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 October 1, 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
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PLY GEM INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-1727150
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Third Avenue, New York, NY 10017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 212-832-1550
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(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
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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 November 1, 1994
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Common stock, par value $.25 per share 14,973,234 Shares
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
October 1, December 31,
ASSETS 1994 1993
- ------ ----------- ------------
(Unaudited)
Cash and cash equivalents $ 10,121 $ 12,499
Marketable securities 1,850 1,942
Accounts receivable, net of allowance
of $8,332; $7,197 in 1993 75,220 54,432
Inventories 121,457 117,515
Prepaid expenses and other current assets 27,757 11,077
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Current assets 236,405 197,465
Funds held for construction 1,038 2,375
Property, plant and equipment - at cost
net of accumulated depreciation and
amortization of $44,381; $38,704 in 1993 72,581 67,766
Patents and trademarks, net of accumulated
amortization of $7,537; $6,677 in 1993 16,752 17,595
Other intangible assets - net 15,581 21,557
Cost in excess of net assets acquired - net 25,181 26,492
Other assets 28,430 11,694
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$395,968 $344,944
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Accounts payable and accrued expenses $ 79,661 $ 55,764
Notes payable and current maturities
of long-term debt and capital leases 489 5,206
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Current liabilities 80,150 60,970
Long-term debt 112,182 142,898
Capital leases 7,143 7,166
Deferred income taxes and other liabilities 26,747 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 17,116,195;
11,872,509 in 1993 4,279 2,968
Additional paid-in capital 143,879 64,006
Retained earnings 62,361 72,601
Less: Treasury stock-at cost
(2,149,961 shares; 910,073 in 1993) 39,631 9,362
Unamortized restricted stock 1,142 1,271
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Stockholders' equity 169,746 128,942
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$395,968 $344,944
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See accompanying notes to the financial statements.
2
PLY GEM INDUSTRIES,INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
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October 1, September 30,
1994 1993
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Net sales $602,214 $539,735
Cost of goods sold 483,005 437,054
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Gross profit 119,209 102,681
Selling, general and administrative
expenses 85,635 78,915
Nonrecurring charges 36,275 --
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Income (loss) from operations (2,701) 23,766
Amortization of goodwill and
other intangibles (3,332) (3,557)
Interest expense (6,026) (7,821)
Investment and other income expense, net (414) (234)
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Income (loss) before income taxes (12,473) 12,154
Income taxes (benefit) (3,456) 5,493
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Net income (loss) ($9,017) $6,661
======== ========
Earnings (loss) per share:
Primary ($.66) $.57
Fully diluted (.66) .55
Weighted average number of shares
outstanding:
Primary 13,594,000 11,604,000
Fully diluted 13,594,000 14,967,000
Cash dividends per share $.09 $.09
See accompanying notes to financial statements.
3
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(Dollars in Thousands)
Quarter Ended
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October 1, September 30,
1994 1993
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Net sales $218,997 $208,966
Cost of goods sold 172,344 168,194
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Gross profit 46,653 40,772
Selling, general and administrative
expenses 29,153 27,114
Nonrecurring charges 36,275 --
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Income (loss) from operations (18,775) 13,658
Amortization of goodwill and
other intangibles (1,007) (1,180)
Interest expense (1,614) (2,702)
Investment and other income
expense, net (81) (169)
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Income (loss) before income taxes (21,477) 9,607
Income taxes (benefit) (7,500) 4,347
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Net income (loss) ($13,977) $5,260
======== ========
Earnings (loss) per share:
Primary ($.95) $.44
Fully diluted ($.95) $.41
Weighted average number of shares
outstanding:
Primary 14,720,000 11,835,000
Fully diluted 14,720,000 14,988.000
Cash dividends per share $.03 $.03
See accompanying notes to financial statements.
4
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
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October 1, September 30,
1994 1993
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Cash flows from operating activities
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Net income (loss) (9,017) 6,661
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Nonrecurring charges 36,275 --
Depreciation and amortization 10,314 9,494
Provision for doubtful accounts 1,096 3,658
Changes in assets and liabilities:
Accounts receivable (22,684) (30,648)
Inventories (11,145) (13,245)
Prepaid expenses and other
current assets (16,680) (1,550)
Accounts payable and
accrued expenses 6,999 14,090
Other 910 5,085 2,215 (15,986)
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Net cash (used in) operating
activities (3,932) (9,325)
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Cash flows from investing activities
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Additions to property, plant and
equipment (14,648) (16,040)
Funds used for construction 1,337 6,031
Other 1,053 593
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Net cash (used in) investing
activities (12,258) (9,416)
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Cash flows from financing activities
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Short-term debt borrowings,
(repayments), net (2,365) (1,075)
Repayments of long-term debt (2,925) (8,290)
Long-term borrowings 19,834 29,390
Cash dividends (1,222) (970)
Other 490 400
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Net cash provided by financing
activities 13,812 19,455
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Net increase (decrease) in cash
and cash equivalents (2,378) 714
Cash and cash equivalents at beginning
of period 12,499 1,880
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Cash and cash equivalents at end of period $10,121 $2,594
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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 nine 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 - During the third quarter of 1994, the Company recorded nonrecurring
charges of $36.3 million ($22.5 million or $1.53 per share after tax). The
charges consist of approximately $29.3 million related to a restructuring
program designed to improve profitability and $7.0 million for unusual items
primarily consisting of the write down of certain intangible assets and obsolete
and discontinued products.
The Company began working on the proposed restructuring program during the
fiscal 1994 second quarter. The restructuring charge consists of several
components including: severance and related costs in connection with the planned
reduction of approximately 15% of the Company's workforce or approximately 600
salaried and hourly jobs, consolidation and closure of selected regional
distribution and manufacturing facilities, the abandonment of certain
information systems and other actions including lease termination expenses and
transaction costs to execute the restructuring program. It is anticipated that
these actions will be implemented over the next twelve months and the Company
should realize annualized pretax savings of approximately $12 million upon full
implementation.
The balance of the restructuring accrual at October 1, 1994 is
approximately $20.2 million of which approximately $16.9 million is included in
accounts payable and accrued expenses and the remainder included in deferred
income taxes and other liabilities.
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PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The current status of the components of the restructuring liability is as
follows:
(In Thousands)
Balance at
Initial Liability October 1, 1994
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Severance and related costs $ 8,500 $ 7,600
Consolidation and closure of
facilities 15,900 9,700
Abandonment of certain information systems 1,600 ---
Other, including lease termination
expenses and costs to execute
the program 3,300 2,900
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$29,300 $20,200
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NOTE 3 - The major classes of inventories were as follows:
(In Thousands)
October 1, December 31,
1994 1993
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Finished goods $55,819 $56,630
Work in process 26,976 25,806
Raw Materials 38,662 35,079
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$121,457 $117,515
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NOTE 4 - Earnings (loss) 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 for the 1993 periods include the dilutive
effect of unexercised stock options. Fully diluted earnings per share in 1993
include the assumed conversion of the Company's Convertible Senior Subordinated
Discount Debentures ("Debentures").
NOTE 5 - Supplemental cash flow information for the nine month periods are as
follows:
(In Thousands)
October 1, September 30,
1994 1993
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Interest paid $ 3,617 $ 6,190
Income taxes paid 2,707 6,799
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PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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
Debentures.
NOTE 6 - The accumulated amortization of cost in excess of net assets acquired
and other intangibles is $25,498,000 at October 1, 1994 and $26,136,000 at
December 31, 1993.
NOTE 7 - 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 October 1, 1994 approximately $1,770,000 of retained
earnings was available for the payment of dividends for the balance of 1994.
NOTE 8 - Hoover Treated Wood Products, Inc. ("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
some of these suits. The number of lawsuits pending, as of October 1, 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.
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PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
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 October 1, 1994 (included in other assets) for $17.9 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.
9
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 9 - 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.
10
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 1, 1994
NONRECURRING CHARGES
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During the third quarter of 1994, the Company recorded nonrecurring charges
of $36.3 million. As more fully described in Note 2 to the Consolidated
Financial Statements, the nonrecurring charges consist of $29.3 million related
to a restructuring program and $7.0 million related to unusual items primarily
consisting of the write down of certain intangible assets and obsolete and
discontinued products. Approximately $14 million of the charge is for non cash
charges resulting from asset write-offs.
The profit improvement actions involve delayering the organization,
changing business processes, utilizing facilities more effectively and improving
product line management. The actions are expected to be implemented over the
next twelve months and the Company expects to realize annualized pretax savings
of approximaely $12 million upon full implementation.
RESULTS OF OPERATIONS
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Net sales for the third quarter of 1994 increased to $219.0 million, a 4.8%
increase from the corresponding 1993 period. Sales for the current quarter were
affected by a ten day work stoppage at the Company's largest window
manufacturing facility. Net sales for the first nine months of 1994 were 11.6%
higher compared to the corresponding 1993 period as substantially all operating
entities reported higher sales for the first nine months of 1994 compared to
1993. Of the total net sales increase in the nine month comparison periods,
approximately 6% is attributable to additional unit volume and the remainder to
increases in average selling prices. The increase in net sales in the quarterly
comparison was primarily attributable to increases in average selling prices.
Gross profit, expressed as a percent of sales, was 21.3% for the third
quarter of 1994 as compared with 19.5% for the same 1993 period. For the first
nine months of 1994 gross profit was 19.8% compared to 19.0% for the same period
in 1993. Improved labor productivity, overall lower conversion costs and the
absence of new plant start-up costs incurred in 1993 were primarily responsible
for the improvement in gross profit.
Selling, general and administrative expenses, as a percent of sales, for
the 1994 third quarter were essentially flat compared to the prior year. For the
year to date comparison, selling, general and administrative expenses were 14.2%
in 1994 compared to 14.6% 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 1, 1994
The nonrecurring charges created a loss from operations of $18.8 million
in the 1994 third quarter compared to operating income of $13.7 million in the
comparable 1993 period. Excluding the charges operating income would have
advanced approximately 28% and 41% respectively, for the quarter and year to
date comparisons for the reasons described in the preceding paragraphs.
Interest expense declined approximately $1.1 million for the third 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 Debentures into common
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.
The Company's effective tax rate was 34.9% and 27.7% respectively, for the
three and nine months ended October 1, 1994 compared to approximately 45.2% for
the 1993 comparison periods. The lower effective rates, which are used to
compute the tax benefit on the periods losses, are attributable to a
proportionately larger amount of non deductible goodwill amortization in 1994
when compared to income (loss) before taxes than in 1993.
Liquidity and Capital Resources
- -------------------------------
The Company used $3.9 million in cash from operations during the first
nine 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 nine months of 1994
include capital expenditures of $14.7 million primarily incurred in the
Company's Windows, Doors and Siding subsidiaries.
Significant financing activities in the first nine months of 1994 related
to the net increase in revolving credit borrowings of $19.8 million used
principally to finance the working capital and capital expenditures of the
Company.
The Company expects to spend approximately $11 million after taxes
in connection with the restructuring program over the next several
years.
The Company's current ratio was 2.9 to 1 at October 1, 1994 compared to 3.2
at December 31, 1993.
Available bank credit facilities were approximately $70 million at October
1, 1994.
12
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
October 1, 1994
PART II - OTHER INFORMATION
All items are inapplicable except:
Item 1. Legal Proceedings
See Note 8 to the consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports - None
13
PLY GEM INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q
October 1, 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.
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(Registrant)
Date: November 15, 1994 /s/ Herbert P. Dooskin
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Executive Vice President
Principal Financial Officer
14