-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HmFoFL/hX3XM3zPDj0mU3gEvnK4hHE5daJRCkiAgBWIco72YHgg2kz01+KRqofp/ ByQwVOKhSwzkzsuqHjEeKw== 0000940180-97-000289.txt : 19970329 0000940180-97-000289.hdr.sgml : 19970329 ACCESSION NUMBER: 0000940180-97-000289 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLY GEM INDUSTRIES INC CENTRAL INDEX KEY: 0000079209 STANDARD INDUSTRIAL CLASSIFICATION: MILLWOOD, VENEER, PLYWOOD & STRUCTURAL WOOD MEMBERS [2430] IRS NUMBER: 111727150 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04087 FILM NUMBER: 97566444 BUSINESS ADDRESS: STREET 1: 777 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017-1401 BUSINESS PHONE: 2128321550 MAIL ADDRESS: STREET 1: PLY GEM INDUSTRIES INC STREET 2: 777 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017-1401 FORMER COMPANY: FORMER CONFORMED NAME: INDUSTRIAL PLYWOOD CO INC DATE OF NAME CHANGE: 19680729 FORMER COMPANY: FORMER CONFORMED NAME: CRAFTMAN PLYWOOD CORP DATE OF NAME CHANGE: 19680212 FORMER COMPANY: FORMER CONFORMED NAME: CRAFTSMAN PLYWOOD CORP DATE OF NAME CHANGE: 19661006 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1996. 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 OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 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 $154,500,000 as of March 24, 1997. The number of shares outstanding of the registrant's common stock, $.25 par value was 14,000,828 as of March 24, 1997. DOCUMENTS INCORPORATED BY REFERENCE
IDENTIFICATION OF DOCUMENT PART INTO WHICH INCORPORATED -------------------------- --------------------------------- Proxy Statement for Annual Meeting of Stockholders to be held on May 9, 1997 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 leading manufacturer and distributor of a wide range of building products for use in the remodeling and new construction of residential and light-commercial properties. The Company believes that it is among the nation's largest manufacturers of wood windows, vinyl windows, vinyl siding and accessories and a major supplier 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 building products industry. Ply Gem continues to successfully employ its strategies for becoming the supplier of choice to the building products industry. Across the multiple distribution channels it serves, the Company is teamed with the premier customers, including the major home centers, whose sales represent the fastest growing segment of the market. The Company's broad line of branded products, combined with its national service capabilities, including the ability to deliver directly to individual retail outlets, enable it to meet the unique needs of each of the customers and channels it serves. Through ongoing expansion of its branded products strategy and innovative cross marketing and bundling programs, Ply Gem continues to expand its share of the growing market for building products. The Company's products are distributed through an extensive network which includes major retail home center chains, specialty one-step building products distributors, lumber and building products wholesalers, professional contractors and Company operated distribution centers. The products are marketed primarily in the United States through Company sales personnel and independent representatives. BUSINESSES OF THE COMPANY The Company's subsidiaries and division are categorized into 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.
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 manufactures a full line of wood, clad and vinyl windows and patio doors, glass and polycarbonate skylights, and wooden interior bifold doors. SNE's products are sold under the Crestline (R), Vetter (R) and Kenergy (R) brand names, as well as through numerous private label programs, to wholesale distributors, home centers and lumber yards. SNE's products are marketed to both the home improvement and new construction markets. The Company believes that it is a leading supplier of wood windows which are sold directly to the major home centers and the fourth largest producer of wood windows in the United States. Crestline (R) and Vetter (R) brand wood windows are available with primed or clad exteriors, and offer innovative product features with a wide selection of options. A complete range of window styles include double hung, single hung, casement, awning, sliding, garden, angle bay and bow windows. Specialty and custom windows are available in a wide variety of shapes and sizes. Patio doors are offered in traditional hinged, French hinged, sliding and French sliding designs. The CrestWood (TM) Series of premium wood windows and patio doors combine the performance of an energy efficient, maintenance-free solid vinyl exterior with the warmth and beauty of a natural pine, oak, walnut or cherry interior that can be painted or stained. Most SNE products are available with insulated divided lite glass, a patented energy efficient replica of historically correct narrow mutten bar divided lite wood windows and patio doors. VinylCrest (TM) and ProCraft (TM), comprise a complete line of solid vinyl windows, which are available for replacement and new construction applications, in a full range of styles. The introduction of these series of vinyl windows give SNE a growing presence in vinyl windows which is the fastest growing segment in the window market. These product offerings are a critical component of SNE's strategy to offer windows in all price points and market segments. In addition to an extremely broad line of standard windows and doors, its custom window factory can build nearly any shape and size window. SNE differentiates itself from its competition with a multiple brand strategy, multi-channels of distribution (with an emphasis on the home center market), an established distribution network utilizing custom design and manufacturing capabilities, and a superior field sales and service support network. SNE's ability to sell in full truck load and less than truck load quantities is tailored to the desires of large home center chains which prefer to purchase windows direct from the manufacturer. SNE is unique in its ability to offer a full product line that includes primed and clad wood windows and patio doors, vinyl windows and patio doors and skylights under a single brand. The Company believes that SNE will continue to grow as its existing products gain market share due to improved brand recognition from cooperative and other advertising programs with its customers, and the introduction of new and innovative products such as CrestWood (TM), VinylCrest (TM) and ProCraft(TM). Furthermore, SNE expects to enjoy continued growth as a result of its focus on the fastest growing segment of the industry, home centers and lumber yards, which will continue to generate an increasing share of industry sales. Currently, SNE's strongest market presence is in the Northeast and Midwest. SNE believes significant opportunity exists to expand geographically, particularly in the Southeast, Southwest, West Coast and international markets. Variform, Inc.: Variform is a manufacturer of vinyl siding, soffit, skirting and accessories, which are available in a wide variety of woodgrains and colors. Its products are used in both remodeling and new construction applications and have captured an increasing share of the overall market for exterior siding materials (which includes wood, aluminum and masonry) due to its ease of installation, high performance, durability, low maintenance requirements and price stability as compared to alternative siding materials. Products are marketed principally to building materials distributors, who in turn sell primarily to home centers and lumber yards, the fastest growing distribution channel for vinyl siding. Variform markets its products under Cedar Lane(R), 2 Varigrain(R), Duragrain(R), Timber Oak(R) and ProLoc(R).The Company believes Variform is the leading supplier to home centers and lumber yards, and the third largest producer of vinyl siding in the United States. In addition, it is a supplier to the growing Eastern European market. Vinyl siding is sold to either specialty distributors who, in turn, sell directly to remodeling contractors or builders, or to building materials wholesale distributors who sell to home centers and lumberyards who in turn sell to remodeling contractors and consumers (two-step distribution). The Company believes that Variform is able to compete on 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. Great Lakes Window, Inc.: Great Lakes is a manufacturer of high quality, energy efficient and maintenance free vinyl windows and patio doors, which are available in a wide variety of styles and options. Historically, Great Lakes focused only on the replacement segment of the vinyl window market. However, in response to the growing acceptance of standard size vinyl windows in new construction applications, Great Lakes introduced a new construction vinyl window in 1994. Great Lakes markets its products under the Great Lakes (R) Gold, PLY GEM (R) Premium, Uniframe (R), and MC + (TM) brand names. Great Lakes's window and patio door systems are available for both new construction and replacement applications. The new construction series is available in both standard and custom sizes. Replacement units are custom manufactured to exact customer specifications. The Company believes it is among the largest suppliers of vinyl windows serving the replacement market in the United States. Products include single hung, double hung, bow and bay, casement, garden, sliding and awning windows, as well as hinged and sliding patio doors in the new construction and remodeling markets. Great Lakes offers a wide selection of products, including a variety of vinyl colors and interior woodgrains, several different grille styles and patterns and a wide assortment of glass options. Great Lakes's product lines feature fusion welded sash and frame corners which are guaranteed not to separate, leak air or water, or require maintenance. The Intercept (TM) warm edge glass spacer system is manufactured in one continuous piece, resulting in a stronger, more energy efficient insulated glass unit. A unique weather-stripping system ensures one of the lowest air infiltration ratings in the industry. Additionally, Great Lakes is the only vinyl window manufacturer to offer Easy Clean (TM) glass, which works like Teflon (TM) on cookware, providing an owner with a window which requires less cleaning. Great Lakes has pioneered other product innovations which differentiate its product line from other window manufacturers, including wood grain vinyl interiors available in three finishes, multi-point locking hardware, and sliding patio doors which utilize a proprietary tank type roller system. Great Lakes's replacement products are sold through specialty distributors and directly to large contractors. The new construction series is currently being sold under private label programs and to a select number of Great Lakes's dealer distributors. Great Lakes's multiple brand approach has allowed it to achieve maximum penetration in a given geographic area, by offering dealer distributors individual brands on an exclusive basis. Great Lakes relies on a highly trained company sales force that is among the most effective in the industry. 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. Richwood Building Products, Inc.: Richwood is a manufacturer of a broad line of injection molded siding components for the remodeling and new construction markets. Siding components include blocks, which allow for the flush mounting of items like light fixtures to the exterior of a home, and gable vents that provide attic ventilation. The products are sold to home centers, lumberyards and wholesale distributors of building materials. Richwood is the only manufacturer of siding components to offer a color selection to match or compliment the colors offered by most, if not all, major manufacturers of vinyl siding. 3 SPECIALTY WOOD PRODUCTS Hoover Treated Wood Products, Inc.: Hoover is a leading producer of pressure treated wood products, offering a full range of preservative and fire retardant treated lumber and wood products, which are sold to home centers, cooperative buying groups and lumber yards for use in architecturally specified applications, commercial construction and residential building. Its products include lumber and plywood which have been treated for fire retardancy and for protection against moisture or insect infestation. Products are sold under PYRO-GUARD (R), CCA KDAT and EXTERIOR FIRE-X brand names. Sagebrush Sales, Inc.: Sagebrush is a manufacturer and distributor of specialty lumber and related building products for a variety of uses including roofing, decking, siding, landscaping and interior paneling marketed principally in the Southwest. Ply*Gem Manufacturing ("PGM") is a manufacturer and distributor of decorative products for the home including prefinished wood paneling, solid wood planking, imported ceramic, marble and porcelain tile, melamine coated kitchens and bath panels finished and unfinished wood and melamine shelving as well as other products sold to home centers and lumber yards. The Ply*Gem brand name has become synonomous with fine quality interior finished products that add value and beauty to any construction or remodeling project. PGM has been undergoing a transformation from a manufacturer of prefinished wall paneling into a strategic, value-added supplier of a wide range of products for the national home center chains. Continental Wood Preservers, Inc.: Continental is a 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 of this segment of its business will result from continued expansion of its share of the home center market. DISTRIBUTION Allied Plywood Corporation: Allied is a 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, high pressure laminates (HPL), solid surface materials and cabinet hardware. Allied is a leading importer of specialty wood panels from all over the world, including Russian plywood sold under its brand name Baltic Birch (R). Allied's customers are industrial woodworkers, including cabinet manufacturers, architectural millworkers, and manufacturers of store fixtures, furniture, and signs and exhibits. Allied sells its products through an extensive network of ten company operated warehouse facilities and utilizes public warehouses from time to time located in various major port cities. 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, and expansion of its market territories. Goldenberg Group, Inc.: Goldenberg is a West Coast manufacturer and distributor of furniture components, laminates and board products to furniture manufacturers and other original equipment manufacturers, building materials retailers and wholesalers. In addition to distribution of wood products, Goldenberg's strengths are laminating, drawer parts, cut to size components and other value added services on a just-in-time basis. As a large manufacturer and distributor of high quality, cost efficient products for the furniture, ready-to-assemble, cabinet and building industries, Goldenberg specializes in providing custom laminations to industrial customers that meet almost any specification. 4 HOME PRODUCTS Studley Products, Inc.: Studley is a manufacturer of disposable paper vacuum cleaner bags. Studley's products are sold to manufacturers of vacuum cleaners, mass merchandisers and other retailers and recently to the retail home center market and other retailers. PRODUCTION AND FACILITIES The Windows, Doors and Siding Group operates thirteen manufacturing and warehouse facilities in the United States. SNE's manufacturing process of wood windows and patio doors involves cutting and shaping of components that are assembled with high speed tools. Manufacturing begins with the receipt of cutstock, which is inspected for quality and then machined (tenoning and molding). After a part has been machined, it is sent to a dip process which treats the wood with a preservative to make it more resistant to damage from moisture. Then the part may be toned or painted, depending on the requirements of a specific order, and dried, palletized and readied for delivery into the various assembly areas. On a just-in-time basis, insulated glass is fabricated upon the receipt of an order beginning with the cutting of raw sheet glass by a computerized glass cutter which optimizes yield and reduces costly scrap. The necessary wood parts are then pulled from inventory and sash frames and unit frames are assembled and finished with appropriate cladding and hardware, again, depending on the specific requirements of an individual order. The finished sash is then installed into the assembled frame, at which time product labels and optional parts, such as screens, are attached to the finished unit. Variform's vinyl siding is produced by an extrusion process which forms siding through various dies from certain resin compounds, primarily polyvinyl chloride ("PVC"). PVC resin is received by rail car and is unloaded into a storage silo in staging for blending. The blending operations are a state-of- the-art, computer-controlled operation where PVC resin and other ingredients, such as stabilizers and processing aids, are blended to give a highly- consistent feedstock for the extrusion process. A variety of capstocks and a substrate are blended in this operation and stored in intermediate silos ready for draw down into the extrusion process. The extrusion process draws blended feedstock to each production line via pneumatic conveying systems. The polymer extruded from the co-extrusion process passes through an embossing roll to imprint the desired woodgrain pattern then passes through post form tooling and a water bath to give the panel its desired shape. Richwood's siding components are manufactured through an injection molding process using proprietary mold designs and polypropylene. The polypropylene is vacuum fed from containers to injection molding machines. Great Lakes's and SNE's insulated vinyl framed replacement windows are manufactured from insulated glass and vinyl extrusions. The vinyl lineals are cut to requirements and welded together to create sash and unit frames. Hardware is then added and the product is prepared for shipping. The Specialty Woods Group operates eight production and warehouse facilities in the United States. The treatment process by Hoover and Continental 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 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 dimensionally more stable product. Ply Gem Manufacturing's high-speed laminating production facilities in Gloucester City, New Jersey afford flexibility in laminating paper and vinyl to various substrate materials. Several unique proprietary processes are employed to manufacture these products efficiently. Specialty lumber products, including siding, decking and paneling are manufactured by Sagebrush in two facilities with a combined annual production capacity in excess of 100 million board feet. The Distribution Group operates twelve distribution centers located primarily in the East and utilizes public warehouses located in various major port cities. Disposable paper vacuum cleaner bags are manufactured at one facility in the United States and one in Canada. 5 RAW MATERIALS The principal raw materials used in the manufacture of the Company's products are PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard, plywood, various species of lumber such as pine, spruce, hemlock and fir, various chemicals, filter paper, woven and non woven fabric, 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. The Company has a procurement strategy whereby it attempts to reduce the total cost of materials and services by integrating suppliers into the supply chain and leveraging purchasing power through joint buying programs. SEASONALITY The demand for building products 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 lower 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. 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. Depending upon the business, significant inventories of finished goods, work-in-process and raw materials are maintained to meet delivery requirements of customers. Hoover and Continental maintain a steady 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, 1996 approximately 4,000 people were employed by the Company. Approximately 1,700 of such employees are covered by collective bargaining agreements which expire at various times over the next three years. The Company has not had any significant work stoppages and considers its relations with its employees to be good. ITEM 2. PROPERTIES. The Windows, Doors and Siding Group operates thirteen manufacturing and warehouse facilities in the United States, ranging in size from approximately 5,000 square feet to 660,000 square feet. Of these facilities, six are owned, and seven are leased under net leases that expire at various dates through 2017. The group's manufacturing facilities operated at ranges of approximately 60% to 75% of capacity during 1996. The Specialty Woods Group operates eight manufacturing and warehouse facilities in the United States ranging in size from approximately 20,000 square feet to 200,000 square feet. Of these facilities, six are owned and two are leased under net leases that expire at various dates through 2001. The group's manufacturing facilities operated at ranges of approximately 50% to 90% of capacity during 1996. Distribution operates twelve distribution centers located primarily in the East ranging in size from approximately 18,000 square feet to 257,000 feet. Two facilities are owned and ten facilities are leased under leases that expire at various dates through 2005. 6 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 65% to 70% of capacity during 1996. 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 12,300 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 in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August 1988. Sales of these products constituted less than 3% of total sales of Ply Gem and its subsidiaries on a consolidated basis during the period January 1, 1984 through December 31, 1990. The number of lawsuits pending has declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement with settlements being paid out of insurance proceeds or other third party recoveries. Hoover and Ply Gem are vigorously defending the suits which remain pending and defense and indemnity costs are being paid out of insurance proceeds and proceeds from the settlement by Hoover with suppliers of material used in the production of interior treated wood products. Hoover and Ply Gem have engaged in coverage litigation with their insurers and have settled their coverage claims with a majority of the insurers. Hoover and Ply Gem believes that the remaining coverage disputes will be resolved on a satisfactory basis and a substantial amount of additional coverage will be available. In reaching this belief, it has analyzed Hoover's insurance coverage and the status of the coverage litigation, considered its history of settlements with primary and excess insurers and consulted with counsel. In evaluating the effect of the lawsuits, a number of factors have been considered, including: the litigation history, the significant decline in the number of cases, the availability of various legal defenses 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 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 1996. 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 and dividends paid.
1996 1995 ------------------------ ------------------------ QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND - ------------------------------ ------- ------- -------- ------- ------- -------- First......................... $18 3/4 $14 5/8 $ .03 $21 1/4 $17 1/8 $ .03 Second........................ 15 7/8 12 7/8 .03 18 3/4 15 .03 Third......................... 13 7/8 11 1/2 .03 19 15 .03 Fourth........................ 13 1/8 11 3/4 .03 19 1/8 15 5/8 .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. 7 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, 1996, approximately $2,800,000 was available for the payment of dividends in 1997. The number of stockholders of record of the Company's common stock as of March 24, 1997 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.
1996 1995 (1) 1994 (2) 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Net sales....................... $774,928 $755,198 $808,874 $731,454 $632,640 Net income (loss)............... 10,454 (7,402) (8,531) 9,650 6,306 Net income (loss) per share..... .74 (.51) (.62) .75 .56 BALANCE SHEET DATA: Total assets.................... $313,447 $324,990 $345,569 $344,944 $313,997 Long-term debt.................. 73,166 93,135 79,501 92,898 62,451 Capital lease obligations....... 9,231 7,106 7,159 7,166 7,215 Convertible subordinated debentures..................... -- -- -- 50,000 50,000 Stockholders' equity............ 145,783 144,485 161,636 128,942 118,439 Dividends per common share...... .12 .12 .12 .12 .12
- -------- (1) Results include a pretax charge of $12.0 million related to the write-down of long-lived assets. (2) Results include a nonrecurring pretax charge of $41.0 million, related to employee severance, facility consolidations and closures and asset writedowns. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Ply Gem reported significantly improved financial results in 1996 when compared to 1995. Before giving effect to the one-time charge of the write- down of long-lived assets in the fourth quarter of 1995: . Income from operations almost tripled to $29 million from $10.5 million; . Gross margins expanded to 19.2% from 16.5%; . Net income advanced to $10.5 million from $.2 million; . Net sales for the year increased 3% to $774.9 million as nine of eleven business units reported higher sales; . Cash provided by operations increased to $50.7 million from $11.1 million; and . Long-term debt declined 21% to $73.2 million from $93.1 million. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Annual Report. 8 Results of Operations for 1996 Compared with 1995 and 1995 Compared with 1994 NET SALES Net sales for 1996 totaled $774.9 million, a 3% increase over 1995 sales of $755.2 million. The sales growth was driven primarily by the Company's Windows, Doors and Siding and Specialty Woods businesses. Nine out of eleven of the Company's business units reported increased sales in 1996 when compared to 1995. Approximately two-thirds of the consolidated sales growth was attributed to unit volume increases and the remainder to increases in average selling prices. Net sales for 1995 totaled $755.2 million, a decrease of 7% from 1994 net sales of $808.9 million. The primary cause of the decline in sales was the Company's planned discontinuance or de-emphasis of certain low margin products. Excluding these products, net sales declined 2% for the comparison period. The 1995 sales growth in the Company's Windows, Doors and Siding businesses was offset by both lower sales volume at the Company's Specialty Wood businesses, which were impacted by low framing lumber prices, and lower volume at the Company's Distribution businesses. GROSS PROFIT Gross margins increased to 19.2% in 1996 from 16.5% in 1995. Gross profit for 1996 increased 19.1% to $148.5 million, as compared to prior year's gross profit of $124.6 million. The significant improvement resulted from actions taken to reduce costs, including aggressive procurement initiatives, particularly with regard to vinyl profiles and glass, improved productivity and process improvements and ongoing cost containment measures. In addition, lower raw material costs, particularly PVC resin and glass (which are used to manufacture siding and windows), product mix and lower unit freight costs contributed to the improvement in gross margins. Gross margins were 16.5% in 1995 as compared to 19.2% in 1994. The 1995 gross margins were impacted by higher conversion costs, including costs related to the restructuring program such as training and moving costs but not classified as such, product mix, and new product manufacturing start-up costs. In addition, higher raw material costs, particularly PVC resin and glass had a negative impact on gross margins in the Company's Windows, Doors and Siding businesses, as did declining framing lumber prices in the Company's Specialty Wood businesses and lower absorption of fixed manufacturing costs in the Company's Distribution business. The Company's results of operations are affected by fluctuations in the market prices of wood products and PVC resin which are used as raw materials in its various manufacturing operations. Over the years, the Company has experienced significant fluctuations in the cost of these commodities from primary suppliers. A variety of factors over which the Company has no control, including supply and demand, environmental regulations, weather and economic conditions, impact the cost of these materials. 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 material costs, such increases may 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 possible increases in the cost of its raw materials, 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, were 15.4% in 1996 as compared to 15.1% in 1995 and 14.7% in 1994. The modest percentage and absolute dollar increase of $5.3 million for the 1996 comparison period to 1995 is primarily due to higher employment costs and higher incentive compensation expenses. In absolute dollars, selling, general and administrative expenses declined by $4.6 million in 1995 compared to 1994 primarily due to lower amortization of intangibles, lower employment costs related in part to the reduction in workforce and lower incentive compensation expense. WRITE-DOWN OF LONG-LIVED ASSETS AND NONRECURRING CHARGES As described in Notes 4 and 11 to the consolidated financial statements, the Company recorded a pretax charge of $12.0 million ($7.6 million after tax) in 1995 related to the write-down of certain long-lived assets. 9 During 1994, the Company recorded nonrecurring charges of $41 million ($25.7 million after tax), relating to a restructuring program and for unusual items primarily consisting of the write-down of certain intangible assets and discontinued products. The 1994 restructuring program was designed by prior operating management to improve the Company's cost structure primarily through facilities consolidations and closures, abandonment of certain information systems and workforce reductions. Implementation of several initiatives associated with the restructuring program have been postponed indefinitely or have resulted in higher costs than originally anticipated. As a result the Company has not realized the savings from the restructuring it had expected. The cash outlays with respect to the 1994 restructuring program during 1996 of approximately $5 million relate primarily to severance costs, lease termination expenses and costs associated with the abandonment of certain information systems. Noncash writedowns relate primarily to fixed asset and inventory write-offs in connection with the closing or consolidation of facilities. Remaining cash outlays relate primarily to work-force related activities and are expected to total approximately $1.9 million of which approximately $1.1 million are expected to be expended in 1997. INCOME FROM OPERATIONS Income from operations, advanced to $29 million in 1996 compared to $10.5 million in 1995 and $36.9 million in 1994. The significant improvement in income from operations in 1996 resulted primarily from improved operating results at the Company's Windows, Doors and Siding and Specialty Woods businesses slightly offset by lower operating results at the Company's Distribution and Home Products businesses both of which faced very competitive market conditions during 1996. As discussed above, income from operations for 1995 and 1994 excludes the write-down of long-lived assets and nonrecurring charges, respectively. INTEREST EXPENSE Interest expense was $6.8 million in 1996 compared to $6.6 million in 1995 and $7.5 million in 1994. The decline in interest expense in 1995 resulted from the conversion of the Company's 10% Convertible Subordinated Debentures into common stock during March 1994, partially offset by higher average debt balances and higher interest rates experienced in 1995. The Company uses various financial instruments to mitigate the Company's exposure to changes in floating interest rates. The impact of these instruments on the Company's results of operations and on its financial position is explained further in Note 8 to the consolidated financial statements. OTHER EXPENSE The increase in other expense of $1.8 million for the 1995 to 1994 comparison period, primarily relates to higher accounts receivable program costs due to an increase in the average amount of receivables sold under this program during 1995 as compared to 1994. Other expense in 1996 primarily includes the costs associated with the sale of accounts receivable's program. INCOME TAXES The effective income tax rate (benefit in 1995 and 1994) was 46.6% in 1996, 27.9% in 1995 and 28.6% in 1994. The difference between these rates and the statutory rate was primarily due to non-deductible goodwill amortization and certain state tax benefits relating to the write-down of long-lived assets in 1995 and nonrecurring charges in 1994 which, in accordance with the criteria set forth in SFAS No. 109, were not recognized. NET INCOME Net income, before the write-down of long-lived assets, advanced to $10.5 million in 1996 from $.2 million in 1995. Net income before nonrecurring charges was $17.2 million in 1994. The factors cited above were responsible for the improvement in the operating results of the Company. 10 LIQUIDITY AND CAPITAL RESOURCES The Company has a $200 million revolving credit facility with a syndicate of eleven banks which provides financing through February 1999. Availability under this facility was $85 million at December 31, 1996. The table below summarizes the Company's cash flow from operating, investing and financing activities as reflected in the Consolidated Statements of Cash Flows.
1996 1995 1994 ----- ----- ----- (IN MILLIONS) Cash provided by (used in): Operating activities..................................... $50.7 $11.1 $48.8 Investing activities..................................... (17.1) (26.2) (19.9) Financing activities..................................... (31.8) 8.8 (27.0) ----- ----- ----- Net increase (decrease) in cash and cash equivalents....... $ 1.8 $(6.3) $ 1.9 ===== ===== =====
OPERATING ACTIVITIES Net cash provided from operations was $50.7 million in 1996, compared to $11.1 million provided in 1995. The $39.6 million increase resulted primarily from improved operating results and improved management of working capital. 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. Capital expenditures were $17.6 million in 1996 compared to $27.8 million in 1995 and $23.0 million in 1994. Approximately $9.9 million and $4.3 million incurred in 1995 and 1994, respectively, were in connection with the design and development of the Company's information systems. The outlays in 1996 were primarily for machinery and equipment used to expand capacity, improve productivity and tool new products. The Company expects to incur approximately $22 million for capital expenditures in 1997. Capital expenditures provide a basis for future growth. 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 its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of the Company's operating subsidiaries. FINANCING ACTIVITIES During 1996, the Company decreased bank debt by $19.5 million primarily as a result of improved operating results and improved working capital management. In the fourth quarter of 1994, the Board of Directors authorized the repurchase of up to one million shares of the Company's common stock. During 1996, the Company purchased 752,200 shares of common stock at a cost of $10 million, bringing the total shares acquired under this program to approximately 920,000 shares. The Company is expected to continue its buy-back program during 1997, subject to market conditions. BALANCE SHEET ANALYSIS The capitalization of the Company (long-term debt plus stockholders' equity) was $228.2 million at December 31, 1996. The ratio of debt to capitalization was 36% at December 31, 1996, as compared to 41% at December 31, 1995 reflecting the decrease in bank debt during 1996 and improved operating results. 11 The Company's working capital was $86.6 million at December 31, 1996 compared to $104.7 million at December 31, 1995. The current ratio was 2.3 at December 31, 1996, compared to 2.8 at December 31, 1995. The decrease in working capital was the result of a decrease in current assets of $7.5 million from December 31, 1995 to December 31, 1996 and an increase in current liabilities of $10.6 million during the same period. The decrease in current assets at December 31, 1996 compared to December 31, 1995 resulted primarily from lower inventories due to improvement in inventory turns, lower accounts receivable as a result of higher cash collections during the fourth quarter of 1996 compared to the same period in 1995 and lower prepaid income taxes resulting from refunds received in 1996 in connection with federal carryback claims recorded in December 31, 1995. The increase in current liabilities from December 31, 1995 to December 31, 1996 was due primarily to an increase in accounts payable and accrued expenses resulting from continued emphasis on working capital management. The Company will continue to have cash requirements to support working capital needs, pay interest, and fund capital expenditures. In order to meet these cash requirements, the Company intends to use internally generated funds and, if necessary, borrowings from its 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 demand for building products 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 lower 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. FORWARD-LOOKING AND CAUTIONARY STATEMENTS Certain statements included in this Annual Report on Form 10-K, including the words "believes," "anticipates," "expects" and similar expressions, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged carefully to review and consider the various disclosures made by the Company in this report, as well as the Company's periodic reports on Forms 10-Q and 8- K filed with the Securities and Exchange Commission. 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........................ 13 Financial Statements Consolidated Balance Sheets at December 31, 1996 and 1995............... 14 Consolidated Statements of Operations for the Three Years Ended December 31, 1996............................................................... 15 Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1996................................................ 16 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996............................................................... 17 Notes to Consolidated Financial Statements.............................. 18 Quarterly Data............................................................ 27
12 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, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. GRANT THORNTON LLP New York, New York February 25, 1997 13 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1996 1995 ---- ---- ASSETS Cash and cash equivalents....................... $ 9,924,000 $ 8,107,000 Accounts receivable, net of allowance of $3,039,000: $4,511,000 in 1995................. 28,003,000 31,736,000 Inventories..................................... 92,983,000 96,228,000 Prepaid and deferred income taxes............... 10,905,000 15,714,000 Other current assets............................ 12,975,000 10,478,000 ------------ ------------ Total Current Assets........................ 154,790,000 162,263,000 Property, plant and equipment--at cost, net..... 90,681,000 81,832,000 Patents and trademarks, net of accumulated amor- tization of $9,776,000; $8,971,000 in 1995..... 13,793,000 15,334,000 Intangible assets, net.......................... 14,794,000 15,507,000 Cost in excess of net assets acquired, net...... 21,618,000 23,081,000 Other assets.................................... 17,771,000 26,973,000 ------------ ------------ TOTAL ASSETS................................ $313,447,000 $324,990,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses........... $ 50,937,000 $ 40,455,000 Accrued restructuring........................... 1,138,000 4,480,000 Accrued payroll and commissions................. 10,408,000 7,790,000 Accrued insurance............................... 4,285,000 4,400,000 Current maturities of long-term debt and capital 1,380,000 458,000 leases......................................... ------------ ------------ Total Current Liabilities................... 68,148,000 57,583,000 Long-term debt.................................. 73,166,000 93,135,000 Capital leases.................................. 9,231,000 7,106,000 Other liabilities............................... 17,119,000 22,681,000 Stockholders' equity -- -- Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued Common stock, $.25 par value; authorized 60,000,000 shares; issued 17,676,540 shares; 17,463,072 shares in 1995...................................... 4,419,000 4,366,000 Additional paid-in capital.................... 149,226,000 148,618,000 Retained earnings............................. 61,993,000 53,246,000 ------------ ------------ 215,638,000 206,230,000 Less Treasury stock--at cost (3,687,954 shares; 3,015,311 shares in 1995).................... 63,936,000 55,676,000 Unamortized restricted stock and note receiv- 5,919,000 6,069,000 able......................................... ------------ ------------ TOTAL STOCKHOLDERS' EQUITY.................. 145,783,000 144,485,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $313,447,000 $324,990,000 ============ ============
The accompanying notes are an integral part of these statements. 14 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net sales............................ $774,928,000 $755,198,000 $808,874,000 Cost of goods sold................... 626,424,000 630,552,000 653,270,000 ------------ ------------ ------------ Gross profit....................... 148,504,000 124,646,000 155,604,000 Selling, general and administrative expenses............................ 119,494,000 114,171,000 118,726,000 Write-down of long-lived assets -- 11,950,000 -- Nonrecurring charges -- -- 40,962,000 ------------ ------------ ------------ Income (loss) from operations...... 29,010,000 (1,475,000) (4,084,000) Interest expense..................... (6,773,000) (6,649,000) (7,479,000) Other expense........................ (2,658,000) (2,138,000) (386,000) ------------ ------------ ------------ Income (loss) before income taxes.. 19,579,000 (10,262,000) (11,949,000) Income tax provision (benefit)....... 9,125,000 (2,860,000) (3,418,000) ------------ ------------ ------------ Net Income (loss).................. $ 10,454,000 $ (7,402,000) $ (8,531,000) ============ ============ ============ Earnings (loss) per share............ $.74 $(.51) $(.62) ------------ ------------ ------------ Weighted average number of shares outstanding......................... 14,065,000 14,445,000 13,870,000 ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 15 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK TREASURY STOCK --------------------- ---------------------- ADDITIONAL NUMBER OF PAID-IN RETAINED NUMBER OF SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ---------- ---------- ------------ ----------- --------- ----------- Balance at January 1, 1994................... 11,872,509 $2,968,000 $ 64,006,000 $72,601,000 910,073 $ 9,362,000 Cash dividends on common stock ($.12 per share). (1,673,000) Exercise of employee stock options.......... 2,672,318 668,000 23,423,000 1,197,241 29,465,000 Tax benefit arising from exercise of stock options................ 9,962,000 Conversion of debentures............. 2,751,328 688,000 48,379,000 Purchase of stock for treasury............... 640,700 12,175,000 Other................... 40 -- 1,197,000 (2,695) (48,000) Net loss................ (8,531,000) ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1994................... 17,296,195 4,324,000 146,967,000 62,397,000 2,745,319 50,954,000 Cash dividends on common stock ($.12 per share). (1,749,000) Exercise of employee stock options.......... 166,872 42,000 1,494,000 30,580 573,000 Tax benefit arising from exercise of stock options................ 174,000 Shares held for distribution to employee profit sharing trust.................. (52,500) (819,000) Purchase of stock for treasury............... 292,000 4,955,000 Other 5 -- (17,000) (88) 13,000 Net loss................ (7,402,000) ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1995................... 17,463,072 4,366,000 148,618,000 53,246,000 3,015,311 55,676,000 Cash dividends on common stock ($.12 per share). (1,707,000) Exercise of employee stock options.......... 213,468 53,000 1,916,000 63,612 915,000 Tax benefit arising from exercise of stock options................ 367,000 Contribution of treasury stock to employee profit sharing trusts.. (1,039,000) (140,700) (2,608,000) Purchase of stock for treasury............... 752,200 9,998,000 Other................... (636,000) (2,469) (45,000) Net income.............. 10,454,000 ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1996................... 17,676,540 $4,419,000 $149,226,000 $61,993,000 3,687,954 $63,936,000 ========== ========== ============ =========== ========= ===========
The accompanying notes are an integral part of these statements. 16 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ------------------------ ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....... $10,454,000 $(7,402,000) $(8,531,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation........... $11,359,000 $10,521,000 $8,733,000 Amortization........... 3,594,000 3,650,000 4,652,000 Non-cash profit sharing expense....... 2,243,000 -- -- Write-down of long- lived assets.......... -- 11,950,000 -- Nonrecurring charges net of cash payments of $5,223,000......... -- -- 35,739,000 Deferred taxes......... 3,339,000 3,644,000 (8,067,000) Provision for doubtful accounts.............. 1,982,000 1,505,000 874,000 Changes in assets and liabilities........... Accounts receivable.. 1,751,000 9,617,000 10,515,000 Inventories.......... 3,245,000 6,861,000 5,575,000 Prepaid expenses and other current assets.............. 2,135,000 (5,129,000) 1,459,000 Accounts payable and accrued expenses.... 12,985,000 (8,195,000) 3,860,000 Income taxes payable. -- -- (4,902,000) Accrued restructuring....... (5,574,000) (10,608,000) -- Other assets......... 3,141,000 40,200,000 (5,305,000) 18,511,000 (1,061,000) 57,377,000 ----------- ----------- ----------- ----------- ---------- ----------- Net cash provided by operating activities.......... 50,654,000 11,109,000 48,846,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment... (17,583,000) (27,827,000) (23,046,000) Funds used for construction.......... -- -- 1,327,000 Proceeds from property, plant and equipment disposals... 473,000 799,000 1,681,000 Proceeds from sales of marketable securities, net....... -- 788,000 -- Other.................. (17,000) 25,000 129,000 ----------- ----------- ----------- Net cash used in investing activities.......... (17,127,000) (26,215,000) (19,909,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term debt repayments, net....... -- -- (2,330,000) Repayment of long-term debt.................. (533,000) (481,000) (881,000) Net increase (decrease) in revolving note borrowings with original maturity of 90 days or less....... (19,540,000) 14,040,000 (14,884,000) Purchase of stock for treasury.............. (9,998,000) (4,955,000) (12,175,000) Cash dividends......... (1,707,000) (1,749,000) (1,673,000) Proceeds from exercise of employee stock options............... 1,500,000 1,499,000 6,491,000 Other.................. (1,432,000) 456,000 (1,581,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities............. (31,710,000) 8,810,000 (27,033,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents......... 1,817,000 (6,296,000) 1,904,000 Cash and cash equivalents at beginning of year...... 8,107,000 14,403,000 12,499,000 ----------- ----------- ----------- Cash and cash equivalents at end of year................... $ 9,924,000 $ 8,107,000 $14,403,000 =========== =========== ===========
The accompanying notes are an integral part of these statements. 17 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ply Gem Industries, Inc. ("Ply Gem") through its subsidiaries (the "Company") operates predominantly in one industry segment, which consists of the manufacture and sale of vinyl siding, wood and vinyl-framed windows, doors, skylights, prefinished decorative plywood and decorator wall and floor coverings, furniture components, pressure-treated wood products and the distribution of other products for the building products and home improvement markets. 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 1996 presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and temporary investments having an original maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. LONG-LIVED ASSETS (a) Property, Plant and Equipment Owned property, plant and equipment are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Service lives for principal assets are 5 to 35 years for buildings and improvements and 3 to 12 years for machinery and equipment. 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. Capitalized leases are amortized on a straight-line basis over the terms of the leases or their economic useful lives. (b) Patents and Trademarks Purchased patents and trademarks are recorded at appraised value at time of the business acquisition and are being amortized on a straight-line basis over their estimated remaining economic lives; thirteen to seventeen years for patents and thirty years for trademarks. (c) Cost in Excess of Net Assets Acquired and Other Intangibles Cost in excess of net assets acquired is being amortized from twenty to thirty years on a straight-line basis. Other intangibles, which arose primarily from the allocation of purchase prices of businesses acquired, are being amortized on a straight-line basis over thirty-nine years. The Company annually evaluates the carrying value of its long-lived assets to evaluate whether changes have occurred that would suggest that the carrying amount of such assets may not be recoverable based on the estimated future undiscounted cash flows of the businesses to which the assets relate. Any impairment loss would be equal to the amount by which the carrying value of the assets exceed its fair value. 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 and credit carryforwards. These differences are classified as current or noncurrent 18 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) based upon the classification of the related asset or liability. Deferred income tax assets, such as benefits related to net operating loss and credit carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. FINANCIAL INSTRUMENTS The Company utilizes various financial instruments to manage interest rate risk associated with its borrowings. Interest rate swap agreements modify the interest characteristics of a portion of the Company's debt. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. Interest rate caps are used to lock in a maximum interest rate if rates rise, but enables the Company to otherwise pay lower market rates. The cost of interest rate cap agreements are amortized to interest expense over the life of the cap. Payments received as a result of the cap agreements reduce interest expense. The unamortized costs of the cap agreements are included in other assets. The fair value for cash, receivables, accounts payable, and accrued liabilities approximate carrying amount because of the short maturity of these instruments. The fair value of long-term debt approximates its carrying amount, as the debt carries variable interest rates. EARNINGS (LOSS) PER SHARE Earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Stock options have been excluded from the calculations as their effect would be anti-dilutive. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company recognizes no compensation expense for the stock option grants. CUSTOMERS The Company's products are distributed through an extensive network that 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 predominately in the United States through Company sales personnel and independent representatives. One customer accounted for approximately 19% of the Company's net sales for the years ended December 31, 1996 and 1995 and approximately 14% in 1994. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 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 April 1998. At December 31, 1996 and 1995 respectively, the Company sold $45 and $42 million of receivables under this program. Program costs of $3,540,000, $3,205,000, and $1,892,000 are included in "other expense" for 1996, 1995 and 1994, respectively. $5,000,000, due from officer, was repaid subsequent to year end. 19 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3 INVENTORIES The classification of inventories at the end of each year was as follows:
1996 1995 ----------- ----------- Finished goods....................................... $53,833,000 $54,530,000 Work in progress..................................... 9,724,000 12,508,000 Raw materials........................................ 29,426,000 29,190,000 ----------- ----------- $92,983,000 $96,228,000 =========== ===========
NOTE 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at the end of each year consisted of the following:
1996 1995 ----------- ----------- Land............................................... $ 2,668,000 $ 2,704,000 Buildings and improvements......................... 27,044,000 24,853,000 Machinery and equipment............................ 94,912,000 78,830,000 Transportation equipment........................... 2,156,000 2,428,000 Furniture and fixtures............................. 10,378,000 11,312,000 Capital leases..................................... 10,705,000 7,501,000 Construction in progress........................... 5,575,000 5,777,000 ----------- ----------- 153,438,000 133,405,000 Accumulated depreciation and amortization.......... (62,757,000) (51,573,000) ----------- ----------- $90,681,000 $81,832,000 =========== ===========
During the fourth quarter of 1995, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and recorded a non cash pretax charge of $12.0 million ($7.6 million after tax) related to the write-down of certain long-lived assets. The charge consisted of a write-down of approximately $9.5 million related to the Company's information system and $2.5 million related primarily to certain machinery and equipment. NOTE 5 INTANGIBLE AND OTHER ASSETS Accumulated amortization of cost in excess of net assets acquired and other intangible assets is $22,357,000 at December 31, 1996 and $19,917,000 at December 31, 1995. The balance sheet at December 31, 1996 includes notes receivable from an officer. The 1992 Note ($5,400,000 principal amount at December 31, 1996 including current maturities), has an average interest rate of 7.1% and is due in approximately equal annual installments through 2003. Under the terms of the note, principal and interest are forgiven upon the attainment of at least a 20% improvement in net income, as defined, compared to the prior year or at the discretion of the Board of Directors. Accordingly, the annual installments for 1996 and 1994 were forgiven. The 1994 Note ($3,000,000 principal amount at December 31, 1996 including current maturities) and the 1995 Note ($5,000,000 principal amount at December 31, 1996) have interest rates which are the higher of the Company's average bank borrowing rate or the applicable Federal rate in effect for such period. They are payable in annual installments of $250,000 each with the final payments due December 31, 1998 and April 30, 2001, respectively. Furthermore, under the terms of the officer's employment agreement, the notes are forgiven upon the occurrence of a change in control of the Company or the permanent disability of the officer. The long-term portion of the 1992 and 1994 Notes are included in other assets. The 1995 Note has been reflected as a reduction of stockholders' equity since the officer may reduce the indebtedness through the Company's redemption of its shares which are owned by the officer. 20 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6 STOCKHOLDERS' EQUITY In addition to treasury stock, deductions from stockholders' equity consists of unamortized restricted stock of $919,000 and $1,069,000 at December 31, 1996 and 1995, respectively and notes receivable due from officer of $5,000,000 at December 31, 1996 and 1995. See Note 5. NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31 is as follows:
1996 1995 1994 ---------- ---------- ---------- Interest paid (net of $453,000 capitalized in 1996, $746,000 in 1995 and $323,000 in 1994)..................................... $6,609,000 $5,887,000 $5,546,000 ---------- ---------- ---------- Income taxes paid.......................... $6,939,000 $ 872,000 $2,819,000 ---------- ---------- ----------
Noncash financing activities involve the issuance of common stock upon conversion of $49,963,000 of the Company's Debentures in 1994 and in 1996 the Company acquired approximately $3.2 million of equipment under capital leases. NOTE 8 LONG-TERM DEBT The composition of long-term debt at the end of each year was as follows:
1996 1995 ----------- ----------- Revolving credit facility expiring in 1999.......... $66,000,000 $85,540,000 Industrial Development Revenue Bonds maturing at various dates to 2012, generally at floating interest rates which are reset periodically (6.0 % weighted average interest rate for 1996)........... 7,561,000 7,955,000 Other............................................... 34,000 45,000 ----------- ----------- 73,595,000 93,540,000 Less current maturities............................. 429,000 405,000 ----------- ----------- $73,166,000 $93,135,000 =========== ===========
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) plus a spread or the bank's prime rate. The Company pays a facility fee quarterly which, based on a formula, averaged .42% of the committed amount during 1996. The average weighted interest rate on the credit facility for the year 1996 and 1995 was 6.7% and 6.9%, respectively (6.3% and 7.0% at December 31, 1996 and 1995, respectively). 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, 1996 $2,800,000 was available for payments of dividends in 1997. Borrowings under this credit facility are collateralized by the common stock of the Company's principal subsidiaries. The Company periodically enters into interest rate swap and cap agreements as a hedge against interest rate exposure of its floating rate bank debt. In 1996, the Company entered into $75 million of interest rate swap agreements, whereby the Company will pay the counterparties interest at a fixed rate of 5.53% and the counterparties will pay the Company interest at a floating rate equal to one month LIBOR for a two year period 21 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ending December 3, 1998. At the option of the counterparties, the termination date may be extended to December 3, 1999 upon notice to the Company. The Company also entered into $75 million of interest rate cap agreements which entitles the Company to receive from the counterparties on a monthly basis an amount by which the Company's interest payments on $75 million of its floating rate debt exceed 7% during the period December 5, 1998 to December 5, 1999. Future maturities of long-term debt, for the years 1997 through 2001, are: 1997-$429,000; 1998-$446,000; 1999-$66,476,000; 2000-$495,000 and 2001- $525,000. The net book value of property, plant and equipment pledged as collateral under industrial revenue bonds was approximately $6,751,000 at December 31, 1996. NOTE 9 INCOME TAXES The income tax provision (benefit) for the years ended December 31 consisted of the following:
1996 1995 1994 ---- ---- ---- Federal Current.............................. $4,163,000 $(7,485,000) $(6,195,000) Deferred............................. 3,075,000 4,172,000 (7,353,000) Foreign................................ 13,000 7,000 (21,000) State and local Current.............................. 1,243,000 800,000 903,000 Deferred............................. 264,000 (528,000) (714,000) ---------- ----------- ----------- 8,758,000 (3,034,000) (13,380,000) Tax benefit from exercise of stock 367,000 174,000 9,962,000 options............................. ---------- ----------- ----------- Actual tax provision (benefit)....... $9,125,000 $(2,860,000) $(3,418,000) ========== =========== ===========
The significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Net deferred tax assets(liabilities)--current: Nonrecurring charge............................. $ 397,000 $ 1,917,000 Allowance for bad debts......................... 1,765,000 1,567,000 Accrued expenses deductible for tax purposes when paid...................................... 3,682,000 2,775,000 State and local net operating loss and tax credit carryforwards........................... 2,465,000 1,747,000 Other........................................... (227,000) 47,000 ----------- ----------- Total deferred tax assets..................... 8,082,000 8,053,000 Valuation allowance for deferred tax assets... (1,104,000) (897,000) ----------- ----------- Net deferred tax current assets............... $ 6,978,000 $ 7,156,000 =========== =========== Net deferred tax liabilities (assets)--noncurrent: Write-down of long-lived assets................. $(2,242,000) $(4,107,000) Nonrecurring charge............................. (395,000) (1,073,000) Accelerated depreciation........................ 7,500,000 6,557,000 State net operating loss and credit carryforwards.................................. (916,000) -- Accrued expenses deductible for tax purposes when paid...................................... (2,254,000) (2,318,000) Income not recognized for book purposes......... (595,000) (671,000) Other........................................... 1,522,000 1,070,000 Net deferred tax noncurrent liabilities ----------- ----------- (assets)..................................... $ 2,620,000 $ (542,000) =========== ===========
22 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As of December 31, 1996, the Company has deferred tax assets largely attributable to the 1995 write-down of long-lived assets (see Note 4) and various state net operating loss and tax credit carryforwards. Deferred tax assets, net of the valuation reserve, are expected to be realized through future taxable income and from the reversal of temporary differences. The actual income tax provision (benefit) varies from the Federal statutory rate applied to consolidated pretax income (loss) as follows:
1996 1995 1994 ---- ---- ---- Income taxes at Federal statutory rate of 35%................................ $6,853,000 $(3,592,000) $(4,182,000) Increases resulting fromState and local income taxes net of Federal income tax benefit.................. 1,080,000 177,000 123,000 Amortization of cost in excess of net assets acquired..................... 534,000 478,000 509,000 Other--net........................... 658,000 77,000 132,000 ---------- ----------- ----------- Actual tax provision (benefit)....... $9,125,000 $(2,860,000) $(3,418,000) ========== =========== ===========
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 pension plan assets are invested in a diversified portfolio of common stock and fixed income securities. The components of pension expense are as follows:
1996 1995 1994 ----------- ---------- ---------- Service cost--benefits earned in current year.......................... $ 1,032,000 $1,013,000 $1,044,000 Interest cost on projected benefit obligation............................ 983,000 923,000 782,000 Income earned on plan assets.......... (643,000) (1,053,000) (866,000) Net amortization and deferral......... (317,000) 200,000 28,000 ----------- ---------- ---------- $ 1,055,000 $1,083,000 $ 988,000 =========== ========== ==========
Assumptions used in the computation of net pension expense are as follows:
1996 1995 1994 ---- ---- ---- Weighted average discount rate for plan obligations........ 8.0% 8.0% 8.0% Rate of future compensation increases...................... 5.0 5.0 5.0 Weighted average rate of return on plan assets............. 8.8 8.8 8.8 === === ===
23 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:
1996 1995 ----------- ----------- Accumulated benefit obligation: Vested........................................... $11,200,000 $10,595,000 Nonvested........................................ 572,000 676,000 ----------- ----------- Total............................................. 11,772,000 11,271,000 Projected salary increases........................ 2,050,000 1,793,000 ----------- ----------- Projected benefit obligation...................... 13,822,000 13,064,000 Plan assets at fair value......................... 12,883,000 12,088,000 ----------- ----------- Assets less than projected benefit obligation..... (939,000) (976,000) Unrecognized net gain............................. (1,053,000) (1,111,000) Unrecognized prior service cost................... 1,656,000 1,742,000 Unrecognized transition cost...................... 120,000 158,000 Additional liability.............................. (1,403,000) (1,623,000) ----------- ----------- Accrued pension................................... $(1,619,000) $(1,810,000) =========== ===========
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 was $2,243,000, $1,371,000 and $2,636,000 for 1996, 1995 and 1994, respectively. The contributions consisted of the Company's common stock. NOTE 11 NONRECURRING CHARGES During 1994, the Company recorded nonrecurring charges of $41.0 million ($25.7 million after tax), consisting of approximately $29.1 million related to a restructuring program and $11.9 million for unusual items primarily consisting of the write down of certain intangible assets and discontinued products. The status of the components of the restructuring provision at the end of the year was:
BALANCE AT 1996 BALANCE AT DECEMBER 31, 1995 ACTIVITY DECEMBER 31, 1996 ----------------- ---------- ----------------- Consolidation and closure of facilities, including severance and related costs...................... $7,779,000 $5,663,000 $2,116,000 Other, including lease termination expenses and costs to execute the 235,000 235,000 -- restructuring program...... ---------- ---------- ---------- $8,014,000* $5,898,000 $2,116,000* ========== ========== ==========
- -------- * The following amounts are included in the consolidated balance sheet at December 31, 1996 and 1995, respectively under the captions: "accrued restructuring" ($1.1 and $4.5 million), "other liabilities" ($.8 and $3.1 million), "property, plant and equipment" (reduction of $.1 and $.2 million), and "various other asset accounts" (reduction of $.1 and $.2 million). 24 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12 STOCK PLANS The Company's stock plans authorize the granting of incentive and non- qualified stock options and restricted stock to executives, key employees and directors of the Company. Stock options are granted at prices not less than the fair market value on the date of grant. Option terms, vesting and exercise periods vary except that the term of an option may not exceed ten years. Certain options provide, among other things, that in the event of a change in control, as defined, such options will become immediately exercisable. At December 31, 1996, approximately 531,000 shares were available for future grants under the Company's plans. 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. These goals were attained in 1994 and 1996. The restrictions will be released 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 the periods earned. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation". Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost been determined based on the fair value at the grant date for stock option awards in 1995 and 1996 consistent with the provision of SFAS No. 123, the Company's net loss and loss per share for 1995 would have been increased by approximately $2,100,000 or $.15 per share, respectively and net income and earnings per share for 1996 would have been decreased by approximately $3,800,000 or $.27 per share, respectively. During the initial phase-in period of SFAS No. 123, such compensation may not be representative of the future effects of applying this statement. The weighted average fair value at date of grant for options granted during 1996 and 1995 was $4.11 and $4.99 per option, respectively. The fair value of each option at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 1996 and 1995, respectively: expected stock price volatility 35% and 39%; expected lives of options of six and three years; expected dividend rate of $.12 per year and risk free interest rate of 6.26% and 5.81%. The pro forma effect for 1995 does not take into account grants made prior to 1995. Information regarding these option plans for 1996, 1995 and 1994 is as follows:
1996 1995 1994 ----------------- ----------------- ------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE (SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES --------------------- ------ --------- ------ --------- ------ Options outstanding beginning of year............................. 4,926 $14.10 4,479 $11.77 5,604 Exercised......................... (216) 9.34 (167) 9.21 (2,672) Granted........................... 1,436 13.10 776 16.18 1,589 Cancelled or forfeited............ (489) 17.64 (162) 20.13 ( 42) ----- ----- ------ Options outstanding end of year... 5,657 $13.72 4,926 $14.10 4,479 ===== ===== ======
25 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- --------------------- WEIGHTED- (SHARES IN THOUSANDS) AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE --------------------- ----------- ----------- --------- ----------- --------- $ 6.63 to $ 9.75........ 258 4 years $8.62 258 $8.62 10.25 to 13.75.......... 3,407 6 years 11.73 3,097 11.66 14.25 to 18.875......... 926 7 years 16.21 926 16.21 19.125 to 20.125........ 1,066 8 years 19.14 1,066 19.14 ----- ----- 5,657 5,347 ===== =====
NOTE 13 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 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, 1996 are as follows:
CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES ------------------------ ----------- ----------- 1997 $ 1,115,000 $11,912,000 1998 1,161,000 10,889,000 1999 1,143,000 9,819,000 2000 138,000 8,013,000 2001 32,000 7,139,000 Subsequent years through 2017 7,000,000 43,816,000 ----------- ----------- Net minimum lease payments 10,589,000 $91,588,000 Amount representing interest 407,000 ----------- Present value of net minimum lease payments $10,182,000 (including $951,000 payable within one year) ===========
Rental expense for operating leases amounted to approximately $19,645,000 in 1996, $19,883,000 in 1995 and $19,993,000 in 1994. HOOVER TREATED WOOD PRODUCTS, INC. Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of Ply Gem, is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August, 1988. The number of lawsuits pending has declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement with settlements being paid out of insurance proceeds or other third party recoveries. Hoover and Ply Gem are vigorously defending the suits which remain pending and defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement by Hoover with suppliers of material used in the production of interior treated wood products. 26 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Hoover and Ply Gym have engaged in coverage litigation with their insurers and have settled their coverage claims with a majority of the insurers. Ply Gem believes that the remaining coverage disputes will be resolved on a satisfactory basis and a substantial amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage and the status of the coverage litigation, considered its history of settlements with primary and excess insurers and consulted with counsel. Hoover has recorded a receivable at December 31, 1996 for approximately $8.9 million for the estimated proceeds and recoveries related to insurance matters discussed above and recorded an accrual for the same amount for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In evaluating the effect of the lawsuits, a number of factors have been considered, including: the litigation history, the significant decline in the number of cases, the availability of various legal defenses 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 effect upon the financial position of the Company. LETTERS OF CREDIT At December 31, 1996 approximately $20 million of letters of credit issued by the Company's banks were outstanding, principally in connection with certain financing transactions. OTHER Ply Gem 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. The Company has various commitments for the purchase of materials arising in the ordinary course of business. NOTE 14 QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Year Ended December 31, 1996 Net Sales.......................... $142,018 $212,079 $230,143 $190,688 Gross Profit....................... 20,514 42,694 49,423 35,873 Income (loss) Before Taxes ........ (4,753) 7,559 12,924 3,849 Net Income (Loss).................. (2,638) 4,157 6,915 2,020 Per Share: Primary.......................... (.18) .28 .45 .15 Fully Diluted.................... (.18) .28 .45 .15 Year Ended December 31, 1995: Net Sales.......................... $162,934 $203,265 $210,973 $178,026 Gross Profit....................... 24,862 34,149 37,444 28,191 Income (loss) Before Taxes (1)..... (4,594) 1,618 4,365 (11,651) Net Income (Loss).................. (2,665) 1,028 2,276 (8,041) Per Share: Primary.......................... (.18) .07 .16 (.56) Fully Diluted.................... (.18) .07 .16 (.56)
- -------- (1) After charge of $12.0 million for the impairment of assets in the fourth quarter. See Note 4 to the consolidated financial statements. 27 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 9, 1997. 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 9, 1997. 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 9, 1997. 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 9, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 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 Schedule: Independent Auditors' Report on Financial Statement Schedule. Schedule II--Valuation and Qualifying Accounts--Three Years Ended December 31, 1996. (b) Reports on Form 8-K None filed during the fourth quarter of 1996. 28 (c) 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 are incorporated by reference herein to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and the registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 1995. 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, 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. Employment agreement with Dana R. Snyder is incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. Employee agreement with Michael Vagedes. 10(iii)(c) 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 is incorporated by reference herein from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule.
29 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 27, 1997) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. NAMES TITLE DATE /s/ Jeffrey S. Silverman Chairman, Chief March 27, 1997 _____________________________________ Executive Officer, JEFFREY S. SILVERMAN (Principal Executive Officer) and Director /s/ Dana R. Snyder President, Chief March 27, 1997 _____________________________________ Operating Officer DANA R. SNYDER and Director /s/ Herbert P. Dooskin Executive Vice March 27, 1997 _____________________________________ President HERBERT P. DOOSKIN (Principal Financial Officer) and Director /s/ Jerome Baum Controller (Chief March 27, 1997 _____________________________________ Accounting Officer) JEROME BAUM /s/ Albert Hersh Director March 27, 1997 _____________________________________ ALBERT HERSH /s/ Elihu H. Modlin Director March 27, 1997 _____________________________________ ELIHU H. MODLIN 30 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Ply Gem Industries, Inc. In connection with our audit of the consolidated financial statements of Ply Gem Industries, Inc. referred to in our report dated February 25, 1997, which is included in the Annual Report on Form 10-K, we have also audited Schedule II for each of the three years in the period ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP New York, New York February 25, 1997 31 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - ----------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------- ADDITIONS --------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COST AND ACCOUNTS END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Year ended December 31, 1996 Allowance for doubtful accounts............... $4,511,000 $1,982,000 $2,987,000(a) 467,000(c) $3,039,000 Income tax valuation.... 897,000 207,000 1,104,000 Accumulated Amortiza- tion: Goodwill.............. 12,800,000 1,463,000 14,263,000 Other Intangibles..... 7,117,000 977,000 8,094,000 Patents/Trademarks.... 8,971,000 1,585,000 780,000(d) 9,776,000
- -------- (a) Uncollectible Receivables Net of Recoveries (b) Fully Amortized (c) Change Resulted from Sale of Receivables (d) Write down of Intangible Assets 32 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------------------------------------------- ADDITIONS --------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COST AND ACCOUNTS END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Year ended December 31, 1995 Allowance for doubtful accounts............... $6,353,000 $1,816,000 $3,347,000(a) 311,000(c) $4,511,000 Income tax valuation al- lowance................ 897,000 897,000 Accumulated Amortiza- tion: Goodwill.............. 11,605,000 1,489,000 294,000(b) 12,800,000 Other Intangibles..... 6,106,000 1,011,000 7,117,000 Patents/Trademarks.... 7,825,000 1,150,000 4,000 8,971,000
- -------- (a) Uncollectible Receivables Net of Recoveries (b) Fully Amortized (c) Change Resulted from Sale of Receivables 33 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - ---------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------------------------------------------------- ADDITIONS --------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COST AND ACCOUNTS END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Year ended December 31, 1994 Allowance for doubtful accounts............... $7,197,000 $2,330,000 $2,518,000(a) $6,353,000 656,000(d) Income tax valuation al- lowance................ 669,000 228,000 897,000 Accumulated Amortiza- tion: Goodwill.............. 9,863,000 1,482,000 (260,000)(f) 11,605,000 Other Intangibles..... 16,273,000 2,048,000 (26,000)(c) 3,650,000(b) 6,106,000 8,539,000(e) Patents/Trademarks.... 6,677,000 1,148,000 7,825,000
- -------- (a) Uncollectible Receivables Net of Recoveries (b) Fully Amortized (c) Charge/(Credit) to Inventory (d) Change Resulted from Sale of Receivables (e) Write down of Intangible Assets (f) Correction of prior period classification between Gross Cost and Accumulated Amortization 34 EX-1 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT -------------------- AGREEMENT, dated the 21st day of November, 1992, between THE PGVA CORPORATION, a Delaware corporation, having an office at 315 Shoreland Drive, Walton, Kentucky (the "Employer"), and MICHAEL VAGEDES, residing at 677 Sunnybrook Drive, Florence, KY 41042, (the "Employee"). W I T N E S S E T H: WHEREAS, the Employee has been employed by the predecessor of the Employer, and the Employer and the Employee desire to have his employment continue with the Employer on the terms and conditions set forth herein, NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the Employer and the Employee agree as follows: 1. Employment. Subject to the terms and conditions hereinafter set ---------- forth, the Employer hereby employs the Employee as an executive of the Employer, and the Employee hereby accepts such employment. 2. Term. The term of the employment of the Employee by the Employer ---- pursuant to this Agreement (the "Employment Term") shall commence on the date hereof and shall terminate upon the earliest of (i) December 31, 1998; or (ii) the date on which the Employment Term is terminated pursuant to any of the other provisions of this Agreement. 3. Employment Services. During the Employment Term, the Employee ------------------- shall render his services to the Employer in such capacities as the Board of Directors of the Employer may, from time to time, designate. The Employee shall hold, without additional compensation therefor, such offices or membership of the Board of Directors, or Committees thereof, of the Employer, from time to time during the Employment Term. During the Employment Term, the Employee shall devote his full business time, efforts and his entire energy and skill to the business of the Employer in accordance with the reasonable directions and orders of the Board of Directors, and will use his best efforts to promote the interests thereof and will not engage in any other business or business activity. The Employee shall render his services with due regard for the prompt, efficient and economical operation of the business of the Employer to the end of maximizing the profitability of the Employer. 4. Compensation. In consideration of the services to be rendered by ------------ the Employee as an employee of the Employer pursuant to this Agreement, including, without limitation, any services which may be rendered by the Employee as an officer or member of any Board of Directors, or Committees thereof, of the Employer, the Employer shall pay or cause to be paid to the Employee during the Employment Term, and the Employee shall accept, a minimum compensation at the rate of $75,000 per annum with a minimum annual increase of $5,000 per annum. The foregoing salary (including subsequent increases) shall commence on the date hereof and shall be payable in semi-monthly installments during the Employment Term in accordance with the normal payroll practices of the Employer. The Employee shall receive such other 2 annual increases in salary as the Board of Directors may direct. In the event of the termination of the Employment Term, the unpaid portion of the salary payable to the Employee on account of periods prior to the date of termination shall be computed and paid to the Employee. The Employee's salary shall be subject to all applicable withholding and other taxes. 5. Employee shall receive as additional payments for his employment contemplated by this agreement and in consideration for the non-competition provisions as set forth in paragraph 11 herein each year for the five calendar years commencing January 1, 1994 an amount equal to 12.5% of each year's income before management fee ("IBMF") (as it is computed in the internal financial statements currently prepared by subsidiaries of Ply Gem Industries, Inc. ("Ply Gem")) of the Employer in excess of $276,335.00 per year (the "Profitability Minimum") earned during such calendar year. Any and all payments under this Paragraph are payable on April 1 of the following year, beginning April 1, 1995. However, in the event that IBMF for the calendar year 1993 ("1993 IBMF") does not exceed $300,000, the Profitability Minimum for each calendar year will be increased for all calculations under this Paragraph by the difference between 1993 IBMF and $300,000. Additionally, in the event that Employer's IBMF in any calendar year during the period 1994 through 1998, inclusive, is less than the Profitability Minimum, the difference between IBMF in such year and the Profitability Minimum shall be defined as a "Deficiency". In the event that a Deficiency occurs, the 3 subsequent year's IBMF shall be reduced by the amount of the Deficiency for purposes of any calculations under this Paragraph. Any portion of the Deficiency not offset by IBMF in a given year shall be carried over as the Deficiency for the following year. For purposes of this Paragraph, Employer's IBMF will be determined in conformity with generally accepted accounting principles applied consistently with the manner applied in the Employer's financial statements for the period ended September 30, 1992. No charge or benefit in computing IBMF shall be made for (1) amortization of any goodwill occasioned by the transaction pursuant to which the Employer acquired certain assets and its business from Vagedes Industries, Inc. on November 21, 1992 (2) any other effects of push down accounting which may result from the aforementioned transaction (3) overhead, management or similar charges of Ply Gem of its Subsidiaries other than the Employer's allocable share of professional fees, audit charges, insurance, compensation (exclusive of management fees), employee benefits and all other expenses which are paid by Ply Gem or its Subsidiaries for the account of the Employer for the benefit of the Employer or its employees and (4) gain or loss on sale of capital assets, including without limitation real property and equipment. Depreciation and amortization on capital assets shall be computed using the method and lives used by Vagedes Industries, Inc. for the period ended September 30, 1992. 6. Employment Benefits. The Employee shall be entitled during the ------------------- Employment Term to receive the benefits from 4 and to participate in any life insurance, accident, medical, hospital, bonus, vacation, sick leave, pension, profit sharing or other similar programs maintained by the Employer for senior executive employees. The Employee's benefits shall be of substantially similar value to the benefits provided to the Employee by Vagedes Industries, Inc. immediately prior to November 21, 1992. During the Employment Term, the Employee shall cooperate with the Employer in obtaining any insurance on the life of the Employee which the Employer may desire to obtain for its own benefit and shall undergo such physical and other examinations as the Employer may request in connection with the issuance of one or more of such policies of insurance. 7. Expenses. During the Employment Term, the Employer shall -------- reimburse the Employee, upon presentation of proper vouchers, for all actual travel, entertainment and other out-of-pocket expenses which are reasonably and necessarily incurred by the Employee in the performance of his duties hereunder in accordance with the Employer's policy for reimbursement of expenses applicable to all employees. 8. Termination. If the Employee shall die during the Employment ----------- Period, this Agreement and the Employment Period shall terminate, and the Employer shall pay to the Employee's estate any unpaid compensation (as provided in paragraph 4 above) to the date of termination at the rate of compensation then in effect. Notwithstanding the foregoing, the Employee's estate shall be 5 entitled to receive the additional compensation payments in accordance with Paragraph 5 above. The Employer may at any time, and in its sole discretion, immediately terminate this Agreement and the Employment Period for cause by written notice to the Employee specifying the nature of such cause. For purposes of this Agreement, "cause" shall include, without limitation, breach of any of the terms of this Agreement, breach of any of the provisions of the Agreement (as therein defined) with respect to the purchase of certain assets of the business by the Employer from Vagedes Industries, Inc. on November 21, 1992, fraud, conviction of a felony, habitual drunkenness, use of illegal substances, gross incompetence, malfeasance, misappropriation, dishonesty, embezzlement or similar misconduct by the Employee, willful failure of the Employee to perform the duties of his employment, failure of the Employee to follow the directions of the Board of Directors of the Employer, other willful misconduct, or similar conduct or activities by or on the part of the Employee. Notwithstanding the aforesaid, in the event that the breach upon which the termination of this Agreement and the Employment Term is based is curable, then this Agreement and the Employment Term shall be terminable only upon thirty-days notice to the Employee, during which time the Employee shall have the opportunity to cure in all respects the subject default and avoid termination of employment during this period. In the event that at any time during the Employment Period, the Employee, due to physical or mental injury, illness, 6 disability or incapacity, shall fail to render satisfactorily the services to be performed by the Employee pursuant to this Agreement for a non-consecutive period of six (6) months within any twelve month period, the Employer may, at its option terminate this Agreement and the Employment Period upon not less than thirty (30) days' written notice to the Employee. Notwithstanding the foregoing, the Employee shall be entitled to receive the additional compensation payments in accordance with Paragraph 5 above in the event of a termination of employment in accordance with this paragraph. 9. Conflicting Agreements. The Employee hereby represents and ---------------------- warrants to the Employer that (a) neither the execution of this Agreement by the Employee nor the performance by the Employee of any of the obligations or duties of the Employee under this Agreement will conflict with or violate or constitute a breach of the terms of any employment or other agreement to which the Employee is a party or by which the Employee is bound, and (b) the Employee is not required to obtain the consent of any person, firm, corporation or other entity in order to enter into this Agreement or to perform any of the obligations or duties of the Employee hereunder. 10. Inventions, Discoveries, Etc. The Employee hereby assigns, and ----------------------------- shall promptly and fully disclose and assign to the Employer, any and all inventions, discoveries, improvements, developments, concepts and ideas which relate to any activities of the Employer or which relate to building materials, whether or not patentable and whether or not conceived, developed or reduced to 7 practice by the Employee alone or by himself and others, or both, during the period of his employment with the Employer or with any affiliate or subsidiary of the Employer. For purposes of this paragraph "building materials" shall be deemed to mean any object which may constitute a component of a structure. 11. Non-Competition and Confidentiality. ----------------------------------- (a) The Employee covenants and agrees that, during the Employment Period, and (except as otherwise set forth herein) for a period of three (3) years thereafter, the Employee: (i) shall not in the United States or Canada, directly or indirectly, engage in the Employer Business for his own account; enter the employ of, or render any services to, any Person engaged in such activities; or become interested in any such Person in any capacity, including, without limitation, as an individual, partner, shareholder, lender, officer, director, employee, principal, agent or trustee; provided, -------- that the Employee may own, directly or indirectly, solely as an investment, securities of any such Person traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if the Employee is not a controlling Person of, or a member of a group which controls, such Person and the Employee does not, directly or indirectly, own one percent (1%) or more of any class of securities of such Person; (ii) shall not disclose to any Person not employed by, or not engaged to render services to, any of the Employer 8 or its parent or Subsidiaries (the "Companies"), and will not use for the benefit of himself or others, any Confidential Information obtained by him by reason of his association with the Companies or otherwise; (iii) shall return, upon request, upon termination of employment all memoranda, notes, lists, records and other documents or papers (and all copies thereof), including such items stored in computer memories, or microfiche or by any other means, made or compiled by or on behalf of the Employee, or made available to the Employee, relating to either or any of the Companies; (iv) for a period of two years from the date hereof shall not, directly or indirectly, hire, solicit or encourage to leave the employment of either of the Companies, any of its employees, or hire any such employee who has left the employment of the Employer within the one year period preceding the date hereof; (v) shall not, directly or indirectly, hire, solicit or cause others to hire or solicit, or conduct a business with any consultant or advisor then under contract, or under contract during the one-year period prior to the date hereof, with either of the Companies or any successor thereto unless the engagement is unrelated to the Employer Business or encourage such consultant or advisor to terminate its relationship with either of the Companies. (vi) shall not directly or indirectly, request or advise a customer or supplier of either of the Companies or 9 any successor thereto to curtail or cancel such customer's or supplier's business relationship with either of the Companies or any successor thereto. (b) The Employer shall be entitled, in addition to any other right and remedy it may have at law or at equity, the right to require the Employee to account for and pay over to the Employer all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Employee as the result of any transactions constituting a breach of any of the covenants contained in this Section 11. If any of the restrictions contained in this Section 11 shall be deemed unenforceable, by reason of extent or geographical scope or otherwise, then the court making such determination shall have the right to reduce such extent, geographical scope, or other provisions hereof, and in its reduced form this Section 11 shall then be enforceable in the manner contemplated hereby. (c) Employee acknowledges that Employee's services to Employer are of a unique character which gives them a special value to the Employer. Employee further acknowledges that any breach by Employee of any of the provisions of Section 11 hereof will result in irreparable and continuing harm to Employer for which the Employer would have no adequate remedy at law. Therefore, in addition to any other remedy which the Employer may have at law or in equity, the Employer shall be entitled to injunctive relief for a breach of this Agreement by Employee. 10 (d) The parties acknowledge that the laws and public policies of the various states of the United States and the District of Columbia may differ as to the validity and enforceability of the covenants contained in this Paragraph. It is the intention of the parties that activities of Employee be restricted only to the extent necessary for the protection of legitimate business interests of Employer, that the provisions of this paragraph shall, to the fullest extent permissible under the law and public policy, be enforced by the courts of each state and jurisdiction in which enforcement is sought, and that the unenforceable (or the modification necessary to conform the covenants contained in this Paragraph with such law and public policy) part of this Paragraph shall be adjudicated to be invalid or unenforceable without affecting any other part of this Paragraph. Accordingly, if any part of Paragraph 11 shall be adjudicated to be invalid or unenforceable in any action or proceeding in which Employee, or Employee's heirs, executors or administrators and the Employer, its successors or assigns, are parties, whether in its entirety or as modified as to duration, territory or to otherwise, then such part shall be deemed modified so as to be enforceable or, if required, deleted from the Agreement or amended, as the case may be, in order to render the remainder of Paragraph 11 valid and enforceable. Any such deletion or amendment shall apply only where the court rendering the same has jurisdiction. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in 11 all respects as if such invalid or unenforceable provision were omitted. The provisions of this Paragraph 11 shall survive the termination or expiration of the Employment Term. 12. Miscellaneous Provisions. ------------------------ (a) As used herein, the following terms shall be defined as follows: "Employer Business" means (i) during the Employment Term the manufacture and distribution of products similar to those which were manufactured or distributed by the Employer or by any subsidiary or of the Employer or entities under common control during the Employment Term; and (ii) during the three years subsequent to the Employment Term the manufacturer and distributor of products similar to those which were manufactured or distributed by the Employer or by any subsidiary of the Employer, or by Variform, Inc. or were in the development phase during the Employment Term or within the one year subsequent thereto. "Confidential Information" means information relating to costs, sales, profits, products, markets, key personnel, customers (including, without limitation, the identity of existing and prospective customers), pricing policies, operational methods, technical processes and other business methods, and acquisition plans, development plans and other business plans as to which the Employer takes reasonable precautions to assert and maintain confidentiality and which are not known or disclosed to persons outside Employer. "Person" means any individual, corporation, partnership, firm, joint venture, association, joint-stock 12 company, trust, unincorporated organization, governmental or regulatory body or other entity. "Subsidiary" of a corporation, person or entity shall mean any corporation, partnership, firm or other entity in which such corporation, person or entity holds an equity ownership interest of fifty percent (50%) or more; an "affiliate" of a corporation, person or entity shall mean any corporation, partnership, firm or other entity which controls, is controlled by, or is under common control with, such corporation, person or entity. (b) The provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns. (c) All notices required or permitted to be given hereunder shall be in writing and shall be deemed given when delivered in person or sent by confirmed facsimile, or when received if given by Federal Express or other nationally recognized overnight courier service, or five (5) business days after being deposited in the United States mail, postage prepaid, registered or certified mail, addressed to the applicable party as follows: (i) If to the Employer: The PGVA Corporation 315 Shoreland Drive Walton, Kentucky 41094 Attn: President 13 Copies to: Elihu H. Modlin EAB Plaza 12th Floor/West Tower Uniondale, NY ll556-0132 (ii) If to the Employee, at: Michael Vagedes 677 Sunnybrook Drive Florence, KY 41042 with a copy to: Stephen A. Kappers Cors & Bassett 1200 Carew Tower Cincinnati, Ohio 45202 (d) This Agreement contains the entire agreement between the parties with respect to the subject matter hereof, and all prior negotiations, agreements or understandings relating to the Employee's employment by the Employer, written or oral. This agreement may not be changed, modified, extended, renewed or supplemented, except in a writing signed by the parties hereto and specifying that it affects this Agreement. No provision hereof may be waived, except by an instrument in writing signed by the party against whom enforcement of any waiver is sought. (e) This Agreement shall be governed and construed in accordance with the laws of the State of Kentucky applicable to agreements made and to be performed entirely within such State. (f) In the event any one or more provisions of this Agreement is held to be invalid or unenforceable, such illegality or unenforceability shall not affect the validity or enforceability of the other provisions hereof and such other 14 provisions shall remain in full force and effect, unaffected by such invalidity or unenforceability. (g) This Agreement is personal to the Employee and the Employee may not assign any of his rights or delegate any of its duties under this Agreement. (h) The Employer may only assign this Agreement to any subsidiary or affiliate of the Employer. (i) The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement. (j) This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above-written. THE PGVA CORPORATION By:_______________________ __________________________ MICHAEL VAGEDES 15 March 11, 1997 Mr. Michael Vagedes Richwood Building Products, Inc. Richwood Industrial Park 315 Shorland Drive Richwood, Kentucky 41094 Dear Mr. Vagedes: Reference is made to the Employment Agreement (the "Employment Agreement") dated November 21, 1992 between yourself and Richwood Building Products, Inc., formerly known as The PGVA Corporation (the "Corporation"). This letter shall constitute a modification and clarification of the Employment Agreement as follows: a. The compensation to be paid to you during the year ending November 22, 1997 in accordance with the provisions of paragraph 4 of the Employment Agreement shall be at the rate of $105,000 per annum. During the subsequent year (commencing November 23, 1997), you shall be paid at a minimum rate of $110,000 per annum. b. A new sentence is added at the end of paragraph 5 of the Employment Agreement as follows: For calendar years 1996, 1997 and 1998, depreciation and amortization on capital assets shall be computed using the average of the following two methods: (a) The tax method (MACRS) which under Code Sec. 168 uses (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable convention. The adjusted basis of the property is multiplied by the declining balance rate. The half-year convention is applied in computing depreciation the first year. (b) The book method of depreciation currently used by the Corporation for calculation of depreciation expense for financial statement purposes in accordance with the Corporation's depreciation policy. c. For 1997 only, in the event that the IBIT (Income Before Income Taxes) for 1997 exceeds the IBIT for 1996 by more than 10%, you shall receive an additional bonus payment in the amount of $30,000 by April 1, 1998. For purposes of this paragraph, IBIT shall be shown on the financial statements of the Corporation, and shall be computed pursuant to generally accepted accounting principles (GAAP) consistently applied in all cases after deducting both the accrual for the additional payment in paragraph 5 of the Employment Agreement and the accrual for the bonus payable pursuant to this paragraph C (See Exhibit A). d. In consideration of the agreement set forth in this letter, it is understood and agreed that the changes provided for herein are in lieu of the reference to any "bonus" to be paid pursuant to paragraph 6 of the Employment Agreement and that paragraph 6 shall be modified and amended effective November 21, 1992 to provide for the deletion of any reference to "bonus" therein, provided, however, the other employment benefits described in paragraph 6 shall not be modified. e. Anything to the contrary notwithstanding, the signing and delivery of this agreement by you, and by these presents, constitutes a general release by you to the Companies (as defined in the Employment Agreement) for any claims that you may have pursuant to the Employment Agreement with respect to the subject matter specifically addressed in this letter to and through the date hereof. Anything to the contrary notwithstanding, the signing and delivery of this agreement by the Corporation, and by these presents, constitutes a general release by the Companies to you for any claims that the Companies may have pursuant to the Employment Agreement with respect to the subject matter specifically addressed in this letter to and through the date hereof. Except as modified by this letter, the Employment Agreement as aforesaid is hereby ratified and confirmed and shall be deemed in full force and effect. Please sign a copy of this letter indicating your agreement to the aforesaid. Sincerely yours, Paul Bogutsky Assistant Secretary ACCEPTED AND AGREED TO: ______________________________ Michael Vagedes March 11, 1997 EXHIBIT A TO PARAGRAPH C Example:
1996 1997 Increase ---------- ---------- -------- IBIT Pre Officer Bonus $2,358,300 $2,624,228 Less: Earn Out Accrual 504,221 554,741 Less: Additional Bonus (Paragraph C) 30,000 ---------- ---------- IBIT $1,854,079 $2,039,487 10% Therefore Bonus would be paid. ========== ==========
1997 Earn Out is an estimate EX-21 3 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 4 CONSENT OF GRANT THORNTON LLP Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated February 25, 1997, accompanying the consolidated financial statements and schedule included in the Annual Report of Ply Gem Industries, Inc. on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Ply Gem Industries, Inc. on Form S-8 (Registration Nos. 33-28753; 33-52514; 33-28752; 2-84279; 33-52516; 33-55035, and 33-55037). /s/ Grant Thornton LLP GRANT THORNTON LLP New York, New York February 25, 1997 EX-27.1 5 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 FINANICAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 9,924 0 31,042 3,039 92,983 154,790 153,438 62,757 313,447 68,148 82,397 0 0 4,419 141,364 313,447 774,928 774,928 626,424 0 0 1,982 6,773 19,579 9,125 10,454 0 0 0 10,454 .74 .74
EX-27.2 6 1995 RESTATED 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 FINANICAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 8,107 0 37,531 4,511 96,228 162,263 133,405 51,573 324,990 57,583 100,241 0 0 4,366 140,119 324,990 755,198 755,198 630,552 0 0 1,505 6,649 (10,262) (2,860) (7,402) 0 0 0 (7,402) .51 .51
EX-27.3 7 1994 RESTATED 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 FINANICAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 14,403 0 48,596 6,353 103,089 185,231 120,930 43,846 345,569 74,733 86,660 0 0 4,324 157,312 345,569 808,874 808,874 653,270 0 0 874 7,479 (11,949) (3,418) (8,531) 0 0 0 (8,531) (.62) (.62)
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