SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
Amendment No. 1
------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 26, 1997
----------------------
NORTEK, INC.
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-6112 05-0314991
- ----------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
50 Kennedy Plaza, Providence, RI 02903-2360
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (401) 751-1600
----------------------------------------
N/A
(Former name or former address, if changed since last report)
Item 7. Financial Statements.
---------------------
(a) Financial Statements of Business Acquired
The consolidated financial statements of Ply Gem
Industries, Inc. and subsidiaries as of December 31, 1996
and 1995 and for the three year period ended December 31,
1996, together with the notes thereto.
Unaudited consolidated condensed balance sheet of Ply Gem
Industries, Inc. and subsidiaries as of June 30, 1997,
together with unaudited consolidated condensed statements
of earnings and cash flows for the second quarter and six
months ended June 30, 1996 and 1997, together with the
notes thereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to its Form 8-K to be signed
on its behalf by the undersigned hereunto duly authorized.
NORTEK, INC.
Date: September 12, 1997 By: /s/ Almon C. Hall
------------------
Almon C. Hall
Vice President-Controller
Item 7(a) Financial Statements of Business Acquired
Consolidated Balance Sheets
- ---------------------------
Ply Gem Industries, Inc. and Subsidiaries December 31,
1996 1995
ASSETS ----------- ------------
Cash and cash equivalents $ 9,924,000 $ 8,107,000
Accounts receivable, net of allowance of
$3,039,000; $4,511,000 in 1995 28,003,000 31,736,000
Inventories 92,983,000 96,228,000
Prepaid and deferred income taxes 10,905,000 15,714,000
Other current assets 12,975,000 10,478,000
------------ ------------
Total current assets 154,790,000 162,263,000
Property, plant and equipment-at cost, net 90,681,000 81,832,000
Patents and trademarks, net of accumulated
amortization of $9,776,000; $8,971,000
in 1995 13,793,000 15,334,000
Intangible assets, net 14,794,000 15,507,000
Cost in excess of net assets acquired, net 21,618,000 23,081,000
Other assets 17,771,000 26,973,000
------------ ------------
Total assets $ 313,447,000 $ 324,990,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 50,937,000 $ 40,455,000
Accrued restructuring 1,138,000 4,480,000
Accrued payroll and commissions 10,408,000 7,790,000
Accrued insurance 4,285,000 4,400,000
Current maturities of long-term debt
and capital leases 1,380,000 458,000
---------- ----------
Total current liabilities 68,148,000 57,583,000
Long-term debt 73,166,000 93,135,000
Capital leases 9,231,000 7,106,000
Other liabilities 17,119,000 22,681,000
Stockholders' equity
Preferred stock, $.01 par value;
authorized 5,000,000 shares; none issued ___ ___
Common stock, $.25 par value; authorized
60,000,000 shares; issued 17,676,540 shares;
17,463,072 shares in 1995 4,419,000 4,366,000
Additional paid-in capital 149,226,000 148,618,000
Retained earnings 61,993,000 53,246,000
----------- -----------
215,638,000 206,230,000
Less:
Treasury stock-at cost (3,687,954 shares;
3,015,311 shares in 1995) 63,936,000 55,676,000
Unamortized restricted stock and note
receivable 5,919,000 6,069,000
----------- -----------
Total stockholders' equity 145,783,000 144,485,000
----------- -----------
Total liabilities and stockholders'
equity $ 313,447,000 $ 324,990,000
============= =============
The accompanying notes are an integral part of these statements.
Consolidated Statements of Operations
- -------------------------------------
Ply Gem Industries, Inc. and Subsidiaries
Years ended December 31,
1996 1995 1994
----------- ------------ ----------
Net sales $774,928,000 $755,198,000 $808,874,000
Cost of goods sold 626,424,000 630,552,000 653,270,000
------------ ------------ -------------
Gross profit 148,504,000 124,646,000 155,604,000
Selling, general and
administrative expenses 119,494,000 114,171,000 118,726,000
Write-down of long-lived assets --- 11,950,000 ---
Nonrecurring charges --- --- 40,962,000
----------- ----------- ------------
Income (loss) from operations 29,010,000 (1,475,000) (4,084,000)
Interest expense (6,773,000) (6,649,000) (7,479,000)
Other expense (2,658,000) (2,138,000) (386,000)
------------ ------------ --------------
Income (loss) before income
taxes 19,579,000 (10,262,000) (11,949,000)
Income tax provision (benefit) 9,125,000 (2,860,000) (3,418,000)
------------ ------------ --------------
NET INCOME (LOSS) $10,454,000 $ (7,402,000) $ (8,531,000)
============ ============ ==============
Earnings (loss) per share $ .74 $ (.51) $ (.62)
============ ============ ==============
Weighted average number of
shares outstanding 14,065,000 14,445,000 13,870,000
The accompanying notes are an integral part of these statements.
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------
Ply Gem Industries, Inc. and Subsidiaries
Three years ended December 31, 1996, 1995 and 1994
Common stock
----------------------------------
Number Additional
of paid-in
Shares Amount capital
------- ------ -------
Balance at January 1, 1994 11,872,509 $2,968,000 $64,006,000
Cash dividends on common stock
($.12 per share) --- --- ---
Exercise of employee stock options 2,672,318 668,000 23,423,000
Tax benefit arising from exercise of
stock options --- --- 9,962,000
Conversion of debentures 2,751,328 688,000 48,379,000
Purchase of stock for treasury --- --- ---
Other 40 --- 1,197,000
Net loss --- --- ---
---------- --------- -----------
Balance at December 31, 1994 17,296,195 4,324,000 146,967,000
Cash dividends on common stock
($.12 per share) --- --- ---
Exercise of employee stock options 166,872 42,000 1,494,000
Tax benefit arising from exercise of
stock options --- --- 174,000
Shares held for distribution to employee
profit sharing trust --- --- ---
Purchase of stock for treasury --- --- ---
Other 5 --- (17,000)
Net loss --- --- ---
---------- --------- -----------
Balance at December 31, 1995 17,463,072 4,366,000 148,618,000
Cash dividends on common stock
($.12 per share) --- --- ---
Exercise of employee stock options 213,468 53,000 1,916,000
Tax benefit arising from exercise of
stock options --- --- 367,000
Contribution of treasury stock to
employee profit sharing trusts --- --- (1,039,000)
Purchase of stock for treasury --- --- ---
Other --- --- (636,000)
Net income --- --- ---
----------- ---------- ------------
Balance at December 31, 1996 17,676,540 $4,419,000 $149,226,000
The accompanying notes are an integral part of these statements.
Common
Stock Treasury Stock
------- --------------------------
Number
Retained of
earnings shares Amount
-------- ------ ------
Balance at January 1, 1994 $72,601,000 910,073 $ 9,362,000
Cash dividends on common stock
($.12 per share) (1,673,000) --- ---
Exercise of employee stock options --- 1,197,241 29,465,000
Tax benefit arising from exercise of
stock options --- --- ---
Conversion of debentures --- --- ---
Purchase of stock for treasury 640,700 12,175,000
Other --- (2,695) (48,000)
Net loss (8,531,000) --- ---
----------- ---------- ----------
Balance at December 31, 1994 62,397,000 2,745,319 50,954,000
Cash dividends on common stock
($.12 per share) (1,749,000) --- ---
Exercise of employee stock options --- 30,580 573,000
Tax benefit arising from exercise of
stock options --- --- ---
Shares held for distribution to employee
profit sharing trust --- (52,500) (819,000)
Purchase of stock for treasury --- 292,000 4,955,000
Other --- (88) 13,000
Net loss (7,402,000) --- ---
---------- ---------- ----------
Balance at December 31, 1995 53,246,000 3,015,311 55,676,000
Cash dividends on common stock
($.12 per share) (1,707,000) --- ---
Exercise of employee stock options --- 63,612 915,000
Tax benefit arising from exercise of
stock options --- --- ---
Contribution of treasury stock to
employee profit sharing trusts --- (140,700) (2,608,000)
Purchase of stock for treasury --- 752,200 9,998,000
Other --- (2,469) (45,000)
Net income 10,454,000 --- ---
----------- -------- ----------
Balance at December 31, 1996 $61,993,000 3,687,954 $63,936,000
=========== ======== ==========
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
Ply Gem Industries, Inc. and Subsidiaries
Years ended December 31,
1996 1995 1994
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $10,454,000 $(7,402,000) $(8,531,000)
--------- --------- ----------
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation $11,359,000 $10,521,000 $ 8,733,000
Amortization 3,594,000 3,650,000 4,652,000
Non-cash profit sharing expense 2,243,000 --- ---
Write-down of long-lived assets --- 11,950,000 ---
Nonrecurring charges net of
cash payments of $5,223,000 --- --- 35,739,000
Deferred taxes 3,339,000 3,644,000 (8,067,000)
Provision for doubtful accounts 1,982,000 1,505,000 874,000
Changes in assets and liabilities:
Accounts receivable 1,751,000 9,617,000 10,515,000
Inventories 3,245,000 6,861,000 5,575,000
Prepaid expenses and other
current assets 2,135,000 (5,129,000) 1,459,000
Accounts payable and accrued
expenses 12,985,000 (8,195,000) 3,860,000
Income taxes payable --- --- (4,902,000)
Accrued restructuring (5,574,000) (10,608,000) ---
Other assets 3,141,000 (5,305,000) (1,061,000)
---------- ------------ ------------
40,200,000 18,511,000 57,377,000
---------- ------------ ------------
Net cash provided by operating
activities 50,654,000 11,109,000 48,846,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (17,583,000) (27,827,000) (23,046,000)
Funds used for construction --- --- 1,327,000
Proceeds from property, plant and
equipment disposals 473,000 799,000 1,681,000
Proceeds from sales of marketable
securities, net --- 788,000 ---
Other (17,000) 25,000 129,000
----------- ------- ---------
Net cash used in investing
activities (17,127,000) (26,215,000) (19,909,000)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt repayments, net --- --- (2,330,000)
Repayment of long-term debt (533,000) (481,000) (881,000)
Net increase (decrease) in
revolving note borrowings with
original maturity of 90
days or less (19,540,000) 14,040,000 (14,884,000)
Purchase of stock for treasury (9,998,000) (4,955,000) (12,175,000)
Cash dividends (1,707,000) (1,749,000) (1,673,000)
Proceeds from exercise of
employee stock options 1,500,000 1,499,000 6,491,000
Other (1,432,000) 456,000 (1,581,000)
------------ --------- -----------
Net cash provided by (used in)
financing activities (31,710,000) 8,810,000 (27,033,000)
------------ --------- -----------
Net increase (decrease) in
cash and cash equivalents 1,817,000 (6,296,000) 1,904,000
Cash and cash equivalents at
beginning of year 8,107,000 14,403,000 12,499,000
------------ --------- ----------
Cash and cash equivalents at
end of year $ 9,924,000 $ 8,107,000 $14,403,000
============ ========== ==========
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Ply Gem Industries, Inc. and Subsidiaries
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Ply Gem Industries, Inc. ("Ply Gem") through its subsidiaries (the
"Company") operates predominantly in one industry segment, which
consists of the manufacture and sale of vinyl siding, wood and vinyl-
framed windows, doors, skylights, prefinished decorative plywood and
decorator wall and floor coverings, furniture components, pressure-
treated wood products and the distribution of other products for the
building products and home improvement markets.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Ply Gem
Industries, Inc. and its wholly-owned subsidiaries after eliminating all
significant intercompany accounts and transactions. Certain prior year
items have been reclassified to conform to 1996 presentation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and temporary investments
having an original maturity of three months or less.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
Long-Lived Assets
- -----------------
(a) Property, Plant and Equipment:
Owned property, plant and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes.
Service lives for principal assets are 5 to 35 years for buildings and
improvements and 3 to 12 years for machinery and equipment.
Leasehold improvements are amortized on a straight-line basis over their
respective lives or the terms of the applicable leases, including
expected renewal options, whichever is shorter. Capitalized leases are
amortized on a straight-line basis over the terms of the leases or their
economic useful lives.
(b) Patents and Trademarks:
Purchased patents and trademarks are recorded at appraised value at time
of the business acquisition and are being amortized on a straight-line
basis over their estimated remaining economic lives; thirteen to
seventeen years for patents and thirty years for trademarks.
(c) Cost in Excess of Net Assets Acquired and Other Intangibles:
Cost in excess of net assets acquired is being amortized from twenty to
thirty years on a straight-line basis. Other intangibles, which arose
primarily from the allocation of purchase prices of businesses acquired,
are being amortized on a straight-line basis over thirty-nine years.
The Company annually evaluates the carrying value of its long-lived
assets to evaluate whether changes have occurred that would suggest that
the carrying amount of such assets may not be recoverable based on the
estimated future undiscounted cash flows of the businesses to which the
assets relate. Any impairment loss would be equal to the amount by
which the carrying value of the assets exceed its fair value.
Income Taxes
- ------------
Deferred income tax liabilities and assets reflect the tax effects of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes and net operating loss and credit carryforwards.
These differences are classified as current or noncurrent based upon the
classification of the related asset or liability. Deferred income tax
assets, such as benefits related to net operating loss and credit
carryforwards, are recognized to the extent that such benefits are more
likely than not to be realized.
Financial Instruments
- ---------------------
The Company utilizes various financial instruments to manage interest
rate risk associated with its borrowings. Interest rate swap agreements
modify the interest characteristics of a portion of the Company's debt.
Amounts to be paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized over the life of the
swap agreements as an adjustment to interest expense. Interest rate caps
are used to lock in a maximum interest rate if rates rise, but enables
the Company to otherwise pay lower market rates. The cost of interest
rate cap agreements are amortized to interest expense over the life of
the cap. Payments received as a result of the cap agreements reduce
interest expense. The unamortized costs of the cap agreements are
included in other assets.
The fair value for cash, receivables, accounts payable, and accrued
liabilities approximate carrying amount because of the short maturity of
these instruments. The fair value of long-term debt approximates its
carrying amount, as the debt carries variable interest rates.
Earnings (Loss) Per Share
- -------------------------
Earnings (loss) per share of common stock is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding. Stock options have been excluded from the calculations as
their effect would be anti-dilutive.
Stock Based Compensation
- ------------------------
The Company grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to or greater than
the fair value of the shares at the date of grant. The Company accounts
for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, the Company
recognizes no compensation expense for the stock option grants.
Customers
- ---------
The Company's products are distributed through an extensive network that
includes major retail home center chains, specialty home remodeling
distributors, lumber and building products wholesalers, professional
contractors and Company operated distribution centers. The products are
marketed predominately in the United States through Company sales
personnel and independent representatives. One customer accounted for
approximately 19% of the Company's net sales for the years ended
December 31, 1996 and 1995 and approximately 14% in 1994.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 ACCOUNTS RECEIVABLE
The Company has a program which currently allows for the sale of up to
$50 million of undivided fractional interests in a designated pool of
eligible accounts receivable to a financial institution with limited
recourse. The program expires in April 1998. At December 31, 1996 and
1995 respectively, the Company sold $45 and $42 million of receivables
under this program. Program costs of $3,540,000, $3,205,000, and
$1,892,000 are included in "other expense" for 1996, 1995 and 1994,
respectively. $5,000,000, due from officer, was repaid subsequent to
year end.
NOTE 3 INVENTORIES
The classification of inventories at the end of each year was as
follows:
1996 1995
------- -------
Finished goods $53,833,000 $54,530,000
Work in progress 9,724,000 12,508,000
Raw materials 29,426,000 29,190,000
---------- ----------
$92,983,000 $96,228,000
========== ==========
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at the end of each year consisted of
the following:
1996 1995
------- -------
Land $ 2,668,000 $ 2,704,000
Buildings and improvements 27,044,000 24,853,000
Machinery and equipment 94,912,000 78,830,000
Transportation equipment 2,156,000 2,428,000
Furniture and fixtures 10,378,000 11,312,000
Capital leases 10,705,000 7,501,000
Construction in progress 5,575,000 5,777,000
------------ ------------
153,438,000 133,405,000
Accumulated depreciation and amortization (62,757,000) (51,573,000)
------------ ------------
$90,681,000 $81,832,000
============ ============
During the fourth quarter of 1995, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and recorded a non cash pretax charge of $12.0
million ($7.6 million after tax) related to the write-down of certain
long-lived assets. The charge consisted of a write-down of
approximately $9.5 million related to the Company's information system
and $2.5 million related primarily to certain machinery and equipment.
NOTE 5 INTANGIBLE AND OTHER ASSETS
Accumulated amortization of cost in excess of net assets acquired and
other intangible assets is $22,357,000 at December 31, 1996 and
$19,917,000 at December 31, 1995.
The balance sheet at December 31, 1996 includes notes receivable from an
officer. The 1992 Note ($5,400,000 principal amount at December 31,
1996 including current maturities), has an average interest rate of 7.1%
and is due in approximately equal annual installments through 2003.
Under the terms of the note, principal and interest are forgiven upon
the attainment of at least a 20% improvement in net income, as defined,
compared to the prior year or at the discretion of the Board of
Directors. Accordingly, the annual installments for 1996 and 1994 were
forgiven. The 1994 Note ($3,000,000 principal amount at December 31,
1996 including current maturities) and the 1995 Note ($5,000,000
principal amount at December 31, 1996) have interest rates which are the
higher of the Company's average bank borrowing rate or the applicable
Federal rate in effect for such period. They are payable in annual
installments of $250,000 each with the final payments due December 31,
1998 and April 30, 2001, respectively. Furthermore, under the terms of
the officer's employment agreement, the notes are forgiven upon the
occurrence of a change in control of the Company or the permanent
disability of the officer. The long-term portion of the 1992 and 1994
Notes are included in other assets. The 1995 Note has been reflected as
a reduction of stockholders' equity since the officer may reduce the
indebtedness through the Company's redemption of its shares which are
owned by the officer.
NOTE 6 STOCKHOLDERS' EQUITY
In addition to treasury stock, deductions from stockholders' equity
consists of unamortized restricted stock of $919,000 and $1,069,000 at
December 31, 1996 and 1995, respectively and notes receivable due from
officer of $5,000,000 at December 31, 1996 and 1995. See Note 5.
NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31
is as follows:
1996 1995 1994
------ ------ ------
Interest paid (net of $453,000
capitalized in 1996, $746,000
in 1995 and $323,000 in 1994) $6,609,000 $5,887,000 $5,546,000
========== ========== ==========
Income taxes paid $6,939,000 $ 872,000 $2,819,000
========== ========== ==========
Noncash financing activities involve the issuance of common stock upon
conversion of $49,963,000 of the Company's Debentures in 1994 and in
1996 the Company acquired approximately $3.2 million of equipment under
capital leases.
NOTE 8 LONG-TERM DEBT
The composition of long-term debt at the end of each year was as
follows:
1996 1995
------- ---------
Revolving credit facility expiring in 1999 $66,000,000 $ 85,540,000
Industrial Development Revenue Bonds
maturing at various dates to 2012, generally
at floating interest rates which are reset
periodically (6.0 % weighted average interest
rate for 1996) 7,561,000 7,955,000
Other 34,000 45,000
----------- ----------
73,595,000 93,540,000
Less current maturities 429,000 405,000
----------- -----------
$73,166,000 $ 93,135,000
=========== ===========
The Company has a revolving credit facility with a syndicate of banks,
which provides financing of up to $200 million through February 1999.
Interest on borrowings are at varying rates based, at the Company's
option, on the London Interbank Offered Rate (LIBOR) plus a spread or
the bank's prime rate. The Company pays a facility fee quarterly which,
based on a formula, averaged .42% of the committed amount during 1996.
The average weighted interest rate on the credit facility for the year
1996 and 1995 was 6.7% and 6.9%, respectively (6.3% and 7.0% at December
31, 1996 and 1995, respectively). The credit facility includes
customary covenants, including covenants limiting the Company's ability
to pledge assets or incur liens on assets and financial covenants
requiring among other things, the Company to maintain a specified
leverage ratio, fixed charge ratio and tangible net worth levels. In
addition, the amount of annual dividends the Company can pay is limited
based on a formula. At December 31, 1996 $2,800,000 was available for
payments of dividends in 1997. Borrowings under this credit facility
are collateralized by the common stock of the Company's principal
subsidiaries.
The Company periodically enters into interest rate swap and cap
agreements as a hedge against interest rate exposure of its floating rate
bank debt. In 1996, the Company entered into $75 million of interest
rate swap agreements, whereby the Company will pay the counterparties
interest at a fixed rate of 5.53% and the counterparties will pay the
Company interest at a floating rate equal to one month LIBOR for a two
year period ending December 3, 1998. At the option of the
counterparties, the termination date may be extended to December 3, 1999
upon notice to the Company. The Company also entered into $75 million of
interest rate cap agreements which entitles the Company to receive from
the counterparties on a monthly basis an amount by which the Company's
interest payments on $75 million of its floating rate debt exceed 7%
during the period December 5, 1998 to December 5, 1999.
Future maturities of long-term debt, for the years 1997 through 2001,
are: 1997-$429,000; 1998-$446,000; 1999-$66,476,000; 2000-$495,000 and
2001-$525,000.
The net book value of property, plant and equipment pledged as
collateral under industrial revenue bonds was approximately $6,751,000
at December 31, 1996.
NOTE 9 INCOME TAXES
The income tax provision (benefit) for the years ended December 31
consisted of the following:
1996 1995 1994
------ ------- -------
Federal:
Current $ 4,163,000 $ (7,485,000) $ (6,195,000)
Deferred 3,075,000 4,172,000 (7,353,000)
Foreign 13,000 7,000 (21,000)
State and local:
Current 1,243,000 800,000 903,000
Deferred 264,000 (528,000) (714,000)
--------- ----------- ------------
8,758,000 (3,034,000) (13,380,000)
Tax benefit from exercise
of stock options 367,000 174,000 9,962,000
--------- ----------- ------------
Actual tax provision
(benefit) $9,125,000 $ (2,860,000) $ (3,418,000)
========= =========== ============
The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995
------- -------
Net deferred tax assets(liabilities) - current:
Nonrecurring charge $ 397,000 $1,917,000
Allowance for bad debts 1,765,000 1,567,000
Accrued expenses deductible for tax
purposes when paid 3,682,000 2,775,000
State and local net operating loss and
tax credit carryforwards 2,465,000 1,747,000
Other (227,000) 47,000
---------- ----------
Total deferred tax assets 8,082,000 8,053,000
Valuation allowance for deferred
tax assets (1,104,000) (897,000)
----------- ----------
Net deferred tax current assets $6,978,000 $7,156,000
=========== ===========
Net deferred tax liabilities (assets) - noncurrent:
Write-down of long-lived assets $(2,242,000) (4,107,000)
Nonrecurring charge (395,000) (1,073,000)
Accelerated depreciation 7,500,000 6,557,000
State net operating loss and credit
carryforwards (916,000) ---
Accrued expenses deductible for tax
purposes when paid (2,254,000) (2,318,000)
Income not recognized for book purposes (595,000) (671,000)
Other 1,522,000 1,070,000
----------- -----------
Net deferred tax noncurrent liabilities
(assets) $2,620,000 $ (542,000)
=========== ============
As of December 31, 1996, the Company has deferred tax assets largely
attributable to the 1995 write-down of long-lived assets (see Note 4)
and various state net operating loss and tax credit carryforwards.
Deferred tax assets, net of the valuation reserve, are expected to be
realized through future taxable income and from the reversal of
temporary differences.
The actual income tax provision (benefit) varies from the Federal
statutory rate applied to consolidated pretax income (loss) as
follows:
1996 1995 1994
------ ------- --------
Income taxes at Federal statutory
rate of 35% $6,853,000 $(3,592,000) $(4,182,000)
Increases resulting from
State and local income taxes
net of Federal income tax benefit 1,080,000 177,000 123,000
Amortization of cost in excess of
net assets acquired 534,000 478,000 509,000
Other-net 658,000 77,000 132,000
----------- ----------- ----------
Actual tax provision (benefit) $9,125,000 $(2,860,000) $(3,418,000)
=========== =========== ==========
NOTE 10 RETIREMENT PLANS
The Company provides retirement benefits to certain of its salaried
and hourly employees through non-contributory defined benefit
pension plans. The benefits provided are primarily based upon length
of service and compensation, as defined. The Company funds the plans
in amounts as actuarially determined and to the extent deductible
for federal income tax purposes. The pension plan assets are
invested in a diversified portfolio of common stock and fixed income
securities.
The components of pension expense are as follows:
1996 1995 1994
------ ------- ---------
Service cost-benefits earned
in current year $ 1,032,000 $ 1,013,000 $ 1,044,000
Interest cost on projected
benefit obligation 983,000 923,000 782,000
Income earned on plan assets (643,000) (1,053,000) (866,000)
Net amortization and deferral (317,000) 200,000 28,000
---------- ----------- -----------
$ 1,055,000 $ 1,083,000 $ 988,000
========== ============ ===========
Assumptions used in the computation of net pension expense are as
follows:
1996 1995 1994
------- -------- --------
Weighted average discount rate
for plan obligations 8.0% 8.0% 8.0%
Rate of future compensation increases 5.0 5.0 5.0
Weighted average rate of return on
plan assets 8.8 8.8 8.8
The reconciliation of the funded status of the plans at year end
follows:
1996 1995
---------- ---------
Accumulated benefit obligation:
Vested $ 11,200,000 $ 10,595,000
Nonvested 572,000 676,000
--------- ----------
Total 11,772,000 11,271,000
Projected salary increases 2,050,000 1,793,000
---------- ----------
Projected benefit obligation 13,822,000 13,064,000
Plan assets at fair value 12,883,000 12,088,000
Assets less than ---------- ----------
projected benefit obligation (939,000) (976,000)
Unrecognized net (gain) loss (1,053,000) (1,111,000)
Unrecognized prior service cost 1,656,000 1,742,000
Unrecognized transition cost 120,000 158,000
Additional liability (1,403,000) (1,623,000)
----------- -----------
Accrued pension $ (1,619,000) $ (1,810,000)
=========== ===========
The Company maintains a discretionary profit sharing plan with a
voluntary 401(k) option for certain of its salaried and hourly
employees who vest after meeting certain minimum age and service
requirements. Profit sharing plan expense, including the Company's
401(k) match was $2,243,000, $1,371,000 and $2,636,000 for 1996, 1995
and 1994, respectively. The contributions consisted of the Company's
common stock.
NOTE 11 NONRECURRING CHARGES
During 1994, the Company recorded nonrecurring charges of $41.0 million
($25.7 million after tax), consisting of approximately $29.1 million
related to a restructuring program and $11.9 million for unusual items
primarily consisting of the write down of certain intangible assets and
discontinued products.
The status of the components of the restructuring provision at the end of
the year was:
Balance at Balance at
December 1996 December
31, 1995 Activity 31, 1996
--------- ------- ---------
Consolidation and closure of
facilities, including
severance and related costs $7,779,000 $5,663,000 $2,116,000
Other, including lease termination
expenses and costs to execute the
restructuring program 235,000 235,000 ---
---------- ---------- ----------
$8,014,000* $5,898,000 $2,116,000*
========== ========== ==========
* The following amounts are included in the consolidated balance sheet at
December 31, 1996 and 1995, respectively under the captions: "accrued
restructuring" ($1.1 and $4.5 million), "other liabilities" ($.8 and
$3.1 million), property, plant and equipment" (reduction of $.1 and $.2
million), and "various other asset accounts" (reduction of $.1 and $.2
million).
NOTE 12 STOCK PLANS
The Company's stock plans authorize the granting of incentive and non-
qualified stock options and restricted stock to executives, key
employees and directors of the Company. Stock options are granted at
prices not less than the fair market value on the date of grant. Option
terms, vesting and exercise periods vary except that the term of an
option may not exceed ten years. Certain options provide, among other
things, that in the event of a change in control, as defined, such
options will become immediately exercisable. At December 31, 1996,
approximately 531,000 shares were available for future grants under the
Company's plans.
In 1991, the Company granted 250,000 shares of restricted stock to an
executive officer of the Company. The restrictions on these shares will
be released at the rate of 25,000 shares per year upon the attainment of
certain performance goals and the continued employment of the officer.
These goals were attained in 1994 and 1996. The restrictions will be
released in the event of a change in control of the Company. The
unamortized restricted stock resulting from this stock award has been
deducted from stockholders' equity and is being amortized over the
periods earned.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation
cost been determined based on the fair value at the grant date for stock
option awards in 1995 and 1996 consistent with the provision of SFAS No.
123, the Company's net loss and loss per share for 1995 would have been
increased by approximately $2,100,000 or $.15 per share, respectively and
net income and earnings per share for 1996 would have been decreased by
approximately $3,800,000 or $.27 per share, respectively. During the
initial phase-in period of SFAS No. 123, such compensation may not be
representative of the future effects of applying this statement.
The weighted average fair value at date of grant for options granted
during 1996 and 1995 was $4.11 and $4.99 per option, respectively. The
fair value of each option at date of grant was estimated using the Black-
Scholes option pricing model with the following weighted average
assumptions for grants in 1996 and 1995, respectively: expected stock
price volatility 35% and 39%; expected lives of options of six and three
years; expected dividend rate of $.12 per year and risk free interest
rate of 6.26% and 5.81%. The pro forma effect for 1995 does not take
into account grants made prior to 1995.
Information regarding these option plans for 1996, 1995 and 1994 is as
follows:
1996 1995 1994
------------------- ------------------ ----------
Weighted- Weighted-
Average Average
Exercise Exercise
(Shares in Shares Price Shares Price Shares
thousands)
Options
outstanding
beginning of year 4,926 $14.10 4,479 $11.77 5,604
Exercised (216) 9.34 (167) 9.21 (2,672)
Granted 1,436 13.10 776 16.18 1,589
Cancelled or
forfeited (489) 17.64 (162) 20.13 (42)
------- ------ ------ ------- --------
Options
outstanding
end of year 5,657 $13.72 4,926 $14.10 4,479
======= ======== ======= ======= ========
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
------------------- -------------------
(Shares in thousands) Weight-
ed
Average Weight-
Remain- ed Weighted
Number ing Average Number Average
Outstan- Contra- Exerci- Exerci- Exerci-
Range of ding at ctual se sable at se
Exercise Prices 12/31/96 Life Price 12/31/96 Price
- --------------- ------- ------ ------ -------- -------
$ 6.63 to $ 9.75 258 4 years $ 8.62 258 $ 8.62
10.25 to 13.75 3,407 6 years 11.73 3,097 11.66
14.25 to 18.875 926 7 years 16.21 926 16.21
19.125 to 20.125 1,066 8 years 19.14 1,066 19.14
----- ------- ----- -------
5,657 5,347
===== =====
NOTE 13 COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases certain of its manufacturing, distribution and office
facilities as well as some transportation and manufacturing equipment
under noncancellable leases expiring at various dates through the year
2017. Certain real estate leases contain escalation clauses and
generally provide for payment of various occupancy costs.
Minimum future lease obligations on noncancellable leases in effect at
December 31, 1996 are as follows:
Capital Operating
leases leases
---------- ------------
Year ending December 31,
1997 $1,115,000 $11,912,000
1998 1,161,000 10,889,000
1999 1,143,000 9,819,000
2000 138,000 8,013,000
2001 32,000 7,139,000
Subsequent years through 2017 7,000,000 43,816,000
Net minimum lease payments 10,589,000 91,588,000
Amount representing interest 407,000
----------
Present value of net minimum lease
payments (including $951,000 payable
within one year) $10,182,000
===========
Rental expense for operating leases amounted to approximately
$19,645,000 in 1996, $19,883,000 in 1995 and $19,993,000 in 1994.
Hoover Treated Wood Products, Inc.
- ----------------------------------
Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary
of Ply Gem, is a defendant in a number of lawsuits alleging damage caused
by alleged defects in certain pressure treated interior wood products.
Hoover has not manufactured or sold these products since August, 1988.
The number of lawsuits pending has declined significantly from earlier
periods. Most of the suits have been resolved by dismissal or settlement
with settlements being paid out of insurance proceeds or other third
party recoveries. Hoover and Ply Gem are vigorously defending the suits
which remain pending and defense and indemnity costs are being paid out
of insurance proceeds and proceeds from a settlement by Hoover with
suppliers of material used in the production of interior treated wood
products.
Hoover and Ply Gem have engaged in coverage litigation with their
insurers and have settled their coverage claims with a majority of the
insurers. Ply Gem believes that the remaining coverage disputes will be
resolved on a satisfactory basis and a substantial amount of additional
coverage will be available to Hoover. In reaching this belief, it has
analyzed Hoover's insurance coverage and the status of the coverage
litigation, considered its history of settlements with primary and excess
insurers and consulted with counsel.
Hoover has recorded a receivable at December 31, 1996 for approximately
$8.9 million for the estimated proceeds and recoveries related to
insurance matters discussed above and recorded an accrual for the same
amount for its estimated cost to resolve those matters not presently
covered by existing settlements with insurance carriers and suppliers.
In evaluating the effect of the lawsuits, a number of factors have been
considered, including: the litigation history, the significant decline
in the number of cases, the availability of various legal defenses and
the likely availability of proceeds from additional insurance. Based on
its evaluation, the Company believes that the ultimate resolution of the
lawsuits and the insurance claims will not have a material effect upon
the financial position of the Company.
Letters of Credit
- -----------------
At December 31, 1996 approximately $20 million of letters of credit
issued by the Company's banks were outstanding, principally in
connection with certain financing transactions.
Other
- -----
Ply Gem and its subsidiaries are subject to legal actions from time to
time which have arisen in the ordinary course of its business. In the
opinion of management, the resolution of these claims will not
materially affect the financial position of the Company. The Company
has various commitments for the purchase of materials arising in the
ordinary course of business.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 14 Quarterly Results (Unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------ ------- ------- -------
(In thousands, except per share data)
Year Ended December
31, 1996
Net Sales $142,018 $212,079 $230,143 $190,688
Gross Profit 20,514 42,694 49,423 35,873
Income (loss) Before
Taxes (4,753) 7,559 12,924 3,849
Net Income (Loss) (2,638) 4,157 6,915 2,020
Per Share:
Primary (.18) .28 .45 .15
Fully Diluted (.18) .28 .45 .15
Year Ended December
31, 1995:
Net Sales $162,934 $203,265 $210,973 $178,026
Gross Profit 24,862 34,149 37,444 28,191
Income (loss) Before
Taxes (1) (4,594) 1,618 4,365 (11,651)
Net Income (Loss) (2,665) 1,028 2,276 (8,041)
Per Share:
Primary (.18) .07 .16 (.56)
Fully Diluted......... (.18) .07 .16 (.56)
(1) After charge of $12.0 million for the impairment of assets in the
fourth quarter. See Note 4 to the consolidated financial statements.
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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ply Gem Industries, Inc.
We have audited the accompanying consolidated balance sheets of Ply Gem
Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1996
and 1995 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conduct our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ply Gem Industries, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
---------------------
GRANT THORNTON LLP
New York, New York
February 25, 1997
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
June 30, December 31,
ASSETS 1997 1996
--------- --------
(Unaudited)
Cash and cash equivalents $ 7,952 $ 9,924
Accounts receivable, net of allowance
of $2,713; $3,039 in 1996 45,937 28,003
Inventories 110,450 92,983
Prepaid and deferred income taxes 10,905 10,905
Other current assets 14,931 12,975
-------- ----------
Total current assets 190,175 154,790
Property, plant and equipment - at cost
net of accumulated depreciation and
amortization of $69,084; $62,757 in 1996 101,543 90,681
Patents and trademarks, net of accumulated
amortization of $10,331; $9,776 in 1996 13,255 13,793
Other intangible assets - net 14,380 14,794
Cost in excess of net assets acquired - net 20,887 21,618
Other assets 18,220 17,771
--------- ---------
Total assets $358,460 $313,447
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 70,755 $ 66,768
Current maturities of long-term debt and
capital leases 1,528 1,380
--------- ----------
Total current liabilities 72,283 68,148
Long-term debt 111,496 73,166
Capital leases 8,656 9,231
Other liabilities 18,819 17,119
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 17,747,957;
17,676,450 in 1996 4,437 4,419
Additional paid-in capital 150,059 149,226
Retained earnings 63,129 61,993
Less: Treasury stock-at cost
(3,764,278 shares; 3,687,954 in 1996) 64,766 63,936
Unamortized restricted stock
and note receivable 5,653 5,919
-------- --------
Total stockholders' equity 147,206 145,783
-------- --------
Total liabilities and stockholders' equity $358,460 $313,447
======== ========
See accompanying notes to the consolidated financial statements.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands Except per Share Data)
Quarter Ended
---------------------
June 30, June 30,
1997 1996
------- --------
Net sales $218,916 $212,079
Cost of goods sold 177,405 169,385
--------- --------
Gross profit 41,511 42,694
Selling, general and administrative
expenses 30,050 32,591
Merger expenses 2,850 ---
Income from operations 8,611 10,103
Interest expense (1,982) (1,933)
Other expense, net (754) (611)
--------- ---------
Income before income taxes 5,875 7,559
Income taxes 2,842 3,402
--------- ----------
Net income $ 3,033 $ 4,157
======== =========
Earnings per share:
Primary $ .20 $ .28
Fully diluted $ .20 $ .28
Weighted average number of shares
outstanding:
Primary 16,586 16,102
Fully diluted 16,586 16,102
Cash dividends per share $ .03 $ .03
See accompanying notes to consolidated financial statements.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands Except per Share Data)
Six Months Ended
-------------------
June 30, June 30,
1997 1996
------- -------
Net sales $381,728 $354,097
Cost of goods sold 313,403 290,889
-------- --------
Gross profit 68,325 63,208
Selling, general and administrative
expenses 56,626 55,988
Merger expenses 2,850 ---
--------- ----------
Income from operations 8,849 7,220
Interest expense (3,649) (3,757)
Other expense, net (1,239) (657)
----------- -----------
Income before income taxes 3,961 2,806
Income taxes 1,981 1,287
---------- ----------
Net income $ 1,980 $ 1,519
========== ==========
Earnings per share:
Primary $ .14 $ .11
Fully diluted $ .14 $ .11
Weighted average number of shares
outstanding:
Primary 13,842 14,251
Fully diluted 13,842 14,251
Cash dividends per share $ .06 $ .06
See accompanying notes to consolidated financial statements.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
----------------------------
June 30, June 30,
1997 1996
CASH FLOWS FROM OPERATING -------- ---------
ACTIVITIES
Net income $1,980 $1,519
-------- --------
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization $ 8,367 $ 7,569
Provision for doubtful accounts 460 1,526
Changes in assets and
liabilities:
Accounts receivable (18,394) (13,830)
Inventories (17,467) (4,494)
Prepaid and deferred income taxes --- 1,272
Prepaid expenses and other
current assets (1,956) (2,241)
Accounts payable and accrued
expenses 4,479 8,873
Restructuring (492) (4,294)
Other 1,251 3,550
--------- --------
(23,752) (2,069)
--------- --------
Net cash used in operating
activities (21,772) (550)
--------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant
and equipment (17,789) (8,623)
Other 243 117
--------- -----------
Net cash used in investing
activities (17,546) (8,506)
----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Purchase of treasury shares (1,808) (4,630)
Proceeds from borrowings 2,725 ---
Net change in revolving note
borrowings with original 35,900 9,460
maturity of 90 days or less
Cash dividends (844) (868)
Other 1,373 992
------------- ------------
Net cash provided by financing
activities 37,346 4,954
------------- ------------
Net decrease in cash and cash
equivalents (1,972) (4,102)
Cash and cash equivalents at
beginning of period 9,924 8,107
-------------- --------------
Cash and cash equivalents at
end of period $ 7,952 $ 4,005
============== ==============
See accompanying notes to consolidated financial statements.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 The accompanying financial statements have been prepared without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations.
These statements include all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation of
financial position and results of operations. The financial statements
included herein should be read in conjunction with the financial statements
and notes thereto included in the latest annual report on Form 10-K.
NOTE 2 On July 24, 1997, Ply Gem Industries, Inc. (the "Company") entered
into an Agreement and Plan of Merger ("Agreement") with Nortek, Inc.
("Nortek") and its subsidiary, NTK Sub, Inc. (the "Purchaser") pursuant to
which Nortek commenced on July 29, 1997, a cash tender offer to purchase all
of the outstanding shares of the Company for cash consideration of $19.50 per
share. The Agreement is subject to customary conditions, including the
tender of a majority of the outstanding shares, regulatory approvals and the
receipt of financing. Also on July 24, 1997, the Company terminated its June
24, 1997 merger agreement with Atrium Acquisition Holdings Corp. (Atrium), an
affiliate of Hicks, Muse, Tate & Furst Incorporated. As a result, the
Company paid $12 million to Atrium which was funded by the sale of 640,000
shares of the Company's stock to Nortek for the same amount.
NOTE 3 The major classes of inventories were as follows:
(In Thousands)
June 30, December 31,
1997 1996
-------- ------------
Finished goods $ 61,696 $ 53,833
Work in process 13,837 9,724
Raw materials 34,917 29,426
---------- ----------
$ 110,450 $ 92,983
========== ==========
NOTE 4 Earnings per share of common stock is computed by dividing net income
by the weighted average number of common shares outstanding. Earnings per
share for the second quarter of 1997 and 1996 is calculated using the
modified treasury stock method, which limits the assumed purchase of treasury
shares to 20% of the outstanding common shares.
In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which is effective for financial statements for both
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 CONTINUED
interim and annual periods ending after December 15, 1997. Early adoption of
the new standard is not permitted. The new standard eliminates primary and
fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure
of how the per share amounts were computed. Adoption of the new standard
would not have had a material effect on earnings per share for the three and
six months ended June 30, 1997.
NOTE 5 Supplemental cash flow information for the six month periods are as
follows:
(In Thousands)
June 30, June 30,
1997 1996
-------- -------
Interest paid $ 3,300 $3,156
======= =======
Income taxes paid $ 1,098 $ 387
======= =======
NOTE 6 The accumulated amortization of cost in excess of net assets acquired
and other intangible assets are $23,502,000 at June 30, 1997 and $22,357,000
at December 31, 1996.
NOTE 7 The Company's loan agreements with its banks require the Company to
maintain a specified leverage ratio, fixed charge ratio and tangible net
worth levels and maintain certain financial ratios, among its provisions.
Under the most restrictive of these covenants, at June 30, 1997,
approximately $1,900,000 of retained earnings was available for the payment
of dividends in 1997.
NOTE 8 During the second quarter of 1997, the Board of Directors adopted
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. At June 30, 1997, the maximum amount payable
would be approximately $5 million.
NOTE 9 Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned
subsidiary of Ply Gem Industries, Inc. ("Ply Gem"), is a defendant in a
number of lawsuits alleging damage caused by alleged defects in certain
pressure treated interior wood products. Hoover has not manufactured or
sold these products since August, 1988. The number of lawsuits pending has
declined significantly from earlier periods. Most of the suits have been
resolved by dismissal or settlement with settlements being paid out of
insurance proceeds or other third party recoveries. Hoover and Ply Gem are
vigorously defending the suits which remain pending and defense and
indemnity costs are being paid out of insurance proceeds and proceeds from
a settlement by Hoover with suppliers of material used in the production of
interior treated wood products.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 - CONTINUED
Hoover and Ply Gem have engaged in coverage litigation with their
insurers and have settled their coverage claims with a majority of the
insurers. Ply Gem believes that the remaining coverage disputes will be
resolved on a satisfactory basis and a substantial amount of additional
coverage will be available to Hoover. In reaching this belief, it has
analyzed Hoover's insurance coverage and the status of the coverage
litigation, considered its history of settlements with primary and excess
insurers and consulted with counsel.
Hoover has recorded a receivable at June 30, 1997 for approximately
$7.5 million for the estimated proceeds and recoveries related to insurance
matters discussed above and recorded an accrual for the same
amount for its estimated cost to resolve those matters not presently covered
by existing settlements with insurance carriers and suppliers.
In evaluating the effect of the lawsuits, a number of factors have
been considered, including, the litigation history, the significant decline
in the number of cases, the availability of various legal defenses and the
likely availability of proceeds from additional insurance. Based on its
evaluation, the Company believes that the ultimate resolution of the lawsuits
and the insurance claims will not have a material effect upon the financial
position of the Company.
Two purported stockholders of the Company, filed a complaint in
Delaware Chancery Court against the Company and its Board of Directors
("Board"). The complaint purports to be brought on behalf of a class
consisting (with certain exceptions) of all stockholders of the Company, and
challenges as inadequate to such stockholders the consideration to be paid in
connection with the June 24, 1997 merger agreement with Atrium (that has
subsequently been terminated in connection with the execution of the July 24,
1997 Agreement with Nortek referred to in Note 2). The complaint alleges,
among other things, that the proposed price to be paid pursuant to the merger
agreement with Atrium is inadequate, and that the Board breached their
fiduciary duties in agreeing to it. The Company and its Board believe the
complaint to be without merit.
