Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-153262
PROSPECTUS
Ply
Gem Industries, Inc.
Exchange
Offer for $700,000,000
11.75%
Senior Secured Notes due 2013
The
Notes and the Guarantees
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We
are offering to exchange $700,000,000 of our outstanding 11.75% Senior
Secured Notes due 2013, which were issued on June 9, 2008 and which
we refer to as the initial notes, for a like aggregate amount of our
registered 11.75% Senior Secured Notes due 2013, which we refer to as the
exchange notes. The initial notes were issued, and the exchange
notes will be issued, under an indenture dated as of June 9,
2008.
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We
will pay interest on the exchange notes semi-annually on June 15 and
December 15 of each year, beginning on December 15, 2008, at a
rate of 11.75% per annum. The exchange notes will mature on
June 15, 2013.
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The
exchange notes will be guaranteed on a senior secured basis by our parent,
Ply Gem Holdings, Inc., and substantially all of our subsidiaries located
in the United States.
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The
exchange notes and the related guarantees will be secured on a
first-priority lien basis by substantially all of the assets (other than
the assets securing our obligations under our senior secured asset-based
revolving credit facility, or ABL Facility, which consist primarily of
accounts receivable and inventory) of Ply Gem Industries, Inc. and the
guarantors and on a second-priority lien basis by the assets that secure
our ABL Facility, in each case as described in this
prospectus. The exchange notes will rank equally with all of
our existing and future senior
indebtedness.
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Terms
of the exchange offer
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It
will expire at 5:00 p.m., New York City time, on October
28, 2008, unless we extend it.
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If
all the conditions to this exchange offer are satisfied, we will exchange
all of our initial notes that are validly tendered and not withdrawn for
the exchange notes.
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You
may withdraw your tender of initial notes at any time before the
expiration of this exchange offer.
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The
exchange notes that we will issue you in exchange for your initial notes
will be substantially identical to your initial notes except that, unlike
your initial notes, the exchange notes will have no transfer restrictions
or registration rights.
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The
exchange notes that we will issue you in exchange for your initial notes
are new securities with no established market for
trading.
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Before
participating in this exchange offer, please refer to the section in this
prospectus entitled “Risk Factors” commencing on page 19.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
Each
broker-dealer that receives exchange notes for its own account pursuant to the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an “underwriter” within the meaning of
the Securities Act of 1933, as amended. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange securities received in exchange for initial
notes where those initial notes were acquired by that broker-dealer as a result
of market-making activities or other trading activities. We have
agreed that, for a period of 180 days after the expiration date, we will make
this prospectus available to any broker-dealer for use in connection with any
such resale. See “Plan of Distribution.”
The date
of this prospectus is September 24, 2008.
TABLE OF CONTENTS
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Page
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________________
MARKET AND INDUSTRY DATA
Market
data and other statistical information used throughout this prospectus are based
on independent industry publications, government publications, reports by market
research firms or other published independent sources. Some data are also based
on good faith estimates by our management, which are derived from their review
of internal surveys, as well as the independent sources listed above. Although
we believe these sources are reliable, we have not independently verified the
information and cannot guarantee its accuracy and completeness.
PROSPECTUS SUMMARY
This
summary may not contain all of the information that may be important to you. You
should read this prospectus carefully in its entirety before making an
investment decision. In particular, you should read the section entitled “Risk
Factors” included elsewhere in this prospectus and the consolidated financial
statements and notes thereto included elsewhere in this prospectus.
The
term “initial notes” refers to the 11.75 % Senior Secured Notes due 2013 that
were issued on June 9, 2008 in a private offering, and the term
“exchange notes” refers to the 11.75% Senior Secured Notes due 2013 offered with
this prospectus. The term “notes” refers to the initial notes and the
exchange notes, collectively. Unless otherwise specified or the
context 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,” “us,” “our,” “Ply Gem” and the “Company” refer collectively to Ply Gem
Holdings and its subsidiaries. “Adjusted EBITDA” has the meaning set forth in
the footnotes to “— Summary Historical Financial Information.”
Our
Company
We are a
leading manufacturer of residential exterior building products in North America.
We offer a comprehensive product line of vinyl siding and skirting, vinyl
windows and doors, and vinyl and composite fencing and railing that serves both
the home repair and remodeling and new home construction sectors in all
50 states and Western Canada. Vinyl building products have the leading
share of sales by volume in siding and windows, and a fast growing share of
sales by volume in fencing in the United States. We also manufacture vinyl and
aluminum soffit and siding accessories, aluminum trim coil, wood and aluminum
windows and steel and fiberglass doors, enabling us to bundle complementary and
color-matched products and accessories with our core vinyl products. We believe
our broad product offering and geographically diverse manufacturing base allow
us to better serve our customers and provide us with a competitive advantage
over other vinyl building products suppliers. We have two reportable segments:
(i) siding, fencing and railing and (ii) windows and
doors.
We market
our products using several leading brands across multiple price points, which
enables us to diversify our sales across distribution channels with minimal
channel conflict and reach the greatest number of end customers. We believe we
are able to compete on favorable terms and conditions and maintain a strong
customer base as a result of our extensive distribution coverage, high quality,
innovative and comprehensive product line, proprietary vendor managed inventory
program and production efficiency.
Ply Gem
Holdings is a holding company with no operations or assets of our own other than
the capital stock of our subsidiaries. For the six months ended June 28, 2008,
we had net sales of $597.7 million, Adjusted EBITDA of $45.4 million and a net
loss of $41.3 million. For the year ended December 31, 2007, we
had net sales of $1,363.5 million, Adjusted EBITDA of $173.5 million and net
income of $5.6 million.
Our
Competitive Strengths
We
believe we are well-positioned in our industry and that our key competitive
strengths are:
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Leading
Sector Positions. We maintain leadership positions across the
siding, fencing, railing, windows and door market sectors. We believe we
are the No. 2 supplier of vinyl siding and designer accents, the
No. 1 supplier of related aluminum accessories and a leader and
innovator in the vinyl fencing and railing products. Additionally, we
believe we are among the top three producers of vinyl windows in North
America. We believe we hold the No. 1 position in the manufactured
housing channel and hold a strong position in both the retail and one-step
distribution channels. We believe these market leading positions enable us
to outperform the industry in unit volumes, increase our market share,
launch new products and maintain
profitability.
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Diverse,
High-Quality Product Portfolio. We offer a comprehensive range of
exterior building products including vinyl siding and skirting, vinyl
windows and patio doors and vinyl fencing and railing among others.
Particularly, our window product platform offers a wide spectrum of
aluminum, vinyl and wood clad windows at multiple price points. The
breadth of our product offering meets many of the needs of our diverse
customer base and allows us to reduce the potential impact of a decline in
demand that might result from reliance on a single
product.
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Strong
Brand Equity. Our brands are well-recognized for innovation
and quality in the building trade, and we believe that they are a
distinguishing factor in customer selection. We sell our high-quality
products under several brand names: MW, Patriot, Alenco, Great
Lakes, Insulate, Mastic, Alcoa Home Exteriors,
Variform, Georgia-Pacific, Napco, Kroy and CWD, among others. We
believe there are significant opportunities to leverage our existing
brands by targeting cross-selling
opportunities.
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Multi-Channel
Distribution Network and Diversified Sales Base. We
have a multi-channel distribution network in the U.S. and Western
Canada that serves both the home repair and remodeling and new home
construction sectors, which exhibit different, but often
counter-balancing, demand characteristics. Our multiple brand and
multi-channel distribution strategy has increased our sales and
penetration within these sectors. Our customer base includes distributors,
retail home centers, lumberyards, remodeling dealers and builders. We
believe our strategy enables us to minimize channel conflict, reduce our
reliance on any one channel and reach the greatest number of end
customers, and provides us with greater ability to sustain our financial
performance through economic
fluctuations.
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Efficient
Manufacturing. We are a low-cost manufacturer of high-quality
vinyl siding, windows and patio doors. We continue to achieve
manufacturing efficiencies across our product categories through vertical
integration, strategic sourcing, process-based reductions in material,
production and warranty costs, and control of selling, general and
administrative expense. We are committed to continuous improvement across
product categories and have made approximately $55.1 million in
capital expenditures, including upgrades to equipment, facilities and
technology, over the three years ended December 31, 2007. We believe
our low cost production allows us to maintain attractive operating margins
while offering a compelling value proposition to our
customers.
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Proven
Ability to Realize Cost Savings. We continue to demonstrate
our ability to right size our manufacturing capacity to the scale of the
market including closing two vinyl siding plants and one window plant
within the past 24 months, which generated savings of over
$16.0 million. Additionally, we have reduced our headcount by
approximately 30% since 2006 and have identified additional cost saving
initiatives to take place in 2008. We have also been able to realize
significant synergies and cost savings from the acquisitions of MW, Alenco
and AHE’s siding business.
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Large
Polyvinyl Chloride Resin Purchaser. We are one of the largest
procurers of polyvinyl chloride resin (PVC) in North America. As such, we
are able to capitalize on our established relationships with key suppliers
as a result of our purchasing scale and to strategically manage our
sourcing to secure the best available prices, terms and input availability
through various cycles. We believe our position helped us secure supply
during the resin shortage caused by Hurricane Katrina in
2005.
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Strong
Operating Cash Flow. We have historically generated strong
operating cash flow before debt service due to (i) our efficient
manufacturing processes, (ii) our ability to pass increases in raw
materials and freight costs through to our customers, (iii) economies
of scale, (iv) low maintenance capital expenditures and
(v) modest working capital
needs.
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Strong
Management Team with Significant Ownership. We are led by an
experienced and committed senior management team with an average of over
approximately 20 years of relevant industry experience. We have
successfully increased our share of sales by volume within the residential
exterior building products industry and have continuously improved our
manufacturing operations to develop a low-cost manufacturing platform. As
of June 28, 2008, members of our management held stock and stock awards
representing approximately 15% of the shares of common stock of Ply Gem
Prime Holdings, Inc., the sole stockholder of Ply Gem Investment Holdings,
Inc., our sole stockholder.
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Business
Strategy
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Continued
Market Share Gains. We intend to increase our market share
both in our siding, fencing and railing products in the United States and
in our window and door products by utilizing the breadth of our broad
geographical footprint to serve customers across the United States.
Additionally, our continued investments in product innovation and quality
coupled with strong customer service further enhance our ability to
capture market share in each of our markets. Furthermore, we believe there
is substantial opportunity across our product families to cross-sell and
bundle products to further leverage our channel partners and exclusive
industry relationships. We believe our broad geographical footprint allows
us to better serve our customers across the United States and provides a
competitive advantage over some of our
competitors.
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We
have integrated our siding businesses into one operating company and have
placed all of our siding, fencing and railing businesses under common
leadership to improve strategic focus, reduce cost and better serve our
customers. We have organized our United States window businesses under one
common leadership team to enhance our strategic focus. With our extensive
manufacturing capabilities, product breadth and national distribution
capabilities, we believe that we can provide our customers with a
cost-effective, single source from which to purchase their residential
exterior building product needs.
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Expand
Brand Coverage and Product Innovation. We intend to leverage
the reputation of our brands for innovation and quality to fill in our
product offerings and price points. In addition, we plan to maximize the
value of our new product innovations and technologies by deploying best
practices and manufacturing techniques across our product categories. Our
vertical integration in producing aluminum windows has positioned us to
introduce a new aluminum and wood clad window. As of June 28, 2008, we
employed 39 research and development professionals dedicated to new
product development, reformulation, product redesign and other
manufacturing and product
improvements.
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Further
Improve Operating Efficiencies. While we have significantly
improved our vinyl siding manufacturing cost structure over the last
several years, we believe that there are further opportunities for
improvement. We have expanded our efforts to vertically integrate certain
raw materials used in window lineal production, including PVC compound, as
well as expanding our in-house window lineal production. In addition, we
implemented manufacturing improvements and best practices across all of
our product categories, including, for example, expansion of our virtual
plant strategy in our vinyl siding facilities and further vertical
integration in our window product lines which was demonstrated with the
introduction of our new aluminum clad window line in early 2008. We also
plan to optimize product development, sales and marketing, materials
procurement, operations and administrative functions across all of our
product categories. We believe that significant opportunities remain as we
further leverage our buying power across raw materials as well as spending
for non-raw material items by obtaining volume discounts and minimizing
costs. In addition, the integration of our sales and marketing efforts
across our product categories provides an ongoing opportunity to
significantly improve sector
penetration.
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Ownership
Structure
The chart
below summarizes our ownership and corporate structure.
Our
Equity Sponsor
CI
Capital Partners (formerly Caxton-Iseman Capital) is a leading private equity
investment firm specializing in leveraged buyouts of middle-market companies
located primarily in North America. The firm was founded in 1993 to invest
private capital on behalf of Caxton Associates, a New York investment
management firm.
Since its
inception, the CI Capital’s investment activities have been managed by Frederick
Iseman and Steven Lefkowitz who have invested together for 15 years. The CI
Capital senior investment professionals consist of Messrs. Iseman and
Lefkowitz, Timothy Hall, Thomas Ritchie and Joost Thesseling, who have worked
together as a team for a combined 49 years at CI Capital.
In
addition to Ply Gem, CI Capital’s portfolio companies include Valley National
Gases, a leading distributor of industrial gases and propane; KIK Custom
Products, Inc., the largest North American contract manufacturer of branded and
retailer-branded consumer products; Electrograph Systems, Inc., a leading
national distributor of display technology solutions; American Residential
Services, LLC, a leading provider of HVAC and plumbing services; Prodigy Health
Group, Inc., a rapidly expanding health care services company; and Conney Safety
Products, LLC, a full-service distributor of safety products.
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Ply Gem
Industries, Inc. is incorporated under the laws of the State of Delaware. Our
principal executive offices are located at 5020 Weston Parkway,
Suite 400, Cary, North Carolina 27513. Our telephone number is
(919) 677-3900.
The
following table describes the guarantors. All of their principal
offices are located at 5020 Weston Parkway, Suite 400, Cary North Carolina
27513, telephone number (919) 677-3900.
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Name of Guarantor
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Jurisdiction of Formation
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Year of Formation
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Ply
Gem Holdings, Inc.
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Delaware
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2004
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Kroy
Building Products, Inc. (“Kroy”)
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Delaware
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1994
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Napco,
Inc. (“Napco”)
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Delaware
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1989
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MWM
Holding, Inc. (“MWM Holding”)
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Delaware
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2002
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MW
Manufacturers Inc. (“MW”)
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Delaware
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1999
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AWC
Holding Company (“AWC,” and together with its subsidiaries,
“Alenco”)
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Delaware
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2004
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Alenco
Holding Corporation
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Delaware
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2000
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AWC
Arizona, Inc.
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Delaware
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2005
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Alenco
Interests, L.L.C.
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Delaware
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2001
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Alenco
Extrusion Management, L.L.C.
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Delaware
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2001
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Alenco
Building Products Management, L.L.C.
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Delaware
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2001
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Alenco
Trans, Inc.
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Delaware
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2000
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Glazing
Industries Management, L.L.C.
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Delaware
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2001
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Alenco
Extrusion GA, L.L.C.
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Delaware
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2001
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Aluminum
Scrap Recycle, L.L.C.
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Delaware
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2001
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Alenco
Window GA, L.L.C.
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Delaware
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2001
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Ply
Gem Pacific Windows Corporation (“Pacific Windows”)
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Delaware
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2006
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Great
Lakes Window, Inc. (“Great Lakes”)
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Ohio
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1986
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Alcoa
Home Exteriors, Inc. (“AHE”)
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Ohio
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1928
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Variform,
Inc. (“Variform”)
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Missouri
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1964
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New
Alenco Extrusion, Ltd.
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Texas
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2001
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New
Alenco Window, Ltd.
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Texas
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2001
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New
Glazing Industries, Ltd.
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Texas
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2001
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Summary
of the Exchange Offer
In this
subsection, “we,” “us” and “our” refer only to Ply Gem Industries, Inc., as
issuer of the notes, exclusive of Ply Gem Holdings and our
subsidiaries.
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Exchange
Offer
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We
are offering to exchange $700,000,000 aggregate principal amount of our
exchange notes for a like aggregate principal amount of our initial notes.
In order to exchange your initial notes, you must properly tender them and
we must accept your tender. We will exchange all outstanding initial notes
that are properly tendered and not validly withdrawn.
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Expiration
Date
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This
exchange offer will expire at 5:00 p.m., New York City time,
on October 28, 2008, unless we decide to extend
it.
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Conditions
to the Exchange Offer
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We
will complete this exchange offer only if:
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· there
is no change in the laws and regulations which would impair our ability to
proceed with this exchange offer;
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· there
is no change in the current interpretation of the staff of the Securities
and Exchange Commission (the “SEC”) permitting resales of the exchange
notes;
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· there
is no stop order issued by the SEC that would suspend the effectiveness of
the registration statement which includes this prospectus or the
qualification of the exchange notes under the Trust Indenture Act of
1939;
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· there
is no litigation or threatened litigation that would impair our ability to
proceed with this exchange offer; and
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· we
obtain all the governmental approvals we deem necessary to complete this
exchange offer.
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Please
refer to the section in this prospectus entitled “The Exchange
Offer—Conditions to the Exchange Offer.”
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Procedures
for Tendering Initial Notes
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To
participate in this exchange offer, you must complete, sign and date the
letter of transmittal or its facsimile and transmit it, together with your
initial notes to be exchanged and all other documents required by the
letter of transmittal, to U.S. Bank National Association, as exchange
agent, at its address indicated under “The Exchange Offer—Exchange
Agent.” In the alternative, you can tender your initial notes
by book-entry delivery following the procedures described in this
prospectus. For more information on tendering your notes,
please refer to the section
in this prospectus entitled “The Exchange Offer—Procedures for Tendering
Initial Notes.”
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Special
Procedures for Beneficial Owners
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If
you are a beneficial owner of initial notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your initial notes in the exchange offer, you
should contact the registered holder promptly and instruct that person to
tender on your behalf.
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Guaranteed
Delivery Procedures
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If
you wish to tender your initial notes and you cannot get the required
documents to the exchange agent on time, you may tender your notes by
using the guaranteed delivery procedures described under the section of
this prospectus entitled “The Exchange Offer—Procedures for Tendering
Initial Notes—Guaranteed Delivery Procedure.”
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Withdrawal
Rights
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You
may withdraw the tender of your initial notes at any time before 5:00
p.m., New York City time, on the expiration date of the exchange
offer. To withdraw, you must send a written or facsimile transmission
notice of withdrawal to the exchange agent at its address indicated under
“The Exchange Offer—Exchange Agent” before 5:00 p.m., New York City
time, on the expiration date of the exchange offer.
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Acceptance
of Initial Notes and Delivery of Exchange Notes
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If
all the conditions to the completion of this exchange offer are satisfied,
we will accept any and all initial notes that are properly tendered in
this exchange offer on or before 5:00 p.m., New York City time, on
the expiration date. We will return any initial note that we do not accept
for exchange to you without expense promptly after the expiration date. We
will deliver the exchange notes to you promptly after the expiration date
and acceptance of your initial notes for exchange. Please refer to the
section in this prospectus entitled “The Exchange Offer—Acceptance of
Initial Notes for Exchange; Delivery of Exchange
Notes.”
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Federal
Income Tax Considerations Relating to the Exchange Offer
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Exchanging
your initial notes for exchange notes will not be a taxable event to you
for United States federal income tax purposes. Please refer to the section
of this prospectus entitled “Federal Income Tax
Considerations.”
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Exchange
Agent
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U.S.
Bank National Association is serving as exchange agent in the exchange
offer.
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Fees
and Expenses
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We
will pay the expenses related to this exchange offer. Please refer to the
section of this prospectus entitled “The Exchange Offer—Fees and
Expenses.”
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Use
of Proceeds
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We
will not receive any proceeds from the issuance of the exchange notes. We
are making this exchange offer solely to satisfy certain of our
obligations under our registration rights agreement entered into in
connection with the offering of the initial
notes.
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Consequences
to Holders Who Do Not Participate in the Exchange Offer
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If
you do not participate in this exchange offer:
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· except
as set forth in the next paragraph, you will not necessarily be able to
require us to register your initial notes under the Securities
Act;
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· you
will not be able to resell, offer to resell or otherwise transfer your
initial notes unless they are registered under the Securities Act or
unless you resell, offer to resell or otherwise transfer them in a
transaction not subject to registration under the Securities Act;
and
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· the
trading market for your initial notes will become more limited to the
extent other holders of initial notes participate in the exchange
offer.
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You
will not be able to require us to register your initial notes under the
Securities Act unless:
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· the
initial purchasers request us to register initial notes that are not
eligible to be exchanged for exchange notes in the exchange offer;
or
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· you
are not eligible to participate in the exchange offer or receive exchange
notes in the exchange offer that are not freely
tradeable.
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In
these cases, the registration rights agreement requires us to file a
registration statement for a continuous offering in accordance with
Rule 415 under the Securities Act for the benefit of the holders of
the initial notes described in this paragraph. We do not
currently anticipate that we will register under the Securities Act any
notes that remain outstanding after completion of the exchange
offer.
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Please
refer to the section of this prospectus entitled “The Exchange Offer—Your
Failure to Participate in the Exchange Offer Will Have Adverse
Consequences.”
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Resales
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It
may be possible for you to resell the notes issued in the exchange offer
without compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to the conditions described
under “—Obligations of Broker-Dealers”
below.
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To
tender your initial notes in this exchange offer and resell the exchange
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act, you must make the following
representations:
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· you
are authorized to tender the initial notes and to acquire exchange notes,
and that we will acquire good and unencumbered title
thereto;
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· the
exchange notes acquired by you are being acquired in the ordinary course
of business;
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· you
have no arrangement or understanding with any person to participate in a
distribution of the exchange notes and are not participating in, and do
not intend to participate in, the distribution of such exchange
notes;
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· you
are not an “affiliate,” as defined in Rule 405 under the Securities
Act, of ours, or you will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent
applicable;
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· if
you are not a broker-dealer, you are not engaging in, and do not intend to
engage in, a distribution of exchange notes; and
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· if
you are a broker-dealer, initial notes to be exchanged were acquired by
you as a result of market-making or other trading activities and you will
deliver a prospectus in connection with any resale, offer to resell or
other transfer of such exchange notes.
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Please
refer to the sections of this prospectus entitled “The Exchange
Offer—Procedure for Tendering Initial Notes—Proper Execution and Delivery
of Letters of Transmittal,” “Risk Factors—Risks Relating to the Exchange
Offer—Some persons who participate in the exchange offer must deliver a
prospectus in connection with resales of the exchange notes” and “Plan of
Distribution.”
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Obligations
of Broker-Dealers
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If
you are a broker-dealer (1) who receives exchange notes, you must
acknowledge that you will deliver a prospectus in connection with any
resales of the exchange notes, (2) who acquired the initial notes as
a result of market making or other trading activities, you may use the
exchange offer prospectus as supplemented or amended, in connection with
resales of the exchange notes, or (3) who acquired the initial notes
directly from the issuers in the initial offering and not as a result of
market making and trading activities, you must, in the absence of an
exemption, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with resales of the
exchange notes.
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Summary
of Terms of the Exchange Notes
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Issuer
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Ply
Gem Industries, Inc., a Delaware corporation.
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Exchange
Notes
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$700.0 million
aggregate principal amount of 11.75% Senior Secured Notes due 2013.
The forms and terms of the exchange notes are the same as the form and
terms of the initial notes except that the issuance of the exchange notes
is registered under the Securities Act, the exchange notes will not bear
legends restricting their transfer and the exchange notes will not be
entitled to registration rights under our registration rights
agreement. The exchange notes will evidence the same debt as
the initial notes, and both the initial notes and the exchange notes will
be governed by the same indenture.
|
|
Interest
|
The
exchange notes will bear interest at a rate per annum equal to 11.75%,
payable semi-annually, on June 15 and December 15 of each year,
commencing on December 15, 2008.
|
|
Maturity
Date
|
June 15,
2013.
|
|
Guarantees
|
The
exchange notes will be fully and unconditionally guaranteed on a senior
secured and joint and several basis, subject to certain limitations
described herein, by our parent company, Ply Gem Holdings, and all of our
subsidiaries located in the United States (other than Unrestricted
Subsidiaries as such term is defined in “Description of the Notes”). Under
certain circumstances, subsidiaries may be released from these guarantees
without the consent of the holders of the exchange notes. See “Description
of the Notes — Note Guarantees.”
|
|
Collateral
|
The
exchange notes and the guarantees will be secured by a first-priority lien
(subject to certain exceptions and permitted liens) on substantially all
the tangible and intangible assets of Ply Gem Industries and the
guarantors (other than 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 in each case held by us and the guarantors, which secure
the senior secured asset-based revolving credit facility, or ABL Facility,
entered into concurrently with the offering of the initial notes, on a
first-priority lien basis and the notes and the guarantees on a
second-priority lien basis), including the capital stock of Ply Gem
Industries and of any subsidiary held by Ply Gem Industries and any
guarantor (which, in the case of any first-tier foreign subsidiary, will
be limited to 66% of the voting stock and 100% of the non-voting stock of
such first-tier foreign subsidiary).
|
|
The
collateral securing the exchange notes on a first-priority lien basis does
not include (i) the collateral securing the ABL Facility on a
first-priority lien basis, (ii) certain excluded assets,
(iii) those assets as to which the collateral agent representing the
holders of the notes offered hereby reasonably determines that the costs
of obtaining such a security interest are excessive in relation to the
value of the security to be afforded thereby and (iv) any released
collateral.
|
|
The
exchange notes and the guarantees will also be secured by a
second-priority lien (subject to certain exceptions and permitted liens)
on all accounts receivable, inventory, cash and proceeds of the foregoing
and certain assets such as contract rights, instruments and documents
related thereto, in each case held by Ply Gem Industries and the
guarantors.
|
|
|
See
“Description of the Notes — Security for the
Notes.”
|
|
|
Ranking
|
The
exchange notes and guarantees will be our and the guarantors’ senior
secured obligations. The indebtedness evidenced by the notes and the
guarantees will rank:
|
|
· equally
with all of Ply Gem Industries’ and the guarantors’ existing and future
senior indebtedness;
|
|
|
· junior
in priority as to collateral that secures the ABL Facility on a
first-priority lien basis with respect to our and the guarantors’
obligations under the ABL Facility, any other debt incurred after the
issue date that has a priority security interest relative to the notes in
the collateral that secures the ABL Facility, any permitted hedging
obligations and all cash management obligations incurred with any lender
or any of its affiliates under the ABL Facility;
|
|
|
· equal
in priority as to collateral that secures the notes and the guarantees on
a first-priority lien basis with respect to Ply Gem Industries’ and the
guarantors’ obligations under any other pari passu lien
obligations incurred after the issue date; and
|
|
|
· senior
to all of Ply Gem Industries’ and the guarantors’ existing and future
subordinated indebtedness.
|
|
|
The
notes will also be effectively junior to the liabilities of the
non-guarantor subsidiaries.
|
|
|
As
of June 28, 2008, we and the guarantors had $40.0 million in aggregate
principal amount of senior indebtedness (excluding the notes and the
guarantees) outstanding (excluding unused commitments). See “Description
of the Notes — Ranking.”
|
|
|
Optional
Redemption
|
Prior
to April 1, 2011, we may redeem up to 35% of the aggregate principal
amount of the exchange notes with the net cash proceeds from certain
equity offerings at a redemption price equal to 111.75% of the aggregate
principal amount of the exchange notes, plus accrued and unpaid interest,
if any, provided that at least 65% of the original aggregate principal
amount of the exchange notes remains outstanding after the
redemption.
|
|
In
addition, not more than once during any twelve-month period we may redeem
up to $70.0 million of the exchange notes at a redemption price equal
to 103% of the aggregate amount of the notes, plus accrued and unpaid
interest, if any.
|
|
At
any time on or after April 1, 2011, we may redeem the exchange notes,
in whole or in part, at the redemption prices listed in “Description of
the Notes — Optional Redemption.”
|
|
|
Change
of Control
|
If
we experience a change of control, we may be required to offer to purchase
the exchange notes at a purchase price equal to 101% of the aggregate
principal amount, plus accrued and unpaid interest, if
any.
|
|
Following
any such offer to purchase, under certain circumstances, prior to
April 1, 2011, we may redeem all, but not less than all, of the
exchange notes not tendered in such offer at a price equal to 101% of the
principal amount, plus accrued and unpaid interest, if
any.
|
|
|
In
addition, if we experience a change of control prior to April 1,
2011, we may redeem all, but not less than all, of the exchange notes at a
redemption price equal to 100% of the principal amount plus a “make-whole”
premium.
|
|
|
Certain
Covenants
|
The
indenture governing the exchange notes contains covenants that limit the
ability of Ply Gem Industries and its subsidiaries to, among other
things:
|
|
· incur
additional indebtedness;
|
|
|
· pay
dividends or make other distributions or repurchase or redeem our
stock;
|
|
|
· make
loans and investments;
|
|
|
· sell
assets;
|
|
|
· incur
certain liens;
|
|
|
· enter
into agreements restricting our subsidiaries’ ability to pay
dividends;
|
|
|
· enter
into transactions with affiliates; and
|
|
|
· consolidate,
merge or sell all or substantially all of our assets.
|
|
|
The
restrictive covenants generally do not restrict our parent company, Ply
Gem Holdings, or any of its subsidiaries that are not our
subsidiaries.
|
|
|
Use
of Proceeds
|
We
will not receive any proceeds from the issuance of the exchange notes in
exchange for the outstanding initial notes. We are making this
exchange solely to satisfy our obligations under the registration rights
agreement entered into in connection with the offering of the initial
notes.
|
|
Absence of a Public Market for
the Exchange Notes
|
The
exchange notes are new securities with no established market for
them. We cannot assure you that a market for these exchange
notes will develop or that this market will be liquid. Please refer to the
section of this prospectus entitled “Risk Factors—Risks Related to Our
Substantial Indebtedness and the Notes—There is no established trading
market for the exchange notes, and you may not be able to sell them
quickly or at the price that you paid.”
|
|
Form
of the Exchange Notes
|
The
exchange notes will be represented by one or more permanent global
securities in registered form deposited on behalf of The Depository Trust
Company with U.S. Bank National Association, as custodian. You
will not receive exchange notes in certificated form unless one of the
events described in the section of this prospectus entitled “Description
of Notes—Book Entry; Delivery and Form—Exchange of Book Entry Notes for
Certificated Notes” occurs. Instead, beneficial interests in
the exchange notes will be shown on, and transfers of these exchange notes
will be effected only through, records maintained in book-entry form by
The Depository Trust Company with respect to its
participants.
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 19 for a discussion of factors you
should carefully consider before deciding to invest in the
notes.
|
Summary
Historical Financial Information
The
summary historical financial data presented below for each of the years in the
three-year period ended December 31, 2007 have been derived from, and
should be read together with, our audited consolidated financial statements and
the accompanying notes included elsewhere in this prospectus.
The
summary historical financial data presented below for the six months ended
June 30, 2007 and June 28, 2008 have been derived from, and should be read
together with, our unaudited condensed consolidated financial statements and the
accompanying notes included elsewhere in this prospectus. In the opinion of
management, all adjustments consisting of normal recurring accruals considered
necessary for a fair presentation have been included. The results of operations
for interim periods are not necessarily indicative of the operating results that
may be expected for the entire year or any future period.
This
summary historical financial data are qualified in their entirety by the more
detailed information appearing in our financial statements and the related
notes, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” “Selected Historical Financial Information,” “Use of Proceeds,”
“Capitalization” and other financial information included elsewhere in this
prospectus.
|
Fiscal
Year Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
June 28, 2008
|
June 30, 2007
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Statement
of operations data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,363,546 | $ | 1,054,468 | $ | 838,868 | $ | 597,653 | $ | 675,969 | ||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||
|
Cost
of products sold
|
1,075,507 | 831,418 | 647,576 | 495,359 | 530,980 | |||||||||||||||
|
Selling,
general and administrative expense
|
162,609 | 125,619 | 92,738 | 85,879 | 79,294 | |||||||||||||||
|
Intangible
asset impairment
|
4,150 | 782 | — | — | — | |||||||||||||||
|
Amortization
of intangible assets
|
17,631 | 11,942 | 9,761 | 9,826 | 8,936 | |||||||||||||||
|
Total
costs and expenses
|
1,259,897 | 969,761 | 750,075 | 591,064 | 619,210 | |||||||||||||||
|
Operating
earnings
|
103,649 | 84,707 | 88,793 | 6,589 | 56,759 | |||||||||||||||
|
Foreign
currency gain (loss)
|
3,961 | 77 | 1,010 | (495 | ) | 2,208 | ||||||||||||||
|
Interest
expense
|
(98,496 | ) | (72,218 | ) | (57,657 | ) | (74,139 | ) | (51,089 | ) | ||||||||||
|
Investment
income
|
1,704 | 1,205 | 730 | 310 | 822 | |||||||||||||||
|
Other
expense
|
(1,202 | ) | (4,462 | ) | — | — | — | |||||||||||||
|
Income
(loss) before provision (benefit) for income taxes and cumulative effect
of accounting change
|
9,616 | 9,309 | 32,876 | (67,735 | ) | 8,700 | ||||||||||||||
|
Provision
(benefit) for income taxes
|
4,002 | 3,502 | 12,651 | (26,400 | ) | 2,294 | ||||||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
5,614 | 5,807 | 20,225 | (41,335 | ) | 6,406 | ||||||||||||||
|
Cumulative
effect of accounting change, net of income tax benefit of
$57
|
— | (86 | ) | — | — | — | ||||||||||||||
|
Net
income (loss)
|
$ | 5,614 | $ | 5,721 | $ | 20,225 | $ | (41,335 | ) | $ | 6,406 | |||||||||
|
Other
financial data:
|
||||||||||||||||||||
|
Adjusted
EBITDA(1)
|
$ | 173,510 | $ | 125,629 | $ | 114,918 | $ | 45,386 | $ | 84,403 | ||||||||||
|
Capital
expenditures
|
20,017 | 20,318 | 14,742 | 7,039 | 7,201 | |||||||||||||||
|
Depreciation
and amortization
|
54,067 | 33,816 | 26,125 | 30,680 | 25,552 | |||||||||||||||
|
Net
cash provided by (used in):
|
||||||||||||||||||||
|
Operating
activities
|
82,545 | 57,878 | 63,910 | (65,108 | ) | (13,428 | ) | |||||||||||||
|
Investing
activities
|
(56,407 | ) | (432,168 | ) | (14,362 | ) | 1,637 | (7,409 | ) | |||||||||||
|
Financing
activities
|
(15,068 | ) | 405,396 | (34,334 | ) | 59,958 | 11,538 | |||||||||||||
|
Ratio
of earnings to fixed charges(2),
(3)
|
1.1 | x | 1.1 | x | 1.5 | x | — | 1.2 | x | |||||||||||
|
Balance
sheet data (at period end):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 65,207 | $ | 53,274 | $ | 22,173 | $ | 61,480 | $ | 44,265 | ||||||||||
|
Total
assets
|
1,625,607 | 1,649,721 | 1049,998 | 1,663,633 | 1,659,277 | |||||||||||||||
|
Total
debt
|
1,038,096 | 1,048,764 | 637,468 | 1,093,729 | 1,065,554 | |||||||||||||||
|
Stockholders’
equity
|
239,544 | 227,716 | 215,514 | 226,847 | 235,446 | |||||||||||||||
___________
|
|
The
following table presents our calculation of Adjusted EBITDA reconciled to
net income (loss).
|
|
Fiscal
Year Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
June 28, 2008
|
June 30,2007
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Net
income (loss)
|
$ | 5,614 | $ | 5,721 | $ | 20,225 | $ | (41,335 | ) | $ | 6,406 | |||||||||
|
Interest
expense, net of interest income
|
96,792 | 71,013 | 56,927 | 73,829 | 50,267 | |||||||||||||||
|
Provision
(benefit) for income taxes
|
4,002 | 3,502 | 12,651 | (26,400 | ) | 2,294 | ||||||||||||||
|
Depreciation
and amortization
|
54,067 | 33,816 | 26,125 | 30,680 | 25,552 | |||||||||||||||
|
(Gain)
/loss on currency transaction
|
(3,961 | ) | (77 | ) | (1,010 | ) | 495 | (2,208 | ) | |||||||||||
|
Non
cash charge of purchase price allocated to inventories
|
1,289 | 3,266 | — | — | — | |||||||||||||||
|
Restructuring/integration
expense
|
10,356 | 1,395 | — | 8,117 | 2,092 | |||||||||||||||
|
Intangible
asset impairment
|
4,150 | 782 | — | — | — | |||||||||||||||
|
Other
expense
|
1,201 | 6,125 | — | — | - | |||||||||||||||
|
Cumulative
effect of accounting change
|
— | 86 | — | — | — | |||||||||||||||
|
Adjusted
EBITDA(4)
|
$ | 173,510 | $ | 125,629 | $ | 114,918 | $ | 45,386 | $ | 84,403 | ||||||||||
|
(1)
|
Adjusted
EBITDA means net income (loss) plus interest expense (net of interest
income), provision (benefit) for income taxes, depreciation and
amortization, foreign currency gain/(loss), amortization of non-cash
write-off of the portion of excess purchase price from acquisitions
allocated to inventories, third-party charges associated with business
combination financing costs (“other expense”), impairment charges to
intangible assets, other expense includes third party financing charges
and one-time costs related to the amendment of the Company’s phantom stock
plan, restructuring and integration costs associated with acquisitions,
and cumulative effect of accounting changes. Other companies may define
Adjusted EBITDA differently and, as a result, our measure of Adjusted
EBITDA may not be directly comparable to Adjusted EBITDA of other
companies. Management believes that the presentation of Adjusted EBITDA
included in this prospectus provides useful information to investors
regarding our results of operations because it assists both investors and
management in analyzing and benchmarking the performance and value of our
business. Although we use Adjusted EBITDA as a financial measure to assess
the performance of our business, the use of Adjusted EBITDA is limited
because it does not include certain material costs, such as depreciation,
amortization, interest and taxes, necessary to operate our business.
Adjusted EBITDA included in this prospectus should be considered in
addition to, and not as a substitute for, net earnings in accordance with
GAAP as a measure of performance in accordance with GAAP. You are
cautioned not to place undue reliance on Adjusted
EBITDA.
|
|
(2)
|
For
the purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income (loss) before provision (benefit) for income
taxes plus fixed charges. Fixed charges consist of interest
expense, net plus amortization of deferred financing expense and our
estimate of the interest within rental
expense.
|
|
(3)
|
Due
to the Company's loss in the first six months of 2008, the ratio coverage
was less than 1:1. The Company would need to generate additional earnings
of approximately $67.7 million to achieve a coverage ratio of 1:1. The
loss incurred for the six months ended June 28, 2008 included interest
expense of approximately $27.6 million for financing costs incurred in the
second quarter 2008.
|
|
(4)
|
Adjusted
EBITDA has not been adjusted to include approximately $9.9 million of
unrealized synergies and cost savings that we expect in the future, which
is comprised of approximately $9.6 million future expected savings from
the February 2008 closure of a Denison, Texas plan, and future
expected savings related to a plant conversion in 2007, each of which is
forward looking in nature and may or may not
materialize.
|
|
|
Certain
statements in this footnote (4) are forward-looking
statements. See “Note Regarding Forward-Looking
Statements.”
|
RISK FACTORS
Investing
in the notes involves a high degree of risk. You should carefully consider the
following factors in addition to the other information set forth in this
prospectus before you decide to invest in the notes. The following risks could
materially and adversely affect our ability to make payments with respect to the
notes, our business or our financial condition or results of operations.
Additional risks and uncertainties not currently known to us or those we
currently deem to be immaterial may also materially and adversely affect us. In
any such case, you may lose all or part of your original
investment.
Risks
Related to Our Substantial Indebtedness and the Notes
Our
substantial debt could negatively impact our business, prevent us from
fulfilling our outstanding debt obligations and adversely affect our financial
condition.
We have a
substantial amount of debt. As of June 28, 2008, we had approximately $1,093.7
million of total debt outstanding and a debt to equity ratio of approximately
4.82 to 1.0. The terms of our outstanding debt, including the notes, our
9% senior subordinated notes due 2012 and the ABL Facility, limit, but do
not prohibit, us from incurring additional debt. If additional debt is added to
current debt levels, the related risks described below could intensify. See also
the discussion in “Description of Other Indebtedness” and “Description of the
Notes” concerning the terms and conditions of our debt covenants.
The
substantial amount of our debt could have important consequences, including the
following:
|
·
|
our
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, refinancing indebtedness or other purposes
could be impaired;
|
|
·
|
a
substantial portion of our cash flow from operations will be dedicated to
paying principal and interest on our debt, thereby reducing funds
available for expansion or other
purposes;
|
|
·
|
we
may be more leveraged than some of our competitors, which may result in a
competitive disadvantage;
|
|
·
|
we
may be vulnerable to interest rate increases, as certain of our
borrowings, including those under the ABL Facility, are at variable
rates;
|
|
·
|
our
failure to comply with the restrictions in our financing agreements would
have a material adverse effect on
us;
|
|
·
|
our
significant amount of debt could make us more vulnerable to changes in
general economic conditions;
|
|
·
|
we
may be restricted from making strategic acquisitions, investing in new
products or capital assets or taking advantage of business
opportunities; and
|
|
·
|
we
may be limited in our flexibility in planning for, or reacting to, changes
in our business and the industries in which we
operate.
|
We
believe that we will need to access the capital markets in the future to raise
the funds to repay our substantial debts. We have no assurance that we will be
able to complete a refinancing or that we will be able to raise any additional
financing, particularly in view of our anticipated high levels of debt and the
restrictions under our debt agreements. If we are unable to satisfy or refinance
our indebtedness as it comes due, we may default on our debt obligations. If we
default on our debt obligations and any of our indebtedness is accelerated, such
acceleration will have a material adverse effect on our financial condition and
cash flows.
Despite
our current indebtedness levels, we may still be able to incur substantially
more debt. This could exacerbate further the risks associated with our
substantial leverage.
We and
our subsidiaries may be able to incur substantial additional indebtedness,
including additional secured indebtedness, in the future. The terms of the
indenture and the ABL facility restrict, but do not completely prohibit, us from
doing so. In addition, the indenture allows us to issue additional notes under
certain circumstances, which will also be guaranteed by the guarantors and will
share in the collateral that secures the notes and guarantees. The indenture
also allows us to incur certain other additional secured debt and allows our
foreign subsidiaries to incur additional debt, which would be effectively senior
to the notes. In addition, the indenture does not prevent us from incurring
other liabilities that do not constitute indebtedness. See “Description of the
Notes.” If new debt or other liabilities are added to our current debt levels,
the related risks that we now face could intensify.
We
must refinance existing indebtedness prior to the maturity of the notes. Failure
to do so could have a material adverse effect upon us.
The
maturity of our senior subordinated notes is February 15, 2012, which is
before the maturity of the notes, and all outstanding loans under the ABL
Facility will be due and payable on June 9, 2013, which is before the
maturity date of the notes. Further, if the senior subordinated notes shall not
have been refinanced in full on or prior to October 15, 2011, then the ABL
Facility will become due and fully payable and the commitments thereunder will
terminate on October 15, 2011. While we expect to refinance this
indebtedness, we cannot assure you that we will be able to refinance this
indebtedness, or whether any refinancing will be on commercially reasonable
terms. There can be no assurance that the financial terms or covenants of any
new credit facility and/or other indebtedness will be the same or as favorable
as those under our ABL Facility and our senior subordinated notes.
Our
ability to complete a refinancing of our ABL Facility and our senior
subordinated notes prior to their respective maturities is subject to a number
of conditions beyond our control. For example, if a disruption in the financial
markets were to occur at the time that we intended to refinance this
indebtedness, we might be restricted in our ability to access the financial
markets. If we are unable to refinance this indebtedness, our alternatives would
consist of negotiating an extension of our ABL Facility with the lenders and
seeking or raising new capital. If we were unsuccessful, the lenders under our
ABL Facility and the holders of our senior subordinated notes could demand
repayment of the indebtedness owed to them on the relevant maturity date. As a
result, our ability to pay the principal of and interest on the notes would be
adversely affected.
The
terms of our debt covenants could limit how we conduct our business and our
ability to raise additional funds.
The
agreements that govern the terms of our debt, including the indenture that
governs the notes, the indenture that governs our senior subordinated notes and
the credit agreement that governs our 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
|
|
·
|
restrict
dividends, distributions or other payments from our
subsidiaries.
|
There are
limitations on our ability to incur the full $150.0 million of commitments
under the ABL Facility, which may be increased to $200.0 million, subject to
certain terms and conditions. Borrowings under our ABL Facility will
be subject to limits on debt incurrence imposed by our senior subordinated notes
due 2012 and to the lesser of the borrowing base and
$150.0 million.
In
addition, under the ABL Facility, if our borrowing availability falls below 15%
of the borrowing base, we will be required to satisfy and maintain a fixed
charge coverage ratio not less than 1.0 to 1.0. Our ability to meet the required
fixed charge coverage ratio can be affected by events beyond our control, and we
cannot assure you that we will meet this ratio. A breach of any of these
covenants could result in a default under the ABL Facility.
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 ability to make interest
payments on the notes.
A breach
of the covenants under the indenture that governs the notes, the indenture that
governs our senior subordinated notes or under the credit agreement that governs
our new ABL Facility could result in an event of default under the applicable
indebtedness. Such default may allow the creditors to accelerate the related
debt and may result in the acceleration of any other debt to which a
cross-acceleration or cross-default provision applies. In addition, an event of
default under our ABL Facility would permit the lenders under our ABL Facility
to terminate all commitments to extend further credit under that facility.
Furthermore, if we were unable to repay the amounts due and payable under our
ABL Facility, those lenders could proceed against the collateral granted to them
to secure that indebtedness. In the event our lenders or noteholders accelerate
the repayment of our borrowings, we cannot assure that we and our subsidiaries
would have sufficient assets to repay such indebtedness. As a result of these
restrictions, we may be:
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limited
in how we conduct our business;
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unable
to raise additional debt or equity financing to operate during general
economic or business
downturns; or
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unable
to compete effectively or to take advantage of new business
opportunities.
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These
restrictions may affect our ability to grow in accordance with our
plans.
We
may be unable to generate sufficient cash to service all of our indebtedness,
including the notes, and may be forced to take other actions to satisfy our
obligations under such indebtedness, which may not be successful.
Our
ability to make scheduled payments on or to refinance our debt obligations
depends on our financial condition and operating performance, which is subject
to prevailing economic and competitive conditions and to financial, business and
other factors beyond our control. We cannot assure you that we will
maintain a level of cash flows from operating activities sufficient to permit us
to pay or refinance our indebtedness, including the notes, our senior
subordinated notes or our indebtedness under our new ABL Facility. 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, including the
notes. These alternative measures may not be successful and may not permit us to
meet our scheduled debt service obligations.
We
may not be able to satisfy our obligations to holders of the notes upon a change
of control.
Upon the
occurrence of a “change of control,” as defined in the indenture that governs
the notes, each holder of the notes will have the right to require us to
purchase the notes at a price equal to 101% of the principal amount thereof. Our
failure to purchase, or give notice of purchase of, the notes would be a default
under the indenture. In addition, a change of control may constitute an event of
default under our ABL Facility and would also require us to offer to purchase
our senior subordinated notes at 101% of the principal amount thereof, together
with accrued and unpaid interest. A default under our ABL Facility would result
in an event of default under the indenture that governs the notes and under the
indenture governing our senior subordinated notes if the lenders accelerate the
debt under our ABL Facility.
If a
change of control occurs, we may not have enough assets to satisfy all
obligations under our ABL Facility, the indenture that governs our senior
subordinated notes and the indenture that governs the notes. Upon the occurrence
of a change of control, we could seek to refinance the indebtedness under our
ABL Facility, our senior subordinated notes and the notes or obtain a waiver
from the lenders under our ABL Facility, the holders of our senior subordinated
notes and you as a holder of the notes. We cannot assure you, however, that we
would be able to obtain a waiver or refinance our indebtedness on commercially
reasonable terms, if at all.
Federal
and state statutes allow courts, under specific circumstances, to void the
notes, guarantees and security interests and may require holders of the notes to
return payments received from us.
Under the
federal bankruptcy laws and comparable provisions of state fraudulent transfer
laws, the notes could be voided, or claims in respect of the notes could be
subordinated to all of our other debt if the issuance of the notes was found to
have been intended to hinder, delay or defraud any existing or future creditor
or contemplated insolvency with a design to prefer one or more creditors to the
exclusions in whole or in part of others or to have been made for less than
their reasonable equivalent value and we, at the time we incurred the
indebtedness evidenced by the notes:
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were
insolvent or rendered insolvent by reason of such
indebtedness;
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were
engaged in, or about to engage in, a business or transaction for which our
remaining assets constituted unreasonably small
capital; or
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intended
to incur, or believed that we would incur, debts beyond our ability to pay
such debts as they mature.
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A court
might also void an issuance of notes, a guaranty or grant of security, without
regard to the above factors, if the court found that we issued the notes or the
guarantors entered into their respective guaranty or security agreements with
actual intent to hinder, delay or defraud our or their respective
creditors.
A court
would likely find that we or a guarantor did not receive reasonably equivalent
value or fair consideration for the notes or the guarantees and security
agreements, respectively, if we or a guarantor did not substantially benefit
directly or indirectly from the issuance of the notes. If a court were to void
an issuance of the notes, the guarantees or the related security agreements, you
would no longer have a claim against us or the guarantors or, in the case of the
security agreements, a claim with respect to the related collateral. Sufficient
funds to repay the notes may not be available from other sources, including the
remaining guarantors, if any. In addition, the court might direct you to repay
any amounts that you already received from us or the guarantors or, with respect
to the notes, any guarantee or the collateral.
In
addition, any payment by us pursuant to the notes made at a time we were found
to be insolvent could be voided and required to be returned to us or to a fund
for the benefit of our creditors if such payment is made to an insider within a
one-year period prior to a bankruptcy filing or within 90 days for any
outside party and such payment would give the creditors more than such creditors
would have received in a distribution under the bankruptcy code.
The
measures of insolvency for purposes of these fraudulent transfer laws will vary
depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, we would be considered
insolvent if:
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the
sum of our debts, including contingent liabilities, were greater than the
fair saleable value of all our
assets;
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the
present fair saleable value of our assets were less than the amount that
would be required to pay our probable liability on existing debts,
including contingent liabilities, as they become absolute and
mature; or
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we
could not pay our debts as they become
due.
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On the
basis of historical financial information, recent operating history and other
factors, we believe that, after giving effect to the indebtedness evidenced by
the notes and the application of the proceeds therefrom, we will not be
insolvent, will not have unreasonably small capital for the business in which we
are engaged and will not have incurred debts beyond our ability to pay such
debts as they mature. There can be no assurance, however, as to what standard a
court would apply in making such determinations or that a court would agree with
our conclusions in this regard.
There
is no established trading market for the exchange notes, and you may not be able
to sell them quickly or at the price that you paid.
The
exchange notes are a new issue of securities for which there is no established
trading market. We do not intend to apply for exchange notes to be
listed on any securities exchange or to arrange for their quotation on any
automated dealer quotation system. The initial purchasers of the initial notes
were Credit Suisse Securities (USA) LLC, UBS Securities LLC, J.P. Morgan
Securities Inc. and Goldman, Sachs & Co. Although the initial
purchasers have advised us that as of the issuance date of the initial notes
that they intended to make a market in the exchange notes, they are not
obligated to do so and may discontinue any market making in the exchange notes
at any time, in their sole discretion. As a result, we cannot assure you as to
the liquidity of any trading market for the exchange notes.
We also
cannot assure you that you will be able to sell the exchange notes at a
particular time or that the prices that you receive when you sell will be
favorable. Future trading prices of the initial notes and exchange
notes will depend on many factors, including:
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our
operating performance and financial
condition;
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the
interest of securities dealers in making a market;
and
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the
market for similar securities.
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Historically,
the market for non-investment grade debt has been subject to disruptions that
have caused volatility in prices. It is possible that the market for the
exchange notes will be subject to disruptions. Any disruptions may have a
negative effect on noteholders, regardless of our prospects and financial
performance.
Our
Canadian subsidiary and our other future foreign subsidiaries will not be
guarantors, and your claims will be subordinated to all of the creditors of the
non-guarantor subsidiaries.
Our
Canadian subsidiary, CWD Windows and Doors, Inc. (“CWD”), is not a guarantor of
the notes or the ABL Facility. This non-guarantor subsidiary generated
approximately 7.0% of our net sales and 84.0% of our operating earnings, for the
six months ended June 28, 2008. In addition, it held approximately 4.5% of
our consolidated assets as of June 28, 2008. Any right of ours to receive the
assets of any of our non-guarantor subsidiaries upon their bankruptcy,
liquidation or reorganization (and the consequent right of the holders of the
notes to participate in those assets) will be subject to the claims of that
subsidiary’s creditors, including trade creditors. To the extent that we are
recognized as a creditor of that subsidiary, we may have such claim, but we
would still be subordinate to any security interests in the assets of that
subsidiary and any indebtedness and other liabilities of that subsidiary senior
to that held by us. As of June 28, 2008, the notes were effectively junior to
approximately $9.8 million of liabilities (including trade payables) of our
non-guarantor subsidiary.
There
are circumstances other than repayment or discharge of the notes under which the
collateral securing the notes and guarantees will be released automatically,
without your consent or the consent of the trustee.
Under
various circumstances, all or a portion of the collateral securing the notes
will be released automatically, including:
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a
sale, transfer or other disposal of such collateral in a transaction not
prohibited under the indenture;
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with
respect to collateral held by a guarantor, upon the release of such
guarantor from its guarantee;
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with
respect to collateral that is capital stock, upon the dissolution of the
issuer of such capital stock in accordance with the
indenture; and
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with
respect to any collateral in which the notes have a second-priority lien,
upon any release by the lenders under our ABL facility of their
first-priority security interest in such collateral (other than any such
release granted following the discharge of the obligations with respect to
the ABL Facility).
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In
addition, the guarantee of a subsidiary guarantor will be automatically released
in connection with a sale of such subsidiary guarantor in a transaction not
prohibited by the indenture.
The
indenture also permits us to designate one or more of our restricted
subsidiaries that is a guarantor of the notes as an unrestricted subsidiary. If
we designate a subsidiary guarantor as an unrestricted subsidiary, all of the
liens on any collateral owned by such subsidiary or any of its subsidiaries and
any guarantees of the notes by such subsidiary or any of its subsidiaries will
be released under the indenture but not under the ABL Facility. Designation of
an unrestricted subsidiary will reduce the aggregate value of the collateral
securing the notes to the extent that liens on the assets of the unrestricted
subsidiary and its subsidiaries are released. In addition, the creditors of the
unrestricted subsidiary and its subsidiaries will have a senior claim on the
assets of such unrestricted subsidiary and its subsidiaries. See “Description of
the Notes.”
The
imposition of certain permitted liens will cause the assets on which such liens
are imposed to be excluded from the collateral securing the notes and the
guarantees. There are also certain other categories of property that are also
excluded from the collateral.
The
indenture permits liens in favor of third parties to secure purchase money
indebtedness and capital lease obligations, and assets subject to such liens
will in certain circumstances be excluded from the collateral securing the notes
and the guarantees. Our ability to incur purchase money indebtedness and capital
lease obligations is subject to limitations as described in “Description of the
Notes.” In addition, certain categories of assets are excluded from the
collateral securing the notes and the guarantees. Excluded assets include
certain contracts, certain equipment, the assets of our non-guarantor
subsidiaries and equity investees and certain capital stock and other securities
of our subsidiaries and equity investees. See “Description of the Notes.” If an
event of default occurs and the notes are accelerated, the notes and the
guarantees will rank equally with the holders of other unsubordinated and
unsecured indebtedness of the relevant entity with respect to such excluded
property.
The
pledge of the capital stock, other securities and similar items of Ply Gem
Industries, Inc. and its subsidiaries that secure the notes will automatically
be released from the lien on them and no longer constitute collateral when the
pledge of such capital stock or such other securities would require the filing
of separate financial statements with the SEC for that subsidiary.
The notes
and the guarantees are secured by a pledge of the stock of Ply Gem Industries,
Inc. and some of its subsidiaries. Under the SEC regulations in effect as of the
issue date of the notes, if the par value, book value as carried by us or market
value (whichever is greatest) of the capital stock, other securities or similar
items of a subsidiary pledged as part of the collateral is greater than or equal
to 20% of the aggregate principal amount of the notes then outstanding, such a
subsidiary would be required to provide separate financial statements to the
SEC. Therefore, the indenture and the collateral documents provide that any
capital stock and other securities of Ply Gem Industries, Inc. or any of its
subsidiaries will be excluded from the collateral to the extent that the pledge
of such capital stock or other securities to secure the notes would cause such
companies to be required to file separate financial statements with the SEC
pursuant to Rule 3-16 of Regulation S-X (as in effect from time to
time).
As a
result, holders of the notes could lose a portion or all of their security
interest in the capital stock or other securities of those subsidiaries. It may
be more difficult, costly and time-consuming for holders of the notes to
foreclose on the assets of a subsidiary than to foreclose on its capital stock
or other securities, so the proceeds realized upon any such foreclosure could be
significantly less than those that would have been received upon any sale of the
capital stock or other securities of such subsidiary. See “Description of the
Notes.”
The
collateral may not be valuable enough to satisfy all the obligations secured by
such collateral.
We
secured our obligations under the notes by the pledge of certain of our assets.
This pledge is also for the benefit of the lenders under our ABL
Facility.
The notes
are secured on a first-priority lien basis (subject to certain exceptions) by
substantially all of our and the guarantors’ assets (other than accounts
receivable, inventory and cash and proceeds of the foregoing and certain assets
related thereto), which we refer to as the “Notes Collateral,” and such
collateral may be shared with our future creditors. The actual value of the
Notes Collateral at any time depends upon market and other economic
conditions.
The notes
are also secured on a second-priority lien basis (subject to certain exceptions)
by our and each guarantor’s accounts receivable, inventory and cash and proceeds
of the foregoing and certain assets related thereto, which we refer to as the
“ABL Collateral.” The ABL Collateral is subject to a first-priority security
interest for the benefit of the lenders under the ABL Facility, and may be
shared with our future creditors. Although the holders of obligations secured by
first-priority liens on the ABL Collateral and the holders of obligations
secured by second-priority liens on the ABL Collateral, including the notes,
will share in the proceeds of the ABL Collateral, the holders of obligations
secured by first-priority liens in the ABL Collateral will be entitled to
receive proceeds from any realization of the ABL Collateral to repay the
obligations held by then, in full before the holders of the notes and the
holders of other obligations secured by second-priority liens in the ABL
Collateral receive any such proceeds.
In
addition, the asset sale covenant and the definition of asset sale, each in the
indenture governing the notes, have a number of significant exceptions pursuant
to which we will be able to sell Notes Collateral without being required to
reinvest the proceeds of such sale into assets that will comprise Notes
Collateral or to make an offer to the holders of the notes to repurchase the
notes.
As of
June 28, 2008, we had $40.0 million of indebtedness outstanding under the ABL
Facility, with approximately $35.0 million of additional availability under
the ABL Facility (subject to a borrowing base and before consideration of
$3.9 million of letters of credit). All indebtedness under the ABL facility
is secured by first-priority liens on the ABL Collateral (subject to certain
exceptions). In addition, under the terms of the indenture governing the notes,
we may grant an additional lien on any property or asset that constitutes ABL
Collateral in order to secure any obligation permitted to be incurred pursuant
to the indenture. Any such additional lien may be a lien that is senior to the
lien securing the notes or may be a second-priority lien that ranks pari passu
with the lien securing the notes. In either case, any grant of additional liens
on the ABL Collateral would further dilute the value of the second-priority lien
on the ABL Collateral securing the notes. Further, as discussed above, we are
permitted under the terms of the indenture governing the notes to sell all
assets that constitute ABL Collateral and not apply the proceeds to invest in
additional assets that secures the notes or repay outstanding
indebtedness.
The value
of the pledged assets in the event of a liquidation depends upon market and
economic conditions, the availability of buyers and similar factors. No
independent appraisals of any of the pledged property were prepared by or on
behalf of us in connection with this offering of the initial notes. Accordingly,
we cannot assure holders of the notes that the proceeds of any sale of the
pledged assets following an acceleration to maturity with respect to the notes
would be sufficient to satisfy, or would not be substantially less than, amounts
due on the notes and the other debt secured thereby.
If the
proceeds of any sale of the pledged assets were not sufficient to repay all
amounts due on the notes, the holder of the notes (to the extent their notes
were not repaid from the proceeds of the sale of the pledged assets) would have
only an unsecured claim against our remaining assets. By their nature, some or
all of the pledged assets may be illiquid and may have no readily ascertainable
market value. Likewise, we cannot assure holders of the notes that the pledged
assets will be saleable or, if saleable, that there will not be substantial
delays in their liquidation. To the extent that liens, rights and easements
granted to third parties encumber assets located on property owned by us or
constitute subordinate liens on the pledged assets, those third parties may have
or may exercise rights and remedies with respect to the property subject to such
encumbrances (including rights to require marshalling of assets) that could
adversely affect the value of the pledged assets located at that site and the
ability of the collateral agent to realize or foreclose on the pledged assets at
that site.
In
addition, the indenture governing the notes permits us, subject to compliance
with certain financial tests, to issue additional secured debt, including debt
secured equally and ratably by the same assets pledged for the benefit of the
holders of the notes. This would reduce amounts payable to holders of the notes
from the proceeds of any sale of the collateral.
The
rights of holders of the notes with respect to the ABL Collateral are
substantially limited by the terms of the intercreditor agreement.
Under the
terms of the intercreditor agreement entered into in connection with the ABL
Facility, at any time that obligations that have the benefit of the
first-priority liens on the ABL Collateral are outstanding, any actions that may
be taken in respect of the ABL Collateral, including the ability to cause the
commencement of enforcement proceedings against the ABL Collateral and to
control the conduct of such proceedings, and the approval of amendments to,
releases of ABL Collateral from the lien of, and waivers of past defaults under,
the security documents, will be at the direction of the holders of the
obligations secured by the first-priority liens and neither the trustee nor the
collateral agent, on behalf of the holders of the notes, will have the ability
to control or direct such actions, even if the rights of the holders of the
notes are adversely affected, subject to certain exceptions. See “Description of
the Notes — Security for the Notes” and “Description of the Notes —
Amendment, Supplement and Waiver.” Under the terms of the intercreditor
agreement, at any time that obligations that have the benefit of the
first-priority liens on the ABL Collateral are outstanding, if the holders of
such indebtedness release the ABL Collateral for any reason whatsoever (other
than any such release granted following the discharge of obligations with
respect to the ABL Facility), including, without limitation, in connection with
any sale of assets, the second-priority security interest in such ABL Collateral
securing the notes will be automatically and simultaneously released without any
consent or action by the holders of the notes, subject to certain exceptions.
The ABL Collateral so released will no longer secure our and the guarantors’
obligations under the notes. In addition, because the holders of the
indebtedness secured by first-priority liens in the ABL Collateral control the
disposition of the ABL Collateral, such holders could decide not to proceed
against the ABL Collateral, regardless of whether there is a default under the
documents governing such indebtedness or under the indenture governing the
notes. In such event, the only remedy available to the holders of the notes
would be to sue for payment on the notes and the related guarantees. In
addition, the intercreditor agreement gives the holders of first-priority liens
on the ABL Collateral the right to access and use the collateral that secures
the notes to allow those holders to protect the ABL Collateral and to process,
store and dispose of the ABL Collateral.
The
waiver in the intercreditor agreement of rights of marshaling may adversely
affect the recovery rates of holders of the notes in a bankruptcy or foreclosure
scenario.
The notes
and the guarantees are secured on a second-priority lien basis by the ABL
Collateral. The intercreditor agreement provides that, at any time that
obligations that have the benefit of the first-priority liens on the ABL
Collateral are outstanding, the holders of the notes, the trustee under the
indenture governing the notes and the collateral agent may not assert or enforce
any right of marshaling accorded to a junior lienholder, as against the holders
of such indebtedness secured by first-priority liens in the ABL Collateral.
Without this waiver of the right of marshaling, holders of such indebtedness
secured by first-priority liens in the ABL Collateral would likely be required
to liquidate collateral on which the notes did not have a lien, if any, prior to
liquidating the ABL Collateral, thereby maximizing the proceeds of the ABL
Collateral that would be available to repay our obligations under the notes. As
a result of this waiver, the proceeds of sales of the ABL Collateral could be
applied to repay any indebtedness secured by first-priority liens in the ABL
Collateral before applying proceeds of other collateral securing indebtedness,
and the holders of notes may recover less than they would have if such proceeds
were applied in the order most favorable to the holders of the
notes.
In
the event of a bankruptcy of us or any of the guarantors, holders of the notes
may be deemed to have an unsecured claim to the extent that our obligations in
respect of the notes exceed the fair market value of the collateral securing the
notes.
In any
bankruptcy proceeding with respect to us or any of the guarantors, it is
possible that the bankruptcy trustee, the debtor-in-possession or competing
creditors will assert that the fair market value of the collateral with respect
to the notes on the bankruptcy filing date was less than the then-current
principal amount of the notes. Upon a finding by the bankruptcy court that the
notes are under-collateralized, the claims in the bankruptcy proceeding with
respect to the notes would be bifurcated between a secured claim and an
unsecured claim, and the unsecured claim would not be entitled to the benefits
of security in the collateral. Other consequences of a finding of
under-collateralization would be, among other things, a lack of entitlement on
the part of the notes to receive post-petition interest and a lack of
entitlement on the part of the unsecured portion of the notes to receive other
“adequate protection” under federal bankruptcy laws. In addition, if any
payments of post-petition interest had been made at the time of such a finding
of under-collateralization, those payments could be recharacterized by the
bankruptcy court as a reduction of the principal amount of the secured claim
with respect to the notes.
Because
each guarantor’s liability under its guarantees may be reduced to zero, avoided
or released under certain circumstances, you may not receive any payments from
some or all of the guarantors.
You have
the benefit of the guarantees of the guarantors. However, the guarantees by the
guarantors are limited to the maximum amount that the guarantors are permitted
to guarantee under applicable law. As a result, a guarantor’s liability under
its guarantee could be reduced to zero, depending upon the amount of other
obligations of such guarantor. Further, under the circumstances discussed more
fully above, a court under federal and state fraudulent conveyance and transfer
statutes could void the obligations under a guarantee or further subordinate it
to all other obligations of the guarantor. See “— Federal and state
statutes allow courts, under specific circumstances, to void notes, guarantees
and security interests and may require holders of the notes to return payments
received from us.” In addition, you will lose the benefit of a particular
guarantee if it is released under certain circumstances described under
“Description of the Notes — Note Guarantees.”
Bankruptcy
laws may limit the ability of holders of the notes to realize value from the
collateral.
The right
of the collateral agent to repossess and dispose of the pledged assets upon the
occurrence of an event of default under the indenture governing the notes is
likely to be significantly impaired by applicable bankruptcy law if a bankruptcy
case were to be commenced by or against us before the collateral agent
repossessed and disposed of the pledged assets. For example, under Title 11
of the United States Code (the “United States Bankruptcy Code”), pursuant to the
automatic stay imposed upon the bankruptcy filing, a secured creditor is
prohibited from repossessing its security from a debtor in a bankruptcy case, or
from disposing of security repossessed from such debtor, or taking other actions
to levy against a debtor, without bankruptcy court approval. Moreover, the
United States Bankruptcy Code permits the debtor to continue to retain and to
use collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given “adequate protection.”
The meaning of the term “adequate protection” may vary according to
circumstances (and is within the discretion of the bankruptcy court), but it is
intended in general to protect the value of the secured creditor’s interest in
the collateral and may include cash payments or the granting of additional
security, if and at such times as the court in its discretion determines, for
any diminution in the value of the collateral as a result of the automatic stay
of repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. Generally, adequate protection payments, in
the form of interest or otherwise, are not required to be paid by a debtor to a
secured creditor unless the bankruptcy court determines that the value of the
secured creditor’s interest in the collateral is declining during the pendency
of the bankruptcy case. Due to the imposition of the automatic stay, the lack of
a precise definition of the term “adequate protection” and the broad
discretionary powers of a bankruptcy court, it is impossible to predict
(1) how long payments under the notes could be delayed following
commencement of a bankruptcy case, (2) whether or when the collateral agent
could repossess or dispose of the pledged assets or (3) whether or to what
extent holders of the notes would be compensated for any delay in payment or
loss of value of the pledged assets through the requirement of “adequate
protection.”
The
value of the collateral securing the notes may not be sufficient to secure
post-petition interest.
In the
event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding against us, holders of the notes will only be entitled to
post-petition interest under the United States Bankruptcy Code to the extent
that the value of their security interest in the collateral is greater than
their pre-bankruptcy claim. Holders of the notes that have a security interest
in collateral with a value equal or less than their pre-bankruptcy claim will
not be entitled to post-petition interest under the United States Bankruptcy
Code. No appraisal of the fair market value of the collateral was prepared in
connection with the offering of the initial notes or this exchange offer and we
therefore cannot assure you that the value of the noteholders’ interest in the
collateral equals or exceeds the principal amount of the notes.
The
collateral is subject to casualty risks.
We are
obligated under our ABL Facility to at all times cause all the pledged assets to
be properly insured and kept insured against loss or damage by fire or other
hazards to the extent that such properties are usually insured by corporations
operating properties of a similar nature in the same or similar localities.
There are, however, some losses, including losses resulting from terrorist acts,
that may be either uninsurable or not economically insurable, in whole or in
part. As a result, we cannot assure holders of notes that the insurance proceeds
will compensate us fully for our losses. If there is a total or partial loss of
any of the pledged assets, we cannot assure holders of the notes that the
proceeds received by us in respect thereof will be sufficient to satisfy all the
secured obligations, including the notes.
In the
event of a total or partial loss to any of the mortgaged facilities, certain
items of equipment and inventory may not be easily replaced. Accordingly, even
though there may be insurance coverage, the extended period needed to
manufacture replacement units or inventory could cause significant
delays.
Rights
of holders of the notes in the collateral may be adversely affected by the
failure to perfect security interests in collateral.
Applicable
law requires that a security interest in certain tangible and intangible assets
can only be properly perfected and its priority retained through certain actions
undertaken by the secured party. The liens in the collateral securing the notes
may not be perfected with respect to the claims of the notes if the collateral
agent was not able to take the actions necessary to perfect any of these liens
on or prior to the date of the indenture governing the notes. There can be no
assurance that the lenders under our ABL Facility have taken all actions
necessary to create properly perfected security interests, which may result in
the loss of the priority of the security interest in favor of the holders of the
notes to which they would otherwise have been entitled. Specifically, the
collateral agent or the lenders under our new ABL Facility may not complete all
the actions necessary to perfect the liens in any real property by the time of
completion of this offering. In addition, applicable law requires that certain
property and rights acquired after the grant of a general security interest,
such as real property, equipment subject to a certificate of title and certain
proceeds, can only be perfected at the time such property and rights are
acquired and identified. We and the guarantors have limited obligations to
perfect the security interest of the holders of the notes in specified
collateral. There can be no assurance that the trustee or the collateral agent
for the notes will monitor, or that we will inform such trustee or collateral
agent of, the future acquisition of property and rights that constitute
collateral, and that the necessary action will be taken to properly perfect the
security interest in such after-acquired collateral. Neither the trustee nor the
collateral agent for the notes has an obligation to monitor the acquisition of
additional property or rights that constitute collateral or the perfection of
any security interest. Such failure may result in the loss of the security
interest in the collateral or the priority of the security interest in favor of
the notes against third parties.
Any
future pledge of collateral in favor of the holders of the notes might be
voidable in bankruptcy.
Any
future pledge of collateral in favor of the holders of the notes, including
pursuant to security documents delivered after the date of the indenture
governing the notes, might be voidable by the pledgor (as debtor-in-possession)
or by its trustee in bankruptcy if certain events or circumstances exist or
occur, including, under the United States Bankruptcy Code, if the pledgor is
insolvent at the time of the pledge, the pledge permits the holders of the notes
to receive a greater recovery than if the pledge had not been given and a
bankruptcy proceeding in respect of the pledgor is commenced with 90 days
following the pledge, or, in certain circumstances, a longer
period.
We
will in most cases have control over the collateral, and the sale of particular
assets by us could reduce the pool of assets securing the notes and the
guarantees.
The
collateral documents allow us to remain in possession of, retain exclusive
control over, freely operate, and collect, invest and dispose of any income
from, the collateral securing the notes and the guarantees.
In
addition, we will not be required to comply with all or any portion of
Section 314(d) of the Trust Indenture Act of 1939 if we determine, in
good faith based on advice of counsel, that, under the terms of that
Section and/or any interpretation or guidance as to the meaning thereof of
the SEC and its staff, including “no action” letters or exemptive orders, all or
such portion of Section 314(d) of the Trust Indenture Act is
inapplicable to the released collateral. For example, so long as no default or
event of default under the indenture would result therefrom and such transaction
would not violate the Trust Indenture Act, we may, among other things,
without any release or consent by the indenture trustee, conduct ordinary course
activities with respect to collateral, such as selling, factoring, abandoning or
otherwise disposing of collateral and making ordinary course cash payments
(including repayments of indebtedness). With respect to such releases, we must
deliver to the collateral agent, from time to time, an officers’ certificate to
the effect that all releases and withdrawals during the preceding six-month
period in which no release or consent of the collateral agent was obtained in
the ordinary course of our business were not prohibited by the indenture. See
“Description of the Notes.”
The
collateral securing the notes will be substantially different from the
collateral securing the ABL Facility.
The
collateral securing the notes is substantially different from the collateral
securing the ABL Facility. The collateral securing the notes does not include:
(i) the assets or capital stock of our Canadian subsidiary and
(ii) the capital stock of Ply Gem Industries, Inc. or its subsidiaries if
the book value (or market value, if greater) of any such company’s capital stock
exceeds 20% of the principal amount of the notes, all of which will continue to
secure the ABL Facility on a first-priority basis. See “— The pledge of
capital stock, other securities and similar items of Ply Gem Industries, Inc.
and its subsidiaries that secure the notes will automatically be released from
the lien on them and no longer constitute collateral when the pledge of such
capital stock or such other securities would require the filing of separate
financial statements with the SEC for that subsidiary,” “Description of the
Notes — Security for the Notes” and “Description of Other
Indebtedness.”
Risks
Related to the Exchange Offer
The
issuance of the exchange notes may adversely affect the market for the initial
notes.
To the
extent the initial notes are tendered and accepted in the exchange offer, the
trading market for the untendered and tendered but unaccepted initial notes
could be adversely affected. Because we anticipate that most holders
of the initial notes will elect to exchange their initial notes for exchange
notes due to the absence of restrictions on the resale of exchange notes under
the Securities Act, we anticipate that the liquidity of the market for any
initial notes remaining after the completion of this exchange offer may be
substantially limited. Please refer to the section in this prospectus
entitled “The Exchange Offer—Your Failure to Participate in the Exchange Offer
Will Have Adverse Consequences.”
Some
persons who participate in the exchange offer must deliver a prospectus in
connection with resales of the exchange notes.
Based on
interpretations of the staff of the SEC contained in Exxon Capital Holdings
Corp., SEC no-action letter (April 13, 1988), Morgan Stanley & Co.
Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC
no-action letter (July 2, 1983), we believe that you may offer for resale,
resell or otherwise transfer the exchange notes without compliance with the
registration and prospectus delivery requirements of the Securities Act.
However, in some instances described in this prospectus under “Plan of
Distribution,” you will remain obligated to comply with the registration and
prospectus delivery requirements of the Securities Act to transfer your exchange
notes. In these cases, if you transfer any exchange note without delivering a
prospectus meeting the requirements of the Securities Act or without an
exemption from registration of your exchange notes under the Securities Act, you
may incur liability under this act. We do not and will not assume, or indemnify
you against, this liability.
Risks
Associated with Our Business
We
face competition from other vinyl 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 vinyl exterior
building products. Some of these companies are larger and have greater financial
resources than we do. Accordingly, these competitors may be better able to
withstand changes in conditions within 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: wood, metal, fiber cement and masonry in siding, and wood
in windows. An increase in competition from other vinyl exterior building
products manufacturers and alternative building materials could cause us to lose
our customers and lead to decreases in net sales.
Downturns
in the home repair and remodeling and new home construction sectors or the
economy could 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 home construction spending, all of which are affected by
such factors as interest rates, inflation, consumer confidence, unemployment,
and the availability of consumer credit. According to the National Association
of Home Builders (“NAHB”), second quarter 2008 single family housing starts are
estimated to show a decline of approximately 28.1% from actual levels achieved
in the second quarter of 2007. The new construction sector of the market is
expected to continue to be negatively impacted during the balance of 2008
according to the NAHB’s July 8, 2008 forecast. Additionally, according to
the NAHB’s July 2008 forecast, single family housing starts are expected to
decline in 2008 by 35.4% as compared to their full year estimate for 2007. In
April 2008, we revised our 2008 forecast in response to market wide increases in
raw material prices and fuel costs, as well as continued declines in both the
residential new construction and repair/remodeling markets. Under the revised
forecast, we currently expect to report significantly lower Adjusted
EBITDA.
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. Over the past four years, PVC resin prices have more
than doubled, primarily due to the increased cost of oil and natural gas,
increases in natural gas and crude oil prices and demand in the broader economy,
resin prices increased to an all time high level. These significantly higher
resin costs have impacted our profitability throughout 2008, 2007 and 2006. In
addition, in April 2008, we revised our 2008 forecast in response to market
wide increases in raw material prices and fuel costs, as well as continued
declines in both the residential new construction and repair/remodeling markets.
Under the revised forecast, we currently expect to report significantly lower
Adjusted EBITDA. 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.
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 they purchase from us.
Our top
ten customers accounted for approximately 35.5% of our net sales in the year
ended December 31, 2007. Our largest customer, BlueLinx, distributes our
vinyl siding and accessories through multiple channels within its building
products distribution business, and accounted for approximately 10.2% of our
2007 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 BlueLinx or any
other major customer could cause a material decrease in our net sales. We expect
our relationship with BlueLinx to continue.
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 which
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 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 reduced profit margins when such conditions
exist.
If
we are unable to meet future capital requirements our product offering may
become dated, our productivity may decrease and the quality of our products may
decline, which, in turn, could reduce our sales and profitability.
We
periodically make capital investments to, among other things, maintain and
upgrade our facilities and enhance our production processes. As we grow our
businesses, we may have to incur significant capital expenditures. 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
offering may become dated, our productivity may decrease and the quality of our
products may decline, which, in turn, could reduce our sales and
profitability.
Increases
in the cost of labor, 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 availability of qualified personnel and
the cost of labor. As of June 28, 2008, approximately 14.0% 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.
We
may be subject to claims arising from the operations of our subsidiaries,
including Ply Gem Industries, MW, Alenco, AHE, and Pacific Windows prior to our
acquisitions. 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 in the last several years, including Ply Gem
Industries, MW, Alenco, AHE and Pacific Windows. We may be subject to claims or
liabilities arising from the ownership or operation of our subsidiaries prior to
our acquisition of them. Our ability to seek indemnification from the former
owners of our subsidiaries is limited by various factors, including the specific
limitations contained in the respective acquisition agreement and the financial
ability of the former owners.
Under the
terms of the stock purchase agreement governing the acquisition of Ply Gem
Industries, Nortek, Inc. (“Nortek”) has agreed to indemnify us for liabilities
arising from its former ownership or operations of subsidiaries or properties
where such ownership or operation ceased prior to the completion of the Ply Gem
acquisition, including environmental liabilities, liabilities arising in
connection with certain leases, product liability and other litigations, benefit
plans, 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. These liabilities could be
significant, and if we are unable to enforce the Nortek indemnification rights,
could make it difficult to pay the interest or principal amount of the notes
when due. Nortek has covenanted to use their reasonable commercial efforts to
novate certain sale and lease contracts relating to discontinued operations,
thereby removing us and our affiliates from certain indemnification obligations
thereunder, which obligations we retained in connection with the sales of
certain of our businesses. Accordingly, during 2004, Nortek successfully novated
four sale contracts relating to our discontinued operations, including our
disposition of Hoover Treated Wood Products, Inc., Sagebrush Sales, Peachtree
Doors and Windows and SNE Enterprises. As a consequence, we are no longer
responsible for any indemnification obligations to the buyers of these former
operations. 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.
We
completed the acquisition of MW during 2004. Our ability to seek
indemnification from the selling stockholders of MWM Holding is restricted
to breaches of a limited amount of corporate representations and warranties, and
for the first $250,000 in costs of compliance by MW with the New Jersey
Industrial Site Recovery Act at an MW facility in Hammonton, New Jersey and
for 75% of any such costs between $250,000 and $5.5 million resulting from
the compliance by MW with that same act.
We
completed the acquisition of Alenco in February of 2006. Our ability to
seek indemnification from the selling stockholders of AWC for specified matters
is subject to limitations, including the periods to submit claims, minimum
amount of losses suffered and aggregate amounts of recovery.
We
completed the acquisition of AHE in October of 2006. Our ability to seek
indemnification from the selling stockholders of AHE for specified matters is
subject to limitations, including the periods to submit claims, minimum amount
of losses suffered and aggregate amounts of recovery.
We
completed the acquisition of Pacific Windows in September of 2007. Our
ability to seek indemnification from the selling stockholders of Pacific Windows
for specified matters is subject to limitations, including the periods to submit
claims, minimum amount of losses suffered and aggregate amounts of
recovery.
We
could face potential product liability claims relating to products we
manufacture.
Our
historical product liability claims have not been material and while management
is not aware of any material product liability issues, we do face an inherent
business risk of exposure to product liability 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. 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 the services of any of these individuals 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. To encourage the retention of certain
key executives in the past, we have entered into various equity-based agreements
with our senior executives, including Messrs. Robinette, Poe, Wayne,
Sveinson and Veach designed to encourage their retention. However, for 2008, we
have eliminated our management incentive bonus that ties management compensation
to attainment of our objectives.
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 particular 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 good could cause us to cease
manufacturing one or more of our products for a period of time.
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 the presence of hazardous
materials, 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 believe that we are in material compliance with all applicable
requirements of such laws and regulations. However, our efforts to comply with
environmental requirements do not remove the risk that we may be held liable, or
incur fines or penalties, and that the amount of liability, fines or penalties
may be material, 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 newly-discovered
contamination at any of our properties from activities conducted by previous
occupants. 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
for any such 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 properties. Our
ability to seek indemnification from Nortek is, however, limited by the strength
of Nortek’s financial condition. 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.
We are
currently involved in environmental proceedings involving CWD (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) and Kroy (relating to contamination in a drinking water well in
York, Nebraska). Under the stock purchase agreement governing the Ply Gem
acquisition, Nortek is to indemnify us for fifty percent of any liability in
excess of $750,000 with respect to the Calgary contamination and 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 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.
Under the
stock purchase agreement governing the acquisition of MW, the sellers agreed to
indemnify us for the first $250,000 in costs of compliance with the
New Jersey Industrial Site Recovery Act at an MW facility in Hammonton,
New Jersey and for 75% of any such costs between $250,000 and
$5.5 million. In connection with the MW acquisition, MW achieved compliance
with the Industrial Site Recovery Act by obtaining a Remediation in Progress
waiver from the New Jersey Department of Environmental Protection based on
the ongoing remediation of the site by a previous occupant. MW’s Rocky Mount,
Virginia property is subject to an environmental investigation relating to
contamination associated with an underground storage tank formerly located at
the Rocky Mount, VA property. Liability for the underground storage tank
contamination and related investigation 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, we are similarly indemnified by U.S. Industries, Inc.
U.S. Industries and MW are working to develop a course of action to address
the site contamination that is acceptable to both companies and the Virginia
regulatory authorities.
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
Nortek, the MW sellers and U.S. Industries, Inc. could result in
significant environmental liabilities which could make it difficult to pay the
interest or principal amount of our debt when due. In addition, we might incur
significant capital and other costs to comply with increasingly stringent
U.S. or Canadian environmental laws or enforcement policies which would
decrease our cash flow available to service our indebtedness.
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 realignments and cost savings
programs could result in a decrease in our short-term earnings until the
expected cost reductions are achieved. 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 have a
significant number of issued patents and rely on 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.
We
are controlled by our principal equity holder, which has the power to take
unilateral action and whose interests in our business could conflict with
yours.
Affiliates
of, and companies managed by, CI Capital Partners, including Caxton-Iseman (Ply
Gem) L.P., Caxton-Iseman (Ply Gem) II L.P. and Frederick Iseman, control
our affairs and policies. Circumstances may occur in which the interests of
these equity holders could be in conflict with the interests of the holders of
the notes. In addition, these equity holders may have an interest in pursuing
acquisitions, divestitures or other transactions that, in their judgment, could
enhance their equity investment, even though such transactions might involve
risks to holders of the notes.
Increases
in key raw material and fuel costs could cause our cost of products sold to
increase and net income to decrease.
Our cost
of products sold may be significantly impacted by market prices for our primary
raw materials which are PVC resin and aluminum. Current market forecasts
indicate that market prices for these raw materials will increase in 2008 as
compared to market levels in 2007. In addition, increases in fuel cost can
negatively impact our cost to deliver our products to our customers and thus
increase our cost of products sold. Fuel costs are currently forecasted to
increase over levels in 2007. If these market forecasts are correct, and we are
unable to increase the selling price of our products to our customers, net
income may be adversely affected.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus 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,”
“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 prospectus 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 prospectus to conform such
statements to actual results or to changes in our expectations.
The
information in this prospectus is not a complete description of our business or
the risks associated with an investment in our securities. 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 that could cause actual results
to differ materially from those estimated by us include, but are not limited to,
those factors or conditions described under “Risk Factors,” and the
following:
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·
|
our
high degree of leverage and significant debt service
obligations;
|
|
·
|
restrictions
under the indenture governing the notes offered hereby and our existing
notes and restrictions under our new senior secured asset-based revolving
credit facility;
|
|
·
|
the
competitive nature of our industry;
|
|
·
|
changes
in interest rates, and general economic and home repair and remodeling and
new home construction market
conditions;
|
|
·
|
changes
in the price and availability of raw materials;
and
|
|
·
|
changes
in our relationships with our significant
customers.
|
USE OF PROCEEDS
We will
not receive any cash proceeds from the issuance of the exchange notes in
exchange for the outstanding initial notes. We are making this
exchange solely to satisfy our obligations under the registration rights
agreement entered into in connection with the offering of the initial
notes. In consideration for issuing the exchange notes, we will
receive initial notes in like aggregate principal amount.
In
connection with the offering of the initial notes, we entered into the ABL
Facility, initially a $135.0 million senior secured asset-based revolving
credit facility, of which $40.0 million was drawn at closing. “See
Description of Other Indebtedness — New Senior Secured Asset-Based
Revolving Credit Facility.” The proceeds from the issuance of the initial notes
was approximately $693.5 million. We used such proceeds, together with the
initial borrowings of $40.0 million under the ABL Facility, to repay
approximately $708.0 million in borrowings outstanding under our existing senior
credit facilities (including a call premium of $6.8 million) and the
financing costs and other expenses in connection with the issuance of the
initial notes and the entering into of our ABL Facility.
The
following is a summary of the sources and uses of proceeds from the offering of
the initial notes and the initial borrowings under our new ABL Facility. You
should read the following together with the information set forth under
“Prospectus Summary — The Offering,” “Capitalization” and “Description of
Other Indebtedness.”
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Sources of funds (in
millions)
|
Uses of funds (in millions)
|
||||||||
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Initial
notes (1)
|
$ | 693.5 |
Repayment
of our existing senior credit facilities (2)
|
$ | 708.0 | ||||
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Initial
borrowings under the ABL facility
|
40.0 |
Financing
costs and other expenses (3)
|
25.0 | ||||||
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Cash
on hand
|
0.5 | ||||||||
| $ | 733.5 | $ | 733.5 | ||||||
____________
|
(1)
|
The
initial notes have a face value of $700.0 million, but were offered
at a discount of $6.5 million.
|
|
(2)
|
Includes
a payment of approximately $676.2 million for the repayment of the term
loan under our prior facility, a call premium of approximately $6.8
million associated with the repayment, and approximately $25.0 million for
the repayment of the revolver borrowings under the prior term
facility.
|
|
(3)
|
Financing
costs and other expenses include the initial purchasers’ discount and fees
and expenses related to the offering of the initial notes and the entering
into of our ABL Facility.
|
CAPITALIZATION
The
following table shows our capitalization as of June 28, 2008 on an actual
basis.
You
should read this table in conjunction with our consolidated financial statements
and the related notes included elsewhere in this prospectus. Also see
“Use of Proceeds,” “Selected Historical Financial Information,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Description of Other Indebtedness.”
|
As of June 28, 2008
|
||||
|
(Unaudited,
in thousands)
|
||||
|
Cash
and cash equivalents
|
$ | 61,480 | ||
|
Short-term
and long-term debt:
|
||||
|
Senior
subordinated notes due 2012 (1)
|
360,163 | |||
|
Initial
notes (2)
|
693,566 | |||
|
ABL
Facility (3)
|
40,000 | |||
|
Total
debt
|
1,093,729 | |||
|
Stockholders’
equity:
|
||||
|
Common
stock
|
— | |||
|
Additional
paid-in capital
|
209,884 | |||
|
Retained
earnings
|
7,907 | |||
|
Accumulated
other comprehensive income
|
9,056 | |||
|
Total
stockholders’ equity
|
226,847 | |||
|
Total
capitalization
|
$ | 1,320,576 | ||
____________
|
(1)
|
Consists
of outstanding principal and unamortized premium on our senior
subordinated notes due 2012.
|
|
(2)
|
The
initial notes have a face value of $700.0 million, but were offered
at a discount of $6.5 million.
|
|
(3)
|
Borrowings
under our ABL Facility are subject to limits on debt incurrence imposed by
the senior subordinated notes due 2012. Borrowings are limited
to the lesser of the borrowing base and $150.0 million, which was
increased from $135.0 million on August 14, 2008. Upon closing of the
offering of the initial notes, we made an initial borrowing of
approximately $40.0 million, which was used, together with the
proceeds of the offering, to refinance our existing senior credit
facilities and pay related fees and expenses. In addition, we used
$3.9 million of availability to replace existing letters of credit.
Future borrowings will be used for general corporate
purposes.
|
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION
The
selected historical financial data presented below is for each of the years in
the five-year period ended December 31, 2007.
The
selected historical financial data as of December 31, 2007 and 2006 and for
each of the years ended December 31, 2007, 2006 and 2005 have been derived
from, and should be read together with, our audited consolidated financial
statements and the accompanying notes included elsewhere in this
prospectus. The selected historical financial data as of and for the
six months ended June 28, 2008 and June 30, 2007 have been derived from,
and should be read together with, our unaudited condensed consolidated financial
statements and the accompanying notes included elsewhere in this
prospectus. In the opinion of management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation have
been included. The results of operations for interim periods are not
necessarily indicative of the operating results that may be expected for the
entire year or any future period.
On
January 9, 2003, our former indirect parent, Nortek Holdings was acquired
in a recapitalization transaction by certain affiliates and designees of Kelso
& Company L.P. and certain members of management of our former parent,
Nortek. The Nortek recapitalization was accounted for as a purchase
and resulted in a new valuation of the assets and liabilities of Nortek Holdings
and its subsidiaries, including us. The audited data for the
pre-Nortek recapitalization period from January 1, 2003 through
January 9, 2003 have been prepared on different bases of accounting and
therefore are not directly comparable to subsequent
periods.
The
audited data for calendar 2004 includes the operating results of Ply Gem
Industries from January 1, 2004 until the date of the Ply Gem acquisition
on February 12, 2004, and separately includes the operating results of Ply
Gem Holdings from the date of its inception on January 23, 2004 through
December 31, 2004. Subsequent to the Ply Gem acquisition, the
financial statements presented are on a different basis of
accounting. Therefore, they are not directly comparable to preceding
periods.
The
selected historical data set forth below is not necessarily indicative of the
results of future operations and should be read together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
other financial information included elsewhere in this prospectus.
|
Consolidated
Ply
Gem Holdings
|
Combined
Ply
Gem Industries
|
|||||||||||||||||||||||||||||||||||
|
Post-Nortek
Recapitalization(1)
|
Pre-Nortek
Recapitalization(1)
|
|||||||||||||||||||||||||||||||||||
|
Jan.
23, 2004
|
Jan.
1, 2004
|
Jan.
10, 2003
|
Jan.
1, 2003
|
Six Months Ended | ||||||||||||||||||||||||||||||||
|
Fiscal
Year Ended December 31,
|
To
|
To
|
To
|
To
|
June
28,
|
June 30,
|
||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
Dec.
31, 2004
|
Feb.
11, 2004
|
Dec.
31, 2003
|
Jan. 9,
2003
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
(unaudited)
|
|||||||||||||||||||||||||||||||||||
|
Statement
of operations data:
|
||||||||||||||||||||||||||||||||||||
|
Net
sales
|
$ | 1,363,546 | $ | 1,054,468 | $ | 838,868 | $ | 585,945 | $ | 40,612 | $ | 522,565 | $ | 8,824 | $ | 597,563 | $ | 675,969 | ||||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||||||||||||||
|
Costs
of products sold
|
1,075,507 | 831,418 | 647,576 | 448,733 | 33,611 | 393,674 | 7,651 | 495,359 | 530,980 | |||||||||||||||||||||||||||
|
Selling,
general and administrative expense
|
162,609 | 125,619 | 92,738 | 67,568 | 8,345 | 73,933 | 1,529 | 85,879 | 79,294 | |||||||||||||||||||||||||||
|
Intangible
asset impairment
|
4,150 | 782 | – | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Amortization
of intangible assets
|
17,631 | 11,942 | 9,761 | 5,911 | 201 | 3,837 | 70 | 9,826 | 8,936 | |||||||||||||||||||||||||||
|
Total
costs and expenses
|
1,259,897 | 969,761 | 750,075 | 522,212 | 42,157 | 471,444 | 9,250 | 591,064 | 619,210 | |||||||||||||||||||||||||||
|
Operation
earnings (loss)
|
103,649 | 84,707 | 88,793 | 63,733 | (1,545 | ) | 51,121 | (426 | ) | 6,589 | 56,759 | |||||||||||||||||||||||||
|
Foreign
currency gain (loss)
|
3,961 | 77 | 1,010 | 2,473 | - | - | - | (495 | ) | 2,208 | ||||||||||||||||||||||||||
|
Interest
expense
|
(98,496 | ) | (72,218 | ) | (57,657 | ) | (37,373 | ) | (3,684 | ) | (33,117 | ) | (976 | ) | (74,139 | ) | (51,089 | ) | ||||||||||||||||||
|
Interest
income
|
1,704 | 1,205 | 730 | 160 | 29 | 196 | 2 | 310 | 822 | |||||||||||||||||||||||||||
|
Other
expense
|
(1,202 | ) | (4,462 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||
|
Income
(loss) before provision (benefit) for income taxes and cumulative effect
of accounting change
|
9,616 | 9,309 | 32,876 | 28,993 | (5,200 | ) | 18,200 | (1,400 | ) | (67,735 | ) | 8,700 | ||||||||||||||||||||||||
|
Provision
(benefit) for income taxes
|
4,002 | 3,502 | 12,651 | 11,311 | (1,850 | ) | 7,200 | (500 | ) | (26,400 | ) | 2,294 | ||||||||||||||||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
5,614 | 5,807 | 20,225 | 17,682 | (3,350 | ) | 11,000 | (900 | ) | (41,335 | ) | 6,406 | ||||||||||||||||||||||||
|
Cumulative
effect of accounting change, net of income tax benefit of $57
(3)
|
- | (86 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
|
Net
income (loss)
|
$ | 5,614 | $ | 5,721 | $ | 20,225 | $ | 17,682 | $ | (3,350 | ) | $ | 11,000 | $ | (900 | ) | $ | (41,335 | ) | $ | 6,406 | |||||||||||||||
|
Consolidated
Ply
Gem Holdings
|
Combined
Ply
Gem Industries
|
|||||||||||||||||||||||||||||||||||
|
Post-Nortek
Recapitalization(1)
|
Pre-Nortek
Recapitalization(1)
|
|||||||||||||||||||||||||||||||||||
|
Jan.
23, 2004
|
Jan.
1, 2004
|
Jan.
10, 2003
|
Jan.
1, 2003
|
Six
Months Ended
|
||||||||||||||||||||||||||||||||
|
Fiscal
Year Ended December 31,
|
To
|
To
|
To
|
To
|
June 28, |
June 30,
|
||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
Dec.
31, 2004
|
Feb.
11, 2004
|
Dec.
31, 2003
|
Jan. 9,
2003
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
(unaudited)
|
|||||||||||||||||||||||||||||||||||
|
Other
financial data:
|
||||||||||||||||||||||||||||||||||||
|
Capital
expenditures
|
$ | 20,017 | $ | 20,318 | $ | 14,742 | $ | (6,773 | ) | $ | (718 | ) | $ | (7,687 | ) | $ | (349 | ) | $ | 7,039 | $ | 7,201 | ||||||||||||||
|
Depreciation
and amortization
|
54,067 | 33,816 | 26,125 | 17,745 | 1,373 | 14,702 | 327 | 30,680 | 25,552 | |||||||||||||||||||||||||||
|
Net
cash provided by (used in):
|
||||||||||||||||||||||||||||||||||||
|
Operating
activities
|
$ | 82,545 | $ | 57,878 | $ | 63,910 | $ | 49,427 | $ | 1,648 | $ | 24,205 | $ | 1,853 | $ | (65,108 | ) | $ | (13,428 | ) | ||||||||||||||||
|
Investing
activities
|
(56,407 | ) | (432,168 | ) | (14,362 | ) | (890,034 | ) | 395 | (7,973 | ) | (312 | ) | 1,637 | (7,409 | ) | ||||||||||||||||||||
|
Financing
activities
|
(15,068 | ) | 405,396 | (34,334 | ) | 847,277 | (7,451 | ) | (11,443 | ) | (4,706 | ) | 59,958 | 11,538 | ||||||||||||||||||||||
|
Ratio
of earnings to fixed charges (2), (4)
|
1.1 | x | 1.1 | x | 1.5 | x | 1.7 | x | N/A | 1.5 | x | N/A | - | 1.2 | x | |||||||||||||||||||||
|
Balance
sheet data (at period end):
|
||||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 65,207 | $ | 53,274 | $ | 22,173 | $ | 6,794 | $ | 8,517 | $ | 61,480 | $ | 44,265 | ||||||||||||||||||||||
|
Total
assets
|
1,625,607 | 1,649,721 | 1,049,998 | 1,104,299 | 503,368 | 1,663,633 | 1,659,277 | |||||||||||||||||||||||||||||
|
Total
debt
|
1,038,096 | 1,048,764 | 637,468 | 707,591 | 424,297 | 1,093,729 | 1,065,554 | |||||||||||||||||||||||||||||
|
Stockholders’
equity (Parent company deficit)
|
239,544 | 227,716 | 215,514 | 195,407 | (27,699 | ) | 226,847 | 235,446 | ||||||||||||||||||||||||||||
_________
|
(1)
|
On
January 9, 2003, our former indirect parent, Nortek Holdings was
acquired in a recapitalization transaction by certain affiliates and
designees of Kelso & Company L.P. and certain members of management of
our former parent, Nortek. The Nortek recapitalization was
accounted for as a purchase and resulted in a new valuation of the assets
and liabilities of Nortek Holdings and its subsidiaries, including
us.
|
|
(2)
|
For
the purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income (loss) before provision for income taxes
plus fixed charges. Fixed charges consist of interest expense,
net plus amortization of deferred financing expense and our estimate of
the interest within rental expense.
|
|
(3)
|
Cumulative
effect change in the fiscal year ended December 31, 2006 relates to the
adoption of FAS 123(R), “Share-Based
Payment”.
|
|
(4)
|
Due
to the Company’s loss in the first six months of 2008, the ratio coverage
was less than 1:1. The Company would need to generate
additional earnings of approximately $67.7 million to achieve a coverage
ratio of 1:1. The loss incurred for the six months ended June
28, 2008 included interest expense of approximately $27.6 million for
financing costs incurred in the second quarter
2008.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion contains forward-looking statements and involves numerous
risks and uncertainties, including, but not limited to, those described in “Risk
Factors” and elsewhere in this prospectus. Actual results may differ
materially from those contained in any forward-looking
statements. The following discussion should be read in conjunction
with “Selected Historical Financial Information” and our financial statements
and related notes included elsewhere in this prospectus.
General
We are a
leading manufacturer of residential exterior building products in North
America. We offer a comprehensive product line of vinyl siding and
skirting, vinyl windows and doors, and vinyl and composite fencing and railing
that serves both the home repair and remodeling and the new home construction
sectors in all 50 states and Western Canada. We also manufacture
vinyl and aluminum soffit and siding accessories, aluminum trim coil, aluminum,
wood and aluminum and vinyl clad windows and steel and fiberglass doors,
enabling us to bundle complementary and color-matched products and accessories
with our core vinyl products. We have two reportable segments:
(i) siding, fencing and railing and (ii) windows and
doors. For periods prior to January 1, 2008, the siding, fencing and
railing segment also included decking products, which were phased out due to
unprofitability.
We market
our products using several leading brands across multiple price points, which
enables us to diversify our sales across distribution channels with minimal
channel conflict and reach the greatest number of end customers. We believe we
are able to compete on favorable terms and conditions and maintain a strong
customer base as a result of our extensive distribution coverage, high quality,
innovative and comprehensive product line, proprietary vendor managed inventory
program and production efficiency.
Ply Gem
Holdings, a wholly-owned subsidiary of Ply Gem Investment Holdings, Inc., was
incorporated on January 23, 2004 for the purpose of acquiring Ply Gem
Industries from Nortek. The Ply Gem acquisition was completed on
February 12, 2004 when Nortek sold Ply Gem Industries to Ply Gem Holdings
pursuant to the terms of a stock purchase agreement among Ply Gem Investment
Holdings, Inc. and Nortek, Inc. and WDS LLC. Prior to
February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings
had no operations and Ply Gem Industries was a wholly-owned subsidiary of WDS
LLC, which was a wholly-owned subsidiary of Nortek.
On
August 27, 2004, Ply Gem Industries acquired all of the outstanding shares
of capital stock of MWM Holding, in accordance with a stock purchase agreement
entered into among Ply Gem, MWM Holding and certain selling
stockholders.
On
February 24, 2006, in connection with the acquisition of AWC Holding
Company (“AWC,” and together with its subsidiaries, “Alenco”), a new holding
company, Ply Gem Prime Holdings, Inc., 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. 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.
On
February 24, 2006, Ply Gem Industries completed the Alenco acquisition in
accordance with a securities purchase agreement entered into among Ply Gem
Industries, all of the direct and indirect stockholders, warrant holders and
stock option holders of AWC and FNL Management Corp., as their representative on
February 6, 2006. Pursuant to the securities purchase agreement,
Ply Gem Industries 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 held by
certain members of the senior management of Alenco that were contributed
separately to Ply Gem Prime Holdings, the new parent company of Ply Gem
Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime
Holdings). Immediately following the completion of the Alenco
acquisition, AWC became a wholly-owned subsidiary of Ply Gem
Industries. The purchase price paid by Ply Gem was approximately
$89.4 million on cash, which included $4.0 million in cash delivered by Ply Gem
to an escrow agent to be held in escrow as security for the sellers’
indemnification and other obligations under the securities purchase agreement,
plus the repayment of approximately $31.3 million of outstanding indebtedness of
Alenco. In connection with the Alenco acquisition, certain members of
Alenco management invested approximately $8.1 million in the capital stock of
Ply Gem Prime Holdings. The accompanying financial statements include
the operating results of Alenco for the period February 24, 2006 through
December 31, 2007.
On
October 31, 2006, Ply Gem Industries acquired all of the outstanding shares
of capital stock of Alcoa Home Exteriors, Inc. (“AHE”), in accordance with a
stock purchase agreement entered into among Ply Gem Industries, Alcoa Securities
Corporation and Alcoa Inc. The purchase price paid by Ply Gem was
approximately $305.0 million in cash. The accompanying financial
statements include the operating results of AHE for the period October 31,
2006 through December 31, 2007.
On
September 30, 2007, Ply Gem Industries acquired the vinyl window and patio
door business of Certain Teed Corporation, 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”). The purchase price paid by Ply Gem was approximately $35.0
million in cash and was funded from a combination of cash on hand and borrowings
against Ply Gem’s prior $75.0 million credit facility. The
accompanying financial statements include the operating results of Pacific
Windows for the period September 30, 2007 through December 31,
2007.
Ply Gem
Holdings is a holding company with no operations or assets of our own other than
the capital stock of our subsidiaries. The terms of the indenture
governing the notes offered hereby and our senior subordinated notes place
restrictions on the ability of Ply Gem Industries and its subsidiaries to pay
dividends and otherwise transfer assets to Ply Gem Holdings.
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
gross 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, or
SG&A expense, includes all non-product related operating expenses, including
selling, marketing, research and development costs, information technology and
other general and administrative expenses.
Operating
earnings. Operating earnings represents net sales less cost of
products sold, SG&A expense and amortization of intangible
assets.
Comparability. All
periods after the Alenco acquisition in February 2006 include the results
of operations of Alenco. All periods after the AHE acquisition in
October 2006 include the results of operations of AHE. All
periods after the Pacific Windows acquisition in September 2007 include the
results of operations of Pacific Windows.
Impact
of Commodity Pricing
Our
principal raw materials, PVC resin and aluminum, have historically been subject
to rapid price changes. We have in the past been able to pass on a
substantial portion of significant cost increases through price increases to our
customers. Our results of operations for individual quarters can and
have been impacted by a delay between the time of PVC resin and aluminum cost
increases and decreases and related price changes that we implement in our
products.
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 quarter of each calendar
year historically result in that quarter producing significantly less sales
revenue than in any other period of the year. As a result, we have
historically had lower profits or 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.
Critical
Accounting Policies
The
following discussion and analysis of our financial position 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 on our historical experience, current trends and information available
from other sources, as appropriate. If different conditions result
than those assumptions used in our judgments, the results could be materially
different from our estimates. Management believes that the two areas
where different assumptions could result in materially different reported
results are accounts receivable related to estimation of allowances for doubtful
accounts and inventories in estimating reserves for obsolete and excess
inventory. Although we believe the likelihood of a material
difference in either of these two areas is very low based upon our historical
experience, a 10% change in our allowance for doubtful accounts and our
inventory reserve estimates at June 28, 2008 would result in a $0.7 million
impact upon SG&A expense and a $0.9 million impact upon cost of products
sold. 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
combined and 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, our customers take title upon delivery, at which time revenue
is then recognized. Revenue includes 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 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 were 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. At June 28, 2008, and December 31, 2007,
approximately $11.5 million and $10.9 million of total inventories,
respectively, were valued on the last-in, first-out method, or
“LIFO.” Under the first-in, first-out method, or “FIFO,” of
accounting, such inventories would have been approximately $3.7 million and $3.7
million higher at June 28, 2008 and December 31, 2007,
respectively. All other inventories were valued under the FIFO
method. In connection with both LIFO and FIFO inventories, 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.
Asset
impairment. In accordance with SFAS No. 144, we evaluate
the reliability of certain long-lived assets, which primarily consist of
property and equipment and purchased intangible assets subject to amortization,
based on expectations of non-discounted future cash flows for each subsidiary
having a material amount of long-lived assets. If circumstances
indicate a potential impairment, and if the sum of the expected non-discounted
future cash flow is less than the carrying amount of all assets including SFAS
No. 144 long-lived assets, we would recognize an impairment
loss. A significant reduction in projected sales and earnings, which
would lead to a reduction in future cash flows could indicate a potential
impairment.
Goodwill and indefinite lived
intangibles impairment. In accordance with SFAS No. 142,
we perform annual tests for goodwill and indefinite lived intangibles
impairment. We assess goodwill and indefinite lived intangibles which
are not subject to amortization for impairment during the fourth quarter of each
year 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 EBITDA valuation multiples for comparable publicly traded
companies. Based upon our most recent analysis, we believe that no
impairment of goodwill existed at June 28, 2008. We did
recognize an impairment of our indefinite lived intangibles, and recorded an
impairment loss of approximately $4.1 million during the fourth quarter of
2007. A significant reduction in projected sales and earnings, which
would lead to a reduction in future cash flows could indicate a potential
impairment.
Share-based
compensation. Effective January 1, 2006, the Company
adopted SFAS No. 123R, “Share-Based Payments,” which requires companies to
measure and recognize compensation expense for all stock-based payments at fair
value. Under FAS 123R, 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. We adopted the provisions of FAS 123R, effective
January 1, 2006, using a modified prospective application. The
fair value of each option award is estimated on the date of the grant 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. We record 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 health insurance reserves to record in our
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.
Income taxes. We
account for deferred income taxes using the asset and liability method in
accordance with SFAS No. 109 “Accounting for Income Taxes,” or “SFAS
No. 109,” which requires that the deferred tax consequences of temporary
differences between the amounts recorded in our financial statements and the
amount included in our federal and state income tax returns be recognized in the
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 to use 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. During 2005, the Company established reserves
relating to net operating losses acquired in the MW acquisition and transaction
costs associated with the Ply Gem acquisition and MW acquisition. If
the benefits for which a reserve has been provided are subsequently recognized,
they will reduce goodwill resulting from the application of the purchase method
of accounting for these transactions. We have executed a tax sharing
agreement with Ply Gem Holdings and Ply Gem Investment Holdings, Inc. pursuant
to which tax liabilities for each respective party are computed on a stand-alone
basis. Our U.S. subsidiaries file unitary, combined and separate
state income tax returns. CWD files separate Canadian income tax
returns.
Purchase
accounting. Business acquisitions are accounted for using the
purchase method of accounting. The cost of the acquired company is
allocated to identifiable tangible and intangible assets based on estimated fair
value generally determined by third party valuation specialists, with the excess
allocated to goodwill.
Results
of Operations
The
following table summarizes net sales and net income by segment and is derived
from the accompanying consolidated and combined statements of operations
included in this report.
|
Year
Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
June
28, 2008
|
June
30, 2007
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Net
sales
|
||||||||||||||||||||
|
Siding, fencing, railing
and decking
|
$ | 828,124 | $ | 502,610 | $ | 390,925 | $ | 356,310 | $ | 416,486 | ||||||||||
|
Windows
and doors
|
535,422 | 551,858 | 447,943 | 241,343 | 259,483 | |||||||||||||||
|
Operating
earnings (loss)
|
||||||||||||||||||||
|
Siding, fencing, railing
and decking
|
74,560 | 44,060 | 44,892 | 17,770 | 36,708 | |||||||||||||||
|
Windows
and doors
|
36,134 | 50,524 | 47,699 | (6,321 | ) | 23,792 | ||||||||||||||
|
Unallocated
|
(7,045 | ) | (9,877 | ) | (3,798 | ) | (4,860 | ) | (3,741 | ) | ||||||||||
|
Foreign
currency gain (loss)
|
||||||||||||||||||||
|
Windows
and doors
|
3,961 | 77 | 1,010 | (495 | ) | 2,208 | ||||||||||||||
|
Interest
expense, net
|
||||||||||||||||||||
|
Siding,
fencing, railing and decking
|
(110 | ) | (168 | ) | 296 | 29 | 75 | |||||||||||||
|
Windows
and doors
|
1,673 | 1,652 | 1,804 | (593 | ) | (753 | ) | |||||||||||||
|
Unallocated
|
95,229 | 69,529 | 54,827 | (73,265 | ) | (49,589 | ) | |||||||||||||
|
Other
expense
|
||||||||||||||||||||
|
Unallocated
|
1,202 | 4,462 | - | - | - | |||||||||||||||
|
Income
tax expense (benefit)
|
||||||||||||||||||||
|
Unallocated
|
4,002 | 3,502 | 12,651 | (26,400 | ) | 2,294 | ||||||||||||||
|
Income
(loss) before cumulative effect of accounting
change
|
5,614 | 5,807 | 20,225 | (41,335 | ) | 6,406 | ||||||||||||||
|
Net
income (loss)
|
5,614 | 5,721 | 20,225 | (41,335 | ) | 6,406 | ||||||||||||||
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.
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. 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, Railing and Decking Segment
|
Fiscal
Year Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
June
28, 2008
|
June
30, 2007
|
||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||||
|
Statement
of operations data:
|
(in
thousands)
|
|||||||||||||||||||||||||||||
|
Net
sales
|
$
|
828,124
|
100.0
|
%
|
$
|
502,610
|
100.0
|
%
|
$
|
390,925
|
100.0
|
%
|
$
|
356,310
|
100.0
|
%
|
$
|
416,486
|
100.0
|
%
|
||||||||||
|
Cost
of products sold
|
658,423
|
79.5
|
%
|
408,158
|
81.2
|
%
|
309,060
|
79.1
|
%
|
294,810
|
82.7
|
%
|
331,984
|
79.7
|
%
|
|||||||||||||||
|
Gross
profit
|
169,701
|
20.5
|
%
|
94,452
|
18.8
|
%
|
81,865
|
20.9
|
%
|
61,500
|
17.3
|
%
|
84,502
|
20.3
|
%
|
|||||||||||||||
|
SG&A
expense
|
86,068
|
10.4
|
%
|
46,571
|
9.3
|
%
|
33,752
|
8.6
|
%
|
39,456
|
11.1
|
%
|
43,056
|
10.3
|
%
|
|||||||||||||||
|
Amortization
of intangible assets
|
9,073
|
1.1
|
%
|
3,821
|
0.8
|
%
|
3,221
|
0.8
|
%
|
4,274
|
1.2
|
%
|
4,738
|
1.1
|
%
|
|||||||||||||||
|
Operating
earnings
|
$
|
74,560
|
9.0
|
%
|
$
|
44,060
|
8.8
|
%
|
$
|
44,892
|
11.5
|
%
|
$
|
17,770
|
5.0
|
%
|
$
|
36,708
|
8.8
|
%
|
||||||||||
Net
sales
Net sales
for the six months ended June 28, 2008 decreased compared to the same period in
2007 by approximately $60.2 million, or 14%. The decrease in net sales was
driven by industry wide market declines resulting from lower single family
housing starts which negatively impacted the new construction sector of the
market and overall softness in repair and remodeling expenditures which
negatively impacted demand for our products. According to the NAHB, second
quarter 2008 single family housing starts are estimated to show a decline of
approximately 28.1% from actual levels achieved in the second quarter of
2007. The new construction sector of the market is expected to
continue to be negatively impacted during the balance of 2008 according to the
NAHB’s July 8, 2008 forecast. Additionally, according to the NAHB’s
July 2008 forecast, single family housing starts are expected to decline in 2008
by 35.4% as compared to their full year estimate for 2007. The
decrease in net sales that resulted from industry wide market demand declines
was partially offset by price increases that we implemented in response to
increasing raw materials and freight costs as discussed below in cost of
products sold.
Net sales
for the year ended December 31, 2007 increased from the year ended
December 31, 2006 by approximately $325.5 million or 64.8%. The
increase was primarily due to the addition of AHE which was acquired on
October 31, 2006 and contributed approximately $478.9 million and $73.3
million of sales to the years ended December 31, 2007 and December 31,
2006, respectively, resulting in a net increase of approximately $405.6
million. The increase in net sales due to AHE was partially offset by
a decrease in sales due to industry wide market declines resulting from lower
single family housing starts which negatively impacted the new construction
sector of the market and corresponding decline in repair and remodeling
expenditures which negatively impacted demand for our
products. According to the NAHB, 2007 single family housing starts
declined by approximately 29.6% from actual levels achieved in
2006. Additionally, according to the NAHB’s forecast single family
housing starts are expected to decline in 2008 by 30.8% as compared to actual
levels achieved in 2007.
Net sales
for the year ended December 31, 2006 increased from the year ended
December 31, 2005 by approximately $111.7 million or 28.6%. The
increase was primarily due to the addition of AHE, which was acquired on
October 31, 2006 and contributed approximately $73.3 million of sales to
the year ended December 31, 2006. The increase in net sales was
also driven by increased unit volume sold, as well as higher selling prices that
were increased in response to industry wide increases in raw material and
freight costs. The increase in units sold was driven by growth with
new vinyl siding customers that were obtained during 2005, and was partially
offset by industry wide market declines resulting from lower single family
housing starts which negatively impacted the new construction sector of the
market. According to the NAHB, single family housing starts declined
by 14.2% in 2006. As a result of the Company’s ability to grow unit
volume sales in 2006, our vinyl siding sales outperformed the industry during
2006 and our market share of the vinyl siding industry increased during 2006 as
compared to 2005.
Cost
of products sold
Cost of
products sold for the six months ended June 28, 2008 decreased compared to
the same period in 2007 by approximately $37.2 million, or 11%. The
decrease in cost of products sold was due to lower sales as discussed above, but
was partially offset by higher raw material costs, primarily PVC resin and
aluminum, as well as higher freight costs driven by higher oil
costs. Gross profit as a percentage of net sales for the six months
ended June 28, 2008 decreased from the same period in 2007 from 20.3% to 17.3%.
The decrease in gross profit as a percentage of sales was driven by lower unit
sales volume and increased raw material and freight costs. We have implemented
selling price increases in response to higher raw material costs and freight
costs, however, our gross profit as a percentage of sales was negatively
impacted by the delay between the time of raw material and freight cost
increases and the price increases that we implemented. Additionally,
in light of current market conditions for building products, the Company has
adjusted the size of its workforce and reduced its fixed overhead structure,
including reductions in certain fixed expenses related to the vinyl siding
plants in Atlanta, GA and Denison, TX, which ceased production in April of 2007
and February of 2008, respectively. The Company expects to save
approximately $5.0 million and $10.0 million from the closure of the Atlanta, GA
and the Denison, TX facilities, respectively.
Cost of
products sold for the year ended December 31, 2007 increased from the year
ended December 31, 2006 by approximately $250.3 million or
61.3%. The increase in cost of products sold was primarily driven by
the cost of products sold contributed by AHE which was acquired on
October 31, 2006. The increase due to the acquisition of AHE was
partially offset by cost savings that the Company is realizing from its
acquisition of AHE which included reduced purchased cost on certain raw
materials, reduced fixed overhead and other manufacturing efficiency
improvements.
Cost of
products sold for the year ended December 31, 2006 increased from the year
ended December 31, 2005 by approximately $99.1 million or
32.1%. The increase in cost of products sold was primarily driven by
the cost of products sold contributed by AHE which was acquired on
October 31, 2006. Excluding the increase attributable to AHE,
cost of products sold increased due to increased sales volume and market wide
increases in raw material costs, specifically PVC resin and aluminum, and higher
freight expense related to carrier fuel costs. The market wide
increase in raw material and freight costs were fully offset by selling price
increases and material strategic sourcing and other cost savings initiatives
that management implemented during 2006. In addition, cost of
products sold for the 2006 period was impacted by purchase accounting, primarily
from the non-cash write off of purchase price allocated to inventory from the
AHE acquisition, which increased cost of products sold by approximately $3.0
million for the year ended December 31, 2006.
Selling,
general and administrative expense
SG&A
expense for the six months ended June 28, 2008 decreased by approximately $3.6
million, or 8%, from the same period in 2007. The decrease in SG&A expenses
was primarily due to lower marketing costs and other fixed expenses that have
been reduced in light of current market conditions for building
products.
SG&A
expense for the year ended December 31, 2007 increased from the year ended
December 31, 2006 by approximately $39.5 million, or 84.8%. The
increase was due to the addition of AHE, which contributed approximately $39.2
million more to SG&A expense in 2007 as compared to 2006. During
2007 the Company reduced certain SG&A expenses in light of current market
conditions and realized cost savings associated with its acquisition of AHE
through the elimination of certain duplicative functions, however, these savings
were largely offset in 2007 by expenses incurred to integrate the AHE
acquisition into the Company’s Siding, Fencing, Railing and Decking
Segment. The Company believes that certain 2007 AHE integration
expenses, such as computer systems consultants, are non-recurring in
nature. In addition, SG&A expense for the year ended
December 31, 2007 included non-recurring costs associated with the closure
its Denison, TX vinyl siding facility which ceased production in
February of 2008.
SG&A
expense for the year ended December 31, 2006 increased from the year ended
December 31, 2005 by approximately $12.8 million, or 38.0%. The
increase was due primarily to the addition of AHE, which contributed
approximately $9.7 to SG&A expense, in addition to increases due to higher
selling and marketing expenses related to the increase in net sales, and higher
management incentive compensation expense in 2006 as compared to
2005.
Amortization
of intangible assets
Amortization
expense for the six months ended June 28, 2008 decreased by approximately
$0.5 million. Amortization expense for the year ended
December 31, 2007 increased by approximately $5.3 million, primarily due to
the addition of AHE operations.
Windows
and Doors Segment
|
Fiscal
Year Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
June
28, 2008
|
June
30, 2007
|
||||||||||||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||||||||||||||
|
Statement
of operations data:
|
(in
thousands)
|
|||||||||||||||||||||||||||||||||||||||
|
Net
sales
|
$ | 535,422 | 100.0 | % | $ | 551,858 | 100.0 | % | $ | 447,943 | 100.0 | % | $ | 241,343 | 100.0 | % | $ | 259,483 | 100.0 | % | ||||||||||||||||||||
|
Cost
of products sold
|
417,084 | 77.9 | % | 423,260 | 76.7 | % | 338,516 | 75.6 | % | 200,549 | 83.1 | % | 198,996 | 76.7 | % | |||||||||||||||||||||||||
|
Gross
profit
|
118,338 | 22.1 | % | 128,598 | 23.3 | % | 109,427 | 24.4 | % | 40,794 | 16.9 | % | 60,487 | 23.3 | % | |||||||||||||||||||||||||
|
SG&A
expense
|
69,496 | 13.0 | % | 69,171 | 12.5 | % | 55,188 | 12.3 | % | 41,563 | 17.2 | % | 32,497 | 12.5 | % | |||||||||||||||||||||||||
|
Intangible
impairment
|
4,150 | 0.8 | % | 782 | 0.0 | % | - | 0.0 | % | - | - | - | - | |||||||||||||||||||||||||||
|
Amortization
of intangible assets
|
8,558 | 1.6 | % | 8,121 | 1.5 | % | 6,540 | 1.5 | % | 5,552 | 2.3 | % | 4,198 | 1.6 | % | |||||||||||||||||||||||||
|
Operating
earnings (loss)
|
36,134 | 6.7 | % | 50,524 | 9.2 | % | 47,699 | 10.6 | % | (6,321 | ) | -2.6 | % | 23,792 | 9.2 | % | ||||||||||||||||||||||||
|
Currency
transaction gain (loss)
|
$ | 3,961 | 0.7 | % | $ | 77 | 0.0 | % | $ | 1,010 | 0.2 | % | $ | (495 | ) | -0.2 | % | $ | 2,208 | 0.9 | % | |||||||||||||||||||
Net
sales
Net sales
for the six months ended June 28, 2008 decreased compared to the same period in
2007 by approximately $18.1 million, or 7%. The decrease was due to lower
sales of our new construction window products which were negatively impacted by
market wide decreased demand that resulted from reductions in single family
housing starts as discussed above, as well as lower demand for our repair and
remodeling windows which declined due to a slowdown in the remodeling and
replacement activity across the U.S. The decrease in sales was
partially offset by the sales from Pacific Windows which was acquired in
September 2007 and increased sales in our Canadian window business.
Net sales
for the year ended December 31, 2007 decreased from the year ended
December 31, 2006 by approximately $16.4 million, or 3.0%. The
decrease in net sales was due to lower sales of our new construction window
products which were negatively impacted by market wide decreased demand that
resulted from reductions in single family housing starts as discussed above, a
decline in demand for our repair and remodeling windows due to a slowdown in the
remodeling and replacement activity across the United States and the
discontinuation of an unprofitable mechanical window product line that was
produced at our Sarver, PA facility which was closed in
June 2006. The decline in sales of our U.S. windows and doors
was partially offset by a 27% increase in sales of our Canadian window and door
business as well as additional sales contributed by Alenco during the first
quarter of 2007 as compared to the same period in 2006 and Pacific Windows in
2007.
Net sales
for the year ended December 31, 2006 increased from the year ended
December 31, 2005 by approximately $103.9 million, or 23.2%. The
increase in net sales was driven by sales of Alenco, which was acquired on
February 24, 2006 and contributed approximately $121.2 million in sales to
the year ended December 31, 2006. In addition, net sales were
favorably impacted by higher selling prices which were increased to offset
market wide increases in raw material and freight costs. The
favorable impact on net sales from higher selling prices was more than offset by
lower unit sales volume for our domestic new construction window products which
were negatively impacted by market wide declines in single family housing starts
during 2006. In addition, demand for our repair and replacement
window products declined as a result of our inability to convert new customers
during 2005, which was due to operational difficulties that we incurred in
introducing our new repair and remodeling window product lines. Sales
were also reduced by our transition of customers from an unprofitable mechanical
window product that was produced at our Sarver, PA facility, which was closed in
June 2006, to other more efficient products that we produce at our other
window manufacturing facilities.
Cost
of products sold
Cost of
products sold for the six months ended June 28, 2008 increased by approximately
$1.6 million, or 0.8%, over the same period in 2007. The increase in
costs of products sold was attributable to Pacific Windows, which was acquired
in the fourth quarter of 2007, but was largely offset by a decrease in cost of
products sold driven by the lower sales levels. Gross profit as a percentage of
net sales for the six months ended June 28, 2008 decreased from the same period
in 2007 from 23.3% to 16.9%. The decrease in gross profit percentage
was driven by lower unit sales volume, increased raw material and freight costs,
as well as Pacific Windows which currently carries a lower gross profit margin
than the Company’s other window and door products.
Cost of
products sold for the year ended December 31, 2007 decreased from the prior
year by approximately $6.2 million, or 1.5%. The decrease in cost of
products sold was primarily driven by the lower level of sales in our new
construction window products and the discontinued mechanical window product line
discussed above. The decrease in cost of products sold was partially
offset by higher cost of products sold in our Canadian window and door business
and due to higher volume and corresponding increases in cost of products sold
for Alenco and Pacific Windows. Cost of products sold associated with
Alenco for 2007 included 12 months as compared to only 10 months in
2006.
Cost of
products sold for the year ended December 31, 2006 increased from the prior
year by approximately $84.7 million, or 25.0%. The increase was
primarily related to the cost of products sold contributed by Alenco, which was
acquired on February 24, 2006. The increase in cost of products
sold from Alenco was partially offset by lower costs due to lower unit sales
volume in both our domestic new construction and repair and remodeling window
and door products as discussed above. In addition, our cost of
products sold was impacted in 2006 by market wide increases in raw material and
freight costs which were partially offset by selling price increases and
material cost synergies and savings in our new construction window and door
products. In our repair and remodeling window and door products, raw
material costs exceeded prior year costs primarily due to increases in PVC
lineal costs during our transition from external sourcing to producing lineals
within our MW lineal production facility. This transition was
completed during 2006. In addition, cost of products sold for the
2006 period was impacted by purchase accounting, primarily from the non-cash
write off of purchase price allocated to inventory from the Alenco acquisition,
which increased cost of products sold by approximately $0.3 million for the year
ended December 31, 2006.
Selling,
general and administrative expense
SG&A
expense for the six months ended June 28, 2008 increased by approximately $9.1
million, or 28%, over the same period in 2007, primarily due to the addition of
Pacific Windows and reorganization expense incurred to integrate our U.S. window
companies into one operating group. The reorganization expense is
primarily comprised of fees paid to third party consultants assisting with the
reorganization and integration of our U.S. window group, as well as severance
costs related to positions that have been eliminated. The Company
believes that the reorganization of our U.S. window group will allow us to
better serve our customers and markets, while reducing our operating
costs.
SG&A
expense for the year ended December 31, 2007 increased from the prior year
by approximately $0.3 million, or 0.5%. The change in SG&A
expense was driven by reduced 2007 selling, marketing and professional fees of
approximately $2.2 million and a reduction to the 2007 net expense due to
approximately $1.2 million of cash received from an account receivable that had
been fully reserved in periods prior to 2006. In addition, SG&A
expenses for the first nine months of 2006 included approximately $0.8 million
of restructuring costs due to the closure of the Sarver, PA facility, and
approximately $0.6 million due to the loss on the sale of the Sarver
building. The decreases were partially offset by higher SG&A
expenses of approximately $5.1 million due to the addition of Alenco in 2006 and
Pacific Windows in 2007.
SG&A
expense for the year ended December 31, 2006 increased from the prior year
by approximately $14.0 million, or 25.3%. The increase in SG&A
expense was driven by the addition of Alenco which contributed approximately
$13.2 million, as well as costs incurred in our repair and remodeling business
related to changes in management and consulting costs incurred to improve
business performance. SG&A costs for the 2006 period also include
approximately $0.8 million of restructuring costs due to the closure of the
Sarver, PA facility, and approximately $0.6 million due to the loss on the sale
of the Sarver building.
Intangible
impairment
We
evaluated the intangible assets (tradenames) with indefinite lives for
impairment as of November 30, 2007, and determined that there was an
impairment. The impairment charge was primarily a result of a change
in the assumption of long-term revenue growth related to the
tradenames. As a result, we wrote down those assets by approximately
$4.2 million.
In 2006,
due to the Sarver facility closure, an intangible asset impairment of
approximately $0.8 million was recognized.
Amortization
of intangible assets
Amortization
expense for the six months ended June 28, 2008 increased by $1.4 million
primarily due to the acquisition of Pacific Windows. Amortization
expense for the year ended December 31, 2007 increased by approximately
$0.4 million, due to the addition Alenco in 2006 and Pacific Windows in
2007.
Currency
transaction gain
Currency
transaction gains for the year ended December 31, 2007 increased by
approximately $3.9 million from the prior year. The transaction
gain resulted from debt, denominated in U.S. dollars, recorded by our Canadian
subsidiary, which fluctuated due to the changing exchange rate.
Unallocated
Operating Earnings, Interest, and Provision for Income Taxes
|
Fiscal
Year Ended December 31,
|
Six
Months Ended
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
June
28, 2008
|
June
30, 2007
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Statement
of operations data:
|
||||||||||||||||||||
|
Operating
loss
|
$ | (7,045 | ) | $ | (9,877 | ) | $ | (3,798 | ) | $ | (4,860 | ) | $ | (3,741 | ) | |||||
|
Interest
expense
|
(96,356 | ) | (70,316 | ) | (55,199 | ) | (73,512 | ) | (50,037 | ) | ||||||||||
|
Investment
income
|
1,127 | 787 | 372 | 247 | 448 | |||||||||||||||
|
Other
expense
|
(1,202 | ) | (4,462 | ) | - | - | - | |||||||||||||
|
Provision
(benefit) for income taxes
|
4,002 | 3,502 | 12,651 | (26,400 | ) | 2,294 | ||||||||||||||
Operating
loss
Unallocated
losses include 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.
Unallocated
operating loss for the six months ended June 28, 2008 increased by
approximately $1.1 million over the same period in 2007. The increase
was driven by higher salary and travel and entertainment expenses primarily due
to the addition of a corporate marketing department combined with costs incurred
in the second quarter of 2008 to initiate the transition of back office
functions to a centralized corporate office.
The
decrease of approximately $2.8 million in expenses for the year ended
December 31, 2007 as compared to the prior year includes a decrease of
approximately $2.5 million in deferred compensation expense and a decrease of
approximately $1.4 million due to changes in the required insurance reserves,
partially offset by an increase of approximately $1.1 million in salaries,
benefits and professional fees.
The
increase in expenses for the year ended December 31, 2006 from the prior
year includes approximately $1.7 million in salaries, benefits and professional
fees, approximately $3.0 million of deferred compensation expense, and
approximately $0.9 million to increase the insurance reserve.
Interest
expense
Interest
expense for the six months ended June 28, 2008 increased by approximately $23.5
million over the same period in 2007, primarily due to approximately $27.6
million of interest costs incurred in the second quarter of 2008 related to the
issuance of new debt (approximately $14.0 million deferred financing costs
associated with previous debt, approximately $6.8 million for a prepayment
premium, and approximately $6.8 million of bank amendment fees that was
subsequently retired). Financing costs of approximately $1.1 million were
included in interest expense recorded in the same period in
2007. Interest expense also increased by approximately $4.6 million
due to interest on the initial notes issued June 9, 2008. This increase was
offset by a decrease of approximately $7.6 million due to a lower variable
interest rate on the Company’s previous term loan and the retirement of the term
loan debt effective June 9, 2008.
Interest
expense for the year ended December 31, 2007 increased by approximately
$26.0 million or 37.0% as a result of increased borrowings used to finance the
Alenco acquisition in February 2006 and the AHE acquisition in
October 2006.
Interest
expense for the year ended December 31, 2006 increased by approximately
$15.1 million or 27.4%, primarily as a result of increased borrowings used to
finance the Alenco acquisition in February 2006 and the AHE acquisition in
October 2006.
Other
expense
Expenses
recognized as “other expense” during 2007 were third-party charges associated
with the Company’s bank refinancing costs. Expenses recognized as
“other expense” during 2006 were third-party charges associated with business
combination financing costs.
Income
taxes
The
income tax provision (benefit) for the six months ended June 28, 2008 changed by
approximately $28.7 million from a tax provision in 2007 to a tax benefit in
2008, primarily as a result of the larger pre-tax loss for the 2008 period
versus the 2007 period. The benefit for the first quarter of 2008
included approximately $0.7 million of adjustments to correct for recent
legislative changes in Canada that impact the future settlement of deferred
taxes. Excluding these adjustments, our effective tax rate for the
quarter was 38.98%, which is consistent with our expectations for the full
fiscal year.
Income
tax expense for the year ended December 31, 2007 increased from the prior
year by approximately $0.5 million, primarily as a result of higher state tax
rates as a result of the inability to utilize losses as well as the Company was
not able to realize the benefit from domestic production activity. In
addition, the Company’s 2007 tax expense included an approximate $0.6 million
tax benefit to correct for rates used in prior periods for the proper graduated
rate structures. These errors were not considered to be material to
current or prior periods.
Income
tax expense for the year ended December 31, 2006 decreased from the prior
year by approximately $9.1 million, primarily as a result of lower pretax
earnings in 2006 as compared to 2005, in addition to a reduction in the
effective tax rate to approximately 37.6% for the year ended December 31,
2006, as compared to approximately 38.5% for the year ended December 31,
2005.
Liquidity
and Capital Resources
Our
primary cash needs are for working capital, capital expenditures and debt
service. We have historically financed these cash requirements
through internally generated cash flow and funds borrowed under our credit
facilities.
Cash
provided by (used in) operating activities
Net cash
used in operating activities for the first six months of 2008 and 2007 was
approximately $65.1 million and $13.4 million, respectively. The
increase in net cash used in operating activities for the 2008 period compared
to the 2007 period was primarily driven by a higher net loss.
Net cash
provided by operating activities for the year ended December 31, 2007 was
approximately $82.5 million. Net cash provided by operating
activities for the years ended December 31, 2006 and 2005 was approximately
$57.9 million and $63.9 million, respectively. The increase in net
cash provided by operating activities for 2007 as compared to 2006 was primarily
driven by higher net income before adjustments for depreciation and amortization
which were higher in 2007 as compared to 2006. The decrease in net
cash provided by operating activities for the 2006 period compared to the 2005
period was primarily driven by decreased earnings.
Cash
provided by (used in) investing activities
Net cash
provided by (used in) investing activities for the first six months of 2008 and
2007 was approximately $1.6 million and ($7.4) million,
respectively. Net cash provided by investing activities for the 2008
period consisted of approximately $5.8 million from the sale of assets,
partially offset by capital expenditures of approximately $4.7
million. Net cash used for capital expenditures was approximately
$3.7 million for the 2007 period.
Net cash
used in investing activities for the year ended December 31, 2007 was
approximately $56.4 million. Net cash used in investing activities
for the year ended December 31, 2006 and 2005 was approximately $432.2
million and $14.4 million, respectively. The cash used in investing
activities for the year ended December 31, 2007 was primarily used to fund
the acquisition of Pacific Windows. The cash used in investing
activities for the year ended December 31, 2006 was primarily used to fund
the Alenco and AHE acquisitions. The cash used in investing
activities for the year ended December 31, 2005 was primarily used for
capital expenditures.
Cash
provided by (used in) financing activities
Net cash
provided by financing activities for the first six months of 2008 and 2007 was
approximately $59.9 million and $11.5 million, respectively.
Net cash
used in financing activities for the year ended December 31, 2007 was
approximately $15.1 million. Net cash provided by financing
activities for the year ended December 31, 2006 was approximately $405.4
million. Net cash used in financing activities for the year ended
December 31, 2005 was approximately $34.3 million. The cash used
in financing activities for the year ended December 31, 2007 was primarily
used to pay down debt. The increase in net cash provided by financing
activities for the year ended December 31, 2006 was driven by the cash
provided from the financing agreement associated with the Alenco and AHE
acquisitions. The cash used in financing activities for the year
ended December 31, 2005 was primarily used to pay down debt.
Long-term
debt
We used
the net proceeds of the issuance of the initial notes to repay all of the
outstanding indebtedness under our existing credit
facilities. Concurrent with the closing of the issuance of the
initial notes, we entered into a new senior secured asset-based revolving credit
facility, which we refer to as the ABL Facility.
Senior secured
notes. The initial notes and the exchange notes offered hereby
will mature on June 15, 2013 and bear interest at the rate of 11.75% per
annum. The notes are secured as described in “Description of the
Notes.” The indenture contains customary restrictive
covenants. See “Description of the Notes—Certain
Covenants.”
Senior subordinated
notes. Concurrently with the acquisition of Ply Gem Industries
on February 12, 2004, Ply Gem Industries issued $225.0 million aggregate
principal amount of our senior subordinated notes, which are guaranteed by Ply
Gem Holdings and the domestic subsidiaries of Ply Gem
Industries. Subsequently, in August 2004, in connection with the
acquisition of MW, Ply Gem Industries issued an additional $135.0 million of
senior subordinated notes, which are guaranteed by Ply Gem Holdings and the
domestic subsidiaries of Ply Gem Industries, including MWM Holding and its
subsidiaries.
ABL Facility. Concurrently
with the closing of the issuance of the initial notes on June 9, 2008, we
entered into the ABL Facility, which initially provided for revolving credit
financing of up to $135.0 million, and was subsequently increased to $150.0
million as of August 14, 2008, subject to borrowing base availability, with a
maturity of five years, including sub-facilities for letters of credit,
swingline loans and borrowings in Canadian dollars and United States dollars by
CWD. However, the ABL Facility will mature on October 15,
2011 if Ply Gem Industries’ senior subordinated notes are not refinanced by such
date. In addition, the ABL Facility provides that the revolving
commitments may be further increased to $200.0 million, subject to certain terms
and conditions.
All
obligations under the ABL Facility are fully and unconditionally guaranteed by
substantially all of Ply Gem Industries’ existing and future, direct and
indirect, wholly-owned domestic subsidiaries, and in any event by all
subsidiaries that guarantee the notes. 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’
material owned real property and equipment and all assets that secure the notes
on a first-priority basis.
The
obligations of CWD, which is a borrower under the Canadian sub-facility under
the ABL Facility, will be secured by a first-priority security interest in
substantially all of the assets of such Canadian subsidiary and by Ply Gem
Industries’ and the guarantors’ assets on the same basis as borrowings by Ply
Gem Industries are secured under the ABL Facility, plus additional mortgages in
Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity
interests of CWD pledged only to secure the Canadian sub-facility.
As of
June 28, 2008, $40.0 million was outstanding under our ABL Facility and
approximately $3.9 million of letters of credit were issued under the ABL
Facility, and based on our calculation as of that date, $31.1 million was
available for borrowing under the borrowing base of this
facility. See Description of Other Indebtedness—Senior Secured
Asset-Based Revolving Credit Facility.”
The
Company’s previous senior facilities with a syndicate of financial institutions
and institutional lenders provided for senior secured financing of up to
approximately $762.1 million, originally consisting of approximately $687.1
million of term loan facilities maturing in August 2011 and a $75.0 million
revolving loan facility, including a letter of credit subfacility, maturing in
February 2009. These
credit facilities imposed certain restrictions on Ply Gem Industries, including
a requirement to maintain a minimum Leverage Ratio of EBITDA (adjusted for
certain items as allowed) to Net Debt (as defined in the credit
facility). In April 2008, the Company revised its 2008 forecast in
response to market wide increases in raw material prices and fuel costs, as well
as continued declines in both the residential new construction and
repair/remodeling markets. Under the revised forecast, the Company
did not expect to be able to comply with the required Leverage Ratio required
for fiscal quarters in 2008 following March 29, 2008. The failure to
comply with this covenant would have caused an event of default.On May
23, 2008, the Company entered into an amendment of the fifth amended and
restated credit agreement which consisted of changes to certain debt covenant
ratios. The amendment also increased the interest rate on the term
loan and extended the maturity of the revolving credit facility from February
12, 2009 to August 12, 2010. On May 23, 2008, Ply Gem received from
CI Capital Partners LLC a $30.0 million cash equity contribution as a condition
to the credit facility amendment. The outstanding indebtedness under
the credit facility was subsequently paid off on June 9, 2008 with the proceeds
from the Senior Secured Notes offering.
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.
Because
of the inherent seasonality in our business and the resulting working capital
requirements, our liquidity position within a given year will
fluctuate. The seasonal effect that creates greatest capital needs is
experienced during the first nine months of the year and we anticipate the need
to borrow funds under ABL Facility to support this
requirement. However, we anticipate that the funds generated by
operations and funds available under that credit facility will be adequate to
finance our ongoing operational cash flow needs, capital expenditures, debt
service obligations, management incentive expenses, fees payable under the
General Advisory and other contractual obligations for the foreseeable
future.
Our
ability to meet our debt service obligations and reduce our total debt will
depend upon our ability to generate cash in the future which, in turn, will be
subject to general economic, financial, business, competitive, legislative,
regulatory and other conditions, many of which are beyond our
control. We may not be able to generate sufficient cash flow from
operations and future borrowings may not be available to us under our amended
revolving credit facility in an amount sufficient to enable us to repay our
debt, including the notes, or to fund our other liquidity needs. If
our future cash flow from operations and other capital resources are
insufficient to pay our obligations as they mature or to fund our liquidity
needs, we may be forced to reduce or delay our business activities and capital
expenditures, sell assets, obtain additional debt or equity capital or
restructure or refinance all or a portion of our debt, including the notes, on
or before maturity. We may not be able to accomplish any of these
alternatives on a timely basis or on satisfactory terms, if at
all. In addition, the terms of our existing and future indebtedness,
including the notes and our ABL Facility, may limit our ability to pursue any of
these alternatives. See “Risk Factors—Risks Related to Our Substantial
Indebtedness and the Notes—Our substantial debt could negatively impact our
business, prevent us from fulfilling our outstanding debt obligations and
adversely affect our financial condition.” Some risks that could
adversely affect our ability to meet our debt service obligations include, but
are not limited to, intense domestic and foreign competition in our industry,
general domestic and international economic conditions, changes in currency
exchange rates, interest and inflation rates, the financial condition or our
customers and the operating performance of joint ventures, alliances and other
equity investments.
Contractual
Obligations
The
following table summarizes our contractual cash obligations under financing
arrangements and lease commitments as of June 28, 2008, including interest
amounts, as adjusted to give effect to the offering of the notes and the
repayment of amounts outstanding under our existing credit
facilities. Except for the notes offered hereby and the senior
subordinated notes, the interest rates are generally variable and have been
presented at the current rates. Actual rates for future periods may
differ from those presented here.
|
More
Than
|
||||||||||||||||||||
|
3
Years Yet
|
||||||||||||||||||||
|
Total
|
Less
Than
|
Less
Than
|
5
Years
|
|||||||||||||||||
|
Amount
|
1 Year
|
1 - 3 Years
|
5 Years
|
or More
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Long-term
debt (1)
|
$ | 1,100,000 | $ | - | $ | - | $ | 1,100,000 | $ | - | ||||||||||
|
Interest
payments (2)
|
543,246 | 116,829 | 233,658 | 192,759 | - | |||||||||||||||
|
Non-cancelable
lease commitments (3)
|
163,488 | 21,677 | 35,099 | 27,012 | 79,700 | |||||||||||||||
|
Purchase
obligations (4)
|
81,760 | 81,760 | - | - | - | |||||||||||||||
|
Other
long-term liabilities (5)
|
12,500 | 1,250 | 2,500 | 2,500 | 6,250 | |||||||||||||||
| $ | 1,900,994 | $ | 221,516 | $ | 271,258 | $ | 1,322,271 | $ | 85,950 | |||||||||||
|
(1)
|
Long-term
debt is shown before discount (premium), and consists of the Company’s
senior secured notes, senior subordinated notes, and 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 at
June 28, 2008.
|
|
(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 and capital
expenditures.
|
|
(5)
|
Other
long term liabilities include pension obligations which are estimated
based on the Company’s 2008 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 have
been excluded from the table above.
|
As
discussed in “Certain Relationships and Related Transactions,” the Company will
pay an annual fee to an affiliate of Caxton-Iseman each year based on 2% of
EBITDA. No amount for this fee has been included in the above
table.
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.
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
In
February 2008, the FASB issued FASB Staff Position 157-2 which defers the
effective date of SFAS 157 “Fair Value Measurements,” for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in an entity’s financial statements on a recurring bases (at least
annually). The Company will be required to adopt SFAS 157 for these
nonfinancial assets and nonfinancial liabilities as of January 1,
2009. The Company does not believe that the adoption of the SFAS 157
deferral provision will have a material effect on its results of operations or
financial position.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R).” This standard requires
employers to recognize the underfunded or overfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in the funded status in the year in which the
changes occur through accumulated other comprehensive income, which is a
component of stockholders’ equity. SFAS No. 158 does not change
the amount of actuarially determined expense that is recorded in the
consolidated statement of income. The new reporting requirements and
related new footnote disclosure rules of SFAS No. 158 are effective for our
December 31, 2007 financial statements. Additionally, SFAS
No. 158 requires employers to measure the funded status of a plan as of the
date of its year-end statement of financial position. For our
financial statements as of December 31, 2008 we will change our
September 30 measurement date for our plans’ assets and obligations to
comply with this requirement.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.” SFAS No. 159
permits entities to choose to measure certain financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in
earnings. SFAS No. 159 is effective for our fiscal year
beginning January 1, 2008. However, the Company did not elect
the option to report any of the selected financial assets and liabilities at
fair value.
In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations.” This Statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date be measured at their fair values as of that
date. An acquirer is required to recognize assets or liabilities
arising from all other contingencies (contractual contingencies) as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6, Elements of Financial
Statements. Any acquisition related costs are to be expensed instead
of capitalized. The impact to the company from the adoption of SFAS
141R in 2009 will depend on acquisitions at the time. The provisions
of SFAS No. 141(R) are effective for the Company’s fiscal year beginning
January 1, 2009, and are to be applied prospectively.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements.” This standard establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. The Statement also
establishes reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the non-controlling owners. The provisions of SFAS
No. 160 are effective for the Company’s fiscal year beginning
January 1, 2009, and are to be applied prospectively. The
Company is currently evaluating the impact that the implementation of SFAS
No. 160 will have on its financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This standard reorganizes the GAAP hierarchy
in order to improve financial reporting by providing a consistent framework for
determining what accounting principles should be used when preparing U.S. GAAP
financial statements. SFAS 162 shall be effective 60 days after the
SEC’s approval of the Public Company Accounting Oversight Board’s amendments to
Interim Auditing Standard, AU Section 411, “The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles”. Management is
currently evaluating the impact, if any, this new standard may have on our
balance sheet, results of operations, or cash flows.
Quantitative
and Qualitative Disclosures about Market Risk
Interest
rate risk
Our
principal interest rate exposure relates to the loans outstanding under our ABL
Facility, which provides for borrowings of up to $150.0 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 $0.4 million per year. In the future we may enter into
interest rate swaps, involving exchange of floating or 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. For the six
month period ended June 28, 2008, the net impact of foreign currency changes to
the Company’s results of operations was a loss of $0.5 million. The
impact of foreign currency changes related to translation resulted in a decrease
in stockholder’s equity of approximately $0.6 million for the six months ended
June 28, 2008. In 2007, the net impact of foreign currency changes to
the Company’s results of operations was a gain of $4.0 million. The
impact of foreign currency changes related to translation resulted in an
increase in stockholder’s equity of approximately $5.7 million at
December 31, 2007. 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. At June 28, 2008, 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.
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, which could expose us to potential higher costs in years with high
inflation.
BUSINESS
Company
Overview
We are a
leading manufacturer of residential exterior building products in North
America. We offer a comprehensive product line of vinyl siding and
skirting, vinyl windows and doors, and vinyl and composite fencing and railing
that serves both the home repair and remodeling and the new home construction
sectors in all 50 states and Western Canada. We also manufacture
vinyl and aluminum soffit and siding accessories, aluminum trim coil, aluminum,
wood and aluminum and vinyl clad windows and steel and fiberglass doors,
enabling us to bundle complementary and color-matched products and accessories
with our core vinyl products. We have two reportable segments:
(i) siding, fencing and railing and (ii) windows and
doors. For periods prior to January 1, 2008, the siding, fencing and
railing segment also included decking products, which were phased out due to
unprofitability.
We market
our products using several leading brands across multiple price points, which
enables us to diversify our sales across distribution channels with minimal
channel conflict and reach the greatest number of end customers. We believe we
are able to compete on favorable terms and conditions and maintain a strong
customer base as a result of our extensive distribution coverage, high quality,
innovative and comprehensive product line, proprietary vendor managed inventory
program and production efficiency.
Additional
information concerning our business is set forth in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this
prospectus.
History
Ply Gem
Holdings was incorporated on January 23, 2004 for the purpose of acquiring
Ply Gem Industries from Nortek. Nortek was at the time a wholly-owned
subsidiary of Nortek Holdings, Inc. The Ply Gem acquisition was
completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply
Gem Holdings, pursuant to the terms of a stock purchase agreement among Ply Gem
Investment Holdings, Nortek and WDS LLC. Prior to February 12,
2004, 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. Ply Gem Holdings, a Delaware corporation, is a wholly-owned
subsidiary of Ply Gem Investment Holdings, a Delaware corporation controlled by
an affiliate of Caxton-Iseman Capital LLC. Prior to the Ply Gem
acquisition, Ply Gem Industries was known as the Windows, Doors and Siding
division of Nortek.
On
August 27, 2004, Ply Gem Industries acquired all of the outstanding shares
of capital stock of MWM Holding, in accordance with a stock purchase agreement
entered into among Ply Gem Industries, MWM Holding and certain selling
stockholders. MWM Holding, a Delaware corporation, is a wholly-owned
subsidiary of Ply Gem Industries. MWM Holding is the sole owner of
all of the outstanding shares of capital stock of MW Manufacturers, Inc.
(“MW”). Prior to the MW acquisition, MWM Holding was owned by
Investcorp SA and its affiliates and members of MW management.
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. 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.
On
February 24, 2006, Ply Gem completed the Alenco acquisition in accordance
with a securities purchase agreement entered into among Ply Gem Industries, all
of the direct and indirect stockholders, warrant holders and stock option
holders of AWC and FNL Management Corp., as their representative on
February 6, 2006. Pursuant to the securities purchase agreement,
Ply Gem Industries 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 held by
certain members of the senior management of Alenco that were contributed
separately to Ply Gem Prime Holdings, the new parent company of Ply Gem
Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime
Holdings). Immediately following the completion of the Alenco
acquisition, AWC became a wholly-owned subsidiary of Ply Gem
Industries. The Alenco acquisition directly supports the Company’s
national window strategy and today operates under common leadership with our
other U.S. Window businesses.
On
October 31, 2006, Ply Gem completed the AHE acquisition in accordance with
a stock purchase agreement entered into among Ply Gem Industries, Alcoa
Securities Corporation and Alcoa Inc. on September 22,
2006. Pursuant to the stock purchase agreement, Ply Gem Industries
purchased all of the issued and outstanding shares of common stock of AHE so
that, immediately following the completion of such purchase, AHE became a
wholly-owned subsidiary of Ply Gem Industries. The purchase price
paid by Ply Gem was approximately $305.0 million in cash. The AHE
acquisition did not include an additional investment by
management. AHE is a leading manufacturer of vinyl siding, aluminum
siding, injection molded shutters and vinyl, aluminum and injection molded
accessories. As a result of the AHE acquisition, AHE became part of
our Siding, Fencing, Railing and Decking Segment and operates under common
leadership with our existing Siding business.
On
September 30, 2007, Ply Gem Industries completed the acquisition of the
vinyl window and patio door business of Certain Teed Corporation through a stock
acquisition. On the acquisition date, the Company changed the name of
the acquired business to Ply Gem Pacific Windows Corporation. The
acquired vinyl window business is a leading manufacturer of premium vinyl
windows and patio doors and produces windows for the residential new
construction and remodeling markets and produces and sells window lineals to
licensed window fabricators in the eastern United States. Pacific
Windows’ vinyl window and patio door business operates three fabrication
facilities which are located in Auburn, WA, Corona, CA, and Sacramento,
CA. The purchase price paid by Ply Gem was approximately $35.0
million in cash. The Pacific Windows acquisition directly supports
the Company’s national window strategy and today Pacific Windows operates under
common leadership with our other U.S. window businesses. During the
first quarter of 2008, Ply Gem sold certain assets that were acquired in the
Pacific Windows acquisition that had been used to produce and sell window
lineals to licensed fabricators in the eastern United States.
Our
Competitive Strengths
We
believe we are well-positioned in our industry and that our key competitive
strengths are:
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Leading
Sector Positions. We maintain leadership positions across the
siding, fencing, railing, windows and door market sectors. We believe we
are the No. 2 supplier of vinyl siding and designer accents, the
No. 1 supplier of related aluminum accessories and a leader and
innovator in the vinyl fencing and railing products. Additionally, we
believe we are among the top three producers of vinyl windows in North
America. We believe we hold the No. 1 position in the manufactured
housing channel and hold a strong position in both the retail and one-step
distribution channels. We believe these market leading positions enable us
to outperform the industry in unit volumes, increase our market share,
launch new products and maintain
profitability.
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Diverse,
High-Quality Product Portfolio. We offer a comprehensive range of
exterior building products including vinyl siding and skirting, vinyl
windows and patio doors and vinyl fencing and railing among others.
Particularly, our window product platform offers a wide spectrum of
aluminum, vinyl and wood clad windows at multiple price points. The
breadth of our product offering meets many of the needs of our diverse
customer base and allows us to reduce the potential impact of a decline in
demand that might result from reliance on a single
product.
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Strong
Brand Equity. Our brands are well-recognized for innovation
and quality in the building trade, and we believe that they are a
distinguishing factor in customer selection. We sell our high-quality
products under several brand names: MW, Patriot, Alenco, Great
Lakes, Insulate, Mastic, Alcoa Home Exteriors,
Variform, Georgia-Pacific, Napco, Kroy and CWD, among others. We
believe there are significant opportunities to leverage our existing
brands by targeting cross-selling
opportunities.
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Multi-Channel
Distribution Network and Diversified Sales Base. We
have a multi-channel distribution network in the U.S. and Western
Canada that serves both the home repair and remodeling and new home
construction sectors, which exhibit different, but often
counter-balancing, demand characteristics. Our multiple brand and
multi-channel distribution strategy has increased our sales and
penetration within these sectors. Our customer base includes distributors,
retail home centers, lumberyards, remodeling dealers and builders. We
believe our strategy enables us to minimize channel conflict, reduce our
reliance on any one channel and reach the greatest number of end
customers, and provides us with greater ability to sustain our financial
performance through economic
fluctuations.
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Efficient
Manufacturing. We are a low-cost manufacturer of high-quality
vinyl siding, windows and patio doors. We continue to achieve
manufacturing efficiencies across our product categories through vertical
integration, strategic sourcing, process-based reductions in material,
production and warranty costs, and control of selling, general and
administrative expense. We are committed to continuous improvement across
product categories and have made approximately $55.1 million in
capital expenditures, including upgrades to equipment, facilities and
technology, over the three years ended December 31, 2007. We believe
our low cost production allows us to maintain attractive operating margins
while offering a compelling value proposition to our
customers.
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Proven
Ability to Realize Cost Savings. We continue to demonstrate
our ability to right size our manufacturing capacity to the scale of the
market including closing two vinyl siding plants and one window plant
within the past 24 months, which generated savings of over
$16.0 million. Additionally, we have reduced our headcount by
approximately 30% since 2006 and have identified additional cost saving
initiatives to take place in 2008. We have also been able to realize
significant synergies and cost savings from the acquisitions of MW, Alenco
and AHE’s siding business.
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Large
Polyvinyl Chloride Resin Purchaser. We are one of the largest
procurers of polyvinyl chloride resin (PVC) in North America. As such, we
are able to capitalize on our established relationships with key suppliers
as a result of our purchasing scale and to strategically manage our
sourcing to secure the best available prices, terms and input availability
through various cycles. We believe our position helped us secure supply
during the resin shortage caused by Hurricane Katrina in
2005.
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Strong
Operating Cash Flow. We have historically generated strong
operating cash flow before debt service due to (i) our efficient
manufacturing processes, (ii) our ability to pass increases in raw
materials and freight costs through to our customers, (iii) economies
of scale, (iv) low maintenance capital expenditures and
(v) modest working capital
needs.
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Strong
Management Team with Significant Ownership. We are led by an
experienced and committed senior management team with an average of over
approximately 20 years of relevant industry experience. We have
successfully increased our share of sales by volume within the residential
exterior building products industry and have continuously improved our
manufacturing operations to develop a low-cost manufacturing platform. As
of June 28, 2008, members of our management held stock and stock awards
representing approximately 15% of the shares of common stock of Ply Gem
Prime Holdings, Inc., the sole stockholder of Ply Gem Investment Holdings,
Inc., our sole stockholder.
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Business
Strategy
We seek
to distinguish ourselves from other manufacturers of residential exterior
building products and to sustain our profitability through the following key
strategies:
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Continued
Market Share Gains. We intend to increase our market share
both in our siding, fencing and railing products in the United States and
in our window and door products by utilizing the breadth of our broad
geographical footprint to serve customers across the United States.
Additionally, our continued investments in product innovation and quality
coupled with strong customer service further enhance our ability to
capture market share in each of our markets. Furthermore, we believe there
is substantial opportunity across our product families to cross-sell and
bundle products to further leverage our channel partners and exclusive
industry relationships. We believe our broad geographical footprint allows
us to better serve our customers across the United States and provides a
competitive advantage over some of our
competitors.
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We have
integrated our siding businesses into one operating company and have placed all
of our siding, fencing and railing businesses under common leadership to improve
strategic focus, reduce cost and better serve our customers. We have organized
our United States window businesses under one common leadership team to enhance
our strategic focus. With our extensive manufacturing capabilities, product
breadth and national distribution capabilities, we believe that we can provide
our customers with a cost-effective, single source from which to purchase their
residential exterior building product needs.
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Expand
Brand Coverage and Product Innovation. We intend to leverage
the reputation of our brands for innovation and quality to fill in our
product offerings and price points. In addition, we plan to maximize the
value of our new product innovations and technologies by deploying best
practices and manufacturing techniques across our product categories. Our
vertical integration in producing aluminum windows has positioned us to
introduce a new aluminum and wood clad window. As of June 28, 2008, we
employed 39 research and development professionals dedicated to new
product development, reformulation, product redesign and other
manufacturing and product
improvements.
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Further
Improve Operating Efficiencies. While we have significantly
improved our vinyl siding manufacturing cost structure over the last
several years, we believe that there are further opportunities for
improvement. We have expanded our efforts to vertically integrate certain
raw materials used in window lineal production, including PVC compound, as
well as expanding our in-house window lineal production. In addition, we
implemented manufacturing improvements and best practices across all of
our product categories, including, for example, expansion of our virtual
plant strategy in our vinyl siding facilities and further vertical
integration in our window product lines which will be demonstrated with
the introduction of our new aluminum clad window line in early 2008. We
also plan to optimize product development, sales and marketing, materials
procurement, operations and administrative functions across all of our
product categories. We believe that significant opportunities remain as we
further leverage our buying power across raw materials as well as spending
for non-raw material items by obtaining volume discounts and minimizing
costs. In addition, the integration of our sales and marketing efforts
across our product categories provides an ongoing opportunity to
significantly improve sector
penetration.
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Industry
Overview
Demand
for exterior building products, including siding, fencing and railing, and
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
factors.
Home
Repair and Remodeling
Since the
early 1990’s and through 2006, demand for home repair and remodeling products
remained robust as a result of strong economic growth, low interest rates and
favorable demographic trends. According to the U.S. Census Bureau,
expenditures for maintenance, repairs, and improvements increased from $130.6
billion in 1994 to $142.9 billion in 1999 and $198.5 billion in 2004,
representing a five and ten-year compound annual growth rate of 1.8% and 4.3%,
respectively. Recently however, the ability for home owners 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 banks and other financial institutions. As such,
management believes expenditures for home repair and remodeling products
declined in 2007 from 2006 levels and expects that expenditures for home repair
and remodeling products to decline in 2008 from 2007 levels.
New
Home Construction
New home
construction experienced strong growth from the early 1990s to 2006, with
housing starts having increased at a compound annual growth rate of
3.9%. In 2007, new housing starts declined by 29.6%, according to the
National Association of Home Builders, and are expected to decline further in
2008 by approximately 30.8%.
While the
industry is experiencing declining demand, the long-term economics
for new construction are favorable supported by a favorable interest rate
environment and strong demographic trends, as increasing immigration drives
demand for starter homes, and maturing baby boomers seek second homes and
trade-up properties. According to the Joint Center for Housing
Studies of Harvard University, net new households between 2005 and 2015 is
expected to reach 14.6 million units, as compared to 12.6 million units added
from 1995 - 2005.
Description
of Business
Financial
information about our segments is included in the notes to our consolidated
financial statements included elsewhere in this prospectus.
Siding,
Fencing, Railing and Decking Segment
Products
In our
siding, fencing, railing and decking segment, our principal products include
vinyl siding and skirting, vinyl and aluminum soffit, aluminum trim coil,
J-channels, wide crown molding, window and door trim, F-channels, H-molds,
fascia, undersill trims, outside/inside corner posts, rain removal systems and
injection molded designer accents such as shakes, shingles, scallops, shutters,
vents and mounts. We sell our siding and accessories under our
Variform, Napco, Alcoa Home Exteriors, Mastic and Cellwood brand names and under
the Georgia-Pacific brand name through a private label program. We
also sell our Providence line of vinyl siding and accessories to Lowe’s under
our Durabuilt private label brand name. Our vinyl and vinyl-composite
fencing and railing products are sold under our Kroy, Assurance and Kroy Express
brand names. A summary of our product lines is presented below
according to price point:
Specialty/Super
Premium
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CSL 600
(Variform)
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Nostalgia Series Shakes and
Scallops (Variform)
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Victoria Harbor
(Variform)
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Cedar Select Shakes and
Scallops (Napco)
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American “76” Collection
(Napco)
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Structure EPS (Alcoa
Home Exteriors)
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Cedar Discovery
(Mastic)
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Cedar Dimensions
(Cellwood)
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Rough Sawn Cedar
(Georgia-Pacific)
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New World Scallops
(Georgia-Pacific)
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Somerset
(Georgia-Pacific)
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Board and Batten
(Variform, Napco, Alcoa Home Exteriors, Cellwood, and
Georgia-Pacific)
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Kroy composite railing systems
(Kroy)
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Premium
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Timber Oak Ascent
(Variform)
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Varigrain Preferred
(Variform)
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American Splendor
(Napco)
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Grand Sierra (Alcoa
Home Exteriors)
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Liberty Elite (Alcoa
Home Exteriors)
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Charleston Beaded Collection
(Alcoa Home Exteriors)
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Quest3 Series
(Mastic)
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T-lok Barkwood
(Mastic)
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Dimensions
(Cellwood)
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Dimensions Beaded
(Cellwood)
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Chatham Ridge
(Georgia-Pacific)
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Cedar Lane Select
(Georgia-Pacific)
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Assurance Outdoor Solutions
(Kroy)
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Kroy Express
(Kroy)
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Standard
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Camden Pointe
(Variform)
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Nottingham (Variform)
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Ashton Heights (Variform)
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American Herald
(Napco)
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American Tradition
(Napco)
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Meadowbrook (Alcoa Home
Exteriors)
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Silhouette Classic
(Alcoa Home Exteriors)
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Carvedwood2 Series
(Mastic)
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Progressions
(Cellwood)
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Heritage Hill
(Georgia-Pacific)
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Forest Ridge
(Georgia-Pacific)
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Shadow Ridge
(Georgia-Pacific)
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Castle Ridge
(Georgia-Pacific)
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Kroy Fence and Railing
Products (Kroy)
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Economy
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Contractor’s Choice
(Variform)
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American Comfort
(Napco)
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Providence
(Napco)
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Mill Creek (Alcoa Home
Exteriors)
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Trade-Mark cg (Alcoa
Home Exteriors)
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Brentwood (Mastic)
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Evolutions
(Cellwood)
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Vision Pro
(Georgia-Pacific)
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Manufactured
Housing
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Parkside
(Georgia-Pacific)
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Oakside
(Georgia-Pacific)
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The
breadth of our product lines and our multiple brand and price point strategy
enable us to target multiple distribution channels (wholesale, retail and
manufactured housing) and end sectors (home repair and remodeling and new home
construction), with minimal channel conflict.
Customers and Distribution
We have a
multi-channel distribution network that serves both the home repair and
remodeling and new home construction 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 exceptionally
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 U.S. 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 Lowe’s Home Improvement Centers under [our]
Durabuilt brand name. Our growing customer base of fencing, railing
and decking consists of distributors, retail home centers and
lumberyards.
Our
largest customer, BlueLinx, made up 16.8% of the net sales of our siding,
fencing, railing and decking segment and 10.2% of our consolidated net sales for
the year ended December 31, 2007. For the year ended
December 31, 2006, BlueLinx made up 34.6% of the net sales of our siding,
fencing, railing and decking segment and 16.5% of our consolidated net
sales.
Production and Facilities
Vinyl
siding, skirting, soffit and accessories are manufactured in our Kearney,
Missouri, Martinsburg, West Virginia, Jasper, Tennessee, and Stuarts Draft,
Virginia facilities, while all metal products are produced in our Valencia,
Pennsylvania and Sidney, Ohio facilities. All injection molded
products such as shakes, shingles, scallops, shutters, vents and mounts are
either manufactured in our Gaffney, South Carolina facility or purchased from
outside suppliers. The Company closed the Atlanta, Georgia facility
in the second quarter of 2007 and the Denison, Texas facility in early 2008 due
to excess production capacity. The vinyl and metal 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. We
expect our capital expenditures for our siding, fencing and railing segment in
the near future to remain consistent with our expenditures in past
years.
Raw Materials and
Suppliers
PVC resin
and aluminum are major components in the production of our siding, fencing,
railing and decking 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 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, fencing
and railing products. We believe we are one of the largest
manufacturers of vinyl siding in North America, alongside CertainTeed and
Alside. We believe that we account for approximately 29% of the U.S.
vinyl siding market. Significant growth in vinyl fencing and railing
has attracted many new entrants, and the sector today is very
fragmented. Our fencing and railing competitors include U.S. Fence,
Homeland, Westech, Bufftech, Outdoor Technologies, Royal, Azek and
Trex. We generally compete on product quality, breadth of product
offering, sales and service support. In addition to competition from
other vinyl siding, fencing and railing products, our products face competition
from alternative materials: wood, metal, fiber cement and masonry
siding. Increases in competition from other vinyl exterior building
products manufacturers and alternative building materials could cause us to lose
customers and lead to decreases in net sales.
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 quarter. 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 railing segment had a backlog of approximately $13.5 million
at June 28, 2008. We expect to fill 100% of the orders during
2008.
Windows
and Doors Segment
Products
In our
windows and doors segment, our principal products include vinyl, aluminum and
wood windows and patio doors, as well as steel and fiberglass doors that serve
both new home construction and the repair and remodeling sectors in the United
States and Western Canada. Our windows and doors segment includes MW,
Great Lakes, Alenco, Pacific Windows, and CWD subsidiaries. We sell
our windows and doors under our MW, Patriot, Twin Seal, Alenco, Builders View,
Great Lakes, Ply Gem, Uniframe, Grandview, Seabrooke, Bayshore, Napco,
CertainTeed, Home Craftsman, and CWD brand names. A summary of our
product lines is presented below according to price point:
Specialty/Super
Premium
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Uniframe (Great
Lakes)
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Mira
(MW)
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Premium
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Freedom
(MW)
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Ply Gem Lifestyles
(Great Lakes)
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Great Lakes Seabrooke
(Great Lakes)
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Grandview 4000 & 5000
(Great Lakes)
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Napco 3500 (Great
Lakes)
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MW 1400 (Great
Lakes)
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Ambassador
(CWD)
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Regency
(CWD)
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Bryn Mawr II
(Pacific Windows)
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Somerton II
(Pacific Windows)
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New Castle XT (Pacific
Windows)
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Standard
|
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Jefferson
(MW)
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Classic
(MW)
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TwinSeal
(MW)
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Bayshore (Great
Lakes)
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Grandview 3000 (Great
Lakes)
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MW 1300 (Great
Lakes)
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Napco 2500 (Great
Lakes)
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Premier
(CWD)
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Diplomat
(CWD)
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Envoy
(CWD)
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Insulate (Pacific
Windows)
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New Castle II
(Pacific Windows)
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Economy
|
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Consul
(CWD)
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Patriot
(MW)
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Alenco
|
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Builders View
(Alenco)
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The
breadth of our product lines and our multiple brand and price point strategy
enable us to target all areas of the sectors, including multiple distribution
channels (wholesale, retail and builder direct) and end sectors (home repair and
remodeling and new home construction), with minimal channel
conflict.
Customers and Distribution
We have a
multi-channel distribution network that serves both the home repair and
remodeling and new home construction 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.
Our US
Window group operates under one leadership team. These window and
door product lines are sold for use in new home construction and in home repair
and remodeling through a highly diversified customer base, which includes, for
our U.S. new construction product lines, independent building material dealers,
regional/national lumberyard chains, builder direct/OEMs, and retail home
centers. New construction windows leverages a network of vertically
integrated production and distribution facilities located in Virginia,
New Jersey, Mississippi, North Carolina, Georgia, Texas, California,
Washington and Arizona. Our repair and remodeling windows products
are primarily sold through dealers and distributors and are manufactured in
Ohio, Texas, California and Washington. Dealers typically market
directly to homeowners or contractors in connection with remodeling requirements
while distributors concentrate on local independent retailers. In
Canada, sales of CWD product lines in the new construction market are
predominantly made through direct sales to builders and contractors, while sales
in the renovation market are made primarily through retail
lumberyards. CWD products are distributed through eight distribution
centers.
Our three
largest customers, NV Ryan, 84 Lumber, and Builders FirstSource represented
7.3%, 4.8% and 4.4% of the sales of our windows and doors segment in 2007,
respectively.
Production and Facilities
Our
windows and doors 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 addition, beginning in 2003, MW significantly lowered
its manufacturing cost basis by expanding its existing in-house capacity to
extrude vinyl lineals used in the production of windows. During 2003
and 2004, MW purchased six new lineal extruders which more than doubled its
previous lineal production capacity. In 2005 and 2006, ten additional
extruders were added to support organic growth and over 90% of the vinyl needs
of Great Lakes. Leveraging our PVC resin blending expertise, 2006
also saw the addition of a new PVC resin blend facility to the already
successful lineal production facility. This successful venture not
only delivered significant cost savings but also allowed us to further refine
and improve our compound formulation and quality. Alenco vinyl
profiles were integrated in 2007. In addition, our vertical
integration allowed us to produce the vinyl window profiles for our Alenco
products rather than purchasing them from outside suppliers, which allowed us to
realize cost savings.
From a
capacity perspective, all of our facilities have the ability to increase
capacity in a cost effective manner by expanding production
shifts. Ongoing capital investments will focus upon new product
development, expanding lineal production capacity, and equipment maintenance and
improvement.
Raw Materials and
Suppliers
PVC
compound, wood, aluminum, and glass are major components in the production of
our window and door products. Historically changes in PVC compound
and wood 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. As mentioned above, the
PVC resin compound that is used in window lineal production is now produced on
site. The leveraging of our PVC resin buying power and the expansion
of PVC resin compounding capabilities has begun to benefit all of our domestic
window companies.
MW, Great
Lakes, Pacific Windows, and CWD have significantly consolidated glass purchases
to take advantage of strategic sourcing savings opportunities.
Competition
The
window and patio door sector remains fragmented, comprised primarily of local
and regional manufacturers. Our competitors include MI Home Products,
Andersen Windows, Jeld-Wen Windows & Doors, Simonton Windows (Fortune
Brands), Milgard Manufacturing, Inc. (Masco Corp.) and Atrium. We
generally compete on service, product performance, sales and support and our
products are competitively priced.
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 quarter. 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 $30.1 million at
June 28, 2008. We expect to fill 100% of the orders during
2008.
Environmental
and Other Regulatory Matters
We are
subject to Canadian and U.S. federal, state, provincial and local environmental
laws and regulations that relate to the presence of hazardous materials,
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 environmental
regulators. We believe that our current operations are in substantial
compliance with all applicable environmental laws and that we maintain all
material permits required to operate our business.
Based on
available 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 these or newly discovered matters or any
inability to enforce available indemnification rights we have against any third
parties, including Nortek under the stock purchase agreement governing the Ply
Gem acquisition and Alcan Aluminum Corporation (an indemnity we received when we
purchased our York, Nebraska facility from Alcan Aluminum Corporation in 1998),
will not result in material costs.
Under the
stock purchase agreement governing the MW acquisition, the sellers agreed to
indemnify us for the first $250,000 in costs of compliance with the
New Jersey Industrial Site Recovery Act at an MW facility in Hammonton,
New Jersey and for 75% of any such costs between $250,000 and $5.5
million. MW’s Rocky Mount, Virginia property is subject to an
environmental investigation pursuant to the Virginia Voluntary Remediation
Program, relating to contamination associated with an underground storage tank
formerly located at the Rocky Mount, VA property. Liability for the
underground storage tank contaimination and related investigation 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, we are
similarly indemnified by U.S. Industries, Inc., which is currently working with
the Virginia Department of Environmental Quality in its continuing efforts under
the Voluntary Remediation Program.
We
voluntarily comply with the Vinyl Siding Institute (“VSI”) Certification Program
with respect to our vinyl siding and accessories. Prior to 1998,
there was no commonly-adopted industry certification process for vinyl siding
products. Uniform minimum standards were available, but uniform
compliance was not assured. In 1998, the VSI, under the leadership of
our former President and Chief Executive Officer, Lee Meyer, at that time the
Chairman of the VSI, instituted a new industry-wide program to assure compliance
with minimum product standards. John Wayne, who is the President of
our vinyl siding group, was the Chairman of the VSI during 2007. All
major vinyl siding manufacturers, representing over 95% of all products, now
comply with these guidelines.
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. ATI
initially inspects all qualifying products for compliance and inspects plants to
assure effective quality control programs. In addition, compliance
with advertised specifications is verified. All manufacturing plants
are inspected bi-annually during unannounced visits to monitor
compliance. Upon certification, products are added to the official
VSI list of certified products and are eligible to bear the official VSI
certification logo.
During
2007, Ply Gem spent approximately $2.8 million to purchase and install a new
thermal oxidizer on the paint line at our Sidney, Ohio metal accessory
production facility. This expenditure was made to ensure compliance
with EPA regulations at this facility.
Employees
As of
June 28, 2008, we had approximately 5,569 full-time employees worldwide, of whom
approximately 4,967 were in the United States and approximately 602 were in
Canada. Employees at our Canadian plant, our Valencia, Pennsylvania
plant, and our Bryan, Texas plant are currently our only employees with whom we
have a collective bargaining agreement.
|
·
|
Approximately
6.7% 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 that expires on
December 31, 2009.
|
|
·
|
Approximately
0.8% of our total employees are represented by the United Steelworkers of
America, AFL-CIO-CLC, pursuant to a collective bargaining agreement with
certain of our Valencia, PA employees, that expires on December 1,
2011.
|
|
·
|
Approximately
5.4% of our total employees are represented by the International Chemical
Workers Union Council, pursuant to a collective bargaining agreement with
certain of our Alenco employees, that expires on December 4,
2010.
|
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 six months ended June
28, 2008 consists of:
|
·
|
$549.8
million from United States
customers
|
|
·
|
$42.5
million from Canadian customers
|
|
·
|
$5.4
million from all other foreign
customers
|
Revenue
from external customers for the year 2007 consists of:
|
·
|
$1,269.8
million from United States
customers
|
|
·
|
$89.3
million from Canadian customers
|
|
·
|
$4.4
million from all other foreign
customers
|
Revenue
from external customers for the year 2006 consists of:
|
·
|
$981.2
million from United States
customers
|
|
·
|
$68.3
million from Canadian customers
|
|
·
|
$5.0
million from all other foreign
customers
|
Revenue
from external customers for the year 2005 consists of:
|
·
|
$775.8
million from United States
customers
|
|
·
|
$58.2
million from Canadian customers
|
|
·
|
$4.9
million from all other foreign
customers
|
At
June 28, 2008, long-lived assets totaled approximately $ 50.1 million
in Canada and $ 1,217.3 million in the United States. At
December 31, 2007, 2006 and 2005, long-lived assets totaled approximately
$51.2 million, $44.2 million, and $43.6 million, respectively, in Canada and
$1,240.0 million, $1,253.6 million, and $835.9 million, respectively, in the
United States. We are exposed to risks inherent in any foreign
operation, including foreign exchange rate fluctuations.
Trademarks
and Patents
We rely
on patent, trademark, trade secret and other intellectual property law and
protective measures to protect our proprietary rights. We have a
significant number of trademarks registered in the United States covering our
material brands. To date, we have been granted 25 patents in the
United States and abroad and have a significant number of U.S. and international
patent applications pending.
Although
we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of that intellectual
property is individually critical to our current operations. Taken as
a whole, however, we believe our intellectual property rights are
significant. We cannot assure you that our intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology. In addition, the laws of many foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. From time to time, third parties have or may assert
infringement claims against us or against our customers in connection with the
use of our products.
Properties
Our
corporate headquarters is located in Cary, North Carolina. We
own and lease several additional properties in the United States and
Canada. We operate the following facilities as
indicated.
|
Location
|
Square Footage
|
Facility Use
|
Lease
Expiration Date
|
||||
|
Siding,
Fencing, Railing and Decking Segment
|
|||||||
|
Jasper,
TN
|
270,000
|
Manufacturing
and Administration
|
NA
|
||||
|
Fair
Bluff, NC
(1)
|
200,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Kearney,
MO
(1)
|
175,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Independence,
MO
|
105,000
|
Warehouse
|
01/31/2010
|
||||
|
Valencia,
PA
(1)
|
175,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Martinsburg,
WV
(1)
|
163,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Martinsburg,
WV
|
124,000
|
Warehouse
|
01/14/2011
|
||||
|
York,
NE
(1)
|
76,000
|
Manufacturing
|
09/30/2024
|
||||
|
Cary,
NC
|
7,000
|
Administration
|
12/31/2014
|
||||
|
Stuarts
Draft,
VA
|
257,000
|
Manufacturing
and Administration
|
NA
|
||||
|
Sidney,
OH
|
819,000
|
Manufacturing
and Administration
|
NA
|
||||
|
Atlanta,
GA
|
151,000
|
Warehouse
|
08/31/2008
|
||||
|
Atlanta,
GA
|
78,000
|
Warehouse
|
08/31/2008
|
||||
|
Staunton,
VA
|
145,000
|
Warehouse
|
11/30/2008
|
||||
|
Harrisburg,
VA
|
268,000
|
Warehouse
|
03/15/2015
|
||||
|
Gaffney,
SC
|
27,000
|
Warehouse
|
Month-to-month
|
||||
|
Kansas
City,
MO
|
36,000
|
Administration
|
12/31/2017
|
||||
|
Windows
and Doors Segment
|
|||||||
|
Calgary,
AB, Canada (1)
|
301,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Walbridge,
OH
(1)
|
250,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Walbridge,
OH
|
30,000
|
Warehouse
|
11/30/2008
|
||||
|
Rocky
Mount, VA
(1)
|
720,000
|
Manufacturing
and Administration
|
09/30/2024
|
||||
|
Rocky
Mount, VA
(1)
|
160,000
|
Manufacturing
|
09/30/2024
|
||||
|
Rocky
Mount,
VA
|
180,000
|
Manufacturing
|
08/31/2016
|
||||
|
Rocky
Mount,
VA
|
80,000
|
Warehouse
|
08/31/2008
|
||||
|
Rocky
Mount,
VA
|
300,000
|
Warehouse
|
08/31/2016
|
||||
|
Hammonton,
NJ
|
360,000
|
Manufacturing
and Administration
|
10/31/2012
|
||||
|
Tupelo,
MS
|
200,000
|
Manufacturing
and Administration
|
06/16/2010
|
||||
|
Fayetteville,
NC
|
56,000
|
Warehouse
|
NA
|
||||
|
Peachtree
City,
GA
|
148,000
|
Manufacturing
|
08/19/2014
|
||||
|
Peachtree
City,
GA
|
40,000
|
Manufacturing
|
NA
|
||||
|
Dallas,
TX
|
32,000
|
Manufacturing
|
03/31/2010
|
||||
|
Bryan,
TX
|
274,000
|
Manufacturing
and Administration
|
08/20/2014
|
||||
|
Bryan,
TX
|
75,000
|
Manufacturing
|
12/31/2014
|
||||
|
Phoenix,
AZ
|
156,000
|
Manufacturing
|
03/31/2011
|
||||
|
Farmers
Branch,
TX
|
53,000
|
Warehouse
|
01/31/2010
|
||||
|
Auburn,
WA
|
262,000
|
Manufacturing
and Administration
|
12/31/2013
|
||||
|
Corona,
CA
|
128,000
|
Manufacturing
and Administration
|
09/30/2012
|
||||
|
Sacramento,
CA
|
234,000
|
Manufacturing
and Administration
|
09/12/2019
|
||||
__________
|
(1)
|
These
properties are included in long-term leases 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.
|
Litigation
In the
ordinary course of our business, we are a party to a number of legal actions,
none of which are expected to have a material impact on us.
MANAGEMENT
Board
of Directors and Executive Officers
The Board
of Directors of Ply Gem Prime Holdings, Inc., Ply Gem Investment Holdings, Inc.,
Ply Gem Holdings, and Ply Gem Industries are identical.
|
Name
|
Age
|
Positions(s)
|
|
Frederick
Iseman
|
55
|
Chairman
of the Board and Director
|
|
Gary
E.
Robinette
|
59
|
President,
Chief Executive Officer and Director
|
|
Shawn
Poe
|
46
|
Vice
President and Chief Financial Officer
|
|
John
Wayne
|
46
|
President,
Siding Group
|
|
Lynn
Morstad
|
44
|
President, U.S.
Windows Group
|
|
Bryan
Sveinson
|
49
|
President,
CWD Windows & Doors, Inc.
|
|
Robert
A.
Ferris
|
66
|
Director
|
|
Steven
M.
Lefkowitz
|
44
|
Director
|
|
John
D.
Roach
|
64
|
Director
|
|
Michael
Haley
|
57
|
Director
|
|
Edward
M.
Straw
|
69
|
Director
|
|
Timothy
T.
Hall
|
39
|
Director
|
Set forth
below is a brief description of the business experience of each of the members
of our Board of Directors and our executive officers.
Frederick
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
Caxton-Iseman Capital, a private equity firm which was founded by
Mr. Iseman in 1993. Prior to establishing Caxton-Iseman Capital,
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, Chairman of the Board of Buffets
Holdings, Inc. and Buffets, Inc.
Gary
E. Robinette – President, Chief Executive Officer and Director
Gary E.
Robinette was appointed President and Chief Executive Officer of the Company in
October 2006, replacing Lee Meyer who had previously announced his
retirement. Prior to joining Ply Gem, Mr. Robinette served as
Executive Vice President and COO at Stock Building Supply, a Wolseley company,
since September 1998, and was also a member of the Wolseley North American
Management Board. Mr. Robinette held the position of President
of Erb Lumber Inc., a Wolseley company, from 1993-1998 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, where he is a member of the
Board of Trustees, and a MBA from Xavier University, where he is a member of the
President’s Advisory Board. He is also a member of Harvard
University’s Joint Center for Housing Studies.
Shawn
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 our company, Mr. Poe held the
position of Corporate Controller and various other accounting positions at
Nordyne, Inc., joining the company 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 BBS in Accounting. Mr. Poe graduated from
Fontbonne College in 1994 with an MBA.
John
Wayne – President, Siding Group
Mr. Wayne
was appointed President of our siding and accessories subsidiaries in
January 2002. Mr. Wayne joined our company in 1998, and
prior to his appointment to President 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 graduated from the University of Wisconsin in
1984 with a BBA in Finance and Marketing. Mr. Wayne served as
the Chairman of the VSI, the Chairman of the VSI Code and Regulatory Committee,
and Chairman of the VSI Board of Directors through December 2007 when his
term ended.
Lynn
Morstad - President, U.S. Windows Group
Mr. Morstad
was appointed President of our U.S. Window 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 with various divisions of the Newell Company for more
than eight years. Mr. Morstad is a graduate of the University of
Iowa and is a Certified Public Accountant.
Bryan
Sveinson – President, CWD Windows & Doors
Mr. Sveinson
was appointed President of CWD Windows & Doors, Inc. in
April 1999. Mr. Sveinson joined our company in 1993, and
prior to his appointment as President held successive positions as Controller,
Vice President of Finance, and Vice President of Business
Development. Prior to joining us, Mr. Sveinson held senior
finance positions with a commercial printing company and a soft drink
manufacturing and distribution company. Mr. Sveinson graduated
from the University of Calgary in 1981 with a Bachelor of Management Degree in
Finance. In addition, Mr. Sveinson is a professional accountant,
having achieved a Certified Management Accountant designation in
1991. Mr. Sveinson is also a past director of the Canadian
Window and Door Manufacturing Association.
Robert
A. Ferris – Director
Since the
Ply Gem acquisition, Robert A. Ferris has served as Chairman of our Executive
Committee and director. Mr. Ferris retired as Managing Director
of Caxton-Iseman Capital in December 2007, and was employed by
Caxton-Iseman Capital 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 New York Stock
Exchange-listed company. Mr. Ferris is a former director of
Anteon International Corporation, and is a director of Buffets Holdings, Inc.
and Buffets, Inc. Effective January 1, 2008, Mr. Ferris will assume
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.
Steven
M. Lefkowitz – Director
Since the
Ply Gem acquisition, Steven M. Lefkowitz has served as a
director. Mr. Lefkowitz is President of Caxton-Iseman Capital
and has been employed by Caxton-Iseman Capital since 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 is a director of
Buffets Holdings, Inc. and Buffets, Inc.
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. Mr. Roach is a director of Kaiser
Aluminum Corporation and its subsidiary, Kaiser Aluminum & Chemical
Corporation, a director of Material Sciences Corp., a provider of
materials-based solutions, a director of URS Corporation, an engineering firm, a
director PMI Group, Inc., a provider of credit enhancement products and lender
services, and a director of VeriSign, a leading provider of internet
infrastructure services.
Michael
Haley – Director
In
June 2005, Mr. Haley announced his retirement as Chairman of MW
Manufacturers, Inc., but has remained as a director. In
January 2005, Mr. Haley was appointed chairman of MW and Senior Vice
President of Sales and Marketing and Director for Ply Gem
Industries. Mr. Haley joined MW in June 2001 as President
and served in this capacity until being named Chairman. Prior to
joining MW, Mr. Haley had been the President of American of Martinsville (a
subsidiary of La-Z-Boy Inc.) from 1994 until May 2001. In
addition, Mr. Haley was President of Loewenstein Furniture Group from 1988
to 1994. 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.
Edward
M. Straw – Director
In
May 2006, the Board of Directors approved the addition of Mr. Straw as
a member of the board. Mr. Straw retired from the Navy as a
three-star admiral in 1996, and has since held senior executive positions in
industry. From March 2000 to February 2005, Mr. Straw
was President of Global Operations for the Estee Lauder Companies, Inc. Prior to
Estee Lauder, Mr. Straw was President of Ryder Integrated Logistics, Inc.
and Senior Vice President of Compaq Computer Corporation. He is
currently the Chairman of Odyssey Logistics and Technology and is a member of
the boards of MeadWestvacto, Eddie Bauer and Panther Expedited
Services. In addition, he is a strategic advisor to IBM Federal
Services. Mr. Straw holds a Master of Business Administration
degree from George Washington University and a Bachelor of Science degree from
the U.S. Naval Academy.
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 Principal
at Caxton-Iseman Capital and has been employed by Caxton-Iseman Capital since
2001. Prior to Caxton-Iseman, Mr. Hall was a Vice President at
FrontLine Capital and an Assistant Vice President at GE
Equity. Mr. Hall has a MBA from Columbia Business School and a
B.S. from Lehigh University.
Executive
Compensation
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, 2007. The individuals who served
as the principal executive officer and principal financial officer during 2007,
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 2007, as reflected in the following
tables and related footnotes and narratives, but also describes compensation
actions taken before or after 2007 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, and equity-based interests. Our 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.
During
2006, certain named executive officers held awards of phantom stock units under
our phantom stock plan, and these awards were converted during 2006 into
cash-denominated deferred compensation accounts. In early 2007, the
officers received special, one-time cash bonuses in connection with this
conversion. The phantom plan, deferred compensation accounts, and
special cash bonuses are described below.
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. We believe that total compensation should be
reflective of individual performance but should also vary with our performance
in achieving financial and non-financial objectives, thus rewarding the
attainment of these objectives.
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 the position 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 and
equity interests described below. Base salaries of our named
executive officers are only one component of our executive officers’
compensation package 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 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 the Company’s performance as well as the individual’s
performance. We provide this opportunity to attract and retain an
appropriate caliber of talent for the position 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.
2007 Target Award
Opportunities. Our 2007 performance measures included such
corporate measures as economic value added (EVA) improvement and Adjusted
EBITDA. Depending upon each officer’s responsibilities, a target
award opportunity was established as a percentage of the individual officer’s
base salary at a range from 40% 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. After the end of 2007,
Mr. Robinette reviewed our annual cash incentive plans, the attainment of
performance measures and resulting awards with our compensation committee and
our Board, and the compensation committee and the Board approved the
awards. For 2007, annual target cash incentive opportunities for the
named executive officers were: 100% of base salary for
Mr. Robinette, 75% of base salary for Mr. Poe, 50% of base salary for
Mr. Wayne and 40% of base salary for Mr. Sveinson and
Mr. Veach.
The 2007
performance targets for Mr. Robinette and Mr. Poe were comprised of
50% EVA improvement and 50% Adjusted EBITDA with the 2007 performance target for
EVA improvement being approximately $202.4 million with the 2007 Adjusted EBITDA
target being approximately $190.7 million. The 2007 performance
targets for Mr. Wayne and Mr. Veach were comprised of 50% EVA
improvement, 40% operating group Adjusted EBITDA and 10% total company Adjusted
EBITDA with the 2007 performance target for EVA improvement being approximately
$143.8 million and the 2007 operating group Adjusted EBITDA target being
approximately $113.0 million and the 2007 total company Adjusted EBITDA being
$190.7 million. The 2007 performance target for Mr. Sveinson was
comprised of 80% EVA improvement, 10% operating group Adjusted EBITDA and 10%
total company Adjusted EBITDA with the 2007 performance target for EVA
improvement being approximately $18.2 million and the 2007 operating group
Adjusted EBITDA target being approximately $13.7 million and the 2007 total
company Adjusted EBITDA being $190.7 million.
|
·
|
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.
Total Compensation
Comparison. Including the 2007 annual cash incentive payout,
for the last completed fiscal year, personal benefits and perquisites accounted
for approximately 3.5% of total compensation for our named executive
officers.
|
·
|
Equity
Awards
|
In General. We
have provided the opportunity for our named executive officers to purchase both
shares of common stock, par value $.01 per share (“Common Stock”) and senior
preferred stock, par value $.01 per share (“Senior Preferred Stock”) in Ply Gem
Prime Holdings, Inc. (“Prime Holdings”), our indirect 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 who are
primarily responsible for 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 Senior Preferred Stock component as well as a
Common Stock component allows the executives to hold an ownership interest that
mirrors that held by non-employee investors in our Company and motivates and
rewards 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 are
event-driven and are not 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 are reviewed
and approved by our compensation committee and Board of Directors.
Common Stock. Our
named executive officers have purchased our 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 our Senior Preferred
Stock.
Incentive Stock – Protected
and Unprotected. Common Stock that is purchased as Incentive
Stock becomes “Protected” over time, based on the officer’s continued service to
our Company. Twenty percent (20%) of each officer’s Incentive Stock
becomes Protected on the first anniversary of the date of purchase 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
the Company. Specifically, if the named executive officer’s
employment with us is terminated for reasons other than cause, then Ply Gem
Prime Holdings 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 Prime Holdings and its consolidated
subsidiaries as of the date of termination by (y) the number of shares of
fully diluted 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 Holdings 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 executive officers by requiring the executives’
continued service to the Company. In addition, because this schedule
provides that the officers’ Incentive Stock becomes protected upon certain
corporate transactions, this schedule will give the officers the incentive to
work toward achieving such a transaction and to share in the value received by
other shareholders.
If Common
Stock is not designated as “Incentive Stock” and is purchased as part of a strip
with Senior Preferred Stock, then the Common Stock is fully vested at the time
of purchase. This Common Stock may be repurchased by Ply Gem Prime
Holdings at any time following the officer’s termination of employment for the
Protected Stock Purchase Price described above.
Senior Preferred
Stock. Senior Preferred Stock that is purchased by the
officers is fully vested at the time of purchase. This Senior
Preferred Stock may be repurchased by Ply Gem Prime Holdings at any time
following the officer’s termination of employment for a price that takes into
account the liquidation value and the maximum dividend on the shares of Senior
Preferred Stock, consistent with the Certificate of Incorporation of Ply Gem
Prime Holdings.
None of
the named executive officers purchased either Common Stock or Senior Preferred
Stock during 2007.
Phantom Common and Preferred Stock
Units. 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. 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 Holdings’ stock having
a fair market value equal to the account balance, in the discretion of Ply Gem
Prime Holdings. 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.
As
described above, SFAS 123(R) was adopted by the Company as of January 1,
2006, and, for the first three quarters of 2006, the phantom units were
recognized under SFAS 123(R) 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, the Company’s 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.
As such,
in September 2006, the Company 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 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 is payable 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.
As a
result of the conversion of the phantom stock plan awards described above, as of
December 31, 2007 there were no phantom common or preferred stock units
outstanding.
In
connection with the conversion described above, the Board authorized Ply Gem
Prime Holdings to allow the officers to invest in 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.
|
·
|
Special
Bonuses
|
In General. In
connection with the conversion of the phantom stock plan awards described above,
our subsidiary, Ply Gem Industries, Inc. provided Mr. Wayne and
Mr. Poe with a special, one-time cash bonus award for our 2006 fiscal
year. The bonus was payable on January 31, 2007 or any earlier
termination of employment other than for cause. If the executives
resigned from employment before January 31, 2007, they would not have been
entitled to the bonus. All special bonuses were paid on
January 31, 2007. The Board of Directors of Prime Holdings
approved and ratified Ply Gem Industries, Inc.’s award of these
bonuses.
|
·
|
Employment
Agreements
|
President and Chief Executive
Officer. 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 to purchase 125,660 shares of Common Stock, at a price of $10.00 per
share and 7,434 shares of Senior Preferred Stock at a price of $100.00 per
share.
|
·
|
Post-termination
Severance
|
In General. 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, 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 agreement were approved by our
Board of Directors, and the terms of these agreements can be found in individual
agreements that have previously 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 are consistent with
the provisions and benefit levels of other companies based upon reviewing
disclosures made by those companies with the SEC. 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 the “Potential
Payments Upon Termination or Change in Control” section 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.
|
·
|
CFO
Retention Payment
|
In
November of 2005, the Company provided Mr. Poe with the opportunity to
receive a special bonus of $100,000 if Mr. Poe is employed with the Company
on December 31, 2007. This special bonus was provided to
Mr. Poe as an incentive for Mr. Poe to remain with the
Company. The Board determined that it was in the Company’s best
interest to retain Mr. Poe’s services in the capacity of Chief Financial
Officer and considers the $100,000 special bonus to be an appropriate
incentive. The Company recognized 50% of the special bonus as expense
in 2006 and 50% of the special bonus as expense in 2007.
The
following table shows information concerning the annual compensation during 2007
for services provided to us by our President and Chief Executive Officer, our
Vice President and Chief Financial Officer and our three other most highly
compensated executive officers.
Summary
Compensation Table
|
Name
and
|
Salary
|
Bonus
|
Stock
Awards
|
Non-Equity
Incentive Plan Compensation
|
All
Other Compensation
|
Total
|
||||||||||||||||||
|
Principal
Position
|
Year
|
($)
|
($)
|
($)
(1)
|
($)
(2)
|
($)
(4)
|
($)
|
|||||||||||||||||
|
Gary
E. Robinette
|
2007
|
530,000
|
-
|
-
|
506,680
|
25,081
|
1,061,761
|
|||||||||||||||||
|
President
& Chief
|
2006
|
112,115
|
(5)
|
133,589
|
(6)
|
-
|
-
|
-
|
245,704
|
|||||||||||||||
|
Executive
Officer
|
||||||||||||||||||||||||
|
Shawn
K.
Poe
|
2007
|
275,000
|
50,000
|
(9)
|
-
|
197,175
|
22,133
|
544,308
|
||||||||||||||||
|
Vice
President & Chief
|
2006
|
222,861
|
77,000
|
(7)
(8)
|
-
|
115,375
|
163,682
|
578,919
|
||||||||||||||||
|
Financial Officer
|
||||||||||||||||||||||||
|
John
Wayne
|
2007
|
370,000
|
-
|
-
|
301,920
|
25,409
|
697,329
|
|||||||||||||||||
|
President,
Siding Group
|
2006
|
298,077
|
76,000
|
(7)
|
-
|
258,137
|
419,495
|
1,051,709
|
||||||||||||||||
|
Bryan
Sveinson
|
2007
|
200,036
|
-
|
-
|
264,466
|
17,451
|
481,953
|
|||||||||||||||||
|
President, CWD
|
||||||||||||||||||||||||
|
Windows
& Doors, Inc.
|
||||||||||||||||||||||||
|
Richard
Veach
|
2007
|
230,000
|
-
|
-
|
150,190
|
21,169
|
401,359
|
|||||||||||||||||
|
Sr.
Vice President,
|
||||||||||||||||||||||||
|
Operations,
Siding
|
||||||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||
|
(1)
|
The
amounts in this column represent, for all shares of Common Stock and
Senior Preferred Stock and all awards of phantom common and preferred
stock units held by each named executive officer in 2006 and 2007, the
dollar amount recognized for financial statement reporting purposes with
respect to 2006 in accordance with SFAS 123(R). Because no
expense was recognized under SFAS 123(R) during 2006 or 2007, the amount
in each row of this column is “0”. (See Note 12 to the
financial statements “Stock Based Compensation” for a discussion of the
assumptions made in this valuation.) As described in the
“Compensation Discussion and Analysis – Phantom Common and Preferred Stock
Units” section above, the awards under the phantom stock plan were amended
on September 25, 2006. These awards were reported under
SFAS 123(R) through the end of the third quarter of the 2006 fiscal
year. During the fourth quarter of 2006, we recognized
nonqualified deferred compensation expense in respect of the cash accounts
that were established in connection with the conversion of the phantom
plan, and the value of these accounts is included in the “All Other
Compensation” column of this table with respect to
2006.
|
|
(2)
|
The
amounts in this column represent performance-based cash bonuses earned for
services rendered during 2007 and 2006. These incentive bonuses
are described in the “Compensation Discussion and Analysis - Annual Cash
Incentive Awards” section above.
|
|
(3)
|
None
of the named executive officers are covered by either of the Company’s
pension plans. The named executive officers did not receive any
above-market or preferential earnings on compensation deferred on a basis
that is not tax-qualified.
|
|
(4)
|
The
amounts in this column with respect to 2007 consist of the following items
for each officer shown below:
|
|
Ø
|
Gary E.
Robinette: $10,500 car allowance, $6,750 company 401k
contributions, $6,750 profit sharing, and $1,081 insurance
premiums.
|
|
Ø
|
Shawn
K. Poe: $7,700 car allowance, $6,750 company
401k contributions, $6,750 profit sharing, and $561 insurance
premiums.
|
|
Ø
|
John
Wayne: $10,500 car allowance, $6,750 company 401k
contributions, $6,750 profit sharing, and $755 insurance
premiums.
|
|
Ø
|
Bryan Sveinson: $10,450
company car benefit, and $7,001 Group Registered Retirement Savings
Plan
|
|
Ø
|
Richard
Veach: $7,200 car allowance, $6,750 company 401k
contributions, $6,750 profit sharing, and $469 insurance
premiums.
|
The
amounts in this column with respect to 2006 consist of the following items for
each officer shown below:
|
Ø
|
Shawn
K. Poe: $135,900 value of cash deferred
compensation account created in connection with phantom plan conversion
described in the “Compensation Discussion and Analysis – Phantom Common
and Preferred Stock Units” section above, $7,200 car allowance, $6,628
company 401k contributions, $6,600 profit sharing, and $6,982 insurance
premiums.
|
|
Ø
|
John Wayne: $388,350
value of cash deferred compensation account created in connection with
phantom plan conversion described in the “Compensation Discussion and
Analysis – Phantom Common and Preferred Stock Units” section above,
$10,500 car allowance, $6,600 company 401k contributions, $6,600 profit
sharing, and $6,791 insurance
premiums.
|
|
(5)
|
Represents
the dollar value of the base salary earned by Mr. Robinette for the
period from the date that he commenced employment in October 2006
through December 31, 2006.
|
|
(6)
|
Represents
the guaranteed bonus paid to Mr. Robinette pursuant to his employment
agreement.
|
|
(7)
|
Represents
the Special Bonus awarded on September 25, 2006 in connection with
the conversion of awards under the phantom stock plan, described in the
“Compensation Discussion and Analysis – Special Bonuses” section
above.
|
|
(8)
|
The
figure includes $50,000 of retention bonus which represents 50% of a total
$100,000 special bonus that Mr. Poe was eligible to receive if he
remained employed with the Company through December 31,
2007.
|
|
(9)
|
Represents
50% of a total $100,000 special bonus that Mr. Poe was eligible to
receive if he remained employed with the Company through December 31,
2007.
|
Grants
of Plan-Based Awards
|
Estimated
Future Payouts Under
|
||||
|
Non-Equity
Incentive Plan
|
||||
|
Awards
|
||||
|
Target
|
||||
|
Name
|
($)
(1)
|
|||
|
Gary
E.
Robinette
|
$
|
530,000
|
||
|
Shawn
K.
Poe
|
206,250
|
|||
|
John
Wayne
|
185,000
|
|||
|
Bryan
Sveinson
|
86,000
|
|||
|
Richard
Veach
|
92,000
|
|||
|
(1)
|
These
amounts represent the annual target cash incentive opportunities as a
percentage of base salary for each named executive
officer.
|
Outstanding
Equity Awards at Fiscal Year-End
|
Number
of Shares or Units of
Stock
that Have Not Vested
|
Market
Value of Shares or Units of Stock That Have Not Vested
|
|||||||
|
Name
|
(#)
(1)
|
($)
(2)
|
||||||
|
Gary
E. Robinette
|
88,000
|
–
|
||||||
|
Shawn
K. Poe
|
15,367
|
–
|
||||||
|
John
Wayne
|
18,122
|
–
|
||||||
|
Bryan
Sveinson
|
9,362
|
–
|
||||||
|
Richard
Veach
|
5,076
|
–
|
||||||
|
(1)
|
The
Stock Awards set forth in this table become Protected as described in the
“Compensation Discussion and Analysis – Common Stock” section
above.
|
|
(2)
|
Because
the Company’s Common Stock is not publicly traded, and the value per share
under the valuation formula contained within the Stockholders’ Agreement
was zero at December 31, 2007, a market value of zero is
shown.
|
Stock
Vested
|
Stock
Awards
|
||||||||
|
Number
of Shares
Acquired
on Vesting
(#)
(1)
|
Value
Realized on
Vesting
($)
(2)
|
|||||||
|
Name
|
||||||||
|
Gary
E.
Robinette
|
37,660
|
–
|
||||||
|
Shawn
K. Poe
|
23,050
|
–
|
||||||
|
John
Wayne
|
27,182
|
–
|
||||||
|
Bryan
Sveinson
|
14,044
|
–
|
||||||
|
Richard
Veach
|
7,614
|
–
|
||||||
|
(1)
|
The
Stock Awards in this table represent the shares of Common Stock that were
either vested on the date of grant or that became Protected during 2007,
as described in the “Compensation Discussion and Analysis – Common Stock”
section above.
|
|
(2)
|
This
amount represents the number of shares of Common Stock and the number of
phantom incentive units that became Protected during
2007. Because the Company’s Common Stock is not publicly traded
and the value per share under the valuation formula contained within the
Stockholders’ Agreement was zero at December 31, 2007, a market value
of zero is shown. These shares remain subject to certain
transfer restrictions provided in a stockholders’ agreement with Prime
Holdings and there is no current market in which the officers may sell
such shares.
|
Nonqualified
Deferred Compensation
|
Name
|
Aggregate
Earnings
in
Last
FY
($)
(1)
|
Aggregate
Balance
at
Last FYE
($)
(2) (3)
|
||||||
|
Gary
E. Robinette
|
- | - | ||||||
|
Shawn
K. Poe
|
636 | 138,452 | ||||||
|
John
Wayne
|
1,808 | 395,632 | ||||||
|
Bryan
Sveinson
|
- | - | ||||||
|
Richard
Veach
|
- | - | ||||||
|
(1)
|
These
amounts do not represent above-market or preferential earnings on
compensation deferred on a basis that is not tax-qualified, and these
amounts were not reported in the “Summary Compensation Table”
above.
|
|
(2)
|
The
aggregate balance at December 31, 2007 represents the balance of the
cash-denominated deferred compensation accounts established in connection
with the conversion of the phantom stock plan awards on September 25,
2006, as described in the “Compensation Discussion and Analysis – Phantom
Common and Preferred Stock Units” section
above.
|
|
(3)
|
These
amounts do not represent above-market or preferential earnings on
compensation deferred on a basis that is not tax-qualified, and these
amounts were not reported in the “Summary Compensation Table” above for
previous years.
|
Termination
or Change in Control Arrangements
|
Years
|
Severance
|
Benefits
|
Bonus
|
|||||||||||||
|
Name
|
($)
|
($)
|
($)
|
|||||||||||||
|
Employment
Agreement:
|
||||||||||||||||
|
Gary
E.
Robinette
|
2
|
$
|
1,060,000
|
$
|
16,944
|
$
|
1,013,360
|
|||||||||
|
Retention
Agreements:
|
||||||||||||||||
|
Shawn
K.
Poe
|
1
|
275,000
|
8,472
|
197,175
|
||||||||||||
|
John
Wayne
|
1
|
370,000
|
8,472
|
301,920
|
||||||||||||
|
Bryan
Sveinson
|
1
|
200,036
|
8,472
|
284,250
|
||||||||||||
|
Richard
Veach
|
NA
|
NA
|
NA
|
NA
|
||||||||||||
Mr. Robinette’s
employment agreement and the retention agreements for each of Mr. Poe,
Mr. Wayne, and Mr. Sveinson 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 or obey the Board 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
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 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
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. In addition,
Mr. Robinette will be eligible to receive payment of a “Year 1 Bonus” equal
to the amount that would have been actually earned and paid to
Mr. Robinette under the cash incentive award plan had he been employed for
the entire 12 month period of the year, plus a “Year 2 Bonus” equal to a
pro-rated portion of the Year 1 Bonus based upon the number of months that
Mr. Robinette was employed with the Company during the year of termination
of his employment with the Company.
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 $150,000.
If the
named executive officer’s employment is terminated during the year, the officer
is eligible to receive a pro rata portion of an amount equal to the lesser of
the officer’s annual cash incentive award target or the actual cash incentive
award that would have been paid under the incentive award plan had the officer
been employed at the date that such cash incentive award is actually
paid.
The named
executive officer’s may be entitled to receive a cash payment for their
individual shares of Incentive Stock, if Prime Holdings elects to exercise its
call right under the Stockholders’ Agreement. If Prime Holdings had
exercised its call right on December 31, 2007, the named executive officers
would not have received any money for any of the shares of common
stock. Because shares of the Company’s Common Stock are not publicly
traded and the value per share at December 31, 2007 per the formula
contained in the Stockholders’ Agreement is zero, no amount has been reflected
in the table for incentive equity.
In
addition, upon a change in control, all Common Stock held by the named executive
officers that is Unprotected will become Protected. If a change in
control had occurred on December 31, 2007, applying the Protected price
formula in the Stockholders’ Agreement based on EBITDA as of that date, the
value per share of Common Stock would be zero.
Director
Compensation
|
Fees
Earned
or
Paid
in
Cash
($)
|
All
Other
Compensation
($)
(1)
|
Total
($)
|
||||||||||
|
Name
|
||||||||||||
|
Frederick
Iseman
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Robert
A.
Ferris
|
-
|
-
|
-
|
|||||||||
|
Steven
M.
Lefkowitz
|
-
|
-
|
-
|
|||||||||
|
John
D.
Roach
|
60,000
|
19,811
|
79,811
|
|||||||||
|
Michael
Haley
|
60,000
|
10,000
|
70,000
|
|||||||||
|
Edward
M.
Straw
|
60,000
|
10,000
|
70,000
|
|||||||||
|
Timothy
T.
Hall
|
-
|
-
|
-
|
|||||||||
________________________
|
(1)
|
All
Other Compensation includes payment of a $2,000 payment per each board
meeting attended and payment for other non-board advisory services
provided.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Upon
completion of the Ply Gem acquisition, Ply Gem Industries entered into two
advisory agreements with an affiliate of Caxton-Iseman Capital (the
“Caxton-Iseman Party”), which we refer to as the “Debt Financing Advisory
Agreement” and the “General Advisory Agreement.”
Under the
Debt Financing Advisory Agreement, Ply Gem Industries paid the Caxton-Iseman
Party a debt financing arrangement and advisory fee, equal to 2.375% of the
aggregate amount of the debt financing incurred in connection with the Ply Gem
acquisition ($11.4 million).
Under the
General Advisory Agreement, the Caxton-Iseman Party 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 the Caxton-Iseman Party (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
(including amortization of goodwill, organization costs, capitalized management
fees, and other items), dividends paid or accrued on preferred stock, certain
management fees paid to the Caxton-Iseman Party, 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 the Caxton-Iseman Party
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.
In
connection with the MW acquisition, pursuant to the General Advisory Agreement,
in November 2004 the Company paid the Caxton-Iseman Party a transaction fee
equal to 2% of the purchase price of the equity of MWM Holding ($6.4
million). In connection with the Alenco acquisition, in
March 2006 the Company paid the Caxton-Iseman Party a transaction fee equal
to 2% of the purchase price of the equity of AWC ($2.4 million). In
connection with the AHE acquisition, in October 2006 the Company paid the
Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of AHE
($6.1 million). In connection with the Pacific Windows acquisition,
in October 2007 the Company paid the Caxton-Iseman Party a transaction fee
equal to 2% of the purchase price of Pacific Windows ($0.7
million).
Under the
General Advisory Agreement the Company paid a management fee of approximately
$0.8 million for the six months ended June 28, 2008, approximately $3.5 million
for the year ended December 31, 2007, approximately $2.5 million for
the year ended December 31, 2006, and approximately $2.3 million for the
year ended December 31, 2005.
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 the
Caxton-Iseman Party provides notice of termination. In addition, the
General Advisory Agreement may be terminated by the Caxton-Iseman Party 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 the
Caxton-Iseman Party 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.
In
connection with the MW acquisition, Ply Gem Investment Holdings received an
equity investment of approximately $0.5 million from The GeMROI Company, an
outside sales agency that represents, among other products and companies, MW
windows for which the Company pays GeMROI a sales commission for their
services. During 2007, 2006 and 2005, the Company paid GeMROI
approximately $1.8 million, $2.3 million, and $2.5 million, respectively, in
sales commission for their services. During 2006, the Company
received an additional equity investment of approximately $0.5 million from JPG
Investments, LLC, an affiliate of The GeMROI Company.
On
May 23, 2008, in connection with an amendment to our prior credit
facilities and as a condition to such amendment, affiliates of CI Capital
Partners LLC made (i) an $18 million cash investment in Ply Gem Prime
Holdings and received 14,518 shares of Ply Gem Prime Holdings’ common stock and
210,482 shares of Ply Gem Prime Holdings’ Class A common stock and (ii) a
$12 million cash investment in Ply Gem Investment Holdings, and received 12,000
shares of senior preferred stock. Ply Gem Prime Holdings and Ply Gem Investment
Holdings then made an aggregate $30 million capital contribution to Ply Gem
Holdings, which in turn contributed such amount to the capital of Ply Gem
Industries.
As a
result of the Ply Gem acquisition, Ply Gem Investment Holdings is the common
parent of an affiliated group of corporations that will include Ply Gem
Holdings, Ply Gem Industries and their subsidiaries. Ply Gem
Investment Holdings will elect to file consolidated federal income tax returns
on behalf of the group. Accordingly, Ply Gem Investment Holdings, Ply
Gem Holdings and Ply Gem Industries have entered into a Tax Sharing Agreement,
under which Ply Gem Holdings and Ply Gem Industries will make payments to Ply
Gem Investment Holdings. These payments will not be in excess of the
tax liabilities of Ply Gem Holdings, Ply Gem Industries and their respective
subsidiaries, if these tax liabilities had been computed on a stand-alone
basis.
Before
entering into any related party transaction, it is the Company’s policy to
submit the proposed transaction to the Board for approval.
PRINCIPAL STOCKHOLDERS
Ply Gem
Holdings is the sole holder of all 100 issued and outstanding shares of Ply Gem
Industries’ common stock. Ply Gem Investment Holdings is the sole
holder of all 100 issued and outstanding shares of common stock of Ply Gem
Holdings. Ply Gem Prime Holdings is the sole holder of all 100 issued
and outstanding shares of common stock of Ply Gem Investment
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 August
15, 2008 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.
|
Shares
Beneficially
Owned(1)
|
||||||||
|
Name of Beneficial Owner
|
Common
Shares(2)
|
%
|
||||||
|
Caxton-Iseman
(Ply Gem), L.P. (3)
|
617,426 | 16.5 | % | |||||
|
Caxton-Iseman
(Ply Gem) II, L.P. (3)
|
2,482,019 | 66.3 | ||||||
|
Frederick
Iseman (3) (4)
|
3,099,445 | 82.8 | ||||||
|
Robert
A. Ferris (3)
|
- | * | ||||||
|
Steven
M. Lefkowitz (3)
|
- | * | ||||||
|
Gary
E. Robinette (5)
|
125,660 | 3.4 | ||||||
|
Shawn
Poe (6)
|
38,417 | 1.0 | ||||||
|
John
Wayne (7)
|
45,304 | 1.2 | ||||||
|
Bryan
Sveinson
|
23,406 | * | ||||||
|
Richard
Veach
|
12,690 | * | ||||||
|
John
D. Roach (8)
|
3,577 | * | ||||||
|
Michael
Haley
|
9,362 | * | ||||||
|
Edward
M. Straw
|
- | * | ||||||
|
Timothy
Hall (3)
|
- | * | ||||||
|
All
Directors and Executive Officers as a Group
|
3,504,539 | 93.6 | ||||||
______________________________________________
|
*
|
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 Caxton-Iseman Capital, 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 the 2,874,445 shares of common stock held by that
entity.
|
|
(5)
|
Mr. Robinette
purchased 125,660 shares of common stock in
2006.
|
|
(6)
|
In
connection with the Ply Gem acquisition, Mr. Poe acquired phantom
incentive stock units representing 13,590 shares of common
stock. In September 2006, Mr. Poe converted the
shares of phantom incentive stock to 9,707 shares of common
stock.
|
|
(7)
|
In
connection with the Ply Gem acquisition, Mr. Wayne acquired phantom
incentive stock units representing 38,835 shares of common
stock. In September 2006, Mr. Wayne converted the
shares of phantom incentive stock to 27,739 shares of common
stock.
|
|
(8)
|
Address
is c/o Stonegate International, 100 Crescent Court, Dallas, Texas
75201.
|
DESCRIPTION OF OTHER INDEBTEDNESS
Senior
Secured Asset-Based Revolving Credit Facility
We
summarize below the principal terms of the agreements that govern our senior
secured asset-based revolving credit facility. This summary is not a complete
description of all the terms of such agreements.
General
In
connection with the offering of the initial notes, we entered into a new senior
secured asset-based revolving credit facility, or ABL Facility, with Credit
Suisse Securities (USA) LLC, as lead arranger and bookrunner, and a syndicate of
financial institutions and institutional lenders. Set forth below is a summary
of the terms of our new ABL Facility.
The ABL
Facility initially provided for revolving credit financing of up to
$135.0 million, which was increased to $150.0 million on August 14,
2008. This borrowing capacity under the ABL Facility is subject to
borrowing base availability. The ABL Facility has a maturity of five
years and includes sub-facilities for letters of credit, swingline loans and
borrowings in Canadian dollars and United States dollars by CWD. In addition,
the ABL Facility provides that the revolving commitments may be
further increased to $200.0 million, subject to certain terms and
conditions.
The
borrowing base at any time equals the sum (subject to certain eligibility
requirements, reserves and other adjustments) of:
|
·
|
85%
of the net amount of eligible receivables;
and
|
|
·
|
85%
of the net orderly liquidation value of eligible
inventory.
|
Our ABL
Facility includes borrowing capacity available for letters of credit and for
borrowings on same-day notice, referred to as swingline loans. A portion of the
revolving credit facility consists of a facility available to CWD in United
States or Canadian dollars.
All
borrowings under our ABL Facility will be subject to the satisfaction of
customary conditions, including absence of a default and accuracy of
representations and warranties. The ABL Facility matures on October 15,
2011 if the existing senior subordinated notes due 2012 are not refinanced by
such date.
Interest
Rate and Fees
Borrowings
under our ABL Facility bear interest at a rate per annum equal to, at our
option, either (a) a base rate determined by reference to the higher of
(1) the prime rate of Credit Suisse and (2) the federal funds
effective rate plus ½ of 1% 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 our ABL Facility is 2.00% for base rate loans and 3.00% for Eurodollar
rate loans. The applicable margin for borrowings under the ABL
Facility will be subject to step ups and step downs based on excess availability
under that facility. Swingline loans will 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 our ABL Facility, we are required to pay
a commitment fee, in respect of the unutilized commitments thereunder which fee
will be determined based on utilization of the ABL Facility (increasing when
utilization is low and decreasing when utilization is high). We must also pay
customary letter of credit fees equal to the applicable margin on Eurodollar
loans and agency fees.
Mandatory
Repayments
If at any
time the aggregate amount of outstanding loans, unreimbursed letter of credit
drawings and undrawn letters of credit under our ABL Facility exceeds the lesser
of (i) the commitment amount and (ii) the borrowing base, we will be
required to repay outstanding loans and cash collateralize letters of credit in
an aggregate amount equal to such excess, with no reduction of the commitment
amount. If the amount available under our ABL Facility is less than 15% of the
commitments or certain events of default have occurred, we will be required to
deposit cash from our material deposit accounts (including all concentration
accounts) daily in a collection account maintained with the administrative agent
under our ABL Facility, which will be used to repay outstanding loans and cash
collateralize letters of credit.
Voluntary
Repayment
We may
voluntarily reduce the unutilized portion of the commitment amount and repay
outstanding loans at any time without premium or penalty other than customary
“breakage” costs with respect to Eurodollar loans.
Amortization
and Final Maturity
There is
no scheduled amortization under our ABL Facility. All outstanding loans under
the facility are due and payable in full on the fifth anniversary of the closing
date (or October 15, 2011 if the existing senior subordinated notes due
2012 are not refinanced by such date).
Guarantees
and Security
All
obligations under our ABL Facility are fully and unconditionally guaranteed by
substantially all of our existing and future, direct and indirect, wholly-owned
domestic subsidiaries and in any event by all subsidiaries that guarantee the
notes. All obligations under our ABL Facility, and the guarantees of those
obligations, are secured, subject to certain exceptions, by substantially all of
our assets and the assets of 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 our material owned real property and equipment and all assets that
secure the notes on a first-priority
basis.
|
The
obligations of CWD, which is a borrower under the Canadian sub-facility under
the ABL Facility, will be secured by a first-priority security interest in
substantially all of the assets of such Canadian subsidiary and by our and the
guarantors’ assets on the same basis as borrowings by us are secured under the
ABL Facility, plus additional mortgages in Canada and a pledge by Ply Gem
Industries of the remaining 35% of the equity interests of CWD pledged only to
secure the Canadian sub-facility.
Restrictive
Covenants and Other Matters
Our ABL
Facility requires that if excess availability is less than 15% of the
commitments, we must comply with a minimum fixed charge coverage ratio test and
certain other covenants. In addition, our new ABL Facility includes negative
covenants that, subject to significant exceptions, limit our ability and the
ability of our parent and our subsidiaries to, among other things:
|
·
|
incur,
assume or permit to exist additional indebtedness or
guarantees;
|
|
·
|
incur
liens and engage in sale leaseback
transactions;
|
|
·
|
make
investments and loans;
|
|
·
|
pay
dividends, make payments or redeem or repurchase capital
stock;
|
|
·
|
engage
in mergers, acquisitions and asset
sales;
|
|
·
|
prepay,
redeem or purchase certain indebtedness including the
notes;
|
|
·
|
amend
or otherwise alter terms of certain indebtedness, including the notes, and
certain material agreements;
|
|
·
|
enter
into agreements limiting subsidiary
distributions;
|
|
·
|
engage
in certain transactions with
affiliates; and
|
|
·
|
alter
the business that we conduct.
|
Our ABL
Facility contains certain customary representations and warranties, affirmative
covenants and events of default, including among other things payment defaults,
breach of representations and warranties, covenant defaults, cross-defaults to
certain indebtedness, certain events of bankruptcy, certain events under ERISA,
material judgments, actual or asserted failure of any guaranty or security
document supporting our ABL Facility to be in full force and effect, and change
of control. If such an event of default occurs, the lenders under our new ABL
Facility are entitled to take various actions, including the acceleration of
amounts due under our ABL Facility and all actions permitted to be taken by a
secured creditor.
Existing
Senior Subordinated Notes
We
currently have $360.0 million in aggregate principal amount of senior
subordinated notes due 2012 outstanding. In February 2004, Ply Gem
Industries issued $225.0 million of the senior subordinated notes, which
are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem
Industries. In August 2004, in connection with the MW acquisition, Ply Gem
Industries issued an additional $135.0 million of senior subordinated
notes, which are guaranteed by Ply Gem Holdings Inc. and the domestic
subsidiaries of Ply Gem Industries, including MWM Holding and its
subsidiaries. The senior subordinated notes mature February 15, 2012 and
bear interest at a rate of 9%.
The
indenture for the senior subordinated notes imposes certain restrictions on Ply
Gem Industries and its subsidiaries, including restrictions on their ability to
incur indebtedness, pay dividends, make investments, grant liens, sell assets
and engage in certain other activities. The terms of the senior subordinated
notes also significantly restrict the ability of Ply Gem Industries to pay
dividends and otherwise distribute assets to Ply Gem Holdings.
THE EXCHANGE OFFER
Terms
of the Exchange Offer
We are
offering to exchange our exchange notes for a like aggregate principal amount of
our initial notes.
The
exchange notes that we propose to issue in this exchange offer will be
substantially identical to our initial notes except that, unlike our initial
notes, the exchange notes will have no transfer restrictions or registration
rights. You should read the description of the exchange notes in the section in
this prospectus entitled “Description of the Notes.”
We
reserve the right in our sole discretion to purchase or make offers for any
initial notes that remain outstanding following the expiration or termination of
this exchange offer and, to the extent permitted by applicable law, to purchase
initial notes in the open market or privately negotiated transactions, one or
more additional tender or exchange offers or otherwise. The terms and prices of
these purchases or offers could differ significantly from the terms of this
exchange offer.
Expiration
Date; Extensions; Amendments; Termination
This
exchange offer will expire at 5:00 p.m., New York City time,
on October 28, 2008, unless we extend it in our reasonable discretion. The
expiration date of this exchange offer will be at least 20 business days after
the commencement of the exchange offer in accordance with Rule 14e-1(a)
under the Securities Exchange Act of 1934.
We
expressly reserve the right to delay acceptance of any initial notes, extend or
terminate this exchange offer and not accept any initial notes that we have not
previously accepted if any of the conditions described below under “—Conditions
to the Exchange Offer” have not been satisfied or waived by us. We will notify
the exchange agent of any extension by oral notice promptly confirmed in writing
or by written notice. We will also notify the holders of the initial notes by a
press release or other public announcement communicated before 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date unless applicable laws require us to do otherwise.
We also
expressly reserve the right to amend the terms of this exchange offer in any
manner. If we make any material change, we will promptly disclose this change in
a manner reasonably calculated to inform the holders of our initial notes of the
change including providing public announcement or giving oral or written notice
to these holders. A material change in the terms of this exchange offer could
include a change in the timing of the exchange offer, a change in the exchange
agent and other similar changes in the terms of this exchange offer. If we make
any material change to this exchange offer, we will disclose this change by
means of a post-effective amendment to the registration statement which includes
this prospectus and will distribute an amended or supplemented prospectus to
each registered holder of initial notes. In addition, we will extend this
exchange offer for an additional five to ten business days as required by the
Exchange Act, depending on the significance of the amendment, if the exchange
offer would otherwise expire during that period. We will promptly notify the
exchange agent by oral notice, promptly confirmed in writing, or written notice
of any delay in acceptance, extension, termination or amendment of this exchange
offer.
Procedures
for Tendering Initial Notes
Proper
Execution and Delivery of Letters of Transmittal
To tender
your initial notes in this exchange offer, you must use one of the three alternative
procedures described below:
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|
(1)
|
Regular delivery
procedure: Complete, sign and date the letter of transmittal, or a
facsimile of the letter of transmittal. Have the signatures on the letter
of transmittal guaranteed if required by the letter of transmittal. Mail
or otherwise deliver the letter of transmittal or the facsimile together
with the certificates representing the initial notes being tendered and
any other required documents to the exchange agent on or before
5:00 p.m., New York City time, on the expiration
date.
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|
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(2)
|
Book-entry delivery
procedure: Send a timely confirmation of a book-entry transfer of
your initial notes, if this procedure is available, into the exchange
agent’s account at The Depository Trust Company in accordance with the
procedures for book-entry transfer described under “—Book-Entry Delivery
Procedure” below, on or before 5:00 p.m., New York City time, on
the expiration date.
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|
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(3)
|
Guaranteed delivery
procedure: If time will not permit you to complete your tender by
using the procedures described in (1) or (2) above before the
expiration date and this procedure is available, comply with the
guaranteed delivery procedures described under “—Guaranteed Delivery
Procedure” below.
|
The
method of delivery of the initial notes, the letter of transmittal and all other
required documents is at your election and risk. Instead of delivery by mail, we
recommend that you use an overnight or hand-delivery service. If you choose the
mail, we recommend that you use registered mail, properly insured, with return
receipt requested. In all
cases, you should allow sufficient time to assure timely delivery. You
should not send any letters of transmittal or initial notes to us. You must
deliver all documents to the exchange agent at its address provided below. You
may also request your broker, dealer, commercial bank, trust company or nominee
to tender your initial notes on your behalf.
Only a
holder of initial notes may tender initial notes in this exchange offer. A
holder is any person in whose name initial notes are registered on our books or
any other person who has obtained a properly completed bond power from the
registered holder.
If you
are the beneficial owner of initial notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender your notes, you must contact that registered holder promptly and instruct
that registered holder to tender your notes on your behalf. If you wish to
tender your initial notes on your own behalf, you must, before completing and
executing the letter of transmittal and delivering your initial notes, either
make appropriate arrangements to register the ownership of these notes in your
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
You must
have any signatures on a letter of transmittal or a notice of withdrawal
guaranteed by:
|
|
(1)
|
a
member firm of a registered national securities exchange or of the
National Association of Securities
Dealers, Inc.;
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|
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(2)
|
a
commercial bank or trust company having an office or correspondent in the
United States; or
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|
(3)
|
an
eligible guarantor institution within the meaning of Rule 17Ad-15
under the Exchange Act, unless the initial
notes are tendered:
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(a)
|
by
a registered holder or by a participant in The Depository Trust Company
whose name appears on a security position listing as the owner, who has
not completed the box entitled “Special Issuance Instructions” or “Special
Delivery Instructions” on the letter of transmittal and only if the
exchange notes are being issued directly to this registered holder or
deposited into this participant’s account at The Depository Trust Company;
or
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|
|
(b)
|
for
the account of a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of
1934.
|
If the
letter of transmittal or any bond powers are signed by:
|
|
(1)
|
the
recordholder(s) of the initial notes tendered: the signature must
correspond with the name(s) written on the face of the initial notes
without alteration, enlargement or any change
whatsoever.
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(2)
|
a
participant in The Depository Trust Company: the signature must correspond
with the name as it appears on the security position listing as the holder
of the initial notes.
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(3)
|
a
person other than the registered holder of any initial notes: these
initial notes must be endorsed or accompanied by bond powers and a proxy
that authorize this person to tender the initial notes on behalf of the
registered holder, in satisfactory form to us as determined in our sole
discretion, in each case, as the name of the registered holder or holders
appears on the initial notes.
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|
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(4)
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trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity:
these persons should so indicate when signing. Unless waived by us,
evidence satisfactory to us of their authority to so act must also be
submitted with the letter of
transmittal.
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To tender
your initial notes in this exchange offer, you must make the following
representations:
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|
(1)
|
you
are authorized to tender, sell, assign and transfer the initial notes
tendered and to acquire exchange notes issuable upon the exchange of such
tendered initial notes, and that we will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim when the same are
accepted by us;
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|
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(2)
|
any
exchange notes acquired by you pursuant to the exchange offer are being
acquired in the ordinary course of business, whether or not you are the
holder;
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(3)
|
you
or any other person who receives exchange notes, whether or not such
person is the holder of the exchange notes, has an arrangement or
understanding with any person to participate in a distribution of such
exchange notes within the meaning of the Securities Act and is not
participating in, and does not intend to participate in, the distribution
of such exchange notes within the meaning of the Securities
Act;
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(4)
|
you
or such other person who receives exchange notes, whether or not such
person is the holder of the exchange notes, is not an “affiliate,” as
defined in Rule 405 of the Securities Act, of ours, or if you or such
other person is an affiliate, you or such other person will comply with
the registration and prospectus delivery requirements of the Securities
Act to the extent applicable;
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|
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(5)
|
if
you are not a broker-dealer, you represent that you are not engaging in,
and do not intend to engage in, a distribution of exchange notes;
and
|
|
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(6)
|
if
you are a broker-dealer that will receive exchange notes for your own
account in exchange for initial notes, you represent that the initial
notes to be exchanged for the exchange notes were acquired by you as a
result of market-making or other trading activities and acknowledge that
you will deliver a prospectus in connection with any resale, offer to
resell or other transfer of such exchange
notes.
|
You must
also warrant that the acceptance of any tendered initial notes by the issuers
and the issuance of exchange notes in exchange therefor shall constitute
performance in full by the issuers of its obligations under the registration
rights agreement relating to the initial notes.
To
effectively tender notes through The Depository Trust Company, the financial
institution that is a participant in The Depository Trust Company will
electronically transmit its acceptance through the Automatic Tender Offer
Program. The Depository Trust Company will then edit and verify the acceptance
and send an agent’s message to the exchange agent for its acceptance. An agent’s
message is a message transmitted by The Depository Trust Company to the exchange
agent stating that The Depository Trust Company has received an express
acknowledgment from the participant in The Depository Trust Company tendering
the notes that this participant has received and agrees to be bound by the terms
of the letter of transmittal, and that we may enforce this agreement against
this participant.
Book-Entry
Delivery Procedure
Any
financial institution that is a participant in The Depository Trust Company’s
systems may make book-entry deliveries of initial notes by causing The
Depository Trust Company to transfer these initial notes into the exchange
agent’s account at The Depository Trust Company in accordance with The
Depository Trust Company’s procedures for transfer. To effectively tender notes
through The Depository Trust Company, the financial institution that is a
participant in The Depository Trust Company will electronically transmit its
acceptance through the Automatic Tender Offer Program. The Depository Trust
Company will then edit and verify the acceptance and send an agent’s message to
the exchange agent for its acceptance. An agent’s message is a message
transmitted by The Depository Trust Company to the exchange agent stating that
The Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the notes that this
participation has received and agrees to be bound by the terms of the letter of
transmittal, and that we may enforce this agreement against this participant.
The exchange agent will make a request to establish an account for the initial
notes at The Depository Trust Company for purposes of the exchange offer within
two business days after the date of this prospectus.
A
delivery of initial notes through a book-entry transfer into the exchange
agent’s account at The Depository Trust Company will only be effective if an
agent’s message or the letter of transmittal or a facsimile of the letter of
transmittal with any required signature guarantees and any other required
documents is transmitted to and received by the exchange agent at the address
indicated below under “—Exchange Agent” on or before the expiration date unless
the guaranteed delivery procedures described below are complied with. Delivery of documents to The
Depository Trust Company does not constitute delivery to the exchange
agent.
Guaranteed
Delivery Procedure
If you
are a registered holder of initial notes and desire to tender your notes, and
(1) these notes are not immediately available, (2) time will not
permit your notes or other required documents to reach the exchange agent before
the expiration date or (3) the procedures for book-entry transfer cannot be
completed on a timely basis and an agent’s message delivered, you may still
tender in this exchange offer if:
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|
(1)
|
you
tender through a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Exchange
Act;
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|
|
(2)
|
on
or before the expiration date, the exchange agent receives a properly
completed and duly executed letter of transmittal or facsimile of the
letter of transmittal, and a notice of guaranteed delivery, substantially
in the form provided by us, with your name and address as holder of the
initial notes and the amount of notes tendered, stating that the tender is
being made by that letter and notice and guaranteeing that within three
New York Stock Exchange trading days after the expiration date the
certificates for all the initial notes tendered, in proper form for
transfer, or a book-entry confirmation with an agent’s message, as the
case may be, and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange agent;
and
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(3)
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the
certificates for all your tendered initial notes in proper form for
transfer or a book-entry confirmation as the case may be, and all other
documents required by the letter of transmittal are received by the
exchange agent within three New York Stock Exchange trading days
after the expiration date.
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Acceptance
of Initial Notes for Exchange; Delivery of Exchange Notes
Your
tender of initial notes will constitute an agreement between you and us governed
by the terms and conditions provided in this prospectus and in the related
letter of transmittal.
We will
be deemed to have received your tender as of the date when your duly signed
letter of transmittal accompanied by your initial notes tendered, or a timely
confirmation of a book-entry transfer of these notes into the exchange agent’s
account at The Depository Trust Company with an agent’s message, or a notice of
guaranteed delivery from an eligible institution is received by the exchange
agent.
All
questions as to the validity, form, eligibility, including time of receipt,
acceptance and withdrawal of tenders will be determined by us in our sole
discretion. Our determination will be final and binding.
We
reserve the absolute right to reject any and all initial notes not properly
tendered or any initial notes which, if accepted, would, in our opinion or our
counsel’s opinion, be unlawful. We also reserve the absolute right to waive any
conditions of this exchange offer or irregularities or defects in tender as to
particular notes with the exception of conditions to this exchange offer
relating to the obligations of broker dealers, which we will not waive. If we
waive a condition to this exchange offer, the waiver will be applied equally to
all note holders. Our interpretation of the terms and conditions of this
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of initial notes must be cured within such time as we
shall determine. We, the exchange agent or any other person will be under no
duty to give notification of defects or irregularities with respect to tenders
of initial notes. We and the exchange agent or any other person will incur no
liability for any failure to give notification of these defects or
irregularities. Tenders of initial notes will not be deemed to have been made
until such irregularities have been cured or waived. The exchange agent will
return without cost to their holders any initial notes that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived promptly following the expiration date.
If all
the conditions to the exchange offer are satisfied or waived on the expiration
date, we will accept all initial notes properly tendered and will issue the
exchange notes promptly thereafter. Please refer to the section of this
prospectus entitled “—Conditions to the Exchange Offer” below. For purposes of
this exchange offer, initial notes will be deemed to have been accepted as
validly tendered for exchange when, as and if we give oral or written notice of
acceptance to the exchange agent.
We will
issue the exchange notes in exchange for the initial notes tendered pursuant to
a notice of guaranteed delivery by an eligible institution only against delivery
to the exchange agent of the letter of transmittal, the tendered initial notes
and any other required documents, or the receipt by the exchange agent of a
timely confirmation of a book-entry transfer of initial notes into the exchange
agent’s account at The Depository Trust Company with an agent’s message, in each
case, in form satisfactory to us and the exchange agent.
If any
tendered initial notes are not accepted for any reason provided by the terms and
conditions of this exchange offer or if initial notes are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
non-exchanged initial notes will be returned without expense to the tendering
holder, or, in the case of initial notes tendered by book-entry transfer
procedures described above, will be credited to an account maintained with the
book-entry transfer facility, promptly after withdrawal, rejection of tender or
the expiration or termination of the exchange offer.
By
tendering into this exchange offer, you will irrevocably appoint our designees
as your attorney-in-fact and proxy with full power of substitution and
resubstitution to the full extent of your rights on the notes tendered. This
proxy will be considered coupled with an interest in the tendered notes. This
appointment will be effective only when, and to the extent that we accept your
notes in this exchange offer. All prior proxies on these notes will then be
revoked and you will not be entitled to give any subsequent proxy. Any proxy
that you may give subsequently will not be deemed effective. Our designees will
be empowered to exercise all voting and other rights of the holders as they may
deem proper at any meeting of note holders or otherwise. The initial notes will
be validly tendered only if we are able to exercise full voting rights on the
notes, including voting at any meeting of the note holders, and full rights to
consent to any action taken by the note holders.
Withdrawal
of Tenders
Except as
otherwise provided in this prospectus, you may withdraw tenders of initial notes
at any time before 5:00 p.m., New York City time, on the expiration
date.
For a
withdrawal to be effective, you must send a written or facsimile transmission
notice of withdrawal to the exchange agent before 5:00 p.m., New York
City time, on the expiration date at the address provided below under “–Exchange
Agent” and before acceptance of your tendered notes for exchange by
us.
Any
notice of withdrawal must:
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(1)
|
specify
the name of the person having tendered the initial notes to be
withdrawn;
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(2)
|
identify
the notes to be withdrawn, including, if applicable, the registration
number or numbers and total principal amount of these
notes;
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(3)
|
be
signed by the person having tendered the initial notes to be withdrawn in
the same manner as the original signature on the letter of transmittal by
which these notes were tendered, including any required signature
guarantees, or be accompanied by documents of transfer sufficient to
permit the trustee for the initial notes to register the transfer of these
notes into the name of the person having made the original tender and
withdrawing the tender;
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(4)
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specify
the name in which any of these initial notes are to be registered, if this
name is different from that of the person having tendered the initial
notes to be withdrawn; and
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(5)
|
if
applicable because the initial notes have been tendered through the
book-entry procedure, specify the name and number of the participant’s
account at The Depository Trust Company to be credited, if different than
that of the person having tendered the initial notes to be
withdrawn.
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We will
determine all questions as to the validity, form and eligibility, including time
of receipt, of all notices of withdrawal and our determination will be final and
binding on all parties. Initial notes that are withdrawn will be deemed not to
have been validly tendered for exchange in this exchange offer.
The
exchange agent will return without cost to their holders all initial notes that
have been tendered for exchange and are not exchanged for any reason, promptly
after withdrawal, rejection of tender or expiration or termination of this
exchange offer.
You may
retender properly withdrawn initial notes in this exchange offer by following
one of the procedures described under “—Procedures for Tendering Initial Notes”
above at any time on or before the expiration date.
Conditions
to the Exchange Offer
We will
complete this exchange offer only if:
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|
(1)
|
there
is no change in the laws and regulations which would reasonably be
expected to impair our ability to proceed with this exchange
offer;
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|
(2)
|
there
is no change in the current interpretation of the staff of the SEC
permitting resales of the exchange
notes;
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(3)
|
there
is no stop order issued by the SEC or any state securities authority
suspending the effectiveness of the registration statement which includes
this prospectus or the qualification of the indenture for our exchange
notes under the Trust Indenture Act of 1939 and there are no proceedings
initiated or, to our knowledge, threatened for that
purpose;
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|
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(4)
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there
is no action or proceeding instituted or threatened in any court or before
any governmental agency or body that would reasonably be expected to
prohibit, prevent or otherwise impair our ability to proceed with this
exchange offer; and
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|
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(5)
|
we
obtain all governmental approvals that we deem in our sole discretion
necessary to complete this exchange
offer.
|
These
conditions are for our sole benefit. We may assert any one of these conditions
regardless of the circumstances giving rise to it and may also waive any one of
them, in whole or in part, at any time and from time to time, if we determine in
our reasonable discretion that it has not been satisfied, subject to applicable
law. Notwithstanding the foregoing, all conditions to the exchange offer must be
satisfied or waived before the expiration of this exchange offer. If we waive a
condition to this exchange offer, the waiver will be applied equally to all note
holders. We will not be deemed to have waived our rights to assert or waive
these conditions if we fail at any time to exercise any of them. Each of these
rights will be deemed an ongoing right which we may assert at any time and from
time to time.
If we
determine that we may terminate this exchange offer because any of these
conditions is not satisfied, we may:
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|
(1)
|
refuse
to accept and return to their holders any initial notes that have been
tendered;
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|
|
(2)
|
extend
the exchange offer and retain all notes tendered before the expiration
date, subject to the rights of the holders of these notes to withdraw
their tenders; or
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|
|
(3)
|
waive
any condition that has not been satisfied and accept all properly tendered
notes that have not been withdrawn or otherwise amend the terms of this
exchange offer in any respect as provided under the section in this
prospectus entitled “—Expiration Date; Extensions; Amendments;
Termination.”
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Accounting
Treatment
We will
record the exchange notes at the same carrying value as the initial notes as
reflected in our accounting records on the date of the exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes upon the completion
of the exchange offer.
Exchange
Agent
We have
appointed U.S. Bank National Association as exchange agent for this exchange
offer. You should direct all questions and requests for assistance on
the procedures for tendering and all requests for additional copies of this
prospectus or the letter of transmittal to the exchange agent as
follows:
By mail
or hand/overnight delivery:
U.S. Bank
National Association
EP-MN-WS2N
60
Livingston Avenue
St. Paul,
MN 55107
Facsimile
Transmission:
U.S. Bank
National Association
(651)
495-8158
Confirm
by Telephone: (800) 934-6802
Attention: Specialized
Finance Department
Fees
and Expenses
We will
bear the expenses of soliciting tenders in this exchange offer, including fees
and expenses of the exchange agent and trustee and accounting, legal, printing
and related fees and expenses.
We will
not make any payments to brokers, dealers or other persons soliciting
acceptances of this exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket expenses in connection with this exchange
offer. We will also pay brokerage houses and other custodians, nominees and
fiduciaries their reasonable out-of-pocket expenses for forwarding copies of the
prospectus, letters of transmittal and related documents to the beneficial
owners of the initial notes and for handling or forwarding tenders for exchange
to their customers.
We will
pay all transfer taxes, if any, applicable to the exchange of initial notes in
accordance with this exchange offer. However, tendering holders will pay the
amount of any transfer taxes, whether imposed on the registered holder or any
other persons, if:
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|
(1)
|
certificates
representing exchange notes or initial notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
holder of the notes tendered;
|
|
|
(2)
|
tendered
initial notes are registered in the name of any person other than the
person signing the letter of transmittal;
or
|
|
|
(3)
|
a
transfer tax is payable for any reason other than the exchange of the
initial notes in this exchange
offer.
|
If you do
not submit satisfactory evidence of the payment of any of these taxes or of any
exemption from this payment with the letter of transmittal, we will bill you
directly the amount of these transfer taxes.
Your
Failure to Participate in the Exchange Offer Will Have Adverse
Consequences
The
initial notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your initial notes for
exchange notes in accordance with this exchange offer, or if you do not properly
tender your initial notes in this exchange offer, you will not be able to
resell, offer to resell or otherwise transfer the initial notes unless they are
registered under the Securities Act or unless you resell them, offer to resell
or otherwise transfer them under an exemption from the registration requirements
of, or in a transaction not subject to, the Securities Act.
In
addition, except as set forth in this paragraph, you will not be able to
obligate us to register the initial notes under the Securities
Act. You will not be able to require us to register your initial
notes under the Securities Act unless:
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|
(1)
|
the
initial purchasers request us to register initial notes that are not
eligible to be exchanged for exchange notes in the exchange offer;
or
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|
|
(2)
|
you
are not eligible to participate in the exchange offer or receive exchange
notes in the exchange offer that are not freely
tradeable;
|
in which
case the registration rights agreement requires us to file a registration
statement for a continuous offer in accordance with Rule 415 under the
Securities Act for the benefit of the holders of the initial notes described in
this sentence. We do not currently anticipate that we will register
under the Securities Act any notes that remain outstanding after completion of
the exchange offer.
Delivery
of Prospectus
Each
broker-dealer that receives exchange notes for its own account in exchange for
initial notes, where such initial notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange
notes. See “Plan of Distribution.”
DESCRIPTION OF THE NOTES
As used
below in this “Description of the Notes” section, the “Issuer” means Ply Gem
Industries, Inc., a Delaware corporation, and its successors, but not any of its
subsidiaries. The Issuer issued the initial notes and will issue the exchange
notes described in this prospectus (collectively, the “Notes”) under an
Indenture, dated as of June 9, 2008 (the “Indenture”), among the Issuer,
the Guarantors and U.S. Bank National Association, as trustee (the
“Trustee”) and as collateral agent (the “Notes Collateral Agent”). The terms of
the Notes include those set forth in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act. You may obtain a copy of
the Indenture from the Issuer at its address set forth elsewhere in this
prospectus.
The
following is a summary of the material terms and provisions of the Notes,
Collateral Agreement, Intercreditor Agreement and Registration Rights Agreement.
The following summary does not purport to be a complete description of the Notes
or such agreements and is subject to the detailed provisions of, and qualified
in its entirety by reference to, the Indenture, Security Documents,
Intercreditor Agreement and Registration Rights Agreement. You can find
definitions of certain terms used in this description under the heading
“— Certain Definitions.”
Brief
Description of the Notes and the Note Guarantees
The
Notes:
|
·
|
are
senior obligations of the Issuer;
|
|
·
|
are
pari passu in
right of payment with any existing and future senior Indebtedness of the
Issuer;
|
|
·
|
are
secured on a first-priority lien basis by the Notes Collateral and on a
second-priority lien basis by the ABL Collateral, in each case subject to
certain liens permitted under the
Indenture;
|
|
·
|
are
effectively subordinated to the Credit Agreement to the extent of the
value of the ABL
Collateral; and
|
|
·
|
are
guaranteed on a senior secured basis by the
Guarantors.
|
The Note
Guarantees:
The Notes
will be guaranteed by Parent and all Subsidiaries of the Issuer (other than
Unrestricted Subsidiaries and Foreign Subsidiaries). See “— Additional Note
Guarantees.”
Each Note
Guarantee:
|
·
|
is
a senior obligation of the
Guarantor;
|
|
·
|
is
pari passu in
right of payment with any existing and future senior Indebtedness of the
Guarantor;
|
|
·
|
is
secured on a first-priority basis by the Notes Collateral owned by such
Guarantor and on a second-priority basis by the ABL Collateral owned by
such Guarantor (in each case subject to certain liens permitted under the
Indenture); and
|
|
·
|
is
effectively subordinated to the Guarantee of such Guarantor under the
Credit Agreement to the extent of the value of the ABL Collateral owned by
such Guarantor.
|
As of the
date of this offering, all of the Issuer’s subsidiaries will be “Restricted
Subsidiaries.” However, none of the Issuer’s Foreign Subsidiaries will guarantee
the Notes. See “Risk Factors — Risks Related to Our Substantial
Indebtedness and the Notes — Our Canadian subsidiary and our other future
foreign subsidiaries will not be guarantors, and your claims will be
subordinated to all of the creditors of the non-guarantor subsidiaries.” In
addition, under the circumstances described below under the subheading
“— Certain Covenants — Limitations on Designation of Unrestricted
Subsidiaries,” the Issuer will be permitted to designate certain of its
Subsidiaries as “Unrestricted Subsidiaries.” The Issuer’s Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants in the
Indenture. The Issuer’s Unrestricted Subsidiaries will not guarantee the
Notes.
Principal,
Maturity and Interest
The Notes
will mature on June 15, 2013. The Notes will bear interest at the rate
shown on the cover page of this prospectus, payable on June 15 and
December 15 of each year, commencing on December 15, 2008, to Holders
of record at the close of business on June 1 or December 1, as the
case may be, immediately preceding the relevant interest payment date. Interest
on the Notes will be computed on the basis of a 360-day year of twelve 30-day
months.
The Notes
will be issued in registered form, without coupons, and in denominations of
$1,000 and integral multiples of $1,000.
An
aggregate principal amount of initial notes equal to $700.0 million was
issued on June 9, 2008 and an aggregate principal amount of exchange notes
equal to $700.0 million is being issued in this offering. The Issuer may issue
additional Notes having identical terms and conditions to the Notes being issued
in this offering, except for issue date, issue price, interest rate, first
interest payment date and the amount of interest paid on the first interest
payment date after such issue date, in an unlimited aggregate principal amount
(the “Additional Notes”), subject to compliance with the covenants described
under “— Certain Covenants — Limitations on Additional Indebtedness”
and “— Certain Covenants — Limitations on Liens.” Any Additional Notes
will be part of the same issue as the Notes being issued in this offering and
will be treated as one class with the Notes being issued in this offering,
including for purposes of voting, redemptions and offers to purchase. For
purposes of this “Description of the Notes,” except for the covenants described
under “— Certain Covenants — Limitations on Additional Indebtedness”
and “— Certain Covenants — Limitations on Liens,” references to the
Notes include Additional Notes, if any.
Methods
of Receiving Payments on the Notes
If a
Holder has given wire transfer instructions to the Issuer at least ten Business
Days prior to the applicable payment date, the Issuer will make all payments on
such Holder’s Notes by wire transfer of immediately available funds to the
account specified in those instructions. Otherwise, payments on the Notes will
be made at the office or agency of the paying agent (the “Paying Agent”) and
registrar (the “Registrar”) for the Notes within the City and State of
New York unless the Issuer elects to make interest payments by check mailed
to the Holders at their addresses set forth in the register of
Holders.
Ranking
The
Indebtedness evidenced by the Notes and the Note Guarantees is senior
Indebtedness of the Issuer or the applicable Guarantor, as the case may be,
ranks pari passu in
right of payment with all existing and future senior Indebtedness of the Issuer
and the Guarantors, as the case may be, and is secured by the Collateral, which
Collateral will be shared on an equal and ratable basis with certain Other Pari
Passu Lien Obligations incurred thereafter. Indebtedness under the Credit
Agreement also is secured by the Collateral. The Indebtedness under
the Credit Agreement and any other Lenders Debt incurred in the future has first
priority with respect to the ABL Collateral but is junior in ranking with
respect to the Notes Collateral. Such security interests are described under
“— Security for the Notes.” The Indebtedness evidenced by the Notes and the
Note Guarantees is senior in right of payment to all existing and future
Subordinated Indebtedness of the Issuer and the Guarantors, as the case may
be.
As of
June 28, 2008, Parent, the Issuer and its Subsidiaries had $40.0 million
aggregate principal amount of senior Indebtedness (excluding the Notes and the
Note Guarantees) outstanding (excluding unused commitments).
A
significant portion of the operations of the Issuer are conducted through its
Subsidiaries. Unless the Subsidiary is a Guarantor, claims of creditors on such
Subsidiaries, including trade creditors, and claims of preferred stockholders
(if any) of such Subsidiaries generally will have priority with respect to the
assets and earnings of such Subsidiaries over the claims of creditors of the
Issuer, including the Holders of the Notes. The Notes, therefore, are
effectively subordinated to holders of Indebtedness and other creditors
(including trade creditors) and preferred stockholders (if any) of Subsidiaries
of the Issuer that are not Guarantors. Although the Indenture limits the
incurrence of Indebtedness by certain of the Issuer’s Subsidiaries, such
limitation is subject to a number of significant qualifications. See
“— Certain Covenants — Limitations on Additional
Indebtedness.”
Although
the Indenture contains limitations on the amount of additional Pari Passu
Indebtedness and additional secured Indebtedness that Parent, the Issuer and its
Restricted Subsidiaries may Incur, under certain circumstances the amount of
such Pari Passu Indebtedness and Secured Indebtedness could be substantial. See
“Certain Covenants — Limitations on Additional Indebtedness” and “Certain
Covenants — Limitations on Liens.”
Note
Guarantees
The
Issuer’s obligations under the Notes, the Indenture, the Security Documents and
the Intercreditor Agreement are jointly and severally guaranteed on a senior
secured basis (the “Note Guarantees”) by (1) Parent and (2) each
Restricted Subsidiary (other than any Foreign Subsidiary).
Not all
of our Subsidiaries will guarantee the Notes. Unrestricted Subsidiaries and
Foreign Subsidiaries will not be Guarantors. In the event of a bankruptcy,
liquidation or reorganization of any of these non-guarantor Subsidiaries, these
non-guarantor Subsidiaries will pay the holders of their debts and their trade
creditors before they will be able to distribute any of their assets to us. For
the six months ended June 28, 2008, our Canadian subsidiary represented
approximately 7.0% of our net sales and 84.0% of our operating earnings. In
addition, as of June 28, 2008, it held approximately 4.5% of our combined assets
and had approximately $9.8 million of liabilities (including trade payables), to
which the Notes are effectively subordinated.
As of the
date of this offering, all of our Subsidiaries will be “Restricted
Subsidiaries.” However, under the circumstances described below under the
subheading “— Certain Covenants — Limitations on Designation of
Unrestricted Subsidiaries,” the Issuer will be permitted to designate some of
our Subsidiaries as “Unrestricted Subsidiaries.” The effect of designating a
Subsidiary as an “Unrestricted Subsidiary” will be:
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an
Unrestricted Subsidiary will not be subject to many of the restrictive
covenants in the Indenture;
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a
Subsidiary that has previously been a Guarantor and that is designated an
Unrestricted Subsidiary will be released from its Note
Guarantee; and
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the
assets, income, cash flow and other financial results of an Unrestricted
Subsidiary will not be consolidated with those of the Issuer for purposes
of calculating compliance with the restrictive covenants contained in the
Indenture.
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The
obligations of each Subsidiary Guarantor under its Note Guarantee are limited to
the maximum amount as will result in the obligations of such Subsidiary
Guarantor under its Note Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Subsidiary Guarantor that
makes a payment for distribution under its Note Guarantee will be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based on
adjusted net assets of each Subsidiary Guarantor.
A
Subsidiary Guarantor shall be released from its obligations under its Note
Guarantee:
(1) in
the event of a sale or other disposition of all or substantially all of the
assets of such Subsidiary Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Equity Interests of such
Subsidiary Guarantor then held by the Issuer and the Restricted
Subsidiaries;
(2) if
such Subsidiary Guarantor is designated as an Unrestricted Subsidiary or
otherwise ceases to be a Restricted Subsidiary, in each case in accordance with
the provisions of the Indenture, upon effectiveness of such designation or when
it first ceases to be a Restricted Subsidiary, respectively; or
(3) if
the Issuer exercises its legal defeasance option or its covenant defeasance
option as described under “— Legal Defeasance and Covenant Defeasance” or
if its obligations under the Indenture are discharged in accordance with the
terms of the Indenture.
Security
for the Notes
The Notes
and the Note Guarantees have the benefit of the Collateral, which consists of
(i) the Notes Collateral as to which the Holders of the Notes and holders
of certain Other Pari Passu Lien Obligations have a first-priority security
interest (subject to Permitted Liens) and the Bank Lenders and certain other
holders of Lenders Debt have a second-priority security interest and
(ii) the ABL Collateral as to which the Bank Lenders and certain other
holders of Lenders Debt have a first-priority security interest and the holders
of the Notes and holders of certain Other Pari Passu Lien Obligations have a
second-priority security interest (subject to Permitted Liens).
The
Issuer and the Guarantors are able to incur additional Indebtedness in the
future which could share in the Collateral. The amount of all such additional
Indebtedness will be limited by the covenants disclosed under “— Certain
Covenants — Limitation on Liens” and “— Certain
Covenants — Limitations on Additional Indebtedness.” Under certain
circumstances the amount of such additional secured Indebtedness could be
significant.
Notes
Collateral
The Notes
Collateral is pledged as collateral to the Notes Collateral Agent for the
benefit of the Trustee, the Notes Collateral Agent, the Holders of the Notes and
the beneficiaries of each indemnification obligation undertaken by any Grantor
under any Note Document. The Notes and Note Guarantees are secured by
first-priority security interests in the Notes Collateral, subject to Permitted
Liens. The Notes Collateral consists of: (i) all of the Equity Interests of
the Issuer, (ii) all of the other Equity Interests held by Parent, the
Issuer or any Guarantor (which, in the case of any Foreign Subsidiary, will be
limited to 100% of the non-voting stock (if any) and 66% of the voting stock of
such Foreign Subsidiary) and (ii) substantially all of the other tangible
and intangible assets of Parent, the Issuer and the Guarantors, other than the
ABL Collateral and Excluded Assets.
In
addition to the limitations described below under “— Limitations on Stock
Collateral,” the Notes Collateral does not include (i) the ABL Collateral,
(ii) the Excluded Assets and (iii) those assets as to which the Notes
Collateral Agent reasonably determines that the costs of obtaining such a
security interest are excessive in relation to the value of the security to be
afforded thereby.
Initially,
subject to Permitted Liens, only the Notes have the benefit of the
first-priority security interest in the Notes Collateral. No other Indebtedness
incurred by the Issuer may share in the first-priority security interest in the
Notes Collateral other than any Additional Notes and certain Indebtedness
constituting Other Pari Passu Lien Obligations.
The
Issuer initially granted a second-priority lien on and security interest in the
Notes Collateral to the Bank Collateral Agent for the benefit of the Lenders
Debt, which initially consisted of the loans outstanding under the Credit
Agreement made by the Bank Lenders, obligations with respect to letters of
credit issued under the Credit Agreement, certain hedging and cash management
obligations incurred with the Bank Lenders or their affiliates and any other
obligations under the Credit Agreement. Certain additional Indebtedness that is
incurred by the Issuer in compliance with the terms of the Indenture may also be
given a lien on and security interest in the Notes Collateral that ranks junior
or pari passu to the lien of the Notes Collateral Agent for the benefit of the
Noteholder Secured Parties in the Notes Collateral. Except as provided in the
Intercreditor Agreement, holders of such junior liens are not able to take any
enforcement action with respect to the Notes Collateral so long as any Notes are
outstanding.
ABL
Collateral
The Notes
are also secured by a second-priority lien on and security interest in the ABL
Collateral (subject to Permitted Liens). The ABL Collateral includes all
accounts receivable, inventory, cash (other than certain cash proceeds of the
Notes Collateral) and proceeds of the foregoing and certain assets related
thereto, in each case held by the Issuer and the Guarantors. Generally, the
Notes second-priority lien on and security interest in the ABL Collateral will
be terminated and automatically released if the lien on such ABL Collateral in
favor of the Lenders Debt is released, other than such release granted upon or
following the discharge of the ABL Facility Obligations.
The
Issuer or any Guarantor may grant an additional lien on any property or asset
that constitutes ABL Collateral in order to secure any obligation permitted to
be incurred pursuant to the Indenture. Any such additional lien may be a
first-priority lien that is senior to the lien securing the Notes or may be a
second-priority lien that will rank pari passu with the second
priority lien securing the Notes or a lien that will rank junior to the
second-priority lien securing the Notes.
Limitations
on Stock Collateral
The
Equity Interests and other securities of a Subsidiary of Parent or the Issuer
that are owned by Parent, the Issuer or any Subsidiary Guarantor will constitute
Notes Collateral only to the extent that such Equity Interests and other
securities can secure the Notes without Rule 3-16 of Regulation S-X
under the Securities Act (or any other U.S. federal law, rule or
regulation) requiring separate financial statements of such Subsidiary to be
filed with the SEC (or any other U.S. federal governmental agency). In the
event that Rule 3-16 of Regulation S-X under the Securities Act
requires or is amended, modified or interpreted by the SEC to require (or is
replaced with another rule or regulation, or any other law, rule or regulation
is adopted, which would require) the filing with the SEC (or any other
governmental agency) of separate financial statements of any Subsidiary due to
the fact that such Subsidiary’s Equity Interests and other securities secure the
Notes, then the Equity Interests and other securities of such Subsidiary shall
automatically be deemed not to be part of the Notes Collateral (but only to the
extent necessary to not be subject to such requirement). In such
event, the Security Documents may be amended or modified, without the consent of
any Holder of Notes, to the extent necessary to release the first-priority
security interests in the Equity Interests and other securities that are so
deemed to no longer constitute part of the Notes Collateral.
In the
event that Rule 3-16 of Regulation S-X under the Securities Act is
amended, modified or interpreted by the SEC to permit (or is replaced with
another rule or regulation, or any other law, rule or regulation is adopted,
which would permit) such Subsidiary’s Equity Interests and other securities to
secure the Notes in excess of the amount then pledged without the filing with
the SEC (or any other U.S. federal governmental agency) of separate
financial statements of such Subsidiary, then the Equity Interests and other
securities of such Subsidiary shall automatically be deemed to be a part of the
Notes Collateral (but only to the extent necessary to not be subject to any such
financial statement requirement). In such event, the Security Documents may be
amended or modified, without the consent of any holder of Notes, to the extent
necessary to subject to the Liens under the Security Documents such additional
Equity Interests and other securities.
In
accordance with the limitations set forth in the two immediately preceding
paragraphs, the Notes Collateral will include Equity Interests of Subsidiaries
of Parent or the Issuer only to the extent that the applicable value of such
Equity Interests (on a Subsidiary-by-Subsidiary basis) is less than 20% of the
aggregate principal amount of the Notes outstanding, and the portion of the
Equity Interests of Subsidiaries constituting Notes Collateral may decrease or
increase as described above. However, as further described under
“— Notes Collateral” and “— ABL Collateral”, the Notes are secured by
first or second priority interests in substantially all of the assets of the
Parent, the Issuer and the Guarantors. The book value of the tangible
and intangible assets (excluding goodwill) of the Parent, the Issuer and the
Guarantors included in such collateral was approximately $797.2 million and
$758.3 million at June 28, 2008 and December 31, 2007,
respectively.
Security
Documents and Certain Related Intercreditor Provisions
The
Issuer, the Guarantors, the Notes Collateral Agent and the Trustee entered into
one or more Security Documents creating and establishing the terms of the
security interests that secure the Notes and the Note Guarantees. These security
interests secure the payment and performance when due of all of the obligations
of the Issuer and the Guarantors under the Notes, the Indenture, the Note
Guarantees, the Intercreditor Agreement and the Security Documents, as provided
in the Security Documents. The Issuer and the Guarantors must use their
commercially reasonable efforts to complete all filings and other similar
actions required in connection with the perfection of such security interests as
soon as reasonably practicable. U.S. Bank National Association was
appointed, pursuant to the Indenture, as the Notes Collateral Agent. The
Trustee, Notes Collateral Agent, each Holder and each other holder of, or
obligee in respect of, any obligations in respect of the Notes outstanding at
such time and the beneficiaries of each indemnification obligation undertaken by
a Note Party or Parent under any Note Document are referred to collectively as
the “Noteholder Secured Parties.”
Intercreditor
Agreement
On the
Issue Date, the Issuer, the Guarantors, the Trustee, the Notes Collateral Agent
and the Bank Collateral Agent entered into the Intercreditor Agreement. Although
the Holders of the Notes are not party to the Intercreditor Agreement, by their
acceptance of the Notes they will agree to be bound thereby. Pursuant to the
terms of the Intercreditor Agreement, the Notes Collateral Agent determines the
time and method by which the security interests in the Notes Collateral will be
enforced and the Bank Collateral Agent determines the time and method by which
the security interests in the ABL Collateral will be enforced.
The
aggregate amount of the obligations secured by the ABL Collateral may, subject
to the limitations set forth in the Indenture, be increased. A portion of the
obligations secured by the ABL Collateral consists or may consist of
Indebtedness that is revolving in nature, and the amount thereof that may be
outstanding at any time or from time to time may be increased or reduced and
subsequently reborrowed and such obligations may, subject to the limitations set
forth in the Indenture, be increased, extended, renewed, replaced, restated,
supplemented, restructured, repaid, refunded, refinanced or otherwise amended or
modified from time to time, all without affecting the subordination of the liens
held by the Holders or the provisions of the Intercreditor Agreement defining
the relative rights of the parties thereto. The lien priorities provided for in
the Intercreditor Agreement shall not be altered or otherwise affected by any
amendment, modification, supplement, extension, increase, replacement, renewal,
restatement or refinancing of either the obligations secured by the ABL
Collateral or the obligations secured by the Notes Collateral, by the release of
any Collateral or of any guarantees securing any secured obligations or by any
action that any representative or secured party may take or fail to take in
respect of any Collateral.
No
Action With Respect to the ABL Collateral
The
Intercreditor Agreement provides that none of the Noteholder Secured Parties may
commence any judicial or nonjudicial foreclosure proceedings with respect to,
seek to have a trustee, receiver, liquidator or similar official appointed for
or over, attempt any action to take possession of, exercise any right, remedy or
power with respect to, or otherwise take any action to enforce its interest in
or realize upon, or take any other action available to it in respect of, the ABL
Collateral under any Security Document, applicable law or otherwise, at any time
when the ABL Collateral is subject to any first-priority security interest and
any Lenders Debt secured by such ABL Collateral remains outstanding or any
commitment to extend credit that would constitute such Lenders Debt remains in
effect. Only the Bank Collateral Agent is entitled to take any such actions or
exercise any such remedies. Notwithstanding the foregoing, the Notes Collateral
Agent may, but has no obligation to, take all such actions it deems necessary to
perfect or continue the perfection of the Holders’ second-priority security
interest in the ABL Collateral. The Bank Collateral Agent is subject to similar
restrictions with respect to its ability to enforce the second-priority security
interest in the Notes Collateral held by holders of Lenders Debt.
No
Duties of Bank Collateral Agent
The
Intercreditor Agreement provides that neither the Bank Collateral Agent nor any
holder of any Lenders Debt secured by any ABL Collateral has any duties or other
obligations to any Noteholder Secured Party with respect to the ABL Collateral,
other than to transfer to the Trustee any proceeds of any such ABL Collateral in
which the Notes Collateral Agent continues to hold a security interest remaining
following any sale, transfer or other disposition of such ABL Collateral (in
each case, unless the Holders’ lien on all such ABL Collateral is terminated and
released prior to or concurrently with such sale, transfer, disposition, payment
or satisfaction), the payment and satisfaction in full of such Lenders Debt and
the termination of any commitment to extend credit that would constitute such
Lenders Debt, or, if the Bank Collateral Agent is in possession of all or any
part of such ABL Collateral after such payment and satisfaction in full and
termination, such ABL Collateral or any part thereof remaining, in each case
without representation or warranty on the part of the Bank Collateral Agent or
any such holder of Lenders Debt. In addition, the Intercreditor Agreement
further provides that, until the Lenders Debt secured by any ABL Collateral
shall have been paid and satisfied in full and any commitment to extend credit
that would constitute Lenders Debt secured thereby shall have been terminated,
the Bank Collateral Agent is entitled, for the benefit of the holders of such
Lenders Debt, to sell, transfer or otherwise dispose of or deal with such ABL
Collateral without regard to any second-priority security interest therein or
any rights to which any Noteholder Secured Party would otherwise be entitled as
a result of such second-priority security interest. Without limiting the
foregoing, the Trustee and the Notes Collateral Agent agreed in the
Intercreditor Agreement and each Holder of the Notes will agree by its
acceptance of the Notes that neither the Bank Collateral Agent nor any holder of
any Lenders Debt secured by any ABL Collateral will have any duty or obligation
first to marshal or realize upon the ABL Collateral, or to sell,
dispose of or
otherwise liquidate all or any portion of the ABL Collateral, in any manner that
would maximize the return to the Noteholder Secured Parties, notwithstanding
that the order and timing of any such realization, sale, disposition or
liquidation may affect the amount of proceeds actually received by the
Noteholder Secured Parties from such realization, sale, disposition or
liquidation. The Intercreditor Agreement has similar provisions regarding the
duties owed to the Bank Collateral Agent and the holders of any Lenders Debt by
the Noteholder Secured Parties with respect to the Notes Collateral.
The
Intercreditor Agreement additionally provides that the Notes Collateral Agent
and the Trustee waive, and each Holder of the Notes will waive by its acceptance
of the Notes, any claim that may be had against the Bank Collateral Agent or any
holder of any Lenders Debt arising out of (i) any actions which the Bank
Collateral Agent or such holder of Lenders Debt take or omit to take (including,
actions with respect to the creation, perfection or continuation of Liens on any
Collateral, actions with respect to the foreclosure upon, sale, release or
depreciation of, or failure to realize upon, any of the Collateral and actions
with respect to the collection of any claim for all or any part of the Lenders
Debt from any account debtor, guarantor or any other party) or the valuation,
use, protection or release of any security for such Lenders Debt, (ii) any
election by the Bank Collateral Agent or such holder of Lenders Debt, in any
proceeding instituted under Title 11 of the United States Code of the
application of Section 1111(b) of Title 11 of the United States Code
or (iii) any borrowing of, or grant of a security interest or
administrative expense priority under Section 364 of Title 11 of the
United States Code to, Parent, the Issuer or any of its Subsidiaries as
debtor-in-possession. The Bank Collateral Agent and holders of Lenders Debt
agree to waive similar claims with respect to the actions of any of the
Noteholder Secured Parties.
No
Interference; Payment Over; Reinstatement
The
Trustee and the Notes Collateral Agent agreed in the Intercreditor Agreement and
each Holder of the Notes will agree by its acceptance of the Notes
that:
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it
will not take or cause to be taken any action the purpose or effect of
which is, or could be, to make any Lien that the Holders of the Notes have
on the ABL Collateral pari passu with, or to give
the Trustee or the Holders of the Notes any preference or priority
relative to, any Lien that the holders of any Lenders Debt secured by any
ABL Collateral have with respect to such ABL
Collateral;
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it
will not challenge or question in any proceeding the validity or
enforceability of any first-priority security interest in the ABL
Collateral, the validity, attachment, perfection or priority of any lien
held by the holders of any Lenders Debt secured by any ABL Collateral, or
the validity or enforceability of the priorities, rights or duties
established by or other provisions of the Intercreditor
Agreement;
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it
will not take or cause to be taken any action the purpose or intent of
which is, or could be, to interfere, hinder or delay, in any manner,
whether by judicial proceedings or otherwise, any sale, transfer or other
disposition of the ABL Collateral by the Bank Collateral Agent or the
holders of any Lenders Debt secured by such ABL
Collateral;
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it
will have no right to (A) direct the Bank Collateral Agent or any
holder of any Lenders Debt secured by any ABL Collateral to exercise any
right, remedy or power with respect to such ABL Collateral or
(B) consent to the exercise by the Bank Collateral Agent or any
holder of any Lenders Debt secured by the ABL Collateral of any right,
remedy or power with respect to such ABL
Collateral;
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it
will not institute any suit or assert in any suit, bankruptcy, insolvency
or other proceeding any claim against the Bank Collateral Agent or any
holder of any Lenders Debt secured by any ABL Collateral seeking damages
from or other relief by way of specific performance, instructions or
otherwise with respect to, and neither the Bank Collateral Agent nor any
holders of under any Lenders Debt secured by any ABL Collateral will be
liable for, any action taken or omitted to be taken by the Bank Collateral
Agent or such lenders with respect to such ABL
Collateral;
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it
will not seek, and will waive any right, to have any ABL Collateral or any
part thereof marshaled upon any foreclosure or other disposition of such
ABL Collateral; and
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it
will not attempt, directly or indirectly, whether by judicial proceedings
or otherwise, to challenge the enforceability of any provision of the
Intercreditor Agreement.
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The Bank
Collateral Agent and the holders of Lenders Debt agreed to similar limitations
with respect to their rights in the Notes Collateral and their ability to bring
a suit against the Notes Collateral Agent or the Holders of the
Notes.
The
Trustee and the Notes Collateral Agent agreed in the Intercreditor Agreement and
each Holder of the Notes will agree by its acceptance of the Notes that if it
obtains possession of the ABL Collateral or realizes any proceeds or payment in
respect of the ABL Collateral, pursuant to any Security Document or by the
exercise of any rights available to it under applicable law or in any
bankruptcy, insolvency or similar proceeding or through any other exercise of
remedies, at any time when any Lenders Debt secured or intended to be secured by
such ABL Collateral remains outstanding or any commitment to extend credit that
would constitute Lenders Debt secured or intended to be secured by such ABL
Collateral remains in effect, then it will hold such ABL Collateral, proceeds or
payment in trust for the Bank Collateral Agent and the holders of any Lenders
Debt secured by such ABL Collateral and transfer such ABL Collateral, proceeds
or payment, as the case may be, to the Bank Collateral Agent. The Trustee, the
Notes Collateral Agent and each Holder of the Notes will further agree that if,
at any time, all or part of any payment with respect to any Lenders Debt secured
by any ABL Collateral previously made shall be rescinded for any reason
whatsoever, it will promptly pay over to the Bank Collateral Agent any payment
received by it in respect of any such ABL Collateral and shall promptly turn any
such ABL Collateral then held by it over to the Bank Collateral Agent, and the
provisions set forth in the Intercreditor Agreement will be reinstated as if
such payment had not been made, until the payment and satisfaction in full of
such Lenders Debt. The Bank Collateral Agent and the holders of Lenders Debt are
subject to similar limitations with respect to the Notes Collateral and any
proceeds or payments in respect of any Notes Collateral.
Entry
Upon Premises by Bank Collateral Agent and Holders of Lenders Debt
The
Intercreditor Agreement provides that if the Bank Collateral Agent takes any
enforcement action with respect to the ABL Collateral, the Noteholder Secured
Parties (i) will cooperate with the Bank Collateral Agent in its efforts to
enforce its security interest in the ABL Collateral and to finish any
work-in-process and assemble the ABL Collateral, (ii) will not hinder or
restrict in any respect the Bank Collateral Agent from enforcing its security
interest in the ABL Collateral or from finishing any work-in-process or
assembling the ABL Collateral, and (iii) will, subject to the rights of any
landlords under real estate leases, permit the Bank Collateral Agent, its
employees, agents, advisers and representatives, at the sole cost and expense of
the Bank Collateral Agent and the holders of Lenders Debt, to enter upon and use
the Notes Collateral (including (x) equipment, processors, computers and
other machinery related to the storage or processing of records, documents or
files and (y) intellectual property), for a period not to exceed
180 days after the taking of such enforcement action, for purposes of
(A) assembling and storing the ABL Collateral and completing the processing
of and turning into finished goods of any ABL Collateral consisting of
work-in-process, (B) selling any or all of the ABL Collateral located on
such Notes Collateral, whether in bulk, in lots or to customers in the ordinary
course of business or otherwise, (C) removing any or all of the ABL
Collateral located on such Notes Collateral, or (D) taking reasonable
actions to protect, secure, and otherwise enforce the rights of the Bank
Collateral Agent and the holders of Lenders Debt in and to the ABL Collateral;
provided,
however,
that
nothing contained in the Intercreditor Agreement restricts the rights of the
Trustee or the Notes Collateral Agent from selling, assigning or otherwise
transferring any Notes Collateral prior to the expiration of such 180-day period
if the purchaser, assignee or transferee thereof agrees to be bound by the
provisions of the Intercreditor Agreement. If any stay or other order
prohibiting the exercise of remedies with respect to the ABL Collateral has been
entered by a court of competent jurisdiction, such 180-day period shall be
tolled during the pendency of any such stay or other order. If the Bank
Collateral Agent conducts a public auction or private sale of the ABL Collateral
at any of the real property included within the Notes Collateral, the Bank
Collateral Agent shall provide the Notes Collateral Agent with reasonable notice
and use reasonable efforts to hold such auction or sale in a manner which would
not unduly disrupt the Notes Collateral Agent’s use of such real
property.
During
the period of actual occupation, use or control by the Bank Collateral Agent or
the holders of Lenders Debt or their agents or representatives of any Notes
Collateral, the Bank Collateral Agent and the holders of Lenders Debt will
(i) be responsible for the ordinary course third-party expenses related
thereto, including costs with respect to heat, light, electricity, water and
real property taxes with respect to that portion of any premises so used or
occupied, and (ii) be obligated to repair at their expense any physical
damage to such Notes Collateral or other assets or property resulting from such
occupancy, use or control, and to leave such Notes Collateral or other assets or
property in substantially the same condition as it was at the commencement of
such occupancy, use or control, ordinary wear and tear excepted. The Bank
Collateral Agent and the holders of Lenders Debt agree to pay, indemnify and
hold the Trustee and the Notes Collateral Agent harmless from and against any
third-party liability resulting from the gross negligence or willful misconduct
of the Bank Collateral Agent or any of its agents, representatives or invitees
in its or their operation of such facilities. In the event, and only in the
event, that in connection with its use of some or all of the premises
constituting Notes Collateral, the Bank Collateral Agent requires the services
of any employees of the Issuer or any of its Subsidiaries, the Bank Collateral
Agent shall pay directly to any such employees the appropriate, allocated wages
of such employees, if any, during the time periods that the Bank Collateral
Agent requires their services. Notwithstanding the foregoing, in no event shall
the Bank Collateral Agent or the holders of Lenders Debt have any liability to
the Noteholder Secured Parties pursuant to the Intercreditor Agreement as a
result of any condition (including any environmental condition, claim or
liability) on or with respect to the Notes Collateral existing prior to the date
of the exercise by the Bank Collateral Agent or the holders of Lenders Debt of
their rights under the Intercreditor Agreement and the Bank Collateral Agent and
the holders of Lenders Debt will not have any duty or liability to maintain the
Notes Collateral in a condition or manner better than that in which it was
maintained prior to the use thereof by them, or for any diminution in the value
of the Notes Collateral that results solely from ordinary wear and tear
resulting from the use of the Notes Collateral by such persons in the manner and
for the time periods specified under the Intercreditor Agreement. Without
limiting the rights granted in under the Intercreditor Agreement, the Bank
Collateral Agent and the holders of Lenders Debt will cooperate with the
Noteholder Secured Parties in connection with any efforts made by the Noteholder
Secured Parties to sell the Notes Collateral.
Agreements With Respect to
Bankruptcy or Insolvency Proceedings
If
Parent, the Issuer or any of its subsidiaries becomes subject to a case under
the U.S. Bankruptcy Code and, as debtor(s)-in-possession, moves for approval of
financing (“DIP Financing”) to be provided by one or
more lenders (the “DIP Lenders”) under Section 364
of the U.S. Bankruptcy Code or the use of cash collateral with the consent of
the DIP Lenders under Section 363 of the U.S. Bankruptcy Code, the
Trustee and the Notes Collateral Agent agreed in the Intercreditor Agreement and
each Holder will agree by its acceptance of the Notes that it will raise no
objection to any such financing or to the Liens on the ABL Collateral securing
the same (“DIP Financing Liens”) or to any use of cash collateral that
constitutes ABL Collateral, unless the Bank Collateral Agent or the holders of
any Lenders Debt secured by such ABL Collateral oppose or object to such DIP
Financing or such DIP Financing Liens or use of such cash collateral (and, to
the extent that such DIP Financing Liens are senior to, or rank pari passu with, the Liens of
such Lenders Debt in such ABL Collateral, the Trustee and the Notes Collateral
Agent will, for themselves and on behalf of the Holders of the Notes,
subordinate the liens of the Noteholder Secured Parties in such ABL Collateral
to the liens of the Lenders Debt in such ABL Collateral and the DIP Financing
Liens), so long as the Noteholder Secured Parties retain liens on all the Notes
Collateral, including proceeds thereof arising after the commencement of such
proceeding, with the same priority as existed prior to the commencement of the
case under the U.S. Bankruptcy Code, subject to any super-priority ranking of
liens in favor of the DIP Lenders. The Bank Collateral Agent and the holders of
Lenders Debt agreed to similar provisions with respect to any DIP
Financing.
The
Trustee and the Noteholder Collateral Agent agreed in the Intercreditor
Agreement and each Holder of the Notes will agree by its acceptance of the Notes
that it will not object to or oppose a sale or other disposition of any ABL
Collateral (or any portion thereof) under Section 363 of the Bankruptcy
Code or any other provision of the Bankruptcy Code if the Bank Collateral Agent
and the holders of Lenders Debt shall have consented to such sale or disposition
of such ABL Collateral. The Bank Collateral Agent and the holders of Lenders
Debt agreed to similar limitations with respect to their right to object to a
sale of Notes Collateral.
Insurance
Unless
and until written notice by the Bank Collateral Agent to the Trustee that the
obligations under the Credit Agreement have been paid in full and all
commitments to extend credit under the Credit Agreement shall have been
terminated, as between the Bank Collateral Agent, on the one hand, and the
Trustee and Notes Collateral Agent, as the case may be, on the other hand, only
the Bank Collateral Agent will have the right (subject to the rights of the
Grantors under the security documents related to the Credit Agreement and the
Indenture and the Security Documents) to adjust or settle any insurance policy
or claim covering or constituting ABL Collateral in the event of any loss
thereunder and to approve any award granted in any condemnation or similar
proceeding affecting the ABL Collateral. Unless and until written notice by the
Trustee to the Bank Collateral Agent that the obligations under the Indenture
and the Notes have been paid in full, as between the Bank Collateral Agent, on
the one hand, and the Trustee and the Notes Collateral Agent, as the case may
be, on the other hand, only the Notes Collateral Agent will have the right
(subject to the rights of the Grantors under the security documents related to
the Credit Agreement and the Indenture and the Security Documents) to adjust or
settle any insurance policy covering or constituting Notes Collateral in the
event of any loss thereunder and to approve any award granted in any
condemnation or similar proceeding solely affecting the Notes Collateral. To the
extent that an insured loss covers or constitutes both ABL Collateral and Notes
Collateral, then the Bank Collateral Agent and the Notes Collateral Agent will
work jointly and in good faith to collect, adjust or settle (subject to the
rights of the Grantors under the security documents related to the Credit
Agreement and the Indenture and the Security Documents) under the relevant
insurance policy.
Refinancings
of the Credit Agreement and the Notes
The
obligations under the Credit Agreement and the obligations under the Indenture
and the Notes may be refinanced or replaced, in whole or in part, in each case,
without notice to, or the consent (except to the extent a consent is otherwise
required to permit the refinancing transaction under the Credit Agreement or any
security document related thereto and the Indenture and the Security Documents)
of the Bank Collateral Agent or any holder of Lenders Debt or any Noteholder
Secured Party, all without affecting the Lien priorities provided for in the
Intercreditor Agreement; provided, however, that the
holders of any such refinancing or replacement indebtedness (or an authorized
agent or trustee on their behalf) bind themselves in writing to the terms of the
Intercreditor Agreement pursuant to such documents or agreements (including
amendments or supplements to the Intercreditor Agreement) as the Bank Collateral
Agent or the Notes Collateral Agent, as the case may be, shall reasonably
request and in form and substance reasonably acceptable to the Bank Collateral
Agent or the Notes Collateral Agent, as the case may be.
In
connection with any refinancing or replacement contemplated by the foregoing
paragraph, the Intercreditor Agreement may be amended at the request and sole
expense of the Issuer, and without the consent of either the Bank Collateral
Agent or the Notes Collateral Agent, (a) to add parties (or any authorized
agent or trustee therefor) providing any such refinancing or replacement
indebtedness, (b) to establish that Liens on any Notes Collateral securing
such refinancing or replacement Indebtedness shall have the same priority as the
Liens on any Notes Collateral securing the Indebtedness being refinanced or
replaced and (c) to establish that the Liens on any ABL Collateral securing
such refinancing or replacement indebtedness shall have the same priority as the
Liens on any ABL Collateral securing the Indebtedness being refinanced or
replaced, all on the terms provided for herein immediately prior to such
refinancing or replacement.
Use
of Proceeds of ABL Collateral
After the
satisfaction of all obligations under any Lenders Debt secured by ABL Collateral
and the termination of all commitments to extend credit that would constitute
Lenders Debt secured or intended to be secured by any ABL Collateral, the
Trustee, in accordance with the terms of the Intercreditor Agreement, the
Indenture and the Security Documents, will distribute all cash proceeds (after
payment of the costs of enforcement and collateral administration, including any
amounts owed to the Trustee in its capacity as Trustee or Notes Collateral
Agent) of the ABL Collateral received by it under the Security Documents for the
ratable benefit of the Holders of the Notes and any remaining Other Pari Passu
Lien Obligations.
Subject
to the terms of the Note Documents, the Issuer and the Guarantors will have the
right to remain in possession and retain control of the Collateral securing the
Notes, to freely operate the Collateral and to collect, invest and dispose of
any income therefrom.
See “Risk
Factors — Risks Related to Our Substantial Indebtedness and the
Notes — Bankruptcy laws may limit the ability of holders of the notes to
realize value from the collateral.”
Release
of Collateral
The
Issuer and the Guarantors will be entitled to the releases of property and other
assets included in the Collateral from the Liens securing the Notes under any
one or more of the following circumstances:
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·
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to
enable the disposition of such property or assets to the extent not
prohibited under the covenant described under “— Certain
Covenants — Limitations on Asset
Sales;”
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·
|
in
the case of a Guarantor that is released from its Note Guarantee, the
release of the property and assets of such
Guarantor; or
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·
|
as
described under “— Amendment, Supplement and Waiver”
below.
|
The
second-priority lien on the ABL Collateral securing the Notes will terminate and
be released automatically if the first-priority liens on the ABL Collateral are
released by the Bank Collateral Agent (unless, at the time of such release of
such first-priority liens, an Event of Default shall have occurred and be
continuing under the Indenture), other than such release granted upon or
following the discharge of the ABL Facility Obligations. Notwithstanding the
existence of an Event of Default, the second-priority lien on the ABL Collateral
securing the Notes shall also terminate and be released automatically to the
extent the first-priority liens on the ABL Collateral are released by the Bank
Collateral Agent in connection with a sale, transfer or disposition of ABL
Collateral that is either not prohibited under the Indenture (other than such
release granted upon or following the discharge of the ABL Facility Obligations)
or occurs in connection with the foreclosure of, or other exercise of remedies
with respect to, such ABL Collateral by the Bank Collateral Agent (except with
respect to any proceeds of such sale, transfer or disposition that remain after
satisfaction in full of the Lenders Debt). The liens on the Collateral securing
the Notes, that otherwise would have been released pursuant to the first
sentence of this paragraph but for the occurrence and continuation of an Event
of Default, will be released when such Event of Default and all other Events of
Default under the Indenture cease to exist.
The
security interests in all Collateral securing the Notes also will be released
upon (i) payment in full of the principal of, together with accrued and
unpaid interest (including additional interest, if any) on, the Notes and all
other obligations under the Indenture, the Note Guarantees under the Indenture
and the Security Documents that are due and payable at or prior to the time such
principal, together with accrued and unpaid interest (including additional
interest, if any), are paid or (ii) a legal defeasance or covenant
defeasance under the Indenture as described below under “— Legal Defeasance
and Covenant Defeasance” or a discharge of the Indenture as described under
“— Satisfaction and Discharge.”
Compliance
with Trust Indenture Act
The
Indenture provides that the Issuer will comply with the provisions of TIA
§ 314 to the extent applicable. To the extent applicable, the Issuer will
cause TIA § 313(b), relating to reports, and TIA § 314(d), relating to
the release of property or securities subject to the Lien of the Security
Documents, to be complied with. Any certificate or opinion required by TIA
§ 314(d) may be made by an officer or legal counsel, as applicable, of the
Issuer except in cases where TIA § 314(d) requires that such certificate or
opinion be made by an independent Person, which Person will be an independent
engineer, appraiser or other expert selected by or reasonably satisfactory to
the Trustee. Notwithstanding anything to the contrary in this paragraph, the
Issuer will not be required to comply with all or any portion of TIA
§ 314(d) if it reasonably determines that under the terms of TIA
§ 314(d) or any interpretation or guidance as to the meaning thereof of the
SEC and its staff, including “no action” letters or exemptive orders, all or any
portion of TIA § 314(d) is inapplicable to any release or series of
releases of Collateral.
Optional
Redemption
Except as
set forth below, the Notes may not be redeemed prior to April 1, 2011 (the
“First Call Date”). At any time on or after the First Call Date, the Issuer, at
its option, may redeem the Notes, in whole or in part, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon, if any, to the date of redemption, if redeemed during
the 12-month period beginning April 1 of the years indicated:
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Year
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Optional Redemption
Price
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|||
|
2011
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105.875 | % | ||
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2012
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102.938 | % | ||
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2013
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100.000 | % | ||
The
Issuer may acquire Notes by means other than a redemption, whether by tender
offer, open market purchases, negotiated transactions or otherwise, in
accordance with applicable securities laws, so long as such acquisition does not
otherwise violate the terms of the Indenture.
Redemption
with Proceeds from Equity Offerings
At any
time prior to April 1, 2011, the Issuer may redeem at its option on any one
or more occasions up to 35% of the aggregate principal amount of the Notes
issued under the Indenture with the net cash proceeds of one or more Qualified
Equity Offerings at a redemption price equal to 111.75% of the principal amount
of the Notes to be redeemed, plus accrued and unpaid interest thereon, if any,
to the date of redemption; provided that (1) at
least 65% of the aggregate principal amount of Notes issued under the Indenture
remains outstanding immediately after the occurrence of such redemption and
(2) the redemption occurs within 90 days of the date of the closing of
any such Qualified Equity Offering.
Periodic
Optional Redemption
In
addition, not more than once in any twelve-month period, the Issuer may redeem
up to $70.0 million in principal amount of the Notes at a redemption price
of 103% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the redemption date.
Redemption
upon a Change of Control
At any
time prior to First Call Date, the Notes may also be redeemed, in whole but not
in part, at the Issuer’s option, upon the occurrence of a Change of Control, at
a redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued but unpaid interest, if any, to, the date
of redemption (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date). Such
redemption may be made upon notice mailed by first-class mail to each Holder’s
registered address, not less than 30 nor more than 60 days prior to the
date of redemption (but in no event more than 90 days after the occurrence
of such Change of Control). The Issuer may provide in such notice that payment
of such price and performance of the Issuer’s obligations with respect to such
redemption may be performed by another Person. Any such notice may be given
prior to the occurrence of the related Change of Control, and any such
redemption or notice may, at the Issuer’s discretion, be subject to the
satisfaction of one or more conditions precedent, including but not limited to
the occurrence of the related Change of Control.
“Applicable
Premium” means,
with respect to a Note at any redemption date, the greater of:
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(1) 1.0%
of the principal amount of such
Note; and
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(2) the
excess of:
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(a) the
present value at such redemption date of (1) the redemption price of such
Note on the First Call Date (such redemption price being that described in the
first paragraph of this “Optional Redemption” section) plus (2) all
required remaining scheduled interest payments due on such Note through the
First Call Date, other than accrued interest to such redemption date, computed
using a discount rate equal to the Treasury Rate plus 75 basis points per
annum, discounted on a semi-annual bond equivalent basis, over
(b) the
principal amount of such Note on such redemption date.
Calculation
of the Applicable Premium will be made by the Issuer or on behalf of the Issuer
by such Person as the Issuer shall designate; provided, however, that such
calculation shall not be a duty or obligation of the Trustee.
“Treasury
Rate” means, with
respect to a redemption date, the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) that
has become publicly available at least two Business Days prior to such
redemption date (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the
period from such redemption date to the First Call Date; provided, however, that if
the period from such redemption date to the First Call Date is not equal to the
constant maturity of the United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from such redemption date to the First Call
Date is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
Redemption Following
a Change of Control Offer
At any
time prior to the First Call Date, after the completion of a Change of Control
Offer that was accepted by Holders of not less than 75% of the aggregate
principal amount of Notes then outstanding, the Issuer may redeem all, but not
less than all, of the Notes not validly tendered in the Change of Control Offer,
at a redemption price equal to 101% of the principal amount, and accrued and
unpaid interest, if any, to the date of redemption; provided that such
redemption occurs within 90 days after the completion of such Change of
Control Offer.
The
Issuer may acquire Notes by means other than a redemption, whether pursuant to
an issuer tender offer, open market purchase or otherwise, so long as the
acquisition does not otherwise violate the terms of the Indenture.
Selection
and Notice of Redemption
In the
event that less than all of the Notes are to be redeemed at any time pursuant to
an optional redemption, selection of the Notes for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national security exchange, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate; provided, however, that no
Notes of a principal amount of $1,000 or less shall be redeemed in part. In
addition, if a partial redemption is made pursuant to the provisions described
under “— Optional Redemption — Periodic Optional Redemption” or
“— Optional Redemption — Redemption with Proceeds from Equity
Offerings,” selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as
nearly a pro rata basis
as is practicable (subject to the procedures of The Depository
Trust Company), unless that method is otherwise prohibited.
Notice of
redemption will be mailed by first-class mail at least 30 but not more than
60 days before the date of redemption to each Holder of Notes to be
redeemed at its registered address, except that redemption notices may be mailed
more than 60 days prior to a redemption date if the notice is issued in
connection with a satisfaction and discharge of the Indenture. If any Note is to
be redeemed in part only, the notice of redemption that relates to that Note
will state the portion of the principal amount of the Note to be redeemed. A new
Note in a principal amount equal to the unredeemed portion of the Note will be
issued in the name of the Holder of the Note upon cancellation of the original
Note. On and after the date of redemption, interest will cease to accrue on
Notes or portions thereof called for redemption so long as the Issuer has
deposited with the paying agent for the Notes funds in satisfaction of the
redemption price (including accrued and unpaid interest on the Notes to be
redeemed) pursuant to the Indenture.
Change
of Control
Upon the
occurrence of any Change of Control, each Holder will have the right to require
that the Issuer purchase that Holder’s Notes for a cash price (the “Change of
Control Purchase Price”) equal to 101% of the principal amount of the Notes to
be purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase.
Within
30 days following any Change of Control, the Issuer will mail, or caused to
be mailed, to the Holders a notice:
(1) describing
the transaction or transactions that constitute the Change of
Control;
(2) offering
to purchase, pursuant to the procedures required by the Indenture and described
in the notice (a “Change of Control Offer”), on a date specified in the notice
(which shall be a Business Day not earlier than 30 days nor later than
60 days from the date the notice is mailed) and for the Change of Control
Purchase Price, all Notes properly tendered by such Holder pursuant to such
Change of Control Offer; and
(3) describing
the procedures that Holders must follow to accept the Change of Control Offer.
The Change of Control Offer is required to remain open for at least 20 Business
Days or for such longer period as is required by law.
The
Issuer will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the date of purchase.
The
Credit Agreement will, and other Indebtedness agreements may, provide that some
change of control events with respect to us would constitute a default under
these agreements. Such defaults could result in amounts outstanding under the
Credit Agreement and such other Indebtedness being declared due and
payable.
If a
Change of Control Offer is made, there can be no assurance that the Issuer will
have available funds sufficient to pay for all or any of the Notes that might be
delivered by Holders seeking to accept the Change of Control Offer.
The
provisions described above that require us to make a Change of Control Offer
following a Change of Control will be applicable regardless of whether any other
provisions of the Indenture are applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Issuer purchase or redeem
the Notes in the event of a takeover, recapitalization or similar
transaction.
The
Issuer’s obligation to make a Change of Control Offer will be satisfied if a
third party makes the Change of Control Offer in the manner and at the times and
otherwise in compliance with the requirements applicable to a Change of Control
Offer made by the Issuer and purchases all Notes properly tendered and not
withdrawn under the Change of Control Offer.
With
respect to any disposition of assets, the phrase “all or substantially all” as
used in the Indenture (including as set forth under “— Certain
Covenants — Limitations on Mergers, Consolidations, Etc.” below) varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which governs the
Indenture) and is subject to judicial interpretation. Accordingly, in certain
circumstances there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of “all or substantially all”
of the assets of the Issuer, and therefore it may be unclear as to whether a
Change of Control has occurred and whether the Holders have the right to require
the Issuer to purchase Notes.
The
Issuer will comply with applicable tender offer rules, including the
requirements of Rule 14e-l under the Exchange Act and any other applicable
laws and regulations in connection with the purchase of Notes pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the “Change of Control” provisions of the
Indenture, the Issuer shall comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
“Change of Control” provisions of the Indenture by virtue of this
compliance.
Certain
Covenants
The
Indenture contains, among others, the following covenants:
Limitations
on Additional Indebtedness
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, incur any Indebtedness; provided that the Issuer or
any Guarantor may incur additional Indebtedness, and any Restricted Subsidiary
may incur Acquired Indebtedness, in each case, if, after giving effect thereto,
the Consolidated Interest Coverage Ratio would be at least 2.00 to 1.00 (the
“Coverage Ratio Exception”).
Notwithstanding
the above, each of the following shall be permitted (the “Permitted
Indebtedness”):
(1) Indebtedness
of the Issuer or any Guarantor under the Credit Facilities in an aggregate
amount at any time outstanding not to exceed the greater of
(a) $150.0 million less, to the extent a
permanent repayment and/or commitment reduction is required thereunder as a
result of such application, the aggregate amount of Net Available Proceeds
applied to repayments under the Credit Facilities in accordance with the
covenant described under “— Limitations on Asset Sales” and (b) the
Borrowing Base as of the date of such incurrence;
(2) the
Notes issued on the Issue Date and the Note Guarantees and the Exchange Notes
and the Note Guarantees in respect thereof to be issued pursuant to the
Registration Rights Agreement;
(3) Indebtedness
of the Issuer and the Restricted Subsidiaries to the extent outstanding on the
Issue Date (other than Indebtedness referred to in clauses (1) and
(2) above, and after giving effect to the intended use of proceeds of the
Notes);
(4) Indebtedness
under Hedging Obligations of the Issuer or any Restricted Subsidiary not for the
purpose of speculation; provided that if such Hedging
Obligations are of the type that relate to Indebtedness described in clause
(1) of the definition of Indebtedness, (a) such Hedging Obligations
relate to payment obligations on Indebtedness otherwise permitted to be incurred
by this covenant, and (b) the notional principal amount of such Hedging
Obligations at the time incurred does not exceed the principal amount of the
Indebtedness to which such Hedging Obligations relate;
(5) Indebtedness
of the Issuer owed to a Restricted Subsidiary and Indebtedness of any Restricted
Subsidiary owed to the Issuer or any other Restricted Subsidiary; provided, however,
(a) that upon any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or such Indebtedness being owed to any Person other than the Issuer
or a Restricted Subsidiary, the Issuer or such Restricted Subsidiary, as
applicable, shall be deemed to have incurred Indebtedness not permitted by this
clause (5); (b) any such Indebtedness made by a Note Party shall be
evidenced by a promissory note pledged to the Note Collateral Agent for the
ratable benefit of the Noteholder Secured Parties pursuant to the Collateral
Agreement; and (c) any such Indebtedness made by Note Parties to
Subsidiaries that are not Subsidiary Guarantors is either a Permitted Investment
or permitted by the covenant “— Limitations on Restricted
Payments;”
(6) Indebtedness
in respect of bid, performance, surety bonds and workers’ compensation claims,
self-insurance obligations and bankers acceptances issued for the account of the
Issuer or any Restricted Subsidiary in the ordinary course of business,
including guarantees or obligations of the Issuer or any Restricted Subsidiary
with respect to letters of credit supporting such bid, performance, surety bonds
and workers’ compensation claims, self-insurance obligations and bankers
acceptances;
(7) Purchase
Money Indebtedness incurred by the Issuer or any Restricted Subsidiary, and
Refinancing Indebtedness thereof, in an aggregate amount not to exceed at any
time outstanding $25.0 million;
(8) Indebtedness
arising from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of business;
provided, however, that
such Indebtedness is extinguished within five Business Days of
incurrence;
(9) Indebtedness
arising in connection with endorsement of instruments for deposit in the
ordinary course of business;
(10) Refinancing
Indebtedness with respect to Indebtedness incurred pursuant to the Coverage
Ratio Exception, clause (2), (3), (11)(B) or (13)(B) of this paragraph or this
clause (10);
(11)
(A) Acquired Indebtedness of the Issuer or any Restricted Subsidiary, and
Refinancing Indebtedness thereof, in an aggregate amount not to exceed
$20.0 million at any time outstanding and (B) Acquired Indebtedness of
the Issuer or any Restricted Subsidiary assumed or acquired in connection with a
transaction governed by, and effected in accordance with, the first paragraph of
the covenant described under “— Limitations on Mergers, Consolidations,
Etc.;”
(12) Indemnification,
adjustment of purchase price, earn-out or similar obligations, in each case,
incurred or assumed in connection with the acquisition or disposition of any
business or assets of the Issuer or any Restricted Subsidiary or Equity
Interests of a Restricted Subsidiary, other than guarantees of Indebtedness
incurred by any Person acquiring all or any portion of such business, assets or
Capital Stock for the purpose of financing any such acquisition; provided that the maximum
aggregate liability in respect of all such obligations outstanding under this
clause (12) shall at no time exceed (a) in the case of an acquisition,
$10.0 million (provided
that the amount of such liability shall be deemed to be the amount
thereof, if any, reflected on the balance sheet of the Issuer or any Restricted
Subsidiary (e.g., the
amount of such liability shall be deemed to be zero if no amount is reflected on
such balance sheet)) and (b) in the case of a disposition, the gross
proceeds actually received by the Issuer and the Restricted Subsidiaries in
connection with such disposition;
(13) Indebtedness
of Foreign Subsidiaries in an aggregate amount not to exceed $30.0 million
at any time outstanding; provided that Indebtedness
under this clause (13) may be incurred under any Credit
Facility;
(14) Indebtedness
of the Issuer or any Restricted Subsidiary incurred in the ordinary course of
business under guarantees of Indebtedness of suppliers, licensees, franchisees
or customers in an aggregate amount, together with the aggregate amount of
Investments under clause (13) of the definition of “Permitted Investments,”
not to exceed $5.0 million at any time outstanding; and
(15) Indebtedness
of the Issuer or any Restricted Subsidiary in an aggregate amount not to exceed
$25.0 million at any time outstanding.
For
purposes of determining compliance with this covenant, in the event that an item
of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (1) through (15) above or
is entitled to be incurred pursuant to the Coverage Ratio Exception, the Issuer
shall classify and may reclassify, in its sole discretion, such item of
Indebtedness and may divide, classify and reclassify such Indebtedness in more
than one of the types of Indebtedness described, except that Indebtedness
incurred under the Credit Facilities on the Issue Date by the Issuer or any
Guarantor shall be deemed to have been incurred under clause (1) above. In
addition, for purposes of determining any particular amount of Indebtedness
under this covenant, guarantees, Liens or letter of credit obligations
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included so long as incurred by a Person that
could have incurred such Indebtedness.
Limitations
on Restricted Payments
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment if at the time of such Restricted
Payment:
(1) a
Default shall have occurred and be continuing or shall occur as a consequence
thereof;
(2) the
Issuer cannot incur $1.00 of additional Indebtedness pursuant to the Coverage
Ratio Exception; or
(3) the
amount of such Restricted Payment, when added to the aggregate amount of all
other Restricted Payments made after the Issue Date (other than Restricted
Payments made pursuant to clause (2), (3), (4), (5), (6), (7), (8) or
(9) of the next paragraph), exceeds the sum (the “Restricted Payments
Basket”) of (without duplication):
(a) 50%
of Consolidated Net Income for the period (taken as one accounting period)
commencing on January 1, 2004 to and including the last day of the fiscal
quarter ended immediately prior to the date of such calculation for which
consolidated financial statements are available (or, if such Consolidated Net
Income shall be a deficit, minus 100% of such aggregate deficit); provided that the excess (to
the extent positive) of (x) 50% of Consolidated Net Income for the period
(taken as one accounting period) from January 1, 2004 to March 29,
2008 over (y) $5.0 million, shall be deducted from any amount
otherwise calculated pursuant to this clause (a), plus
(b) 100%
of the aggregate net cash proceeds received by the Issuer and 100% of the Fair
Market Value at the time of receipt of assets other than cash, if any, received
by the Issuer, either (x) as contributions to the common equity of the
Issuer after the Issue Date or (y) from the issuance and sale of Qualified
Equity Interests after the Issue Date, other than (A) any such proceeds
which are used to redeem Notes in accordance with the second paragraph under
“— Optional Redemption — Redemption with Proceeds from Equity
Offerings” or (B) any such proceeds or assets received from a Subsidiary of
the Issuer, plus
(c) the
aggregate amount by which Indebtedness (other than any Subordinated
Indebtedness) incurred by the Issuer or any Restricted Subsidiary subsequent to
the Issue Date is reduced on the Issuer’s balance sheet upon the conversion or
exchange (other than by a Subsidiary of the Issuer) into Qualified Equity
Interests (less the amount of any cash, or the fair value of assets, distributed
by the Issuer or any Restricted Subsidiary upon such conversion or exchange),
plus
(d) in
the case of the disposition or repayment of or return on any Investment that was
treated as a Restricted Payment made after the Issue Date, an amount (to the
extent not included in the computation of Consolidated Net Income) equal to the
lesser of (i) 100% of the aggregate amount received by the Issuer or any
Restricted Subsidiary in cash or other property (valued at the Fair Market Value
thereof) as the return of capital with respect to such Investment and
(ii) the amount of such Investment that was treated as a Restricted
Payment, plus
(e) upon
a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the
lesser of (i) the Fair Market Value of the Issuer’s proportionate interest
in such Subsidiary immediately following such Redesignation, and (ii) the
aggregate amount of the Issuer’s Investments in such Subsidiary to the extent
such Investments reduced the Restricted Payments Basket and were not previously
repaid or otherwise reduced.
The
foregoing provisions will not prohibit:
(1) the
payment by the Issuer or any Restricted Subsidiary of any dividend within
60 days after the date of declaration thereof, if on the date of
declaration the payment would have complied with the provisions of the
Indenture;
(2) the
redemption of any Equity Interests of the Issuer or any Restricted Subsidiary in
exchange for, or out of the proceeds of the substantially concurrent issuance
and sale of, Qualified Equity Interests;
(3) the
redemption of Subordinated Indebtedness of the Issuer or any Restricted
Subsidiary (a) in exchange for, or out of the proceeds of the substantially
concurrent issuance and sale of, Qualified Equity Interests, (b) in
exchange for, or out of the proceeds of the substantially concurrent incurrence
of, Refinancing Indebtedness permitted to be incurred under the “Limitations on
Additional Indebtedness” covenant and the other terms of the Indenture or
(c) upon a Change of Control or in connection with an Asset Sale to the
extent required by the agreement governing such Subordinated Indebtedness but
only if the Issuer shall have complied with the covenants described under
“— Change of Control” and “— Limitations on Asset Sales” and purchased
all Notes validly tendered pursuant to the relevant offer prior to redeeming
such Subordinated Indebtedness;
(4) payments
by the Issuer or to Parent to permit Parent or Holdings, and which are used by
Parent or Holdings, to redeem Equity Interests of the Issuer, Parent or Holdings
held by officers, directors or employees or former officers, directors or
employees (or their transferees, estates or beneficiaries under their estates),
upon their death, disability, retirement, severance or termination of employment
or service; provided
that the aggregate cash consideration paid for all such redemptions shall
not exceed the sum of (A) $5.0 million during any calendar year (with
unused amounts being available to be used in the following calendar year), but
not in any succeeding calendar year plus (B) the amount of any net cash
proceeds received by or contributed to the Issuer from the issuance and sale
after the Issue Date of Qualified Equity Interests of Holdings, Parent or the
Issuer to its officers, directors or employees that have not been applied to the
payment of Restricted Payments pursuant to this clause (4), plus (C) the
net cash proceeds of any “key-man” life insurance policies that have not been
applied to the payment of Restricted Payments pursuant to this clause
(4);
(5) payments
to Parent permitted pursuant to clauses (3) and (4) in the second
paragraph of the covenant described under “— Limitations on Transactions
with Affiliates;”
(6) repurchases
of Equity Interests deemed to occur upon the exercise of stock options if the
Equity Interests represent a portion of the exercise price thereof;
(7) [Reserved];
(8) distributions
to Parent in order to enable Parent or Holdings to pay customary and reasonable
costs and expenses of an offering of securities of Parent or Holdings that is
not consummated; or
(9) additional
Restricted Payments of $20.0 million; provided that Restricted
Payments pursuant to this clause (9) shall not be used to redeem,
repurchase, retire or otherwise acquire for consideration any Subordinated
Indebtedness;
provided that (a) in the
case of any Restricted Payment pursuant to clause (3)(c) above, no Default shall
have occurred and be continuing or occur as a consequence thereof and
(b) no issuance and sale of Qualified Equity Interests pursuant to clause
(2), (3) or (4)(B) above shall increase the Restricted Payments
Basket.
Notwithstanding
the foregoing provisions of this covenant, neither the Issuer nor its Restricted
Subsidiaries may make a Restricted Payment to, or make any Investment in the
holder of any Equity Interests in, Parent, Holdings or any other ParentCo of the
Issuer, in each case by means of utilization of the cumulative Restricted
Payment credit provided by the first paragraph of this covenant or the
exceptions provided by clauses (1), (2), (3) or (9) of the second
paragraph of this covenant.
Limitations
on Dividend and Other Restrictions Affecting Restricted Subsidiaries
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or permit to exist or become effective any
consensual encumbrance or consensual restriction on the ability of any
Restricted Subsidiary to:
(a) pay
dividends or make any other distributions on or in respect of its Equity
Interests;
(b) make
loans or advances or pay any Indebtedness or other obligation owed to the Issuer
or any other Restricted Subsidiary; or
(c) transfer
any of its assets to the Issuer or any other Restricted Subsidiary;
except
for:
(1) encumbrances
or restrictions existing under or by reason of applicable law, regulation or
order;
(2) encumbrances
or restrictions existing under the Note Documents;
(3) non-assignment
provisions of any contract or any lease entered into in the ordinary course of
business;
(4) encumbrances
or restrictions existing under agreements existing on the date of the Indenture
(including, without limitation, the Credit Agreement) as in effect on that
date;
(5) restrictions
relating to any Lien permitted under the Indenture imposed by the holder of such
Lien;
(6) restrictions
imposed under any agreement to sell assets permitted under the Indenture to any
Person pending the closing of such sale;
(7) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so
acquired;
(8) any
other agreement governing Indebtedness entered into after the Issue Date that
contains encumbrances and restrictions that are not materially more restrictive
with respect to any Restricted Subsidiary than those in effect on the Issue Date
with respect to that Restricted Subsidiary pursuant to agreements in effect on
the Issue Date;
(9) customary
provisions in partnership agreements, limited liability company organizational
governance documents, joint venture, asset sale and stock sale agreements and
other similar agreements entered into in the ordinary course of business that
restrict the transfer of ownership interests in such partnership, limited
liability company, joint venture or similar Person;
(10) Purchase
Money Indebtedness incurred in compliance with the covenant described under
“— Limitations on Additional Indebtedness” that impose restrictions of the
nature described in clause (c) above on the assets acquired;
(11) restrictions
on cash or other deposits or net worth imposed by suppliers or landlords under
contracts entered into in the ordinary course of business;
(12) encumbrances
or restrictions contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of assets subject to such security agreements
or mortgages;
(13) encumbrances
or restrictions contained in Indebtedness of Foreign Subsidiaries, or municipal
loan or related agreements entered into in connection with the incurrence of
industrial revenue bonds, permitted to be incurred under the Indenture; provided that any such
encumbrances or restrictions are ordinary and customary with respect to the type
of Indebtedness being incurred under the relevant circumstances and do not, in
the good faith judgment of the Board of Directors of the Issuer, materially
impair the Issuer’s ability to make payment on the Notes when
due; and
(14) any
encumbrances or restrictions imposed by any amendments or refinancings of the
contracts, instruments or obligations referred to in clauses (1) through
(13) above; provided
that such amendments or refinancings are no more materially restrictive
with respect to such encumbrances and restrictions than those prior to such
amendment or refinancing.
Limitations
on Transactions with Affiliates
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, in one transaction or a series of related transactions, sell, lease,
transfer or otherwise dispose of any of its assets to, or purchase any assets
from, or enter into any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (an “Affiliate
Transaction”), unless:
(1) such
Affiliate Transaction is on terms that are no less favorable to the Issuer or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction at such time on an arm’s-length basis by the Issuer or
that Restricted Subsidiary from a Person that is not an Affiliate of the Issuer
or that Restricted Subsidiary; and
(2) the
Issuer delivers to the Trustee:
(a) with
respect to any Affiliate Transaction involving aggregate value in excess of
$5.0 million, an Officers’ Certificate certifying that such Affiliate
Transaction complies with clause (1) above and (x) a Secretary’s
Certificate which sets forth and authenticates a resolution that has been
adopted by a majority of the directors of the Issuer who are disinterested with
respect to such Affiliate Transaction, approving such Affiliate Transaction or
(y) if there are no such disinterested directors, a written opinion
described in clause (b) below; and
(b) with
respect to any Affiliate Transaction involving aggregate value of
$20.0 million or more, the certificates described in the preceding clause
(a) and a written opinion as to the fairness of such Affiliate Transaction
to the Issuer or such Restricted Subsidiary from a financial point of view
issued by an Independent Financial Advisor to the Board of Directors of the
Issuer.
The
foregoing restrictions shall not apply to:
(1) transactions
exclusively between or among (a) the Issuer and one or more Subsidiary
Guarantors; (b) Subsidiary Guarantors; (c) Foreign Subsidiaries; or
(d) the Issuer and the Guarantors, on the one hand, and Restricted
Subsidiaries that are not Guarantors, on the other hand, in the ordinary course
of business; provided,
in each case, that no Affiliate of the Issuer (other than another Restricted
Subsidiary) owns Equity Interests of any such Restricted
Subsidiary;
(2) reasonable
director, officer and employee compensation (including bonuses) and other
benefits (including retirement, health, stock option and other benefit plans),
indemnification arrangements, compensation, employment and severance agreements,
in each case approved by the Board of Directors;
(3) the
entering into of a tax sharing agreement, or payments pursuant thereto, between
the Issuer and/or one or more Subsidiaries, on the one hand, and any other
Person with which the Issuer or such Subsidiaries are required or permitted to
file a consolidated tax return or with which the Issuer or such Subsidiaries are
part of a consolidated group for tax purposes, on the other hand, which payments
by the Issuer and the Restricted Subsidiaries are not in excess of the tax
liabilities that would have been payable by them on a stand-alone
basis;
(4) payments
by the Issuer to or on behalf of Parent in an amount sufficient to pay
out-of-pocket legal, accounting and filing and other general corporate overhead
costs of Parent actually incurred by Parent, in any case in an aggregate amount
not to exceed $500,000 in any calendar year;
(5) loans
and advances permitted by clause (3) of the definition of “Permitted
Investments;”
(6) payments
to Sponsor or an Affiliate or Related Party thereof in respect of management and
consulting services rendered to the Issuer and the Restricted Subsidiaries in
the amounts and at the times specified or permitted in the Advisory Agreement,
as in effect on the Issue Date or as thereafter amended or replaced in any
manner, that, taken as a whole, is not more adverse to the interests of the
Holders in any material respect than such agreement as it was in effect on the
Issue Date; provided
that no Default described in clause (1), (2), (3), (7) or
(8) of the definition of “Event of Default” shall have occurred and be
continuing or occur as a consequence thereof;
(7) any
Restricted Payments which are made in accordance with the covenant described
under “— Limitations on Restricted Payments;”
(8) entering
into an agreement that provides registration rights to the shareholders of the
Issuer, Parent or Holdings or amending any such agreement with shareholders of
the Issuer, Parent or Holdings and the performance of such
agreements;
(9) any
transaction with a joint venture or similar entity which would constitute an
Affiliate Transaction solely because the Issuer or a Restricted Subsidiary owns
an equity interest in or otherwise controls such joint venture or similar
entity; provided that
no Affiliate of the Issuer or any of its Subsidiaries other than the Issuer or a
Restricted Subsidiary shall have a beneficial interest in such joint venture or
similar entity;
(10) any
merger, consolidation or reorganization of the Issuer with an Affiliate, solely
for the purposes of (a) reorganizing to facilitate an initial public
offering of securities of the Issuer, Parent, Holdings or other holding company
or (b) reincorporating the Issuer in a new jurisdiction;
(11)
(a) any transaction with an Affiliate where the only consideration paid by
the Issuer or any Restricted Subsidiary is Qualified Equity Interests,
(b) forming a holding company or (c) the issuance or sale of any
Qualified Equity Interests;
(12)
(a) any agreement in effect on the Issue Date (other than the Advisory
Agreement) and disclosed in this prospectus, as in effect on the Issue Date or
as thereafter amended or replaced in any manner, that, taken as a whole, is not
more adverse to the interests of the Holders in any material respect than such
agreement as it was in effect on the Issue Date or (b) any transaction
pursuant to any agreement referred to in the immediately preceding clause
(a); or
(13) any
Investment in a Foreign Subsidiary, a Restricted Subsidiary that is not a
Guarantor or an Unrestricted Subsidiary; provided that no Affiliate of
the Issuer or any of its Subsidiaries other than the Issuer or a Restricted
Subsidiary shall have a beneficial interest in such Unrestricted
Subsidiary.
Limitations on
Liens
The
Parent and the Issuer shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, create, incur, assume or permit or suffer to exist
any Lien of any nature whatsoever against any assets of Parent, the Issuer or
any Restricted Subsidiary securing any Indebtedness (including Equity Interests
of a Restricted Subsidiary or the Issuer), whether owned at the Issue Date or
thereafter acquired, or any proceeds therefrom, or assign or otherwise convey
any right to receive income or profits therefrom (other than Permitted Liens),
unless contemporaneously therewith:
(1) in
the case of any Lien securing an obligation that ranks pari passu with the Notes or
a Note Guarantee, effective provision is made to secure the Notes or such Note
Guarantee, as the case may be, at least equally and ratably with or prior to
such obligation with a Lien on the same collateral; and
(2) in
the case of any Lien securing an obligation that is subordinated in right of
payment to the Notes or a Note Guarantee, effective provision is made to secure
the Notes or such Note Guarantee, as the case may be, with a Lien on the same
collateral that is prior to the Lien securing such subordinated
obligation,
in each
case, for so long as such obligation is secured by such Lien.
Limitations on Asset
Sales
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Sale unless:
(1) the
Issuer or such Restricted Subsidiary receives consideration at the time of such
Asset Sale at least equal to the Fair Market Value of the assets included in
such Asset Sale;
(2) either
(x) at least 75% of the total consideration received in such Asset Sale
consists of cash or Cash Equivalents or (y) the cash or Cash Equivalents
portion (without giving effect to clause (c) of the next paragraph) of the
total consideration received in such Asset Sale shall be no less than an amount
equal to the product of (A) 5.25 and (B) the portion of Consolidated
Cash Flow for the Four-Quarter Period directly attributable to the assets
included in such Asset Sale; and
(3) with
respect to any Asset Sale of any Notes Collateral, the Net Available Proceeds
from such Asset Sale are paid directly by the purchaser thereof to an Asset Sale
Proceeds Account over which the Notes Collateral Agent has a fully perfected
first-priority lien pursuant to arrangements reasonably satisfactory to the
Notes Collateral Agent for application in accordance with this
covenant.
For
purposes of clause (2), the following shall be deemed to be cash:
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(a)
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the amount (without duplication)
of any Indebtedness (other than Subordinated Indebtedness) of the Issuer
or such Restricted Subsidiary that is expressly assumed by the transferee
in such Asset Sale and with respect to which the Issuer or such Restricted
Subsidiary, as the case may be, is unconditionally released by the holder
of such Indebtedness,
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(b)
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the
amount of any obligations received from such transferee that are within
90 days converted by the Issuer or such Restricted Subsidiary to cash
(to the extent of the cash actually so
received), and
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(c)
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the
Fair Market Value of (i) any assets (other than securities) received
by the Issuer or any Restricted Subsidiary to be used by it in the
Permitted Business, (ii) Equity Interests in a Person that is a
Restricted Subsidiary or in a Person engaged in a Permitted Business that
shall become a Restricted Subsidiary immediately upon the acquisition of
such Person by the Issuer or (iii) a combination of (i) and
(ii).
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If at any
time any non-cash consideration received by the Issuer or any Restricted
Subsidiary, as the case may be, pursuant to clause (b) above in connection
with any Asset Sale is repaid or converted into or sold or otherwise disposed of
for cash (other than interest received with respect to any such non-cash
consideration), then the date of such repayment, conversion or disposition shall
be deemed to constitute the date of an Asset Sale hereunder and the Net
Available Proceeds thereof shall be applied in accordance with this
covenant.
If the
Issuer or any Restricted Subsidiary engages in an Asset Sale, the Issuer or such
Restricted Subsidiary shall, by no later than 12 months following the later
of the consummation thereof and the Issuer’s or Restricted Subsidiary’s receipt
of the Net Available Proceeds, have applied all or any of the Net Available
Proceeds therefrom:
(1) if
such Net Available Proceeds are proceeds of ABL Collateral, to permanently repay
Lenders Debt and, if the obligation repaid is revolving credit Indebtedness, to
correspondingly reduce commitments with respect thereto;
(2) if
such Net Available Proceeds are proceeds of any Asset Sale (other than an Asset
Sale of Collateral), to permanently reduce any Indebtedness constituting
Indebtedness of a Foreign Subsidiary (and, in the case of revolving credit
Indebtedness, to correspondingly reduce commitments with respect thereto) or any
Pari Passu Indebtedness; provided, however, that if
any Pari Passu Indebtedness is so reduced, the Issuer will equally and ratably
reduce Indebtedness under the Notes by making an offer to all holders of Notes
to purchase at a purchase price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, the pro rata principal amount of the
Notes; or
(3) to
(A) invest in the purchase of assets (other than securities) to be used by
the Issuer or any Restricted Subsidiary in the Permitted Business,
(B) acquire Equity Interests in a Person that is a Restricted Subsidiary or
in a Person engaged in a Permitted Business that shall become a Restricted
Subsidiary immediately upon the consummation of such acquisition or (C) a
combination of (A) and (B). In addition, following the entering into of a
binding agreement with respect to an Asset Sale and prior to the consummation
thereof, cash (whether or not actual Net Available Proceeds of such Asset Sale)
used for the purposes described in subclause (A), (B) and (C) of this
clause (3) that are designated as uses in accordance with this clause (3),
and not previously or subsequently so designated in respect of any other Asset
Sale, shall be deemed to be Net Available Proceeds applied in accordance with
this clause (3).
The
amount of Net Available Proceeds not applied or invested as provided in this
paragraph will constitute “Excess Proceeds;” provided that until the
aggregate amount of Excess Proceeds equals or exceeds $15.0 million, all or
any portion of such Excess Proceeds may be invested in the manner described in
clause (3) above and such invested amount shall no longer be considered
Excess Proceeds.
When the
aggregate amount of Excess Proceeds equals or exceeds $15.0 million, the
Issuer will be required to make an offer to purchase from all Holders and, if
applicable, redeem (or make an offer to do so) any Other Pari Passu Lien
Obligations of the Issuer the provisions of which require the Issuer to redeem
such Indebtedness with the proceeds from any Asset Sales (or offer to do so), in
an aggregate principal amount of Notes and such Other Pari Passu Lien
Obligations equal to the amount of such Excess Proceeds as follows:
(1) the
Issuer will (a) make an offer to purchase (a “Net Proceeds Offer”) to all
Holders in accordance with the procedures set forth in the Indenture, and
(b) redeem (or make an offer to do so) any such Other Pari Passu Lien
Obligations (and permanently reduce the related loan commitment (if any) in an
amount equal to the principal amount so redeemed), pro rata in proportion to the
respective principal amounts of the Notes and such other Indebtedness required
to be redeemed, the maximum principal amount of Notes and Other Pari Passu Lien
Obligations that may be redeemed out of the amount (the “Payment Amount”) of
such Excess Proceeds;
(2) the
offer price for the Notes will be payable in cash in an amount equal to 100% of
the principal amount of the Notes tendered pursuant to a Net Proceeds Offer,
plus accrued and unpaid interest thereon, if any, to the date such Net Proceeds
Offer is consummated (the “Offered Price”), in accordance with the procedures
set forth in the Indenture and the redemption price for such Other Pari Passu
Lien Obligations (the “Pari Passu Indebtedness Price”) shall be as set forth in
the related documentation governing such Indebtedness;
(3) if
the aggregate Offered Price of Notes validly tendered and not withdrawn by
Holders thereof exceeds the pro rata portion of the
Payment Amount allocable to the Notes, Notes to be purchased will be selected on
a pro rata
basis; and
(4) upon
completion of such Net Proceeds Offer in accordance with the foregoing
provisions, the amount of Excess Proceeds with respect to which such Net
Proceeds Offer was made shall be deemed to be zero and released from the Assets
Sale Proceeds Account.
To the
extent that the sum of the aggregate Offered Price of Notes tendered pursuant to
a Net Proceeds Offer and the aggregate Pari Passu Indebtedness Price paid to the
holders of such Other Pari Passu Lien Obligations is less than the Payment
Amount relating thereto (such shortfall constituting a “Net Proceeds
Deficiency”), the Issuer may use the Net Proceeds Deficiency, or a portion
thereof, for general corporate purposes, subject to the provisions of the
Indenture.
In the
event of the transfer of substantially all (but not all) of the assets of the
Issuer and the Restricted Subsidiaries as an entirety to a Person in a
transaction covered by and effected in accordance with the covenant described
under “— Limitations on Mergers, Consolidations, Etc.,” other than a
transaction meeting the requirements of clause (3)(b) of the first paragraph of
such covenant, the successor shall be deemed to have sold for cash at Fair
Market Value the assets of the Issuer and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale
(with such Fair Market Value being deemed to be Net Available Proceeds for such
purpose).
The
Issuer will comply with applicable tender offer rules, including the
requirements of Rule 14e-1 under the Exchange Act and any other applicable
laws and regulations in connection with the purchase of Notes pursuant to a Net
Proceeds Offer. To the extent that the provisions of any securities laws or
regulations conflict with the “Limitations on Asset Sales” provisions of the
Indenture, the Issuer shall comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
“Limitations on Asset Sales” provisions of the Indenture by virtue of this
compliance.
Limitations
on Designation of Unrestricted Subsidiaries
The
Issuer may designate any Subsidiary (including any newly formed or newly
acquired Subsidiary) of the Issuer as an “Unrestricted Subsidiary” under the
Indenture (a “Designation”) only if:
(1) no
Default shall have occurred and be continuing at the time of or after giving
effect to such Designation; and
(2) either
(A) the Subsidiary to be so Designated has total assets of $1,000 or less;
or (B) the Issuer would be permitted to make, at the time of such
Designation, (x) a Permitted Investment or (y) an Investment pursuant
to the first paragraph of “— Limitations on Restricted Payments” above, in
either case, in an amount (the “Designation Amount”) equal to the Fair Market
Value of the Issuer’s proportionate interest in such Subsidiary on such
date.
No
Subsidiary shall be Designated as an “Unrestricted Subsidiary” if such
Subsidiary or any of its Subsidiaries owns (i) any Equity Interests (other
than Qualified Equity Interests) of the Issuer or (ii) any Equity Interests
of any Restricted Subsidiary that is not a Subsidiary of the Subsidiary to be so
Designated.
If, at
any time, any Unrestricted Subsidiary fails to meet the preceding requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of the Subsidiary
and any Liens on assets of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary as of the date and, if the Indebtedness is not permitted
to be incurred under the covenant described under “— Limitations on
Additional Indebtedness” or the Lien is not permitted under the covenant
described under “— Limitations on Liens,” the Issuer shall be in default of
the applicable covenant.
The
Issuer may redesignate an Unrestricted Subsidiary as a Restricted Subsidiary (a
“Redesignation”) only if:
(1) no
Default shall have occurred and be continuing at the time of and after giving
effect to such Redesignation; and
(2) all
Liens, Indebtedness and Investments of such Unrestricted Subsidiary outstanding
immediately following such Redesignation would, if incurred or made at such
time, have been permitted to be incurred or made for all purposes of the
Indenture.
All
Designations and Redesignations must be evidenced by resolutions of the Board of
Directors of the Issuer, delivered to the Trustee, certifying compliance with
the foregoing provisions.
Limitations
on the Issuance or Sale of Equity Interests of Restricted
Subsidiaries
The
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, sell or issue any shares of Equity Interests of any Restricted
Subsidiary except (1) to the Issuer, a Restricted Subsidiary or the
minority stockholders of any Restricted Subsidiary, on a pro rata basis,
(2) to the extent such shares represent directors’ qualifying shares or
shares required by applicable law to be held by a Person other than the Issuer
or a Wholly-Owned Restricted Subsidiary, or (3) if immediately after giving
effect to such sale or issuance, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary. The sale of all the Equity Interests of any
Restricted Subsidiary is permitted by this covenant but is subject to the
covenant described under “— Limitations on Asset Sales.” Notwithstanding
the foregoing, this covenant shall not prohibit the issuance or sale of Equity
Interests of any Restricted Subsidiary in connection with (a) the formation
or capitalization of a Restricted Subsidiary or (b) a single transaction or
a series of substantially contemporaneous transactions whereby such Restricted
Subsidiary becomes a Restricted Subsidiary of the Issuer by reason of
acquisition of securities or assets from another Person; provided that following
the consummation of any transaction or transactions contemplated by clause
(a) or (b), the ownership of the Equity Interests of the relevant
Restricted Subsidiary or Restricted Subsidiaries shall be as if this covenant
had been complied with at all times.
Limitations
on Mergers, Consolidations, Etc.
The
Issuer will not, directly or indirectly, in a single transaction or a series of
related transactions, (a) consolidate or merge with or into another Person
(other than a merger with an Affiliate solely for the purpose of and with the
effect of changing the Issuer’s jurisdiction of incorporation to another State
of the United States or forming a holding company for the Issuer (provided that
such holding company becomes a Guarantor)), or sell, lease, transfer, convey or
otherwise dispose of or assign all or substantially all of the assets of the
Issuer or the Issuer and the Restricted Subsidiaries (taken as a whole) or
(b) adopt a Plan of Liquidation unless, in either case:
(1) either:
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(a)
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the
Issuer will be the surviving or continuing
Person; or
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(b)
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the
Person formed by or surviving such consolidation or merger or to which
such sale, lease, conveyance or other disposition shall be made (or, in
the case of a Plan of Liquidation, any Person to which assets are
transferred) (collectively, the “Successor”) is a corporation, limited
liability company or limited partnership organized and existing under the
laws of any State of the United States of America or the District of
Columbia, and the Successor expressly assumes, by supplemental indenture,
security documents and intercreditor agreement in form and substance
reasonably satisfactory to the Trustee, all of the obligations of the
Issuer under the Notes, the Indenture, the applicable Security Documents,
the Intercreditor Agreement and the Registration Rights Agreement;
provided that if such Person is a limited liability company or a
partnership, such Person will form a Wholly-Owned Restricted Subsidiary
that is a corporation and cause such Subsidiary to become a co-issuer of
the Notes;
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(2) immediately prior to and immediately after giving effect to such
transaction and the assumption of the obligations as set forth in clause (1)(b)
above and the incurrence of any Indebtedness to be incurred in connection
therewith, and the use of any net proceeds therefrom on a pro forma basis, no
Default shall have occurred and be continuing; and
(3) immediately after and giving effect to such transaction and the
assumption of the obligations set forth in clause (1)(b) above and the
incurrence of any Indebtedness to be incurred in connection therewith, and the
use of any net proceeds therefrom on a pro forma basis, (a) the Issuer or
the Successor, as the case may be, could incur $1.00 of additional Indebtedness
pursuant to the Coverage Ratio Exception or (b) the Consolidated Interest
Coverage Ratio of the Issuer or the Successor, as the case may be, would be not
less than the Consolidated Coverage Ratio of the Issuer immediately prior to
such transaction.
For purposes of this covenant, any Indebtedness of the Successor which was not
Indebtedness of the Issuer immediately prior to the transaction shall be deemed
to have been incurred in connection with such transaction.
Parent will not, directly or indirectly, in a single transaction or a series of
related transactions, (a) consolidate or merge with or into another Person,
or sell, lease, transfer, convey or otherwise dispose of or assign all or
substantially all of the assets of Parent and its Subsidiaries (taken as a
whole) or (b) adopt a Plan of Liquidation unless, in either
case:
(1) either:
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(a)
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Parent
will be the surviving or continuing
Person; or
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(b)
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the
Person formed by or surviving such consolidation or merger or to which
such sale, lease, conveyance or other disposition shall be made (or, in
the case of a Plan of Liquidation, any Person to which assets are
transferred) (collectively, the “Parent Successor”) is a corporation,
limited liability company or limited partnership organized and existing
under the laws of any State of the United States of America or the
District of Columbia, and the Parent Successor (unless the Parent
Successor is the Issuer) expressly assumes, by supplemental indenture,
security documents and intercreditor agreement in form and substance
reasonably satisfactory to the Trustee, all of the obligations of Parent
under the Notes, the Indenture, the applicable Security Documents, the
Intercreditor Agreement and the Registration Rights
Agreement; and
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(2) immediately after giving effect to such transaction, no Default shall
have occurred and be continuing.
Except as
provided in the fifth paragraph under the caption “— Note Guarantees,” no
Guarantor (other than Parent) may consolidate with or merge with or into
(whether or not such Guarantor is the surviving Person) another Person,
unless:
(1) either:
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(a)
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such
Guarantor will be the surviving or continuing
Person; or
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(b)
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the
Person formed by or surviving any such consolidation or merger assumes, by
supplemental indenture, security documents and intercreditor agreement in
form and substance reasonably satisfactory to the Trustee, all of the
obligations of such Guarantor under the Note Guarantee of such Guarantor,
the Indenture, the applicable Security Documents, the Intercreditor
Agreement and the Registration Rights Agreement, and is a corporation,
limited liability company or limited partnership organized and existing
under the laws of any State of the United States of America or the
District of Columbia; and
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(2) immediately after giving effect to such transaction, no Default shall
have occurred and be continuing.
For
purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Equity Interests of which constitute all or substantially all
of the properties and assets of the Issuer, will be deemed to be the transfer of
all or substantially all of the properties and assets of the Issuer or Parent,
as the case may be.
Upon any
consolidation, combination or merger of the Issuer or a Guarantor, or any
transfer of all or substantially all of the assets of the Issuer or Parent in
accordance with the foregoing, in which the Issuer or such Guarantor is not the
continuing obligor under the Notes or its Note Guarantee, the surviving entity
formed by such consolidation or into which the Issuer or such Guarantor is
merged or the Person to which the conveyance, lease or transfer is made will
succeed to, and be substituted for, and may exercise every right and power of,
the Issuer or such Guarantor under the Indenture, the Notes, the Note
Guarantees, the Security Documents and Intercreditor Agreement with the same
effect as if such surviving entity had been named therein as the Issuer or such
Guarantor and, except in the case of a lease, the Issuer or such Guarantor, as
the case may be, will be released from the obligation to pay the principal of
and interest on the Notes or in respect of its Note Guarantee, as the case may
be, and all of the Issuer’s or such Guarantor’s other obligations and covenants
under the Notes, the Indenture and its Note Guarantee, if
applicable.
Notwithstanding
the foregoing, any Restricted Subsidiary may consolidate with, merge with or
into or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to the Issuer or another
Restricted Subsidiary (provided that if any party to
any such transaction is a Note Party, the surviving entity or recipient entity,
as the case may be, shall be a Note Party).
Additional
Note Guarantees
The
Issuer shall cause each Restricted Subsidiary (including any newly formed, newly
acquired or newly Designated Restricted Subsidiary) (other than any Foreign
Subsidiary) to:
(1) execute
and deliver to the Trustee (a) a supplemental indenture pursuant to which
such Restricted Subsidiary shall unconditionally guarantee all of the Issuer’s
obligations under the Notes and the Indenture, (b) a notation of guarantee
in respect of its Note Guarantee, (c) a supplement to the Collateral
Agreement, (d) a supplement to the Intercreditor Agreement and
(e) other applicable Security Documents, in each case in form and substance
reasonably satisfactory to the Trustee; and
(2) deliver
to the Trustee one or more opinions of counsel that such documents required by
the preceding clause (1) (a) have been duly authorized, executed and
delivered by such Restricted Subsidiary and (b) constitute valid and
legally binding obligation of such Restricted Subsidiary in accordance with
their terms.
Each Note
Guarantee by a Guarantor may be released as described under “— Note
Guarantees.”
Further
Assurances
The
Issuer and Guarantors shall execute any and all further documents, financing
statements, agreements and instruments, and take all further action that may be
required under applicable law, or that the Trustee may reasonably request, in
order to grant, preserve, protect and perfect the validity and priority of the
security interests created or intended to be created by the Security Documents
in the Collateral. In addition, from time to time, the Issuer will reasonably
promptly secure the obligations under the Indenture, Security Documents and
Intercreditor Agreement by pledging or creating, or causing to be pledged or
created, perfected security interests with respect to the Collateral. Such
security interests and Liens will be created under the Security Documents and
other security agreements, mortgages, deeds of trust and other instruments and
documents in form and substance reasonably satisfactory to the Trustee, and the
Issuer shall deliver or cause to be delivered to Trustee all such instruments
and documents (including legal opinions, title insurance policies and lien
searches) as the Trustee shall reasonably request to evidence compliance with
this covenant. The Issuer agrees to provide such evidence as the Trustee shall
reasonably request as to the perfection and priority status of each such
security interest and Lien. In furtherance of the foregoing, the Issuer will
give prompt notice to the Trustee of the acquisition by it or any of the
Guarantors of any real property (or any interest in real property) having a
value in excess of $2.0 million; provided that the Issuer and
Guarantors shall only be required to deliver Mortgages with respect to Material
Real Property.
Information
Regarding Collateral
The
Issuer will furnish to the Notes Collateral Agent, with respect to the Issuer or
any Guarantor, prompt written notice of any change in such Person’s
(i) corporate name, (ii) jurisdiction of organization or formation,
(iii) identity or corporate structure or (iv) Federal Taxpayer
Identification Number. The Issuer will agree not to effect or permit any change
referred to in the preceding sentence unless all filings have been made under
the Uniform Commercial Code or otherwise that are required in order for the
Notes Collateral Agent to continue at all times following such change to have a
valid, legal and perfected security interest in all the Collateral. The Issuer
also agrees promptly to notify the Notes Collateral Agent if any material
portion of the Collateral is damaged or destroyed.
Each
year, at the time of delivery of the annual financial statements with respect to
the preceding fiscal year, the Issuer shall deliver to the Trustee a certificate
of a financial officer setting forth the information required pursuant to the
perfection certificate required by the Collateral Agreement or confirming that
there has been no change in such information since the date of the prior
delivered perfection certificate.
Impairment
of Security Interest
Subject
to the rights of the holders of Permitted Liens, the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, take or knowingly or
negligently omit to take, any action which action or omission would reasonably
be expected to have the result of materially impairing the security interest
with respect to the Collateral for the benefit of Noteholder Secured Parties,
subject to limited exceptions. The Issuer shall not amend, modify or supplement,
or permit or consent to any amendment, modification or supplement of, the
Security Documents in any way that would be adverse to the Holders of the Notes
in any material respect, except as described above under “— Security for
the Notes” or as permitted under “— Amendment, Supplement and
Waiver.”
Insurance
The
Issuer and Guarantors (a) will cause any insurance policies covering any
Collateral to be endorsed or otherwise amended to include a customary lender’s
loss payable endorsement, in form and substance reasonably satisfactory to the
Trustee, which endorsement shall provide that, from and after the Issue Date, if
the insurance carrier shall have received written notice from the Trustee of the
occurrence of an Event of Default, the insurance carrier shall pay all proceeds
otherwise payable to the Grantors under such policies directly to the Trustee;
(b) will cause all such policies to provide that neither the Issuer, the
Trustee nor any other party shall be a coinsurer thereunder and to contain a
“Replacement Cost Endorsement,” without any deduction for depreciation, and such
other provisions as the Trustee may reasonably require from time to time to
protect their interests; deliver original or certified copies of all such
policies to the Trustee; cause each such policy to provide that it shall not be
canceled, modified or not renewed (i) by reason of nonpayment of premium
upon not less than 10 days’ prior written notice thereof by the insurer to
the Trustee (giving the Trustee the right to cure defaults in the payment of
premiums) or (ii) for any other reason upon not less than 30 days’
prior written notice thereof by the insurer to the Trustee; (c) will
deliver to the Trustee, prior to the cancellation, modification or nonrenewal of
any such policy of insurance, a draft copy of a renewal or replacement policy
(or other evidence of renewal of a policy previously delivered to the Trustee)
and reasonably promptly thereafter deliver a duplicate original copy of such
policy together with evidence satisfactory to the Trustee of payment of the
premium therefor.
The
Grantors will notify the Trustee promptly whenever any separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained under this covenant is taken out by any Grantor; and promptly deliver
to the Trustee a duplicate original copy of such policy or
policies.
Subrogation
and Subordination
Each
Guarantor will agree that until the indefeasible payment and satisfaction in
full in cash of all applicable obligations under the Note Documents it shall
waive any claim and shall not exercise any right or remedy, direct or indirect,
arising by reason of any performance by it of its Note Guarantee, whether by
subrogation or otherwise, against either the Issuer or any other Guarantor. The
Issuer and each Guarantor will agree that all Indebtedness and other monetary
obligations owed by it to the Issuer or any Restricted Subsidiary shall be fully
subordinated to the indefeasible payment in full in cash of the obligations with
respect to the Note Documents.
Reports
Whether
or not required by the SEC, so long as any Notes are outstanding, the Issuer
will furnish to the Holders of Notes, or file electronically with the SEC
through the SEC’s Electronic Data Gathering, Analysis and Retrieval System (or
any successor system), within the time periods that would be applicable to the
Issuer if it were subject to Section 13(a) or 15(d) of the Exchange
Act:
(1) all
quarterly and annual financial and other information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if the Issuer were
required to file these Forms; and
(2) all
current reports that would be required to be filed with the SEC on Form 8-K
if the Issuer were required to file these reports.
In
addition, whether or not required by the SEC, the Issuer will file a copy of all
of the information and reports referred to in clauses (1) and
(2) above with the SEC for public availability within the time periods
specified in the SEC’s rules and regulations (unless the SEC will not accept the
filing) and make the information available to securities analysts and
prospective investors upon request.
Notwithstanding
anything to the contrary, the Issuer will be deemed to have complied with its
obligations in the preceding two paragraphs following the filing of the Exchange
Offer Registration Statement and prior to the effectiveness thereof if the
Exchange Offer Registration Statement includes the information specified in
clause (1) above at the times it would otherwise be required to file such
Forms. If Parent has complied with the reporting requirements of Section 13
or 15(d) of the Exchange Act, if applicable, and has furnished the Holders of
Notes, or filed electronically with the SEC’s Electronic Data Gathering,
Analysis and Retrieval System (or any successor system), the reports described
herein with respect to Parent (including any financial information required by
Regulation S-X relating to the Issuer and the Subsidiary Guarantors), the
Issuer shall be deemed to be in compliance with the provisions of this
covenant.
The
Issuer and the Guarantors have agreed that, for so long as any Notes remain
outstanding, the Issuer will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities
Act.
Events
of Default
Each of
the following is an “Event of Default”:
(1) failure
by the Issuer to pay interest on any of the Notes when it becomes due and
payable and the continuance of any such failure for 30 days;
(2) failure
by the Issuer to pay the principal on any of the Notes when it becomes due and
payable, whether at stated maturity, upon redemption, upon purchase, upon
acceleration or otherwise;
(3) failure
by the Issuer to comply with any of its agreements or covenants described above
under “— Certain Covenants — Limitations on Mergers, Consolidations,
Etc.,” or in respect of its obligations to make a Change of Control Offer as
described above under “— Change of Control;”
(4) failure
by the Issuer or any Guarantor to comply with any other agreement or covenant in
the Indenture, the Security Documents or the Intercreditor Agreement and
continuance of this failure for 60 days after notice of the failure has
been given to the Issuer by the Trustee or by the Holders of at least 25% of the
aggregate principal amount of the Notes then outstanding;
(5) default
under any mortgage, indenture or other instrument or agreement under which there
may be issued or by which there may be secured or evidenced Indebtedness of the
Issuer or any Restricted Subsidiary, whether such Indebtedness now exists or is
incurred after the Issue Date, which default:
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(a)
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is
caused by a failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) principal on such
Indebtedness within the applicable express grace
period,
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(b)
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results
in the acceleration of such Indebtedness prior to its express final
maturity or
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(c)
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results
in the judicial authorization to foreclose upon, or to exercise remedies
under applicable law or applicable security documents to take ownership
of, the assets securing such
Indebtedness, and
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in each
case, the principal amount of such Indebtedness, together with any other
Indebtedness with respect to which an event described in clause (a), (b) or
(c) has occurred and is continuing, aggregates $20.0 million or
more;
(6) one
or more judgments or orders that exceed $20.0 million in the aggregate (net
of amounts covered by insurance or bonded) for the payment of money have been
entered by a court or courts of competent jurisdiction against the Issuer or any
Restricted Subsidiary and such judgment or judgments have not been satisfied,
stayed, annulled or rescinded within 60 days of being entered;
(7) the
Issuer or any Significant Subsidiary pursuant to or within the meaning of any
Bankruptcy Law:
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(a)
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commences
a voluntary case,
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(b)
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consents
to the entry of an order for relief against it in an involuntary
case,
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(c)
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consents
to the appointment of a Custodian of it or for all or substantially all of
its assets, or
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(d)
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makes
a general assignment for the benefit of its
creditors;
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(8) a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that:
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(a)
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is
for relief against the Issuer or any Significant Subsidiary as debtor in
an involuntary case,
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(b)
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appoints
a Custodian of the Issuer or any Significant Subsidiary or a Custodian for
all or substantially all of the assets of the Issuer or any Significant
Subsidiary, or
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(c)
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orders
the liquidation of the Issuer or any Significant
Subsidiary,
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and the
order or decree remains unstayed and in effect for 60 days;
(9) any
Note Guarantee of any Significant Subsidiary ceases to be in full force and
effect (other than in accordance with the terms of such Note Guarantee and the
Indenture) or is declared null and void and unenforceable or found to be invalid
or any Guarantor denies its liability under its Note Guarantee (other than by
reason of release of a Guarantor from its Note Guarantee in accordance with the
terms of the Indenture and the Note Guarantee); or
(10) any
security interest and Lien purported to be created by any Security Document with
respect to any Collateral, individually or in the aggregate, having a fair
market value in excess of $50.0 million shall cease to be in full force and
effect, or shall cease to give the Notes Collateral Agent, for the benefit of
the applicable Noteholder Secured Parties, the Liens, rights, powers and
privileges purported to be created and granted thereby (including a perfected
first priority security interest in and Lien on,
all
of the Collateral thereunder (except as otherwise expressly provided in the
Indenture and the Intercreditor Agreement)) in favor of the Notes Collateral
Agent, or shall be asserted by the Issuer or any other Guarantor not to be, a
valid, perfected, first priority (except as otherwise expressly provided in the
Indenture or the Intercreditor Agreement) security interest in or Lien on the
Collateral covered thereby; except to the extent that any such loss of
perfection or priority results from the failure of the Trustee to make filings,
renewals and continuations (or other equivalent filings) which the Issuer has
indicated in the perfection certificate are required to be made or the failure
of the Trustee to maintain possession of certificates actually delivered to it
representing securities pledged under the Security Documents.
If an
Event of Default (other than an Event of Default specified in clause (7) or
(8) above with respect to the Issuer) shall have occurred and be continuing
under the Indenture, the Trustee, by written notice to the Issuer, or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Issuer and the Trustee, may declare (an
“acceleration declaration”) all amounts owing under the Notes to be due and
payable immediately. Upon such declaration of acceleration, the aggregate
principal of and accrued and unpaid interest on the outstanding Notes shall
become due and payable immediately; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of such outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the nonpayment of accelerated principal and interest, have
been cured or waived as provided in the Indenture. If an Event of Default
specified in clause (7) or (8) with respect to the Issuer occurs, all
outstanding Notes shall become due and payable without any further action or
notice.
The
Trustee shall, within 30 days after the occurrence of any Default with
respect to the Notes, give the Holders notice of all uncured Defaults thereunder
known to it; provided,
however, that, except in the case of an Event of Default in payment with
respect to the Notes or a Default in complying with “— Certain
Covenants — Limitations on Mergers, Consolidations, Etc.,” the Trustee
shall be protected in withholding such notice if and so long as a committee of
its trust officers in good faith determines that the withholding of such notice
is in the interest of the Holders.
No Holder
will have any right to institute any proceeding with respect to the Indenture or
for any remedy thereunder, unless the Trustee:
(1) has
failed to act for a period of 60 days after receiving written notice of a
continuing Event of Default by such Holder and a request to act by Holders of at
least 25% in aggregate principal amount of Notes outstanding;
(2) has
been offered indemnity satisfactory to it in its reasonable
judgment; and
(3) has
not received from the Holders of a majority in aggregate principal amount of the
outstanding Notes a direction inconsistent with such request.
However,
such limitations do not apply to a suit instituted by a Holder of any Note for
enforcement of payment of the principal of or interest on such Note on or after
the due date therefor (after giving effect to the grace period specified in
clause (1) of the first paragraph of this “— Events of Default”
section).
The
Issuer is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture and, upon any Officer of the Issuer becoming aware
of any Default, a statement specifying such Default and what action the Issuer
is taking or proposes to take with respect thereto.
Legal
Defeasance and Covenant Defeasance
The
Issuer may, at its option and at any time, elect to have its obligations and the
obligations of the Guarantors discharged with respect to the outstanding Notes,
Note Guarantees and the Security Documents (“Legal Defeasance”). Legal
Defeasance means that the Issuer and the Guarantors shall be deemed to have paid
and discharged the entire Indebtedness represented by the Notes and the Note
Guarantees, and the Indenture and Security Documents shall cease to be of
further effect as to all outstanding Notes and Note Guarantees, except as
to:
(1) rights
of Holders to receive payments in respect of the principal of and interest on
the Notes when such payments are due from the trust funds referred to
below,
(2) the
Issuer’s obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment and money for security
payments held in trust,
(3) the
rights, powers, trust, duties, and immunities of the Trustee and Notes
Collateral Agent, and the Issuer’s and Guarantors’ obligations in connection
therewith, and
(4) the
Legal Defeasance provisions of the Indenture.
In
addition, the Issuer may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors released with respect to most
of the covenants under the Indenture and Security Documents, except as described
otherwise in the Indenture (“Covenant Defeasance”), and thereafter any omission
to comply with such obligations shall not constitute a Default. In the event
Covenant Defeasance occurs, certain Events of Default (not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events)
will no longer apply. The Issuer may exercise its Legal Defeasance option
regardless of whether it previously exercised Covenant Defeasance.
In order
to exercise either Legal Defeasance or Covenant Defeasance:
(1) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders, U.S. legal tender, U.S. Government Obligations or a
combination thereof, in such amounts as will be sufficient (without
reinvestment) in the opinion of a nationally recognized firm of independent
public accountants selected by the Issuer, to pay the principal of and interest
on the Notes on the stated date for payment or on the redemption date of the
principal or installment of principal of or interest on the Notes,
(2) in
the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an
opinion of counsel in the United States confirming that:
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(a)
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the
Issuer has received from, or there has been published by the Internal
Revenue Service, a ruling, or
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(b)
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since
the date of the Indenture, there has been a change in the applicable
U.S. federal income tax law,
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in either
case to the effect that, and based thereon this opinion of counsel shall confirm
that, the Holders will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of the Legal Defeasance and will be subject to
U.S. federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred,
(3) in
the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such Covenant Defeasance
and will be subject to U.S. federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if the Covenant
Defeasance had not occurred,
(4) no
Default shall have occurred and be continuing on the date of such deposit (other
than a Default resulting from the borrowing of funds to be applied to such
deposit),
(5) the
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a Default under the Indenture or a default under any
other material agreement or instrument to which the Issuer or any of its
Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is
bound (other than any such Default or default resulting solely from the
borrowing of funds to be applied to such deposit),
(6) the
Issuer shall have delivered to the Trustee an Officers’ Certificate stating that
the deposit was not made by it with the intent of preferring the Holders over
any other of its creditors or with the intent of defeating, hindering, delaying
or defrauding any other of its creditors or others, and
(7) the
Issuer shall have delivered to the Trustee an Officers’ Certificate and an
opinion of counsel, each stating that the conditions provided for in, in the
case of the Officers’ Certificate, clauses (1) through (6) and, in the
case of the opinion of counsel, clauses (2) and/or (3) and (5) of
this paragraph have been complied with.
If the
funds deposited with the Trustee to effect Covenant Defeasance are insufficient
to pay the principal of and interest on the Notes when due, then our obligations
and the obligations of Guarantors under the Indenture will be revived and no
such defeasance will be deemed to have occurred.
Satisfaction
and Discharge
The
Indenture and Security Documents will be discharged and will cease to be of
further effect (except as to rights of registration of transfer or exchange of
Notes which shall survive until all Notes have been canceled) as to all
outstanding Notes when either:
(1) all
the Notes that have been authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for whose payment
money has been deposited in trust or segregated and held in trust by the Issuer
and thereafter repaid to the Issuer or discharged from this trust) have been
delivered to the Trustee for cancellation, or
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(2)
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(a)
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all
Notes not delivered to the Trustee for cancellation otherwise have become
due and payable, will become due and payable, or may be called for
redemption, within one year or have been called for redemption pursuant to
the provisions described under “— Optional Redemption,” and the
Issuer has irrevocably deposited or caused to be deposited with the
Trustee funds in trust sufficient to pay and discharge the entire
Indebtedness (including all principal and accrued interest) on the Notes
not theretofore delivered to the Trustee for
cancellation,
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(b)
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the
Issuer has paid all sums payable by it under the
Indenture, and
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(c)
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the
Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes at maturity or on the date
of redemption, as the case may
be.
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In
addition, the Issuer must deliver an Officers’ Certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
Transfer
and Exchange
A Holder
will be able to register the transfer of or exchange Notes only in accordance
with the provisions of the Indenture. The Registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and to
pay any taxes and fees required by law or permitted by the Indenture. Without
the prior consent of the Issuer, the Registrar is not required (1) to
register the transfer of or exchange any Note selected for redemption,
(2) to register the transfer of or exchange any Note for a period of
15 days before a selection of Notes to be redeemed or (3) to register
the transfer or exchange of a Note between a record date and the next succeeding
interest payment date.
The Notes
will be issued in registered form and the registered Holder will be treated as
the owner of such Note for all purposes.
Amendment,
Supplement and Waiver
Subject
to certain exceptions, the Indenture, the Notes, the Security Documents or the
Intercreditor Agreement may be amended with the consent (which may include
consents obtained in connection with a tender offer or exchange offer for Notes)
of the Holders of at least a majority in principal amount of the Notes then
outstanding, and any existing Default under, or compliance with any provision
of, the Indenture, the Notes, the Security Documents or the Intercreditor
Agreement may be waived (other than any continuing Default in the payment of the
principal or interest on the Notes) with the consent (which may include consents
obtained in connection with a tender offer or exchange offer for Notes) of the
Holders of a majority in principal amount of the Notes then outstanding;
provided that without the consent of each Holder affected, no amendment or
waiver may:
(1) reduce,
or change the maturity, of the principal of any Note;
(2) reduce
the rate of or extend the time for payment of interest on any Note;
(3) reduce
any premium payable upon optional redemption of the Notes or change the date on,
or the circumstances under, which any Notes are subject to redemption (other
than provisions relating to the purchase of Notes described above under
“— Change of Control” and “— Certain Covenants — Limitations on
Asset Sales,” except that if a Change of Control has occurred, no amendment or
other modification of the obligation of the Issuer to make a Change of Control
Offer relating to such Change of Control shall be made without the consent of
each Holder of the Notes affected);
(4) make
any Note payable in money or currency other than that stated in the
Notes;
(5) expressly
subordinate such Note or any Note Guarantee to any other Indebtedness of the
Issuer or any Guarantor in right of payment or make any other change in the
ranking or priority of any Note that would adversely affect the
Holders;
(6) reduce
the percentage of Holders necessary to consent to an amendment or waiver to the
Indenture or the Notes;
(7) waive
a default in the payment of principal of or premium or interest on any Notes
(except a rescission of acceleration of the Notes by the Holders thereof as
provided in the Indenture and a waiver of the payment default that resulted from
such acceleration);
(8) impair
the rights of Holders to receive payments of principal of or interest on the
Notes on or after the due date therefor or to institute suit for the enforcement
of any such payment on the Notes;
(9) release
any Guarantor that is a Significant Subsidiary from any of its obligations under
its Note Guarantee or the Indenture, except as permitted by the
Indenture;
(10) make
any change in these amendment and waiver provisions; or
(11) make
any change in the Intercreditor Agreement or in the provisions of the Indenture
or any Security Document dealing with the application of proceeds of the
Collateral that would adversely affect the Holders.
Notwithstanding
the foregoing, the Issuer and the Trustee may amend the Indenture, the Note
Guarantees, the Notes, the Security Documents or the Intercreditor Agreement
without the consent of any Holder, to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Issuer’s obligations to
the Noteholder Secured Parties in the case of a merger, consolidation or sale of
all or substantially all of the assets in accordance with “— Certain
Covenants — Limitations on Mergers, Consolidations, Etc.,” to add any
Subsidiary of the Issuer as a Guarantor, to release any Guarantor from any of
its obligations under its Note Guarantee or the Indenture (to the extent
permitted by the Indenture), to make any change that does not materially
adversely affect the rights of any Holder, in the case of the Indenture, to
maintain the qualification of the Indenture under the Trust Indenture Act,
to add additional assets as Collateral, to release Collateral from the Lien
pursuant to the Indenture, the Security Documents and the Intercreditor
Agreement when permitted or required by such agreements, or to provide for the
issuance of Additional Notes in accordance with the Indenture.
The
Intercreditor Agreement may be amended from time to time with the consent of
certain parties thereto. In addition, the Intercreditor Agreement may be amended
from time to time at the sole request and expense of the Issuer, and without the
consent of either the Bank Collateral Agent or the Notes Collateral
Agent,
(1)
(A) to add other parties (or any authorized agent thereof or trustee
therefor) holding Other Pari Passu Lien Obligations that are incurred in
compliance with the Credit Agreement, the Indenture and the Security Documents,
(B) to establish that the Liens on any Notes Collateral securing such Other
Pari Passu Lien Obligations shall be pari passu under the Intercreditor
Agreement with the Liens on such Notes Collateral securing the Obligations under
the Indenture and the Notes and senior to the Liens on such Notes Collateral
securing any Obligations under the Credit Agreement, all on the terms provided
for in the Intercreditor Agreement in effect immediately prior to such amendment
and (C) to establish that the Liens on any ABL Collateral securing such
Other Pari Passu Lien Obligations shall be pari passu under the Intercreditor
Agreement with the Liens on such ABL Collateral securing the Obligations under
the Indenture and the Notes and junior and subordinated to the Liens on such ABL
Collateral securing any obligations under the Credit Agreement, all on the terms
provided for in the Intercreditor Agreement as in effect immediately prior to
such amendment, and
(2)
(A) to add other parties (or any authorized agent thereof or trustee
therefor) holding Indebtedness that is incurred in compliance with the Credit
Agreement and the Indenture and the Security Documents, (B) to establish
that the Liens on any ABL Collateral securing such Indebtedness shall be pari
passu under the Intercreditor Agreement with the Liens on such ABL Collateral
securing the obligations under the Credit Agreement and senior to the Liens on
such ABL Collateral securing any obligations under the Indenture and the Notes,
all on the terms provided for in the Intercreditor Agreement in effect
immediately prior to such amendment and (C) to establish that the Liens on
any Notes Collateral securing such Indebtedness shall be pari passu under the
Intercreditor Agreement with the Liens on such Notes Collateral securing the
obligations under the Credit Agreement and junior and subordinated to the Liens
on such Notes Collateral securing any obligations under the Indenture and the
Notes,
all
on the terms provided for in the Intercreditor Agreement in effect immediately
prior to such amendment. Any such additional party and the Bank Collateral
Agent, Trustee and Notes Collateral Agent shall be entitled to rely upon a
certificate delivered by an officer of the issuer certifying that such Other
Pari Passu Lien Obligations or Indebtedness, as the case may be, were issued or
borrowed in compliance with the Credit Agreement and the Indenture and the
Security Documents. Any amendment of the Intercreditor Agreement that is
proposed to be effected without the consent of the Bank Collateral Agent or the
Notes Collateral Agent will be submitted to such Person for its review at least
5 business days prior to the proposed effectiveness of such amendment (or such
shorter period acceptable to such agent).
See also
“Security for the Notes — Intercreditor Agreement — Refinancings of
the Credit Agreement and the Notes.”
No
Personal Liability of Directors, Officers, Employees and
Stockholders
No
director, officer, employee, incorporator or stockholder of the Issuer or any
Guarantor will have any liability for any obligations of the Issuer under the
Notes or the Indenture or of any Guarantor under its Note Guarantee or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes and the Note Guarantees. The waiver may not be effective to waive
liabilities under the federal securities laws. It is the view of the SEC that
this type of waiver is against public policy.
Concerning
the Trustee
U.S. Bank
National Association is the Trustee and Notes Collateral Agent under the
Indenture and has been appointed by the Issuer as Registrar and Paying Agent
with regard to the Notes. U.S. Bank National Association is also the
trustee with respect to the Issuer’s 9% Senior Subordinated Notes due 2012.
The Indenture contains certain limitations on the rights of the Trustee, should
it become a creditor of the Issuer, to obtain payment of claims in certain
cases, or to realize on certain assets received in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Indenture), it must eliminate such conflict or resign.
The
Holders of a majority in principal amount of the then outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that, in case an Event of Default occurs and
is not cured, the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent person in similar circumstances in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to the Trustee.
Governing
Law
The
Indenture, the Notes, the Note Guarantees, the Collateral Agreement and the
Intercreditor Agreement are governed by, and construed in accordance with, the
laws of the State of New York.
Certain
Definitions
Set forth
below is a summary of certain of the defined terms used in the Indenture.
Reference is made to the Indenture and the other Note Documents for the full
definition of all such terms.
“ABL
Collateral” means (a) all Accounts; (b) all Inventory; (c) to the
extent evidencing, governing, securing or otherwise related to the items
referred to in the preceding clauses (a) and (b), all (i) General
Intangibles, (ii) Chattel Paper, (iii) Instruments and
(iv) Documents; (d) all Payment Intangibles (including corporate tax
refunds), other than any Payment Intangibles that represent tax refunds in
respect of or otherwise relate to real property, Fixtures or Equipment;
(e) all collection accounts, deposit accounts, lock-boxes, securities
accounts and commodity accounts and any cash or other assets in any such
accounts and all cash equivalents (other than (i) identifiable cash
proceeds in respect of real estate, Fixtures or Equipment and (ii) amounts
held in any Asset Sale Proceeds Account to the extent that such amounts
(A) do not exceed the amount of proceeds of the sale or other disposition
of any Noteholder First Lien Collateral that are deposited in such Asset Sales
Proceeds Account plus interest, dividends, earnings and other proceeds thereof,
and minus withdrawals thereof that are applied as provided in the Indenture, and
(B) are then required to be held in such account under the terms of the
Indenture as in effect on the date hereof; (f) all books and records
related to the foregoing; and (g) all proceeds and Supporting Obligations
of any and all of the foregoing in whatever form received, including all
collateral security and guarantees given by any other Person with respect to any
of the foregoing; provided
that proceeds of ABL Collateral described in clause (e) above shall
not constitute ABL Collateral unless such Proceeds are otherwise described in
any of the foregoing clauses (a) - (f). All capitalized terms used in this
definition and not defined elsewhere herein have the meanings assigned to them
in the UCC.
“ABL
Facility Obligations” means the “Revolving Facility Obligations” (as such term
is defined in the Intercreditor Agreement).
“Acquired
Indebtedness” means (1) with respect to any Person that becomes a
Restricted Subsidiary after the Issue Date, Indebtedness of such Person and its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
that was not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary and (2) with respect to the Issuer or any
Restricted Subsidiary, any Indebtedness of a Person (other than the Issuer or a
Restricted Subsidiary) existing at the time such Person is merged with or into
the Issuer or a Restricted Subsidiary, or Indebtedness expressly assumed by the
Issuer or any Restricted Subsidiary in connection with the acquisition of an
asset or assets from another Person, which Indebtedness was not, in any case,
incurred by such other Person in connection with, or in contemplation of, such
merger or acquisition.
“Additional
Interest” has the meaning set forth in the Registration Rights
Agreement.
“Advisory
Agreement” means the General Advisory Agreement dated as of February 12,
2004, between the Issuer and CxCIC LLC.
“Affiliate”
of any Person means any other Person which directly or indirectly controls or is
controlled by, or is under direct or indirect common control with, the referent
Person. For purposes of the covenant described under “— Certain
Covenants — Limitations on Transactions with Affiliates” only, Affiliates
shall be deemed to include, with respect to any Person, any other Person
(1) which beneficially owns 10% or more of any class of the Voting Stock of
the referent Person or (2) of which 10% or more of the Voting Stock is
beneficially owned by the referenced Person. For purposes of this definition and
the definition of “Permitted Holder,” “control” of a Person shall mean the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or
otherwise.
“amend”
means to amend, supplement, restate, amend and restate or otherwise modify; and
“amendment” shall have a correlative meaning.
“asset”
means any asset or property.
“Asset
Acquisition” means
(1) an
Investment by the Issuer or any Restricted Subsidiary of the Issuer in any other
Person if, as a result of such Investment, such Person shall become a Restricted
Subsidiary of the Issuer, or shall be merged with or into the Issuer or any
Restricted Subsidiary of the Issuer, or
(2) the
acquisition by the Issuer or any Restricted Subsidiary of the Issuer of all or
substantially all of the assets of any other Person or any division or line of
business of any other Person.
“Asset
Sale” means any sale, issuance, conveyance, transfer, lease, assignment or other
disposition by the Issuer or any Restricted Subsidiary to any Person other than
the Issuer or any Subsidiary Guarantor (including by means of a sale and
leaseback transaction or a merger or consolidation) (collectively, for purposes
of this definition, a “transfer”), in one transaction or a series of related
transactions, of any assets of the Issuer or any of its Restricted Subsidiaries
other than in the ordinary course of business. For purposes of this definition,
the term “Asset Sale” shall not include:
(1) transfers
of cash or Cash Equivalents;
(2) transfers
of assets (including Equity Interests) that are governed by, and made in
accordance with, the covenant described under “— Certain Covenants —
Limitations on Mergers, Consolidations, Etc.;”
(3) Permitted
Investments and Restricted Payments permitted under the covenant described under
“— Certain Covenants — Limitations on Restricted
Payments;”
(4) the
creation or realization of any Lien permitted under the Indenture;
(5) transfers
of damaged, worn-out or obsolete equipment or assets that, in the Issuer’s
reasonable judgment, are no longer used or useful in the business of the Issuer
or its Restricted Subsidiaries;
(6) sales
or grants of licenses or sublicenses to use the patents, trade secrets, know-how
and other intellectual property, and licenses, leases or subleases of other
assets, of the Issuer or any Restricted Subsidiary to the extent not materially
interfering with the business of Issuer and the Restricted
Subsidiaries;
(7) any
transfer or series of related transfers that, but for this clause, would be
Asset Sales, if after giving effect to such transfers, the aggregate Fair Market
Value of the assets transferred in such transaction or any such series of
related transactions does not exceed $3.5 million; and
(8) dispositions
between or among Foreign Subsidiaries.
“Asset
Sale Proceeds Account” means one or more deposit accounts or securities accounts
holding the proceeds of any sale or disposition of any Notes
Collateral.
“Bank
Collateral Agent” means General Electric Capital Corporation and any successor
under the Credit Agreement, or if there is no Credit Agreement, the “Bank
Collateral Agent” designated pursuant to the terms of the Lenders
Debt.
“Bank
Lenders” means the lenders or holders of Indebtedness issued under the Credit
Agreement.
“Bankruptcy
Law” means Title 11 of the United States Code, as amended, or any similar
federal or state law for the relief of debtors.
“Board of
Directors” means, with respect to any Person, (i) in the case of any
corporation, the board of directors of such Person, (ii) in the case of any
limited liability company, the board of managers of such Person, (iii) in
the case of any partnership, the Board of Directors of the general partner of
such Person and (iv) in any other case, the functional equivalent of the
foregoing or, in each case, other than for purposes of the definition of “Change
of Control,” any duly authorized committee of such body.
“Borrowing
Base” means, as of any date, the sum of (x) 90% of the book value of the
inventory of the Issuer and its Restricted Subsidiaries as of the end of the
most recent fiscal quarter preceding such date, (y) 90% of the book value
of the accounts receivable of the Issuer and its Restricted Subsidiaries as of
the end of the most recent fiscal quarter preceding such date and (z) 100%
of the unrestricted cash and Cash Equivalents of the Issuer and its Restricted
Subsidiaries as of the end of the most recent fiscal quarter preceding such
date, in each case calculated on a consolidated basis in accordance with
GAAP.
“Business
Day” means a day other than a Saturday, Sunday or other day on which banking
institutions in New York are authorized or required by law to
close.
“Capitalized
Lease” means a lease required to be capitalized for financial reporting purposes
in accordance with GAAP.
“Capitalized
Lease Obligations” of any Person means the obligations of such Person to pay
rent or other amounts under a Capitalized Lease, and the amount of such
obligation shall be the capitalized amount thereof determined in accordance with
GAAP.
“Cash
Equivalents” means:
(1) marketable
obligations issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof), maturing within 360 days of the date of acquisition
thereof;
(2) demand
and time deposits and certificates of deposit or acceptances, maturing within
360 days of the date of acquisition thereof, of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million and is assigned
at least a “B” rating by Thomson Financial BankWatch;
(3) commercial
paper maturing no more than 180 days from the date of creation thereof
issued by a corporation that is not the Issuer or an Affiliate of the Issuer,
and is organized under the laws of any State of the United States of America or
the District of Columbia and rated at least A-1 by S&P or at least P-1 by
Moody’s;
(4) repurchase
obligations with a term of not more than ten days for underlying securities of
the types described in clause (1) above entered into with any commercial
bank meeting the specifications of clause (2) above; and
(5) investments
in money market or other mutual funds substantially all of whose assets comprise
securities of the types described in clauses (1) through
(4) above.
“Change
of Control” means the occurrence of any of the following events:
(1) any
“person” or “group” (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act, except that in no event shall the parties to the Stockholders’
Agreement be deemed a “group” solely by virtue of being parties to the
Stockholders’ Agreement), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause that person or group shall
be deemed to have “beneficial ownership” of all securities that any such person
or group has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of Voting Stock
representing 50% or more of the voting power of the total outstanding Voting
Stock of the Issuer; provided,
however, that such event shall not be deemed to be a Change of Control so
long as one or more of the Permitted Holders have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority of
the Board of Directors of the Issuer;
(2) during
any period of two consecutive years, individuals who at the beginning of such
period constituted the Board of Directors (together with any new directors whose
election to such Board of Directors or whose nomination for election by the
stockholders of the Issuer was approved by a vote of the majority of the
directors of the Issuer then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Issuer;
(3)
(a) all or substantially all of the assets of the Issuer and the Restricted
Subsidiaries are sold or otherwise transferred to any Person other than a
Wholly-Owned Restricted Subsidiary or one or more Permitted Holders or
(b) the Issuer consolidates or merges with or into another Person or any
Person consolidates or merges with or into the Issuer, in either case under this
clause (3), in one transaction or a series of related transactions in which
immediately after the consummation thereof Persons beneficially owning (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, Voting Stock representing in the aggregate a majority of the total
voting power of the Voting Stock of the Issuer immediately prior to such
consummation do not beneficially own (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, Voting Stock representing a
majority of the total voting power of the Voting Stock of the Issuer or the
surviving or transferee Person; provided that it shall not
constitute a Change of Control under this clause (3)(b) if, after giving
effect to such transaction, one or more of the Permitted Holders beneficially
own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, Voting Stock representing (i) 35% or more of the total
voting power of the Voting Stock of the Issuer or the surviving or transferee
Person in such transaction immediately after such transaction and (ii) a
greater percentage of the total voting power of the Voting Stock of the Issuer
than any other “person” or “group” (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act); or
(4) the
Issuer shall adopt a plan of liquidation or dissolution or any such plan shall
be approved by the stockholders of the Issuer.
For
purposes of this definition, (i) a Person shall not be deemed to have
beneficial ownership of securities subject to a stock purchase agreement, merger
agreement or similar agreement until the consummation of the transactions
contemplated by such agreement and (ii) any holding company whose only
significant asset is Equity Interests of Parent or the Issuer shall not itself
be considered a “person” or “group” for purposes of clause (1) or
(3) above.
“Collateral”
means all the assets and properties subject to the Liens created by the Security
Documents.
“Collateral
Agreement” means the Collateral Agreement dated the Issue Date (as amended,
supplemented or otherwise modified from time to time) among the Issuer, Parent,
the Subsidiary Guarantors party thereto and the Collateral Agent.
“Consolidated
Amortization Expense” for any period means the amortization expense of the
Issuer and the Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
“Consolidated
Cash Flow” for any period means, without duplication, the sum of the amounts for
such period of
(1) Consolidated
Net Income, plus
(2) in
each case only to the extent (and in the same proportion) deducted in
determining Consolidated Net Income and with respect to the portion of
Consolidated Net Income attributable to any Restricted Subsidiary (other than
any Foreign Subsidiary) only if a corresponding amount would be permitted at the
date of determination to be distributed to the Issuer by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements (other than any municipal loan or
related agreements entered into in connection with the incurrence of industrial
revenue bonds), instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders,
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(a)
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Consolidated
Income Tax Expense,
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(b)
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Consolidated
Amortization Expense (but only to the extent not included in Consolidated
Interest Expense),
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(c)
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Consolidated
Depreciation Expense,
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(d)
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Consolidated
Interest Expense,
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(e)
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Restructuring
Expenses,
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(f)
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payments
pursuant to the Advisory
Agreement, and
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(g)
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all
other non-cash items reducing the Consolidated Net Income (excluding any
non-cash charge that results in an accrual of a reserve for cash charges
in any future period) for such
period,
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in each
case determined on a consolidated basis in accordance with GAAP,
minus
(3) the
aggregate amount of all non-cash items, determined on a consolidated basis, to
the extent such items increased Consolidated Net Income for such
period.
“Consolidated
Depreciation Expense” for any period means the depreciation expense of the
Issuer and the Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
“Consolidated
Income Tax Expense” for any period means the provision for taxes of the Issuer
and the Restricted Subsidiaries, determined on a consolidated basis in
accordance with GAAP.
“Consolidated
Interest Coverage Ratio” means the ratio of Consolidated Cash Flow during the
most recent four consecutive full fiscal quarters for which financial statements
are available (the “Four-Quarter Period”) ending on or prior to the date of
determination (the “Transaction Date”) to Consolidated Interest Expense for the
Four-Quarter Period. For purposes of this definition, Consolidated Cash Flow and
Consolidated Interest Expense shall be calculated after giving effect on a pro
forma basis for the period of such calculation to:
(1) the
incurrence of any Indebtedness or the issuance of any Preferred Stock of the
Issuer or any Restricted Subsidiary (and the application of the proceeds
thereof) and any repayment of other Indebtedness or redemption of other
Preferred Stock (and the application of the proceeds therefrom) (other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to any revolving credit arrangement) occurring
during the Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction Date, as if such
incurrence, repayment, issuance or redemption, as the case may be (and the
application of the proceeds thereof), occurred on the first day of the
Four-Quarter Period; and
(2) any
Asset Sale or Asset Acquisition (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Issuer or any Restricted Subsidiary (including any Person who becomes a
Restricted Subsidiary as a result of such Asset Acquisition) incurring Acquired
Indebtedness and also including any Consolidated Cash Flow (including any Pro
Forma Cost Savings) associated with any such Asset Acquisition) occurring during
the Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction Date, as if such Asset
Sale or Asset Acquisition (including the incurrence of, or assumption or
liability for, any such Indebtedness or Acquired Indebtedness) occurred on the
first day of the Four-Quarter Period.
In
calculating Consolidated Interest Expense for purposes of determining the
denominator (but not the numerator) of this Consolidated Interest Coverage
Ratio:
(1) interest
on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on this Indebtedness in effect on the Transaction Date;
(2) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a Eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four-Quarter Period; and
(3) notwithstanding
clause (1) or (2) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Hedging Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of these agreements.
“Consolidated
Interest Expense” for any period means the sum, without duplication, of the
total interest expense (less interest income) of the Issuer and the Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP and including without duplication,
(1) imputed
interest on Capitalized Lease Obligations,
(2) commissions,
discounts and other fees and charges owed with respect to letters of credit
securing financial obligations, bankers’ acceptance financing and receivables
financings,
(3) the
net costs associated with Hedging Obligations,
(4) the
interest portion of any deferred payment obligations,
(5) all
other non-cash interest expense,
(6) capitalized
interest,
(7) the
product of (a) all dividend payments on any series of Disqualified Equity
Interests of the Issuer or any Preferred Stock of any Restricted Subsidiary
(other than any such Disqualified Equity Interests or any Preferred Stock held
by the Issuer or a Wholly-Owned Restricted Subsidiary or to the extent paid in
Qualified Equity Interests), multiplied by (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of the Issuer and the Restricted
Subsidiaries, expressed as a decimal,
(8) all
interest payable with respect to discontinued operations, and
(9) all
interest on any Indebtedness described in clause (7) or (8) of the
definition of “Indebtedness”; provided that such interest shall be included in
Consolidated Interest Expense only to the extent that the amount of the related
Indebtedness is reflected on the balance sheet of the Issuer or any Restricted
Subsidiary,
less, to the extent included
in such total interest expense, (A) the amortization during such period of
capitalized financing costs associated with the Transactions and (B) the
amortization during such period of other capitalized financing costs; provided, however, that, in
the case of clause (B), the aggregate amount of amortization relating to such
capitalized financing costs deducted in calculating Consolidated Interest
Expense shall not exceed 5% of the aggregate amount of the financing giving rise
thereto.
Consolidated
Interest Expense shall be calculated excluding unrealized gains and losses with
respect to Hedging Obligations.
“Consolidated
Net Income” for any period means the net income (or loss) of the Issuer and the
Restricted Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP; provided that there shall be
excluded from such net income (or loss) (to the extent otherwise included
therein), without duplication:
(1) the
net income (or loss) of any Person (other than a Restricted Subsidiary) in which
any Person other than the Issuer and the Restricted Subsidiaries has an
ownership interest, except to the extent that cash in an amount equal to any
such income has actually been received by the Issuer or any of its Wholly-Owned
Restricted Subsidiaries during such period;
(2) except
to the extent includible in the consolidated net income of the Issuer pursuant
to the foregoing clause (1), the net income (or loss) of any Person that accrued
prior to the date that (a) such Person becomes a Restricted Subsidiary or
is merged into or consolidated with the Issuer or any Restricted Subsidiary or
(b) the assets of such Person are acquired by the Issuer or any Restricted
Subsidiary;
(3) the
net income of any Restricted Subsidiary (other than any Foreign Subsidiary)
during such period to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary of that income is not
permitted by operation of the terms of its charter or any agreement (other than
any municipal loan or related agreements entered into in connection with the
incurrence of industrial revenue bonds), instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary during
such period, except that the Issuer’s equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining
Consolidated Net Income;
(4) for
the purposes of calculating the Restricted Payments Basket only, in the case of
a successor to the Issuer by consolidation, merger or transfer of its assets,
any income (or loss) of the successor prior to such merger, consolidation or
transfer of assets;
(5) any
gain (or loss), together with any related provisions for taxes on any such gain
(or the tax effect of any such loss), realized during such period by the Issuer
or any Restricted Subsidiary upon (a) the acquisition of any securities, or
the extinguishment of any Indebtedness, of the Issuer or any Restricted
Subsidiary or (b) any Asset Sale by the Issuer or any Restricted
Subsidiary;
(6) gains
and losses due solely to fluctuations in currency values and the related tax
effects according to GAAP;
(7) unrealized
gains and losses with respect to Hedging Obligations;
(8) the
cumulative effect of any change in accounting principles;
(9) any
amortization or write-offs of debt issuance or deferred financing costs,
premiums and prepayment penalties, and other costs and expenses, in each case,
paid or charged during such period to the extent attributable to the
Transactions and the Exchange Offer pursuant to the Registration Rights
Agreement;
(10) gains
and losses realized upon the refinancing of any Indebtedness of the Issuer or
any Restricted Subsidiary;
(11) any
extraordinary or nonrecurring gain (or extraordinary or nonrecurring loss),
together with any related provision for taxes on any such extraordinary or
nonrecurring gain (or the tax effect of any such extraordinary or nonrecurring
loss), realized by the Issuer or any Restricted Subsidiary during such
period;
(12) non-cash
compensation charges or other non-cash expenses or charges arising from the
grant of or issuance or repricing of Equity Interests or other equity-based
awards or any amendment or substitution of any such Equity Interests or other
equity-based awards;
(13) any
non-cash goodwill or non-cash asset impairment charges subsequent to the Issue
Date;
(14) any
expenses or reserves for liabilities to the extent that the Issuer or any
Restricted Subsidiary is entitled to indemnification therefor under binding
agreements; provided that any liabilities for which the Issuer or such
Restricted Subsidiary is not actually indemnified shall reduce Consolidated Net
Income in the period in which it is determined that the Issuer or such
Restricted Subsidiary will not be indemnified; and
(15) so
long as the Issuer and the Restricted Subsidiaries file a consolidated tax
return, or are part of a consolidated group for tax purposes, with Parent,
Holdings or any other holding company, the excess of (a) the Consolidated
Income Tax Expense for such period over (b) all tax payments payable for
such period by the Issuer and the Restricted Subsidiaries to Parent, Holdings or
such other holding company under a tax sharing agreement or
arrangement.
In
addition:
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(a)
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Consolidated
Net Income shall be reduced by the amount of any payments to or on behalf
of Parent made pursuant to clause (4) of the last paragraph of the
covenant described under “— Certain Covenants — Limitations on
Transactions with
Affiliates”; and
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(b)
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any
return of capital with respect to an Investment that increased the
Restricted Payments Basket pursuant to clause (3)(d) of the first
paragraph under “— Certain Covenants — Limitations on Restricted
Payments” or decreased the amount of Investments outstanding pursuant to
clause (17), (18) or (19) of the definition of “Permitted
Investments” shall be excluded from Consolidated Net Income for purposes
of calculating the Restricted Payments
Basket.
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For
purposes of this definition of “Consolidated Net Income,” “nonrecurring” means,
with respect to any cash gain or loss, any gain or loss as of any date that is
not reasonably likely to recur within the two years following such date;
provided that if there was a gain or loss similar to such gain or loss within
the two years preceding such date, such gain or loss shall not be deemed
nonrecurring.
Notwithstanding
the foregoing, “Consolidated Net income,” as used in clause (3)(a) of the first
paragraph under “— Certain Covenants — Limitations on Restricted
Payments” in respect of any period prior to March 29, 2008, shall be
calculated in the manner prescribed under the indenture (as in effect on the
Issue Date) for the Issuer’s existing 9% senior subordinated notes due
2012.
“Consolidated
Net Tangible Assets” means the aggregate amount of assets of the Issuer (less
applicable reserves and other properly deductible items) after deducting
therefrom (to the extent otherwise included therein) (a) all current
liabilities (other than the obligations under the Indenture or current
maturities of long-term Indebtedness), and (b) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the books and records of the Issuer and the
Restricted Subsidiaries on a consolidated basis and in accordance with
GAAP.
“Consolidated
Secured Debt Ratio” means, as of any date of determination, the ratio of
(a) consolidated total Indebtedness of the Issuer and its Restricted
Subsidiaries on the date of determination that constitutes the Notes, any Other
Pari Passu Lien Obligations or any Lenders Debt to (b) the aggregate amount
of Consolidated Cash Flow for the then most recent four fiscal quarters for
which internal financial statements of the Issuer and its Restricted
Subsidiaries are available in each case with such pro forma and other
adjustments to such consolidated total Indebtedness and Consolidated Cash Flow
as are consistent with the adjustment provisions set forth in the definition of
Consolidated Interest Coverage Ratio.
“Coverage
Ratio Exception” has the meaning set forth in the proviso in the first paragraph
of the covenant described under “— Certain Covenants — Limitations on
Additional Indebtedness.”
“Credit
Agreement” means the Credit Agreement dated the Issue Date by and among the
Issuer, as Borrower, Parent, CWD Windows and Doors, Inc., a Canadian
corporation, as Canadian borrower, Credit Suisse, as administrative agent, and
General Electric Capital Corporation, as collateral agent, the lenders named
therein, including any notes, guarantees, collateral and security documents,
instruments and agreements executed in connection therewith (including Hedging
Obligations related to the Indebtedness incurred thereunder), and in each case
as amended or refinanced from time to time.
“Credit
Facilities” means one or more debt facilities (which may be outstanding at the
same time and including, without limitation, the Credit Agreement) providing for
revolving credit loans, term loans, letters of credit, receivables financing,
commercial paper or any other form of senior debt securities and, in each case,
as such agreements may be amended, amended and restated, supplemented, modified,
extended, refinanced, replaced or otherwise restructured, in whole or in part
from time to time (including increasing the amount of available borrowings
thereunder or adding Subsidiaries of the Issuer as additional borrowers or
guarantors thereunder) with respect to all or any portion of the Indebtedness
under such agreement or agreements or any successor or replacement agreement or
agreements and whether by the same or any other agent, lender or group of
lenders.
“Custodian”
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
“Default”
means (1) any Event of Default or (2) any event, act or condition
that, after notice or the passage of time or both, would be an Event of
Default.
“Designation”
has the meaning given to this term in the covenant described under
“— Certain Covenants — Limitations on Designation of Unrestricted
Subsidiaries.”
“Designation
Amount” has the meaning given to this term in the covenant described under
“— Certain Covenants — Limitations on Designation of Unrestricted
Subsidiaries.”
“Disqualified
Equity Interests” of any Person means any class of Equity Interests of such
Person that, by its terms, or by the terms of any related agreement or of any
security into which it is convertible, puttable or exchangeable, is, or upon the
happening of any event or the passage of time would be, required to be redeemed
by such Person, whether or not at the option of the holder thereof, or matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, in whole or in part, on or prior to the date which is 91 days
after the final maturity date of the Notes; provided, however, that any
class of Equity Interests of such Person that, by its terms, authorizes such
Person to satisfy in full its obligations with respect to the payment of
dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise)
or repurchase thereof or otherwise by the delivery of Equity Interests that are
not Disqualified Equity Interests, and that is not convertible, puttable or
exchangeable for Disqualified Equity Interests or Indebtedness, will not be
deemed to be Disqualified Equity Interests so long as such Person satisfies its
obligations with respect thereto solely by the delivery of Equity Interests that
are not Disqualified Equity Interests; provided, further, however, that any Equity
Interests that would not constitute Disqualified Equity Interests but for
provisions thereof giving holders thereof (or the holders of any security into
or for which such Equity Interests is convertible, exchangeable or exercisable)
the right to require the Issuer to redeem such Equity Interests upon the
occurrence of a change in control or an asset sale occurring prior to the
91st day after the final maturity date of the Notes shall not constitute
Disqualified Equity Interests if the change in control or asset sale provisions
applicable to such Equity Interests are no more favorable to such holders than
the provisions described under “— Change of Control” and “— Certain
Covenants — Limitations on Asset Sales,” respectively, and such Equity
Interests provide that the Issuer will not redeem any such Equity Interests
pursuant to such provisions prior to the Issuer’s purchase of the Notes as
required pursuant to the provisions described under “— Change of Control”
and “— Certain Covenants — Limitations on Asset Sales,”
respectively.
“Equity
Interests” of any Person means (1) any and all shares or other equity
interests (including common stock, preferred stock, limited liability company
interests and partnership interests) in such Person and (2) all rights to
purchase, warrants or options (whether or not currently exercisable),
participations or other equivalents of or interests in (however designated) such
shares or other interests in such Person.
“Exchange
Act” means the U.S. Securities Exchange Act of 1934, as
amended.
“Exchange
Offer Registration Statement” has the meaning given to such term in the
Registration Rights Agreement.
“Excluded
Assets” means (a) Excluded Equity, (b) those assets that would
constitute ABL Collateral but as to which the Bank Collateral Agent shall not
have required a lien or security interest (other than such forbearance by the
Bank Collateral Agent after (x) the discharge in full in cash of the
obligations (other than contingent obligations) with respect to the Lenders
Debt, (y) the cancellation or other satisfactory arrangement with respect
to all letters of credit which are Lenders Debt and (z) termination or
expiration of all commitments to lend and all obligations to issue or extent
letters of credit which would constitute Lenders Debt) and (c) Special
Property other than the following:
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(a)
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the
right to receive any payment of money (including Accounts, General
Intangibles and Payment Intangibles) or any other rights referred to in
Sections 9-406, 9-407, 9-408, 9-409 of the UCC to the extent that
such sections of the UCC are effective to limit the prohibitions which
make such property “Special
Property”; and
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(b)
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any
Proceeds, substitutions or replacements of any Special Property (unless
such Proceeds, substitutions or replacements would constitute Special
Property).
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“Excluded
Equity” means Equity Interests solely to the extent:
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(a)
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in
excess of 66% of the issued and outstanding voting Equity Interests of any
Foreign Subsidiary; or
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(b)
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the
inclusion of such Equity Interests in the Collateral would require
separate financial statements for a Subsidiary of the Parent or the Issuer
to be filed with the SEC (or any successor federal agency) pursuant to
Rule 3-16 of Regulation S-X (or any successor law or
regulation), as in effect from time to
time.
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“Existing
Credit Agreement” means the Fifth Amended and Restated Credit Agreement dated
April 5, 2007, among the Issuer, CWD Windows and Doors, Inc., Parent, the
other guarantors party thereto and the lenders party thereto.
“Fair
Market Value” means, with respect to any asset, the price (after taking into
account any liabilities relating to such asset) that would be negotiated in an
arm’s-length transaction for cash between a willing seller and a willing and
able buyer, neither of which is under any compulsion to complete the
transaction. Fair Market Value (other than of any asset with a public trading
market) in excess of $5.0 million shall be determined by the Board of
Directors of the Issuer acting reasonably and in good faith and shall be
evidenced by a board resolution delivered to the Trustee. Fair Market Value
(other than of any asset with a public trading market) in excess of
$20.0 million shall be determined by an Independent Financial Advisor,
which determination shall be evidenced by an opinion addressed to the Board of
Directors of the Issuer and delivered to the Trustee.
“Foreign
Subsidiary” means any Restricted Subsidiary of the Issuer which is not organized
under the laws of (x) the United States or any state thereof or
(y) the District of Columbia.
“Four-Quarter
Period” has the meaning given to such term in the definition of “Consolidated
Interest Coverage Ratio.”
“GAAP”
means generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
may be approved by a significant segment of the accounting profession of the
United States, as in effect on the Issue Date.
“Grantors”
means the Issuer and the Guarantors.
“guarantee”
means a direct or indirect guarantee by any Person of any Indebtedness of any
other Person and includes any obligation, direct or indirect, contingent or
otherwise, of such Person: (1) to purchase or pay (or advance or supply
funds for the purchase or payment of) Indebtedness of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
arrangements are on arm’s-length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise); or (2) entered into for purposes of assuring in
any other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
“guarantee,” when used as a verb, and “guaranteed” have correlative
meanings.
“Guarantors”
means (1) Parent, (2) each Restricted Subsidiary of the Issuer on the
Issue Date (other than any Foreign Subsidiaries) and (3) each other Person
that is required to, or at the election of the Issuer does, become a Guarantor
by the terms of the Indenture after the Issue Date, in each case, until such
Person is released from its Note Guarantee in accordance with the terms of the
Indenture.
“Hedging
Obligations” of any Person means the obligations of such Person under swap, cap,
collar, forward purchase or similar agreements or arrangements dealing with
interest rates, currency exchange rates or commodity prices, either generally or
under specific contingencies.
“Holder”
means any registered holder, from time to time, of the Notes.
“Holdings”
means Ply Gem Investment Holdings, Inc., a Delaware corporation, and its
successors and assigns.
“incur”
means, with respect to any Indebtedness or Obligation, incur, create, issue,
assume, guarantee or otherwise become directly or, indirectly liable,
contingently or otherwise, with respect to such Indebtedness or Obligation;
provided that
(1) the Indebtedness of a Person existing at the time such Person became a
Restricted Subsidiary shall be deemed to have been incurred by such Restricted
Subsidiary and (2) the accrual of interest, the accretion of original issue
discount or the accretion or accumulation of dividends on any Equity Interests
shall not be deemed to be an incurrence of Indebtedness.
“Indebtedness”
of any Person at any date means, without duplication:
(1) all
liabilities, contingent or otherwise, of such Person for borrowed money (whether
or not the recourse of the lender is to the whole of the assets of such Person
or only to a portion thereof);
(2) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(3) all
reimbursement obligations of such Person in respect of letters of credit,
letters of guaranty, bankers’ acceptances and similar credit
transactions;
(4) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, except trade payables and accrued expenses incurred by
such Person in the ordinary course of business in connection with obtaining
goods, materials or services;
(5) the
amount of all Disqualified Equity Interests of such Person calculated in
accordance with GAAP (whether classified as debt, equity or
mezzanine);
(6) all
Capitalized Lease Obligations of such Person;
(7) all
Indebtedness of others secured by a Lien on any asset of such Person, whether or
not such Indebtedness is assumed by such Person;
(8) all
Indebtedness of others guaranteed by such Person to the extent of such
guarantee; provided
that Indebtedness of the Issuer or its Subsidiaries that is guaranteed by
the Issuer or the Issuer’s Subsidiaries shall only be counted once in the
calculation of the amount of Indebtedness of the Issuer and its Subsidiaries on
a consolidated basis;
(9) to
the extent not otherwise included in this definition, Hedging Obligations of
such Person;
(10) all
obligations of such Person under conditional sale or other title retention
agreements relating to assets purchased by such Person, except trade payables
incurred by such Person in the ordinary course of
business; and
(11) Indebtedness
of any partnership in which such Person is a general partner (other than to the
extent that the instrument or agreement evidencing such Indebtedness expressly
provides that such Indebtedness is recourse only to the partnership and not to
the general partner).
The
amount of any Indebtedness which is incurred at a discount to the principal
amount at maturity thereof as of any date shall be deemed to have been incurred
at the accreted value thereof as of such date. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above, the maximum liability of such
Person for any such contingent obligations at such date and, in the case of
clause (7), the lesser of (a) the Fair Market Value of any asset subject to
a Lien securing the Indebtedness of others on the date that the Lien attaches
and (b) the amount of the Indebtedness secured.
Notwithstanding
the foregoing, Indebtedness shall not include any liability for Federal, state,
local or other taxes owed or owing to any governmental entity.
“Independent
Financial Advisor” means an accounting, appraisal or investment banking firm of
nationally recognized standing that is, in the reasonable judgment of the
Issuer’s Board of Directors, disinterested and independent with respect to the
Issuer and its Affiliates.
“Intercreditor
Agreement” means the Lien Subordination and Intercreditor Agreement dated as of
the Issue Date among the Bank Collateral Agent, the Trustee, the Notes
Collateral Agent, the Issuer and each Guarantor, as it may be amended from time
to time in accordance with the Indenture.
“interest”
means, with respect to the Notes, interest and Additional Interest, if any, on
the Notes.
“Investments”
of any Person means:
(1) all
direct or indirect investments by such Person in any other Person in the form of
loans, advances or capital contributions or other credit extensions constituting
Indebtedness of such other Person, and any guarantee of Indebtedness of any
other Person;
(2) all
purchases (or other acquisitions for consideration) by such Person of
Indebtedness, Equity Interests or other securities of any other Person (other
than any such purchase that constitutes a Restricted Payment of the type
described in clause (2) of the definition thereof);
(3) all
other items that would be classified as investments on a balance sheet of such
Person prepared in accordance with GAAP; and
(4) the
Designation of any Subsidiary as an Unrestricted Subsidiary.
Except as
otherwise expressly specified in this definition, the amount of any Investment
(other than an Investment made in cash) shall be the Fair Market Value thereof
on the date such Investment is made. The amount of Investment pursuant to
clause (4) shall be the Designation Amount determined in accordance with
the covenant described under “— Certain Covenants — Limitations on
Designation of Unrestricted Subsidiaries.” If the Issuer or any Restricted
Subsidiary sells or otherwise disposes of any Equity Interests of any Restricted
Subsidiary, or any Restricted Subsidiary issues any Equity Interests, in either
case, such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary, the Issuer shall be deemed to have
made an Investment on the date of any such sale or other disposition equal to
the Fair Market Value of the Equity Interests of and all other Investments in
such Restricted Subsidiary retained. Notwithstanding the foregoing, purchases or
redemptions of Equity Interests of the Issuer, Parent or Holdings shall be
deemed not to be Investments.
“Issue
Date” means the date on which the Notes are originally issued.
“Lenders
Debt” means any (i) Indebtedness outstanding from time to time under the
Credit Agreement, (ii) any Indebtedness which has a priority security
interest relative to the Notes in the ABL Collateral, (iii) all obligations
with respect to such Indebtedness, (iv) any Hedging Obligations or cash
management obligations, in each case to the extent such obligations are subject
to the Intercreditor Agreement or another intercreditor agreement substantially
consistent with and no less favorable to the Holders in any material respect
than the Intercreditor Agreement and treated as “Revolving Facility Liens” (as
defined in the Intercreditor Agreement) under the applicable intercreditor
agreement and (v) all cash management obligations incurred with any Bank
Lender (or their affiliates).
“Lien”
means, with respect to any asset, any mortgage, deed of trust, lien (statutory
or other), pledge, lease, easement, restriction, covenant, charge, security
interest or other encumbrance of any kind or nature in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement.
“Material
Real Property” means any real property (or any interest in real property)
(x) having a value in excess of $2.0 million or (y) that prior to
the Issue Date is mortgaged to secure the obligations with respect to the
Existing Credit Agreement.
“Moody’s”
means Moody’s Investors Service, Inc. and its successors.
“Mortgages”
means mortgages, deeds of trust, leasehold mortgages, assignments of leases and
rents, modifications and other security documents delivered pursuant to the
covenant “— Further Assurances”.
“Net
Available Proceeds” means, with respect to any Asset Sale, the proceeds thereof
in the form of cash or Cash Equivalents, net of
(1) brokerage
commissions and other fees and expenses (including fees, discounts and expenses
of legal counsel, accountants, investment banks, consultants and placement
agents) of such Asset Sale;
(2) provisions
for taxes payable as a result of such Asset Sale (after taking into account any
available tax credits or deductions and any tax sharing
arrangements);
(3) amounts
required to be paid to any Person (other than the Issuer or any Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale
or having a Lien thereon;
(4) payments
of unassumed liabilities (not constituting Indebtedness) relating to the assets
sold at the time of, or within 30 days after the date of, such Asset
Sale; and
(5) appropriate
amounts to be provided by the Issuer or any Restricted Subsidiary, as the case
may be, as a reserve required in accordance with GAAP against any adjustment in
the sale price of such asset or assets or liabilities associated with such Asset
Sale and retained by the Issuer or any Restricted Subsidiary, as the case may
be, after such Asset Sale, including pensions and other postemployment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an Officers’ Certificate delivered to the Trustee; provided, however, that any
amounts remaining after adjustments, revaluations or liquidations of such
reserves shall constitute Net Available Proceeds.
“Note
Documents” means the Notes, the Notes Guarantees, the Indenture, the Security
Documents and the Intercreditor Agreement.
“Note
Parties” means the Issuer and the Subsidiary Guarantors.
“Notes
Collateral” means the portion of the Collateral as to which the Notes have a
priority security interest relative to Lenders Debt.
“Notes
Collateral Agent” means U.S. Bank National Association, in its capacity as
“Collateral Agent” under the Indenture and under the Security Documents, and any
successor thereto in such capacity.
“Obligation”
means any principal, interest, penalties, fees, indemnification, reimbursements,
costs, expenses, damages and other liabilities payable under the documentation
governing any Indebtedness.
“Officer”
means any of the following of the Issuer: the Chairman of the Board of
Directors, the Chief Executive Officer, the Chief Financial Officer, the
President, any Vice President, the Treasurer or the Secretary.
“Officers’
Certificate” means a certificate signed by two Officers.
“Offering”
means the offering of the Notes by the Issuer pursuant to this prospectus in
connection with the funding of the Transactions.
“Other
Pari Passu Lien Obligations” means any Additional Notes and any other
Indebtedness having substantially identical terms as the Notes (other than issue
price, interest rate, yield and redemption terms) and issued under an indenture
substantially identical to the Indenture and any Indebtedness that refinances or
refunds (or successive refinancings and refundings) any Notes or Additional
Notes and all obligations with respect to such Indebtedness; provided, that such
Indebtedness may (a) have a stated maturity date that is equal to or longer
than the Notes,
(b) contain
terms and covenants that are, in the reasonable opinion of the Issuer, less
restrictive than the terms and covenants under the Notes, (c) contain terms
and covenants that are more restrictive than the terms and covenants under the
Notes so long as prior to or substantially simultaneously with the issuance of
any such Indebtedness, the Notes and the Indenture are amended to contain any
such more restrictive terms and covenants and (d) be secured by an interest
in the Collateral that ranks pari passu or junior to the security interest and
Liens of the Notes Collateral Agent in the Collateral for the benefit of the
Noteholder Secured Parties.
“Parent”
means Ply Gem Holdings, Inc., a Delaware corporation, and its successors and
assigns.
“ParentCo”
means any direct or indirect parent company of the Issuer.
“Pari
Passu Indebtedness” means any Indebtedness of the Issuer or any Guarantor that
ranks pari passu in
right of payment with the Notes or the Note Guarantees, as
applicable.
“Permitted
Business” means the businesses engaged in by the Issuer and its Subsidiaries on
the Issue Date as described in this prospectus and businesses that are
reasonably related thereto, reasonable extensions thereof or necessary or
desirable to facilitate any such business, and any unrelated business to the
extent that it is not material in size as compared with the Issuer’s business as
a whole.
“Permitted
Holders” means (1) Sponsor, Caxton Associates, LLC, Caxton-Iseman (Ply Gem)
L.P., Caxton-Iseman (Ply Gem) II L.P., Frederick J. Iseman, Lee D. Meyer,
John Wayne, Shawn Poe, Mark Watson, Bryan Sveinson, David S. McCready, Robert A.
Ferris, Steven M. Lefkowitz and any other Person that is a controlled Affiliate
of any of the foregoing and (2) any Related Party of any of the foregoing;
provided that in no
event shall any operating portfolio company or any holding company for any
operating portfolio company (other than the Issuer) be a Permitted
Holder.
“Permitted
Investment” means:
(1) (i) Investments
by the Issuer or any Subsidiary Guarantor in (a) any Restricted Subsidiary
that is a Subsidiary Guarantor or (b) any Person that will become
immediately after such Investment a Restricted Subsidiary that is a Subsidiary
Guarantor or that will merge or consolidate into the Issuer or any Restricted
Subsidiary that is a Subsidiary Guarantor and (ii) Investments by any
Restricted Subsidiary that is not a Subsidiary Guarantor in any other Restricted
Subsidiary;
(2) Investments
in the Issuer by any Restricted Subsidiary;
(3) loans
and advances to directors, employees and officers of the Issuer and the
Restricted Subsidiaries for bona fide business purposes and to purchase Equity
Interests of the Issuer, Parent or Holdings not in excess of $5.0 million
at any one time outstanding;
(4) Hedging
Obligations incurred pursuant to the covenant described under “— Certain
Covenants — Limitations on Additional Indebtedness;”
(5) cash
and Cash Equivalents;
(6) receivables
owing to the Issuer or any Restricted Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such
trade terms may include such concessionary trade terms as the Issuer or any such
Restricted Subsidiary deems reasonable under the circumstances;
(7) Investments
in securities of trade creditors or customers received upon foreclosure or
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(8) Investments
made by the Issuer or any Restricted Subsidiary as a result of consideration
received in connection with an Asset Sale made in compliance with the covenant
described under “— Certain Covenants — Limitations on Asset
Sales;”
(9) lease,
utility and other similar deposits in the ordinary course of
business;
(10) Investments
made by the Issuer or a Restricted Subsidiary for consideration consisting only
of Qualified Equity Interests;
(11) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Issuer or any Restricted Subsidiary
or in satisfaction of judgments;
(12) guarantees
of Indebtedness permitted to be incurred under the Indenture;
(13) loans
and advances to suppliers, licensees, franchisees or customers of the Issuer or
any Restricted Subsidiary made in the ordinary course of business in an
aggregate amount, together with the aggregate amount of Indebtedness under
clause (14) of the definition of “Permitted Indebtedness,” not to exceed
$5.0 million at any time outstanding;
(14) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as operating expenses for accounting
purposes and that are made in the ordinary course of business;
(15) Investments
in existence on the Issue Date;
(16) prepaid
expenses, negotiable instruments held for collection and workers’ compensation,
performance and other similar deposits in the ordinary course of
business;
(17) Investments
in an aggregate amount not to exceed, at any one time outstanding, the greater
of (a) $20.0 million and (b) 7.0% of Consolidated Net Tangible
Assets at such time (with each Investment being valued as of the date made and
without regard to subsequent changes in value); provided that Investments
pursuant to this clause (17) shall not be used (x) to make Investments
in Parent, Holdings, any other ParentCo or in the holder of any Equity Interests
of the foregoing or (y) to redeem, repurchase, retire or otherwise acquire
for consideration any Subordinated Indebtedness;
(18) Investments
in Subsidiaries that are not Guarantors or Foreign Subsidiaries in an aggregate
amount not to exceed $10.0 million at any one time outstanding (with each
Investment being valued as of the date made and without regard to subsequent
changes in value); and
(19) Investments
in Foreign Subsidiaries in an aggregate amount not to exceed, at any one time
outstanding, the greater of (a) $10.0 million and (b) 3.5% of
Consolidated Net Tangible Assets at such time (with each Investment being valued
as of the date made and without regard to subsequent changes in
value).
The
amount of Investments outstanding at any time pursuant to clause (17),
(18) or (19) above shall be deemed to be reduced:
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(a)
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upon
the disposition or repayment of or return on any Investment made pursuant
to clause (17), (18) or (19) above, as the case may be, by an
amount equal to the return of capital with respect to such Investment to
the Issuer or any Restricted Subsidiary (to the extent not included in the
computation of Consolidated Net Income);
and
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(b)
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upon
a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary,
by an amount equal to the lesser of (x) the Fair Market Value of the
Issuer’s proportionate interest in such Subsidiary immediately following
such Redesignation, and (y) the aggregate amount of Investments in
such Subsidiary that increased (and did not previously decrease) the
amount of Investments outstanding pursuant to clause (17), (18) or
(19) above, as the case may
be.
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“Permitted
Liens” means the following types of Liens:
(1) Liens
for taxes, assessments or governmental charges or claims either (a) not
delinquent or (b) contested in good faith by appropriate proceedings and as
to which the Issuer or the Restricted Subsidiaries shall have set aside on its
books such reserves or other appropriate provisions as may be required pursuant
to GAAP;
(2) statutory
Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen and other Liens imposed by law incurred in the ordinary
course of business for sums not yet delinquent or being contested in good faith,
if such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(3) Liens
incurred or deposits made in the ordinary course of business in connection with
workers’ compensation, unemployment insurance and other types of social
security, or to secure the performance of tenders, statutory obligations, surety
and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money);
(4) Liens
upon specific items of inventory or other goods and proceeds of any Person
securing such Person’s obligations in respect of bankers’ acceptances issued or
created for the account of such Person to facilitate the purchase, shipment or
storage of such inventory or other goods;
(5) judgment
Liens not giving rise to a Default so long as such Liens are adequately bonded
and any appropriate legal proceedings which may have been duly initiated for the
review of such judgment have not been finally terminated or the period within
which the proceedings may be initiated has not expired;
(6) easements,
rights-of-way, zoning restrictions and other similar charges, restrictions or
encumbrances in respect of real property or immaterial imperfections of title
which do not, in the aggregate, impair in any material respect the ordinary
conduct of the business of the Issuer and the Restricted Subsidiaries taken as a
whole;
(7) Liens
securing reimbursement obligations with respect to letters of credit which
encumber documents and other assets relating to such letters of credit and
products and proceeds thereof;
(8) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Issuer or any Restricted
Subsidiary, including rights of offset and setoff;
(9)
(A) bankers’ Liens, rights of setoff and other similar Liens existing
solely with respect to cash and Cash Equivalents on deposit in one or more of
accounts maintained by the Issuer or any Restricted Subsidiary, in each case
granted in the ordinary course of business in favor of the bank or banks with
which such accounts are maintained, securing amounts owing to such bank with
respect to cash management and operating account arrangements, including those
involving pooled accounts and netting arrangements; provided that in no case
shall any such Liens secure (either directly or indirectly) the repayment of any
Indebtedness; and (B) Liens (i) of a collection bank arising under
Section 4-208 of the Uniform Commercial Code (or equivalent statutes) on
items in the course of collection and (ii) in favor of a banking
institution arising as a matter of law encumbering deposits (including the right
of set-off) and which are within the general parameters customary in the banking
industry;
(10) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Issuer or any Restricted
Subsidiary;
(11) Liens
arising from filing precautionary Uniform Commercial Code financing statements
regarding leases;
(12) Liens
securing the Notes outstanding on the Issue Date, the Exchange Notes issued in
exchange for such Notes, Refinancing Indebtedness with respect to such Notes or
Exchange Notes, the Note Guarantees relating thereto and any obligations with
respect to such Notes, Exchange Notes, Refinancing Indebtedness and Note
Guarantees;
(13) [Reserved];
(14) Liens
existing on the Issue Date securing Indebtedness outstanding on the Issue Date
and set forth in a schedule to the Indenture (as agreed to by the initial
purchasers);
(15) Liens
in favor of the Issuer or a Subsidiary Guarantor;
(16) Liens
securing Indebtedness and related obligations (including Hedging Obligations and
cash management obligations) permitted pursuant to the first paragraph or
clauses (1), (4), (13) or (15) of the second paragraph of the covenant
“— Certain Covenants — Limitations on Additional Indebtedness” and
Refinancing Indebtedness of such, in each case, to the extent such Liens are
subject to the Intercreditor Agreement or another intercreditor agreement
substantially consistent with and no less favorable to the Holders in any
material respect than the Intercreditor Agreement and treated as “Revolving
Facility Liens” (as defined in the Intercreditor Agreement) under the applicable
intercreditor agreement;
(17) Liens
securing Purchase Money Indebtedness and Capitalized Lease Obligations; provided that such Liens
shall not extend to any asset other than the specified asset being financed and
additions and improvements thereon;
(18) Liens
securing Acquired Indebtedness permitted to be incurred under the Indenture;
provided that the Liens
do not extend to assets not subject to such Lien at the time of acquisition
(other than improvements thereon) and are no more favorable to the lienholders
than those securing such Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Issuer or a Restricted Subsidiary;
(19) Liens
on assets of a Person existing at the time such Person is acquired or merged
with or into or consolidated with the Issuer or any such Restricted Subsidiary
(and not created in anticipation or contemplation thereof);
(20) Liens
to secure Refinancing Indebtedness of Indebtedness secured by Liens referred to
in the foregoing clauses (14), (17), (18) and (19); provided that in the case of
Liens securing Refinancing Indebtedness of Indebtedness secured by Liens
referred to in the foregoing clauses (14), (17), (18) and (19), such Liens
do not extend to any additional assets (other than improvements thereon and
replacements thereof);
(21)
(A) Liens securing Indebtedness of any Restricted Subsidiary that is not a
Subsidiary Guarantor permitted to be incurred under the Indenture; provided that such Lien
extends only to the assets of (and Equity Interests held by) such Restricted
Subsidiary; and (B) Liens to secure Indebtedness of any Foreign Subsidiary
permitted by clause (13) of the second paragraph of the covenant entitled
“— Certain Covenants — Limitations on Additional Indebtedness”
covering only the assets of such Foreign Subsidiary;
(22) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of
goods;
(23) Liens
with respect to obligations that do not in the aggregate exceed
$10.0 million at any one time outstanding;
(24) Liens
securing any Other Pari Passu Lien Obligations incurred pursuant to
clause (15) of the second paragraph of the covenant “— Certain
Covenants — Limitations on Additional Indebtedness;” provided that such Liens
described in clause (12) are equal and ratable with (or senior to) any Lien
pursuant to this clause (24);
(25) Liens
securing any Other Pari Passu Lien Obligations not incurred pursuant to clause
(1) of the second paragraph of the covenant “— Certain
Covenants — Limitations on Additional Indebtedness,” which Liens are not
permitted pursuant to clause (24) of this definition; provided, however, that, at
the time of incurrence of such Other Pari Passu Lien Obligations and after
giving pro forma effect thereto, the Consolidated Secured Debt Ratio would be no
greater than (x) prior to the First Call Date, 3.75 to 1.0 and
(y) from and after the First Call Date, 3.50 to 1.0; provided, further, that such
Liens described in clause (12) are equal and ratable with (or senior to)
any Lien pursuant to this clause (25);
(26) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the issuer or any of its Restricted
Subsidiaries relating to such property or assets;
(27) Liens
on property of, or on shares of stock or Indebtedness of, any Person existing at
the time (A) such Person becomes a Restricted Subsidiary of the issuer or
(B) such Person or such property is acquired by the Issuer or any
Restricted Subsidiary; provided that such Liens do
not extend to any other assets of the Issuer or any Restricted Subsidiary and
such Lien secures only those obligations which it secures on the date of such
acquisition (and extensions, renewals, refinancings and replacements
thereof);
(28) Liens
solely on any cash earnest money deposits made by the Issuer or any of its
Restricted Subsidiaries in connection with any letter of intent or purchase
agreement permitted under the Indenture; and
(29) Liens
encumbering reasonable customary initial deposits and margin deposits and
similar Liens attaching to brokerage accounts incurred in the ordinary course of
business and not for speculative purposes.
“Person”
means any individual, corporation, partnership, limited liability company, joint
venture, incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
“Plan of
Liquidation” with respect to any Person, means a plan that provides for,
contemplates or the effectuation of which is preceded or accompanied by (whether
or not substantially contemporaneously, in phases or otherwise): (1) the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of such Person otherwise than as an entirety or substantially as an
entirety; and (2) the distribution of all or substantially all of the
proceeds of such sale, lease, conveyance or other disposition of all or
substantially all of the remaining assets of such Person to holders of Equity
Interests of such Person.
“Preferred
Stock” means, with respect to any Person, any and all preferred or preference
stock or other equity interests (however designated) of such Person whether now
outstanding or issued after the Issue Date.
“principal”
means, with respect to the Notes, the principal of, and premium, if any, on the
Notes.
“Pro
Forma Cost Savings” means, with respect to any period, the reductions in costs
that occurred during the Four-Quarter Period that are (1) directly
attributable to an asset acquisition and calculated on a basis that is
consistent with Article 11 of Regulation S-X under the Securities Act
or (2) implemented, committed to be implemented or the commencement of
implementation of which has begun in good faith by the business that was the
subject of any such asset acquisition within six months of the date of the asset
acquisition and that are supportable and quantifiable by the underlying records
of such business, as if, in the case of each of clauses (1) and (2), all
such reductions in costs had been effected as of the beginning of such period,
decreased by any incremental expenses incurred or to be incurred during the
Four-Quarter Period in order to achieve such reduction in costs.
“Purchase
Money Indebtedness” means Indebtedness, including Capitalized Lease Obligations,
of the Issuer or any Restricted Subsidiary incurred for the purpose of financing
all or any part of the purchase price of property, plant or equipment used in
the business of the Issuer or any Restricted Subsidiary or the cost of
installation, construction or improvement thereof, and the payment of any sales
or other taxes associated therewith; provided, however, that
(1) the amount of such Indebtedness shall not exceed such purchase price or
cost and payment and (2) such Indebtedness shall be incurred within one
year after such acquisition of such asset by the Issuer or such Restricted
Subsidiary or such installation, construction or improvement.
“Qualified
Equity Interests” means Equity Interests of the Issuer other than Disqualified
Equity Interests; provided
that such Equity Interests shall not be deemed Qualified Equity Interests
to the extent sold or owed to a Subsidiary of the Issuer or financed, directly
or indirectly, using funds (1) borrowed from the Issuer or any Subsidiary
of the Issuer until and to the extent such borrowing is repaid or
(2) contributed, extended, guaranteed or advanced by the Issuer or any
Subsidiary of the Issuer (including, without limitation, in respect of any
employee stock ownership or benefit plan).
“Qualified
Equity Offering” means the issuance and sale of Qualified Equity Interests by
the Issuer or Equity Interests by Parent or Holdings; provided, however, that in
the case of an issuance or sale of Equity Interests of Parent or Holdings, cash
proceeds therefrom equal to not less than 100% of the aggregate principal amount
of any Notes to be redeemed are received by the Issuer as a capital contribution
or consideration for the issuance and sale of Qualified Equity Interests
immediately prior to such redemption.
“redeem”
means to redeem, repurchase, purchase, defease, retire, discharge or otherwise
acquire or retire for value; and “redemption” shall have a correlative meaning;
provided that this
definition shall not apply for purposes of “— Optional
Redemption.”
“Redesignation”
has the meaning given to such term in the covenant described under
“— Certain Covenants — Limitations on Designation of Unrestricted
Subsidiaries.”
“refinance”
means to refinance, repay, prepay, replace, renew, refund, redeem, defease or
retire.
“Refinancing
Indebtedness” means Indebtedness of the Issuer or a Restricted Subsidiary issued
in exchange for, or the proceeds from the issuance and sale or disbursement of
which are used to redeem, extend, renew, replace, defease, refund or refinance
in whole or in part, any Indebtedness of the Issuer or any Restricted Subsidiary
(the “Refinanced Indebtedness”); provided that:
(1) the
principal amount (or accreted value, in the case of Indebtedness issued at a
discount) of the Refinancing Indebtedness does not exceed the principal amount
(or accreted value, as the case may be) of the Refinanced Indebtedness plus the
amount of accrued and unpaid interest on the Refinanced Indebtedness, any
premium paid to the holders of the Refinanced Indebtedness and reasonable
expenses incurred in connection with the incurrence of the Refinancing
Indebtedness;
(2) the
Refinancing Indebtedness is the obligation of the same Person as that of the
Refinanced Indebtedness;
(3) if
the Refinanced Indebtedness was subordinated in right of payment to the Notes or
the Note Guarantees, as the case may be, then such Refinancing Indebtedness, by
its terms, is subordinate in right of payment to the Notes or the Note
Guarantees, as the case may be, at least to the same extent as the Refinanced
Indebtedness, and if the Refinanced Indebtedness was pari passu with the Notes or
the Note Guarantees, as the case may be, then the Refinancing Indebtedness ranks
pari passu with, or is
subordinated in right of payment to, the Notes or the Note Guarantees, as the
case may be; provided
that if at the time of the incurrence and after giving pro forma effect
thereto the Consolidated Secured Debt Ratio would be no greater than 3.0 to 1.0,
then such Refinancing Indebtedness need not comply with this clause
(3);
(4) the
Refinancing Indebtedness has a final stated maturity either (a) no earlier
than the Refinanced Indebtedness being repaid or amended or (b) after the
maturity date of the Notes; provided that (x) if the
Refinancing Indebtedness is subordinated in right of payment to the Notes or the
Note Guarantees, then such Refinancing Indebtedness shall have a final stated
maturity after the maturity date of the Notes and (y) if the Refinancing
Indebtedness is with respect to Refinanced Indebtedness that was Subordinated
Indebtedness, then such Refinancing Indebtedness shall have a maturity date no
earlier than the maturity date of the Notes; and
(5) the
portion, if any, of the Refinancing Indebtedness that is scheduled to mature on
or prior to the maturity date of the Notes has a Weighted Average Life to
Maturity at the time such Refinancing Indebtedness is incurred that is equal to
or greater than the Weighted Average Life to Maturity of the portion of the
Refinanced Indebtedness being repaid that is scheduled to mature on or prior to
the maturity date of the Notes; provided that (x) if the
Refinancing Indebtedness is subordinated in right of payment to the Notes or the
Note Guarantees, then no portion of such Refinancing Indebtedness shall mature
until after the maturity date of the Notes and (y) if the Refinancing
Indebtedness is with respect to Refinanced Indebtedness that was Subordinated
Indebtedness, then no portion of such Refinancing Indebtedness shall mature
before the maturity date of the Notes.
“Registration
Rights Agreement” means (i) the Registration Rights Agreement dated as of
the Issue Date among the Issuer, the Guarantors and Credit Suisse Securities
(USA) LLC and UBS Securities LLC, as representatives of the Initial Purchasers,
and (ii) any other registration rights agreement entered into in connection
with an issuance of Additional Notes in a private offering after the Issue
Date.
“Related
Party” means, with respect to any Person, (1) any controlling stockholder,
controlling member, general partner, Subsidiary, or spouse or immediate family
member (in the case of an individual), of such Person, (2) any estate,
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners or owners of which consist solely of one or more
Permitted Holders and/or such other Persons referred to in the immediately
preceding clause (1), or (3) any executor, administrator, trustee, manager,
director or other similar fiduciary of any Person referred to in the immediately
preceding clause (2), acting solely in such capacity.
“Requirements
of Law” means, collectively, any and all requirements of any governmental
authority including any and all laws, ordinances, rules, regulations or similar
statutes or case law.
“Restricted
Payment” means any of the following:
(1) the
declaration or payment of any dividend or any other distribution on Equity
Interests of the Issuer or any Restricted Subsidiary or any payment made to the
direct or indirect holders (in their capacities as such) of Equity Interests of
the Issuer or any Restricted Subsidiary, including, without limitation, any
payment in connection with any merger or consolidation involving the Issuer but
excluding (a) dividends or distributions payable solely in Qualified Equity
Interests or through accretion or accumulation of such dividends on such Equity
Interests and (b) in the case of Restricted Subsidiaries, dividends or
distributions payable to the Issuer or to a Restricted Subsidiary and pro rata dividends or
distributions payable to minority stockholders of any Restricted
Subsidiary;
(2) the
redemption of any Equity Interests of the Issuer or any Restricted Subsidiary,
or any equity holder of the Issuer, including, without limitation, any payment
in connection with any merger or consolidation involving the Issuer but
excluding any such Equity Interests held by the Issuer or any Restricted
Subsidiary;
(3) any
Investment other than a Permitted Investment; or
(4) any
redemption, repurchase, retirement, other acquisition for consideration of
principal or sinking fund payment in respect of Subordinated
Indebtedness.
“Restricted
Payments Basket” has the meaning given to such term in the first paragraph of
the covenant described under “— Certain Covenants — Limitations on
Restricted Payments.”
“Restricted
Subsidiary” means any Subsidiary of the Issuer other than an Unrestricted
Subsidiary.
“Restructuring
Expenses” means losses, expenses and charges incurred in connection with
restructuring within the Issuer and/or one or more Restricted Subsidiaries,
including in connection with integration of acquired businesses or Persons,
disposition of one or more Subsidiaries or businesses, exiting of one or more
lines of businesses and relocation or consolidation of facilities, including
severance, lease termination and other non-ordinary-course, non-operating costs
and expenses in connection therewith.
“S&P”
means Standard & Poor’s Ratings Services, a division of the McGraw-Hill
Companies, Inc., and its successors.
“Sale and
Leaseback Transactions” means with respect to any Person an arrangement with any
bank, insurance company or other lender or investor or to which such lender or
investor is a party, providing for the leasing by such Person of any asset of
such Person which has been or is being sold or transferred by such Person to
such lender or investor or to any Person to whom funds have been or are to be
advanced by such lender or investor on the security of such asset.
“SEC”
means the U.S. Securities and Exchange Commission.
“Secretary’s
Certificate” means a certificate signed by the Secretary of the
Issuer.
“Securities
Act” means the U.S. Securities Act of 1933, as amended.
“Security
Documents” means the security agreements, pledge agreements, mortgages,
collateral assignments and related agreements, as amended, supplemented,
restated, renewed, refunded, replaced, restructured, repaid, refinanced or
otherwise modified from time to time, creating the security interests in the
Collateral as contemplated by the Indenture.
“Significant
Subsidiary” means (1) any Restricted Subsidiary that would be a
“significant subsidiary” as defined in Regulation S-X promulgated pursuant
to the Securities Act as such Regulation is in effect on the Issue Date and
(2) any Restricted Subsidiary that, when aggregated with all other
Restricted Subsidiaries that are not otherwise Significant Subsidiaries and as
to which any event described in clause (7) or (8) under “— Events
of Default” has occurred and is continuing, or which are being released from
their Note Guarantees (in the case of clause (9) of the provisions
described under “Amendment, Supplement and Waiver”), would constitute a
Significant Subsidiary under clause (1) of this definition.
“Special
Property” means:
(a) any
contract, General Intangible, permit, lease or license held by any Grantor that
validly prohibits the creation by such Grantor of a security interest
therein;
(b) any
contract, General Intangible, permit, lease or license held by any Grantor to
the extent that any Requirement of Law applicable thereto prohibits the creation
of a security interest therein;
(c) any
contract, General Intangible, permit, lease or license held by any Grantor to
the extent that the creation by such Grantor of a security interest therein is
permitted only with the consent of another party, if the requirement to obtain
such consent is legally enforceable and such consent has not been
obtained;
(d) Equipment
owned by any Grantor on the date hereof or hereafter acquired that is subject to
a Lien securing a Purchase Money Obligation or Capital Lease Obligation
permitted to be incurred or outstanding pursuant to the provisions of the
Indenture if the contract or other agreement in which such Lien is granted (or
the documentation providing for such Purchase Money Obligation or Capital Lease
Obligation) validly prohibits the creation of any other Lien on such Equipment
or requires consent of another party (which requirement is legally enforceable)
to create such other Lien, which consent can not be
obtained; and
(e) any
property owned on the date hereof or acquired after the date hereof by any
Grantor that is subject to a Lien permitted by either clause (14), (18) or
(19) of the definition of Permitted Liens if the contract or agreement
pursuant to which such Lien is granted validly prohibits the creation of any
other Lien on such property or requires the consent of another party to create
such Lien, if the requirement to obtain such consent is legally enforceable and
such consent has not been obtained.
provided, however, that to
the extent such property constitutes Special Property due to a prohibition on
the creation of any other Lien in the relevant permit, lease, license, contract
or other agreement or by Requirement of Law applicable thereto, then in each
case described in clauses (a), (b), (c), (d) or (e) of this
definition, such property shall constitute “Special Property” only to the extent
and for so long as such permit, lease, license, contract or other agreement or
Requirement of Law applicable thereto validly prohibits the creation of a Lien
on such property in favor of the Notes Collateral Agent and, upon the
termination of such prohibition (howsoever occurring), such property shall cease
to constitute “Special Property.” In addition, to the extent such property
constitutes “Special Property” due to failure of Grantor to obtain consent as
described in clauses (c), (d) and (e), such Grantor shall use its
commercially reasonable efforts to obtain such consent, and, upon obtaining such
consent, such property shall cease to constitute “Special
Property.”
“Sponsor”
means CI Capital Partners LLC.
“Stockholders’
Agreement” means the Amended and Restated Stockholders’ Agreement, dated as of
February 24, 2007, by and among Ply Gem Prime Holdings, Inc., Ply Gem
Investment Holdings, Inc., Caxton-Iseman (Ply Gem), L.P., Caxton-Iseman (Ply
Gem) II, L.P. and certain members of our management and other parties
thereto.
“Subordinated
Indebtedness” means Indebtedness of the Issuer or any Restricted Subsidiary that
is expressly subordinated in right of payment to the Notes or the Note
Guarantees, respectively.
“Subsidiary”
means, with respect to any Person:
(1) any
corporation, limited liability company, association or other business entity of
which more than 50% of the total voting power of the Equity Interests entitled
(without regard to the occurrence of any contingency) to vote in the election of
the Board of Directors thereof are at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or of one or more Subsidiaries of such Person
(or any combination thereof).
Unless
otherwise specified, “Subsidiary” refers to a Subsidiary of the
Issuer.
“Subsidiary
Guarantor” means any Guarantor other than Parent.
“Transactions”
means, collectively, (a) the execution, delivery and performance by the
Issuer and the Guarantors of the Indenture, Collateral Agreement, Intercreditor
Agreement and other related documents to which they are a party and the issuance
of the Notes thereunder, (b) the execution, delivery and performance by
Parent, the Issuer and the Subsidiaries party thereto of the Credit Agreement,
Intercreditor Agreement and related security documents on the Issue Date and
borrowing thereunder, (c) the repayment in full of all obligations, and
cancellation of all commitments, with respect to the Existing Credit Agreement
and the release of all guarantees (if any) thereof and security (if any)
therefor and (d) the payment of related fees and expenses.
“Trust Indenture
Act” means the Trust Indenture Act of 1939, as amended.
“Uniform
Commercial Code” or “UCC” means the Uniform Commercial Code as in effect in the
relevant jurisdiction from time to time. Unless otherwise specified, references
to the Uniform Commercial Code herein refer to the New York Uniform
Commercial Code.
“Unrestricted
Subsidiary” means (1) any Subsidiary that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors of the
Issuer in accordance with the covenant described under “— Certain
Covenants — Limitations on Designation of Unrestricted Subsidiaries” and
(2) any Subsidiary of an Unrestricted Subsidiary.
“U.S. Government
Obligations” means direct non-callable obligations of, or obligations guaranteed
by, the United States of America for the payment of which guarantee or
obligations the full faith and credit of the United States is
pledged.
“Voting
Stock” with respect to any Person, means securities of any class of Equity
Interests of such Person entitling the holders thereof (whether at all times or
only so long as no senior class of stock or other relevant equity interest has
voting power by reason of any contingency) to vote in the election of members of
the Board of Directors of such Person.
“Weighted
Average Life to Maturity” when applied to any Indebtedness at any date, means
the number of years obtained by dividing (1) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment by (2) the then outstanding principal amount of
such Indebtedness.
“Wholly-Owned
Restricted Subsidiary” means a Restricted Subsidiary of which 100% of the Equity
Interests (except for directors’ qualifying shares or certain minority interests
owned by other Persons solely due to local law requirements that there be more
than one stockholder, but which interest is not in excess of what is required
for such purpose) are owned directly by the Issuer or through one or more
Wholly-Owned Restricted Subsidiaries.
Book-Entry,
Delivery and Form of Securities
Except as
described below, we will initially issue the exchange notes in the form of one
or more registered exchange notes in global form without coupons. We
will deposit each global note on the date of the closing of this exchange offer
with, or on behalf of, The Depository Trust Company in New York,
New York, and register the exchange notes in the name of The Depository
Trust Company or its nominee, or will leave these notes in the custody of the
trustee.
Depository
Trust Company Procedures
For your
convenience, we are providing you with a description of the operations and
procedures of The Depository Trust Company, the Euroclear System and Clearstream
Banking, S.A. These operations and procedures are solely within the
control of the respective settlement systems and are subject to changes by
them. We are not responsible for these operations and procedures and
urge you to contact the system or its participants directly to discuss these
matters.
The
Depository Trust Company has advised us that it is a limited-purpose trust
company created to hold securities for its participating organizations and to
facilitate the clearance and settlement of transactions in those securities
between its participants through electronic book entry changes in the accounts
of these participants. These direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Access to The Depository Trust Company’s system is
also indirectly available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a direct
participant. The Depository Trust Company may hold securities
beneficially owned by other persons only through its participants and the
ownership interests and transfers of ownership interests of these other persons
will be recorded only on the records of the participants and not on the records
of The Depository Trust Company.
The
Depository Trust Company has also advised us that, in accordance with its
procedures,
(1) upon
deposit of the global notes, it will credit the accounts of the direct
participants with an interest in the global notes, and
(2) it
will maintain records of the ownership interests of these direct participants in
the global notes and the transfer of ownership interests by and between direct
participants.
The
Depository Trust Company will not maintain records of the ownership interests
of, or the transfer of ownership interests by and between, indirect participants
or other owners of beneficial interests in the global notes. Both
direct and indirect participants must maintain their own records of ownership
interests of, and the transfer of ownership interests by and between, indirect
participants and other owners of beneficial interests in the global
notes.
Investors
in the global notes may hold their interests in the notes directly through The
Depository Trust Company if they are direct participants in The Depository Trust
Company or indirectly through organizations that are direct participants in The
Depository Trust Company. Investors in the global notes may also hold
their interests in the notes through Euroclear and Clearstream if they are
direct participants in those systems or indirectly through organizations that
are participants in those systems. Euroclear and Clearstream will
hold omnibus positions in the global notes on behalf of the Euroclear
participants and the Clearstream participants, respectively, through customers’
securities accounts in Euroclear’s and Clearstream’s names on the books of their
respective depositories, which are Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear, and Citibank, N.A. and The Chase
Manhattan Bank, N.A., as operators of Clearstream. These
depositories, in turn, will hold these positions in their names on the books of
DTC. All interests in a global note, including those held through
Euroclear or Clearstream, may be subject to the procedures and requirements of
The Depository Trust Company. Those interests held through Euroclear
or Clearstream may also be subject to the procedures and requirements of those
systems.
The laws
of some states require that some persons take physical delivery in definitive
certificated form of the securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a global note to these
persons. Because The Depository Trust Company can act only on behalf
of direct participants, which in turn act on behalf of indirect participants and
others, the ability of a person having a beneficial interest in a global note to
pledge its interest to persons or entities that are not direct participants in
The Depository Trust Company or to otherwise take actions in respect of its
interest, may be affected by the lack of physical certificates evidencing the
interests.
Except as
described below, owners of interests in the global notes will not have notes
registered in their names, will not receive physical delivery of notes in
certificated form and will not be considered the registered owners or holders of
these notes under the indenture for any purpose.
Payments
with respect to the principal of and interest on any notes represented by a
global note registered in the name of The Depository Trust Company or its
nominee on the applicable record date will be payable by the trustee to or at
the direction of The Depository Trust Company or its nominee in its capacity as
the registered holder of the global note representing these notes under the
indenture. Under the terms of the indenture, we and the trustee will
treat the person in whose names the notes are registered, including notes
represented by global notes, as the owners of the notes for the purpose of
receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal and interest on
global notes registered in the name of The Depository Trust Company or its
nominee will be payable by the trustee to The Depository Trust Company or its
nominee as the registered holder under the indenture. Consequently,
none of Ply Gem, the trustee or any of our agents, or the trustee’s agents has
or will have any responsibility or liability for:
(1) any
aspect of The Depository Trust Company’s records or any direct or indirect
participant’s records relating to, or payments made on account of, beneficial
ownership interests in the global notes or for maintaining, supervising or
reviewing any of The Depository Trust Company’s records or any direct or
indirect participant’s records relating to the beneficial ownership interests in
any global note or
(2) any
other matter relating to the actions and practices of The Depository Trust
Company or any of its direct or indirect participants.
The
Depository Trust Company has advised us that its current practice, upon receipt
of any payment in respect of securities such as the notes, including principal
and interest, is to credit the accounts of the relevant participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in the principal amount of beneficial interest in the security as shown
on its records, unless it has reasons to believe that it will not receive
payment on the payment date. Payments by the direct and indirect
participants to the beneficial owners of interests in the global note will be
governed by standing instructions and customary practice and will be the
responsibility of the direct or indirect participants and will not be the
responsibility of The Depository Trust Company, the trustee or us.
Neither
we nor the trustee will be liable for any delay by The Depository Trust Company
or any direct or indirect participant in identifying the beneficial owners of
the notes and Ply Gem and the trustee may conclusively rely on, and will be
protected in relying on, instructions from The Depository Trust Company or its
nominee for all purposes, including with respect to the registration and
delivery, and the respective principal amounts, of the notes.
Transfers
between participants in The Depository Trust Company will be effected in
accordance with The Depository Trust Company’s procedures, and will be settled
in same day funds, and transfers between participants in Euroclear and
Clearstream will be effected in accordance with their respective rules and
operating procedures.
Cross-market
transfers between the participants in The Depository Trust Company, on the one
hand, and Euroclear or Clearstream participants, on the other hand, will be
effected through The Depository Trust Company in accordance with The Depository
Trust Company’s rules on behalf of Euroclear or Clearstream, as the case may be,
by its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or Clearstream, as the case may
be, by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such system.
Euroclear or Clearstream, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf by delivering or receiving
interests in the relevant global note in The Depository Trust Company, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to The Depository Trust
Company. Euroclear participants and Clearstream participants may not
deliver instructions directly to the depositories for Euroclear or
Clearstream.
The
Depository Trust Company has advised us that it will take any action permitted
to be taken by a holder of notes only at the direction of one or more
participants to whose account The Depository Trust Company has credited the
interests in the global notes and only in respect of the portion of the
aggregate principal amount of the notes as to which the participant or
participants has or have given that direction. However, if there is
an event of default with respect to the notes, The Depository Trust Company
reserves the right to exchange the global notes for legended notes in
certificated form and to distribute them to its participants.
Although
The Depository Trust Company, Euroclear and Clearstream have agreed to these
procedures to facilitate transfers of interests in the global notes among
participants in The Depository Trust Company, Euroclear and Clearstream, they
are under no obligation to perform or to continue to perform these procedures
and may discontinue them at any time. None of Ply Gem, the trustee or
any of our or the trustee’s respective agents will have any responsibility for
the performance by The Depository Trust Company, Euroclear or Clearstream or
their direct or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Exchange
of Book-Entry Notes for Certificated Notes
A global
note will be exchangeable for definitive notes in registered certificated form
if:
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(1)
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The
Depository Trust Company notifies us that it is unwilling or unable to act
as depository for the global notes and we fail to appoint a successor
depository within 90 days, or
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(2)
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we,
at our option, notify the trustee in writing that we elect to cause the
issuance of Notes in definitive form under the indenture governing the
Notes.
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In all
cases, certificated notes delivered in exchange for any global note or
beneficial interests in a global note will be registered in the name, and issued
in any approved denominations, requested by or on behalf of The Depository Trust
Company, in accordance with its customary procedures.
Exchange
of Certificated Notes for Book-Entry Notes
Initial
notes issued in certificated form may be exchanged for beneficial interests in
the global note.
Same
Day Settlement
We expect
that the interests in the global notes will be eligible to trade in The
Depository Trust Company’s Same-Day Funds Settlement System. As a
result, secondary market trading activity in these interests will settle in
immediately available funds, subject in all cases to the rules and procedures of
The Depository Trust Company and its participants. We expect that
secondary trading in any certificated notes will also be settled in immediately
available funds.
Because
of time zone differences, the securities account of a Euroclear or Clearstream
participant purchasing an interest in a global note from a participant in The
Depository Trust Company will be credited, and any such crediting will be
reported to the relevant Euroclear or Clearstream participant, during the
securities settlement processing day (which must be a business day for Euroclear
and Clearstream) immediately following the settlement date of The Depository
Trust Company. The Depository Trust Company has advised us that cash
received in Euroclear or Clearstream as a result of sales of interests in a
global note by or through a Euroclear or Clearstream participant to a
participant in The Depository Trust Company will be received with value on the
settlement date of The Depository Trust Company but will be available in the
relevant Euroclear or Clearstream cash account only as of the business day for
Euroclear or Clearstream following The Depository Trust Company’s settlement
date.
Payment
The
indenture requires that payments in respect of the notes represented by global
notes, including principal and interest, be made by wire transfer of immediately
available funds to the accounts specified by the holder of the global
notes. With respect to notes in certificated form, we will make all
payments of principal and interest on the notes at our office or agency
maintained for that purpose within the city and state of
New York. This office will initially be the office of the Paying
Agent maintained for that purpose. At our option however, we may make
these installments of interest by
(1) check
mailed to the holders of notes at their respective addresses provided in the
register of holder of notes or
(2) transfer
to an account maintained by the payee.
FEDERAL INCOME TAX CONSIDERATIONS
To ensure compliance with
requirements by the U.S. Internal Revenue Service, we inform you that the United States tax
advice contained herein (i) is written in connection with the promotion or
marketing by Ply Gem of the transactions or matters addressed herein, and (ii) is
not intended or written to be used, and cannot be used by any taxpayers, for the
purpose of avoiding United States tax penalties. Each taxpayer should seek advice based on
the taxpayer’s particular circumstances from an independent tax
advisor.
The
following discussion is a summary of certain U.S. federal income tax
considerations relevant to the purchases, ownership and disposition of the notes
issued pursuant to this exchange offer, but does not purport to be a complete
analysis of all potential tax consequences. The discussion is based on the
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury
Regulations issued thereunder, Internal Revenue Service (the “IRS”) rulings and
pronouncements and judicial decisions now in effect or in existence as of the
date of this prospectus, all of which are subject to change at any time or to
different interpretations. Any such change may be applied retroactively in a
manner that could adversely affect a holder of the notes and the continued
validity of this summary. This discussion does not address all of the
U.S. federal income tax considerations that may be relevant to a holder in
light of such holder’s particular circumstances (for example, United States
Holders subject to the alternative minimum tax provisions of the Code) or to
holders subject to special rules, such as certain financial institutions,
U.S. expatriates, partnerships or other pass-through entities, insurance
companies, regulated investment companies, real estate investment trusts,
dealers in securities or currencies, traders in securities, holders whose
functional currency is not the U.S. dollar, tax-exempt organizations and
persons holding the notes as part of a “straddle,” “hedge,” conversion
transaction within the meaning of Section 1258 of the Code or other
integrated transaction within the meaning of Section 1.1275-6 of the
U.S. Treasury Regulations. In addition, this discussion is limited to
persons purchasing the notes for cash at original issue and at their “issue
price” within the meaning of Section 1273 of the Code (in other words, the
first price at which a substantial amount of notes are sold to the public for
cash). Moreover, the effect of any applicable state, local or foreign tax laws,
or U.S. federal, state and gift law is not discussed. The discussion deals
only with notes held as “capital assets” within the meaning of Section 1221
of the Code.
Furthermore,
this summary assumes that: (i) the notes will not be issued at a discount
so as to cause original issue discount or de minimis original issue
discount for U.S. federal income tax purposes and (ii) the notes will
not be issued with pre-issuance accrued interest for U.S. federal income
tax purposes. One or both of the foregoing assumptions may turn out to be
incorrect at the time of pricing. If any of the foregoing assumptions are not
correct, the discussion set forth below will not be an accurate and complete
summary of the U.S. federal income tax consequences applicable to the
purchase, ownership or disposition of notes by a United States
Holder.
We have
not sought and will not seek any rulings from the IRS with respect to the
matters discussed below. There can be no assurance that the IRS will not take a
different position concerning the tax consequences of the purchase, ownership or
disposition of the notes or that any such position would not be
sustained.
If a
partnership or other entity taxable as a partnership for U.S. federal
income tax purposes, holds the notes, the U.S. federal income tax treatment
of a partner generally will depend on the status of the partner and the
activities of the partnership. Such partner should consult its tax advisor as to
the tax consequences of the partnership purchasing, owning and disposing of the
notes.
Prospective investors should consult
their own tax advisors with regard to the application of the tax consequences
discussed below to their particular situations as well as the application of any state,
local, foreign or other tax laws, including gift and estate tax
laws.
United
States Holders
This
section applies to “United States Holders.” A United States Holder
is:
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an
individual that is a citizen or resident of the United States, including
an alien individual who is a lawful permanent resident of the United
States or meets the “substantial presence” test under Section 7701(b)
of the Code,
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a
corporation or other entity taxable as a corporation created or organized
under the laws of the United States or any state thereof or the District
of Columbia, or
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an
estate or trust, the income of which is subject to U.S. federal
income tax regardless of its
source.
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Interest
Payments
of stated interest on the notes generally will be taxable to a United States
Holder as ordinary income at the time that such payments are received or
accrued, in accordance with such United States Holder’s method of tax
accounting. In certain circumstances we may be obligated to pay amounts in
excess of stated interest or principal on the notes. According to
U.S. Treasury Regulations, the possibility that any such payments in excess
of stated interest or principal will be made will not affect the amount of
interest income a United States Holder recognizes if there is only a remote
chance as of the date the notes are issued that such payments will be made. We
believe that the likelihood that we will be obligated to make any such payments
is remote. Therefore, we do not intend to treat the potential payment of
additional interest pursuant to the registration rights provisions or the
potential payment of a premium pursuant to the optional redemption or change of
control provisions as part of the yield to maturity of any notes. Our
determination that these contingencies are remote is binding on a United States
Holder unless such holder discloses its contrary position in the manner required
by applicable U.S. Treasury Regulations. Our determination is not, however,
binding on the IRS and if the IRS were to challenge this determination, a United
States Holder might be required to accrue income on its notes in excess of
stated interest and to treat as ordinary income rather than as capital gain any
income realized on the taxable disposition of a note before the resolution of
the contingencies. In the event a contingency occurs, it would affect the amount
and timing of the income recognized by a United States Holder. If we pay
additional amounts on the notes pursuant to the registration rights provisions
or a premium pursuant to the optional redemption or change of control
provisions, United States Holders will be required to recognize such amounts as
income.
Sale
or other taxable disposition of the notes
A United
States Holder will recognize gain or loss on the sale, exchange (other than for
exchange notes pursuant to an exchange offer or a tax-free transaction),
redemption, retirement or other taxable disposition of a note equal to the
difference, if any, between the amount realized upon the disposition (less any
portion allocable to any accrued and unpaid interest, which will be taxable as
ordinary income if not previously included in such holder’s income) and the
United States Holder’s adjusted tax basis in the note. A United States Holder’s
adjusted tax basis in a note generally will be the United States Holder’s cost
therefor, less any principal payments received by such holder. This gain or loss
generally will be a capital gain or loss and will be long-term capital gain or
loss if the United States Holder has held the note for more than one year.
Otherwise, such gain or loss will be a short-term capital gain or loss.
Long-term capital gains of noncorporate United States Holders, including
individuals, may be taxed at lower rates than items of ordinary income. The
ability of a United States Holder to offset capital losses against ordinary
income is limited.
Exchange
of notes into exchange notes
The
exchange of a note for an exchange note by a United States Holder pursuant to
the exchange offer (see “The Exchange Offer”) will not constitute a taxable
exchange for U.S. federal income tax purposes. A United States Holder will
not recognize any gain or loss upon the receipt of an exchange note and a United
States Holder will be required to continue to include interest on the exchange
note in gross income in the manner and to the extent described herein. A United
States Holder’s holding period for an exchange note will include the holding
period for the original note exchanged therefor, and such United States Holder’s
basis in the exchange note immediately after the exchange will be the same as
such United States Holder’s basis in such original note immediately before the
exchange.
Backup
withholding
A United
States Holder may be subject to “backup withholding” upon the receipt of
interest and principal payments on the notes or upon the receipt of proceeds
upon the sale or other disposition of such notes. Certain holders (including,
among others, corporations and tax-exempt organizations) generally are not
subject to backup withholding. A United States Holder will be subject to this
backup withholding tax if such holder is not otherwise exempt and such
holder:
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fails
to furnish its taxpayer identification number (“TIN”), which for an
individual is ordinarily his or her social security
number,
|
|
·
|
furnishes
an incorrect TIN,
|
|
·
|
is
notified by the IRS that it has failed to properly report payments of
interest or dividends, or
|
|
·
|
fails
to certify, under penalties of perjury, that it has furnished a correct
TIN and that the IRS has not notified that United States Holder that it is
subject to backup withholding.
|
United
States Holders should consult their personal tax advisor regarding their
qualification for an exemption from backup withholding and the procedures for
obtaining such an exemption, if applicable. The backup withholding tax is not an
additional tax and taxpayers may use amounts withheld as a credit against their
U.S. federal income tax liability or may claim a refund as long as they
timely provide certain information to the IRS.
Non-United
States Holders
This
section applies to “non-United States Holders.” A non-United States Holder
is:
|
·
|
an
individual who is a nonresident
alien,
|
|
·
|
a
corporation or other entity taxable as a corporation organized under
non-U.S. law, or
|
|
·
|
an
estate or trust, the income of which is not subject to U.S. federal
income tax.
|
Interest
payments
Generally,
interest paid to a non-United States Holder (other than contingent interest)
will not be subject to U.S. federal withholding tax provided that such
non-United States Holder meets one of the following requirements:
|
·
|
Such
holder provides a completed IRS Form W-8BEN (or substitute form) to
the bank, broker or other intermediary through which it holds the notes.
The IRS Form W-8BEN contains the non-United States Holder’s name,
address and a statement that such holder is the beneficial owner of the
notes and that such holder is not a United States
Holder.
|
|
·
|
Such
holder holds its notes directly through a “qualified intermediary”, and
the qualified intermediary has sufficient information in its files
indicating that such holder is not a United States Holder. A qualified
intermediary is a bank, broker or other intermediary that (1) is
either a U.S. or non-U.S. entity, (2) is acting out of a
non-U.S. branch or office and (3) has signed an agreement with
the IRS providing that it will administer all or part of the U.S. tax
withholding rules under specified
procedures.
|
|
·
|
Such
holder is entitled to an exemption from withholding tax on interest under
a tax treaty between the U.S. and such holder’s country of residence.
To claim this exemption, a non-United States Holder generally must
complete an IRS Form W-8BEN and claim this exemption on the form. In
some cases, a non-United States Holder may instead be permitted to provide
documentary evidence of its claim to the intermediary, or a qualified
intermediary may already have some or all of the necessary evidence in its
files.
|
|
·
|
The
interest income on the notes is effectively connected with the conduct of
such holder’s trade or business in the United States, and is not exempt
from U.S. tax under a tax treaty. To claim this exemption, a
non-United States Holder must complete an IRS
Form W-8ECI.
|
|
|
Even
if a non-United States Holder meets one of the above requirements,
interest paid to such holder will be subject to withholding tax under any
of the following circumstances:
|
|
·
|
The
withholding agent or an intermediary knows or has reason to know that such
holder is not entitled to an exemption from withholding tax. Specific
rules apply for this test.
|
|
·
|
The
IRS notifies the withholding agent that information that such holder or an
intermediary provided concerning such holder’s status is
false.
|
|
·
|
An
intermediary through which such holder holds the notes fails to comply
with the procedures necessary to avoid withholding taxes on the notes. In
particular, an intermediary is generally required to forward a copy of
such non-United States Holder’s IRS Form W-8BEN (or other documentary
information concerning such holder’s status) to the withholding agent for
the notes. However, if such holder holds the notes through a qualified
intermediary — or if there is a qualified intermediary in the chain
of title between the non-United States holder and the withholding agent
for the notes — the qualified intermediary will not generally forward
this information to the withholding
agent.
|
|
·
|
Such
holder owns 10% or more of the voting stock of the Company, is a
“controlled foreign corporation” with respect to the Company, or is a bank
making a loan in the ordinary course of its business. In these cases, a
non-United States Holder will be exempt from withholding taxes only if
such Holder is eligible for a treaty exemption or if the interest income
is effectively connected with such holder’s conduct of a trade or business
in the U.S., as discussed above.
|
Interest
payments made to a non-United States Holder will generally be reported to the
IRS and to such holder on IRS Form 1042-S. However, this reporting does not
apply to non-United States Holders that hold notes directly through a qualified
intermediary if the applicable procedures are complied with.
The rules
regarding withholding are complex and vary depending on individual situations.
They are also subject to change. Prospective investors should consult with their
tax advisors regarding the certification requirements for non-United States
persons.
Sale
or other taxable disposition of the notes
Subject
to the discussion below concerning effectively connected income and backup
withholding, a non-United States Holder generally will not be subject to
U.S. federal income tax or withholding tax on gain recognized on the sale,
exchange, redemption, retirement or other disposition of a note unless such
holder is an individual who was present in the United States for 183 days
or more in the taxable year of the disposition and certain other conditions are
met or if the gain represents accrued interest, in which case the rules for
interest would apply.
Effectively
connected income
If
interest or gain from a disposition of the notes is effectively connected with a
non-United States Holder’s conduct of a U.S. trade or business, or if an
income tax treaty applies and the non-United States Holder maintains a
U.S. ”permanent establishment” to which the interest or gain is generally
attributable, the non-United States Holder may be subject to U.S. federal
income tax on the interest or gain on a net basis in the same manner as if it
were a United States Holder. If interest income received with respect to the
notes is taxable on a net basis, the withholding tax described above will not
apply (assuming an appropriate certification is provided). A foreign corporation
that is a holder of a note also may be subject to a branch profits tax equal to
30% of its effectively connected earnings and profits for the taxable year,
subject to certain adjustments, unless it qualifies for a lower rate under an
applicable income tax treaty. A non-United States Holder will not be considered
to be engaged in a U.S. trade or business solely by reason of holding
notes.
Backup
withholding and information reporting
Backup
withholding likely will not apply to payments made by us or our paying agents,
in their capacities as such, to a non-United States Holder of a note if the
holder has provided the required certification that it is not a United States
person as described above. However, certain information reporting may still
apply with respect to interest payments even if certification is provided.
Payments of the proceeds from a disposition by a non-United States Holder of a
note made to or through a foreign office of a broker will not be subject to
information reporting or backup withholding, except that information reporting
(but generally not backup withholding) may apply to those payments if the broker
is:
|
·
|
a
United States person;
|
|
·
|
a
controlled foreign corporation for U.S. federal income tax
purposes;
|
|
·
|
a
foreign person 50% or more of whose gross income is effectively connected
with a U.S. trade or business for a specified three-year
period; or
|
|
·
|
a
foreign partnership, if at any time during its tax year, one or more of
its partners are United States persons, as defined in applicable
U.S. Treasury Regulations, who in the aggregate hold more than 50% of
the income or capital interest in the partnership or if, at any time
during its tax year, the foreign partnership is engaged in a
U.S. trade or business.
|
Payment
of the proceeds from a disposition by a non-United States Holder of a note made
to or through the U.S. office of a broker generally is subject to
information reporting and backup withholding unless the holder or beneficial
owner has provided the required certification that it is not a United States
person as described above.
Non-United
States Holders should consult their own tax advisors regarding application of
withholding and backup withholding in their particular circumstance and the
availability of and procedure for obtaining an exemption from withholding and
backup withholding under current U.S. Treasury Regulations. In this regard,
the current U.S. Treasury Regulations provide that a certification may not
be relied on if we or our agent (or other payor) knows or has reason to know
that the certification may be false. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a credit against the holder’s U.S. federal income tax liability or may
be claimed as a refund, provided the required information is furnished timely to
the IRS.
PLAN OF DISTRIBUTION
Each
broker-dealer that receives exchange notes for its own account pursuant to the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for initial notes
where such initial notes were acquired as a result of market-making activities
or other trading activities. Ply Gem has agreed that, for a period of
180 days after the expiration date of the exchange offer, it will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until October
28, 2008, all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus.
Ply Gem
will not receive any proceeds from any sale of exchange notes by
broker-dealers. The exchange notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such exchange notes. Any broker-dealer that resells exchange notes
that were received by it for its own account pursuant to the exchange offer and
any broker or dealer that participates in a distribution of such exchange notes
may be deemed to be an “underwriter” within the meaning of the Securities Act
and any profit on any such resale of exchange notes and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
“underwriter” within the meaning of the Securities Act.
For a period of 180 days after the
Expiration Date, Ply Gem will promptly send additional copies of this prospectus
and any amendment or supplement to this prospectus to any broker-dealer that
requests such documents in the letter of transmittal. Ply Gem has
agreed to pay all expenses incident to the exchange offer (including the
expenses of one counsel for the holders of the notes) other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the
notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Paul,
Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, will
pass on the validity of the exchange notes and guarantees offered hereby. Paul,
Weiss, Rifkind, Wharton & Garrison LLP has represented CI Capital
Partners and its related parties from time to time. Certain members of Paul,
Weiss, Rifkind, Wharton & Garrison LLP have made investments in Ply Gem
Investment Holdings, Inc.
EXPERTS
The
consolidated financial statements and schedule of Ply Gem Holdings, Inc. and
subsidiaries as of December 31, 2007 and 2006, and for each of the years in the
three-year period ended December 31, 2007, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
registered public accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The
audit report covering the 2006 consolidated financial statements refers to the
adoption of Statement of Financial Accounting Standard No. 123(R), Share-Based
Payment.
WHERE YOU CAN FIND MORE INFORMATION
We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and file reports and other information with the SEC. We have
also filed with the SEC a registration statement on Form S-4 to register the
exchange notes. This prospectus, which forms part of the registration
statement, does not contain all of the information included in that registration
statement. For further information about us and the exchange notes
offered in this prospectus, you should refer to the registration statement and
its exhibits. You may read and copy any document we file with the SEC
at the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C.
20549. Copies of these reports and information may be obtained at
prescribed rates from the Public Reference Section of the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room. In
addition, the SEC maintains a web site that contains reports, proxy statements
and other information regarding registrants, such as us, that file
electronically with the SEC. The address of this web site is
http://www.sec.gov.
Anyone
who receives a copy of this prospectus may obtain a copy of the indenture
without charge by writing to Shawn K. Poe, Vice President and Chief Financial
Officer, Ply Gem Industries, Inc., 5020 Weston Parkway, Suite 400,
Cary, North Carolina 27513, (919) 677-3900.
INDEX TO FINANCIAL STATEMENTS
|
Page
|
||
|
Audited
Consolidated Financial Statements
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Statements of Operations for each of the years in
the three-year period ended December 31, 2007
|
F-3
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for each of the years in
the three-year period ended December 31, 2007
|
F-5
|
|
|
Consolidated
Statements of Stockholder’s Equity and Comprehensive
Income for each of the years in the three-year period
ended December 31, 2007
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
Unaudited
Condensed Consolidated Financial Statements
|
||
|
Condensed
Consolidated Statements of Operations – Three
months ended June 28, 2008 and June 30, 2007
|
F-46
|
|
|
Condensed
Consolidated Statements of Operations – Six
months ended June 28, 2008 and June 30, 2007
|
F-47
|
|
|
Condensed
Consolidated Balance Sheets as of June
28, 2008 and December 31, 2007
|
F-48
|
|
|
Condensed
Consolidated Statements of Cash Flows – Six
months ended June 28, 2008 and June 30, 2007
|
F-49
|
|
|
Condensed
Consolidated Statement of Stockholder’s Equity and Comprehensive
Income – Six
months ended June 28, 2008
|
F-50
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-51
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholder
Ply Gem
Holdings, Inc.:
We have
audited the accompanying consolidated balance sheets of Ply Gem Holdings, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholder’s equity and comprehensive income, and
cash flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements 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. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ply Gem Holdings, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in notes 1 and 12 to the consolidated financial statements on January
1, 2006, the Company adopted Statement of Financial Accounting Standard No.
123(R), Share-Based Payment.
/s/ KPMG
LLP
Kansas
City, Missouri
March 25,
2008
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
For
the Year
|
For
the Year
|
For
the Year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Amounts
in thousands)
|
||||||||||||
|
Net
sales
|
$ | 1,363,546 | $ | 1,054,468 | $ | 838,868 | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of products sold
|
1,075,507 | 831,418 | 647,576 | |||||||||
|
Selling,
general and administrative expense
|
162,609 | 125,619 | 92,738 | |||||||||
|
Intangible
asset impairment
|
4,150 | 782 | - | |||||||||
|
Amortization
of intangible assets
|
17,631 | 11,942 | 9,761 | |||||||||
|
Total
Costs and Expenses
|
1,259,897 | 969,761 | 750,075 | |||||||||
|
Operating
earnings
|
103,649 | 84,707 | 88,793 | |||||||||
|
Foreign
currency gain
|
3,961 | 77 | 1,010 | |||||||||
|
Interest
expense
|
(98,496 | ) | (72,218 | ) | (57,657 | ) | ||||||
|
Investment
income
|
1,704 | 1,205 | 730 | |||||||||
|
Other
expense
|
(1,202 | ) | (4,462 | ) | - | |||||||
|
Income
before provision for income taxes and
|
||||||||||||
|
cumulative
effect of accounting change
|
9,616 | 9,309 | 32,876 | |||||||||
|
Provision
for income taxes
|
4,002 | 3,502 | 12,651 | |||||||||
|
Income
before cumulative effect of
|
||||||||||||
|
accounting
change
|
5,614 | 5,807 | 20,225 | |||||||||
|
Cumulative
effect of accounting change, net of
|
||||||||||||
|
income
tax benefit of $57
|
- | (86 | ) | - | ||||||||
|
Net
income
|
$ | 5,614 | $ | 5,721 | $ | 20,225 | ||||||
See
accompanying notes to consolidated financial statements.
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(Amounts
in thousands, except share amounts)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 65,207 | $ | 53,274 | ||||
|
Accounts
receivable, less allowances of $7,320 and $6,802,
respectively
|
111,653 | 130,795 | ||||||
|
Inventories:
|
||||||||
|
Raw
materials
|
60,003 | 50,936 | ||||||
|
Work
in process
|
23,071 | 25,339 | ||||||
|
Finished
goods
|
45,208 | 51,881 | ||||||
|
Total
inventory
|
128,282 | 128,156 | ||||||
|
Prepaid
expenses and other current assets
|
16,462 | 20,873 | ||||||
|
Deferred
income taxes
|
12,797 | 18,770 | ||||||
|
Total
current assets
|
334,401 | 351,868 | ||||||
|
Property
and Equipment, at cost:
|
||||||||
|
Land
|
4,017 | 3,990 | ||||||
|
Buildings
and improvements
|
37,927 | 34,889 | ||||||
|
Machinery
and equipment
|
240,921 | 215,555 | ||||||
|
Total
property and equipment
|
282,865 | 254,434 | ||||||
|
Less
accumulated depreciation
|
(83,869 | ) | (47,597 | ) | ||||
|
Total
property and equipment, net
|
198,996 | 206,837 | ||||||
|
Other
Assets:
|
||||||||
|
Intangible
assets, less accumulated amortization of $45,081 and
$27,450,
|
||||||||
|
respectively
|
213,257 | 232,833 | ||||||
|
Goodwill
|
835,820 | 811,285 | ||||||
|
Other
|
43,133 | 46,898 | ||||||
|
Total
other assets
|
1,092,210 | 1,091,016 | ||||||
| $ | 1,625,607 | $ | 1,649,721 | |||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 6,873 | $ | 5,870 | ||||
|
Accounts
payable
|
96,256 | 95,568 | ||||||
|
Accrued
expenses and taxes
|
93,416 | 113,527 | ||||||
|
Total
current liabilities
|
196,545 | 214,965 | ||||||
|
Deferred
income taxes
|
91,151 | 107,854 | ||||||
|
Other
long term liabilities
|
67,144 | 56,292 | ||||||
|
Long-term
debt, less current maturities
|
1,031,223 | 1,042,894 | ||||||
| Commitments and contingencies | ||||||||
|
Stockholders'
Equity:
|
||||||||
|
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
|
180,667 | 181,792 | ||||||
|
Retained
earnings
|
49,242 | 43,628 | ||||||
|
Accumulated
other comprehensive income
|
9,635 | 2,296 | ||||||
|
Total
stockholder's equity
|
239,544 | 227,716 | ||||||
| $ | 1,625,607 | $ | 1,649,721 | |||||
See
accompanying notes to consolidated financial statements.
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
For
the Year
|
For
the Year
|
For
the Year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Amounts
in thousands)
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 5,614 | $ | 5,721 | $ | 20,225 | ||||||
|
Adjustments
to reconcile net income
|
||||||||||||
|
to
cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization expense
|
54,067 | 33,816 | 26,125 | |||||||||
|
Fair
value premium on purchased inventory
|
1,289 | 3,266 | - | |||||||||
|
Non-cash
interest expense, net
|
6,941 | 5,571 | 5,079 | |||||||||
|
Gain
on foreign currency transactions
|
(3,961 | ) | (77 | ) | (1,010 | ) | ||||||
|
Intangible
asset impairment
|
4,150 | 782 | - | |||||||||
|
Loss
on sale of assets
|
356 | 840 | - | |||||||||
|
Other
non-cash items
|
- | 1,772 | - | |||||||||
|
Deferred
income taxes
|
(920 | ) | (1,377 | ) | 1,785 | |||||||
|
Changes
in operating assets and
|
||||||||||||
|
liabilities,
net of effects from acquisitions:
|
||||||||||||
|
Accounts
receivable, net
|
32,654 | 25,264 | (4,898 | ) | ||||||||
|
Inventories
|
6,523 | 9,965 | 6,859 | |||||||||
|
Prepaid
expenses and other current assets
|
7,127 | (981 | ) | 395 | ||||||||
|
Accounts
payable
|
(8,373 | ) | (33,598 | ) | 7,595 | |||||||
|
Accrued
expenses and taxes
|
(23,536 | ) | 6,511 | 2,715 | ||||||||
|
Other
|
614 | 403 | (960 | ) | ||||||||
|
Net
cash provided by operating activities
|
82,545 | 57,878 | 63,910 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(20,017 | ) | (20,318 | ) | (14,742 | ) | ||||||
|
Proceeds
from sale of assets
|
63 | 4,536 | - | |||||||||
|
Acquisitions,
net of cash acquired
|
(36,453 | ) | (416,386 | ) | 380 | |||||||
|
Net
cash used in investing activities
|
(56,407 | ) | (432,168 | ) | (14,362 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from long-term debt
|
- | 414,808 | - | |||||||||
|
Proceeds
from revolver borrowings
|
50,000 | 15,000 | 35,500 | |||||||||
|
Payments
on long-term debt
|
(10,623 | ) | (3,467 | ) | (34,368 | ) | ||||||
|
Payments
on revolver borrowings
|
(50,000 | ) | (15,000 | ) | (35,500 | ) | ||||||
|
Debt
issuance costs paid
|
(2,100 | ) | (9,534 | ) | - | |||||||
|
Equity
contributions
|
900 | 4,717 | 1,320 | |||||||||
|
Equity
repurchases
|
(3,245 | ) | (1,128 | ) | (1,286 | ) | ||||||
|
Net
cash provided by (used in)
|
||||||||||||
|
financing
activities
|
(15,068 | ) | 405,396 | (34,334 | ) | |||||||
|
Impact
of exchange rate movements on cash
|
863 | (5 | ) | 165 | ||||||||
|
Net
increase in cash and cash equivalents
|
11,933 | 31,101 | 15,379 | |||||||||
|
Cash
and cash equivalents at the beginning of the period
|
53,274 | 22,173 | 6,794 | |||||||||
|
Cash
and cash equivalents at the end of the period
|
$ | 65,207 | $ | 53,274 | $ | 22,173 | ||||||
|
Supplemental
Information
|
||||||||||||
|
Interest
paid
|
$ | 98,847 | $ | 70,431 | $ | 52,533 | ||||||
|
Income
taxes paid (received), net
|
$ | 6,576 | $ | 5,621 | $ | 7,172 | ||||||
See
accompanying notes to consolidated financial statements.
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE
INCOME
|
||||||||||||||||
|
Accumulated
|
||||||||||||||||
|
Other
|
Total
|
|||||||||||||||
|
Additional
|
Comprehen-
|
Stock-
|
||||||||||||||
|
Paid
in
|
Retained
|
sive
Income
|
holder's
|
|||||||||||||
|
Capital
|
Earnings
|
(Loss)
|
Equity
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Balance,
December 31, 2004
|
$ | 175,427 | $ | 17,682 | $ | 2,298 | $ | 195,407 | ||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
- | 20,225 | - | 20,225 | ||||||||||||
|
Currency
translation
|
- | - | 1,044 | 1,044 | ||||||||||||
|
Minimum
pension liability, net of tax
|
||||||||||||||||
|
benefit
of $971
|
- | - | (1,196 | ) | (1,196 | ) | ||||||||||
|
Total
comprehensive income
|
20,073 | |||||||||||||||
|
Contributions
|
34 | - | - | 34 | ||||||||||||
|
Balance,
December 31, 2005
|
175,461 | 37,907 | 2,146 | 215,514 | ||||||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
- | 5,721 | - | 5,721 | ||||||||||||
|
Currency
translation
|
(347 | ) | (347 | ) | ||||||||||||
|
Minimum
pension liability, net of tax
|
||||||||||||||||
|
provision
of $353
|
- | - | 497 | 497 | ||||||||||||
|
Total
comprehensive income
|
5,871 | |||||||||||||||
|
Contributions
|
6,331 | - | - | 6,331 | ||||||||||||
|
Balance,
December 31, 2006
|
181,792 | 43,628 | 2,296 | 227,716 | ||||||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
- | 5,614 | - | 5,614 | ||||||||||||
|
Currency
translation
|
- | - | 5,658 | 5,658 | ||||||||||||
|
Minimum
pension liability for actuarial
|
||||||||||||||||
|
gain,
net of tax provision of $638
|
961 | 961 | ||||||||||||||
|
Total
comprehensive income
|
12,233 | |||||||||||||||
|
Adjustment
to initially apply SFAS No.
|
||||||||||||||||
|
158,
net of tax of $460
|
720 | 720 | ||||||||||||||
|
Contributions
(repurchase of equity)
|
(1,125 | ) | - | - | (1,125 | ) | ||||||||||
|
Balance,
December 31, 2007
|
$ | 180,667 | $ | 49,242 | $ | 9,635 | $ | 239,544 | ||||||||
See
accompanying notes to consolidated financial statements.
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Ply Gem
Holdings, Inc. 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 principal segments: (i) Siding,
Fencing, Railing and Decking and (ii) Windows and Doors. Through
these principal segments, 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 the do-it-yourself and
professional remodeling and renovation markets.
Ply Gem
Holdings, Inc., a wholly owned subsidiary of Ply Gem Investment Holdings, Inc.,
was incorporated on January 23, 2004 for the purpose of acquiring Ply Gem
Industries, Inc. ( “Ply Gem Industries”) from Nortek (the “Ply Gem
Acquisition”). The Ply Gem Acquisition was completed on February 12,
2004, when Nortek, Inc. sold Ply Gem Industries, Inc., to Ply Gem Holdings,
Inc., an affiliate of Caxton-Iseman Capital, Inc., pursuant to the terms of the
Stock Purchase Agreement among Ply Gem Investment Holdings, Inc., Nortek, and
WDS LLC dated as of December 19, 2003, as amended (the “Purchase Agreement”).
Prior to February 12, 2004, the date of the Ply Gem Acquisition, Ply Gem
Holdings, Inc. had no operations and Ply Gem Industries, Inc. was wholly owned
by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek,
(collectively with subsidiaries “Nortek”). As a result of the Ply Gem
Acquisition, we applied purchase accounting on the date of February 12,
2004.
On August
27, 2004, Ply Gem Industries, Inc. 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 (the “MW Acquisition”).
On
February 24, 2006, Ply Gem Industries, Inc. 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 (the “Alenco
Acquisition”). The accompanying financial statements include the
operating results of Alenco for periods after February 26, 2006, the date of
acquisition.
On
October 31, 2006, Ply Gem Industries, Inc. acquired all of the issued and
outstanding shares of common stock of Alcoa Home Exteriors, Inc. (“AHE”), in
accordance with a stock purchase agreement entered into among Ply Gem
Industries, Alcoa Securities Corporation, and Alcoa Inc. (the “AHE
Acquisition”). The accompanying financial statements include the operating
results of AHE for periods after October 31, 2006, the date of
acquisition.
On
September 30, 2007, Ply Gem Industries, Inc. completed the acquisition of
CertainTeed Corporation’s vinyl window and patio door business through a stock
acquisition (the “Pacific Windows Acquisition”). On the acquisition
date, the Company changed the name of the acquired business to Ply Gem Pacific
Windows Corporation. The accompanying financial statements include
the operating results of Ply Gem Pacific Windows Corporation for period after
September 30, 2007, the date of acquisition.
Principles
of Consolidation and Combination
The accompanying consolidated
financial statements include the accounts of Ply Gem Holdings, Inc. and its
subsidiaries, all of which are wholly owned. All intercompany
accounts and transactions have been eliminated.
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 effect 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. These judgments are
based on the Company’s historical experience, current trends and information
available from other sources, as appropriate. If different conditions
result from those assumptions used in the Company’s judgments, the 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 their 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 our customers take title upon delivery,
at which time revenue is then recognized. 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 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 date of the sale and the date of the return 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, bad debts 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
expense. 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 debts.
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.
Inventories
Inventories
in the accompanying consolidated balance sheets are valued at the lower of cost
or market. Approximately $10.9 million and $9.6 million of total inventories at
December 31, 2007 and December 31, 2006, respectively, were valued on the
last-in, first-out method (“LIFO”). Under the first-in, first-out
method (“FIFO”) of accounting, such inventories would have been approximately
$3.7 million and $4.7 million higher at December 31, 2007 and December 31, 2006,
respectively. All other inventories were valued under the FIFO
method. In connection
with both LIFO and FIFO inventories, 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 the actual results to differ from the estimates
at the time such inventory is disposed or sold.
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.
Intangible
Assets, Goodwill and other Long-lived Assets
The
Company applies SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), to its intangible and other long-lived
assets. SFAS No. 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets but does not apply to goodwill
or intangible assets that are not being amortized and certain other long-lived
assets.
The
Company accounts for acquired goodwill and intangible assets in accordance with
SFAS No. 142. Purchase accounting required by SFAS No. 141, “Business
Combination” (“SFAS no. 141”), involves judgment with respect to the valuation
of the acquired assets and liabilities in order to determine the final amount of
goodwill (see Note 2). For significant acquisitions, the Company
values items such as property and equipment and acquired intangibles based upon
appraisals, and determines the value of assets and liabilities associated with
pension plans based upon actuarial studies.
The
Company applies SFAS No, 142, “Goodwill and Other Intangible Assets” (SFAS No.
142”) to goodwill and certain intangible assets. Under this
statement, goodwill and intangible assets determined to have an indefinite
useful life are no longer amortized, instead these assets are evaluated 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 evaluated the intangible assets
with indefinite lives for impairment as of November 30, 2007, and determined
that there was an impairment. As a result, the Company wrote down
those assets by approximately $4.2 million. The Company has also
re-evaluated these assets and determined that due to changes in the business,
the assets should be assigned a life of 14 years and will be amortized over that
time, beginning November 30, 2007. In 2006, as a part of the
Company’s restructuring of its subsidiary, Napco Window Systems, Inc., the
Company recognized an impairment to its intangible assets, consisting of
Tradenames and Customer relationships, of approximately $0.8
million.
Share
based compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments”,
which requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. Under FAS 123R, 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. We adopted the provisions of FAS123R,
effective January 1, 2006, using a modified prospective
application. The fair value of each option award is estimated on the
date of the grant 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. 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 health insurance reserves to record in our 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.
Income
Taxes
We
account for deferred income taxes using the asset and liability method in
accordance with SFAS No. 109, “Accounting for Income Taxes,” or “SFAS No. 109,”
which requires that the deferred tax consequences of temporary differences
between the amounts recorded in our financial statements and the amount included
in our federal and state income tax returns be recognized in the balance
sheet. Estimates are required with respect to, among other things,
the appropriate state income tax rates to use in the various states that 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. During 2005, the Company established reserves relating to
net operating losses acquired in the MW Acquisition and transactions costs
associated with the Ply Gem and MW Acquisitions. If the benefits for
which a reserve has been provided are subsequently recognized, they will reduce
goodwill resulting from the application of the purchase method of accounting for
these transactions. 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, Inc., Ply Gem Industries, Inc. and its
subsidiaries. The existing tax sharing agreement between Ply Gem
Holdings and Ply Gem Investment Holdings, Inc., under which tax liabilities for
each respective party are computed on a stand-alone basis, was amended during
2006 to include Ply Gem Prime Holdings, Inc. U.S. subsidiaries file
unitary, combined and separate state income tax returns. CWD Windows
and Doors files separate Canadian income tax returns.
On
January 1, 2007, the Company adopted the Financial Accounting Standards
Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes,” an interpretation of the Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes”. This
interpretation clarifies how companies calculate and disclose uncertain tax
positions. The effect of adopting this interpretation did not impact any
previously recorded amounts for unrecognized tax benefits.
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.
Related
Party Transactions
Under the
General Advisory Agreement (the “General Advisory Agreement”) we entered into
with an affiliate of Caxton-Iseman Capital, LLC (the “Caxton-Iseman Party”), the
Caxton-Iseman Party 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 the Caxton-Iseman
Party (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 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 (including amortization of organization
costs, capitalized management fees, and other items), dividends paid or accrued
on preferred stock, certain management fees paid to the Caxton-Iseman Party,
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 the Caxton-Iseman Party 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
Debt Financing Advisory Agreement (the “Debt Financing Advisory Agreement”) we
entered into with the Caxton-Iseman Party, we paid the Caxton-Iseman Party a
debt financing arrangement and advisory fee, equal to 2.375% of the aggregate
amount of the debt financing incurred in connection with the Ply Gem Acquisition
($11.4 million), in the first quarter of 2004. Pursuant to the
General Advisory Agreement, the Company paid the Caxton-Iseman Party a
transaction fee of 1) $6.4 million in connection with the MW Acquisition in
November 2004, 2) $2.4 million in connection with the Alenco Acquisition in
March 2006, 3) $6.1 million in connection with the AHE acquisition in October
2006, and 4) $0.7 million in connection with the Pacific Windows Corporation
acquisition in September 2007 (in each case, the fee, as described above, was 2%
of the purchase price paid in the respective acquisition). During
2006, approximately $0.4 million and $1.0 million were expensed as third-party
financing fees for the Alenco Acquisition and the AHE Acquisition, respectively,
and were reported in the statement of operations as other
expense. The remaining amounts were capitalized as part of the
purchase price for the respective acquisitions. Under the ‘General
Advisory Agreement” the Company paid and expensed as a component of SG&A, a
management fee of approximately $3.5 million, $2.5 million, and $2.3 million for
the years ended December 31, 2007, 2006 and 2005, respectively.
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 the
Caxton-Iseman Party provide notice of termination. In addition, the
General Advisory Agreement may be terminated by the Caxton-Iseman Party 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 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 the
Caxton-Iseman Party 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
the Company’s cost of funds to borrow amounts under our senior credit
facilities.
In
connection with the MW Acquisition, Ply Gem Investment Holdings, Inc. received
an equity investment of approximately $0.5 million from The GeMROI Company, an
outside sales agency that represents, among other products and companies, MW
windows for which the Company pays GeMROI a sales commission for their
services. During 2007 and 2006, the Company paid GeMROI approximately
$1.8 million and $2.1 million, respectively, in sales commission for their
services. During 2006, the Company received an additional
equity investment of approximately $0.5 million from JPG Investments, LLC, an
affiliate of The GeMROI Company.
Foreign
Currency
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 and combined
balance sheets. A transaction gain or loss resulting from
fluctuations in the exchange rate may be recognized in the statement of
operations due to debt, denominated in US dollars, recorded by the Company’s
Canadian subsidiary.
For the
years ended December 31, 2007 and December 31, 2006, the Company recorded a gain
from foreign currency transactions of approximately $4.0 million and $0.1
million, respectively. As of December 31, 2007 and December 31, 2006
accumulated other comprehensive income included a currency translation of
approximately $8.9 million and $3.3 million, respectively.
Other
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement addresses how to calculate fair value
measurements required or permitted under other accounting pronouncements.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change
current practice. On February 12, 2008, the FASB issued FASB Staff Position
(“FSP”) FAS 157-2 which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). This FSP partially defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for items within the scope of the
FSP. Effective for 2008, the Company will adopt SFAS 157 except as it
applies to those nonfinancial assets and liabilities as noted in FSP
157-2. The Company is currently evaluating the impact of this
standard.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”. This standard requires employers
to recognize the underfunded or overfunded status of each pension and
postretirement benefit plan as an asset or liability in its statement of
financial position and to recognize changes in the funded status in the year in
which the changes occur through accumulated other comprehensive income, which is
a component of stockholders’ equity. SFAS No. 158 does not change the
amount of actuarially determined expense that is recorded in the consolidated
statement of income. The new reporting requirements and related new footnote
disclosure rules of SFAS No. 158 are effective for our December 31, 2007
financial statements. Additionally, SFAS No. 158 requires employers
to measure the funded status of a plan as of the date of its year-end statement
of financial position. For our financial statements as of December
31, 2008 we will change our September 30 measurement date for our plans’ assets
and obligations to comply with this requirement.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS No. 159
permits entities to choose to measure certain financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159
is effective for our fiscal year beginning January 1, 2008. The Company is
currently evaluating the impact of this standard.
In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations”. This Statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date be measured at their fair values as of that
date. An acquirer is required to recognize assets or liabilities
arising from all other contingencies (contractual contingencies) as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6, Elements of Financial Statements. Any
acquisition related costs are to be expensed instead of capitalized. The impact
to the company from the adoption of SFAS 141R in 2009 will depend on
acquisitions at the time. The provisions of SFAS No. 141(R) are effective
for the Company’s fiscal year beginning January 1, 2009, and are to be
applied prospectively.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”. This standard establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. The Statement also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. The provisions of SFAS No. 160 are effective for
the Company’s fiscal year beginning January 1, 2009, and are to be applied
prospectively. The Company is currently evaluating the impact that the
implementation of SFAS No. 160 will have on its financial
statements.
Concentration
of Credit Risk
The
accounts receivable balance related to one customer of our siding, fencing,
railing and decking segment was approximately $6.4 million and $11.1 million at
December 31, 2007 and December 31, 2006, respectively. This
customer accounted for approximately 10.2% of net sales for the year ended
December 31, 2007, 16.5% of net sales for the year ended December 31, 2006, and
18.9% of net sales for the year ended December 31, 2005.
Fair
Value of Financial Instruments
The
carrying value of the Company’s senior subordinated notes at December 31, 2007
was approximately $360.2 million. The fair value of the Company’s senior
subordinated notes at December 31, 2007 is estimated to be approximately $279.0
million based on available market information. The carrying value of the
Company’s other financial instruments approximates their fair
value.
2. PURCHASE
ACCOUNTING
Alenco
Acquisition
On
February 24, 2006, Ply Gem completed the Alenco Acquisition. The Company
accounted for the transaction as a purchase in accordance with the provisions of
SFAS No. 141, which results in a new valuation for the assets and liabilities of
Alenco based upon fair values as of the date of the purchase. Alenco
is a leading regional manufacturer of aluminum and vinyl windows and doors for
the new home construction market in the fast-growing Southern regions of the
United States. The addition of Alenco will expand the Company’s
geographical reach into the southern regions and expands our window products
offering with aluminum.
The
purchase price, including approximately $6.0 million of value attributed to Ply
Gem Prime Holdings, Inc. common stock issued to replace AWC Holding Company
employee’s forfeited AWC Holding Company stock, was allocated to the assets and
liabilities based on their fair values. The following is the
allocation of the purchase price.
|
(in
thousands)
|
||||
|
Other
current assets, net of cash
|
$ | 17,324 | ||
|
Inventories
|
7,312 | |||
|
Property,
plant and equipment
|
10,580 | |||
|
Trademarks
|
7,000 | |||
|
Customer
relationships
|
21,950 | |||
|
Goodwill
|
89,929 | |||
|
Other
assets
|
198 | |||
|
Current
liabilities
|
(11,929 | ) | ||
|
Other
liabilities
|
(15,575 | ) | ||
|
Purchase
price, net of cash acquired
|
$ | 126,789 | ||
Based on
appraisals for the purchased intangible assets, $7.0 million was assigned to
Trademarks and Tradenames with weighted average lives of 15 years, and
approximately $22.0 million was assigned to customer relationships with weighted
average lives of 15 years. As a result of this transaction, debt
issue costs in the amount of approximately $3.6 million were incurred, of which
approximately $2.2 million were deferred and approximately $1.4 million were
expensed as third-party financing costs. Approximately $89.9 million of goodwill
was assigned to the windows and doors segment as a result of the Alenco
Acquisition. None of the goodwill is expected to be deductible for
tax purposes.
AHE
Acquisition
On
October 31, 2006, Ply Gem completed its acquisition of Alcoa Home Exteriors,
Inc. (“AHE”) (the “AHE Acquisition”). The Company accounted for the transaction
as a purchase in accordance with the provisions of SFAS No. 141, which results
in a new valuation for the assets and liabilities of AHE based upon fair values
as of the date of the purchase. AHE is a leading manufacturer of
vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and
injection molded accessories. The addition of AHE to Ply Gem’s
portfolio will enable the Company to capitalize on attractive market
opportunities and provide the Company with a strong sustainable platform to
fully serve all channels of the vinyl siding market.
The
purchase price was allocated to the assets and liabilities based on their fair
values. The following is the allocation of the purchase
price.
|
(in
thousands)
|
||||
|
Other
current assets, net of cash
|
$ | 83,089 | ||
|
Inventories
|
74,466 | |||
|
Property,
plant and equipment
|
86,699 | |||
|
Trademarks
|
23,950 | |||
|
Patents
|
770 | |||
|
Customer
relationships
|
36,435 | |||
|
Goodwill
|
147,732 | |||
|
Other
assets
|
6,634 | |||
|
Current
liabilities
|
(115,217 | ) | ||
|
Other
liabilities
|
(48,939 | ) | ||
|
Purchase
price, net of cash acquired
|
$ | 295,619 | ||
The
allocation of the purchase price reported in our 2006 Annual Report on Form 10K
was based on preliminary information. The above table reflects
adjustments for updated information, including asset valuations, as further
information has become available. In 2007, property, plant and
equipment decreased by approximately $7.3 million primarily due to the final
asset appraisals. Trademarks and Customer Relationships decreased in 2007 by a
net $2.5 million due to an updated appraisal report. We recorded a
net decrease to goodwill of $6.6 million in 2007 primarily related to changes in
deferred taxes and inventory amounts based on receiving further information
about the acquisition date fair value of certain assets and
liabilities. Current liabilities increased by approximately $0.3
million in 2007 primarily due to an increase to the reserve for exit costs for
the shutdown of our Atlanta facility in accordance with EITF 95-3.
Based on
appraisals for the purchased intangible assets, approximately $24.0 million was
assigned to Trademarks and Tradenames with weighted average lives of 15 years,
approximately $0.8 million was assigned to Patents with weighted average lives
of 20 years, and approximately $36.4 million was assigned to customer
relationships with weighted average lives of 10 years.
Approximately
$147.7 million of goodwill was assigned to the siding, fencing, railing and
decking segment as a result of the AHE Acquisition. None of the
goodwill is expected to be deductible for tax purposes.
As of
December 31, 2006, the Company had recorded an obligation of $3.5 million in
current liabilities for the shut down of AHE’s Atlanta facility in accordance
with EITF 95-3. This accrual included estimates for lease payments
and associated costs of the facility through the remaining lease term, severance
costs and costs related to the removal of equipment and other costs required to
return the facility to a state required by the lessor. In the year
ended December 31, 2007, cash payments of approximately $3.5 million have
reduced the accrual. In addition, during 2007 the accrual was
increased to account for additional exit costs identified of approximately $0.5
million and recorded as an adjustment of the cost of acquiring
AHE. As a result, the accrual at December 31, 2007 is approximately
$0.5 million. This accrual could change in the future to the extent
that the company is successful in reducing its costs associated with leasing the
facility through the end of the lease term in August 2008.
Pacific Windows
Acquisition
On
September 30, 2007, Ply Gem completed its acquisition of CertainTeed
Corporation’s vinyl window and patio door business through a stock acquisition
(the “Pacific Windows Acquisition”). On the acquisition date, the
Company changed the name of the acquired business to Ply Gem Pacific Windows
Corporation. The Company accounted for the transaction as a purchase in
accordance with the provisions of SFAS No. 141, which results in a new valuation
for the assets and liabilities of Ply Gem Pacific Windows based upon fair values
as of the date of the purchase. The acquired vinyl window business
is a leading manufacturer of premium vinyl windows and doors and produces
windows for the residential new construction and remodeling markets. The
acquisition will provide the Company with a presence on the west
coast.
The
purchase price was allocated to the assets and liabilities based on their fair
values. The following is the allocation of the purchase
price.
|
(in
thousands)
|
||||
|
Other
current assets, net of cash
|
$ | 10,845 | ||
|
Inventories
|
11,244 | |||
|
Property,
plant and equipment
|
19,452 | |||
|
Trademarks
|
1,200 | |||
|
Customer
relationships
|
1,800 | |||
|
Goodwill
|
16,103 | |||
|
Other
assets
|
1,398 | |||
|
Current
liabilities
|
(11,872 | ) | ||
|
Other
liabilities
|
(13,717 | ) | ||
|
Purchase
price, net of cash acquired
|
$ | 36,453 | ||
Based on
preliminary appraisals for the purchased intangible assets, approximately $1.2
million was assigned to Trademarks with weighted average lives of 9 years,
approximately $1.8 million was assigned to customer relationships with weighted
average lives of 11 years, and approximately $0.8 million was assigned to
internally developed software with weighted average lives of 3
years. We have estimated the fair value of our assets and liabilities
and the lives of those assets being amortized or depreciated as of the
acquisition date. Management is continuing to assess the asset
valuations, warranties, and certain other liabilities assumed in the transaction
and tax-related assets and liabilities. Approximately $16.1 million
of goodwill was assigned to the windows and doors segment as a result of the
Pacific Windows Acquisition. None of the goodwill is expected to be
deductible for tax purposes.
Goodwill
increased by approximately $24.5 million from December 31, 2006 to December 31,
2007. The change consists of:
|
·
|
an
increase of approximately $16.1 million due to the Pacific Windows
Acquisition,
|
|
·
|
an
increase of approximately $3.5 million due exit liabilities recognized in
conjunction with the AHE
Acquisition,
|
|
·
|
a
decrease of approximately $0.2 million due adjustments to certain items in
the Alenco Acquisition,
|
|
·
|
an
increase of approximately $7.0 million due to foreign currency translation
changes,
|
|
·
|
and
a decrease of approximately $1.9 million due to a change in deferred tax
assets estimates related to our prior
acquisitions.
|
3. INTANGIBLE
ASSETS
The table
that follows presents the major components of intangible assets as of December
31, 2007 and 2006:
|
Average
Amortization
Period
(in Years)
|
Cost
|
Accumulated
Amortization
|
Net
Carrying
Value
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
As
of December 31, 2007:
|
||||||||||||||||
|
Patents
|
14
|
$ | 12,770 | $ | (3,591 | ) | $ | 9,179 | ||||||||
|
Trademarks/Tradenames
|
15
|
85,644 | (9,679 | ) | 75,965 | |||||||||||
|
Customer
relationships
|
13
|
158,158 | (31,452 | ) | 126,706 | |||||||||||
|
Other
|
1,520 | (113 | ) | 1,407 | ||||||||||||
|
Total
intangible assets
|
$ | 258,092 | $ | (44,835 | ) | $ | 213,257 | |||||||||
|
Intangible
with indefinite lives:
|
||||||||||||||||
|
Trademarks
|
$ | -- | $ | -- | $ | -- | ||||||||||
|
As
of December 31, 2006:
|
||||||||||||||||
|
Patents
|
14
|
$ | 12,770 | $ | (2,648 | ) | $ | 10,122 | ||||||||
|
Trademarks/Tradenames
|
15
|
32,145 | (5,394 | ) | 26,751 | |||||||||||
|
Customer
relationships
|
13
|
155,538 | (19,408 | ) | 136,130 | |||||||||||
|
Total
intangible assets
|
$ | 200,453 | $ | (27,450 | ) | $ | 173,003 | |||||||||
|
Intangible
with indefinite lives:
|
||||||||||||||||
|
Trademarks
|
$ | 59,830 | $ | -- | $ | 59,830 | ||||||||||
Amortization
expense for the years ended December 31, 2007 and 2006 was approximately $17.6
million and $11.9 million, respectively. Amortization expense for the
fiscal years 2008, 2009, 2010, 2011, and 2012 is estimated to be approximately
$19.8 million, $19.6 million, $19.5 million, $19.1 million, and $19.1 million,
respectively.
During
2007 the Company evaluated the AHE intangible assets referred to in Note 2, and
determined that approximately $27.3 million of AHE Trademarks previously treated
as indefinite lived assets should have useful lives of 15 years with a value of
approximately $24.0 million. As such, those assets were reclassified
in the above table. Due to the Sarver facility closure, intangible
asset impairments of approximately $0.8 million were recognized in the second
quarter of 2006 as Selling, general and administrative expense.
The
Company evaluated the carrying value of certain tradenames with indefinite lives
as of November 30, 2007, and determined that there was an
impairment. Due to acquisitions of additional window companies
subsequent to the purchase of the tradenames, and the move of the Company to a
‘one company’ structure, the brands have become co-mingled and the sales of the
original trademarks have been diluted. As a result, the Company wrote
down those assets by approximately $4.2 million. The Company has also
re-evaluated these assets and determined that that due to changes in the
business, these assets should be reclassified to finite-lived intangible assets
effective November 30, 2007. The Company determined that the estimated useful
lives of these assets, was 14 years and they will be amortized over that time
period.
4. LIQUIDITY
As of
December 31, 2007, the Company has $65.2 million of cash and cash equivalents
and $70.8 million of availability under its revolving credit
facility. As of December 31, 2007, the Company had approximately
$1,038.1 million of indebtedness outstanding. The Company’s credit
facilities and the indenture for the Senior Subordinated Notes impose certain
restrictions on Ply Gem Industries, including restrictions on its ability to
incur indebtedness, pay dividends, make investments, grant liens, sell assets
and engage in certain other activities. In addition, the credit
facility requires Ply Gem Industries to comply with certain financial ratios
which includes a financial covenant that does not allow our maximum leverage
ratio of EBITDA (adjusted for certain items as allowed by the credit facility)
to Net Debt (as defined in the credit facility) to exceed 6.75 to 1.00 for the
period April 5, 2007 through December 31, 2008. The maximum leverage
ratio will decrease to 6.25 to 1.00 for the period January 1, 2009 and
thereafter.
Based
upon current market conditions and our expectation of our ability to continue to
realize cost savings and synergies and drive profitable market share gains, the
Company believes it will maintain compliance with its
covenants. Given the uncertainty that currently exists in the U.S.
housing industry, no assurances can be given that future compliance will be
maintained. However, Management has implemented plans to mitigate this risk
through cost reduction and cash management measures. If the Company
fails to comply with its financial covenants, a default may allow creditors to
accelerate the related debt as well as any other debt of which a
cross-acceleration or cross-default provision applies, which could adversely
affect our financial condition. Additionally, lenders under the
current facility may be able to terminate any commitments they have made to
supply us with further funds, including not permitting the Company to borrow
under our existing revolving credit facility and not permitting the Company to
issue letters of credit, which could affect our working capital and our ability
to make capital improvements or expenditures. The Company may not be
able to fully repay its obligations if some or all of our debt obligations are
accelerated upon an event of default.
Indebtedness
under the credit facilities is secured by substantially all of Ply Gem
Industries’ assets, including its real and personal property, inventory,
accounts receivable, intellectual property and other intangibles. In
addition, borrowings under the credit facilities are guaranteed by Ply Gem
Holdings and secured by its assets (including its equity
interests). Borrowings under the credit facilities (except for the
$25.0 million tranche under which our Canadian subsidiary, CWD, is the
borrower) are also guaranteed and secured by the equity interests and
substantially all of the assets of our current and future domestic subsidiaries,
subject to exceptions. The $25.0 million tranche under which CWD is
the borrower is also guaranteed and secured by the equity interests and
substantially all of the assets of CWD’s current and future Canadian
subsidiaries.
5. LONG-TERM
DEBT
Long-term
debt in the accompanying consolidated balance sheets at December 31, 2007 and
2006 consists of the following:
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Senior
term loan facility
|
$ | 677,910 | $ | 688,533 | ||||
|
Senior
subordinated notes
|
360,186 | 360,231 | ||||||
| 1,038,096 | 1,048,764 | |||||||
|
Less
current maturities
|
6,873 | 5,870 | ||||||
| $ | 1,031,223 | $ | 1,042,894 | |||||
On April
5, 2007, the Company entered into the fifth amendment to its credit
facility. The Company’s senior credit facilities with a syndicate of
financial institutions and institutional lenders provide for senior secured
financing of up to approximately $762.1 million, consisting of
approximately $687.1 million of term loan facilities maturing in August
2011 and a $75.0 million revolving loan facility, including a letter of
credit subfacility, maturing in February 2009. The term loan facility was drawn
in full and has two tranches, originally consisting of: 1) an approximate $662.3
million tranche under which Ply Gem Industries, Inc. is the borrower (the
“U.S. Borrower”), and 2) an approximate $24.8 million tranche under which
our Canadian subsidiary, CWD Windows and Doors, Inc., is the borrower (the
“Canadian Borrower). As of December 31, 2007 the balances of the two
tranches were approximately $657.3 million and $20.6 million,
respectively.
As a
result of the refinancing that occurred on April 5, 2007, the Company has
evaluated its financing costs in accordance with EITF 96-19 “Debtor’s Accounting
for a Modification or Exchange of Debt Instruments”, and accordingly has
expensed approximately $1.1 million of fees, and deferred $2.1 million to be
amortized over the remaining life of the loan.
Under the
terms of the credit agreement, the Company will be permitted to use its excess
cash flow and/or a portion of its revolving credit facility to repurchase up to
$40.0 million aggregate principal amount of the Company’s 9% senior subordinated
notes due 2012. Subject to market conditions, its capital needs and
other factors, the Company may from time to time purchase up to $40.0 million
aggregate principal amount of its 9% senior subordinated notes due 2012 in
market transactions, privately negotiated sales or other
transactions. As of December 31, 2007 the Company has not purchased
any of its Senior Subordinated Notes.
On
February 24, 2006, in connection with the Alenco Acquisition, the Company
entered into the third amendment to its credit facility. Under the
terms of the amended agreement, the Company borrowed $375.0 million in U.S. term
loans to refinance $252.7 million of outstanding U.S. term loans, repay
approximately $1.8 million in revolving credit loans and fund the Alenco
Acquisition, which was completed on February 24, 2006. Additionally,
under the terms of the amended agreement, the Company’s Canadian borrower
borrowed $25.0 million to refinance approximately $24.5 million of outstanding
Canadian term loans. In connection with the third amendment, the
Company paid and deferred approximately $2.2 million of bank fees and expensed
approximately $0.9 million of third-party financing costs.
On
October 31, 2006, in connection with the AHE Acquisition, the Company entered
into the fourth amendment to its credit facility and a Second Lien Credit
agreement. Under the terms of the amended agreement, the Company
borrowed an additional $187.0 million in U.S. term loans, and under the second
lien credit agreement the Company borrowed $105.0 million. Both
amounts were used to finance the AHE Acquisition, which was completed on October
31, 2006. In connection with the fourth amendment, the Company paid
and deferred approximately $7.3 million of bank fees and expensed approximately
$2.0 million of third-party financing costs.
As of
December 31, 2007, we had $70.8 million of availability under our revolving
credit facility, due to approximately $4.2 million of letters of credit issued
under the facility. As of December 31, 2006, we had $67.6 million of
availability under our revolving credit facility.
The
interest rates applicable to loans under our senior credit facilities are, at
our option, equal to either a base rate plus an applicable interest margin, or
an adjusted LIBOR rate plus an applicable interest margin, as defined in the
senior credit facility agreement. Our rate at December 31, 2007 was
7.95%.
Our
senior credit facilities require scheduled quarterly principal payments on the
term loan facilities of approximately $1.7 million through March 31, 2011, and a
payment of approximately $655.6 million on August 15, 2011, allocated pro rata
between the U.S. term loan and the Canadian term loan.
The
indebtedness of the U.S. borrower (Ply Gem Industries, Inc.) under our senior
credit facilities is guaranteed by Ply Gem Holdings, Inc., and all of our
existing and future direct and indirect subsidiaries, subject to exceptions for
foreign subsidiary guarantees of the U.S. borrower’s obligations to the extent
such guarantees are prohibited by applicable law or would result in materially
adverse tax consequences and other exceptions. The indebtedness of
the Canadian borrower under our senior credit facilities is guaranteed by
Ply Gem Holdings, Inc., the U.S. borrower and all of the Canadian
borrower’s future direct and indirect subsidiaries and is effectively guaranteed
by all subsidiaries guaranteeing the U.S. borrower’s obligations under our
senior credit facilities. All indebtedness under our senior credit
facilities is secured, subject to certain exceptions, by a perfected first
priority pledge of all of our equity interests and those of our direct and
indirect subsidiaries, and, subject to certain exceptions, perfected first
priority security interests in, and mortgages on, all tangible and intangible
assets; provided that all tangible and intangible assets of the Canadian
borrower and its subsidiaries are pledged to secure debt only of the Canadian
borrower.
Our
senior credit facilities require that we comply on a quarterly basis with
financial covenants consisting of a maximum leverage ratio
test. Based upon current market conditions and our expectation of our
ability to continue to realize cost savings and synergies and drive profitable
market share gains, the Company believes it will maintain compliance with its
covenants. Given the uncertainty that currently exists in the U.S.
housing industry, no assurances can be given that future compliance will be
maintained. However, Management has implemented plans to mitigate this risk
through cost reduction and cash management measures. Our covenants
also restrict the payment of dividends, with certain exceptions, without the
lenders consent in writing. The Company is also required at each year
end, commencing December 31, 2008, to calculate and submit within 90 days a
payment of excess cash, as defined in the Company’s credit agreement. This
payment will reduce the outstanding balance on the Company’s term
loans.
Concurrently
with the Ply Gem Acquisition, on February 12, 2004 Ply Gem Industries, Inc.
issued $225.0 million aggregate principal amount of our 9% senior subordinated
notes due 2012, which are guaranteed by Ply Gem Holdings Inc. and the domestic
subsidiaries of Ply Gem Industries, Inc. Subsequently, in August of
2004 in connection with the MW Acquisition, Ply Gem Industries, Inc. issued an
additional $135.0 million of our 9% senior subordinated notes due 2012, which
are guaranteed by Ply Gem Holdings Inc. and the domestic subsidiaries of Ply Gem
Industries, Inc., including MWM Holding, Inc. and its subsidiaries.
Ply Gem
Holdings, Inc. is a holding company and has no operations. Under the
terms of the indenture governing the senior subordinated notes, there are
restrictions on the ability of Ply Gem Industries, Inc. to dividend or
distribute cash or property to Ply Gem Holdings, Inc.
The table
that follows is a summary of maturities of all of the Company’s long-term debt
obligations due in each fiscal year after December 31, 2007:
(Amounts
in thousands)
|
2008
|
$ | 6,873 | ||
|
2009
|
6,873 | |||
|
2010
|
6,873 | |||
|
2011
|
657,291 | |||
|
2012
|
360,186 | |||
|
Thereafter
|
- | |||
| $ | 1,038,096 |
Approximately
$3.2 million of letters of credit have been issued apart from the senior credit
facility to secure certain environmental obligations.
6. 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
Company uses a September 30 measurement date for both plans. The
table that follows provides a reconciliation of benefit obligations, plan
assets, and funded status of the combined plans in the accompanying consolidated
and combined balance sheets at December 31, 2007 and 2006:
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Change
in projected benefit obligation
|
||||||||
|
Benefit
obligation at October 1, 2006 and 2005
|
$ | 34,488 | $ | 34,539 | ||||
|
Service
cost
|
314 | 329 | ||||||
|
Interest
cost
|
1,948 | 1,857 | ||||||
|
Actuarial
loss (gain)
|
(1,207 | ) | (667 | ) | ||||
|
Benefits
and expenses paid
|
(1,633 | ) | (1,570 | ) | ||||
|
Projected
benefit obligation at September 30, 2007 and 2006
|
$ | 33,910 | $ | 34,488 | ||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets at October 1, 2006 and 2005
|
$ | 26,212 | $ | 23,596 | ||||
|
Actual
return on plan assets
|
3,532 | 2,002 | ||||||
|
Employer
and participant contributions
|
1,377 | 2,184 | ||||||
|
Benefits
and expenses paid
|
(1,633 | ) | (1,570 | ) | ||||
|
Fair
value of plan assets at September 30, 2007 and 2006
|
$ | 29,488 | $ | 26,212 | ||||
|
Funded
status and financial position:
|
||||||||
|
Fair
value of plan assets at September 30, 2007 and 2006
|
$ | 29,488 | $ | 26,212 | ||||
|
Benefit
obligation at September 30, 2007 and 2006
|
33,910 | 34,488 | ||||||
|
Funded
status
|
(4,422 | ) | (8,276 | ) | ||||
|
Amount
contributed during fourth quarter
|
365 | 160 | ||||||
|
Unrecognized
actuarial loss (gain)
|
(1,204 | ) | 1,509 | |||||
|
Accrued
benefit cost
|
$ | (5,261 | ) | $ | (6,607 | ) | ||
|
Amount
recognized in the balance sheet consists of:
|
||||||||
|
Accrued
benefit liabilities
|
$ | (4,056 | ) | $ | (8,116 | ) | ||
|
Accumulated
other comprehensive loss (gain)
|
(1,205 | ) | 1,509 | |||||
|
Accrued
benefit cost
|
$ | (5,261 | ) | $ | (6,607 | ) | ||
The
accumulated benefit obligation for the combined plans was approximately $33.9
million, and $34.5 million as of December 31, 2007 and December 31, 2006,
respectively.
On
December 31, 2007, the Company adopted the recognition and disclosure provisions
of SFAS No. 158. SFAS No. 158 required the Company to recognize the
funded status of its pension plans in the December 31, 2007 balance sheet, with
a corresponding adjustment to accumulated other comprehensive
income. This requirement did not have an effect on the Company’s
balance sheet, due to the fact that the Company has included the entire funded
status of its pension plans on its balance sheets since the Company’s
acquisition in 2004. The Company was also not affected by the SFAS
No. 158 requirement to adjust accumulated other comprehensive income for
unrecognized prior serve costs remaining from the initial adoption of SFAS No.
87. As a result of the adoption of SFAS No. 158, the Company has
recognized in accumulated other comprehensive income, actuarial gains that are
not recognized as net periodic pension costs. The effect
of recognizing the minimum liability is included in the table below. (in thousands)
|
At
December 31, 2007
|
||||||||||||
|
Prior
to Application
|
Effect
of Adopting
|
As
Reported at
|
||||||||||
|
of SFAS No. 158
|
SFAS No. 158
|
December 31, 2007
|
||||||||||
|
Other
long term liabilities
|
$ | (5,261 | ) | $ | 1,205 | $ | (4,056 | ) | ||||
|
Deferred
income tax asset
|
2,001 | (470 | ) | 1,531 | ||||||||
|
Accumulated
other comprehensive
|
||||||||||||
|
Income,
net of tax
|
(8,915 | ) | (720 | ) | (9,635 | ) | ||||||
Amounts
recognized in accumulated other comprehensive income at December 31, 2007
consist of: (in thousands)
|
For
the year
|
||||
|
ended
|
||||
|
December
31,
|
||||
|
2007
|
||||
|
Initial
net asset (obligation)
|
$ | - | ||
|
Prior
service credit (cost)
|
- | |||
|
Net
(gain) loss
|
(1,205 | ) | ||
|
Accumulated
other comprehensive income
|
$ | (1,205 | ) | |
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. With advice from our actuaries, 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:
|
Ply
Gem Plan
|
For
the year
|
For
the year
|
For
the year
|
|||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Discount
rate for projected
|
||||||||||||
|
benefit
obligation
|
6.00 | % | 5.75 | % | 5.50 | % | ||||||
|
Discount
rate for pension costs
|
5.75 | % | 5.50 | % | 6.00 | % | ||||||
|
Expected
long-term average
|
||||||||||||
|
return
on plan assets
|
7.75 | % | 7.75 | % | 7.75 | % | ||||||
|
MW
Plan
|
For
the year
|
For
the year
|
For
the year
|
|||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Discount
rate for projected
|
||||||||||||
|
benefit
obligation
|
6.00 | % | 5.75 | % | 5.50 | % | ||||||
|
Discount
rate for pension costs
|
5.75 | % | 5.50 | % | 6.15 | % | ||||||
|
Expected
long-term average
|
||||||||||||
|
return
on plan assets
|
7.75 | % | 7.75 | % | 7.50 | % | ||||||
The
Company’s net periodic benefit expense for the combined plans for the periods
indicated consists of the following components:
(in thousands)
|
Combined
Plans
|
For
the year
|
For
the year
|
For
the year
|
|||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Service
cost
|
$ | 314 | $ | 329 | $ | 337 | ||||||
|
Interest
cost
|
1,947 | 1,857 | 1,905 | |||||||||
|
Expected
return on plan assets
|
(2,025 | ) | (1,798 | ) | (1,655 | ) | ||||||
|
Net
periodic benefit expense
|
$ | 236 | $ | 388 | $ | 587 | ||||||
The
weighted-average asset allocations at December 31, 2007 and 2006, by asset
category are as follows:
|
Ply
Gem Plan
|
Plan
Assets at December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Asset
Category
|
||||||||
|
Equity
securities
|
58 | % | 60 | % | ||||
|
Debt
securities
|
41 | % | 40 | % | ||||
|
Other
|
1 | % | - | |||||
|
MW
Plan
|
Plan
Assets at December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Asset
Category
|
||||||||
|
Equity
securities
|
58 | % | 55 | % | ||||
|
Debt
securities
|
41 | % | 39 | % | ||||
|
Cash
and equivalents
|
1 | % | 1 | % | ||||
|
Other
|
- | 5 | % | |||||
The plan
assets are invested to maximize returns without undue exposure to
risk. The investment objectives are also to produce a total return
exceeding the median of a universe of portfolios with similar average asset
allocation and investment style objectives, and to earn a return, net of fees,
greater or equal to the long-term rate of return used in the actuarial
computations.
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. For 2008, the target allocation is 55%-65% for equity
securities and 35%-45% for fixed income securities.
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.
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. As a result of
this change, a curtailment gain of approximately $1.5 million was recognized
during 2005.
During
fiscal year 2008 the Company expects to make cash contributions to the combined
plans of approximately $1.3 million.
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
|
|||
|
(in
thousands)
|
||||
|
2008
|
$ | 1,500 | ||
|
2009
|
1,700 | |||
|
2010
|
1,640 | |||
|
2011
|
1,800 | |||
|
2012
|
1,950 | |||
|
2013-2017
|
10,860 | |||
The
Company has an unfunded nonqualified Supplemental Executive Retirement Plan for
certain employees. The projected benefit obligation relating to this
unfunded plan totaled approximately $311,000 and $325,000 at December 31, 2007
and 2006, respectively. Pension expense for the plan was
approximately $19,000 and $17,000 for the years ended December 31, 2007 and
2006, respectively.
7. DEFINED
CONTRIBUTION PLANS
The
Company has defined contribution 401(k) plans covering substantially all
employees. The Company provides a matching contribution that varies
by subsidiary. The level varies between 25% of the first 6% of
employee contributions to 100% of the first 6% of employee
contributions. The majority of the subsidiaries have a match of 50%
of the first 6% contributions. Each matching contribution formula is
approved on an annual basis. The Company also has the option of
making discretionary contributions. Our contributions were approximately $4.3
million for the year ended December 31, 2007, $3.1 million for the year ended
December 31, 2006, and approximately $3.1 million for the year ended December
31, 2005.
8. COMMITMENTS
AND CONTINGENCIES
At
December 31, 2007, the Company is obligated under lease agreements for the
rental of certain real estate and machinery and equipment used in its
operations. Future minimum rental obligations aggregate approximately
$158.8 million at December 31, 2007. Certain of our lease agreements
contain clauses for rent increases based on the consumer price index. The
obligations are payable as follows:
(Amounts
in thousands)
|
2008
|
$ | 22,433 | ||
|
2009
|
17,884 | |||
|
2010
|
15,277 | |||
|
2011
|
13,628 | |||
|
2012
|
12,852 | |||
|
Thereafter
|
76,736 |
Total
rental expense for all operating leases amounted to approximately $23.7 million
for the year ended December 31, 2007, $17.3 million for the year ended December
31, 2006, and $13.7 million for the year ended December 31, 2005
respectively.
In
connection with the Ply Gem Acquisition, Nortek has agreed to indemnify the
Company for certain liabilities as set forth in the Purchase
Agreement. In the event Nortek is unable to satisfy amounts due under
these indemnifications then 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 Purchase Agreement. A
receivable related to this indemnification has been recorded in other long-term
assets in the approximate amount of $8.2 million. The Company has indemnified
third parties in certain transactions involving dispositions of former
subsidiaries. As of December 31, 2007 and December 31, 2006, the
Company has recorded liabilities in relation to these indemnifications of
approximately $8.2 million and $8.8 million, respectively, consisting of the
following:
|
(amounts
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Product
claim liabilities
|
$ | 3,780 | $ | 3,795 | ||||
|
Multiemployer
pension plan withdrawal liability
|
3,681 | 3,860 | ||||||
|
Other
|
721 | 1,219 | ||||||
| $ | 8,182 | $ | 8,874 | |||||
The
product claim liabilities of approximately $3.8 million at December 31, 2007 and
December 31, 2006, consisting of approximately $2.3 million recorded in current
liabilities and approximately $1.5 million 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 $3.7 million and $3.9 million
recorded in long term liabilities at December 31, 2007 and December 31, 2006,
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 using a 6% discount rate 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 are accrued liabilities as of December 31, 2007 and
2006, of approximately $0.5 million and $0.8 million, respectively, in accrued
expenses to cover the estimated costs of known litigation claims, including the
estimated cost of legal services, that the Company is contesting including
certain employment and former shareholder litigation related to the
Company.
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 periodically
assesses the adequacy of the recorded warranty claims and adjusts the amounts as
necessary. As of December 31, 2007 and 2006, warranty liabilities of
approximately $11.5 million and $12.3 million, respectively, have been recorded
in current liabilities and approximately $38.4 million and $24.6 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
|
For
the year
|
|||||||
|
ended
|
ended
|
|||||||
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Balance,
beginning of period
|
$ | 36,947 | $ | 10,790 | ||||
|
Warranty
expense provided during period
|
7,633 | 2,042 | ||||||
|
Settlements
made during period
|
(7,693 | ) | (2,864 | ) | ||||
|
Liability
assumed with acquisitions
|
13,012 | 26,979 | ||||||
|
Balance,
end of period
|
$ | 49,899 | $ | 36,947 | ||||
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,
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. It is impossible to ascertain the ultimate legal and
financial liability with respect to certain contingent liabilities, including
lawsuits, and therefore in these cases, no such estimate has been
made.
9. ACCRUED
EXPENSES AND TAXES, AND OTHER LONG-TERM LIABILITIES
Accrued
expenses and taxes, net, consist of the following at December 31, 2007 and
December 31, 2006:
|
December 31, 2007
|
December 31,
2006
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Insurance
|
$ | 6,566 | $ | 8,551 | ||||
|
Employee
compensation and benefits
|
19,722 | 23,701 | ||||||
|
Sales
and marketing
|
20,384 | 30,833 | ||||||
|
Product
warranty
|
11,453 | 12,310 | ||||||
|
Short-term
product claim liability
|
2,321 | 2,321 | ||||||
|
Accrued
freight
|
753 | 3,959 | ||||||
|
Interest
|
12,426 | 12,789 | ||||||
|
Accrued
severance
|
1,931 | 3,808 | ||||||
|
Accrued
taxes
|
5,844 | 2,650 | ||||||
|
Other
|
12,016 | 12,605 | ||||||
| $ | 93,416 | $ | 113,527 | |||||
The
accrued severance amounts in the above table include amounts resulting from the
purchase of AHE during the fourth quarter of 2006. During 2007 cash
severance payments were paid out for approximately $3.9 million and the
severance accrual estimate was increased by approximately $0.1 million,
resulting in an accrual of zero as of December 31, 2007. No severance
costs were expensed. Also included in the above accrued severance
amounts are accruals for Denison restructuring (Note 10). During 2007
cash severance payments were paid for approximately $0.2 million and the accrual
balance is approximately $1.9 million as of December 31, 2007.
Other
long-term liabilities consist of the following at December 31, 2007 and December
31, 2006:
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Insurance
|
$ | 4,757 | $ | 4,097 | ||||
|
Pension
liabilities
|
4,056 | 8,116 | ||||||
|
Multiemployer
pension withdrawal liability
|
3,681 | 3,860 | ||||||
|
Product
warranty
|
38,446 | 24,637 | ||||||
|
Long-term
lease liabilities
|
38 | 186 | ||||||
|
Long-term
product claim liability
|
1,459 | 1,474 | ||||||
|
Long-term
deferred compensation
|
4,810 | 4,363 | ||||||
|
Liabilities
for tax uncertainties
|
7,193 | 6,788 | ||||||
|
Other
|
2,704 | 2,771 | ||||||
| $ | 67,144 | $ | 56,292 | |||||
10. RESTRUCTURING
In
October 2007, the Company commenced its plan to close the Denison, Texas
facility in 2008. Management expects that the plant closure will
reduce costs and increase operating efficiency by increasing capacity
utilization, as the production will be absorbed by other
locations. The Company began to shift production to other facilities
within the company during November 2007, and production ceased at the Denison
facility during February 2008.
|
Original
accrual
|
Accrued
as of
|
|||||||||||
|
Amount
|
Cash payments
|
December 31, 2007
|
||||||||||
|
(Amounts
in thousands)
|
||||||||||||
|
Severance
Costs
|
$ | 2,142 | $ | 210 | $ | 1,932 | ||||||
Total
restructuring costs are expected to be approximately $6.0 million. A
liability of approximately $2.1 million was recognized in 2007 for severance
costs. As of December 31, 2007, the Company has a current liability
for severance costs of approximately $1.9 million and paid approximately $0.2
million in cash during the fourth quarter of 2007. The Company
expects to incur approximately $0.4 million of contract termination costs during
2008, but as of December 31, 2007 has not incurred or accrued for any of this
amount. The Company expects to incur approximately $3.5 million of
other costs, primarily related to equipment removal during 2008, but as of
December 31, 2007 has not incurred or accrued for any of this
amount. The costs recognized related to the Denison plant closure
were recorded in Selling, general and administrative expense in the Siding,
Fencing, Railing and Decking segment.
During
2006, the Company announced the restructuring of its subsidiary, Napco Window
Systems, Inc., which included the closure of the production facility located in
Sarver, PA. The closure of the Sarver facility was expected to
reduce costs and increase operating efficiencies by increasing capacity
utilization. Most of the production of the Sarver, PA facility was
absorbed by other locations, primarily the Toledo, OH
facility. Restructuring costs included termination benefits and asset
impairments. Termination benefits of approximately $0.2 million were
comprised of severance-related payments for all employees terminated in
connection with the plant closure. Asset impairments of approximately
$0.8 million were recognized for intangible assets consisting of tradenames and
customer relationships. Losses of approximately $0.6 million were
incurred for inventory and equipment write-downs. The restructuring
costs, impairment, and losses from asset write-downs totaling approximately $0.8
million were recorded in 2006 in Selling, general and administrative expense in
the Windows and Doors segment.
The
Company entered into an agreement to sell the land and building at the Sarver,
PA location, and finalized the sale during 2006. The carrying value
of the land and building prior to the sale was approximately $4.6
million. In accordance with SFAS No. 144 (Accounting for the
impairment or disposal of long-lived assets), the assets held for sale were
written-down to the fair market value less costs to sell. As a
result, the Company recognized a loss of approximately $0.6 million in Selling,
general and administrative expense in the Windows and Doors segment in
2006.
11. INCOME
TAXES
The
following is a summary of the components of earnings (loss) before provision
(benefit) for income taxes: (in thousands)
|
For
the year
|
For
the year
|
For
the year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December 31, 2007
|
December 31, 2006
|
December 31, 2005
|
||||||||||
|
Domestic
|
$ | (6,897 | ) | $ | 1,800 | $ | 25,182 | |||||
|
Foreign
|
16,513 | 7,509 | 7,694 | |||||||||
| $ | 9,616 | $ | 9,309 | $ | 32,876 | |||||||
The
following is a summary of the provision (benefit) for income taxes included in
the accompanying consolidated statement of operations: (in thousands)
|
For
the year
|
For
the year
|
For
the year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December 31, 2007
|
December 31, 2006
|
December 31, 2005
|
||||||||||
|
Federal:
|
||||||||||||
|
Current
|
$ | 142 | $ | 4,615 | $ | 5,071 | ||||||
|
Deferred
|
(2,339 | ) | (4,013 | ) | 3,130 | |||||||
| (2,197 | ) | 602 | 8,201 | |||||||||
|
State:
|
||||||||||||
|
Current
|
$ | 1,476 | $ | 584 | $ | 1,060 | ||||||
|
Deferred
|
(895 | ) | (507 | ) | 884 | |||||||
| 581 | 77 | 1,944 | ||||||||||
|
Foreign:
|
||||||||||||
|
Current
|
$ | 4,011 | $ | 2,063 | $ | 1,563 | ||||||
|
Deferred
|
1,607 | 760 | 943 | |||||||||
| 5,618 | 2,823 | 2,506 | ||||||||||
|
Total
|
$ | 4,002 | $ | 3,502 | $ | 12,651 | ||||||
Income
tax payments, net of refunds received, were approximately $6.6 million for the
year ended December 31, 2007, approximately $4.7 million for the year ended
December 31, 2006, and approximately $7.2 million for the year ended December
31, 2005.
The table
that follows reconciles the federal statutory income tax rate of continuing
operations to the effective tax rate of such earnings of approximately 41.62%
for the year ended December 31, 2007, 37.62% for the year ended December 31,
2006, and 38.5% for the year ended December 31, 2005. (in thousands)
|
For
the year
|
For
the year
|
For
the year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December 31, 2007
|
December 31, 2006
|
December 31, 2005
|
||||||||||
|
Income
tax provision
|
||||||||||||
|
(benefit)
at the federal
|
||||||||||||
|
statutory
rate
|
$ | 3,365 | $ | 3,258 | $ | 11,510 | ||||||
|
Net
change from
|
||||||||||||
|
statutory
rate:
|
||||||||||||
|
Prior
period federal adjustment
|
(563 | ) | - | - | ||||||||
|
State
income tax provision (benefit),
|
||||||||||||
|
net
of federal income tax benefit,
|
||||||||||||
|
Including
the effect of Michigan Law
|
||||||||||||
|
change
and valuation allowances
|
560 | 72 | 1,260 | |||||||||
|
Effect
of subsidiaries
|
||||||||||||
|
taxes
at non U.S.
|
||||||||||||
|
statutory rate
|
(161 | ) | (146 | ) | (67 | ) | ||||||
|
FIN
48
|
269 | - | - | |||||||||
|
Other,
net
|
532 | 318 | (52 | ) | ||||||||
| $ | 4,002 | $ | 3,502 | $ | 12,651 | |||||||
The 2007
tax expense included approximately a $0.6 million tax benefit to correct for
rates used in prior periods for the proper graduated rate
structures. Management does not consider the impact of these errors
to be material to current or prior periods.
The tax
effect of temporary differences, which gave rise to significant portions of
deferred income tax assets and liabilities as of December 31, 2007 and 2006 are
as follows (in thousands):
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Accounts
receivable
|
$ | 2,234 | $ | 2,636 | ||||
|
Accrued
rebates
|
- | 2,386 | ||||||
|
Insurance
reserves
|
3,289 | 4,709 | ||||||
|
Warranty
reserves
|
13,775 | 14,131 | ||||||
|
Pension
accrual
|
1,999 | 3,292 | ||||||
|
Deferred
financing
|
2,900 | 2,580 | ||||||
|
Deferred
compensation
|
604 | 601 | ||||||
|
Plant
closure/relocation
|
1,677 | 2,851 | ||||||
|
Other
assets, net
|
3,460 | 3,995 | ||||||
|
Capital
loss carry-forwards and net loss
operating
carry-forwards
|
1,723 | 6,662 | ||||||
|
State
net operating loss carry-forwards
|
2,492 | - | ||||||
|
Valuation
allowance
|
(858 | ) | (138 | ) | ||||
|
Total
deferred tax assets
|
33,295 | 43,705 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment, net
|
(31,186 | ) | (39,835 | ) | ||||
|
Inventories
|
(1,421 | ) | (5,790 | ) | ||||
|
Intangible
assets, net
|
(77,384 | ) | (84,242 | ) | ||||
|
Unrealized
foreign currency gain
|
(1,023 | ) | (634 | ) | ||||
|
Other
liabilities, net
|
(635 | ) | (2,288 | ) | ||||
|
Total
deferred tax liabilities
|
(111,649 | ) | (132,789 | ) | ||||
|
Net
deferred tax liability
|
$ | (78,354 | ) | $ | (89,084 | ) | ||
During
2007 Ply Gem had approximately $0.4 million of unused capital loss
carry-forwards that expired. The Company had established a valuation
allowance for these carry-forwards. The Company has approximately
$4.9 million of federal net operating loss carry-forwards which can be used to
offset future taxable income. These carry-forwards will expire
between the years of 2017 and 2022 if not utilized. The Company has
approximately $2.5 million (net of federal benefit) of deferred tax assets
related to state NOL carry-forwards which can be used to offset future state
taxable income. The Company has established a valuation allowance of
approximately $0.9 million for these state NOL carry-forwards.
In 2005
pursuant to the American Jobs Creation Act of 2004, the Company repatriated
approximately $1.0 million (net of approximately $.1 million withholding) from
its Canadian subsidiary.
The
Company has not provided United States income taxes or foreign withholding taxes
on un-remitted foreign earnings in Canada. Not withstanding the provisions
within the American Jobs Creation Act of 2004, the company continues to consider
these amounts to be permanently invested. As of December 31, 2007,
accumulated foreign earnings in Canada were approximately $25.7
million.
The
Company adopted the provisions of Financial Accounting Standards Board,
("FASB"), interpretation No. 48, "Accounting for Uncertain Tax Positions - an
interpretation of FASB Statement No. 109" ("FIN 48") in the first quarter of
2007. At adoption the Company did not adjust the carrying
amount of its long-term contingency reserve of approximately $6.7 million, which
includes interest of approximately $0.1 million. Of this amount,
approximately $0.1 million, if recognized, would have an impact on the Company’s
effective tax rate. Throughout the year the Company took certain new
tax positions and accrued interest and the year to date reserve is now
approximately $7.3 million which includes interest of approximately $0.4
million. Of this amount, approximately $0.4 million, if recognized,
would have an impact on the Company’s effective tax rate.
As of
January 1, 2007, the Company had approximately $0.1 million of accrued
interest recorded related to uncertain tax positions. The Company has
elected to treat interest and penalties on uncertain tax positions as income tax
expense in its consolidated statement of operations. No accrual for tax
penalties was recorded upon adoption of FIN 48.
The
Company currently has no ongoing income tax examinations with the Internal
Revenue Service or other tax authorities. The Company’s federal and
state income tax filings for the years 2004, 2005 and 2006 remain subject to
examination by taxing authorities. Additionally, the Company has
federal net operating loss carry-forwards from years 1999 through 2003 that
could be subject to examination.
Following
is a rollforward of tax contingencies from January 1, 2007 through December 31,
2007. (in
thousands)
|
Balance
at January 1, 2007
|
$ | 6,566 | ||
|
Additions
based on tax positions related to current year
|
114 | |||
|
Additions
for tax positions of prior years
|
197 | |||
|
Reductions
for tax positions of prior years
|
- | |||
|
Settlement
or lapse of applicable statutes
|
- | |||
|
Balance
at December 31, 2007
|
$ | 6,877 |
12. STOCK-BASED
COMPENSATION
Stock Option
Plan
On
February 12, 2004, Ply Gem Investment Holdings, Inc.’s Board of Directors
adopted the Ply Gem Investment Holdings, Inc. 2004 Stock Option Plan (the
“Plan”) allowing for grants of options to purchase up to 148,050 shares of Ply
Gem Investment Holdings, Inc.’s common stock under nonqualified stock options or
incentive stock options and on November 30, 2004, increased the grants allowed
under the plan up to 184,065 shares. On February 24, 2006 in
connection with the Alenco Acquisition, a new holding company, Ply Gem Prime
Holdings, Inc., was formed pursuant to a merger involving Ply Gem Investment
Holdings, Inc. As a result, Ply Gem Prime Holdings, Inc. became the
sole shareholder of Ply Gem Investment Holdings, Inc., each outstanding share of
capital stock of Ply Gem Investment Holdings, Inc. was converted into a share of
a corresponding class of shares of the capital stock of Ply Gem Prime Holdings,
Inc. and Ply Gem Prime Holdings, Inc. assumed Ply Gem Investment Holdings,
Inc.’s 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, Inc. was converted on a 1:1 basis into a stock option and phantom unit
of Ply Gem Prime Holdings, Inc. Employees, directors and
consultants of Ply Gem Prime Holdings, Inc. or any of its majority-owned
subsidiaries are eligible for options, as specified in the Plan. Ply
Gem Prime Holdings, Inc.’s 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 five 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.
Effective
January 1, 2006 the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123(R), “Share-Based Payments.” The
Company elected the modified prospective transition method as permitted by SFAS
No. 123(R) and, accordingly, prior periods were not restated to reflect the
impact of SFAS No. 123(R). In accordance with SFAS No. 123(R), the
Company considered these options to be liability-classified awards based on the
fact that the employee has the ability to put shares back to the company in
certain circumstances, thus avoiding exposure to the risk and rewards of
ownership for a reasonable period of time. 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 30,
2006 began treating these stock options as equity-classified
awards. The impact of this modification was to reclassify
approximately $0.1 million from a liability account to Additional Paid in
Capital.
The value
of the options did not change due to the modification to the Stockholder’s
Agreement, and no additional compensation expense was recorded.
As a
result of adopting SFAS No. 123(R), a cumulative effect of accounting change for
approximately $0.09 million (net of a tax benefit of approximately $0.06
million) was recognized during the first quarter of 2006. Due to the
decrease in the value of the options, a reduction of compensation expense of
approximately $0.02 million and $0.08 million was recognized for the three month
and nine months ended September 30, 2006. The implementation of SFAS
No. 123(R) did not have any impact on cash flows during 2006.
The fair
value of each option was estimated on the date of grant and updated each
reporting period until the modification on September 29, 2006, using the
Black-Scholes option pricing method. The assumptions used in the
model are outlined in the following table:
|
As
of
September 30, 2006
|
As
of
January 1, 2006
|
|||||||
|
Weighted
average fair value of options granted
|
$ | 1.01 | $ | 3.47 | ||||
|
Weighted
average assumptions used:
|
||||||||
|
Expected
volatility
|
30 | % | 30 | % | ||||
|
Expected
term (in years)
|
5 | 5 | ||||||
|
Risk-free
interest rate
|
4.59 | % | 4.35 | % | ||||
|
Expected
dividend yield
|
0 | % | 0 | % | ||||
Due to
the fact that Ply Gem Prime Holding Inc.’s shares are not publicly traded, a
third-party valuation specialist was retained to assist in the determination of
the fair value of the shares, which was determined to be $10.00 per share and
$6.00 per share at December 31, 2005 and September 29, 2006,
respectively. The Company estimated its expected volatility through
the review of several market indicators, including peer companies.
Before
adopting FASB 123(R), the Company accounted for employee options in accordance
with APB 25. No stock-based employee compensation cost was reflected
in the Statement of Operations, as all options granted under the plan had an
exercise price at least equal to the fair value of the underlying common stock
on the date of grant. For the year ended December 31, 2005, the
Company presented pro forma net income of approximately $20.2 million, as if the
Company had applied the fair value recognition provisions of SFAS No.
123.
A summary of changes in
stock options outstanding during the year ended December 31, 2007 is presented
below:
|
Stock Options
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining Contractual Term
(Years)
|
||||||||||
|
Balance
at January 1, 2007
|
146,194 | $ | 10.00 | 7.88 | ||||||||
|
Granted
|
102,400 | $ | 78.27 | 9.48 | ||||||||
|
Forfeited
or expired
|
- | - | - | |||||||||
|
Balance
at December 31, 2007
|
248,594 | $ | 38.12 | 7.95 | ||||||||
As of
December 31, 2007, no options have vested. At December 31, 2007, the
Company had approximately $0.1 million of total unrecognized compensation
expense that will be recognized over the weighted average period of 2.95
years.
Other Share-Based
compensation
Upon
completion of the acquisitions of Ply Gem Industries, Inc. (the “Ply Gem
Acquisition”) and MWM Holding, Inc. (the “MW Acquisition”), certain members of
management contributed their investments in predecessor companies in exchange
for phantom common stock units in Ply Gem Investment Holdings, Inc., which were
governed by the Ply Gem Prime Investment Holdings, Inc. Phantom Stock
Plan. As described above, in connection with the Alenco Acquisition,
Ply Gem Prime Holdings, Inc. assumed Ply Gem Investment Holdings, Inc.’s
obligations under the Phantom Plan, and each outstanding phantom unit of Ply Gem
Investment Holdings, Inc. was converted on a 1:1 basis into a phantom unit of
Ply Gem Prime Holdings, Inc. (References to the “Phantom Plan” in
this section refer to the predecessor and amended versions of such
plan.)
Under the
Phantom Plan (until it, and the units outstanding thereunder, were subsequently
amended, as described below), each participant’s interest in the plan was
recorded in a bookkeeping account, and each account was deemed invested in Ply
Gem Prime Holdings, Inc.’s stock. No stock was initially issued under
the Phantom Plan, but, upon liquidation and payment of a participant’s account
under the Phantom Plan, the value of the account generally was to be paid to the
participant either in shares of Ply Gem Prime Holdings, Inc.’s stock having a
fair value equal to the account balance or in cash, at the discretion of Ply Gem
Prime Holdings, Inc.
Certain
terms of the Phantom Plan were governed by the Ply Gem Prime Holdings, Inc.’s
Stockholders’ Agreement (and the predecessor agreement for Ply Gem Investment
Holdings, Inc.), which gave the participant put rights in certain circumstances
to put the stock back to Ply Gem Prime Holdings, Inc. at a price determined
using predefined formulas contained in the Stockholders’ Agreement and the
Phantom Plan. The Stockholders’ Agreement and the Phantom Plan
contained two separate put right price formulas that were used to determine the
participants’ account balances. The determination of which put right
price formula was applicable to each of the participants’ phantom common stock
awards was based upon the participant’s reaching certain vesting requirements
described in the Stockholders’ Agreement. Based on the above, the
Company accounted for these awards of phantom common shares under the modified
prospective transition method of SFAS No. 123(R) as liability-classified
awards.
On
September 25, 2006, the Company amended the Phantom Plan, so that each award
under the Phantom plan was converted into a cash-denominated account earning
interest through a fixed date. Phantom common shares valued at
approximately $1.7 million were paid out, and approximately $1.2 million of
common stock was purchased by the holders of the phantom common
shares. Approximately $1.7 million was recognized as compensation
expense during the third quarter of 2006 as a result of the pay out of Phantom
common shares, and approximately $0.9 million was recognized as compensation
expense during the third quarter of 2006 as a result of the pay out of Phantom
preferred shares.
A summary
of changes in phantom common stock units outstanding during the year ended
December 31, 2006 is presented below:
|
Phantom
Common
Stock
Units
|
||||
|
Balance
at January 1, 2006
|
179,915 | |||
|
Repurchased
|
(13,590 | ) | ||
|
Converted
to cash account
|
(166,325 | ) | ||
|
Balance
at December 31, 2006
|
- | |||
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, Inc. in exchange for shares of Ply Gem Prime Holdings, Inc.’s
common stock. (As described above, investments in connection with the
Ply Gem Acquisition and the MW Acquisition were in Ply Gem Investment Holdings,
Inc. common stock, which stock was later converted into Ply Gem Prime Holdings,
Inc. common stock in connection with the Alenco
Acquisition.) Management’s shares of common stock are governed by the
Ply Gem Prime Holdings, Inc. Stockholders’ Agreement which gives the management
participants put rights in certain circumstances to put the stock back to Ply
Gem Prime Holdings, Inc. 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
common stock shares is based upon the participants reaching certain vesting
requirements which are described in the Stockholders’ Agreement. The
common shares 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 common shares under the modified transition method
of SFAS No. 123(R) as liability-classified awards.
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, will treat 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, 2007
|
765,008 | |||
|
Shares
issued
|
11,250 | |||
|
Shares
repurchased
|
(100,500 | ) | ||
|
Balance
at December 31, 2007
|
675,758 | |||
13. SEGMENT
INFORMATION
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS 131) requires companies to
report certain information about operating segments in their financial
statements and established standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 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. Operating
segments meeting certain aggregation criteria may be combined into one
reportable segment for disclosure purposes. Comparative information for prior
years is presented to conform to our current organizational
structure.
The
Company has two reportable segments: 1) vinyl siding, fencing, railing, and
decking 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 our reporting
segments. Such items include interest, legal costs, corporate
payroll, and unallocated finance and accounting expenses. Unallocated corporate
assets include cash and certain receivables. Interest expense is
presented net of investment income.
Following
is a summary of the Company’s segment information:
|
For
the Year
|
For
the Year
|
For
the Year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Amounts
in thousands)
|
||||||||||||
|
Net
Sales
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | 828,124 | $ | 502,610 | $ | 390,925 | ||||||
|
Windows
and Doors
|
535,422 | 551,858 | 447,943 | |||||||||
| $ | 1,363,546 | $ | 1,054,468 | $ | 838,868 | |||||||
|
Operating
Earnings
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | 74,560 | $ | 44,060 | $ | 44,892 | ||||||
|
Windows
and Doors
|
36,134 | 50,524 | 47,699 | |||||||||
|
Unallocated
|
(7,045 | ) | (9,877 | ) | (3,798 | ) | ||||||
| $ | 103,649 | $ | 84,707 | $ | 88,793 | |||||||
|
Interest
expense, net
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | (110 | ) | $ | (168 | ) | $ | 296 | ||||
|
Windows
and Doors
|
1,673 | 1,652 | 1,804 | |||||||||
|
Unallocated
|
95,229 | 69,529 | 54,827 | |||||||||
| $ | 96,792 | $ | 71,013 | $ | 56,927 | |||||||
|
Depreciation
and amortization
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | 33,858 | $ | 16,259 | $ | 12,552 | ||||||
|
Windows
and Doors
|
20,168 | 17,516 | 13,247 | |||||||||
|
Unallocated
|
41 | 41 | 326 | |||||||||
| $ | 54,067 | $ | 33,816 | $ | 26,125 | |||||||
|
Income
tax expense
|
||||||||||||
|
Unallocated
|
$ | 4,002 | $ | 3,502 | $ | 12,651 | ||||||
|
Capital
expenditures
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | 11,260 | $ | 4,032 | $ | 4,948 | ||||||
|
Windows
and Doors
|
8,757 | 16,286 | 9,794 | |||||||||
|
Unallocated
|
- | - | - | |||||||||
| $ | 20,017 | $ | 20,318 | $ | 14,742 | |||||||
|
Total
assets
|
||||||||||||
|
Siding,
Fencing, Railing and Decking
|
$ | 826,480 | $ | 885,423 | ||||||||
|
Windows
and Doors
|
717,740 | 664,808 | ||||||||||
|
Unallocated
|
81,387 | 99,490 | ||||||||||
| $ | 1,625,607 | $ | 1,649,721 | |||||||||
Our
Canadian subsidiary, which had sales of approximately $88.0 million for the year
ended December 31, 2007, represents a majority of our sales to foreign
customers. Other subsidiaries’ sales outside the United States are
less than 1% of our total sales.
14. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
The
following is a summary of the quarterly results of operations.
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
December
31,
|
September
29,
|
June
30,
|
March
31,
|
|||||||||||||
|
2007
|
2007
|
2007
|
2007
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 317,902 | $ | 369,675 | $ | 390,695 | $ | 285,274 | ||||||||
|
Gross
Profit
|
57,400 | 85,650 | 97,799 | 47,190 | ||||||||||||
|
Net
income (loss)
|
(12,412 | ) | 11,620 | 17,270 | (10,864 | ) | ||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
|
December
31,
|
September
30,
|
July
1,
|
April
1,
|
|||||||||||||
|
2006
|
2006
|
2006
|
2006
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Net
sales
|
$ | 292,988 | $ | 257,058 | $ | 288,111 | $ | 216,311 | ||||||||
|
Gross
Profit
|
50,240 | 60,687 | 68,860 | 43,263 | ||||||||||||
|
Net
income (loss)
|
(9,773 | ) | 6,532 | 10,878 | (1,916 | ) | ||||||||||
Gross
profit and net loss for the quarter ended December 31, 2007 includes an
adjustment to correct errors in the carrying value of consignment inventory that
was previously expensed to cost of goods sold in prior periods. The
impact of this adjustment is to increase pretax income and gross margin by
approximately $1.0 million and to decrease the net loss for the quarter by
approximately $0.6 million. The impact of this adjustment is not
material to previously reported periods.
15. GUARANTOR/NON-GUARANTOR
The Senior Secured Notes and
Senior Subordinated Notes were both 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, 2007 and December 31, 2006, for the
years ended December 31, 2007, 2006, and 2005. The non-guarantor information
presented represents our Canadian subsidiary.
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 1,275,571 | $ | 87,975 | $ | - | $ | 1,363,546 | ||||||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 1,016,986 | 58,521 | - | 1,075,507 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 7,045 | 140,990 | 14,574 | - | 162,609 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | (12,762 | ) | 12,762 | - | - | - | |||||||||||||||||
|
Intangible
asset impairment
|
- | - | 4,150 | - | - | 4,150 | ||||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 17,631 | - | - | 17,631 | ||||||||||||||||||
|
Total
Costs and Expenses
|
- | (5,717 | ) | 1,192,519 | 73,095 | - | 1,259,897 | |||||||||||||||||
|
Operating
earnings
|
- | 5,717 | 83,052 | 14,880 | - | 103,649 | ||||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 3,961 | - | 3,961 | ||||||||||||||||||
|
Intercompany
interest
|
- | 91,418 | (91,039 | ) | (379 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (96,356 | ) | (1 | ) | (2,139 | ) | - | (98,496 | ) | ||||||||||||||
|
Investment
income
|
- | 1,127 | 388 | 189 | - | 1,704 | ||||||||||||||||||
|
Other
expense
|
- | (1,202 | ) | - | - | - | (1,202 | ) | ||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | 704 | (7,600 | ) | 16,512 | - | 9,616 | |||||||||||||||||
|
Equity
in subsidiaries' income
|
5,614 | 5,203 | - | - | (10,817 | ) | - | |||||||||||||||||
|
Income
before provision (benefit)
|
||||||||||||||||||||||||
|
for
income taxes
|
5,614 | 5,907 | (7,600 | ) | 16,512 | (10,817 | ) | 9,616 | ||||||||||||||||
|
Provision
(benefit) for income taxes
|
- | 293 | (1,743 | ) | 5,452 | - | 4,002 | |||||||||||||||||
|
Net
income (loss)
|
$ | 5,614 | $ | 5,614 | $ | (5,857 | ) | $ | 11,060 | $ | (10,817 | ) | $ | 5,614 | ||||||||||
|
Other
Comprehensive Income:
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | 5,658 | - | 5,658 | ||||||||||||||||||
|
Minimum
pension liability for actuarial gain
|
- | 73 | 888 | - | - | 961 | ||||||||||||||||||
|
Total
Comprehensive Income
|
$ | 5,614 | $ | 5,687 | $ | (4,969 | ) | $ | 16,718 | $ | (10,817 | ) | $ | 12,233 | ||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2006
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 985,335 | $ | 69,133 | $ | - | $ | 1,054,468 | ||||||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 784,140 | 47,278 | - | 831,418 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 9,877 | 103,829 | 11,913 | - | 125,619 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | (9,118 | ) | 9,118 | - | - | - | |||||||||||||||||
|
Intangible
asset impairment
|
- | - | 782 | - | - | 782 | ||||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 11,942 | - | - | 11,942 | ||||||||||||||||||
|
Total
Costs and Expenses
|
- | 759 | 909,811 | 59,191 | - | 969,761 | ||||||||||||||||||
|
Operating
earnings
|
- | (759 | ) | 75,524 | 9,942 | - | 84,707 | |||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 77 | - | 77 | ||||||||||||||||||
|
Intercompany
interest
|
- | 66,987 | (66,222 | ) | (765 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (70,316 | ) | - | (1,902 | ) | - | (72,218 | ) | |||||||||||||||
|
Investment
income
|
- | 787 | 261 | 157 | - | 1,205 | ||||||||||||||||||
|
Other
expense
|
- | (4,462 | ) | - | - | - | (4,462 | ) | ||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (7,763 | ) | 9,563 | 7,509 | - | 9,309 | |||||||||||||||||
|
Equity
in subsidiaries' income
|
5,721 | 10,643 | - | - | (16,364 | ) | - | |||||||||||||||||
|
Income
before income taxes and
|
||||||||||||||||||||||||
|
cumulative
effect of accounting change
|
5,721 | 2,880 | 9,563 | 7,509 | (16,364 | ) | 9,309 | |||||||||||||||||
|
Provision
(benefit) for income taxes
|
- | (2,927 | ) | 3,951 | 2,478 | - | 3,502 | |||||||||||||||||
|
Income
before cumulative
|
||||||||||||||||||||||||
|
effect
of accounting change
|
5,721 | 5,807 | 5,612 | 5,031 | (16,364 | ) | 5,807 | |||||||||||||||||
|
Cumulative
effect of accounting change
|
- | (86 | ) | - | - | - | (86 | ) | ||||||||||||||||
|
Net
income
|
$ | 5,721 | $ | 5,721 | $ | 5,612 | $ | 5,031 | $ | (16,364 | ) | $ | 5,721 | |||||||||||
|
Other
Comprehensive Income:
|
||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
(347)
|
-
|
(347)
|
|
Minimum
pension liability
|
-
|
362
|
135
|
-
|
-
|
497
|
|
Total
Comprehensive Income
|
$ 5,721
|
$ 6,083
|
$ 5,747
|
$ 4,684
|
$ (16,364)
|
$ 5,871
|
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2005
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 778,927 | $ | 59,941 | $ | - | $ | 838,868 | ||||||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 606,886 | 40,690 | - | 647,576 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 6,298 | 76,297 | 10,143 | - | 92,738 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | (7,795 | ) | 7,795 | - | - | - | |||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 9,761 | - | - | 9,761 | ||||||||||||||||||
|
Total
Costs and Expenses
|
- | (1,497 | ) | 700,739 | 50,833 | - | 750,075 | |||||||||||||||||
|
Operating
earnings
|
- | 1,497 | 78,188 | 9,108 | - | 88,793 | ||||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 1,010 | - | 1,010 | ||||||||||||||||||
|
Intercompany
interest
|
- | 49,815 | (48,790 | ) | (1,025 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (55,199 | ) | (999 | ) | (1,459 | ) | - | (57,657 | ) | ||||||||||||||
|
Investment
income
|
- | 372 | 299 | 59 | - | 730 | ||||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (3,515 | ) | 28,698 | 7,693 | - | 32,876 | |||||||||||||||||
|
Equity
in subsidiaries' income
|
20,225 | 22,334 | - | - | (42,559 | ) | - | |||||||||||||||||
|
Income
before provision (benefit)
|
||||||||||||||||||||||||
|
for
income taxes
|
20,225 | 18,819 | 28,698 | 7,693 | (42,559 | ) | 32,876 | |||||||||||||||||
|
Provision
(benefit)for income taxes
|
- | (1,406 | ) | 11,551 | 2,506 | - | 12,651 | |||||||||||||||||
|
Net
income
|
$ | 20,225 | $ | 20,225 | $ | 17,147 | $ | 5,187 | $ | (42,559 | ) | $ | 20,225 | |||||||||||
|
Other
Comprehensive Income:
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | 1,044 | - | 1,044 | ||||||||||||||||||
|
Minimum
pension liability
|
- | (359 | ) | (837 | ) | - | - | (1,196 | ) | |||||||||||||||
|
Total
Comprehensive Income
|
$ | 20,225 | $ | 19,866 | $ | 16,310 | $ | 6,231 | $ | (42,559 | ) | $ | 20,073 | |||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | - | $ | 40,647 | $ | 18,376 | $ | 6,184 | $ | - | $ | 65,207 | ||||||||||||
|
Accounts
receivable, net
|
- | - | 100,221 | 11,432 | - | 111,653 | ||||||||||||||||||
|
Inventories:
|
||||||||||||||||||||||||
|
Raw
materials
|
- | - | 55,506 | 4,497 | - | 60,003 | ||||||||||||||||||
|
Work
in process
|
- | - | 21,987 | 1,084 | - | 23,071 | ||||||||||||||||||
|
Finished
goods
|
- | - | 42,296 | 2,912 | - | 45,208 | ||||||||||||||||||
|
Total
inventory
|
- | - | 119,789 | 8,493 | - | 128,282 | ||||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 3,451 | 12,622 | 389 | - | 16,462 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 12,797 | - | - | 12,797 | ||||||||||||||||||
|
Total
current assets
|
- | 44,098 | 263,805 | 26,498 | - | 334,401 | ||||||||||||||||||
|
Investments
in subsidiaries
|
239,544 | 115,861 | - | - | (355,405 | ) | - | |||||||||||||||||
|
Property
and Equipment, at cost:
|
||||||||||||||||||||||||
|
Land
|
- | - | 3,840 | 177 | - | 4,017 | ||||||||||||||||||
|
Buildings
and improvements
|
- | 106 | 36,865 | 956 | - | 37,927 | ||||||||||||||||||
|
Machinery
and equipment
|
- | 49 | 234,750 | 6,122 | - | 240,921 | ||||||||||||||||||
| - | 155 | 275,455 | 7,255 | - | 282,865 | |||||||||||||||||||
|
Less
accumulated depreciation
|
- | (126 | ) | (81,417 | ) | (2,326 | ) | - | (83,869 | ) | ||||||||||||||
|
Total
property and equipment, net
|
- | 29 | 194,038 | 4,929 | - | 198,996 | ||||||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||||||
|
Goodwill
|
- | - | 789,575 | 46,245 | - | 835,820 | ||||||||||||||||||
|
Intangible
assets, net
|
- | - | 213,257 | - | - | 213,257 | ||||||||||||||||||
|
Intercompany
note receivable
|
- | 1,088,999 | - | - | (1,088,999 | ) | - | |||||||||||||||||
|
Other
|
- | 37,932 | 5,201 | - | - | 43,133 | ||||||||||||||||||
|
Total
other assets
|
- | 1,126,931 | 1,008,033 | 46,245 | (1,088,999 | ) | 1,092,210 | |||||||||||||||||
| $ | 239,544 | $ | 1,286,919 | $ | 1,465,876 | $ | 77,672 | $ | (1,444,404 | ) | $ | 1,625,607 | ||||||||||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | 6,623 | $ | - | $ | 250 | $ | - | $ | 6,873 | ||||||||||||
|
Accounts
payable
|
- | 547 | 90,317 | 5,392 | - | 96,256 | ||||||||||||||||||
|
Accrued
expenses and taxes
|
- | 17,787 | 68,787 | 6,842 | - | 93,416 | ||||||||||||||||||
|
Total
current liabilities
|
- | 24,957 | 159,104 | 12,484 | - | 196,545 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 86,866 | 4,285 | - | 91,151 | ||||||||||||||||||
|
Intercompany
note payable
|
- | - | 1,088,999 | - | (1,088,999 | ) | - | |||||||||||||||||
|
Other
long term liabilities
|
- | 11,508 | 54,473 | 1,163 | - | 67,144 | ||||||||||||||||||
|
Long-term
debt, less current
|
||||||||||||||||||||||||
|
maturities
|
- | 1,010,910 | - | 20,313 | - | 1,031,223 | ||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||
|
Stockholder's
Equity:
|
||||||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Common
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Additional
paid-in-capital
|
180,667 | 180,667 | 26,812 | 5,572 | (213,051 | ) | 180,667 | |||||||||||||||||
|
Retained
earnings
|
49,242 | 49,242 | 49,622 | 24,942 | (123,806 | ) | 49,242 | |||||||||||||||||
|
Accumulated
other
|
||||||||||||||||||||||||
|
comprehensive
income (loss)
|
9,635 | 9,635 | - | 8,913 | (18,548 | ) | 9,635 | |||||||||||||||||
| $ | 239,544 | $ | 1,286,919 | $ | 1,465,876 | $ | 77,672 | $ | (1,444,404 | ) | $ | 1,625,607 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of December 31, 2006
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | - | $ | 36,532 | $ | 13,419 | $ | 3,323 | $ | - | $ | 53,274 | ||||||||||||
|
Accounts
receivable, net
|
- | - | 122,051 | 8,744 | - | 130,795 | ||||||||||||||||||
|
Inventories:
|
||||||||||||||||||||||||
|
Raw
materials
|
- | - | 46,465 | 4,471 | - | 50,936 | ||||||||||||||||||
|
Work
in process
|
- | - | 24,400 | 939 | - | 25,339 | ||||||||||||||||||
|
Finished
goods
|
- | - | 49,832 | 2,049 | - | 51,881 | ||||||||||||||||||
|
Total
inventory
|
- | - | 120,697 | 7,459 | - | 128,156 | ||||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 11,157 | 9,291 | 425 | - | 20,873 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 18,770 | - | - | 18,770 | ||||||||||||||||||
|
Total
current assets
|
- | 47,689 | 284,228 | 19,951 | - | 351,868 | ||||||||||||||||||
|
Investments
in subsidiaries
|
227,716 | 139,930 | - | - | (367,646 | ) | - | |||||||||||||||||
|
Property
and Equipment, at cost:
|
||||||||||||||||||||||||
|
Land
|
- | - | 3,840 | 150 | - | 3,990 | ||||||||||||||||||
|
Buildings
and improvements
|
- | 106 | 34,062 | 721 | - | 34,889 | ||||||||||||||||||
|
Machinery
and equipment
|
- | 49 | 211,115 | 4,391 | - | 215,555 | ||||||||||||||||||
| - | 155 | 249,017 | 5,262 | - | 254,434 | |||||||||||||||||||
|
Less
accumulated depreciation
|
- | (85 | ) | (46,153 | ) | (1,359 | ) | - | (47,597 | ) | ||||||||||||||
|
Total
property and equipment, net
|
- | 70 | 202,864 | 3,903 | - | 206,837 | ||||||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||||||
|
Goodwill
|
- | - | 770,940 | 40,345 | - | 811,285 | ||||||||||||||||||
|
Intangible
assets, net
|
- | - | 232,833 | - | - | 232,833 | ||||||||||||||||||
|
Intercompany
note receivable
|
- | 1,058,346 | - | - | (1,058,346 | ) | - | |||||||||||||||||
|
Other
|
- | 40,358 | 6,540 | - | - | 46,898 | ||||||||||||||||||
|
Total
other assets
|
- | 1,098,704 | 1,010,313 | 40,345 | (1,058,346 | ) | 1,091,016 | |||||||||||||||||
| $ | 227,716 | $ | 1,286,393 | $ | 1,497,405 | $ | 64,199 | $ | (1,425,992 | ) | $ | 1,649,721 | ||||||||||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | 5,620 | $ | - | $ | 250 | $ | - | $ | 5,870 | ||||||||||||
|
Accounts
payable
|
- | 484 | 90,356 | 4,728 | - | 95,568 | ||||||||||||||||||
|
Accrued
expenses and taxes
|
- | 19,545 | 90,319 | 3,663 | - | 113,527 | ||||||||||||||||||
|
Total
current liabilities
|
- | 25,649 | 180,675 | 8,641 | - | 214,965 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 105,729 | 2,125 | - | 107,854 | ||||||||||||||||||
|
Intercompany
note payable
|
- | - | 1,054,000 | 4,346 | (1,058,346 | ) | - | |||||||||||||||||
|
Other
long term liabilities
|
- | 14,697 | 40,661 | 934 | - | 56,292 | ||||||||||||||||||
|
Long-term
debt, less current
|
||||||||||||||||||||||||
|
maturities
|
- | 1,018,331 | - | 24,563 | - | 1,042,894 | ||||||||||||||||||
|
Stockholder's
Equity:
|
||||||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Common
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Additional
paid-in-capital
|
181,792 | 181,792 | 66,718 | 6,440 | (254,950 | ) | 181,792 | |||||||||||||||||
|
Retained
earnings
|
43, 628 | 43,628 | 49,622 | 13,895 | (107,145 | ) | 43,628 | |||||||||||||||||
|
Accumulated
other
|
||||||||||||||||||||||||
|
comprehensive
income (loss)
|
2,296 | 2,296 | - | 3,255 | (5,551 | ) | 2,296 | |||||||||||||||||
| $ | 227,716 | $ | 1,286,393 | $ | 1,497,405 | $ | 64,199 | $ | (1,425,992 | ) | $ | 1,649,721 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Cash
flows from operating
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Net
income (loss)
|
$ | 5,614 | $ | 5,614 | $ | (5,857 | ) | $ | 11,060 | $ | (10,817 | ) | $ | 5,614 | ||||||||||
|
Adjustments
to reconcile net
|
||||||||||||||||||||||||
|
income
(loss) to cash provided by
|
||||||||||||||||||||||||
|
(used
in) operating activities:
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
||||||||||||||||||||||||
|
expense
|
- | 41 | 53,312 | 714 | - | 54,067 | ||||||||||||||||||
|
Fair
value premium on purchased inventory
|
- | - | 1,289 | - | - | 1,289 | ||||||||||||||||||
|
Non-cash
interest expense, net
|
- | 6,941 | - | - | - | 6,941 | ||||||||||||||||||
|
Gain
on foreign currency transactions
|
- | - | - | (3,961 | ) | - | (3,961 | ) | ||||||||||||||||
|
Loss
on sale of assets
|
- | - | 356 | - | - | 356 | ||||||||||||||||||
|
Intangible
asset impairment
|
- | - | 4,150 | - | - | 4,150 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | (2,488 | ) | 1,568 | - | (920 | ) | ||||||||||||||||
|
Equity
in subsidiaries' net income
|
(5,614 | ) | (5,203 | ) | - | - | 10,817 | - | ||||||||||||||||
|
Changes
in operating Assets and
|
||||||||||||||||||||||||
|
liabilities:
|
||||||||||||||||||||||||
|
Accounts
receivable, net
|
- | - | 33,665 | (1,011 | ) | - | 32,654 | |||||||||||||||||
|
Inventories
|
- | - | 6,283 | 240 | - | 6,523 | ||||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 4,554 | 2,445 | 128 | - | 7,127 | ||||||||||||||||||
|
Accounts
payable
|
- | 60 | (8,283 | ) | (150 | ) | - | (8,373 | ) | |||||||||||||||
|
Accrued
expenses and taxes
|
- | (1,844 | ) | (23,974 | ) | 2,282 | - | (23,536 | ) | |||||||||||||||
|
Other
|
- | 45 | (199 | ) | 768 | - | 614 | |||||||||||||||||
|
Net
cash provided by
|
||||||||||||||||||||||||
|
operating
activities
|
- | 10,208 | 60,699 | 11,638 | - | 82,545 | ||||||||||||||||||
|
Cash
flows from investing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | - | (18,973 | ) | (1,044 | ) | - | (20,017 | ) | |||||||||||||||
|
Proceeds
from sale of assets
|
- | - | 63 | - | - | 63 | ||||||||||||||||||
|
Acquisitions,
net of cash acquired
|
- | (36,453 | ) | - | - | - | (36,453 | ) | ||||||||||||||||
|
Net
cash used in investing
|
||||||||||||||||||||||||
|
activities
|
- | (36,453 | ) | (18,910 | ) | (1,044 | ) | - | (56,407 | ) | ||||||||||||||
|
Cash
flows from financing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Proceeds
from long-term debt
|
- | - | - | - | - | - | ||||||||||||||||||
|
Proceeds
from revolver borrowings
|
- | 50,000 | - | - | - | 50,000 | ||||||||||||||||||
|
Proceeds
from intercompany
|
- | |||||||||||||||||||||||
|
investment
|
- | 41,178 | (36,832 | ) | (4,346 | ) | - | - | ||||||||||||||||
|
Payments
on long-term debt
|
- | (6,373 | ) | - | (4,250 | ) | - | (10,623 | ) | |||||||||||||||
|
Payments
on revolver borrowings
|
- | (50,000 | ) | - | - | - | (50,000 | ) | ||||||||||||||||
|
Debt
issuance costs
|
- | (2,100 | ) | - | - | - | (2,100 | ) | ||||||||||||||||
|
Equity
contribution
|
- | 900 | - | - | - | 900 | ||||||||||||||||||
|
Equity
repurchase
|
- | (3,245 | ) | - | - | - | (3,245 | ) | ||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities
|
- | 30,360 | (36,832 | ) | (8,596 | ) | - | (15,068 | ) | |||||||||||||||
|
Impact
of exchange rate movement
|
||||||||||||||||||||||||
|
on
cash
|
- | - | - | 863 | - | 863 | ||||||||||||||||||
|
Net
increase in cash
|
||||||||||||||||||||||||
|
and
cash equivalents
|
- | 4,115 | 4,957 | 2,861 | - | 11,933 | ||||||||||||||||||
|
Cash
and cash equivalents at the
|
||||||||||||||||||||||||
|
beginning
of the period
|
- | 36,532 | 13,419 | 3,323 | - | 53,274 | ||||||||||||||||||
|
Cash
and cash equivalents at the end
|
||||||||||||||||||||||||
|
of
the period
|
$ | - | $ | 40,647 | $ | 18,376 | $ | 6,184 | $ | - | $ | 65,207 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2006
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Cash
flows from operating
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Net
income
|
$ | 5,721 | $ | 5,721 | $ | 5,612 | $ | 5,031 | $ | (16,364 | ) | $ | 5,721 | |||||||||||
|
Adjustments
to reconcile net
|
||||||||||||||||||||||||
|
income
(loss) to cash provided by
|
||||||||||||||||||||||||
|
(used
in) operating activities:
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
||||||||||||||||||||||||
|
expense
|
- | 41 | 33,190 | 585 | - | 33,816 | ||||||||||||||||||
|
Fair
value premium on purchased inventory
|
- | - | 3,266 | - | - | 3,266 | ||||||||||||||||||
|
Non-cash
interest expense, net
|
- | 5,571 | - | - | - | 5,571 | ||||||||||||||||||
|
Gain
on foreign currency transactions
|
- | - | - | (77 | ) | - | (77 | ) | ||||||||||||||||
|
Intangible
asset impairment
|
- | - | 782 | - | - | 782 | ||||||||||||||||||
|
Loss
on sale of building
|
- | - | 840 | - | - | 840 | ||||||||||||||||||
|
Other
non-cash items
|
- | 1,094 | 678 | - | - | 1,772 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | (2,281 | ) | 904 | - | (1,377 | ) | ||||||||||||||||
|
Equity
in subsidiaries' net income
|
(5,721 | ) | (10,643 | ) | - | - | 16,364 | - | ||||||||||||||||
|
Changes
in operating Assets and
|
||||||||||||||||||||||||
|
liabilities:
|
||||||||||||||||||||||||
|
Accounts
receivable, net
|
- | - | 27,414 | (2,150 | ) | - | 25,264 | |||||||||||||||||
|
Inventories
|
- | - | 11,197 | (1,232 | ) | - | 9,965 | |||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 221 | (1,194 | ) | (8 | ) | - | (981 | ) | |||||||||||||||
|
Accounts
payable
|
- | - | (34,988 | ) | 1,390 | - | (33,598 | ) | ||||||||||||||||
|
Accrued
expenses and taxes
|
- | 55 | 5,204 | 1,573 | - | 6,511 | ||||||||||||||||||
|
Other
|
- | 1,221 | (664 | ) | (154 | ) | - | 403 | ||||||||||||||||
|
Net
cash provided by
|
||||||||||||||||||||||||
|
operating
activities
|
- | 3,281 | 48,735 | 5,862 | - | 57,878 | ||||||||||||||||||
|
Cash
flows used in investing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | - | (18,942 | ) | (1,376 | ) | - | (20,318 | ) | |||||||||||||||
|
Proceeds
from sale of building
|
- | - | 4,536 | - | - | 4,536 | ||||||||||||||||||
|
Acquisitions,
net of cash acquired
|
- | (416,386 | ) | - | - | - | (416,386 | ) | ||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
investing
activities
|
- | (416,386 | ) | (14,406 | ) | (1,376 | ) | - | (432,168 | ) | ||||||||||||||
|
Cash
flows provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities:
|
||||||||||||||||||||||||
|
Proceeds
from long-term debt
|
- | 414,320 | - | 488 | - | 414,808 | ||||||||||||||||||
|
Proceeds
from revolver borrowings
|
- | 15,000 | - | - | - | 15,000 | ||||||||||||||||||
|
Proceeds
from intercompany
|
- | |||||||||||||||||||||||
|
investment
|
- | 35,040 | (30,040 | ) | (5,000 | ) | - | - | ||||||||||||||||
|
Payments
on long-term debt
|
- | (3,279 | ) | - | (188 | ) | - | (3,467 | ) | |||||||||||||||
|
Payments
on revolver borrowings
|
- | (15,000 | ) | - | - | - | (15,000 | ) | ||||||||||||||||
|
Debt
issuance costs
|
- | (9,534 | ) | - | - | - | (9,534 | ) | ||||||||||||||||
|
Equity
contribution
|
- | 3,589 | - | - | - | 3,589 | ||||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities
|
- | 440,136 | (30,040 | ) | (4,700 | ) | - | 405,396 | ||||||||||||||||
|
Impact
of exchange rate movement
|
||||||||||||||||||||||||
|
on
cash
|
- | - | - | (5 | ) | - | (5 | ) | ||||||||||||||||
|
Net
increase (decrease) in cash
|
||||||||||||||||||||||||
|
and
cash equivalents
|
- | 27,031 | 4,289 | (219 | ) | - | 31,101 | |||||||||||||||||
|
Cash
and cash equivalents at the
|
||||||||||||||||||||||||
|
beginning
of the period
|
- | 9,501 | 9,130 | 3,542 | - | 22,173 | ||||||||||||||||||
|
Cash
and cash equivalents at the end
|
||||||||||||||||||||||||
|
of
the period
|
$ | - | $ | 36,532 | $ | 13,419 | $ | 3,323 | $ | - | $ | 53,274 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the year ended December 31, 2005
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
|||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Cash
flows from operating
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Net
income
|
$ | 20,225 | $ | 20,225 | $ | 17,147 | $ | 5,187 | $ | (42,559 | ) | $ | 20,225 | |||||||||||
|
Adjustments
to reconcile net
|
||||||||||||||||||||||||
|
income
(loss) to cash provided by
|
||||||||||||||||||||||||
|
(used
in) operating activities:
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
||||||||||||||||||||||||
|
expense
|
- | 29 | 25,616 | 480 | - | 26,125 | ||||||||||||||||||
|
Non-cash
interest expense, net
|
- | 5,079 | - | - | - | 5,079 | ||||||||||||||||||
|
Gain
on foreign currency transactions
|
- | - | - | (1,010 | ) | - | (1,010 | ) | ||||||||||||||||
|
Deferred
income taxes
|
- | - | 1,489 | 296 | - | 1,785 | ||||||||||||||||||
|
Equity
in subsidiaries' net income
|
(20,225 | ) | (22,334 | ) | - | - | 42,559 | - | ||||||||||||||||
|
Changes
in operating Assets and
|
||||||||||||||||||||||||
|
liabilities:
|
||||||||||||||||||||||||
|
Accounts
receivable, net
|
- | - | (3,859 | ) | (1,039 | ) | - | (4,898 | ) | |||||||||||||||
|
Inventories
|
- | - | 7,531 | (672 | ) | - | 6,859 | |||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | (5,425 | ) | 5,517 | 303 | - | 395 | |||||||||||||||||
|
Accounts
payable
|
- | (101 | ) | 6,184 | 1,512 | - | 7,595 | |||||||||||||||||
|
Accrued
expenses and taxes
|
- | 3,800 | 647 | (1,732 | ) | - | 2,715 | |||||||||||||||||
|
Other
|
- | (329 | ) | (859 | ) | 228 | - | (960 | ) | |||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
operating
activities
|
- | 944 | 59,413 | 3,553 | - | 63,910 | ||||||||||||||||||
|
Cash
flows used in investing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | - | (13,752 | ) | (990 | ) | - | (14,742 | ) | |||||||||||||||
|
Acquisitions,
net of cash acquired
|
- | (409 | ) | - | 789 | - | 380 | |||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
investing
activities
|
- | (409 | ) | (13,752 | ) | (201 | ) | - | (14,362 | ) | ||||||||||||||
|
Cash
flows provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities:
|
||||||||||||||||||||||||
|
Proceeds
from long-term debt
|
- | - | - | - | - | - | ||||||||||||||||||
|
Proceeds
from revolver borrowings
|
- | 35,500 | - | - | - | 35,500 | ||||||||||||||||||
|
Proceeds
from intercompany
|
||||||||||||||||||||||||
|
investment
|
- | 34,114 | (33,014 | ) | (1,100 | ) | - | - | ||||||||||||||||
|
Payments
on long-term debt
|
- | (27,105 | ) | (7,000 | ) | (263 | ) | - | (34,368 | ) | ||||||||||||||
|
Payments
on revolver borrowings
|
- | (35,500 | ) | - | - | - | (35,500 | ) | ||||||||||||||||
|
Equity
contribution
|
- | 34 | - | - | - | 34 | ||||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities
|
- | 7,043 | (40,014 | ) | (1,363 | ) | - | (34,334 | ) | |||||||||||||||
|
Impact
of exchange rate movement
|
||||||||||||||||||||||||
|
on
cash
|
- | - | - | 165 | - | 165 | ||||||||||||||||||
|
Net
increase (decrease) in cash
|
||||||||||||||||||||||||
|
and
cash equivalents
|
- | 7,578 | 5,647 | 2,154 | - | 15,379 | ||||||||||||||||||
|
Cash
and cash equivalents at the
|
||||||||||||||||||||||||
|
beginning
of the period
|
- | 1,923 | 3,483 | 1,388 | - | 6,794 | ||||||||||||||||||
|
Cash
and cash equivalents at the end
|
||||||||||||||||||||||||
|
of
the period
|
$ | - | $ | 9,501 | $ | 9,130 | $ | 3,542 | $ | - | $ | 22,173 | ||||||||||||
PLY
GEM HOLDINGS, INC.
For
the Three month and Six month Periods Ended June 28, 2008
(Unaudited)
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
For
the three months ended
|
||||||||
|
June
28,
|
June
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Net
sales
|
$ | 341,280 | $ | 390,695 | ||||
|
Costs
and expenses:
|
||||||||
|
Cost
of products sold
|
271,093 | 292,896 | ||||||
|
Selling,
general and administrative expense
|
44,402 | 41,897 | ||||||
|
Amortization
of intangible assets
|
4,912 | 4,302 | ||||||
|
Total
costs and expenses
|
320,407 | 339,095 | ||||||
|
Operating
earnings
|
20,873 | 51,600 | ||||||
|
Foreign
currency gain
|
56 | 1,992 | ||||||
|
Interest
expense
|
(51,065 | ) | (25,823 | ) | ||||
|
Interest
income
|
107 | 245 | ||||||
|
Income
(loss) before provision (benefit) for income taxes
|
(30,029 | ) | 28,014 | |||||
|
Provision
(benefit) for income taxes
|
(10,536 | ) | 10,744 | |||||
|
Net
income (loss)
|
$ | (19,493 | ) | $ | 17,270 | |||
See
accompanying notes to condensed consolidated financial statements.
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
For
the six months ended
|
||||||||
|
June
28,
|
June
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Net
sales
|
$ | 597,653 | $ | 675,969 | ||||
|
Costs
and expenses:
|
||||||||
|
Cost
of products sold
|
495,359 | 530,980 | ||||||
|
Selling,
general and administrative expense
|
85,879 | 79,294 | ||||||
|
Amortization
of intangible assets
|
9,826 | 8,936 | ||||||
|
Total
costs and expenses
|
591,064 | 619,210 | ||||||
|
Operating
earnings
|
6,589 | 56,759 | ||||||
|
Foreign
currency gain (loss)
|
(495 | ) | 2,208 | |||||
|
Interest
expense
|
(74,139 | ) | (51,089 | ) | ||||
|
Interest
income
|
310 | 822 | ||||||
|
Income
(loss) before provision (benefit) for income taxes
|
(67,735 | ) | 8,700 | |||||
|
Provision
(benefit) for income taxes
|
(26,400 | ) | 2,294 | |||||
|
Net
income (loss)
|
$ | (41,335 | ) | $ | 6,406 | |||
See
accompanying notes to condensed consolidated financial statements.
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
June
28,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Amounts
in thousands, except
|
||||||||
|
share
amounts)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 61,480 | $ | 65,207 | ||||
|
Accounts
receivable, less allowances of $7,152 and $7,320,
respectively
|
176,362 | 111,653 | ||||||
|
Inventories:
|
||||||||
|
Raw
materials
|
54,300 | 60,003 | ||||||
|
Work
in process
|
32,969 | 23,071 | ||||||
|
Finished
goods
|
37,355 | 45,208 | ||||||
|
Total
inventory
|
124,624 | 128,282 | ||||||
|
Prepaid
expenses and other current assets
|
21,016 | 16,462 | ||||||
|
Deferred
income taxes
|
12,773 | 12,797 | ||||||
|
Total
current assets
|
396,255 | 334,401 | ||||||
|
Property
and Equipment, at cost:
|
||||||||
|
Land
|
3,738 | 4,017 | ||||||
|
Buildings
and improvements
|
33,953 | 37,927 | ||||||
|
Machinery
and equipment
|
244,064 | 240,921 | ||||||
|
Total
property and equipment
|
281,755 | 282,865 | ||||||
|
Less
accumulated depreciation
|
(100,724 | ) | (83,869 | ) | ||||
|
Total
property and equipment, net
|
181,031 | 198,996 | ||||||
|
Other
Assets:
|
||||||||
|
Intangible
assets, less accumulated amortization of $54,661 and
$45,081,
|
||||||||
|
respectively
|
203,431 | 213,257 | ||||||
|
Goodwill
|
835,967 | 835,820 | ||||||
|
Other
|
46,949 | 43,133 | ||||||
|
Total
other assets
|
1,086,347 | 1,092,210 | ||||||
| $ | 1,663,633 | $ | 1,625,607 | |||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | 6,873 | ||||
|
Accounts
payable
|
127,286 | 96,256 | ||||||
|
Accrued
expenses and taxes
|
87,601 | 93,416 | ||||||
|
Total
current liabilities
|
214,887 | 196,545 | ||||||
|
Deferred
income taxes
|
62,973 | 91,151 | ||||||
|
Other
long term liabilities
|
65,197 | 67,144 | ||||||
|
Long-term
debt, less current maturities
|
1,093,729 | 1,031,223 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholder's
Equity:
|
||||||||
|
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
|
209,884 | 180,667 | ||||||
|
Retained
earnings
|
7,907 | 49,242 | ||||||
|
Accumulated
other comprehensive income
|
9,056 | 9,635 | ||||||
|
Total
stockholder's equity
|
226,847 | 239,544 | ||||||
| $ | 1,663,633 | $ | 1,625,607 | |||||
See
accompanying notes to condensed consolidated financial statements.
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
For
the six months ended
|
||||||||
|
June
28,
|
June
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Net
cash used in operating activities
|
$ | (65,108 | ) | $ | (13,428 | ) | ||
|
Cash
flows from investing activities:
|
||||||||
|
Capital
expenditures
|
(7,039 | ) | (7,201 | ) | ||||
|
Proceeds
from sale of assets
|
8,803 | 15 | ||||||
|
Other
|
(127 | ) | (223 | ) | ||||
|
Net
cash provided by (used in) investing activities
|
1,637 | (7,409 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from long-term debt
|
693,504 | - | ||||||
|
Proceeds
from revolver borrowings
|
80,000 | 30,000 | ||||||
|
Payments
on long-term debt
|
(677,910 | ) | (3,187 | ) | ||||
|
Payments
on revolver borrowings
|
(40,000 | ) | (10,000 | ) | ||||
|
Debt
issuance costs
|
(24,843 | ) | (2,100 | ) | ||||
|
Equity
contributions
|
30,000 | - | ||||||
|
Equity
repurchases
|
(793 | ) | (3,175 | ) | ||||
|
Net
cash provided by financing activities
|
59,958 | 11,538 | ||||||
|
Impact
of exchange rate movements on cash
|
(214 | ) | 290 | |||||
|
Net
decrease in cash and cash equivalents
|
(3,727 | ) | (9,009 | ) | ||||
|
Cash
and cash equivalents at the beginning of the period
|
65,207 | 53,274 | ||||||
|
Cash
and cash equivalents at the end of the period
|
$ | 61,480 | $ | 44,265 | ||||
See
accompanying notes to condensed consolidated financial statements.
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
AND
COMPREHENSIVE LOSS
(UNAUDITED)
|
Accumulated
|
||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||
|
Paid
in
|
Retained
|
Comprehensive
|
Stockholders
|
|||||||||||||
|
Capital
|
Earnings
|
Income
(Loss)
|
Equity
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 180,667 | $ | 49,242 | $ | 9,635 | $ | 239,544 | ||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
(loss)
|
- | (41,335 | ) | - | (41,335 | ) | ||||||||||
|
Change
in currency translation
|
- | - | (579 | ) | (579 | ) | ||||||||||
|
Comprehensive
(loss)
|
(41,914 | ) | ||||||||||||||
|
Contributions,
net
|
29,217 | - | - | 29,217 | ||||||||||||
|
Balance,
June 28, 2008
|
$ | 209,884 | $ | 7,907 | $ | 9,056 | $ | 226,847 | ||||||||
See
accompanying notes to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of Ply Gem
Holdings, Inc. (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the
“Company”, “we”, or “us”) have been prepared in accordance with U.S. generally
accepted accounting principles as described in the audited consolidated
financial statements and related notes included elsewhere in this
prospectus. These statements do not include all of the information
and footnotes required by U.S. generally accepted accounting principles and
should be read in conjunction with our audited consolidated financial statements
and related notes. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period
from January 1, 2008 through June 28, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008.
The
condensed consolidated balance sheet at December 31, 2007 has been derived from
the audited consolidated financial statements of Ply Gem Holdings, Inc. at that
date, but does not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements.
The
Company’s fiscal quarters are based on periods ending on the last Saturday of
the last week in the quarter. Therefore, the financial results of
certain fiscal quarters will not be comparable to the prior and subsequent
fiscal quarters.
The
accompanying financial statements include the consolidated results of operations
and cash flows for the Company for the three month and six month periods ended
June 28, 2008 and June 30, 2007, and the consolidated financial position for the
Company as of June 28, 2008 and December 31, 2007.
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 our 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. Our sales are usually lower during the first and fourth
quarters.
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 quarter of each calendar
year historically result in that quarter producing significantly less sales
revenue than in any other period of the year. As a result, we have
historically had lower profits or 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. 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.
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, unemployment,
and availability of consumer credit.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Ply Gem Holdings, Inc.
and its subsidiaries, all of which are wholly owned. All intercompany
accounts and transactions have been eliminated.
Reclassifications
Certain
amounts in the prior fiscal year have been reclassified to conform to the
presentation adopted in the current fiscal year, with no effect on net income
(loss) or retained earnings.
Accounting
Policies and Use of Estimates
The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles 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 for their interim and year-end
reporting requirements. These judgments are based on the Company’s
historical experience, current trends and information available from other
sources, as appropriate. If different conditions result from those
assumptions used in the Company’s judgments, the results could be materially
different from the Company’s estimates.
Inventories
Inventories in the accompanying
consolidated balance sheets are valued at the lower of cost or market. At June
28, 2008 and December 31, 2007, approximately $11.5 million and $10.9 million of
total inventories, respectively, were valued on the last-in, first-out method
(“LIFO”). Under the first-in, first-out method (“FIFO”) of
accounting, such inventories would have been approximately $3.7 million higher
at both June 28, 2008 and December 31, 2007. All other inventories
were valued under the 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 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.
Income
Taxes
We
account for deferred income taxes using the asset and liability method in
accordance with SFAS No. 109, “Accounting for Income Taxes,” or “SFAS No. 109,”
which requires that the deferred tax consequences of temporary differences
between the amounts recorded in our financial statements and the amount included
in our federal and state income tax returns be recognized in the balance
sheet. Estimates are required with respect to, among other things,
the appropriate state income tax rates to use in the various states that 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. U.S. federal income tax returns are prepared and filed by
Ply Gem Investment Holdings, Inc. on behalf of itself, Ply Gem Holdings, Inc.,
Ply Gem Industries, Inc. (“Ply Gem Industries”) and its
subsidiaries. The existing tax sharing agreement between Ply Gem
Holdings and Ply Gem Investment Holdings, Inc., under which tax liabilities for
each respective party are computed on a stand-alone basis, was amended during
2006 to include Ply Gem Prime Holdings, Inc. U.S. subsidiaries file
unitary, combined and separate state income tax returns. CWD Windows
and Doors, Inc. (“CWD”) files separate Canadian income tax returns. For
the six months ended June 28, 2008, the Company’s tax benefit includes
approximately $0.7 million tax benefit to correct for recent legislative changes
in Canada that impact the future settlement of deferred taxes.
Related
Party Transactions
The
Company has entered into two advisory agreements with an affiliate of CI Capital
Partners LLC, formerly known as Caxton-Iseman Capital, LLC (the “Caxton-Iseman
Party”), which we refer to as the “Debt Financing Advisory Agreement” and the
“General Advisory Agreement”. Under the General Advisory Agreement,
the Company expensed management fees to the Caxton-Iseman Party of approximately
$0.7 million and $1.3 million for the three month periods ended June 28, 2008
and June 30, 2007, respectively, and approximately $0.8 million and $1.7 million
for the six month periods ended June 28, 2008 and June 30, 2007,
respectively.
Foreign
Currency
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 the end
of the reporting periods. Net sales and expenses are translated using
average exchange rates in effect during the periods. Gains and losses
from foreign currency translation are credited or charged to accumulated other
comprehensive income in the accompanying consolidated balance
sheets. A gain or loss resulting from fluctuations in the exchange
rate may be recognized due to debt, denominated in US dollars, recorded by the
Company’s Canadian subsidiary.
For the
three month periods ended June 28, 2008 and June 30, 2007, the Company recorded
a gain from foreign currency transactions of approximately $0.1 million and $2.0
million, respectively. For the six month periods ending June 28, 2008
and June 30, 2007, the Company recorded a loss from foreign currency
transactions of approximately $0.5 million and a gain from foreign currency
transactions of approximately $2.2 million, respectively. As of June
28, 2008, and December 31, 2007 accumulated other comprehensive income included
a currency translation adjustment of approximately $8.3 million and $8.9
million, respectively.
Concentration
of Credit Risk
The
accounts receivable balance related to one customer of our siding, fencing and
railing segment was approximately $14.4 million and $6.4 million at June 28,
2008 and December 31, 2007, respectively. This customer accounted for
approximately 10.2% of net sales for the six month period ended June 28, 2008
and approximately 10.2% of net sales for the year ended December 31,
2007.
Fair
Value Measurement
In the
first quarter of 2008, the Company adopted SFAS 157 “Fair Value
Measurements” for financial assets and liabilities. This standard defines fair
value, provides guidance for measuring fair value and requires certain
disclosures. This standard does not require any new fair value measurements, but
rather applies to all other accounting pronouncements that require or permit
fair value measurements. This standard does not apply measurements related to
share-based payments, nor does it apply to measurements related to
inventory.
SFAS 157
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 statement 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:
Observable inputs that reflect the reporting entity’s own
assumptions.
|
As of
June 28, 2008, the Company did not have any financial assets or liabilities that
are affected by the adoption of this standard.
In
accordance with Financial Accounting Standards Board Staff Position No. 157-2,
“Effective Date of FASB Statement No. 157”, the Company will delay application
of SFAS 157 for non-financial assets and non-financial liabilities, until
January 1, 2009. Certain non-financial assets and non-financial
liabilities measured at fair value on a recurring basis include reporting units
measured at fair value in the first step of a goodwill impairment
test. Certain non-financial assets and non-financial liabilities
measured at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment. As permitted under the deferral for non-financial assets
and liabilities, SFAS 157 will be applicable to these fair value measurements
beginning January 1, 2009.
Fair
Value of Financial Instruments
The
carrying value of the Company’s 9% senior subordinated notes due 2012 (the
“Senior Subordinated Notes”) was approximately $360.2 million and $360.2 million
at June 28, 2008 and December 31, 2007, respectively. The fair value
of the Company’s Senior Subordinated Notes at June 28, 2008 and December 31,
2007 was estimated to be approximately $208.8 million and $279.0 million,
respectively, based on available market information.
The
carrying value of the Company’s 11.75% senior secured notes due 2013 was
approximately $693.6 million at June 28, 2008 and the fair value of the notes at
June 28, 2008 was estimated to be approximately $630.0 million, based on
available market information.
The
carrying value of the Company’s other financial instruments approximates their
fair value.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”. This standard requires employers
to recognize the underfunded or overfunded status of each pension and
postretirement benefit plan as an asset or liability in its balance sheet and to
recognize changes in the funded status in the year in which the changes occur
through accumulated other comprehensive income, which is a component of
stockholders’ equity. SFAS No. 158 does not change the amount of
actuarially determined expense that is recorded in the consolidated statement of
income. The new reporting requirements and related new footnote disclosure rules
of SFAS No. 158 were effective for our December 31, 2007 financial
statements. Additionally, SFAS No. 158 requires employers to measure
the funded status of a plan as of its year-end balance sheet. For our
financial statements as of December 31, 2008, we will change our September 30
measurement date for our plans’ assets and obligations to comply with this
requirement. The Company is currently evaluating the impact of the measurement
date change.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS No. 159
permits entities to choose to measure certain financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159
is effective for fiscal years beginning January 1, 2008, however the Company did
not elect the option to report any of the selected financial assets and
liabilities at fair value.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. This Statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date be measured at their fair values as of that
date. An acquirer is required to recognize assets or liabilities
arising from all other contingencies (contractual contingencies) as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6, “Elements of Financial Statements”. Any
acquisition related costs are to be expensed. The impact to the Company from the
adoption of SFAS 141(R) in 2009 will depend on acquisitions at the time.
The provisions of SFAS No. 141(R) are effective for the Company’s fiscal
year beginning January 1, 2009, and are to be applied
prospectively.
In
December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements”. This standard
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. The provisions of SFAS
No. 160 are effective for the Company’s fiscal year beginning
January 1, 2009, and are to be applied prospectively. The Company is
currently evaluating the impact that the implementation of SFAS No. 160 will
have on its financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This standard reorganizes the GAAP hierarchy
in order to improve financial reporting by providing a consistent framework for
determining what accounting principles should be used when preparing U.S. GAAP
financial statements. SFAS 162 shall be effective 60 days after the
SEC’s approval of the Public Company Accounting Oversight Board’s amendments to
Interim Auditing Standard, AU Section 411, “The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles”. Management is
currently evaluating the impact, if any, this new standard may have on our
balance sheet, results of operations, or cash flows.
2. PURCHASE
ACCOUNTING
Pacific Windows
Acquisition
On
September 30, 2007, Ply Gem completed its 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”). The Company accounted for the transaction as a purchase in accordance
with the provisions of SFAS No. 141, which results in a new valuation for the
assets and liabilities of Pacific Windows based upon fair values as of the
purchase date. The acquired vinyl window business is a leading
manufacturer of premium vinyl windows and patio doors and produces windows for
the residential new construction and remodeling markets. The acquisition
provides the Company with a physical window manufacturing presence on the west
coast.
The purchase price was
allocated to the assets and liabilities based on their fair
values. The following is the allocation of the purchase
price.
|
(in
thousands)
|
||||
|
Other
current assets, net of cash
|
$ | 10,828 | ||
|
Inventories
|
11,038 | |||
|
Property,
plant and equipment
|
19,269 | |||
|
Trademarks
|
1,200 | |||
|
Customer
relationships
|
1,800 | |||
|
Goodwill
|
17,134 | |||
|
Other
assets
|
1,398 | |||
|
Current
liabilities
|
(12,571 | ) | ||
|
Other
liabilities
|
(13,514 | ) | ||
|
Purchase
price, net of cash acquired
|
$ | 36,582 | ||
Goodwill
increased by approximately $0.1 million from December 31, 2007 to June 28,
2008. An increase of approximately $1.0 million was due to a change
in the allocation of the Pacific Windows purchase price related to accrued
warranties and a decrease of approximately $0.9 million was due to currency
translation changes.
3. INTANGIBLE
ASSETS
The table
that follows presents the components of intangible assets as of June 28, 2008
and December 31, 2007:
|
Average
|
||||||||||||||||
|
Amortization
|
||||||||||||||||
|
Period
|
Accumulated
|
Net
Carrying
|
||||||||||||||
|
(in Years)
|
Cost
|
Amortization
|
Value
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
As
of June 28, 2008
|
||||||||||||||||
|
Patents
|
14
|
$ | 12,770 | $ | (4,066 | ) | $ | 8,704 | ||||||||
|
Trademarks/Tradenames
|
15
|
85,644 | (12,629 | ) | 73,015 | |||||||||||
|
Customer
relationships
|
13
|
158,158 | (37,651 | ) | 120,507 | |||||||||||
|
Other
|
1,520 | (315 | ) | 1,205 | ||||||||||||
|
Total
intangible assets
|
$ | 258,092 | $ | (54,661 | ) | $ | 203,431 | |||||||||
|
As
of December 31, 2007
|
||||||||||||||||
|
Patents
|
14
|
$ | 12,770 | $ | (3,591 | ) | $ | 9,179 | ||||||||
|
Trademarks/Tradenames
|
15
|
85,644 | (9,679 | ) | 75,965 | |||||||||||
|
Customer
relationships
|
13
|
158,158 | (31,452 | ) | 126,706 | |||||||||||
|
Other
|
1,520 | (113 | ) | 1,407 | ||||||||||||
|
Total
intangible assets
|
$ | 258,092 | $ | (44,835 | ) | $ | 213,257 | |||||||||
Amortization
expense for the six months ended June 28, 2008 and June 30, 2007 was
approximately $9.8 million and $8.9 million,
respectively. Amortization expense for the remainder of 2008 and for
fiscal years 2009, 2010, 2011, and 2012 is estimated to be approximately $9.8
million, $19.6 million, $19.5 million, $19.1 million, and $19.1 million,
respectively.
4. COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) is comprised of the following:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 28, 2008
|
June 30, 2007
|
June 28, 2008
|
June 30, 2007
|
|||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Net
income (loss)
|
$ | (19,493 | ) | $ | 17,270 | $ | (41,335 | ) | $ | 6,406 | ||||||
|
Foreign
currency translation adjustment
|
594 | 2,760 | (579 | ) | 3,296 | |||||||||||
|
Comprehensive
income (loss)
|
$ | (18,899 | ) | $ | 20,030 | $ | (41,914 | ) | $ | 9,702 | ||||||
5. LONG-TERM
DEBT
Long-term
debt in the accompanying consolidated balance sheets at June 28, 2008 and
December 31, 2007 consists of the following:
|
June 28, 2008
|
December 31, 2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Senior
term loan facility
|
$ | - | $ | 677,910 | ||||
|
Asset
based lending revolving facility
|
40,000 | - | ||||||
|
Senior
subordinated notes due 2012 net of
unamortized premium of $163 and $186
|
360,163 | 360,186 | ||||||
|
Senior
secured notes due 2013 net of unamortized
discount of $6,434
|
693,566 | - | ||||||
| 1,093,729 | 1,038,096 | |||||||
|
Less
current maturities
|
- | 6,873 | ||||||
| $ | 1,093,729 | $ | 1,031,223 | |||||
11.75% Senior Secured Notes
due 2013
On June
9, 2008, Ply Gem Industries issued $700.0 million of its 11.75% senior secured
notes due 2013 (the “Senior Secured Notes”) at an approximate 1.0% discount,
yielding proceeds of approximately $693.5 million. Ply Gem Industries
used the proceeds to repay all of the outstanding indebtedness under our
existing senior secured credit facility of approximately $691.2
million. The Senior Secured Notes will mature on June 15, 2013 and
bear interest at the rate of 11.75% per annum. Interest will be paid
semi-annually on June 15 and December 15 of each year commencing on December 15,
2008.
Prior to
April 1, 2011, Ply Gem Industries may redeem up to 35% of the aggregate
principal amount of the Senior Secured Notes with the net cash proceeds from
certain equity offerings at a redemption price equal to 111.75% of the aggregate
principal amount of the Senior Secured Notes, plus accrued and unpaid interest,
if any, provided that at least 65% of the original aggregate principal amount of
the 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 $70.0 million of the Senior Secured Notes at a redemption price
equal to 103% of the aggregate amount of the Senior Secured Notes, plus accrued
and unpaid interest, if any. At any time on or after April 1, 2011,
Ply Gem Industries may redeem the Senior Secured Notes, in whole or in part, at
declining redemption prices set forth in the indenture governing the Senior
Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the
redemption date.
The
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 Senior Secured Indenture
contains certain covenants that will 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 agreements restricting their
ability to pay dividends, enter into transactions with affiliates, and
consolidate, merge or sell Ply Gem Industries’ assets. The
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 our senior secured asset-based revolving credit facility,
or ABL Facility, which consist primarily of accounts receivable and inventory)
of Ply Gem Industries and the Guarantors and on a second-priority lien basis by
the assets that secure the ABL Facility. The
capital stock of our subsidiaries will constitute collateral for the Senior
Secured Notes only to the extent that Rule 3-16 of Regulation S-X under the
Securities Act does not require separate financial statements of a subsidiary to
be filed with the SEC. The applicable value of the capital stock of
any entity is deemed to be the greater of its par value, book value or market
value.
ABL
Facility
Concurrently
with the Senior Secured Notes offering, Ply Gem Industries, the Company and the
subsidiaries of Ply Gem Industries entered into a new senior secured asset-based
revolving credit facility (the “ABL Facility”). The ABL Facility
provides for revolving credit financing of up to $150.0 million, subject to
borrowing base availability, with a maturity of five years including
sub-facilities for letters of credit, swingline loans, and borrowings in
Canadian dollars and United States dollars by CWD. However, the ABL
Facility will mature on October 15, 2011 if Ply Gem Industries’ 9% senior
subordinated notes due 2012 are not refinanced by such date. In
addition, the ABL Facility provides that the revolving commitments may be
increased to $200.0 million, subject to certain terms and
conditions. Until the administrative agent and collateral agent under
the ABL Facility have completed a collateral audit which is scheduled to be
completed in August 2008, availability under the ABL Facility is limited to
$75.0 million. $40.0 million was outstanding under the ABL Facility
at June 28, 2008.
As of
June 28, 2008, Ply Gem Industries had $31.1 million of availability under the
ABL Facility, due to the $40.0 million borrowed under the ABL Facility and
approximately $3.9 million of letters of credit issued under the ABL Facility.
Further, approximately $3.2 million of letters of credit have been issued apart
from the ABL facility to secure certain environmental obligations and this
amount does not reduce our availability under the ABL Facility.
The
interest rates applicable to loans under our ABL Facility are, at our option,
equal to either a base rate plus an applicable interest margin, or an adjusted
LIBOR rate plus an applicable interest margin, as defined in the ABL Facility
credit agreement. Our rate at June 28, 2008 was approximately
5.4%.
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’ material owned real property and equipment and all assets
that secure the Senior Secured Notes on a first-priority basis.
9.00% Senior Subordinated
Notes due 2012
Concurrently
with the acquisition of Ply Gem Industries on February 12, 2004, Ply Gem
Industries issued $225.0 million aggregate principal amount of its 9.0% Senior
Subordinated Notes due 2012, which are guaranteed by Ply Gem Holdings and the
domestic subsidiaries of Ply Gem Industries. Subsequently, in August
of 2004 in connection with the MW acquisition, Ply Gem Industries issued an
additional $135.0 million of Senior Subordinated Notes, which are guaranteed by
Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries, including
MWM Holding and its subsidiaries.
Senior Term Loan
Facility
The
Company’s senior facilities with a syndicate of financial institutions and
institutional lenders provided for senior secured financing of up to
approximately $762.1 million, originally consisting of approximately $687.1
million of term loan facilities maturing in August 2011 and a $75.0 million
revolving loan facility, including a letter of credit subfacility, maturing in
February 2009. On May 23, 2008, the Company entered into an amendment
of the fifth amended and restated credit agreement which consisted of changes to
certain debt covenant ratios. The amendment also increased the
interest rate on the term loan and extended the maturity of the revolving credit
facility from February 12, 2009 to August 12, 2010. On May 23, 2008,
Ply Gem received from CI Capital Partners LLC a $30.0 million cash equity
contribution as a condition to the credit facility amendment.
As a
result of the debt amendment that occurred on May 23, 2008 and the issuance of
Senior Secured Notes on June 9, 2008, the Company evaluated its financing costs
and expensed approximately $27.6 million of fees in the three and six month
periods ended June 28, 2008 which has been recorded within interest expense on
the Condensed Consolidated Statement of Operations. The Company
deferred costs of approximately $24.8 million as of June 28, 2008 which have
been recorded within other assets in the Condensed Consolidated Balance Sheets
at June 28, 2008. For the three and six month periods ended June 30,
2007, the Company expensed deferred financing costs of approximately $1.1
million which has been recorded within interest expense.
The
following table summarizes the Company’s long-term debt maturities due in each
twelve month period after June 28, 2008:
(Amounts in
thousands)
|
Twelve month period
ending:
|
||||
|
July
4, 2009
|
$ | - | ||
|
July
3, 2010
|
- | |||
|
July
2, 2011
|
- | |||
|
June
30, 2012
|
360,163 | |||
|
June
29, 2013 and thereafter
|
733,566 | |||
| $ | 1,093,729 | |||
6. PENSION
PLANS
The
Company has two separate pension plans, the Ply Gem Group Pension Plan (the “Ply
Gem Plan”) and the MW Manufacturers, Inc. Retirement Plan (the “MW
Plan”).
The
Company’s net periodic expense for the combined pension plans for the periods
indicated consists of the following components:
|
For
the six
months
ended
June 28, 2008
|
For
the six
months
ended
June 30, 2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Service
cost
|
$ | 97 | $ | 157 | ||||
|
Interest
cost
|
1,011 | 981 | ||||||
|
Expected
return on plan assets
|
(1,101 | ) | (1,009 | ) | ||||
|
Net
periodic expense
|
$ | 7 | $ | 129 | ||||
7. COMMITMENTS
AND CONTINGENCIES
In
connection with the Ply Gem acquisition, in which Ply Gem Industries was
acquired from Nortek, Inc. (“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 $8.0 million and $8.2 million at June 28, 2008 and December 31, 2007,
respectively. The Company has indemnified third parties in certain
transactions involving dispositions of former subsidiaries. As of
June 28, 2008 and December 31, 2007, the Company has recorded liabilities in
relation to these indemnifications of approximately $8.0 million and $8.2
million, respectively, consisting of the following:
|
(Amounts
in thousands)
|
||||||||
|
June 28,
2008
|
December 31, 2007
|
|||||||
|
Product
claim liabilities
|
$ | 3,775 | $ | 3,780 | ||||
|
Multiemployer
pension plan withdrawal liability
|
3,587 | 3,681 | ||||||
|
Other
|
603 | 721 | ||||||
| $ | 7,965 | $ | 8,182 | |||||
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 and the country in which the product is
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,
which is recorded in accrued expenses and other long-term
liabilities. 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
periodically assesses the adequacy of the recorded warranty claims and adjusts
the amounts as necessary. As of June 28, 2008, warranty liabilities
of approximately $11.1 million have been recorded in current liabilities and
approximately $37.7 million have been recorded in long-term
liabilities.
Changes
in the Company’s warranty liabilities are as follows:
|
For
the six
months
ended
June 28, 2008
|
For
the six
months
ended
June 30, 2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Balance,
beginning of period
|
$ | 49,899 | $ | 36,947 | ||||
|
Warranty
expense provided during period
|
2,667 | 3,411 | ||||||
|
Settlements
made during period
|
(4,417 | ) | (3,324 | ) | ||||
|
Liability
incurred with Pacific Windows acquisition
|
644 | - | ||||||
|
Balance,
end of period
|
$ | 48,793 | $ | 37,034 | ||||
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,
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. It is not possible to ascertain the ultimate legal and
financial liability with respect to contingent liabilities, including lawsuits,
and therefore no such estimate has been made.
8. ACCRUED
EXPENSES, TAXES, AND OTHER LONG-TERM LIABILITIES
Accrued
expenses and taxes consist of the following at June 28, 2008 and December 31,
2007:
|
June 28, 2008
|
December 31, 2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Insurance
|
$ | 6,829 | $ | 6,566 | ||||
|
Employee
compensation and benefits
|
12,323 | 19,722 | ||||||
|
Sales
and marketing
|
21,651 | 20,384 | ||||||
|
Product
warranty
|
11,053 | 11,453 | ||||||
|
Short-term
product claim liability
|
2,321 | 2,321 | ||||||
|
Accrued
freight
|
2,576 | 753 | ||||||
|
Interest
|
17,115 | 12,426 | ||||||
|
Accrued
severance
|
94 | 1,931 | ||||||
|
Accrued
taxes
|
3,130 | 5,844 | ||||||
|
Other,
net
|
10,509 | 12,016 | ||||||
| $ | 87,601 | $ | 93,416 | |||||
The
accrued severance amount in the above table as of December 31, 2007 was a result
of the Denison restructuring (Note 9). During 2008, cash severance
payments were made for approximately $1.8 million and the accrual balance for
Denison severance is approximately $0.1 million as of June 28,
2008.
Other
long-term liabilities consist of the following at June 28, 2008 and December 31,
2007:
|
June 28, 2008
|
December 31, 2007
|
|||||||
|
(Amounts
in thousands)
|
||||||||
|
Insurance
|
$ | 4,567 | $ | 4,757 | ||||
|
Pension
liabilities
|
3,022 | 4,056 | ||||||
|
Multiemployer
pension withdrawal liability
|
3,587 | 3,681 | ||||||
|
Product
warranty
|
37,740 | 38,446 | ||||||
|
Long-term
lease liabilities
|
25 | 38 | ||||||
|
Long-term
product claim liability
|
1,454 | 1,459 | ||||||
|
Long-term
deferred compensation
|
5,050 | 4,810 | ||||||
|
Liabilities
for tax uncertainties
|
7,316 | 7,193 | ||||||
|
Other
|
2,436 | 2,704 | ||||||
| $ | 65,197 | $ | 67,144 | |||||
9. RESTRUCTURING
In
October 2007, the Company commenced its plan to close the Denison, Texas
facility in 2008. The Company began to shift production to other
facilities within the Company during November 2007, and production ceased at the
Denison facility during February 2008. The following table summarizes
the restructuring activity for the six months ended June 28, 2008:
|
Accrued
as of
|
Cash
payments
|
Expensed
|
Accrued
as of
|
|||||||||||||
|
December 31, 2007
|
During 2008
|
During 2008
|
June 28, 2008
|
|||||||||||||
|
(Amounts
In thousands)
|
||||||||||||||||
|
Severance
costs
|
$ | 1,931 | $ | (1,837 | ) | $ | - | $ | 94 | |||||||
|
Contract
terminations
|
- | - | 67 | 67 | ||||||||||||
|
Equipment
removal and other
|
- | (4,408 | ) | 4,408 | - | |||||||||||
| $ | 1,931 | $ | (6,245 | ) | $ | 4,475 | $ | 161 | ||||||||
For the
three months and six months ended June 28, 2008, the Company incurred
restructuring costs of approximately $2.7 million and $4.5 million,
respectively. All costs were recorded in selling, general and
administrative expense in the Siding, Fencing and Railing segment.
10. STOCK-BASED
COMPENSATION
Stock Option
Plan
A summary
of changes in stock options outstanding as of June 28, 2008 is presented
below:
|
Stock Options
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining Contractual Term
(Years)
|
||||||||||
|
Balance
at January 1, 2008
|
248,594 | $ | 38.12 | 7.95 | ||||||||
|
Granted
|
- | - | - | |||||||||
|
Forfeited
or expired
|
8,400 | $ | 10.00 | - | ||||||||
|
Balance
at June 28, 2008
|
240,194 | $ | 39.11 | 7.50 | ||||||||
As of
June 28, 2008, no options have vested. At June 28, 2008, the Company
had approximately $0.1 million of total unrecognized compensation expense that
will be recognized over the weighted average period of 2.5 years.
Other Share-Based
Compensation
Upon
completion of each of the Ply Gem Acquisition, the MW Acquisition and the
acquisition of AWC Holding Company and its subsidiaries (collectively,
“Alenco”), certain members of management made a cash contribution to Ply Gem
Prime Holdings, Inc. in exchange for shares of Ply Gem Prime Holdings, Inc.’s
common stock. During 2007, shares were issued to certain
members of management in exchange for cash.
A summary
of the changes in common stock shares as of June 28, 2008 is presented
below.
|
Common
Stock
Shares
Owned by
Management
|
||||
|
Balance
at January 1, 2008
|
675,758 | |||
|
Shares
issued
|
- | |||
|
Shares
repurchased
|
(31,440 | ) | ||
|
Balance
at June 28, 2008
|
644,318 | |||
11. SEGMENT
INFORMATION
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS 131) requires companies to report
certain information about operating segments in their financial statements and
established standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 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. Operating
segments meeting certain aggregation criteria may be combined into one
reportable segment for disclosure purposes. Comparative information for prior
years is presented to conform to our current organizational
structure.
The
Company has two reportable segments: 1) siding, fencing, and railing, and 2)
windows and doors.
The
operating earnings of each segment includes the revenue generated on
transactions involving products within that segment less identifiable
expenses. Corporate unallocated income and expenses include items
which are not directly attributed to or allocated to either of our reporting
segments. Such items include interest, legal costs, corporate
payroll, and unallocated finance and accounting expenses. Corporate unallocated
assets include deferred financing costs, cash and certain non-operating
receivables.
Following
is a summary of the Company’s segment information. (Amounts in
thousands)
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June 28, 2008
|
June 30, 2007
|
June 28, 2008
|
June 30, 2007
|
|||||||||||||
|
Net
Sales
|
||||||||||||||||
|
Siding,
Fencing, and Railing
|
$ | 209,250 | $ | 246,972 | $ | 356,310 | $ | 416,486 | ||||||||
|
Windows
and Doors
|
132,030 | 143,723 | 241,343 | 259,483 | ||||||||||||
| $ | 341,280 | $ | 390,695 | $ | 597,653 | $ | 675,969 | |||||||||
|
Operating
earnings (loss)
|
||||||||||||||||
|
Siding,
Fencing, and Railing
|
$ | 21,971 | $ | 37,123 | $ | 17,770 | $ | 36,708 | ||||||||
|
Windows
and Doors
|
1,235 | 16,265 | (6,321 | ) | 23,792 | |||||||||||
|
Corporate
unallocated
|
(2,333 | ) | (1,788 | ) | (4,860 | ) | (3,741 | ) | ||||||||
| $ | 20,873 | $ | 51,600 | $ | 6,589 | $ | 56,759 | |||||||||
|
As
of
|
As
of
|
|||||||
|
June 28, 2008
|
December 31, 2007
|
|||||||
|
Total
Assets
|
||||||||
|
Siding,
Fencing, and Railing
|
$ | 855,547 | $ | 826,480 | ||||
|
Windows
and Doors
|
715,966 | 717,740 | ||||||
|
Corporate
unallocated
|
92,120 | 81,387 | ||||||
| $ | 1,663,633 | $ | 1,625,607 | |||||
12. GUARANTOR
/ NON-GUARANTOR FINANCIAL INFORMATION
The
Senior Secured Notes and Senior Subordinated Notes were both 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 June 28, 2008 and for
the three and six month periods ended June 28, 2008 and June 30,
2007. The non-guarantor information presented represents our Canadian
subsidiary.
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the three months ended June 28, 2008
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 319,358 | $ | 21,922 | $ | - | $ | 341,280 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 256,648 | 14,445 | - | 271,093 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 2,333 | 37,991 | 4,078 | - | 44,402 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | - | 3,195 | - | (3,195 | ) | - | |||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 4,912 | - | - | 4,912 | ||||||||||||||||||
|
Total
costs and expenses
|
- | 2,333 | 302,746 | 18,523 | (3,195 | ) | 320,407 | |||||||||||||||||
|
Operating
earnings (loss)
|
- | (2,333 | ) | 16,612 | 3,399 | 3,195 | 20,873 | |||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 56 | - | 56 | ||||||||||||||||||
|
Intercompany
interest
|
- | 18,351 | (18,233 | ) | (118 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (50,823 | ) | 13 | (255 | ) | - | (51,065 | ) | |||||||||||||||
|
Interest
income
|
86 | 3 | 18 | - | 107 | |||||||||||||||||||
|
Intercompany
administrative income
|
- | 3,195 | - | - | (3,195 | ) | - | |||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (31,524 | ) | (1,605 | ) | 3,100 | - | (30,029 | ) | |||||||||||||||
|
Equity
in subsidiaries' income
|
(19,493 | ) | 970 | - | - | 18,523 | - | |||||||||||||||||
|
Income
(loss) before income tax
|
||||||||||||||||||||||||
|
provision
(benefit)
|
(19,493 | ) | (30,554 | ) | (1,605 | ) | 3,100 | 18,523 | (30,029 | ) | ||||||||||||||
|
Provision
(benefit) for income taxes
|
- | (11,061 | ) | (498 | ) | 1,023 | - | (10,536 | ) | |||||||||||||||
|
Net
income (loss)
|
$ | (19,493 | ) | $ | (19,493 | ) | $ | (1,107 | ) | $ | 2,077 | $ | 18,523 | $ | (19,493 | ) | ||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | 594 | - | 594 | ||||||||||||||||||
|
Total
comprehensive income (loss)
|
$ | (19,493 | ) | $ | (19,493 | ) | $ | (1,107 | ) | $ | 2,671 | $ | 18,523 | $ | (18,899 | ) | ||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the three months ended June 30, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 370,127 | $ | 20,568 | $ | - | $ | 390,695 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 279,385 | 13,511 | - | 292,896 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 1,788 | 36,627 | 3,482 | - | 41,897 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | - | 3,705 | - | (3,705 | ) | - | |||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 4,302 | - | - | 4,302 | ||||||||||||||||||
|
Total
costs and expenses
|
- | 1,788 | 324,019 | 16,993 | (3,705 | ) | 339,095 | |||||||||||||||||
|
Operating
earnings (loss)
|
- | (1,788 | ) | 46,108 | 3,575 | 3,705 | 51,600 | |||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 1,992 | - | 1,992 | ||||||||||||||||||
|
Intercompany
interest
|
- | 22,497 | (22,399 | ) | (98 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (25,292 | ) | - | (531 | ) | - | (25,823 | ) | |||||||||||||||
|
Interest
income
|
- | 153 | 69 | 23 | - | 245 | ||||||||||||||||||
|
Intercompany
administrative income
|
- | 3,705 | - | - | (3,705 | ) | - | |||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (725 | ) | 23,778 | 4,961 | - | 28,014 | |||||||||||||||||
|
Equity
in subsidiaries' income
|
17,270 | 18,268 | - | - | (35,538 | ) | - | |||||||||||||||||
|
Income
before income tax
|
||||||||||||||||||||||||
|
provision
|
17,270 | 17,543 | 23,778 | 4,961 | (35,538 | ) | 28,014 | |||||||||||||||||
|
Provision
for income taxes
|
- | 273 | 8,834 | 1,637 | - | 10,744 | ||||||||||||||||||
|
Net
income
|
$ | 17,270 | $ | 17,270 | $ | 14,944 | $ | 3,324 | $ | (35,538 | ) | $ | 17,270 | |||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | 2,760 | - | 2,760 | ||||||||||||||||||
|
Total
comprehensive income
|
$ | 17,270 | $ | 17,270 | $ | 14,944 | $ | 6,084 | $ | (35,538 | ) | $ | 20,030 | |||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the six months ended June 28, 2008
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 556,054 | $ | 41,599 | $ | - | $ | 597,653 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 467,324 | 28,035 | - | 495,359 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 4,860 | 72,991 | 8,028 | - | 85,879 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | - | 5,563 | - | (5,563 | ) | - | |||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 9,826 | - | - | 9,826 | ||||||||||||||||||
|
Total
costs and expenses
|
- | 4,860 | 555,704 | 36,063 | (5,563 | ) | 591,064 | |||||||||||||||||
|
Operating
earnings (loss)
|
- | (4,860 | ) | 350 | 5,536 | 5,563 | 6,589 | |||||||||||||||||
|
Foreign
currency loss
|
- | - | - | (495 | ) | - | (495 | ) | ||||||||||||||||
|
Intercompany
interest
|
- | 40,509 | (40,391 | ) | (118 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (73,512 | ) | 29 | (656 | ) | - | (74,139 | ) | |||||||||||||||
|
Interest
income
|
247 | 6 | 57 | 310 | ||||||||||||||||||||
|
Intercompany
administrative income
|
- | 5,563 | - | - | (5,563 | ) | - | |||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (32,053 | ) | (40,006 | ) | 4,324 | - | (67,735 | ) | |||||||||||||||
|
Equity
in subsidiaries' income
|
(41,335 | ) | (21,775 | ) | - | - | 63,110 | - | ||||||||||||||||
|
Income
(loss) before income tax
|
||||||||||||||||||||||||
|
provision
(benefit)
|
(41,335 | ) | (53,828 | ) | (40,006 | ) | 4,324 | 63,110 | (67,735 | ) | ||||||||||||||
|
Provision
(benefit) for income taxes
|
- | (12,493 | ) | (15,333 | ) | 1,426 | - | (26,400 | ) | |||||||||||||||
|
Net
income (loss)
|
$ | (41,335 | ) | $ | (41,335 | ) | $ | (24,673 | ) | $ | 2,898 | $ | 63,110 | $ | (41,335 | ) | ||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | (579 | ) | - | (579 | ) | ||||||||||||||||
|
Total
comprehensive income (loss)
|
$ | (41,335 | ) | $ | (41,335 | ) | $ | (24,673 | ) | $ | 2,319 | $ | 63,110 | $ | (41,914 | ) | ||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the six months ended June 30, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | - | $ | - | $ | 639,319 | $ | 36,650 | $ | - | $ | 675,969 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Cost
of products sold
|
- | - | 506,147 | 24,833 | - | 530,980 | ||||||||||||||||||
|
Selling,
general and
|
||||||||||||||||||||||||
|
administrative
expense
|
- | 3,741 | 68,834 | 6,719 | - | 79,294 | ||||||||||||||||||
|
Intercompany
administrative
|
||||||||||||||||||||||||
|
charges
|
- | - | 6,397 | - | (6,397 | ) | - | |||||||||||||||||
|
Amortization
of intangible assets
|
- | - | 8,936 | - | - | 8,936 | ||||||||||||||||||
|
Total
costs and expenses
|
- | 3,741 | 590,314 | 31,552 | (6,397 | ) | 619,210 | |||||||||||||||||
|
Operating
earnings (loss)
|
- | (3,741 | ) | 49,005 | 5,098 | 6,397 | 56,759 | |||||||||||||||||
|
Foreign
currency gain
|
- | - | - | 2,208 | - | 2,208 | ||||||||||||||||||
|
Intercompany
interest
|
- | 46,198 | (46,001 | ) | (197 | ) | - | - | ||||||||||||||||
|
Interest
expense
|
- | (50,037 | ) | (1 | ) | (1,051 | ) | - | (51,089 | ) | ||||||||||||||
|
Interest
income
|
- | 448 | 328 | 46 | - | 822 | ||||||||||||||||||
|
Intercompany
administrative income
|
- | 6,397 | - | - | (6,397 | ) | - | |||||||||||||||||
|
Income
(loss) before equity in
|
||||||||||||||||||||||||
|
subsidiaries'
income
|
- | (735 | ) | 3,331 | 6,104 | - | 8,700 | |||||||||||||||||
|
Equity
in subsidiaries' income
|
6,406 | 7,418 | - | - | (13,824 | ) | - | |||||||||||||||||
|
Income
before income tax
|
||||||||||||||||||||||||
|
provision
|
6,406 | 6,683 | 3,331 | 6,104 | (13,824 | ) | 8,700 | |||||||||||||||||
|
Provision
for income taxes
|
- | 277 | 3 | 2,014 | - | 2,294 | ||||||||||||||||||
|
Net
income
|
$ | 6,406 | $ | 6,406 | $ | 3,328 | $ | 4,090 | $ | (13,824 | ) | $ | 6,406 | |||||||||||
|
Other
comprehensive income :
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | 3,296 | - | 3,296 | ||||||||||||||||||
|
Total
comprehensive income
|
$ | 6,406 | $ | 6,406 | $ | 3,328 | $ | 7,386 | $ | (13,824 | ) | $ | 9,702 | |||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of June 28, 2008
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | - | $ | 46,805 | $ | 11,277 | $ | 3,398 | $ | - | $ | 61,480 | ||||||||||||
|
Accounts
receivable, net
|
- | - | 164,412 | 11,950 | - | 176,362 | ||||||||||||||||||
|
Inventories:
|
||||||||||||||||||||||||
|
Raw
materials
|
- | - | 49,508 | 4,792 | - | 54,300 | ||||||||||||||||||
|
Work
in process
|
- | - | 31,633 | 1,336 | - | 32,969 | ||||||||||||||||||
|
Finished
goods
|
- | - | 33,840 | 3,515 | - | 37,355 | ||||||||||||||||||
|
Total
inventory
|
- | - | 114,981 | 9,643 | - | 124,624 | ||||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 3,997 | 16,441 | 578 | - | 21,016 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 12,773 | - | - | 12,773 | ||||||||||||||||||
|
Total
current assets
|
- | 50,802 | 319,884 | 25,569 | - | 396,255 | ||||||||||||||||||
|
Property
and Equipment, at cost:
|
||||||||||||||||||||||||
|
Land
|
- | - | 3,565 | 173 | - | 3,738 | ||||||||||||||||||
|
Buildings
and improvements
|
- | - | 33,004 | 949 | - | 33,953 | ||||||||||||||||||
|
Machinery
and equipment
|
- | 1,098 | 236,611 | 6,355 | - | 244,064 | ||||||||||||||||||
|
Total
property and equipment, net
|
- | 1,098 | 273,180 | 7,477 | - | 281,755 | ||||||||||||||||||
|
Less
accumulated depreciation
|
- | (188 | ) | (97,887 | ) | (2,649 | ) | - | (100,724 | ) | ||||||||||||||
|
Total
property and equipment, net
|
- | 910 | 175,293 | 4,828 | - | 181,031 | ||||||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||||||
|
Intangible
assets, net
|
- | - | 203,431 | - | - | 203,431 | ||||||||||||||||||
|
Goodwill
|
- | - | 790,732 | 45,235 | - | 835,967 | ||||||||||||||||||
|
Investments
in subsidiaries
|
226,847 | 151,951 | - | - | (378,798 | ) | - | |||||||||||||||||
|
Intercompany
note receivable
|
- | 1,107,260 | - | - | (1,107,260 | ) | - | |||||||||||||||||
|
Other
|
- | 43,394 | 3,555 | - | - | 46,949 | ||||||||||||||||||
|
Total
other assets
|
226,847 | 1,302,605 | 997,718 | 45,235 | (1,486,058 | ) | 1,086,347 | |||||||||||||||||
| $ | 226,847 | $ | 1,354,317 | $ | 1,492,895 | $ | 75,632 | $ | (1,486,058 | ) | $ | 1,663,633 | ||||||||||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Accounts
payable
|
- | 2,193 | 119,062 | 6,031 | - | 127,286 | ||||||||||||||||||
|
Accrued
expenses and taxes
|
- | 20,276 | 63,570 | 3,755 | - | 87,601 | ||||||||||||||||||
|
Total
current liabilities
|
- | 22,469 | 182,632 | 9,786 | - | 214,887 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 58,556 | 4,417 | - | 62,973 | ||||||||||||||||||
|
Intercompany
note payable
|
- | - | 1,088,999 | 18,261 | (1,107,260 | ) | - | |||||||||||||||||
|
Other
long term liabilities
|
- | 11,272 | 52,784 | 1,141 | - | 65,197 | ||||||||||||||||||
|
Long-term
debt, less current
|
||||||||||||||||||||||||
|
maturities
|
- | 1,093,729 | - | - | - | 1,093,729 | ||||||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||||||
|
Stockholder's
Equity:
|
||||||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Common
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Additional
paid-in-capital
|
209,884 | 209,884 | 84,975 | 5,853 | (300,712 | ) | 209,884 | |||||||||||||||||
|
Retained
earnings
|
7,907 | 7,907 | 24,949 | 27,840 | (60,696 | ) | 7,907 | |||||||||||||||||
|
Accumulated
other
|
||||||||||||||||||||||||
|
comprehensive
income
|
9,056 | 9,056 | - | 8,334 | (17,390 | ) | 9,056 | |||||||||||||||||
| $ | 226,847 | $ | 1,354,317 | $ | 1,492,895 | $ | 75,632 | $ | (1,486,058 | ) | $ | 1,663,633 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | - | $ | 40,647 | $ | 18,376 | $ | 6,184 | $ | - | $ | 65,207 | ||||||||||||
|
Accounts
receivable, net
|
- | - | 100,221 | 11,432 | - | 111,653 | ||||||||||||||||||
|
Inventories:
|
||||||||||||||||||||||||
|
Raw
materials
|
- | - | 55,506 | 4,497 | - | 60,003 | ||||||||||||||||||
|
Work
in process
|
- | - | 21,987 | 1,084 | - | 23,071 | ||||||||||||||||||
|
Finished
goods
|
- | - | 42,296 | 2,912 | - | 45,208 | ||||||||||||||||||
|
Total
inventory
|
- | - | 119,789 | 8,493 | - | 128,282 | ||||||||||||||||||
|
Prepaid
expenses and other
|
||||||||||||||||||||||||
|
current
assets
|
- | 3,451 | 12,622 | 389 | - | 16,462 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 12,797 | - | - | 12,797 | ||||||||||||||||||
|
Total
current assets
|
- | 44,098 | 263,805 | 26,498 | - | 334,401 | ||||||||||||||||||
|
Property
and Equipment, at cost:
|
||||||||||||||||||||||||
|
Land
|
- | - | 3,840 | 177 | - | 4,017 | ||||||||||||||||||
|
Buildings
and improvements
|
- | 106 | 36,865 | 956 | - | 37,927 | ||||||||||||||||||
|
Machinery
and equipment
|
- | 49 | 234,750 | 6,122 | - | 240,921 | ||||||||||||||||||
| - | 155 | 275,455 | 7,255 | - | 282,865 | |||||||||||||||||||
|
Less
accumulated depreciation
|
- | (126 | ) | (81,417 | ) | (2,326 | ) | - | (83,869 | ) | ||||||||||||||
|
Total
property and equipment, net
|
- | 29 | 194,038 | 4,929 | - | 198,996 | ||||||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||||||
|
Intangible
assets, net
|
- | - | 213,257 | - | - | 213,257 | ||||||||||||||||||
|
Goodwill
|
- | - | 789,575 | 46,245 | - | 835,820 | ||||||||||||||||||
|
Investments
in subsidiaries
|
239,544 | 115,861 | - | - | (355,405 | ) | - | |||||||||||||||||
|
Intercompany
note receivable
|
- | 1,088,999 | - | - | (1,088,999 | ) | - | |||||||||||||||||
|
Other
|
- | 37,932 | 5,201 | - | - | 43,133 | ||||||||||||||||||
|
Total
other assets
|
239,544 | 1,242,792 | 1,008,033 | 46,245 | (1,444,404 | ) | 1,092,210 | |||||||||||||||||
| $ | 239,544 | $ | 1,286,919 | $ | 1,465,876 | $ | 77,672 | $ | (1,444,404 | ) | $ | 1,625,607 | ||||||||||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | 6,623 | $ | - | $ | 250 | $ | - | $ | 6,873 | ||||||||||||
|
Accounts
payable
|
- | 547 | 90,317 | 5,392 | - | 96,256 | ||||||||||||||||||
|
Accrued
expenses and taxes
|
- | 17,787 | 68,787 | 6,842 | - | 93,416 | ||||||||||||||||||
|
Total
current liabilities
|
- | 24,957 | 159,104 | 12,484 | - | 196,545 | ||||||||||||||||||
|
Deferred
income taxes
|
- | - | 86,866 | 4,285 | - | 91,151 | ||||||||||||||||||
|
Intercompany
note payable
|
- | - | 1,088,999 | - | (1,088,999 | ) | - | |||||||||||||||||
|
Other
long term liabilities
|
- | 11,508 | 54,473 | 1,163 | - | 67,144 | ||||||||||||||||||
|
Long-term
debt, less current
|
||||||||||||||||||||||||
|
maturities
|
- | 1,010,910 | - | 20,313 | - | 1,031,223 | ||||||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||||||
|
Stockholder's
Equity:
|
||||||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Common
stock
|
- | - | - | - | - | - | ||||||||||||||||||
|
Additional
paid-in-capital
|
180,667 | 180,667 | 26,812 | 5,572 | (213,051 | ) | 180,667 | |||||||||||||||||
|
Retained
earnings
|
49,242 | 49,242 | 49,622 | 24,942 | (123,806 | ) | 49,242 | |||||||||||||||||
|
Accumulated
other
|
||||||||||||||||||||||||
|
comprehensive
income (loss)
|
9,635 | 9,635 | - | 8,913 | (18,548 | ) | 9,635 | |||||||||||||||||
| $ | 239,544 | $ | 1,286,919 | $ | 1,465,876 | $ | 77,672 | $ | (1,444,404 | ) | $ | 1,625,607 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the six months ended June 28, 2008
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
operating
activities
|
$ | - | $ | 3,280 | $ | (68,514 | ) | $ | 126 | $ | - | $ | (65,108 | ) | ||||||||||
|
Cash
flows from investing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | (556 | ) | (6,087 | ) | (396 | ) | - | (7,039 | ) | ||||||||||||||
|
Proceeds
from sale of assets
|
- | 5,810 | 2,993 | - | - | 8,803 | ||||||||||||||||||
|
Other
|
- | (127 | ) | - | - | - | (127 | ) | ||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
investing
activities
|
- | 5,127 | (3,094 | ) | (396 | ) | - | 1,637 | ||||||||||||||||
|
Cash
flows from financing
|
||||||||||||||||||||||||
|
activities:
|
||||||||||||||||||||||||
|
Proceeds
from long-term debt
|
- | 693,504 | - | - | - | 693,504 | ||||||||||||||||||
|
Proceeds
from revolver borrowings
|
- | 80,000 | - | - | - | 80,000 | ||||||||||||||||||
|
Proceeds
from intercompany
|
||||||||||||||||||||||||
|
investment
|
- | (82,257 | ) | 63,996 | 18,261 | - | - | |||||||||||||||||
|
Payments
on long-term debt
|
- | (657,347 | ) | - | (20,563 | ) | - | (677,910 | ) | |||||||||||||||
|
Payments
on revolver borrowings
|
- | (40,000 | ) | - | - | - | (40,000 | ) | ||||||||||||||||
|
Debt
issuance costs
|
- | (24,843 | ) | - | - | - | (24,843 | ) | ||||||||||||||||
|
Equity
contributions
|
- | 30,000 | - | - | - | 30,000 | ||||||||||||||||||
|
Equity
repurchase
|
- | (793 | ) | - | - | - | (793 | ) | ||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities
|
- | (1,736 | ) | 63,996 | (2,302 | ) | - | 59,958 | ||||||||||||||||
|
Impact
of exchange rate movement
|
||||||||||||||||||||||||
|
on
cash
|
- | - | - | (214 | ) | - | (214 | ) | ||||||||||||||||
|
Net
increase (decrease) in cash
|
||||||||||||||||||||||||
|
and
cash equivalents
|
- | 6,671 | (7,612 | ) | (2,786 | ) | - | (3,727 | ) | |||||||||||||||
|
Cash
and cash equivalents at the
|
||||||||||||||||||||||||
|
beginning
of the period
|
- | 40,647 | 18,376 | 6,184 | - | 65,207 | ||||||||||||||||||
|
Cash
and cash equivalents at the end
|
||||||||||||||||||||||||
|
of
the period
|
$ | - | $ | 47,318 | $ | 10,764 | $ | 3,398 | $ | - | $ | 61,480 | ||||||||||||
|
PLY
GEM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||
|
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the six months ended June 30, 2007
|
||||||||||||||||||||||||
|
Guarantor
|
Issuer
|
Non-
|
||||||||||||||||||||||
|
Ply
Gem
|
Ply
Gem
|
Guarantor
|
Guarantor
|
Consolidating
|
||||||||||||||||||||
|
Holdings, Inc.
|
Industries, Inc.
|
Subsidiaries
|
Subsidiary
|
Adjustments
|
Consolidated
|
|||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
operating
activities
|
$ | - | $ | 2,182 | $ | (16,225 | ) | $ | 615 | $ | - | $ | (13,428 | ) | ||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | - | (6,459 | ) | (742 | ) | - | (7,201 | ) | |||||||||||||||
|
Proceeds
from sale of assets
|
- | - | 15 | - | - | 15 | ||||||||||||||||||
|
Other
|
- | (223 | ) | - | - | - | (223 | ) | ||||||||||||||||
|
Net
cash used in investing
|
||||||||||||||||||||||||
|
activities
|
- | (223 | ) | (6,444 | ) | (742 | ) | - | (7,409 | ) | ||||||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||||||
|
Proceeds
from long-term debt
|
- | - | - | - | - | - | ||||||||||||||||||
|
Proceeds
from revolver borrowings
|
- | 30,000 | - | - | - | 30,000 | ||||||||||||||||||
|
Proceeds
from intercompany
|
||||||||||||||||||||||||
|
investment,
net
|
- | (25,853 | ) | 25,853 | - | - | - | |||||||||||||||||
|
Payments
on long-term debt
|
- | (3,061 | ) | - | (126 | ) | - | (3,187 | ) | |||||||||||||||
|
Payments
on revolver borrowings
|
- | (10,000 | ) | - | - | - | (10,000 | ) | ||||||||||||||||
|
Debt
issuance costs
|
- | (2,100 | ) | - | - | - | (2,100 | ) | ||||||||||||||||
|
Equity
repurchases
|
- | (3,175 | ) | - | - | - | (3,175 | ) | ||||||||||||||||
|
Net
cash provided by (used in)
|
||||||||||||||||||||||||
|
financing
activities
|
- | (14,189 | ) | 25,853 | (126 | ) | - | 11,538 | ||||||||||||||||
|
Impact
of exchange rate movement
|
||||||||||||||||||||||||
|
on
cash
|
- | - | - | 290 | - | 290 | ||||||||||||||||||
|
Net
increase (decrease) in cash
|
||||||||||||||||||||||||
|
and
cash equivalents
|
- | (12,230 | ) | 3,184 | 37 | - | (9,009 | ) | ||||||||||||||||
|
Cash
and cash equivalents at the
|
||||||||||||||||||||||||
|
beginning
of the period
|
- | 35,632 | 14,319 | 3,323 | - | 53,274 | ||||||||||||||||||
|
Cash
and cash equivalents at the end
|
||||||||||||||||||||||||
|
of
the period
|
$ | - | $ | 23,402 | $ | 17,503 | $ | 3,360 | $ | - | $ | 44,265 | ||||||||||||
No person
has been authorized to give any information or to make any representation other
than those contained in this prospectus, and, if given or made, any information
or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or
the solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
these securities in any circumstances in which this offer or solicitation is
unlawful. Neither the delivery of this prospectus nor any sale made
under this prospectus shall, under any circumstances, create any implication
that there has been no change in the affairs of Ply Gem since the date of this
prospectus.
Until October
28, 2008, broker-dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the broker-dealers’ obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.