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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number
1-4087
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.25 par value New York Stock Exchange
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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. .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant, using the closing price which the registrant's voting stock was
sold on such date, was $154,500,000 as of March 24, 1997.
The number of shares outstanding of the registrant's common stock, $.25 par
value was 14,000,828 as of March 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
IDENTIFICATION OF DOCUMENT PART INTO WHICH INCORPORATED
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<S> <C>
Proxy Statement for Annual Meeting of
Stockholders
to be held on May 9, 1997 Part III--Items 10, 11, 12 and 13
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PART I
ITEM 1. BUSINESS.
PLY GEM Industries, Inc., a Delaware corporation ("Ply Gem", hereinafter
with its subsidiaries referred to collectively as the "Company"), was
originally incorporated in 1946 in New York and reincorporated in Delaware in
1987. The Company is a leading manufacturer and distributor of a wide range of
building products for use in the remodeling and new construction of
residential and light-commercial properties. The Company believes that it is
among the nation's largest manufacturers of wood windows, vinyl windows, vinyl
siding and accessories and a major supplier of specialty wood and other
related products. Each of the Company's ten wholly-owned subsidiaries and its
one division have achieved a leading market position within their respective
niches of the building products industry.
Ply Gem continues to successfully employ its strategies for becoming the
supplier of choice to the building products industry. Across the multiple
distribution channels it serves, the Company is teamed with the premier
customers, including the major home centers, whose sales represent the fastest
growing segment of the market. The Company's broad line of branded products,
combined with its national service capabilities, including the ability to
deliver directly to individual retail outlets, enable it to meet the unique
needs of each of the customers and channels it serves. Through ongoing
expansion of its branded products strategy and innovative cross marketing and
bundling programs, Ply Gem continues to expand its share of the growing market
for building products.
The Company's products are distributed through an extensive network which
includes major retail home center chains, specialty one-step building products
distributors, lumber and building products wholesalers, professional
contractors and Company operated distribution centers. The products are
marketed primarily in the United States through Company sales personnel and
independent representatives.
BUSINESSES OF THE COMPANY
The Company's subsidiaries and division are categorized into four primary
business groups: Windows, Doors and Siding; Specialty Wood Products;
Distribution; and Home Products. Set forth below are the operating entities
within each group and the year in which the entity was acquired by the
Company. Ply*Gem Manufacturing is a division of the Company and constitutes
the Company's original business.
<TABLE>
<CAPTION>
YEAR
ACQUIRED
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<S> <C>
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
</TABLE>
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WINDOWS, DOORS AND SIDING
SNE Enterprises, Inc.: SNE manufactures a full line of wood, clad and vinyl
windows and patio doors, glass and polycarbonate skylights, and wooden
interior bifold doors. SNE's products are sold under the Crestline (R),
Vetter (R) and Kenergy (R) brand names, as well as through numerous private
label programs, to wholesale distributors, home centers and lumber yards.
SNE's products are marketed to both the home improvement and new construction
markets. The Company believes that it is a leading supplier of wood windows
which are sold directly to the major home centers and the fourth largest
producer of wood windows in the United States.
Crestline (R) and Vetter (R) brand wood windows are available with primed or
clad exteriors, and offer innovative product features with a wide selection of
options. A complete range of window styles include double hung, single hung,
casement, awning, sliding, garden, angle bay and bow windows. Specialty and
custom windows are available in a wide variety of shapes and sizes. Patio
doors are offered in traditional hinged, French hinged, sliding and French
sliding designs.
The CrestWood (TM) Series of premium wood windows and patio doors combine
the performance of an energy efficient, maintenance-free solid vinyl exterior
with the warmth and beauty of a natural pine, oak, walnut or cherry interior
that can be painted or stained. Most SNE products are available with insulated
divided lite glass, a patented energy efficient replica of historically
correct narrow mutten bar divided lite wood windows and patio doors.
VinylCrest (TM) and ProCraft (TM), comprise a complete line of solid vinyl
windows, which are available for replacement and new construction
applications, in a full range of styles. The introduction of these series of
vinyl windows give SNE a growing presence in vinyl windows which is the
fastest growing segment in the window market. These product offerings are a
critical component of SNE's strategy to offer windows in all price points and
market segments. In addition to an extremely broad line of standard windows
and doors, its custom window factory can build nearly any shape and size
window.
SNE differentiates itself from its competition with a multiple brand
strategy, multi-channels of distribution (with an emphasis on the home center
market), an established distribution network utilizing custom design and
manufacturing capabilities, and a superior field sales and service support
network. SNE's ability to sell in full truck load and less than truck load
quantities is tailored to the desires of large home center chains which prefer
to purchase windows direct from the manufacturer. SNE is unique in its ability
to offer a full product line that includes primed and clad wood windows and
patio doors, vinyl windows and patio doors and skylights under a single brand.
The Company believes that SNE will continue to grow as its existing products
gain market share due to improved brand recognition from cooperative and other
advertising programs with its customers, and the introduction of new and
innovative products such as CrestWood (TM), VinylCrest (TM) and ProCraft(TM).
Furthermore, SNE expects to enjoy continued growth as a result of its focus on
the fastest growing segment of the industry, home centers and lumber yards,
which will continue to generate an increasing share of industry sales.
Currently, SNE's strongest market presence is in the Northeast and Midwest.
SNE believes significant opportunity exists to expand geographically,
particularly in the Southeast, Southwest, West Coast and international
markets.
Variform, Inc.: Variform is a manufacturer of vinyl siding, soffit, skirting
and accessories, which are available in a wide variety of woodgrains and
colors. Its products are used in both remodeling and new construction
applications and have captured an increasing share of the overall market for
exterior siding materials (which includes wood, aluminum and masonry) due to
its ease of installation, high performance, durability, low maintenance
requirements and price stability as compared to alternative siding materials.
Products are marketed principally to building materials distributors, who in
turn sell primarily to home centers and lumber yards, the fastest growing
distribution channel for vinyl siding. Variform markets its products under
Cedar Lane(R),
2
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Varigrain(R), Duragrain(R), Timber Oak(R) and ProLoc(R).The Company believes
Variform is the leading supplier to home centers and lumber yards, and the
third largest producer of vinyl siding in the United States. In addition, it
is a supplier to the growing Eastern European market.
Vinyl siding is sold to either specialty distributors who, in turn, sell
directly to remodeling contractors or builders, or to building materials
wholesale distributors who sell to home centers and lumberyards who in turn
sell to remodeling contractors and consumers (two-step distribution). The
Company believes that Variform is able to compete on favorable terms as a
result of its broad distribution coverage, high quality innovative products,
and production efficiency. Additionally, Variform is strongest in the retail
segment of the market, which continues to grow at a rate that is faster than
the overall market.
Great Lakes Window, Inc.: Great Lakes is a manufacturer of high quality,
energy efficient and maintenance free vinyl windows and patio doors, which are
available in a wide variety of styles and options. Historically, Great Lakes
focused only on the replacement segment of the vinyl window market. However,
in response to the growing acceptance of standard size vinyl windows in new
construction applications, Great Lakes introduced a new construction vinyl
window in 1994. Great Lakes markets its products under the Great Lakes (R)
Gold, PLY GEM (R) Premium, Uniframe (R), and MC + (TM) brand names. Great
Lakes's window and patio door systems are available for both new construction
and replacement applications. The new construction series is available in both
standard and custom sizes. Replacement units are custom manufactured to exact
customer specifications. The Company believes it is among the largest
suppliers of vinyl windows serving the replacement market in the United
States.
Products include single hung, double hung, bow and bay, casement, garden,
sliding and awning windows, as well as hinged and sliding patio doors in the
new construction and remodeling markets. Great Lakes offers a wide selection
of products, including a variety of vinyl colors and interior woodgrains,
several different grille styles and patterns and a wide assortment of glass
options.
Great Lakes's product lines feature fusion welded sash and frame corners
which are guaranteed not to separate, leak air or water, or require
maintenance. The Intercept (TM) warm edge glass spacer system is manufactured
in one continuous piece, resulting in a stronger, more energy efficient
insulated glass unit. A unique weather-stripping system ensures one of the
lowest air infiltration ratings in the industry. Additionally, Great Lakes is
the only vinyl window manufacturer to offer Easy Clean (TM) glass, which works
like Teflon (TM) on cookware, providing an owner with a window which requires
less cleaning. Great Lakes has pioneered other product innovations which
differentiate its product line from other window manufacturers, including wood
grain vinyl interiors available in three finishes, multi-point locking
hardware, and sliding patio doors which utilize a proprietary tank type roller
system.
Great Lakes's replacement products are sold through specialty distributors
and directly to large contractors. The new construction series is currently
being sold under private label programs and to a select number of Great
Lakes's dealer distributors. Great Lakes's multiple brand approach has allowed
it to achieve maximum penetration in a given geographic area, by offering
dealer distributors individual brands on an exclusive basis. Great Lakes
relies on a highly trained company sales force that is among the most
effective in the industry.
The Company believes that Great Lakes is able to compete successfully due to
the breadth and quality of its product offering and its merchandising support.
Richwood Building Products, Inc.: Richwood is a manufacturer of a broad line
of injection molded siding components for the remodeling and new construction
markets. Siding components include blocks, which allow for the flush mounting
of items like light fixtures to the exterior of a home, and gable vents that
provide attic ventilation. The products are sold to home centers, lumberyards
and wholesale distributors of building materials. Richwood is the only
manufacturer of siding components to offer a color selection to match or
compliment the colors offered by most, if not all, major manufacturers of
vinyl siding.
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SPECIALTY WOOD PRODUCTS
Hoover Treated Wood Products, Inc.: Hoover is a leading producer of pressure
treated wood products, offering a full range of preservative and fire
retardant treated lumber and wood products, which are sold to home centers,
cooperative buying groups and lumber yards for use in architecturally
specified applications, commercial construction and residential building. Its
products include lumber and plywood which have been treated for fire
retardancy and for protection against moisture or insect infestation. Products
are sold under PYRO-GUARD (R), CCA KDAT and EXTERIOR FIRE-X brand names.
Sagebrush Sales, Inc.: Sagebrush is a manufacturer and distributor of
specialty lumber and related building products for a variety of uses including
roofing, decking, siding, landscaping and interior paneling marketed
principally in the Southwest.
Ply*Gem Manufacturing ("PGM") is a manufacturer and distributor of
decorative products for the home including prefinished wood paneling, solid
wood planking, imported ceramic, marble and porcelain tile, melamine coated
kitchens and bath panels finished and unfinished wood and melamine shelving as
well as other products sold to home centers and lumber yards. The Ply*Gem
brand name has become synonomous with fine quality interior finished products
that add value and beauty to any construction or remodeling project. PGM has
been undergoing a transformation from a manufacturer of prefinished wall
paneling into a strategic, value-added supplier of a wide range of products
for the national home center chains.
Continental Wood Preservers, Inc.: Continental is a manufacturer of pressure
treated wood products for home improvement retailers and lumberyards in the
Midwest.
While the specialty wood products industry is very competitive, the Company
believes it is able to compete effectively by providing superior customer
service, outstanding quality, and wherever possible, proprietary products. The
companies within the group focus on high margin, niche markets within the
broader defined wood products industry which tends to be commodity driven. Its
products are sold through home center retailers and wholesalers of building
materials. The Company believes that growth of this segment of its business
will result from continued expansion of its share of the home center market.
DISTRIBUTION
Allied Plywood Corporation: Allied is a distributor of a broad range of high
end specialty wood and wood related products, including hardwood plywood,
melamine and other laminated board products, hardwood lumber, high pressure
laminates (HPL), solid surface materials and cabinet hardware. Allied is a
leading importer of specialty wood panels from all over the world, including
Russian plywood sold under its brand name Baltic Birch (R). Allied's customers
are industrial woodworkers, including cabinet manufacturers, architectural
millworkers, and manufacturers of store fixtures, furniture, and signs and
exhibits. Allied sells its products through an extensive network of ten
company operated warehouse facilities and utilizes public warehouses from time
to time located in various major port cities. Sales are generated by a well
trained and experienced sales force.
Allied differentiates itself from its competitors, which primarily include
local independent distributors, by its superior customer service, geographic
coverage and breadth of product line. As a result, it has become a preferred
distributor of many products, selling them on an exclusive, or limited
exclusive, basis.
The Company believes that Allied's future growth will be from the
introduction of new products, and expansion of its market territories.
Goldenberg Group, Inc.: Goldenberg is a West Coast manufacturer and
distributor of furniture components, laminates and board products to furniture
manufacturers and other original equipment manufacturers, building materials
retailers and wholesalers. In addition to distribution of wood products,
Goldenberg's strengths are laminating, drawer parts, cut to size components
and other value added services on a just-in-time basis. As a large
manufacturer and distributor of high quality, cost efficient products for the
furniture, ready-to-assemble, cabinet and building industries, Goldenberg
specializes in providing custom laminations to industrial customers that meet
almost any specification.
4
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HOME PRODUCTS
Studley Products, Inc.: Studley is a manufacturer of disposable paper vacuum
cleaner bags. Studley's products are sold to manufacturers of vacuum cleaners,
mass merchandisers and other retailers and recently to the retail home center
market and other retailers.
PRODUCTION AND FACILITIES
The Windows, Doors and Siding Group operates thirteen manufacturing and
warehouse facilities in the United States.
SNE's manufacturing process of wood windows and patio doors involves cutting
and shaping of components that are assembled with high speed tools.
Manufacturing begins with the receipt of cutstock, which is inspected for
quality and then machined (tenoning and molding). After a part has been
machined, it is sent to a dip process which treats the wood with a
preservative to make it more resistant to damage from moisture. Then the part
may be toned or painted, depending on the requirements of a specific order,
and dried, palletized and readied for delivery into the various assembly
areas. On a just-in-time basis, insulated glass is fabricated upon the receipt
of an order beginning with the cutting of raw sheet glass by a computerized
glass cutter which optimizes yield and reduces costly scrap. The necessary
wood parts are then pulled from inventory and sash frames and unit frames are
assembled and finished with appropriate cladding and hardware, again,
depending on the specific requirements of an individual order. The finished
sash is then installed into the assembled frame, at which time product labels
and optional parts, such as screens, are attached to the finished unit.
Variform's vinyl siding is produced by an extrusion process which forms
siding through various dies from certain resin compounds, primarily polyvinyl
chloride ("PVC"). PVC resin is received by rail car and is unloaded into a
storage silo in staging for blending. The blending operations are a state-of-
the-art, computer-controlled operation where PVC resin and other ingredients,
such as stabilizers and processing aids, are blended to give a highly-
consistent feedstock for the extrusion process. A variety of capstocks and a
substrate are blended in this operation and stored in intermediate silos ready
for draw down into the extrusion process. The extrusion process draws blended
feedstock to each production line via pneumatic conveying systems. The polymer
extruded from the co-extrusion process passes through an embossing roll to
imprint the desired woodgrain pattern then passes through post form tooling
and a water bath to give the panel its desired shape.
Richwood's siding components are manufactured through an injection molding
process using proprietary mold designs and polypropylene. The polypropylene is
vacuum fed from containers to injection molding machines.
Great Lakes's and SNE's insulated vinyl framed replacement windows are
manufactured from insulated glass and vinyl extrusions. The vinyl lineals are
cut to requirements and welded together to create sash and unit frames.
Hardware is then added and the product is prepared for shipping.
The Specialty Woods Group operates eight production and warehouse facilities
in the United States. The treatment process by Hoover and Continental of wood
products generally involves vacuum pressure impregnation of chemicals into the
wood in an enclosed vessel to ensure thorough penetration to meet industry and
government standards. Some of the wood is kiln dried after treatment to remove
moisture imparted during the pressure impregnation process, providing a clean,
dry and dimensionally more stable product. Ply Gem Manufacturing's high-speed
laminating production facilities in Gloucester City, New Jersey afford
flexibility in laminating paper and vinyl to various substrate materials.
Several unique proprietary processes are employed to manufacture these
products efficiently. Specialty lumber products, including siding, decking and
paneling are manufactured by Sagebrush in two facilities with a combined
annual production capacity in excess of 100 million board feet.
The Distribution Group operates twelve distribution centers located
primarily in the East and utilizes public warehouses located in various major
port cities.
Disposable paper vacuum cleaner bags are manufactured at one facility in the
United States and one in Canada.
5
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RAW MATERIALS
The principal raw materials used in the manufacture of the Company's
products are PVC, polypropylene, glass, vinyl extrusions, particle board,
fiberboard, plywood, various species of lumber such as pine, spruce, hemlock
and fir, various chemicals, filter paper, woven and non woven fabric, and
paper.
The Company purchases its raw materials from a large number of domestic and
international sources. The Company believes that there are alternative sources
of supply in the event of its inability to purchase from its present
suppliers.
The Company has a procurement strategy whereby it attempts to reduce the
total cost of materials and services by integrating suppliers into the supply
chain and leveraging purchasing power through joint buying programs.
SEASONALITY
The demand for building products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of activity in both the home
improvement and new construction markets. The Company's lower sales levels
usually occur during the first and fourth quarters. Since a high percentage of
the Company's manufacturing overhead and operating expenses are relatively
fixed throughout the year, operating income tends to be lower in quarters with
lower sales.
BACKLOG
In general, the Company does not produce against a backlog of firm orders;
production is geared primarily to the level of incoming orders and to
projections of future demand. Depending upon the business, significant
inventories of finished goods, work-in-process and raw materials are
maintained to meet delivery requirements of customers.
Hoover and Continental maintain a steady backlog of firm orders to be filled
in an amount representing approximately 5% of its annual sales. Distribution
consists of warehouse operations where orders are filled from stock and where
there is no significant backlog.
EMPLOYEES
At December 31, 1996 approximately 4,000 people were employed by the
Company. Approximately 1,700 of such employees are covered by collective
bargaining agreements which expire at various times over the next three years.
The Company has not had any significant work stoppages and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES.
The Windows, Doors and Siding Group operates thirteen manufacturing and
warehouse facilities in the United States, ranging in size from approximately
5,000 square feet to 660,000 square feet. Of these facilities, six are owned,
and seven are leased under net leases that expire at various dates through
2017. The group's manufacturing facilities operated at ranges of approximately
60% to 75% of capacity during 1996.
The Specialty Woods Group operates eight manufacturing and warehouse
facilities in the United States ranging in size from approximately 20,000
square feet to 200,000 square feet. Of these facilities, six are owned and two
are leased under net leases that expire at various dates through 2001. The
group's manufacturing facilities operated at ranges of approximately 50% to
90% of capacity during 1996.
Distribution operates twelve distribution centers located primarily in the
East ranging in size from approximately 18,000 square feet to 257,000 feet.
Two facilities are owned and ten facilities are leased under leases that
expire at various dates through 2005.
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Home Products has one manufacturing facility (approximately 160,000 square
feet) in the United States and one (approximately 39,000 square feet) in
Canada. These facilities are leased by the Company under leases that expire in
2007. The facilities operated at ranges of approximately 65% to 70% of
capacity during 1996.
The Company's building, machinery and equipment have been generally well
maintained, are in good operating condition and are adequate for current and
future production requirements.
The Company's executive offices are located at 777 Third Avenue, New York,
New York and consist of 12,300 square feet of office space which is leased
through 1999.
ITEM 3. LEGAL PROCEEDINGS.
Hoover, a wholly-owned subsidiary of Ply Gem, is a defendant in a number of
lawsuits alleging damage caused by alleged defects in certain pressure treated
interior wood products. Hoover has not manufactured or sold these products
since August 1988. Sales of these products constituted less than 3% of total
sales of Ply Gem and its subsidiaries on a consolidated basis during the
period January 1, 1984 through December 31, 1990. The number of lawsuits
pending has declined significantly from earlier periods. Most of the suits
have been resolved by dismissal or settlement with settlements being paid out
of insurance proceeds or other third party recoveries. Hoover and Ply Gem are
vigorously defending the suits which remain pending and defense and indemnity
costs are being paid out of insurance proceeds and proceeds from the
settlement by Hoover with suppliers of material used in the production of
interior treated wood products.
Hoover and Ply Gem have engaged in coverage litigation with their insurers
and have settled their coverage claims with a majority of the insurers. Hoover
and Ply Gem believes that the remaining coverage disputes will be resolved on
a satisfactory basis and a substantial amount of additional coverage will be
available. In reaching this belief, it has analyzed Hoover's insurance
coverage and the status of the coverage litigation, considered its history of
settlements with primary and excess insurers and consulted with counsel.
In evaluating the effect of the lawsuits, a number of factors have been
considered, including: the litigation history, the significant decline in the
number of cases, the availability of various legal defenses and the likely
availability of proceeds from additional insurance. Based on its evaluation,
the Company believes that the ultimate resolution of the lawsuits and the
insurance claims will not have a material effect upon the financial position
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has been listed on the New York Stock Exchange
since December 1, 1994. Prior to that date, the stock traded on the American
Stock Exchange. The following table sets forth, for the periods indicated, the
high and low market prices and dividends paid.
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1996 1995
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<S> <C> <C> <C> <C> <C> <C>
QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ------------------------------ ------- ------- -------- ------- ------- --------
First......................... $18 3/4 $14 5/8 $ .03 $21 1/4 $17 1/8 $ .03
Second........................ 15 7/8 12 7/8 .03 18 3/4 15 .03
Third......................... 13 7/8 11 1/2 .03 19 15 .03
Fourth........................ 13 1/8 11 3/4 .03 19 1/8 15 5/8 .03
</TABLE>
The Company has paid cash dividends on its Common Stock since 1976 and
presently pays quarterly dividends at the annual rate of $.12 per share.
7
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The Company's revolving credit facility has limitations on the annual
amounts of the Company's dividends. Under the most restrictive provision, at
December 31, 1996, approximately $2,800,000 was available for the payment of
dividends in 1997.
The number of stockholders of record of the Company's common stock as of
March 24, 1997 was approximately 2,700.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below as of the dates and for the
periods indicated are derived from the consolidated financial statements of
the Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
1996 1995 (1) 1994 (2) 1993 1992
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Net sales....................... $774,928 $755,198 $808,874 $731,454 $632,640
Net income (loss)............... 10,454 (7,402) (8,531) 9,650 6,306
Net income (loss) per share..... .74 (.51) (.62) .75 .56
BALANCE SHEET DATA:
Total assets.................... $313,447 $324,990 $345,569 $344,944 $313,997
Long-term debt.................. 73,166 93,135 79,501 92,898 62,451
Capital lease obligations....... 9,231 7,106 7,159 7,166 7,215
Convertible subordinated
debentures..................... -- -- -- 50,000 50,000
Stockholders' equity............ 145,783 144,485 161,636 128,942 118,439
Dividends per common share...... .12 .12 .12 .12 .12
</TABLE>
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(1) Results include a pretax charge of $12.0 million related to the write-down
of long-lived assets.
(2) Results include a nonrecurring pretax charge of $41.0 million, related to
employee severance, facility consolidations and closures and asset
writedowns.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Ply Gem reported significantly improved financial results in 1996 when
compared to 1995. Before giving effect to the one-time charge of the write-
down of long-lived assets in the fourth quarter of 1995:
. Income from operations almost tripled to $29 million from $10.5 million;
. Gross margins expanded to 19.2% from 16.5%;
. Net income advanced to $10.5 million from $.2 million;
. Net sales for the year increased 3% to $774.9 million as nine of eleven
business units reported higher sales;
. Cash provided by operations increased to $50.7 million from $11.1
million; and
. Long-term debt declined 21% to $73.2 million from $93.1 million.
The following discussion should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this Annual Report.
8
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Results of Operations for 1996 Compared with 1995 and 1995 Compared with 1994
NET SALES
Net sales for 1996 totaled $774.9 million, a 3% increase over 1995 sales of
$755.2 million. The sales growth was driven primarily by the Company's
Windows, Doors and Siding and Specialty Woods businesses. Nine out of eleven
of the Company's business units reported increased sales in 1996 when compared
to 1995. Approximately two-thirds of the consolidated sales growth was
attributed to unit volume increases and the remainder to increases in average
selling prices.
Net sales for 1995 totaled $755.2 million, a decrease of 7% from 1994 net
sales of $808.9 million. The primary cause of the decline in sales was the
Company's planned discontinuance or de-emphasis of certain low margin
products. Excluding these products, net sales declined 2% for the comparison
period. The 1995 sales growth in the Company's Windows, Doors and Siding
businesses was offset by both lower sales volume at the Company's Specialty
Wood businesses, which were impacted by low framing lumber prices, and lower
volume at the Company's Distribution businesses.
GROSS PROFIT
Gross margins increased to 19.2% in 1996 from 16.5% in 1995. Gross profit
for 1996 increased 19.1% to $148.5 million, as compared to prior year's gross
profit of $124.6 million. The significant improvement resulted from actions
taken to reduce costs, including aggressive procurement initiatives,
particularly with regard to vinyl profiles and glass, improved productivity
and process improvements and ongoing cost containment measures. In addition,
lower raw material costs, particularly PVC resin and glass (which are used to
manufacture siding and windows), product mix and lower unit freight costs
contributed to the improvement in gross margins.
Gross margins were 16.5% in 1995 as compared to 19.2% in 1994. The 1995
gross margins were impacted by higher conversion costs, including costs
related to the restructuring program such as training and moving costs but not
classified as such, product mix, and new product manufacturing start-up costs.
In addition, higher raw material costs, particularly PVC resin and glass had a
negative impact on gross margins in the Company's Windows, Doors and Siding
businesses, as did declining framing lumber prices in the Company's Specialty
Wood businesses and lower absorption of fixed manufacturing costs in the
Company's Distribution business.
The Company's results of operations are affected by fluctuations in the
market prices of wood products and PVC resin which are used as raw materials
in its various manufacturing operations. Over the years, the Company has
experienced significant fluctuations in the cost of these commodities from
primary suppliers. A variety of factors over which the Company has no control,
including supply and demand, environmental regulations, weather and economic
conditions, impact the cost of these materials. The Company anticipates that
these fluctuations will continue in the future. Although the Company attempts
to increase sales prices of its products in response to higher material costs,
such increases may lag behind the escalation of the cost of raw materials in
question. While the Company intends to increase prices in a timely manner to
cover possible increases in the cost of its raw materials, its ability to do
so may be limited by competitive or other factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, as a percentage of net sales,
were 15.4% in 1996 as compared to 15.1% in 1995 and 14.7% in 1994. The modest
percentage and absolute dollar increase of $5.3 million for the 1996
comparison period to 1995 is primarily due to higher employment costs and
higher incentive compensation expenses. In absolute dollars, selling, general
and administrative expenses declined by $4.6 million in 1995 compared to 1994
primarily due to lower amortization of intangibles, lower employment costs
related in part to the reduction in workforce and lower incentive compensation
expense.
WRITE-DOWN OF LONG-LIVED ASSETS AND NONRECURRING CHARGES
As described in Notes 4 and 11 to the consolidated financial statements, the
Company recorded a pretax charge of $12.0 million ($7.6 million after tax) in
1995 related to the write-down of certain long-lived assets.
9
<PAGE>
During 1994, the Company recorded nonrecurring charges of $41 million ($25.7
million after tax), relating to a restructuring program and for unusual items
primarily consisting of the write-down of certain intangible assets and
discontinued products.
The 1994 restructuring program was designed by prior operating management to
improve the Company's cost structure primarily through facilities
consolidations and closures, abandonment of certain information systems and
workforce reductions. Implementation of several initiatives associated with
the restructuring program have been postponed indefinitely or have resulted in
higher costs than originally anticipated. As a result the Company has not
realized the savings from the restructuring it had expected.
The cash outlays with respect to the 1994 restructuring program during 1996
of approximately $5 million relate primarily to severance costs, lease
termination expenses and costs associated with the abandonment of certain
information systems. Noncash writedowns relate primarily to fixed asset and
inventory write-offs in connection with the closing or consolidation of
facilities. Remaining cash outlays relate primarily to work-force related
activities and are expected to total approximately $1.9 million of which
approximately $1.1 million are expected to be expended in 1997.
INCOME FROM OPERATIONS
Income from operations, advanced to $29 million in 1996 compared to $10.5
million in 1995 and $36.9 million in 1994. The significant improvement in
income from operations in 1996 resulted primarily from improved operating
results at the Company's Windows, Doors and Siding and Specialty Woods
businesses slightly offset by lower operating results at the Company's
Distribution and Home Products businesses both of which faced very competitive
market conditions during 1996. As discussed above, income from operations for
1995 and 1994 excludes the write-down of long-lived assets and nonrecurring
charges, respectively.
INTEREST EXPENSE
Interest expense was $6.8 million in 1996 compared to $6.6 million in 1995
and $7.5 million in 1994. The decline in interest expense in 1995 resulted
from the conversion of the Company's 10% Convertible Subordinated Debentures
into common stock during March 1994, partially offset by higher average debt
balances and higher interest rates experienced in 1995.
The Company uses various financial instruments to mitigate the Company's
exposure to changes in floating interest rates. The impact of these
instruments on the Company's results of operations and on its financial
position is explained further in Note 8 to the consolidated financial
statements.
OTHER EXPENSE
The increase in other expense of $1.8 million for the 1995 to 1994
comparison period, primarily relates to higher accounts receivable program
costs due to an increase in the average amount of receivables sold under this
program during 1995 as compared to 1994. Other expense in 1996 primarily
includes the costs associated with the sale of accounts receivable's program.
INCOME TAXES
The effective income tax rate (benefit in 1995 and 1994) was 46.6% in 1996,
27.9% in 1995 and 28.6% in 1994. The difference between these rates and the
statutory rate was primarily due to non-deductible goodwill amortization and
certain state tax benefits relating to the write-down of long-lived assets in
1995 and nonrecurring charges in 1994 which, in accordance with the criteria
set forth in SFAS No. 109, were not recognized.
NET INCOME
Net income, before the write-down of long-lived assets, advanced to $10.5
million in 1996 from $.2 million in 1995. Net income before nonrecurring
charges was $17.2 million in 1994. The factors cited above were responsible
for the improvement in the operating results of the Company.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $200 million revolving credit facility with a syndicate of
eleven banks which provides financing through February 1999. Availability
under this facility was $85 million at December 31, 1996.
The table below summarizes the Company's cash flow from operating, investing
and financing activities as reflected in the Consolidated Statements of Cash
Flows.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities..................................... $50.7 $11.1 $48.8
Investing activities..................................... (17.1) (26.2) (19.9)
Financing activities..................................... (31.8) 8.8 (27.0)
----- ----- -----
Net increase (decrease) in cash and cash equivalents....... $ 1.8 $(6.3) $ 1.9
===== ===== =====
</TABLE>
OPERATING ACTIVITIES
Net cash provided from operations was $50.7 million in 1996, compared to
$11.1 million provided in 1995. The $39.6 million increase resulted primarily
from improved operating results and improved management of working capital.
The Company's working capital requirements for inventory and accounts
receivable are impacted by changes in raw material costs, the availability of
raw materials, growth of the Company's business and seasonality. As a result,
such requirements may fluctuate significantly.
INVESTING ACTIVITIES
Investing activities of the Company during the discussion periods primarily
consist of acquisition of property, plant and equipment.
Capital expenditures were $17.6 million in 1996 compared to $27.8 million in
1995 and $23.0 million in 1994. Approximately $9.9 million and $4.3 million
incurred in 1995 and 1994, respectively, were in connection with the design
and development of the Company's information systems. The outlays in 1996 were
primarily for machinery and equipment used to expand capacity, improve
productivity and tool new products. The Company expects to incur approximately
$22 million for capital expenditures in 1997.
Capital expenditures provide a basis for future growth. The acceptability of
a capital project is based on many factors, including its discounted cash
flow, return on investment and projected payback period. Management expects
that its capital expenditure program will continue at a level sufficient to
support the strategic and operating needs of the Company's operating
subsidiaries.
FINANCING ACTIVITIES
During 1996, the Company decreased bank debt by $19.5 million primarily as a
result of improved operating results and improved working capital management.
In the fourth quarter of 1994, the Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock. During
1996, the Company purchased 752,200 shares of common stock at a cost of $10
million, bringing the total shares acquired under this program to
approximately 920,000 shares. The Company is expected to continue its buy-back
program during 1997, subject to market conditions.
BALANCE SHEET ANALYSIS
The capitalization of the Company (long-term debt plus stockholders' equity)
was $228.2 million at December 31, 1996. The ratio of debt to capitalization
was 36% at December 31, 1996, as compared to 41% at December 31, 1995
reflecting the decrease in bank debt during 1996 and improved operating
results.
11
<PAGE>
The Company's working capital was $86.6 million at December 31, 1996
compared to $104.7 million at December 31, 1995. The current ratio was 2.3 at
December 31, 1996, compared to 2.8 at December 31, 1995. The decrease in
working capital was the result of a decrease in current assets of $7.5 million
from December 31, 1995 to December 31, 1996 and an increase in current
liabilities of $10.6 million during the same period. The decrease in current
assets at December 31, 1996 compared to December 31, 1995 resulted primarily
from lower inventories due to improvement in inventory turns, lower accounts
receivable as a result of higher cash collections during the fourth quarter of
1996 compared to the same period in 1995 and lower prepaid income taxes
resulting from refunds received in 1996 in connection with federal carryback
claims recorded in December 31, 1995. The increase in current liabilities from
December 31, 1995 to December 31, 1996 was due primarily to an increase in
accounts payable and accrued expenses resulting from continued emphasis on
working capital management.
The Company will continue to have cash requirements to support working
capital needs, pay interest, and fund capital expenditures. In order to meet
these cash requirements, the Company intends to use internally generated funds
and, if necessary, borrowings from its credit facility. Management believes
cash generated from these sources will be adequate to meet the Company's cash
requirements over the next 12 months.
SEASONAL NATURE OF BUSINESS
The demand for building products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth quarters. Since a high
percentage of the Company's manufacturing overhead and operating expenses are
relatively fixed throughout the year, operating income tends to be lower in
quarters with lower sales.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Annual Report on Form 10-K, including
the words "believes," "anticipates," "expects" and similar expressions, are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged
carefully to review and consider the various disclosures made by the Company
in this report, as well as the Company's periodic reports on Forms 10-Q and 8-
K filed with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS IS INCORPORATED
BY REFERENCE IN ITEM 14(A) OF PART IV OF THIS FORM 10-K)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................ 13
Financial Statements
Consolidated Balance Sheets at December 31, 1996 and 1995............... 14
Consolidated Statements of Operations for the Three Years Ended December
31, 1996............................................................... 15
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1996................................................ 16
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1996............................................................... 17
Notes to Consolidated Financial Statements.............................. 18
Quarterly Data............................................................ 27
</TABLE>
12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ply Gem Industries, Inc.
We have audited the accompanying consolidated balance sheets of Ply Gem
Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conduct our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ply Gem
Industries, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 25, 1997
13
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents....................... $ 9,924,000 $ 8,107,000
Accounts receivable, net of allowance of
$3,039,000: $4,511,000 in 1995................. 28,003,000 31,736,000
Inventories..................................... 92,983,000 96,228,000
Prepaid and deferred income taxes............... 10,905,000 15,714,000
Other current assets............................ 12,975,000 10,478,000
------------ ------------
Total Current Assets........................ 154,790,000 162,263,000
Property, plant and equipment--at cost, net..... 90,681,000 81,832,000
Patents and trademarks, net of accumulated amor-
tization of $9,776,000; $8,971,000 in 1995..... 13,793,000 15,334,000
Intangible assets, net.......................... 14,794,000 15,507,000
Cost in excess of net assets acquired, net...... 21,618,000 23,081,000
Other assets.................................... 17,771,000 26,973,000
------------ ------------
TOTAL ASSETS................................ $313,447,000 $324,990,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses........... $ 50,937,000 $ 40,455,000
Accrued restructuring........................... 1,138,000 4,480,000
Accrued payroll and commissions................. 10,408,000 7,790,000
Accrued insurance............................... 4,285,000 4,400,000
Current maturities of long-term debt and capital 1,380,000 458,000
leases......................................... ------------ ------------
Total Current Liabilities................... 68,148,000 57,583,000
Long-term debt.................................. 73,166,000 93,135,000
Capital leases.................................. 9,231,000 7,106,000
Other liabilities............................... 17,119,000 22,681,000
Stockholders' equity -- --
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued Common stock,
$.25 par value; authorized 60,000,000 shares;
issued 17,676,540 shares; 17,463,072 shares
in 1995...................................... 4,419,000 4,366,000
Additional paid-in capital.................... 149,226,000 148,618,000
Retained earnings............................. 61,993,000 53,246,000
------------ ------------
215,638,000 206,230,000
Less
Treasury stock--at cost (3,687,954 shares;
3,015,311 shares in 1995).................... 63,936,000 55,676,000
Unamortized restricted stock and note receiv- 5,919,000 6,069,000
able......................................... ------------ ------------
TOTAL STOCKHOLDERS' EQUITY.................. 145,783,000 144,485,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $313,447,000 $324,990,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
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
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------- ----------------------
ADDITIONAL
NUMBER OF PAID-IN RETAINED NUMBER OF
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
---------- ---------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 11,872,509 $2,968,000 $ 64,006,000 $72,601,000 910,073 $ 9,362,000
Cash dividends on common
stock ($.12 per share). (1,673,000)
Exercise of employee
stock options.......... 2,672,318 668,000 23,423,000 1,197,241 29,465,000
Tax benefit arising from
exercise of stock
options................ 9,962,000
Conversion of
debentures............. 2,751,328 688,000 48,379,000
Purchase of stock for
treasury............... 640,700 12,175,000
Other................... 40 -- 1,197,000 (2,695) (48,000)
Net loss................ (8,531,000)
---------- ---------- ------------ ----------- --------- -----------
Balance at December 31,
1994................... 17,296,195 4,324,000 146,967,000 62,397,000 2,745,319 50,954,000
Cash dividends on common
stock ($.12 per share). (1,749,000)
Exercise of employee
stock options.......... 166,872 42,000 1,494,000 30,580 573,000
Tax benefit arising from
exercise of stock
options................ 174,000
Shares held for
distribution to
employee profit sharing
trust.................. (52,500) (819,000)
Purchase of stock for
treasury............... 292,000 4,955,000
Other 5 -- (17,000) (88) 13,000
Net loss................ (7,402,000)
---------- ---------- ------------ ----------- --------- -----------
Balance at December 31,
1995................... 17,463,072 4,366,000 148,618,000 53,246,000 3,015,311 55,676,000
Cash dividends on common
stock ($.12 per share). (1,707,000)
Exercise of employee
stock options.......... 213,468 53,000 1,916,000 63,612 915,000
Tax benefit arising from
exercise of stock
options................ 367,000
Contribution of treasury
stock to employee
profit sharing trusts.. (1,039,000) (140,700) (2,608,000)
Purchase of stock for
treasury............... 752,200 9,998,000
Other................... (636,000) (2,469) (45,000)
Net income.............. 10,454,000
---------- ---------- ------------ ----------- --------- -----------
Balance at December 31,
1996................... 17,676,540 $4,419,000 $149,226,000 $61,993,000 3,687,954 $63,936,000
========== ========== ============ =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $10,454,000 $(7,402,000) $(8,531,000)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation........... $11,359,000 $10,521,000 $8,733,000
Amortization........... 3,594,000 3,650,000 4,652,000
Non-cash profit
sharing expense....... 2,243,000 -- --
Write-down of long-
lived assets.......... -- 11,950,000 --
Nonrecurring charges
net of cash payments
of $5,223,000......... -- -- 35,739,000
Deferred taxes......... 3,339,000 3,644,000 (8,067,000)
Provision for doubtful
accounts.............. 1,982,000 1,505,000 874,000
Changes in assets and
liabilities...........
Accounts receivable.. 1,751,000 9,617,000 10,515,000
Inventories.......... 3,245,000 6,861,000 5,575,000
Prepaid expenses and
other current
assets.............. 2,135,000 (5,129,000) 1,459,000
Accounts payable and
accrued expenses.... 12,985,000 (8,195,000) 3,860,000
Income taxes payable. -- -- (4,902,000)
Accrued
restructuring....... (5,574,000) (10,608,000) --
Other assets......... 3,141,000 40,200,000 (5,305,000) 18,511,000 (1,061,000) 57,377,000
----------- ----------- ----------- ----------- ---------- -----------
Net cash provided by
operating
activities.......... 50,654,000 11,109,000 48,846,000
----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property,
plant and equipment... (17,583,000) (27,827,000) (23,046,000)
Funds used for
construction.......... -- -- 1,327,000
Proceeds from
property, plant and
equipment disposals... 473,000 799,000 1,681,000
Proceeds from sales of
marketable
securities, net....... -- 788,000 --
Other.................. (17,000) 25,000 129,000
----------- ----------- -----------
Net cash used in
investing
activities.......... (17,127,000) (26,215,000) (19,909,000)
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Short-term debt
repayments, net....... -- -- (2,330,000)
Repayment of long-term
debt.................. (533,000) (481,000) (881,000)
Net increase
(decrease) in
revolving note
borrowings with
original maturity of
90 days or less....... (19,540,000) 14,040,000 (14,884,000)
Purchase of stock for
treasury.............. (9,998,000) (4,955,000) (12,175,000)
Cash dividends......... (1,707,000) (1,749,000) (1,673,000)
Proceeds from exercise
of employee stock
options............... 1,500,000 1,499,000 6,491,000
Other.................. (1,432,000) 456,000 (1,581,000)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. (31,710,000) 8,810,000 (27,033,000)
----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents......... 1,817,000 (6,296,000) 1,904,000
Cash and cash
equivalents at
beginning of year...... 8,107,000 14,403,000 12,499,000
----------- ----------- -----------
Cash and cash
equivalents at end of
year................... $ 9,924,000 $ 8,107,000 $14,403,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ply Gem Industries, Inc. ("Ply Gem") through its subsidiaries (the
"Company") operates predominantly in one industry segment, which consists of
the manufacture and sale of vinyl siding, wood and vinyl-framed windows,
doors, skylights, prefinished decorative plywood and decorator wall and floor
coverings, furniture components, pressure-treated wood products and the
distribution of other products for the building products and home improvement
markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ply Gem
Industries, Inc. and its wholly-owned subsidiaries after eliminating all
significant intercompany accounts and transactions. Certain prior year items
have been reclassified to conform to 1996 presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and temporary investments
having an original maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
(a) Property, Plant and Equipment
Owned property, plant and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Service
lives for principal assets are 5 to 35 years for buildings and improvements
and 3 to 12 years for machinery and equipment.
Leasehold improvements are amortized on a straight-line basis over their
respective lives or the terms of the applicable leases, including expected
renewal options, whichever is shorter. Capitalized leases are amortized on a
straight-line basis over the terms of the leases or their economic useful
lives.
(b) Patents and Trademarks
Purchased patents and trademarks are recorded at appraised value at time of
the business acquisition and are being amortized on a straight-line basis over
their estimated remaining economic lives; thirteen to seventeen years for
patents and thirty years for trademarks.
(c) Cost in Excess of Net Assets Acquired and Other Intangibles
Cost in excess of net assets acquired is being amortized from twenty to
thirty years on a straight-line basis. Other intangibles, which arose
primarily from the allocation of purchase prices of businesses acquired, are
being amortized on a straight-line basis over thirty-nine years.
The Company annually evaluates the carrying value of its long-lived assets
to evaluate whether changes have occurred that would suggest that the carrying
amount of such assets may not be recoverable based on the estimated future
undiscounted cash flows of the businesses to which the assets relate. Any
impairment loss would be equal to the amount by which the carrying value of
the assets exceed its fair value.
INCOME TAXES
Deferred income tax liabilities and assets reflect the tax effects of
temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
and net operating loss and credit carryforwards. These differences are
classified as current or noncurrent
18
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based upon the classification of the related asset or liability. Deferred
income tax assets, such as benefits related to net operating loss and credit
carryforwards, are recognized to the extent that such benefits are more likely
than not to be realized.
FINANCIAL INSTRUMENTS
The Company utilizes various financial instruments to manage interest rate
risk associated with its borrowings. Interest rate swap agreements modify the
interest characteristics of a portion of the Company's debt. Amounts to be
paid or received under interest rate swap agreements are accrued as interest
rates change and are recognized over the life of the swap agreements as an
adjustment to interest expense. Interest rate caps are used to lock in a
maximum interest rate if rates rise, but enables the Company to otherwise pay
lower market rates. The cost of interest rate cap agreements are amortized to
interest expense over the life of the cap. Payments received as a result of
the cap agreements reduce interest expense. The unamortized costs of the cap
agreements are included in other assets.
The fair value for cash, receivables, accounts payable, and accrued
liabilities approximate carrying amount because of the short maturity of these
instruments. The fair value of long-term debt approximates its carrying
amount, as the debt carries variable interest rates.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share of common stock is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Stock
options have been excluded from the calculations as their effect would be
anti-dilutive.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to or greater than the fair value
of the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the Company recognizes no compensation expense for
the stock option grants.
CUSTOMERS
The Company's products are distributed through an extensive network that
includes major retail home center chains, specialty home remodeling
distributors, lumber and building products wholesalers, professional
contractors and Company operated distribution centers. The products are
marketed predominately in the United States through Company sales personnel
and independent representatives. One customer accounted for approximately 19%
of the Company's net sales for the years ended December 31, 1996 and 1995 and
approximately 14% in 1994.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 ACCOUNTS RECEIVABLE
The Company has a program which currently allows for the sale of up to $50
million of undivided fractional interests in a designated pool of eligible
accounts receivable to a financial institution with limited recourse. The
program expires in April 1998. At December 31, 1996 and 1995 respectively, the
Company sold $45 and $42 million of receivables under this program. Program
costs of $3,540,000, $3,205,000, and $1,892,000 are included in "other
expense" for 1996, 1995 and 1994, respectively. $5,000,000, due from officer,
was repaid subsequent to year end.
19
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 INVENTORIES
The classification of inventories at the end of each year was as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at the end of each year consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
During the fourth quarter of 1995, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" and recorded a non cash pretax charge of $12.0 million
($7.6 million after tax) related to the write-down of certain long-lived
assets. The charge consisted of a write-down of approximately $9.5 million
related to the Company's information system and $2.5 million related primarily
to certain machinery and equipment.
NOTE 5 INTANGIBLE AND OTHER ASSETS
Accumulated amortization of cost in excess of net assets acquired and other
intangible assets is $22,357,000 at December 31, 1996 and $19,917,000 at
December 31, 1995.
The balance sheet at December 31, 1996 includes notes receivable from an
officer. The 1992 Note ($5,400,000 principal amount at December 31, 1996
including current maturities), has an average interest rate of 7.1% and is due
in approximately equal annual installments through 2003. Under the terms of
the note, principal and interest are forgiven upon the attainment of at least
a 20% improvement in net income, as defined, compared to the prior year or at
the discretion of the Board of Directors. Accordingly, the annual installments
for 1996 and 1994 were forgiven. The 1994 Note ($3,000,000 principal amount at
December 31, 1996 including current maturities) and the 1995 Note ($5,000,000
principal amount at December 31, 1996) have interest rates which are the
higher of the Company's average bank borrowing rate or the applicable Federal
rate in effect for such period. They are payable in annual installments of
$250,000 each with the final payments due December 31, 1998 and April 30,
2001, respectively. Furthermore, under the terms of the officer's employment
agreement, the notes are forgiven upon the occurrence of a change in control
of the Company or the permanent disability of the officer. The long-term
portion of the 1992 and 1994 Notes are included in other assets. The 1995 Note
has been reflected as a reduction of stockholders' equity since the officer
may reduce the indebtedness through the Company's redemption of its shares
which are owned by the officer.
20
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 STOCKHOLDERS' EQUITY
In addition to treasury stock, deductions from stockholders' equity consists
of unamortized restricted stock of $919,000 and $1,069,000 at December 31,
1996 and 1995, respectively and notes receivable due from officer of
$5,000,000 at December 31, 1996 and 1995. See Note 5.
NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
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
---------- ---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
The Company has a revolving credit facility with a syndicate of banks, which
provides financing of up to $200 million through February 1999. Interest on
borrowings are at varying rates based, at the Company's option, on the London
Interbank Offered Rate (LIBOR) plus a spread or the bank's prime rate. The
Company pays a facility fee quarterly which, based on a formula, averaged .42%
of the committed amount during 1996. The average weighted interest rate on the
credit facility for the year 1996 and 1995 was 6.7% and 6.9%, respectively
(6.3% and 7.0% at December 31, 1996 and 1995, respectively). The credit
facility includes customary covenants, including covenants limiting the
Company's ability to pledge assets or incur liens on assets and financial
covenants requiring among other things, the Company to maintain a specified
leverage ratio, fixed charge ratio and tangible net worth levels. In addition,
the amount of annual dividends the Company can pay is limited based on a
formula. At December 31, 1996 $2,800,000 was available for payments of
dividends in 1997. Borrowings under this credit facility are collateralized by
the common stock of the Company's principal subsidiaries.
The Company periodically enters into interest rate swap and cap agreements
as a hedge against interest rate exposure of its floating rate bank debt. In
1996, the Company entered into $75 million of interest rate swap agreements,
whereby the Company will pay the counterparties interest at a fixed rate of
5.53% and the counterparties will pay the Company interest at a floating rate
equal to one month LIBOR for a two year period
21
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ending December 3, 1998. At the option of the counterparties, the termination
date may be extended to December 3, 1999 upon notice to the Company. The
Company also entered into $75 million of interest rate cap agreements which
entitles the Company to receive from the counterparties on a monthly basis an
amount by which the Company's interest payments on $75 million of its floating
rate debt exceed 7% during the period December 5, 1998 to December 5, 1999.
Future maturities of long-term debt, for the years 1997 through 2001, are:
1997-$429,000; 1998-$446,000; 1999-$66,476,000; 2000-$495,000 and 2001-
$525,000.
The net book value of property, plant and equipment pledged as collateral
under industrial revenue bonds was approximately $6,751,000 at December 31,
1996.
NOTE 9 INCOME TAXES
The income tax provision (benefit) for the years ended December 31
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal
Current.............................. $4,163,000 $(7,485,000) $(6,195,000)
Deferred............................. 3,075,000 4,172,000 (7,353,000)
Foreign................................ 13,000 7,000 (21,000)
State and local
Current.............................. 1,243,000 800,000 903,000
Deferred............................. 264,000 (528,000) (714,000)
---------- ----------- -----------
8,758,000 (3,034,000) (13,380,000)
Tax benefit from exercise of stock 367,000 174,000 9,962,000
options............................. ---------- ----------- -----------
Actual tax provision (benefit)....... $9,125,000 $(2,860,000) $(3,418,000)
========== =========== ===========
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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)
=========== ===========
</TABLE>
22
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, the Company has deferred tax assets largely
attributable to the 1995 write-down of long-lived assets (see Note 4) and
various state net operating loss and tax credit carryforwards. Deferred tax
assets, net of the valuation reserve, are expected to be realized through
future taxable income and from the reversal of temporary differences.
The actual income tax provision (benefit) varies from the Federal statutory
rate applied to consolidated pretax income (loss) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income taxes at Federal statutory rate
of 35%................................ $6,853,000 $(3,592,000) $(4,182,000)
Increases resulting fromState and
local income taxes net of Federal
income tax benefit.................. 1,080,000 177,000 123,000
Amortization of cost in excess of net
assets acquired..................... 534,000 478,000 509,000
Other--net........................... 658,000 77,000 132,000
---------- ----------- -----------
Actual tax provision (benefit)....... $9,125,000 $(2,860,000) $(3,418,000)
========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
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
=========== ========== ==========
</TABLE>
Assumptions used in the computation of net pension expense are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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
=== === ===
</TABLE>
23
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested........................................... $11,200,000 $10,595,000
Nonvested........................................ 572,000 676,000
----------- -----------
Total............................................. 11,772,000 11,271,000
Projected salary increases........................ 2,050,000 1,793,000
----------- -----------
Projected benefit obligation...................... 13,822,000 13,064,000
Plan assets at fair value......................... 12,883,000 12,088,000
----------- -----------
Assets less than projected benefit obligation..... (939,000) (976,000)
Unrecognized net gain............................. (1,053,000) (1,111,000)
Unrecognized prior service cost................... 1,656,000 1,742,000
Unrecognized transition cost...................... 120,000 158,000
Additional liability.............................. (1,403,000) (1,623,000)
----------- -----------
Accrued pension................................... $(1,619,000) $(1,810,000)
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
BALANCE AT 1996 BALANCE AT
DECEMBER 31, 1995 ACTIVITY DECEMBER 31, 1996
----------------- ---------- -----------------
<S> <C> <C> <C>
Consolidation and closure of
facilities, including
severance and related
costs...................... $7,779,000 $5,663,000 $2,116,000
Other, including lease
termination expenses and
costs to execute the 235,000 235,000 --
restructuring program...... ---------- ---------- ----------
$8,014,000* $5,898,000 $2,116,000*
========== ========== ==========
</TABLE>
- --------
* The following amounts are included in the consolidated balance sheet at
December 31, 1996 and 1995, respectively under the captions: "accrued
restructuring" ($1.1 and $4.5 million), "other liabilities" ($.8 and $3.1
million), "property, plant and equipment" (reduction of $.1 and $.2
million), and "various other asset accounts" (reduction of $.1 and $.2
million).
24
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12 STOCK PLANS
The Company's stock plans authorize the granting of incentive and non-
qualified stock options and restricted stock to executives, key employees and
directors of the Company. Stock options are granted at prices not less than
the fair market value on the date of grant. Option terms, vesting and exercise
periods vary except that the term of an option may not exceed ten years.
Certain options provide, among other things, that in the event of a change in
control, as defined, such options will become immediately exercisable. At
December 31, 1996, approximately 531,000 shares were available for future
grants under the Company's plans.
In 1991, the Company granted 250,000 shares of restricted stock to an
executive officer of the Company. The restrictions on these shares will be
released at the rate of 25,000 shares per year upon the attainment of certain
performance goals and the continued employment of the officer. These goals
were attained in 1994 and 1996. The restrictions will be released in the event
of a change in control of the Company. The unamortized restricted stock
resulting from this stock award has been deducted from stockholders' equity
and is being amortized over the periods earned.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost been
determined based on the fair value at the grant date for stock option awards
in 1995 and 1996 consistent with the provision of SFAS No. 123, the Company's
net loss and loss per share for 1995 would have been increased by
approximately $2,100,000 or $.15 per share, respectively and net income and
earnings per share for 1996 would have been decreased by approximately
$3,800,000 or $.27 per share, respectively. During the initial phase-in period
of SFAS No. 123, such compensation may not be representative of the future
effects of applying this statement.
The weighted average fair value at date of grant for options granted during
1996 and 1995 was $4.11 and $4.99 per option, respectively. The fair value of
each option at date of grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for grants in
1996 and 1995, respectively: expected stock price volatility 35% and 39%;
expected lives of options of six and three years; expected dividend rate of
$.12 per year and risk free interest rate of 6.26% and 5.81%. The pro forma
effect for 1995 does not take into account grants made prior to 1995.
Information regarding these option plans for 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- ------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
(SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES
--------------------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
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
===== ===== ======
</TABLE>
25
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
(SHARES IN THOUSANDS) AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
--------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 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
===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ----------- -----------
<S> <C> <C>
1997 $ 1,115,000 $11,912,000
1998 1,161,000 10,889,000
1999 1,143,000 9,819,000
2000 138,000 8,013,000
2001 32,000 7,139,000
Subsequent years through 2017 7,000,000 43,816,000
----------- -----------
Net minimum lease payments 10,589,000 $91,588,000
Amount representing interest 407,000
-----------
Present value of net minimum lease payments $10,182,000
(including $951,000 payable within one year) ===========
</TABLE>
Rental expense for operating leases amounted to approximately $19,645,000 in
1996, $19,883,000 in 1995 and $19,993,000 in 1994.
HOOVER TREATED WOOD PRODUCTS, INC.
Hoover Treated Wood Products, Inc. ("Hoover"), a wholly-owned subsidiary of
Ply Gem, is a defendant in a number of lawsuits alleging damage caused by
alleged defects in certain pressure treated interior wood products. Hoover has
not manufactured or sold these products since August, 1988. The number of
lawsuits pending has declined significantly from earlier periods. Most of the
suits have been resolved by dismissal or settlement with settlements being
paid out of insurance proceeds or other third party recoveries. Hoover and Ply
Gem are vigorously defending the suits which remain pending and defense and
indemnity costs are being paid out of insurance proceeds and proceeds from a
settlement by Hoover with suppliers of material used in the production of
interior treated wood products.
26
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Hoover and Ply Gym have engaged in coverage litigation with their insurers
and have settled their coverage claims with a majority of the insurers. Ply
Gem believes that the remaining coverage disputes will be resolved on a
satisfactory basis and a substantial amount of additional coverage will be
available to Hoover. In reaching this belief, it has analyzed Hoover's
insurance coverage and the status of the coverage litigation, considered its
history of settlements with primary and excess insurers and consulted with
counsel.
Hoover has recorded a receivable at December 31, 1996 for approximately $8.9
million for the estimated proceeds and recoveries related to insurance matters
discussed above and recorded an accrual for the same amount for its estimated
cost to resolve those matters not presently covered by existing settlements
with insurance carriers and suppliers.
In evaluating the effect of the lawsuits, a number of factors have been
considered, including: the litigation history, the significant decline in the
number of cases, the availability of various legal defenses and the likely
availability of proceeds from additional insurance. Based on its evaluation,
the Company believes that the ultimate resolution of the lawsuits and the
insurance claims will not have a material effect upon the financial position
of the Company.
LETTERS OF CREDIT
At December 31, 1996 approximately $20 million of letters of credit issued
by the Company's banks were outstanding, principally in connection with
certain financing transactions.
OTHER
Ply Gem and its subsidiaries are subject to legal actions from time to time
which have arisen in the ordinary course of its business. In the opinion of
management, the resolution of these claims will not materially affect the
financial position of the Company. The Company has various commitments for the
purchase of materials arising in the ordinary course of business.
NOTE 14 QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
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)
</TABLE>
- --------
(1) After charge of $12.0 million for the impairment of assets in the fourth
quarter. See Note 4 to the consolidated financial statements.
27
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings (loss) per share calculations for each of the quarters presented
are based on the weighted average number of shares and common equivalent
shares outstanding during such periods. The sum of the quarters may not
necessarily be equal to the full year earnings per share amounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required is incorporated by reference from the Proxy
Statement prepared with respect to the Annual Meeting of Stockholders to be
held on May 9, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required is incorporated by reference from the Proxy
Statement prepared with respect to the Annual Meeting of Stockholders to be
held on May 9, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required is incorporated by reference from the Proxy
Statement prepared with respect to the Annual Meeting of Stockholders to be
held on May 9, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required is incorporated by reference from the Proxy
Statement prepared with respect to the Annual Meeting of Stockholders to be
held on May 9, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(a)(1) Financial Statements:
The list of consolidated financial statements is set forth in Part II,
Item 8 of this Form 10-K and such Index to Consolidated Financial
Statements is incorporated herein by reference.
(a)(2) Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule.
Schedule II--Valuation and Qualifying Accounts--Three Years Ended December 31,
1996.
(b) Reports on Form 8-K
None filed during the fourth quarter of 1996.
28
<PAGE>
(c) Exhibits:
<TABLE>
<S> <C>
3(a) Registrant's By-Laws as currently in effect is incorporated by reference herein
from the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992, as amended by the Registrant's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 4, 1994.
3(b) Registrant's Certificate of Incorporation and all amendments thereto are
incorporated by reference herein to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended July 1, 1995.
10(iii)(a) Registrant's 1989 Employee Incentive Stock Plan is incorporated by reference
herein from the Registrant's Registration Statement on Form S-8 (Registration
Number 33-28753), as amended by the Company's Registration Statement on Form S-8
(Registration Number 33-52514).
10(iii)(b) Registrant's 1989 Senior Executive Stock Option Plan is incorporated by reference
herein from the Registrant's Registration Statement on Form S-8 (Registration
Number 33-28752)
10(iii)(c) Registrant's Executive Incentive Stock Option Plan is incorporated herein by
reference from the Registrant's Registration Statement on Form S-8 (Registration
Number 2-84279), as amended by the Registrant's Registration Statement on Form S-
8 (Registration Number 33-52516).
10(iii)(d) Employment agreements with Herbert P. Dooskin, Donald Kruse and Jeffrey S.
Silverman are incorporated by reference herein from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993. Employment agreement
with Dana R. Snyder is incorporated by reference from the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995. Employee agreement with
Michael Vagedes.
10(iii)(c) Registrant's 1994 Employee Incentive Stock Plan is incorporated herein by
reference from the Registrant's Registration Statement on Form S-8 (Registration
No. 33-55035).
10(iii)(f) Registrant's Group Profit-Sharing/401(k) Plan is incorporated herein by reference
to the Registrant's Registration Statement on Form S-8 (Registration No. 33-
55037).
10(iii)(g) Registrant's 1994 Incentive Compensation Plan is incorporated by reference herein
from the Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule.
</TABLE>
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Ply Gem Industries, Inc.
(Registrant)
/s/ Jeffrey S. Silverman
By __________________________________
JEFFREY S. SILVERMAN, CHAIRMAN
(MARCH 27, 1997)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAMES TITLE DATE
/s/ Jeffrey S. Silverman Chairman, Chief March 27, 1997
_____________________________________ Executive Officer,
JEFFREY S. SILVERMAN (Principal
Executive Officer)
and Director
/s/ Dana R. Snyder President, Chief March 27, 1997
_____________________________________ Operating Officer
DANA R. SNYDER and Director
/s/ Herbert P. Dooskin Executive Vice March 27, 1997
_____________________________________ President
HERBERT P. DOOSKIN (Principal
Financial Officer)
and Director
/s/ Jerome Baum Controller (Chief March 27, 1997
_____________________________________ Accounting Officer)
JEROME BAUM
/s/ Albert Hersh Director March 27, 1997
_____________________________________
ALBERT HERSH
/s/ Elihu H. Modlin Director March 27, 1997
_____________________________________
ELIHU H. MODLIN
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ply Gem Industries, Inc.
In connection with our audit of the consolidated financial statements of Ply
Gem Industries, Inc. referred to in our report dated February 25, 1997, which
is included in the Annual Report on Form 10-K, we have also audited Schedule
II for each of the three years in the period ended December 31, 1996. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Grant Thornton LLP
New York, New York
February 25, 1997
31
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
- ----------------------------------------------------------------------------------
<CAPTION>
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
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Allowance for doubtful
accounts............... $4,511,000 $1,982,000 $2,987,000(a)
467,000(c) $3,039,000
Income tax valuation.... 897,000 207,000 1,104,000
Accumulated Amortiza-
tion:
Goodwill.............. 12,800,000 1,463,000 14,263,000
Other Intangibles..... 7,117,000 977,000 8,094,000
Patents/Trademarks.... 8,971,000 1,585,000 780,000(d) 9,776,000
</TABLE>
- --------
(a) Uncollectible Receivables Net of Recoveries
(b) Fully Amortized
(c) Change Resulted from Sale of Receivables
(d) Write down of Intangible Assets
32
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
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
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995
Allowance for doubtful
accounts............... $6,353,000 $1,816,000 $3,347,000(a)
311,000(c) $4,511,000
Income tax valuation al-
lowance................ 897,000 897,000
Accumulated Amortiza-
tion:
Goodwill.............. 11,605,000 1,489,000 294,000(b) 12,800,000
Other Intangibles..... 6,106,000 1,011,000 7,117,000
Patents/Trademarks.... 7,825,000 1,150,000 4,000 8,971,000
</TABLE>
- --------
(a) Uncollectible Receivables Net of Recoveries
(b) Fully Amortized
(c) Change Resulted from Sale of Receivables
33
<PAGE>
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
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
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994
Allowance for doubtful
accounts............... $7,197,000 $2,330,000 $2,518,000(a) $6,353,000
656,000(d)
Income tax valuation al-
lowance................ 669,000 228,000 897,000
Accumulated Amortiza-
tion:
Goodwill.............. 9,863,000 1,482,000 (260,000)(f) 11,605,000
Other Intangibles..... 16,273,000 2,048,000 (26,000)(c) 3,650,000(b) 6,106,000
8,539,000(e)
Patents/Trademarks.... 6,677,000 1,148,000 7,825,000
</TABLE>
- --------
(a) Uncollectible Receivables Net of Recoveries
(b) Fully Amortized
(c) Charge/(Credit) to Inventory
(d) Change Resulted from Sale of Receivables
(e) Write down of Intangible Assets
(f) Correction of prior period classification between Gross Cost and
Accumulated Amortization
34
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, dated the 21st day of November, 1992, between THE PGVA
CORPORATION, a Delaware corporation, having an office at 315 Shoreland Drive,
Walton, Kentucky (the "Employer"), and MICHAEL VAGEDES, residing at 677
Sunnybrook Drive, Florence, KY 41042, (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee has been employed by the predecessor of the
Employer, and the Employer and the Employee desire to have his employment
continue with the Employer on the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the Employer and the Employee agree as follows:
1. Employment. Subject to the terms and conditions hereinafter set
----------
forth, the Employer hereby employs the Employee as an executive of the Employer,
and the Employee hereby accepts such employment.
2. Term. The term of the employment of the Employee by the Employer
----
pursuant to this Agreement (the "Employment Term") shall commence on the date
hereof and shall terminate upon the earliest of (i) December 31, 1998; or (ii)
the date on which the Employment Term is terminated pursuant to any of the other
provisions of this Agreement.
3. Employment Services. During the Employment Term, the Employee
-------------------
shall render his services to the Employer in such
<PAGE>
capacities as the Board of Directors of the Employer may, from time to time,
designate. The Employee shall hold, without additional compensation therefor,
such offices or membership of the Board of Directors, or Committees thereof, of
the Employer, from time to time during the Employment Term. During the
Employment Term, the Employee shall devote his full business time, efforts and
his entire energy and skill to the business of the Employer in accordance with
the reasonable directions and orders of the Board of Directors, and will use his
best efforts to promote the interests thereof and will not engage in any other
business or business activity. The Employee shall render his services with due
regard for the prompt, efficient and economical operation of the business of the
Employer to the end of maximizing the profitability of the Employer.
4. Compensation. In consideration of the services to be rendered by
------------
the Employee as an employee of the Employer pursuant to this Agreement,
including, without limitation, any services which may be rendered by the
Employee as an officer or member of any Board of Directors, or Committees
thereof, of the Employer, the Employer shall pay or cause to be paid to the
Employee during the Employment Term, and the Employee shall accept, a minimum
compensation at the rate of $75,000 per annum with a minimum annual increase of
$5,000 per annum. The foregoing salary (including subsequent increases) shall
commence on the date hereof and shall be payable in semi-monthly installments
during the Employment Term in accordance with the normal payroll practices of
the Employer. The Employee shall receive such other
2
<PAGE>
annual increases in salary as the Board of Directors may direct. In the event of
the termination of the Employment Term, the unpaid portion of the salary payable
to the Employee on account of periods prior to the date of termination shall be
computed and paid to the Employee. The Employee's salary shall be subject to all
applicable withholding and other taxes.
5. Employee shall receive as additional payments for his employment
contemplated by this agreement and in consideration for the non-competition
provisions as set forth in paragraph 11 herein each year for the five calendar
years commencing January 1, 1994 an amount equal to 12.5% of each year's income
before management fee ("IBMF") (as it is computed in the internal financial
statements currently prepared by subsidiaries of Ply Gem Industries, Inc. ("Ply
Gem")) of the Employer in excess of $276,335.00 per year (the "Profitability
Minimum") earned during such calendar year. Any and all payments under this
Paragraph are payable on April 1 of the following year, beginning April 1, 1995.
However, in the event that IBMF for the calendar year 1993 ("1993 IBMF") does
not exceed $300,000, the Profitability Minimum for each calendar year will be
increased for all calculations under this Paragraph by the difference between
1993 IBMF and $300,000.
Additionally, in the event that Employer's IBMF in any calendar year
during the period 1994 through 1998, inclusive, is less than the Profitability
Minimum, the difference between IBMF in such year and the Profitability Minimum
shall be defined as a "Deficiency". In the event that a Deficiency occurs, the
3
<PAGE>
subsequent year's IBMF shall be reduced by the amount of the Deficiency for
purposes of any calculations under this Paragraph. Any portion of the
Deficiency not offset by IBMF in a given year shall be carried over as the
Deficiency for the following year.
For purposes of this Paragraph, Employer's IBMF will be determined in
conformity with generally accepted accounting principles applied consistently
with the manner applied in the Employer's financial statements for the period
ended September 30, 1992. No charge or benefit in computing IBMF shall be made
for (1) amortization of any goodwill occasioned by the transaction pursuant to
which the Employer acquired certain assets and its business from Vagedes
Industries, Inc. on November 21, 1992 (2) any other effects of push down
accounting which may result from the aforementioned transaction (3) overhead,
management or similar charges of Ply Gem of its Subsidiaries other than the
Employer's allocable share of professional fees, audit charges, insurance,
compensation (exclusive of management fees), employee benefits and all other
expenses which are paid by Ply Gem or its Subsidiaries for the account of the
Employer for the benefit of the Employer or its employees and (4) gain or loss
on sale of capital assets, including without limitation real property and
equipment. Depreciation and amortization on capital assets shall be computed
using the method and lives used by Vagedes Industries, Inc. for the period ended
September 30, 1992.
6. Employment Benefits. The Employee shall be entitled during the
-------------------
Employment Term to receive the benefits from
4
<PAGE>
and to participate in any life insurance, accident, medical, hospital, bonus,
vacation, sick leave, pension, profit sharing or other similar programs
maintained by the Employer for senior executive employees. The Employee's
benefits shall be of substantially similar value to the benefits provided to the
Employee by Vagedes Industries, Inc. immediately prior to November 21, 1992.
During the Employment Term, the Employee shall cooperate with the
Employer in obtaining any insurance on the life of the Employee which the
Employer may desire to obtain for its own benefit and shall undergo such
physical and other examinations as the Employer may request in connection with
the issuance of one or more of such policies of insurance.
7. Expenses. During the Employment Term, the Employer shall
--------
reimburse the Employee, upon presentation of proper vouchers, for all actual
travel, entertainment and other out-of-pocket expenses which are reasonably and
necessarily incurred by the Employee in the performance of his duties hereunder
in accordance with the Employer's policy for reimbursement of expenses
applicable to all employees.
8. Termination. If the Employee shall die during the Employment
-----------
Period, this Agreement and the Employment Period shall terminate, and the
Employer shall pay to the Employee's estate any unpaid compensation (as provided
in paragraph 4 above) to the date of termination at the rate of compensation
then in effect. Notwithstanding the foregoing, the Employee's estate shall be
5
<PAGE>
entitled to receive the additional compensation payments in accordance with
Paragraph 5 above.
The Employer may at any time, and in its sole discretion, immediately
terminate this Agreement and the Employment Period for cause by written notice
to the Employee specifying the nature of such cause. For purposes of this
Agreement, "cause" shall include, without limitation, breach of any of the terms
of this Agreement, breach of any of the provisions of the Agreement (as therein
defined) with respect to the purchase of certain assets of the business by the
Employer from Vagedes Industries, Inc. on November 21, 1992, fraud, conviction
of a felony, habitual drunkenness, use of illegal substances, gross
incompetence, malfeasance, misappropriation, dishonesty, embezzlement or similar
misconduct by the Employee, willful failure of the Employee to perform the
duties of his employment, failure of the Employee to follow the directions of
the Board of Directors of the Employer, other willful misconduct, or similar
conduct or activities by or on the part of the Employee. Notwithstanding the
aforesaid, in the event that the breach upon which the termination of this
Agreement and the Employment Term is based is curable, then this Agreement and
the Employment Term shall be terminable only upon thirty-days notice to the
Employee, during which time the Employee shall have the opportunity to cure in
all respects the subject default and avoid termination of employment during this
period.
In the event that at any time during the Employment Period, the
Employee, due to physical or mental injury, illness,
6
<PAGE>
disability or incapacity, shall fail to render satisfactorily the services to be
performed by the Employee pursuant to this Agreement for a non-consecutive
period of six (6) months within any twelve month period, the Employer may, at
its option terminate this Agreement and the Employment Period upon not less than
thirty (30) days' written notice to the Employee. Notwithstanding the foregoing,
the Employee shall be entitled to receive the additional compensation payments
in accordance with Paragraph 5 above in the event of a termination of employment
in accordance with this paragraph.
9. Conflicting Agreements. The Employee hereby represents and
----------------------
warrants to the Employer that (a) neither the execution of this Agreement by the
Employee nor the performance by the Employee of any of the obligations or duties
of the Employee under this Agreement will conflict with or violate or constitute
a breach of the terms of any employment or other agreement to which the Employee
is a party or by which the Employee is bound, and (b) the Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into this Agreement or to perform any of the obligations or
duties of the Employee hereunder.
10. Inventions, Discoveries, Etc. The Employee hereby assigns, and
-----------------------------
shall promptly and fully disclose and assign to the Employer, any and all
inventions, discoveries, improvements, developments, concepts and ideas which
relate to any activities of the Employer or which relate to building materials,
whether or not patentable and whether or not conceived, developed or reduced to
7
<PAGE>
practice by the Employee alone or by himself and others, or both, during the
period of his employment with the Employer or with any affiliate or subsidiary
of the Employer. For purposes of this paragraph "building materials" shall be
deemed to mean any object which may constitute a component of a structure.
11. Non-Competition and Confidentiality.
-----------------------------------
(a) The Employee covenants and agrees that, during the Employment
Period, and (except as otherwise set forth herein) for a period of three (3)
years thereafter, the Employee:
(i) shall not in the United States or Canada, directly or
indirectly, engage in the Employer Business for his own account; enter the
employ of, or render any services to, any Person engaged in such
activities; or become interested in any such Person in any capacity,
including, without limitation, as an individual, partner, shareholder,
lender, officer, director, employee, principal, agent or trustee; provided,
--------
that the Employee may own, directly or indirectly, solely as an investment,
securities of any such Person traded on any national securities exchange or
listed on the National Association of Securities Dealers Automated
Quotation System if the Employee is not a controlling Person of, or a
member of a group which controls, such Person and the Employee does not,
directly or indirectly, own one percent (1%) or more of any class of
securities of such Person;
(ii) shall not disclose to any Person not employed by, or not
engaged to render services to, any of the Employer
8
<PAGE>
or its parent or Subsidiaries (the "Companies"), and will not use for the
benefit of himself or others, any Confidential Information obtained by him
by reason of his association with the Companies or otherwise;
(iii) shall return, upon request, upon termination of employment
all memoranda, notes, lists, records and other documents or papers (and all
copies thereof), including such items stored in computer memories, or
microfiche or by any other means, made or compiled by or on behalf of the
Employee, or made available to the Employee, relating to either or any of
the Companies;
(iv) for a period of two years from the date hereof shall not,
directly or indirectly, hire, solicit or encourage to leave the employment
of either of the Companies, any of its employees, or hire any such employee
who has left the employment of the Employer within the one year period
preceding the date hereof;
(v) shall not, directly or indirectly, hire, solicit or cause
others to hire or solicit, or conduct a business with any consultant or
advisor then under contract, or under contract during the one-year period
prior to the date hereof, with either of the Companies or any successor
thereto unless the engagement is unrelated to the Employer Business or
encourage such consultant or advisor to terminate its relationship with
either of the Companies.
(vi) shall not directly or indirectly, request or advise a
customer or supplier of either of the Companies or
9
<PAGE>
any successor thereto to curtail or cancel such customer's or supplier's
business relationship with either of the Companies or any successor
thereto.
(b) The Employer shall be entitled, in addition to any other right
and remedy it may have at law or at equity, the right to require the
Employee to account for and pay over to the Employer all compensation,
profits, monies, accruals, increments or other benefits (collectively,
"Benefits") derived or received by the Employee as the result of any
transactions constituting a breach of any of the covenants contained in
this Section 11. If any of the restrictions contained in this Section 11
shall be deemed unenforceable, by reason of extent or geographical scope or
otherwise, then the court making such determination shall have the right to
reduce such extent, geographical scope, or other provisions hereof, and in
its reduced form this Section 11 shall then be enforceable in the manner
contemplated hereby.
(c) Employee acknowledges that Employee's services to Employer are of
a unique character which gives them a special value to the Employer. Employee
further acknowledges that any breach by Employee of any of the provisions of
Section 11 hereof will result in irreparable and continuing harm to Employer for
which the Employer would have no adequate remedy at law. Therefore, in addition
to any other remedy which the Employer may have at law or in equity, the
Employer shall be entitled to injunctive relief for a breach of this Agreement
by Employee.
10
<PAGE>
(d) The parties acknowledge that the laws and public policies of the
various states of the United States and the District of Columbia may differ as
to the validity and enforceability of the covenants contained in this Paragraph.
It is the intention of the parties that activities of Employee be restricted
only to the extent necessary for the protection of legitimate business interests
of Employer, that the provisions of this paragraph shall, to the fullest extent
permissible under the law and public policy, be enforced by the courts of each
state and jurisdiction in which enforcement is sought, and that the
unenforceable (or the modification necessary to conform the covenants contained
in this Paragraph with such law and public policy) part of this Paragraph shall
be adjudicated to be invalid or unenforceable without affecting any other part
of this Paragraph. Accordingly, if any part of Paragraph 11 shall be
adjudicated to be invalid or unenforceable in any action or proceeding in which
Employee, or Employee's heirs, executors or administrators and the Employer, its
successors or assigns, are parties, whether in its entirety or as modified as to
duration, territory or to otherwise, then such part shall be deemed modified so
as to be enforceable or, if required, deleted from the Agreement or amended, as
the case may be, in order to render the remainder of Paragraph 11 valid and
enforceable. Any such deletion or amendment shall apply only where the court
rendering the same has jurisdiction. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in
11
<PAGE>
all respects as if such invalid or unenforceable provision were omitted. The
provisions of this Paragraph 11 shall survive the termination or expiration of
the Employment Term.
12. Miscellaneous Provisions.
------------------------
(a) As used herein, the following terms shall be defined as follows:
"Employer Business" means (i) during the Employment Term the
manufacture and distribution of products similar to those which were
manufactured or distributed by the Employer or by any subsidiary or of the
Employer or entities under common control during the Employment Term; and (ii)
during the three years subsequent to the Employment Term the manufacturer and
distributor of products similar to those which were manufactured or distributed
by the Employer or by any subsidiary of the Employer, or by Variform, Inc. or
were in the development phase during the Employment Term or within the one year
subsequent thereto.
"Confidential Information" means information relating to costs, sales,
profits, products, markets, key personnel, customers (including, without
limitation, the identity of existing and prospective customers), pricing
policies, operational methods, technical processes and other business methods,
and acquisition plans, development plans and other business plans as to which
the Employer takes reasonable precautions to assert and maintain confidentiality
and which are not known or disclosed to persons outside Employer.
"Person" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock
12
<PAGE>
company, trust, unincorporated organization, governmental or regulatory body or
other entity.
"Subsidiary" of a corporation, person or entity shall mean any
corporation, partnership, firm or other entity in which such corporation, person
or entity holds an equity ownership interest of fifty percent (50%) or more; an
"affiliate" of a corporation, person or entity shall mean any corporation,
partnership, firm or other entity which controls, is controlled by, or is under
common control with, such corporation, person or entity.
(b) The provisions of this Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.
(c) All notices required or permitted to be given hereunder shall be
in writing and shall be deemed given when delivered in person or sent by
confirmed facsimile, or when received if given by Federal Express or other
nationally recognized overnight courier service, or five (5) business days after
being deposited in the United States mail, postage prepaid, registered or
certified mail, addressed to the applicable party as follows:
(i) If to the Employer:
The PGVA Corporation
315 Shoreland Drive
Walton, Kentucky 41094
Attn: President
13
<PAGE>
Copies to:
Elihu H. Modlin
EAB Plaza
12th Floor/West Tower
Uniondale, NY ll556-0132
(ii) If to the Employee, at:
Michael Vagedes
677 Sunnybrook Drive
Florence, KY 41042
with a copy to:
Stephen A. Kappers
Cors & Bassett
1200 Carew Tower
Cincinnati, Ohio 45202
(d) This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof, and all prior negotiations,
agreements or understandings relating to the Employee's employment by the
Employer, written or oral. This agreement may not be changed, modified,
extended, renewed or supplemented, except in a writing signed by the parties
hereto and specifying that it affects this Agreement. No provision hereof may
be waived, except by an instrument in writing signed by the party against whom
enforcement of any waiver is sought.
(e) This Agreement shall be governed and construed in accordance with
the laws of the State of Kentucky applicable to agreements made and to be
performed entirely within such State.
(f) In the event any one or more provisions of this Agreement is held
to be invalid or unenforceable, such illegality or unenforceability shall not
affect the validity or enforceability of the other provisions hereof and such
other
14
<PAGE>
provisions shall remain in full force and effect, unaffected by such invalidity
or unenforceability.
(g) This Agreement is personal to the Employee and the Employee may
not assign any of his rights or delegate any of its duties under this Agreement.
(h) The Employer may only assign this Agreement to any subsidiary or
affiliate of the Employer.
(i) The headings in this Agreement are for reference only and shall
not affect the interpretation of this Agreement.
(j) This Agreement may be executed in counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the day and year first above-written.
THE PGVA CORPORATION
By:_______________________
__________________________
MICHAEL VAGEDES
15
<PAGE>
March 11, 1997
Mr. Michael Vagedes
Richwood Building Products, Inc.
Richwood Industrial Park
315 Shorland Drive
Richwood, Kentucky 41094
Dear Mr. Vagedes:
Reference is made to the Employment Agreement (the "Employment
Agreement") dated November 21, 1992 between yourself and Richwood Building
Products, Inc., formerly known as The PGVA Corporation (the "Corporation").
This letter shall constitute a modification and clarification of the
Employment Agreement as follows:
a. The compensation to be paid to you during the year ending
November 22, 1997 in accordance with the provisions of paragraph 4 of the
Employment Agreement shall be at the rate of $105,000 per annum. During the
subsequent year (commencing November 23, 1997), you shall be paid at a minimum
rate of $110,000 per annum.
b. A new sentence is added at the end of paragraph 5 of the
Employment Agreement as follows:
For calendar years 1996, 1997 and 1998, depreciation and amortization
on capital assets shall be computed using the average of the following two
methods:
(a) The tax method (MACRS) which under Code Sec. 168 uses (1) the
applicable depreciation method, (2) the applicable recovery period,
and (3) the applicable convention. The adjusted basis of the property
is multiplied by the declining balance
<PAGE>
rate. The half-year convention is applied in computing depreciation
the first year.
(b) The book method of depreciation currently used by the Corporation for
calculation of depreciation expense for financial statement purposes
in accordance with the Corporation's depreciation policy.
c. For 1997 only, in the event that the IBIT (Income Before Income
Taxes) for 1997 exceeds the IBIT for 1996 by more than 10%, you shall receive an
additional bonus payment in the amount of $30,000 by April 1, 1998. For
purposes of this paragraph, IBIT shall be shown on the financial statements of
the Corporation, and shall be computed pursuant to generally accepted accounting
principles (GAAP) consistently applied in all cases after deducting both the
accrual for the additional payment in paragraph 5 of the Employment Agreement
and the accrual for the bonus payable pursuant to this paragraph C (See
Exhibit A).
d. In consideration of the agreement set forth in this letter, it is
understood and agreed that the changes provided for herein are in lieu of the
reference to any "bonus" to be paid pursuant to paragraph 6 of the Employment
Agreement and that paragraph 6 shall be modified and amended effective November
21, 1992 to provide for the deletion of any reference to "bonus" therein,
provided, however, the other employment benefits described in paragraph 6 shall
not be modified.
e. Anything to the contrary notwithstanding, the signing and
delivery of this agreement by you, and by these presents, constitutes a general
release by you to the Companies (as defined in the Employment Agreement) for any
claims that you may have pursuant to the Employment Agreement with respect to
the subject matter specifically addressed in this letter to and through the date
hereof.
Anything to the contrary notwithstanding, the signing and delivery of
this agreement by the Corporation, and by these presents, constitutes a general
release by the Companies to you for any claims that the Companies may have
pursuant to the Employment Agreement with respect to the subject matter
specifically addressed in this letter to and through the date hereof.
Except as modified by this letter, the Employment Agreement as
aforesaid is hereby ratified and confirmed and shall be deemed in full force and
effect.
<PAGE>
Please sign a copy of this letter indicating your agreement to the
aforesaid.
Sincerely yours,
Paul Bogutsky
Assistant Secretary
ACCEPTED AND AGREED TO:
______________________________
Michael Vagedes
<PAGE>
March 11, 1997
EXHIBIT A TO PARAGRAPH C
Example:
<TABLE>
<CAPTION>
1996 1997 Increase
---------- ---------- --------
<S> <C> <C> <C>
IBIT Pre Officer Bonus $2,358,300 $2,624,228
Less: Earn Out Accrual 504,221 554,741
Less: Additional Bonus (Paragraph C) 30,000
---------- ----------
IBIT $1,854,079 $2,039,487 10% Therefore Bonus would be paid.
========== ==========
</TABLE>
1997 Earn Out is an estimate
<PAGE>
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)
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 25, 1997, accompanying the
consolidated financial statements and schedule included in the Annual Report
of Ply Gem Industries, Inc. on Form 10-K for the year ended December 31, 1996.
We hereby consent to the incorporation by reference of said reports in the
Registration Statements of Ply Gem Industries, Inc. on Form S-8 (Registration
Nos. 33-28753; 33-52514; 33-28752; 2-84279; 33-52516; 33-55035, and 33-55037).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
New York, New York
February 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,924
<SECURITIES> 0
<RECEIVABLES> 31,042
<ALLOWANCES> 3,039
<INVENTORY> 92,983
<CURRENT-ASSETS> 154,790
<PP&E> 153,438
<DEPRECIATION> 62,757
<TOTAL-ASSETS> 313,447
<CURRENT-LIABILITIES> 68,148
<BONDS> 82,397
0
0
<COMMON> 4,419
<OTHER-SE> 141,364
<TOTAL-LIABILITY-AND-EQUITY> 313,447
<SALES> 774,928
<TOTAL-REVENUES> 774,928
<CGS> 626,424
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,982
<INTEREST-EXPENSE> 6,773
<INCOME-PRETAX> 19,579
<INCOME-TAX> 9,125
<INCOME-CONTINUING> 10,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,454
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,107
<SECURITIES> 0
<RECEIVABLES> 37,531
<ALLOWANCES> 4,511
<INVENTORY> 96,228
<CURRENT-ASSETS> 162,263
<PP&E> 133,405
<DEPRECIATION> 51,573
<TOTAL-ASSETS> 324,990
<CURRENT-LIABILITIES> 57,583
<BONDS> 100,241
0
0
<COMMON> 4,366
<OTHER-SE> 140,119
<TOTAL-LIABILITY-AND-EQUITY> 324,990
<SALES> 755,198
<TOTAL-REVENUES> 755,198
<CGS> 630,552
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,505
<INTEREST-EXPENSE> 6,649
<INCOME-PRETAX> (10,262)
<INCOME-TAX> (2,860)
<INCOME-CONTINUING> (7,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,402)
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 14,403
<SECURITIES> 0
<RECEIVABLES> 48,596
<ALLOWANCES> 6,353
<INVENTORY> 103,089
<CURRENT-ASSETS> 185,231
<PP&E> 120,930
<DEPRECIATION> 43,846
<TOTAL-ASSETS> 345,569
<CURRENT-LIABILITIES> 74,733
<BONDS> 86,660
0
0
<COMMON> 4,324
<OTHER-SE> 157,312
<TOTAL-LIABILITY-AND-EQUITY> 345,569
<SALES> 808,874
<TOTAL-REVENUES> 808,874
<CGS> 653,270
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 874
<INTEREST-EXPENSE> 7,479
<INCOME-PRETAX> (11,949)
<INCOME-TAX> (3,418)
<INCOME-CONTINUING> (8,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,531)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
