SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 2, 1994 or --------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 1-4087 ---------- PLY GEM INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-1727150 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 Third Avenue, New York, NY 10017 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 212-832-1550 -------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 30, 1994 - -------------------------------------- ------------------------------- Common stock, par value $.25 per share 14,853,506 Shares PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) July 2, December 31, ASSETS 1994 1993 ------ ------------------------- (Unaudited) Cash and cash equivalents $ 10,193 $ 12,499 Marketable securities 1,879 1,942 Accounts receivable, net of allowance of $7,790; $7,197 in 1993 77,355 54,432 Inventories 133,700 117,515 Prepaid expenses and other current assets 16,999 11,077 -------- -------- Current assets 240,126 197,465 Funds held for construction 2,114 2,375 Property, plant and equipment - at cost net of accumulated depreciation and amortization of $42,709; $38,704 in 1993 70,866 67,766 Patents and trademarks, net of accumulated amortization of $7,250; $6,677 in 1993 17,027 17,595 Other intangible assets - net 20,226 21,557 Cost in excess of net assets acquired - net 25,761 26,492 Other assets 27,584 11,694 -------- -------- $403,704 $344,944 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Accounts payable and accrued expenses $ 61,022 $ 55,764 Notes payable 2,365 Current maturities of long-term debt 928 2,841 -------- -------- Current liabilities 61,950 60,970 Long-term debt 129,264 142,898 Capital leases 7,153 7,166 Deferred income taxes and other liabilities 21,819 4,968 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued Common stock, $.25 par value; authorized 30,000,000 shares; issued 16,993,832; 11,872,509; in 1993 4,248 2,968 Additional paid-in capital 142,245 64,006 Retained earnings 76,785 72,601 Less: Treasury stock-at cost (2,094,551 shares; 910,073 in 1993) 38,573 9,362 Unamortized restricted stock 1,187 1,271 -------- -------- Stockholders' equity 183,518 128,942 -------- -------- $403,704 $344,944 ======== ======== See accompanying notes to financial statements. 2 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in Thousands) Quarter Ended -------------- July 2 June 30 1994 1993 ----------- ----------- Net sales $ 219,805 $ 184,422 Cost of goods sold 173,726 148,522 ----------- ----------- Gross profit 46,079 35,900 Selling, general and administrative expenses 31,353 25,703 ----------- ----------- Income from operations 14,726 10,197 Amortization of goodwill and other intangibles (1,141) (1,181) Interest expense (1,750) (2,727) Investment and other income (expense), net (459) (23) ----------- ----------- Income before income taxes 11,376 6,266 Income taxes 5,111 2,819 ----------- ----------- Net income $ 6,265 $ 3,447 =========== =========== Earnings per share: Primary $.40 $.31 Fully diluted .40 .31 Weighted average number of shares outstanding: Primary 15,756,000 11,254,000 Fully diluted 15,756,000 14,008,000 Cash dividends per share $.03 $.03 See accompanying notes to financial statements. 3 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in Thousands) Six Months Ended ----------------- July 2 June 30 1994 1993 ----------- ----------- Net sales $ 383,217 $ 330,769 Cost of goods sold 310,661 268,860 ----------- ----------- Gross profit 72,556 61,909 Selling, general and administrative expenses 56,482 51,801 ----------- ----------- Income from operations 16,074 10,108 Amortization of goodwill and other intangibles (2,325) (2,377) Interest expense (4,412) (5,119) Investment and other income (expense), net (333) (65) ----------- ----------- Income before income taxes 9,004 2,547 Income taxes 4,044 1,146 ----------- ----------- Net income $ 4,960 $ 1,401 =========== =========== Earnings per share: Primary $.36 $.12 Fully diluted .34 .12 Weighted average number of shares outstanding: Primary 13,639,000 11,480,000 Fully diluted 14,623,000 14,234,000 Cash dividends per share $.06 $.06 See accompanying notes to financial statements. 4 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Six Months Ended ------------------ July 2, June 30, 1994 1993 ------- ------- Cash flows from operating activities - ------------------------------------ Net income $ 4,960 $ 1,401 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization $ 6,930 $ 6,270 Provision for doubtful accounts 1,123 2,433 Changes in assets and liabilities: Accounts receivable (24,046) (22,486) Inventories (16,185) (23,386) Prepaid expenses and other (5,922) (833) current assets Accounts payable and accrued expenses 5,258 14,526 Other 961 (31,881) 552 (22,924) ------- ------- ------- ------- Net cash (used in) operating activities (26,921) (21,523) ------- ------- Cash flows from investing activities - ------------------------------------ Additions to property, plant and equipment (7,654) (11,157) Funds used for construction 261 3,913 Other 285 532 ------- ------- Net cash (used in) investing activities (7,108) (6,712) ------- ------- Cash flows from financing activities - ------------------------------------ Short-term debt borrowings, (repayments), net (2,365) 3,674 Repayments of long-term debt (1,875) (4,604) Long-term borrowings 36,328 31,215 Cash dividends (776) (646) Other 411 (209) ------- ------- Net cash provided by financing activities 31,723 29,430 ------- ------- Net increase (decrease) in cash and cash equivalents (2,306) 1,195 Cash and cash equivalents at beginning of period 12,499 1,880 ------- ------- Cash and cash equivalents at end of period $10,193 $ 3,075 ======= ======= See accompanying notes to financial statements. 5 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year items have been reclassified to conform to the 1994 presentation. In 1994 the Company modified its interim fiscal reporting periods. Each period will end on the Saturday nearest to the end of the respective calendar quarters for March, June and September. This change will have no effect on the annual reporting period which will continue to end on December 31 and will have no material effect on the quarterly or six month comparisons. These statements include all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of financial position and results of operations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the latest annual report on Form 10-K. NOTE 2 - The major classes of inventories were as follows: (In Thousands) July 2, December 31, 1994 1993 -------- ------------ Finished goods $ 69,634 $ 56,630 Work in process 26,909 25,806 Raw materials 37,157 35,079 -------- -------- $133,700 $117,515 ======== ======== NOTE 3 - Earnings per share of common stock are based on the weighted average number of shares outstanding during each of the periods. Primary and fully diluted earnings per share include the dilutive effect of unexercised stock options as modified for options in excess of 20% of shares outstanding. NOTE 4 - Supplemental cash flow information for the six month periods are as follows: (In Thousands) July 2, June 30, 1994 1993 ------- -------- Interest paid $2,181 $3,565 Income taxes paid 2,487 2,900 Non-cash financing activities involve the issuance of common stock during the first quarter of 1994 upon conversion of $49,963,000 of the Company's subordinated debentures. 6 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 5 - The accumulated amortization of cost in excess of net assets acquired and other intangibles is $24,544,000 at July 2, 1994 and $26,136,000 at December 31, 1993. NOTE 6 - The Company's loan agreement with its banks require the attainment of certain working capital and tangible net worth levels and the maintenance of various financial ratios, among its provisions. Under the most restrictive of these covenants, at July 2, 1994 approximately $2,170,000 of retained earnings was available for the payment of dividends for the balance of 1994. NOTE 7 - Hoover, a wholly-owned subsidiary of the Company, is a defendant, along with many other parties, in a number of commercial lawsuits, including a purported class action on behalf of certain Maryland homeowners, alleging property damage caused by alleged defects in certain pressure treated interior wood products. Hoover has not manufactured or sold these products since August 1988. The Company is also a defendant in many of these suits. The number of lawsuits pending, as of July 2, 1994, where Hoover is not being defended and indemnified by a third party, as well as the number of lawsuits filed in 1993 and 1994 have declined significantly from earlier periods. Many of the suits and claims have been settled. In those suits that remain pending, direct defense costs are being paid by either insurance carriers, under reservations of rights agreements, or out of insurance proceeds. Two actions have proceeded to trial against Hoover and resulted in jury verdicts against it. In one of these actions, judgment was entered in Hoover's favor by the court after a jury verdict against it and the plaintiff's petition to appeal the judgment entered in Hoover's favor was denied. Hoover is appealing the other judgment and believes that it has meritorious grounds for overturning it in whole or in part. Hoover and the Company have engaged in litigation with their insurers regarding coverage for these lawsuits and claims. Hoover has settled its coverage claims with a majority of its insurers and is negotiating settlements with others. Hoover and the Company believe they have meritorious claims for coverage from their remaining unsettled insurers and are seeking declaratory judgments confirming such coverage. The proceeds from settled insurance claims, along with the proceeds from a settlement of claims by Hoover against certain suppliers of materials used by it in the production of treated wood, are available for the settlement of the underlying property damage actions, including the jury verdict now on appeal. The Company believes that Hoover's remaining coverage disputes will be resolved within the next two years on a satisfactory basis and a substantial amount of additional coverage will be available to Hoover. In reaching this belief, it has analyzed Hoover's insurance coverage, considered its history of successful settlements with primary and excess insurers and consulted with counsel. Hoover and the Company are vigorously defending the underlying lawsuits which cannot be resolved on a reasonable basis and believe that they have meritorious defenses to those suits including, in the case of the Company, the defense that it has been improperly joined, as it did not manufacture or market the Hoover products at issue, and is not legally liable for the damage allegedly caused by them. 7 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) In accordance with the provisions of Financial Accounting Standards Board Interpretation No. 39, which became effective on January 1, 1994, Hoover has a receivable at July 2, 1994 (included in other assets) for $16.5 million for the estimated proceeds and recoveries related to insurance matters discussed above and an accrual for the same amount (included in other liabilities), for its estimated cost to resolve those matters not presently covered by existing settlements with insurance carriers and suppliers. In estimating both this liability, which Hoover expects to discharge over the next four years, and its anticipated additional insurance recoveries, Hoover and the Company have considered a number of factors, including: the number and exposure posed by the pending lawsuits; the significant decline in the number of lawsuits filed in 1993 and 1994; the availability of various legal defenses, including statutes of limitations; the existence of settlement protocols; an agreement indemnifying Hoover as to certain past and future claims; and Hoover's experience to date in settling with its insurance companies and the likely availability of additional insurance. Based on its evaluation, the Company believes that the ultimate resolution of the lawsuits and the insurance claims will not have a material adverse effect upon the financial position of the Company. NOTE 8 - During the period February 23 to March 23, 1994 holders of $49,963,000 principal amount of 10% Convertible Senior Subordinated Discount Debentures, due October 1, 2008, exchanged them for 2,751,328 shares of common stock of the Company. The remaining $37,000 of the original $50 million face amount was redeemed by the Company. If this transaction had occurred on January 1, 1994 fully dilutive earnings per share for the six months ended July 2, 1994 would have been $.36. 8 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JULY 2, 1994 RESULTS OF OPERATIONS - --------------------- Substantially all operating entities of the Company reported higher sales for the second quarter and first six months of 1994 when compared with the corresponding periods in 1993. Net sales for the second quarter of 1994 increased to a record $219.8 million, a 19.2% increase from the corresponding 1993 period. Net sales for the first six months of 1994 were 15.9% higher from the comparison period in 1993. Of the total net sales increase in the 1994 periods, approximately 65% is attributable to additional unit volume and approximately 35% to increases in average selling prices. Gross profit, expressed as a percent of sales, was 21.0% for the second quarter of 1994 as compared with 19.5% for the same 1993 period. Improved labor productivity, lower conversion costs and the absence of new plant start-up costs incurred in 1993 were primarily responsible for the improvement in gross profit. The first half of 1994 gross profit of 18.9% is substantially the same as in 1993. Selling, general and administrative expenses, as a percent of sales, for the 1994 second quarter were essentially flat compared to the prior year. For the first half comparison, selling, general and administrative expenses were 14.7% in 1994 compared to 15.7% in 1993. The decline is primarily due to economies resulting from absorption of fixed expenses over a larger sales base and a lower provision for bad debts partially offset by higher employment costs. Interest expense declined approximately $1 million for the second quarter of 1994 when compared to the second quarter of 1993. Lower interest expense for the quarter resulted from the conversion of the Company's 10% debentures into stock on March 25, 1994, partially offset by higher borrowing levels primarily needed to support the higher level of operations and slightly higher interest rates. Income from operations for the second quarter of 1994 was $14.7 million compared with $10.2 million last year. The 44% increase in operating income for the quarter as well as the increase for the first half of 1994 is primarily attributable to the reasons cited in the preceding paragraphs. The Company continues to explore various strategies to reduce costs including reduction in employment levels, consolidation or closure of certain operating locations, and consolidation of product lines. In pursuit of greater stockholder value, these strategies may lead to charges beginning in the third quarter which would likely be recovered through cost savings in future periods. 9 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JULY 2, 1994 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company used $26.9 million in cash from operations during the first six months of 1994 principally as a result of an increase in working capital primarily associated with the higher level of overall business activity and the timing of the tax benefit related to the exercise of stock options. Significant investing activities during the first six months of 1994 include capital expenditures of $7.7 million primarily incurred in the Company's Windows, Doors and Siding Group. Significant financing activities in the first six months of 1994 related to the net increase in revolving credit borrowings of $36.3 million used principally to finance the working capital and capital enditures of the Company. The Company's current ratio was 3.9 to 1 at July 2, 1994 compared to 3.2 at December 31, 1993. Available bank credit facilities were approximately $40 million at July 2, 1994. 10 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES July 2, 1994 PART II - OTHER INFORMATION All items are inapplicable except: Item 1. Legal Proceedings See Note 7 to the consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of Ply Gem Industries, Inc. was held on May 14, 1994. (b) The directors named in the Proxy Statement constituting the entire Board of Directors were elected to one year terms expiring in 1995, as follows: FOR WITHHELD ---------- -------- Albert Hersh 10,273,434 587,830 Jeffrey S. Silverman 10,278,298 582,966 Herbert P. Dooskin 10,279,123 582,141 Joseph Goldenberg 10,274,972 586,292 David Gotterer 10,274,600 586,664 Elihu H. Modlin 10,278,593 582,671 Monte R. Haymon 10,279,123 582,141 (c) A proposal submitted to the stockholders for approval of the 1994 employee Incentive Stock Plan was adopted as follows: FOR THE PROPOSAL: 6,144,420 AGAINST THE PROPOSAL: 2,748,287 WITHHELD: 58,480 (d) A proposal submitted to the stockholders for adoption of the 1994 Incentive Compensation Plan was adopted as follows: FOR THE PROPOSAL: 8,848,615 AGAINST THE PROPOSAL: 1,357,816 WITHHELD: 48,429 The Notice of Annual Meeting of Shareholders and Proxy Statement for Ply Gem Industries, Inc. dated April 15, 1994 was filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Act and is incorporated herein by reference. 11 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES July 2, 1994 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit 11 - Schedule of Computation of Net Income Per Share (b) Reports - None 12 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q July 2, 1994 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Ply Gem Industries, Inc. ------------------------ (Registrant) Date: August 15, 1994 /s/ Herbert P. Dooskin --------------- ------------------------ Executive Vice President Principal Financial Officer 13 Exhibit 11 PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATIONS OF NET INCOME PER SHARE (Unaudited) Quarter Six Months Ended Ended July 2, 1994 July 2, 1994 ------------ ------------ Weighted average common shares outstanding, net of unamortized restricted stock 14,570,000 13,025,000 Add: shares assumed to be issued upon exercise of employee stock options at the average market price under the modified treasury stock method and restricted stock earned 1,186,000 614,000 ----------- ----------- Primary shares 15,756,000 13,639,000 ----------- ----------- Add: additional shares assumed to be issued upon exercise of employee stock options at quarter - end market price (if higher than average market price) -0- 984,000 ----------- ----------- Fully diluted shares 15,756,000 14,623,000 =========== =========== Net Income $ 6,265,000 $ 4,960,000 =========== =========== Primary earnings per share $.40 $.36 ==== ==== Fully diluted earnings per share .40 .34 === === 14