10-K 1 pgem2012123110k.htm 10-K PGEM 2012.12.31 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]        Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
or
[  ]        Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________.

Commission File Number:   333-114041

 

PLY GEM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-0645710
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5020 Weston Parkway, Suite 400, Cary, North Carolina
 
27513
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code: 919-677-3900

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by checkmark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]    No [X]

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes [  ]    No [X]

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 [  ]    No [X] *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X]    No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) 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].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]    Accelerated filer [  ]     Non-accelerated filer [X]    Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ]  No [X]

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of December 31, 2012 was $0.

The Company had 100 shares of common stock outstanding as of March 15, 2013.

Documents incorporated by reference:  None

* The registrant is not required to file this Annual Report on Form 10-K or other reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, but has filed all reports during the preceding 12 months that would have been required pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The filing is required, however, pursuant to the terms of the indentures governing Ply Gem Industries, Inc.’s 8.25% senior secured notes due 2018 and 9.375% senior notes due 2017.



Form 10-K Annual Report
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions.  Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All written and oral forward-looking statements made in connection with this Annual Report on Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements included herein. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations, except as required by federal securities laws.

There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to the following:

 
• downturns in the home repair and remodeling and new construction sectors or the economy and the availability of consumer credit;
 
• competition from other exterior building products manufacturers and alternative building materials;
 
• changes in the costs and availability of raw materials;
 
• consolidation and further growth of our customers;
 
• loss of, or a reduction in orders from, any of our significant customers;
 
• inclement weather conditions;
 
• increases in the cost of labor, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
 
• claims arising from the operations of our various businesses prior to our acquisitions;
 
• products liability claims relating to the products we manufacture;
 
• loss of certain key personnel;
 
• interruptions in deliveries of raw materials or finished goods;
 
• environmental costs and liabilities;
 
• manufacturing or assembly realignments;
 
• threats to, or impairments of, our intellectual property rights;
 
• increases in fuel costs;
 
• material non-cash impairment charges;
 
• our significant amount of indebtedness;
 
• covenants in the senior secured asset-based revolving credit facility and the indentures governing the 8.25% senior secured notes due 2018 and the 9.375% senior notes due 2017;
 
• limitations on our net operating losses;

• failure to successfully integrate future acquisitions;

• failure to effectively manage labor inefficiencies associated with increased production and new employees added to the Company; and

• failure to generate sufficient cash to service all of our indebtedness and make capital expenditures.
 
These and other factors are more fully discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Annual Report on Form 10-K.




1


PART I

Item 1.      BUSINESS

Company Overview

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing, and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012.  These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both new construction and home repair and remodeling in the United States and Western Canada.  Vinyl building products have the leading share of sales volume in siding and windows in the United States.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products.  We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.

Additional information concerning our business is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.

Unless the context indicates or requires otherwise, (i) the term “Ply Gem Holdings” refers to Ply Gem Holdings, Inc.; (ii) the term “Ply Gem Industries” refers to Ply Gem Industries, Inc., our principal operating subsidiary; and (iii) the terms “we”, “our”, “us”, “Ply Gem”, and the “Company” refer collectively to Ply Gem Holdings and its subsidiaries. The use of these terms is not intended to imply that Ply Gem Holdings and Ply Gem Industries and its subsidiaries are not separate and distinct legal entities.

History

Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”).  The Ply Gem acquisition was completed on February 12, 2004.  Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands.  Since the Ply Gem acquisition, we have acquired six additional businesses to complement and expand our product portfolio and geographical diversity.  Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand.  On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”), with Ply Gem Prime being the surviving corporation.  As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime.

The following is a summary of Ply Gem’s acquisition history:

•
On August 27, 2004, Ply Gem acquired MWM Holding, Inc. (“MWM Holding”), a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows.

•
On February 24, 2006, Ply Gem acquired AWC Holding Company (“AWC,” and together with its subsidiaries, “Alenco”), a manufacturer of aluminum and vinyl windows products. This acquisition supported our national window strategy and today operates under common leadership with our other U.S. window businesses.

•
On October 31, 2006, Ply Gem completed the acquisition of Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”), a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories.  MHE is part of our Siding, Fencing, and Stone segment and operates under common leadership with our siding business.

•
On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Ply Gem Pacific Windows Corporation (“Pacific Windows”), a leading manufacturer of premium vinyl windows and patio doors.

•
On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products.  Ply Gem Stone is part of our Siding, Fencing, and Stone segment and operates under common leadership with our siding business.

•
On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck Products, LLC, a composite products development company.  


2


Access to Company Information

The Company maintains a website with the address www.plygem.com. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”).
 
Business Strategy

We are pursuing the following business and growth strategies:

•
Capture Growth Related to Housing Market Recovery.  As a leading manufacturer of exterior building products, we intend to capitalize on the recovery in new construction and home repair and remodeling.  The National Association of Home Builders’ (“NAHB”) 2012 estimate of single family housing starts was 535,000, which was approximately 49% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels.  Furthermore, we believe that the underinvestment in homes during the recent recession and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling.

We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings.  Our broad product offering addresses expected demand growth from all of these key trends through our exposure to the new construction as well as the home repair and remodel end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.

•
Continue to Increase Market Penetration.  We intend to increase the market penetration of our siding, fencing, and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities.  Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories.  In 2012, we maintained our U.S. vinyl siding leading market position at approximately 36.0% after increasing our position to 36.0% in 2011 from 32.3% in 2010 due in part to a significant customer win in the retail sales channel as well as with a top national builder.  In 2012, we continued to achieve strategic market share gains obtaining new regional window business with a large home center.

The national builder win in 2011 represented an existing top 10 customer in our window business. We believe that this demonstrates the substantial opportunity across our product categories to cross-sell and bundle products, thereby increasing revenues from our existing channel partners and industry relationships.  Another example of this cross-selling opportunity is the introduction in 2010 of a new line of vinyl windows under our Ply Gem brand as well as under our Mastic Home Exteriors brand, historically associated with vinyl siding products.  We expect to build upon our share gains as the housing market recovers from its current levels and to further enhance our leading positions.

•
Expand Brand Coverage and Product Innovation.  Ply Gem's brand building efforts extend across multiple media, including national trade journals, website marketing and social media, and national consumer magazines and broadcast outlets, both in the U.S. and Canada, resulting in over 10 million trade impressions and more than 200 million consumer impressions in 2012. Significant brand recognition in 2012 included Fox News "Fox and Friends" morning program, Better Homes and Gardens Magazine, and The New York Times, each focusing on Ply Gem's ability to deliver a complete exterior as a single manufacturer, something we call "The Designed Exterior by Ply Gem". We will continue to increase the value of the Ply Gem brands by introducing new product categories for our customers and by developing innovative new products within our existing product categories.  For example, we have developed a complete series of window products under the Ply Gem brand to target the higher margin home repair and remodeling window end market.  Furthermore, our 2008 addition of stone veneer to our product offering in the Siding, Fencing, and Stone segment provides existing siding customers with access to the fastest growing category of exterior cladding products. In 2013, we announced that we will be manufacturing and selling cellular PVC trim and mouldings, a low-maintenance alternative to traditional wood trim designed to work well with siding, within the $1.4 billion residential trim market.

Our new products frequently receive industry recognition, as evidenced by our Ply Gem Mira aluminum-clad wood window, which was an International Builder’s Show Product Pick in 2008.  In addition, our Cedar Discovery designer accent product and our Ovation vinyl siding product were both named one of the top 100 products by leading industry publications.  The result of our commitment to product development and innovation has been demonstrated in the approximately $441.7 million of incremental annualized sales that we recognized for new products introduced from 2009 to 2012.

•
Drive Operational Leverage and Further Improvements.  While we reduced our production capacity during the past several years, we have retained the flexibility to bring back idled lines, facilities and production shifts in order to increase our production as market conditions improve.  This incremental capacity can be selectively restarted, providing us with the ability to match increasing customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment as long as the growth in single family housing starts or increased volume from new customer wins is not unique to a particular region or area.  In our Windows and Doors segment, where we have historically focused on new construction, we believe that our new window products for home repair and remodeling will be able to drive increased volumes through these manufacturing facilities and enhance operating margins.

Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements.  We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors.  In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands.  Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina and believe that additional opportunities remain.  We believe all of these factors should drive continued growth in profitability while improving our cash flow and capital efficiency.

3


Industry Overview

Demand for exterior building products, including siding, fencing, stone, windows and doors, is primarily driven by repair and remodeling of existing homes and construction of new homes, which are affected by changes in national and local economic and demographic conditions, employment levels, availability of financing, interest rates, consumer confidence and other economic factors.
 
New Home Construction

New construction in the United States experienced strong growth from the early 1990s to 2006, with housing starts increasing at a compounded annual growth rate of 3.8%.  However, from 2006 to 2012, single family housing starts declined 64% according to the NAHB.  While the industry has experienced a period of severe correction and downturn, management believes that the long-term economic outlook for new construction in the United States is favorable and supported by an attractive interest rate environment and strong demographics, as new household formations and increasing immigration drives demand for starter homes.  According to the Joint Center for Housing Studies of Harvard University, net new household formations between 2010 and 2020 are expected to be approximately 11.8 million units.  Favorable demographic trends and historically low interest rates should be stimulants for new construction demand in the United States.

During 2011, single family housing starts declined 7.9% to 434,000 compared to 2010.  During 2012, single family housing starts are estimated to have increased 23.2% to 535,000 compared to 2011. The NAHB is currently forecasting single family housing starts to further increase in 2013 and 2014 by 23.0% and 28.9%, respectively.  

Home Repair and Remodeling

Since the early 1990s and through 2006, demand for home repair and remodeling products in the United States increased at a compounded annual growth rate of 4.3%, according to the U.S. Census Bureau, as a result of strong economic growth, low interest rates and favorable demographics.  However, beginning in 2007 the ability for homeowners to finance repair and remodeling expenditures, such as replacement windows or vinyl siding, has been negatively impacted by a general tightening of lending requirements by financial institutions and the significant decrease in home values, which limited the amount of home equity against which homeowners could borrow.  Management believes that expenditures for home repair and remodeling products are also affected by consumer confidence that continued to be depressed during 2012 due to general economic conditions, debt ceiling and national budget deliberations, and unemployment levels. Management believes the long-term economic outlook of the demand for home repair and remodeling products in the United States is favorable and supported by the move towards more energy-efficient products, recent underinvestment in home maintenance and repair, and an aging housing stock.

Description of Business

Financial information about our segments is included in the Notes to Consolidated Financial Statements and incorporated herein by reference.

4




Siding, Fencing, and Stone segment

Products

In our Siding, Fencing, and Stone segment, our principal products include vinyl siding and skirting, vinyl and aluminum soffit, aluminum trim coil, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl and composite railing and stone veneer. We sell our siding and accessories under our Variform®, Napco®, Mastic® Home Exteriors and Cellwood® brand names and under the Georgia-Pacific brand name through a private label program. We also sell our vinyl siding and accessories to Lowe's under our Durabuilt® private label brand name. Our cellular PVC Trim products are sold under our Ply Gem® Trim and Mouldings brand name. Our vinyl and vinyl-composite fencing and railing products are sold under our Kroy® and Kroy Express brand names. Our stone veneer products are sold under our Ply Gem Stone brand name. A summary of our product lines is presented below according to price point:
 
 
Mastic® Home
Exteriors
 
Variform® 
 
Napco® 
 
Cellwood ® 
 
Durabuilt® 
 
Georgia Pacific
 
Kroy® 
 
Ply Gem® Stone
Ply Gem ® Trim and Mouldings (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specialty/Super Premium
 
Cedar Discovery® 
Structure® 
EPS Premium Insulated Siding
 
Heritage Cedar™
Climaforce™
 
Cedar Select®
 American Essence™
 
Cedar Dimensions™
 
670 Series™ Hand Split
650 Series™ Shingle Siding
660 Series™ Round Cut Siding
 
Cedar Spectrum™
Caliber
 
 
 
Fieldstone Tuscan
Fieldstone Shadow
Ledgestone
Cut Cobblestone
Cobblestone
Ridgestone
Riverstone Brick
True Stack
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
 
Quest®
T-Lok® 
Barkwood® 
Liberty Elite® 
Board + Batten
 
Timber Oak Ascent™
Vortex Extreme™
Board + Batten
 
American Splendor®
Board + Batten™
 
Dimensions®
 Board + Batten
 
480 Series™
440 Series™
 
Cedar Lane® 
Select Board + Batten
 
Elegance Vinyl Fence and Composite Rail
 
 
Trim Boards
Corners
Post Wraps
Mouldings

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standard
 
Carvedwood 44®
 Silhouette Classic® 
Ovation™
Charleston Beaded®
 
Camden Pointe® 
Nottingham®
Ashton Heights® 
Victorian Harbor®
 
American Herald® 
American Tradition
American 76 Beaded®
 
Progressions® 
Colonial Beaded
 
450 Series™ Beaded
 
Heritage Hill™
Forest Ridge® 
Shadow Ridge® 
Castle Ridge® 
Somerset™ Beaded
 
Performance Vinyl Fence and Rail
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Economy
 
Mill Creek® 
Brentwood® 
Eclipse
 
Contractors Choice®
 
American Comfort®
 
Evolutions®
 
410 Series™
 
Chatham Ridge® 
Vision Pro® 
Parkside® 
Oakside®
 
Classic Vinyl Fence
 
 
 

(1) The cellular PVC Trim product category launched during the first quarter of 2013.
 

5

The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).
 
Customers and distribution

We have a multi-channel distribution network that serves both the new construction and the home repair and remodeling sectors, which exhibit different, often counter-balancing, demand characteristics.  In conjunction with our multiple brand and price point strategy, we believe our multi-channel distribution strategy enables us to increase our sales and sector penetration while minimizing channel conflict.  We believe our strategy reduces our dependence on any one channel, which provides us with a greater ability to sustain our financial performance through economic fluctuations.

We sell our siding and accessories to specialty distributors (one-step distribution) and to wholesale distributors (two-step distribution).  Our specialty distributors sell directly to remodeling contractors and builders.  Our wholesale distributors sell to retail home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers.  In the specialty channel, we have developed an extensive network of approximately 800 independent distributors, serving over 22,000 contractors and builders nationwide.  We are well-positioned in this channel as many of these distributors are both the largest and leading consolidators in the industry.  In the wholesale channel, we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a distribution operation of the Georgia-Pacific Corporation), one of the largest building products distributors in the United States.  Through BlueLinx and our BlueLinx dedicated sales force, our Georgia-Pacific private label vinyl siding products are sold at major retail home centers, lumberyards and manufactured housing manufacturers.  A portion of our siding and accessories is also sold directly to home improvement centers.  Our growing customer base of fencing and railing consists of fabricators, distributors, retail home centers and lumberyards.  Our customer base of stone veneer products consists of distributors, lumberyards, retailers and contractors.

Our largest customer comprised 17.1% and 14.7% of the net sales of our Siding, Fencing, and Stone segment for the years ended December 31, 2012 and 2011, respectively.

Production and facilities

Vinyl siding, skirting, soffit and accessories are manufactured in our Martinsburg, West Virginia, Jasper, Tennessee, Stuarts Draft, Virginia and Kearney, Missouri facilities, while all metal products are produced in our Sidney, Ohio facility.  The majority of our injection molded products such as shakes, shingles, scallops, shutters, vents and mounts are manufactured in our Gaffney, South Carolina facility.  The cellular PVC trim and mouldings products are manufactured in Kearney, Missouri. The vinyl, metal, and injected molded plants have sufficient capacity to support planned levels of sales growth for the foreseeable future.  Our fencing and railing products are currently manufactured at our York, Nebraska and Fair Bluff, North Carolina facilities.  The fencing and railing plants have sufficient capacity to support our planned sales growth for the foreseeable future.  Our stone veneer products are manufactured at our Middleburg, Pennsylvania facility.  Our manufacturing facilities are among the safest in all of North America with three of them having received the highest federal and/or state OSHA safety award and rating.

Raw materials and suppliers

PVC resin and aluminum are major components in the production of our Siding, Fencing, and Stone products. PVC resin and aluminum are commodity products and are available from both domestic and international suppliers. Changes in PVC resin and aluminum prices have a direct impact on our cost of products sold.  Historically, we have been able to pass on the price increases to our customers.  The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.
 
Competition

We compete with other national and regional manufacturers of vinyl siding, aluminum, cellular PVC, fencing, and stone products. We believe we are currently the largest manufacturer of vinyl siding in North America. Our vinyl siding competitors include CertainTeed, Alside, Royal Building Products and smaller, regional competitors. Based on our internal estimates and industry experience, we believe that we have a U.S. vinyl siding market position of 36.0%, consistent with 2011. Our aluminum accessories competitors include Alsco, Gentek and other smaller regional competitors. Significant growth in vinyl fencing and railing has attracted many new entrants, and the sector today is fragmented. Our cellular PVC Trim and Moulding competitors include Azek, Inteplast, Kommerling (KOMA), Jain (Excel), Wolfpac (Veratex), Tapco (Kleer), CertainTeed and Royal Building Products. Our fencing and railing competitors include U.S. Fence, Homeland, Westech, Bufftech, and Azek. Our stone veneer competitors include Boral, Eldorado Stone, Coronado Stone and smaller, regional competitors. We generally compete on product quality, breadth of product offering, sales and service support. In addition to competition from other vinyl siding, fencing and stone products, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry. Increases in competition from other exterior building products manufacturers and alternative building materials could cause us to lose customers and lead to net sales decreases.

Intellectual property

We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, proprietary technology and know-how and other proprietary rights.  In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Siding, Fencing, and Stone segment.  Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic.  Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use.  While we do not believe the Siding, Fencing, and Stone segment is dependent on any one of our trademarks, we believe that our trademarks are important to the development and conduct of our business as well as the marketing of our products.  We vigorously protect all of our intellectual property rights.

Seasonality

Markets for our products are seasonal and can be affected by inclement weather conditions.  Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods.  Because a portion of our overhead and expenses are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters.  Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.

We generally carry increased working capital during the first half of a fiscal year to support those months where customer demand exceeds production capacity.  We believe that this is typical within the industry.

Backlog

Our Siding, Fencing, and Stone segment had a backlog of approximately $9.5 million at December 31, 2012, and a backlog of approximately $8.5 million at December 31, 2011.  We filled 100% of the backlog at December 31, 2011 during 2012. We expect to fill 100% of the orders during 2013 that were included in our backlog at December 31, 2012.

6



Windows and Doors segment

Products

In our Windows and Doors segment, our principal products include vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada.  Our products in our Windows and Doors segment are sold under the Ply Gem® Windows, Great Lakes® Window, Mastic® by Ply Gem, and Ply Gem® Canada brands.  In the past, we have also sold our windows and doors under our CWD Windows and Doors brand names.  A summary of our current product lines is presented below according to price point:
 
Ply Gem U.S. Windows
Mastic by Ply Gem
Great Lakes
Window
Ply Gem Canada
 
New Construction
Replacement
 
Replacement
New Construction
 
 
 
 
 
 
   Specialty/ Super-Premium
 
Mira® Premium Series
Select Series
Mastic 5000
Series
Uniframe®
EcoSMART
Regency®
Ambassador®
Fusion®
 
 
 
 
 
 
Premium
Pro Series - West
Premium Series
Mastic 4000
Series
Lifestyles®
Envoy®
Diplomat®
Concorde®
 
 
 
 
 
 
Standard
Pro Series - East
Pro Series
Mastic 3000
Series
Seabrooke®
Pro Series
 
 
 
 
 
 
Economy
Builder Series
Contractor Series
 
Bayshore®
 

We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers.  The breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).

Customers and distribution

We have a multi-channel distribution and product strategy that enables us to serve both the new construction and the home repair and remodeling sectors.  By offering this broad product offering and industry leading service, we are able to meet the local needs of our customers on a national scale.  This strategy has enabled our customer base (existing and new) to simplify their supply chain by consolidating window suppliers.  Our good, better, best product and price point strategy allows us to increase our sales and sector penetration while minimizing channel conflict.  This strategy reduces our dependence on any one channel, providing us with a greater ability to sustain our financial performance through economic fluctuations.

The new construction product lines are sold for use in new residential and light commercial construction through a highly diversified customer base, which includes independent building material dealers, regional/national lumberyard chains, builder direct/OEMs and retail home centers.  Our repair and remodeling window products are primarily sold through independent home improvement dealers, one-step distributors, and big box retail outlets.  Dealers typically market directly to homeowners or contractors in connection with remodeling requirements while distributors concentrate on local independent retailers.

In Canada, sales of product lines for new construction are predominantly made through direct sales to builders and contractors, while sales for repair and remodeling are made primarily through retail lumberyards.  Ply Gem Canada products are distributed through nine company-owned distribution centers.

Our sales to our five largest window and door customers represented 28.6% and 28.9% of the net sales of our Windows and Doors segment for the years ended December 31, 2012 and 2011, respectively.

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Production and facilities

Our window and door products leverage a network of vertically integrated production and distribution facilities located in Virginia, Ohio, North Carolina, Georgia, Texas, California, Washington and Alberta, Canada.  Our window and door manufacturing facilities have benefited from our continued investment and commitment to product development and product quality combined with increasing integration of best practices across our product offerings.  In 2010, we began producing vinyl compound for our west coast facilities which improved our operating efficiency and resulted in lower production cost for these items.  In 2010, we continued making upgrades to insulated glass production lines in anticipation of more stringent energy efficiency requirements driven by changes in building codes and consumer demand for Energy Star rated products.

While market conditions required us to close three facilities in 2009, all of our facilities have the ability to increase capacity in a cost effective manner by expanding production shifts.  Any capacity increase may, however, initially be offset by labor inefficiencies or difficulties obtaining the appropriate labor force. Ongoing capital investments will focus upon new product introductions and simplification, equipment maintenance and cost reductions.   Our manufacturing facility in Alberta, Canada received the highest provincial safety award during 2010, demonstrating our commitment to safety.

During 2012, our Windows and Doors segment streamlined its product offerings by realigning its SKUs to simplify the structure and manufacturing process while maximizing product features for our customers at competitive prices.

Raw materials and suppliers

PVC compound, wood, aluminum and glass are major components in the production of our window and door products.  These products are commodity products available from both domestic and international suppliers. Historically, changes in PVC compound, aluminum billet and wood cutstock prices have had the most significant impact on our material cost of products sold in our Windows and Doors segment.  We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material.  The PVC resin compound that is used in our window lineal production is produced internally.  The leveraging of our PVC resin buying power and our PVC resin compounding capabilities benefits all of our window companies.  Our window plants have consolidated glass purchases to take advantage of strategic sourcing savings opportunities.  In addition, we have continued to vertically integrate aluminum extrusion in our window plants.

Competition

The window and patio door sector remains fragmented, comprised primarily of local and regional manufacturers with limited product offerings.  The sector’s competitors in the United States include national brands, such as Jeld-Wen, Simonton, Pella and Andersen, and numerous regional brands, including MI Home Products, Atrium, Weathershield and Milgard.  Competitors in Canada include Jeld-Wen, Gienow, All Weather, Loewen, and numerous regional brands.  We generally compete on service, product performance, product offering, sales and support.  We believe all of our products are competitively priced and that we are one of the only manufacturers to serve all end markets and price points.

Intellectual property

We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, proprietary technology and know-how and other proprietary rights.  In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Windows and Doors segment.  Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic.  Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe the Windows and Doors segment is dependent on any one of our trademarks, we believe that our trademarks are important to the Windows and Doors segment and the development and conduct of our business as well as the marketing of our products.  We vigorously protect all of our intellectual property rights.


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Seasonality

Markets for our products are seasonal and can be affected by inclement weather conditions.  Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods.  Accordingly, our working capital is typically higher in the second and third quarters as well. Because much of our overhead and expense are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters.  Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.

Because we have successfully implemented lean manufacturing techniques and many of our windows and doors are made to order, inventories in our Windows and Doors segment do not change significantly with seasonal demand.

Backlog

Our Windows and Doors segment had a backlog of approximately $24.8 million at December 31, 2012, and approximately $19.4 million at December 31, 2011.  We filled 100% of the backlog at December 31, 2011 during 2012. We expect to fill 100% of the orders during 2013 that were included in our backlog at December 31, 2012.

Environmental and Other Regulatory Matters

We are subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety.  From time to time, our facilities are subject to investigation by governmental regulators.  In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal.  We may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of our properties from activities conducted by previous occupants.  The amount of such liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

We believe that we maintain all material permits required to operate our business and that our current operations are in substantial compliance with such permit terms, with the exception of the late filing on January 10, 2013 of the Title V semi-annual monitoring report for our Rocky Mount, Virginia facility air permit, for which we are currently investigating certain assumptions and calculations used in the permit development. Based on current information, we do not believe that any known compliance obligations, claims, releases or investigations will have a material adverse effect on our results of operations, cash flows or financial position.  However, there can be no guarantee that previously known or newly-discovered matters or any inability to enforce our available indemnification rights against previous owners of our subsidiaries will not result in material costs or liabilities.

Under the stock purchase agreement governing the Ply Gem acquisition, our former parent, Nortek, has agreed to indemnify us, subject to certain limitations, for environmental liabilities arising from our former ownership or operation of subsidiaries or properties where such ownership or operation ceased prior to the completion of the Ply Gem acquisition and for certain other liabilities.  Our ability to seek indemnification from Nortek is, however, limited by the strength of Nortek’s financial condition, which could change in the future, as well as by limits to any such indemnities or obligations. Nortek has also covenanted that after the Ply Gem acquisition, it will not dispose of all or substantially all of its property and assets in a single transaction or series of related transactions, unless the acquirer of either its residential building products segment or HVAC segment (whichever is sold first) assumes all of Nortek’s obligations (including Nortek’s indemnification obligations) under the stock purchase agreement.


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We are currently involved in environmental proceedings involving Ply Gem Canada and Alberta Environment (arising from subsurface contamination discovered at our Calgary, Alberta property), and we may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania), Kroy Building Products, Inc. (relating to contamination in a drinking water well in York, Nebraska), and Mastic Home Exteriors, Inc. (relating to a closed landfill site in Sidney, Ohio).  Under the stock purchase agreement governing the Ply Gem acquisition, Nortek is to indemnify us fully for any liability in connection with the Punxsutawney contamination. Alcan Aluminum Corporation assumed the obligation to indemnify us with respect to certain liabilities for environmental contamination of the York property occurring prior to 1994 when it sold the property to us in 1998.  Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in an environmental proceeding with the Georgia Department of Natural Resources in connection with a contaminated landfill site in Thomson, Georgia.  While we had assumed an obligation to indemnify the purchaser of our former subsidiary when we sold Hoover Treated Wood Products, Inc., our obligation has been novated and assumed by Nortek. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits of any such indemnities or obligations.

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property.  As part of the Administrative Order on Consent, MW provided the EPA with a preliminary cost estimate of approximately $1.8 million over the remediation period.  This preliminary cost estimate was approved by the EPA for initiation of remediation work in December 2012. Certain liabilities for this subject contamination have been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners.  As the successor-in-interest of Fenway Partners, we are similarly indemnified by U.S. Industries, Inc.  Our ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future.

In addition, under the stock purchase agreement governing the MWM Holding acquisition, the sellers agreed to indemnify us for the first $250,000 in certain costs of compliance with the New Jersey Industrial Site Recovery Act at a facility of MW in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million.  Our ability to seek indemnification is, however, limited by the strength of the sellers’ financial condition, which could change in the future, as well as by limits to this indemnity.

We voluntarily comply with the Vinyl Siding Institute (“VSI”) Certification Program with respect to our vinyl siding and accessories.  Under the VSI Certification Program, third party verification and certification, provided by Architectural Testing, Inc. (“ATI”), is used to ensure uniform compliance with the minimum standards set by the American Society for Testing and Materials (“ASTM”).  Those products compliant with ASTM specifications for vinyl siding will perform satisfactorily in virtually any environment.  Upon certification, products are added to the official VSI list of certified products and are eligible to bear the official VSI certification logo.

Employees

•
As of December 31, 2012, we had 4,992 full-time employees worldwide, of whom 4,605 were in the United States and 387 were in Canada.  Employees at our Canadian plant and our Bryan, Texas plant are currently our only employees with whom we have a collective bargaining agreement.
•
Approximately 4.1% of our total employees are represented by the United Brotherhood of Carpenters and Joiners of America, pursuant to a collective bargaining agreement with certain of our Canadian employees, which expires on December 31, 2014.
•
Approximately 10.5% of our total employees are represented by the International Chemical Workers Union Council, pursuant to a collective bargaining agreement with certain of our Alenco Windows employees, which expires in December 2013.

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Financial Information about Geographic Areas

All of the Company’s operations are located in the United States and Canada.  

Revenue from external customers for the year 2012 consisted of:
•
$1,043.6 million from United States customers
•
$74.4 million from Canadian customers
•
$3.3 million from all other foreign customers

Revenue from external customers for the year 2011 consisted of:
•
$959.2 million from United States customers
•
$70.9 million from Canadian customers
•
$4.8 million from all other foreign customers

Revenue from external customers for the year 2010 consisted of:
•
$915.5 million from United States customers
•
$75.9 million from Canadian customers
•
$4.5 million from all other foreign customers


At December 31, 2012, 2011, and 2010, long-lived assets totaled approximately $17.1 million, $17.1 million, and $18.0 million, respectively, in Canada, and $601.7 million and $630.9 million, and $667.5 million, respectively, in the United States.  We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations.

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 Item 1A.  RISK FACTORS
Risks Associated with Our Business

Downturns in the home repair and remodeling and new construction sectors or the economy and the availability of consumer credit could adversely impact our end users and lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new construction spending, which declined significantly in the 2009 through 2011 period as compared to 2008 recovering slightly in 2012 compared to historical levels and are affected by such factors as interest rates, inflation, consumer confidence, unemployment and the availability of consumer credit.

Our performance is also dependent upon consumers having the ability to finance home repair and remodeling projects and/or the purchase of new homes.  The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures, which in turn could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures.  Trends such as declining home values, increased home foreclosures and tightening of credit standards by lending institutions, have negatively impacted the home repair and remodeling and the new construction sectors.  If these credit market trends continue or worsen, our net sales and net income may be adversely affected.

We face competition from other exterior building products manufacturers and alternative building materials. If we are unable to compete successfully, we could lose customers and our sales could decline.

We compete with other national and regional manufacturers of exterior building products.  Some of these companies are larger and have greater financial resources than we do.  Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do.  These competitors could take a greater share of sales and cause us to lose business from our customers.  Additionally, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry in siding, and wood in windows.  An increase in competition from other exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to decreases in net sales.
 
Changes in the costs and availability of raw materials, especially PVC resin and aluminum, can decrease our profit margin by increasing our costs.

Our principal raw materials, PVC resin and aluminum, have been subject to rapid price changes in the past. While we have historically been able to substantially pass on significant PVC resin and aluminum cost increases through price increases to our customers, our results of operations for individual quarters can be and have been hurt by a delay between the time of PVC resin and aluminum cost increases and price increases in our products.  While we expect that any significant future PVC resin and aluminum cost increases will be offset in part or whole over time by price increases to our customers, we may not be able to pass on any future price increases.

Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our revenues, results of operations and financial position.

Certain of our important customers are large companies with significant buying power.  In addition, potential further consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us.  Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases.  If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our revenues, operating results and financial position may be materially and adversely affected.


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Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may decline if our key customers reduce the amount of products that they purchase from us.

Our top ten customers accounted for approximately 45.9% of our net sales in the year ended December 31, 2012.  Our largest customer distributes our products within its building products distribution business, and accounted for approximately 10.5% of our consolidated 2012 net sales.  We expect a small number of customers to continue to account for a substantial portion of our net sales for the foreseeable future.

The loss of, or a significant adverse change in our relationships with our largest customer or any other major customer could cause a material decrease in our net sales.  The loss of, or a reduction in orders from, any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major retail customer could cause a decrease in our net income and our cash flow.  In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.

Our business is seasonal and can be affected by inclement weather conditions that could affect the timing of the demand for our products and cause reduced profit margins when such conditions exist.

Markets for our products are seasonal and can be affected by inclement weather conditions.  Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods.  Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters.  Inclement weather conditions can affect the timing of when our products are applied or installed, causing reduced profit margins when such conditions exist.

Increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.

Our financial performance is affected by the cost of labor.  As of December 31, 2012, approximately 14.5% of our employees were represented by labor unions.  We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity.  Furthermore, some of our direct and indirect suppliers have unionized work forces.  Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured.  Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.

Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.

Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to employ, train and retain qualified personnel with the ability to design, manufacture, and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market recovers in the United States and Western Canada. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both. In addition, our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality will be a strategic initiative in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.

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We may be subject to claims arising from the operations of our various businesses arising from periods prior to the dates we acquired them.  Our ability to seek indemnification from the former owners of our subsidiaries may be limited, in which case, we would be liable for these claims.

We have acquired all of our subsidiaries, including Ply Gem Industries, MWM Holding, AWC Holding Company, MHE, and Pacific Windows, and substantially all of the assets of Ply Gem Stone, in the last several years.  We may be subject to claims or liabilities arising from the ownership or operation of our subsidiaries for the periods prior to our acquisition of them, including environmental liabilities.  These claims or liabilities could be significant.  Our ability to seek indemnification from the former owners of our subsidiaries for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreement and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce our indemnification rights against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.
 
We could face potential product liability claims, including class action claims, relating to products we manufacture.

We face an inherent business risk of exposure to product liability claims, including class action claims, in the event that the use of any of our products results in personal injury or property damage.  In the event that any of our products proves to be defective, among other things, we may be responsible for damages related to any defective products and we may be required to recall or redesign such products.  Because of the long useful life of our products, it is possible that latent defects might not appear for several years.  Any insurance we maintain may not continue to be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred.  Further, any claim or product recall could result in adverse publicity against us, which could cause our sales to decline, or increase our costs.

We are dependent on certain key personnel, the loss of whom could materially affect our financial performance and prospects.

Our continued success depends to a large extent upon the continued services of our senior management and certain key employees.  To encourage the retention of certain key executives, we have entered into various equity-based compensation agreements with our senior executives, including Messrs. Robinette, Poe, Wayne, Buckley, and Morstad, designed to encourage their retention.  Each member of our senior management team has substantial experience and expertise in our industry and has made significant contributions to our growth and success.  We do face the risk, however, that members of our senior management may not continue in their current positions and the loss of their services could cause us to lose customers and reduce our net sales, lead to employee morale problems and/or the loss of key employees, or cause disruptions to our production.  Also, we may be unable to find qualified individuals to replace any of the senior executive officers who leave our company.

Interruptions in deliveries of raw materials or finished goods could adversely affect our production and increase our costs, thereby decreasing our profitability.

Our dependency upon regular deliveries from suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made.  If any of our suppliers were unable to deliver materials to us for an extended period of time, as the result of financial difficulties, catastrophic events affecting their facilities or other factors beyond our control, or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer.  We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us.  Even if acceptable alternatives were found, the process of locating and securing such alternatives might be disruptive to our business.  Extended unavailability of a necessary raw material or finished goods could cause us to cease manufacturing one or more of our products for a period of time.

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Environmental requirements may impose significant costs and liabilities on us.

Our facilities are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites and protection of worker health and safety.  From time to time, our facilities are subject to investigation by governmental regulators.  In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal.  We may be held liable, or incur fines or penalties in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of our properties from activities conducted by previous occupants.  The amount of such liability, fine or penalty may be material.  Certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

Under the stock purchase agreement governing the Ply Gem acquisition, our former parent, Nortek, has agreed to indemnify us, subject to certain limitations, for environmental liabilities arising from our former ownership or operation of subsidiaries or properties where such ownership or operation ceased prior to the completion of the Ply Gem acquisition and for certain other liabilities. Our ability to seek indemnification from Nortek is, however, limited by the strength of Nortek’s financial condition, which could change in the future, as well as by limits to the indemnity.


We are currently involved in environmental proceedings involving Ply Gem Canada and Alberta Environment (arising from subsurface contamination discovered at our Calgary, Alberta property), and we may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania), Kroy Building Products, Inc. (relating to contamination in a drinking water well in York, Nebraska) and Mastic Home Exteriors, Inc. (relating to a closed landfill site in Sidney, Ohio).  Under the stock purchase agreement governing the Ply Gem acquisition, Nortek has agreed to indemnify us fully for any liability in connection with the Punxsutawney contamination. Alcan Aluminum Corporation assumed the obligation to indemnify us with respect to certain liabilities for environmental contamination of the York property occurring prior to 1994 when it sold the property to us in 1999.  Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in an environmental proceeding with the Georgia Department of Natural Resources in connection with a contaminated landfill site in Thomson, Georgia.  While we had assumed an obligation to indemnify the purchaser of our former subsidiary when we sold Hoover Treated Wood Products, Inc., our obligation has been novated and assumed by Nortek. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits to any such indemnities or obligations.

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property.  As part of the Administrative Order on Consent, MW provided the EPA with a preliminary cost estimate of approximately $1.8 million over the remediation period.  This preliminary cost estimate was approved by the EPA for initiation of remediation work in December 2012. Certain liabilities for this subject contamination have been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners.  As the successor-in-interest of Fenway Partners, we are similarly indemnified by U.S. Industries, Inc.  Our ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future.

In addition, under the stock purchase agreement governing the MWM Holding acquisition, the sellers agreed to indemnify us for the first $250,000 in certain costs of compliance with the New Jersey Industrial Site Recovery Act at a facility of MW in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits to any such indemnities or obligations.


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Changes in environmental laws and regulations or in their enforcement, the discovery of previously unknown contamination or other liabilities relating to our properties and operations or the inability to enforce the indemnification obligations of the previous owners of our subsidiaries could result in significant environmental liabilities that could adversely impact our operating performance.  In addition, we might incur significant capital and other costs to comply with increasingly stringent United States or Canadian environmental laws or enforcement policies that would decrease our cash flow.

Manufacturing or assembly realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, due to the costs of implementation.

We continually review our manufacturing and assembly operations and sourcing capabilities.  Effects of periodic manufacturing realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize.  Such programs may include the consolidation and integration of facilities, functions, systems and procedures.  Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.

We rely on a variety of intellectual property rights.  Any threat to, or impairment of, these rights could cause us to incur costs to defend these rights.

As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands.  We also have issued patents and rely on trade secret and copyright protection for certain of our technologies.  These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our intellectual property rights, which may harm our operating results.  There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we would have to defend these rights.  There is also a risk that third parties, including our current competitors, will claim that our products infringe on their intellectual property rights.  These third parties may bring infringement claims against us or our customers, which may harm our operating results.

Increases in fuel costs could cause our cost of products sold to increase and net income to decrease.

Increases in fuel costs can negatively impact our cost to deliver our products to our customers and thus increase our cost of products sold.  If we are unable to increase the selling price of our products to our customers to cover any increases in fuel costs, net income may be adversely affected.

Declines in our business conditions may result in an impairment of our tangible and intangible assets, which could result in a material non-cash charge.

A negative long-term performance outlook could result in a decrease in net sales, which could result in a decrease in operating cash flows.  These declines could result in an impairment of our tangible and intangible assets which results when the carrying value of the assets exceed their fair value.

The significant amount of our indebtedness may limit the cash flow available to invest in the ongoing needs of our business.

Our indebtedness could have important consequences. For example, it could:
 
•
require us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, reducing the availability of our cash flow for other purposes, such as capital expenditures, acquisitions and working capital;
•
limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate and the general economy;
•
place us at a disadvantage compared to our competitors that have less debt;
•
expose us to fluctuations in the interest rate environment because the interest rates of our ABL Facility are at variable rates; and
•
limit our ability to borrow additional funds.

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness.

The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

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The agreements that govern the terms of our debt, including the indentures that govern the 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") we issued on February 11, 2011 and February 16, 2012 and the 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”) we issued on September 27, 2012 and the credit agreement that governs the senior secured asset based revolving credit facility (“ABL Facility”), contain covenants that restrict our ability and the ability of our subsidiaries to:

•
incur and guarantee indebtedness or issue equity interests of restricted subsidiaries;
•
repay subordinated indebtedness prior to its stated maturity;
•
pay dividends or make other distributions on or redeem or repurchase our stock;
•
issue capital stock;
•
make certain investments or acquisitions;
•
create liens;
•
sell certain assets or merge with or into other companies;
•
enter into certain transactions with stockholders and affiliates;
•
make capital expenditures; and
•
pay dividends, distributions or other payments from our subsidiaries.

These restrictions may affect our ability to grow our business and take advantage of market and business opportunities or to raise additional debt or equity capital.

In addition, under the ABL Facility, if our excess availability is less than the greater of (a) 12.5% of the lesser of the revolving credit commitments and the borrowing base and (b) $17.5 million, we will be required to comply with a minimum fixed charge coverage ratio test. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure that we will meet this ratio.  A breach of any of these covenants under the ABL Facility or the indentures governing our 8.25% Senior Secured Notes or our 9.375% Senior Notes could result in an event of default under the ABL Facility or the indentures. An event of default under any of our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable and, in some cases, proceed against the collateral securing such indebtedness.

Moreover, the ABL Facility provides the lenders considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us.  There can be no assurance that the lenders under the ABL Facility will not impose such actions during the term of the ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our liquidity.
 
We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.  We may also be unable to generate sufficient cash to make required capital expenditures.

Our ability to make scheduled payments on or to refinance our debt obligations and to make capital expenditures depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors.  We will not be able to control many of these factors, such as economic conditions in the industry in which we operate and competitive pressures.  We cannot assure that we will maintain a level of cash flows from operating activities sufficient to permit us to pay or refinance our indebtedness, including the 8.25% Senior Secured Notes, the 9.375% Senior Notes or our indebtedness under our ABL Facility, or make required capital expenditures.  If our cash flows and capital resources are insufficient to fund our debt service obligations, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness.

In addition, if we do not have, or are unable to obtain, adequate funds to make all necessary capital expenditures when required, or if the amount of future capital expenditures are materially in excess of our anticipated or current expenditures, our product offerings may become dated, our productivity may decrease and the quality of our products may decline, which, in turn, could reduce our sales and profitability.

17



Our income tax net operating loss carryovers may be limited and our results of operations may be adversely impacted.

We have substantial deferred tax assets related to net operating loss carryforwards (“NOLs”) for United States federal and state income tax purposes, which are available to offset future taxable income.  As a result, we project that the U.S. cash tax rate will be reduced from the federal statutory rate and state rate as a result of approximately $229.3 million of gross NOLs for federal purposes and $245.8 million of gross state NOLs.  Our ability to utilize the NOLs may be limited as a result of certain events, such as insufficient future taxable income prior to expiration of the NOLs or annual limits imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), or by state law, as a result of a change in control.  A change in control is generally defined as a cumulative change of more than 50 percentage points in the ownership positions of certain stockholders during a rolling three-year period.  Changes in the ownership positions of certain stockholders could occur as the result of stock transactions by such stockholders and/or by the issuance of stock by us.  Such limitations may cause us to pay income taxes earlier and in greater amounts than would be the case if the NOLs were not subject to such limitations.  Should we determine that it is likely that our recorded NOL benefits are not realizable, we would be required to reduce the NOL tax benefits reflected on our consolidated financial statements to the net realizable amount by establishing a valuation reserve and recording a corresponding charge to earnings.  Conversely, if we are required to reverse any portion of the accounting valuation allowance against our U.S. deferred tax assets related to our NOLs, such reversal could have a positive effect on our financial condition and results of operations in the period in which it is recorded.

If Ply Gem Holdings enters into a tax receivable agreement in connection with its initial public offering, it may be required to pay an affiliate of our current stockholders for certain tax benefits it may claim. The amounts it may pay could be significant and the amounts it pays may not be reimbursed even if the claimed tax benefits are later determined by the U.S. Internal Revenue Service (“IRS”) not to be allowed. The agreement could also adversely affect the ability of Ply Gem Holdings or us to enter into transactions with third parties because of additional obligations that might arise under the agreement.

The amount and timing of any payments under the tax receivable agreement may vary depending upon a number of factors, including the amount and timing of the taxable income Ply Gem Holdings generates in the future and the tax rate then applicable, its use of NOL carryovers and the portion of its payments under the tax receivable agreement constituting imputed interest.   The payments it may be required to make under the tax receivable agreement could be substantial. Ply Gem Holdings expects that, as a result of the amount of the NOL carryovers from prior periods (or portions thereof) and the deductible expenses attributable to the transactions related to its initial public offering, assuming no material changes in the relevant tax law and that Ply Gem Holdings earns sufficient taxable income to realize in full the potential tax benefit described above, future payments under the tax receivable agreement, in respect of the federal and state NOL carryovers, are expected to be approximately $84.0 million and are expected to be paid within the next five years. These amounts reflect only the cash savings attributable to current tax attributes resulting from the NOL carryovers. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments from these tax attributes.  In addition, although Ply Gem Holdings is not aware of any issue that would cause the IRS to challenge the benefits expected to arise under the tax receivable agreement, the tax receivable agreement is expected to provide that the Tax Receivable Entity will not reimburse Ply Gem Holdings for any payments previously made if such benefits are subsequently disallowed, except that excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after Ply Gem Holding’s determination of such excess. As a result, if such circumstances were to occur, Ply Gem Holdings could make payments under the tax receivable agreement that are greater than its actual cash tax savings and may not be able to recoup those payments, which could adversely affect its liquidity. Finally, because Ply Gem Holdings is a holding company with no operations of its own, its ability to make payments under the tax receivable agreement will be dependent on the ability of its subsidiaries to make distributions to it. The ABL Facility and the indentures governing the 8.25% Senior Secured  Notes and the 9.375% Senior Notes restrict the ability of Ply Gem Holdings’ subsidiaries to make distributions to it, which could affect its ability to make payments under the tax receivable agreement. To the extent that Ply Gem Holdings is unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid, which could adversely affect our results of operations and could also affect our liquidity in periods in which such payments are made. In addition, the tax receivable agreement is expected to provide that, upon certain mergers, asset sales, or other forms of business combinations or certain other changes of control, Ply Gem Holdings’ or its successor’s obligations with respect to tax benefits would be based on certain assumptions, including that Ply Gem Holdings or its successor would have sufficient taxable income to fully utilize the NOL carryovers covered by the tax receivable agreement. As a result, upon a change of control, Ply Gem Holdings may be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of its actual cash tax savings.


18

Our ability to effectively integrate future acquisitions, if any, will be critical to maintaining and improving our operating performance.

We will continue to pursue strategic acquisitions into our business if they provide future financial and operational benefits. However, our ability to effectively integrate these acquisitions into our existing business and culture may not be successful, which could jeopardize future operational performance for the combined businesses.
Actual or perceived security vulnerabilities or cyberattacks on our networks could have a material adverse impact on our business and results of operations.

Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers' business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We devote significant resources to address security vulnerabilities through enhancing security and reliability features in our computer networks, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. Experienced hackers, cybercriminals and perpetrators of advanced persistent threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. However, because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until long after being launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could result in:

•
harm to our reputation or brand, which could lead some customers to seek to cancel subscriptions, stop purchasing our products, reduce or delay future purchases of our products, or use competing products;
•
state or federal enforcement action, which could result in fines and/penalties and which would cause us to incur legal fees and costs, and/or
•
additional costs associated with responding to the cyberattack, such as the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities required by credit card associates, and costs incurred by credit card issuers associated with the compromise and additional monitoring of systems for further fraudulent activity.

Any of these actions could materially adversely impact our business and results of operations.



Item 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

19


Item 2.      PROPERTIES

Our corporate headquarters is located in Cary, North Carolina.  We own and lease several additional properties in the U.S. and Canada.  We operate the following facilities as indicated, and each facility is leased unless indicated with “Owned” under the Lease Expiration Date column below.
Location
 
Square Footage
 
Facility Use
 
Lease
Expiration Date
 
 
 
 
 
 
 
Siding, Fencing, and Stone Segment
 
 
Jasper, TN
 
270,000
 
Manufacturing and Administration
 
Owned
Fair Bluff, NC (1)
 
198,000
 
Manufacturing and Administration
 
9/30/2024
Kearney, MO (1)
 
175,000
 
Manufacturing and Administration
 
9/30/2024
Kansas City, MO
 
125,000
 
Warehouse
 
12/31/2013
Valencia, PA (2)
 
104,000
 
Manufacturing and Administration
 
9/30/2024
Martinsburg, WV (1)
 
163,000
 
Manufacturing and Administration
 
9/30/2024
Martinsburg, WV
 
165,000
 
Warehouse
 
4/14/2016
York, NE (1)
 
76,000
 
Manufacturing
 
9/30/2024
Stuarts Draft, VA
 
257,000
 
Manufacturing and Administration
 
Owned
Sidney, OH
 
819,000
 
Manufacturing and Administration
 
Owned
Gaffney, SC
 
259,000
 
Manufacturing and Administration
 
Owned
Harrisonburg, VA
 
358,000
 
Warehouse
 
2/28/2018
Kansas City, MO
 
36,000
 
Administration
 
12/31/2017
Middleburg, PA
 
100,000
 
Manufacturing and Administration
 
12/31/2016
South Pittsburgh, TN
 
95,000
 
Warehouse
 
10/31/2014
Gaffney, SC
 
55,000
 
Warehouse
 
12/31/2013
Selinsgrove, PA
 
32,000
 
Warehouse
 
Month-to-month
 
 
 
 
 
 
 
Windows and Doors Segment
 
 
 
 
Calgary, AB, Canada (1)
 
301,000
 
Manufacturing and Administration
 
9/30/2024
Walbridge, OH (1)
 
250,000
 
Manufacturing and Administration
 
9/30/2024
Walbridge, OH
 
20,000
 
Warehouse
 
5/30/2017
Rocky Mount, VA (1)
 
600,000
 
Manufacturing and Administration
 
9/30/2024
Rocky Mount, VA
 
163,000
 
Manufacturing
 
5/31/2013
Rocky Mount, VA
 
180,000
 
Manufacturing
 
8/31/2016
Rocky Mount, VA
 
70,000
 
Warehouse
 
2/16/2016
Rocky Mount, VA
 
80,000
 
Warehouse
 
8/31/2013
Rocky Mount, VA
 
120,000
 
Warehouse
 
8/31/2016
Rocky Mount, VA
 
50,000
 
Warehouse
 
Month-to-month
Roanoke, VA
 
13,000
 
Administration
 
3/31/2013
Fayetteville, NC
 
56,000
 
Warehouse
 
Owned
Peachtree City, GA
 
148,000
 
Manufacturing
 
8/19/2014
Peachtree City, GA
 
40,000
 
Manufacturing
 
Owned
Dallas, TX (3)
 
54,000
 
Manufacturing
 
8/31/2015
Dallas, TX (3)
 
29,000
 
Warehouse
 
6/30/2015
Bryan, TX
 
273,000
 
Manufacturing and Administration
 
8/20/2014
Bryan, TX
 
75,000
 
Manufacturing
 
12/31/2014
Auburn, WA
 
262,000
 
Manufacturing and Administration
 
10/31/2017
Corona, CA
 
128,000
 
Manufacturing and Administration
 
12/30/2015
Sacramento, CA
 
234,000
 
Manufacturing and Administration
 
9/12/2019
Tualatin, OR
 
8,000
 
Warehouse
 
Month-to-month
Edmonton, AB, Canada
 
29,000
 
Warehouse
 
4/30/2016
Red Deer, AB, Canada
 
7,000
 
Warehouse
 
4/30/2016
Medicine Hat, AB, Canada
 
9,000
 
Warehouse
 
12/31/2017
Regina, SK, Canada
 
10,000
 
Warehouse
 
5/31/2015
Saskatoon, SK, Canada
 
17,000
 
Warehouse
 
Owned
Grand Praire, AB, Canada
 
4,000
 
Warehouse
 
12/31/2013
Winnipeg, MB, Canada
 
9,000
 
Warehouse
 
3/31/2014
Langely, BC, Canada
 
9,000
 
Warehouse
 
2/28/2014
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
Cary, NC
 
20,000
 
Administration
 
10/31/2015

(1)
These properties are included in a long-term lease entered into as a result of a sale/leaseback agreement entered into in August 2004 as part of the funding for the purchase of MWM Holding.
(2)
This property was subleased to a third party during 2010.
(3)
The lease for these two properties was adjusted in 2013 to consolidate operations into one larger facility.

20


Item 3.      LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations and businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty, and modification, adjustment or replacement of component parts or units sold. Reference is made to Note 7 to our consolidated financial statements, incorporated herein by reference, which contains a general description of certain environmental and legal proceedings to which the Company or its subsidiaries are a party and certain related matters.

Item 4.     MINE SAFETY DISCLOSURES

Not applicable.

21


PART II


Item 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no established trading market for the common stock of Ply Gem Holdings.

Holders

As of March 15, 2013, there was one holder of record of the common stock of Ply Gem Holdings.
Dividends

Ply Gem Holdings paid dividends of approximately $0.0 million and $14.0 million to its sole shareholder, Ply Gem Prime, for equity repurchases in the years ended December 31, 2012 and 2011, respectively.

The indentures for the 8.25% Senior Secured Notes and the 9.375% Senior Notes and the ABL Facility restrict the ability of Ply Gem Industries and its subsidiaries to make certain payments and transfer assets to Ply Gem Holdings.  In addition, the ABL Facility imposes restrictions on the ability of Ply Gem Holdings to make certain dividend payments.  As a result, it is unlikely that Ply Gem Holdings will pay dividends in respect of its common stock in the foreseeable future.

22


Item 6.      SELECTED FINANCIAL DATA

The financial data set forth below is for the five-year period ended December 31, 2012.   The data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this report.
 
 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
 
2009
 
2008 (1)
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,121,301

 
$
1,034,857

 
$
995,906

 
$
951,374

 
$
1,175,019

Cost of products sold
 
877,102

 
824,325

 
779,946

 
749,841

 
980,098

Gross profit
 
244,199

 
210,532

 
215,960

 
201,533

 
194,921

Operating expenses:
 
 

 
 
 
 
 
 
 
 
  Selling, general and administrative expenses
 
147,242

 
138,912

 
130,460

 
141,772

 
155,388

  Amortization of intangible assets
 
26,937

 
26,689

 
27,099

 
19,651

 
19,650

  Write-off of previously capitalized offering costs
 
—

 
—

 
1,571

 
—

 
—

  Goodwill impairment
 
—

 
—

 
—

 
—

 
450,000

Total operating expenses
 
174,179

 
165,601

 
159,130

 
161,423

 
625,038

Operating earnings (loss)
 
70,020

 
44,931

 
56,830

 
40,110

 
(430,117
)
Foreign currency gain (loss)
 
409

 
492

 
510

 
475

 
(911
)
Interest expense
 
(103,133
)
 
(101,488
)
 
(122,992
)
 
(135,514
)
 
(138,015
)
Interest income
 
91

 
104

 
159

 
211

 
617

Gain (loss) on modification or extinguishment of debt
 
(3,607
)
 
(27,863
)
 
98,187

 
—

 
—

Income (loss) before provision (benefit) for income taxes
 
(36,220
)
 
(83,824
)
 
32,694

 
(94,718
)
 
(568,426
)
Provision (benefit) for income taxes
 
2,835

 
683

 
5,027

 
(17,966
)
 
(69,951
)
Net income (loss)
 
$
(39,055
)
 
$
(84,507
)
 
$
27,667

 
$
(76,752
)
 
$
(498,475
)
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
881,850

 
$
892,912

 
$
922,237

 
$
982,033

 
$
1,104,053

Long-term debt, less current maturities
 
$
964,384

 
$
961,670

 
$
894,163

 
$
1,100,397

 
$
1,114,186

 
(1)
Includes the results of Ply Gem Stone from the date of acquisition, October 31, 2008.

23


Item 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included in this Annual Report on Form 10-K.  This discussion should be read in conjunction with, and is qualified by reference to, the other related information including, but not limited to, the audited consolidated financial statements (including the notes thereto and the independent registered public accounting firm’s reports thereon), and the description of our business, all as set forth in this Annual Report on Form 10-K, as well as the risk factors discussed below and in Item 1A.

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.”  See “Cautionary Statement with Respect to Forward-Looking Statements” and “Risk Factors.”

General

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing, and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012.  These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both new construction and home repair and remodeling in the United States and Western Canada.  Vinyl building products have the leading share of sales volume in siding and windows in the United States.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products.  We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.

Ply Gem Holdings was incorporated on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek.  The Ply Gem acquisition was completed on February 12, 2004.  Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands.  Since the Ply Gem acquisition, we have acquired six additional businesses to complement and expand our product portfolio and geographical diversity.  Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand.

The following is a summary of Ply Gem’s acquisition history:

•
On August 27, 2004, Ply Gem acquired MWM Holding, a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows.

•
On February 24, 2006, Ply Gem acquired Alenco, a manufacturer of aluminum and vinyl windows products.  This acquisition supported our national window strategy and today operates under common leadership with our other U.S. window businesses.

•
On October 31, 2006, Ply Gem completed the acquisition of Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”), a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories.  MHE became part of our Siding, Fencing, and Stone segment and operates under common leadership with our existing siding business.  

•
On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Ply Gem Pacific Windows, a leading manufacturer of premium vinyl windows and patio doors.

•
On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products.


24

•
On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck Products, LLC, a composite products development company.  

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, which was a wholly owned subsidiary of Ply Gem Prime.  On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation.  As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries' $212.5 million senior secured asset-based revolving credit facility (the “ABL Facility”) place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.  Further, the terms of the indentures governing Ply Gem Industries 8.25% senior secured notes due 2018 (the “8.25% Senior Secured Notes”) and 9.375% senior notes due 2017 (the “9.375% Senior Notes”) place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.

Financial statement presentation

Net sales.  Net sales represent the fixed selling price of our products plus certain shipping charges less applicable provisions for discounts and allowances.  Allowances include cash discounts, volume rebates and returns among others.

Cost of products sold.  Cost of products sold includes direct material and manufacturing costs, manufacturing depreciation, third-party and in-house delivery costs and product warranty expense.

Selling, general and administrative expense.  Selling, general and administrative expense (“SG&A expense”) includes all non-product related operating expenses, including selling, marketing, research and development costs, information technology, restructuring, and other general and administrative expenses.

Operating earnings (loss).  Operating earnings (loss) represents net sales less cost of products sold, SG&A expense, amortization of intangible assets, and write-off of previously capitalized offering costs.

Impact of commodity pricing

PVC resin and aluminum are major components in the production of our products and changes in PVC resin and aluminum prices have a direct impact on our cost of products sold.  Historically, we have been able to pass on a substantial portion of significant price increases to our customers.  The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.

Impact of weather

Since our building products are intended for exterior use, our sales and operating earnings tend to be lower during periods of inclement weather.  Weather conditions in the first and fourth quarters of each calendar year historically result in these quarters producing significantly less sales revenue than in any other period of the year.  As a result, we have historically had lower profits or higher losses in the first quarter, and reduced profits in the fourth quarter of each calendar year due to the weather.  Our results of operations for individual quarters in the future may be impacted by adverse weather conditions.

25



Critical accounting policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  Certain of our accounting policies require the application of judgments in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements.  These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate.  If different conditions result compared to our assumptions and judgments, the results could be materially different from our estimates.  Management also believes that the nine areas where different assumptions could result in materially different reported results are 1) goodwill and intangible asset impairment tests, 2) accounts receivable related to estimation of allowances for doubtful accounts, 3) inventories in estimating reserves for obsolete and excess inventory, 4) warranty reserves, 5) insurance reserves, 6) income taxes, 7) rebates, 8) pensions, and 9) environmental accruals and other contingencies.  Although we believe the likelihood of a material difference in these areas is low based upon our historical experience, a 10% change in our allowance for doubtful accounts, inventory reserve estimates, and warranty reserve at December 31, 2012 would result in an approximate $0.4 million, $0.7 million, and $3.8 million impact on expenses, respectively. Additionally, we have included in the discussion that follows our estimation methodology for both accounts receivable and inventories.  While all significant policies are important to our consolidated financial statements, some of these policies may be viewed as being critical.  Our critical accounting policies include:

Revenue Recognition.  We recognize sales based upon shipment of products to our customers net of applicable provisions for discounts and allowances.  Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product.  For certain products, it is industry standard that customers take title to products upon delivery, at which time revenue is then recognized by the Company.  Revenue includes the selling price of the product and all shipping costs paid by the customer.  Revenue is reduced at the time of sale for estimated sales returns and all applicable allowances and discounts based on historical experience.  We also provide for estimates of warranty, bad debts, shipping costs and certain sales-related customer programs at the time of sale.  Shipping and warranty costs are included in cost of products sold.  Bad debt expense and sales-related marketing programs are included in SG&A expense.  We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are reconciled to the actual amounts.

Accounts Receivable.  We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which is provided for in bad debt expense.  We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers’ receivables, considering customers’ financial condition, credit history and other current economic conditions.  If a customer’s financial condition was to deteriorate, which might impact its ability to make payment, then additional allowances may be required.

Inventories.  Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market.  We record provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold.

Goodwill Impairment.  We perform an annual test for goodwill impairment during the fourth quarter of each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  We use the two-step method to determine goodwill impairment.  If the carrying amount of a reporting unit exceeds its fair value (Step One Analysis), we measure the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (Step Two Analysis).  The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

To evaluate goodwill impairment, we estimate the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.

26


A summary of the key assumptions utilized in the goodwill impairment analysis at November 24, 2012, November 26, 2011, and November 27, 2010, as it relates to the Step One fair values and the sensitivities for these assumptions follows:
  
 
 
Windows and Doors
 
 
As of
November 24,
2012
 
As of
November 26,
2011
 
As of
November 27,
2010
Assumptions:
 
 
 
 
 
 
Income approach:
 
 
 
 
 
 
Estimated housing starts in terminal year
 
1,050,000

 
1,050,000

 
1,150,000

Terminal growth rate
 
3.5
%
 
3.5
%
 
3.5
%
Discount rates
 
18.0
%
 
20.0
%
 
19.0
%
 
 
 
 
 
 
 
Market approach:
 
 
 
 

 
 

Control premiums
 
20.0
%
 
20.0
%
 
20.0
%
 
 
 
 
 
 
 
Sensitivities:
 
 
 
 

 
 

(Amounts in thousands)
 
 
 
 

 
 

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% decrease in the terminal year growth
 
$
8,000

 
$
7,768

 
$
10,679

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% increase in the discount rate
 
22,000

 
16,170

 
16,859

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% decrease in the control premium
 
3,000

 
2,143

 
2,330

 
 
Siding, Fencing, and Stone
 
 
As of
November 24,
2012
 
As of
November 26,
2011
 
As of
November 27,
2010
Assumptions:
 
 
 
 
 
 
Income approach:
 
 
 
 
 
 
Estimated housing starts in terminal year
 
1,050,000

 
1,050,000

 
1,150,000

Terminal growth rate
 
3.0
%
 
3.0
%
 
3.0
%
Discount rates
 
13.0
%
 
17.0
%
 
16.0
%
 
 
 
 
 
 
 
Market approach:
 
 
 
 

 
 

Control premiums
 
10.0
%
 
10.0
%
 
10.0
%
 
 
 
 
 
 
 
Sensitivities:
 
 
 
 

 
 

(Amounts in thousands)
 
 
 
 

 
 

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% decrease in the terminal year growth
 
$
62,000

 
$
32,974

 
$
47,251

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% increase in the discount rate
 
135,000

 
64,112

 
71,220

Estimated fair value decrease in the event of a
 
 
 
 

 
 

1% decrease in the control premium
 
14,000

 
8,930

 
8,865



27

(Amounts in thousands)
 
As of
 
As of
 
As of
 
 
November 24,
 
November 26,
 
November 27,
 
 
2012
 
2011
 
2010
Estimated Windows and Doors reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method
 
$
—

 
$
4,000

 
$
5,600

Estimated Siding, Fencing, and Stone reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method
 
30,000

 
10,300

 
2,700


We provide no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of our reporting units will not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in future goodwill impairments.

Income Taxes.  We utilize the asset and liability method in accounting for income taxes, which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financial statements and the amounts included in our federal and state income tax returns be recognized in the consolidated balance sheet.  The amount recorded in our consolidated financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns.  Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states in which we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  We establish reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  We have executed a tax sharing agreement with Ply Gem Holdings and Ply Gem Investment Holdings (during 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation) pursuant to which tax liabilities for each respective party are computed on a stand-alone basis.  Our U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns.  Ply Gem Canada files separate Canadian income tax returns.

At December 31, 2011, we were in a full federal valuation allowance position as we were no longer in a net deferred liability tax position and continued to incur losses for income tax purposes.  Additionally, at December 31, 2011, we were in a partial state valuation allowance position for certain legal entities primarily related to losses for income tax purposes. At December 31, 2012, we remained in a full federal valuation allowance position and a partial state valuation allowance position as we continued to incur cumulative losses for income tax purposes.  As of December 31, 2012 and 2011, we did not have a valuation allowance for our profitable foreign operations. Refer to Note 10 to the consolidated financial statements for additional information regarding income taxes.

28


 
Results of Operations

The following table summarizes net sales and net income (loss) by segment and is derived from the accompanying consolidated statements of operations included in this report.
 
 
Year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Net Sales
 
 
 
 
 
 
  Siding, Fencing, and Stone
 
$
658,045

 
$
639,290

 
$
604,406

  Windows and Doors
 
463,256

 
395,567

 
391,500

Operating earnings (loss)
 
 

 
 

 
 

  Siding, Fencing, and Stone
 
110,456

 
90,849

 
92,612

  Windows and Doors
 
(20,565
)
 
(31,134
)
 
(19,410
)
  Unallocated
 
(19,871
)
 
(14,784
)
 
(16,372
)
Foreign currency gain
 
 

 
 

 
 

  Windows and Doors
 
409

 
492

 
510

Interest expense, net
 
 

 
 

 
 

  Siding, Fencing, and Stone
 
47

 
83

 
121

  Windows and Doors
 
18

 
13

 
(90
)
  Unallocated
 
(103,107
)
 
(101,480
)
 
(122,864
)
Income tax benefit (expense)
 
 

 
 

 
 

  Unallocated
 
(2,835
)
 
(683
)
 
(5,027
)
Gain (loss) on modification or
 
 

 
 

 
 

extinguishment of debt
 
 

 
 

 
 

  Unallocated
 
(3,607
)
 
(27,863
)
 
98,187

 
 
 
 
 
 
 
Net income (loss)
 
$
(39,055
)
 
$
(84,507
)
 
$
27,667

    
The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated. However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.

This review of performance is organized by business segment, reflecting the way we manage our business.  Each business group leader is responsible for operating results down to operating earnings (loss).  We use operating earnings as a performance measure as it captures the income and expenses within the management control of our business leaders.  Corporate management is responsible for making all financing decisions.  Therefore, each segment discussion focuses on the factors affecting operating earnings, while interest expense and income taxes and certain other unallocated expenses are separately discussed at the corporate level.

Siding, Fencing, and Stone Segment

 
 
Year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
658,045

 
100.0
%
 
$
639,290

 
100.0
%
 
$
604,406

 
100.0
%
Gross profit
 
180,244

 
27.4
%
 
158,798

 
24.8
%
 
155,535

 
25.7
%
SG&A expenses
 
61,201

 
9.3
%
 
59,646

 
9.3
%
 
54,410

 
9.0
%
Amortization of intangible assets
 
8,587

 
1.3
%
 
8,303

 
1.3
%
 
8,513

 
1.4
%
Operating earnings
 
110,456

 
16.8
%
 
90,849

 
14.2
%
 
92,612

 
15.3
%


29

Net Sales

Net sales for the year ended December 31, 2012 increased $18.8 million or 2.9% compared to the year ended December 31, 2011. During the year ended December 31, 2011, our net sales were reduced by a $10.4 million sales credit related to an inventory buyback for the lift-out of competitors' inventory related to a significant new customer win. However, the $10.4 million inventory buyback was offset by the initial stocking sales and inventory build to this same new customer. Overall, our 2.9% net sales increase was driven by higher unit volumes which resulted from improved conditions in the U.S. new construction housing market including, but not limited to, the declining number of foreclosures, rising home prices, and improving general economic conditions for the year ended December 31, 2012. According to the NAHB, 2012 single family housing starts are estimated to have increased approximately 23.2% relative to 2011. Historically, we have believed there is a 90 day lag between a new housing start with ground being broken and the time when our products are utilized on the exterior of a home. During 2012, we believe that this lag period may have expanded as a result of labor shortages in the homebuilding industry.

While new construction experienced significant growth, market demand for repair and remodeling products continued to lag the new construction sector in 2012. According to the Leading Indicator of Remodeling Activity index, the four-quarter moving growth rate at December 31, 2012 was 8.8% compared to 2.2% at December 31, 2011. Combining the strength of demand in the new construction market with the softer market conditions for repair and remodeling products, the Vinyl Siding Institute reported that vinyl siding industry shipments increased 3.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011. After giving effect to the aforementioned initial stocking sales and inventory build, the Company believes that its vinyl siding unit volume shipments would have increased 5.3%. The Company's vinyl siding market position remained consistent in 2012 at approximately 36.0% compared to 2011. During the 2012 fourth quarter, the Company's vinyl siding industry shipments increased 5.7% compared to the same period in 2011, while industry shipments increased 2.7%.

Net sales for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $34.9 million, or 5.8%.  Net sales increased despite continued low industry unit volume that resulted from the challenging market conditions that persisted in the U.S. housing market.  These negative general market conditions were offset by sales to new customers and higher selling prices that were increased in response to higher raw material and freight costs.  According to the NAHB, 2011 single family housing starts decreased approximately 7.9% from 2010.  This decrease was attributable in part to the poor general economic conditions that existed in the United States including, among other things, high unemployment, the number of foreclosures, and falling home prices that negatively impacted demand for the U.S. housing market.
 
The Company’s sales to new customers and higher selling prices related to increased material costs offset the general housing market conditions.  In addition, favorable weather conditions during the fourth quarter also contributed to the sales growth year over year.  During the 2011 fourth quarter, the Company’s vinyl siding unit shipments increased 10.8% compared to the same period in 2010.  According to the Vinyl Siding Institute, the vinyl siding industry shipments decreased 3.9% for 2011 compared to 2010 while the Company’s shipments increased approximately 7.1% driven by sales to new customers.  The Company’s vinyl siding market position for 2011 increased to approximately 36.0% from 32.3% for 2010.  Included as a reduction of net sales for the year ended December 31, 2011 were inventory buybacks for the lift-out of competitors’ inventory of approximately $11.2 million related to these new customers.  Excluding the impact of these buybacks, 2011 net sales would have increased 7.6% compared to 2010.

Gross Profit

Gross profit for the year ended December 31, 2012 increased $21.4 million or 13.5% compared to the year ended December 31, 2011. Gross profit as a percentage of sales increased from 24.8% for the year ended December 31, 2011 to 27.4% for the year ended December 31, 2012. Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the buyback, or lift-out, of our competitor's product on initial stocking orders, partially offset by the scrap value of inventory received. Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks. The remaining increase from 25.9% to 27.4% was primarily attributable to increases in unit volume shipments specifically related to new construction and the 23.2% volume increase from 2011.

As it relates to our two primary raw material cost components, aluminum and PVC resin, there has been movement relative to prior years. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

 

30

Gross profit for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $3.3 million, or 2.1%.  Gross profit as a percentage of sales decreased from 25.7% for the year ended December 31, 2010 to 24.8% for the year ended December 31, 2011.  Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the buyback, or lift-out, of our competitor’s product on initial stocking orders, partially offset by the scrap value of inventory received.  Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks, which is consistent with the prior year.  According to the London Metal Exchange, the price of aluminum increased approximately 13.9% for the year ended December 31, 2011 compared to the year ended December 31, 2010.  In addition, the average market price for PVC resin was estimated to have increased 14.1% for 2011 compared to 2010.  As discussed above, the Company initiated selling price increases in response to these rising material and freight costs.

SG&A Expense

SG&A expenses for the year ended December 31, 2012 increased $1.6 million or 2.6% relative to the year ended December 31, 2011. As a percentage of sales, SG&A expenses were consistent between 2012 and 2011 at approximately 9.3%. The SG&A expense dollar increase resulted primarily from higher management incentive compensation expense related to improved business performance.

SG&A expense for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $5.2 million, or 9.6%.  The increase in SG&A expense was attributed to higher employee related expenses of approximately $2.7 million as well as increased selling and marketing expenses of approximately $2.2 million related to increased sales. As a percentage of sales, SG&A expense increased slightly to 9.3% for the year ended December 31, 2011 from 9.0% for the year ended December 31, 2010 due to higher employee related expenses.

Amortization of Intangible Assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and December 31, 2010.

Windows and Doors Segment

 
 
Year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
463,256

 
100.0
 %
 
$
395,567

 
100.0
 %
 
$
391,500

 
100.0
 %
Gross profit
 
63,955

 
13.8
 %
 
51,734

 
13.1
 %
 
60,425

 
15.4
 %
SG&A expenses
 
66,170

 
14.3
 %
 
64,518

 
16.3
 %
 
61,285

 
15.7
 %
Amortization of intangible assets
 
18,350

 
4.0
 %
 
18,350

 
4.6
 %
 
18,550

 
4.7
 %
Operating loss
 
(20,565
)
 
(4.4
)%
 
(31,134
)
 
(7.9
)%
 
(19,410
)
 
(5.0
)%
Currency transaction gain
 
409

 
0.1
 %
 
492

 
0.1
 %
 
510

 
0.1
 %

Net Sales

Net sales for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $67.7 million, or 17.1%. The net sales increase is primarily attributable to the aforementioned 23.2% increase in single family housing starts for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Since the majority of our current Windows and Doors business is related to new construction demand versus repair and remodeling, current market conditions for new construction have driven the net sales increase as well as certain strategic market share gains. In addition, the net sales increase resulted from improving end market conditions in Western Canada which according to the Canadian Mortgage and Housing Corporation, estimates that single family housing starts in Alberta, Canada have increased approximately 15.1% for the year ended December 31, 2012.

31


 
Net sales for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $4.1 million, or 1.0%.  Despite the aforementioned 7.9% decrease in U.S. single family housing starts for the year ended December 31, 2011 compared to the year ended December 31, 2010, the Windows and Doors segment demonstrated an ability to offset this general market decrease by gaining sales with new customers in both the new construction and repair and remodeling markets specifically expanding our multi-family opportunities.  The sales gains to new customers were partially offset by a declining end user market in Western Canada resulting from decreased housing starts in Alberta, Canada which the Company believes were impacted in part by unusually poor weather conditions in the first half of 2011.  According to the Canadian Mortgage and Housing Corporation, housing starts in Alberta, Canada were estimated to have decreased by 2.1% in 2011 as compared to 2010.
.
 
Gross Profit

Gross profit for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $12.2 million or 23.6%. Gross profit as a percentage of sales increased from 13.1% for the year ended December 31, 2011 to 13.8% for the year ended December 31, 2012. The increase in gross profit and gross profit percentage can be attributed to the net sales increase of 17.1% and the corresponding improved operating leverage, specifically in the domestic United States, on fixed costs resulting from the net sales increase during the year ended December 31, 2012. The favorable volume impact on gross profit was partially offset by unfavorable labor inefficiencies due to production ramp-up costs related to the 2012 market position gains.
 
Gross profit for the year ended December 31, 2011 decreased compared to the year ended December 31, 2010 by approximately $8.7 million, or 14.4%.  Gross profit as a percentage of sales decreased from 15.4% in 2010 to 13.1% in 2011.  The decrease in gross profit and gross profit percentage was caused by higher raw material costs, specifically PVC resin and aluminum, and freight costs that were not fully offset by selling price increases.  In addition, the Company experienced short-term inefficiencies related to increased production volumes associated with the sales to new customers as discussed above, which also increased our sales mix of our value priced window products that generally carry lower gross profit margins, partially offset by favorable warranty experience for the year ended December 31, 2011.

SG&A Expense

SG&A expenses for the year ended December 31, 2012 increased $1.7 million or 2.6% relative to the year ended December 31, 2011. The 2011 SG&A expense included a $1.6 million expense related to an incremental environmental liability that was nonrecurring in 2012 adjusting the actual increase relative to 2012 to approximately $3.3 million. This increase was primarily driven by higher employee related costs specifically higher management incentive compensation expense of $1.6 million based on improved operating performance. In addition, we also incurred increased selling and marketing expenses of approximately $1.7 million related primarily to increased sales in the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of net sales, SG&A expenses decreased to 14.3% for the year ended December 31, 2012 from 16.3% for the year ended December 31, 2011 as we supported the higher net sales with better leverage on our SG&A expenses.

SG&A expense for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $3.2 million, or 5.3%.  The increase can be predominantly attributed to higher selling and marketing expenses of approximately $1.1 million as well as higher legal and professional fees of approximately $0.4 million.  In addition, we recognized an incremental environmental liability of approximately $1.6 million within SG&A expenses during the fourth quarter of 2011 related to a preliminary cost estimate provided to the EPA, as discussed in the “Environmental and Other Regulatory Matters” section in Item 1 of this Annual Report on Form 10-K. Excluding the $1.6 million, SG&A expense as a percentage of net sales would have been 15.9% for the year ended December 31, 2011 consistent with the 15.7% for the year ended December 31, 2010.

Amortization of Intangible Assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.  

32



Currency Transaction Gain (Loss)

Currency transaction gain was substantially the same for the years ended December 31, 2012, 2011 and 2010.


Unallocated Operating Earnings, Interest, and Provision for Income Taxes
 
 
Year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Statement of operations data:
 
 
 
 
 
 
SG&A expenses
 
$
(19,871
)
 
$
(14,748
)
 
$
(14,765
)
Amortization of intangible assets
 
—

 
(36
)
 
(36
)
Write-off of previously capitalized offering costs
 
—

 
—

 
(1,571
)
Operating loss
 
(19,871
)
 
(14,784
)
 
(16,372
)
Interest expense
 
(103,112
)
 
(101,486
)
 
(122,881
)
Interest income
 
5

 
6

 
17

Gain (loss) on modification or extinguishment of debt
 
(3,607
)
 
(27,863
)
 
98,187

Provision for income taxes
 
$
(2,835
)
 
$
(683
)
 
$
(5,027
)

SG&A Expense

Unallocated SG&A expense includes items which are not directly attributed to or allocated to either of our reporting segments.  Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses.  The SG&A expense for the year ended December 31, 2012 increased by $5.1 million compared with the year ended December 31, 2011.  This SG&A expense increase in 2012 is primarily due to the timing of certain employee related costs, including stock compensation ($1.3 million), long-term incentive plan expenses ($0.9 million), insurance expenses ($0.3 million) and management incentive compensation expenses ($2.1 million). The SG&A expense for the year ended December 31, 2011 was consistent with the year ended December 31, 2010.

Amortization of Intangible Assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.

Write-off of previously capitalized offering costs

We incurred approximately $1.6 million of costs associated with a public equity offering during 2010.  Since the offering was postponed for a period greater than 90 days, the costs, which were initially capitalized, were written off during the fourth quarter of 2010.  

33


Interest expense

Interest expense for the year ended December 31, 2012 increased by approximately $1.6 million compared to the same period in 2011.  The net increase was primarily due to the $40 million Senior Tack-on Notes offering in February 2012.

Interest expense for the year ended December 31, 2011 decreased by approximately $21.4 million, or 17.4%, over the same period in 2010.  The decrease was primarily due to the deleveraging event that occurred in February 2010 and the debt refinancings that were completed during 2011.  Specifically, the net decrease was due to the following:

•
a decrease of approximately $3.9 million of interest on the 9.0% Senior Subordinated Notes, which were redeemed on February 16, 2010,
•
a decrease of approximately $75.9 million of interest on the 11.75% Senior Secured Notes, which were purchased and redeemed in February and March 2011,
•
an increase of approximately $58.7 million of  interest paid on the 8.25% Senior Secured Notes, which were issued in February 2011,
•
a decrease of approximately $1.1 million of interest on our ABL Facility borrowings, primarily due to a decrease in the interest rate,
•
an increase of approximately $2.5 million due to the amortization of the discount and tender premium on the 8.25% Senior Secured Notes, which were issued in February 2011, and
•
a decrease of approximately $1.7 million due to the write off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes purchased and redeemed in February and March 2011, partially offset by additional amortization related to the financing costs for the new 8.25% Senior Secured Notes.


Interest income

 Interest income for the year ended December 31, 2012 was consistent with the year ended December 31, 2011. Interest income for the year ended December 31, 2011 decreased by $11,000 due to lower interest rates in 2011 as compared to 2010.  

Gain (loss) on modification or extinguishment of debt

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes in September 2012, as further described in the Liquidity and Capital Resources section below, we recognized a loss on modification/extinguishment of debt of approximately $3.6 million for the year ended December 31, 2012. The loss consisted of an early call premium of approximately $9.8 million, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes, and approximately $1.5 million was expensed as a loss on extinguishment of debt in the consolidated statement of operations. We also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes in this transaction. We also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations. The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the debt refinancings during January and February 2011, as further described in the Liquidity and Capital Resources section below, we recognized a loss on modification or extinguishment of debt of approximately $27.9 million for the year ended December 31, 2011.  The loss consisted of the write off of a portion of the tender premium paid with the redemption of the 11.75% Senior Secured Notes of approximately $10.9 million, the write off of a portion of the capitalized bond discount related to the 11.75% Senior Secured Notes of approximately $0.8 million, the write off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes of approximately $2.8 million, the write off of the capitalized financing costs related to the previous ABL Facility of approximately $1.2 million, and the expense of certain third-party financing costs related to the 8.25% Senior Secured Notes of approximately $12.2 million.  The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2011.

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For the year ended December 31, 2010, we reported a gain on extinguishment of debt of approximately $98.2 million.  As a result of the $141.2 million redemption of the 9% Senior Subordinated Notes on February 16, 2010, we recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write off of unamortized debt issuance costs.  As a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by an affiliate of our controlling stockholder in exchange for equity of Ply Gem Prime valued at approximately $114.9 million on February 12, 2010, we recognized a gain on extinguishment of debt of approximately $100.4 million including the write-off of unamortized debt issuance costs of approximately $3.5 million.  The net $98.2 million gain on debt extinguishment was recorded within other income (expense) separately in the consolidated statement of operations for the year ended December 31, 2010.
 
Income taxes

Income tax expense for the year ended December 31, 2012 increased to approximately $2.8 million tax expense from approximately $0.7 million tax expense for the year ended December 31, 2011.  The income tax expense of approximately $2.8 million was comprised of approximately $0.8 million of federal tax expense, $2.3 state tax expense, and approximately $0.3 million of foreign income tax benefit.  The increase in tax expense is primarily due to the impact of the full valuation allowance in addition to state income tax expense as operating performance has improved offset by the foreign income benefit caused primarily by a reversal of certain tax uncertainties.

As of December 31, 2012, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized.  Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets.  The Company's effective tax rate for the year ended December 31, 2012 was approximately 7.8%. For the year ended December 31, 2012, our estimated effective tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and foreign income tax benefit.

Income tax expense for the year ended December 31, 2011 decreased to approximately $0.7 million tax expense from approximately $5.0 million tax expense for the year ended December 31, 2010. The income tax expense of approximately $0.7 million was comprised of approximately $0.2 million of state tax benefit and approximately $0.9 million of foreign income tax expense. The decrease in tax expense is primarily due to the increase in the taxable loss for the year ended December 31, 2011. As of December 31, 2011, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon the projections of future taxable income in assessing the recoverability of deferred tax assets. The Company's effective tax rate for the year ended December 31, 2011 was approximately 0.8%.

Liquidity and Capital Resources

During the year ended December 31, 2012, cash and cash equivalents increased to approximately $27.2 million compared to approximately $11.7 million as of December 31, 2011.  During the year ended December 31, 2011, cash and cash equivalents decreased from approximately $17.5 million to $11.7 million as of December 31, 2011.

Our business is seasonal because inclement weather during the winter months reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors, especially in the Northeast and Midwest regions of the United States and Western Canada.  As a result, our liquidity typically increases during the second and third quarters as our borrowing base increases under the ABL Facility reaching a peak early in the fourth quarter, and decreases late in the fourth quarter and throughout the first quarter.

Our primary cash needs are for working capital, capital expenditures and debt service.  As of December 31, 2012, our annual interest charges for debt service, including the ABL Facility, were estimated to be approximately $86.3 million.  As of December 31, 2012, we did not have any scheduled debt maturities until 2016.  The specific debt instruments and their corresponding terms and due dates are described in the following sections.  Our capital expenditures have historically averaged approximately 1.5% of net sales on an annual basis.  We finance these cash requirements through internally generated cash flow and funds borrowed under Ply Gem Industries’ ABL Facility.
 

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Ply Gem’s specific cash flow movement for the year ended December 31, 2012 is summarized below:

Cash provided by (used in) operating activities

Net cash provided by operating activities for the year ended December 31, 2012 was approximately $48.7 million.  Net cash used in operating activities for the year ended December 31, 2011 was approximately $3.5 million, and net cash provided by operating activities for the year ended December 31, 2010 was approximately $6.7 million.  

The increase in cash provided by operating activities was primarily caused by higher operating earnings of $25.1 million reflecting the recovering U.S. residential housing market which improved our operating leverage in the year ended December 31, 2012 as compared to the prior year. The higher operating earnings were supplemented by improved working capital metrics primarily achieved by monitoring inventory levels more effectively ($11.1 million), more favorable collection on receivables ($7.9 million) and management of accounts payable ($22.4 million) offset by negative movement in accrued expenses ($10.7 million) attributed to the refinancing of the 13.125% Senior Subordinated Notes with the 9.375% Senior Notes where accrued interest of approximately $5.8 million was paid during 2012.

The increase in cash used in operating activities during 2011 as compared to 2010 was due to an approximate $11.9 million decrease in operating earnings driven by commodity cost increases that were not fully offset with selling price increases and increased SG&A expense.  In addition, the increase in cash used in operating activities was caused by a negative working capital change of approximately $14.6 million compared to 2010.  This working capital change was driven by an increase in fourth quarter activity as the Company’s net sales increased 9.9% during the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010.  This sales activity drove the corresponding receivable and inventory increases comparing December 31, 2011 to December 31, 2010.  These increases were partially offset by a favorable change within accrued expenses which was primarily caused by an increase in accrued interest of approximately $20.6 million.  This increase in accrued interest resulted from the debt refinancing activity in which $725.0 million of 11.75% Senior Secured Notes (June and December interest payments) were refinanced through the $800.0 million of 8.25% Senior Secured Notes (February and August interest payments).  The change in the coupon rate saved the Company approximately $19.2 million in annual cash interest, while the new interest dates caused the 2011 favorable change within accrued interest.

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Cash used in investing activities

Net cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was approximately $24.6 million, $11.4 million, and $9.1 million, respectively.  The cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was for capital expenditures.  Capital expenditures for 2012 were higher at approximately 2.2% of net sales compared to our historical average of 1.5% due to the Company's entrance into the cellular PVC trim market in our Siding, Fencing, and Stone segment officially during 2013, which required equipment purchases in 2012. In addition, our Windows and Door segment incurred increased capital expenditures in 2012 related to tooling and equipment purchases for a product streamlining initiative aimed at optimizing our SKUs while improving certain functionalities across multiple window products. By streamlining product offerings, the Company will be able to capitalize on operating efficiencies in a recovering U.S. housing market allowing the Company to produce identical product at multiple facilities throughout the United States.

Cash provided by (used in) financing activities

Net cash used in financing activities for the year ended December 31, 2012 was approximately $8.8 million. The cash provided by financing activities was primarily from net proceeds of $34.0 million from the Senior Tack-on Notes issued in February 2012, $10.0 million in net proceeds from the issuance of the 9.375% Senior Notes in September 2012 used for the $9.8 million call premium partially offset by debt issuance costs of $3.0 million incurred for the Senior Tack-on Notes as well as the 9.375% Senior Notes. These financing activities were offset by $40.0 million in net revolver payments under the ABL Facility during 2012 reflective of improved operating performance for 2012.

Net cash provided by financing activities for the year ended December 31, 2011 was approximately $9.2 million, primarily from net revolver borrowings of $25.0 million under the ABL Facility, net proceeds of $75.0 million from the debt refinancing for the 8.25% Senior Secured Notes, offset by early tender premium payments of approximately $49.8 million, equity repurchases of $14.0 million, and debt issuance costs of approximately $27.0 million.

Net cash provided by financing activities for the year ended December 31, 2010 was approximately $2.4 million, and consisted of approximately $4.5 million net cash provided as a result of the $210.0 million deleveraging event that occurred during February 2010 of the 9.0% Senior Subordinated Notes, approximately $5.0 million cash provided from net ABL borrowings, approximately $5.0 million cash used for debt issuance costs, approximately $1.5 million cash used for a tax payment on behalf of our parent, and approximately $0.6 million net cash used in equity contributions/repurchases.  

Ply Gem’s specific debt instruments and terms are described below:


2012 Developments
On September 27, 2012, Ply Gem Industries completed an offering for $160.0 million aggregate principal amount of 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”). The net proceeds of this offering, together with cash on hand, were deposited with the trustee for Ply Gem Industries' 13.125% Senior Subordinated Notes due 2014 (the “13.125% Senior Subordinated Notes”) to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017.

On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction (“Senior Tack-on Notes”). The net proceeds of approximately $32.7 million, after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will continue to be utilized for general corporate purposes. The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes due 2018.

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8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par. Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses. A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes given that the 2011 transaction was predominately accounted for as a loan modification. The 8.25% Senior Secured Notes due 2018 originally issued in February 2011 and the Senior Tack-on Notes (collectively, the “8.25% Senior Secured Notes”) will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum. Interest will be paid semi-annually on February 15 and August 15 of each year.

Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the aggregate principal amount of the 8.25% Senior Secured Notes remains outstanding after the redemption. In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to the greater of (i) $84.0 million of the 8.25% Senior Secured Notes and (ii) 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any. At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”). The indenture governing the 8.25% Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt in limited circumstances as defined in the indenture) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing the Company's obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

In addition, the Company's stock ownership in the Company's subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission (“SEC”).

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On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes issued in February 2011 by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes. Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act. However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% Senior Secured Notes at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million.  Interest was paid semi-annually on June 15 and December 15 of each year.  On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its 11.75% Senior Secured Notes in a private placement transaction.  The additional $25.0 million of 11.75% Senior Secured Notes had the same terms and covenants as the initial $700.0 million of 11.75% Senior Secured Notes.
 
On February 11, 2011, we purchased approximately $718.6 million principal amount of the 11.75% Senior Secured Notes in a tender offer at a price of $1,069.00 per $1,000 principal amount, which included an early tender payment of $40.00 per $1,000 principal amount, plus accrued and unpaid interest, and on February 28, 2011, we purchased $6.0 million principal amount of the 11.75% Senior Secured Notes in the tender offer at a price of $1,029.00 per $1,000 principal amount, plus accrued and unpaid interest.  On March 13, 2011, pursuant to the terms of the indenture governing the 11.75% Senior Secured Notes, we redeemed the remaining approximate $0.4 million at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest.  As a result of these transactions, we paid cumulative early tender premiums of approximately $49.8 million during the year ended December 31, 2011.  Following the redemption on March 13, 2011, there were no longer any 11.75% Senior Secured Notes outstanding.  The 11.75% Senior Secured Notes would have matured on June 15, 2013 and bore interest at the rate of 11.75% per annum.  The loss recorded as a result of this purchase is discussed in detail in the section “Gain (loss) on debt extinguishment” below.

 
Senior Secured Asset Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility. Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013. The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In August 2011, the Company exercised a portion of the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the new ABL Facility from $175.0 million to $212.5 million. Under the terms of the new ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0 million. Under the new ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada. All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries' option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans. The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

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In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high). Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility. As of December 31, 2012, the Company's interest rate on the new ABL Facility was approximately 2.5%. The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company's excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million. The new ABL Facility also contains a cash dominion requirement if the Company's excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February and March).

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries' existing and future, direct and indirect, wholly owned domestic subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries' and the Guarantors' material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

The ABL Facility contains certain covenants that limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

On September 21, 2012, Ply Gem Industries completed an amendment to its ABL Facility to permit the refinancing of its 13.125% Senior Subordinated Notes with unsecured notes rather than subordinated notes. No other terms or provisions were modified or changed in conjunction with this amendment.

As of December 31, 2012, Ply Gem Industries had approximately $191.2 million of contractual availability and approximately $113.4 million of borrowing base availability under the new ABL Facility, reflecting $15.0 million of borrowings outstanding and approximately $6.3 million of letters of credit and priority payables reserves.


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Senior Secured Asset-Based Revolving Credit Facility due 2013

Concurrently with the 11.75% Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into an ABL Facility.  The prior ABL Facility initially provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada.  In July 2009, we amended the prior ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million.  As of December 31, 2011, there were no outstanding borrowings under the prior ABL Facility, as it was replaced with the new ABL Facility on January 26, 2011.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

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Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any. On or after October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries' and the guarantors' existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

The indenture governing the 9.375% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries' assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.
13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million. Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses. The interest rate on these Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

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On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest.

On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes. The loss recorded as a result of the debt transactions is discussed in the section “Gain (Loss) on debt modification or extinguishment” below.


Gain (loss) on debt modification or extinguishment

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes during the year ended December 31, 2012, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 13.125% Senior Subordinated Notes and the 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. The Company incurred an early call premium of approximately $9.8 million in connection with this transaction, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes and approximately $1.5 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012. The Company also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes as a result of this transaction for the year ended December 31, 2012. The Company also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the 8.25% Senior Secured Notes issuance and purchase and redemption of the 11.75% Senior Secured Notes during the year ended December 31, 2011, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt. The Company determined that this transaction resulted predominantly in a modification but in some instances as an extinguishment as some creditors did not participate in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes. The Company incurred an early tender premium of approximately $49.8 million in conjunction with this transaction, of which approximately $38.9 million was recorded as a discount on the 8.25% Senior Secured Notes and approximately $10.9 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011. The Company also expensed approximately $0.8 million for the unamortized discount and $2.8 million for the unamortized debt issuance costs for the 11.75% Senior Secured Notes in this transaction for the year ended December 31, 2011. The Company also incurred approximately $25.9 million of costs associated with this transaction, of which approximately $13.6 million was recorded as debt issuance costs and approximately $12.3 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.

As a result of the ABL Facility refinancing during the first quarter of 2011, the Company evaluated the proper accounting treatment for the debt issuance costs associated with the prior ABL Facility and the new ABL Facility as there were certain members of the loan syndication that existed in both facilities and other members who were not participants in the new ABL Facility. Based on this evaluation, the Company expensed approximately $1.2 million of debt issuance costs as a loss on modification or extinguishment of debt and recorded approximately $2.1 million of debt issuance costs.

43



As a result of the $141.2 million redemption of the previous 9% Senior Subordinated Notes on February 16, 2010, the Company recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write-off of unamortized debt issuance costs. On February 12, 2010, as a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by affiliates of the Company’s controlling stockholders in exchange for equity of Ply Gem Prime valued at approximately $114.9 million, the Company recognized a gain on extinguishment of approximately $100.4 million, including the write-off of unamortized debt issuance costs of approximately $3.5 million. The $98.2 million gain on debt extinguishment was recorded separately in the accompanying consolidated statement of operations for the year ended December 31, 2010.

Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately $3.6 million and $27.9 million and a gain on debt extinguishment of approximately $98.2 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, as summarized in the table below.
 
(Amounts in thousands)
 
For the year ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Gain (loss) on extinguishment of debt:
 
 
 
 
 
 
Tender premium
 
$
—

 
$
(10,883
)
 
$
—

11.75% Senior Secured Notes unamortized discount
 
—

 
(775
)
 
—

11.75% Senior Secured Notes unamortized debt issuance costs
 
—

 
(2,757
)
 
—

   13.125% Senior Subordinated Notes call premium
 
(1,487
)
 
—

 
—

   13.125% Senior Subordinated Notes unamortized discount
 
(299
)
 
—

 
—

   13.125% Senior Subordinated Notes unamortized debt issuance costs
 
(372
)
 
—

 
—

 
 
(2,158
)
 
(14,415
)
 
—

 
 
 
 
 
 
 
   Carrying value of 9% Senior Subordinated Notes
 
—

 
—

 
360,000

   9% Senior Subordinated Notes unamortized debt issuance costs
 
—

 
—

 
(5,780
)
   9% Senior Subordinated Notes unamortized premium
 
—

 
—

 
100

   Reacquisition price of 9% Senior Subordinated Notes
 
—

 
—

 
(256,133
)
 
 
—

 
—

 
98,187

Loss on modification of debt:
 
 

 
 

 
 
Third party fees for 8.25% Senior Secured Notes
 
—

 
(12,261
)
 
—

Unamortized debt issuance costs for prior ABL Facility
 
—

 
(1,187
)
 
—

   Third party fees for 9.375% Senior Notes
 
(1,449
)
 
—

 
—

 
 
(1,449
)
 
(13,448
)
 
—

 
 
 
 
 
 
 
Total gain (loss) on modification or extinguishment of debt
 
$
(3,607
)
 
$
(27,863
)
 
$
98,187


44


 
Liquidity requirements

We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under our ABL Facility.  We believe that we will continue to meet our liquidity requirements over the next 12 months.  We believe that our operating units are positive cash flow generating units and will continue to sustain their operations without any significant liquidity concerns.  The performance of these operating units is significantly impacted by the performance of the housing industry, specifically single family housing starts and the repair and remodeling activity.  Any unforeseen or unanticipated downturn in the housing industry could have a negative impact on our liquidity position.
    
Management anticipates that our current liquidity position, as well as expected cash flows from our operations should be sufficient to meet ongoing operational cash flow needs, capital expenditures, debt service obligations, and other fees payable under other contractual obligations for the foreseeable future. As of December 31, 2012, we had cash and cash equivalents of approximately $27.2 million, $191.2 million of contractual availability under the ABL Facility and approximately $113.4 million of borrowing base availability.  

In order to further supplement the Company's operating cash flow, the Company has from time to time opportunistically accessed capital markets based on prevailing economic and financial conditions. Based on market conditions, the Company may elect to pursue additional financing alternatives in the future. 

45


Contractual Obligations

The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2012.  Interest on the 8.25% Senior Secured Notes and the 9.375% Senior Notes is fixed.  Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.9%.  Actual interest rates for future periods may differ from those presented here.
 
 
 
Total
 
Less Than
 
 
 
 
 
More than
(Amounts in thousands)
 
Amount
 
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
5 Years
Long-term debt (1)
 
$
1,071,000

 
$
—

 
$
—

 
$
231,000

 
$
840,000

Interest payments (2)
 
455,857

 
86,359

 
172,718

 
162,130

 
34,650

Non-cancelable lease commitments (3)
 
112,698

 
18,861

 
32,225

 
22,768

 
38,844

Purchase obligations (4)
 
78,660

 
78,660

 
—

 
—

 
—

Other long-term liabilities (5)
 
11,319

 
1,131

 
2,264

 
2,264

 
5,660

 
 
$
1,729,534

 
$
185,011

 
$
207,207

 
$
418,162

 
$
919,154


(1)
Long-term debt is shown before discount, and consists of our 9.375% Senior Notes, 8.25% Senior Secured Notes, and the ABL Facility.  For more information concerning the long-term debt, see “Liquidity and Capital Resources” above.
(2)
Interest payments for variable interest debt are based on current interest rates.
(3)
Non-cancelable lease commitments represent lease payments for facilities and equipment.
(4)
Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction.  These obligations are related primarily to inventory purchases under a 2013 contract that was finalized during 2012.
(5)
Other long term liabilities include pension obligations which are estimated based on our 2012 annual funding requirement.  Because we are unable to reliably estimate the timing of future tax payments related to uncertain tax positions, certain tax related obligations of approximately $3.5 million, including interest of approximately $0.9 million, have been excluded from the table above.

As discussed in “Certain Relationships and Related Transactions,” we will pay an annual fee to an affiliate of CI Capital Partners each year based on 2% of EBITDA.  No amount for this fee has been included in the above table.

 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation; Seasonality

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment.  We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.

The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather conditions during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors.  Our sales in both segments are usually lower during the first and fourth quarters.  Since a portion of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels.  In addition, the demand for cash to fund our working capital is greater from late in the fourth quarter through the first quarter.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements for recent accounting pronouncements, which are hereby incorporated by reference into this Part II, Item 7.

46


 
Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk

Our principal interest rate exposure relates to the loans outstanding under our new ABL Facility, which provides for borrowings of up to $212.5 million, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin.  Assuming the ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.5 million per year.  At December 31, 2012, we were not party to any interest rate swaps to manage our interest rate risk.  In the future, we may enter into interest rate swaps, involving exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.

Foreign Currency Risk

Our results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of the Canadian dollar.  In 2012, the net impact of foreign currency changes to our results of operations was a gain of $0.4 million.  The impact of foreign currency changes related to translation resulted in an increase in stockholder’s equity of approximately $0.8 million at December 31, 2012.  The revenue or expense reported by us as a result of currency fluctuations will be greater in times of U.S. dollar devaluation and less in times of U.S. dollar appreciation.  We generally do not enter into derivative financial instruments to manage foreign currency exposure.  For the year ended December 31, 2012, we did not have any significant outstanding foreign currency hedging contracts.

Commodity Pricing Risk

We are subject to significant market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum, and wood.  If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly.  We manage the exposure to commodity pricing risk by continuing to diversify our product mix, strategic buying programs and vendor partnering. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

47



Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations.  Our lease payments related to our sale/leaseback agreement include an annual increase based on the Consumer Price Index ("CPI"), which could expose us to potential higher costs in years with high inflation. The CPI increase for 2012 was approximately 1.6%.

Consumer and Commercial Credit

As general economic conditions in the United States continue to be challenging for the Company and its customers, we have increased our focus on the credit worthiness of our customers.  These procedures are necessary to ensure that our allowance for doubtful accounts is adequate and that we are performing proper due diligence prior to initiating sales.  We will continue to monitor these statistics to ensure that issues, if any, are identified in a timely manner to reduce risk and minimize our bad debt exposure.  If general economic conditions continue to worsen, additional reserves may be necessary. For the years ended December 31, 2012, 2011, and 2010, the Company's bad debt expense was $0.8 million, $1.5 million, and $3.2 million, respectively.

Labor Force Risk

Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize, and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the U.S. housing market recovers and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired. Historically, the Company has believed that the lag period between breaking ground on a new housing start and the utilization of our products on the exterior of a home was 90 days. The Company believes that this labor force risk could expand the historical 90 day lag period to 120 days or more, potentially.


48



Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Registered Public Accounting Firm
 


The Board of Directors and Stockholder
of Ply Gem Holdings, Inc.
 
We have audited the accompanying consolidated balance sheets of Ply Gem Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive (loss) income, stockholder's equity (deficit), and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 Holdings, Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 
 
/s/ Ernst & Young LLP
 
 
Raleigh, North Carolina
March 15, 2013

49


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts in thousands)
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
Net sales
 
$
1,121,301

 
$
1,034,857

 
$
995,906

Cost of products sold
 
877,102

 
824,325

 
779,946

Gross profit
 
244,199

 
210,532

 
215,960

Operating expenses:
 
 

 
 

 
 

Selling, general and administrative expenses
 
147,242

 
138,912

 
130,460

Amortization of intangible assets
 
26,937

 
26,689

 
27,099

Write-off of previously capitalized offering costs
 
—

 
—

 
1,571

Total operating expenses
 
174,179

 
165,601

 
159,130

Operating earnings
 
70,020

 
44,931

 
56,830

Foreign currency gain
 
409

 
492

 
510

Interest expense
 
(103,133
)
 
(101,488
)
 
(122,992
)
Interest income
 
91

 
104

 
159

Gain (loss) on modification or extinguishment of debt
 
(3,607
)
 
(27,863
)
 
98,187

Income (loss) before provision for income taxes
 
(36,220
)
 
(83,824
)
 
32,694

Provision for income taxes
 
2,835

 
683

 
5,027

Net income (loss)
 
$
(39,055
)
 
$
(84,507
)
 
$
27,667









See accompanying notes to consolidated financial statements.

50


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Amounts in thousands)
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
Net (loss) income
 
$
(39,055
)
 
$
(84,507
)
 
$
27,667

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

Currency translation
 
835

 
(691
)
 
1,639

Minimum pension liability for actuarial loss, net of tax
 
(1,103
)
 
(6,600
)
 
(740
)
Other comprehensive (loss) income
 
(268
)
 
(7,291
)
 
899

Comprehensive (loss) income
 
$
(39,323
)
 
$
(91,798
)
 
$
28,566

 

 
See accompanying notes to consolidated financial statements.



51


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)
 
December 31, 2012
 
December 31, 2011
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
27,194

 
$
11,700

Accounts receivable, less allowances of $3,584 and $3,883, respectively
 
115,052

 
109,515

Inventories:
 
 

 
 

   Raw materials
 
39,952

 
41,909

   Work in process
 
20,931

 
24,286

   Finished goods
 
39,409

 
38,610

Total inventory
 
100,292

 
104,805

Prepaid expenses and other current assets
 
15,384

 
13,272

Deferred income taxes
 
5,172

 
5,675

    Total current assets
 
263,094

 
244,967

Property and Equipment, at cost:
 
 

 
 

   Land
 
3,737

 
3,737

   Buildings and improvements
 
37,941

 
36,588

   Machinery and equipment
 
293,275

 
272,120

   Total property and equipment
 
334,953

 
312,445

   Less accumulated depreciation
 
(235,848
)
 
(212,600
)
Total property and equipment, net
 
99,105

 
99,845

Other Assets:
 
 

 
 

Intangible assets, net
 
94,356

 
121,148

Goodwill
 
392,455

 
391,467

Deferred income taxes
 
2,981

 
3,121

Other
 
29,859

 
32,364

Total other assets
 
519,651

 
548,100

 
 
$
881,850

 
$
892,912

LIABILITIES AND STOCKHOLDER'S DEFICIT
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
67,797

 
$
50,090

Accrued expenses
 
93,918

 
90,881

Total current liabilities
 
161,715

 
140,971

Deferred income taxes
 
10,049

 
9,865

Other long-term liabilities
 
60,644

 
57,728

Long-term debt
 
964,384

 
961,670

Commitments and contingencies
 


 


 
 
 
 
 
Stockholder's Deficit:
 
 

 
 

Preferred stock $0.01 par, 100 shares authorized, none issued and outstanding
 
—

 
—

Common stock $0.01 par, 100 shares authorized, issued and outstanding
 
—

 
—

Additional paid-in-capital
 
311,034

 
309,331

Accumulated deficit
 
(619,640
)
 
(580,585
)
Accumulated other comprehensive loss
 
(6,336
)
 
(6,068
)
Total stockholder's deficit
 
(314,942
)
 
(277,322
)

 
$
881,850

 
$
892,912


See accompanying notes to consolidated financial statements.

52


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
(39,055
)
 
$
(84,507
)
 
$
27,667

Adjustments to reconcile net income (loss) to cash
 
 

 
 

 
 

provided by (used in) operating activities:
 
 

 
 

 
 

Depreciation and amortization expense
 
52,277

 
54,020

 
60,718

Non-cash interest expense, net
 
11,428

 
10,518

 
9,800

Gain on foreign currency transactions
 
(409
)
 
(492
)
 
(510
)
(Gain) loss on modification or extinguishment of debt
 
3,607

 
27,863

 
(98,187
)
Write-off of previously capitalized offering costs
 
—

 
—

 
1,571

Stock based compensation
 
1,703

 
430

 
164

Deferred income taxes
 
1,027

 
6,293

 
1,603

Reduction in tax uncertainty, net of valuation allowance
 
(92
)
 
(6,617
)
 
—

Other
 
(37
)
 
(484
)
 
(168
)
Changes in operating assets and liabilities:
 
 

 
 

 
 

Accounts receivable, net
 
(5,377
)
 
(13,266
)
 
(3,023
)
Inventories
 
4,696

 
(6,413
)
 
(120
)
Prepaid expenses and other assets
 
(2,534
)
 
(1,948
)
 
7,624

Accounts payable
 
17,606

 
(4,772
)
 
1,917

Accrued expenses
 
4,592

 
15,314

 
452

Cash payments on restructuring liabilities
 
(1,177
)
 
(407
)
 
(2,630
)
Other
 
449

 
1,009

 
(130
)
Net cash provided by (used in) operating activities
 
48,704

 
(3,459
)
 
6,748

Cash flows from investing activities:
 
 

 
 

 
 

Capital expenditures
 
(24,646
)
 
(11,490
)
 
(11,105
)
Proceeds from sale of assets
 
193

 
102

 
2,032

Acquisitions, net of cash acquired
 
(100
)
 
—

 
—

Net cash used in investing activities
 
(24,553
)
 
(11,388
)
 
(9,073
)
Cash flows from financing activities:
 
 

 
 

 
 

Proceeds from long-term debt
 
102,991

 
423,684

 
145,709

Payments on long-term debt
 
(58,991
)
 
(348,684
)
 
(141,191
)
Net revolver borrowings (payments)
 
(40,000
)
 
55,000

 
5,000

Payments on previous revolver credit facility
 
—

 
(30,000
)
 
—

Payment of early tender premium
 
(9,844
)
 
(49,769
)
 
—

Equity contributions
 
—

 
—

 
2,428

Equity repurchases
 
—

 
(14,049
)
 
(2,978
)
Debt issuance costs paid
 
(2,969
)
 
(26,984
)
 
(5,029
)
Tax payments on behalf of parent
 
—

 
—

 
(1,532
)
Net cash provided by (used in) financing activities
 
(8,813
)
 
9,198

 
2,407

Impact of exchange rate movements on cash
 
156

 
(149
)
 
353

Net increase (decrease) in cash and cash equivalents
 
15,494

 
(5,798
)
 
435

Cash and cash equivalents at the beginning of the period
 
11,700

 
17,498

 
17,063

Cash and cash equivalents at the end of the period
 
$
27,194

 
$
11,700

 
$
17,498

Supplemental Information
 
 

 
 

 
 

Interest paid
 
$
95,406

 
$
90,867

 
$
113,032

Income taxes paid (received), net
 
$
307

 
$
3,937

 
$
(4,857
)

See accompanying notes to consolidated financial statements.

53


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)
(Amounts in thousands)
 
Additional
Paid in
 
Accumulated
 
Accumulated
Other
Comprehensive
 
Total
Stockholder's
 
 
Capital
 
Deficit
 
Income (Loss)
 
(Deficit)
Balance, December 31, 2009
 
$
209,939

 
$
(523,745
)
 
$
324

 
$
(313,482
)
Comprehensive income:
 
 

 
 

 
 

 
 

Net income
 
—

 
27,667

 
—

 
27,667

Currency translation
 
—

 
—

 
1,639

 
1,639

Minimum pension liability for actuarial
 
 

 
 

 
 

 
 

loss, net of tax
 
—

 
—

 
(740
)
 
(740
)
Total comprehensive income
 
 

 
 

 
 

 
28,566

Non-cash equity contribution by affiliate
 
114,929

 
—

 
—

 
114,929

Contributions and repurchase of equity, net
 
(550
)
 
—

 
—

 
(550
)
Tax payment on behalf of parent
 
(1,532
)
 
—

 
—

 
(1,532
)
Repurchase of former employee equity
 
(1,183
)
 
—

 
—

 
(1,183
)
Stock compensation
 
164

 
—

 
—

 
164

Balance, December 31, 2010
 
$
321,767

 
$
(496,078
)
 
$
1,223

 
$
(173,088
)
Comprehensive loss:
 
 

 
 

 
 

 
 

Net loss
 
—

 
(84,507
)
 
—

 
(84,507
)
Currency translation
 
—

 
—

 
(691
)
 
(691
)
Minimum pension liability for actuarial
 
 

 
 

 
 

 
 

loss, net of tax
 
—

 
—

 
(6,600
)
 
(6,600
)
Total comprehensive loss
 
 

 
 

 
 

 
(91,798
)
  Repurchase of equity
 
(12,866
)
 
—

 
—

 
(12,866
)
  Stock compensation
 
430

 
—

 
—

 
430

Balance, December 31, 2011
 
$
309,331

 
$
(580,585
)
 
$
(6,068
)
 
$
(277,322
)
Comprehensive loss:
 
 

 
 

 
 

 
 

Net loss
 
—

 
(39,055
)
 
—

 
(39,055
)
Currency translation
 
—

 
—

 
835

 
835

Minimum pension liability for actuarial
 
 

 
 

 
 

 
 

   loss, net of tax
 
—

 
—

 
(1,103
)
 
(1,103
)
Total comprehensive loss
 
 

 
 

 
 

 
(39,323
)
   Stock compensation
 
1,703

 
—

 
—

 
1,703

Balance, December 31, 2012
 
$
311,034

 
$
(619,640
)
 
$
(6,336
)
 
$
(314,942
)



See accompanying notes to consolidated financial statements.

54


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Ply Gem Holdings, Inc. (“Ply Gem Holdings”) and its wholly owned subsidiaries (individually and collectively, the “Company” or “Ply Gem”) are diversified manufacturers of residential and commercial building products, operating with two segments: (i) Siding, Fencing, and Stone and (ii) Windows and Doors.  Through these segments, Ply Gem Industries, Inc. (“Ply Gem Industries”) manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and remodeling and renovation markets.

Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), on January 23, 2004 by affiliates of CI Capital Partners LLC (“CI Capital Partners”) for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”).  On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”), with Ply Gem Prime being the surviving corporation.  As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime.

The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings, an affiliate of CI Capital Partners pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC dated as of December 19, 2003, as amended.  Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek.  As a result of the Ply Gem acquisition, the Company applied purchase accounting on February 12, 2004. The Company's acquisition history is summarized below:

•
On August 27, 2004, Ply Gem Industries acquired all of the outstanding shares of capital stock of MWM Holding, Inc., (“MWM Holding”), in accordance with a stock purchase agreement entered into among Ply Gem Industries, MWM Holding and the selling stockholders.

•
On February 24, 2006, Ply Gem Industries acquired all of the outstanding shares of capital stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC Holding Company (“AWC”, and together with its subsidiaries, “Alenco”), in accordance with a securities purchase agreement entered into among Ply Gem, all of the direct and indirect stockholders, warrant holders and stock options holders of AWC and FNL Management Corp, an Ohio corporation, as their representative.  Pursuant to the securities purchase agreement, Ply Gem purchased all of the issued and outstanding shares of common stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC (other than certain shares of common stock of AWC held by certain members of the senior management of Alenco that were contributed separately to Ply Gem Prime, the new parent company of Ply Gem Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime).  Immediately following the completion of the Alenco acquisition, AWC became a wholly owned subsidiary of Ply Gem.

•
On October 31, 2006, Ply Gem Industries acquired all of the issued and outstanding shares of common stock of Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”), in accordance with a stock purchase agreement entered into among Ply Gem Industries, Alcoa Securities Corporation, and Alcoa Inc.

•
On September 30, 2007, Ply Gem Industries completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business through a stock acquisition.  On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation (“Pacific Windows”).

•
On October 31, 2008, Ply Gem Industries acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer).

•
On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck Products, LLC, a composite products development company.  


55

Ply Gem is a diversified manufacturer of residential and commercial building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets.  The demand for the Company’s products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors.  The Company’s sales are usually lower during the first and fourth quarters.

Principles of Consolidation
        
The accompanying consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned.  All intercompany accounts and transactions have been eliminated.

Reclassifications and Retrospective Application of Comprehensive Income Guidance

Certain amounts in the prior fiscal years have been reclassified to conform to the presentation adopted in the current fiscal year, with no effect on net income (loss) or accumulated deficit. The financial statements include the consolidated statements of comprehensive income (loss) as required by new accounting guidance, which was retrospectively adopted during 2012.

Accounting Policies and Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods.  Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable.  Such estimates include the allowance for doubtful accounts receivable, rebates, pensions, valuation reserve for inventories, warranty reserves, insurance reserves, legal contingencies, assumptions used in the calculation of income taxes, projected cash flows used in the goodwill and intangible asset impairment tests, and environmental accruals and other contingencies.  These judgments are based on the Company’s historical experience, current trends and information available from other sources, as appropriate and are based on management’s best estimates and judgments.  The Company adjusts such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity, foreign currency, and the depressed housing and remodeling market have combined to increase the uncertainty inherent in such estimates and assumptions.  If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.

Recognition of Sales and Related Costs, Incentives and Allowances

The Company recognizes sales upon the shipment of products, net of applicable provisions for discounts and allowances.  Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product.  For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company.  Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome.  Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.  The Company records periodic estimates for these amounts based upon the historical results to date, estimated future results through the end of the contract period and the contractual provisions of the customer agreements.  Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period.  The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date while also factoring in any new business conditions that might impact the historical analysis such as new product introduction.  The Company also provides for estimates of warranty and shipping costs at the time of sale.  Shipping and warranty costs are included in cost of products sold.  Bad debt provisions are included in selling, general and administrative expenses.  The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that are expected to impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debt.


56

Cash Equivalents

Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash.

Accounts receivable

Accounts receivable-trade are recorded at their net realizable value.  The allowance for doubtful accounts was $3.6 million and $3.9 million at December 31, 2012 and 2011, respectively.  The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, the financial health of its customers, unusual macroeconomic conditions and historical experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible trade accounts receivable against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded. During the year ended December 31, 2011, the Company reclassified approximately $1.4 million from accounts receivable to a note receivable, which is classified as other assets in the accompanying consolidated balance sheets. As of December 31, 2012 and 2011, the balance of the note receivable was $0.6 million and $0.7 million, respectively.

Inventories

Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market and are determined primarily by the first-in, first-out (FIFO) method.  The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold.

The inventory reserves were approximately $6.5 million at December 31, 2012, increasing during 2012 by $0.2 million compared to the December 31, 2011 reserve balance of approximately $6.3 million.

Property and Equipment
 
Property and equipment are presented at cost.  Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows:
 
Buildings and improvements
10-37 years
Machinery and equipment, including leases
3-15 years
Leasehold improvements
Term of lease or useful life, whichever is shorter
 
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized.  When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations.  Depreciation expense for the years ended December 31, 2012, 2011, and 2010 was approximately $25.4 million, $27.3 million, and $33.6 million, respectively.

On July 30, 2010, the Company entered into an asset purchase agreement to sell substantially all of the assets associated with the operations of its Valencia, Pennsylvania facility for $2.5 million, with $1.9 million received at closing and the remaining $0.6 million recorded as a note receivable due in July 2011.  The Company recognized a loss on the sale of approximately $0.1 million, which was recorded within selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2010 and the note receivable was recorded as a current asset in the consolidated balance sheet as of December 31, 2010.  The note receivable was collected during 2011.


57

Intangible Assets, Goodwill and Other Long-lived Assets

Long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.  The Company performs undiscounted operating cash flow analyses to determine if impairment exists.  If an impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flow.

The Company tests for long-lived asset impairment at the following asset group levels: i) Siding, Fencing, and Stone (“Siding”), ii) the combined US Windows companies in the Windows and Doors segment (“US Windows”), and iii) Ply Gem Canada in the Windows and Doors segment.  For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities.  During the year ended December 31, 2011, the Company incurred an asset impairment charge of approximately $0.2 million related to a specific asset in the Windows and Doors segment that was no longer utilized.

Goodwill
    
Purchase accounting involves judgment with respect to the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill.  For significant acquisitions, the Company values items such as property and equipment and acquired intangibles based upon appraisals.

The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant.  All other intangible assets are amortized over their estimated useful lives.  The Company assesses goodwill for impairment at the November month end each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.  Refer to Note 2 for additional considerations regarding the results of the impairment test in 2012 and 2011.

Debt Issuance Costs

Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt, are amortized over the contractual term of the related agreement using the effective interest method.  Net debt issuance costs totaled approximately $23.6 million and $26.5 million as of December 31, 2012 and December 31, 2011, respectively, and have been recorded in other long term assets in the accompanying consolidated balance sheets.

Share Based Compensation

Share-based compensation cost for the Company’s stock option plan is measured at the grant date, based on the estimated fair value of the award, and is recognized over the requisite service period.  The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model.  Expected volatility is based on a review of several market indicators, including peer companies.  The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option.

Insurance Liabilities

The Company is self-insured for certain casualty losses and medical liabilities. The Company records insurance liabilities and related expenses for health, workers’ compensation, product and general liability losses and other insurance expenses in accordance with either the contractual terms of their policies or, if self-insured, the total liabilities that are estimable and probable as of the reporting date.  Insurance liabilities are recorded as current liabilities to the extent they are expected to be paid in the succeeding year with the remaining requirements classified as long-term liabilities.  The accounting for self-insured plans requires that significant judgments and estimates be made both with respect to the future liabilities to be paid for known claims and incurred but not reported claims as of the reporting date.  The Company relies on historical trends when determining the appropriate incurred but not reported claims and health insurance reserves to record in its consolidated balance sheets.  In certain cases where partial insurance coverage exists, the Company must estimate the portion of the liability that will be covered by existing insurance policies to arrive at the net expected liability to the Company.


58

Income Taxes
 
The Company utilizes the asset and liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs.  A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  Subsequent to February 12, 2004, U.S. federal income tax returns are prepared and filed by Ply Gem Investment Holdings, Inc. on behalf of itself, Ply Gem Holdings, and Ply Gem Industries and its subsidiaries.  The existing tax sharing agreement between Ply Gem Holdings and Ply Gem Investment Holdings under which tax liabilities for each respective party are computed on a stand-alone basis, was amended to include Ply Gem Prime Holdings during 2010.  U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns.  Ply Gem Canada files separate Canadian income tax returns.

Sales Taxes

Sales taxes collected from customers are recorded as liabilities until remitted to taxing authorities and therefore are not reflected in the consolidated statements of operations.

Commitments and Contingencies

The Company provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated.  Costs accrued have been estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes.

Environmental

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Environmental remediation obligation accruals are adjusted as further information develops or circumstances change.  Costs of future expenditures for environmental remediation obligations are not discounted to their present value.  Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Liquidity

The Company intends to fund its ongoing capital and working capital requirements, including its internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under the revolving credit portion of its senior secured asset based revolving credit facility (“ABL Facility”).  As of December 31, 2012, the Company had approximately $964.4 million of indebtedness, $191.2 million of contractual availability under the ABL Facility, and approximately $113.4 million of borrowing base availability reflecting $15.0 million of ABL borrowings and approximately $6.3 million of letters of credit and priority payable reserves issued under the ABL Facility.

Because of the inherent seasonality in our business and the resulting working capital requirements, the Company’s liquidity position fluctuates within a given year.  The seasonal effect that creates the Company’s greatest needs has historically been experienced during the first six months of the year and the Company anticipates borrowing funds under its ABL Facility to support this requirement.  However, the Company anticipates the funds generated from operations and funds available under the ABL Facility will be adequate to finance its ongoing operational cash flow needs, capital expenditures, debt service obligations, management incentive expenses, and other fees payable under other contractual obligations for the foreseeable future.


59

Foreign Currency

Ply Gem Canada, the Company’s Canadian subsidiary, utilizes the Canadian dollar as its functional currency.  For reporting purposes, the Company translates the assets and liabilities of its foreign entity at the exchange rates in effect at year-end.  Net sales and expenses are translated using average exchange rates in effect during the period.  Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying consolidated balance sheets.
 
The Company recorded a gain from foreign currency transactions of approximately $0.4 million, for the year ended December 31, 2012, and approximately $0.5 million for the years ended December 31, 2011 and 2010.  As of December 31, 2012 and December 31, 2011, accumulated other comprehensive income (loss) included a currency translation adjustment of approximately $0.8 million and $(0.7) million, respectively.

Concentration of Credit Risk

The Company’s largest customer in each year accounted for approximately 10.5%, 9.4%, and 9.0% of consolidated net sales for the years ended December 31, 2012, 2011, and 2010, respectively and 12.7% and 13.7% of outstanding accounts receivable as of December 31, 2012 and 2011, respectively.

Fair Value Measurement

The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

•
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3: Inputs that reflect the reporting entity’s own assumptions.

The hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

 
 
 
 
 
 
Quoted Prices
in Active Markets
 
Significant
Other
 
Significant
(Amounts in thousands)
 
 
 
Fair
 
for Identical
 
Observable
 
Unobservable
 
 
Carrying
 
Value
 
Assets
 
Inputs
 
Inputs
Description
 
Value
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior Notes-9.375%
 
$
160,000

 
$
170,400

 
$
170,400

 
$
—

 
$
—

Senior Secured Notes-8.25%
 
840,000

 
907,200

 
907,200

 
—

 
—

As of December 31, 2012
 
$
1,000,000

 
$
1,077,600

 
$
1,077,600

 
$
—

 
$
—

Liabilities:
 
 

 
 

 
 

 
 

 
 

Senior Subordinated Notes-13.125%
 
$
150,000

 
$
132,188

 
$
132,188

 
$
—

 
$
—

Senior Secured Notes-8.25%
 
800,000

 
697,000

 
697,000

 
—

 
—

As of December 31, 2011
 
$
950,000

 
$
829,188

 
$
829,188

 
$
—

 
$
—


The fair value of the long-term debt instruments was determined by utilizing available market information.  The carrying value of the Company’s other financial instruments approximates their fair value.  Also see Note 5 for fair value disclosures of the pension assets.


60

New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards ("IFRS"). The differences in the offsetting requirements account for a significant difference in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and IFRS for certain entities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The implementation of this guidance is not expected to have a material impact on the Company's disclosures.

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The standard allows companies to perform a "qualitative" assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar to the recently issued guidance on goodwill impairment. The standard allows companies the option to first assess qualitatively whether it is necessary to perform the quantitative impairment test. A company would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not (that is, a likelihood of more than 50 percent) that the asset is impaired. The implementation of this guidance is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.

On January 1, 2012, the Company adopted an update issued by the FASB to existing guidance on the presentation of comprehensive income. This update requires the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Net income and other comprehensive income have been presented in two separate but consecutive statements for the current reporting period and prior comparative period in our consolidated financial statements. On February 5, 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the board's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The new requirements will take effect for public companies in interim and annual reporting periods beginning after December 15, 2012. The standard requires that companies present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. The implementation of this guidance is not expected to have a material impact on the Company's disclosures.


Comprehensive (Loss) Income
 
The components of accumulated other comprehensive (loss) income are as follows:
 
(Amounts in thousands)
 
Foreign currency
translation
 
Minimum pension
liability adjustments
 
Accumulated other comprehensive
(loss) income
Balance at December 31, 2009
 
$
4,104

 
$
(3,780
)
 
$
324

  Net current period change
 
1,639

 
(740
)
 
899

Balance at December 31, 2010
 
5,743

 
(4,520
)
 
1,223

  Net current period change
 
(691
)
 
(6,600
)
 
(7,291
)
Balance at December 31, 2011
 
5,052

 
(11,120
)
 
(6,068
)
  Net current period change
 
835

 
(1,103
)
 
(268
)
Balance at December 31, 2012
 
$
5,887

 
$
(12,223
)
 
$
(6,336
)



61

2.   GOODWILL
 
The Company records the excess of purchase price over the fair value of the net assets of acquired companies as goodwill or other identifiable intangible assets.  The Company performs an annual test for goodwill impairment at the November month end each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level.  The Company has two reporting units: 1) Siding, Fencing, and Stone and 2) Windows and Doors.  Separate valuations are performed for each of these reporting units in order to test for impairment.      

The Company uses the two-step method to determine goodwill impairment.  If the carrying amount of a reporting unit exceeds its fair value (“Step One”), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”).  The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill. The Company has elected not to utilize the qualitative Step Zero impairment assessment.
 
To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies.  The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate.  The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples.  These comparable public company multiples are then applied to the reporting unit’s financial performance.  The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable.  Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.

The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples.  In order to accurately forecast future cash flows, the Company estimated single family housing starts and the repair and remodeling market’s growth rate through 2021.  These assumptions modeled information published by the National Association of Home Builders (“NAHB”).  The Company estimated single family housing starts increasing from 2012 levels (535,000) to approximately 1,050,000 in 2021 (terminal growth year) and estimated the repair and remodeling growth rate at approximately 3.0% in each year through 2021.  The 1,050,000 terminal housing starts figure represents a historical average that tracks domestic population growth.  The forecasted sales growth and operating earnings increases coincided with the growth in these two key assumptions.  The Company utilized its weighted average cost of capital and its long-term growth rate to derive the appropriate capitalization rate used in the terminal value calculation.  The Company utilized these fair value estimate assumptions during the impairment analysis conducted during the years ended December 31, 2012 and 2011.

The Company’s annual goodwill impairment tests performed as of November 24, 2012 and November 26, 2011 indicated no impairment.  The Windows and Doors and Siding, Fencing, and Stone reporting units exceeded their 2012 carrying values by approximately 69% and 219%, respectively.

The Company provides no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods. The Company will also continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in future goodwill impairments.


62



The reporting unit goodwill balances were as follows as of December 31, 2012 and December 31, 2011:

 
(Amounts in thousands)
 
 
 
 
 
 
December 31, 2012
 
December 31, 2011
Siding, Fencing and Stone
 
$
320,984

 
$
320,107

Windows and Doors
 
71,471

 
71,360

 
 
$
392,455

 
$
391,467

 
Greendeck Products Acquisition

On July 30, 2012, the Company acquired substantially all of the production assets of Greendeck Products LLC (“Greendeck”) for total consideration of approximately $1.0 million consisting of cash of $0.1 million and contingent consideration fair valued at $0.9 million. Greendeck was developing an exterior building products production process. The goodwill of approximately $0.9 million arising from the acquisition consists largely of the commercialization valuation of the underlying products and economies of scale expected from combining the operations of the Company and the assets of Greendeck. The goodwill has been recorded within the Siding, Fencing and Stone segment. The Company also acquired an intangible asset in this asset purchase valued at approximately $0.1 million, which is based on a license agreement with a third party entity.

The acquisition has an earnout clause included within the asset purchase agreement. The earnout clause has been fair valued as of the acquisition date and the valuation will be updated at each reporting period. As of December 31, 2012, the fair value of the earnout is approximately $0.9 million and has been classified within other long-term liabilities in the accompanying consolidated balance sheet. There are currently no revenues or earnings from Greendeck for any comparative periods or since the date of acquisition and, consequently, no pro forma information is required or disclosed related to Greendeck.

Goodwill Rollforward

A rollforward of goodwill for 2012 and 2011 is included in the table below:

 
 
Windows and
 
Siding, Fencing
(Amounts in thousands)
 
Doors
 
and Stone
Balance as of January 1, 2011
 
 

 
 

Goodwill
 
$
401,099

 
$
442,334

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
73,326

 
320,107

Currency translation adjustments
 
(244
)
 
—

Purchase accounting adjustment
 
(307
)
 
—

Tax benefit of excess tax goodwill
 
(1,415
)
 
—

Balance as of December 31, 2011
 
 

 
 

Goodwill
 
399,133

 
442,334

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
71,360

 
$
320,107

Currency translation adjustments
 
241

 
—

Tax benefit of excess tax goodwill
 
(130
)
 
—

Greendeck acquisition
 
—

 
877

Balance as of December 31, 2012
 
 

 
 

Goodwill
 
399,244

 
443,211

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
71,471

 
$
320,984


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During the year ended December 31, 2012, the Windows and Doors goodwill increase was primarily attributed to $0.2 million of foreign currency movement and the Siding, Fencing and Stone goodwill increase of $0.9 million was due to the Greendeck acquisition. During the year ended December 31, 2011, the Windows and Doors’ goodwill decrease was attributed to: 1) foreign currency movement $(0.2) million, 2) a purchase accounting adjustment related to a previous acquisition $(0.3) million for a reduction in accrued expenses, and 3) a tax adjustment $(1.4) million resulting from the original Ply Gem acquisition reducing deferred tax liabilities and goodwill.

3.   INTANGIBLE ASSETS
 
The table that follows presents the major components of intangible assets as of December 31, 2012 and 2011:

(Amounts in thousands)
 
Average
Amortization
Period
 
 
 
Accumulated
 
Net Carrying
 
 
(in Years)
 
Cost
 
Amortization
 
Value
As of December 31, 2012:
 
 
 
 
 
 
 
 
Patents
 
14
 
$
12,770

 
$
(8,308
)
 
$
4,462

Trademarks/Tradenames
 
11
 
85,669

 
(61,737
)
 
23,932

Customer relationships
 
13
 
158,158

 
(93,025
)
 
65,133

Other
 
 
 
2,647

 
(1,818
)
 
829

Total intangible assets
 
13
 
$
259,244

 
$
(164,888
)
 
$
94,356

 
 
 
 
 
 
 
 
 
As of December 31, 2011:
 
 
 
 

 
 

 
 

Patents
 
14
 
$
12,770

 
$
(7,361
)
 
$
5,409

Trademarks/Tradenames
 
11
 
85,644

 
(48,296
)
 
37,348

Customer relationships
 
13
 
158,158

 
(80,851
)
 
77,307

Other
 
 
 
2,503

 
(1,419
)
 
1,084

Total intangible assets
 
13
 
$
259,075

 
$
(137,927
)
 
$
121,148

    
Amortization expense related to these intangible assets for the years ended December 31, 2012, 2011, and 2010 was approximately $26.9 million, $26.7 million, and $27.1 million, respectively.  Estimated amortization expense for the fiscal years 2013 through 2017 is shown in the following table:
 
 
Amortization
(Amounts in thousands)
expense
 
 
2013
$
16,677

2014
15,248

2015
14,799

2016
14,156

2017
10,420


During the year ended December 31, 2010, the Company decreased the remaining useful life of certain trademarks in the Windows and Doors segment to three years (applied prospectively) as a result of future marketing plans regarding the use of these trademarks.  For each of the years ended December 31, 2012, December 31, 2011, and December 31, 2010, the Company incurred approximately $7.4 million of increased amortization expense compared to the year ended December 31, 2009, primarily as a result of this decrease in useful life. As of December 31, 2012 these specific trademarks are fully amortized.


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4.   LONG-TERM DEBT
 
Long-term debt in the accompanying consolidated balance sheets at December 31, 2012 and 2011 consists of the following:

(Amounts in thousands)
 
 
 
 
 
 
December 31, 2012
 
December 31, 2011
Senior secured asset based revolving credit facility
 
$
15,000

 
$
55,000

8.25% Senior secured notes due 2018, net of
 
 

 
 

unamortized early tender premium and
 
 

 
 

discount of $40,870 and $40,641
 
799,130

 
759,359

13.125% Senior subordinated notes due 2014, net of
 
 

 
 

unamortized discount of $0 and $2,689
 
—

 
147,311

9.375% Senior notes due 2017, net of
 
 
 
 
   unamortized discount of $9,746 and $0
 
150,254

 
—

 
 
$
964,384

 
$
961,670


2012 developments
    
On September 27, 2012, Ply Gem Industries completed an offering for $160.0 million aggregate principal amount of 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”). The net proceeds of this offering, together with cash on hand, were deposited with the trustee for Ply Gem Industries' 13.125% Senior Subordinated Notes due 2014 (the “13.125% Senior Subordinated Notes”) to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017.

On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction (“Senior Tack-on Notes”).  The net proceeds of approximately $32.7 million after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will be utilized for general corporate purposes.  The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par.  Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses.  A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes due 2018 given that the 2011 transaction was predominately accounted for as a loan modification.  The 8.25% Senior Secured Notes due 2018 together with the Senior Tack-on Notes (“8.25% Senior Secured Notes”) will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum.  Interest will be paid semi-annually on February 15 and August 15 of each year.

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Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium.  Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the original aggregate principal amount of the 8.25% Senior Secured Notes remains outstanding after the redemption.  In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to the greater of (i) $84.0 million of the 8.25% Senior Secured Notes and (ii) 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the aggregate amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any.  At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”).  The indenture governing the 8.25% Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt in limited circumstances as defined in the indentures) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00.  In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances.  In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

In addition, the Company's stock ownership in the Company's subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission ("SEC").

On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes.  Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act.  However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

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11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% Senior Secured Notes due 2013 (“11.75% Senior Secured Notes”) at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million.  Interest was paid semi-annually on June 15, 2013 and December 15 of each year.  On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its 11.75% Senior Secured Notes in a private placement transaction.  The additional $25.0 million of 11.75% Senior Secured Notes had the same terms and covenants as the initial $700.0 million of 11.75% Senior Secured Notes.

On February 11, 2011, the Company purchased approximately $718.6 million principal amount of the 11.75% Senior Secured Notes in a tender offer at a price of $1,069.00 per $1,000 principal amount, which included an early tender payment of $40.00 per $1,000 principal amount, plus accrued and unpaid interest, and on February 28, 2011, the Company purchased $6.0 million principal amount of the 11.75% Senior Secured Notes in the tender offer at a price of $1,029.00 per $1,000 principal amount, plus accrued and unpaid interest.  On March 13, 2011, pursuant to the terms of the indenture governing the 11.75% Senior Secured Notes, the Company redeemed the remaining approximate $0.4 million at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest.  As a result of these transactions, the Company paid cumulative early tender premiums of approximately $49.8 million during the year ended December 31, 2011.  Following the redemption on March 13, 2011, there were no longer any 11.75% Senior Secured Notes outstanding.  The 11.75% Senior Secured Notes would have matured on June 15, 2013 and bore interest at the rate of 11.75% per annum.  The loss recorded as a result of this purchase is discussed in detail in the section “Gain (loss) on debt extinguishment” below.

Senior Secured Asset Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility.  Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013.  The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada.  In August 2011, the Company exercised the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the Company’s ABL Facility from $175.0 million to $212.5 million.  Under the terms of the ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0 million.  Under the amended ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada.  All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans.  The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility.  Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high).  Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees.  The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility.  As of December 31, 2012, the Company’s interest rate on the new ABL Facility was approximately 2.5%.  The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company’s excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million.  The new ABL Facility also contains a cash dominion requirement if the Company’s excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February, and March).

67


All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries.  All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

The ABL Facility contains certain covenants that limit the Company’s ability and the ability of the Company’s subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances.  In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings.  Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

As of December 31, 2012, Ply Gem Industries had approximately $191.2 million of contractual availability and approximately $113.4 million of borrowing base availability under the new ABL Facility, reflecting $15.0 million of borrowings outstanding and approximately $6.3 million of letters of credit and priority payables reserves.

Senior Secured Asset Based Revolving Credit Facility due 2013

Concurrently with the 11.75% Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into an ABL Facility.  The prior ABL Facility initially provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada.  In July 2009, the Company amended the prior ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million.  As of December 31, 2011, there were no outstanding borrowings under the prior ABL Facility, as it was replaced with the new ABL Facility on January 26, 2011, as discussed above.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

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Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any. On or after October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries' and the guarantors' existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

The indenture governing the 9.375% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries' assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.
13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million.  Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses.  The interest rate on the Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

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On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest.

On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes. The loss recorded as a result of the debt transactions is discussed in the section “Gain (loss) on debt modification or extinguishment” below.

9.00% Senior Subordinated Notes due 2012

In connection with the issuance of $150.0 million of the 13.125% Senior Subordinated Notes on January 11, 2010, Ply Gem Industries redeemed approximately $141.2 million aggregate principal amount of the 9% Senior Subordinated Notes on February 16, 2010 at a redemption price of 100% of the principal amount thereof plus accrued interest.  Approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by certain affiliates of the CI Partnerships were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime. Such notes were then transferred to the Company and then to Ply Gem Industries as a capital contribution and cancelled on February 12, 2010.  As of December 31, 2011, there were no 9% Senior Subordinated Notes outstanding.

Gain (loss) on debt modification or extinguishment

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes during the year ended December 31, 2012, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 13.125% Senior Subordinated Notes and the 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. The Company incurred an early call premium of approximately $9.8 million in connection with this transaction, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes and approximately $1.5 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012. The Company also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes as a result of this transaction for the year ended December 31, 2012. The Company also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the 8.25% Senior Secured Notes issuance and purchase and redemption of the 11.75% Senior Secured Notes during the year ended December 31, 2011, the Company performed an analysis to determine the proper accounting treatment for this transaction.  Specifically, the Company evaluated each creditor with ownership in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt.  The Company determined that this transaction resulted predominantly in a modification but in some instances as an extinguishment as some creditors did not participate in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes.  The Company incurred an early tender premium of approximately $49.8 million in conjunction with this transaction, of which approximately $38.9 million was recorded as a discount on the 8.25% Senior Secured Notes and approximately $10.9 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.  The Company also expensed approximately $0.8 million for the unamortized discount and $2.8 million for the unamortized debt issuance costs for the 11.75% Senior Secured Notes in this transaction for the year ended December 31, 2011.  The Company also incurred approximately $25.9 million of costs associated with this transaction, of which approximately $13.6 million was recorded as debt issuance costs and approximately $12.3 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.

70


As a result of the ABL Facility refinancing during 2011, the Company evaluated the proper accounting treatment for the debt issuance costs associated with the prior ABL Facility and the new ABL Facility as there were certain members of the loan syndication that existed in both facilities and other members who were not participants in the new ABL Facility.  Based on this evaluation, the Company expensed approximately $1.2 million of debt issuance costs as a loss on modification or extinguishment of debt and recorded approximately $2.1 million of debt issuance costs.

As a result of the $141.2 million redemption of the previous 9% Senior Subordinated Notes on February 16, 2010, the Company recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write-off of unamortized debt issuance costs. On February 12, 2010, as a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by affiliates of the Company’s controlling stockholders in exchange for equity of Ply Gem Prime valued at approximately $114.9 million, the Company recognized a gain on extinguishment of approximately $100.4 million, including the write-off of unamortized debt issuance costs of approximately $3.5 million. The $98.2 million gain on debt extinguishment was recorded separately in the accompanying consolidated statement of operations for the year ended December 31, 2010.

Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately $3.6 million and $27.9 million and a gain on debt extinguishment of approximately $98.2 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, as summarized in the table below.

(Amounts in thousands)
 
For the year ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Gain (loss) on extinguishment of debt:
 
 
 
 
 
 
Tender premium
 
$
—

 
$
(10,883
)
 
$
—

11.75% Senior Secured Notes unamortized discount
 
—

 
(775
)
 
—

11.75% Senior Secured Notes unamortized debt issuance costs
 
—

 
(2,757
)
 
—

   13.125% Senior Subordinated Notes call premium
 
(1,487
)
 
—

 
—

   13.125% Senior Subordinated Notes unamortized discount
 
(299
)
 
—

 
—

   13.125% Senior Subordinated Notes unamortized debt issuance costs
 
(372
)
 
—

 
—

 
 
(2,158
)
 
(14,415
)
 
—

 
 
 
 
 
 
 
   Carrying value of 9% Senior Subordinated Notes
 
—

 
—

 
360,000

   9% Senior Subordinated Notes unamortized debt issuance costs
 
—

 
—

 
(5,780
)
   9% Senior Subordinated Notes unamortized premium
 
—

 
—

 
100

   Reacquisition price of 9% Senior Subordinated Notes
 
—

 
—

 
(256,133
)
 
 
—

 
—

 
98,187

Loss on modification of debt:
 
 

 
 

 
 
Third party fees for 8.25% Senior Secured Notes
 
—

 
(12,261
)
 
—

Unamortized debt issuance costs for prior ABL Facility
 
—

 
(1,187
)
 
—

   Third party fees for 9.375% Senior Notes
 
(1,449
)
 
—

 
—

 
 
(1,449
)
 
(13,448
)
 
—

 
 
 
 
 
 
 
Total gain (loss) on modification or extinguishment of debt
 
$
(3,607
)
 
$
(27,863
)
 
$
98,187



71




Debt maturities

The following table summarizes the Company’s long-term debt maturities due in each fiscal year after December 31, 2012.
 
 
 
As of
(Amounts in thousands)
 
December 31, 2012
2013
 
$
—

2014
 
—

2015
 
—

2016
 
15,000

2017
 
150,254

Thereafter
 
799,130

 
 
$
964,384



5.   DEFINED BENEFIT PLANS

The Company has two pension plans, the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc. Retirement Plan (the “MW Plan”).  The plans are combined in the following discussion.

The table that follows provides a reconciliation of benefit obligations, plan assets, and funded status of the combined plans in the accompanying consolidated balance sheets at December 31, 2012 and 2011:
 

 

72

 
 
December 31,
 
December 31,
(Amounts in thousands)
 
2012
 
2011
Change in projected benefit obligation
 
 
 
 
Benefit obligation at beginning of year
 
$
42,400

 
$
38,066

Service cost
 
101

 
98

Interest cost
 
1,850

 
1,931

Actuarial loss
 
3,066

 
4,138

Benefits and expenses paid
 
(2,357
)
 
(1,833
)
Projected benefit obligation at end of year
 
$
45,060

 
$
42,400

 
 
 
 
 
Change in plan assets
 
 

 
 

Fair value of plan assets at beginning of year
 
$
26,377

 
$
26,929

Actual return on plan assets
 
3,164

 
(680
)
Employer and participant contributions
 
2,596

 
1,961

Benefits and expenses paid
 
(2,357
)
 
(1,833
)
Fair value of plan assets at end of year
 
$
29,780

 
$
26,377

 
 
 
 
 
Funded status and financial position:
 
 

 
 

Fair value of plan assets
 
$
29,780

 
$
26,377

Benefit obligation at end of year
 
45,060

 
42,400

Funded status
 
$
(15,280
)
 
$
(16,023
)
 
 
 
 
 
Amount recognized in the balance sheet consists of:
 
 

 
 

Current liability
 
$
(1,141
)
 
$
(2,577
)
Noncurrent liability
 
(14,139
)
 
(13,446
)
Liability recognized in the balance sheet
 
$
(15,280
)
 
$
(16,023
)


The accumulated benefit obligation for the combined plans was approximately $45.1 million and $42.4 million as of December 31, 2012 and December 31, 2011, respectively.

Accumulated Other Comprehensive Loss

Amounts recognized in accumulated other comprehensive loss at December 31, 2012 and December 31, 2011 consisted of the following:
 
(Amounts in thousands)
 
December 31,
 
December 31,
 
 
2012
 
2011
Initial net asset (obligation)
 
$
—

 
$
—

Prior service credit (cost)
 
—

 
—

Net loss
 
15,468

 
14,365

Accumulated other comprehensive loss
 
$
15,468

 
$
14,365

 
These amounts do not include any amounts recognized in accumulated other comprehensive income related to the nonqualified Supplemental Executive Retirement Plan.


73

Actuarial Assumptions

Plan assets consist of cash and cash equivalents, fixed income mutual funds, equity mutual funds, as well as other investments.  The discount rate for the projected benefit obligation was chosen based upon rates of returns available for high-quality fixed-income securities as of the plan's measurement date.   The Company reviewed several bond indices, comparative data, and the plan's anticipated cash flows to determine a single discount rate which would approximate the rate in which the obligation could be effectively settled.  The expected long-term rate of return on assets is based on the Company’s historical rate of return. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation for the periods indicated are as follows:

 
 
For the year ended December 31,
 
 
2012
 
2011
 
2010
Discount rate for projected benefit obligation
 
4.00
%
 
4.50
%
 
5.30
%
Discount rate for pension costs
 
4.50
%
 
5.30
%
 
5.95
%
Expected long-term average return on plan assets
 
7.50
%
 
7.50
%
 
7.50
%

Net Periodic Benefit Costs

The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components:
 
(Amounts in thousands)
 
For the year ended December 31,
 
 
2012
 
2011
 
2010
Service cost
 
$
101

 
$
98

 
$
92

Interest cost
 
1,850

 
1,931

 
2,014

Expected return on plan assets
 
(2,008
)
 
(2,028
)
 
(1,818
)
Amortization of loss
 
807

 
269

 
203

Net periodic benefit expense
 
$
750

 
$
270

 
$
491


Pension Assets

The weighted-average asset allocations at December 31, 2012 by asset category are as follows:
 
 
 
Target
Allocation
 
Actual allocation as of
December 31, 2012
 
Weighted Average
Expected Long-Term
Rate of Return (1)
Asset Category
 
 
 
 
 
 
U.S. Large Cap Funds
 
25.0
%
 
21.9
%
 
2.0
%
U.S. Mid Cap Funds
 
5.0
%
 
8.0
%
 
0.5
%
U.S. Small Cap Funds
 
3.0
%
 
3.2
%
 
0.3
%
International Equity
 
15.0
%
 
14.6
%
 
1.6
%
Fixed income
 
45.0
%
 
45.2
%
 
2.3
%
Other investments
 
7.0
%
 
7.1
%
 
0.6
%
 
 
100.0
%
 
100.0
%
 
7.3
%
(1) The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

The weighted-average asset allocations at December 31, 2011 by asset category are as follows:
 

74

 
 
Target
Allocation
 
Actual allocation as of
December 31, 2011
 
Weighted Average
Expected Long-Term
Rate of Return (1)
Asset Category
 
 
 
 
 
 
U.S. Large Cap Funds
 
25.0
%
 
21.9
%
 
2.0
%
U.S. Mid Cap Funds
 
5.0
%
 
7.9
%
 
0.5
%
U.S. Small Cap Funds
 
3.0
%
 
3.1
%
 
0.3
%
International Equity
 
15.0
%
 
15.2
%
 
1.6
%
Fixed income
 
45.0
%
 
45.0
%
 
2.3
%
Other investments
 
7.0
%
 
6.9
%
 
0.6
%
 
 
100.0
%
 
100.0
%
 
7.3
%
(1) The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

The Company has established formal investment policies for the assets associated with the Company’s pension plans. Policy objectives include maximizing long-term return at acceptable risk levels, diversifying among asset classes, if appropriate, and among investment managers, as well as establishing relevant risk parameters within each asset class. Investment policies reflect the unique circumstances of the respective plans and include requirements designed to mitigate risk including quality and diversification standards. Asset allocation targets are based on periodic asset reviews and/or risk budgeting study results which help determine the appropriate investment strategies for acceptable risk levels. The investment policies permit variances from the targets within certain parameters.

Factors such as asset class allocations, long-term rates of return (actual and expected), and results of periodic asset liability modeling studies are considered when constructing the long-term rate of return assumption for the Company’s pension plans. While historical rates of return play an important role in the analysis, the Company also considers data points from other external sources if there is a reasonable justification to do so.

The plan assets are invested to maximize returns without undue exposure to risk.  Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers.  The plan’s asset allocation policies are consistent with the established investment objectives and risk tolerances.  The asset allocation policies are developed by examining the historical relationships of risk and return among asset classes, and are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk.  The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

The following table summarizes the Company’s plan assets measured at fair value on a recurring basis (at least annually) as of December 31, 2012 and December 31, 2011:

(Amounts in thousands)
 
Fair value as of
 
Quoted Prices in Active
 
Significant Other
 
Significant
 
 
December 31,
 
Markets for Identical
 
Observable Inputs
 
Unobservable Inputs
 
 
2012
 
Assets (Level 1)
 
(Level 2)
 
(Level 3)
Equity Securities (1)
 
 
 
 
 
 
 
 
U.S. Large Cap Funds
 
$
6,530

 
$
6,530

 
$
—

 
$
—

U.S. Mid Cap Funds
 
2,380

 
1,173

 
1,207

 
—

U.S. Small Cap Funds
 
938

 
468

 
470

 
—

International Funds
 
4,364

 
4,364

 
—

 
—

Fixed Income
 
 

 
 

 
 

 
 

Domestic Bond Funds (2)
 
13,460

 
1,520

 
11,940

 
—

Other Investments
 
 

 
 

 
 

 
 

Commodity Funds (3)
 
1,419

 
1,419

 
—

 
—

Cash & Equivalents
 
689

 
—

 
689

 
—

 
 
$
29,780

 
$
15,474

 
$
14,306

 
$
—

 

 

75

(Amounts in thousands)
 
Fair value as of
 
Quoted Prices in Active
 
Significant Other
 
Significant
 
 
December 31,
 
Markets for Identical
 
Observable Inputs
 
Unobservable Inputs
 
 
2011
 
Assets (Level 1)
 
(Level 2)
 
(Level 3)
Equity Securities (1)
 
 
 
 
 
 
 
 
U.S. Large Cap Funds
 
$
5,793

 
$
5,793

 
$
—

 
$
—

U.S. Mid Cap Funds
 
2,087

 
1,032

 
1,055

 
—

U.S. Small Cap Funds
 
812

 
393

 
419

 
—

International Funds
 
3,996

 
3,996

 
—

 
—

Fixed Income
 
 

 
 

 
 

 
 

Domestic Bond Funds (2)
 
11,863

 
1,317

 
10,546

 
—

Other Investments
 
 

 
 

 
 

 
 

Commodity Funds (3)
 
1,302

 
1,302

 
—

 
—

Cash & Equivalents
 
524

 
—

 
524

 
—

 
 
$
26,377

 
$
13,833

 
$
12,544

 
$
—

 
(1) Equity securities are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(2) Domestic bonds are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(3) Commodity funds are comprised of two mutual funds which represent small market energy funds.
 
The Ply Gem Plan was frozen as of December 31, 1998, and no further increases in benefits may occur as a result of increases in service or compensation and no new participants can be added to the Plan.

The MW Plan was frozen for salaried participants as of October 31, 2004, and no further increases in benefits for salaried participants may occur as a result of increases in service or compensation.  The MW Plan was frozen for non-salaried participants during 2005.  No additional non-salaried participants may enter the plan, but increases in benefits as a result of increases in service or compensation will still occur.

Benefit Plan Contributions

The Company made cash contributions to the combined plans of approximately $2.6 million and $2.0 million for the years ended December 31, 2012 and 2011, respectively.  During fiscal year 2013, the Company expects to make cash contributions to the combined plans of approximately $1.1 million.

Benefit Plan Payments

The following table shows expected benefit payments for the next five fiscal years and the aggregate five years thereafter from the combined plans. These benefit payments consist of qualified defined benefit plan payments that are made from the respective plan trusts and do not represent an immediate cash outflow to the Company.

Fiscal Year
 
Expected Benefit Payments
(Amounts in thousands)
 

 
 
 
2013
 
$
1,956

2014
 
2,029

2015
 
2,111

2016
 
2,211

2017
 
2,315

2018-2022
 
13,117



76

Other Retirement Plans

The Company also has an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees.  The projected benefit obligation relating to this unfunded plan totaled approximately $349,000 and $354,000 at December 31, 2012 and 2011, respectively.  The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of December 31, 2012 and 2011.  Pension expense for the plan was approximately $14,000 , $17,000 , and $18,000 for the years ended December 31, 2012, 2011, and 2010, respectively.

6.   DEFINED CONTRIBUTION PLANS
 
The Company has a defined contribution 401(k) plan covering all eligible employees.  Effective September 1, 2010, the Company reinstated matching contributions after suspending the contributions on April 1, 2008.  Effective with the reinstatement, the Company matched 50% of the first 6% of employee contributions for most members, with the exception of matching 25% of the first 6% of employee contributions for certain union members per a negotiated contract.  The Company also has the option of making discretionary contributions.  The Company contributed approximately $2.1 million for the year ended December 31, 2012, approximately $2.1 million for the year ended December 31, 2011, and $0.7 million (including forfeitures) for the year ended December 31, 2010, which has been expensed within selling, general, and administrative expense in the accompanying consolidated statement of operations.


 
7.   COMMITMENTS AND CONTINGENCIES

Operating leases

At December 31, 2012, the Company was obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations.  Future minimum rental obligations for non-cancellable lease payments total approximately $112.7 million at December 31, 2012.  The lease obligations, partially offset by subleases, are payable as follows:
 
 
 
Lease
 
Sublease
(Amounts in thousands)
 
Commitments
 
Income
2013
 
$
18,861

 
$
445

2014
 
17,290

 
454

2015
 
14,935

 
463

2016
 
12,033

 
472

2017
 
10,735

 
481

Thereafter
 
38,844

 
3,650

 
Total rental expense for all operating leases amounted to approximately $26.0 million for the year ended December 31, 2012, $24.6 million for the year ended December 31, 2011, and $24.6 million for the year ended December 31, 2010.

Indemnifications

In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition.  In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable.  The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement.  A receivable related to this indemnification has been recorded in other long-term assets in the approximate amount of $3.4 million and $3.6 million at December 31, 2012 and December 31, 2011, respectively.  As of December 31, 2012 and December 31, 2011, the Company has recorded liabilities related to these indemnifications of approximately $0.4 million and $0.4 million, respectively, in current liabilities and $3.0 million and $3.2 million, respectively, in long-term liabilities, consisting of the following:


77

(Amounts in thousands)
 
December 31, 2012
 
December 31, 2011
Product claim liabilities
 
$
218

 
$
193

Multiemployer pension plan withdrawal liability
 
2,615

 
2,854

Other
 
578

 
572

 
 
$
3,411

 
$
3,619


The product claim liabilities of approximately $0.2 million at December 31, 2012 and December 31, 2011, recorded in long term liabilities, represents the estimated costs to resolve the outstanding matters related to a former subsidiary of the Company, which is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products.  The Company had indemnified the buyer of the former subsidiary for all known liabilities and future claims relating to such matters and retained the rights to all potential reimbursements related to insurance coverage.  Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries.  The Company and the former subsidiary continue to vigorously defend the remaining suits.  Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products.  The Company and the former subsidiary have engaged in coverage litigation with certain insurers and have settled coverage claims with several of the insurers.

The multiemployer pension liability of approximately $2.6 million and $2.9 million recorded in long term liabilities at December 31, 2012 and December 31, 2011, respectively, relate to liabilities assumed by the Company in 1998 when its former subsidiary, Studley Products, Inc. (“Studley”) was sold.  In connection with the sale, Studley ceased making contributions to the Production Service and Sales District Council Pension Fund (the “Pension Fund”), and the Company assumed responsibility for all withdrawal liabilities to be assessed by the Pension Fund.  Accordingly, the Company is making quarterly payments of approximately $0.1 million to the Pension Fund through 2018 based upon the assessment of withdrawal liability received from the Pension Fund.  The multiemployer pension liability represents the present value of the quarterly payment stream as well as an estimate of additional amounts that may be assessed in the future by the Pension Fund under the contractual provisions of the Pension Fund.
    
Included in the indemnified items is approximately $0.4 million for each of the years ended December 31, 2012 and 2011, of accrued expenses to cover the estimated costs of known litigation claims, including the estimated cost of legal services incurred, that the Company is contesting including certain employment and former shareholder litigation related to the Company.

Warranty claims

The Company sells a number of products and offers a number of warranties.  The specific terms and conditions of these warranties vary depending on the product sold.  The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale.  Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction.  The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary.  As of December 31, 2012 and 2011, warranty liabilities of approximately $8.3 million and $7.7 million, respectively, have been recorded in current liabilities and approximately $29.5 million and $30.9 million, respectively, have been recorded in long term liabilities.

Changes in the Company’s short-term and long-term warranty liabilities are as follows:

 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Balance, beginning of period
 
$
38,612

 
$
41,780

 
$
43,398

Warranty expense during period
 
11,034

 
7,359

 
11,364

Settlements made during period
 
(11,776
)
 
(10,527
)
 
(12,982
)
Balance, end of period
 
$
37,870

 
$
38,612

 
$
41,780



78

Environmental

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property.  During 2011, as part of the Administrative Order on Consent, the Company provided the EPA with a preliminary cost estimate of approximately $1.8 million over the remediation period, which is estimated through 2023.  During December 2012, the EPA formally approved the Company's remediation plan and the cost estimate of $1.8 million. As a result, the Company incurred an incremental expense of approximately $1.6 million during the year and quarter ended December 31, 2011 to record an additional accrual for this preliminary cost estimate.  This expense has been recognized within selling, general, and administrative expenses for the year ended December 31, 2011 in the consolidated statement of operations.  The Company has recorded approximately $0.3 million and $0.5 million of this environmental liability within current liabilities and approximately $1.5 million and $1.3 million within other long-term liabilities in the Company’s consolidated balance sheet at December 31, 2012 and December 31, 2011, respectively.  The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.

Certain liabilities for this subject contamination has been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners.   As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc.  The Company’s ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future.  As of December 31, 2012, no recovery has been recognized on the Company’s consolidated balance sheet but the Company will actively pursue the validity of this indemnity in future periods and will recognize future recoveries in the period in which they become probable.

Self-insured risks

The Company maintains a broad range of insurance policies which include general liability insurance coverage and workers compensation. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a portion of the overall risk for such claims through its self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The Company's general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. The Company's insurance coverage is subject to a per occurrence retention.

The Company reserves for costs associated with claims, as well as incurred but not reported losses (“IBNR”), based on an outside actuarial analyses of its historical claims. These estimates make up a significant portion of the Company's liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in type of claims, claims reporting and resolution patterns, frequency and timing of claims, third party recoveries, estimates of claim values, claims management expenses (including legal fees and expert fees), insurance industry practices, the regulatory environment, and legal precedent. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

During 2012, the Company experienced a higher level of estimated claims management expenses, primarily due to claims discussed in “Litigation” below, which increased the Company's estimated claim reserves by $0.4 million which has been recorded in selling, general and administrative expense in the consolidated statement of operations for the year ended December 31, 2012. Because of the inherent uncertainty in estimating future losses related to claims, actual costs could differ significantly from current estimates.


79

Litigation

During 2012, the Company incurred increased litigation expense primarily related to the claims discussed below. While the Company believes it has valid defenses to these claims and will vigorously defend, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.

In John Gulbankian and Robert D. Callahan v. MW Manufacturers, Inc., a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW's V-Wood windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc., a purported class action filed in July 2012 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW's Freedom and Freedom 800 windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Anthony Pagliaroni v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by MHE. The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim. Decuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify us for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. Our ability to seek indemnification from Deceuninck is, however, limited by the terms of the indemnity as well as the strength of Deceuninck's financial condition, which could change in the future.

In The Muhler Company, Inc. v. Ply Gem Prime Holdings, Inc. et al., a lawsuit filed in April 2011 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff, alleges unfair competition and trade practices. The plaintiff seeks a variety of relief, including (i) consequential damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. This action is currently in discovery. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

Other contingencies

The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls.  Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned.  The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear.  Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.  Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made.

80



8.   ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
 
Accrued expenses consist of the following at December 31, 2012 and December 31, 2011:
 
(Amounts in thousands)
 
December 31, 2012
 
December 31, 2011
Insurance
 
$
3,499

 
$
3,229

Employee compensation and benefits
 
5,745

 
6,270

Sales and marketing
 
23,939

 
23,282

Product warranty
 
8,336

 
7,677

Accrued freight
 
890

 
498

Accrued interest
 
30,465

 
34,183

Accrued environmental liability
 
473

 
708

Accrued pension
 
1,141

 
2,577

Accrued sales returns and discounts
 
2,201

 
1,782

Accrued taxes
 
3,035

 
2,093

Other
 
14,194

 
8,582

 
 
$
93,918

 
$
90,881


Other long-term liabilities consist of the following at December 31, 2012 and December 31, 2011:
 
(Amounts in thousands)
 
December 31, 2012
 
December 31, 2011
Insurance
 
$
1,593

 
$
1,642

Pension liabilities
 
14,139

 
13,446

Multi-employer pension withdrawal liability
 
2,615

 
2,854

Product warranty
 
29,534

 
30,935

Long-term product claim liability
 
218

 
193

Long-term environmental liability
 
1,824

 
1,750

Liabilities for tax uncertainties
 
3,454

 
3,546

Other
 
7,267

 
3,362

 
 
$
60,644

 
$
57,728


Long-term incentive plan

During the year ended December 31, 2011, the Company finalized a long-term incentive plan (“LTIP”) for certain employees. The long-term incentive plan was implemented to retain and incentivize employees through the downturn in the housing market. During the years ended December 31, 2012 and December 31, 2011, the Company recognized a LTIP expense of $1.9 million and $0.9 million, respectively, which has been recorded within selling, general, and administrative expenses in the consolidated statement of operations. The LTIP liability is $2.8 million and $0.9 million as of December 31, 2012 and December 31, 2011, respectively, and has been recognized as an other long-term liability in the consolidated balance sheets.

Other liabilities

During the years ended December 31, 2012, 2011 and 2010, the Company made approximately $1.2 million, $0.4 million, and $2.6 million in cash payments on restructuring liabilities, respectively. These payments were for general back office centralization efforts incurred during 2012 as well as product simplification costs incurred for the Windows and Doors segment. In addition, during the year ended December 31, 2011, the Company made $3.7 million in retention payments to certain members of management that were previously accrued within accrued expenses.

81



9.   RESTRUCTURING
 
In November 2008, the Company announced the closure of its Hammonton, New Jersey and Phoenix, Arizona window and door manufacturing facilities.  During December 2008, production began to shift to other locations and production ceased at Hammonton and Phoenix during 2009.  By shifting production to other facilities within the Company, the closures reduced costs and increased operating efficiencies.  Total costs were approximately $5.4 million, including approximately $1.0 million for personnel-related costs and approximately $4.4 million in other facilities-related costs, which include approximately $4.0 million in lease costs.

On April 2, 2009, the Company announced that it would consolidate production across several of its manufacturing facilities improving the Company’s overall operating efficiency.  The Company’s plans included shifting the majority of the production from its Kearney, Missouri facility to its other three vinyl siding manufacturing facilities.  The Company continued to operate the Kearney, Missouri facility on a limited basis until the housing began market recovering.  The Company also closed its Tupelo, Mississippi window and door manufacturing facility.  In addition, the Company consolidated certain of the vinyl lineal production to its Rocky Mount, Virginia facility and realigned production of its west coast window and door facilities at Sacramento, California and Auburn, Washington to better serve customers and improve overall operating efficiency.  In connection with the April 2, 2009 announcement, the Company incurred pre-tax exit and restructuring costs, all of which were cash charges, of approximately $2.0 million, including approximately $0.9 million for personnel-related costs, approximately $0.1 million for contract termination costs, and approximately $1.0 million in other facilities-related costs.


The Company recorded restructuring costs in selling, general and administrative expenses in the years and segments shown in the following table:
 
 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Siding, Fencing and Stone
 
$
—

 
$
—

 
$
112

Windows and Doors
 
—

 
—

 
102

 
 
$
—

 
$
—

 
$
214


The Company also recorded in its Windows and Doors segment interest expense related to lease termination costs of approximately $111,000 for the year ended December 31, 2010.  

 
 
10.   INCOME TAXES
 
The following is a summary of the components of income (loss) before provision (benefit) for income taxes:
 
 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Domestic
 
$
(37,675
)
 
$
(86,538
)
 
$
23,927

Foreign
 
1,455

 
2,714

 
8,767

 
 
$
(36,220
)
 
$
(83,824
)
 
$
32,694

 
 
    

82


The following is a summary of the provision (benefit) for income taxes included in the accompanying consolidated statement of operations:
 
 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Federal:
 
 
 
 
 
 
Current
 
$
—

 
$
(6,617
)
 
$
83

Deferred
 
835

 
6,640

 
1,331

 
 
835

 
23

 
1,414

State:
 
 

 
 

 
 

Current
 
$
2,461

 
$
654

 
$
1,526

Deferred
 
(146
)
 
(847
)
 
(350
)
 
 
2,315

 
(193
)
 
1,176

Foreign:
 
 

 
 

 
 

Current
 
$
(653
)
 
$
353

 
$
1,815

Deferred
 
338

 
500

 
622

 
 
(315
)
 
853

 
2,437

 
 
 
 
 
 
 
Total
 
$
2,835

 
$
683

 
$
5,027

 
The table that follows reconciles the federal statutory income tax rate to the effective tax rate of approximately 7.8% for the year ended December 31, 2012, 0.8% for the year ended December 31, 2011, and 15.4% for the year ended December 31, 2010.
 
 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Income tax provision (benefit)
 
 
 
 
 
 
at the federal statutory rate
 
$
(12,677
)
 
$
(29,338
)
 
$
11,443

 
 
 
 
 
 
 
Net change from statutory rate:
 
 

 
 

 
 

Valuation allowance
 
16,073

 
38,939

 
(28,692
)
Federal impact of cancellation of debt income
 
—

 
—

 
17,667

State impact of cancellation of debt income
 
—

 
—

 
2,646

Federal net operating loss adjustment
 
—

 
—

 
2,581

State income tax benefit, net of federal income tax benefit
 
(919
)
 
(1,936
)
 
(766
)
Taxes at non U.S. statutory rate
 
194

 
76

 
(153
)
Additional provisions/reversals of uncertain
 
 
 
 

 
 

tax positions
 
(92
)
 
(6,287
)
 
342

Canadian rate differential
 
(171
)
 
(254
)
 
(592
)
Other, net
 
427

 
(517
)
 
551

 
 
$
2,835

 
$
683

 
$
5,027


 

83


The tax effect of temporary differences, which gave rise to significant portions of deferred income tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

(Amounts in thousands)
 
December 31, 2012
 
December 31, 2011
Deferred tax assets:
 
 
 
 
Accounts receivable
 
$
1,291

 
$
1,397

Insurance reserves
 
1,876

 
1,832

Warranty reserves
 
11,937

 
11,668

Pension accrual
 
6,628

 
6,413

Deferred compensation
 
2,028

 
683

Inventories
 
3,474

 
3,100

Federal, net operating loss carry-forwards
 
80,268

 
76,789

State net operating loss carry-forwards
 
11,875

 
11,380

Interest
 
4,573

 
4,636

Other assets, net
 
5,780

 
5,172

Valuation allowance
 
(66,279
)
 
(49,780
)
Total deferred tax assets
 
63,451

 
73,290

Deferred tax liabilities:
 
 

 
 

Pension accrual
 
(514
)
 
—

Property and equipment, net
 
(14,260
)
 
(17,517
)
Intangible assets, net
 
(32,276
)
 
(39,912
)
Deferred financing
 
(16,709
)
 
(14,995
)
Other liabilities, net
 
(1,588
)
 
(1,935
)
Total deferred tax liabilities
 
(65,347
)
 
(74,359
)
Net deferred tax liability
 
$
(1,896
)
 
$
(1,069
)

Debt Transactions

On February 16, 2012, Ply Gem issued an additional $40.0 million aggregate principal amount of 8.25% Senior Secured Notes in a private placement transaction. The notes will mature on February 15, 2018 and are secured by substantially all assets of Ply Gem Industries and the Guarantors.  The Senior Tack-on Notes were issued at a discount yielding net proceeds of approximately $34.0 million, prior to debt issuance costs. As a result of the discount, the Senior Tack-on Notes are subject to the Applicable High Yield Discount Obligation (“AHYDO”) rules. Consequently, no portion of the original issue discount (OID) will be deductible for income tax purposes in the future.

Cancellation of indebtedness

Affiliates of Ply Gem Prime’s controlling stockholders purchased approximately $281.4 million of the Company’s 9% Senior Subordinated Notes during the year ended December 31, 2009.  The cumulative affiliate purchases were made at amounts below the $281.4 million face value of the 9% Senior Subordinated Notes.  The Company determined that approximately $121.5 million would be considered cancellation of indebtedness income (“CODI”) for tax purposes.  The Company determined that it is eligible to reduce CODI by certain tax attributes including net operating loss carry-forwards for the year ended December 31, 2009.  The Company reduced certain tax attributes including net operating loss carryforwards (“NOLs”) and tax basis in certain assets in lieu of recognizing approximately $121.5 million of CODI for income tax purposes during the year ended December 31, 2009.


84

During February 2010, approximately $218.8 million aggregate principal amount of 9% Senior Subordinated Notes held by affiliates of Ply Gem Prime’s  controlling stockholders were transferred to Ply Gem Prime’s controlling stockholders and ultimately to Ply Gem Prime in exchange for equity of Ply Gem Prime valued at approximately $114.9 million.  These notes were then transferred to the Company and then to Ply Gem Industries as a capital contribution and cancelled. Also during February 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million aggregate principal amount of the 9% Senior Subordinated Notes held by affiliates of Ply Gem Prime’s controlling stockholders). As a result of these debt transactions, the Company realized $35.3 million of additional CODI for income tax purposes during the year ended December 31, 2010.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”). Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of CODI arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010.  For debt acquired in 2009, the CODI can be deferred for five years and then included in taxable income ratably over the next five years.  The CODI deferral and inclusion periods for debt acquired during 2010 would be four years. If the CODI is deferred, the Company will also be required to defer the deduction of all or a substantial portion of any “original issue discount” (“OID”) deductions.  The Company does not currently plan to utilize this deferral election for the 2010 CODI.

Valuation allowance

As of December 31, 2012, a full federal valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized.  The Company considered the impact of reversing taxable temporary differences with regard to realization of deferred tax assets to determine the amount of valuation allowance for 2012.  Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. Additionally, at December 31, 2012, the Company was in a partial state valuation allowance position for certain legal entities primarily related to losses for income tax purposes.

During the year ended December 31, 2012, the Company’s federal and state valuation allowance increased by approximately $14.7 million and $1.8 million, respectively.  The increase is primarily due to the current year taxable loss.  The Company currently has book goodwill of approximately $18.7 million that is not amortized and results in a deferred tax liability of approximately $4.4 million at December 31, 2012.  Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets.  The Company continues to evaluate the realizability of its net deferred tax assets and its estimates are subject to change.

During the year ended December 31, 2011, the Company’s federal and state valuation allowances increased by approximately $40.2 million and $1.3 million, respectively. The increase is primarily due to the 2011 taxable loss.  The Company currently has book goodwill of approximately $13.4 million that is not amortized and results in a deferred tax liability of approximately $3.5 million at December 31, 2011.  Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets.

Other tax considerations
 
As of December 31, 2012, the Company has approximately $229.3 million of federal gross operating loss carry-forwards which can be used to offset future taxable income.  These federal carry-forwards will begin to expire in 2028 if not utilized.  The Company has approximately $245.8 million of gross state NOL carry-forwards and $11.9 million (net of federal benefit) of deferred tax assets related to these state NOL carry-forwards which can be used to offset future state tax liabilities.  The Company has established a valuation allowance of approximately $9.1 million for the deferred tax asset associated with these state NOL carry-forwards.  The Company currently has no state NOL carry-forwards that are expiring.  Future tax planning strategies implemented by the Company could reduce or eliminate future NOL expiration.
 
As of December 31, 2012, The Company has not established U.S. deferred taxes on approximately $23.4 million of unremitted earnings of the Company's foreign subsidiary, Ply Gem Canada.  Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently invested.

On December 23, 2011, the U.S. Treasury Department issued comprehensive temporary and proposed regulations addressing the treatment of expenditures related to tangible property for tax purposes effective for tax years beginning January 1, 2014 and thereafter.  The Company has begun to evaluate the changes necessary to comply with the regulations and the related administrative procedures and is not currently aware of any adjustments that would be material to the Company's consolidated financial statements.

85


Tax uncertainties

The Company records reserves for certain tax uncertainties based on the likelihood of an unfavorable outcome.  Of this amount, approximately $3.5 million, if recognized, would have an impact on the Company’s effective tax rate.  As of December 31, 2012, the reserve was approximately $3.5 million which includes interest of approximately $0.9 million.  As of December 31, 2011, the reserve was approximately $3.5 million which included interest of approximately $0.8 million.
 
The Company has elected to treat interest and penalties on uncertain tax positions as income tax expense in its consolidated statement of operations.  Interest charges have been recorded in the contingency reserve account within other long term liabilities in the consolidated balance sheet.
 
The following is a rollforward of gross tax contingencies from January 1, 2011 through December 31, 2012.

Balance at January 1, 2011
$
18,704

Additions based on tax positions related to current year
274

Additions for tax positions of prior years
—

Reductions for tax positions of prior years
—

Settlement or lapse of applicable statutes
(6,268
)
Unrecognized tax benefits balance at December 31, 2011
12,710

Additions based on tax positions related to current year
604

Additions for tax positions of prior years
1,033

Reductions for tax positions of prior years
(545
)
Settlement or lapse of applicable statutes
(891
)
Unrecognized tax benefits balance at December 31, 2012
$
12,911



Unrecognized tax benefits are reversed as a discrete event if an examination of applicable tax returns is not begun by a federal or state tax authority within the statute of limitations or upon effective settlement with federal or state tax authorities.  During the year ended December 31, 2012, the Company reversed approximately $0.6 million of unrecognized tax benefits due to the expiration of the statute of limitations for the tax year ended December 31, 2004.  During the year ended December 31, 2012, the Company reversed approximately $0.9 million of unrecognized tax benefits due to the effective settlement of an audit for the tax years ended December 31, 2004 through December 31, 2007. The Company’s open tax years that are subject to federal examination are 2008 through 2012.

During the next 12 months, it is reasonably possible the Company may reverse $0.5 million of the tax contingency reserves primarily related to expiring statutes of limitations.



86

11.   STOCK-BASED COMPENSATION

Stock option plan

On February 12, 2004, Ply Gem Investment Holdings’ Board of Directors adopted the Ply Gem Investment Holdings 2004 Stock Option Plan (the “Plan”) allowing for grants of options to purchase shares of Ply Gem Investment Holdings common stock under nonqualified stock options or incentive stock options.  On February 24, 2006 in connection with the Alenco acquisition, a new holding company, Ply Gem Prime Holdings, was formed pursuant to a merger involving Ply Gem Investment Holdings.  As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings, each outstanding share of capital stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime Holdings and Ply Gem Prime Holdings assumed Ply Gem Investment Holdings’ obligations under the Ply Gem Investment Holdings 2004 Stock Option Plan and the Ply Gem Investment Holdings Phantom Stock Plan.  In connection therewith, each outstanding stock option and phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a stock option and phantom unit of Ply Gem Prime Holdings.   Employees, directors and consultants of Ply Gem Prime Holdings or any of its majority-owned subsidiaries are eligible for options, as specified in the Plan.  Ply Gem Prime Holdings’ Board of Directors may, among other things, select recipients of options grants, determine whether options will be nonqualified or incentive stock options, set the number of shares that may be purchased pursuant to option exercise, and determine other terms and conditions of options. The exercise price of an option must be at least the estimated fair market value of a share of common stock as of the grant date.  Options generally vest over 5 years from the date of grant, unless specified otherwise in any individual option agreement.  Generally, options will expire on the tenth anniversary of the grant date or in connection with termination of employment.  The Board of Directors has the discretion to accelerate the vesting and exercisability of outstanding options.
 
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing method.  The assumptions used in the model are outlined in the following table:

 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Weighted average fair value of options granted
 
$
40.11

 
$
35.07

 
$
24.69

Weighted average assumptions used:
 
 

 
 

 
 

Expected volatility
 
46
%
 
46
%
 
30
%
Expected term (in years)
 
5

 
3.65

 
5

Risk-free interest rate
 
0.64
%
 
0.91
%
 
2.42
%
Expected dividend yield
 
—
%
 
—
%
 
—
%
 
A summary of changes in stock options outstanding during the year ended December 31, 2012 is presented below:
 
 
 
Stock Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
Balance at January 1, 2012
 
502,844

 
$
68.57

 
6.75

Granted
 
26,000

 
$
100.00

 
—

Forfeited or expired
 
(4,500
)
 
 

 
—

Balance at December 31, 2012
 
524,344

 
$
70.16

 
5.95


As of December 31, 2012, 158,494 options were 100% vested.  At December 31, 2012, the Company had approximately $4.6 million of total unrecognized compensation expense that will be recognized over the weighted average period of 2.96 years.  The Company recorded compensation expense of $1.7 million, $0.4 million, and $0.2 million for the years ended December 31, 2012, 2011, and 2010, respectively, related to the vesting of these options.


87


Other share-based compensation

Upon completion of each of the Ply Gem acquisition, MW acquisition and Alenco acquisition, certain members of management made a cash contribution to Ply Gem Prime Holdings in exchange for shares of Ply Gem Prime Holdings’ common stock.  (As previously described, investments in connection with the Ply Gem acquisition and the MW acquisition were in Ply Gem Investment Holdings common stock, which stock was later converted into Ply Gem Prime Holdings common stock in connection with the Alenco acquisition.)  Management’s shares of common stock are governed by the Ply Gem Prime Holdings Stockholders’ Agreement, which gives the management participants put rights in certain circumstances to put the stock back to Ply Gem Prime Holdings at a price that is determined using defined formulas contained within the Stockholders’ Agreement.  The Stockholders’ Agreement contains two separate put right price formulas. The determination of which put right price formula will be applicable to each of the participant’s shares of common stock is based upon the participants reaching certain vesting requirements which are described in the Stockholders’ Agreement.  The shares of common stock generally vest at a rate of 20% per year of service, but may vest earlier if certain events occur.  Based on the above, the Company has accounted for these awards of shares of common stock under the modified transition method.

    On September 29, 2006 the Company amended the put right section of its Stockholders’ Agreement to require that Stockholders must have held vested shares for a minimum of six-months from the last day of the quarter during which such shares vested in order to receive the put right price formula for vested shares to ensure that stockholders are exposed to the risks and rewards of true equity ownership.  As a result, the Company modified its accounting treatment, and as of September 29, 2006, treated these as equity classified awards.  On September 29, 2006, the repurchase price under the put right formula was less than $0.  As such, no compensation cost will be recognized for these shares.
 
Common Stock
 
Shares Owned by
 
Management
 
 
Balance at January 1, 2012
452,872

Shares issued
1,800

Shares repurchased
—

Balance at December 31, 2012
454,672



Restricted stock

During January 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors.  These shares vested over the 2012 calendar period and the Company expensed these items as compensation expense ratably during 2012. During the year ended December 31, 2012, the Company expensed $180,000, related to these grants in selling, general, and administrative expenses within the consolidated statement of operations.

During December 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors.  These shares will vest over the 2012 through 2013 twelve month period and the Company is expensing these items ratably over the twelve month period up to the vesting date. During the year ended December 31, 2012, the Company expensed $10,000, related to these grants in selling, general, and administrative expenses within the consolidated statement of operations.

Phantom stock

Upon the completion of the Ply Gem Acquisition and the MW Acquisition, certain members of management contributed their investment in predecessor companies in exchange for phantom common stock units and phantom preferred stock units which were governed by a phantom stock plan.  Under the phantom stock plan, each participant’s interest in the plan was recorded in a bookkeeping account; however, no stock was initially issued under the phantom stock plan.  Each account recorded a number of units so that, any “phantom common stock units” were deemed to be invested in common stock and any “phantom preferred stock units” were deemed invested in senior preferred stock.  Under the plan, upon liquidation and payment of a participant’s account, the value of the account generally was to be paid to the participant either in cash or in shares of Prime Holdings’ stock having a fair market value equal to the account balance, in the discretion of Prime Holdings.

88

 
For the first three quarters of 2006, the phantom units were recognized by the Company as liability awards that had to be marked to market every quarter.  During September 2006, the Company converted all phantom common and preferred stock units into a cash account payable on a fixed schedule in years 2007 and beyond.  The value of the portion of each cash account that represented phantom common units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00.  From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest was credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans.  This portion of the account was paid to each party in a single lump-sum cash payment on January 31, 2007.  The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of senior preferred stock represented by such units.  This portion of the account is credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment.  This portion of the account was payable on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, was paid on each such date.  During the years ended December 31, 2011 and 2010, the Company made cash phantom stock payments of approximately $2.3 million and $2.1 million, respectively.   The final payment of approximately $2.3 million was paid during the year ended December 31, 2011 and, as a result, there was no liability on the consolidated balance sheet as of December 31, 2012 and 2011.



12.   SEGMENT INFORMATION
 
The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.  The Company has two reportable segments:  1) Siding, Fencing, and Stone and 2) Windows and Doors.

The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses.  Unallocated income and expenses include items which are not directly attributed to or allocated to either of the Company’s reporting segments.  Such items include interest, legal costs, corporate payroll, and unallocated finance, accounting expenses, gain (loss) on modification or extinguishment of debt, and write-off of previously capitalized offering costs. Unallocated corporate assets include cash and certain receivables.  Interest expense is presented net of interest income.

Following is a summary of the Company’s segment information:

89

 
 
For the year ended December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
Net sales
 
 
 
 
 
 
Siding, Fencing, and Stone
 
$
658,045

 
$
639,290

 
$
604,406

Windows and Doors
 
463,256

 
395,567

 
391,500

 
 
$
1,121,301

 
$
1,034,857

 
$
995,906

Operating earnings (loss)
 
 

 
 

 
 

Siding, Fencing, and Stone
 
$
110,456

 
$
90,849

 
$
92,612

Windows and Doors
 
(20,565
)
 
(31,134
)
 
(19,410
)
Unallocated
 
(19,871
)
 
(14,784
)
 
(16,372
)
 
 
$
70,020

 
$
44,931

 
$
56,830

Interest expense, net
 
 

 
 

 
 

Siding, Fencing, and Stone
 
$
(47
)
 
$
(83
)
 
$
(121
)
Windows and Doors
 
(18
)
 
(13
)
 
90

Unallocated
 
103,107

 
101,480

 
122,864

 
 
$
103,042

 
$
101,384

 
$
122,833

Depreciation and amortization
 
 

 
 

 
 

Siding, Fencing, and Stone
 
$
22,616

 
$
23,634

 
$
27,614

Windows and Doors
 
29,490

 
30,217

 
32,936

Unallocated
 
171

 
169

 
168

 
 
$
52,277

 
$
54,020

 
$
60,718

Income tax expense
 
 

 
 

 
 

Unallocated
 
$
2,835

 
$
683

 
$
5,027

 
 
 
 
 
 
 
Capital expenditures
 
 

 
 

 
 

Siding, Fencing, and Stone
 
$
11,219

 
$
6,776

 
$
5,928

Windows and Doors
 
12,617

 
4,651

 
5,177

Unallocated
 
810

 
63

 
—

 
 
$
24,646

 
$
11,490

 
$
11,105

 
 
 
 
 
 
 
 
 
As of December 31,
 
 

 
 
2012
 
2011
 
 

Total assets
 
 

 
 

 
 

Siding, Fencing, and Stone
 
$
558,501

 
$
579,195

 
 

Windows and Doors
 
271,650

 
273,909

 
 

Unallocated
 
51,699

 
39,808

 
 

 
 
$
881,850

 
$
892,912

 
 

 
Our Canadian subsidiary, which had sales of approximately $70.0 million for the year ended December 31, 2012, represents a majority of our sales to foreign customers.  Other subsidiaries’ sales outside the United States are less than 1% of our total sales.

90

13.   RELATED PARTY TRANSACTIONS

Under the General Advisory Agreement (the “General Advisory Agreement”) the Company entered into with CI Capital Partners LLC (“CI Capital Partners”), formerly Caxton-Iseman Capital LLC , CI Capital Partners provides the Company with acquisition and financial advisory services as the Board of Directors shall reasonably request.  In consideration of these services, the Company agreed to pay CI Capital Partners (1) an annual fee equal to 2% of our earnings before interest, tax, depreciation and amortization, (“EBITDA”), as defined in such agreement, (2) a transaction fee, payable upon the completion by the Company of any acquisition, of 2% of the sale price, (3) a transaction fee, payable upon the completion by the Company of any divestitures, of 1% of the sale price, and (4) a transaction fee, payable upon the completion of the sale of the Company, of 1% of the sale price.  EBITDA in the General Advisory Agreement is based on the Company’s net income (loss) plus extraordinary losses and/or any net capital losses realized, provision for income taxes, interest expense (including amortization or write-off of debt discount and debt issuance costs and commissions, and other items), depreciation and amortization, dividends paid or accrued on preferred stock, certain management fees paid to CI Capital Partners, charges related to certain phantom units, and a number of other items.  The annual fee payable in any year may not exceed the amounts permitted under the senior credit facilities or the indenture governing the senior secured notes, and CI Capital Partners is obligated to return any portion of the annual fee that has been prepaid if an event of default has occurred and is continuing under either the senior credit facilities or the indenture governing the senior secured notes.

Under the General Advisory Agreement the Company paid and expensed, as a component of selling, general, and administrative expenses, a management fee of approximately $2.5 million, $2.3 million, and $2.5 million, for the years ended December 31, 2012, 2011 and 2010, respectively.  The original term of the General Advisory Agreement was 10 years, and was automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or CI Capital Partners provide notice of termination.  In addition, the General Advisory Agreement may be terminated by CI Capital Partners at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of the Company’s shares or shares of any of the Company’s parent companies.  During the fourth quarter of 2012, the Company and CI Capital Partners amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. If the General Advisory Agreement is terminated for any reason prior to the end of the initial term, Ply Gem Industries will pay to CI Capital Partners `an amount equal to the present value of the annual advisory fees that would have been payable through the end of the term or three years, whichever is less, based on the Company’s cost of funds to borrow amounts under the Company’s senior credit facilities.

During 2010, approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by such affiliates were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime Holdings in exchange for equity of Ply Gem Prime valued at approximately $114.9 million.  Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries for no consideration as a capital contribution and cancelled on February 12, 2010.  On February 16, 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million of the 9% Senior Subordinated Notes held by affiliates of the Company’s controlling stockholder).  During the year ended December 31, 2010, the Company paid these affiliates approximately $9.8 million of interest for the 9% Senior Subordinated Notes owned by these related parties. These interest payments have been recorded within interest expense in the Company’s consolidated statement of operations.

During 2010, the Company received equity contributions of approximately $2.5 million from certain members of management.  In addition, the Company repurchased equity of approximately $4.2 million from certain former and existing members of management.  As of December 31, 2010, approximately $1.2 million was classified as a current liability in accrued expenses in the consolidated balance sheet.  During the year ended December 31, 2011, the approximate $1.2 million was paid in cash by the Company and reflected as an equity repurchase in 2011 on the Company’s consolidated statement of cash flows.

During June 2010, the Company made a state tax payment of approximately $1.5 million for Ply Gem Prime.  Ply Gem Prime incurred a state tax liability as a result of the 9% Senior Subordinated Note debt extinguishment and related contribution during the first quarter of 2010 in which Ply Gem Prime recognized a capital gain of approximately $13.3 million.  Ply Gem Prime is a holding company with no independent operating assets or liabilities other than its investment in the Company and therefore has no ability to make tax payments.  The Company recognized this payment as a return of capital.
 

91

During the fourth quarter of 2011, the Company entered into an amendment to the employee agreement originally dated August 14, 2006 for the Company’s chief executive officer.   In conjunction with the amendment to the employment agreement, the Company also entered into a retention agreement and stock repurchase agreement.  These agreements, among other things, provided for: (i) the extension of the chief executive officer’s term of employment for three years, (ii) the Company to make a retention payment of $2.0 million to the chief executive officer on December 31, 2014 if he remains employed by the Company on that date, (iii) the repurchase of 125,660 shares of common stock of Ply Gem Prime and (iv) the issuance of 150,000 stock options to the chief executive officer for non-voting Class C common stock of Ply Gem Prime.   The $12.6 million repurchase of common stock was made by Ply Gem Prime based on proceeds provided by the Company.  The stock options granted to the chief executive officer vest 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015.  

The Company also entered into a retention agreement with the Company’s chief financial officer which will require the Company to make a retention payment of $0.7 million on December 31, 2014 if he remains employed by the Company on that date.  The Company also repurchased equity of approximately $0.3 million during 2011 from a former member of management.
 
    
14.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
The following is a summary of the quarterly results of operations.
 
 
 
Quarter
Ended
December 31,
 
Quarter
Ended
September 29,
 
Quarter
Ended
June 30,
 
Quarter
Ended
March 31,
 
 
(Amounts in thousands)
 
2012
 
2012
 
2012
 
2012
 
 
Net sales
 
$
268,643

 
$
306,193

 
$
307,289

 
$
239,176

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
57,218

 
70,693

 
73,373

 
42,915

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(15,007
)
 
(3,673
)
(1
)
5,267

 
(25,642
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter
Ended
December 31,
 
Quarter
Ended
October 1,
 
Quarter
Ended
July 2,
 
Quarter
Ended
April 2,
 
 
(Amounts in thousands)
 
2011
 
2011
 
2011
 
2011
 
 
Net sales
 
$
242,370

 
$
297,889

 
$
294,491

 
$
200,107

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
49,899

 
65,822

 
67,029

 
27,782

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(15,220
)
 
(458
)
 
2,063

 
(70,892
)
 
(2)

 
(1)
The net loss for the quarter ended September 29, 2012 includes an approximate $3.6 million loss on modification or extinguishment of debt.  See Note 4 for description of loss on debt modification and extinguishment.
(2)
The net loss for the quarter ended April 2, 2011 includes an approximate $27.9 million loss on modification or extinguishment of debt.  See Note 4 for description of loss on debt modification and extinguishment.

Significant Fourth Quarter Adjustments
 
During the fourth quarter of 2011, the Company increased their environmental reserve by $1.6 million as a result of the completion of a preliminary cost estimate for an underground storage tank that was filed with the EPA during November 2011.  The expense has been recognized within selling, general, and administrative expenses for the year ended December 31, 2011 in the consolidated statement of operations.
 


92

15.   GUARANTOR/NON-GUARANTOR
 
The 8.25% Senior Secured Notes and the 9.375% Senior Notes were issued by our direct subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries.  Accordingly, the following guarantor and non-guarantor information is presented as of December 31, 2012 and December 31, 2011, and for the years ended December 31, 2012, 2011, and 2010.  The non-guarantor information presented represents our Canadian subsidiary, Ply Gem Canada.




PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended December 31, 2012
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
1,051,312

 
$
69,989

 
$
—

 
$
1,121,301

Cost of products sold
 
—

 
—

 
826,496

 
50,606

 
—

 
877,102

Gross profit
 
—

 
—

 
224,816

 
19,383

 
—

 
244,199

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
19,871

 
112,073

 
15,298

 
—

 
147,242

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
15,202

 
3,057

 
(18,259
)
 
—

Amortization of intangible assets
 
—

 
—

 
26,937

 
—

 
—

 
26,937

Total operating expenses
 
—

 
19,871

 
154,212

 
18,355

 
(18,259
)
 
174,179

Operating earnings (loss)
 
—

 
(19,871
)
 
70,604

 
1,028

 
18,259

 
70,020

Foreign currency gain
 
—

 
—

 
—

 
409

 
—

 
409

Intercompany interest
 
—

 
102,729

 
(102,729
)
 
—

 
—

 
—

Interest expense
 
—

 
(103,112
)
 
(18
)
 
(3
)
 
—

 
(103,133
)
Interest income
 
—

 
5

 
65

 
21

 
—

 
91

Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

extinguishment of debt
 
—

 
(3,607
)
 
—

 
—

 
—

 
(3,607
)
Intercompany administrative income
 
—

 
18,259

 
—

 
—

 
(18,259
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
(5,597
)
 
(32,078
)
 
1,455

 
—

 
(36,220
)
Equity in subsidiaries' income (loss)
 
(39,055
)
 
(33,458
)
 
—

 
—

 
72,513

 
—

Income (loss) before provision
 
 

 
 

 
 

 
 

 
 

 
 

   (benefit) for income taxes
 
(39,055
)
 
(39,055
)
 
(32,078
)
 
1,455

 
72,513

 
(36,220
)
Provision (benefit) for income taxes
 
—

 
—

 
3,150

 
(315
)
 
—

 
2,835

Net income (loss)
 
$
(39,055
)
 
$
(39,055
)
 
$
(35,228
)
 
$
1,770

 
$
72,513

 
$
(39,055
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
835

 
—

 
835

Minimum pension liability for
 
 

 
 

 
 

 
 

 
 

 
 

actuarial loss
 
—

 
(673
)
 
(430
)
 
—

 
—

 
(1,103
)
Total comprehensive income (loss)
 
$
(39,055
)
 
$
(39,728
)
 
$
(35,658
)
 
$
2,605

 
$
72,513

 
$
(39,323
)

93


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended December 31, 2011
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
967,694

 
$
67,163

 
$
—

 
$
1,034,857

Cost of products sold
 
—

 
—

 
777,256

 
47,069

 
—

 
824,325

Gross profit
 
—

 
—

 
190,438

 
20,094

 
—

 
210,532

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

  Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
14,748

 
109,061

 
15,103

 
—

 
138,912

  Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
13,287

 
2,783

 
(16,070
)
 
—

Amortization of intangible assets
 
—

 
36

 
26,653

 
—

 
—

 
26,689

Total operating expenses
 
—

 
14,784

 
149,001

 
17,886

 
(16,070
)
 
165,601

Operating earnings (loss)
 
—

 
(14,784
)
 
41,437

 
2,208

 
16,070

 
44,931

Foreign currency gain
 
—

 
—

 
—

 
492

 
—

 
492

Intercompany interest
 
—

 
102,729

 
(102,729
)
 
—

 
—

 
—

Interest expense
 
—

 
(101,486
)
 
(1
)
 
(1
)
 
—

 
(101,488
)
Interest income
 
—

 
6

 
83

 
15

 
—

 
104

Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

     extinguishment of debt
 
—

 
(27,863
)
 
—

 
—

 
—

 
(27,863
)
Intercompany administrative income
 
—

 
16,070

 
—

 
—

 
(16,070
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
(25,328
)
 
(61,210
)
 
2,714

 
—

 
(83,824
)
Equity in subsidiaries' income (loss)
 
(84,507
)
 
(59,179
)
 
—

 
—

 
143,686

 
—

Income (loss) before provision
 
 

 
 

 
 

 
 

 
 

 
 

(benefit) for income taxes
 
(84,507
)
 
(84,507
)
 
(61,210
)
 
2,714

 
143,686

 
(83,824
)
Provision (benefit) for income taxes
 
—

 
—

 
(170
)
 
853

 
—

 
683

Net income (loss)
 
$
(84,507
)
 
$
(84,507
)
 
$
(61,040
)
 
$
1,861

 
$
143,686

 
$
(84,507
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
(691
)
 
—

 
(691
)
Minimum pension liability for
 
 

 
 

 
 

 
 

 
 

 
 

actuarial loss
 
—

 
(3,091
)
 
(3,509
)
 
—

 
—

 
(6,600
)
Total comprehensive income (loss)
 
$
(84,507
)
 
$
(87,598
)
 
$
(64,549
)
 
$
1,170

 
$
143,686

 
$
(91,798
)

94


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended December 31, 2010
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
922,240

 
$
73,666

 
$
—

 
$
995,906

Cost of products sold
 
—

 
—

 
730,896

 
49,050

 
—

 
779,946

Gross profit
 
—

 
—

 
191,344

 
24,616

 
—

 
215,960

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
14,765

 
101,767

 
13,928

 
—

 
130,460

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
12,143

 
1,639

 
(13,782
)
 
—

Amortization of intangible assets
 
—

 
36

 
27,063

 
—

 
—

 
27,099

Write-off of previously capitalized
 
 

 
 

 
 

 
 

 
 

 
 

   offering costs
 
—

 
1,571

 
—

 
—

 
—

 
1,571

Total operating expenses
 
—

 
16,372

 
140,973

 
15,567

 
(13,782
)
 
159,130

Operating earnings (loss)
 
—

 
(16,372
)
 
50,371

 
9,049

 
13,782

 
56,830

Foreign currency gain
 
—

 
—

 
—

 
510

 
—

 
510

Intercompany interest
 
—

 
106,899

 
(106,086
)
 
(813
)
 
—

 
—

Interest expense
 
—

 
(122,881
)
 
(111
)
 
—

 
—

 
(122,992
)
Interest income
 
—

 
17

 
121

 
21

 
—

 
159

Gain on extinguishment of debt
 
—

 
98,187

 
—

 
—

 
—

 
98,187

Intercompany administrative income
 
—

 
13,782

 
—

 
—

 
(13,782
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
79,632

 
(55,705
)
 
8,767

 
—

 
32,694

Equity in subsidiaries' income (loss)
 
27,667

 
(52,648
)
 
—

 
—

 
24,981

 
—

Income (loss) before provision
 
 

 
 

 
 

 
 

 
 

 
 

   (benefit) for income taxes
 
27,667

 
26,984

 
(55,705
)
 
8,767

 
24,981

 
32,694

Provision (benefit) for income taxes
 
—

 
(683
)
 
3,273

 
2,437

 
—

 
5,027

Net income (loss)
 
$
27,667

 
$
27,667

 
$
(58,978
)
 
$
6,330

 
$
24,981

 
$
27,667

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
1,639

 
—

 
1,639

Mininum pension liability for
 
 

 
 

 
 

 
 

 
 

 
 

actuarial gain
 
—

 
(292
)
 
(448
)
 
—

 
—

 
(740
)
Total comprehensive income (loss)
 
$
27,667

 
$
27,375

 
$
(59,426
)
 
$
7,969

 
$
24,981

 
$
28,566


95


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2012
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
ASSETS
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
23,332

 
$
(4,307
)
 
$
8,169

 
$
—

 
$
27,194

Accounts receivable, net
 
—

 
—

 
107,961

 
7,091

 
—

 
115,052

Inventories:
 
 

 
 

 
 

 
 

 
 

 
 

Raw materials
 
—

 
—

 
35,074

 
4,878

 
—

 
39,952

Work in process
 
—

 
—

 
20,220

 
711

 
—

 
20,931

Finished goods
 
—

 
—

 
35,927

 
3,482

 
—

 
39,409

Total inventory
 
—

 
—

 
91,221

 
9,071

 
—

 
100,292

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
12

 
13,844

 
1,528

 
—

 
15,384

Deferred income taxes
 
—

 
—

 
5,161

 
11

 
—

 
5,172

Total current assets
 
—

 
23,344

 
213,880

 
25,870

 
—

 
263,094

Investments in subsidiaries
 
(314,942
)
 
(212,065
)
 
—

 
—

 
527,007

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

   Land
 
—

 
—

 
3,565

 
172

 
—

 
3,737

   Buildings and improvements
 
—

 
—

 
36,320

 
1,621

 
—

 
37,941

   Machinery and equipment
 
—

 
2,145

 
281,885

 
9,245

 
—

 
293,275

 
 
—

 
2,145

 
321,770

 
11,038

 
—

 
334,953

Less accumulated depreciation
 
—

 
(932
)
 
(228,596
)
 
(6,320
)
 
—

 
(235,848
)
    Total property and equipment, net
 
—

 
1,213

 
93,174

 
4,718

 
—

 
99,105

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
94,356

 
—

 
—

 
94,356

Goodwill
 
—

 
—

 
383,042

 
9,413

 
—

 
392,455

Deferred income taxes
 
—

 
—

 
—

 
2,981

 
—

 
2,981

Intercompany note receivable
 
—

 
856,739

 
—

 
—

 
(856,739
)
 
—

Other
 
—

 
27,142

 
2,717

 
—

 
—

 
29,859

Total other assets
 
—

 
883,881

 
480,115

 
12,394

 
(856,739
)
 
519,651

 
 
$
(314,942
)
 
$
696,373

 
$
787,169

 
$
42,982

 
$
(329,732
)
 
$
881,850

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
254

 
$
63,110

 
$
4,433

 
$
—

 
$
67,797

Accrued expenses
 
—

 
32,744

 
58,547

 
2,627

 
—

 
93,918

Total current liabilities
 
—

 
32,998

 
121,657

 
7,060

 
—

 
161,715

Deferred income taxes
 
—

 
—

 
10,049

 
—

 
—

 
10,049

Intercompany note payable
 
—

 
—

 
856,739

 
—

 
(856,739
)
 
—

Other long-term liabilities
 
—

 
13,933

 
45,811

 
900

 
—

 
60,644

Long-term debt
 
—

 
964,384

 
—

 
—

 
—

 
964,384

Commitments and contingencies
 


 


 


 


 


 
 
Stockholder's Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
—

 
—

 
—

 
—

 
—

 
—

Additional paid-in-capital
 
311,034

 
311,034

 
407,525

 
5,737

 
(724,296
)
 
311,034

(Accumulated deficit) retained earnings
 
(619,640
)
 
(619,640
)
 
(654,612
)
 
23,400

 
1,250,852

 
(619,640
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive income (loss)
 
(6,336
)
 
(6,336
)
 
—

 
5,885

 
451

 
(6,336
)
Total stockholder's (deficit) equity
 
(314,942
)
 
(314,942
)
 
(247,087
)
 
35,022

 
527,007

 
(314,942
)
 
 
$
(314,942
)
 
$
696,373

 
$
787,169

 
$
42,982

 
$
(329,732
)
 
$
881,850


96


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2011
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
ASSETS
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
8,578

 
$
(3,408
)
 
$
6,530

 
$
—

 
$
11,700

Accounts receivable, net
 
—

 
—

 
102,052

 
7,463

 
—

 
109,515

Inventories:
 
 

 
 

 
 

 
 

 
 

 
 

Raw materials
 
—

 
—

 
37,024

 
4,885

 
—

 
41,909

Work in process
 
—

 
—

 
23,619

 
667

 
—

 
24,286

Finished goods
 
—

 
—

 
36,282

 
2,328

 
—

 
38,610

Total inventory
 
—

 
—

 
96,925

 
7,880

 
—

 
104,805

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
422

 
9,893

 
2,957

 
—

 
13,272

Deferred income taxes
 
—

 
—

 
5,666

 
9

 
—

 
5,675

Total current assets
 
—

 
9,000

 
211,128

 
24,839

 
—

 
244,967

Investments in subsidiaries
 
(277,322
)
 
(164,863
)
 
—

 
—

 
442,185

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

Land
 
—

 
—

 
3,565

 
172

 
—

 
3,737

Buildings and improvements
 
—

 
—

 
35,280

 
1,308

 
—

 
36,588

Machinery and equipment
 
—

 
1,335

 
262,349

 
8,436

 
—

 
272,120

 
 
—

 
1,335

 
301,194

 
9,916

 
—

 
312,445

Less accumulated depreciation
 
—

 
(762
)
 
(206,585
)
 
(5,253
)
 
—

 
(212,600
)
Total property and equipment, net
 
—

 
573

 
94,609

 
4,663

 
—

 
99,845

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
121,148

 
—

 
—

 
121,148

Goodwill
 
—

 
—

 
382,165

 
9,302

 
—

 
391,467

Deferred income taxes
 
—

 
—

 
—

 
3,121

 
—

 
3,121

Intercompany note receivable
 
—

 
856,739

 
—

 
—

 
(856,739
)
 
—

Other
 
—

 
30,235

 
2,129

 
—

 
—

 
32,364

Total other assets
 
—

 
886,974

 
505,442

 
12,423

 
(856,739
)
 
548,100

 
 
$
(277,322
)
 
$
731,684

 
$
811,179

 
$
41,925

 
$
(414,554
)
 
$
892,912

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
720

 
$
44,652

 
$
4,718

 
$
—

 
$
50,090

Accrued expenses
 
—

 
36,987

 
50,790

 
3,104

 
—

 
90,881

Total current liabilities
 
—

 
37,707

 
95,442

 
7,822

 
—

 
140,971

Deferred income taxes
 
—

 
—

 
9,865

 
—

 
—

 
9,865

Intercompany note payable
 
—

 
—

 
856,739

 
—

 
(856,739
)
 
—

Other long-term liabilities
 
—

 
9,629

 
47,240

 
859

 
—

 
57,728

Long-term debt
 
—

 
961,670

 
—

 
—

 
—

 
961,670

Commitments and contingencies
 


 


 


 


 


 
 
Stockholder's Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
—

 
—

 
—

 
—

 
—

 
—

Additional paid-in-capital
 
309,331

 
309,331

 
421,277

 
6,562

 
(737,170
)
 
309,331

(Accumulated deficit) retained earnings
 
(580,585
)
 
(580,585
)
 
(619,384
)
 
21,630

 
1,178,339

 
(580,585
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive income (loss)
 
(6,068
)
 
(6,068
)
 
—

 
5,052

 
1,016

 
(6,068
)
Total stockholder's (deficit) equity
 
(277,322
)
 
(277,322
)
 
(198,107
)
 
33,244

 
442,185

 
(277,322
)
 
 
$
(277,322
)
 
$
731,684

 
$
811,179

 
$
41,925

 
$
(414,554
)
 
$
892,912


97



PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2012
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
 
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Cash flows from operating
 
 
 
 
 
 
 
 
 
 
 
 
activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(39,055
)
 
$
(39,055
)
 
$
(35,228
)
 
$
1,770

 
$
72,513

 
$
(39,055
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash provided by operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 
 

 
 

 
 

 
 

 
 

 
 

expense
 
—

 
171

 
51,095

 
1,011

 
—

 
52,277

Non-cash interest expense, net
 
—

 
11,428

 
—

 
—

 
—

 
11,428

Gain on foreign currency transactions
 
—

 
—

 
—

 
(409
)
 
—

 
(409
)
Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

extinguishment of debt
 
—

 
3,607

 
—

 
—

 
—

 
3,607

Stock based compensation
 
—

 
1,703

 
—

 
—

 
 
 
1,703

Deferred income taxes
 
—

 
—

 
844

 
183

 
—

 
1,027

Reduction in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
(92
)
 
—

 
—

 
(92
)
Equity in subsidiaries' net loss
 
39,055

 
33,458

 
—

 
—

 
(72,513
)
 
—

Other
 
—

 
—

 
(37
)
 
—

 
—

 
(37
)
Changes in operating assets and
 
 

 
 

 
 

 
 

 
 

 
 

liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(5,909
)
 
532

 
—

 
(5,377
)
Inventories
 
—

 
—

 
5,704

 
(1,008
)
 
—

 
4,696

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
616

 
(4,586
)
 
1,436

 
—

 
(2,534
)
Accounts payable
 
—

 
(466
)
 
19,195

 
(1,123
)
 
—

 
17,606

Accrued expenses
 
—

 
(562
)
 
5,794

 
(640
)
 
—

 
4,592

Cash payments on restructuring liabilities
 
—

 
—

 
(1,177
)
 
—

 
—

 
(1,177
)
Other
 
—

 
—

 
(240
)
 
689

 
—

 
449

Net cash provided by
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
10,900

 
35,363

 
2,441

 
—

 
48,704

Cash flows from investing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(810
)
 
(22,969
)
 
(867
)
 
—

 
(24,646
)
Proceeds from sale of assets
 
—

 
—

 
284

 
(91
)
 
—

 
193

Acquisitions, net of cash acquired
 
—

 
—

 
(100
)
 
—

 
—

 
(100
)
Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(810
)
 
(22,785
)
 
(958
)
 
—

 
(24,553
)
Cash flows from financing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from long-term debt
 
—

 
102,991

 
—

 
—

 
—

 
102,991

Payments on long-term debt
 
—

 
(58,991
)
 
—

 
—

 
—

 
(58,991
)
Net revolver payments
 
—

 
(40,000
)
 
—

 
—

 
—

 
(40,000
)
Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 


investment
 
—

 
13,477

 
(13,477
)
 
—

 
—

 
—

Payment of early tender premium
 
—

 
(9,844
)
 
—

 
—

 
—

 
(9,844
)
Equity repurchases
 
—

 
—

 
—

 
—

 
—

 
—

Debt issuance costs paid
 
—

 
(2,969
)
 
—

 
—

 
—

 
(2,969
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
4,664

 
(13,477
)
 
—

 
—

 
(8,813
)
Impact of exchange rate movement
 
 

 
 

 
 

 
 

 
 

 
 

on cash
 
—

 
—

 
—

 
156

 
—

 
156

Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
14,754

 
(899
)
 
1,639

 
—

 
15,494

Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
8,578

 
(3,408
)
 
6,530

 
—

 
11,700

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
23,332

 
$
(4,307
)
 
$
8,169

 
$
—

 
$
27,194


98


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2011
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
 
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Cash flows from operating
 
 
 
 
 
 
 
 
 
 
 
 
activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(84,507
)
 
$
(84,507
)
 
$
(61,040
)
 
$
1,861

 
$
143,686

 
$
(84,507
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash provided by (used in) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 
 

 
 

 
 

 
 

 
 

 
 

expense
 
—

 
169

 
52,951

 
900

 
—

 
54,020

Non-cash interest expense, net
 
—

 
10,518

 
—

 
—

 
—

 
10,518

Gain on foreign currency transactions
 
—

 
—

 
—

 
(492
)
 
—

 
(492
)
Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

extinguishment of debt
 
—

 
27,863

 
—

 
—

 
—

 
27,863

Stock based compensation
 
—

 
431

 
(1
)
 
—

 
—

 
430

Deferred income taxes
 
—

 
—

 
7,872

 
(1,579
)
 
—

 
6,293

Reduction in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
(6,617
)
 
—

 
—

 
(6,617
)
Equity in subsidiaries' net loss
 
84,507

 
59,179

 
—

 
—

 
(143,686
)
 
—

Other
 
—

 
—

 
(481
)
 
(3
)
 
—

 
(484
)
Changes in operating assets and
 
 

 
 

 
 

 
 

 
 

 
 

liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(13,107
)
 
(159
)
 
—

 
(13,266
)
Inventories
 
—

 
—

 
(5,253
)
 
(1,160
)
 
—

 
(6,413
)
Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
(176
)
 
(1,622
)
 
(150
)
 
—

 
(1,948
)
Accounts payable
 
—

 
321

 
(6,593
)
 
1,500

 
—

 
(4,772
)
Accrued expenses
 
—

 
11,300

 
3,256

 
758

 
—

 
15,314

Cash payments on restructuring liabilities
 
—

 
—

 
(407
)
 
—

 
—

 
(407
)
Other
 
—

 
(1
)
 
531

 
479

 
—

 
1,009

Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
25,097

 
(30,511
)
 
1,955

 
—

 
(3,459
)
Cash flows from investing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(63
)
 
(10,490
)
 
(937
)
 
—

 
(11,490
)
Proceeds from sale of assets
 
—

 
—

 
102

 
—

 
—

 
102

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(63
)
 
(10,388
)
 
(937
)
 
—

 
(11,388
)
Cash flows from financing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from long-term debt
 
—

 
423,684

 
—

 
—

 
—

 
423,684

Payments on long-term debt
 
—

 
(348,684
)
 
—

 
—

 
—

 
(348,684
)
Net revolver borrowings
 
—

 
55,000

 
—

 
—

 
—

 
55,000

Payments on previous revolver credit facility
 
—

 
(30,000
)
 
—

 
—

 
—

 
(30,000
)
Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 
—

investment
 
—

 
(37,826
)
 
38,608

 
(782
)
 
—

 
—

Payment of early tender premium
 
—

 
(49,769
)
 
—

 
—

 
—

 
(49,769
)
Equity repurchases
 
—

 
(14,049
)
 
—

 
—

 
—

 
(14,049
)
Debt issuance costs paid
 
—

 
(26,984
)
 
—

 
—

 
—

 
(26,984
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
(28,628
)
 
38,608

 
(782
)
 
—

 
9,198

Impact of exchange rate movement
 
 

 
 

 
 

 
 

 
 

 
 

on cash
 
—

 
—

 
—

 
(149
)
 
—

 
(149
)
Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
(3,594
)
 
(2,291
)
 
87

 
—

 
(5,798
)
Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
12,172

 
(1,117
)
 
6,443

 
—

 
17,498

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
8,578

 
$
(3,408
)
 
$
6,530

 
$
—

 
$
11,700


99


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2010
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
 
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Cash flows from operating
 
 
 
 
 
 
 
 
 
 
 
 
activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
27,667

 
$
27,667

 
$
(58,978
)
 
$
6,330

 
$
24,981

 
$
27,667

Adjustments to reconcile net
 
 

 
 

 
 

 
 

 
 

 
 

income (loss) to cash provided by
 
 

 
 

 
 

 
 

 
 

 
 

(used in) operating activities:
 
 

 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 
 

 
 

 
 

 
 

 
 

 
 

expense
 
—

 
168

 
59,761

 
789

 
—

 
60,718

Non-cash interest expense, net
 
—

 
9,800

 
—

 
—

 
—

 
9,800

Gain on foreign currency transactions
 
—

 
—

 
—

 
(510
)
 
—

 
(510
)
Gain on extinguishment of debt
 
—

 
(98,187
)
 
—

 
—

 
—

 
(98,187
)
Write-off of previously capitalized
 
 

 
 

 
 

 
 

 
 

 
 

offering costs
 
—

 
1,571

 
—

 
—

 
—

 
1,571

Stock based compensation
 
—

 
164

 
—

 
—

 
—

 
164

Deferred income taxes
 
—

 
—

 
981

 
622

 
—

 
1,603

Equity in subsidiaries' net income (loss)
 
(27,667
)
 
52,648

 
—

 
—

 
(24,981
)
 
—

Other
 
—

 
—

 
(156
)
 
(12
)
 
—

 
(168
)
Changes in operating assets and
 
 

 
 

 
 

 
 

 
 

 
 

liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(3,730
)
 
707

 
—

 
(3,023
)
Inventories
 
—

 
—

 
(1,384
)
 
1,264

 
—

 
(120
)
Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
(1,488
)
 
6,634

 
2,478

 
—

 
7,624

Accounts payable
 
—

 
(199
)
 
1,090

 
1,026

 
—

 
1,917

Accrued expenses
 
—

 
(4,384
)
 
4,211

 
625

 
—

 
452

Cash payments on restructuring liabilities
 
—

 
—

 
(2,630
)
 
—

 
—

 
(2,630
)
Other
 
—

 
(1
)
 
(554
)
 
425

 
—

 
(130
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
(12,241
)
 
5,245

 
13,744

 
—

 
6,748

Cash flows from investing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
—

 
(10,275
)
 
(830
)
 
—

 
(11,105
)
Proceeds from sale of assets
 
—

 
—

 
2,032

 
—

 
—

 
2,032

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
—

 
(8,243
)
 
(830
)
 
—

 
(9,073
)
Cash flows from financing
 
 

 
 

 
 

 
 

 
 

 
 

activities:
 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from long-term debt
 
—

 
145,709

 
—

 
—

 
—

 
145,709

Payments on long-term debt
 
—

 
(141,191
)
 
—

 
—

 
—

 
(141,191
)
Net revolver borrowings
 
—

 
5,000

 
—

 
—

 
—

 
5,000

Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 
 
investment
 
—

 
14,665

 
(711
)
 
(13,954
)
 
—

 
—

Equity contributions
 
—

 
2,428

 
—

 
—

 
—

 
2,428

Equity repurchases
 
—

 
(2,978
)
 
—

 
—

 
—

 
(2,978
)
Debt issuance costs paid
 
—

 
(5,029
)
 
—

 
—

 
—

 
(5,029
)
Tax payments on behalf of parent
 
—

 
(1,532
)
 
—

 
—

 
—

 
(1,532
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
17,072

 
(711
)
 
(13,954
)
 
—

 
2,407

Impact of exchange rate movement
 
 

 
 

 
 

 
 

 
 

 
 

on cash
 
—

 
—

 
—

 
353

 
—

 
353

Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
4,831

 
(3,709
)
 
(687
)
 
—

 
435

Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
7,341

 
2,592

 
7,130

 
—

 
17,063

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
12,172

 
$
(1,117
)
 
$
6,443

 
$
—

 
$
17,498


100


Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


Not Applicable
 
Item 9A.   CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of December 31, 2012 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and the information required to be disclosed by us is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management of the Company (Ply Gem Holdings) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation conducted under the framework in “Internal Control – Integrated Framework,” the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

Item 9B.   OTHER INFORMATION
 
None

101


PART III

 
Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The Board of Directors of Ply Gem Prime Holdings, Inc., Ply Gem Holdings, and Ply Gem Industries are identical.

Name
 
Age
 
Position(s)
Frederick  J. Iseman
 
60
 
Chairman of the Board and Director
Gary E. Robinette
 
64
 
President, Chief Executive Officer and Director
Shawn K. Poe
 
51
 
Vice President and Chief Financial Officer
John Wayne
 
51
 
Executive Vice President, Chief Operating Officer
John Buckley
 
48
 
President, Siding Group
Lynn Morstad
 
49
 
President, U.S. Windows Group
David N. Schmoll
 
53
 
Senior Vice President, Human Resources
Timothy D. Johnson
 
37
 
General Counsel
Robert A. Ferris
 
70
 
Director
Steven M. Lefkowitz
 
48
 
Director
John D. Roach
 
69
 
Director
Michael Haley
 
62
 
Director
Timothy T. Hall
 
43
 
Director
Jeffrey T. Barber
 
60
 
Director

Set forth below is a brief description of the business experience for each member of our Board of Directors and our executive officers.

Frederick J. Iseman - Chairman of the Board and Director
Since the Ply Gem acquisition, Frederick Iseman has served as our Chairman of the Board of Directors. Mr. Iseman is currently Chairman and CEO of CI Capital Partners, a private equity firm which was founded by Mr. Iseman in 1993.  Prior to establishing CI Capital Partners, Mr. Iseman founded Hambro-Iseman Capital Partners, a merchant banking firm. From 1988 to 1990, Mr. Iseman was a member of the Hambro International Venture Fund. Mr. Iseman is a former Chairman of the Board of Anteon International Corporation and a former director of Buffets Holdings, Inc. Mr. Iseman graduated from Yale University with a BA in English Literature.

Mr. Iseman's experience in the private equity field provides us with valuable insight regarding acquisitions, debt financings, equity financings and public market sentiment.  In addition, Mr. Iseman's experience with growing portfolio companies similar to the Company provides benchmarking and other industry tools pertinent to us. Mr. Iseman's background and experiences qualify him to serve as Chairman of the Board.

Gary E. Robinette - President, Chief Executive Officer and Director
Gary E. Robinette was appointed our President and Chief Executive Officer in October 2006 at which time he was also elected to our Board of Directors.  Prior to joining Ply Gem, Mr. Robinette served as Executive Vice President and COO at Stock Building Supply, formerly a Wolseley company, since September 1998, and was also a member of the Wolseley North American Management board of directors.  Mr. Robinette held the position of President of Erb Lumber Inc., a Wolseley company, from 1993 to 1998 and served as Chief Financial Officer and Vice President of Carolina Holdings which was the predecessor company of Stock Building Supply.  Mr. Robinette received a BS in accounting from Tiffin University and a MBA from Xavier University, where he is a member of the Board of Trustees.  He is also a member of the Policy Advisory Board of Harvard University's Joint Center for Housing Studies and serves on the Board of Directors for three companies sponsored by private equity firms.


102

Mr. Robinette's 36 years of experience with building products and distribution companies provides the Board with relevant industry knowledge and expertise pertinent to the current economic environment.  Throughout Mr. Robinette's tenure with various building product companies, he has experienced the housing industry's thriving growth, as well as a number of recessionary declines in the market.  These experiences provide the Board with valuable insight regarding strategic decisions and the future direction and vision of the Company.

Shawn K. Poe – Vice President and Chief Financial Officer
Since the Ply Gem acquisition, Mr. Poe has served as our Vice President and Chief Financial Officer. Mr. Poe was appointed Vice President of Finance of our siding and accessories subsidiaries in March 2000.  Prior to joining the Company, Mr. Poe held the position of Corporate Controller and various other accounting positions at Nordyne, Inc., which he joined in 1990.  In addition, Mr. Poe held various accounting positions with Federal Mogul Corporation from 1984 to 1990.  Mr. Poe graduated from Southeast Missouri State University in 1984 with a BS in Accounting. Mr. Poe graduated from Fontbonne College in 1994 with an MBA.

John Wayne - Executive Vice President, Chief Operating Officer
Mr. Wayne was appointed Chief Operating Officer of the Company on June 1, 2012 after having served as President of our siding and accessories subsidiaries since January of 2002.  Mr. Wayne joined the Company in 1998, and prior to his appointment to President of our Siding Group had been Vice President of Sales and Marketing for our Variform and Napco siding and accessories subsidiaries.  Prior to joining us, Mr. Wayne worked for Armstrong World Industries, Inc. from 1985 to 1998, holding a variety of sales management positions, including Vice President of Sales.  Mr. Wayne served as the Chairman of the Vinyl Siding Institute, the Chairman of the VSI Code and Regulatory Committee, and Chairman of the VSI board of directors through December 2007 when his term ended.  Mr. Wayne graduated from the University of Wisconsin in 1984 with a BBA in Finance and Marketing.

John Buckley - President, Siding Group
Mr. Buckley was appointed President of our Siding Group effective June 1, 2012. Mr. Buckley joined the Company in 1999, and prior to his appointment to President of our Siding Group had been Senior Vice President of Sales for our siding and accessories subsidiaries. Prior to joining us, Mr. Buckley worked for CertainTeed from 1991 to 1999, holding a variety of sales management positions. Mr. Buckley received a BA in communications from the University of Michigan in 1986, and a MSA from Madonna University in 1991.
 
Lynn Morstad - President, U.S. Windows Group
Mr. Morstad was appointed President of our U.S. Windows Group in October 2007 after having served as President of our New Construction Window Group since November 2006.  Prior to that, Mr. Morstad served as President, Chief Operating Officer and Chief Financial Officer respectively of MW Manufacturers Inc., a Ply Gem subsidiary he joined in 2000.  From March 1998 to May 2000, Mr. Morstad was employed by the Dr. Pepper/Seven Up division of Cadbury Schweppes as Vice President and Corporate Controller.  In addition, Mr. Morstad served in senior financial positions, including Vice President Controller with various divisions of the Newell Company for more than eight years.  Mr. Morstad is a graduate of the University of Iowa.

David N. Schmoll - Senior Vice President, Human Resources
Mr. Schmoll was appointed Senior Vice President of Human Resources in July 2007.  Prior to joining Ply Gem, he served as Vice President of Stock Building Supply (formerly a Wolseley plc company) since 1995.  Prior to that position, he served as Director of Human Resources since 1989 at Carolina Holdings, the predecessor company of Stock Building Supply, with responsibility for all human resource and development functions.  Previously, Mr. Schmoll served in both human resource and collective bargaining positions at Reynolds & Reynolds.  Mr. Schmoll graduated from the University of North Texas in 1981 and has attended executive development programs at both Duke University and the International Institute of Management Development.

Timothy D. Johnson - General Counsel
Mr. Johnson joined the Company in June 2008 as General Counsel.  Prior to joining the Company, he served as Vice President and Regional Counsel at Arysta LifeScience North America from 2006 to 2008.  Previously, Mr. Johnson was an attorney with the law firms of Hunton & Williams from 2003 to 2006 and Wilson Sonsini Goodrich & Rosati from 2001 to 2003.  Mr. Johnson received a BA in biology from Taylor University in 1997, and a JD from Duke University School of Law in 2001.


103

Robert A. Ferris - Director
Since the Ply Gem acquisition, Robert A. Ferris has served as a director. Mr. Ferris retired as Managing Director of CI Capital Partners in December 2007, and was employed by CI Capital Partners since March 1998.  From 1981 to February 1998, Mr. Ferris was a General Partner of Sequoia Associates (a private investment firm headquartered in Menlo Park, California).  Prior to founding Sequoia Associates, Mr. Ferris was a Vice President of Arcata Corporation, a NYSE-listed company.  Mr. Ferris is a former director of Anteon International Corporation, Buffets Holdings, Inc., Timberjack, Inc. and Champion Road Machinery Ltd and is currently a director of A-T Solutions, Inc. Effective January 1, 2008, Mr. Ferris assumed the position of President of Celtic Capital LLC, the investment manager of the entities that primarily hold the assets and investments of the Ferris Family.  Mr. Ferris attended Boston College and Fordham Law School.

Mr. Ferris's prior tenure with CI Capital Partners as well as his public company experience as a director provides the Board with extensive knowledge of the debt and equity markets and the effect that pending strategic decisions will have on these public markets.  Mr. Ferris provides advice regarding the impact of certain strategic decisions on both the Company and our industry.

Steven M. Lefkowitz - Director
Since the Ply Gem acquisition, Steven M. Lefkowitz has served as a director.  Mr. Lefkowitz is President and Chief Operating Officer of CI Capital Partners, which he co-founded in 1993.  From 1988 to 1993, Mr. Lefkowitz was employed by Mancuso & Company, a private investment firm, and served in several positions including as Vice President and as a Partner of Mancuso Equity Partners.  Mr. Lefkowitz is a former director of Anteon International Corporation and Buffets Holdings, Inc.  Mr. Lefkowitz graduated from Northwestern University and Kellogg Graduate School of Management.

Mr. Lefkowitz's experience with private equity markets provides the Board integral knowledge with respect to acquisitions, debt financings and equity financings.

John D. Roach - Director
Since the Ply Gem acquisition, Mr. Roach has served as a director.  Mr. Roach is Chairman of the Board and Chief Executive Officer of Stonegate International, a private investment and advisory services company, and has been employed by Stonegate International since 2001.  Mr. Roach served as Chairman of the Board, President and Chief Executive Officer of Builders FirstSource, Inc. from 1998 to 2001, and as Chairman of the Board, President and Chief Executive Officer of Fibreboard Corporation from 1991 to 1997.  From 1987 to 1991, Mr. Roach held senior positions with Johns Manville Corporation, including President of Building Products Operations as well as Chief Financial Officer of Manville Corp, and served as a Senior Officer with Braxton Associates, Booz Allen Hamilton as well as The Boston Consulting Group.  In addition, Mr. Roach currently serves as a director of URS Corporation, an engineering firm, a director of PMI Group, Inc., a provider of credit enhancement products and lender services, and a director of VeriSign, a leading provider of internet infrastructure services.  Mr. Roach has previously served as a director of Kaiser Aluminum Corporation and its subsidiary, Kaiser Aluminum & Chemical Corporation, as a director of Material Sciences Corp., a provider of materials-based solutions, and participated on the boards of Magma Power, NCI Building Systems and Washington Group International.  Mr. Roach holds a BS degree in Industrial Management from Massachusetts Institute of Technology and received an MBA degree from Stanford University Graduate School of Business, with highest distinction.

Mr. Roach's industry experience has provided valuable insight to the Board regarding strategic decisions. Mr. Roach understands the Board’s impact in establishing corporate governance and evaluating strategic alternatives. Mr. Roach's vast experience with multiple Boards is valuable to the current Board when establishing the future direction of the Company.
 
Michael Haley – Director
Mr. Haley has served as a director since January 2005.  Mr. Haley joined MW Manufacturers Inc. in June 2001 as President and served in this capacity until being named Chairman in January 2005.  Mr. Haley retired as Chairman of MW in June 2005.  Prior to joining MW, Mr. Haley was the President of American of Martinsville (a subsidiary of La-Z-Boy Inc.) from 1994 until May 2001 and was President of Loewenstein Furniture Group from 1988 to 1994.  In addition, Mr. Haley currently serves as a director of American National Bankshares, Inc., Stanley Furniture Co. and LifePoint Hospitals, Inc.  Mr. Haley graduated from Roanoke College in 1973 with a Bachelor’s Degree in Business Administration.  From April 2006 to present, Mr. Haley has served as an advisor to Fenway Partners, a private equity firm.

Mr. Haley’s industry experience and background with the Company provides the Board with relevant industry knowledge and expertise when evaluating certain strategic decisions.


104

Timothy T. Hall - Director
In December 2006, the Board of Directors approved the addition of Mr. Hall as a member of the Board. Mr. Hall is a Managing Director at CI Capital Partners and has been employed by CI Capital Partners since 2001.  Prior to joining CI Capital Partners, Mr. Hall was a Vice President at FrontLine Capital and an Assistant Vice President at GE Equity. Mr. Hall has an MBA from Columbia Business School and a BS degree from Lehigh University.

Mr. Hall's experience with private equity markets provides the Board integral knowledge with respect to acquisitions, debt financings and equity financings.

Jeffrey T. Barber - Director
In January 2010, the Board of Directors approved the addition of Mr. Barber as a member of the Board. Mr. Barber is a certified public accountant who worked for PricewaterhouseCoopers LLP from 1977 to 2008 and served as managing partner of PricewaterhouseCoopers' Raleigh, North Carolina office for 14 years.  Mr. Barber is currently a Managing Director with Fennebresque & Co., a Charlotte, North Carolina based investment banking firm.  In addition, Mr. Barber currently serves on the Board of Trustees of Blue Cross and Blue Shield of North Carolina and the Board of Directors of SciQuest, Inc., a procurement software company, where he serves as chair of the audit committee.  Mr. Barber has a BS degree in accounting from the University of Kentucky.

Mr. Barber's audit experience with PricewaterhouseCoopers LLP for 31 years in which he worked on initial public offerings, Sarbanes-Oxley 404 attestations, business acquisitions and debt financings provides the Board with the financial background and experience to ensure the Company's consolidated financial statements comply with financial reporting guidelines.  These experiences qualify Mr. Barber as a financial expert allowing him to contribute financial reporting considerations when evaluating certain strategic decisions.

Board Leadership Structure
Frederick J. Iseman serves as our Chairman and Gary E. Robinette serves as our President and CEO and also as a member of the Board of Directors.  The Board of Directors has determined that this is an effective leadership structure at the present time because Mr. Iseman brings experience regarding acquisitions, debt financings, equity financings and public market sentiment while the Board receives the benefit of Mr. Robinette’s intimate knowledge of the day-to-day operations of our business and his significant experience in the building products industry. A substantial majority of the equity of the Company is controlled by affiliates of CI Capital Partners LLC, including Frederick Iseman, and Messrs. Iseman, Lefkowitz and Hall (affiliates of CI Capital Partners, LLC) serve as our directors.

Audit Committee
Our Audit Committee recommends to the Board of Directors the appointment of our independent auditors, reviews and approves the scope of the annual audits of our financial statements, reviews our internal control over financial reporting, reviews and approves any non-audit services performed by the independent auditors, reviews the findings and recommendations of the internal and independent auditors and periodically reviews major accounting policies.

The Audit Committee is currently comprised of Messrs. Barber, Hall, Roach and Haley.  The Board of Directors has determined that Jeffrey Barber is qualified as Audit Committee “financial expert” under the rules of the SEC implementing Section 407 of the Sarbanes-Oxley Act of 2002.  Mr. Barber serves as the Audit Committee chairman.  Each of the members of the Audit Committee meets the independence and the experience requirements of the NYSE and the federal securities laws.
 
Compensation Committee
Our Compensation Committee reviews our compensation philosophy and strategy and considers the material risks that face us in evaluating compensation, administers incentive compensation and stock option plans, reviews the CEO’s performance and compensation, reviews recommendations on compensation of other executive officers and reviews other special compensation matters, such as executive employment agreements. The Compensation Committee is currently comprised of Messrs. Lefkowitz, Roach, Hall and Ferris.  Mr. Lefkowitz serves as the Compensation Committee chairman.

Board of Directors Meetings
The Company’s Board of Directors met five times during 2012.
 
Director Independence
We have determined that Messrs. Barber, Ferris, Haley and Roach are independent as such term is defined by the applicable rules and regulations of the NYSE and the federal securities laws.


105

Risk Oversight
The Board of Directors has an oversight role, as a whole and also at the committee level, in overseeing management of our risks. The Board of Directors regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. The Compensation Committee of the Board of Directors is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the Audit Committee of the Board of Directors oversees the management of financial risks. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks.
 
Risk and Compensation Policies
Our management, at the direction of our Board of Directors, has reviewed our employee compensation policies, plans and practices to determine if they create incentives or encourage behavior that is reasonably likely to have a material adverse effect on the Company.  In conducting this evaluation, management has reviewed our various compensation plans, including our incentive and bonus plans, equity award plans, and severance compensation, to evaluate risks and the internal controls we have implemented to manage those risks. In completing this evaluation, the Board of Directors and management believe that there are no unmitigated risks created by our compensation policies, plans and practices that create incentives or encourage behavior that is reasonably likely to have a material adverse effect on us.

Code of Ethics
The Company has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer and all other employees.  This code of ethics is posted on our website at www.plygem.com.  Any waiver or amendment to this code of ethics will be timely disclosed on our website.  Copies of the code of ethics are available without charge by sending a written request to Shawn K. Poe at the following address:  Ply Gem Holdings, Inc., 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513.

106



Item 11.     EXECUTIVE COMPENSATION


COMPENSATION DISCUSSION AND ANALYSIS

Compensation Committee Report
 
The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis with the Board of Directors and, based on such review and discussions, the Compensation Committee has recommended to management and the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.  Members of the Compensation Committee are Messrs. Steven M. Lefkowitz (chairman), John D. Roach, Timothy T. Hall, and Robert A. Ferris.

Overview

This compensation discussion describes the material elements of compensation of the Company’s executive officers who served as named executive officers during our fiscal year ended December 31, 2012.  The individuals who served as the principal executive officer and principal financial officer during 2012, as well as the other individuals included in the Summary Compensation Table below, are referred to as the “named executive officers.”  This compensation discussion focuses primarily on compensation awarded to, earned by, or paid to the named executive officers in 2012, as reflected in the following tables and related footnotes and narratives, but also describes compensation actions taken before or after 2012 to the extent that it enhances an understanding of the executive compensation disclosure.
 
The principal elements of our executive compensation program are base salary, annual cash incentives, other personal benefits and perquisites, post-termination severance, equity-based interests, and a long-term incentive plan.  The Company’s other personal benefits and perquisites consist of life insurance benefits and car allowances.  The named executive officers are also eligible to participate in our 401(k) plan and our company-wide employee benefit health and welfare programs.

 
Compensation Program Objectives and Philosophy

General Philosophy

Our compensation philosophy is designed to provide a total compensation package to our executive officers that is competitive within the building materials industry and enables us to attract, retain, and motivate the appropriate talent for long-term success. In determining whether the components of our compensation packages, including salary and target bonus percentages, are competitive within the industry, we conduct informal, internal reviews of other building material companies that file public reports with the SEC to obtain a general understanding of such companies’ compensation practices.  During the year ended December 31, 2010, the Compensation Committee retained a compensation consultant to evaluate the total compensation packages for our executive officers.  As a result of this compensation consultant’s analysis, the Chief Executive Officer’s and the Chief Financial Officer’s base salaries were adjusted to market rates effective January 2011.  We did not utilize the services of a compensation consultant for the years ended December 31, 2012 or 2011.  We may continue to utilize a compensation consultant in future periods as necessary.  The compensation consultant that was retained in 2010 did not perform any other services for the Company.
 
We believe that total compensation should be reflective of individual performance, which we evaluate based on the executive’s achievement of individual performance targets, such as increasing operational efficiencies and successfully meeting budget, product development and customer focused initiatives, but should also vary with our performance in achieving financial and non-financial objectives, thus rewarding the attainment of these objectives. We align compensation levels commensurate with responsibilities and experience of the respective executive officers. We balance these compensation levels with our risk management policies to mitigate any conflicts of interest. We also weight executive officers’ base salaries, incentive amounts, and equity awards in a manner intended to minimize risk-taking incentives that could have a detrimental effect on us.


107

The components of total compensation for our executive officers are as follows:

•
Base salary

In general. We provide the opportunity for our named executive officers and other executives to earn a competitive annual base salary. We provide this opportunity to attract and retain an appropriate caliber of talent for these positions and to provide a base wage that is not subject to our performance risk, as are other elements of our compensation, such as the annual cash incentive awards, equity interests, and long-term incentive awards described below. Base salaries of our named executive officers are only one component of our named executive officers’ compensation packages and will not substitute for our incentive awards.

Our President and Chief Executive Officer, Gary E. Robinette, reviews the base salaries for our named executive officers, other than the President and Chief Executive Officer, in November and December of each year with any recommended increases being based on our performance as well as the individual’s performance and responsibilities, which we believe to be consistent with our overall philosophy of rewarding both strong individual and Company performance. After this review, any salary increases for the executive officers other than the President and Chief Executive Officer are recommended by our President and Chief Executive Officer to our Compensation Committee and Board of Directors for approval. The base salary for our President and Chief Executive Officer is determined by the Compensation Committee of our Board of Directors, but will not be less than $530,000 per year.

•
Annual cash incentive awards

In general. We provide the opportunity for our named executive officers to earn an annual cash incentive award based upon our performance as well as the executive’s individual performance. We provide this opportunity to attract and retain an appropriate caliber of talent for these positions and to motivate executives to achieve our financial goals. We believe that providing these annual incentives is consistent with our objective of providing compensation that varies with our performance in achieving financial and non-financial objectives.

2012 target award opportunities.  Our 2012 performance measure is based upon the Company meeting or exceeding the following targets:

(i) Adjusted EBITDA targets (70% of total bonus for Siding, Fencing, and Stone segment and Windows and Doors segment and 80% of total bonus for Corporate) – For purposes of measuring annual cash incentives, we define “adjusted EBITDA” as net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash loss (gain) on modification or extinguishment of debt, non-cash foreign currency gain/(loss), restructuring and integration costs, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships.  We established adjusted EBITDA targets for each of our respective segments and corporate office personnel with a minimum level of adjusted EBITDA required before any target award is achieved.  A portion of every dollar of incremental consolidated adjusted EBITDA above the minimum threshold level will go to fund the bonus pool.  The actual 2012 award achieved as a percentage of the target award for each segment and corporate are detailed in the table below.

(ii) Market share (10% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment) – The market share growth criteria is measured based upon relative market share holdings compared from 2011 to 2012 for the respective segments. The actual 2012 award achieved as a percentage of the target for each segment are detailed in the table below.

(iii) Working capital (10% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment)– The working capital criteria is measured based upon comparative year over year period working capital performance by segment.   We define working capital as accounts receivable plus inventory less accounts payable. The actual 2012 award achieved as a percentage of the target for each segment are detailed in the table below.

(iv) Innovation (10% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment, and Corporate)– The innovation criteria was achieved if the Company effectively pursued new product opportunities or new operating processes or procedures based on a ratings scale designed to measure creative thinking.  The actual 2012 award achieved as a percentage of the target for each segment and corporate are detailed in the table below.
 

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Percentage of Target
Percentage of Target
Percentage of Target
Percentage of Target
 
(EBITDA) (i)
(Market share) (ii)
(Working capital) (iii)
(Innovation) (iv)
 
 
 
 
 
Siding, fencing, and stone
150%
100%
138%
100%
Windows and doors
48%
50%
125%
100%
Unallocated/Corporate
93%
NA
NA
100%
 
 (v) Expense reduction (10% of total bonus for Corporate)- The expense reduction criteria was achieved if corporate expenditures were less than budgeted corporate expenditures of approximately $19.9 million. Corporate achieved an award of 143.6% of target for the year ended December 31, 2012.

Depending upon each named executive officer’s responsibilities, a target award opportunity was established as a percentage of the individual officer’s base salary at a range from 75% to 100% of base salary.  The target cash incentive opportunity percentage of base salary for each individual officer is established based upon the position within the Company and is comparable to like positions within our Company.  Prior to the beginning of 2012, Mr. Robinette reviewed our annual cash incentive plans, the performance measures and resulting awards with our Compensation Committee and our Board of Directors.  For the year ended December 31, 2012, annual target cash incentive opportunities for the named executive officers are 100% of base salary for Mr. Robinette and 75% of base salary for Messrs. Poe, Wayne, Buckley, and Morstad.  Based on the 2012 incentives above, the named exective officers earned bonuses of $693,000, $259,875, $520,125, $286,647, and $168,659 for Mr. Robinette, Mr. Wayne, Mr. Poe, Mr. Buckley, and Mr. Morstad, respectively.
 
•
Perquisites and other personal benefits

In general. We provide the opportunity for our named executive officers to receive certain perquisites and other personal benefits, including car allowances and Company-paid life insurance premiums. We provide these benefits to provide an additional useful benefit for our executives, and we believe that providing these benefits is essential to our ability to remain competitive in the general marketplace for attracting and retaining executive talent.  For the year ended December 31, 2012, we provided personal benefits and perquisites, including car allowances and Company-paid life insurance premiums, to all of our named executive officers, as described below in the “Summary Compensation Table.”
 
•
Equity awards

In general. Historically, we have provided the opportunity for our named executive officers to purchase both shares of common stock, par value $.01 per share (“Ply Gem Prime Common Stock”) and senior preferred stock, par value $.01 per share (“Ply Gem Prime Senior Preferred Stock”) in Ply Gem Prime, our parent company.

We believe it is vital to our Company to provide our named executive officers with the opportunity to hold an equity interest in our business. We believe that equity ownership among executives aligns management’s interests with those of stockholders and provides long-term incentives for the executives. Our named executive officers are the employees that have a significant impact on the long-term performance of the Company, so this opportunity is intended to incentivize them to improve the overall value of the business. Providing a Ply Gem Prime Senior Preferred Stock component as well as a Ply Gem Prime Common Stock component has allowed the executives to hold an ownership interest that has mirrored that held by non-employee investors in our Company and motivated and rewarded the executives for achieving financial objectives. We also believe that our management equity ownership structure promotes the retention of key management and that providing an equity component of compensation is consistent with our compensation objectives of rewarding performance-based compensation and attracting and retaining an appropriate caliber of talent.

The opportunities that we give our executive officers to invest in the business have been event-driven and have not been provided on any annual or other regular basis. The number of shares that a named executive officer has been permitted to purchase is determined based upon the individual’s level of responsibility within the Company. All equity purchases have been reviewed and approved by our Compensation Committee and Board of Directors.

Ply Gem Prime Common Stock. Some of our named executive officers have purchased Ply Gem Prime Common Stock either as (1) “Incentive Stock” or (2) part of a strip of equity that is purchased at the same time the officer purchases shares of Ply Gem Prime Senior Preferred Stock.

Incentive Stock—Protected and unprotected. Ply Gem Prime Common Stock purchased as Incentive Stock becomes “Protected” over time, based on the officer’s continued service with the Company. Twenty percent (20%) of each officer’s

109

Incentive Stock becomes Protected on the first anniversary of the purchase date and on each of the next four anniversaries. If the officer’s employment with us is terminated at any time, no remaining Incentive Stock that is not Protected (“Unprotected”) will become Protected. In addition, if a realization event or an initial public offering occurs at any time, any Incentive Stock that is Unprotected becomes immediately fully Protected.

Incentive Stock—Termination of employment. If a named executive officer’s Incentive Stock becomes Protected, the officer may have the opportunity to receive a greater per share price for such stock if the stock is purchased by Ply Gem Prime. Specifically, if the named executive officer’s employment with us is terminated for reasons other than cause, then Ply Gem Prime has the right to purchase the officer’s shares of Protected Incentive Stock at a price per share (the “Protected Stock Purchase Price”) equal to the quotient obtained by dividing (x) the excess of (i) a multiple of consolidated EBITDA over (ii) consolidated indebtedness, less the amount of unrestricted cash of Ply Gem Prime and its consolidated subsidiaries as of the date of termination by (y) the number of shares of fully diluted Ply Gem Prime Common Stock on the date of the officer’s termination of employment. For any Incentive Stock that is Unprotected as of termination, the purchase price is the lesser of (a) the original purchase price paid by the officer for the Incentive Stock, plus or minus any change in adjusted retained earnings per share from the date the shares were originally purchased through the end of the most recent fiscal quarter preceding the date of termination of employment and (b) the Protected Stock Purchase Price. If the officer is terminated for cause, all Incentive Stock held by the officer, whether or not Protected, will be repurchased by Ply Gem Prime for the same price applicable to Unprotected Incentive Stock in the preceding sentence.
 
We believe that this schedule whereby Incentive Stock becomes Protected over time aids in our ability to retain our named executive officers by requiring the executives’ continued service with the Company. In addition, because this schedule provides that the officers’ Incentive Stock becomes Protected upon certain corporate transactions, this schedule will provide the officers the incentive to work toward achieving such a transaction and to share in the value received by other shareholders.

If Ply Gem Prime Common Stock is not designated as Incentive Stock and is purchased as part of a strip with Ply Gem Prime Senior Preferred Stock, then the Ply Gem Prime Common Stock is fully vested at the time of purchase. This Ply Gem Prime Common Stock may be repurchased by Ply Gem Prime at any time following the officer’s termination of employment for the Protected Stock Purchase Price described above.

Ply Gem Prime Senior Preferred Stock. Ply Gem Prime Senior Preferred Stock that is purchased by the officers is fully vested at the time of purchase. This Ply Gem Prime Senior Preferred Stock may be repurchased by Ply Gem Prime at any time following the officer’s termination of employment and takes into account the liquidation value and the maximum dividend on the shares of Ply Gem Prime Senior Preferred Stock, consistent with the Certificate of Incorporation of Ply Gem Prime.

Phantom common and preferred stock units. Upon the completion of the Ply Gem acquisition and the MWM Holding acquisition, certain members of management contributed their investment in predecessor companies in exchange for phantom common stock units and phantom preferred stock units which were governed by a phantom stock plan. Under the phantom stock plan, each participant’s interest in the plan was recorded in a bookkeeping account; however, no stock was initially issued under the phantom stock plan. Each account recorded a number of units so that, any “phantom common stock units” were deemed to be invested in Ply Gem Prime Common Stock and any “phantom preferred stock units” were deemed invested in Ply Gem Prime Senior Preferred Stock. Certain of the phantom common stock units became “Protected” according to the same schedule as the Incentive Stock, based on the date the units were first awarded to the officers. Other phantom common stock units were not subject to any such schedule. Under the plan, upon liquidation and payment of a participant’s account, the value of the account generally was to be paid to the participant either in cash or in shares of Ply Gem Prime’s stock having a fair market value equal to the account balance, in the discretion of Ply Gem Prime. The opportunity for any named executive officer to participate in the phantom stock plan, as well as their level of participation, was reviewed and approved by our board of directors.

For the first three quarters of 2006, the phantom units were recognized by us as liability awards that had to be marked to market every quarter. In addition, in 2004, 2005, and 2006, new tax rules governing nonqualified deferred compensation required a re-examination of the structure of the phantom stock plan. Because of the risk of volatility associated with the above accounting treatment and the complexity associated with tax and accounting rule changes, our Board of Directors determined that the cost associated with the administrative, accounting and tax work for the phantom stock units was excessive and outweighed the benefits of continuing to permit the officers to hold such units.


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As such, in September 2006, we converted all phantom common and preferred stock units held by each named executive officer into a cash account payable on a fixed schedule in years 2007 and beyond. The value of the portion of each cash account that represented phantom common units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00. From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest was credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans. This portion of the account was paid to each officer in a single lump-sum cash payment on January 31, 2007. The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of Ply Gem Prime Senior Preferred Stock represented by such units. This portion of the account is credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment. This portion of the account was paid on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, is paid on each such date, or, if earlier, the officer’s death, disability or a change of control. During the years ended December 31, 2012, 2011 and 2010, Mr. Morstad received phantom stock payouts of $0, $216,630, and $262,583, respectively.
 
In connection with the conversion described above, the Board of Directors authorized Ply Gem Prime to allow the named executive officers to invest in Ply Gem Prime Common Stock on September 25, 2006, which stock was either Incentive Stock or not, in the same proportion that the officer’s phantom units had been deemed invested in such stock.

Stock options. We may grant the named executive officers options to purchase shares of Ply Gem Prime Common Stock pursuant to the Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. Options granted pursuant to the 2004 Option Plan are intended to qualify as incentive stock options under the Code.  In November 2011, we granted Mr. Robinette an option to purchase 150,000 shares of a new non-voting class of our common stock at an exercise price of $100.  These stock options were not intended to qualify as incentive stock options.  Our Compensation Committee determined that the November 2011 option grant was necessary for retention purposes and to keep Mr. Robinette aligned with shareholders to an extent commensurate with the amount of shares repurchased by Ply Gem Prime in 2011. (See Item 13 for additional discussion).  The stock options granted to the chief executive officer vest 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015.  
 
•
Long-term incentive plan
During the year ended December 31, 2011, the Company finalized a long-term incentive plan (“LTIP”) for certain employees including named executive officers- Messrs. Robinette, Poe, Wayne, Buckley, and Morstad.  During the year ended December 31, 2012, another LTIP grant was provided to certain executive officers. The long-term incentive plan was implemented to retain and incentivize the named executive officers to remain with the Company through the downturn in the housing market and ensure consistency with the executive team.  The target bonus percentages were established at the following levels based on industry benchmarks for similar compensation programs for named executive officers:

 
Long-term incentive plan
 
Target bonus percentage
 
of base salary
 
 
Mr. Robinette
300%
Mr. Poe
150%
Mr. Wayne
150%
Mr. Buckley
150%
Mr. Morstad
150%

The long-term incentive plan has two separate components:
 
Performance bonus (50% of long-term incentive bonus) – The performance bonus component vests over a two year period with the first potential payment in January 2013 based on the initial 2011 grant.  The performance bonus can be paid either in cash or stock.  The participants in the plan are required to be an employee at the time of the payment in order to receive the award.  For 2011 and 2012 grants, the performance criterion is 90% of targeted EBITDA for the following combined two fiscal years (2012 and 2013 for 2012 grants). For the years ended December 31, 2012 and 2011, the performance bonus portion of the LTIP was not achieved.
 

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Restricted stock (50% of long-term incentive bonus) – The restricted stock component vests over a three year period with the first vesting date in January 2014 since the plan was incepted in 2011. The participants in the plan are required to be an employee at the time of the payment in order to receive the award.  In 2014 and 2015, an appropriate number of shares of restricted stock or common stock will be provided to eligible participants, including named executive officers, equating to the 50% restricted stock component based on the fair value of the stock.

Employment agreements

President and Chief Executive Officer

CEO employment agreement

In October 2006, Mr. Robinette joined the Company and was appointed as our President and Chief Executive Officer. In connection with such appointment, Mr. Robinette entered into an employment agreement with us, pursuant to which we have agreed to pay him an annual base salary of not less than $530,000 and an annual cash incentive target of 100% of base salary.  In addition, Mr. Robinette was provided the opportunity by our Compensation Committee and Board of Directors to purchase 125,660 shares of Ply Gem Prime Common Stock, at a price of $10.00 per share, 110,000 shares of which were shares of Incentive Stock.  The previous employment agreement expired during 2011 and a new employment agreement was finalized between the Company and the President and Chief Executive Officer during November 2011, which extended the term of his agreement by three years.
 
CEO retention agreement
 
In November 2008, the Company finalized a retention agreement with Mr. Robinette for his continued service through September 1, 2011 at which point Mr. Robinette would be entitled to receive a one-time, lump-sum cash bonus of $2,000,000. The bonus amount represents an amount that the Board of Directors determined to be a reasonable and necessary amount to retain Mr. Robinette’s services and remain competitive in the marketplace for executive talent. We provided this retention opportunity to Mr. Robinette because we believe that Mr. Robinette’s experience and talent are necessary to guide us through the depressed residential housing markets which then existed.  On May 27, 2010, Mr. Robinette’s retention agreement described above was amended so that he would receive a bonus of $3,000,000, rather than $2,000,000, payable upon the earlier of (i) the effective date of an initial public offering of the Company generating gross proceeds in excess of $100 million and (ii) September 1, 2011. This increase was made in light of his increased duties and our increased need for the retention of his services.  During the year ended December 31, 2011, the Company made this $3,000,000 retention payment to Mr. Robinette.

During November 2011, the Company finalized a new retention agreement with Mr. Robinette for his continued services through December 31, 2014 at which point Mr. Robinette would be entitled to receive a one-time, lump-sum cash bonus of $2,000,000.  The bonus amount represents an amount that the Board of Directors determined to be a reasonable and necessary amount to retain Mr. Robinette’s services and remain competitive in the marketplace for executive talent.  We provided this retention opportunity to Mr. Robinette because we believe that Mr. Robinette’s experience and talent are necessary to guide us through the depressed residential housing and repair and remodeling markets.
 

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Post-termination severance

We provide the opportunity for certain of our named executive officers to be protected under the severance provisions contained within their retention agreements and, for Mr. Robinette, his employment agreement, by providing salary continuation if employment is terminated under certain circumstances (two years for Mr. Robinette and one year for our other named executive officers). If the payment of severance to Mr. Robinette causes him to become subject to the golden parachute excise tax rules under Section 280G and 4999 of the Internal Revenue Code, then we will pay him a gross-up amount so that after all taxes are paid on the gross-up, he will have enough funds remaining to pay the excise tax imposed on the severance payments. We provide this opportunity to attract and retain an appropriate caliber of talent for the position. These retention agreements and Mr. Robinette’s employment and retention agreements were approved by our Compensation Committee and Board of Directors, and the terms of these agreements can be found in individual agreements that have been filed as exhibits with the Securities and Exchange Commission (SEC). We believe the terms of our retention agreements and of Mr. Robinette’s employment agreement and amended retention agreement are consistent with the provisions and benefit levels of other companies based upon reviewing disclosures made by those companies with the SEC in order to obtain a general understanding of current compensation practices. We believe the arrangements and benefits opportunity contained within our retention agreements and Mr. Robinette’s employment agreement are reasonable and allow us to remain competitive in the general marketplace for executive talent. These arrangements are described in detail in “—Termination or change in control arrangements for 2011” below. The employment agreement between Mr. Robinette and the Company establishes the terms of his employment including salary and benefits, annual cash incentive award target and severance provisions in the event of termination of Mr. Robinette’s employment.

Chief Financial Officer retention payment

In November of 2008, the Company finalized a retention agreement with Mr. Poe for his continued service through September 1, 2011 at which point Mr. Poe would be entitled to receive a one-time, lump-sum cash payment of $650,000, which the Board of Directors determined to be a reasonable and necessary amount to retain Mr. Poe’s services and remain competitive in the marketplace for executive talent. We provided this retention opportunity to Mr. Poe because we believe that Mr. Poe’s experience and talent are necessary to guide us through the residential housing and repair and remodeling markets downturn which currently exists. During the year ended December 31, 2011, the Company made this $650,000 retention payment to Mr. Poe.

During November 2011, the Company finalized a new retention agreement with Mr. Poe for his continued services through December 31, 2014, at which point Mr. Poe would be entitled to receive a one-time, lump-sum cash bonus of $700,000.  The bonus amount represents an amount that the Board of Directors determined to be a reasonable and necessary amount to retain Mr. Poe’s services and remain competitive in the marketplace for executive talent.  We provided this retention opportunity to Mr. Poe because his prior retention arrangement was paid out and we believe that Mr. Poe’s experience and talent remain necessary to guide us through the depressed residential housing and repair and remodeling markets.

    

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The following table shows information concerning the annual compensation during 2012 for services provided to us by our President and Chief Executive Officer, our Vice President and Chief Financial Officer and our three other most highly compensated executive officers.

Summary Compensation Table
 
 
 
 
 
 
 
Stock
 
Option
 
Non-equity
Incentive Plan
 
Change in
Pension
 
All Other
 
 
Name and
 
 
Salary
 
Bonus
 
Awards
 
Awards
 
Compensation
 
Value
 
Compensation
 
Total
Principal Position
Year
 
($)
 
($) (1)
 
(2)
 
($) (3)
 
($) (4)
 
(5)
 
($) (6)
 
($)
Gary E. Robinette
2012
 
$
700,000

 
$
—

 
$
1,050,000

 
$
—

 
$
693,000

 
$
—

 
$
30,046

 
$
2,473,046

President &
2011
 
700,000

 
3,000,000

 
1,050,000

 
5,261,100

 
70,000

 
—

 
35,527

 
10,116,627

Chief Executive Officer
2010
 
580,000

 
—

 
—

 
298,272

 
—

 
—

 
27,066

 
905,338

Shawn K. Poe
2012
 
350,000

 
—

 
262,500

 
—

 
259,875

 
—

 
31,474

 
903,849

Vice President &
2011
 
350,000

 
650,000

 
262,500

 
—

 
26,250

 
—

 
33,354

 
1,322,104

Chief Financial  Officer
2010
 
300,000

 
—

 
—

 
248,560

 
—

 
—

 
26,864

 
575,424

John Wayne
2012
 
458,580

 
—

 
301,574

 
200,560

 
520,125

 
—

 
151,913

 
1,632,752

   Executive Vice President &
2011
 
394,165

 
—

 
291,375

 
—

 
216,752

 
—

 
31,642

 
933,934

   Chief Operating Officer
2010
 
388,500

 
—

 
—

 
—

 
19,425

 
—

 
25,687

 
433,612

John Buckley
2012
 
282,032

 
—

 
83,948

 
320,896

 
286,647

 
—

 
30,357

 
1,003,880

President, Siding Group
2011
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2010
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Lynn Morstad
2012
 
383,000

 
—

 
287,250

 
—

 
168,659

 
12,500

 
30,271

 
881,680

President,
2011
 
375,417

 
—

 
277,500

 
—

 
28,725

 
15,017

 
32,276

 
728,935

Windows & Doors
2010
 
370,000

 
—

 
—

 
—

 
—

 
9,879

 
25,649

 
405,528


 
(1)
The amounts in this column represent retention cash payments during 2011.  These retention bonuses are described in the “Employment agreements” section above.
(2)
The amounts in this column represent the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of the restricted stock portion of the long-term incentive plan 2011 and 2012 grants.  At the end of the vesting period, restricted stock will be provided equating to the fixed dollar value of the grant varying by the then determined fair value of the restricted stock. This long-term incentive plan is described in the “General Philosophy” section of the Compensation Discussion and Analysis above.
(3)
For the years ended December 31, 2012, 2011, and 2010, the amounts in this column represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718 made during each respective year.  Refer to Note 11 to the consolidated financial statements for a discussion of the assumptions made in the valuation.
(4)
The amounts in this column represent performance-based cash bonuses earned for services rendered during 2012, 2011 and 2010.  These incentive bonuses are described in the “Compensation Discussion and Analysis - Annual Cash Incentive Awards” section above.
(5)
None of the named executive officers, other than Lynn Morstad, are covered by either of the Company’s pension plans. For Mr. Morstad, the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2012 increased by $9,552 and $2,948, respectively.   For Mr. Morstad, the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2011 increased by $10,544 and $4,473, respectively, and the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2010 increased by $6,930 and $2,949, respectively.  The named executive officers did not receive any above-market or preferential earnings on compensation deferred on a basis that is not tax-qualified.
(6)
The amounts in this column with respect to 2012 consist of the following items for each named executive officer shown below:
(1)
Gary E. Robinette:  $18,480 car allowance, $4,066 insurance premiums, and $7,500 company 401(k) contributions.
(2)
Shawn K. Poe:   $14,400 car allowance, $9,574 insurance premiums, and $7,500 company 401(k) contributions.
(3)
John Wayne:  $15,450 car allowance, $9,648 insurance premiums, $8,530 company 401(k) contributions, and $118,285 in relocation reimbursement.
(4)
John Buckley: $13,650 car allowance, $9,391 insurance premiums, and $7,316 company 401(k) contributions.
(5)
Lynn Morstad: $14,400 car allowance, $9,621 insurance premiums, and $6,250 company 401(k) contributions.

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Grants of Plan-Based Awards for 2012
 
 
 
 
 
 
Estimated Future Payouts Under Non-equity Incentive Plan Awards (1)
 
 
 
 
 
 
 
 
Name
 
Award
 
Grant Date
 
Target
 
Maximum
 
All Other Stock Awards (2)
 
Option Awards: Number of Securities Underlying Options (#)(3)
 
Exercise Price of Option Awards ($/Sh)
 
Grant Date Fair Value of Stock and Option Awards (3)
Gary E. Robinette
 
Long-term
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
January 1, 2012
 
$
1,050,000

 
$
—

 
$
1,050,000

 
—

 
—

 
—

 
 
Annual
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
N/A
 
700,000

 
1,050,000

 
—

 
—

 
—

 
—

Shawn K. Poe
 
Long-term
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
January 1, 2012
 
262,500

 
—

 
262,500

 
—

 
—

 
—

 
 
Annual
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
N/A
 
262,500

 
393,750

 
—

 
—

 
—

 
—

John Wayne
 
Stock Options
 
December 11, 2012
 
—

 
—

 
—

 
5,000

 
$
100

 
$
200,560

 
 
Long-term
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
January 1, 2012
 
301,574

 
—

 
301,574

 
—

 
—

 
—

 
 
Annual
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
N/A
 
375,000

 
562,500

 
—

 
—

 
—

 
—

John Buckley
 
Stock Options
 
December 11, 2012
 
—

 
—

 
—

 
8,000

 
$
100

 
$
320,896

 
 
Long-term
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
January 1, 2012
 
83,948

 
—

 
83,948

 
—

 
—

 
—

 
 
Annual
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
N/A
 
240,000

 
360,000

 
—

 
—

 
—

 
—

Lynn Morstad
 
Long-term
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
January 1, 2012
 
287,250

 
—

 
287,250

 
—

 
—

 
—

 
 
Annual
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
incentive plan
 
N/A
 
287,250

 
430,875

 
—

 
—

 
—

 
—

 
 
(1)
These amounts represent the target payout amounts for the performance portion of the long-term incentive plan awards and the target and maximum payouts for the incentive plan granted to each named executive officer in 2012.
(2)
These amounts represent the restricted stock portion of the long-term incentive plan grant for each named executive officer when the stock vests after three years.  The dollar amount of the payout is fixed at grant and will be paid in three years in a variable amount of restricted stock or Common Stock for this service component of the long-term incentive plan.
(3)
These amounts represent stock options granted to each of the named executive officers during 2012, computed in accordance with FASB ASC Topic 718.  Refer to Note 11 to the consolidated financial statements for a discussion of the assumptions made in the valuation.

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Outstanding Equity Awards at Fiscal Year-End for 2012
Name
 
Number of Securities Underlying Unexercised Options (#) Exercisable (1)
 
Number of Securities Underlying Unexercised Options (#) Unexercisable (1)
 
Option Exercise Price ($)
 
Option Expiration Date
 
Number of Shares or Units of Stocks of Stock that Have Not Vested (#)(2)
 
Market Value of Shares or Units of Stock That Have Not Vested ($)(3)
Gary E. Robinette
 
3,934
 
984
 
$80
 
October 2, 2018
 
21,000
 
$2,100,000
 
 
4,800
 
7,200
 
$80
 
April 28, 2020
 
—
 
—
 
 
37,500
 
112,500
 
$100
 
November 11, 2021
 
—
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
Shawn K. Poe
 
1,202
 
301
 
$80
 
October 2, 2018
 
5,250
 
525,000
 
 
4,000
 
6,000
 
$80
 
April 28, 2020
 
—
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
John Wayne
 
2,573
 
643
 
$80
 
October 2, 2018
 
5,929
 
592,949
 
 
12,000
 
3,000
 
$80
 
December 5, 2018
 
—
 
—
 
 
—
 
5,000
 
$100
 
December 11, 2022
 
—
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
John Buckley
 
1,600
 
400
 
$80
 
October 2, 2018
 
1,658
 
165,848
 
 
1,500
 
1,000
 
$80
 
December 14, 2009
 
—
 
—
 
 
—
 
8,000
 
$100
 
December 11, 2022
 
—
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
Lynn Morstad
 
3,090
 
773
 
$80
 
October 2, 2018
 
5,648
 
564,750
 
 
9,600
 
2,400
 
$80
 
December 5, 2018
 
—
 
—
 
(1)
Each option becomes vested and exercisable with respect to 20% of the shares covered by the option on each of the first five anniversaries of the grant date, excluding Mr. Robinette’s November 2011 grant which vests 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015.
(2)
The Stock Awards set forth in this table represent restricted stock awards described in the long-term incentive plan section above.  The actual number of shares eligible to vest in 2014 and 2015 will be a number with an aggregate fair market value equal to the fixed dollar amount in the column to the immediate right, and the share numbers in this column were calculated by dividing that fixed number by $100, an estimate of the current fair market value of one share of our common stock.
(3)
The Market Value represents the fixed liability related to the long-term incentive plan to be settled in January 2014 and January 2015 with a variable amount of restricted stock or Common Stock based on the fair value of the stock at that time.

116

 
Pension Benefits for 2012
 
 
 
 
Number of Years
 
Present Value of
 
Payments During Last
Name
 
Plan Name
 
Credited Service
 
Accumulated Benefit
 
Fiscal Year
 
 
 
 
(#)
 
($)
 
($)
(a)
 
(b)
 
(c)
 
(d) (1)
 
(e)
Gary E. Robinette
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shawn K. Poe
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John Wayne
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John Buckley
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lynn Morstad
 
MW Retirement Plan
 
4 (2)
 
$55,403
 
 
 
 
MW SERP Plan
 
4 (2)
 
$22,397
 
 

(1)
The material assumptions used to derive the present value of the accumulated pension benefit shown in this table are set forth in Note 5 “Defined Benefit Plans” to our consolidated financial statements.
(2)
The number in this column is less than the number of the officer’s actual years of service with the Company.  This is because the plans have been frozen, as described below.
 
Pension Plans

We maintain the MW Manufacturers, Inc. Retirement Plan, a tax-qualified defined benefit retirement plan, acquired with the MWM Holding acquisition in August 2004 (the “MW Retirement Plan”) and the MW Manufacturers, Inc. Supplemental Executive Retirement Plan (the “MW SERP Plan”), which covers our executives whose benefits are limited by operation of the Code. We refer to both the MW Retirement Plan and the MW SERP Plan together as the “MW Plans.” Mr. Morstad is a participant in the MW Plans. None of the other named executive officers are participants in our pension plans.

The MW Plans’ benefits are calculated based upon years of service with the Company and compensation levels during the service period. Participation under the MW Plans was frozen with respect to all salaried employees effective October 31, 2004. The decision to freeze the benefit provisions affects any executive officer under the MW Plans.

The normal retirement date to receive full benefits is the first calendar month following the participant’s 65th birthday. There are provisions under the MW Plans for a reduced benefit amount upon election of early retirement prior to age 65, with this option available to all participants of the MW Plans, including executive officers.

The benefit payment options under the MW Plans are as follows:

•
Life annuity;
•
Period certain annuities;
•
Joint and survivor annuity (if married); and
•      In some cases under the MW Retirement Plan only, a full or partial lump sum payment.
 

117


Termination or Change in Control Arrangements for 2012

Each of the named executive officers is entitled to certain payments and benefits in the event his employment is terminated by the Company without “cause” or he resigns following a “material adverse change”.  The following chart quantifies these payments and benefits:

 
 
Years
 
Severance
 
Benefits
 
Bonus
 
Total
Name
 
 
 
($) (1)
 
($)
 
($) (2)
 
($)
 
 
 
 
 
 
 
 
 
 
 
Employment Agreement:
 
 
 
 
 
 
 
 
 
 
Gary E. Robinette
 
2
 
$
1,400,000

 
$
4,066

 
$
700,000

 
$
2,104,066

 
 
 
 
 
 
 
 
 
 
 
Retention Agreements:
 
 
 
 

 
 

 
 

 
 

Shawn K. Poe
 
1
 
350,000

 
9,574

 
262,500

 
622,074

 
 
 
 
 
 
 
 
 
 
 
John Wayne
 
1
 
500,000

 
9,648

 
375,000

 
884,648


 
 
 
 
 
 
 
 
 
 
John Buckley
 
1
 
320,000

 
9,391

 
240,000

 
569,391

 
 
 
 
 
 
 
 
 
 
 
Lynn Morstad
 
1
 
383,000

 
9,621

 
287,250

 
679,871


(1)
As described in the narrative below, the severance arrangement is payable over a two-year salary continuation period for Mr. Robinette and a one-year salary continuation period for the other named executive officers.

(2)
A portion of the performance measures for the year ended December 31, 2012 were achieved.  As a result, the amounts in this column represent the target amounts for the annual management incentive plan bonuses.

Mr. Robinette’s employment agreement and the retention agreements for each of Messrs. Wayne, Poe, Buckley, and Morstad provide that the officer will receive payments and benefits if he is terminated without “cause” or resigns following a “material adverse change.” “Cause” means certain failures to perform duties after demand by the Board of Directors or obey the Board of Directors or a senior executive of the Company, a material act of dishonesty in connection with executive duties, or conviction of a felony, a fraudulent or dishonest misdemeanor or a civil judgment for fraud.

“Material adverse change” is defined in Mr. Robinette’s employment agreement as an assignment of duties inconsistent with his position, reduction of salary or target bonus or Company action that would deny him any material employee benefit without his consent. “Material adverse change” in the retention agreements for the other named executive officers is defined the same as in Mr. Robinette’s employment agreement; however, it does not include a reduction in target bonus, but does include the Company requiring the executive to be based more than 50 miles from his current office location, as well as any Company breach of any provision of the retention agreement.

To receive any payments or benefits in connection with a termination for cause or material adverse change, the executive must release certain claims against the Company. In addition, the executive must comply with certain restrictive covenants, including a covenant not to compete with our business for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives. The restrictive covenants also prohibit the executives from soliciting our employees for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives. The covenants also prohibit disclosure of our confidential information and the mailing of disparaging statements about the Company and our people.

Mr. Robinette’s current employment agreement provides that he will receive an amount equal to two years of his base salary at the time of termination, plus medical insurance benefit coverage paid over the 24 months following termination. If Mr. Robinette dies or becomes disabled prior to December 31, 2014, he will be paid a pro rata portion of the $2,000,000 retention payment described above under “—Compensation Discussion and Analysis—Employment agreements—President and Chief Executive Officer.”


118

For the named executive officers other than Mr. Robinette, if the named executive officer’s employment is terminated during the year, the officer is eligible to receive an amount equal to one year of base salary at the rate at the time of termination, paid over a one year period, plus a pro rata portion of an amount equal to the lesser of the officer’s annual cash incentive award target or the actual cash incentive award that would have been paid under the incentive award plan had the officer been employed at the date that such cash incentive award is actually paid, paid in a lump sum as soon as practicable following the date on which the amount which will be paid is determined. The named executive officers other than Mr. Robinette are also eligible to receive a lump sum payment equal to a pro rata portion of any annual cash bonus the officer would have received with respect to the year of termination, paid when bonuses are paid to other executives, as well as continuation of medical and dental benefits for one year following termination of employment.

Mr. Poe may be eligible to receive severance in addition to that shown in the table above worth up to one additional year if at the end of the 12 month period following his termination he has not been able to obtain employment providing him with a salary of at least $350,000. If Mr. Poe dies or becomes disabled prior to December 31, 2014, he will be paid a pro rata portion of the $700,000 retention payment described above under “—Compensation Discussion and Analysis—Employment agreements—Chief Financial Officer retention payment.”

The named executive officers may be entitled to receive a cash payment for their individual shares of Incentive Stock, if Ply Gem Prime elects to exercise its call right under the existing stockholders agreement. If Ply Gem Prime had exercised its call right on December 31, 2012, the named executive officers would not have received any money for any of the shares of common stock because the value per share at December 31, 2012 per the formula and terms contained in the existing stockholders agreement is zero.

In addition, upon a change in control, all Ply Gem Prime Common Stock held by the named executive officers that is Unprotected will become Protected. Vesting of Ply Gem Prime Common Stock accelerates upon a change of control transaction or an initial public offering but only to the extent of the proportion of our business that is sold or offered to the public.


Director Compensation for 2012
 
 
Fees
 
 
 
 
 
 
 
 
 
 
Earned
 
 
 
 
 
All
 
 
 
 
or Paid
 
Stock
 
Option
 
Other
 
 
Name
 
in Cash
 
Awards
 
Awards
 
Compensation
 
Total
 
 
($)
 
($) (1)
 
($)
 
($)
 
($)
 
 
 
 
 
 
 
 
 
 
 
Frederick Iseman
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Robert A. Ferris
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Steven M. Lefkowitz
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
John D. Roach
 
77,500

 
63,000

 
—

 
—

 
140,500

 
 
 
 
 
 
 
 
 
 
 
Michael Haley
 
75,000

 
63,000

 
—

 
—

 
138,000

 
 
 
 
 
 
 
 
 
 
 
Jeffrey T. Barber
 
80,000

 
63,000

 
—

 
—

 
143,000

 
 
 
 
 
 
 
 
 
 
 
Timothy T. Hall
 
—

 
—

 
—

 
—

 
—


(1) The amounts in this column represent the aggregate grant date fair value of $60,000 for each of the three awards issued in January 2012 to Directors as well as the portion of the December 2012 $60,000 issued to each Director that was earned by the end of 2012.


119

The Director fees consist of annual amounts for participation on the Board of Directors as well as participation on the compensation Committee, the Audit Committee, and the Nominating and Governance Committee for certain directors.

During January 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three members of the Board of Directors (Mr. Roach, Mr. Haley, and Mr. Barber).  These shares became fully vested during 2012.

During December 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three members of the Board of Directors (Mr. Roach, Mr. Haley, and Mr. Barber).  These shares will vest over the 2012 through 2013 twelve month period.  
  
Compensation Committee lnterlocks and Insider Participation
 
During 2012, our Compensation Committee consisted of: Mssrs. Steven M. Lefkowitz (chairman), John D. Roach, Timothy T. Hall, and Robert A. Ferris.  None of these directors has ever served as an officer or employee of the Company.  During 2012, none of the members of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K.  None of our executive officers served as a member of the board of directors or compensation committee, or similar committee, of any other company whose executive officers(s) served as a member of our Board of Directors or our Compensation Committee.


Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
                    
Ply Gem Holdings is the sole holder of all 100 issued and outstanding shares of Ply Gem Industries’ common stock.  Ply Gem Prime Holdings, Inc. is the sole holder of all 100 issued and outstanding shares of common stock of Ply Gem Holdings.

The following table sets forth the number and percentage of the outstanding shares of common stock of Ply Gem Prime Holdings, Inc. beneficially owned as of March 15, 2013 by:

•
each named executive officer;
•
each of our directors;
•
each person known to us to be the beneficial owner of more than 5% of the common stock of Ply Gem Prime Holdings; and
•
all of our executive officers and directors as a group.

Unless otherwise noted below, the address of each beneficial owner listed on the table below is c/o Ply Gem Industries, Inc., 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513.


120

 
 
Shares Beneficially
Owned (1)
 
 
Common
 
 
Name of Beneficial Owner
 
Shares (2)
 
%
Caxton-Iseman (Ply Gem), L.P. (3)
 
828,140

 
19.4%
Caxton-Iseman (Ply Gem) II, L.P. (3)
 
2,990,767

 
70.0%
Frederick J. Iseman (3) (4)
 
3,818,807

 
89.4%
Steven M. Lefkowitz (3) (5)
 
3,818,807

 
89.4%
Gary E. Robinette
 
—

 
*
Shawn K. Poe
 
40,608

 
1.0%
John Wayne
 
45,304

 
1.1%
John Buckley
 
12,690

 
*
Lynn Morstad
 
55,974

 
1.3%
David N. Schmoll
 
4,376

 
*
John D. Roach
 
4,177

 
*
Michael Haley
 
11,539

 
*
Robert A. Ferris
 
—

 
*
Jeffrey T. Barber
 
600

 
*
Timothy Hall (3)
 
—

 
*
All Directors and Executive Officers as a Group
 
3,994,175

 
93.5%
* Less than 1%.

(1)
Determined in accordance with Rule 13d-3 under the Exchange Act.

(2)
Ply Gem Prime Holdings also has a series of non-voting senior preferred stock.

(3)
Address is c/o CI Capital Partners LLC, 500 Park Avenue, New York, New York 10022.

(4)
By virtue of his indirect control of Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P., Mr. Iseman is deemed to beneficially own (i) the 3,818,807 shares of common stock of Ply Gem Prime Holdings held by those entities and (ii) the 1,417,853 preferred securities of Ply Gem Prime Holdings held by those entities which is 97.8% of the outstanding preferred securities of Ply Gem Prime Holdings.

(5)
By virtue of being a director of the general partner of Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P., Mr. Lefkowitz is deemed to beneficially own (i) the 3,818,807 shares of common stock of Ply Gem Prime Holdings held by those entities and (ii) the 1,417,853 preferred securities of Ply Gem Prime Holdings held by those entities which is 97.8% of the outstanding preferred securities of Ply Gem Prime Holdings.

Securities authorized for issuance under equity compensation plans
 
The following table shows the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2012.
 

121

 
 
(A)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
 
(B)
Weighted
average
exercise price of
outstanding
options,
warrants and
 
(C)
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
Plan Category
 
and rights
 
rights
 
reflected in column (A))
Equity compensation plans
 
 
 
 
 
 
approved by shareholders
 
524,344
 
$70.16
 
75,656
 
 
 
 
 
 
 
Equity compensation plans not
 
 
 
 
 
 
approved by shareholders
 
—
 
—
 
—
 
 
 
 
 
 
 
Total
 
524,344
 
$70.16
 
75,656

During the fiscal year ended December 31, 2012, no equity securities of the Company were sold by the Company that were not registered under the Securities Act of 1933, as amended, except as previously disclosed in the Company’s periodic reports.


122



Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Upon completion of the Ply Gem Acquisition, Ply Gem Industries entered into an advisory agreement with CI Capital Partners LLC, (“CI Capital Partners”), which we refer to the “General Advisory Agreement”.
 
Under the General Advisory Agreement, CI Capital Partners provides us with acquisition and financial advisory services as the Board of Directors shall reasonably request. In consideration of these services, Ply Gem Industries agreed to pay CI Capital Partners (1) an annual fee equal to 2% of our EBITDA, as defined in such agreement, (2) a transaction fee, payable upon the completion by us of any acquisition, of 2% of the sale price, (3) a transaction fee, payable upon the completion by us of any divestitures, of 1% of the sale price, and (4) a transaction fee, payable upon the completion of the sale of our company, of 1% of the sale price. EBITDA in the General Advisory Agreement is based on our net income (loss) plus extraordinary losses and/or any net capital losses realized, provision for income taxes, interest expense (including amortization or write-off of debt discount and debt issuance costs and commissions, and other items), depreciation and amortization, dividends paid or accrued on preferred stock, certain management fees paid to CI Capital Partners, charges related to certain phantom units, and a number of other items. The annual fee payable in any year may not exceed the amounts permitted under the senior credit facilities or the indenture governing the senior secured notes.  CI Capital Partners is obligated to return any portion of the annual fee that has been prepaid if an event of default has occurred and is continuing under either the senior credit facilities or the indenture governing the senior secured notes.
 
The initial term of the General Advisory Agreement is 10 years, and is automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or CI Capital Partners provide notice of termination.  In addition, the General Advisory Agreement may be terminated by CI Capital Partners at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of our shares or shares of any of our parent companies.  If the General Advisory Agreement is terminated for any reason prior to the end of the initial term, Ply Gem Industries will pay to CI Capital Partners an amount equal to the present value of the annual advisory fees that would have been payable through the end of the initial term, based on our cost of funds to borrow amounts under our senior credit facilities.  During the fourth quarter of 2012, the Company and CI Capital Partners amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. If the General Advisory Agreement is terminated for any reason prior to the end of the term, Ply Gem Industries will pay to CI Capital Partners `an amount equal to the present value of the annual advisory fees that would have been payable through the end of the initial term or three years, whichever is less, based on the Company’s cost of funds to borrow amounts under the Company’s senior credit facilities. Under the General Advisory Agreement, the Company paid management fees of approximately $2.5 million, $2.3 million, and $2.5 million for the years ended December 31, 2012, 2011, and 2010, respectively.

During 2010, approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by such affiliates were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime Holdings, our indirect parent company, in exchange for equity of Ply Gem Prime valued at approximately $114.9 million. Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries for no consideration as a capital contribution and canceled on February 12, 2010.  On February 16, 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million of the 9% Senior Subordinated Notes held by affiliates of the Company’s controlling stockholder).  During the year ended December 31, 2010, the Company paid these affiliates approximately $9.8 million of interest for the 9% Senior Subordinated Notes owned by these related parties.

During 2010, the Company received equity contributions of approximately $2.5 million from certain members of management.  In addition, the Company repurchased equity of approximately $4.2 million from certain former members of management.  As of December 31, 2010, approximately $1.2 million was classified as a current liability in accrued expenses in the consolidated balance sheet.  During the year ended December 31, 2011, the approximate $1.2 million was paid in cash by the Company and reflected as an equity repurchase in 2011 on the Company's consolidated statement of cash flows.

During June 2010, the Company made a state tax payment of approximately $1.5 million for Ply Gem Prime.  Ply Gem Prime incurred a state tax liability as a result of the 9% Senior Subordinated Notes debt extinguishment and related contribution during the first quarter of 2010 in which Ply Gem Prime recognized a capital gain of approximately $13.3 million.  Ply Gem Prime is a holding company with no independent operating assets or liabilities other than its investment in the Company and therefore had no ability to make tax payments.  The Company recognized this payment as a return of capital.


123

During the fourth quarter of 2011, Ply Gem Prime entered into a stock repurchase agreement with the Company’s Chief Executive Officer providing for the repurchase of 125,660 shares of common stock of Ply Gem Prime for $12.6 million. The repurchase was made by Ply Gem Prime with cash proceeds provided by the Company.  Also during 2011, the Company repurchased equity of approximately $0.3 million from a former member of management.

As a result of the Ply Gem acquisition, Ply Gem Prime Holdings was the common parent of an affiliated group of corporations that includes Ply Gem Holdings, Ply Gem Industries and their subsidiaries. Ply Gem Prime Holdings elected to file consolidated federal income tax returns on behalf of the group. Accordingly, Ply Gem Prime Holdings, Ply Gem Industries and Ply Gem Holdings have entered into a Tax Sharing Agreement, under which Ply Gem Industries and Ply Gem Holdings will make payments to Ply Gem Prime Holdings. These payments will not be in excess of the tax liabilities of Ply Gem Industries, Ply Gem Holdings, and their respective subsidiaries, if these tax liabilities had been computed on a stand-alone basis.  As previously stated, on January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime Holdings, with Ply Gem Prime Holdings as the surviving corporation.

Before entering into any related party transaction, it is the Company’s policy to submit the proposed transaction to the Board for approval.  The Company is not subject to the New York Stock Exchange listing requirements.  As such, the Board has not made any affirmative determinations regarding material relationships of the directors with the Company, meaning that as of December 31, 2012, none of the Company’s current non-employee directors qualified as independent directors as defined in Section 303A of the NYSE’s Listed Company Manual.

 
Item 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following table sets forth the aggregate fees billed to us by the independent registered public accounting firms, Ernst & Young LLP, for services rendered during fiscal years 2012 and 2011, respectively.
 
(Amounts in thousands) 
 
2012
 
2011
Audit Fees (1)
 
$
1,029

 
$
846

Audit-Related Fees (2)
 
—

 
—

Tax Fees (3)
 
—

 
—

Total Fees
 
$
1,029

 
$
846


(1) Consists primarily of fees paid for audit, registration statements, initial equity offering, and assistance with debt offering memorandums.
(2) Consists primarily of fees paid for due diligence and accounting consultation.  
(3) Consists primarily of fees paid for tax compliance and consultation.

            Our audit committee has a policy to pre-approve all audit and non-audit services provided by our independent registered public accounting firm prior to the engagement of our independent registered public accounting firm each year with respect to such services.  All of the audit-related fees, tax fees and all other fees listed in the table above were approved by the audit committee.

124


 
PART IV
  
Item 15.       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  The following documents are filed as part of this report:
 
1.  Consolidated Financial Statements
 
The list of consolidated financial statements and related notes, together with the report of Ernst & Young LLP, appear in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K and are hereby incorporated by reference.
 
2.  Schedule II Valuation and Qualifying Accounts -
Page 133
 
All other schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the consolidated financial statements or notes thereto.
 
3.  Exhibits files - See Exhibit Index


125


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 HOLDINGS, INC.
 
 
(Registrant)
 
 
 
 
Date: March 15, 2013
 
 
 
 
 
 
 
By:  /s/ Gary E. Robinette                     
 
 
Gary E. Robinette
 
 
President and Chief Executive Officer

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
 
 
 
/s/ Gary E. Robinette 
President, Chief Executive Officer and Director
March 15, 2013
Gary E. Robinette
(Principal Executive Officer)
 
 
 
 
/s/ Shawn K. Poe 
Vice President, Chief Financial Officer, Treasurer
March 15, 2013
Shawn K. Poe
and Secretary (Principal Financial and Accounting Officer)
 
 
 
 
/s/ Frederick J. Iseman 
Chairman of the Board and Director
March 15, 2013
Frederick J. Iseman
 
 
 
 
 
/s/ Robert A. Ferris 
Director
March 15, 2013
Robert A. Ferris
 
 
 
 
 
/s/ Steven M. Lefkowitz 
Director
March 15, 2013
Steven M. Lefkowitz
 
 
 
 
 
/s/ John D. Roach 
Director
March 15, 2013
John D. Roach
 
 
 
 
 
/s/ Michael P. Haley 
Director
March 15, 2013
Michael P. Haley
 
 
 
 
 
/s/ Jeffrey T. Barber 
Director
March 15, 2013
Jeffrey T. Barber
 
 
 
 
 
/s/ Timothy T. Hall 
Director
March 15, 2013
Timothy T. Hall
 
 

126


EXHIBIT INDEX

Exhibit Number
 
Description
2.1
 
Stock Purchase Agreement, dated as of December 19, 2003, among Ply Gem Investment Holdings, Inc., (f/k/a CI Investment Holdings, Inc.), Nortek, Inc. and WDS LLC (incorporated by reference from Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
2.2
 
Stock Purchase Agreement, dated as of July 23, 2004, among Ply Gem Industries, Inc., MWM Holding, Inc. and the stockholders listed on Schedule 1 thereto (incorporated by reference from Exhibit 2.2 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
2.3
 
Securities Purchase Agreement, dated as of February 6, 2006, among Ply Gem Industries, Inc., and all of the direct and indirect stockholders, warrant holders and stock option holders of AWC Holding Company and FNL Management Corp., an Ohio corporation, as their representative (incorporated by reference from Exhibit 2.1 on Form 8-K dated March 2, 2006 (File No. 333-114041-07)).
 
 
 
2.4
 
Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
 
 
 
2.5
 
First Amendment, dated as of October 31, 2006, to the Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.2 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
 
 
 
3.1
 
Certificate of Incorporation of Ply Gem Holdings, Inc. (incorporated by reference from Exhibit 3.3 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
3.2
 
Amended Bylaws of Ply Gem Holdings, Inc. (incorporated by reference from Exhibit 3.4 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
4.1
 
Indenture, dated as of February 11, 2011, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent (incorporated by reference from Exhibit 4.20 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.2
 
First Supplemental Indenture, dated as of August 2, 2012, among Ply Gem Industries, Inc., Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as trustee and noteholder collateral agent (incorporated by reference from Exhibit 4.4 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
4.3
 
Indenture, dated as of September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.2 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
4.4
 
Registration Rights Agreement, dated September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and UBS Securities LLC and J.P. Morgan Securities LLC, as initial purchasers (incorporated by reference from Exhibit 4.3 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 

127

4.5
 
Credit Agreement, dated January 26, 2011, among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Inc., the other borrowers named therein, each lender from time to time party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, U.S. Collateral Agent and a U.S. L/C Issuer, UBS Loan Finance LLC, as U.S. Swing Line Lender, Wells Fargo Bank, National Association, as a U.S. L/C Issuer, UBS AG Canada Branch, as Canadian Administrative Agent, as Canadian Collateral Agent, as Canadian Swing Line Lender, and as a Canadian L/C Issuer, Credit Suisse, as a U.S. L/C Issuer, Credit Suisse, Toronto Branch, as a Canadian L/C Issuer, UBS Securities LLC, as Joint Lead Arranger and Joint Bookrunner, and Wells Fargo Capital Finance, LLC, as Co-Collateral Agent, Syndication Agent, Joint Lead Arranger and Joint Bookrunner (incorporated by reference from Exhibit 4.22 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.6
 
Amendment No. 1 to Credit Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
 
 
 
4.7
 
Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Credit Suisse AG, Cayman Islands Branch (incorporated by reference from Exhibit 4.2 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
 
 
 
4.8
 
Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Goldman Sachs Bank USA (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
 
 
 
4.9
 
Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Royal Bank of Canada (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
 
 
 
4.10
 
Amendment No. 2 to Credit Agreement, dated as of September 21, 2012, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
4.11
 
Amended and Restated Lien Subordination and Intercreditor Agreement, dated as of February 11, 2011, among UBS AG, Stamford Branch, as Collateral Agent, Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent, Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on Schedule I thereto (incorporated by reference from Exhibit 4.23 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.12
 
Intercreditor Agreement Supplement, dated as of August 2, 2012, by Foundation Labs by Ply Gem, LLC (incorporated by reference from Exhibit 4.6 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).

 
 
 
4.13
 
Collateral Agreement, dated February 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.24 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.14
 
Collateral Agreement Supplement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.7 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 

128

4.15
 
Intellectual Property Collateral Agreement, dated February 11, 2011, by Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on the Annex thereto in favor of Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.25 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.16
 
U.S. Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.26 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.17
 
Supplement to U.S. Security Agreement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.8 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
4.18
 
U.S. Guaranty, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.27 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.19
 
Supplement to U.S. Guaranty, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.9 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
4.20
 
U.S. Intellectual Property Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.28 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.21
 
U.S. Intellectual Property Security Agreement, dated March 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as collateral Agent (incorporated by reference from Exhibit 4.29 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.22
 
Canadian Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.30 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
4.23
 
Canadian Intellectual Property Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.31 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
10.1
*
Amended and Restated Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
 
 
10.2
*
Amendment to Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
 
 
10.3
*
Phantom Incentive Unit Award Agreement Amendment letter to Lynn Morstad, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
 
 

129

10.4
*
Phantom Incentive Unit Award Agreement Amendment letter to Michael Haley, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.6 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
 
 
10.5
*
Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.4 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
 
 
10.6
*
Form of Incentive Stock Option Agreement for Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
 
 
10.7
*
Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.7 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.8
*
Form of Performance Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.8 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.9
*
Form of Restricted Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.10
*
Form of Restricted Stock Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.11
 
General Advisory Agreement dated as of February 12, 2004, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
10.12
 
Amendment No. 1 to Advisory Agreement, dated as of November 6, 2012, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.2 to the Company's Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
 
 
 
10.13
 
Second Amended and Restated Tax Sharing Agreement dated as of March 17, 2011, and effective as of January 11, 2010, between Ply Gem Prime Holdings, Inc., Ply Gem Holdings, Inc. and Ply Gem Industries, Inc. (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
 
 
 
10.14
 
Stock Purchase Agreement, dated as of November 22, 2002, between Alcoa Building Products, Inc., Ply Gem Industries, Inc. and Nortek, Inc. (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
 
 
10.15
*
Amended and Restated Retention Agreement with John C. Wayne, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.13 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).
 
 
 
10.16
*
Letter to John C. Wayne, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.17
*
Letter to John C. Wayne, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
 
 
 

130

10.18
*
Amended and Restated Retention Agreement with Lynn Morstad, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.14 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).
 
 
 
10.19
*
Letter to Lynn Morstad, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.20
*
Letter to Lynn Morstad, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
 
 
 
10.21
*
Amended and Restated Rentention Agreement with John Buckley, dated as of December 31, 2008.
 
 
 
10.22
*
Letter to John Buckley, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement.

 
 
 
10.23
*
Letter to John Buckley, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
 
 
 
10.24
*
Amended and Restated Retention Agreement with David Schmoll, dated as of December 31, 2008(incorporated by reference from Exhibit 10.20 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.25
*
Letter to David Schmoll, dated as of December 13, 2011, regarding Renewal and Amended and Restated Retention Agreement (incorporated by reference from Exhibit 10.21 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.26
*
Letter to David Schmoll, dated as of December 17, 2012, regarding Renewal and Amended and Restated Retention Agreement.
 
 
 
10.27
*
Employment Agreement with Gary E. Robinette, dated as of August 14, 2006. (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
 
 
10.28
*
First Amendment to Employment Agreement with Gary E. Robinette, dated as of November 11, 2011(incorporated by reference from Exhibit 10.23 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.29
*
Retention Bonus Award letter to Gary E. Robinette, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
 
 
 
10.30
*
Retention Bonus Award Amendment with Gary E. Robinette, dated as of May 27, 2010 (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-1 (File No. 333-167193)).
 
 
 
10.31
*
Retention Bonus Award letter to Gary E. Robinette, dated as of November 11, 2011 (incorporated by reference from Exhibit 10.26 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.32
*
Amended and Restated Retention Agreement with Shawn K. Poe, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
 
 
 

131

10.33
*
Letter to Shawn K. Poe, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.28 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.34
*
Letter to Shawn K. Poe, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.

 
 
 
10.35
*
Retention Bonus Award letter to Shawn K. Poe, dated as of November 11, 2011(incorporated by reference from Exhibit 10.29 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
10.36
 
Repurchase Agreement, dated as of November 11, 2011, between Gary E. Robinette and Ply Gem Prime Holdings, Inc(incorporated by reference from Exhibit 10.30 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
 
 
 
21.1
 
List of Subsidiaries (incorporated by reference from Exhibit 21.1 to the Company’s Form S-4, dated December 11, 2012 (File No. 333-145386-06)).
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following financial statements from the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, were formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Stockholder's Equity (Deficit) and Comprehensive Income (Loss); and (v) Notes to Consolidated Financial Statements. **

 
 
 

 
* Management Agreement

** In accordance with Rule 406T of Regulation S-T, the XBRL related to information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Exchange Act or otherwise subject to liability of under these section, and shall not be part of any registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


132


SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
December 31, 2012

(Amounts in thousands)
 
 
Balance at
Beginning
of Year
 
Charged to
Costs and
Expenses
 
Charged to
Other
Accounts
 
Uncollectible accounts
written off, net of
recoveries
 
Balance at
End of
Year
Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts and sales allowances............
 
$
3,883

 
$
778

 
$
—

 
$
(1,077
)
 
$
3,584

 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2011
 
 

 
 

 
 

 
 

 
 

Allowance for doubtful accounts and sales allowances............
 
$
5,294

 
$
1,501

 
$
(24
)
 
$
(2,888
)
 
$
3,883

 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2010
 
 

 
 

 
 

 
 

 
 

Allowance for doubtful accounts and sales allowances…………
 
$
5,467

 
$
3,193

 
$
(43
)
 
$
(3,323
)
 
$
5,294



See accompanying report of independent registered public accounting firm.


133