the periods indicated, the high and low market prices for the Company's Common Stock and dividends paid.
1994 1993 ------------------------ ------------------------ QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND ------- ------- ------- -------- ------- ------- -------- First......................... $25 5/8 $17 1/2 $.03 $13 3/8 $11 1/2 $.03 Second........................ 23 5/8 19 1/2 .03 11 7/8 10 1/8 .03 Third......................... 23 1/2 18 3/4 .03 13 1/2 10 3/8 .03 Fourth........................ 23 1/4 17 .03 18 1/4 14 1/4 .03
The Company has paid cash dividends on its Common Stock since 1976 and presently pays quarterly dividends at the annual rate of $.12 per share. The Company's revolving credit facility has limitations on the annual amounts of the Company's dividends. Under the most restrictive provision, at December 31, 1994, approximately $2,900,000 was available for the payment of dividends in 1995. The number of holders of record of the Company's Common Stock as of March 13, 1995 was approximately 2,700. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data presented below as of the dates and for the periods indicated are derived from the consolidated financial statements of the Company. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto.
1994(1) 1993 1992 1991 1990(1) -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales........................ $796,419 $722,600 $623,182 $561,550 $545,511 Net income (loss)................ (8,531) 9,650 6,306 4,039 3,175 Net income (loss) per share...... (.62) .75 .56 .39 .31 BALANCE SHEET DATA: Total assets..................... $345,569 $344,944 $313,997 $281,124 $329,975 Long-term debt................... 79,501 92,898 62,451 57,996 106,186 Capital lease obligations........ 7,159 7,166 7,215 105 236 Convertible subordinated deben- tures........................... -- 50,000 50,000 50,000 46,489 Stockholders' equity............. 161,636 128,942 118,439 111,349 107,620 Dividends per common share....... .12 .12 .12 .12 .12
-------- (1) Results include a nonrecurring pretax charge of $41.0 million and $4.2 million in 1994 and 1990, respectively related to employee severance, facility consolidations and closures and asset writedowns. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION This discussion summarizes the significant factors affecting the consolidated operating results and financial condition of the Company during the three-year period ended December 31, 1994. It should be read in conjunction with the financial statements and notes thereto. As more fully described in Note 2 to the consolidated financial statements, the Company recorded a nonrecurring charge of $41.0 million ($25.7 million after tax) during 1994. The nonrecurring charge consists of $29.1 million related to a restructuring program and $11.9 million related to unusual items primarily consisting of the write-offs of certain intangible assets and discontinued products and costs associated with the Company's business process redesign. Approximately $17 million of the charge is for noncash asset write- offs. The Company's restructuring program is intended to strengthen the Company's core businesses, improve long-term profitability and enhance shareholder value. These actions are part of the Company's continuing effort to identify opportunities to improve its cost structure. The Company's restructuring program provides for a wide range of targeted initiatives including delayering the organization, consolidation and closure of selected regional distribution and manufacturing facilities, abandonment of certain information systems and other actions including lease termination expenses. Implementation of certain of these initiatives has already begun, while others are planned to be completed during 1995. The restructuring includes an expected reduction in workforce of approximately 600 positions. As of December 31, 1994, approximately 150 positions have been eliminated. The restructuring actions and the unusual charge are expected to result in annualized pretax savings of approximately $13 million upon full implementation. There can be no assurance, however, that the Company will realize these savings. Furthermore, the Company expects to exit certain lower margin businesses during 1995. The estimated annual net sales associated with these discontinued products is approximately $25 million. The effect of these lost revenues on 1995 net income is not expected to be significant. NET SALES Net sales for the year ended December 31, 1994 were $796.4 million which represents a 10.2% increase over 1993 net sales of $722.7 million. The Company continues to improve its position in the retail channel of the home improvement market as evidenced by a 34% increase in sales to this market. The 1994 sales growth was driven by the Company's Windows, Doors and Siding subsidiaries which experienced a 14% increase in sales. Increased market penetration and new products helped fuel this growth. Of the total net sales increase in 1994, approximately 6% is attributable to increases in unit volume and the remainder to increases in average selling prices. Strong sales in the Company's Windows, Doors and Siding group, and improved sales of the Company's Distribution business, resulted in a 16% increase in net sales for the year 1993 when compared to 1992. Approximately 10% of the increase was attributable to unit volume growth and 6% due to increases in average selling prices. GROSS PROFIT Gross profit, expressed as a percentage of net sales, was 19.3% in 1994, compared with 19.1% in 1993 and 20.7% in 1992. Although the price of PVC resin and glass, which are used in the manufacturing of siding and windows, increased significantly during 1994, improved labor productivity, overall lower conversion costs and the absence of new plant start-up costs, which were incurred in 1993, offset these increases and were primarily responsible for the improvement in gross profit during 1994. Higher raw material costs (particularly wood and resin), competitive pricing pressures, costs of introducing new products and the aforementioned new plant start-up costs accounted for most of the decline in gross profit experienced in 1993 as compared to 1992. 8 The Company's results of operations are affected by fluctuations in the market prices of wood products used as raw materials in its various manufacturing operations. Over the years, the Company has experienced significant fluctuations in the cost of wood products from primary suppliers. A variety of factors over which the Company has no control, including environmental regulations, weather, economic conditions and natural disasters, impact the cost of wood products. The Company anticipates that these fluctuations will continue in the future. Although the Company attempts to increase sales prices of its products in response to higher wood products costs, such sales prices often lag behind the escalation of the cost of raw materials in question. While the Company intends to increase prices in a timely manner to cover further increases in the cost of wood products, its ability to do so may be limited by competitive or other factors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, as a percentage of net sales, decreased to 14.2% in 1994 as compared to 14.8% in 1993 and 16.3% in 1992. In general, the improvement reflects the efforts by the Company to manage expense growth relative to revenue growth and the implementation of cost containment programs. Specifically, the decrease in 1994 is primarily attributable to a lower provision for bad debts, certain administrative and functional consolidations and work force reductions, partially offset by employment costs associated with the creation of new positions in purchasing, executive management, information systems, total quality management and marketing. Economies resulting from the absorption of fixed expenses over a larger sales base also attributed somewhat to the improvement in 1994 and were primarily responsible for the improvement in 1993. INCOME FROM OPERATIONS Income from operations, excluding the $41.0 million nonrecurring charge described previously, increased 30% to $41.1 million in 1994 from $31.6 million in 1993. Income from operations was $27.4 million in 1992. The improvements are due to the factors discussed above. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles was $4.2 million, $4.7 million and $4.8 million in 1994, 1993 and 1992, respectively. The decrease in amortization in 1994 of $0.5 million, when compared to 1993, is attributable to the write-off of certain intangible assets as described in Note 2 to the consolidated financial statements. INTEREST EXPENSE Interest expense was $7.5 million in 1994 compared to $10.1 million in 1993 and $9.6 million in 1992. Lower interest expense in 1994 resulted from the conversion of the Company's 10% Convertible Subordinated Debentures ("Debentures") into common stock during March 1994, partially offset by higher average debt balances and higher interest rates experienced during the year. The slight increase in interest expense during 1993 as compared to 1992 is due primarily to higher borrowing levels during 1993. OTHER INCOME (EXPENSE) Other income (expense) primarily includes the costs associated with the sale of accounts receivables program, partially offset in 1993 by a gain resulting from an involuntary conversion of property. INCOME TAXES The effective income tax rate (benefit in 1994) was 28.6% in 1994, 44.8% in 1993 and 44.6% in 1992. The lower tax rate in 1994 is due to the proportionately higher amount of non-deductible goodwill amortization in 1994 as compared to the loss before taxes than in 1993 and certain state tax benefits related to the nonrecurring charge which, in accordance with the criteria set forth in Financial Accounting Standards Board Statement No. 109, were not recognized. Excluding the effect of the nonrecurring charges, the effective tax rate in 1994 was 41%. 9 The effective income tax rate in 1993 and 1992 was approximately the same. During 1993, the federal statutory rate was increased by 1% retroactive to January 1, 1993. This rate increase in 1993 was offset by a proportionately lower amount of non-deductible goodwill amortization in 1993 as compared to income before taxes than in 1992. NET INCOME Net income, before the nonrecurring charge, increased 77% to $17.2 million in 1994 from $9.7 million in 1993. Net income was $6.3 million in 1992. The factors cited above were responsible for the improved results of the Company. LIQUIDITY AND CAPITAL RESOURCES In February 1994, the Company entered into a five-year revolving credit facility with a syndicate of banks which provides available financing of up to $200 million. Initial borrowings were used to repay the Company's previous bank credit facilities. The new credit facility provides the Company with financing at competitive prices, strengthens the balance sheet by extending debt maturities to 1999 and makes available additional resources to fund the Company's growth programs. Approximately $92 million was available under this facility at December 31, 1994. See Note 8 to the consolidated financial statements for additional information on the new credit facility. As more fully described in Note 8 to the consolidated financial statements, in March 1994 holders of the Company's Debentures converted a total principal amount of approximately $50 million into 2,751,328 shares of the Company's common stock. As a result, the Company's net worth was increased by approximately $49.1 million after the costs of the conversion; in addition, the Company will save $5 million of annual interest expense. The sale of accounts receivable program, which is a $50 million facility, resulted in the sale of $40.0 million of accounts receivables at December 31, 1994 compared to $20.0 million at the end of 1993. The table below summarizes the Company's cash flow from operating, investing and financing activities as reflected in the Consolidated Statement of Cash Flows.
1994 1993 1992 ------ ------ ------ (IN MILLIONS) Cash provided by (used in) Operating activities................................. $ 48.9 $ 4.7 $ 5.5 Investing activities................................. (20.0) (11.0) (24.9) Financing activities................................. (27.0) 16.9 16.9 ------ ------ ------ Net increase (decrease) in cash and cash equiva- lents............................................. $ 1.9 $ 10.6 $ (2.5) ====== ====== ======
OPERATING ACTIVITIES Cash flow provided from operations was $48.9 million, an increase of $44.2 million compared to $4.7 million provided in 1993. Although the Company reported a net loss of $8.5 million for 1994, such loss was the result of nonrecurring charges of $41.0 million. Approximately 60% of the nonrecurring charge will require cash outlays of which approximately $5.2 was spent as of the end of 1994. The increase in cash from operations resulted primarily from improved operating results (before nonrecurring charges), implementation of inventory reduction programs resulting primarily from discontinued sales of lower margin products and proceeds from the Company's accounts receivable program more fully discussed in Note 3 to the consolidated financial statements. Cash generated from operations was used to fund capital expenditures, repurchase Company shares and reduce bank debt. 10 The Company's working capital requirements for inventory and accounts receivable are impacted by changes in raw material costs, the availability of raw materials, growth of the Company's business and seasonality. As a result, such requirements may fluctuate significantly. INVESTING ACTIVITIES Investing activities of the Company during the discussion periods primarily consist of acquisition of property, plant and equipment and the receipt and use of funds held for construction. Capital expenditures were $23.0 million in 1994 compared to $20.5 million in 1993 and $17.1 million in 1992. Most of the outlays in 1994 were for machinery and equipment used to expand capacity and improve productivity. Approximately $4.3 million was incurred in connection with the design and development of the Company's new information systems. Funds Held for Construction relate to proceeds and usage of cash from the industrial development revenue obligations which were used to finance plant expansions in prior years. Capital expenditures provide a basis for future growth. The Company has a formalized review procedure for all capital spending. The acceptability of a capital project is based on many factors, including its discounted cash flow, return on investment and projected payback period. Management expects that 1995 capital expenditures will approximate 1994 levels. FINANCING ACTIVITIES In the fourth quarter of 1994, the Board of Directors authorized the repurchase of up to 1 million shares of the Company's common stock. Aggregate repurchases for the year approximated 641,000 shares with a total purchase price of $12.2 million. The Company is expected to continue its buy-back program during 1995 as determined by market conditions. During 1994, the Company reduced bank debt by $15.8 million. In addition, the Company received approximately $6.5 million from the exercise of employee stock options. BALANCE SHEET ANALYSIS The capitalization of the Company (long-term debt plus stockholders' equity) was $248.3 million at December 31, 1994. The ratio of debt to capitalization was 35% at December 31, 1994, which reflects the conversion of the Company's Debentures. This is substantially improved from such ratio at December 31, 1993 which was 54%. The Company's working capital was $110.5 million at December 31, 1994 compared to $137.4 million at December 31, 1993. The current ratio was 2.5 at December 31, 1994, compared to 3.2 at December 31, 1993. The decrease in working capital and the current ratio was the result of a decrease in current assets of $13.2 million from December 31, 1993 to December 31, 1994 and an increase in current liabilities of $13.8 million during the same period. The decrease in current assets at December 31, 1994 compared to December 31, 1993 resulted primarily from lower inventories due to the implementation of inventory reduction programs and lower accounts receivable as a result of additional sales under the Company's accounts receivable program, offset by higher deferred taxes resulting from the tax benefits associated with the nonrecurring charge. Such benefits are deductible for income tax purposes in years when the assets are disposed of or expenditures incurred. The increase in current liabilities from December 31, 1993 to December 31, 1994 was due primarily to the restructuring accrual. 11 The increase in other assets and other liabilities resulted primarily from the adoption of Financial Accounting Standards Board Interpretation No. 39 which became effective January 1, 1994 and is more fully described in Note 12 to the consolidated financial statements. Long-term debt at December 31, 1994 was $79.5 million compared $142.9 million at December 31, 1993. Conversion of the Company's Debentures and the additional proceeds of the Company's accounts receivable program used to repay long-term debt were primarily responsible for the decline. The Company will continue to have cash requirements to support working capital needs, pay interest, fund the restructuring program and fund capital expenditures. In order to meet these cash requirements, the Company intends to use internally generated funds and, if necessary, borrowings from the new credit facility. Management believes cash generated from these sources will be adequate to meet the Company's cash requirements over the next 12 months. SEASONAL NATURE OF BUSINESS The home improvement business is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. The Company's lowest sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income tends to be lower in quarters with lower sales. Inventory and borrowings to satisfy working capital requirements are usually at their highest level during the second and third quarters. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (THE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS IS INCORPORATED BY REFERENCE IN ITEM 14(A) OF PART IV OF THIS FORM 10-K)
PAGE ---- Report of Independent Certified Public Accountants........................ 14 Financial Statements...................................................... Consolidated Balance Sheets at December 31, 1994 and 1993............... 15 Consolidated Statements of Operations for the Three Years Ended December 31, 1994............................................................... 16 Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1994................................................ 17 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1994............................................................... 18 Notes to Consolidated Financial Statements.............................. 19 Quarterly Data............................................................ 29
13 (ART) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Ply Gem Industries, Inc. We have audited the accompanying consolidated balance sheets of Ply Gem Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conduct our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ply Gem Industries, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. GRANT THORNTON LLP New York, New York February 24, 1995 14 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1994 1993 ------------ ------------ ASSETS Cash and cash equivalents............................ $ 14,403,000 $ 12,499,000 Marketable securities................................ 1,813,000 1,942,000 Accounts receivable, net of allowance of $6,353,000; $7,197,000 in 1993.................................. 42,243,000 54,432,000 Inventories.......................................... 103,089,000 117,515,000 Prepaid and deferred income taxes.................... 17,426,000 4,000,000 Prepaid expenses and other current assets............ 6,257,000 8,017,000 ------------ ------------ Total current assets............................. 185,231,000 198,405,000 Funds held for construction.......................... 1,048,000 2,375,000 Property, plant and equipment--at cost, net.......... 77,084,000 67,766,000 Patents and trademarks, net of accumulated amortiza- tion of $7,825,000; $6,677,000 in 1993.............. 16,464,000 17,595,000 Other intangible assets, net......................... 16,586,000 21,557,000 Cost in excess of net assets acquired, net........... 24,647,000 26,492,000 Other assets......................................... 24,509,000 10,754,000 ------------ ------------ $345,569,000 $344,944,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses................ $ 46,743,000 $ 41,328,000 Accrued restructuring................................ 13,413,000 -- Accrued payroll and commissions...................... 10,539,000 10,165,000 Accrued insurance.................................... 3,523,000 3,090,000 Income taxes payable................................. -- 1,181,000 Short-term borrowings................................ 35,000 2,365,000 Current maturities of long-term debt and capital leases.............................................. 480,000 2,841,000 ------------ ------------ Total current liabilities........................ 74,733,000 60,970,000 Long-term debt....................................... 79,501,000 142,898,000 Capital leases....................................... 7,159,000 7,166,000 Deferred income taxes................................ -- 724,000 Other liabilities.................................... 22,540,000 4,244,000 Stockholders' equity Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued....................................... -- -- Common stock, $.25 par value; authorized 30,000,000 shares; issued 17,296,195 shares; 11,872,509 shares in 1993.................................... 4,324,000 2,968,000 Additional paid-in capital......................... 146,967,000 64,006,000 Retained earnings.................................. 62,397,000 72,601,000 ------------ ------------ 213,688,000 139,575,000 Less Treasury stock--at cost (2,745,319 shares; 910,073 shares in 1993)................................... 50,954,000 9,362,000 Unamortized restricted stock....................... 1,098,000 1,271,000 ------------ ------------ Total stockholders' equity....................... 161,636,000 128,942,000 ------------ ------------ $345,569,000 $344,944,000 ============ ============
The accompanying notes are an integral part of these statements. 15 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Net sales............................ $796,419,000 $722,660,000 $623,182,000 Cost of goods sold................... 642,337,000 584,271,000 494,093,000 ------------ ------------ ------------ Gross profit....................... 154,082,000 138,389,000 129,089,000 Selling, general and administrative expenses............................ 113,019,000 106,812,000 101,738,000 Nonrecurring charges................. 40,962,000 -- -- ------------ ------------ ------------ Income from operations............. 101,000 31,577,000 27,351,000 Amortization of goodwill and other intangibles......................... (4,165,000) (4,748,000) (4,825,000) Interest expense..................... (7,479,000) (10,056,000) (9,644,000) Other income (expense)............... (406,000) 708,000 (1,508,000) ------------ ------------ ------------ Income (loss) before income taxes.. (11,949,000) 17,481,000 11,374,000 Income tax provision (benefit)....... (3,418,000) 7,831,000 5,068,000 ------------ ------------ ------------ NET INCOME (LOSS).................. $ (8,531,000) $ 9,650,000 $ 6,306,000 ============ ============ ============ Earnings (loss) per share Primary............................ $ (.62) $ .76 $ .56 Fully diluted...................... (.62) .75 .56 ------------ ------------ ------------ Weighted average number of shares outstanding Primary............................ 13,870,000 14,217,000 13,065,000 Fully diluted...................... 13,870,000 14,217,000 13,065,000 ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 16 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
COMMON STOCK TREASURY STOCK --------------------- ---------------------- NUMBER ADDITIONAL NUMBER OF PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ---------- ---------- ------------ ----------- --------- ----------- Balance at January 1, 1992................... 11,408,009 $2,852,000 $ 59,701,000 $59,209,000 891,327 $ 8,786,000 Cash dividends on common stock ($.12 per share). (1,266,000) Exercise of employee stock options.......... 142,810 35,000 1,070,000 32,501 389,000 Tax benefit arising from exercise of stock options................ 121,000 Contribution of treasury stock to employee profit sharing trust... 30,000 (76,000) (749,000) Other................... 92,000 (16,706) (164,000) Net income.............. 6,306,000 ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1992................... 11,550,819 2,887,000 61,014,000 64,249,000 831,122 8,262,000 Cash dividends on common stock ($.12 per share). (1,298,000) Exercise of employee stock options.......... 321,690 81,000 2,591,000 87,356 1,185,000 Tax benefit arising from exercise of stock options................ 210,000 Contribution of treasury stock to employee profit sharing trust... 42,000 (5,600) (58,000) Other................... 149,000 (2,805) (27,000) Net income.............. 9,650,000 ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1993................... 11,872,509 2,968,000 64,006,000 72,601,000 910,073 9,362,000 Cash dividends on common stock ($.12 per share). (1,673,000) Exercise of employee stock options.......... 2,672,318 668,000 23,423,000 1,197,241 29,465,000 Tax benefit arising from exercise of stock options................ 9,962,000 Conversion of debentures............. 2,751,328 688,000 48,379,000 Repurchase of common stock.................. 640,700 12,175,000 Other................... 40 -- 1,197,000 (2,695) (48,000) Net loss................ (8,531,000) ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1994................... 17,296,195 $4,324,000 $146,967,000 $62,397,000 2,745,319 $50,954,000 ========== ========== ============ =========== ========= ===========
The accompanying notes are an integral part of these statements. 17 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1994 1993 1992 ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..... $ (8,531,000) $ 9,650,000 $ 6,306,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization......... $13,385,000 $ 12,166,000 $ 11,830,000 Nonrecurring charges net of cash payments of $5,223,000........ 35,739,000 -- -- Deferred taxes........ (8,067,000) (1,782,000) (2,389,000) Provision for doubtful accounts............. 874,000 4,642,000 4,652,000 Changes in assets and liabilities Accounts receivable.. 10,515,000 (16,720,000) (7,732,000) Inventories.......... 5,575,000 (10,325,000) (12,754,000) Prepaid expenses and other current assets.............. 1,459,000 (423,000) (2,199,000) Accounts payable and accrued expenses.... 3,860,000 4,768,000 6,040,000 Income taxes payable. (4,902,000) (1,535,000) 2,716,000 Other................ (1,061,000) 57,377,000 4,273,000 (4,936,000) (994,000) (830,000) ----------- ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities......... 48,846,000 4,714,000 5,476,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment.. (23,046,000) (20,519,000) (17,138,000) Funds (held) used for construction......... 1,327,000 7,721,000 (8,357,000) Proceeds from proper- ty, plant and equip- ment disposals....... 1,681,000 216,000 361,000 Other................. 129,000 1,564,000 247,000 ------------ ------------ ------------ Net cash used in investing activities......... (19,909,000) (11,018,000) (24,887,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Short-term debt borrowings (repayments), net.... (2,330,000) (4,752,000) 5,928,000 Repayment of long-term debt................. (15,765,000) (13,482,000) (11,850,000) Purchase of treasury shares............... (12,175,000) -- -- Long-term borrowings.. -- 34,760,000 16,392,000 Additions to capital leases............... -- -- 7,000,000 Cash dividends........ (1,673,000) (1,298,000) (1,266,000) Proceeds from exercise of employee stock options.............. 6,491,000 1,655,000 731,000 Other................. (1,581,000) 40,000 (62,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities......... (27,033,000) 16,923,000 16,873,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 1,904,000 10,619,000 (2,538,000) Cash and cash equivalents at beginning of year.. 12,499,000 1,880,000 4,418,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 14,403,000 $ 12,499,000 $ 1,880,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 18 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Ply Gem Industries, Inc. and its wholly-owned subsidiaries after eliminating all significant intercompany accounts and transactions. Certain prior year items have been reclassified to conform to the 1994 presentation. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and temporary investments having a maturity of three months or less. Marketable Securities Marketable securities are carried at fair value. The fair value of these securities is estimated based on current market prices and management's estimates. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Property, Plant and Equipment Owned property, plant and equipment are depreciated, generally on a straight- line basis over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over their respective lives or the terms of the applicable leases, including expected renewal options, whichever is shorter. Accelerated depreciation methods are used for tax purposes. Capitalized leases are amortized on a straight-line basis over the terms of the leases or their economic useful lives. Intangible Assets (a) Patents and Trademarks Purchased patents and trademarks are recorded at appraised value at time of acquisition and are being amortized on a straight-line basis over their estimated remaining economic lives; thirteen to sixteen years for patents and thirty years for trademarks. (b) Other Intangibles Cost in excess of net assets acquired is being amortized from twenty to thirty years on a straight-line basis. On a periodic basis, the Company estimates the future undiscounted cash flows of the businesses to which goodwill relates in order to ensure that the carrying value of such goodwill has not been impaired. Other purchased intangibles are being amortized on a straight-line basis generally from ten to thirty-nine years. Income Taxes Deferred income tax liabilities and assets reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss carryforwards. Deferred income tax assets, such as benefits related to net operating loss carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. 19 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (a) Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. (b) Long-Term Debt The carrying amount approximates fair value, as the debt carries variable interest rates. Earnings (Loss) Per Share Earnings (loss) per share of common stock is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding. Stock options have been excluded from the calculation in 1994 as their effect would be anti-dilutive. Earnings per share is calculated using the modified treasury stock method, which limits the assumed purchase of treasury shares to 20% of the outstanding common shares. The assumed conversion of the Company's 10% Convertible Subordinated Debentures ("Debentures") was not used in 1993 and 1992 because the result would be anti-dilutive. NOTE 2 -- NONRECURRING CHARGES During 1994, the Company recorded nonrecurring charges of $41.0 million ($25.7 million after tax), of which $4.7 million ($3.2 million after tax) was recorded in the fourth quarter. The charges consist of approximately $29.1 million related to a restructuring program designed to improve profitability and $11.9 million for unusual items primarily consisting of the write down of certain intangible assets and discontinued products and costs associated with the Company's business process redesign. The Company began working on the proposed restructuring program during the fiscal 1994 second quarter. The restructuring charge consists of several components including: severance and related costs in connection with the planned reduction of approximately 15% of the Company's workforce or approximately 600 salaried and hourly jobs, consolidation and closure of selected regional distribution and manufacturing facilities, the abandonment of certain information systems and other actions including lease termination expenses and transaction costs to execute the restructuring program. It is anticipated that these actions will be implemented over the next twelve months and the Company expects to realize annualized pretax savings of approximately $13 million upon full implementation. However, there can be no assurance that the Company will realize these savings. The status of the components of the restructuring provision at the end of the year was:
BALANCE AT INITIAL 1994 DECEMBER 31, PROVISION ACTIVITY 1994 ----------- ---------- ------------ Consolidation and closure of facilities, including severance and related costs..... $19,500,000 $4,400,000 $15,100,000 Other severance and related costs.......... 5,000,000 1,100,000 3,900,000 Abandonment of certain information systems. 1,700,000 400,000 1,300,000 Other, including lease termination expenses and costs to execute the restructuring program................................... 2,900,000 900,000 2,000,000 ----------- ---------- ----------- $29,100,000 $6,800,000 $22,300,000* =========== ========== ===========
-------- * The following amounts are included in the consolidated balance sheet at December 31, 1994 under the captions: "accrued restructuring" ($13.4 million), "other liabilities" ($4.1 million), "property, plant and equipment" (reduction of $2.0 million), "inventory" (reduction of $1.5 million), "accounts receivable" (reduction of $.8 million) and various other asset accounts (reduction of $.5 million). 20 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3 -- ACCOUNTS RECEIVABLE The Company has a program which currently allows for the sale of up to $50 million of undivided fractional interests in a designated pool of eligible accounts receivable to a financial institution with limited recourse. The program expires in January 1998 with options to extend the agreement to January 2000. At December 31, 1994, the Company sold $40 million of receivables under this program compared to $20 million at December 31, 1993. Program costs of $1,892,000, $1,495,000 and $1,502,000 are included in other income (expense) for 1994, 1993 and 1992, respectively. NOTE 4 -- INVENTORIES The classification of inventories at the end of each year was as follows:
1994 1993 ------------ ------------ Finished goods..................................... $ 52,390,000 $ 56,630,000 Work in progress................................... 18,002,000 25,806,000 Raw materials...................................... 32,697,000 35,079,000 ------------ ------------ $103,089,000 $117,515,000 ============ ============
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at the end of each year consisted of the following:
1994 1993 ------------ ------------ Land............................................. $ 2,679,000 $ 2,420,000 Buildings and improvements....................... 26,389,000 26,240,000 Machinery and equipment.......................... 64,285,000 53,726,000 Transportation equipment......................... 2,313,000 2,720,000 Furniture and fixtures........................... 11,107,000 10,057,000 Capital leases................................... 7,397,000 7,364,000 Construction in progress......................... 6,760,000 3,943,000 ------------ ------------ 120,930,000 106,470,000 Accumulated depreciation and amortization........ (43,846,000) (38,704,000) ------------ ------------ $ 77,084,000 $ 67,766,000 ============ ============
NOTE 6 -- INTANGIBLE AND OTHER ASSETS The accumulated amortization of cost in excess of net assets acquired and other intangible assets is $25,990,000 at December 31, 1994 and $26,136,000 at December 31, 1993. Other assets at December 31, 1994 include notes receivable from an executive officer of $5,400,000 ($6,340,000 at December 31, 1993) and $3,250,000. The $5,400,000 notes have an average interest rate of 7.1% and are due in approximately equal annual installments through 2003. Under the terms of the notes, principal and interest are forgiven upon the attainment of at least a 20% improvement in net income, as defined, versus the prior year or at the discretion of the Board of Directors. Accordingly, the annual installments for 1994 and 1993 were forgiven. Furthermore, under the terms of the officer's employment agreement, the loan shall be forgiven upon the occurrence of a change in control of the Company or permanent disability of the officer. The $3,500,000 note has an interest rate which is the higher of the Company's average bank borrowing rate or the applicable Federal rate in effect for such period. The note is payable in annual installments of $250,000 with the final payment due December 31, 1998. 21 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7 -- SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31 is as follows:
1994 1993 1992 ---------- ----------- ---------- Interest paid (net of $323,000 capitalized in 1994, $510,000 in 1993 and $263,000 in 1992).................................... $5,546,000 $ 9,692,000 $9,723,000 ---------- ----------- ---------- Income taxes paid......................... $2,819,000 $10,180,000 $4,064,000 ---------- ----------- ----------
Noncash financing activities involve the issuance of common stock upon conversion of $49,963,000 of the Company's Debentures in 1994. NOTE 8 -- LONG-TERM DEBT The composition of long-term debt at the end of each year was as follows:
1994 1993 ----------- ------------ Revolving credit facility expiring in 1999........ $71,500,000 $ 86,384,000 10% Convertible Subordinated Debentures due 2008.. -- 50,000,000 Industrial Development Revenue Bonds maturing at various dates to 2012, gener- ally at floating interest rates which are reset periodically (4.8% average interest rate for 1994).......................................... 8,324,000 8,760,000 Other............................................. 557,000 107,000 ----------- ------------ 79,931,000 145,701,000 Less current maturities........................... 430,000 2,803,000 ----------- ------------ $79,501,000 $142,898,000 =========== ============
The Company has a revolving credit facility with a syndicate of banks, which provides financing of up to $200 million through February 1999. Interest on borrowings are at varying rates based, at the Company's option, on the London Interbank Offered Rate (LIBOR) or the bank's prime rate. The Company pays an annual fee of .375% on the facility amount. The average weighted interest rate on these loans for the year 1994 was 5.9%. The credit facility includes customary covenants, including covenants limiting the Company's ability to pledge assets or incur liens on assets and financial covenants requiring among other things, the Company to maintain a specified leverage ratio, fixed charge ratio and tangible net worth levels. In addition, the amount of annual dividends the Company can pay is limited based on a formula. At December 31, 1994 $2,900,000 was available for payments of dividends in 1995. Borrowings under this credit facility are collateralized by the common stock of the Company's principal subsidiaries. During 1994, holders of the Company's Debentures converted a total principal amount of $49,963,000 into 2,751,328 shares of the Company's common stock. As a result of this transaction, the total principal amount converted was credited to common stock at par and paid-in-capital, net of unamortized expenses of the original debt issue and transaction costs and offset by the accrued interest from the last payment date to the conversion date. The remaining $37,000 of the original $50 million face amount was redeemed by the Company. The Company has purchased $60 million of interest rate caps, which has the effect of limiting the Company's exposure to high interest rates. These caps mature over various periods through October 1996 and have cap rates ranging from 6.5% to 8.5%. 22 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future maturities of long-term debt, for the years 1996 through 1999, are: 1996-$401,000; 1997-$421,000; 1998-$446,000; and 1999-$71,976,000. The net book value of property, plant and equipment pledged as collateral under mortgages and industrial revenue bonds approximated $7,780,000 at December 31, 1994. NOTE 9 -- INCOME TAXES The income tax provision (benefit) for the years ended December 31 consisted of the following:
1994 1993 1992 ------------ ----------- ----------- Federal Current........................... $ (6,195,000) $ 7,986,000 $ 5,098,000 Deferred.......................... (7,353,000) (1,782,000) (1,266,000) Foreign............................. (21,000) 190,000 245,000 State and local Current........................... 903,000 1,227,000 870,000 Deferred.......................... (714,000) -- -- ------------ ----------- ----------- (13,380,000) 7,621,000 4,947,000 Tax benefit from exercise of stock options.......................... 9,962,000 210,000 121,000 ------------ ----------- ----------- Actual tax provision (benefit).... $ (3,418,000) $ 7,831,000 $ 5,068,000 ============ =========== ===========
The significant components of the Company's deferred tax assets and liabilities as of December 31, 1994 and 1993 are as follows:
1994 1993 ----------- ----------- Net deferred tax assets -- current: Nonrecurring charge............................. $ 6,581,000 $ -- Allowance for bad debts......................... 2,678,000 2,734,000 Accrued expenses deductible for tax purposes when paid...................................... 1,831,000 1,209,000 State and local net operating loss tax carryforwards.................................. 897,000 669,000 Other........................................... (290,000) 57,000 ----------- ----------- Total deferred tax assets..................... 11,697,000 4,669,000 Valuation allowance for deferred tax assets... (897,000) (669,000) ----------- ----------- Net deferred tax current assets............... 10,800,000 4,000,000 =========== =========== Net deferred tax liabilities (assets) -- noncurrent: Nonrecurring charge............................. (2,843,000) -- Accelerated depreciation........................ 4,330,000 2,844,000 Asset revaluations, net......................... (81,000) (1,790,000) Involuntary conversion.......................... 450,000 450,000 Accrued expenses deductible for tax purposes when paid...................................... (2,037,000) -- Income not recognized for book purposes......... (493,000) (493,000) Other........................................... 132,000 (287,000) ----------- ----------- Net deferred tax noncurrent liabilities (as- sets)........................................ $ (542,000) $ 724,000 =========== ===========
As of December 31, 1994, the Company has deferred tax assets largely attributable to the 1994 nonrecurring charge (see Note 2) and other accrued expenses. These items are expected to reverse when paid and are therefore likely to be realized. 23 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Prior to the adoption of Financial Accounting Standards Board Statement No. 109, the deferred tax provision was comprised as follows:
1992 ----------- Depreciation................................................... $ 204,000 Bad debt reserves, net......................................... (690,000) Accrued expenses deductible for tax purposes when paid......... (400,000) Unusual charge................................................. (176,000) Other.......................................................... (204,000) ----------- $(1,266,000) ===========
The actual income tax provision (benefit) varies from the Federal statutory rate applied to consolidated pretax income (loss) as follows:
1994 1993 1992 ----------- ---------- ---------- Income taxes at Federal statutory rate of 35% in 1994 and 1993; 34% in 1992... $(4,182,000) $6,118,000 $3,867,000 Increases resulting from State and local income taxes net of Federal income tax benefit........... 123,000 798,000 574,000 Amortization of cost in excess of net assets acquired...................... 509,000 513,000 498,000 Other--net............................ 132,000 402,000 129,000 ----------- ---------- ---------- Actual tax provision (benefit)........ $(3,418,000) $7,831,000 $5,068,000 =========== ========== ==========
NOTE 10 -- RETIREMENT PLANS The Company provides retirement benefits to certain of its salaried and hourly employees through non-contributory defined benefit pension plans. The benefits provided are primarily based upon length of service and compensation, as defined. The Company funds the plans in amounts as actuarially determined and to the extent deductible for federal income tax purposes. The Company's pension plan assets consist of marketable securities including stocks, bonds and U.S. government securities and insurance company contracts. The components of pension expense are as follows:
1994 1993 1992 ---------- --------- --------- Service cost--benefits earned in current year.................................... $1,044,000 $ 786,000 $ 809,000 Interest cost on projected benefit obligation.............................. 782,000 665,000 595,000 Income earned on plan assets............. (866,000) (680,000) (684,000) Net amortization and deferral............ 28,000 (134,000) (71,000) ---------- --------- --------- $ 988,000 $ 637,000 $ 649,000 ========== ========= =========
Assumptions used in the computation of net pension expense are as follows:
1994 1993 1992 ---- ---- ---- Weighted average discount rate for plan obligations........ 8.0% 7.5% 8.0% Rate of future compensation increases...................... 5.0 5.0 5.0 Weighted average rate of return on plan assets............. 8.8 8.9 8.9
24 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reconciliation of the funded status of the plans at year end follows:
1994 1993 ----------- ----------- Accumulated benefit obligation: Vested.......................................... $ 9,748,000 $ 7,917,000 Nonvested....................................... 662,000 491,000 ----------- ----------- Total............................................. 10,410,000 8,408,000 Projected salary increases........................ 1,690,000 1,737,000 ----------- ----------- Projected benefit obligation...................... 12,100,000 10,145,000 Plan assets at fair value......................... 11,016,000 10,255,000 ----------- ----------- Assets (less) greater than projected benefit obli- gation........................................... (1,084,000) 110,000 Unrecognized net (gain) loss...................... (1,179,000) (90,000) Additional liability.............................. (1,595,000) -- Unrecognized prior service cost................... 1,828,000 23,000 Unrecognized transition cost...................... 169,000 206,000 ----------- ----------- Prepaid (accrued) pension......................... $(1,861,000) $ 249,000 =========== ===========
The Company maintains a discretionary profit sharing plan with a voluntary 401(k) option for certain of its salaried and hourly employees who vest after meeting certain minimum age and service requirements. Profit sharing plan expense, including the Company's 401(k) match, is comprised as follows:
1994 1993 1992 ---------- ---------- ---------- Ply Gem common stock........................ $2,636,000 $1,181,000 $1,155,000 Cash........................................ -- 170,000 677,000 ---------- ---------- ---------- $2,636,000 $1,351,000 $1,832,000 ========== ========== ==========
NOTE 11 -- STOCK OPTION PLANS The Company's Executive Incentive Stock Option Plan provides for the granting of options to key employees to purchase up to 2,037,500 shares of common stock. Option prices must be 100% of fair market value at date of grant except for an employee who owns in excess of 10% of the common stock outstanding, in which case the exercise price is 110% of the fair market value at date of grant. Options are exercisable in full or in part after one year from the date of grant and expire within ten years (within five years for an employee owning in excess of 10% of the outstanding common stock). Shares acquired must be held for one year. The Senior Executive Stock Option Plan ("the Senior Plan") authorizes the granting of either incentive or non-qualified stock options only to executives of businesses acquired by the Company or to newly employed executives. The Senior Plan provides for 750,000 shares of the Company's common stock to be reserved for such issuance. The 1989 Employee Incentive Stock Plan ("the 1989 Plan") authorizes the granting of incentive and non-qualified stock options and awards of restricted stock and is made available to executives and key employees of the Company. As in the Senior Plan, option terms and holding and exercise periods may vary except that no option may be exercised more than ten years after date of grant. Stock awarded under the Plan will be subject to restrictions as to sale or transfer. These restrictions may lapse or be waived based on performance, period of service or other factors. The 1989 Plan provides for 3,500,000 shares of the Company's common stock to be reserved for issuance. 25 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The 1994 Incentive Stock Plan ("the 1994 Plan") authorizes the granting of incentive and non-qualified stock options and awards of restricted stock. The terms and conditions of the 1994 Plan are similar to those as described above. The 1994 Plan provides for 2,250,000 shares reserved for such issuance. At December 31, 1994, approximately 1,862,000 shares were available for future grant. In 1991, the Company granted 250,000 shares of restricted stock to an executive officer of the Company. The restrictions on these shares will be released at the rate of 25,000 shares per year upon the attainment of certain performance goals and the continued employment of the officer. The restrictions will be lifted in the event of a change in control of the Company. The unamortized restricted stock resulting from this stock award has been deducted from stockholders' equity and is being amortized over ten years at the fair market value on the dates the restrictions are released. In 1994, the Company granted 175,000 shares of restricted stock to an executive officer of the Company. The shares will be released at the rate of 43,750 per year upon the attainment of certain performance goals and the continued employment of the officer. Compensation expense is charged to the income statement at the fair market value on the dates the restrictions are released. For the three years ended December 31, 1994, option activity was as follows:
INCENTIVE OPTION NON-QUALIFIED OPTIONS ---------------------- ----------------------- NUMBER OF OPTION NUMBER OF OPTION SHARES PRICES SHARES PRICES --------- ----------- ---------- ----------- Outstanding January 1, 1992...... 1,394,650 $5.50-14.25 2,900,250 $5.63-16.00 1992 Granted........................ 289,675 9.75 539,000 6.75- 9.75 Exercised...................... (77,880) 5.50-12.25 (64,930) 6.63-12.13 Canceled....................... (76,400) 6.63-12.25 (13,750) 6.63-12.13 --------- ----------- ---------- ----------- Outstanding December 31, 1992.... 1,530,045 5.50-14.25 3,360,570 5.63-16.00 1993 Granted........................ 323,900 10.25-10.38 792,650 10.38-12.63 Exercised...................... (198,370) 5.50-10.75 (123,320) 6.63-12.13 Canceled....................... (35,750) 6.63-12.25 (45,700) 8.38-12.13 --------- ----------- ---------- ----------- Outstanding December 31, 1993.... 1,619,825 6.63-14.25 3,984,200 5.63-16.60 1994 Granted........................ 160,970 19.13 1,428,400 17.75-25.50 Exercised...................... (796,644) 6.63-13.75 (1,875,674) 5.63-13.25 Canceled....................... (42,050) 6.63-12.25 0 -- --------- ----------- ---------- ----------- At December 31, 1994 Outstanding.................... 942,101 6.63-19.13 3,536,926 5.63-25.50 Exercisable.................... 781,131 6.63-14.25 3,026,926 5.63-21.86 --------- ----------- ---------- -----------
NOTE 12 -- COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain of its manufacturing, distribution and office facilities as well as some transportation and manufacturing equipment under noncancellable leases expiring at various dates through 26 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the year 2017. Certain real estate leases contain escalation clauses and generally provide for payment of various occupancy costs. Minimum future lease obligations on noncancellable leases in effect at December 31, 1994 are as follows:
CAPITAL OPERATING LEASES LEASES ---------- ----------- Year ending December 31, 1995............................................... $ 63,000 $14,648,000 1996............................................... 63,000 12,517,000 1997............................................... 60,000 9,157,000 1998............................................... 38,000 7,913,000 1999............................................... 9,000 6,838,000 Subsequent years through 2017...................... 7,008,000 48,220,000 ---------- ----------- Net minimum lease payments........................... 7,241,000 $99,293,000 =========== Amount representing interest......................... 33,000 ---------- Present value of net minimum lease payments (includ- ing $50,000 payable within one year)................ $7,208,000 ==========
Rental expense for operating leases amounted to approximately $21,036,000 in 1994, $21,224,000 in 1993, and $20,146,000 in 1992. HOOVER TREATED WOOD PRODUCTS, INC. ("HOOVER") Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of the Company is a defendant, along with many other parties, in a number of commercial lawsuits, including a purported class action on behalf of certain Maryland homeowners, alleging property damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August 1988. The Company is also a defendant in some of these suits. The number of lawsuits pending, as of December 31, 1994, as well as the number of lawsuits filed in 1993 and 1994, have declined significantly from earlier periods. Many of the suits and claims have been settled. In those suits that remain pending, direct defense costs are being paid by either insurance carriers, under reservations of rights agreements, or out of insurance proceeds. Two actions have proceeded to trial against Hoover and resulted in jury verdicts against it. In one of these actions, judgment was entered in Hoover's favor by the court after a jury verdict against it and the plaintiff's petition to appeal the judgment entered in Hoover's favor was denied. Hoover is appealing the other judgment and believes that it has meritorious grounds for overturning it in whole or in part. Hoover and the Company are engaged in litigation with their insurers regarding coverage for these lawsuits and claims. Hoover has settled its coverage claims with a majority of its insurers and is negotiating settlements with others. Hoover and the Company believe they have meritorious claims for coverage from their remaining unsettled insurers and are seeking declaratory judgments confirming such coverage. The proceeds from settled insurance claims, along with the proceeds from a settlement of claims by Hoover against certain suppliers of materials used by it in the production of treated wood, are available for the settlement of the underlying property damage actions, including the jury verdict now on appeal. The Company believes that Hoover's remaining coverage disputes will be resolved within the next two years on a satisfactory basis and a sufficient amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage, considered its history of successful settlements with primary and excess insurers and consulted with counsel. 27 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Hoover and the Company are vigorously defending the underlying lawsuits which cannot be resolved on a reasonable basis and believe that they have meritorious defenses to those suits including, in the case of the Company, the defense that it has been improperly joined, as it did not manufacture or market the Hoover products at issue, and is not legally liable for the damage allegedly caused by them. In accordance with the provisions of Financial Accounting Standards Board Interpretation No. 39, which became effective on January 1, 1994, Hoover has recorded a receivable at December 31, 1994 (included in other assets) for $12.1 million for the estimated proceeds and recoveries related to insurance matters discussed above and recorded an accrual for the same amount (included in other liabilities) for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In estimating both this liability, which Hoover expects to discharge over the next four years, and its anticipated additional insurance recoveries, Hoover and the Company have considered a number of factors including: the number and exposure posed by the pending lawsuits; the significant decline in the number of lawsuits filed in 1993 and to date; the availability of various legal defenses, including statutes of limitations; the existence of settlement protocols; an agreement indemnifying Hoover as to certain past and future claims; and Hoover's experience to date in settling with its insurance companies and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material adverse effect upon the financial position of the Company. EXECUTIVE COMPENSATION In the event of a change in control of the Company, as defined, senior management, except for the chairman, have the right to receive payments upon termination of employment or resignation within one year. Such payments are to be 2.75 times average annual compensation, as defined, plus in some cases 2.75 times the difference between the market and exercise price of any unexercised stock options. At December 31, 1994, the maximum amount payable, applicable to thirteen individuals, would be approximately $14 million. LETTERS OF CREDIT At December 31, 1994 $18,811,000 of letters of credit issued by the Company's banks were outstanding, principally in connection with certain financing transactions. OTHER The Company and its subsidiaries are subject to legal actions from time to time which have arisen in the ordinary course of its business. In the opinion of management, the resolution of these claims will not materially affect the financial position of the Company. NOTE 13 -- INDUSTRY SEGMENT The Company operates predominantly in one business segment. Operations in the Home Improvement Products business consist of the manufacture and sale of vinyl siding, wood and vinyl-framed windows and patio doors, prefinished decorative plywood and solid wood paneling, furniture components, various pressure-treated wood products and the purchase and resale of a variety of other products for the home improvement markets. One customer accounted for 14.2%, 12.2% and 11.2% of the Company's net sales for the years ended December 31, 1994, 1993 and 1992, respectively. 28 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) NOTE 14 -- QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) Year Ended December 31, 1994: Net Sales.................... $163,412 $219,805 $218,997 $194,205 Gross Profit................. 26,477 46,079 46,653 34,873 Income (loss) before tax- es(/1/)..................... (2,372) 11,376 (21,477) 524 Net Income (Loss)............ (1,305) 6,265 (13,977) 486 Per Share: Primary.................... (.11) .40 (.95) .03 Fully Diluted.............. (.11) .40 (.95) .03 Year Ended December 31, 1993: Net Sales.................... $146,347 $184,422 $208,966 $182,925 Gross Profit................. 26,009 35,900 40,772 35,708 Income (loss) before taxes... (3,719) 6,266 9,607 5,327 Net Income (Loss)............ (2,046) 3,447 5,260 2,989 Per Share: Primary.................... (.19) .31 .44 .23 Fully Diluted.............. (.19) .31 .41 .23
-------- (1) After nonrecurring charges of $36.3 million in the third quarter and $4.7 million in the fourth quarter. See Note 2 to the consolidated financial statements. Earnings (loss) per share calculations for each of the quarters presented are based on the weighted average number of shares and common equivalent shares outstanding during such periods. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on May 11, 1995. ITEM 11. EXECUTIVE COMPENSATION. The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on May 11, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on May 11, 1995. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on May 11, 1995. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. The following documents are filed as part of this report: (a)(1) Financial Statements: The list of consolidated financial statements is set forth in Part II, Item 8 of this Form 10-K and such Index to Consolidated Financial Statements is incorporated herein by reference. (a)(2) Financial Statement Schedules: The financial statement schedules that are required by Part II, Item 8 of this Form 10-K, will be filed by amendment. (a)(3) Exhibits: 3(a) Registrant's By-Laws as currently in effect is incorporated by reference herein from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 1994. 3(b) Registrant's Certificate of Incorporation, and all amendments thereto is incorporated by reference herein from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10(iii)(a) Registrant's 1989 Employee Incentive Stock Plan is incorporated by reference herein from the Registrant's Registration Statement on Form S-8 (Registration Number 33-28753), as amended by the Company's Registration Statement on Form S-8 (Registration Number 33-52514). 10(iii)(b) Registrant's 1989 Senior Executive Stock Option Plan is incorporated by reference herein from the Registrant's Registration Statement on Form S-8 (Registration Number 33- 28752). 10(iii)(c) Registrant's Executive Incentive Stock Option Plan is incorporated herein by reference from the Registrant's Registration Statement on Form S-8 (Registration Number 2-84279), as amended by the Registrant's Registration Statement on Form S-8 (Registration Number 33-52516). 10(iii)(d) Employment agreements with Herbert P. Dooskin, Joseph Goldenberg, Monte R. Haymon, Donald Kruse and Jeffrey S. Silverman are incorporated by reference herein from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 10(iii)(e) Registrant's 1994 Employee Incentive Stock Plan is incorporated herein by reference from the Registrant's Registration Statement on Form S-8 (Registration No. 33-55035). 10(iii)(f) Registrant's Group Profit-Sharing/401(k) Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-55037). 10(iii)(g) Registrant's 1994 Incentive Compensation Plan. 11 Schedule of Computation of Net Income per Share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule.
(b) Reports on Form 8-K On October 18, 1994, the Company reported on a restructuring plan to improve profitability. On November 4, 1994, the Company reported on an amendment to its By-laws. On November 23, 1994, the Company reported on a plan for the Company to purchase up to 1,000,000 shares of its common stock in the open market. 31 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Ply Gem Industries, Inc. (Registrant) /s/ Jeffrey S. Silverman By: _________________________________ JEFFREY S. SILVERMAN, CHAIRMAN (MARCH 31, 1995) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. NAME TITLE DATE /s/ Jeffrey S. Silverman Chairman, Chief March 31, 1995 ------------------------------------- Executive Officer JEFFREY S. SILVERMAN (Principal Executive Officer) and Director /s/ Herbert P. Dooskin Executive Vice March 31, 1995 ------------------------------------- President HERBERT P. DOOSKIN (Principal Financial Officer) and Director /s/ Jerome Baum Controller March 31, 1995 ------------------------------------- JEROME BAUM /s/ Albert Hersh Director March 31, 1995 ------------------------------------- ALBERT HERSH /s/ Elihu H. Modlin Director March 31, 1995 ------------------------------------- ELIHU H. MODLIN /s/ Joseph Goldenberg Director March 31, 1995 ------------------------------------- JOSEPH GOLDENBERG 32 EX-10.(III)(G) 2 INCENTIVE COMPENSATION PLAN EXHIBIT 10(iii)(g) PLY GEM INDUSTRIES, INC. INCENTIVE COMPENSATION PLAN Section 1. Purpose The purpose of this Plan is to recognize and reward key employees of the Company for the attainment of established performance goals reflecting both annual and long-term results which further the success of the Company. Section 2. Definitions For Plan purposes, the following terms shall have the following respective meanings: (a) "Award" means a payment or payment opportunity granted to a Participant pursuant to Section 5 of the Plan. (b) "Board" means the Board of Directors of Ply Gem Industries, Inc. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (d) "Committee" means a committee designated by the Board and comprised of two or more non-employee members of the Board, each of whom is an "outside director" within the meaning of Section 162(m) of the Code. (e) "Company" means Ply Gem Industries, Inc., including any subsidiary and division, and any other entity in which the Company has a significant equity interest, as determined by the Committee. (f) "Net Profit Margin" means the quotient resulting from dividing Net Income by Net Sales for the applicable period designated by the Committee. (g) "Net Income" means such amount as is reported in the Company's annual report to stockholders, but before extraordinary items and the cumulative effect of accounting changes, for the applicable period. (h) "Net Sales" means such amount as is reported in the Company's annual report to stockholders, but before extraordinary items and the cumulative effect of accounting changes, for the applicable period. (i) "Operating Income" means such amount of income from operations as is reported in the Company's annual report to stockholders, or comparable amount for a subsidiary or division, for the applicable period. (j) "Participant" means an employee of the Company designated by the Committee to receive an Award. (k) "Performance Period" means either, as designated by the Committee, a single fiscal year of the Company, or three successive fiscal years of the Company. (l) "Plan" means the Incentive Compensation Plan as set forth herein and as may be amended from time to time pursuant to Section 14. (m) "RONA" means the quotient resulting from dividing Operating Income, by the average of applicable net assets, as determined by the Committee, for the applicable period. Section 3. Administration (a) The Committee shall have full power and authority to construe, interpret and administer the Plan and to make rules and regulations subject to the provisions of the Plan. All decisions, actions, determinations and interpretations of the Committee shall be made in its sole discretion and shall be final, conclusive and binding on all parties. (b) No member of the Committee shall be personally liable by reason of any contract or other instrument executed by him, or on his behalf, in his capacity as a member of the Committee or for any mistake of judgment made in good faith. To the extent permitted by law, the Company shall indemnify and hold harmless each member of the Committee and each other officer, employee or director of the Company to whom any duty or power relating to the administration of the Plan has been delegated, against any cost or expense (including counsel and related fees) or liability (including any sum paid in settlement of a claim with approval of the Committee) arising out of any act or omission in connection with the Plan unless arising out of such person's own fraud, gross negligence, willful misconduct or bad faith. Section 4. Eligibility for Participation (a) The Committee shall select Participants from among officers and other key employees of the Company. No member of the Committee or other non-employee member of the Board shall participate in the Plan. (b) The Committee may also grant an Award to a person (or his or her beneficiary or estate) who has terminated employment with the Company prior to the end of a Performance Period based on the terms of the Award or the Committee's determination that the person is deserving of such an Award. Section 5. Determination and Payments of Award (a) For each Performance Period, the Committee shall, in its discretion, establish target award levels and respective performance measure(s) which are to be attained for the applicable Award(s). The performance measures used shall be Net Profit Margin, Net Income, Net Sales, Operating Income, and RONA, either solely or in combination, as established in the discretion of the Committee. The Committee shall have the right to reduce or eliminate Awards otherwise payable under the Plan. (b) Following the conclusion of the applicable Performance Period, the Committee shall authorize the payment of Awards to Participants. However, an Award payment to any one Participant for a fiscal year Performance Period shall not exceed five percent (5%) of Operating Income for such year and an Award payment to any one Participant for a three-year Performance Period shall not exceed two percent (2%) of cumulative Operating Income for such period. (c) Awards may be paid in cash, shares of Common Stock or a combination and payments may be deferred pursuant to Section 7, all as determined by the Committee. Section 6. Withholding Tax The Company shall deduct from any payments under the Plan, a sufficient amount to cover withholding of any federal, state or local taxes required by law. Section 7. Payment Deferrals The Committee may require or permit Participants to elect to defer the payment of Awards under such rules and procedures as it may establish under the Plan, including providing for the payment or crediting of interest on the deferred amounts or the payment or crediting of dividend equivalents if deferred amounts are denominated in Common Stock equivalents. Section 8. Transferability and Exercisability Awards and rights to deferred payments, granted under the Plan shall not be transferable or assignable other than by will or the laws of descent and distribution. Section 9. Other Benefit and Compensation Programs Unless otherwise specifically determined by the Committee, settlements of Awards received by Participants under the Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan, severance program or severance pay law of any country, or benefits that may be provided pursuant to a contractual obligation of the Company. Further, the Company may adopt other compensation programs, plans or arrangements as it deems appropriate or necessary. Section 10. Unfunded Plan Unless otherwise determined by the Committee, the Plan and any deferred amounts under Section 7 hereof, shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any participant or other person. To the extent any person holds any rights by virtue of a grant awarded under the Plan, such rights (unless otherwise determined by the Committee) shall be no greater than the rights of an unsecured general creditor of the Company. Section 11. Future Rights No person shall have any claim or rights to be granted an award under the Plan, and no participant shall have any rights under the Plan to be retained in the employ of the Company. Likewise, participation in the Plan will not in any way affect the Company's right to terminate the employment of the participant at any time with or without cause. Participation in the Plan with respect to any Performance Period shall not affect the Committee's right to include or exclude any person for participation with respect to any other Performance Period. Section 12. Governing Law The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of New York and applicable federal law. Section 13. Successors and Assigns The Plan shall be binding on all successors and assigns of a Participant, including, without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the particpant's creditors. Section 14. Amendment or Termination The Committee may from time to time amend or terminate the Plan, provided that no amendment shall increase the maximum amount payable to a Participant for a Performance Period as specified in Section 5; and further provided that no amendment will cause an Award to become subject to the tax deduction limitation contained in section 162(m) of the Code. Section 15. Effective Date The Plan shall become effective upon its approval by the stockholders of the Company. Such approval shall constitute the effectiveness of Awards granted by the Committee prior to such approval for purposes of qualifying such Awards for the performance-based exemption provided under section 162(m) of the Code. EX-11 3 SCHEDULE OF COMPUTATION EXHIBIT 11 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE YEAR ENDED DECEMBER 31,
1993 1992 ----------------------- ----------------------- FULLY FULLY PRIMARY DILUTED PRIMARY DILUTED ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding during year................... 10,814,000 10,814,000 10,562,483 10,562,483 Excess of weighted average number of shares issuable upon exercise of employee stock options over 20% of shares outstanding at end of year.... 3,403,000 3,403,000 2,502,741 2,502,741 ----------- ----------- ----------- ----------- Weighted average number of shares........................ 14,217,000 14,217,000 13,065,224 13,065,224 ----------- ----------- ----------- ----------- Proceeds available to repay debt: From exercise of options, including tax benefits, at average market price........ $31,541,000 $22,046,854 From exercise of options, including tax benefits, at year-end market price....... $28,379,000 $20,230,728 Other........................ 1,360,000 1,360,000 1,538,000 1,538,000 ----------- ----------- ----------- ----------- 32,901,000 29,739,000 23,584,854 21,768,728 ----------- ----------- ----------- ----------- Interest saved................. 1,513,000 1,368,000 1,347,335 1,258,344 Other.......................... 198,000 187,000 187,119 184,298 ----------- ----------- ----------- ----------- 1,711,000 1,555,000 1,534,454 1,442,642 ----------- ----------- ----------- ----------- Increase to income, net of tax- es............................ 1,112,000 1,011,000 1,012,740 952,144 Net income as reported......... 9,650,000 9,650,000 6,305,756 6,305,756 ----------- ----------- ----------- ----------- Adjusted net income............ $10,762,000 $10,661,000 $ 7,318,496 $ 7,257,900 ----------- ----------- ----------- ----------- Per share...................... $.76 $.75 $.56 $.56
EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES (SUBSIDIARIES)
PARENT CORPORATION SUBSIDIARY AND STATE OF INCORPORATION ------------------ ------------------------------------- Ply Gem Industries, Inc. Allied Plywood Corporation (Delaware) Continental Wood Preserves, Inc. (Michigan) Great Lakes Window, Inc. (Ohio) Goldenberg Group, Inc. (California) Hoover Treated Wood Products, Inc. (Delaware) Richwood Building Products, Inc. (Delaware) Sagebrush Sales, Inc. (New Mexico) SNE Enterprises, Inc. (Delaware) Studley Products, Inc. (New York) Variform, Inc. (Missouri)
EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 24, 1995, accompanying the consolidated financial statements included in the Annual Report of Ply Gem Industries, Inc. on Form 10-K for the year ended December 31, 1994. We hereby consent to the incorporation by reference of said report in the Registration Statements of PlyGem Industries, Inc. on Form S-8 (Registration Nos. 33-28753; 33-52514; 33-28752; 2-84279; 33-52516; 33-55035; and 33-55037). Grant Thornton LLP New York, New York March 30, 1995 EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated financial statements of the Company and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 14,403 1,813 48,596 6,353 103,089 185,231 120,930 43,846 345,569 74,733 86,660 4,324 0 0 157,312 345,569 796,419 796,419 642,337 0 0 874 7,479 (11,949) (3,418) (8,531) 0 0 0 (8,531) (.62) (.62)