For the three months ended
		October 3,				September 27,
		2009				2008
		(Amounts in thousands)
Net sales		$	293,469			$	342,825
Costs and expenses:
Cost of products sold			216,091				277,437
Selling, general and administrative expenses			33,482				36,958
Amortization of intangible assets			4,916				4,913
Goodwill impairment			-				200,000
Total costs and expenses			254,489				519,308
Operating earnings (loss)			38,980				(176,483	)
Foreign currency gain (loss)			242				(60	)
Interest expense			(32,609	)			(30,300	)
Interest income			32				176
Income (loss) before benefit for income taxes			6,645				(206,667	)
Provision (benefit) for income taxes			2,260				(15,835	)
Net income (loss)		$	4,385			$	(190,832	)

See accompanying notes to condensed consolidated financial statements.

 

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PLY GEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		For the nine months ended
		October 3,				September 27,
		2009				2008
		(Amounts in thousands)
Net sales		$	736,796			$	940,478
Costs and expenses:
Cost of products sold			583,613				776,244
Selling, general and administrative expenses			110,452				119,389
Amortization of intangible assets			14,734				14,739
Goodwill impairment			-				200,000
Total costs and expenses			708,799				1,110,372
Operating earnings (loss)			27,997				(169,894	)
Foreign currency gain (loss)			84				(555	)
Interest expense			(99,489	)			(104,439	)
Interest income			180				486
Loss before benefit for income taxes			(71,228	)			(274,402	)
Benefit for income taxes			(12,096	)			(42,235	)
Net loss		$	(59,132	)		$	(232,167	)

See accompanying notes to condensed consolidated financial statements.

 

 

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		October 3,				December 31,
		2009				2008
	(Amounts in thousands, except share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	39,767			$	58,289
Accounts receivable, less allowances of $6,195 and $6,405, respectively			149,541				90,527
Inventories:
Raw materials			40,442				53,060
Work in process			20,197				28,085
Finished goods			34,549				42,267
Total inventory			95,188				123,412
Prepaid expenses and other current assets			21,811				19,985
Deferred income taxes			-				16,867
Total current assets			306,307				309,080
Property and Equipment, at cost:
Land			3,727				3,709
Buildings and improvements			35,517				35,206
Machinery and equipment			259,043				253,290
Total property and equipment			298,287				292,205
Less accumulated depreciation			(149,876	)			(122,194	)
Total property and equipment, net			148,411				170,011
Other Assets:
Intangible assets, less accumulated amortization of $79,222 and $64,488,
respectively			178,980				193,604
Goodwill			392,532				390,779
Deferred income taxes			2,686				-
Other			37,529				40,579
Total other assets			611,727				624,962
		$	1,066,445			$	1,104,053
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	71,413			$	59,603
Accrued expenses and taxes			101,630				76,304
Total current liabilities			173,043				135,907
Deferred income taxes			2,739				28,355
Other long-term liabilities			69,102				68,233
Long-term debt due to related parties			234,707				-
Long-term debt			885,236				1,114,186
Commitments and contingencies
Stockholder's Equity (Deficit):
Preferred stock $0.01 par, 100 shares authorized, none issued and outstanding			-				-
Common stock $0.01 par, 100 shares authorized, issued and outstanding			-				-
Additional paid-in-capital			209,933				209,908
Accumulated deficit			(506,125	)			(446,993	)
Accumulated other comprehensive loss, net of tax			(2,190	)			(5,543	)
Total stockholder's deficit			(298,382	)			(242,628	)
		$	1,066,445			$	1,104,053

See accompanying notes to condensed consolidated financial statements.

 

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PLY GEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

		For the nine months ended
		October 3,				September 27,
		2009				2008
		(Amounts in thousands)
Cash flows from operating activities:
Net loss		$	(59,132	)		$	(232,167	)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization expense			42,269				47,235
Non-cash interest expense, net			6,368				5,141
Loss (gain) on foreign currency transactions			(84	)			555
Goodwill impairment			-				200,000
(Gain) loss on sale of assets			(6	)			844
Write-off of debt financing costs			-				14,047
Deferred income taxes			(11,105	)			(45,319	)
Changes in operating assets and liabilities:
Accounts receivable, net			(57,798	)			(58,387	)
Inventories			29,111				(5,143	)
Prepaid expenses and other current assets			(2,230	)			948
Accounts payable			11,304				19,406
Accrued expenses and taxes			29,656				5,617
Cash payments on restructuring liabilities			(5,274	)			(6,803	)
Other			(201	)			66
Net cash used in operating activities			(17,122	)			(53,960	)
Cash flows from investing activities:
Capital expenditures			(5,546	)			(13,516	)
Proceeds from sale of assets			78				8,812
Other			(109	)			(127	)
Net cash used in investing activities			(5,577	)			(4,831	)
Cash flows from financing activities:
Proceeds from long-term debt			-				693,504
Net revolver borrowings			5,000				-
Payments on long-term debt			-				(677,910	)
Debt issuance costs paid			(1,215	)			(26,025	)
Equity contributions			-				30,310
Equity repurchases			-				(793	)
Net cash provided by financing activities			3,785				19,086
Impact of exchange rate movements on cash			392				(215	)
Net decrease in cash and cash equivalents			(18,522	)			(39,920	)
Cash and cash equivalents at the beginning of the period			58,289				52,053
Cash and cash equivalents at the end of the period		$	39,767			$	12,133

 

See accompanying notes to condensed consolidated financial statements.

 

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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. and its subsidiaries (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with U.S. generally accepted accounting principles as described in the consolidated financial statements and related notes included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2009.  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 2008 Annual Report on Form 10-K.  In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the period from January 1, 2009 through October 3, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The condensed consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements of Ply Gem Holdings 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 Company’s condensed consolidated statements of operations for the three month and nine month periods ended October 3, 2009 and September 27, 2008, the condensed consolidated statements of cash flows for the nine month periods ended October 3, 2009 and September 27, 2008, and the condensed consolidated balance sheets for the Company as of October 3, 2009 and December 31, 2008.

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.  As a result, the Company has historically had lower profits or increased losses in the first quarter and reduced profits in the fourth quarter of each calendar year due to seasonality and the weather.  Our results of operations for future quarters 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.

 

To a significant extent our performance is dependent 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 condensed consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned.  All intercompany accounts and transactions have been eliminated.  The Company has evaluated all subsequent events through the date that these condensed consolidated financial statements were issued.

 

 

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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 accumulated deficit.

Accounting Policies and Use of Estimates

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

Inventories

Inventories in the accompanying condensed consolidated balance sheets are valued at the lower of cost or market. During the year ended December 31, 2008, the Company elected to conform its method of valuing its inventory to the FIFO method from the LIFO method for a portion of its inventory.  The change in accounting method occurred following the consolidation of the LIFO inventory into another location that uses the FIFO method of accounting.  The Company determined that the impact of this change on 2008 interim periods was not significant.

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 may cause actual results to differ from estimates at the time such inventory is disposed or sold.   As of October 3, 2009, the Company had inventory purchase commitments of approximately $0.8 million.

Intangible Assets, Goodwill and other Long-lived Assets

The Company records impairment losses on long-lived assets including property, plant and equipment and intangible assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.  The Company evaluates impairment at the lowest level of identifiable cash flows which are “U.S. Windows”, “Canadian Windows and Doors”, and “Siding”.  This is one level below the segment reporting unit level of “Windows and Doors” and “Siding, Fencing, and Stone”.  From an economic standpoint, these levels represent the lowest level of reliable information that is prepared and reviewed by executive management on a consistent basis.  There were no indicators of impairment at October 3, 2009.  As of September 27, 2008 and December 31, 2008, the Company determined that the historic decline in the U.S. housing market required a re-evaluation of the Company’s forecasts.  The Company’s revised forecasts reflected reduced undiscounted cash flow projections for the affected asset groups, which were believed to be indicative of a significant adverse change in the business climate that could affect the value of the long-lived asset groups.  The Company tested for impairment using the “step one” test for asset groups held and used, and determined that further impairment testing of the fair value of the asset group (under “step two”) was not necessary at September 27, 2008 and December 31, 2008 because the undiscounted cash flows exceeded the carrying values of the long-lived assets of the respective reporting units.

The Company tests goodwill for impairment on an annual basis and between annual tests in certain circumstances using a two-step process.  The first step is to compare the fair value of the reporting unit (“Windows and Doors” and “Siding, Fencing, and Stone”) to the carrying value of the reporting unit.  If the carrying value exceeds the fair value, a second step must be followed to calculate the impairment.  The second step involves calculating the fair value of the individual assets and liabilities of the reporting unit and calculating the implied fair value of the goodwill.  See Note 3 to the condensed consolidated financial statements for impairment calculations for the three and nine months ended September 27, 2008.

 

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Debt Issuance Costs

Debt issuance costs, composed of facility, agency, and certain legal fees associated with acquiring new debt financing, are amortized over the contractual term of the related agreement using the effective interest method.  Debt issuance costs, net of accumulated amortization, were approximately $29.1 million and $32.5 million at October 3, 2009 and December 31, 2008, respectively, and have been recorded in other long term assets in the accompanying condensed consolidated balance sheets.

 

Foreign Currency

 

The Company’s Canadian subsidiary, CWD Windows and Doors, Inc. (“CWD”), 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 (loss) in the accompanying condensed consolidated balance sheets.

For the three month periods ended October 3, 2009 and September 27, 2008, the Company recorded a gain from foreign currency transactions of approximately $0.2 million and a loss from foreign currency transactions of approximately $0.1 million, respectively. For the nine month periods ended October 3, 2009 and September 27, 2008, the Company recorded a gain from foreign currency transactions of approximately $0.1 million and a loss from foreign currency transactions of approximately $0.6 million, respectively.  As of October 3, 2009, and December 31, 2008, accumulated other comprehensive income (loss) included a currency translation adjustment of approximately $2.8 million and $(0.6) million, respectively.

 

Concentration of Credit Risk

 

The accounts receivable balance related to one customer of the Siding, Fencing and Stone segment was approximately $10.3 million and $5.8 million at October 3, 2009 and December 31, 2008, respectively.  This customer accounted for approximately 9.9% of net sales for the nine month period ended October 3, 2009 and 10.2% of net sales for the nine months ended September 27, 2008.

 

Fair Value Measurement

 

The Company adopted the fair value accounting standard during the first quarter of 2008.  The accounting standard for 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 to measurements related to share-based payments, nor does it apply to measurements related to inventory.

The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The 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.

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

 

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										Quoted Prices				Significant Other
										in Active Markets								Significant
										for identical				Observable				Unobservable
		Carrying								Assets				Inputs				Inputs
Description		Value				Total				(Level 1)				(Level 2)				(Level 3)
Assets:
Money market funds		$	-			$	-			$	-			$	-			$	-
Liabilities:
Senior Subordinated Notes-9%		$	360,000			$	198,000			$	198,000			$	-			$	-
Senior Secured Notes-11.75%			700,000				621,250				621,250				-				-
As of October 3, 2009		$	1,060,000			$	819,250			$	819,250			$	-			$	-
Assets:
Money market funds		$	29,197			$	29,197			$	29,197			$	-			$	-
Liabilities:
Senior Subordinated Notes-9%		$	360,000			$	86,400			$	86,400			$	-			$	-
Senior Secured Notes-11.75%			700,000				378,000				378,000				-				-
As of December 31, 2008		$	1,060,000			$	464,400			$	464,400			$	-			$	-

The fair value of the long-term debt instruments was determined by utilizing available market information.  The carrying value of the Company’s other financial instruments approximates their fair value.

In accordance with the fair value accounting standard, 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.

 

New Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to affirm that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.   This guidance requires an acquirer to recognize the assets acquired, the liabilities assumed, contingent consideration and any noncontrolling interest in the acquiree at the acquisition date to be measured at their fair values as of that date.  It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of the provision for income taxes. This guidance is effective for the Company’s fiscal year beginning January 1, 2009, and is to be applied prospectively. The impact to the Company will depend on future acquisition activity.

In December 2008, the FASB issued authoritative guidance to require employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan.  The objective of this guidance is to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets held by the plans, the inputs and valuation techniques used to measure the fair value of plan assets, significant concentration of risk within the Company’s plan assets, and for fair value measurements determined using significant unobservable inputs a reconciliation of changes between the beginning and ending balances. This guidance is effective for fiscal years ending after December 15, 2009. The Company will adopt the new disclosure requirements in the 2009 annual reporting period.

In January 2009, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities.  This guidance required qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in hedged positions. This guidance also requires enhanced disclosure regarding derivative instruments in financial statements and how hedges affect an entity’s financial position, financial performance and cash flows. The adoption of this guidance did not have any impact on the Company’s condensed consolidated financial statements.

 

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In April 2009, the FASB issued authoritative guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased and identifying transactions that are not orderly.  This guidance clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. This guidance also reaffirms the objective of fair value measurement, as stated in authoritative guidance for fair value measurements, which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. This guidance is effective for financial statement purposes for interim and annual financial statements issued for fiscal periods ended after June 15, 2009. The Company adopted the provisions of this guidance effective April 2009 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance for interim disclosures about fair value of financial instruments, which requires fair value disclosures for financial instruments that are not reflected in the condensed consolidated balance sheets at fair value. Prior to the issuance of this guidance, the fair values of those assets and liabilities were disclosed only once each year. This guidance requires the Company to disclose this information on a quarterly basis and provide quantitative and qualitative information about fair value estimates for all financial instruments not measured in the condensed consolidated balance sheets at fair value.  This guidance was effective in the quarter ended July 4, 2009, and the adoption of these standards did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on the determination of the useful life of intangible assets.  This guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset.  This guidance also requires expanded disclosure regarding the determination of intangible asset useful lives. The Company adopted the provisions of this guidance effective April 2009 and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2009, the FASB issued authoritative guidance regarding subsequent events that provides guidance as to when an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the necessary disclosures related to these events.  This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  See “Principles of Consolidation” included in “Note 1 — Summary of Significant Accounting Policies” for the related disclosure. The Company adopted the provisions of this guidance effective May 2009, and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued authoritative guidance regarding accounting standards codification and the hierarchy of the Generally Accepted Accounting Principles (“GAAP”).  This guidance has become the source of authoritative U.S. GAAP recognized by the FASB and applied by nongovernmental entities.  This guidance was effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company adopted the provisions of this guidance during the third quarter, and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

 

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2.  BUSINESS COMBINATIONS

United Stone Veneer Acquisition

On October 31, 2008, Ply Gem Industries, Inc. (“Ply Gem Industries”) a wholly-owned subsidiary of the Company, completed the acquisition of substantially all of the assets of United Stone Veneer, LLC (“USV”).  The Company accounted for the transaction as a purchase.  USV manufactures stone veneer enabling the Company to expand its building products offering across different areas and capitalize on this product growth opportunity.  The condensed consolidated financial statements include the operating results of USV for periods after October 31, 2008.  As a result of the USV acquisition, the Company changed the title of its “Siding, Fencing, and Railing” segment to “Siding, Fencing, and Stone”.

The preliminary purchase price was allocated to the assets and liabilities based on their fair values.  The following is the allocation of the purchase price:

		(Amounts in thousands)
Other current assets, net of cash acquired		$	566
Inventories			307
Property, plant and equipment			1,863
Goodwill			1,584
Current liabilities			(706	)
Purchase price, net of cash acquired		$	3,614

The goodwill is expected to be deductible for income tax purposes.

3.  GOODWILL IMPAIRMENT

The Company records the excess of purchase price over the fair value of the net assets of acquired companies as goodwill or other identifiable intangible assets.  The Company performs an annual test for goodwill impairment 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.  The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level.  The Company has aggregated US Windows and CWD into a single reporting unit since they have similar economic characteristics.  Thus, the Company has two reporting units- (Siding, Fencing, and Stone) and (Windows and Doors.)  Separate valuations are performed for each of these reporting units in order to test for impairment.   During the year ended December 31, 2008, the Company acquired USV on October 31, 2008, which was included within the Siding, Fencing, and Stone reporting unit.   

The Company uses the two-step method to determine goodwill impairment.  If the carrying amount of a reporting unit exceeds its fair value (Step One), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (Step Two).  The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

 
 

 

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To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies.  The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate.  The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples.  These comparable public company multiples are then applied to the reporting unit’s financial performance.  The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable.  Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.  This weighting is consistent with previous years.

The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples.  In order to accurately forecast future cash flows, the Company estimated single family housing starts and the growth rate for the repair and remodeling market through 2013.  These assumptions modeled the information published by the National Association of Home Builders (“NAHB”).  The Company estimated housing starts growing from current levels to approximately 1,100,000 in 2013 (terminal growth year) and the repair and remodeling growth rate at approximately 3.0% for 2013.  The sales growth and operating earnings increases coincided with the growth in these two key assumptions.  The Company utilized its weighted average cost of capital and its long-term growth rate to derive the appropriate capitalization rate used in the terminal value calculation.  The Company utilized these fair value estimate assumptions during the impairment reviews conducted in the quarter ended September 27, 2008.

The Company determined that the depressed residential housing and remodeling market was a triggering event during the third quarter of 2008 with housing starts declining to a historical low in August 2008 which caused U.S. Windows to lower their forecasted cash flow projections.  As a result of the interim impairment test, the Company concluded that the Windows and Doors reporting unit failed Step One of the impairment test comparing carrying value and fair value.  The Siding, Fencing, and Stone fair value exceeded its carrying value by approximately 20% as of September 27, 2008.  The Step Two Windows and Doors impairment test results indicated that an estimated impairment of approximately $200.0 million existed at September 27, 2008.  This impairment was recognized within the Windows and Doors segment in the third quarter of 2008.

The Company performed the following sensitivity analysis on the reporting unit Step One fair values as of September 27, 2008.

(amounts in thousands)

Estimated Windows and Doors reporting unit fair value decrease in the event of a 10% increase in the weighting of the market multiples method		$	(15,800	)
Estimated Siding, Fencing, and Stone reporting unit fair value decrease in the event of a 10% increase in the weighting of the market multiples method			(500	)

A summary of the key assumptions utilized in the goodwill impairment analysis at September 27, 2008 as it relates to the Step One fair values and the sensitivities for these assumptions follows:

		Windows and Doors				Siding, Fencing, and Stone
Income approach:
Estimated housing starts in 2013			1,100,000				1,100,000
Terminal growth rate			3.5	%			3.0	%
Discount rates			14.0	%			14.0	%
Market approach:
Market multiples			11.0				9.0
Control premiums			20	%			10	%
(amounts in thousands)		Windows and Doors				Siding, Fencing, and Stone
Estimated fair value decrease in the event of a 1%
decrease in the terminal year growth rate		$	26,629			$	38,064
Estimated fair value decrease in the event of a 1%
increase in the discount rate			43,331				64,261
Estimated fair value decrease in the event of a 1 basis
point decrease in market multiples			27,472				89,813
Estimated fair value decrease in the event of a 1%
decrease in the control premium			2,518				7,348

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

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The reporting unit goodwill balances were as follows as of October 3, 2009 and December 31, 2008:

		(Amounts in thousands)
		October 3, 2009				December 31, 2008
Windows and Doors		$	72,425			$	70,683
Siding, Fencing and Stone			320,107				320,096
		$	392,532			$	390,779

The increase in goodwill during the nine months ended October 3, 2009 was due to currency translation adjustments of approximately $1.1 million and purchase price adjustments of approximately $0.6 million.

4.  INTANGIBLE ASSETS

The following table presents the components of intangible assets as of October 3, 2009 and December 31, 2008:

 

		Average
		Amortization
		Period								Accumulated				Net Carrying
		(in Years)				Cost				Amortization				Value
						(Amounts in thousands)
As of October 3, 2009
Patents			14			$	12,770			$	(5,241	)		$	7,529
Trademarks/tradenames			15				85,644				(20,000	)			65,644
Customer relationships			13				158,158				(53,150	)			105,008
Other			4				1,630				(831	)			799
Total intangible assets						$	258,202			$	(79,222	)		$	178,980
As of December 31, 2008
Patents			14			$	12,770			$	(4,533	)		$	8,237
Trademarks/tradenames			15				85,644				(15,578	)			70,066
Customer relationships			13				158,158				(43,850	)			114,308
Other			4				1,520				(527	)			993
Total intangible assets						$	258,092			$	(64,488	)		$	193,604

 

Amortization expense for the remainder of 2009 and for fiscal years 2010, 2011, 2012, and 2013 is estimated to be approximately $4.9 million, $19.6 million, $19.2 million, $19.1 million, and $19.1 million, respectively.

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5.  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of the following:

		Three Months Ended								Nine Months Ended
		October 3,  2009				September 27, 2008				October 3,  2009				September 27, 2008
		(Amounts in thousands)
Net income (loss)		$	4,385			$	(190,832	)		$	(59,132	)		$	(232,167	)
Foreign currency translation adjustment			2,154				(1,296	)			3,352				(1,875	)
Comprehensive income (loss)		$	6,539			$	(192,128	)		$	(55,780	)		$	(234,042	)

6.  LONG-TERM DEBT

Long-term debt in the accompanying condensed consolidated balance sheets at October 3, 2009 and December 31, 2008 consists of the following:

		October 3, 2009				December 31, 2008
		(Amounts in thousands)
Senior secured asset based revolving credit facility		$	65,000			$	60,000
9% Senior subordinated notes due 2012, including     unamortized premium of $115 and $146			360,115				360,146
11.75% Senior secured notes due 2013, net of     unamortized discount of $5,172 and $5,960			694,828				694,040
		$	1,119,943			$	1,114,186
Less:
9% Senior subordinated notes due to related parties,
including unamortized premium of $75			234,707				-
		$	885,236			$	1,114,186

 

 

 

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% senior secured notes due 2013 (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 the existing senior secured credit facility of approximately $676.2 million of term loan borrowings and approximately $15.0 million of revolver borrowings.  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.  On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its Senior Secured Notes in a private placement transaction.  The net proceeds will be utilized for general corporate purposes.

 

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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 indenture governing the Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries’ assets. On November 3, 2008, Ply Gem Industries completed its exchange offer with respect to the Senior Secured Notes by exchanging $700.0 million Senior Secured Notes, which were registered under the Securities Act of 1933, as amended (the "Securities Act"), for $700.0 million of the issued and outstanding Senior Secured Notes.  Upon completion of the exchange offer, all issued and outstanding Senior Secured Notes were registered under the Securities Act.

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 the Company’s obligations under the 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.

In addition, the Company’s stock ownership in its subsidiaries collateralizes the Senior Secured Notes 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 requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission.  As of October 3, 2009, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.

Senior Secured Asset Based Revolving Credit Facility due 2013

Concurrently with the Senior Secured Notes offering on June 9, 2008, 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 provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and United States dollars by CWD.  On July 16, 2009, the Company amended the ABL facility, increasing the available commitments to $175.0 million, and on October 9, 2009, the Company further amended the ABL facility to among other things, allow for the issuance of the additional $25.0 million of Senior Secured Notes.

The ABL Facility will mature on October 15, 2011 if Ply Gem Industries’ Senior Subordinated Notes are not refinanced by such date.  The Company may need to refinance, extend the maturity or otherwise amend the ABL facility.  The Company’s ability to refinance the ABL facility and/or Senior Subordinated Notes is dependent, among other things, on business conditions and our financial performance.  In addition, the ABL Facility provides that the revolving commitments may be increased to $200.0 million, subject to certain terms and conditions.  The Company had borrowings of $65.0 million outstanding under the ABL Facility as of October 3, 2009.

As of October 3, 2009, Ply Gem Industries had approximately $102.9 million of contractual availability and approximately $76.5 million of borrowing base availability under the ABL Facility, reflecting $65.0 million of borrowings outstanding and approximately $7.1 million of letters of credit issued.

The interest rates applicable to loans under the ABL Facility are, at the Company’s 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.  As of October 3, 2009, the Company’s interest rate on the ABL Facility was approximately 6.0%.  The ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.1:1.0 if the Company’s borrowings under the ABL Facility exceed certain levels.

 

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In July 2009, the Company amended the ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million, and change both the availability threshold for certain cash dominion events and compliance with the fixed charge and other covenants from 15% of revolving credit commitments to 15% of the lower of the revolving credit commitments or the borrowing base but not less than $20.0 million. The Company must maintain excess availability of at least $20.0 million to avoid being subject to the fixed charge covenant ratio.  As a condition to this availability increase, the applicable margins payable on the loans were increased and made subject to certain minimums.  In October 2009, the Company amended the ABL Facility to allow for the issuance of the additional $25.0 million Senior Secured Notes and to permit certain refinancing transactions with respect to the Senior Subordinated Notes (as defined below).  The October amendment also permits Ply Gem Industries to issue equity securities to Ply Gem Holdings, its parent.  The October 2009 amendment does not affect the $175.0 million availability amount or the applicable interest rate margins under the ABL Facility.

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.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of CWD, which is a borrower under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of CWD pledged only to secure the Canadian sub-facility.

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 senior subordinated notes due 2012 (the “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 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, Inc. and its subsidiaries.  Ply Gem Industries pays interest semi-annually on February 15 and August 15 of each year.  See Note 14 for related party transaction related to the Senior Subordinated Notes.

On March 24, 2009, after receipt of the requisite consents, Ply Gem Industries entered into a Fifth Supplemental Indenture (the “Fifth Supplemental Indenture”) among Ply Gem Industries, the Company, the other guarantors party thereto and U.S. Bank National Association, as trustee, containing the amendments to the indenture.  The Fifth Supplemental Indenture eliminated substantially all of the restrictive covenants of the indenture governing the Senior Subordinated Notes, including, among other things, the limitation on indebtedness, the change of control put provisions, the limitation on restricted payments, the limitation on liens, the limitation on asset sales, the limitation on transactions with affiliates, the limitation on dividends and other restrictions affecting restricted subsidiaries, the limitation on layering indebtedness and the limitation on the issuance or sale of equity interests in restricted subsidiaries.  The Fifth Supplemental Indenture also eliminated certain events of default in the indenture governing the Senior Subordinated Notes.  The amendments contained in the Fifth Supplemental Indenture became operative upon completion of the purchase of a specified amount of the Senior Subordinated Notes by certain affiliates of the Company’s controlling stockholder.  In connection with this debt modification, the Company incurred third-party fees of approximately $2.5 million during the nine months ended October 3, 2009 which has been recorded within interest expense in the condensed consolidated statement of operations.

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. 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.  On June 9, 2008, the Company used the proceeds from the Senior Secured Notes offering to pay off the obligations under the senior term loan facility.

 

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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 nine month period ended September 27, 2008 which has been recorded within interest expense on the condensed consolidated statement of operations.  The Company deferred costs of approximately $26.6 million in conjunction with this transaction which have been recorded within other long-term assets in the condensed consolidated balance sheets.

7.  PENSION PLANS

The Company has two separate pension plans, the Ply Gem Group Pension Plan and the MW Manufacturers, Inc. Retirement Plan.

 

The Company’s net periodic expense for the combined pension plans for the periods indicated consists of the following components:

		For the three months ended October 3, 2009				For the three months ended September 27, 2008
		(Amounts in thousands)
Service cost		$	44			$	48
Interest cost			500				506
Expected return on plan assets			(366	)			(550	)
Amortization of loss			125				-
Net periodic expense		$	303			$	4

 

 

 

 

		For the nine months ended October 3, 2009				For the nine months ended September 27, 2008
		(Amounts in thousands)
Service cost		$	132			$	145
Interest cost			1,500				1,517
Expected return on plan assets			(1,098	)			(1,651	)
Amortization of loss			377				-
Net periodic expense		$	911			$	11

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8.  COMMITMENTS AND CONTINGENCIES

 

In connection with the acquisition of Ply Gem Industries from Nortek, Inc. (“Nortek”) in February 2004, Nortek 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 and intent 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 $7.6 million and $7.8 million at October 3, 2009 and December 31, 2008, respectively.  The Company has indemnified third parties in certain transactions involving dispositions of former subsidiaries.  As of October 3, 2009 and December 31, 2008, the Company has recorded liabilities in relation to these indemnifications of approximately $2.5 million and $2.7 million, respectively, in current liabilities and $5.1 million and $5.1 million, respectively, in long-term liabilities, consisting of the following:

		October 3, 2009				December 31, 2008
		(Amounts in thousands)
Product claim liabilities		$	3,725			$	3,718
Multi-employer pension plan withdrawal liability			3,342				3,492
Other			577				584
		$	7,644			$	7,794

The Company sells a number of products and offers a number of warranties on these products.  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 expected to be incurred under its warranties and records a liability for such costs at the time of sale, which is recorded in both accrued expenses and other long-term liabilities in the accompanying condensed consolidated balance sheets.  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 October 3, 2009 and December 31, 2008, warranty liabilities of approximately $11.1 million and $12.1 million, respectively, have been recorded in current liabilities and approximately $32.9 million and $33.6 million, respectively, have been recorded in long-term liabilities.

Changes in the Company’s warranty liabilities are as follows:

		For the three months ended October 3, 2009				For the three months ended September 27, 2008
		(Amounts in thousands)
Balance, beginning of period		$	44,204			$	48,793
Warranty expense during period			3,459				2,510
Settlements made during period			(3,688	)			(4,715	)
Balance, end of period		$	43,975			$	46,588

 

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		For the nine months ended October 3, 2009				For the nine months ended September 27, 2008
		(Amounts in thousands)
Balance, beginning of period		$	45,653			$	49,899
Warranty expense during period			9,986				9,136
Settlements made during period			(11,664	)			(13,091	)
Liability assumed with Pacific Windows acquisition			-				644
Balance, end of period		$	43,975			$	46,588

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.  Also, 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.  However, the Company is not aware of any contingencies for which a material loss is reasonably possible.

 

9.  ACCRUED EXPENSES, TAXES, AND OTHER LONG-TERM LIABILITIES

Accrued expenses and taxes consist of the following at October 3, 2009 and December 31, 2008:

 

		October 3, 2009				December 31, 2008
		(Amounts in thousands)
Insurance		$	5,181			$	5,169
Employee compensation and benefits			6,361				6,705
Sales and marketing			24,121				18,023
Product warranty			11,101				12,069
Short-term product claim liability			2,075				2,321
Accrued freight			1,954				748
Interest			30,206				17,238
Accrued severance			234				471
Accrued pension			1,810				1,810
Accrued deferred compensation			2,081				1,886
Accrued taxes			2,730				1,188
Other			13,776				8,676
		$	101,630			$	76,304

 

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Other long-term liabilities consist of the following at October 3, 2009 and December 31, 2008:

 

		October 3, 2009				December 31, 2008
		(Amounts in thousands)
Insurance		$	3,449			$	3,697
Pension liabilities			10,817				10,744
Multi-employer pension withdrawal liability			3,342				3,492
Product warranty			32,874				33,584
Long-term product claim liability			1,649				1,396
Long-term deferred compensation			1,711				3,416
Liabilities for tax uncertainties			10,128				7,806
Other			5,132				4,098
		$	69,102			$	68,233

10.   RESTRUCTURING

 

In September 2008, the Company commenced its plan to move certain metal production from its Valencia, Pennsylvania facility to its Sidney, Ohio facility.  The Valencia facility remained open on a reduced production schedule, primarily performing contract coating for third parties.  Total costs to move this production were approximately $2.0 million consisting of termination benefits, contract termination costs and other restructuring costs of approximately $0.7 million, $0.1 million and $1.2 million, respectively.

In November 2008, the Company announced the closure of its Hammonton, New Jersey and Phoenix, Arizona window and door manufacturing facilities.  During December 2008, production began to shift to other locations and production ceased at Hammonton and Phoenix during 2009.  By shifting production to other facilities within the Company, the closures reduced costs and increased operating efficiencies.  Total costs are expected to be approximately $5.4 million, including approximately $0.9 million for personnel-related costs and approximately $4.5 million in other facilities-related costs, which include approximately $4.1 million in lease costs.

On April 2, 2009, the Company announced that it would consolidate production across several of its manufacturing facilities improving the Company’s overall operating efficiency.  The Company’s plans include shifting the majority of the production from its Kearney, Missouri facility to its other three vinyl siding manufacturing facilities.  The Company plans to continue to operate the Kearney facility on a limited basis until the housing market recovers.  The Company also plans to close its Tupelo, Mississippi window and door manufacturing facility.  In addition, the Company will consolidate certain of the vinyl lineal production to its Rocky Mount, Virginia facility and realign production of its west coast window and door facilities at Sacramento, California and Auburn, Washington to better serve customers and improve overall operating efficiency. In connection with the April 2, 2009 announcement, the Company expects to incur pre-tax exit and restructuring costs, all of which will be cash charges, of approximately $2.3 million, including approximately $1.1 million for personnel-related costs, approximately $0.5 million for contract termination costs, and approximately $0.7 million in other facilities-related costs.

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The following table summarizes the Company’s restructuring activity for the nine months ended October 3, 2009:

(amounts in thousands)		Accrued as of				Adjustments				Cash payments				Expensed				Accrued as of
		December 31, 2008				during 2009				during 2009				during 2009				October 3, 2009
Valencia, PA
Severance costs		$	243			$	-			$	(362	)		$	119			$	-
Equipment removal and other			-				-				(889	)			889				-
		$	243			$	-			$	(1,251	)		$	1,008			$	-
Hammonton, NJ
Severance costs		$	217			$	(36	)		$	(872	)		$	691			$	-
Other termination benefits			-				136				(136	)			-				-
Contract terminations			-				312				(577	)			2,515				2,250
Equipment removal and other			-				-				(191	)			191				-
		$	217			$	412			$	(1,776	)		$	3,397			$	2,250
Phoenix, AZ
Severance costs		$	11			$	-			$	(44	)		$	33			$	-
Other termination benefits			-				16				(16	)			-				-
Contract terminations			-				-				(490	)			1,423				933
Equipment removal and other			-				-				(184	)			184				-
		$	11			$	16			$	(734	)		$	1,640			$	933
Kearney, MO
Severance costs		$	-			$	-			$	(612	)		$	651			$	39
Equipment removal and other			-				-				(610	)			610				-
		$	-			$	-			$	(1,222	)		$	1,261			$	39
Tupelo, MS
Severance costs		$	-			$	-			$	(145	)		$	145			$	-
Contract terminations			-				-				(31	)			140				109
Equipment removal and other			-				-				(43	)			43				-
		$	-			$	-			$	(219	)		$	328			$	109
Auburn, WA
Severance costs		$	-			$	-			$	(44	)		$	239			$	195
Contract terminations			-				-				-				-				-
Equipment removal and other			-				-				(28	)			18				(10	)
		$	-			$	-			$	(72	)		$	257			$	185

For the three and nine month periods ended October 3, 2009, the Company incurred costs of approximately $0.9 million and $7.9 million, respectively.  For the three months ended October 3, 2009, approximately $0.6 million was recorded in selling, general and administrative expenses in the Siding, Fencing and Stone segment and approximately $0.3 million was recorded primarily in selling, general and administrative expenses in the Windows and Doors segment.  For the nine months ended October 3, 2009, approximately $2.3 million was recorded in selling, general and administrative expenses in the Siding, Fencing and Stone segment and approximately $5.6 million was recorded primarily in selling, general and administrative expenses in the Windows and Doors segment.

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11.   INCOME TAXES

 

 

The Company utilizes the asset and liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs.  A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

Estimates are required with respect to, among other things, the appropriate state income tax rates to use in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  Subsequent to February 12, 2004, U.S. federal income tax returns are prepared and filed by Ply Gem Investment Holdings, Inc. on behalf of itself, Ply Gem Holdings, and Ply Gem Industries and its subsidiaries.  The existing tax sharing agreement between Ply Gem Holdings and Ply Gem Investment Holdings, 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 federal income tax returns and separate state income tax returns.  CWD Windows and Doors files separate Canadian income tax returns.

 

Income taxes for the interim periods have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company includes certain items treated as discrete events to arrive at an estimated overall tax amount.  As of October 3, 2009, the Company’s estimated effective income tax rate for the full year was approximately 17.8%, which varied from the statutory rate primarily due to state tax expense, an increase in the valuation allowance, and the tax benefit associated with cancellation of debt income.  As of October 3, 2009, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets.  At December 31, 2008, the Company was in a net deferred tax liability position and had sufficient taxable income from reversing taxable temporary differences to realize the federal deferred tax assets.  The Company scheduled out the reversing temporary differences associated with their deferred tax assets and deferred tax liabilities to conclude that a full valuation allowance was not necessary at December 31, 2008.  The Company currently has book goodwill of approximately $13.4 million that is not amortized and results in a deferred tax liability of approximately $2.2 million at October 3, 2009.  Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets.  The Company continues to evaluate the realizability of its net deferred tax assets and its estimates are subject to change.  During the three and nine months ended October 3, 2009, the Company’s valuation allowance increased by approximately $9.2 million and $26.4 million, respectively.  As of September 27, 2008, the Company’s estimated effective tax rate for the full year was 37.8%.

 

Affiliates of the Company’s controlling stockholder have purchased approximately $234.7 million of the Senior Subordinated Notes as of October 3, 2009.  The Company determined that approximately $115.1 million would be considered cancellation of indebtedness (“COD”) income as the acquiring party was deemed a related party for tax purposes.  In connection with this transaction, the Company was able to reduce certain tax attributes including net operating losses ("NOLs") and tax basis in certain assets in lieu of recognizing approximately $115.1 million of COD income for income tax purposes during the nine months ended October 3, 2009.  For the three months ended October 3, 2009, the Company was able to reduce certain tax attributes including NOLs and tax basis in certain assets in lieu of recognizing $19.3 million of COD income for tax purposes. The Company is in the process of determining the COD amount for the additional Senior Subordinated Notes purchased by affiliates of the Company’s stockholder subsequent to October 3, 2009.  The impact of this transaction will be recognized during the fourth quarter.

 

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”).  Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of COD income arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010.  The COD income can be deferred for five years and then included in taxable income ratably over the next five years.  The Company does not believe it will have any federal cash income tax expense associated with the COD income.

 

During 2009, the Company filed an amended federal income tax return for the year ended December 31, 2005 in order to adjust its net operating loss limitations.  The Company recorded the resulting income tax benefit as an income tax receivable of approximately $4.1 million as of October 3, 2009, which has been recorded in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of October 3, 2009.

 

 

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Despite our belief that our tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities.  Our tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest applicable to both permanent and temporary differences.  The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law.  During the three and nine months ended October 3, 2009, the Company increased the tax contingency reserve by $0.1 million and $2.3 million, respectively, predominantly for state income tax items.  During the next twelve months, it is reasonably possible the Company may reverse approximately $6.0 million of tax contingency reserves primarily related to additional federal and state taxes that have expiring statutes of limitations.  The Company’s federal income tax return for the tax year ended December 31, 2008 is currently under examination by the Internal Revenue Service as well as the 2005 amended net operating loss limitation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 12.  STOCK-BASED COMPENSATION

Stock Option Plan

A rollforward of stock options outstanding during the nine months ended October 3, 2009 is as follows:

		Stock Options				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (Years)
Balance at January 1, 2009			314,694			$	48.79				7.83
Granted			-				-				-
Forfeited or expired			(6,900	)		$	44.20				-
Balance at October 3, 2009			307,794			$	48.89				6.98

As of October 3, 2009, 105,094 options have vested.  At October 3, 2009, the Company had approximately $0.1 million of total unrecognized compensation expense that will be recognized over a weighted average period of 2.1 years.

Other Share-Based Compensation

Upon completion of the acquisition of Ply Gem, the acquisition of MW 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.   Ply Gem Prime Holdings, Inc. is the sole shareholder of Ply Gem Investment Holdings, Inc., which is the sole shareholder of Ply Gem Holdings.

 

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A rollforward of Ply Gem Prime Holdings, Inc.’s common stock shares during the nine months ended October 3, 2009 is as follows.

		Common Stock Shares Owned by Management
Balance at January 1, 2009			642,895
Shares issued			-
Shares repurchased			-
Balance at October 3, 2009			642,895

13.  SEGMENT INFORMATION

The Company’s operating segments are components of the business for which separate financial information is available and are evaluated regularly by management in deciding how to allocate resources and in assessing performance.  Operating segments meeting certain aggregation criteria are combined into one reportable segment for disclosure purposes.

The Company has two reportable segments: 1) Siding, Fencing, and Stone, and 2) Windows and Doors.  Prior to the acquisition of USV on October 31, 2008, the Siding, Fencing, and Stone segment was titled Siding, Fencing, and Railing and did not include USV.

The operating earnings (loss) 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.

		Three months ended								Nine months ended
		October 3, 2009				September 27, 2008				October 3, 2009				September 27, 2008
		(Amounts in thousands)								(Amounts in thousands)
Net Sales
Siding, Fencing, and Stone		$	182,166			$	216,446			$	456,239			$	572,756
Windows and Doors			111,303				126,379				280,557				367,722
		$	293,469			$	342,825			$	736,796			$	940,478
Operating Earnings (loss)
Siding, Fencing, and Stone		$	39,721			$	27,146			$	59,956			$	44,952
Windows and Doors			3,010				(201,171	)			(21,671	)			(207,519	)
Unallocated			(3,751	)			(2,458	)			(10,288	)			(7,327	)
		$	38,980			$	(176,483	)		$	27,997			$	(169,894	)
		As of				As of
		October 3, 2009				December 31, 2008
Total assets
Siding, Fencing, and Stone		$	645,032			$	655,183
Windows and Doors			346,843				357,471
Unallocated			74,570				91,399
		$	1,066,445			$	1,104,053

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14.  RELATED PARTY TRANSACTIONS

The Company has entered into two advisory agreements with an affiliate of CI Capital Partners LLC, formerly Caxton-Iseman Capital, LLC (the “Caxton-Iseman Party”), which we refer to as the “Debt Financing Advisory Agreement” and the “General Advisory Agreement”.  The Caxton-Iseman Party provides the Company with acquisition and financial advisory services as the Board of Directors shall reasonably request.  Under the General Advisory Agreement, the Company expensed management fees to the Caxton-Iseman Party of approximately $0.4 million and $0.8 million within selling, general, and administrative expenses for the three month periods ended October 3, 2009 and September 27, 2008, respectively, and approximately $1.8 million and $1.6 million within selling, general, and administrative expenses for the nine month periods ended October 3, 2009 and September 27, 2008, respectively.

As of October 3, 2009, certain affiliates of the Company's controlling stockholder have acquired approximately $234.7 million of the outstanding Senior Subordinated Notes. Subsequent to October 3, 2009, these affiliates had acquired an additional $46.7 million of the outstanding Senior Subordinated Notes bringing the total owned by related parties to approximately $281.4 million including an unamortized premium of approximately $0.1 million. In the future, the Company and its affiliates may consider conducting exchange or tender offers for its indebtedness or purchasing or otherwise acquiring its indebtedness.

 

 

 

 

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15.  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 October 3, 2009 and December 31, 2008 and for the three and nine month periods ended October 3, 2009 and September 27, 2008.  The non-guarantor information presented represents CWD, our Canadian subsidiary.