-----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, U00bDdHKuXr1AUpuaEv5ug5Q8Q/cJ4X/uAE902FL+SW/MXWiyNpUSPwbys4AFoKp PcRjGQQcuHiqdVsFwf8ybw== 0000950130-96-001103.txt : 19960402 0000950130-96-001103.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950130-96-001103 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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: 96542781 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, 1995. 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 $191,900,000 as of March 20, 1996. The number of shares outstanding of the registrant's common stock, $.25 par value was 14,460,173 as of March 20, 1996. DOCUMENTS INCORPORATED BY REFERENCE
IDENTIFICATION OF DOCUMENT PART INTO WHICH INCORPORATED -------------------------- -------------------------------- Proxy Statement for Annual Meeting of Stockholders to be held on May 10, 1996 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 specialty products for the home improvement industry. 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 home improvement industry. The home improvement industry includes products designed for remodeling, repair and alteration of residential structures whether the work is performed by the homeowner (the "do-it-yourselfer" or "D-I-Y"), or by a professional contractor. Home improvement products, which in some cases are also used in new construction applications, are sold either through retailers or specialty wholesale distributors that in turn sell to retailers, contractors and builders. The success of the recently introduced warehouse home center format, such as that utilized by Home Depot, continues to change the traditional way in which home improvement products are sold. Ply Gem is strategically positioned to be the supplier of choice to major home centers, the fastest growing segment of the home improvement industry. Reflecting its broad product offering, national coverage and superior customer service, including its direct to retail distribution capability, the nation's largest retailers are increasingly turning to the Company to meet their strict service requirements across many product lines. Consequently, Ply Gem is attractively positioned for growth in sales and earnings as it further penetrates this rapidly expanding customer base and continues to broaden its product offerings. The Company's products are distributed through an extensive network which includes major retail home center chains, specialty home remodeling distributors, lumber and building products wholesalers, professional contractors and Company operated distribution centers. The products are marketed primarily in the United States through Company sales personnel and independent representatives. The Company operates predominantly in one business segment--Home Improvement Products. Prior to 1992, the Company reported in two industry segments, Home Improvement Products and Home Products. The operations of the latter segment, consisting of manufacturing and distribution of disposable paper vacuum cleaner bags, have become less significant over the past several years and as a result the Home Products operations are not material to an understanding of the Company's business taken as a whole. On August 2, 1995, the Company engaged the investment banking firm of Bear, Stearns & Co. Inc. to explore strategic alternatives for the Company, including the possible sale of the Company, with the intent of maximizing shareholder value. The Company does not expect to disclose developments with respect to its exploration of strategic alternatives unless and until it is in a position to announce a definitive transaction. Furthermore, no assurances can be given that the process will result in any specific transaction. 1 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
SNE Enterprises, Inc.: SNE is a major manufacturer of wood windows, competing with companies such as Andersen Corporation, Marvin Windows and Doors and Pella Corporation. 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. SNE manufactures a full line of wood, wood clad and vinyl windows and patio doors, glass and polycarbonate skylights, and wooden interior bifold doors and shutters. 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. 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, casement, awning, sliding, 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 new CrestWood(TM) Series of premium wood windows and patio doors combines the performance of an energy efficient, maintenance free solid vinyl exterior with the warmth and beauty of a natural pine interior that can be painted or stained, and is also available in three hardwood species. 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. Introduced in late 1994, VinylCrest(TM), a complete line of solid vinyl windows, is available for replacement and new construction applications, in a full range of window styles. The introduction of this line of vinyl new construction windows gives SNE an important presence in what is believed to be the fastest growing niche in the window market. The new VinylCrest(TM) product line is 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. 2 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 direct to this channel in full truck load and less than truck load quantities is tailored to the desires of large home center chains who prefer to purchase windows direct from the manufacturer. SNE is the only company in the United States to supply 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 products such as CrestWood(TM) and VinylCrest(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 export markets. Variform, Inc.: Variform is a manufacturer of vinyl siding, soffit, skirting and accessories, which are available in a wide variety of woodgrain, colors, price points and profiles. 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 material distributors, who in turn sell primarily to home centers and lumber yards, the fastest growing distribution channel for vinyl siding. 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. Vinyl siding is sold to either specialty wholesale distributors who, in turn, sell directly to remodeling contractors (one-step distribution), or to building materials distributors who sell to home centers and lumberyards who in turn sell to remodeling contractors and consumers (two-step distribution). While Variform sells through both channels of distribution, it focuses on the two step market, where management believes it is the dominant supplier to the major home center retailers and retail lumber yards. 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 that the overall market, as warehouse retailers continue to take business away from the traditional one-step market by offering remodeling contractors a "one-stop- shop" for all of their home improvement material needs. Great Lakes Window, Inc.: Great Lakes is a manufacturer of high quality, energy efficient and maintenance free vinyl windows and patio doors. 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), MC +(TM) and Duo Temp(TM) brand names. Great Lakes' 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 specifications and include patented R-Core insulation within the frame. The Company believes it is among the largest suppliers of vinyl windows serving the replacement market in the United States. 3 Products include single hung, double hung, 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' 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, 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' replacement products are sold through specialty distributors and directly to large contractors. The new construction series is currently being sold under a private label program and to a select number of Great Lakes' dealer distributors. Great Lakes' 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 accessories for the remodeling and new construction markets. Siding accessories include blocks, which allow for the flush mounting of items like light fixtures to the exterior of a home, and gable vents that provide attic ventilation. The products are sold through a network of manufacturers representatives and directly to home centers, lumberyards and wholesale distributors of building materials, electrical and plumbing products. Richwood is the only manufacturer of siding accessories to offer a color selection that matches the colors offered by most, if not all, major manufacturers of vinyl siding. 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 plywood products which are marketed to distributors, home centers, cooperative buying groups and lumber yards for use generally in residential decking and commercial construction applications. Its products include lumber and plywood which have been treated for fire retardancy and for protection against moisture and insect infestation. Sagebrush Sales, Inc.: Sagebrush is a manufacturer and distributor of specialty lumber and related building products serving the home improvement and building materials market principally in the Southwest. Ply*Gem Manufacturing is a manufacturer of decorative pre-finished wall coverings and is a distributor of ceramic marble, porcelain tile and wood and melamine shelving, as well as many other products sold to home centers and lumber yards. Continental Wood Preservers, Inc .: Continental is a Midwestern manufacturer of pressure treated wood products for home improvement retailers and lumberyards in the Midwest. While the specialty wood products industry is very competitive, the Company believes it is able to compete effectively by providing superior customer service, outstanding quality, and wherever possible, proprietary products. The companies within the group focus on high margin, niche markets within the 4 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 Plywoood Corporation: Allied is a national distributor of a broad range of high end specialty wood and wood related products, including hardwood plywood, melamine and other laminated board products, hardwood lumber, high pressure laminate (HPL), solid surface materials and cabinet hardware. Allied is a leading importer of specialty wood panels from all over the world, including Baltic Birch(R) from Russia. 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 twelve company operated warehouse facilities and utilizes numerous public warehouses 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 customer base. Allied recently began to penetrate the retail home center market with some of its products and, the Company believes, will increase its sales to that industry segment. Goldenberg Group, Inc.: Goldenberg is a West Coast manufacturer and distributor of furniture components, laminates and board products to furniture manufacturers and other original equipment manufacturers, building material retailers and wholesalers. In addition to distribution of wood products, Goldenberg is capable of laminating vinyl and paper on almost any core material. 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. HOME PRODUCTS Studley Products, Inc.: Studley is a manufacturer of disposable paper vacuum cleaner bags and related floor care products. Studley's products are sold to manufacturers of vacuum cleaners, mass merchandisers and other retailers and recently to the retail home center market and other retailers. Even though the market is very competitive, Studley is able to compete on the basis of its technical expertise in the design and manufacture of its products. In 1994, Studley introduced an innovative new vacuum cleaner bag that is able to capture pollen and other allergy causing bacteria through the use of such high performance materials. The continued introduction of new products and the fact that many consumers are now likely to own more than one vacuum cleaner are expected to provide opportunities for future growth. PRODUCTION AND FACILITIES The Windows, Doors and Siding group operates eleven manufacturing and warehouse facilities in the United States and one in Canada. 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 5 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. 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. In 1994, the Company closed three window assembly and distribution facilities and consolidated these operations into its main facility in Mosinee, Wisconsin. 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. Siding accessories are manufactured through an injection molding process using proprietary mold designs and polypropylene. The polypropylene is vacuum fed from containers to injection molding machines. Insulated vinyl framed replacement windows are manufactured, using a patented process, 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 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 easily handled product. The Company's high-speed laminating production facilities in Gloucester City, New Jersey afford flexibility in laminating paper and vinyl to various substrate materials. Furniture components are manufactured from particle board or fiberboard which is machined to customer specifications. Several unique proprietary processes are employed to manufacture these products efficiently. Specialty lumber products, including siding, decking and paneling are manufactured by the Company in three facilities with a combined annual production capacity in excess of 100 million board feet. The Distribution Group operates fourteen distribution centers located primarily in the East and utilizes numerous 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. Disposable paper vacuum cleaner bags are manufactured on highly automated equipment, the major part of which was designed and built by the Company. The Company is continuously engaged in designing vacuum cleaner bags for new vacuum cleaner models. RAW MATERIALS The principal raw materials used in the manufacture of the Company's products are PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard, plywood, various species of lumber such as pine, spruce, lauan, hemlock and fir, various chemicals, filter paper, woven and non woven fabric, and paper. 6 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 Company's home improvement business is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of activity in both the home improvement and new construction markets. The Company's lowest sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income tends to be lower in quarters with lower sales. Inventory and borrowings to satisfy working capital requirements are usually at their highest level during the second and third quarters. BACKLOG In general, the Company does not produce against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Significant inventories of finished goods, work- in-process and raw materials are maintained to meet delivery requirements of customers. Hoover and Continental maintain a steady backlog of firm orders to be filled in an amount representing approximately 6% 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, 1995 approximately 3,700 persons were employed by the Company. Approximately 1,400 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 eleven manufacturing and warehouse facilities in the United States and one in Canada ranging in size from approximately 19,000 square feet to 660,000 square feet. Of these facilities, six are owned, and six are leased under net leases that expire at various dates through 2017. The group's manufacturing facilities operated at ranges of approximately 60% to 85% of capacity during 1995. 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 facilities 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 1995. Distribution operates fourteen facilities located primarily in the East ranging in size from approximately 16,000 square feet to 257,000 feet. Two facilities are owned, and twelve facilities are leased under leases that expire at various dates through 2005. 7 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 50% of capacity during 1995. 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 14,700 square feet of office space which is leased through 1999. ITEM 3. LEGAL PROCEEDINGS. Hoover, a wholly-owned subsidiary of Ply Gem, is a defendant in a number of commercial lawsuits alleging property damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August, 1988. Sales of this product 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, as of December 31, 1995, as well as the number of lawsuits filed since 1993, have declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement. A purported class action on behalf of certain Maryland homeowners was dismissed in November, 1995, when the Maryland Court of Appeals, the State's highest court, found that the homeowners had no viable claims against Hoover. In those suits that remain pending, direct defense costs are being paid out of insurance proceeds. Two actions have proceeded to trial against Hoover and resulted in jury verdicts against it. In one of these actions, judgment was entered in Hoover's favor by the court after a jury verdict against it and the plaintiff's petition to appeal the judgment entered in Hoover's favor was denied. In the other case, the judgment against Hoover was vacated and the case was settled with proceeds from insurance settlements. Hoover and Ply Gem have engaged in litigation with some of their insurers regarding coverage for these lawsuits and claims. Hoover has settled its coverage claim with a majority of its insurers and is negotiating settlements with others. Hoover and Ply Gem believe they have meritorious claims for coverage from their remaining unsettled insurers and are seeking declaratory judgments confirming such coverage. The proceeds from settled insurance claims, along with the proceeds from a settlement of claims by Hoover against certain suppliers of materials used by it in the production of treated wood, are available for the settlement of the underlying property damage actions. Ply Gem believes that Hoover's remaining coverage disputes will be resolved within the next two years 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, considered its history of successful settlements with primary and excess insurers and consulted with counsel. Hoover and Ply Gem are vigorously defending the underlying lawsuits which cannot be resolved on a reasonable basis and believe that they have meritorious defenses to those suits including, in the case of Ply Gem, the defense that it has been improperly joined, as it did not manufacture or market the Hoover products at issue, and is not legally liable for the damage allegedly caused by them. In evaluating the effect of the lawsuits, which Hoover expects to discharge over the next four years, and its anticipated additional insurance recoveries, Hoover and Ply Gem have considered a number of factors including: the number and exposure posed by the pending lawsuits; the significant decline in the number of lawsuits filed in 1994 and 1995; the availability of various legal defenses, including statutes of limitations; the existence of settlement protocols; an agreement indemnifying Hoover as to certain past and future claims; and Hoover's experience to date in settling with its insurance companies and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material 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 1995. 8 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.
1995 1994 ------------------------ ------------------------ QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND - ------- ------- ------- -------- ------- ------- -------- First......................... $21 1/4 $17 1/8 $.03 $25 5/8 $17 1/2 $.03 Second........................ 18 3/4 15 .03 23 5/8 19 1/2 .03 Third......................... 19 15 .03 23 1/2 18 3/4 .03 Fourth........................ 19 1/8 15 5/8 .03 23 1/4 17 .03
The Company has paid cash dividends on its Common Stock since 1976 and presently pays quarterly dividends at the annual rate of $.12 per share. The Company's revolving credit facility has limitations on the annual amounts of the Company's dividends. Under the most restrictive provision, at December 31, 1995, approximately $2,900,000 was available for the payments of dividends in 1996. The number of stockholders of record of the Company's common stock as of March 20, 1996 was approximately 2,800. 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.
1995 (1) 1994(2) 1993 1992 1991 -------- ------- ---- ---- ---- INCOME STATEMENT DATA - --------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales...................... $741,394 $796,419 $722,660 $623,182 $561,550 Net income (loss).............. (7,402) (8,531) 9,650 6,306 4,039 Net income (loss) per share.... (.51) (.62) .75 .56 .39 BALANCE SHEET DATA: Total assets................... $324,990 $345,569 $344,944 $313,997 $281,124 Long-term debt................. 93,135 79,501 92,898 62,451 57,996 Capital lease obligations...... 7,106 7,159 7,166 7,215 105 Convertible subordinated deben- tures......................... -- -- 50,000 50,000 50,000 Stockholders' equity........... 144,485 161,636 128,942 118,439 111,349 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. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. RESTRUCTURING UPDATE As further described in Note 2 to the consolidated financial statements, the Company commenced a restructuring program during 1994 designed to improve its cost structure primarily through facilities consolidations and closures, abandonment of certain information systems and workforce reductions, and has recorded $29.1 million for these actions. Implementation of several initiatives included in the restructuring program have been delayed or have resulted in higher costs than originally anticipated, primarily in the Company's window subsidiaries, and to a lesser extent, in its distribution businesses, which offset the aggressive cost cutting actions implemented by the Company. As a result the Company does not expect to realize the majority of the savings from full implementation of the restructuring program until 1996 and thereafter. As previously disclosed, however, there can be no assurance that the Company will realize any significant future savings. The cash outlays with respect to the restructuring program during 1995 of approximately $10 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 $7.6 million of which approximately $4.5 million will be expended in 1996. WRITE-DOWN OF LONG-LIVED ASSETS As more fully described in Note 5 to the consolidated financial statements, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" during the fourth quarter of 1995. Adoption of SFAS No. 121 required a non-cash pre-tax write-down of certain long-lived assets of approximately $12.0 million. Future depreciation and amortization of these assets will be reduced by approximately $2 million annually. NET SALES Net sales for the year ended December 31, 1995 totaled $741.4 million, a decrease of 6.9% over 1994 net sales of $ 796.4 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 approximately 1.8% for the comparison period. The Company's Windows, Doors and Siding businesses experienced sales growth of approximately $10.4 million during 1995 as unit sales increases in the Company's vinyl siding and vinyl window businesses were partially offset by a decline in unit volume in the Company's wood window business. 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 continue to be impacted by low framing lumber prices, and lower volume at the Company's Distribution businesses. Net sales for the year ended December 31, 1994 were $796.4 million, which represents a 10.2% increase over 1993 net sales of $722.7 million. The 1994 sales growth was driven by the Company's Windows, Doors and Siding subsidiaries which experienced a 14% increase in sales. Increased market penetration and new products helped fuel this growth. Of the total net sales increase in 1994, approximately 6% is attributable to increases in unit volume and the remainder to increases in average selling prices. 10 GROSS PROFIT Gross profit, expressed as a percentage of net sales, was 16.7% in 1995, compared with 19.3% in 1994 and 19.1% in 1993. The 1995 gross margins have been 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 commodity costs, particularly PVC resin and glass (which are used in the manufacture of siding and windows), had a negative impact on gross margins, 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. Gross profit in 1994 was also impacted by higher commodity costs, particularly PVC resin and glass. However, improved labor productivity, lower conversion costs and the absence of new plant start-up costs (incurred in 1993) offset these higher costs and resulted in a modest improvement in gross profit during 1994 as compared to 1993. The Company's results of operations are affected by fluctuations in the market prices of wood products used as raw materials in its various manufacturing operations. Over the years, the Company has experienced significant fluctuations in the cost of wood products from primary suppliers. A variety of factors over which the Company has no control, including environmental regulations, weather, economic conditions and natural disasters, impact the cost of wood products. The Company anticipates that these fluctuations will continue in the future. Although the Company attempts to increase sales prices of its products in response to higher wood products costs, such sales prices often lag behind the escalation of the cost of raw materials in question. While the Company intends to increase prices in a timely manner to cover possible increases in the cost of wood products, its ability to do so may be limited by competitive or other factors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, as a percentage of net sales, were 15.3% in 1995 as compared to 14.7% in 1994 and 15.4% in 1993. The percentage increase for the 1995 comparison to 1994 is primarily due to the absorption of such expenses over lower sales levels. In absolute dollars, selling, general and administrative expenses declined by $3.9 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. The percentage decrease in 1994 compared to 1993 is primarily attributable to a lower provision for bad debts, certain administrative and functional consolidations and workforce reductions, partially offset by employment costs associated with the creation of new positions in purchasing, executive management, information systems, total quality management and marketing. INCOME FROM OPERATIONS Income from operations, excluding the write-down of long-lived assets in 1995 and nonrecurring charges in 1994, was $10.5 million in 1995 compared to $36.9 million in 1994 and $26.8 million in 1993. The lower levels of operating income were a result of the aforementioned factors. The Company is taking a number of steps to improve operating results in 1996 and beyond. These actions include: implementation of a new systems at the Company's window businesses; aggressive procurement initiatives, particularly with regard to vinyl profiles and glass; elimination of costly consulting fees; reduction in administrative costs, including the closure of an administrative facility; and, realization of fixed cost reductions from the completion of facility consolidations and headcount reductions. 11 INTEREST EXPENSE Interest expense was $6.6 million in 1995 compared to $7.5 million in 1994 and $10.1 million in 1993. The decline in interest expense in 1995 and 1994 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 during 1995 and 1994. OTHER INCOME (EXPENSE) The increase in other income (expense) of $1.8 million for the 1995 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 income (expense) in 1994 includes the costs associated with the sale of accounts receivables program, partially offset in 1993 by a gain resulting from an involuntary conversion of property. INCOME TAXES The effective income tax rate (benefit in 1995 and 1994) was 27.9% in 1995, 28.6% in 1994 and 44.8% in 1993. The lower tax benefit in 1995 is due to the proportionately higher amount of non-deductible goodwill amortization in 1995 as compared to the loss before taxes than such comparison in 1994. The lower tax rate in 1994 compared to 1993 is due to factors discussed in the preceding sentence and certain state tax benefits relating to the nonrecurring charge which, in accordance with the criteria set forth in SFAS No. 109, were not recognized. NET INCOME Net income, before the aforementioned nonrecurring charges and write-down of long-lived assets, decreased to $.2 million in 1995 from $17.2 million in 1994. Net income was $9.7 million in 1993. The factors cited above were responsible for the decline in operating results of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has a revolving $200 million credit facility with a syndicate of twelve banks which provides financing through February 1999. Availability under this facility was $58 million at December 31, 1995. The table below summarizes the Company's cash flow from operating, investing and financing activities as reflected in the Consolidated Statements of Cash Flows.
1995 1994 1993 ------ ----- ----- (IN MILLIONS) Cash provided by (used in) Operating activities.................................... $ 11.1 $48.8 $ 4.7 Investing activities.................................... 26.2) 19.9) 11.0) Financing activities.................................... 8.8 (27.0) 16.9 ------ ----- ----- Net increase (decrease) in cash and cash equivalents.... $ (6.3) $ 1.9 $10.6 ====== ===== =====
OPERATING ACTIVITIES Cash flow provided from operations was $11.1 million in 1995, compared to $48.8 million provided in 1994. The decrease in cash from operations resulted primarily from lower operating results, cash used for the restructuring program and an increase in notes receivable. 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. 12 INVESTING ACTIVITIES Investing activities of the Company during the discussion periods primarily consist of acquisition of property, plant and equipment. Capital expenditures were $27.8 million in 1995 compared to $23.0 million in 1994 and $20.5 million in 1993. Approximately $9.9 million and $4.3 million was incurred in 1995 and 1994 respectively, in connection with the design and development of the Company's new information systems. The remaining outlays in 1995 were for machinery and equipment used to expand capacity and improve productivity. The Company expects to incur approximately $16 million in 1996 for capital expenditures. 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 1995, the Company increased bank debt by $13.6 million primarily to fund capital expenditures. 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. Repurchases for 1995 were 292,000 shares with a total purchase price of approximately $5.0 million. The Company is expected to continue its buy-back program during 1996 subject to market conditions. BALANCE SET ANALYSIS The capitalization of the Company (long-term debt plus stockholders' equity) was $244.7 million at December 31, 1995. The ratio of debt to capitalization was 41% at December 31, 1995, as compared to 35% at December 31, 1994 reflecting the increase in bank debt during 1995 and the net loss incurred. The Company's working capital was $104.7 million at December 31, 1995 compared to $110.5 million at December 31, 1994. The current ratio was 2.8 at December 31, 1995, compared to 2.5 at December 31, 1994. The decrease in working capital was the result of a decrease in current assets of $23.0 million from December 31, 1994 to December 31, 1995 and a decrease in current liabilities of $17.2 million during the same period. The decrease in current assets at December 31, 1995 compared to December 31, 1994 resulted primarily from lower inventories due to the implementation of inventory reduction programs and lower accounts receivable as a result of lower sales volume during the fourth quarter of 1995 compared to the same period in 1994. The decrease in current liabilities from December 31, 1994 to December 31, 1995 was due primarily to the reduction in restructuring accrual as a result of cash payments in 1995. In 1995 the Company increased its outstanding borrowings by a net total of $14.0 million compared to reducing its borrowings by a net total of $14.9 million in 1994. In 1995 borrowings were used to finance capital expenditures and working capital needs of the Company. The Company will continue to have cash requirements to support working capital needs, pay interest, fund the balance of the restructuring program and fund capital expenditures. In order to meet these cash requirements, the Company intends to use internally generated funds and, if necessary, borrowings from 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 home improvement business is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. The Company's lowest sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income tends to be lower in quarters with lower sales. Inventory and borrowings to satisfy working capital requirements are usually at their highest level during the second and third quarters. 13 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........................ 15 Financial Statements Consolidated Balance Sheets at December 31, 1995 and 1994............... 16 Consolidated Statements of Operations for the Three Years Ended December 31, 1995............................................................... 17 Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1995................................................ 18 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995............................................................... 19 Notes to Consolidated Financial Statements.............................. 20 Quarterly Data............................................................ 31
14 [LOGO] 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, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Grant Thornton LLP New York, New York March 6, 1996 15 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1995 1994 ---- ---- ASSETS Cash and cash equivalents....................... $ 8,107,000 $ 14,403,000 Accounts receivable, net of allowance of $4,511,000; $6,353,000 in 1994................. 33,020,000 42,243,000 Inventories..................................... 96,228,000 103,089,000 Prepaid and deferred income taxes............... 15,714,000 17,426,000 Other current assets............................ 9,194,000 8,070,000 ------------ ------------ Total Current Assets........................ 162,263,000 185,231,000 Property, plant and equipment--at cost, net..... 81,832,000 77,084,000 Patents and trademarks, net of accumulated amor- tization of $8,971,000; $7,825,000 in 1994..... 15,334,000 16,464,000 Intangible assets, net.......................... 15,507,000 16,586,000 Cost in excess of net assets acquired, net...... 23,081,000 24,647,000 Other assets.................................... 26,973,000 25,557,000 ------------ ------------ Total Assets................................ $324,990,000 $345,569,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses........... $ 40,455,000 $ 46,778,000 Accrued restructuring........................... 4,480,000 13,413,000 Accrued payroll and commissions................. 7,790,000 10,539,000 Accrued insurance............................... 4,400,000 3,523,000 Current maturities of long-term debt and capital 458,000 480,000 leases......................................... ------------ ------------ Total Current Liabilities................... 57,583,000 74,733,000 Long-term debt.................................. 93,135,000 79,501,000 Capital leases.................................. 7,106,000 7,159,000 Other liabilities............................... 22,681,000 22,540,000 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 17,463,072 shares; 17,296,195 shares in 1994...................................... 4,366,000 4,324,000 Additional paid-in capital...................... 148,618,000 146,967,000 Retained earnings............................... 53,246,000 62,397,000 ------------ ------------ Less Treasury stock--at cost (3,015,311 shares; 2,745,319 shares in 1994)...................... 55,676,000 50,954,000 Unamortized restricted stock and note receiv- 6,069,000 1,098,000 able......................................... ------------ ------------ TOTAL STOCKHOLDERS' EQUITY.................. 144,485,000 161,636,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $324,990,000 $345,569,000 ============ ============
The accompanying notes are an integral part of these statements. 16 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Net sales............................ $741,394,000 $796,419,000 $722,660,000 Cost of goods sold................... 617,620,000 642,337,000 584,271,000 ------------ ------------ ------------ Gross profit....................... 123,774,000 154,082,000 138,389,000 Selling, general and administrative expenses............................ 113,276,000 117,184,000 111,560,000 Write-down of long-lived assets...... 11,950,000 -- -- Nonrecurring charges................. -- 40,962,000 -- ------------ ------------ ------------ Income (loss) from operations...... (1,452,000) (4,064,000) 26,829,000 Interest expense..................... (6,649,000) (7,479,000) (10,056,000) Other income (expense)............... (2,161,000) (406,000) 708,000 ------------ ------------ ------------ Income (loss) before income taxes.. (10,262,000) (11,949,000) 17,481,000 Income tax provision (benefit)....... (2,860,000) (3,418,000) 7,831,000 ------------ ------------ ------------ Net Income (loss).................. $ (7,402,000) $ (8,531,000) $ 9,650,000 ============ ============ ============ Earnings (loss) per share............ Primary............................ $(0.51) $(.62) $.76 Fully diluted...................... (0.51) (.62) .75 ------------ ------------ ------------ Weighted average number of shares outstanding......................... Primary............................ 14,445,000 13,870,000 14,217,000 Fully diluted...................... 14,445,000 13,870,000 14,217,000 ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 17 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK TREASURY STOCK --------------------- ---------------------- NUMBER ADDITIONAL NUMBER OF PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ---------- ---------- ------------ ----------- --------- ----------- Balance at January 1, 1993................... 11,550,819 $2,887,000 $ 61,014,000 $64,249,000 831,122 $ 8,262,000 Cash dividends on common stock ($.12 per share). (1,298,000) Exercise of employee stock options.......... 321,690 81,000 2,591,000 87,356 1,185,000 Tax benefit arising from exercise of stock options................ 210,000 Contribution of treasury stock to employee profit sharing trust... 42,000 (5,600) (58,000) Other................... 149,000 (2,805) (27,000) Net income.............. 9,650,000 ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 1993................... 11,872,509 2,968,000 64,006,000 72,601,000 910,073 9,362,000 Cash dividends on common stock ($.12 per share). (1,673,000) Exercise of employee stock options.......... 2,672,318 668,000 23,423,000 1,197,241 29,465,000 Tax benefit arising from exercise of stock options................ 9,962,000 Conversion of debentures............. 2,751,328 688,000 48,379,000 Purchase of treasury shares................. 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 treasury shares................. 292,000 4,955,000 Other................... 5 -- (17,000) (88) 13,000 Net loss................ (7,402,000) ---------- ---------- ------------ ----------- --------- ----------- Balance at December 31, 17,463,072 $4,366,000 $148,618,000 $53,246,000 3,015,311 $55,676,000 1995................... ========== ========== ============ =========== ========= ===========
The accompanying notes are an integral part of these statements. 18 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1995 1994 1993 ------------------------- ------------------------- ------------------------ CASH FLOWS FROM OPERAT- ING ACTIVITIES: Net income (loss)....... $ (7,402,000) $ (8,531,000) $ 9,650,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amor- tization.............. $14,171,000 $13,385,000 $12,166,000 Write-down of long- lived assets.......... 11,950,000 -- -- Nonrecurring charges net of cash payments of $5,223,000......... -- 35,739,000 -- Deferred taxes......... 3,644,000 (8,067,000) (1,782,000) Provision for doubtful accounts.............. 1,505,000 874,000 4,642,000 Changes in assets and liabilities Accounts receivable............ 8,333,000 10,515,000 (16,720,000) Inventories............ 6,861,000 5,575,000 (10,325,000) Prepaid expenses and other current assets.............. (3,845,000) 1,459,000 (423,000) Accounts payable and accrued expenses............ (8,195,000) 3,860,000 4,768,000 Income taxes payable. -- (4,902,000) (1,535,000) Restructuring........ (10,608,000) -- -- Other assets......... (5,305,000) 18,511,000 (1,061,000) 57,377,000 4,273,000 (4,936,000) ----------- ------------ ----------- ------------ ----------- ----------- Net cash provided by operating activities.......... 11,109,000 48,846,000 4,714,000 ------------ ------------ ----------- CASH FLOWS FROM INVEST- ING ACTIVITIES: Additions to property, plant and equipment............. (27,827,000) (23,046,000) (20,519,000) Funds used for con- struction............. -- 1,327,000 7,721,000 Proceeds from proper- ty, plant and equip- ment disposals........ 799,000 1,681,000 216,000 Proceeds from sales of marketable securi- ties, net............. 788,000 -- -- Other.................. 25,000 129,000 1,564,000 ------------ ------------ ----------- Net cash used in in- vesting activities.. (26,215,000) (19,909,000) (11,018,000) ------------ ------------ ----------- CASH FLOWS FROM FINANC- ING ACTIVITIES: Short-term debt repay- ments, net............ -- (2,330,000) (4,752,000) Repayment of long-term debt.................. (481,000) (881,000) (13,482,000) Net change in revolv- ing note borrowings with original matu- rity of 90 days or less.................. 14,040,000 (14,884,000) -- Purchase of treasury shares................ (4,955,000) (12,175,000) -- Long-term borrowings... -- -- 34,760,000 Cash dividends......... (1,749,000) (1,673,000) (1,298,000) Proceeds from exercise of employee stock op- tions................. 1,499,000 6,491,000 1,655,000 Other.................. 456,000 (1,581,000) 40,000 ------------ ------------ ----------- Net cash provided by (used in) financing activities............. 8,810,000 (27,033,000) 16,923,000 ------------ ------------ ----------- Net increase (de- crease) in cash and cash equivalents.... (6,296,000) 1,904,000 10,619,000 Cash and cash equiva- lents at beginning of year................... 14,403,000 12,499,000 1,880,000 ------------ ------------ ----------- Cash and cash equiva- lents at end of year... $ 8,107,000 $ 14,403,000 $12,499,000 ------------ ------------ -----------
The accompanying notes are an integral part of these statements. 19 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. and subsidiaries (the "Company") operates predominantly in one business segment; the manufacture and sale of vinyl siding, wood and vinyl-framed windows and patio doors, prefinished decorative plywood and solid wood paneling, furniture components, pressure-treated wood products and the distribution of a variety of other products for the 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. The Company revised its statement of operations reporting format in 1995 to include amortization expense relating to intangible assets as a selling, general and administrative expense. Previously such amortization had been reported as a separate expense caption after income from operations. In addition, other prior year items have been reclassified to conform to the 1995 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. PROPERTY, PLANT AND EQUIPMENT Owned property, plant and equipment are depreciated on a straight-line basis 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. INTANGIBLE ASSETS (a) Patents and Trademarks Purchased patents and trademarks are recorded at appraised value at time of acquisition and are being amortized on a straight-line basis over their estimated remaining economic lives; thirteen to seventeen years for patents and thirty years for trademarks. (b) 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 purchased intangibles are being amortized on a straight-line basis generally from ten to thirty-nine years. 20 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company annually evaluates the carrying value of its intangible 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 intangible relates. INCOME TAXES Deferred income tax liabilities and assets reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss carryforwards. These differences are classified as current or noncurrent based upon the classification of the related asset or liability. Deferred income tax assets, such as benefits related to net operating loss carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS 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 Loss per share of common stock is computed by dividing net loss by the weighted average number of common shares outstanding. Stock options have been excluded from the calculation in 1995 and 1994 as their effect would be anti- dilutive. Earnings per share is calculated using the modified treasury stock method, which limits the assumed purchase of treasury shares to 20% of the outstanding common shares. 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 18.8%, 14.2% and 12.2% of the Company's net sales for the years ended December 31, 1995, 1994 and 1993, respectively. 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 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 designed to improve profitability and $11.9 million for unusual items primarily consisting of the write down of certain intangible assets and 21 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) discontinued products and costs associated with the Company's business process redesign. The status of the components of the restructuring provision at the end of the year was:
BALANCE AT BALANCE AT DECEMBER 31, 1995 DECEMBER 31, 1994 ACTIVITY 1995 ------------ ----------- ------------ Consolidation and closure of facili- ties, including severance and related costs........ $15,100,000 $ 8,274,000 $6,826,000 Other severance and related costs... 3,900,000 2,947,000 953,000 Abandonment of certain information systems............................ 1,300,000 1,150,000 150,000 Other, including lease termination expenses and costs to execute the restructuring program.............. 2,000,000 1,915,000 85,000 ----------- ----------- ---------- $22,300,000* $14,286,000 $8,014,000* =========== =========== ==========
- -------- * The following amounts are included in the consolidated balance sheet at December 31, 1995 and 1994, respectively, under the captions: "accrued restructuring" ($4.5 and $13.4 million), "other liabilities" ($3.1 and $4.1 million), "property, plant and equipment" (reduction of $.2 and $2.0 million), "inventory" (reduction of $.1 and $1.5 million) and "accounts receivable" (reduction of $.1 and $.8 million), and "various other asset accounts" (reduction of $.5 million in 1994.) The Company has completed the consolidation or closure of six facilities since the inception of the program. During 1995, the Company wrote-off additional discontinued products, closed an administrative office and incurred additional severance. These items were not included in the original nonrecurring/restructuring charge recorded in 1994. Based on current estimates, existing accruals are adequate to cover the above items because the estimated cost to implement certain strategies was reduced or the initiatives were cancelled. The cash outlays with respect to the restructuring program during 1995 of approximately $10 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. NOTE 3 ACCOUNTS RECEIVABLE The Company has a program which currently allows for the sale of up to $50 million of undivided fractional interests in a designated pool of eligible accounts receivable to a financial institution with limited recourse. The program expires in January 1998 with options to extend the agreement to January 2000. At December 31, 1995 and 1994 respectively, the Company sold $42 and $40 million of receivables under this program. Program costs of $3,205,000, $1,892,000, and $1,495,000 are included in "other income (expense)" for 1995, 1994 and 1993, respectively. NOTE 4 INVENTORIES The classification of inventories at the end of each year was as follows:
1995 1994 ----------- ------------ Finished goods.................................... $54,530,000 $ 52,390,000 Work in progress.................................. 12,508,000 18,002,000 Raw materials..................................... 29,190,000 32,697,000 ----------- ------------ $96,228,000 $103,089,000 =========== ============
22 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at the end of each year consisted of the following:
1995 1994 ------------ ------------ Land........................................... $ 2,704,000 $ 2,679,000 Buildings and improvements..................... 24,853,000 26,389,000 Machinery and equipment........................ 78,830,000 64,285,000 Transportation equipment....................... 2,428,000 2,313,000 Furniture and fixtures......................... 11,312,000 11,107,000 Capital leases................................. 7,501,000 7,397,000 Construction in progress....................... 5,777,000 6,760,000 ------------ ------------ 133,405,000 120,930,000 Accumulated depreciation and amortization...... (51,573,000) (43,846,000) ------------ ------------ $ 81,832,000 $ 77,084,000 ============ ============
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 pre-tax 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 new information system and $2.5 million related primarily to certain machinery and equipment. The latter charge related to the permanent decline in the value of these assets as a result of the Company not relocating a facility in 1995 as planned. NOTE 6 INTANGIBLE AND OTHER ASSETS Accumulated amortization of cost in excess of net assets acquired and other intangible assets is $19,917,000 at December 31, 1995 and $17,711,000 at December 31, 1994. Other assets at December 31, 1995 includes notes receivable from an officer. The $5,400,000 ($5,400,000 at December 31, 1994) note, which includes 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, versus the prior year or at the discretion of the Board of Directors. Accordingly, the annual installments for 1994 and 1993 were forgiven. The $3,000,000 ($3,250,000 at December 31, 1994) and $5,000,000 notes 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 shall be forgiven upon the occurrence of a change in control of the Company or permanent disability of the officer. At December 31, 1995, $5,000,000 of notes receivable have been reflected as a reduction of stockholder's equity since the officer may reduce the indebtedness through the Company's redemption of its shares which are owned by the officer. NOTE 7 STOCKHOLDERS' EQUITY In addition to treasury stock, deductions from stockholders' equity consists of unamortized restricted stock of $1,069,000 and $1,098,000 at December 31, 1995 and 1994, respectively and notes receivable due from officer of $5,000,000 at December 31, 1995. See Note 6. 23 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8 SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31 is as follows:
1995 1994 1993 ---------- ---------- ----------- Interest paid (net of $746,000 capitalized in 1995, $323,000 in 1994 and $510,000 in 1993).................................... $5,887,000 $5,546,000 $ 9,692,000 ---------- ---------- ----------- Income taxes paid......................... $ 872,000 $2,819,000 $10,180,000 ========== ========== ===========
Noncash financing activities involve the issuance of common stock upon conversion of $49,963,000 of the Company's Debentures in 1994. NOTE 9 LONG-TERM DEBT The composition of long-term debt at the end of each year was as follows:
1995 1994 ----------- ----------- Revolving credit facility expiring in 1999.......... $85,540,000 $71,500,000 Industrial Development Revenue Bonds maturing at various dates to 2012, generally at floating inter- est rates which are reset periodically (6.0% average interest rate for 1995). 7,955,000 8,324,000 Other............................................... 45,000 107,000 ----------- ----------- 93,540,000 79,931,000 Less current maturities............................. 405,000 430,000 ----------- ----------- $93,135,000 $79,501,000 =========== ===========
The Company has a revolving credit facility with a syndicate of banks, which provides financing of up to $200 million through February 1999. Interest on borrowings are at varying rates based, at the Company's option, on the London Interbank Offered Rate (LIBOR) or the bank's prime rate. The Company pays an annual fee on the facility which, based on a formula, was .4375% of the facility amount at December 31, 1995. The average weighted interest rate on these loans for the year 1995 and 1994 was 6.9% and 5.9%, respectively (7.0% and 6.6% at December 31, 1995 and 1994, 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, 1995 $2,900,000 was available for payments of dividends in 1996. Borrowings under this credit facility are collateralized by the common stock of the Company's principal subsidiaries. During 1994, holders of the Company's Debentures converted a total principal amount of $49,963,000 into 2,751,328 shares of the Company's common stock. As a result of this transaction, the total principal amount converted was credited to common stock at par and paid-in-capital, net of unamortized expenses of the original debt issue and transaction costs and offset by the accrued interest from the last payment date to the conversion date. The remaining $37,000 of the original $50 million face amount was redeemed by the Company. The Company has $40 million of interest rate caps, which has the effect of mitigating the Company's current exposure to high interest rates. These caps mature over various periods through October 1996 and have cap rates ranging from 7.5% to 8.0%. 24 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future maturities of long-term debt, for the years 1996 through 2000, are: 1996-$405,000; 1997-$421,000; 1998-$446,000; 1999-$86,016,000 and 2000- $500,000. The net book value of property, plant and equipment pledged as collateral under industrial revenue bonds was approximately $7,266,000 at December 31, 1995. NOTE 10 INCOME TAXES The income tax provision (benefit) for the years ended December 31 consisted of the following:
1995 1994 1993 ---- ---- ---- Federal Current........................... $ (7,485,000) $ (6,195,000) $7,986,000 Deferred.......................... 4,172,000 (7,353,000) (1,782,000) Foreign............................. 7,000 (21,000) 190,000 State and local Current........................... 800,000 903,000 1,227,000 Deferred.......................... (528,000) (714,000) -- ------------ ------------ ---------- (3,034,000) (13,380,000) 7,621,000 Tax benefit from exercise of stock 174,000 9,962,000 210,000 options.......................... ------------ ------------ ---------- Actual tax provision (benefit).... $ (2,860,000) $ (3,418,000) $7,831,000 ============ ============ ==========
The significant components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994 are as follows:
1995 1994 ---- ---- Net deferred tax assets (liabilities)--current: Nonrecurring charge............................. $ 1,917,000 $ 6,581,000 Allowance for bad debts......................... 1,567,000 2,678,000 Accrued expenses deductible for tax purposes when paid...................................... 2,775,000 1,831,000 State and local net operating loss tax carryforwards.................................. 1,747,000 897,000 Other........................................... 47,000 (290,000) ----------- ----------- Total deferred tax assets..................... 8,053,000 11,697,000 Valuation allowance for deferred tax assets... (897,000) (897,000) ----------- ----------- Net deferred tax current assets............... $ 7,156,000 $10,800,000 =========== =========== Net deferred tax liabilities (assets)--noncurrent: Write-down of long-lived assets................. $(4,107,000) $ -- Nonrecurring charge............................. (1,073,000) (2,843,000) Accelerated depreciation........................ 6,557,000 4,330,000 Involuntary conversion.......................... 450,000 450,000 Accrued expenses deductible for tax purposes when paid...................................... (2,318,000) (2,037,000) Income not recognized for book purposes......... (671,000) (493,000) Other........................................... 620,000 51,000 ----------- ----------- Net deferred tax noncurrent (assets).......... $ (542,000) $ (542,000) =========== ===========
As of December 31, 1995, the Company has deferred tax assets largely attributable to the 1994 nonrecurring charge (see Note 2) and the 1995 write- down of long-lived assets (see Note 5). Deferred tax assets, net of the valuation reserve, are expected to be realized through carryback to taxable income in prior years, future taxable income and from the reversal of temporary differences. 25 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The actual income tax provision (benefit) varies from the Federal statutory rate applied to consolidated pretax income (loss) as follows:
1995 1994 1993 ---- ---- ---- Income taxes at Federal statutory rate of 35%................................ $(3,592,000) $(4,182,000) $6,118,000 Increases resulting from State and local income taxes net of Federal income tax benefit.................. 177,000 123,000 798,000 Amortization of cost in excess of net assets acquired............................ 478,000 509,000 513,000 Other--net........................... 77,000 132,000 402,000 ----------- ----------- ---------- Actual tax provision (benefit)....... $(2,860,000) $(3,418,000) $7,831,000 =========== =========== ==========
NOTE 11 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:
1995 1994 1993 ---------- ---------- -------- Service cost--benefits earned in cur- rent year............................. $1,013,000 $1,044,000 $786,000 Interest cost on projected benefit ob- ligation.............................. 923,000 782,000 665,000 Income earned on plan assets........... (1,053,000) (866,000) (680,000) Net amortization and deferral.......... 200,000 28,000 (134,000) ---------- ---------- -------- $1,083,000 $ 988,000 $637,000 ========== ========== ========
Assumptions used in the computation of net pension expense are as follows:
1995 1994 1993 ---- ---- ---- Weighted average discount rate for plan obligations...... 8.0% 8.0% 7.5% Rate of future compensation increases.................... 5.0 5.0 5.0 Weighted average rate of return on plan assets........... 8.0 8.8 8.9 === === ===
26 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:
1995 1994 ----------- ----------- Accumulated benefit obligation: Vested........................................ $10,595,000 $ 9,748,000 Nonvested..................................... 676,000 662,000 Total........................................... 11,271,000 10,410,000 Projected salary increases...................... 1,793,000 1,690,000 Projected benefit obligation.................... 13,064,000 12,100,000 Plan assets at fair value....................... 12,088,000 11,016,000 Assets (less) greater than projected benefit ob- ligation....................................... (976,000) (1,084,000) Unrecognized net (gain) loss.................... (1,111,000) (1,179,000) Unrecognized prior service cost................. 1,742,000 1,828,000 Unrecognized transition cost.................... 158,000 169,000 Additional liability............................ (1,623,000) (1,595,000) ----------- ----------- Prepaid (accrued) pension....................... $(1,810,000) $(1,861,000) =========== ===========
The Company maintains a discretionary profit sharing plan with a voluntary 401(k) option for certain of its salaried and hourly employees who vest after meeting certain minimum age and service requirements. Profit sharing plan expense, including the Company's 401(k) match, is comprised as follows:
1995 1994 1993 ---------- ---------- ---------- Ply Gem common stock...................... $1,371,000 $2,636,000 $1,181,000 Cash...................................... -- -- 170,000 ---------- ---------- ---------- $1,371,000 $2,636,000 $1,351,000 ========== ========== ==========
NOTE 12 STOCK OPTION PLANS The Company's Executive Incentive Stock Option Plan provides for the granting of options to key employees to purchase up to 2,037,500 shares of common stock. Option prices must be 100% of fair market value at date of grant except for an employee who owns in excess of 10% of the common stock outstanding, in which case the exercise price is 110% of the fair market value at date of grant. Options are exercisable in full or in part after one year from the date of grant and expire within ten years (within five years for an employee owning in excess of 10% of the outstanding common stock). Shares acquired must be held for one year. The Senior Executive Stock Option Plan (the "Senior Plan") authorizes the granting of either incentive or non-qualified stock options only to executives of businesses acquired by the Company or to newly employed executives. The Senior Plan provides for 750,000 shares of the Company's common stock to be reserved for such issuance. The 1989 Employee Incentive Stock Plan (the "1989 Plan") authorizes the granting of incentive and non-qualified stock options and awards of restricted stock and is made available to executives and key employees of the Company. As in the Senior Plan, option terms and holding and exercise periods may vary except that no option may be exercised more than ten years after date of grant. Stock awarded under the 1989 Plan will be subject to restrictions as to sale or transfer. These restrictions may lapse or be waived based on performance, period of service or other factors. The 1989 Plan provides for 3,500,000 shares of the Company's common stock to be reserved for issuance. 27 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The 1994 Incentive Stock Plan (the "1994 Plan") authorizes the granting of incentive and non-qualified stock options and awards of restricted stock. The terms and conditions of the 1994 Plan are similar to those as described above. The 1994 Plan provides for 2,250,000 shares reserved for such issuance. At December 31, 1995, approximately 1,248,000 shares were available for future grants. 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 1993 and 1994. 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. For the three years ended December 31, 1995, option activity was as follows:
INCENTIVE OPTIONS NON-QUALIFIED OPTIONS ------------------------ ------------------------- NUMBER OF NUMBER OF SHARES OPTION PRICES SHARES OPTION PRICES --------- ------------- ---------- ------------- Outstanding, January 1, 1993.................... 1,530,045 $5.50-$14.25 3,360,570 $5.63-$16.00 1993 Granted.............. 323,900 10.25- 10.38 792,650 10.38- 12.63 Exercised............ (198,370) 5.50- 10.75 (123,320) 6.63- 12.13 Cancelled............ (35,750) 6.63- 12.25 (45,700) 8.38- 12.13 --------- ------------ ---------- ------------ Outstanding, December 31, 1993.................... 1,619,825 6.63- 14.25 3,984,200 5.63- 16.60 1994 Granted.............. 160,970 19.13 1,428,400 17.75- 25.50 Exercised............ (796,644) 6.63- 13.75 (1,875,674) 5.63- 13.25 Cancelled............ (42,050) 6.63- 12.25 -- -- --------- ------------ ---------- ------------ Outstanding, December 31, 1994.................... 942,101 6.63- 19.13 3,536,926 5.63- 25.50 1995 Granted.............. 168,950 16.00- 18.00 607,400 16.00- 18.88 Exercised............ (118,682) 6.25- 12.25 (48,750) 5.63- 12.13 Cancelled............ (20,350) 6.63- 19.13 (142,200) 6.63- 25.50 --------- ------------ ---------- ------------ At December 31, 1995..... Outstanding............ 972,019 6.63- 19.13 3,953,376 5.63- 21.88 Exercisable............ 803,069 6.63- 19.13 3,553,376 5.63- 21.88 ========= ============ ========== ============
During 1995, SFAS No. 123--"Accounting for Stock Based Compensation" was issued. SFAS No. 123 is effective in 1996 and the Company believes the effect of the adoption of the new standard will have no impact on the Company's consolidated results of operations or financial position because, in accordance with SFAS No. 123, the Company intends to continue to measure compensation costs under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and present footnote disclosures of net income and earnings per share as required by SFAS No. 123. 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. 28 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Minimum future lease obligations on noncancellable leases in effect at December 31, 1995 are as follows:
CAPITAL OPERATING LEASES LEASES ---------- ----------- Year ending December 31, 1996............................................. $ 63,000 $14,236,000 1997............................................. 60,000 11,263,000 1998............................................. 38,000 9,659,000 1999............................................. 9,000 8,455,000 2000............................................. 9,000 6,949,000 Subsequent years through 2017.................... 7,000,000 46,888,000 ---------- ----------- Net minimum lease payments......................... 7,179,000 $97,450,000 Amount representing interest....................... 20,000 ---------- Present value of net minimum lease payments (in- cluding $53,000 payable within one year).......... $7,159,000 ==========
Rental expense for operating leases amounted to approximately $19,883,000 in 1995, $19,993,000 in 1994 and $20,004,000 in 1993. HOOVER TREATED WOOD PRODUCTS, INC. Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of the Company, is a defendant in a number of commercial lawsuits alleging property damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August, 1988. The number of lawsuits pending, as of December 31, 1995, as well as the number of lawsuits filed since 1993, have declined significantly from earlier periods. Most of the suits have been resolved by dismissal or settlement. A purported class action on behalf of certain Maryland homeowners was dismissed in November, 1995 when the Maryland Court of Appeals, the State's highest court, found that the homeowners had no viable claims against Hoover. In those suits that remain pending, direct defense costs are being paid out of insurance proceeds. Two actions have proceeded to trial against Hoover and resulted in jury verdicts against it. In one of these actions, judgment was entered in Hoover's favor by the court after a jury verdict against it and the plaintiff's petition to appeal the judgment entered in Hoover's favor was denied. In the other case, the judgment against Hoover was vacated and the case was settled with proceeds from insurance settlements. Hoover and the Company have engaged in litigation with some of their insurers regarding coverage for these lawsuits and claims. Hoover has settled its coverage claim with a majority of its insurers and is negotiating settlements with others. Hoover and the Company believe they have meritorious claims for coverage from their remaining unsettled insurers and are seeking declaratory judgments confirming such coverage. The proceeds from settled insurance claims, along with the proceeds from a settlement of claims by Hoover against certain suppliers of materials used by it in the production of treated wood, are available for the settlement of the underlying property damage actions. The Company believes that Hoover's remaining coverage disputes will be resolved within the next two years 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, considered its history of successful settlements with primary and excess insurers and consulted with counsel. Hoover and the Company are vigorously defending the underlying lawsuits which cannot be resolved on a reasonable basis and believe that they have meritorious defenses to those suits including, in the case of the Company, the defense that it has been improperly joined, as it did not manufacture or market the Hoover products at issue, and is not legally liable for the damage allegedly caused by them. 29 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In accordance with the provisions of SFAS Interpretation No. 39, which became effective on January 1, 1994, Hoover has recorded a receivable at December 31, 1995 (included in other assets) for $12.7 million for the estimated proceeds and recoveries related to insurance matters discussed above and recorded an accrual for the same amount (included in other liabilities) for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In estimating both this liability, which Hoover expects to discharge over the next four years, and its anticipated additional insurance recoveries, Hoover and the Company have considered a number of factors including: the number and exposure posed by the pending lawsuits; the significant decline in the number of lawsuits filed in 1994 and 1995; the availability of various legal defenses, including statutes of limitations; the existence of settlement protocols; an agreement indemnifying Hoover as to certain past and future claims; and Hoover's experience to date in settling with its insurance companies and the likely availability of proceeds from additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material effect upon the financial position of the Company. EXECUTIVE COMPENSATION During the third quarter of 1995, the Board of Directors amended resolutions providing for severance payments in the event of a change in control and subsequent termination, as defined, to certain designated employees of the Company. As of December 31, 1995 the maximum amount payable would be approximately $5.2 million. Under the previous plan the maximum amount payable would have been approximately $14 million at December 31, 1994. LETTERS OF CREDIT At December 31, 1995 approximately $20 million of letters of credit issued by the Company's banks were outstanding, principally in connection with certain financing transactions. OTHER The Company and its subsidiaries are subject to legal actions from time to time which have arisen in the ordinary course of its business. In the opinion of management, the resolution of these claims will not materially affect the financial position of the Company. The Company has various commitments for the purchase of materials arising in the ordinary course of business. 30 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED NOTE 14 QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) Year Ended December 31, 1995: Net Sales.................... $160,235 $199,571 $207,099 $174,489 Gross Profit................. 24,429 33,770 37,559 28,016 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) Year Ended December 31, 1994: Net Sales.................... $163,412 $219,805 $218,997 $194,205 Gross Profit................. 26,477 46,079 46,653 34,873 Income (loss) Before Taxes (2)......................... (2,372) 11,376 (21,477) 524 Net Income (Loss)............ (1,305) 6,265 (13,977) 486 Per Share: Primary.................... (.11) .40 (.95) .03 Fully Diluted.............. (.11) .40 (.95) .03
- -------- (1) After charge of $12.0 million for the impairment of assets in the fourth quarter. See Note 5 to the consolidated financial statements. (2) After nonrecurring charges of $36.3 million in third quarter and $4.7 million in fourth quarter. See Note 2 to the consolidated financial statements. Earnings (loss) per share calculations for each of the quarters presented are based on the weighted average number of shares and common equivalent shares outstanding during such periods. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 31 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 10, 1996. 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 10, 1996. 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 10, 1996. 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 10, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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: Report of Independent Certified Public Accountants Schedule II--Valuation and Qualifying Accounts--Two Years Ended December 31, 1995. (b) Reports on Form 8-K None filed during the fourth quarter of 1995. 32 (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. 10(iii)(e) Registrant's 1994 Employee Incentive Stock Plan is incorporated herein by reference from the Registrant's Registration Statement on Form S-8 (Registration No. 33-55035). 10(iii)(f) Registrant's Group Profit-Sharing/401(k) Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33- 55037). 10(iii)(g) Registrant's 1994 Incentive Compensation Plan is incorporated by reference herein from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 11 Schedule of Computation of Net Income per Share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule.
33 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 29, 1996) 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 29, 1996 _____________________________________ Executive Officer, JEFFREY S. SILVERMAN (Principal Executive Officer) and Director /s/ Dana R. Synder President, Chief March 29, 1996 _____________________________________ Operating Officer DANA R. SYNDER and Director /s/ Herbert P. Dooskin Executive Vice March 29, 1996 _____________________________________ President and HERBERT P. DOOSKIN Director (Principal Financial Officer) /s/ Jerome Baum Controller (Chief March 29, 1996 _____________________________________ Accounting Officer) JEROME BAUM /s/ Albert Hersh Director March 29, 1996 _____________________________________ ALBERT HERSH /s/ Elihu H. Modlin Director March 29, 1996 _____________________________________ ELIHU H. MODLIN 34 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) $4,511,000 311,00(d) 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) 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 35 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 Patents/Trademarks.... 6,677,000 1,148,000 8,539,000(e) 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 36 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Ply Gem Industries, Inc. In connection with our audit of the financial statements of Ply Gem, Industries, Inc. referred to in our report dated March 6, 1996, which is included in the annual report on Form 10-K, we have also audited Schedule II for the two years in the period ended December 31, 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. New York, New York March 6, 1996 37 EX-10 2 EMPLOYMENT AGREEMENT EXHIBIT 10(iii)(d) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, dated as of June 5, 1995, is entered into between Ply Gem Industries, Inc., a Delaware corporation (the "COMPANY"), and Dana R. Snyder (the "EXECUTIVE"). RECITALS WHEREAS, the Company desires to obtain the services of the Executive, and the Executive desires to be employed by the Company, upon the following terms and conditions. NOW, THEREFORE, in consideration of the mutual agreements and understandings set forth herein, the Company and the Executive hereby agree as follows: TERMS OF AGREEMENT 1. DEFINITIONS. ----------- (a) "Agreement" shall mean this Employment Agreement, together with the attachments and schedules attached hereto, as amended or modified from time to time. (b) "Base Salary" shall mean Four Hundred Twenty Five Thousand Dollars ($425,000.00) per year; provided, however, that, unless the Chairman has -------- ------- ---- determined not to grant salary increases to senior executive employees (other than the Chairman) during any annual period, the Executive shall be entitled to a minimum annual increase in the Base Salary of five percent (5%). (c) "Board" shall mean the Board of Directors of the Company. (d) "Bonus Year" shall mean the particular calendar year for which a Performance Award is calculated pursuant to SECTION 4(b) hereof. (e) "Cause" shall mean a good faith determination by the Chairman that one or more of the following has occurred (i) the Executive has engaged in illegal misconduct, (ii) the Executive has engaged in gross insubordination, (iii) the Executive has engaged in other misconduct materially detrimental to the Company, (iv) the Executive has willfully neglected his duties to the detriment of the Company or (v) the Executive has materially breached this Agreement and the Executive has failed to cure such breach within twenty (20) days of written notification from the Company of such breach. (f) "Chairman" shall mean the Chairman of the Board of the Company. (g) "Change of Control" shall mean (i) the sale of all or substantially all of the assets of the Company, (ii) the merger or consolidation of the Company with any entity which, prior to such merger or consolidation, was not an Affiliate of the Company, in any case where the holders of the Stock prior to such merger or consolidation do not hold at least fifty percent (50%) of the voting common equity of the surviving entity after such merger or consolidation or (iii) the accumulation by any person or entity or group of persons or entities (where the term "GROUP" is used as set forth in SECTION 13(D)(3) of the Exchange Act of 1934, as amended) of more than fifty percent (50%) of the total outstanding Stock; provided, however, that, in each of the -------- ------- ---- cases set forth above in CLAUSES (I), (II) AND (III), no "CHANGE OF CONTROL" shall be deemed to take place if the transaction was approved by the Board, the majority of the members of which were in place prior to the commencement of such sale, merger, consolidation or accumulation. (h) "Company" shall have the meaning ascribed to such term in the preamble hereof and shall include all permitted successors and assigns, subject to the Executive's rights in the event of a Change of Control. (i) "Executive" shall have the meaning ascribed to such term in the preamble hereof. (j) "Good Reason" shall mean the Executive's voluntary resignation due to one or more of the following (i) the Base Salary is reduced during the Term below the amount set forth in SECTION 4(A) hereof, (ii) the Executive's group benefits are materially reduced, (iii) the Company insists upon relocation of the Executive in violation of SECTION 4(F) hereof, (iv) a Change of Control event occurs or (v) the Company has materially breached this Agreement and the Company has failed to cure such breach within twenty (20) days of written notification from the Executive of such breach. (k) "Great Lakes" shall mean Great Lakes Window, Inc., a Delaware corporation. (l) "Life Insurance Policy" shall mean a split dollar permanent whole life insurance policy in the amount of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) in respect of the life of the Executive, which Life Insurance Policy shall be owned by the Executive. (m) "Operating Income" shall mean the Company's income before income taxes as reflected in the Company's audited financial statements; provided, -------- that, for calendar year 1994, the Operating Income is deemed to be Twenty-Nine - ---- Million Thirteen Thousand Dollars ($29,013,000.00). (n) "Option" shall mean the right and option to purchase a total of three hundred thousand (300,000) shares of Stock pursuant to the Stock Option Agreement. (o) "Pension Plan Benefits" shall mean the Ply Gem Industries, Inc. Group Pension Plan or any successor plan, which currently provides annual pension benefits to the Executive in an amount of approximately Twenty Thousand Dollars ($20,000.00) before taxes, beginning at age 65, through age 90. (p) "Performance Award" shall mean an annual performance bonus as more fully set forth in SECTION 4(b) hereof. (q) "Permanent Disability" shall mean, with respect to the Executive (i) the absence of the Executive from his employment by reason of any mental or physical illness, disability or incapacity for a period of one hundred eighty (180) days during any twelve-month period (with such one hundred eighty (180) days comprised solely of the number of days during which the Executive is absent for a consecutive period of at least thirty (30) days), effective as of the last day of such one hundred eighty (180) day period or (ii) the good faith determination by a physician, reasonably agreed to by the parties, that the Executive is suffering from any mental or physical illness, disability or incapacity such that the Executive is, or shall be, unable to perform his duties prospectively for a period of one hundred eighty (180) days during any twelve- month period (calculated in the same manner as in CLAUSE (I) above), upon the giving of notice to the Executive, effective as of the date set forth in such notice. (r) "Personal Property" shall mean, without limitation, all books, manuals, records, reports, notes, contracts, lists, blueprints and other documents, programs, software or materials or copies thereof, equipment (including office equipment), credit cards and all other Proprietary Information relating to the business of the Company held by the Executive from time to time. (s) "Policy" shall mean the Mass Mutual Limited Payment Whole Life Insurance Policy (paid up at age 65), in a form reasonably acceptable to the Executive, to be purchased by the Company in the Executive's name with an initial face amount of One Million Eight Hundred Fifteen Thousand Dollars ($1,815,000.00) owned and structured as a split dollar instrument pursuant and subject to the provisions of SECTION 6 hereof which has been designed to provide annual benefits to the Executive in an amount of approximately One Hundred Thirty Thousand Dollars ($130,000.00) after taxes (based upon estimated tax rates), beginning at age 65, through age 90. (t) "Prohibited Activity" shall mean to directly or indirectly (i) own, manage, operate, join, control, participate in, or become employed by, (ii) render any services (including, without limitation, consulting services), advice or assistance of any nature on behalf of or (iii) invest in, acquire any interest in, or participate in the management, operation or control of, any person, corporation, partnership or other entity which is engaged in the manufacture or sale of building materials or any other businesses in which the Company or any of its Subsidiaries is engaged; provided, however, that, the -------- ------- ---- Executive shall not be prohibited from continuing to hold or subsequently purchasing, on a passive basis, the real estate investments described in SCHEDULE 1(q) attached hereto as amended from time to time by the Executive; provided, further, however, that, if the Company or any Subsidiary commences - -------- ------- ------- ---- activities, or acquires a business which includes activities, which result in any then current activity or interest of the Executive becoming a Prohibited Activity, then the Executive and the Company shall negotiate in good faith a reasonable manner for and timing of the cessation of such Prohibited Activities by the Executive and/or the disposition of such interest; provided, however, -------- ------- that, this restriction shall not preclude the Executive from investing his funds - ---- in securities of any company if the securities of such company are listed for trading on a nationally registered stock exchange or traded in the NASDAQ "National Market" and the Executive's holdings therein represent less than two percent (2%) of the total number of outstanding shares or other securities of such company. (u) "Proprietary Information" shall mean information which would be treated under appropriate legal standards as confidential and proprietary, including, but not limited to (i) marketing, competitive or other information available only to top management of the Company, (ii) information pertaining to the contracts between the Company and its customers or vendors, including the identity of the customers or vendors, pricing information and contract termination dates, (iii) any and all other information related to the Company of which the Executive may become aware but which is not generally known to outsiders, including, but not limited to, cost allocations and other confidential information concerning or relating to any of the customers, business or methods of operation of the Company and (iv) various trade secrets which are or will in the future be owned by the Company and which are or will be regularly used in the business of the Company; provided, that, the foregoing -------- ---- provisions shall not be construed to prevent the Executive from making use of or disclosing information which (A) is in the public domain through no fault on the part of the Executive, provided, however, that, specific information which is -------- ------- ---- aggregated specifically on behalf of the Company shall not be deemed to be in the public domain merely because the components thereof are encompassed in general information that is published or in the public domain or in the Executive's prior possession, (B) is intentionally disclosed by the Company to any entity (not an affiliate of the Company) on a non-confidential basis, (C) was in the possession of the Executive prior to commencing discussions with the Company with regard to a potential employment relationship with the Company or (D) is developed by the Executive without the use of any Proprietary Information. (v) "Return on Net Assets" shall mean the Operating Income for the Bonus Year divided by the stockholders' equity as of the last date of the preceding calendar year as reflected in the Company's audited financial statements. (w) "Richwood" shall mean Richwood Building Products, Inc. (x) "Signing Date" shall mean the date first written above. (y) "SNE" shall mean SNE Enterprises, Inc., a Delaware corporation. (z) "Start Date" shall mean June 15, 1995 or such earlier or later date as the Executive shall be reasonably available, but in no event later than July 3, 1995. (aa) "Start Price" per share shall mean the lower of the closing price of the Stock on the Start Date and on the last trading day prior to the Signing Date. (ab) "Stock" shall mean the Company's common stock, par value $0.25 per share. (ac) "Stock Option Agreement" shall mean that certain Stock Option Agreement to be entered into on the Start Date between the Company and the Executive substantially in the form of EXHIBIT A attached hereto. (ad) "Stolle Arrangements" shall mean the terms of the Executive's prior employment with the Aluminum Company of America or its subsidiary, the Stolle Corporation, including, without limitation, that certain Employment Agreement, between the Stolle Corporation and the Executive, dated as of June 28, 1989 and any amendments, renewals, continuations or replacements thereof. (ae) "Subsidiaries" shall mean any corporation, partnership or other entity in which the Company has, directly or indirectly, (i) a majority equity interest or (ii) in the case where the Executive has or shares, or has had or shared, operation or management responsibility therefor, a minority equity interest. (af) "Target Subsidiaries" shall mean collectively, SNE, Variform, Richwood, and Great Lakes. (ag) "Term" shall mean the period commencing on the Start Date and ending on the fourth anniversary of the Start Date, or any abbreviated portion thereof resulting from termination of employment pursuant to the provisions of SECTION 5(A) hereof. (ah) "Termination Date" shall mean the date on which the Executive's employment is terminated due to the expiration of the Term in accordance with SECTION 2(a) or SECTION 2(b) hereof or pursuant to SECTION 5(a) hereof. (ai) "Variform" shall mean Variform, Inc. 2. EMPLOYMENT; TERM. ---------------- (a) Initial Term. The Company hereby employs the Executive as its President and Chief Operating Officer and the Executive hereby accepts employment from the Company and agrees to perform in such capacity upon the terms and conditions set forth herein, for a term commencing no later than the Start Date and continuing thereafter for the duration of the Term. The Chairman shall promptly submit this Agreement to the Board for its required approval and recommend and vote in favor of such approval. (b) Extensions. On the fourth anniversary of the Start Date, subject to earlier termination pursuant to the provisions of SECTION 5 hereof, the term of this Agreement shall be extended for an additional one (1) year, unless either the Company or the Executive notifies the other in writing no later than six (6) months prior to the fourth anniversary of the Start Date, that it does not intend to renew this Agreement. 3. POSITION; DUTIES; RESPONSIBILITY. -------------------------------- (a) Position. During the Term, the Executive shall be employed as the --- -------- President and Chief Operating Officer of the Company. The Executive shall faithfully and diligently use his best efforts to perform the duties and bear the responsibilities of such office and report and be responsible directly to the Chairman. The Executive acknowledges and agrees that his exclusive function shall be to be responsible for the overall profitability of the Subsidiaries in order to enhance the value of the Stock and that unless otherwise specifically directed by the Chairman, the Executive shall have no responsibility with respect to the operation of the Company at the holding company level. Without limiting the generality of the foregoing, the Executive further acknowledges and agrees that his primary focus shall be to be responsible for the management of the Target Subsidiaries. The Executive shall devote all of his professional time to the business of the Company in order to satisfactorily discharge his duties and responsibilities to the Company, except for reasonable time spent for trade, civic and charitable activities or for service on other boards of directors, subject to approval as provided in SECTION 3(b) hereof. Notwithstanding any provision in this Agreement to the contrary, the Executive's employment will be subject to the Ply Gem Industries, Inc. Code of Conduct and Conflict of Interest Policy. (b) Other Activities. Except upon the prior oral or written consent of the Chairman, the Executive, during the Term, shall not (i) accept any other employment, (ii) serve on the board of directors of any other company or (iii) engage in any Prohibited Activity. (c) Board Member; Other Duties. The Chairman shall nominate and vote for the Executive, and the Executive agrees to serve, for no additional compensation, as a member of the Board. The Executive further agrees to serve as an officer or director of any of the Subsidiaries of the Company as the Chairman shall request, without any additional compensation. 4. SALARY AND BENEFITS. ------------------- (a) Base Salary. In consideration of the services to be rendered hereunder, the Executive shall be paid the Base Salary payable at the same intervals as the other senior executive employees of the Company. (b) Performance Award. The committee that administers the Company's Incentive Compensation Plan has selected the Executive to participate in such Incentive Compensation Plan and to receive an annual Performance Award commencing January 1, 1996 (together with a Performance Award for calendar year 1995 referenced below). The Performance Awards are subject to the provisions of SECTION 5 hereof, have been awarded in accordance with such Incentive Compensation Plan, shall be paid in cash and shall be determined in accordance with the following formula: (i) If the Return on Net Assets of the Company is less than twenty percent (20%), then the Performance Award shall be determined based upon SCHEDULE 4(b)(i) attached hereto based upon the positive difference in the Company's Operating Income for the Bonus Year and the Company's average Operating Income for the two (2) immediately preceding calendar years; provided, that, the Executive shall not be entitled to any Performance -------- ---- Award under this formula if the Company's Operating Income for such Bonus Year is less than one hundred ten percent (110%) of the Company's average Operating Income for the two (2) immediately preceding calendar years. (ii) If the Return on Net Assets of the Company is twenty percent (20%) or greater, the Performance Award calculation shall be made pursuant to SCHEDULE 4(b)(ii) attached hereto. A Performance Award pursuant to this SECTION 4(b)(ii) shall be calculated and paid for in a Bonus Year, regardless of whether or not the Return of Equity percentage of the Company is more or less than the prior year. For calendar year 1995 (A) the minimum Performance Award shall be Seventy Five Thousand Dollars ($75,000.00) and (B) any additional Performance Award shall be dependent upon a good faith, reasonable determination by the Chairman evaluating the performance of the Subsidiaries for which the Executive has operating authority, the formula for which shall be finalized within sixty (60) days of the Start Date. The Company agrees to determine the amount of the Performance Award, if any, to which the Executive shall be entitled as soon as possible after the end of each Bonus Year, and to pay such Performance Award no later than April 30 of the following year. The parties agree to re-evaluate in good faith and make any appropriate adjustments to both formulas if there occurs a material event not in the ordinary course of business such as an acquisition or divestiture of any substantial assets of the Company or a debt restructuring in order to accomplish the same objectives from the application of the Performance Award criteria for the Executive that were in place prior to the acquisition, divestiture, or debt restructuring. (c) Benefits. During the Executive's employment hereunder, the Executive shall be entitled to an automobile allowance of Eight Hundred Dollars ($800.00), net of any applicable taxes, per month and to participate in any plan, arrangement or policy of the Company providing for medical benefits, dental benefits, life insurance, disability insurance, vacation time, sick leave, options or other stock programs and other benefits offered by the Company to senior executive employees of the Company generally. In addition, the Company shall obtain and maintain during the Term, the Life Insurance Policy. The Executive shall be entitled to four (4) weeks of paid vacation per year to be taken at such times as shall be mutually agreed by the Chairman and the Executive. To the extent not prohibited by law and not commercially unreasonable, the Company shall waive all waiting periods required for participation in the benefit plans and arrangements and policies described above. (d) Withholding. The Company shall make all legally required deductions and other withholdings, including, without limitation, from all applicable payments of the Base Salary, the Performance Award and benefits to the Executive. (e) Expense Reimbursement. The Company shall reimburse the Executive for all reasonable and necessary business expenses incurred by him in connection with his duties; provided, that, such expenses are appropriately documented and -------- ---- are otherwise consistent with the Company's policies. (f) Relocation. The Executive acknowledges and agrees that the Executive shall be principally based at a location to be jointly determined; provided, that, the Executive hereby acknowledges and agrees that he is prepared - -------- ---- to relocate to any of the Company's current executive offices, including, without limitation, to the Company's offices in the Chicago area; provided, -------- further, however, that, if the - ------- ------- ---- Executive shall be principally based at the Company's New York City location, the Company and the Executive shall in good faith negotiate appropriate increases in the Executive's compensation to account for cost of living and tax rate differentials. At the time that the Executive is required to relocate in connection with his employment with the Company, the Company shall provide an Executive relocation package, consistent with industry standards, as agreed by the Chairman and the Executive; provided, that, in the event that the Executive -------- ---- is unable to sell his home located in Sidney, Ohio at fair market value, the Company shall either purchase such home or pay the Executive the difference between the fair market value and the actual sales price of such home; provided, -------- further, that, the Executive agrees to use good faith efforts to obtain the - ------- ---- highest reasonable sales price for the home within a reasonable time. (g) Physical Examinations. The Executive agrees that as soon as practicable after the Start Date, and from time to time thereafter, he shall undergo any physical examinations and any other tests required for key man, disability and employee benefit insurance (including, without limitation, the Life Insurance Policy), as are reasonably required to obtain such insurance. The cost of such physical examinations shall be borne by the Company. The Executive shall make immediately available to the Chairman and any medical representative of the Company the results of his last physical examination. It is agreed that such information shall remain confidential. The Executive shall promptly sign any insurance applications submitted to enable the Company to obtain key man insurance. (h) Country Club Membership. In the event of a relocation pursuant to SECTION 4(f) hereof, the Company agrees to make a one-time payment to the Executive, upon presentation by the Executive of appropriate documentation, to reimburse the Executive for the cost of the Executive's initiation fees at a country club of the Executive's reasonable choice; provided, however, that, the -------- ------- ---- amount of such one-time payment shall not exceed a reasonable amount to be jointly determined by the parties. In addition, without regard to whether the Executive has relocated pursuant to SECTION 4(f) hereof, the Company agrees to reimburse the Executive, upon presentation by the Executive of appropriate documentation, for the annual dues incurred by the Executive during each year of the Term hereof in connection with the Executive's membership at a country club of his choice. The Executive agrees to provide the Company with any evidence he may have showing that his membership related to a business use. 5. TERMINATION OF EMPLOYMENT. ------------------------- (a) Termination Events. Subject to the other terms and conditions hereof, the Executive's employment under this Agreement shall terminate upon the expiration of the Term or, if earlier, upon the earliest to occur of any of the following events. (i) Death; Permanent Disability. The Executive's employment shall terminate upon (A) the death of the Executive or (B) the Permanent Disability of the Executive. (ii) Resignation With Good Reason; Termination Without Cause. The Executive's employment may be terminated (A) by the Executive for Good Reason or (B) by the Company without Cause, each upon the giving of notice to the other party, effective as of the date set forth in such notice. (iii) Resignation Without Good Reason; Termination With Cause. The Executive's employment may be terminated (A) by the Executive without Good Reason or (B) by the Company with Cause, each upon the giving of notice to the other party, effective as of the date set forth in such notice. (b) Termination Obligations of the Company. Upon the termination of the Executive's employment, subject in every respect to the fulfillment of the Executive's obligations pursuant to SECTIONS 5(c) AND 5(d) hereof, the Executive shall be entitled to the following. (i) Death; Permanent Disability. In the event of termination pursuant to SECTION 5(A)(I) hereof, the Executive or his estate, as applicable, shall be entitled to the following: (A) BASE SALARY. The Base Salary accrued and unpaid through the Termination Date. (B) PERFORMANCE AWARD. A pro rata portion of the --- ---- Performance Award for the Bonus Year which includes the Termination Date to be paid at the time specified in SECTION 4(b) hereof, with such proration to be calculated based on the financial results of the Company for the entire Bonus Year prorated for the period during which the Executive was employed. (C) BENEFITS. Any benefits pursuant to SECTION 4(c) hereof accrued through the Termination Date; provided, that, in the event of -------- ---- termination of employment as a result of Permanent Disability, the Company shall maintain the Life Insurance Policy through age 65 for the Executive; provided, further, that, in the event that the -------- ------- ---- Executive's employment is terminated as a result of Permanent Disability which is employment related then the Company shall fund the Policy through age 65; provided, further, that, in the event that the -------- ------- ---- Executive's employment is terminated as a result of Permanent Disability which is not employment related, then the Company shall cease funding the Policy on the Termination Date. (D) STOCK. The Stock Option benefits pursuant to SECTION 6(B) hereof. (ii) Resignation With Good Reason; Termination Without Cause. In the event of termination pursuant to SECTION 5(a)(ii) hereof, the Executive shall be entitled to the following: (A) BASE SALARY. The Base Salary through the fourth anniversary of the Start Date as described in SECTION 4(a) hereof (or through the end of any extension period pursuant to SECTION 2(b) hereof to the extent that the Termination Date occurs within that extension period); provided, that, after the Termination Date the Base -------- ---- Salary shall not be increased as provided in the definition of "BASE SALARY"; provided, further, that, the Base Salary shall not be -------- ------- ---- decreased below the level of the Base Salary on the Termination Date. (B) PERFORMANCE AWARD. A pro rata portion of the --- ---- Performance Award for the Bonus Year which includes the Termination Date to be paid at the time specified in SECTION 4(b) hereof, with such proration to be calculated based on the financial results of the Company for the entire Bonus Year prorated for the period during which the Executive was employed; provided, however, that, in the event of a -------- ------- ---- Change of Control, the Executive shall be entitled to receive a Performance Award for all periods through the fourth anniversary of the Start Date (or through the end of any extension pursuant to SECTION 2(b) hereof to the extent that the Termination Date occurs within that extension period) at the time specified in SECTION 4(b) hereof, calculated based on the average Performance Award received for all periods prior to the Termination Date. For the period commencing January 1, 1999, through the fourth anniversary of the Start Date (or through the end of any extension pursuant to SECTION 2(b) hereof to the extent that the Termination Date occurs within that extension period), the Performance Award specified in the proviso in the immediately preceding sentence shall be paid no later than such fourth anniversary of the Start Date (or through the end of any extension pursuant to SECTION 2(B) hereof to the extent that the Termination Date occurs within that extension period) and shall be calculated on a pro rata portion of the year --- ---- represented by such period. (C) BENEFITS. Any benefits pursuant to SECTION 4(c) hereof accrued through the fourth anniversary of the Start Date (or through the end of any extension pursuant to SECTION 2(b) hereof to the extent that the Termination Date occurs within that extension period) that the Executive is entitled to receive. (D) STOCK. The Option with respect to fifty percent (50%) of the shares of Stock with respect to which the Option have not, on or prior to the Termination Date, become exercisable shall become exercisable on the Termination Date; provided, however, that, nothing -------- ------- ---- in this SECTION 5(b)(ii)(D) shall be deemed to affect the period of time following the Termination Date in which the Executive may exercise the Option which period shall be determined by the terms of the Stock Option Agreement; provided, that, in the event of a Change -------- ---- of Control, the Executive shall receive the most favorable treatment to the Executive available with respect to the Options pursuant to the 1989 Senior Executive Stock Option Plan as such plan provides as of the date hereof or the Stock Option Agreement; provided, further, -------- ------- that, any additional Options granted to the Executive shall be subject ---- to the above referenced plan, or any successor plan, as such plan may be amended from time to time. (iii) Resignation Without Good Reason; Termination With Cause. In the event of termination pursuant to SECTION 5(a)(iii) hereof, the Executive shall be entitled to the Base Salary accrued and unpaid through the Termination Date and any benefits pursuant to SECTION 4(c) hereof accrued through the Termination Date. Except as expressly set forth in this SECTION 5(b), following the Termination Date, the Executive shall be entitled to no compensation, bonus, benefits, stock, stock options or other remuneration of any kind whether under this Agreement or otherwise. Without limiting the foregoing, the remuneration described in this SECTION 5(b) shall be deemed to be liquidated damages in the case of every termination described above and shall be deemed to be adequate and appropriate consideration for all releases, covenants and other agreements of the Executive hereunder which survive the Termination Date. Notwithstanding any provision herein to the contrary, the Company shall be permitted to maintain key man insurance policies regarding the life of the Executive for its own benefit during any period of time whether during the Term or thereafter. (c) Termination Obligations of the Executive. (i) The Executive hereby acknowledges and agrees that all Personal Property furnished to or prepared by the Executive in the course of or incident to his employment, belong to the Company and shall be promptly returned to the Company upon the Termination Date. Following the Termination Date, the Executive shall not retain any written or other tangible material containing any Proprietary Information relating to the business of the Company. (ii) The Executive hereby acknowledges that for the duration of this Agreement, he has gained and will gain knowledge of Proprietary Information. The Executive shall not during the Term or for a period of three (3) years thereafter use (other than in the performance of his duties to the Company) or disclose to any person, firm, corporation, partnership or other entity whatsoever outside the Company or to any officer, director, stockholder, partner, associate, employee, agent or representative of any thereof (except as required by law or with the express prior written approval of the Chairman) any such Proprietary Information either directly or indirectly. (iii) The Company shall be entitled, in addition to any other right and remedy it may have, at law or in equity, to seek an injunction, enjoining or restraining the Executive from any violation or threatened violation of this SECTION 5(c), and the Executive agrees that the Company has the right to seek such injunction. (iv) For a period of two (2) years following the Termination Date, the Executive agrees that the Executive shall not, engage in any Prohibited Activity; provided, however, that, in the event that the -------- ------- ---- Executive's employment is terminated pursuant to the provisions of SECTION 5(a)(ii) hereof or the Company elects nor to renew this Agreement pursuant to the provisions of SECTION 2(b) hereof following the end of the period referenced in SECTION 5(b)(ii)(A) hereof, the Executive shall have the option of electing to either (A) render the provisions of this SECTION 5(c)(iv) inapplicable to the Executive in its entirety thereafter or (B) receive for the balance of the two (2) year period referenced in this SECTION 4(c)(iv) an amount equal to fifty percent (50%) of the Base Salary in effect on the Termination Date; provided, further, that, this provision -------- ------- ---- shall not prohibit the Executive from making any personal investment which is purely passive in nature following the Termination Date; provided, -------- further, that, so long as the Executive has no responsibility to manage or ------- ---- advise with respect to the Prohibited Activity, nothing in this Agreement shall prohibit the Executive from acting as (A) a senior officer of an entity which is engaged in a Prohibited Activity so long as such Prohibited Activity is not a principal activity of such entity or (B) an officer, employee or manager of a division or subsidiary of an entity which may be engaged in a Prohibited Activity so long as such division or subsidiary is not engaged in a Prohibited Activity; provided, further, that, if the -------- ------- ---- Executive desires to become a consultant to an entity which is engaged in a Prohibited Activity, the Executive may seek the consent of the Company by submitting to the Chairman in writing a detailed description of the Executive's proposed consulting activities, the identity of the entity to receive such consulting activities and the Executive's proposed responsibilities (including, without limitation, the extent to which the Executive will be engaged in consulting activities relating to a Prohibited Activity). (v) The Executive acknowledges and agrees that any solicitation of the Company's or any of its Subsidiaries' customers or suppliers may involve the use or disclosure of Proprietary Information protected by this Agreement. In recognition of this fact, for a period of two (2) years following the Termination Date, the Executive agrees that the Executive shall not for himself or on behalf of any other person, corporation, partnership or other entity, directly or indirectly, or by action in concert with others, solicit, induce or encourage or attempt to solicit, induce or encourage, any person known by him to have a relationship with the Company or any of its Subsidiaries, or any customer or supplier of the Company or any of its Subsidiaries, to discontinue, terminate, cancel or refrain from entering into any contractual or business relationship with the Company or any of its Subsidiaries. (vi) The Executive acknowledges and agrees that any solicitation of the Company's or any of its Subsidiaries' officers, managers or other employees may involve the use or disclosure of Proprietary Information protected by this Agreement. In recognition of this fact, for a period of two (2) years following the Termination Date, the Executive agrees that the Executive shall not for himself or on behalf of any other person, corporation, partnership or other entity, directly or indirectly, or by action in concert with others, solicit for employment any person who at the Termination Date is or was an officer, manager or other employee of the Company or any of its Subsidiaries without the prior written consent of the Company. The Executive acknowledges and agrees that any obligations of the Company payable to or inuring to the benefit of the Executive following the Termination Date are expressly conditioned upon the Executive's compliance with and adherence to the provisions of SECTION 5(c) hereof and to the execution, delivery and performance of a general release in favor of the Company, its affiliates, advisors, representatives, senior executive officers and directors from any and all claims relating to the Executive's employment with the Company in a form reasonably satisfactory to the Company; provided, that, -------- ---- any rights and obligations of the Company pursuant to this Agreement arising after the Termination Date shall not be subject to such general release; provided, further, that, the Company shall execute, deliver and perform a - -------- ------- ---- general release of the Executive from all claims discovered subsequent to one (1) year after the Termination Date. (d) Other Positions. Upon the Termination Date, the Executive shall be deemed to have resigned, and if requested by the Company shall tender his resignation, from all offices and directorships then held with the Company and any Subsidiaries. (e) Survival. The representations, warranties, covenants and agreements contained in SECTIONS 5(b), 5(c), 5(d) AND 7 hereof shall survive the Termination Date and the expiration of this Agreement pursuant to their respective terms. 6. THE POLICY; CERTAIN STOCK MATTERS. In addition to any other --------------------------------- compensation described in this Agreement, as of the Start Date, the Executive shall be granted certain additional consideration as set forth hereinbelow. (a) The Policy. The Company agrees to provide the Executive with annual retirement benefits in the amount of Two Hundred Twenty Six Thousand Dollars ($226,000.00) before taxes, beginning at age 65, through age 90, pursuant to a combination of the Company's Pension Plan Benefits and the Policy to be purchased by the Company in the Executive's name and to be funded ratably and equally over the sixteen (16) year period commencing the Start Date; provided, that, the Company shall retain an interest in the cash value and death - -------- ---- benefit of the Policy in the amount of aggregate premiums paid from time to time by the Company for the Policy; provided, further, that, the Company shall pay to -------- ------- ---- the Executive, on an annual basis, from the date hereof to age 65, the amount, after taxes, of any income tax required to be paid by the Executive as a result of income imputed to the Executive based upon the Insurer's Alternate Term Rate tables in connection with premium payments paid in respect of the Policy; provided, further, that, the Company agrees to pay to the Executive at age 65 - -------- ------- ---- and each calendar year thereafter, an amount, before taxes, equal to (i) Two Hundred Twenty Six Thousand Dollars ($226,000.00) minus (ii) the actual Pension ----- Plan Benefits paid for such year minus (iii) the Policy benefits, before taxes, ----- paid for such year, as calculated by grossing up the actual after tax Policy payments using the Executive's then current effective local, state and federal income tax rates; provided, further, that, in the event that the Executive's -------- ------- ---- employment is terminated pursuant to the provisions of SECTION 5(a)(ii) hereof or the Company elects not to renew this Agreement pursuant to the provisions of SECTION 2(B) hereof, the Company shall continue to fund the Policy through age 65; provided, -------- further, that, in the event the Executive's employment is terminated pursuant to - ------- ---- the provisions of SECTION 5(a)(iii) hereof, the Company shall cease funding the Policy on the Termination Date; provided, further, that, in the event that the -------- ------- ---- Executive elects not to renew this Agreement pursuant to the provisions of SECTION 2(b) hereof, the Company shall continue to fund the Policy for a period of two (2) years form the Termination Date. (b) Stock Options. The Company shall issue to the Executive the Option pursuant to the Stock Option Agreement, the terms of which shall provide as follows (i) the Option with respect to one hundred thousand (100,000) shares of the Stock shall be exercisable on the first anniversary of the Start Date, (ii) the Option with respect to one hundred twenty five thousand (125,000) shares of the Stock shall be exercisable at any time during the Term on and after the price of the Stock has reached or exceeded a price which shall be equal to one hundred fifty percent (150%) of the Start Price and (iii) the Option with respect to seventy five thousand (75,000) shares of the Stock shall be exercisable at any time during the Term on and after the price of the Stock has reached or exceeded a price which shall be equal to two hundred percent (200%) of the Start Price. A portion of the Option may be incentive stock options qualifying as such under the Internal Revenue Code. The Option granted pursuant to this SECTION 6(b) shall be for ten (10) years, subject to continued employment with the Company; provided, that, such Option shall be subject to -------- ---- SECTION 7 of the Stock Option Agreement. The Company shall seek immediate ratification of the Stock Option Agreement by the Board. 7. REPRESENTATIONS OF THE EXECUTIVE AND THE COMPANY. ------------------------------------------------ (a) Other Agreements. The Executive hereby represents and warrants to the Company that he is not bound by any employment agreement, restrictive covenant, confidentiality or proprietary information or other agreement that would prohibit or inhibit in any way the full and complete performance by the Executive of his duties hereunder or as the President and Chief Operating Officer of the Company. The Executive further represents, warrants and agrees that he will not use any trade secret, confidential or other proprietary information of any former employer or other person or entity in the course of performing his duties hereunder or as the President and Chief Operating Officer of the Company and will not disclose any such information to the Company or any of its representatives. Without limitation, the Executive acknowledges that the representations and warranties set forth in this SECTION 7(a) shall apply with full force and effect to those certain restrictions placed upon the Executive in SECTION 10 of the Stolle Arrangements. The Company hereby represents, warrants and agrees that the Company shall not request or require the Executive to divulge, in whole or any part, any information that would be in violation of the Stolle Arrangements. (b) Tax Consequences. The Executive acknowledges that the payments and other benefits herein provided will have serious negative income tax consequences to the Executive. The Executive represents, warrants and agrees that he has consulted with an independent, professional tax advisor, that he is fully responsible for all the tax ramifications of the provisions of this Agreement and that neither the Company nor any of its representatives, agents or advisors has made any representations or warranties to the Executive as to the appropriate tax treatment to the Executive of these matters. (c) Health of the Executive. The Executive represents and warrants that as of the date hereof, the Executive has no reason to believe that he suffers from a condition that would lead to a Permanent Disability during the four year period commencing on the Start Date. 8. MISCELLANEOUS ------------- (a) Assignment; Successors and Assigns. This Agreement may not be assigned, nor may any obligations hereunder be delegated, by the Executive. This Agreement is fully and freely assignable by the Company in connection with the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets subject to the Executive's rights in the event of a Change in Control. Subject to the foregoing, the Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and permitted assigns, and shall not benefit any person or entity other than those enumerated above. (b) Notices. Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt or, in the case of transmission by mail as set forth below, three (3) business following deposit of such notice, request, claim, demand, document or communication with the postal service, and shall be in writing and delivered personally or sent by courier, telecopy, or certified or registered mail, postage prepaid, or other similar means of communication, (i) if to the Company, addressed to its principal executive offices to the attention of its Chairman and (ii) if to the Executive, to him at the address set forth below under his signature or at any such other address as either party shall have specified by notice in writing to the other. (c) Entire Agreement. The terms of this Agreement together with the attachments hereto are intended by the parties to be the final expression of their agreement with respect to the employment of the Executive by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties hereby agree that this Agreement shall be in effect as of the date hereof and shall supersede and be in lieu of any and all prior agreements or understandings regarding the employment of the Executive, whether verbal or written. (d) Amendments; Waivers. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed by the Executive and by the Chairman. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform. A waiver of any provision of this Agreement shall not be deemed a waiver of any other provision of this Agreement. No waiver of any breach of any provision of this Agreement shall be deemed the waiver of any subsequent breach thereof or of any other provision. (e) Severability; Enforcement. If any provision of this Agreement, or the application thereof to any person, place or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this Agreement and such provisions as applied to other persons, places and circumstances shall remain in full force and effect. (f) Governing Law. The validity, interpretation, enforceability and performance of this Agreement shall be governed by and construed in accordance with the internal substantive laws (and not the law of conflict of laws) of the State of New York. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. PLY GEM INDUSTRIES, INC. By: /s/ Jeffrey S. Silverman -------------------------- Name: Jeffrey S. Silverman Title: Chairman of the Board and Chief Executive Officer /s/ Dana R. Snyder -------------------------- Dana R. Snyder Address for Notices Dana R. Snyder c/o Richard H. Wallace Elsass, Wallace, Evans, Schelle & Co., L.P.A 100 South Main Avenue, Suite 162 Sidney, Ohio 45365-0499 Ply Gem Industries, Inc. 777 Third Avenue New York, New York 10017 June 5, 1995 Mr. Dana R. Snyder c/o Richard H. Wallace Elsass, Wallace, Evans, Schelle & Co. L.P.A. 100 South Main Avenue, Suite 102 Sidney, Ohio 45365-0499 Dear Mr. Snyder: This letter agreement (this "LETTER AGREEMENT") will confirm our understanding with respect to the obligation of Ply Gem Industries, Inc. (the "COMPANY") to defend and hold you (the "EXECUTIVE") harmless in the event of certain claims made against you, as more fully provided hereinbelow. 1. Effectiveness. This Letter Agreement shall be effective for the Term of ------------ the Executive's employment by the Company, or by the Company's Subsidiaries or affiliates, pursuant to the terms and conditions set forth in that certain Employment Agreement between the Company and the Executive dated as of even date herewith (the "AGREEMENT"); provided, that, in the event of a termination of -------------- employment of the Executive as a result of (i) Permanent Disability, (ii) termination by the Company without Cause or (iii) resignation by the Executive for Good Reason, the term of this Letter Agreement shall extend through the end of the fourth anniversary of the Start Date (or through the end of any extension pursuant to SECTION 2(b) of the Agreeemnt to the extent that the Termination Date occurs within that extension period). Unless otherwise defined herein, or the context otherwise requires, all terms used but not defined herein shall have the meanings ascribed to such term in the Agreement. 2. The Company. Subject to the provisions of Section 3 hereof, and ----------- notwithstanding any provision in the Agreement to the contrary, the Company agrees to defend and to hold harmless the Executive from any claims that may be brought against the Executive by the Aluminum Company of America ("ALCOA") or its subsidiary, the Stolle Corporation ("STOLLE"), which claims assert that the performance by the Executive of any duties as an employee of the Company, or the Company's Subsidiaries or affiliates, constitutes a breach of the terms of the Executive's prior employment with ALCOA or STOLLE, including, without limitation, under SECTION 10 of that certain Employment Agreement with the Stolle Corporation, dated as of June 28, 1989 (collectively, the "STOLLE ARRANGEMENTS")' provided that, the indemnification provided for in this -------- ---- SECTION 2 shall not apply to any non-appealable judgment against the Executive based upon a breach of his obligations to ALCOA or Stolle pursuant to the Stolle Arrangements. 3. The Executive. The Executive acknowledges and agrees that the Company's ------------- obligation to defend and hold harmless the Executive from the claims referenced in SECTION 2 hereof shall be subject to the execution, delivery and performance by the Executive of a Reimbursement Agreement, in a form satisfactory to the Company, which shall provide that the Executive shall reimburse the Company for any non-appealable judgments and attorneys' fees incurred therewith in connection with the Company's obligations set forth in Section 2 hereof, in the event that a court or other judicial tribunal or any arbitrator with jurisdiction renders a non-appealable judgment against the Executive based upon any of the following: (a) a breach of the Executive's obligations to ALCOA or Stolle pursuant to the Stolle Arrangements, (b) a breach by the Executive of any convenant or agreement set forth in SECTION 7(a) of the Agreement or (c) any representation or warranty contained in such SECTION 7(a) being untrue; provided, that, any amount to be reimbursed to the Company by the Executive - --------------- shall consist solely of the forfeiture of the Option on shares not yet vested pursuant to the Agreement and the documents referenced therein. 4. ALCOA Stock Options. In the event that the Executive is not permitted to ------------------- exercise his option on approximately eight thousand seven hundred (8,700) shares of common stock of ALCOA (the "ALCOA OPTION") as a result of the termination of his employment with ALCOA, the Company shall pay to the Executive fifty percent (50%) of any monetary losses incurred by the Executive as a result of the inability to exercise the ALCOA Option; provided, that, the Executive shall attempt to exercise the ALCOA Option no later than September 1, 1995; provided, further, that, the Executive shall present appropriate proof of such loss; provided further, that, the Company's obligations pursuant to this Section 4 shall not exceed an aggregate amount equal to Forty Three Thousand Five Hundred Dollars ($43,500.00). 5. General Matters. (a) Entire Agreement. This Letter Agreement, the Agreement and the other documents contemplated herein and therein constitute the entire agreement and understanding of the parties hereto with respect to the obligations referenced herein and supersedes all prior agreements and correspondence among the parties with respect to such subject matter. (b) Governing Law. It is understood and agreed that the construction and interpretation of this Letter Agreement shall at all times and in all respects be governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law thereunder. The parties hereto irrevocably submit to the jurisdiction of (i) the state or federal courts located in New York, New York, in the event that a claim is brought against the Company and (ii) the state or federal courts located at the Executive's residence or principal place of business, in the event that a claim is brought against the Executive; in connection with any claim arising out of or relating to this Letter Agreement and the Agreement and the transactions contemplated hereby and hereby agree not to assert, by way of motion, as a defense or otherwise in any such claim that the claim is brought in an inconvenient forum or that the venue of the claim is improper. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. PLY GEM INDUSTRIES, INC. By: /s/ Jeffrey S. Silverman -------------------------- Name: Jeffrey S. Silverman Title: Chairman of the Board and Chief Executive Officer /s/ Dana R. Snyder -------------------------- Dana R. Snyder Address for Notices Dana R. Snyder c/o Richard H. Wallace Elsass, Wallace, Evans, Schelle & Co., L.P.A 100 South Main Avenue, Suite 162 Sidney, Ohio 45365-0499 EMPLOYMENT AGREEMENT AMENDMENT NO. 1 THIS AMENDMENT, dated as of October 25, 1995, by and between Ply Gem Industries, Inc., a Delaware corporation, having its principal place of business at 777 Third Avenue, New York, New York 10017 (the Company), and Dana R. Snyder, residing at 700 Plum Ridge Trail, Sidney, Ohio 45365 (the Executive). RECITALS WHEREAS, the parties hereto, under date of June 5, 1995, have entered into an Employment Agreement (the "Employment Agreement") pursuant to which the Company employed the Executive as its Chief Operating Officer upon terms and conditions therein set forth; and WHEREAS, Section 6(a) of the Employment Agreement requires the Company to annually pay the Executive $226,000 commencing in the year in which he attains the age of 65 and ending in the year in which he attains the age of 90, which payments are to be funded in part by the Policy and the Pension Plan Benefits; and WHEREAS, Section 4(c) of the Employment Agreement requires the Company to provide the Executive with the Life Insurance Policy, a $1,750,000 split dollar life insurance policy; and WHEREAS, pursuant to Section 6(b) of the Employment Agreement, the Company granted the Executive options to acquire 300,000 shares of the Company's common stock, which options as of the date hereof have not become exercisable; and WHEREAS, the Company and the Executive desire to exchange (i) the Company's obligations under the Employment Agreement to pay the Executive the $226,000 annuity and to provide the Life Insurance Policy for (ii) the acceleration of the exercisability of the options to acquire 300,000 shares and the issuance of additional options to acquire up to 500,000 shares of the Company's common stock; and WHEREAS, the parties hereto desire to restate and modify certain provisions of the Employment Agreement upon the following terms and conditions. NOW, THEREFORE, in consideration of the mutual agreements and understandings between them, the Company and the Executive hereby agree as follows: 1. Section 6 of the Employment Agreement shall be deemed modified and amended to provide that the provisions of Section 6(a) shall be deleted and deemed of no further force and effect. In addition, the Company's obligation to furnish the Life Insurance Policy in accordance with Section 4(c) is canceled. References in the Agreement to Life Insurance Policy and Policy shall be deleted and canceled. In consideration therefore it is agreed that: (i) The stock options issued pursuant to Section 6(b) shall be deemed modified and amended so as to provide that all of the options shall be fully exercisable as of the date hereof and the option agreement shall be as more particularly set forth in the forms attached to this Amendment as Exhibit A and Exhibit A-1 respectively. The provisions of Section 5(b)(ii)(D) of the Employment Agreement shall be canceled. (ii) The Company has issued to the Executive additional stock options to acquire 250,000 shares of common stock of the Company pursuant to the Stock Option Agreement delivered this date, the form of which is attached hereto as Exhibit B. (iii) The Company shall issue to Executive on January 2, 1996, additional stock options to acquire 206,000 shares of common stock of the Company pursuant to the 1994 Employee Incentive Stock Plan. Except as herein set forth, these options shall be in the form of Exhibit B attached hereto. The exercise price of the options shall be the Fair Market Value of the shares of Ply Gem Common Stock on January 2, 1996. In the event the Fair Market Value of Ply Gem Common Stock on January 2, 1996 shall be in excess of $16 per share, then the number of options granted shall be increased so that the number of options granted times the difference between the Fair Market Value of Ply Gem Common Stock on January 2, 1996 and $26 shall equal $2,060,000. Notwithstanding the aforesaid, the maximum number of options to be granted on January 2, 1996 shall be 250,000. (iv) The provisions of Section 1(g) shall be modified in its entirety as more particularly set forth on Exhibit C attached hereto so that the definition of "Change of Control" shall be consistent with and conform to the definition adopted by the Board of Directors of the Company for other purposes. 2. Section 1(j) of the Agreement shall be amended in its entirety, for clarification purposes and to reflect the understanding and agreement of the parties, as follows: (j) "Good Reason" shall mean the Executive's voluntary resignation due to one or more of the following (i) the Base Salary is reduced during the Term below the amount set forth in Section 4(a) hereof, (ii) the Executive's group benefits are materially reduced, (iii) the Company insists upon relocation of the Executive in violation of Section 4(f) hereof or a change occurs in the Executives responsibilities without his consent, (iv) a Change of Control event occurs or (v) the Company has materially breached this Agreement and the Company has failed to cure such breach within twenty (20) days of written notification from the Executive of such breach. 3. The Company agrees to furnish to the Executive at the Company's expense a term life insurance policy in the amount of $1,750,000. The Executive shall have the right to designate the beneficiary. The Employment Agreement as heretofore adopted and as dated as of June 5, 1995 and as amended herein is hereby ratified and confirmed and is deemed in full force and effect. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. PLY GEM INDUSTRIES, INC. By: /s/ Jeffrey S. Silverman ------------------------------ Name: Jeffrey S. Silverman Title: Chairman of the Board and Chief Executive Officer /s/ Dana R. Snyder ------------------------------ Dana R. Snyder EX-11 3 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE YEAR ENDED DECEMBER 31,
1993 ----------------------- FULLY PRIMARY DILUTED ----------- ----------- Weighted average number of common shares outstanding during year..................... 10,814,000 10,814,000 Excess of weighted average number of shares issuable upon exercise of employee stock options over 20% of shares outstanding at end of year................................. 3,403,000 3,403,000 ----------- ----------- Weighted average number of shares............. 14,217,000 14,217,000 ----------- ----------- Proceeds available to repay debt: From exercise of options, including tax benefits, at average market price......... $31,541,000 From exercise of options, including tax benefits, at year-end market price........ $28,379,000 Other...................................... 1,360,000 1,360,000 ----------- ----------- 32,901,000 29,739,000 ----------- ----------- Interest saved................................ 1,513,000 1,368,000 Other......................................... 198,000 187,000 ----------- ----------- 1,711,000 1,011,000 ----------- ----------- Interest to income, net of taxes.............. 1,112,000 1,011,000 Net income as reported........................ 9,650,000 9,650,000 ----------- ----------- Adjusted net income........................... $10,762,000 $10,661,000 ----------- ----------- Per share..................................... $.76 $.75
EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES (SUBSIDIARIES)
Parent Corporation Subsidiary and State of Incorporation ------------------ ------------------------------------- Ply Gem Industries, Inc. Allied Plywood Corporation (Delaware) Continental Wood Preserves, Inc. (Michigan) Great Lakes Window, Inc. (Ohio) Goldenberg Group, Inc. (California) Hoover Treated Wood Products, Inc. (Delaware) Richwood Building Products, Inc. (Delaware) Sagebrush Sales, Inc. (New Mexico) SNE Enterprises, Inc. (Delaware) Studley Products, Inc. (New York) Variform, Inc. (Missouri)
EX-23 5 CONSENT OF PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUUBLIC ACCOUNTANTS We have issued our report dated March 6, 1996, accompanying the consolidated financial statements included in the Annual Report of Ply Gem Industries, Inc. on Form 10-K for the year ended Dcember 31, 1995. We hereby consent to the incorporation by reference of said report 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). GRANT THORNTON LLP New York, New York March 6, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-1-1995 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 0 324,990 741,394 741,394 617,620 0 0 1,505 6,649 (10,262) (2,860) (7,402) 0 0 0 0 (.51) (.51)
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